<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5088 59-2223025
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1954 AIRPORT ROAD
SUITE 200
ATLANTA, GEORGIA 30341
(770) 455-7575
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
ALEXIUS A. DYER III
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
1954 AIRPORT ROAD
SUITE 200
ATLANTA, GEORGIA 30341
(770) 455-7575
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
PHILIP A. THEODORE, ESQ. ROBERT W. WALTER, ESQ.
KING & SPALDING DAVID C. ROOS, ESQ.
191 PEACHTREE STREET BERLINER ZISSER WALTER & GALLEGOS, P.C.
ATLANTA, GEORGIA 30303 ONE NORWEST CENTER, SUITE 4700
(404) 572-4600 1700 LINCOLN STREET
DENVER, COLORADO 80203
(303) 830-1700
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE (2) OFFERING PRICE(2) FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per 2,012,500 $ 8.50 $ 17,106,250 $5,898.71
share..................................
</TABLE>
(1) Includes 262,500 shares which the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c), based on the average of the high and low sales
prices of the Common Stock on the American Stock Exchange on November 18,
1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
CROSS REFERENCE TABLE
LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NO. LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus....................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front Cover Page; Outside Back Cover Page;
Available Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges............................ Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. *
7. Selling Security Holders............................. *
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered........... Outside Front Cover Page; Prospectus Summary;
Dividend Policy; Capitalization; Description of
Capital Stock; Shares Eligible for Future Sale
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Outside Front Cover Page; Prospectus Summary; Risk
Factors; Use of Proceeds; Dividend Policy;
Capitalization; Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Principal Stockholders; Description of Capital Stock;
Shares Eligible for Future Sale; Consolidated
Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Description of Capital Stock
</TABLE>
- ------------------------
* Item is omitted because response is negative or item is inapplicable.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 20, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES, IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
PROSPECTUS
1,750,000 SHARES
<TABLE>
<S> <C> <C>
INTERNATIONAL AIRLINE
[LOGO] SUPPORT GROUP, INC.
</TABLE>
COMMON STOCK
------------------
The 1,750,000 shares of Common Stock offered hereby are being offered by
International Airline Support Group, Inc. (the "Company"). The Common Stock is
traded on the American Stock Exchange under the symbol "YLF." On November 18,
1997, the last sale price of the Common Stock reported on the American Stock
Exchange ("AMEX") was $8.375 per share.
------------------------
SEE "RISK FACTORS" BEGINNING AT PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. Excludes the value of warrants to purchase up to 175,000 shares of
Common Stock (the "Representatives' Warrants") granted to the
representatives of the several underwriters (the "Representatives"). See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $400,000.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 262,500 additional shares of Common Stock to cover over-allotments, if
any. To the extent that the option is exercised, the Underwriters will offer
the additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to the Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to the right of the Underwriters to reject any order in
whole or in part and certain other conditions. It is expected that delivery of
the certificates for the Common Stock will be made against payment therefor at
the offices of Cruttenden Roth Incorporated or through the book-entry facilities
of The Depositary Trust Company, on or about , 1997.
------------------------
<TABLE>
<S> <C>
[LOGO] [LOGO]
THE DATE OF THIS PROSPECTUS IS , 1997
</TABLE>
<PAGE>
Inside front cover page: cut-away of McDonnell-Douglas MD-80 aircraft
together with list of parts.
Inside rear cover page: pictures of Company warehouse and parts offered by
the Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN
MARKET. FOR A DESCRIPTION OF SUCH ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES THERETO CONTAINED ELSEWHERE IN THIS PROSPECTUS. CERTAIN TERMS USED
IN THE FOLLOWING SUMMARY ARE DEFINED ON THE COVER PAGE OF THIS PROSPECTUS.
EXCEPT AS OTHERWISE CITED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. ON OCTOBER 3, 1996, THE
COMPANY COMPLETED A CAPITAL RESTRUCTURING (THE "RESTRUCTURING"). FOR INFORMATION
REGARDING THE RESTRUCTURING, SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--THE RESTRUCTURING."
THE COMPANY
OVERVIEW
The Company is a leading redistributor of aftermarket aircraft spare parts
used primarily for McDonnell-Douglas MD-80 and DC-9 aircraft. According to the
World Jet Airplane Inventory, MD-80 and DC-9 aircraft accounted for
approximately 15% of the commercial aircraft in service worldwide at December
31, 1996. Management believes that the Company has one of the most extensive
inventories of aftermarket MD-80 and DC-9 parts in the industry. In addition,
the Company provides aircraft spare parts for Boeing, Lockheed, Airbus and
commuter aircraft. The aircraft spare parts distributed by the Company,
including avionics, rotable and expendable airframe and engine parts, are sold
to a wide variety of domestic and international air cargo carriers, major
commercial and regional passenger airlines, maintenance and repair facilities
and other redistributors. The wide variety of aircraft spare parts distributed
by the Company is acquired through purchase or consignment of surplus or bulk
inventories from airlines, purchases from other redistributors and disassembly
of older aircraft.
In addition to being a provider of aircraft spare parts, the Company
leverages its industry expertise to purchase, sell and lease aircraft and
engines. The Company has periodically acquired, leased and sold a variety of
narrow-body commercial jet aircraft, such as Boeing 727 and 737 and DC-9
aircraft, and has recently increased its focus on these activities. The Company
currently leases three Boeing 727 freighter aircraft to a major cargo carrier
and four Pratt & Whitney JT8D series engines to a smaller cargo and charter
passenger carrier, and is holding for lease or sale two newly-acquired DC-9
aircraft. Once leased, the Company derives revenue from lease payments and seeks
to sell spare parts to the lessee both for the leased aircraft and other
aircraft in the lessee's fleet. Upon return of the aircraft, the Company either
re-leases, sells or disassembles the aircraft for parts in order to achieve the
highest utilization of the asset.
The Company believes that the existing annual worldwide market for aircraft
spare parts is approximately $10 billion, of which approximately $1.3 billion
represents sales of aircraft spare parts to the redistribution market. The
Company believes that this market will continue to grow due to several trends.
According to Boeing's 1997 Current Market Outlook (the "Boeing Report"), the
demand for aircraft continues to grow with the world fleet of aircraft projected
to increase to 23,000 in 2016 from 11,500 in 1996. The Company believes that,
over the long term, the growing number of aircraft will increase demand for
spare parts. Additionally, according to the World Jet Airplane Inventory, the
world fleet had an average age of 13.5 years at December 31, 1996, and the
Company believes the average age of the world fleet of aircraft will increase in
the future, which would increase demand for parts in the aftermarket. Airline
cost and availability considerations are causing airlines to decrease their
parts inventories and part procurement capability and rely on a small group of
approved redistributors to meet their parts needs. In addition, the number of
suppliers is being reduced due to quality concerns.
STRATEGY
The Company's strategy is to capitalize upon its position as a leading
redistributor of MD-80 and DC-9 aircraft spare parts and to broaden its product
lines to include other high-use aircraft as the world fleet grows. Key elements
of the Company's strategy include:
3
<PAGE>
BROADEN PRODUCT LINE. The Company has recently expanded its product line to
include aftermarket parts for certain commuter aircraft including Shorts, de
Havilland and British Aerospace. In addition, the Company intends to expand its
product line to include parts for the McDonnell-Douglas DC-10, the Boeing 767,
and the Airbus A-300 series aircraft. The Company believes that a significant
number of these aircraft types have been or will be converted to cargo use and
that its relationship with cargo carriers will provide an advantage in supplying
parts for these aircraft to such customers.
EXPAND AIRCRAFT AND ENGINE LEASING SERVICES. The Company believes that
airlines are becoming increasingly aware of the benefits of financing their
fleet equipment on an operating lease basis, including cost reduction and
flexibility regarding fleet size and composition. Once leased, the Company
derives revenue from lease payments and seeks to sell spare parts to the lessee
both for the leased aircraft as well as other aircraft in the lessee's fleet.
Upon return of the aircraft, the Company either re-leases, sells or disassembles
the aircraft for parts in order to achieve the highest utilization of the asset.
INCREASE SALES TO CARGO CARRIERS AND REGIONAL COMMERCIAL AIRLINES. Cargo
carriers and regional commercial airlines are among the Company's principal
customers. Cargo carriers are important customers because the fleets of such
operators typically consist of older aircraft of the type for which the Company
maintains an extensive inventory of parts and because such customers typically
do not maintain extensive inventories of spare parts. Regional commercial
airlines are important customers because such airlines favor narrow-body
aircraft, such as MD-80 and DC-9 aircraft, for which the Company is a primary
source of spare parts. The Company will direct its marketing activities to
broadening its customer base of cargo and regional airlines in order to increase
market share and leverage its core competencies.
CAPITALIZE ON BULK PURCHASE OPPORTUNITIES. Bulk purchase opportunities
arise when airlines, in order to reduce capital requirements, sell large amounts
of inventory in a single transaction, when inventories of aircraft spare parts
are sold in conjunction with corporate restructuring or reorganization or when
an aircraft operator realigns its aircraft fleet, reducing the number of or
exiting a particular aircraft model. Bulk inventory purchases allow the Company
to obtain large inventories of aircraft spare parts at a lower cost than can
ordinarily be obtained by purchasing spare parts on an individual basis,
resulting generally in higher gross margins on sales of such parts. Upon
completion of this offering, the Company believes its increased borrowing
capacity will allow it to respond quickly to bulk purchase opportunities.
INCREASE MARKET SHARE OF PARTS FOR MD-80 AND DC-9 AIRCRAFT. The Company
intends to increase its market share of parts for MD-80 and DC-9 aircraft.
According to the World Jet Airplane Inventory, MD-80 and DC-9 aircraft together
accounted for approximately 15% of the commercial aircraft in service worldwide
at December 31, 1996. The Company intends to capitalize on the limited
availability of new 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 disassembly when
economically justified. The Company believes that its knowledge of the fleets of
MD-80s and DC-9s currently in operation and its worldwide contacts in the
commercial aviation industry will permit it to acquire other inventory pools and
aircraft for disassembly on favorable terms in the future.
CONTINUE COMMITMENT TO QUALITY AND TECHNOLOGICAL INNOVATION. The Company
emphasizes adherence to high quality standards during each stage of its
operations (product acquisition, documentation, inventory control and delivery).
In August 1997, the Airline Suppliers Association ("ASA"), an FAA-recognized
independent quality assurance organization, accredited the Company as an
aftermarket supplier. In addition, the Company believes it was one of the first
aftermarket distributors to bar-code its inventory and it has created and
sponsors an industry-wide internet parts locator service for its customers,
which heightens awareness of the Company, enhances its position in the industry
and increases sales of parts.
PURSUE STRATEGIC ACQUISITIONS. The Company believes that small aftermarket
parts redistributors, many of which are family-owned and capital constrained,
are unable to provide the extensive inventory and quality control measures
necessary to comply with applicable regulatory and customer requirements, and
4
<PAGE>
will provide acquisition opportunities for the Company. Acquisitions are
expected to increase the Company's customer base, expand its product line both
with respect to aircraft in which the Company currently specializes and into new
aircraft types, and to strengthen its relationships with existing customers
through availability of additional inventory.
COMPANY HISTORY
In 1993, the Company commenced a diversification program that included the
development of an FAA-approved maintenance and overhaul facility. After
sustaining a $17.4 million loss in fiscal 1994, primarily attributable to the
operation of this facility, a management realignment was undertaken pursuant to
which Alexius A. Dyer III became President of the Company. Thereafter, the
Company initiated the sale of the maintenance and overhaul facility and returned
the Company's focus to the redistribution of aftermarket spare parts. This
successful redirection of operations was followed by the Restructuring. The
redirection of operations returned the Company to profitability and the
Restructuring resulted in a significant reduction in the Company's leverage and
interest expense. The Company's profitability and strengthened financial
condition can be seen through the expansion of its gross margin as a percent of
revenues, which increased from 29.1% in fiscal 1995 to 43.6% in the quarter
ended August 31, 1997, as well as by 11 consecutive profitable quarters
following the Company's refocus on its aftermarket spare parts business.
* * * *
The Company's principal executive offices are located at 1954 Airport Road,
Suite 200, Atlanta, Georgia 30341. Its telephone number is (770) 455-7575.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,750,000 shares
Common Stock to be outstanding after the
offering................................... 4,213,095 shares(1)
Use of proceeds.............................. The net proceeds of the offering will be used
to reduce indebtedness incurred pursuant to
the Company's Credit Agreement. The Company
expects to use its resulting borrowing
capacity for working capital and general
corporate purposes, including the purchase of
aircraft and aircraft spare parts, and to
finance acquisitions. See "Use of Proceeds."
American Stock Exchange symbol............... YLF
</TABLE>
- ------------------------
(1) Excludes an aggregate of (i) 262,500 shares of Common Stock that may be sold
by the Company upon exercise of the Underwriters' over-allotment option,
(ii) 175,000 shares of Common Stock issuable upon exercise of the
Representatives' Warrants and (iii) 645,782 shares of Common Stock issuable
upon exercise of options granted pursuant to the Company's 1996 Long Term
Incentive and Share Award Plan (the "Stock Option Plan").
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MAY 31, ENDED AUGUST 31,
------------------------------- --------------------
1995 1996 1997(1) 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Total revenues.............................................. $ 24,983 $ 23,205 $ 21,232 $ 4,159 $ 5,567
Income from operations...................................... 1,640 4,677 3,809 800 1,184
Interest expense, net....................................... 2,254 2,377 1,550 456 412
Earnings (loss) before income taxes and extraordinary
loss...................................................... (614) 2,300 2,259 344 773
Provision for income taxes (benefit)........................ -- 14 -- -- (212)
--------- --------- --------- --------- ---------
Earnings (loss) before extraordinary loss................... (614) 2,286 2,259 344 985
Extraordinary loss on debt restructuring.................... -- -- 531 -- --
--------- --------- --------- --------- ---------
Net earnings (loss)................................... $ (614) $ 2,286 $ 1,728 $ 344 $ 985
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental pro forma net earnings (2)............... $ 3,338 $ 1,398
--------- ---------
--------- ---------
PER SHARE DATA:
Primary earnings (loss) per common and common equivalent
share
Earnings (loss) before extraordinary item................. $ (4.10) $ 15.27 $ 1.25 $ 2.30 $ 0.37
Extraordinary item........................................ -- -- (0.29) -- --
--------- --------- --------- --------- ---------
Net earnings (loss)................................... $ (4.10) $ 15.27 $ 0.96 $ 2.30 $ 0.37
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental pro forma net earnings (2)............... $ 0.97 $ 0.33
--------- ---------
--------- ---------
Weighted average shares outstanding used in primary
calculation............................................... 149,696 149,696 1,806,938 149,704 2,696,275
Fully-diluted earnings (loss) per common and common
equivalent share
Earnings (loss) before extraordinary item................. $ (4.10) $ 12.69 $ 1.25 $ 2.30 $ 0.37
Extraordinary item........................................ -- -- (0.29) -- --
--------- --------- --------- --------- ---------
Net earnings (loss) (3)............................... $ (4.10) $ 12.69 $ 0.96 $ 2.30 $ 0.37
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding used in fully-diluted
calculation............................................... 149,696 242,228 1,806,938 149,704 2,696,275
<CAPTION>
AUGUST 31, 1997
MAY 31, --------------------
------------------------------- AS
1995 1996 1997 ACTUAL ADJUSTED(4)
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................... $ (13,489) $ (10,840) $ 9,144 $ 9,201 $ 11,573
Inventory................................................... 6,497 9,277 11,645 10,952 10,952
Accounts receivable......................................... 2,592 2,015 1,354 1,661 1,661
Total assets................................................ 14,511 16,132 21,287 20,748 21,616(5)
Total debt.................................................. 20,335 18,144 13,750 12,362 --(5)
Stockholders' equity (deficit).............................. (9,702) (7,416) 4,660 5,780 19,010
</TABLE>
- ------------------------------
(1) On October 3, 1996, the Company completed the Restructuring. Pursuant to the
Restructuring, the Company (i) effected a 1-for-27 reverse split of its
Common Stock; (ii) issued approximately 2,245,400 shares of its Common
Stock, after giving effect to the reverse split, in exchange for the entire
$10,000,000 principal amount outstanding of, and related accrued interest
on, its 8% Convertible Debentures due 2003 (the "Debentures"); and (iii)
redeemed the entire $7,700,000 principal amount outstanding of its 12%
Senior Notes due July 17, 1997 (the "Senior Notes") with the proceeds of an
advance under a credit agreement entered into on October 3, 1996 (the
"Credit Agreement").
(2) The supplemental pro forma net earnings and earnings per share reflect the
issuance of shares necessary to repay average outstanding indebtedness and
the resulting increase in net earnings for fiscal 1997 and the three months
ended August 31, 1997, respectively, as of the beginning of the period
presented. The earnings per share calculation has been adjusted for the
number of shares that would be issued by the Company at $8.375 per share
(the closing price of the Common Stock on the AMEX on November 18, 1997) to
retire these obligations.
(3) Fully diluted earnings per share in 1996 has been calculated as if the
Debentures were converted into Common Stock as of the beginning of the
period with a corresponding decrease in interest expense.
(4) Adjusted to reflect the sale of 1,750,000 shares of Common Stock offered by
the Company hereby (after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company) and the application
of the net proceeds to the Company from the offering as set forth herein.
See "Use of Proceeds."
(5) Does not include $4.0 million borrowed in September 1997 to finance the
purchase of two DC-9 aircraft held for lease or sale, $868,000 of which will
be repaid with the proceeds of the offering.
6
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER
CAREFULLY THE FACTORS SET FORTH BELOW, TOGETHER WITH OTHER INFORMATION SET FORTH
IN THIS PROSPECTUS.
CONCENTRATION ON MD-80 AND DC-9 AIRCRAFT
The Company's net parts sales are concentrated in the aftermarket for MD-80
and DC-9 aircraft, which aircraft at December 31, 1996 accounted for
approximately 15% of the commercial aircraft in service worldwide according to
the World Jet Airplane Inventory. The DC-9 is no longer in production and Boeing
has indicated its intention to cease production of the MD-80 around mid-1999 or
when current production commitments end. Any decline in the use of MD-80 and
DC-9 aircraft by aircraft operators, the unscheduled removal from service of
large numbers of MD-80 and DC-9 aircraft or the grounding of such aircraft by
governmental authorities for any reason could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, all DC-9 aircraft in the United States and European Union will need to
be hush-kitted, relocated to other areas or removed from service by 2000 and
2002, respectively. In the event these aircraft are removed from service, demand
for the Company's MD-80 and DC-9 parts could decline and the supply of spare
parts may increase, which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
BROADENING OF PRODUCT LINE
The Company has recently expanded its product line to include aftermarket
parts for certain commuter aircraft including Shorts, de Havilland and British
Aerospace aircraft. In addition, the Company intends to broaden its product line
following this offering to include parts for McDonnell-Douglas DC-10, Boeing 767
and the Airbus A-300 series aircraft. The Company has limited experience with
respect to the purchase and sale of spare parts for these aircraft models. There
can be no assurance that the Company will have the same level of success in
managing its parts inventories for such aircraft that it has had with parts for
MD-80 and DC-9 aircraft. The failure to successfully broaden its product line
could have a material adverse effect on the Company's ability to implement its
growth strategy. See "Business."
RISKS REGARDING THE COMPANY'S INVENTORY
The Company obtains most of its parts inventory by purchase or consignment
of excess inventory from aircraft operators, purchase from other redistributors
or by purchase of aircraft for disassembly. The Company's business is
substantially dependent on its purchasing activities because its net parts sales
are directly influenced by the level and composition of inventory available for
sale. Because the size and composition of the Company's inventory is critical to
its results of operations and because there is no organized market to procure
surplus inventory, the Company's operations are materially dependent on the
success of management in identifying potential sources of inventory and
effecting timely purchases at acceptable prices. There can be no assurance that
inventory will be available on acceptable terms or at the times required by the
Company. In addition, once acquired, the market value of the Company's inventory
could be adversely affected by factors beyond the Company's control, such as the
sudden availability of additional inventory, a sudden decline in demand for the
Company's parts due to a decline in use of certain aircraft types, regulatory
changes mandating uneconomic improvements to items in inventory, or a decision
by an OEM to begin manufacturing new parts that would compete with aftermarket
parts. The failure to identify and purchase inventory in a timely fashion at
acceptable prices or a decline in the value of the Company's inventory would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Operations of the Company--Inventory
Acquisition."
7
<PAGE>
IMPACT OF GOVERNMENT REGULATION
The aviation industry is highly regulated by the FAA in the United States
and similar regulatory agencies of other countries. Before spare parts are
installed on an aircraft, they must meet certain standards as to their condition
and have appropriate documentation. Parts owned or acquired by the Company may
not meet currently applicable standards, or standards may change in the future,
causing parts already contained in the Company's inventory to be scrapped or
modified. While the Company's operations are not currently regulated directly by
the FAA, the independent facilities that repair and overhaul the Company's
products and the aircraft operators that ultimately utilize the Company's
products are subject to extensive regulation. In addition, the Company is
currently subject to a voluntary accreditation program.
In September 1996, the FAA issued an advisory circular to support the
implementation of a voluntary accreditation program for civil aircraft parts
suppliers. The accreditation program establishes quality standards applicable to
aftermarket suppliers such as the Company, and designates FAA approved
organizations to perform quality assurance audits for initial and continued
accreditation of such aftermarket suppliers. In August 1997, the Company
received accreditation from the ASA.
Standards established by the FAA and other regulatory agencies relating to
the operation and maintenance of aircraft have significant effects on aircraft
operations and the composition of airline and air cargo fleets. Noise and
emission standards, and related additional maintenance for older aircraft, may
increase the cost of operating aircraft such as the DC-9 and 727, which could
lead to a decline in the demand for the products provided by the Company.
The inability of the Company to supply its customers with spare parts on a
timely basis, or any occurrence of the Company providing products which
subsequently fail, may adversely affect the Company's relationships with its
customers and have a material adverse effect on its business, financial
condition and results of operations. There can also be no assurance that new and
more stringent government regulations, if enacted, would not have a direct or
indirect adverse effect on the Company. See "Business--Regulation."
EFFECTS OF THE ECONOMY ON THE OPERATIONS OF THE COMPANY
The Company's customers consist of a wide variety of domestic and
international air cargo carriers, major commercial and regional passenger
airlines, maintenance and repair facilities and other redistributors. As a
result, the Company's business can be impacted by the economic factors that
affect the airline and air cargo industries. When such factors adversely affect
the airline and air cargo industries, they tend to cause downward pressure on
the pricing for aircraft spare parts and increase the credit risk associated
with doing business with airlines and air cargo carriers. Additionally, factors
such as the price of fuel affect the aircraft spare parts market for older
aircraft, since older aircraft become less competitive with newer model aircraft
as the price of fuel increases. There can be no assurance that economic and
other factors which might affect the airline and air cargo industries will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results, both on an annual and a quarterly basis,
are affected by many factors, including the timing of orders from large
customers, the timing of expenditures to purchase inventory in anticipation of
future sales, the timing of bulk inventory purchases, the mix of available
aircraft spare parts contained at any time in the Company's inventory, the
timing of aircraft or engine sales or leases, unanticipated aircraft or engine
lease terminations, default by any lessees and many other factors largely
outside the Company's control. Since the Company typically does not obtain
long-term purchase orders or commitments from its customers, it must anticipate
the future volume of orders based upon the
8
<PAGE>
historic purchasing patterns of its customers and discussions with customers as
to their future requirements. Cancellations, reductions or delays in orders by a
customer or group of customers could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
due to the value of a single aircraft or engine sale relative to the value of
parts typically sold by the Company, any concentration of aircraft or engine
sales in a particular quarter may obscure existing or developing trends in the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Fluctuations in Operating Results."
CUSTOMER CONCENTRATION
In fiscal 1997, two customers accounted for between 5% and 10% of the
Company's revenues with no customer accounting for more than 10% of the
Company's revenues. Currently, the Company believes that it has no customer, the
loss of which would have a material adverse effect on the Company's business,
financial condition and results of operations. In a given period, a substantial
portion of the Company's revenues may be attributable to the sale of one or more
aircraft or engines. Such sales are unpredictable transactions dependent, in
part, upon the Company's ability to purchase an aircraft or engine at an
attractive price and resell it within a relatively brief period of time. The
revenues from the sale of an aircraft or engine, the timing of inventory sales
or a lease transaction during a given period may result in a customer being
considered a major customer of the Company for that period. See "Business--Sales
and Marketing; Customers."
RISKS ASSOCIATED WITH LEASES
The Company currently leases three Boeing 727 freighter aircraft to a major
cargo carrier and four Pratt & Whitney JT8D series engines to a smaller cargo
and charter passenger carrier under operating leases and is holding for lease or
sale two newly acquired DC-9 aircraft. The success of an operating lease depends
on the re-lease of aircraft and engines on favorable terms on a timely basis,
the ability to sell the aircraft or engines at favorable prices or realize
sufficient value from the disassembly for parts of the aircraft or engines at
the end of the lease term. In addition, the success of an operating lease
depends in part upon having the aircraft and engines returned to the Company in
marketable condition as required by the lease of such aircraft and engines.
Numerous factors, many of which are beyond the control of the Company, may have
an impact on the Company's ability to re-lease or sell aircraft, engines and
parts. These factors include general market conditions, regulatory changes
(particularly those imposing environmental, maintenance and other requirements
on the operation of aircraft and engines), changes in the supply or cost of
aircraft and engines and technological developments. Consequently, there can be
no assurance that the Company's estimated residual value for aircraft or engines
will be realized. If the Company is unable to re-lease, sell its aircraft or
engines on favorable terms or realize sufficient value from the disassembly for
parts of the aircraft or engines on a timely basis upon expiration of the
related lease, its business, financial condition and results of operations may
be adversely affected. In the event that a lessee defaults in the performance of
its obligations, the Company may be unable to enforce its remedies under a
lease. The Company's inability to collect lease payments when due or to
repossess aircraft or engines in the event of a default by a lessee could have
an adverse effect on the Company's business, financial condition and results of
operations. If the Company were to acquire an aircraft or engines and such
acquisitions were not financed by additional borrowings, it could result in a
reduction of the Company's liquidity. See "Business--Operations of the
Company--Aircraft and Engine Sales and Leasing" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
9
<PAGE>
PRODUCT LIABILITY
The commercial aviation industry periodically experiences catastrophic
losses. As a redistributor, the Company may be named as a defendant in a lawsuit
as a result of such catastrophic loss if a part sold by the Company were
installed in an incident-related aircraft. The Company currently has in force
product liability insurance with coverage limits for each occurrence and in the
aggregate which it believes to be in amounts and on terms that are generally
consistent with industry practice. To date, the Company has not experienced any
aviation related claims, and has not experienced any product liability claims
related to its products. However, an uninsured or partially insured claim, or a
claim for which third-party indemnification is not available, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Product Liability."
RISKS ASSOCIATED WITH ACQUISITIONS
One of the Company's strategies for growth is to pursue acquisitions of
aftermarket redistributors. Currently, the Company has no acquisition
agreements, understandings or commitments for any acquisitions and, in order to
consummate an acquisition, the Company would be required to receive the consent
of the lender under its Credit Agreement. There can be no assurance that any
such acquisitions will be completed on reasonable terms, if at all. Certain of
the Company's competitors may also seek to acquire the same companies which the
Company seeks to acquire. This may increase the price and related costs at which
the Company could otherwise have acquired such companies, perhaps materially.
The Company's inability to complete acquisitions on reasonable terms could limit
the Company's ability to grow its business.
The Company may expend significant funds to pursue and consummate
acquisitions. Such use of funds will reduce the Company's working capital. In
addition, the Company may fund acquisitions in whole or in part by issuing
equity securities, and any such issuances, individually or in the aggregate, may
be dilutive to holders of the Common Stock. Acquisitions also may result in the
Company incurring additional debt and amortizing costs related to goodwill and
other intangible assets, either of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company may experience difficulties in assimilating the operations,
services and personnel of acquired companies and may be unable to sustain or
improve the historical revenue and earnings levels of acquired companies, any of
which may materially adversely affect the Company's business, financial
condition and results of operations. In addition, to the extent it becomes
necessary for the Company to fund the working capital requirements of acquired
companies, the Company's working capital available for its currently existing
operations will decrease. Acquisitions involve a number of additional risks,
including the diversion of management's attention from ongoing business
operations and the potential loss of key employees of acquired companies. There
can be no assurance that the Company can successfully implement its acquisition
strategy. The failure to consummate acquisitions on reasonable terms or the
inability to successfully integrate and manage acquired operations and personnel
could have a material adverse impact on the Company's business, financial
condition and results of operations.
RELIANCE ON EXECUTIVE OFFICERS
The continued success of the Company is dependent to a significant degree
upon the services of its executive officers and upon the Company's ability to
attract and retain qualified personnel experienced in the various phases of the
Company's business. The ability of the Company to operate successfully could be
jeopardized if one or more of its executive officers were unavailable and
capable successors were not found. The Company does not maintain key man
insurance on any of its executive officers. The Company has employment
agreements with Alexius A. Dyer III, its Chairman of the Board, President and
Chief Executive Officer and George Murnane III, its Executive Vice President and
Chief Financial Officer. The
10
<PAGE>
employment agreements between the Company and Messrs. Dyer and Murnane are
individually terminable by each executive officer upon a change of control of
the Company. See "Management."
COMPETITION
The aircraft spare parts redistribution market is highly competitive. The
market consists of a limited number of well-capitalized companies selling a
broad range of products and numerous small competitors serving distinct market
niches. Certain of these competitors have substantially greater financial,
marketing and other resources than the Company. The Company believes that
current industry trends will benefit larger, well-capitalized companies. The
Company believes that range and depth of inventories, quality and traceability
of product, service and price are the key competitive factors in the industry.
The principal companies with which the Company competes are AAR Corp., AGES,
Aviation Sales Company and Banner Aerospace. Customers in need of aircraft parts
have access, through computer-generated inventory catalogues, to a broad array
of suppliers including aircraft manufacturers, airlines and aircraft services
companies, which may have the effect of increasing competition for, and lowering
prices on, parts sales. See "Business--Competition."
POSSIBLE VOLATILITY OF STOCK PRICE
The Common Stock has been listed on the AMEX since April 21, 1997. Since
then, the per share price of the Common Stock has risen substantially from the
price of $3.625 per share on the date of such listing. During and after this
offering, the market price of the Common Stock may be highly volatile and could
be subject to wide fluctuations in response to quarterly variations in operating
results, changes in financial estimates by securities analysts, announcements of
material events by the Company, developments in the aftermarket industry or
other events or factors. The market price of the Common Stock also may be
affected by the Company's ability to meet analysts' expectations, and any
failure to meet such expectations, even if minor, could have a material adverse
effect on the market price of the Common Stock. In addition, changes in general
conditions in the economy or the financial markets could adversely affect the
market price of the Common Stock.
NO DIVIDENDS
The Company does not anticipate that it will pay any dividends on the Common
Stock in the foreseeable future. The Company's Credit Agreement contains
provisions prohibiting the Company from paying dividends without the consent of
the lender. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after this offering, the Company's executive officers and
directors will beneficially own approximately 9.3% of the outstanding Common
Stock, after giving effect to options exercisable within 60 days of the date of
this Prospectus (approximately 8.8% if the over-allotment option is exercised in
full). Subject to the restrictions set forth below, the officers and directors
will be free to sell such shares and may determine to sell them from time to
time to take advantage of favorable market conditions or for any other reason.
Future sales of shares of Common Stock by the Company and its stockholders could
adversely affect the prevailing market price of the Common Stock. The Company
and its executive officers and directors have entered into a lock-up agreement
with Cruttenden Roth Incorporated, as representative of the Underwriters,
pursuant to which the Company and its executive officers and directors have
agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell,
grant any option to purchase or otherwise transfer or dispose of any Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock or to file a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the foregoing or (ii) enter into
any swap or other agreement or transaction that transfers, in whole or in part,
the economic consequence of ownership of the Common Stock for a period of 180
days after the date of this Prospectus, without the prior written consent
11
<PAGE>
of Cruttenden Roth Incorporated. After such time, 426,328 shares of Common
Stock, including shares of Common Stock issuable on exercise of options,
beneficially held by its executive officers and directors will be eligible for
sale pursuant to Rule 144 promulgated under the Securities Act. See "Shares
Eligible for Future Sale" and "Underwriting."
ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW;
"BLANK CHECK" PREFERRED STOCK
Certain provisions of the Delaware General Corporation Law (the "DGCL") and
the Company's Certificate of Incorporation and Bylaws (the "Bylaws") could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that investors might be willing to pay in
the future for the Common Stock.
The Board of Directors of the Company has the authority to issue up to
2,000,000 shares of Preferred Stock (the "Preferred Stock") and to determine the
price, rights, preference, privileges and restrictions, including voting rights,
of those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. The Company
has no present plans to issue shares of Preferred Stock. In addition, the
Company is subject to the anti-takeover provisions of Section 203 of the DGCL.
In general, this statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder unless such business combination is approved in
the prescribed manner. Further, the Board of Directors is divided into three
classes of directors elected for staggered three-year terms. Such staggered
terms may affect the ability of the holders of the Common Stock to effect a
change in control of the Company by limiting the number of directors subject to
election at any one time. See "Description of Capital Stock--Preferred Stock"
and "--Anti-takeover Effects of Certain Provisions of the Company's Restated
Certificate of Incorporation and Bylaws."
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, including the plans and objectives of management for the
business, operations, and economic performance of the Company. The forward-
looking statements and associated risks set forth in this Prospectus may include
or relate to, among other things, (i) increasing the Company's market share of
parts for MD-80 and DC-9 aircraft, (ii) potential acquisitions of additional
inventories of aircraft spare parts and the acquisition of other companies,
assets or product lines that would complement or expand the Company's existing
aircraft spare parts business, (iii) demand among the Company's principal
customers, including cargo carriers and regional commercial airlines, for the
Company's inventory of parts, (iv) the size and growth rate of the aircraft
parts aftermarket redistribution industry and the aircraft and engine leasing
industry, (v) increases or changes in government regulations regarding the
aviation industry, (vi) competition from other aircraft parts redistributors and
(ix) proposed expansion of the Company's product line.
The forward-looking statements included herein are based upon current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based upon assumptions that the Company will
continue to manage its inventory effectively, that competitive conditions within
the aircraft parts redistribution industry will not change materially or
adversely, that demand for aircraft spare parts will remain strong and that
there will be no material adverse change in the Company's business, financial
condition and results of operations. Assumptions relating to the foregoing
involve judgment with respect,
12
<PAGE>
among other things, to future economic competitive market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and most of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in such forward-looking
information will be realized. In addition, as disclosed above, the business and
operations of the Company are subject to substantial risks that increase the
uncertainty inherent in such forward-looking statements. Any of the other
factors disclosed above could cause the Company's revenues or net earnings, or
growth in revenues or net earnings, to differ materially from prior results.
Growth in absolute amounts of cost of sales and general and administrative
expenses or the occurrence of extraordinary events could cause actual results to
vary materially from the results contemplated in the forward-looking statements.
Budgeting and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic revisions based on actual
experience and business developments, the impact of which may cause the Company
to alter its marketing, capital expenditure or other budgets, which may in turn
affect the Company's results of operations. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,750,000 shares of
Common Stock offered hereby, based on an assumed offering price of $8.375 per
share of Common Stock (the last reported sale price for the Common Stock on the
AMEX on November 18, 1997) and after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$13.2 million ($15.3 million if the Underwriters' over-allotment option is
exercised in full).
The Company intends to use the net proceeds from the offering to reduce
indebtedness incurred pursuant to the Company's Credit Agreement. The Company
expects to use its resulting borrowing capacity for working capital and general
corporate purposes, including the purchase of aircraft and aircraft spare parts,
and to finance acquisitions. Although the Company has from time to time engaged
in discussions with respect to possible acquisitions, it has no present plans,
intentions, understandings, commitments or agreements, nor is it currently
engaged in negotiations with respect to any material acquisitions. As of August
31, 1997, the Company had $6.7 million outstanding under its revolving credit
facility that bore interest at a weighted average rate of 10.5% and matures in
October 2001 and $5.7 million outstanding under its term loan facilities that
bore interest at a weighted average rate of 10.5% and mature between March 2000
and October 2001. The Company expects to repay all amounts outstanding under its
revolving credit facility and use the balance of the proceeds to reduce its term
loan indebtedness. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Pending such uses, the net proceeds will be invested in short term,
investment-grade securities, certificates of deposit, or direct or guaranteed
obligations of the United States government.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
Prior to April 21, 1997, the Common Stock traded on the Nasdaq OTC Bulletin
Board. Effective April 21, 1997, the Common Stock was listed and traded on the
AMEX under the symbol "YLF." The following table sets forth the high and low bid
quotations for the Common Stock from June 1, 1995 through April 18, 1997 and the
high and low sales prices of the Common Stock as reported on the AMEX
thereafter, in each case as adjusted to give effect to a 1-for-27 reverse stock
split consummated on October 3, 1996.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1996
First Quarter..................................... $11 13/16 $ 7 19/32
Second Quarter.................................... 7 19/32 4 7/32
Third Quarter..................................... 5 1/16 3 3/8
Fourth Quarter.................................... 5 29/32 3 3/8
FISCAL 1997
First Quarter..................................... 5 29/32 5 1/16
Second Quarter.................................... 5 29/32 3
Third Quarter..................................... 3 5/8 2 3/4
Fourth Quarter (through April 18)................. 4 3 7/32
Fourth Quarter (from April 21).................... 4 1/2 3
FISCAL 1998
First Quarter..................................... 8 1/4 4 1/2
Second Quarter (through November 18, 1997)........ 11 7 5/8
</TABLE>
On November 18, 1997, the last sale price of the Common Stock as reported on
the AMEX was $8.375 per share. At November 18, 1997, there were 58 holders of
record of the Company's Common Stock.
DIVIDEND POLICY
The Company has not paid dividends, and the Board of Directors has no
present intention to pay dividends on the Common Stock. The covenants contained
in the Company's Credit Agreement prohibit the Company from paying dividends on
the Common Stock as long as indebtedness issued pursuant to the Credit Agreement
remains outstanding, without the lender's consent.
14
<PAGE>
CAPITALIZATION
The following unaudited table sets forth the short-term debt and
consolidated capitalization of the Company at August 31, 1997, and as adjusted
to give effect to the offering and the application of the net proceeds. See "Use
of Proceeds." The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes included
elsewhere in this Prospectus. See "Consolidated Financial Statements."
<TABLE>
<CAPTION>
AUGUST 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Current maturities of long-term obligations............................................... $ 1,504 $ --
--------- -----------
Long-term debt: (1)
Senior secured revolving credit loans................................................... $ 6,686 $ --
Senior secured term loans............................................................... 4,172 --
--------- -----------
Total long-term obligations less current maturities................................. 10,858 --
Stockholders' equity:
Preferred Stock, $.001 par value, authorized 2,000,000 shares; no shares issued and
outstanding, actual or as adjusted.................................................... -- --
Common Stock, $.001 par value; authorized 20,000,000 shares;
2,440,595 shares issued and outstanding, actual;
4,213,095 issued and outstanding, as adjusted (2)..................................... 2 4
Additional paid-in capital.............................................................. 13,138 26,366
Accumulated deficit..................................................................... (7,360) (7,360)
--------- -----------
Total stockholders' equity.......................................................... 5,780 19,010
--------- -----------
Total capitalization................................................................ $ 16,638 $ 19,010
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Does not include $4.0 million borrowed since August 31, 1997 to finance the
purchase of two DC-9 aircraft held for lease or sale, $868,000 of which will
be repaid with the proceeds of the offering.
(2) Excludes an aggregate of (i) 262,500 shares of Common Stock that may be sold
by the Company upon exercise of the Underwriter's over-allotment option,
(ii) 175,000 shares of Common Stock issuable upon exercise of the
Representatives' Warrants and (iii) 645,782 shares of Common Stock issuable
upon exercise of options granted pursuant to the Company's Stock Option
Plan. As adjusted includes the 1,750,000 shares offered hereby and 22,500
shares issued pursuant to the exercise of options since August 31, 1997.
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company for each
of the three fiscal years ended May 31, 1997 are extracted or derived from, and
should be read in conjunction with, the audited Consolidated Financial
Statements, and the Notes thereto of the Company included herein, which
statements have been audited by Grant Thornton LLP, independent accountants. The
selected consolidated financial data of the Company for the two fiscal years
ended May 31, 1994 are extracted or derived from the audited Consolidated
Financial Statements of the Company which are not included herein. The selected
consolidated financial data for the three months ended August 31, 1996 and
August 31, 1997 are extracted or derived from, and should be read in conjunction
with, the unaudited Consolidated Financial Statements and the Notes thereto of
the Company included herein, which, in the opinion of the Company's management,
include all adjustments (consisting of only normal recurring accruals) necessary
for a fair presentation of the financial position and results of operations for
such periods. The selected consolidated financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MAY 31, AUGUST 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997(1) 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ 32,032 $ 16,747 $ 21,999 $ 21,410 $ 20,123 $ 4,039 $ 4,941
Lease revenue....................... 1,473 1,986 2,984 1,795 1,109 120 626
--------- --------- --------- --------- --------- --------- ---------
Total revenues.................. 33,505 18,733 24,983 23,205 21,232 4,159 5,567
Total operating expenses............ 29,456 34,932 23,343 18,528 17,423 3,359 4,383
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations....... 4,049 (16,199) 1,640 4,677 3,809 800 1,184
Interest expense, net............... 2,503 2,866 2,254 2,377 1,550 456 412
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes,
equity in loss of joint venture
and extraordinary loss............ 1,546 (19,065) (614) 2,300 2,259 344 773
Provision for income taxes
(benefit)......................... 510 (2,476) -- 14 -- -- (212)
Equity in loss of joint venture..... (59) (424) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Earning (loss) before extraordinary
loss.............................. 977 (17,013) (614) 2,286 2,259 344 985
--------- --------- --------- --------- --------- --------- ---------
Extraordinary loss on debt
restructuring..................... -- 363 -- -- 531 -- --
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)............. $ 977 $ (17,376) $ (614) $ 2,286 $ 1,728 $ 344 $ 985
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Supplemental pro forma net
earnings (2).................. $ 3,338 $ 1,398
--------- ---------
--------- ---------
PER SHARE DATA:
Primary earnings (loss) per common
and common equivalent share
Earnings (loss) before extraordinary
item.............................. $ 6.59 $ (113.65) $ (4.10) $ 15.27 $ 1.25 $ 2.30 $ 0.37
Extraordinary item.................. -- (2.43) -- -- (0.29) -- --
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)............. $ 6.59 $ (116.08) $ (4.10) $ 15.27 $ 0.96 $ 2.30 $ 0.37
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Supplemental pro forma net
earnings (2).................. $ 0.97 $ 0.33
--------- ---------
--------- ---------
Weighted average shares outstanding
used in primary calculation....... 148,054 149,696 149,696 149,696 1,806,938 149,704 2,696,275
Fully diluted earnings (loss) per
common and common equivalent share
Earnings (loss) before extraordinary
item.............................. $ 6.59 $ (113.65) $ (4.10) $ 12.69 $ 1.25 $ 2.30 $ 0.37
Extraordinary item.............. -- (2.43) -- -- (0.29) -- --
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) (3)......... $ 6.59 $ (116.08) $ (4.10) $ 12.69 $ 0.96 $ 2.30 $ 0.37
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average shares outstanding
used in fully diluted
calculation....................... 148,054 149,696 149,696 242,228 1,806,938 149,704 2,696,275
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AUGUST 31, 1997
MAY 31, ------------------------
--------------------------------------------------------------- AS
1993 1994 1995 1996 1997 ACTUAL ADJUSTED(4)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Working capital
(deficit)........... $ 17,088 $ (18,312) $ (13,489) $ (10,840) $ 9,144 $ 9,201 $ 11,573
Inventory............. 3,734 8,720 6,497 9,277 11,645 10,952 10,952
Accounts receivable... 18,621 3,817 2,592 2,015 1,354 1,661 1,661
Total assets.......... 35,709 25,553 14,511 16,132 21,287 20,748 21,616(5)
Total debt............ 23,484 26,173 20,335 18,144 13,750 12,362 --(5)
Stockholders' equity
(deficit)........... 8,173 (9,088) (9,702) (7,416) 4,660 5,780 19,010
</TABLE>
- ------------------------------
(1) On October 3, 1996, the Company completed the Restructuring. Pursuant to the
Restructuring, the Company (i) effected a 1-for-27 reverse split of its
Common Stock; (ii) issued approximately 2,245,400 shares of its Common
Stock, after giving effect to the reverse split, in exchange for the entire
$10,000,000 principal amount outstanding of, and related accrued interest
on, its Debentures; and (iii) redeemed the Senior Notes with the proceeds of
an advance under the Credit Agreement.
(2) The supplemental pro forma net earnings and earnings per share reflect the
issuance of shares necessary to repay average outstanding indebtedness and
the resulting increase in net earnings for fiscal 1997 and the three months
ended August 31, 1997, respectively, as of the beginning of the period
presented. The earnings per share calculation has been adjusted for the
number of shares that would be issued by the Company at $8.375 per share
(the closing price of the Common Stock on the AMEX on November 18, 1997) to
retire these obligations.
(3) Fully diluted earnings per share in 1996 has been calculated as if the
Debentures were converted into Common Stock as of the beginning of the
period with a corresponding decrease in interest expense.
(4) Adjusted to reflect the sale of 1,750,000 shares of Common Stock offered by
the Company hereby (after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company) and the application
of the net proceeds to the Company from the offering as set forth herein.
See "Use of Proceeds."
(5) Does not include $4.0 million borrowed in September 1997 to finance the
purchase of two DC-9 aircraft held for lease or sale, $868,000 of which will
be repaid with the proceeds of the offering.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading redistributor of aftermarket aircraft spare parts
used primarily for McDonnell-Douglas MD-80 and DC-9 aircraft. According to the
World Jet Airplane Inventory, MD-80 and DC-9 aircraft accounted for
approximately 15% of the commercial aircraft in service worldwide at December
31, 1996. Management believes that the Company has one of the most extensive
inventories of aftermarket MD-80 and DC-9 parts in the industry. In addition,
the Company provides aircraft spare parts for Boeing, Lockheed, Airbus and
commuter aircraft. The aircraft spare parts distributed by the Company,
including avionics, rotable and expendable airframe and engine parts, are sold
to a wide variety of domestic and international air cargo carriers, major
commercial and regional passenger airlines, maintenance and repair facilities
and other redistributors. The wide variety of aircraft spare parts distributed
by the Company is acquired through purchase or consignment of surplus or bulk
inventories from airlines, purchase from other redistributors and disassembly of
older aircraft.
In addition to being a provider of aircraft spare parts, the Company
leverages its industry expertise to purchase, sell and lease aircraft and
engines. In the past, the Company has periodically acquired, leased and sold a
variety of narrow-body commercial jet aircraft, such as Boeing 727 and 737
aircraft and DC-9 aircraft and has recently increased its focus on these
activities. The Company currently leases three Boeing 727 freighter aircraft to
a major cargo carrier and four Pratt & Whitney JT8D series engines to a smaller
cargo and charter passenger carrier and is holding for lease or sale two
newly-acquired DC-9 aircraft. Once leased, the Company derives revenue from
lease payments and seeks to sell spare parts to the lessee both for the leased
aircraft and other aircraft in the lessee's fleet. Upon return of the aircraft,
the Company either re-leases, sells or disassembles the aircraft for parts in
order to achieve the highest utilization of the asset.
The increase in liquidity available to the Company following closing of this
offering is expected to (i) support the Company's acquisition of additional
aircraft, engines and inventories of spare parts, (ii) enhance the Company's
ability to acquire aircraft and engines available for leasing, (iii) provide the
Company with increased financial flexibility in purchase of aircraft, engines
and bulk inventory and (iv) enable the Company to achieve growth in revenues
through greater availability of inventory to satisfy customer requirements. In
addition, the increase in the Company's cash resources provided by this offering
will position the Company to take advantage of acquisitions in which cash forms
all or a part of the consideration to be paid. Although the Company is not
engaged in negotiations with respect to any acquisitions and has no commitments
or agreements with respect to potential acquisitions and would need to receive
the consent of the lender under its Credit Agreement to consummate an
acquisition, the Company expects to intensify its search for potential
acquisitions following completion of this offering.
In a strategic response to changing industry conditions, the Company has
elected to expand the focus of its operations to increase its emphasis on the
purchase, lease and sale of aircraft and engines. The Company has historically
engaged in these activities, but has determined that increasing its emphasis on
purchase, lease and sale of aircraft and engines may potentially increase
revenues at a faster rate, position the Company to increase parts sales to
lessees, and expand inventories of parts in certain aircraft models when
disassembly is appropriate. The strategic determination by the Company to
increase its focus on purchase, lease and sale activities will affect the
Company's revenue mix, cost components, interest expense and, accordingly, net
earnings.
ACCOUNTING POLICIES
Inventories are stated at the lower of cost or market. The cost of aircraft
and aircraft parts is determined on a specific identification basis.
18
<PAGE>
Revenue from the sale of parts is recognized when products are shipped to
the customer. Revenue from aircraft and engine sales is recognized when the
Company has received all consideration and title and risk of ownership are
transferred to the customer, which is generally upon delivery of the aircraft or
engines. Lease revenue is recognized on an accrual basis, unless collectibility
is uncertain.
THE RESTRUCTURING
On October 3, 1996, the Company completed the Restructuring. Pursuant to the
Restructuring, the Company (i) effected a 1-for-27 reverse split of its Common
Stock; (ii) issued approximately 2,245,400 shares of its Common Stock, after
giving effect to the reverse split, in exchange for the entire $10,000,000
principal amount outstanding of, and related accrued interest on, its
Debentures; and (iii) redeemed the Senior Notes with the proceeds of an advance
under the Credit Agreement.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues as included in the Consolidated Statements of Operations of the
Company represented by net parts sales, aircraft and engine sales and lease
revenues.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MAY 31, ENDED AUGUST 31,
---------------------------------------------------------------- -------------------------------
1995 1996 1997 1996 1997
-------------------- -------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net parts sales.............. $ 12,788 51.2% $ 17,873 77.0% $ 18,388 86.6% $ 4,039 97.1% $ 4,166
Aircraft and engine sales.... 9,211 36.9 3,537 15.2 1,735 8.2 -- -- 775
Lease revenues............... 2,984 11.9 1,795 7.8 1,109 5.2 120 2.9 626
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total revenues........... $ 24,983 100.0% $ 23,205 100.0% $ 21,232 100.0% $ 4,159 100.0% $ 5,567
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
Net parts sales.............. 74.9%
Aircraft and engine sales.... 13.9
Lease revenues............... 11.2
---------
Total revenues........... 100.0%
</TABLE>
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items included in the Consolidated
Statements of Operations of the Company:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MAY 31, ENDED AUGUST 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues............................................... 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
Cost of sales................................................ 70.9 56.9 59.7 55.7 56.4
Selling, general and administrative expenses................. 17.4 16.9 18.0 20.1 18.6
Provision (recovery) for doubtful accounts................... (1.3) 2.0 0.6 1.0 (0.9)
Depreciation and amortization................................ 4.4 4.0 3.7 4.0 4.6
Unusual and nonrecurring items............................... (0.7) -- -- -- --
Losses of service center subsidiary.......................... 2.7 -- -- -- --
Interest expense............................................. 11.4 10.4 7.6 11.7 7.4
Interest and other income.................................... (2.4) (0.1) (0.3) (0.8) *
Provision for income taxes................................... -- * -- -- (3.8)
Extraordinary loss on debt restructuring..................... -- -- 2.5 -- --
--------- --------- --------- --------- ---------
Net earnings (loss).......................................... (2.4)% 9.9% 8.1% 8.3% 17.7%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
* Less than 0.1%.
19
<PAGE>
QUARTER ENDED AUGUST 31, 1996 COMPARED WITH QUARTER ENDED AUGUST 31, 1997
Net parts sales (excluding the sale of aircraft and engines) for the three
months ended August 31, 1997 were $4.2 million compared to $4.0 million during
the three months ended August 31, 1996. Aircraft and engine sales were $775,000
for the three months ended August 31, 1997 compared to none for the three months
ended August 31, 1996. Lease revenue increased to $626,000 during the three
months ended August 31, 1997 compared to $120,000 during the three months ended
August 31, 1996. The increase in lease revenues was attributable to the lease of
three B-727-100 aircraft during the fourth quarter of fiscal 1997. Total revenue
during the three months ended August 31, 1997 increased 33% to $5.6 million from
$4.2 million during the three months ended August 31, 1996.
Cost of sales increased 22% from $2.3 million during the three months ended
August 31, 1996 to $2.8 million during the three months ended August 31, 1997,
primarily as a result of higher revenues. As a percentage of total revenues,
cost of sales for the three months ended August 31, 1997 and August 31, 1996 was
56%. Excluding aircraft and engine transactions, which transactions are
unpredictable and fluctuate from period to period, cost of sales as a percentage
of part sales during the three months ended August 31, 1996 was 56% compared to
58% during the three months ended August 31, 1997.
Selling, general and administrative expenses increased from $800,000 during
the three months ended August 31, 1996 to $1.1 million during the three months
ended August 31, 1997. This increase is due, in part, to higher levels of
insurance costs, American Stock Exchange and investor relations fees, rent and
certain relocation expenses associated with the move of the Company's warehouse,
and compensation associated with increased sales.
For the three months ended August 31, 1997, the Company had a recovery of
doubtful accounts of $47,529 compared to a provision for doubtful accounts of
$41,157 for the three months ended August 31, 1996. This decrease in expense was
primarily related to the recovery of a certain doubtful account during the first
quarter of fiscal 1998.
Depreciation and amortization for the three months ended August 31, 1996
increased from $166,000 to $254,000 for the three months ended August 31, 1997.
The increase in depreciation and amortization was due primarily to the
acquisition of three B-727-100 aircraft during the fourth quarter of fiscal
1997, while being partially offset by the sale of the Company's headquarters
during the third quarter of fiscal 1997.
Interest expense for the three months ended August 31, 1996 was $489,000
compared to $413,000 for the three months ended August 31, 1997. The decrease in
interest expense was due to a net reduction in total debt outstanding during
this period from $18.1 million at August 31, 1996 to $12.4 million at August 31,
1997.
The Company's tax benefits (and related estimated tax rate) result from 1)
the utilization of its net operating loss carryforward to eliminate the current
tax that would otherwise be payable and 2) the Company's reduction in the
valuation allowance applied against its deferred tax assets. The Company has
reduced the valuation allowance by $212,499 as a result of its continuing
profitability. Subject to its continuing profitability, the Company expects to
further reduce the valuation allowance in the future.
FISCAL 1997 COMPARED WITH FISCAL 1996
Net parts sales increased by 3% or $515,000, from $17.9 million in fiscal
1996 to $18.4 million in fiscal 1997. Aircraft and engine sales decreased to
$1.7 million in fiscal 1997, compared to $3.5 million in fiscal 1996. During
fiscal 1997, the Company acquired three aircraft and sold or traded two
aircraft, as compared to fiscal 1996, during which the Company sold three
aircraft and acquired one. Lease revenue decreased to $1.1 million in fiscal
1997 from $1.8 million in fiscal 1996, as certain leases that were in existence
during the prior year were terminated and not renewed. Going forward, however,
the Company's lease revenues will be positively affected by the Company's
acquisition and lease of three aircraft during the fourth quarter of
20
<PAGE>
fiscal 1997. Although the Company was able to replace reduced sales to one large
customer, the increase in parts sales was insufficient to offset the decrease in
aircraft sales and lease revenues and, as a result, total revenues for fiscal
1997 decreased 8.6% to $21.2 million from $23.2 million for fiscal 1996.
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.
Cost of sales decreased 4.9% from $13.2 million in fiscal 1996 to $12.7
million in fiscal 1997. Cost of sales as a percentage of total revenues
increased from 56.9% in fiscal 1996 to 59.7% in fiscal 1997, respectively. The
increase in cost of sales as a percentage of total revenues from fiscal 1996 to
fiscal 1997 was primarily due to lower aircraft and engine sales, which
typically have a lower cost of sales. Cost of aircraft and engine sales was
49.9% of aircraft and engine revenues in fiscal 1997 compared to 45.5% in fiscal
1996. Cost of parts sales as a percentage of total parts sales was 63.6% in
fiscal 1997 compared to 62.9% in fiscal 1996.
Selling, general and administrative expenses decreased $94,000, amounting to
$3.8 million, or 18.0% of total revenues in fiscal 1997, compared to $3.9
million, or 16.9% of total revenues in fiscal 1996.
Provision (recovery) for doubtful accounts was $123,000 in fiscal 1997
compared to $464,000 in fiscal 1996. During fiscal 1996, the Company instituted
a policy whereby it records a provision of approximately 2% of total revenues
for estimated future write-offs of accounts receivable. For fiscal 1997, the
Company revised the policy to record a provision of approximately 1% of net part
sales.
Depreciation was $792,000 in fiscal 1997 compared to $934,000 in fiscal
1996. 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.
The sale of the building was consummated in March 1997. The net reduction from
fiscal 1996 to fiscal 1997 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 1996.
Interest expense in fiscal 1997 was $1.6 million, compared to $2.4 million
in fiscal 1996. The decrease in interest expense from fiscal 1996 to fiscal 1997
was due to a net reduction in total debt outstanding, to $13.7 million at May
31, 1997 compared to $18.1 million at May 31, 1996. Interest and other income
for fiscal 1997 was $61,000, compared to $34,000 in fiscal 1996. In connection
with the Restructuring, the Company recorded an extraordinary loss of $530,596
relating to the exchange of shares of its Common Stock for the Debentures.
The Company's income tax expense in fiscal 1997 was zero primarily as a
result of the utilization of net operating loss carryforwards to offset taxes
that would otherwise have been payable. The Company has continued to maintain
approximately a 100% valuation allowance against its existing deferred tax
assets due to the Company's previous financial problems and its relatively short
history of profitability. If the Company remains profitable, and there can be no
assurance of such profitability, the Company expects to further reduce the
allowance in the future. The fiscal 1996 expense of $14,000 related to
amendments of certain prior year state and federal tax returns.
Net earnings before an extraordinary loss for fiscal 1997 were $2,259,000,
or $1.25 per share, compared to a net of $2,286,000, or $15.27 per share, during
fiscal 1996. On a fully-diluted basis, earnings per share were $12.69 per share
during fiscal 1996. Net earnings, after considering an extraordinary loss, were
$1,728,493 or $.96 per share, for fiscal 1997.
21
<PAGE>
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 was
primarily attributable in part to the Company's sales to ValuJet Airlines, Inc.,
a low-cost carrier now known as AirTran 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. During fiscal
1996, the Company acquired one aircraft and sold three aircraft, as compared to
fiscal 1995, during which the Company sold eight aircraft and acquired none.
Lease revenue decreased to $1.8 million in fiscal 1996 from $3.0 million in
fiscal 1995, as certain leases that were in existence during the prior year were
terminated and not renewed (two of the aircraft under such terminated leases
were sold during fiscal 1996). The increase in parts sales was insufficient to
offset the decrease in aircraft sales and lease revenue and, as a result, total
revenues for fiscal 1996 decreased 7% to $23.2 million from $25.0 million for
fiscal 1995.
Fiscal 1996 lease revenues included $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 was 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.
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% in
fiscal 1995 and fiscal 1996, 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 aircraft sales revenues in fiscal 1996 compared
to 98.6% in fiscal 1995. The cost of aircraft sales during fiscal 1995 was in
excess of normal levels as the result of the sale at cost of three DC-9
aircraft. 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
22
<PAGE>
future write-offs of accounts receivable. There were no other significant
provisions or recoveries made during fiscal 1996.
Depreciation was $934,000 in fiscal 1996 compared to $1.1 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.
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 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 $2.4 million, compared to $2.9 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 certain transactions between the Company
and former officers of the Company and a gain of $375,000 relating to settlement
of litigation which had previously had 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
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 $15.27 per share,
compared to a net loss of $614,000 or $(4.10) per share, during fiscal 1995. On
a fully-diluted basis, earnings (loss) per share were $12.69 and $(4.10) per
share during fiscal 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since the Restructuring, the Company's principal source of liquidity has
been borrowings under its Credit Agreement with BNY Financial Corporation ("BNY
Financial").
The Credit Agreement entered into by the Company in connection with the
Restructuring provided for a $3 million term loan and up to an $11 million
revolving credit line. During the fourth fiscal quarter of 1997, the Credit
Agreement was amended to create a new term loan facility of $3.75 million and to
increase the revolving credit line to $13 million. During the second quarter of
fiscal 1998, the Credit Agreement was amended twice to create two additional
term loan facilities in the amounts of $1.5 million and $1.6 million (the Credit
Agreement and amendments are collectively referred to as the "Credit Facility").
The interest rate under the Credit Facility on both the term loan and the credit
line is the lender's base lending rate plus 2%. The Company is currently in
negotiations with BNY Financial to, among other things, reduce the rate of
interest charged on its borrowings. The revolving credit facility matures in
October 2001 and the term loans mature between March 2000 and October 2001. The
Credit
23
<PAGE>
Facility is secured by substantially all of the assets of the Company and
availability of amounts for borrowing is subject to certain limitations and
restrictions.
At November 14, 1997, the Company was permitted to borrow up to an
additional $2.0 million pursuant to the Credit Facility. The Company believes
that amounts available to be borrowed pursuant to the Credit Facility net of the
proceeds of this offering, together with its working capital will be sufficient
to meet the requirements of the Company's business for the foreseeable future.
The Company's election to use the net proceeds of $13.2 million to repay
outstanding debt obligations is expected to reduce its annual interest expense
by approximately $1.4 million calculated at the Company's interest rate as of
November 14, 1997.
At August 31, 1997, the Company had cash and cash equivalents, accounts
receivable and working capital of $219,000, $1.7 million and $9.2 million,
respectively.
Net cash provided by (used in) operating activities for the three months
ended August 31, 1997 and August 31, 1996 were $1.0 million and $(234,000),
respectively. The increase in cash provided by operating activities was due, in
part, to a decrease in inventory of $1.0 million for three months ended August
31, 1997 compared to an increase in inventory of $84,000 for three months ended
August 31, 1996. Net cash provided by operating activities for the fiscal years
ended May 31, 1997 and 1996 amounted to $582,000 and $2.1 million, respectively.
The primary use of cash in fiscal 1997 from operating activities was an increase
in inventories of $2.4 million and a decrease in accounts payable and accrued
expenses of $500,000.
Net cash used for investing activities for the fiscal year ended May 31,
1997 amounted to $5.4 million. The primary usage of the funds was the purchase
of three aircraft, which are on lease to a major cargo carrier. The Company
received proceeds of $750,000 from the sale of its headquarters facility in
Miami during the fourth quarter of fiscal 1997. Net cash provided by investing
activities for fiscal 1996 amounted to $575,000. The primary source of such
funds was proceeds of $1.5 million from the sale of aircraft held for lease
partially offset by capital expenditures of $875,000.
Net cash used in financing activities for three months ended August 31, 1997
amounted to $1.2 million. This net cash usage was primarily the result of a net
decrease in debt obligations of $1.4 million. Net cash provided by financing
activities for the fiscal year ended May 31, 1997 amounted to $4.4 million. The
Company borrowed $6.8 million under term loans under which the Company's five
aircraft and certain engines are pledged as collateral. During fiscal 1997, the
Company repaid $8.1 million of debt obligations including $7.7 million of Senior
Notes pursuant to the Restructuring. For fiscal 1997, the Company had net
borrowings under the Credit Facility of $7.4 million. Net cash used in financing
activities for the fiscal year ended May 31, 1996 amounted to $2.6 million
dollars.
The Company does not have any material planned capital expenditures for
fiscal 1998 that would significantly impact its liquidity and capital resources.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results, both on an annual and a quarterly basis,
are affected by many factors, including the timing of orders from large
customers, the timing of expenditures to purchase inventory in anticipation of
future sales, the timing of bulk inventory purchases, the mix of available
aircraft spare parts contained at any time in the Company's inventory, the
timing of aircraft or engine sales or leases, unanticipated aircraft or engine
lease terminations, default by any lessees and many other factors largely
outside the Company's control. Since the Company typically does not obtain
long-term purchase orders or commitments from its customers, it must anticipate
the future volume of orders based upon the historic purchasing patterns of its
customers and discussions with customers as to their future requirements.
Cancellations, reductions or delays in orders by a customer or group of
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. In
24
<PAGE>
addition, due to the value of a single aircraft or engine sale relative to the
value of parts typically sold by the Company, any concentration of aircraft or
engine sales in a particular quarter may obscure existing or developing trends
in the Company's business, financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS 128 establishes new standards for computing and presenting earnings
per share ("EPS"). Specifically, SFAS No. 128 replaces the presentation of
primary EPS with a presentation of basic EPS, requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
a complex capital structure and requires a reconciliation of the numerator and
denominator of the diluted EPS computation. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted. At this time, management has not determined the
impact of SFAS No. 128 on the earnings per share amounts presented herein.
25
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading redistributor of aftermarket aircraft spare parts
used primarily for McDonnell-Douglas MD-80 and DC-9 aircraft. According to the
World Jet Airplane Inventory, MD-80 and DC-9 aircraft accounted for
approximately 15% of the commercial aircraft in service worldwide at December
31, 1996. Management believes that the Company has one of the most extensive
inventories of aftermarket MD-80 and DC-9 parts in the industry. In addition,
the Company provides aircraft spare parts for Boeing, Lockheed, Airbus and
commuter aircraft. The aircraft spare parts distributed by the Company,
including avionics, rotable and expendable airframe and engine parts, are sold
to a wide variety of domestic and international air cargo carriers, major
commercial and regional passenger airlines, maintenance and repair facilities
and other redistributors. The wide variety of aircraft spare parts distributed
by the Company is acquired through purchase or consignment of surplus or bulk
inventories from airlines, purchases from other redistributors and disassembly
of older aircraft.
In addition to being a provider of aircraft spare parts, the Company
leverages its industry expertise to purchase, sell and lease aircraft and
engines. The Company has periodically acquired, leased and sold a variety of
narrow-body commercial jet aircraft, such as Boeing 727 and 737 and DC-9
aircraft, and has recently increased its focus on these activities. The Company
currently leases three Boeing 727 freighter aircraft to a major cargo carrier
and four Pratt & Whitney JT8D series engines to a smaller cargo and charter
passenger carrier, and is holding for lease or sale two newly-acquired DC-9
aircraft. Once leased, the Company derives revenue from lease payments and seeks
to sell spare parts to the lessee both for the leased aircraft and other
aircraft in the lessee's fleet. Upon return of the aircraft, the Company either
re-leases, sells or disassembles the aircraft for parts in order to achieve the
highest utilization of the asset.
COMPANY HISTORY
In 1993, the Company commenced a diversification program that included the
development of an FAA-approved maintenance and overhaul facility. After
sustaining a $17.4 million loss in fiscal 1994, primarily attributable to the
operation of this facility, a management realignment was undertaken pursuant to
which Alexius A. Dyer III became President of the Company. Thereafter, the
Company initiated the sale of the maintenance and overhaul facility and returned
the Company's focus to the redistribution of aftermarket spare parts. This
successful redirection of operations was followed by the Restructuring. The
redirection of operations returned the Company to profitability, and the
Restructuring resulted in a significant reduction in the Company's leverage and
interest expense. The Company's profitability and strengthened financial
condition can be seen through the expansion of its gross margin as a percent of
revenues, which increased from 29.1% in fiscal 1995 to 43.6% in the quarter
ended August 31, 1997, as well as by 11 consecutive profitable quarters
following the Company's refocus on its aftermarket spare parts business.
INDUSTRY OVERVIEW
The Company believes that the annual worldwide market for aircraft spare
parts is approximately $10 billion, of which approximately $1.3 billion
represents sales of aircraft spare parts to the redistribution market. The
Company believes that the following factors will continue to affect the
redistribution market as a whole and will have a specific impact on demand for
the Company's products.
GROWTH IN AIR TRANSPORTATION ACTIVITY. According to the Boeing Report,
global air travel is projected to increase approximately 75% by the year 2006,
and the number of passenger and cargo aircraft in service will increase
approximately 48% to 17,000 from 11,500. Specifically, the Boeing Report
projects that jet cargo aircraft will increase 34% to 1,650 aircraft by 2006
from 1,230 aircraft in 1996 and passenger aircraft
26
<PAGE>
will increase approximately 49% to 15,350 aircraft in 2006 from 10,270 aircraft
in 1996. In addition, the Boeing Report forecasts a shift to larger aircraft in
the cargo market, as evidenced by the following charts:
<TABLE>
<CAPTION>
EDGAR REPRESENTATION OF DATA POINTS USED IN
PRINTED GRAPHIC
SMALL 43.0%
<C> <C>
Medium 37.0%
Large 20.0%
1996=1,230 Airplanes
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SMALL 38.0%
<S> <C>
Medium 28.0%
Large 34.0%
2006=1,650 Airplanes
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT TYPE
- ----------------------------------------------------------------------------
SMALL MEDIUM LARGE
(UNDER 30 TONNES) (30 TO 50 TONNES) (OVER 50 TONNES)
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
727 707 747
737 757 767
DC-9 DC-8 DC-10
BAe 146 A300 MD-11
BAC-111 A310
L-1011
</TABLE>
Source: The Boeing Report
According to the Boeing Report, most of the aircraft delivered to cargo
carriers during this period are expected to be used aircraft converted from
commercial passenger service. The Company believes that growth in air
transportation activity and the anticipated increase in utilization of used
aircraft in cargo operations will continue to increase the demand for
aftermarket spare parts.
27
<PAGE>
INCREASE IN THE NUMBER OF OLDER COMMERCIAL AIRCRAFT. Increased demand for
air travel and the need for aircraft operators to reduce operating and capital
costs have prompted many airlines to extend the useful life of older equipment.
The installation of FAA-approved hush-kits and extended life maintenance
programs have also increased the useful life of many older aircraft. As a
result, most aircraft types have had a longer service life than originally
certified. In addition, many foreign and domestic aircraft operators and cargo
carriers are increasing their fleets through the acquisition of less expensive
used aircraft. As older aircraft are transitioned from major domestic passenger
airlines to lower cost international and
28
<PAGE>
regional domestic passenger airlines and cargo carriers, used aircraft have
enjoyed longer service lives than originally anticipated. New aircraft sales are
projected to be significantly greater than reductions of used aircraft as
illustrated by the following table:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YEARS NEW AIRPLANES RETAINED FLEET
<S> <C> <C>
1996 11,000 11,000
2001 14,000 10,000
2006 16,500 9,000
2011 20,000 8,000
2016 24,000 7,000
Number of Aircraft
</TABLE>
Source: The Boeing Report
Older aircraft typically require more maintenance and replacement parts than
new aircraft. According to the World Jet Airplane Inventory, at December 31,
1996, the average age of the worldwide jet fleet was 13.5 years and the Company
believes the average age will increase in the future.
LEASING. The Company believes that due to the increasing costs of
commercial jet aircraft, the anticipated growth of the worldwide aircraft fleet,
and the emergence of new regional airlines, aircraft operators will increasingly
turn to operating leases as an alternative method to finance their aircraft and
engine needs. The Company believes that leasing of used commercial jet aircraft
and engines should grow due to the emphasis on airline cost reduction, the
desire of airlines for fleet flexibility and the growth in air travel. In
addition, several smaller and regional airlines have recently chosen to lease
inventories of aircraft spare parts in order to preserve capital while
maintaining adequate spare parts support.
REDUCTION IN NUMBER OF APPROVED SUPPLIERS. Cost considerations cause many
aircraft operators to reduce the size of their spare parts inventories, while
efficiency and quality concerns may cause aircraft operators to maintain
relationships with a more limited number of approved suppliers. Quality concerns
are causing aircraft operators to demand that their suppliers be quality
certified by organizations such as the ASA or the International Standards
Organization ("ISO") and at least one major commercial airline has begun to
demand its suppliers carry product liability insurance. In addition, as aircraft
operators adopt just-in-time inventory procurement processes, inventory storage
is increasingly handled by suppliers such as the Company. The Company believes
that these trends will continue in the future and will benefit well-positioned
aircraft parts suppliers such as the Company.
INCREASED INVENTORY CONSIGNMENT. Certain of the Company's customers adjust
inventory levels on a periodic basis by disposing of excess aircraft spare
parts. Traditionally, larger airlines have used internal sales agents to manage
such dispositions. The Company believes that major airlines and other owners of
aircraft spare parts, in order to concentrate on their core businesses and to
more effectively redistribute their excess parts and inventories, are
increasingly entering into long-term consignment agreements with redistributors.
By consigning inventories through a redistributor such as the Company, customers
are able to offer their aircraft spare parts to a larger number of prospective
inventory buyers, allowing the customer to maximize the value of their
inventory. Consignment also enables a consignee to offer for sale significant
parts and inventory at minimal capital cost.
29
<PAGE>
STRATEGY
The Company's strategy is to capitalize upon its position as a leading
redistributor of MD-80 and DC-9 aircraft spare parts and to broaden its product
lines to include other high-use aircraft as the world fleet grows. Key elements
of the Company's strategy include:
BROADEN PRODUCT LINE. The Company has recently expanded its product line to
include aftermarket parts for certain commuter aircraft including Shorts, de
Havilland and British Aerospace. In addition, the Company intends to expand its
product line to include parts for McDonnell-Douglas DC-10, Boeing 767, and
Airbus A-300 series aircraft. As fleets of these aircraft age and as air cargo
carriers transition larger portions of their fleets to wide-body aircraft, the
Company will seek to capitalize on the demand for parts resulting from the aging
and continued use of these aircraft models. Several air cargo carriers utilize
DC-10, 767 and A-300 series aircraft currently, and the Company believes their
use will increase. The Company believes that a significant number of these
aircraft types have been or will be converted to cargo use and that its
relationship with cargo carriers will provide an advantage in supplying parts
for these aircraft to such customers.
EXPAND AIRCRAFT AND ENGINE LEASING SERVICES. The Company believes that
airlines are becoming increasingly aware of the benefits of financing their
fleet equipment on an operating lease basis, including cost reduction and
flexibility regarding fleet size and composition. The Company believes that
leasing commercial aircraft and engines offers an effective use of the Company's
capital. Once leased, the Company derives revenue from lease payments and seeks
to sell spare parts to the lessee both for the leased aircraft as well as other
aircraft in the lessee's fleet. Upon return of the aircraft, the Company either
re-leases, sells or disassembles the aircraft for parts in order to achieve the
highest utilization of the asset.
INCREASE SALES TO CARGO CARRIERS AND REGIONAL COMMERCIAL AIRLINES. Cargo
carriers and regional commercial airlines are among the Company's principal
customers. Cargo carriers are important customers because the fleets of such
operators typically consist of older aircraft of the type for which the Company
maintains an extensive inventory of parts and because such customers typically
do not maintain extensive inventories of spare parts. Regional commercial
airlines are important customers because such airlines favor narrow-body
aircraft, such as MD-80 and DC-9 aircraft, for which the Company is a primary
source of spare parts. The Company will direct its marketing activities to
broadening its customer base of cargo and regional airlines in order to increase
market share and leverage its core competencies.
CAPITALIZE ON BULK PURCHASE OPPORTUNITIES. While there is no predictability
as to when opportunities will arise to purchase large inventories in bulk, such
opportunities periodically become available. Bulk purchase opportunities arise
when airlines, in order to reduce capital requirements, sell large amounts of
inventory in a single transaction, when inventories of aircraft spare parts are
sold in conjunction with corporate restructurings or reorganizations or when an
aircraft operator realigns its aircraft fleet, reducing the number of or exiting
a particular aircraft model. Bulk inventory purchases allow the Company to
obtain large inventories of aircraft spare parts at a lower cost than can
ordinarily be obtained by purchasing spare parts on an individual basis,
resulting generally in higher gross margins on sales of such parts. Since fiscal
1996, the Company has successfully completed two large bulk inventory purchases.
Upon completion of this offering, the Company believes its increased borrowing
capacity will allow it to respond quickly to bulk purchase opportunities. The
Company believes that its market presence, experience in evaluating bulk
purchases, sophisticated management information systems and capital strength
will enable the Company to quickly analyze and complete large bulk purchase
opportunities to the extent that the economics of such purchases are considered
favorable.
INCREASE MARKET SHARE OF PARTS FOR MD-80 AND DC-9 AIRCRAFT. The Company
intends to increase its market share of parts for MD-80 and DC-9 aircraft.
According to the World Jet Airplane Inventory, MD-80 and DC-9 aircraft together
accounted for approximately 15% of the commercial aircraft in service worldwide
at December 31, 1996. Although the DC-9 is no longer in production, many of the
DC-9's parts
30
<PAGE>
are interchangeable with the MD-80, which, given the Company's experience and
knowledge of the DC-9, gives it a competitive advantage in selling parts into
the MD-80 marketplace. Boeing has indicated its intention to cease production of
the MD-80 around mid-1999 or when current production commitments end. The
Company intends to capitalize on the limited availability of new 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 disassembly when economically justified. The Company
believes that its knowledge of the fleets of MD-80s and DC-9s currently in
operation and its worldwide contacts in the commercial aviation industry will
permit it to acquire other inventory pools and aircraft for disassembly on
favorable terms in the future.
CONTINUE COMMITMENT TO QUALITY AND TECHNOLOGICAL INNOVATION. The Company
emphasizes adherence to high quality standards during each stage of its
operations (product acquisition, documentation, inventory control and delivery).
In August 1997, the ASA, an FAA-recognized independent quality assurance
organization, accredited the Company as an aftermarket supplier. The Company
believes that as of November 6, 1997 there were 31 ASA-100 accredited
aftermarket suppliers. In addition, the Company believes it was one of the first
aftermarket redistributors to bar-code its inventory and it has created and
sponsors an industry-wide internet parts locator service for its customers,
which heightens awareness of the Company, enhances its position in the industry
and increases sales of parts.
PURSUE STRATEGIC ACQUISITIONS. The Company competes in a fragmented market
in which numerous small companies serve distinct market niches. The Company
believes that small aftermarket parts redistributors, many of which are
family-owned and capital constrained, are unable to provide the extensive
inventory and quality control measures necessary to comply with applicable
regulatory and customer requirements, and will provide acquisition opportunities
for the Company. Acquisitions are expected to increase the Company's customer
base, expand its product line both with respect to aircraft in which the Company
currently specializes and into new aircraft types, and to strengthen its
relationships with existing customers through availability of additional
inventory.
AIRCRAFT SPARE PARTS
Aircraft spare parts can be categorized by their ongoing ability to be
repaired and returned to service. The general categories are as follows: (i)
rotable; (ii) repairable; and (iii) expendable. A rotable is a part which is
removed periodically as dictated by an operator's maintenance procedures or on
an as-needed basis and is typically repaired or overhauled and re-used an
indefinite number of times. An important subset of rotables is life limited
parts. A life limited rotable has a designated number of allowable flight hours
and/or cycles (one take-off and landing generally constitutes one cycle) after
which it is rendered unusable. A repairable is similar to a rotable except that
it can only be repaired a limited number of times before it must be discarded.
An expendable is generally a part which is used and not thereafter repaired for
further use.
Aircraft spare parts' conditions are classified within the industry as (i)
factory new, (ii) new surplus, (iii) overhauled, (iv) serviceable, and (v) as
removed. A factory new or new surplus part is one that has never been installed
or used. Factory new parts are purchased from manufacturers or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other redistributors. An overhauled part has been
completely disassembled, inspected, repaired, reassembled and tested by a
licensed repair facility. An aircraft spare part is classified serviceable if it
is repaired by a licensed repair facility rather than completely disassembled as
in an overhaul. A part may also be classified serviceable if it is removed by
the operator from an aircraft or engine while operating under an approved
maintenance program and is functional and meets any manufacturer or time and
cycle restrictions applicable to the part. A factory new, new surplus,
overhauled or serviceable part designation indicates that the part can be
immediately utilized on an aircraft. A part in as removed condition requires
functional testing, repair or overhaul by a licensed facility prior to being
returned to service in an aircraft.
30
<PAGE>
The aircraft spare parts sold by the Company include avionics, rotable and
expendable airframe and engine parts for commercial aircraft. Currently, the
Company specializes in replacement parts for MD-80 and DC-9 aircraft and
management believes that the Company has one of the most extensive inventories
of aftermarket MD-80 and DC-9 parts in the industry. As of November 17, 1997,
the Company had 52,645 line items, many of which represent multiple unit
quantities and relate to the MD-80 and DC-9 aircraft. Many of these parts such
as avionics can also be used by a wide variety of aircraft other than MD-80 and
DC-9 aircraft. In addition to the Company's inventory of MD-80 and DC-9 parts,
the Company's inventory also includes spare parts for Boeing 727, 737 and 747
aircraft, Lockheed L-1011 aircraft, Airbus, Shorts, de Havilland and British
Aerospace aircraft and for the Pratt & Whitney JT8D engine series.
OPERATIONS OF THE COMPANY
The Company's core business is the buying and selling of aircraft spare
parts. In addition, the Company has recently expanded its product line to
include the sale and leasing of aircraft and engines. The Company believes that
the leasing of aircraft and engines will become a more significant part of the
Company's business in the future and that it provides significant opportunities
for expansion.
INVENTORY ACQUISITION. The Company obtains most of its parts inventory by
purchasing individual parts from airlines, repair facilities or other
redistributors, by purchasing excess inventory from aircraft operators ("bulk
inventory purchases") or by purchasing aircraft for disassembly. The Company may
also fill a customer order for a part not held in the Company's inventory by
locating the part for the customer from another vendor, purchasing the part and
then reselling the part to the customer. The Company makes bulk inventory
purchases by bidding on the inventory of companies that are eliminating certain
portions of their spare parts inventory due to the retirement of an aircraft
type from their fleets, inventory reduction programs to reduce costs, the
downsizing of their operations or the dissolution of their businesses as a
whole.
The Company acquires aircraft for disassembly 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 one year through the sale of a portion of the
parts, and to sell the remaining parts for amounts in excess of the purchase
price over the subsequent five years. The Boeing Report notes that approximately
1,900 aircraft will be removed from active commercial service between 1996 and
2006. Many of these aircraft will be disassembled in order to sell their parts.
When the Company acquires an aircraft for disassembly, 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 disassembled.
The parts and equipment are catalogued and all the relevant information
regarding the parts, including each part's repair history, is entered into the
Company's computer database. Management believes that it is essential that such
information be immediately available in order to facilitate sales by the
Company's sales personnel. In certain instances, parts which are in high demand
are pre-sold prior to the delivery of the aircraft to the Company. High value
parts such as engines and engine components are also often pre-sold. Pre-selling
allows the Company to recover a significant amount of its investment within a
short time from the date of the aircraft delivery.
An aircraft purchased for disassembly 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 prices that justify disassembly for a variety of
reasons, including the seller's need for immediate liquidity or inability to
economically operate or lease the aircraft to third parties. Additionally, such
aircraft may require extensive maintenance or overhaul or may require
government-mandated improvements which are uneconomical for the sellers to
perform.
A number of factors influence the relative importance to the Company during
a particular fiscal year of the two principal sources of bulk inventory. For
example, several regional airlines commenced operations during fiscal 1994
through 1996. During this period, the Company competed for aircraft with
31
<PAGE>
such airlines, which often use older narrow-body aircraft such as the DC-9.
Opportunities to purchase aircraft for disassembly during this period were
curtailed by such competition, which caused the sales prices for such aircraft
to increase. More recently, the growth of regional airlines has slowed, creating
more opportunities for the Company to acquire aircraft for disassembly.
AIRCRAFT AND ENGINE SALES AND LEASING. The Company has determined that its
spare parts sales opportunities are enhanced by providing existing and new
customers with whole aircraft and engines through sale and lease transactions.
Such transactions allow the Company to expand its customer base for spare parts
and, through leasing, to reduce the cost basis in its aircraft. Once leased, the
Company derives revenue from lease payments and seeks to sell spare parts to the
lessee both for the leased aircraft as well as other aircraft in the lessee's
fleet. Upon return of the aircraft, the Company either re-leases, sells or
disassembles the aircraft for parts in order to achieve the highest utilization
of the asset.
The Company currently leases three Boeing 727 freighter aircraft to a major
cargo carrier, four JT8D engines to a smaller cargo and charter passenger
carrier and is holding for lease or sale two newly-acquired DC-9 aircraft. All
of the Company's aircraft leases are operating leases rather than finance leases
and expire between January and March 1999. The Company's engine leases are
"evergreen" leases which, although they have no termination date, are
cancellable by either party upon specified notice, typically 30 to 90 days.
Under an operating lease, the Company retains title to the aircraft or engine,
thereby retaining the potential benefits and assuming the risk of the residual
value of the aircraft or engine. Operating leases allow aircraft operators
greater fleet and financial flexibility due to their shorter-term nature, the
relatively small initial capital outlay necessary to obtain use of the aircraft
or engine and off-balance sheet accounting treatment. The Company focuses on
leasing to its customers older, narrow-body aircraft and the engines they use
for periods between six months to three years. The Company believes that there
is an increasing demand by customers for operating leases, which are being used
as an alternative to traditional financing arrangements.
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. If the "core" unit cannot be repaired, it is returned to the
customer and the exchange transaction is converted to an outright sale at a
sales price agreed upon at the time the exchange transaction was negotiated. The
Company continues to emphasize exchange transactions because they are profitable
and ensure that scarce parts remain in stock for future sales.
SALES AND MARKETING; CUSTOMERS
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.
In addition to directly marketing its inventory, the Company has created the
Internet Parts Locator System ("IPLS"). IPLS is a free service available to any
potential customer and lists all of the inventory available for sale from the
Company. In order to increase its value to potential customers, the IPLS also
contains inventory of approximately 50 additional aftermarket parts
redistributors. Similarly, the Company lists its inventory in the Air Transport
Association's computerized databank ("AIRS") and with the Inventory Locator
Service ("ILS") proprietary computerized databank. Unlike the ILS and AIRS
databanks, the Company's IPLS service does not charge fees for either listing or
purchasing agents, and the Company believes that it will represent a growing
marketplace for aircraft spare parts transactions. Buyers
32
<PAGE>
of aircraft spare parts can access either the IPLS, AIRS or ILS databases and
determine the companies which have the desired inventory available. Neither the
IPLS, AIRS or ILS list price information relating to particular parts.
Market forces establish the price for aftermarket aircraft parts. No pricing
service or price catalogue exists for aftermarket parts. 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 meet the same FAA standard as new
parts, cost less than the same new parts, if available, and are often more
readily available.
The Company's customers include a wide variety of domestic and international
air cargo carriers, major commercial and regional passenger airlines,
maintenance and repair facilities and other redistributors. Management believes
that its customer relationships are important to the Company's operational
success. The Company maintains an adequate level of inventory in order to
service its 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. Cargo carriers and
regional commercial airlines are among the Company's principal customers. Cargo
carriers are important customers because the fleets of such operators typically
consist of older aircraft of the type for which the Company maintains an
extensive inventory of parts and because such customers typically do not
maintain extensive inventories of spare parts. Regional commercial airlines are
important customers because such airlines favor narrow-body aircraft, such as
MD-80 and DC-9 aircraft for which the Company is a primary source of spare
parts.
In fiscal 1997, two customers accounted for between 5% and 10% of the
Company's revenues with no customer accounting for more than 10% of the
Company's revenues. Currently, the Company believes that it has no customer, the
loss of which would have a material adverse effect on the Company's business,
financial condition and results of operations. In a given period, a substantial
portion of the Company's revenues may be attributable to the sale of one or more
aircraft or engines. Such sales are unpredictable transactions dependent, in
part, upon the Company's ability to purchase an aircraft or engine at an
attractive price and resell it within a relatively brief period of time. The
revenues from the sale of an aircraft or engine, the timing of inventory sales
or a lease transaction during a given period may result in a customer being
considered a major customer of the Company for that period.
QUALITY ASSURANCE
The Company adheres to stringent quality control standards and procedures in
the purchase and sale of its products. In August 1997, the ASA accredited the
Company as an aftermarket supplier after the completion of an extensive
facilities audit and numerous meetings with the Company's management. The
Company believes that as of November 6, 1997 there were 31 ASA-100 accredited
aftermarket suppliers. Parts procured from an accredited supplier convey
assurance to the purchaser that the quality is as stated and the appropriate
documentation is on file at the supplier's place of business. Furthermore,
accreditation provides assurance that the supplier has implemented an
appropriate quality assurance system and has demonstrated the ability to
maintain that system. In addition, many of the Company's customers periodically
audit the Company's operations to ensure compliance with such customer's quality
standards.
Because aircraft operators require a readily available and identifiable
source of inventory meeting regulatory requirements, the Company has implemented
a total quality assurance program. This program consists of numerous quality
procedures, including the following:
- Inspection procedures mandating that procured aircraft, engines and parts
be traceable to a source approved by the Company
- Training and supervision of personnel to properly carry out the total
quality assurance program
33
<PAGE>
- On-going quality review board meetings conducted by senior management to
oversee the total quality assurance program
REGULATION
The aviation industry is highly regulated in the United States by the FAA
and in other countries by similar regulatory agencies. These regulations are
designed to ensure that all aircraft, engines and aircraft components are
continuously maintained in proper condition for the safe operation of aircraft.
While the Company's operations are not currently regulated directly by the FAA,
the independent facilities that repair and overhaul the Company's products and
the aircraft operators that ultimately utilize the Company's products are
subject to extensive regulation. Accordingly, the Company must consider the
regulatory requirements of its customers and provide them with parts that comply
with airworthiness standards established by the FAA and OEMs, together with
required documentation which enables these customers to comply with other
applicable regulatory requirements. The inspection, maintenance and repair
procedures for the various types of aircraft, engines and aircraft components
are prescribed by regulatory authorities and can be performed only by
FAA-licensed repair facilities utilizing certified technicians. Compliance with
applicable FAA and OEM standards are required prior to installation of a part on
an aircraft. The Company only utilizes FAA-licensed repair facilities to repair
and certify aircraft, engines and aircraft components.
In June 1996, the FAA articulated a series of changes in the FAA's
inspection policies to enhance its oversight of aircraft operators that rely on
third-party maintenance. The effect on the Company of such changes to the FAA's
inspection policies may be to reduce the number of third-party maintenance
providers that provide services to the Company. To date, the Company's
operations have not been materially adversely affected as a result of such
regulations.
In September 1996, the FAA issued an advisory circular to support the
implementation of a voluntary accreditation program for civil aircraft parts
suppliers. This accreditation program establishes quality standards applicable
to aftermarket suppliers, such as the Company, and designates FAA approved
organizations such as ASA to perform quality assurance audits for initial
accreditation of aftermarket suppliers. Quality assurance audits are required on
an on-going basis to maintain accreditation. In addition, many of the Company's
customers periodically audit the Company's operations to ensure compliance with
such customer's quality standards. The Company believes that ongoing quality
assurance audits and strict adherence to its quality assurance system is
essential to meeting the needs of its existing and future customers.
Because the Company's sales consist largely of parts for older aircraft,
regulations promulgated by the FAA governing noise emission standards for older
aircraft and the FAA's Aging Aircraft Program Plan (the "Aging Aircraft
Program") have a material impact on the market for the Company's products. All
stage 2 aircraft must install hush-kits pursuant to such noise emission
standards or be phased out of operation in the United States by December 31,
1999 and in the European Union by April 1, 2002. The Aging Aircraft Program
requires aircraft operators to perform structural modifications and inspections
to address airframe fatigue and to implement corrosion prevention and control
programs, which increase the operating and maintenance costs of older aircraft.
Furthermore, the EPA and the various agencies of the European Union have sought
the adoption of stricter standards limiting the emission of nitrous oxide from
aircraft engines. The Company believes that notwithstanding the substantial
costs imposed by noise emission standards and the Aging Aircraft Program on
older aircraft, estimated by the Company to average less than $4 million per
aircraft on aircraft such as the DC-9, certain aircraft operators will continue
to utilize older aircraft due to the substantially greater cost of acquiring new
replacement aircraft.
The core operations of the Company may in the future be subject to FAA or
other regulatory requirements. The Company closely monitors the FAA and industry
trade groups in an attempt to understand how possible future regulations might
impact the Company.
34
<PAGE>
An important factor in the aircraft spare parts redistribution market
relates to the documentation and traceability of an aircraft spare part. The
Company requires all of its suppliers to provide adequate documentation as
dictated by the Company's customers. The Company utilizes electronic data
scanning and storage techniques to maintain complete copies of all
documentation. Documentation required includes, where applicable, (i) a
maintenance release from a certified airline repair facility signed and dated by
a licensed airframe and/or power plant mechanic who repaired the aircraft spare
part and an inspection to certify that the proper methods, materials and
workmanship were used, (ii) a "tear-down" report detailing the discrepancies and
corrective actions taken during the last shop repair, and (iii) an invoice or
purchase order for an approved source.
PRODUCT LIABILITY
The commercial aviation industry periodically experiences catastrophic
losses. As a redistributor, the Company may be named as a defendant in a lawsuit
as a result of such catastrophic loss if a part sold by the Company were
installed in an incident-related aircraft. In this regard, the Company maintains
product liability insurance in the amount of $10 million. While the Company
believes this amount 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 product 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 competitive. The
market consists of a limited number of well-capitalized companies selling a
broad range of products and numerous small competitors serving distinct market
niches. Certain of these competitors have substantially greater financial,
marketing and other resources than the Company. The Company believes that
current industry trends will benefit larger, well-capitalized companies. The
Company believes that range and depth of inventories, quality and traceability
of product, service and price are the key competitive factors in the industry.
The principal companies with which the Company competes are AAR Corp., AGES,
Aviation Sales Company and Banner Aerospace. Customers in need of aircraft parts
have access, through computer-generated inventory catalogues, to a broad array
of suppliers, including aircraft manufacturers, airlines and aircraft services
companies, which may have the effect of increasing competition for, and lowering
prices on, parts sales.
EMPLOYEES
As of October 31, 1997, the Company had 26 employees. The Company is not a
party to any collective bargaining agreement. The Company believes its relations
with its employees are good.
PROPERTIES
The Company's executive offices and operations are located at 1954 Airport
Road, Suite 200, Atlanta, Georgia 30341, consisting of approximately 3,600
square feet of leased space pursuant to a lease expiring in January 2000. The
Company leases approximately 29,500 square feet of warehouse facilities in Fort
Lauderdale, Florida pursuant to a lease expiring in June 2002. Both facilities
are rented at competitive rates for their location and utility. The Company
believes that its facilities are adequate for its needs for the foreseeable
future.
LEGAL PROCEEDINGS
The Company is not now a defendant in any material litigation or other legal
proceeding. The Company may become a defendant in legal proceedings in the
ordinary course of business.
35
<PAGE>
MANAGEMENT
The executive officers and directors of the Company as of the date of this
Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Alexius A. Dyer III(1)............................... 41 Chairman of the Board, President and Chief Executive
Officer
George Murnane III(1)................................ 39 Executive Vice President, Chief Financial Officer and
Director
James M. Isaacson.................................... 36 Vice President of Finance, Treasurer and Secretary
Kyle R. Kirkland (2)(3).............................. 35 Director
E. James Mueller (2)(3).............................. 51 Director
</TABLE>
- ------------------------
(1) Member of the 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 the Company. Additionally,
during 1991, he served as the President and director of the Company's
subsidiary, Barnstorm Leasing, Inc., which was merged into the Company in July
1992.
GEORGE MURNANE III has been Executive Vice President and Chief Financial
Officer of the Company since June 1996 and has served as a director of the
Company since October 3, 1996. From March 1996 through June 1996, Mr. Murnane
served as a consultant for companies in the aviation industry. From October 1995
through February 1996 he served as Executive Vice President and Chief Operating
Officer of Atlas Air, Inc., an air cargo company. From 1986 to 1995 he was
affiliated with the New York investment banking firm of Merrill Lynch & Co.,
most recently as a Director in the firm's Transportation Group. Mr. Murnane was
named to the Board of Directors of CCAIR, Inc., a commuter airline, in January
1997. Mr. Murnane is the general partner of Barlow Partners, L.P., which owns
approximately 6.6% of CCAIR, Inc.
JAMES M. ISAACSON has been the Company's Vice President of Finance and
Treasurer since December 1996 and has served as Secretary since July 1997. From
April 1995 to December 1996 he served as Director of Corporate Finance and
Assistant Secretary for ValuJet Airlines, Inc. From May 1984 through April 1995
he served in a number of capacities for Delta Air Lines, Inc., where he most
recently served as Manager--Capital Markets & Analysis.
KYLE R. KIRKLAND has been a director of the Company since July 1992. Mr.
Kirkland has served as the President of Kirkland Messina LLC, an investment
banking firm, since March 1994. Mr. Kirkland was employed as Senior Vice
President of Dabney/Resnick, Inc., an investment banking firm now known as
Dabney/Resnick/Imperial, LLC ("D/R") from June 1991 until February 1994. D/R
acted as the placement agent for certain debt securities previously issued by
the Company. 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
the Chairman and a director of Steinway Musical Instruments, Inc. and
Utilimaster Corporation. He also serves on the boards of several privately held
businesses.
36
<PAGE>
E. JAMES MUELLER has been a director of the Company since 1991. Mr. Mueller
has been a principal with J.M. Associates, Inc., a business development
consulting firm, since January 1992. From June 1978 through December 1991, Mr.
Mueller was the Vice President of Sales/Marketing of Air Cargo Associates, Inc.,
a Connecticut airline charter brokerage/sales corporation. The Company has
entered into a commission agreement with J.M. Associates, Inc., pursuant to
which J.M. Associates, Inc. is compensated for originating transactions for the
Company. See "--Certain Transactions."
COMPOSITION OF THE BOARD
The number of directors of the Company is fixed at seven members; and the
number of directors constituting the Board shall not be changed without the
affirmative vote of at least 75% of the issued and outstanding shares of Common
Stock. The directors of the Company are elected at the annual meeting of the
stockholders. The Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws of the Company provide for a Board of Directors divided into
three classes, as nearly equal in size as possible, with staggered terms of
three years. As a result, approximately one-third of the Board will be elected
each year. Messrs. Mueller and Kirkland will serve until the 1999 Annual Meeting
of Stockholders and Messrs. Dyer and Murnane will serve until the 2000 Annual
Meeting of Stockholders. There are currently three vacancies on the Board and
the Company intends to fill these vacancies in the near future or reduce the
size of the Board.
COMMITTEES OF THE BOARD AND COMPENSATION COMMITTEE INTERLOCKS
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. No executive officer of the Company
serves as a member of the Board of Directors or compensation committee of any
entity which has one or more executive officers serving as a member of the
Company's Board of Directors.
The Audit Committee makes recommendations to the Board concerning the
selection of outside auditors, reviews the financial statements of the Company
and considers such other matters in relation to the internal and external audit
of the financial affairs of the Company as may be necessary or appropriate in
order to facilitate accurate and timely financial reporting. The Audit Committee
also reviews proposals for major transactions.
The Company does not maintain a standing nominating committee or other
committee performing similar functions.
EXECUTIVE COMPENSATION
The following sets forth certain information regarding the aggregate cash
compensation paid to or earned by the Company's Chief Executive Officer during
fiscal 1995, 1996 and 1997. Mr. Murnane became Chief Financial Officer of the
Company on June 17, 1996. Messrs. Dyer and Murnane are referred to as the "Named
Executives." No other executive officer of the Company earned in excess of
$100,000 in fiscal 1997.
37
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
NAME AND ------------------------------- --------------------
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)
- ------------------------------------------------------- --------- --------- --------- --------------------
<S> <C> <C> <C> <C>
Alexius A. Dyer III.................................... 1997 1996 161,154 125,911(1) 224,543 (2)
President and Chief 1995 135,000 80,000(1) --
Executive Officer 133,108 -- 107,000
George Murnane III..................................... 1997 139,615 -- (3) 104,787
Executive Vice President
and Chief Financial Officer
</TABLE>
- ------------------------
(1) Mr. Dyer's fiscal 1997 bonus was $133,343 and was paid in fiscal 1998. The
$125,911 listed for fiscal 1997 is bonus paid in fiscal 1997 but earned with
respect to fiscal 1996 under the terms of his employment agreement. The
bonus of $80,000 listed for fiscal 1996 was paid to him upon execution of
his employment agreement.
(2) These options were canceled pursuant to the restructuring of the Company's
indebtedness (the "Restructuring"), effective on October 3, 1996.
(3) Mr. Murnane became Executive Vice President and Chief Financial Officer of
the Company on June 17, 1996. Mr. Murnane's fiscal 1997 bonus was $80,000
and was paid in fiscal 1998.
STOCK OPTION GRANTS AND VALUES
The following table sets forth certain information regarding option grants
to the Named Executives during fiscal 1997:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS
-------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE ---------------------
NAME GRANTED (#) FISCAL YEAR (%) ($/SH) EXPIRATION DATE 5%($) 10%($)
- ------------------------------------------ ----------- ------------------- ----------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alexius A. Dyer III....................... 224,543 47 3.00 10/03/06 423,642 1,073,591
George Murnane III........................ 104,787 22 3.00 10/03/06 197,700 501,010
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES TABLE
The following table sets forth certain information with respect to option
exercises by the Named Executives during fiscal year 1997 and the value of
options owned by the Named Executives at May 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------------- ----------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Alexius A. Dyer III........................ 0 0 89,818/134,725 134,727/202,088
George Murnane III......................... 0 0 33,333/71,454 50,000/107,181
</TABLE>
- ------------------------
(1) Based on the closing price of the Company's Common Stock on the AMEX on May
31, 1997 of $4.50 per share.
38
<PAGE>
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 1997 pursuant to a
Directors compensation plan that was adopted during fiscal 1995. Directors are
also reimbursed for expenses incurred in connection with their attendance at
meetings of the Board of Directors.
THE STOCK OPTION PLAN
PLAN DESCRIPTION. The Stock Option Plan is intended to provide a means to
attract, retain and motivate selected employees and directors of the Company.
The Stock Option Plan provides for the grant to eligible employees of incentive
stock options, non-qualified stock options, stock appreciation rights,
restricted shares and restricted share units, performance shares and performance
units, dividend equivalents and other share-based awards (collectively
"awards"). All employees and directors are eligible to participate in the Stock
Option Plan. The Stock Option Plan is administered by the Compensation
Committee. The Compensation Committee has the full and final authority to select
employees to whom awards may be granted, to determine the type of awards to be
granted to such employees and to make all administrative determinations required
by the Stock Option Plan. The Compensation Committee also has authority to waive
conditions relating to an award or to accelerate vesting of awards. The Stock
Option Plan provides for certain grants of nonqualified stock options to
directors who are not executive officers of the Company. An aggregate of 645,782
shares of Common Stock have been reserved for issuance under the Stock Option
Plan, subject to anti-dilution adjustments in the event of certain changes in
the Company's capital structure.
STOCK OPTIONS. The Stock Option Plan authorizes the granting of both
incentive stock options and non-qualified stock options. At the discretion of
the Compensation Committee, awards of options to employees under the Stock
Option Plan may be granted in tandem with other types of awards. Incentive stock
options granted to employees under the Stock Option Plan, and any accompanying
share appreciation rights, must generally expire within 10 years after the date
of grant. The exercise prices of incentive stock options must be equal to at
least 100% of the fair market value of the Common Stock on the date of grant.
The exercise prices of non-qualified stock options may be more or less than the
fair market value of the Common Stock on the date of grant. Awards under the
Stock Option Plan to employees, except for vested shares, are not transferable
by the holder other than by will or applicable laws of descent or distribution,
except pursuant to a designation filed by an employee with the Company as to who
shall receive the benefits specified under the Stock Option Plan upon the death
of such employee.
RESTRICTED STOCK. The Stock Option Plan authorizes the Compensation
Committee to grant shares of restricted stock to employees, subject to the terms
and conditions imposed by the Compensation Committee. These terms may include a
restriction period during which the shares of restricted stock may not be sold,
assigned, transferred, pledged or otherwise encumbered and during which such
shares may be subject to forfeiture. Except for such restrictions on transfer
and such other restrictions as the Compensation Committee may impose, the
recipient of restricted stock will have all the rights of a holder of Common
Stock as to such restricted stock including the right to vote the shares and the
right to receive dividends. Except as provided by the Compensation Committee at
the time of grant or otherwise, upon a termination of employment for any reason
during the restriction period, all shares still subject to restriction will be
forfeited by the employee. The Stock Option Plan also authorizes the
Compensation Committee to grant restricted share units to an employee, under
which shares of Common Stock or cash will be delivered to the employee after the
expiration of the restriction period.
SHARE APPRECIATION RIGHTS. The Stock Option Plan authorizes the
Compensation Committee to grant share appreciation rights to employees, subject
to the terms and conditions imposed by the Compensation Committee. Share
appreciation rights give an employee the right to receive the excess of the fair
market value of shares of Common Stock on the date of exercise over the exercise
price of the share appreciation
39
<PAGE>
rights, as set by the Compensation Committee. Terms within the discretion of the
Compensation Committee may include the time of exercise, the form of
consideration payable at exercise, and the method by which shares of Common
Stock will be delivered or deemed to be delivered to an employee.
PERFORMANCE SHARES AND PERFORMANCE UNITS. The Stock Option Plan also
authorizes the Compensation Committee to grant performance shares or performance
units to employees, subject to the terms and conditions imposed by the
Compensation Committee. These awards provide shares of Common Stock or cash to
an employee upon the satisfaction of certain performance objectives, as
determined by the Compensation Committee. Awards may be fixed or may vary in
accordance with the level of such performance. The Compensation Committee
generally may revise the performance objectives to reflect the occurrence of
significant events which it expects to have a substantial effect on the
performance objectives. Except as provided by the Compensation Committee at the
time of grant or otherwise, upon termination of employment during the
performance period, all shares and units relating to such performance period
will be forfeited by the employee.
DIVIDEND EQUIVALENTS. The Stock Option Plan also authorizes the
Compensation Committee to grant dividend equivalents to employees. These awards
may relate to other awards of shares, rights or units and generally give an
employee the right to receive cash or other property equal to any dividends paid
on the shares of Common Stock underlying such other awards. Such dividend
equivalents may either be paid when accrued or deemed to have been reinvested in
additional shares of Common Stock. Dividend equivalents (other than freestanding
dividend equivalents) will be subject to all conditions and restrictions of the
underlying awards to which they relate.
In addition to the foregoing types of awards, the Stock Option Plan also
authorizes the Compensation Committee, subject to limitations under applicable
law, to grant employees any other awards based on shares of Common Stock,
including the award of unrestricted shares purely as a bonus and not subject to
any conditions. Cash awards, as an element of or supplement to any other award,
are also authorized under the Stock Option Plan. In all cases, the Compensation
Committee shall determine the terms and conditions of such awards.
The Stock Option Plan generally may be amended, altered, suspended,
discontinued or terminated from time to time by the Board of Directors, except
that stockholder approval is required, in accordance with Section 422 of the
Code, for any amendment (a) to increase the number of shares of Common Stock
reserved for issuance under the Stock Option Plan or (b) to change the class of
employees eligible to participate in the Stock Option Plan; provided, however,
that no such amendment may impair the rights of any participant without his
consent.
The Stock Option Plan provides that, if the Compensation Committee
determines that a stock dividend, recapitalization, stock split, reorganization,
merger, consolidation, spin-off, combination, or similar corporate transaction
affects the Common Stock such that an adjustment is appropriate to prevent
dilution or enlargement of rights of employees participating in the Stock Option
Plan, the Compensation Committee has discretion to adjust the number and kind of
shares to be issued under the Stock Option Plan, the number and kind of shares
issuable in respect of outstanding awards and the exercise price, grant price or
purchase price of any award. The Stock Option Plan provides that such
adjustments with respect to options of directors who are not executive officers
of the Company shall be made automatically. In addition, the Compensation
Committee is authorized to make adjustments in the terms of awards in
recognition of certain unusual or non-recurring events affecting the Company and
its financial statements.
EMPLOYMENT AGREEMENTS
As of October 3, 1996, the Company extended for an additional five years the
employment agreement with Mr. Dyer. The employment agreement provides for
payment of a base salary of $175,000 per annum for each year during the
remaining term and annual cost-of-living increases, which base salary may be
40
<PAGE>
increased as the Board deems appropriate. During the term of the employment
agreement and any extension thereof, Mr. Dyer shall serve as a member of the
Board of Directors.
Mr. Dyer's employment agreement also provides that he is entitled to an
annual bonus during the stated term in an amount not less than 5% of the
Company's net income before extraordinary and non-recurring items and income
taxes, subject to two adjustments. First, in computing net income, the Company
is required to exclude any item of revenue (including cancellation of
indebtedness income) or expense attributable to any litigation commenced by or
against the Company. Second, items of revenue and expense attributable to the
sale of aircraft are not considered extraordinary or non-recurring items.
Pursuant to the employment agreement, if Mr. Dyer is terminated without
cause prior to the end of the term of the employment agreement, the Company is
required to pay to Mr. Dyer the base salary for the remaining term of the
agreement plus an amount equal to a pro rata portion (based on months employed
during the current fiscal year) of the bonus paid to him during the previous
fiscal year. If Mr. Dyer terminates the employment agreement following the
occurrence of a "Change of Control" (as defined), the Company is obligated to
pay to him an amount equal to the average annual compensation paid to him during
the two most recent fiscal years by the Company.
As of October 3, 1996, the Company entered into a five-year employment
agreement with Mr. Murnane. The employment agreement provides for payment of a
base salary of $150,000 per annum for each year during the remaining term and
annual cost-of-living increases, which base salary may be increased as the Board
deems appropriate. During the term of the employment agreement and any extension
thereof, Mr. Murnane shall serve as a member of the Board of Directors.
Mr. Murnane's employment agreement also provides that he is entitled to an
annual bonus during the stated term in an amount not less than 3% of the
Company's net income before extraordinary and non-recurring items and income
taxes, subject to two adjustments. First, in computing net income, the Company
is required to exclude any item of revenue (including cancellation of
indebtedness income) or expense attributable to any litigation commenced by or
against the Company. Second, items of revenue and expense attributable to the
sale of aircraft are not considered extraordinary or non-recurring items.
Pursuant to the employment agreement, if Mr. Murnane is terminated without
cause prior to the end of the term of the employment agreement, the Company is
required to pay to Mr. Murnane the base salary for the remaining term of the
agreement plus an amount equal to a pro rata portion (based on months employed
during the current fiscal year) of the bonus paid to him during the previous
fiscal year. If Mr. Murnane terminates the employment agreement following the
occurrence of a "Change of Control" (as defined), the Company is obligated to
pay to him an amount equal to the average annual compensation paid to him during
the two most recent fiscal years by the Company.
CERTAIN TRANSACTIONS
In connection with the Restructuring, Kirkland Messina LLC, an investment
banking firm of which Mr. Kirkland is a principal, acted in an advisory capacity
to the Company with respect to the negotiation of the Credit Agreement. Kirkland
Messina LLC received customary fees for acting in this capacity which did not
exceed 5% of such firm's consolidated gross revenues during its last fiscal
year.
In December 1995, the Company entered into a commission agreement with J.M.
Associates, Inc. a business development consulting firm of which Mr. Mueller is
a principal. The commission agreement is non-exclusive and provides that J.M.
Associates will receive commissions of between 3% and 4% of the purchase or sale
price of completed parts acquisitions or sales with parties introduced to the
Company by J.M. Associates. During fiscal 1997 and 1996, J.M. Associates
received commissions totaling $6,500 and $86,000, respectively, for services
rendered under the commission agreement.
In March 1997, CCAIR, Inc., a commuter airline of which Mr. Murnane is a
director, entered into a nonexclusive consignment arrangement for aircraft spare
parts with the Company. The consignment arrangement is terminable by either
party on 30-days' written notice, and provides that the Company will receive
consignment fees consistent with industry practice. Such fees totaled less than
$60,000 in fiscal 1997.
The Company believes the terms of such transactions were on terms no less
favorable then could be obtained from unaffiliated third parties. Any future
transactions between the Company and its officers or directors are subject to
approval by a majority of the disinterested directors of the Company.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 14, 1997 and as adjusted
to reflect the sale of Common Stock offered by this Prospectus, by (i) each
person who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock, (ii) each of the Company's executive
officers and directors, and (iii) all executive officers and directors as a
group. Common Stock not outstanding but deemed beneficially owned by virtue of
the right of an individual to acquire shares within 60 days are treated as
outstanding only when determining the amount and percentage of Common Stock
owned by such individual. Except as noted, each person has sole voting and sole
investment power with respect to the shares shown. The address of each person
listed is 1954 Airport Road, Suite 200, Atlanta, Georgia 30341, except as
otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED AFTER THE
OWNED PRIOR TO OFFERING OFFERING
------------------------ ----------------------
<S> <C> <C> <C> <C>
NAME NUMBER(1) PERCENT NUMBER PERCENT
- --------------------------------------------------------------------- ----------- ----------- --------- -----------
Alexius A. Dyer III.................................................. 172,743 6.6% 172,743 3.9%
George Murnane III................................................... 72,633 2.9 72,633 1.7
James M. Isaacson.................................................... 24,673 * 24,673 *
Kyle R. Kirkland..................................................... 57,207 2.3 57,207 1.3
E. James Mueller..................................................... 99,072 3.9 99,972 2.3
Kennedy Capital Management, Inc. (2)(3).............................. 400,000 16.2 400,000 9.5
10829 Olive Blvd.
St. Louis, Missouri 63141
Executive officers and directors as a group (five persons)........... 426,328 14.8 426,328 9.3
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes the following shares of Common Stock subject to options exercisable
presently or within 60 days: Mr. Dyer, 161,500; Mr. Murnane, 72,633; Mr.
Isaacson, 24,673; Mr. Kirkland, 57,207 and Mr. Mueller, 64,072.
(2) Based on the Schedule 13G filed by Kennedy Capital Management, Inc. on July
11, 1997.
(3) Kennedy Capital Management has sole voting power with respect to 379,961
shares constituting 15.86% of the outstanding shares prior to the offering.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred Stock
par value $.001 per share. As of November 18, 1997, there were 2,463,095 shares
of Common Stock outstanding which were held of record by 58 stockholders and no
shares of Preferred Stock outstanding.
COMMON STOCK
Subject to the rights of the holders of any Preferred Stock which may be
outstanding, each holder of Common Stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor, and, in the event of liquidation to
share pro rata in any distribution of the Company's assets after payment or
providing for the payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote
for each share held of record on the applicable record date on all matters
presented to a vote of stockholders, including the election of directors.
Holders of Common Stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities. All outstanding shares
of Common Stock are, and the shares of Common Stock offered hereby will be when
issued, fully paid and nonassessable.
The transfer agent for the Common Stock is The First Union National Bank of
North Carolina.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue shares of
Preferred Stock in one or more series and to fix, by resolution, the voting
powers, full or limited or no voting powers, and such designations, preferences
and relative, participating, optional or other rights, if any, and the
qualifications, limitations or restrictions thereof, if any, including the
number of shares in such series (which the Board may increase or decrease as
permitted by Delaware law), liquidation preferences, dividend rates, conversion
rights and redemption provisions of the shares constituting any series, without
any further vote or action by the stockholders. Any share of Preferred Stock so
issued would have priority over the Common Stock with respect to dividend or
liquidation rights or both.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy contest, tender
offer, merger, or otherwise, and thereby protect the continuity of the Company's
management.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company has included in its Amended and Restated Certificate of
Incorporation provisions to eliminate the personal liability of its directors
for monetary damages resulting from breaches of their fiduciary duty (provided
that such provision does not eliminate liability for breaches of the duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
DGCL or for any transaction from which the director derived an
43
<PAGE>
improper personal benefit) and in its Bylaws provisions to indemnify its
directors and officers to the fullest extent permitted by Section 145 of the
DGCL, including circumstances in which indemnification is otherwise
discretionary. The Company believes that these provisions are necessary to
attract and retain qualified persons as directors and officers. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions or otherwise, the Company has been advised that in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S RESTATED
CERTIFICATE OF INCORPORATION AND BYLAWS
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. Section 203 of the
DGCL applies to the Company. Section 203 may have the effect of delaying,
deferring or preventing a change of control of the Company. In general, Section
203 of the DGCL prohibits a publicly held Delaware corporation from engaging in
a "business combination" with an "interested stockholder" for a period of three
years following the time such stockholder became an "interested stockholder,"
unless (a) prior to such time the board of directors of the corporation approved
either the "business combination" or the transaction which resulted in the
stockholder becoming an "interested stockholder" or (b) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (i) persons who are directors and also officers and (ii) by
employee stock plans, in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (c) at or subsequent to such time the
"business combination" is approved by the board of directors and authorized at
the annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the "interested stockholder." A "business combination" includes
certain mergers, stock or asset sales and other transactions resulting in a
financial benefit to the "interested stockholder." An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock.
CLASSIFIED BOARD. The Company's Amended and Restated Certificate of
Incorporation provides for three classes of directors with staggered terms of up
to three years such that approximately one-third of the Board stands for
election each year. Directors of the first class, which shall initially consist
of two members, shall be elected to hold office for terms expiring at the annual
meeting of the Company held with respect to fiscal 1998; directors of the second
class, which shall initially consist of two members, shall be elected to hold
office for terms expiring at the annual meeting of the Company held with respect
to fiscal 1999; and directors of the third class, which shall initially consist
of two members, shall be elected to hold office for terms expiring at the annual
meeting of the Company held with respect to fiscal 2000. Thereafter, the
successors to each class of directors shall be elected for three-year terms.
Directors so elected may not be removed except for cause. Such removal for cause
may be effected only by the resolution of all other Board members, stating such
cause, or by the affirmative vote of the holders of at least 75% of the voting
power of all of the then outstanding shares of Common Stock. No director so
removed may be reinstated so long as the cause for removal continues to exist.
"Cause," shall be limited to criminal acts and gross negligence. The
classified-board provisions may not be repealed except by the affirmative vote
of 75% of the voting power of all the then outstanding shares of Common Stock.
Staggered terms for members of the Board of Directors may have the effect of
delaying, deferring or preventing a change of control of the Company since only
one-third of the directors are up for election each year and may not be removed
except for cause.
44
<PAGE>
STOCKHOLDER ACTION BY WRITTEN CONSENT. The Company's Amended and Restated
Certificate of Incorporation provides that no action required or permitted to be
taken at any annual or special meeting of the stockholders of the Company may be
taken without a meeting, and the power of stockholders of the Company to consent
in writing, without a meeting, to the taking of any action is specifically
denied. This provision of the Certificate of Incorporation may not be amended,
modified or repealed by the stockholders of the Company, except with the consent
of holders of three-fourths of the Company's outstanding Common Stock.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Amended and Restated Bylaws provide that stockholders seeking
to bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual or special meeting of
stockholders, must provide timely notice thereof in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than 30 days nor more than
60 days prior to the meeting; provided, however, that in the event that less
than 40 days' notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be timely must be
received no later than the close of business on the 10th day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made. The Company's Amended and Restated Bylaws also specify
certain requirements for a stockholder's notice to be in proper written form.
These provision may preclude some stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting. As set forth below, this provision of
the Company's Amended and Restated Bylaws may not be amended, modified or
repealed by the stockholders of the Company, except with the consent of holders
of three-fourths of the Company's outstanding Common Stock.
ADJOURNMENT OF MEETINGS OF STOCKHOLDERS. The Company's Amended and Restated
Bylaws provide that when a meeting of stockholders of the Company is convened,
the presiding officer, if directed by the Board of Directors, may adjourn the
meeting if no quorum is present for the transaction of business or if the Board
of Directors determines that adjournment is necessary or appropriate to enable
the stockholders to consider fully information which the Board of Directors
determines has not been made sufficiently or timely available to stockholders or
to otherwise effectively exercise their voting rights. This provision will,
under certain circumstances, make more difficult or delay actions by the
stockholders opposed by the Board of Directors. The effect of such provision
could be to delay the timing of a stockholders' meeting, including in cases
where stockholders have brought proposals before the stockholders which are in
opposition to those brought by the Board of Directors and therefore may provide
the Board of Directors with additional flexibility in responding to such
stockholder proposals. This provision of the Company's Amended and Restated
Bylaws may not be amended, modified or repealed by the stockholders of the
Company, except with the consent of holders of three-fourths of the Company's
outstanding Common Stock.
AMENDMENT OF THE BYLAWS. The Company's Amended and Restated Certificate of
Incorporation provides that no provision of the Company's Amended and Restated
Bylaws may be amended, altered, changed or repealed by the stockholders of the
Company, nor may any provision of the Company's Amended and Restated Bylaws
inconsistent with such provision be adopted by the stockholders of the Company,
except with the consent of holders of three-fourths of the Company's outstanding
Common Stock. This provision will make it more difficult for stockholders to
make changes to the Company's Amended and Restated Bylaws that are opposed by
the Board of Directors. This provision of the Amended and Restated Certificate
of Incorporation may not be amended, modified or repealed by the stockholders of
the Company, except with the consent of holders of three-fourths of the
Company's outstanding Common Stock.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the offering, the Company will have outstanding
4,213,095 shares of Common Stock (4,475,595 if the Underwriters' over-allotment
option is exercised in full). The 1,750,000 shares of Common Stock sold in the
offering (2,012,500 if the Underwriters' over-allotment option is exercised in
full), together with all other shares outstanding as of the effective date of
the offering, will be freely tradable without restriction or further
registration under the Securities Act, except for shares then held by
"affiliates" of the Company or purchased by any affiliate of the Company in this
offering, which will be subject to the limitations of Rule 144 promulgated under
the Securities Act ("Rule 144").
In general, under Rule 144 as currently in effect, a person (or persons who
shares are aggregated) who holds shares of restricted securities as to which a
minimum of one year has elapsed since the later of the date of acquisition from
an issuer or from an affiliate of the issuer, and any person who is an
"affiliate" as that term is defined under the Securities Act, is entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of the Common Stock of
the Company (approximately 42,131 immediately following this offering) or (ii)
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding a sale by such person. Sales under Rule 144 are also subject to
certain manner-of-sale provisions, notice requirements and the availability of
current public information about the Company. Under Rule 144, however, a person
who holds shares of Restricted Securities as to which a minimum of two years has
elapsed since their acquisition from the issuer or an affiliate of the issuer
and who is not, and for three months prior to the sale of such shares has not
been, an affiliate of the Company is free to sell such shares without regard to
the volume, manner-of-sale and certain other limitations contained in Rule 144.
On the closing date of the offering, there will be outstanding options to
purchase 645,782 shares of the Company's Common Stock. The shares of Common
Stock that may be issued upon the exercise of options granted under the Stock
Option Plan are subject to an effective registration statement pursuant to the
Securities Act. Shares issued under the Stock Option Plan are freely tradeable
in the open market, subject, in the case of sales by affiliates, to the volume,
manner of sale, notice and public information requirements of Rule 144. See
"Management--The Stock Option Plan."
The Company and its executive officers and directors have entered into
lock-up agreements with Cruttenden Roth Incorporated, pursuant to which the
Company and its executive officers and directors have agreed, subject to certain
exceptions, not to, directly or indirectly, (i) sell, grant any option to
purchase or otherwise transfer or dispose of any Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock or file a
registration statement under the Securities Act with respect to the foregoing or
(ii) enter into any swap or other agreement or transaction that transfers, in
whole or in part, the economic consequence of ownership of the Common Stock for
a period of 180 days after the date of this Prospectus, without the prior
written consent of Cruttenden Roth Incorporated.
46
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Cruttenden Roth Incorporated and Scott &
Stringfellow, Inc. are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company the shares of Common Stock offered
hereby. Each Underwriter will purchase the number of shares set forth opposite
its name below, and will purchase the shares at the price to public less
underwriting discounts and commissions set forth on the cover page of this
Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated.....................................................
Scott & Stringfellow, Inc........................................................
----------
Total........................................................................ 1,750,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if the Underwriters purchase any
shares.
The Representatives have advised the Company that the several Underwriters
propose to offer the shares of Common Stock in part directly to the public at
the price to public set forth on the cover page of this Prospectus, and in part
to certain dealers at the price to public less a concession not exceeding
$ per share. The Underwriters may allow, and such dealers may reallow, a
concession not exceeding $ per share to other dealers. After the shares
of Common Stock are released for sale to the public, the Representatives may
change the initial price to public and other selling terms. No change in such
terms shall change the amount of proceeds to be received by the Company as set
forth on the cover page of this Prospectus.
The Company has granted the Underwriters an option, exercisable for 45 days
after the date of this Prospectus, to purchase up to 262,500 additional shares
of Common Stock at the same price per share as the initial shares offered. The
Underwriters may purchase these shares solely to cover over-allotments, if any,
in connection with the sale of the shares of Common Stock offered hereby. If the
Underwriters exercise the over-allotment option, the Underwriters will purchase
additional shares in approximately the same proportions as those in the above
table.
The Representatives have informed the Company that they do not expect any
sales of the shares of Common Stock offered hereby to be made to discretionary
accounts by the Underwriters.
The Underwriting Agreement provides that the Company and the Underwriters
will indemnify each other against certain liabilities under the Act.
The Company's executive officers and directors, beneficially owning in the
aggregate 426,328 shares of Common Stock prior to this offering, including
options exercisable within 60 days of the date of this Prospectus, have agreed,
subject to certain exceptions, not to, directly or indirectly, (i) sell, grant
any option to purchase or otherwise transfer or dispose of any Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock or
file a registration statement under the Securities Act with respect to the
foregoing or (ii) enter into any swap or other agreement or transaction that
transfers, in
47
<PAGE>
whole or in part, the economic consequence of ownership of the Common Stock for
a period of 180 days after the date of this Prospectus, without the prior
written consent of Cruttenden Roth Incorporated.
The Company has also agreed to sell to the Representatives, for nominal
consideration, warrants (the "Representatives' Warrants") to purchase 175,000
shares of Common Stock. The Representatives' Warrants will be exercisable for a
period of five years commencing one year after the effective date of the
Registration Statement of which this Prospectus forms a part, at a price per
share equal to 120% of the price to public set forth on the cover hereof. During
the exercise period, holders of the Representatives' Warrants are entitled to
certain demand and incidental registration rights with respect to the securities
issuable upon exercise of the Representatives' Warrants. The Common Stock
issuable on exercise of the Representatives' Warrants are subject to adjustment
in certain events to prevent dilution. The Representatives' Warrants cannot be
transferred, assigned or hypothecated for a period of one year from the date of
issuance except to the Underwriters, selling group members and their officers or
partners.
48
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Common Stock will be passed upon
for the Company by King & Spalding, Atlanta, Georgia. Certain legal matters will
be passed upon for the Underwriters by Berliner Zisser Walter & Gallegos, P.C.,
Denver, Colorado.
EXPERTS
The consolidated balance sheets of the Company as of May 31, 1996 and 1997
and the consolidated statements of operations, stockholders' equity and cash
flows for the years ended May 31, 1995, 1996 and 1997 have been included herein
in reliance upon the report of Grant Thornton LLP, independent certified public
accountants and upon the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act, with respect to the securities offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings contained in the
Registration Statement. Such additional information, exhibits and undertakings
can be inspected at and obtained from the Commission in the manner set forth
below. For further information with respect to the securities offered hereby and
the Company, reference is made to the Registration Statement and the financial
schedules and exhibits filed as a part thereof. Statements contained in this
Prospectus as to the terms of any contract or other document are not necessarily
complete, and, in each case, reference is made to the copy of each such contract
or other document that has been filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files periodic reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed with
the Commission, as well as the Registration Statement, can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of such
material can also be obtained by mail from the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a Web site at http:\\www.sec.gov
which contains reports, proxy statements and other information regarding
registrants that file electronically with the Commission. Copies of such
reports, proxy statements and other information may also be obtained from the
Company upon request to the Company at its principal executive offices.
49
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants......................................................... F-2
Consolidated Balance Sheets as of May 31, 1997 and 1996.................................................... F-3
Consolidated Statements of Operations for the years ended May 31, 1997, 1996 and 1995...................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended May 31, 1997, 1996 and
1995..................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended May 31, 1997, 1996 and 1995...................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of May 31, 1997 and August 31, 1997......................................... F-18
Consolidated Statements of Earnings for the three months ended August 31, 1996 and August 31, 1997......... F-19
Consolidated Statements of Cash Flows for the three months ended August 31, 1996 and August 31, 1997....... F-20
Notes to Consolidated Financial Statements................................................................. F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
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, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
May 31, 1997. 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 of 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, 1997 and 1996 and the
consolidated results of its operations and its consolidated cash flows for each
of the three years in the period ended May 31, 1997, in conformity with
generally accepted accounting principles.
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,
1997. In our opinion, this schedule presents fairly, in all material respects,
the information required to be set forth therein.
Grant Thornton LLP
Fort Lauderdale, Florida
July 21, 1997
F-2
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents (Note A)............................................... $ 465,725 $ 940,274
Accounts receivable, net of allowance for doubtful accounts of approximately
$610,000 in 1997 and $735,000 in 1996.......................................... 1,354,030 2,014,691
Inventories (Notes A, C and D)................................................... 11,645,284 9,277,315
Deferred tax benefit--current, net of valuation allowance of $772,000 in 1997 and
$960,000 in 1996 (Note F)...................................................... -- --
Other current assets............................................................. 98,285 68,798
------------- -------------
Total current assets........................................................... 13,563,324 12,301,078
Property and equipment (Notes A, D, E)
Aircraft held for lease.......................................................... 6,914,458 2,974,760
Leasehold improvements........................................................... 21,567 36,815
Machinery and equipment.......................................................... 908,590 972,507
------------- -------------
7,844,615 3,984,082
Less accumulated depreciation.................................................... 1,186,444 2,051,620
Land and building held for sale, net............................................. -- 750,000
------------- -------------
Property and equipment, net.................................................... 6,658,171 2,682,462
------------- -------------
Other assets
Deferred debt costs, net (Note A)................................................ 638,012 762,431
Deferred tax benefit, net of valuation allowance of $1,814,000 in 1997 and
$3,011,000 in 1996 (Note F).................................................... 72,663 --
Deferred restructuring fees...................................................... -- 334,860
Deposits and other assets........................................................ 355,000 51,500
------------- -------------
1,065,675 1,148,791
------------- -------------
$ 21,287,170 $ 16,132,331
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current maturities of long-term obligations (Note D)............................. $ 1,542,488 $ 3,695,108
Long-term obligations in default classified as current........................... -- 14,041,667
Income tax payable............................................................... 156,096 72,249
Accounts payable................................................................. 486,854 2,171,496
Accrued liabilities (Note M)....................................................... 2,234,350 3,160,982
------------- -------------
Total current liabilities...................................................... 4,419,788 23,141,502
Long-term obligations, less current maturities (Notes D)........................... 12,207,113 406,760
Commitments and contingencies (Notes E)............................................ -- --
Stockholders' equity (deficit) (Notes G and H) Preferred Stock--$.001 par value;
authorized 2,000,000 shares and 500,000 shares; no shares outstanding in 1997 and
1996 respectively................................................................ -- --
Common stock--$.001 par value; authorized 20,000,000 shares; issued and outstanding
2,395,095 and 4,041,779 shares in 1997 and 1996 respectively..................... 2,395 4,042
Additional paid-in capital......................................................... 13,003,686 2,654,332
Accumulated deficit................................................................ (8,345,812) (10,074,305)
------------- -------------
Total stockholders' equity (deficit)........................................... 4,660,269 (7,415,931)
------------- -------------
$ 21,287,170 $ 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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Net sales......................................................... $ 20,123,196 $ 21,410,201 $ 21,998,869
Lease revenue..................................................... 1,108,702 1,794,768 2,984,218
------------- ------------- -------------
Total revenues.................................................. 21,231,898 23,204,969 24,983,087
Cost of sales....................................................... 12,679,915 13,207,671 17,712,427
Selling, general and administrative expenses........................ 3,828,020 3,921,795 4,358,119
Provision (recovery) for doubtful accounts.......................... 123,399 464,099 (334,571)
Depreciation........................................................ 791,517 933,976 1,108,363
Unusual and nonrecurring items (Note N)............................. -- -- (177,115)
Losses of service center subsidiary (Note O)........................ -- -- 675,860
------------- ------------- -------------
Total operating costs........................................... 17,422,851 18,527,541 23,343,083
Income from operations.......................................... 3,809,047 4,677,428 1,640,004
Interest expense.................................................... 1,610,590 2,411,469 2,856,787
Interest and other income........................................... (60,632) (34,058) (602,943)
------------- ------------- -------------
Earnings (loss) before income taxes and extraordinary loss...... 2,259,089 2,300,017 (613,840)
Provision for income taxes (Note F)................................. -- 14,048 --
------------- ------------- -------------
Earnings (loss) before extraordinary loss....................... 2,259,089 2,285,969 (613,840)
Extraordinary loss on debt restructuring (Note B)................... 530,596 -- --
------------- ------------- -------------
Net earnings (loss)............................................. $ 1,728,493 $ 2,285,969 $ (613,840)
------------- ------------- -------------
------------- ------------- -------------
Per share data:
Primary earnings (loss) per common and common equivalent share
Earnings (loss) before extraordinary item....................... $ 1.25 $ 15.27 $ (4.10)
Extraordinary item.............................................. (.29) -- --
------------- ------------- -------------
Net earnings (loss)........................................... $ .96 $ 15.27 $ (4.10)
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding used in primary calculation... 1,806,938 149,696 149,696
------------- ------------- -------------
------------- ------------- -------------
Fully-diluted earnings (loss) per common and common equivalent
share
Earnings (loss) before extraordinary item....................... $ 1.25 $ 12.69 $ (4.10)
Extraordinary item.............................................. (.29) -- --
------------- ------------- -------------
Net earnings (loss)........................................... $ .96 $ 12.69 $ (4.10)
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding used in fully-diluted
calculation..................................................... 1,806,938 242,288 149,696
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL
NUMBER OF PAR PAID-IN ACCUMULATED
SHARES VALUE CAPITAL DEFICIT TOTAL
----------- --------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 1, 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)
1-for-27 reverse Stock Split (Note B)........... (3,892,084) (3,892) -- -- (3,892)
Issuance of Common Stock in exchange for
extinguishment of Subordinated Debentures
(Note B)...................................... 2,245,400 2,245 11,224,755 -- 11,227,000
Costs incurred related to stock issuance (Note
B)............................................ -- -- (875,401) -- (875,401)
Net earnings.................................... -- -- -- 1,728,493 1,728,493
----------- --------- ------------- -------------- -------------
Balance at May 31, 1997......................... 2,395,095 $ 2,395 $ 13,003,686 $ (8,345,812) $ 4,660,269
----------- --------- ------------- -------------- -------------
----------- --------- ------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................................. $ 1,728,493 $ 2,285,969 $ (613,840)
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization...................................... 1,010,302 1,372,979 1,693,301
Depreciation--service center....................................... -- -- 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
Loss on restructuring.............................................. 530,596 -- --
(Increase) in deferred tax benefit................................. (66,428) -- (23,696)
Decrease in accounts receivable.................................... 640,461 577,770 1,224,560
Decrease in notes receivable....................................... -- 313,490 806,510
Decrease in income tax refund...................................... -- -- 1,930,000
(Increase) decrease in inventories................................. (2,433,481) (3,030,045) 4,910,834
(Increase) decrease in other current assets........................ (29,487) (37,318) 154,271
(Increase) decrease in other assets................................ (303,500) (51,500) 178,322
(Decrease) increase in accounts payable and accrued expenses....... (494,754) 1,527,750 (4,591,430)
------------ ------------ -------------
Net cash provided by operating activities........................ 582,202 2,094,300 5,828,098
Cash flows from investing activities:
Capital expenditures................................................. (6,197,955) (875,281) (135,936)
Proceeds from sale of aircraft held for lease........................ -- 1,450,000 --
Proceeds from sale of land and building.............................. 750,000 -- --
------------ ------------ -------------
Net cash provided by (used in) investing activities.............. (5,447,955) 574,719 (135,936)
Cash flows from financing activities:
Net borrowings under line of credit.................................. 7,397,930 -- --
Borrowings under term loans.......................................... 6,750,000 -- --
Payments under term loans............................................ (403,331) -- --
Increase in deferred restructuring costs............................. (540,641) (334,860) --
Increase in deferred debt costs...................................... (675,785) (50,000) --
Repayments of debt obligations....................................... (8,136,969) (2,192,216) (4,939,621)
------------ ------------ -------------
Net cash (used in) provided by financing activities.............. 4,391,204 (2,577,076) (4,939,621)
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents................... (474,549) 91,943 752,541
Cash and cash equivalents at beginning of year......................... 940,274 848,331 95,790
------------ ------------ -------------
Cash and cash equivalents at end of year............................... $ 465,725 $ 940,274 $ 848,331
------------ ------------ -------------
Supplemental disclosures of cash flow information (Note J):
Cash paid during the year for:
Interest........................................................... $ 1,321,259 $ 1,206,028 $ 2,167,279
------------ ------------ -------------
------------ ------------ -------------
Income taxes....................................................... $ 1,400 $ 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, 1997, 1996 AND 1995
NOTE A-- DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
International Airline Support Group, Inc. and Subsidiaries (the "Company")
is primarily engaged in the sale of aircraft, aircraft parts, leasing of
aircraft and related services. Since its inception in 1982, the Company has
become a primary source of replacement parts for widely operated aircraft models
such as the McDonnell Douglas MD-80 and DC-9. The Company supplies parts to over
600 customers worldwide.
A) 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. Included in cash and cash equivalents at
May 31, 1997 is $90,564 of restricted cash representing maintenance reserves
received on certain aircraft held for lease.
B) INVENTORIES
Inventories are stated at the lower of cost or market. The cost of aircraft
and aircraft parts is determined on a specific identification basis.
C) 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 3 to 7 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.
D) DEFERRED DEBT COSTS
The deferred debt costs as of May 31, 1996 relate to the costs associated
with obtaining the Company's Senior Secured Notes and Convertible Subordinated
Debentures. However, in Fiscal 1997, these obligations were settled and
accordingly, the remaining unamortized balance of the deferred debt costs were
written off to amortization expense and extraordinary loss on debt
restructuring.
The deferred debt costs as of May 31, 1997 relate to the costs associated
with obtaining the Senior Secured Revolving Credit Loan Facility and the Senior
Secured Term Loans. These costs are being amortized using the interest method
over five years, the life of the respective debt issue. Accumulated amortization
at May 31, 1997 and 1996, was approximately $87,773 and $1,307,000,
respectively.
E) 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 antidilutive. 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.
F-7
<PAGE>
NOTE A-- DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Earnings per share for fiscal 1997 is computed using the treasury stock
method. Fully diluted earnings (loss) per shares is computed for fiscal 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 year 1995 due to the net losses for those periods.
Supplemental pro forma earnings per share data, assuming the issuance of
certain shares and repayment of indebtedness as discussed in Note Q, would be
$0.97 for the year ended May 31, 1997.
F) 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.
G) 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 1997, 1996 and 1995 were insignificant. The Company does not provide
any health or other benefits to retirees.
H) 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.
I) 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 of assets and liabilities at each
year end.
J) 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, 1997 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.
F-8
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997, 1996 AND 1995
NOTE A-- DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
K) LAND AND BUILDING HELD FOR SALE
The land and building (the "property") held for sale represented the
Company's corporate offices and adjacent warehouse located in Miami, Florida. As
of May 31, 1996, the property was written down to $750,000. Included in
depreciation expense for the year ended May 31, 1996 is approximately $190,000
relating to this write down. In fiscal 1997, the Company sold the property for
approximately $750,000, after related selling expenses.
L) NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS 128 establishes new standards for computing and presenting earnings
per share ("EPS"). Specifically, SFAS No. 128 replaces the presentation of
primary EPS with a presentation of basic EPS, requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
a complex capital structure and requires a reconciliation of the numerator and
denominator of the diluted EPS computation. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted. At this time, management has not determined the
impact of SFAS No. 128 on the earnings per share amounts presented in the
accompanying statements of operations.
M) RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
NOTE B--RESTRUCTURING OF CAPITAL
On October 3, 1996, the Company completed a restructuring of its capital
structure. Pursuant to the restructuring, the Company effected a 1-for-27
reverse split of its common stock, issued approximately 2,245,400 shares of
common stock in exchange for the entire $10 million principal amount outstanding
and related accrued interest of its 8% Convertible Debentures of $1,227,000, and
redeemed the entire $7.7 million principal amount outstanding of its 12% Senior
Notes with the proceeds of an advance under a credit agreement entered into on
October 3, 1996 with the Bank of New York (See Note D). Consummation of the
restructuring cured all defaults with respect to the Debentures and the Senior
Notes. Upon completion of the restructuring, costs incurred related to the
restructuring and issuance of common stock of $875,401 were recorded as an
offset to paid in capital. The transaction resulted in an after tax charge of
$530,596, which has been recorded as an extraordinary item.
F-9
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997, 1996 AND 1995
NOTE C--INVENTORY
Inventories at May 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Aircraft parts................................................... $ 10,758,867 $ 7,938,049
Aircraft available for sale...................................... 886,417 1,339,266
------------- ------------
$ 11,645,284 $ 9,277,315
------------- ------------
------------- ------------
</TABLE>
NOTE D--LONG-TERM OBLIGATIONS
Long-term obligations at May 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
12% Senior Secured Notes......................................... $ -- $ 7,700,000
8% Convertible Subordinated Debentures........................... -- 10,000,000
Mortgage note payable to bank.................................... -- 429,260
Senior Secured Revolving Credit Loans............................ 7,397,931 --
Senior Secured Term Loan--A...................................... 2,766,669 --
Senior Secured Term Loan--B...................................... 3,580,000 --
Notes payable due in equal monthly installments through October
1997, bearing interest at 9.5% to 11.5% collateralized by
equipment...................................................... 2,471 8,000
Capitalized lease obligations.................................... 2,530 6,275
------------- ------------
13,749,601 18,143,535
Less: Current maturities and long-term obligations in default
classified as current.......................................... 1,542,488 17,736,775
------------- ------------
$ 12,207,113 $ 406,760
------------- ------------
------------- ------------
</TABLE>
In October 1996 the Company entered into a five-year Credit Agreement with
the Bank of New York, which provides for a $3 million term loan and up to an $11
million revolving credit. The Credit Facility is secured by substantially all of
the assets of the Company and availability of amounts for borrowing is subject
to certain limitations and restrictions. The interest rate is the higher of the
prime rate plus 2% or the federal funds effective rate plus 2.5% per annum. The
revolving line of credit was increased to $13 million in March 1997. As of May
31, 1997, the available line of credit is $2,912,260. The credit agreement
includes certain covenants which provide, among other things, restrictions
relating to the maintenance of consolidated net worth and other financial
ratios, as well as a restriction on the payment of dividends.
In March 1997, the Company entered into a Second Term Loan with the Bank of
New York for an additional $3,750,000. The Term Loan is collateralized by
certain aircraft purchased by the Company with the proceeds from the loan. The
interest rate is the higher of the prime rate plus 2% or the federal funds
effective rate plus 2.5% per annum.
F-10
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997, 1996 AND 1995
NOTE D--LONG-TERM OBLIGATIONS (CONTINUED)
In July 1992, the Company issued $18.0 million of five (5) year 12% Senior
Secured Notes ("Notes") due July 1997. In October 1996, the Company paid the
remaining outstanding principal on these Notes.
In September 1993, the Company issued $10.0 million in Convertible
Subordinated Debentures ("Debentures"), due August 2003, through a private
placement offering. The Debentures were redeemed in whole on October 3, 1996 as
part of the Company's restructuring of capital (see Note B). Pursuant to the
restructuring, the Company issued approximately 2,245,400 shares of common stock
in exchange for the entire $10 million principal amount outstanding and the
related accrued interest of $1,227,000.
In September 1992, the Company entered into a promissory note and mortgage
and security agreement with a bank. In fiscal 1997, the Company sold the land
and building in Miami, and with the proceeds from the sale, paid the remaining
balance on the promissory note.
The scheduled maturities of long-term obligations in each of the next five
years subsequent to May 31, 1997 are as follows: 1998--$1,542,488,
1999--$1,516,664, 2000--$2,256,664, 2001--$766,660, and 2002-- $7,662,124.
NOTE E--LEASES
The Company leases 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, 1997, 1996 and 1995 was approximately
$36,000, $53,000 and $220,000, respectively. At May 31, 1997, the future minimum
payments on non-cancellable operating leases are as follows: 1998--$244,669,
1999--$249,625, 2000-- $236,167, 2001--$205,977, and 2002--$210,961.
The Company currently leases aircraft and engines to customers under
long-term operating lease agreements. In addition to minimum base rentals, the
lease agreement requires additional rent based upon aircraft and engine usage.
The net investment in aircraft and engines held for or leased to customers was
approximately $6,124,000 and $1,849,000 at May 31, 1997 and 1996, respectively.
NOTE F--INCOME TAXES
The provision for income taxes for the years ended May 31, 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Current provision:
Federal................................................... $ 72,663 $ 14,048 $ --
State..................................................... -- -- --
--------- --------- ----------
72,663 14,048 --
Deferred provision.......................................... (72,663) -- --
--------- --------- ----------
$ -- $ 14,048 $ --
--------- --------- ----------
--------- --------- ----------
</TABLE>
F-11
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997, 1996 AND 1995
NOTE F--INCOME TAXES (CONTINUED)
The tax effect of the Company's temporary differences and carryforwards is
as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax (benefits)--current:
Reserve for overhaul costs.................................... $ (103,000) $ (332,000)
Bad debt reserve.............................................. (257,000) (276,000)
Inventory capitalization...................................... (187,000) (145,000)
Accrued payroll............................................... (131,000) --
Accrued legal settlement costs................................ -- (1,000)
Accrued vacation.............................................. (15,000) (15,000)
Accrued--other................................................ -- (4,000)
Accrued repair costs.......................................... -- (187,000)
Reserve for inventory......................................... (79,000) --
------------- -------------
$ (772,000) $ (960,000)
------------- -------------
------------- -------------
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax liabilities (benefits)--non-current:
Depreciation and amortization................................. $ (647,000) $ (17,000)
Aircraft--capitalized maintenance............................. 36,000 36,000
Restructuring charges......................................... (135,000) (160,000)
Net operating loss carryforward--federal...................... (759,000) (2,467,000)
Net operating loss carryforward--state........................ (177,000) (260,000)
Minimum tax credit--federal................................... (196,000) (135,000)
Other, net...................................................... (8,000) (8,000)
------------- -------------
$ (1,886,000) $ (3,011,000)
------------- -------------
------------- -------------
</TABLE>
The Company has recorded valuation allowances equal to the amount of the
deferred tax benefits at May 31, 1996 and 1997. The valuation allowance has
decreased by $1,385,000 in fiscal 1997.
The following table summarizes the differences between the Company's
effective tax rate and the statutory federal rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal rate................................................ 34.0% 34.0% (34.0)%
Operating losses with no current tax benefit.......................... -- -- 34.0
Tax benefit from net operating loss carryforward...................... (30.7) (33.4) --
Other................................................................. (3.3) -- --
--------- --------- ---------
Effective tax rate.................................................... --% 0.6% --%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has net operating loss carryforwards for federal tax purposes of
approximately $2.0 million. The net operating losses will expire at various
points through the year 2010. The Company has a federal minimum tax credit
carryover of approximately $195,000 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.
F-12
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997, 1996 AND 1995
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 October 1996, the Company amended the Articles of Incorporation to
authorize the issuance of up to 2,000,000 shares of preferred stock. No such
stock has been issued.
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. However, upon the completion of the
restructuring of the Company's capital in October 1996, the Company terminated
this plan and the stockholders concurrently approved a New Stock Option Plan,
pursuant to which 598,782 shares of common stock were reserved. In fiscal 1997,
options were granted to purchase 598,609 shares of common stock at exercise
prices ranging from $2.75--$3.00 per share and expire 10 years from the date of
the grant. Prior to May 31, 1996, the Company accounted for such options under
APB Opinion 25 and related Interpretations. Commencing June 1, 1996, the Company
accounts for non-qualified options issued to non-employees, under SFAS 123,
Accounting for Stock Based Compensation.
The exercise price of all options granted by the Company equals the market
price at the date of the grant. No compensation expense has been recognized.
Had compensation cost for the Stock Option Plan and non-qualified options to
employees been determined based on the fair value of the options at the grant
dates consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been changed to the pro forma amounts below.
Disclosure of such amounts is not required for the fiscal year ended May 31,
1995 and accordingly is not presented below.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net income
As reported..................................................... $ 1,728,493 $ 2,285,969
Pro forma....................................................... $ 1,150,122 $ 2,285,969
Primary earnings per share
As reported..................................................... $ .96 $ 15.27
Pro forma....................................................... $ .63 $ 15.27
</TABLE>
The above pro forma disclosures may not be representative of the effects on
reported net income for future years as certain options vest over several years
and the Company may continue to grant options to employees.
The fair value of each option grant is estimated on the date of grant using
the binomial option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1997 and fiscal 1996, respectively:
dividend yield of 0.0 percent for all years; expected volatility of 30 percent;
risk-free interest rates of 6.25 percent; and expected holding periods of 4
years.
F-13
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997, 1996 AND 1995
NOTE H--STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's fixed stock options as of May 31,
1997 and 1996, and changes during the years ending on those dates is as follows:
<TABLE>
<CAPTION>
MAY 31, 1997 MAY 31, 1996
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- --------------- ----------- -----------------
Outstanding at beginning of year......................... 269,500 $ .70 295,000 $ .65
Granted.................................................. 598,609 2.99 --
Exercised................................................ -- --
Expired.................................................. -- --
Cancelled................................................ (269,500) .70 (25,500) .19
----------- -----------
Outstanding at end of year............................... 598,609 2.99 269,500 .70
Options exercisable at end of year....................... 392,430 269,500
Weighted-average fair value of options granted during the
year................................................... $ .97 $ --
</TABLE>
The following information applies to options outstanding at May 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED-
AVERAGE
RANGES OF REMAINING WEIGHTED- WEIGHTED-
EXERCISE CONTRACTUAL AVERAGE AVERAGE
PRICES SHARES LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- -------------- --------- ----------- --------------- --------- ---------------
$ 2.75--$3.00 598,609 9.4 years $ 2.99 392,430 $ 2.98
</TABLE>
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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
United States.................................................................... $ 18,067 $ 19,800 $ 18,048
Africa and Middle East........................................................... 402 623 1,204
Europe........................................................................... 319 177 1,350
Latin America.................................................................... 408 2,454 4,347
Canada........................................................................... 133 -- 34
Asia............................................................................. 1,903 151 --
--------- --------- ---------
$ 21,232 $ 23,205 $ 24,983
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997, 1996 AND 1995
NOTE I--SALES TO MAJOR CUSTOMERS/FOREIGN AND DOMESTIC (CONTINUED)
No customer accounted for more than 10% of the Company's sales in fiscal
1997. 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
both fiscal 1997 and 1995. No other customer accounted for more than 10% of the
Company's sales in fiscal 1996.
The Company had sales to a Venezuelan customer which accounted for
approximately 11% of net sales in fiscal 1995. There were no sales to this
customer in fiscal 1997 or fiscal 1996. 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'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
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--SUPPLEMENTAL CASH FLOW DISCLOSURE
In fiscal 1997, the Company completed a restructuring of its capital (See
Note B). In conjunction with this restructuring, the Company incurred the
following noncash financing activity:
<TABLE>
<S> <C>
Decrease in Subordinated Debentures............................ $10,000,000
Decrease in Accrued Interest................................... 1,224,755
Decrease in Common Stock....................................... 2,245
Increase in Paid in Capital.................................... (10,892,140)
Decrease in Deferred Restructuring Fees........................ (334,860)
</TABLE>
In fiscal 1997, the Company exchanged an aircraft with a net book value of
$237,552 for certain inventory. No gain or loss was recorded on the exchange.
The net change in inventory in fiscal 1997 and 1996, as derived from the
change in balance sheet amounts, has been adjusted for the following items:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net increase in inventory............................................................. $ 2,367,969 $ 2,780,045
Write-down of aircraft................................................................ -- 250,000
Transfer of aircraft from inventory to held for lease................................. 303,064 --
Exchange of aircraft held for lease for inventory..................................... (237,552) --
------------ ------------
Cash flow impact from change in inventory............................................. $ 2,433,481 $ 3,030,045
------------ ------------
------------ ------------
</TABLE>
F-15
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997, 1996 AND 1995
NOTE K--RELATED PARTY TRANSACTIONS
In connection with obtaining the Credit Agreement with the Bank of New York,
the Company agreed to pay the placement agent a $250,000 placement fee. A
director of the Company was a principal of the placement agent. In fiscal 1997,
the Company paid the placement agent $200,000 of this fee, and the remaining
$50,000 will be paid in fiscal 1998.
In fiscal 1997, the Company entered into a consignment inventory agreement
with another company which has a Board member who is also a director of the
Company. Payments under this agreement were de-minimis in fiscal 1997.
NOTE L--FOURTH QUARTER ADJUSTMENTS
In fiscal 1997, the Company recorded a fourth quarter tax benefit of
approximately $102,000 as a result of adjusting the estimated effective tax rate
used during the year.
In 1996, the Company recorded a fourth quarter adjustment in the amount of
approximately $385,000 which related to capitalizing the costs incurred as a
result of the planned restructuring (see Note B). Approximately $306,000 of
these costs were expensed in the first three quarters of fiscal 1996.
NOTE M--ACCRUED LIABILITIES
Accrued liabilities consist of the following items:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Customer deposits................................................. $ 361,153 $ 367,669
Accrued repair costs.............................................. 507,161 187,157
Accrued legal costs............................................... 10,000 --
Accrued interest.................................................. 9,014 1,165,468
Accrued payroll................................................... 559,270 399,886
Accrued property taxes............................................ 28,695 31,144
Accrued commissions............................................... 167,741 167,741
Reserve for repair of leased aircraft............................. 579,143 480,308
Other............................................................. 12,173 361,609
------------ ------------
$ 2,234,350 $ 3,160,982
------------ ------------
------------ ------------
</TABLE>
NOTE N--WELLMAN TRANSACTION
In January 1995, the Company entered into an agreement with the former
Chairman 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
F-16
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997, 1996 AND 1995
NOTE N--WELLMAN TRANSACTION (CONTINUED)
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. 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 O--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.
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.
NOTE P--EMPLOYMENT AGREEMENTS
In October 1996, the Company entered into employment agreements with two of
its executive officers for a period of five years. The agreements provide the
employees with a certain minimum annual salary plus bonus. The agreements
provide the employees with an option to terminate their agreements and receive a
lump sum payment equal to the employee's average annual compensation paid by the
Company for the most recent two years upon a change in control of the Company.
NOTE Q--SECURITIES OFFERING
In November 1997, the Board of Directors authorized the Company to file a
registration statement with the Securities and Exchange Commission, and the
Company plans to sell 1,750,000 shares. The proceeds will be used to repay
indebtedness.
F-17
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1997* 1997
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents........................................................ $ 465,725 $ 219,215
Accounts receivable, net of allowance for doubtful accounts
of approximately $610,000 at May 31, 1997 and $636,000 at
August 31, 1997................................................................ 1,354,030 1,661,424
Inventories...................................................................... 12,000,284 10,951,751
Deferred tax benefit--current, net of valuation allowance
of $772,000 at May 31, 1997 and August 31, 1997................................ -- --
Other current assets............................................................. 98,285 478,701
------------- -------------
Total current assets....................................................... 13,918,324 13,311,091
Property and equipment
Aircraft and engines held for lease.............................................. 6,914,458 6,929,058
Leasehold improvements........................................................... 21,567 43,609
Machinery and equipment.......................................................... 908,590 918,095
------------- -------------
7,844,615 7,890,762
Accumulated depreciation......................................................... 1,186,444 1,439,847
------------- -------------
Property and equipment, net.................................................. 6,658,171 6,450,915
Other assets
Deferred debt costs, net......................................................... 638,012 700,837
Deferred tax benefit, net of valuation allowance of
$1,814,000 at May 31, 1997 and August 31, 1997................................. 72,663 285,163
------------- -------------
Total other assets........................................................... 710,675 986,000
------------- -------------
$ 21,287,170 $ 20,748,006
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term obligations...................................... $ 1,542,488 $ 1,503,827
Accounts payable................................................................. 642,950 1,016,217
Accrued expenses................................................................. 2,234,350 1,590,095
------------- -------------
Total current liabilities.................................................. 4,419,788 4,110,139
Long-term obligations, less current maturities..................................... 12,207,113 10,858,111
Commitments and contingencies
Stockholders' equity
Preferred stock--$.001 par value; authorized 2,000,000 shares;
0 shares outstanding at May 31, 1997 and August 31, 1997....................... -- --
Common stock--$.001 par value; authorized 20,000,000 shares;
issued and outstanding 2,395,095 shares at May 31, 1997 and
2,440,595 shares at August 31, 1997............................................ 2,395 2,440
Additional paid-in capital....................................................... 13,003,686 13,137,891
Accumulated deficit.............................................................. (8,345,812) (7,360,575)
------------- -------------
Total stockholders' equity............................................... 4,660,269 5,779,756
------------- -------------
$ 21,287,170 $ 20,748,006
------------- -------------
------------- -------------
</TABLE>
- ------------------------
* Condensed from audited Financial Statements
The accompanying notes are an integral part of these condensed financial
statements.
F-18
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
<S> <C> <C>
AUGUST 31, AUGUST 31,
1996 1997
------------ ------------
Revenues
Net sales......................................................................... $ 4,038,671 $ 4,940,969
Lease revenue..................................................................... 120,000 626,057
------------ ------------
Total revenues................................................................ 4,158,671 5,567,026
Cost of sales......................................................................... 2,317,141 3,140,020
Selling, general and administrative expenses.......................................... 834,654 1,036,448
Provision (recovery) for doubtful accounts............................................ 41,157 (47,529)
Depreciation and amortization......................................................... 165,812 253,744
------------ ------------
Total operating costs......................................................... 3,358,764 4,382,683
------------ ------------
Earnings from operations...................................................... 799,907 1,184,343
Interest expense...................................................................... 488,879 413,300
Interest and other income............................................................. (33,040) (1,695)
------------ ------------
Earnings before income taxes.................................................. 344,068 772,738
Benefit from income taxes............................................................. -- (212,499)
------------ ------------
Net earnings.................................................................. $ 344,068 $ 985,237
------------ ------------
------------ ------------
Per share data:
Earnings per common and common equivalent share................................... $ 2.30 $ 0.37
------------ ------------
------------ ------------
Weighted average shares outstanding used in calculation........................... 149,704 2,696,275
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-19
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
<S> <C> <C>
AUGUST 31, AUGUST 31,
1996 1997
---------- -----------
Cash flows from operating activities:
Net earnings.......................................................................... $ 344,068 $ 985,237
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 211,622 253,404
Provision (recovery) for doubtful accounts.......................................... 41,157 (47,529)
(Increase) decrease in inventory.................................................... (83,711) 1,048,533
Changes in other assets and liabilities............................................. (747,075) (1,191,598)
---------- -----------
Total adjustments............................................................... (578,007) 62,810
Net cash provided by (used in) operating activities............................. (233,939) 1,048,047
Cash flows from investing activities:
Capital equipment additions........................................................... (3,448) (46,146)
---------- -----------
Net cash used in investing activities........................................... (3,448) (46,146)
Cash flows from financing activities:
Net decrease in debt obligations...................................................... (10,073) (1,382,661)
Issuance of common stock.............................................................. -- 134,250
Payment of deferred restructuring costs............................................... (233,687) --
Payment of deferred debt issue costs.................................................. (95,000) --
---------- -----------
Net cash used in financing activities........................................... (338,760) (1,248,411)
---------- -----------
Net decrease in cash.................................................................... (576,147) (246,510)
Cash and cash equivalents at beginning of period........................................ 940,274 465,725
---------- -----------
Cash and cash equivalents at end of period.............................................. $ 364,127 $ 219,215
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-20
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain adjustments (consisting only of normal
and recurring adjustments) necessary to present fairly International Airline
Support Group, Inc. and Subsidiaries' condensed consolidated balance sheets as
of May 31, 1997 and August 31, 1997, the condensed consolidated statements of
earnings for the three months ended August 31, 1996 and August 31, 1997, and the
condensed consolidated statements of cash flows for the three months ended
August 31, 1996 and August 31, 1997.
The accounting policies followed by the Company are described in the May 31,
1997 financial statements.
The results of operations for the three months ended August 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
2. Inventories consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31,
MAY 31, 1997 1997
------------- --------------
<S> <C> <C>
Aircraft parts................................................ $ 11,113,867 $ 10,050,334
Aircraft and Engines available for sale....................... 886,417 901,417
------------- --------------
$ 12,000,284 $ 10,951,751
------------- --------------
------------- --------------
</TABLE>
3. On October 3, 1996, the Company completed a restructuring of its capital
structure (the "Restructuring"). Pursuant to the Restructuring, the Company
effected a 1-for-27 reverse split of its common stock, $.001 par value per share
(the "Common Stock"); issued approximately 2,245,400 shares of its Common Stock,
after giving effect to the reverse split, in exchange for the entire $10,000,000
principal amount outstanding of, and related accrued interest on, its 8%
Convertible Debentures due November 30, 2003 (the "Debentures"); and redeemed
the entire $7,700,000 principal amount outstanding of its 12% Senior Notes due
July 17, 1997 (the "Senior Notes") with the proceeds of an advance under a
credit agreement entered into on October 3 (the "Credit Agreement").
Consummation of the Restructuring cured all defaults with respect to the
Debentures and the Senior Notes.
All references to the number of common shares and per common share amounts
throughout the financial statements have been restated to reflect the reverse
split.
4. Earnings per Share
The Company's earnings per share for the three months ended August 31, 1997
were calculated using the modified treasury stock method. This method was used
because the number of shares common stock issuable on exercise of stock options,
in the aggregate, exceeded 20 percent of the number of shares of common stock
outstanding as of August 31, 1997.
Supplemental pro forma earnings per share data, assuming the issuance of
certain shares and repayment of indebtedness as discussed in Note 7, would be
$.33 for the three months ended August 31, 1997.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which changes the
method for reporting Earnings Per Share. The statement is effective for
financial statement periods ending after December 15, 1997. The Company has not
yet determined the impact, if any, of adopting the new standard.
F-21
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. Credit Facility
On October 3, 1996, the Company entered into the Credit Agreement, which
provided for a $3 million term loan and up to an $11 million revolving credit.
During the fourth fiscal quarter of 1997, the Credit Agreement was amended to
create a new term loan facility of $3.75 million (collectively referred to as
the "Credit Facility") and the revolving credit was increased to $13 million.
The Credit Facility is secured by substantially all of the assets of the Company
and availability of amounts for borrowing is subject to certain limitations and
restrictions. Such limitations and restrictions are discussed in the Company's
Proxy Statement/Prospectus filed with the Securities and Exchange Commission on
August 29, 1996.
6. Supplemental Cash Flow Disclosures: Cash payments for interest were
$255,000 and $413,000 for the three months ended August 31, 1996 and August 31,
1997, respectively. Cash and cash equivalents include $247,317 of restricted
cash at August 31, 1997. Restricted cash includes customer receipts deposited
into the Company's lockbox account, which are applied the next business day
against the outstanding amount of the Credit Facility, and customer deposits on
aircraft and engines leases.
7. In June 1997, the Board of Directors authorized an increase of 115,000 in
the number of shares available for grant under the Company's 1996 Long Term
Incentive and Share Award Plan, subject to approval by the shareholders, which
was subsequently obtained. In fiscal 1998, options to purchase 115,173 shares
have been granted.
8. In November 1997, the Board of Directors authorized the Company to file a
registration statement with the Securities and Exchange Commission to sell
1,750,000 shares. The proceeds will be used to repay indebtedness.
F-22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 13
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Selected Financial Data................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 26
Management................................................................ 36
Principal Stockholders.................................................... 42
Description of Capital Stock.............................................. 43
Shares Eligible for Future Sale........................................... 46
Underwriting.............................................................. 47
Legal Matters............................................................. 49
Experts................................................................... 49
Available Information..................................................... 49
Index to Consolidated Financial Statements................................ F-1
</TABLE>
1,750,000 SHARES
[LOGO]
INTERNATIONAL AIRLINE
SUPPORT GROUP, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
[LOGO]
[LOGO]
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 5,898
NASD filing fee................................................... 2,211
American Stock Exchange additional listing fee.................... 17,500
Accounting fees and expenses...................................... 70,000
Legal fees and expenses........................................... 140,000
Blue Sky fees and expenses (including counsel fees)............... 7,500
Printing and Engraving expenses................................... 115,000
Transfer Agent and Registrar fees and expenses.................... 1,500
Miscellaneous Expenses............................................ 40,391
---------
Total......................................................... $ 400,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The following summary is qualified in its entirety by reference to the
complete text of the statute referred to below, the Registrant's Amended and
Restated Certificate of Incorporation and its Amended and Restated Bylaws.
The Registrant's Amended and Restated Bylaws provides that each person who
was or is made a party to, is threatened to be made a party to or is otherwise
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, or is contacted by any governmental or
regulatory body in connection with any investigation or inquiry, by reason of
the fact that he or she is or was a director or executive officer of the
Registrant or is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding or investigation is alleged
action in an official capacity or in any other capacity as set forth above shall
be indemnified and held harmless by the Registrant to the fullest extent
authorized by the Delaware General Corporation Law as it currently exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Registrant to provide broader indemnification
rights than such law permitted the Registrant to provide prior to such
amendment).
Under Section 145 of the Delaware General Corporation Law, a corporation may
indemnify a director, officer, employee or agent of the corporation (or other
entity if such person is serving in such capacity at the corporation's request)
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him if he acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. In the
case of an action brought by or in the right of a corporation, the corporation
may indemnify a director, officer, employee or agent of the corporation (or
other entity if such person is serving in such capacity at the corporation's
request) against expenses (including attorneys' fees) actually and reasonably
incurred by him if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation, except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless a court determines that, despite the adjudication of liability but in
view of all the circumstances of
II-1
<PAGE>
the case, such person is fairly and reasonably entitled to indemnification for
such expenses as the court shall deem proper. Expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation.
The Registrant's Amended and Restated Certificate of Incorporation provides
that no director of the Registrant shall be personally liable to the Registrant
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for any acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv)
for any transaction in which the director derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following list describes sales by the Registrant of securities in the
past three years which were not registered under the Securities Act in reliance
upon Sections 4(2), 3(b) and/or 3(a)(2) of the Securities Act.
The Company has from time to time granted options to employees and directors
pursuant to its Stock Option Plan. The issuance of the options was exempt
pursuant to Section 4(2).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
1.1** Underwriting Agreement
2.4 Credit Agreement between BNY Financial Corporation and the Registrant (incorporated by reference to
Exhibit 2.4 to Amendment No. 2 to the Registrant's Registration Statement on Form S-4 filed on August
29, 1996 (File No. 333-08065) (the "S-4")).
2.4.1** First Amendment, Waiver and Agreement, dated as of March 24, 1997, between BNY Financial Corporation
and the Registrant.
2.4.2** Second Amendment and Agreement, dated as of September 9, 1997, between BNY Financial Corporation and
the Registrant.
2.4.3** Third Amendment and Agreement, dated as of October 15, 1997, between BNY Financial Corporation and the
Registrant.
3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1996 (the
"1996 Form 10-K").
3.1.1** Amendment to Amended and Restated Certificate of Incorporation of the Registrant dated as of September
22, 1997.
3.1.2** Amendment to Amended and Restated Certificate of Incorporation of the Registrant dated as of September
22, 1997
3.2 Restated and Amended Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the 1996
Form 10-K).
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the 1996 Form 10-K).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
4.2** Form of Representatives' Warrants
5.1* Opinion of King & Spalding as to the legality of the securities being registered.
10.1.1 Employment Agreement, dated as of December 1, 1995, between the Registrant and Alexius A. Dyer III, as
amended on October 3, 1996 (incorporated by reference to Exhibit 10.1.1 to the 1996 Form 10-K).
10.1.2 Employment Agreement dated as of October 3, 1996, between the Registrant and George Murnane III
(incorporated by reference to Exhibit 10.1.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 28, 1997).
10.2.1 1996 Long-Term Incentive and Share Award Plan (incorporated by reference to Appendix B to the Proxy
Statement/Prospectus included in the S-4).
10.2.2 401(k) Plan (incorporated by reference to Exhibit 10-H to the Registrant's Annual Report on Form 10-K
for the fiscal year ended May 31, 1992 (the "1992 Form 10-K")).
10.2.3 Bonus Plan (incorporated by reference to Exhibit 10.2.4 to the 1992 Form 10-K).
10.2.4 Cafeteria Plan (incorporated by reference to Exhibit 10.2.5 to the 1993 Form 10-K).
10.2.5 Form of Option Certificate (Employee Non-Qualified Stock Option) (incorporated by reference to Exhibit
10.2.5 to the 1996 Form 10-K).
10.2.6 Form of Option Certificate (Director Non-Qualified Stock Option) (incorporated by reference to Exhibit
10.2.6 to the 1996 Form 10-K).
10.2.7 Form of Option Certificate (Incentive Stock Option) (incorporated by reference to Exhibit 10.2.7 to the
1996 Form 10-K).
10.14 Commission Agreement dated December 1, 1995 between the Registrant and J.M. Associates, Inc.
(incorporated by reference to Exhibit 10.14 to the Registrant's 1996 Form 10-K).
10.15 Aircraft Parts Purchase Agreement, dated May 16, 1996, between Paxford Int'l, Inc. and the Registrant
(incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-4 (File
No. 333-08065) filed on July 12, 1996).
10.16 Contract for Sale and Purchase dated January 10, 1997 between the Registrant and American Connector
Corporation (incorporated by reference to Exhibit 10.16 to Registrant's Annual Report on Form 10-K for
the fiscal year ended May 31, 1997 (the "1997 Form 10-K").
10.17 Office Lease Agreement dated January 31, 1997 between the Registrant and Globe Corporate Center, as
amended (incorporated by reference to Exhibit 10.17 to the 1997 Form 10-K).
10.18 Lease Agreement dated March 31, 1997 between the Registrant and Port 95-4, Ltd. (incorporated by
reference to Exhibit 10.18 to the Registrant's 1997 Form 10-K).
11** Statement regarding computation of per share earnings.
21** Subsidiaries of Registrant.
23.1** Consent of Grant Thornton LLP.
23.2 Consent of King & Spalding (included in Exhibit 5.1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
24.1 Power of attorney of the officers and directors of Registrant signing this Registration Statement
(included on signature page hereof).
</TABLE>
- ------------------------
* to be filed by amendment
** filed herewith
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer, or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on November 19, 1997.
<TABLE>
<S> <C> <C>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
By: /s/ GEORGE MURNANE III
-----------------------------------------
George Murnane III
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Alexius A. Dyer III and George Murnane III, and
each of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, from such person and in each person's
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to the Registration Statement, and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission and to sign and file any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done as fully
to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue thereof.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ ALEXIUS A. DYER III President, Chief
- ------------------------------ Executive Officer and November 19, 1997
Alexius A. Dyer III Director
/s/ GEORGE MURNANE III Executive Vice President
- ------------------------------ and Chief Financial November 19, 1997
George Murnane III Officer and Director
/s/ JAMES M. ISAACSON
- ------------------------------ Vice President of Finance, November 19, 1997
James M. Isaacson Treasurer and Secretary
/s/ E. JAMES MUELLER
- ------------------------------ Director November 19, 1997
E. James Mueller
/s/ KYLE R. KIRKLAND
- ------------------------------ Director November 19, 1997
Kyle R. Kirkland
- ------------------------
* by signing his name hereto, does hereby
sign this Registration Statement on behalf of each of the directors and
officers of the Registrant after whose typed names asterisks appear pursuant
to powers of attorney duly executed by such directors and officers, and filed
with the Securities and Exhcange Commission as exhibits to this Registration
Statement.
II-5
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------- ------------ ------------------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ADDITIONS
------------------------
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------------------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1995
Reserves deducted from assets to which
they apply:
Allowance for possible losses on
accounts receivable................. $ 940,214 $ 406,147 $ -- $ 727,176(a) $ 619,185
------------ ----------- ----------- ------------ ------------
------------ ----------- ----------- ------------ ------------
Year ended May 31, 1996
Reserves deducted from assets to which
they apply:
Allowance for possible losses on
accounts receivable................. $ 619,185 $ 482,375 $ -- $ 366,874(a) $ 734,686
------------ ----------- ----------- ------------ ------------
------------ ----------- ----------- ------------ ------------
Year ended May 31, 1997
Reserves deducted from assets to which
they apply:
Allowance for possible losses on
accounts receivable................. $ 734,686 $ 123,375 $ -- $ 247,585(a) $ 610,476
------------ ----------- ----------- ------------ ------------
------------ ----------- ----------- ------------ ------------
</TABLE>
- ------------------------
(a) Write-off of accounts receivable against the reserve.
S-1
<PAGE>
EXHIBIT 1.1
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
1,750,000 Shares (1)
Common Stock
UNDERWRITING AGREEMENT
December ___, 1997
CRUTTENDEN ROTH INCORPORATED
SCOTT & STRINGFELLOW, INC.
As Representatives of the Several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92715
Dear Sirs:
International Airline Support Group, Inc., a Delaware corporation (the
"Company"), hereby confirms its agreement with the several underwriters named in
Schedule 1 hereto (the "Underwriters"), for whom you have been duly authorized
to act as representatives (in such capacity, the "Representatives"), as set
forth below. If you are the only Underwriters, all references herein to the
Representatives shall be deemed to be to the Underwriters.
1. Securities. Subject to the terms and conditions herein contained, the
Company proposes to sell to the several Underwriters an aggregate of 1,750,000
shares (the "Firm Securities") of the Company's Common Stock, $.001 par value
per share (the "Common Stock"). The Company also proposes to sell to the
several Underwriters not more than 262,500 additional shares of Common Stock if
requested by the Representatives as provided in Section 3 of this Agreement.
Any and all shares of Common Stock to be purchased by the Underwriters pursuant
to such option are referred to herein as the "Option Securities." The Firm
Securities and any Option Securities are collectively referred to herein as the
"Securities."
2. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agree with, each of
the several Underwriters that:
(i) a registration statement on Form S-1 (File No. 333-_______)
with respect to the Securities, including a prospectus subject to
completion, has been filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of
1933, as amended (the "Act"), and one or more amendments to such
registration statement may have been so filed. After the execution of
this Agreement, the Company will file with the Commission either (A)
- ---------------
(1) Plus an option to purchase up to 262,500 additional shares to cover
over-allotments, if any.
<PAGE>
if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (1)
if the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Securities, that shall identify
the Preliminary Prospectus (as hereinafter defined) that it
supplements containing such information as is required or permitted by
Rules 434, 430A and 424(b) under the Act or (2) if the Company does
not rely on Rule 434 under the Act, a prospectus in the form most
recently included in an amendment to such registration statement (or,
if no such amendment shall have been filed, in such registration
statement), with such changes or insertions as are required by Rule
430A under the Act or permitted by Rule 424(b) under the Act, and in
the case of either clause (A)(1) or (A)(2) of this sentence, as have
been provided to and approved by the Representatives prior to the
execution of this Agreement, or (B) if such registration statement, as
it may have been amended, has not been declared by the Commission to
be effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment
has been furnished to and approved by the Representatives prior to the
execution of this Agreement. As used in this Agreement, the term
"Registration Statement" means the registration statement initially
filed relating to the Securities, as amended at the time when it was
or is declared effective, including all financial schedules and
exhibits thereto and including any information omitted therefrom
pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Preliminary Prospectus" means each
prospectus subject to completion filed with such registration
statement or any amendment thereto (including the prospectus subject
to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the
term "Prospectus" means: (x) if the Company relies on Rule 434 under
the Act, the Term Sheet relating to the Securities that is first filed
pursuant to Rule 424(b)(7) under the Act, together with the
Preliminary Prospectus identified therein that such Term Sheet
supplements; (y) if the Company does not rely on Rule 434 under the
Act, the prospectus first filed with the Commission pursuant to Rule
424(b) under the Act; or (z) if the Company does not rely on Rule 434
under the Act and if no prospectus is required to be filed pursuant to
Rule 424(b) under the Act, the prospectus included in the Registration
Statement; and the term "Term Sheet" means any term sheet that
satisfies the requirements of Rule 434 under the Act. Any reference
herein to the "date" of a Prospectus that includes a Term Sheet shall
mean the date of such Term Sheet.
(ii) The Commission has not issued or, to the best knowledge of
the Company, threatened or contemplated any order preventing or
suspending the use of any Preliminary Prospectus; no stop order
suspending the sale of the Securities in any jurisdiction has been
issued and no proceedings for that purpose are pending or, to the best
knowledge of the Company, threatened or contemplated, and any request
of the Commission for additional information (to be included in the
Registration Statement, any Preliminary Prospectus or the Prospectus
or otherwise) has been complied with. When any Preliminary Prospectus
was filed with the Commission it (A) contained all statements required
to be stated therein in accordance with, and complied in all material
respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not include any
untrue statement of a material fact or omit to state any material fact
necessary in order to
-2-
<PAGE>
make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement
or any amendment thereto was or is declared effective, it (A)
contained or will contain all statements required to be stated therein
in accordance with, and complied or will comply in all material
respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not or will not
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading. When the Prospectus or any Term Sheet that is a part
thereof or any amendment or supplement to the Prospectus is filed with
the Commission pursuant to Rule 424(b) (or, if the Prospectus or any
part thereof or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto
containing such amendment or supplement to the Prospectus was or is
declared effective) and on the Firm Closing Date and any Option
Closing Date (both as hereinafter defined), the Prospectus, as amended
or supplemented at any such time, (A) contained or will contain all
statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements
of, the Act and the rules and regulations of the Commission thereunder
and (B) did not or will not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph
(ii) do not apply to statements or omissions made in any Preliminary
Prospectus, the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance upon and
in conformity with written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein.
(iii) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation and
are duly qualified to transact business as foreign corporations and
are in good standing under the laws of all other jurisdictions where
the ownership or leasing of their respective properties or the conduct
of their respective businesses requires such qualification, except
where the failure to be so qualified does not result in a material
adverse change in the condition (financial or otherwise), business,
prospects, net worth or results of operations of the Company and its
subsidiaries, taken as a whole (a "Material Adverse Effect").
(iv) The Company and each of its subsidiaries have full power
(corporate and other) to own or lease their respective properties and
conduct their respective businesses as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); the Company has
full power (corporate and other) and authority to enter into this
Agreement and to carry out all the terms and provisions hereof to be
carried out by it; and the Company has full power (corporate and
other) and authority to execute and deliver the warrants to purchase
Common Stock to be issued and sold to the Representatives under the
terms of the Warrant Agreement (as hereinafter defined) in accordance
with Section 5(n) hereto (the "Representatives' Warrants").
-3-
<PAGE>
(v) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and are owned beneficially by the Company free
and clear of any security interests, liens, encumbrances, equities or
claims. The Warrant Agreement and the Representatives' Warrants, as
of the Closing Date, will have been duly authorized and validly
issued, and when executed and delivered by the Company will be valid
and binding obligations enforceable against the Company in accordance
with their terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general
equitable principles. The Common Stock issuable pursuant to the
Representatives' Warrants, when issued in accordance with the terms
thereof, will be duly authorized, validly issued, fully paid and
nonassessable. The Representatives' Warrants and the shares of Common
Stock issuable thereunder were not and will not be issued in violation
of any preemptive rights of any security holder of the Company. The
Company has reserved a sufficient number of shares of Common Stock for
issuance pursuant to the Representatives' Warrants. The holders of
the Common Stock issuable pursuant to the Representatives' Warrants
will not be subject to personal liability solely by reason of being
such holders. The issuance and sale of the Common Stock pursuant to
the Representatives' Warrants will be made in conformity with the
applicable registration requirements or exemptions therefrom under
federal and applicable state securities law.
(vi) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). All of
the issued shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable.
The Firm Securities and the Option Securities have been duly
authorized and at the Firm Closing Date or the related Option Closing
Date (as the case may be), after payment therefor in accordance
herewith, will be validly issued, fully paid and nonassessable. At
the Firm Closing Date or the Option Closing Date, no holders of
outstanding shares of capital stock of the Company will be entitled as
such to any preemptive or other rights to subscribe for any of the
Securities, and no holder of securities of the Company has any right
which has not been fully exercised or waived to require the Company to
register the offer or sale of any securities owned by such holder
under the Act in the public offering contemplated by this Agreement.
(vii) The capital stock of the Company conforms in all
material respects to the description thereof contained in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), and this Agreement, the Warrant Agreement and
the Representatives' Warrants conform in all material respects to the
descriptions thereof contained in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus).
(viii) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no outstanding (A) securities or obligations of
the Company or any of its subsidiaries convertible into or
exchangeable for any capital stock of the Company or any such
subsidiary, (B) warrants, rights or options to subscribe for or
purchase from the Company or any
-4-
<PAGE>
such subsidiary any such capital stock or any such convertible or
exchangeable securities or obligations, or (C) obligations of the
Company or any such subsidiary to issue any shares of capital stock,
any such convertible or exchangeable securities or obligations, or any
such warrants, rights or options. The information in the Registration
Statement and the Prospectus insofar as it relates to the
Representatives' Warrants, in each case as of the date on which the
Registration Statement is declared effective by the Commission, the
Closing Date and any Option Closing Date, is true, correct and
complete in all material respects.
(ix) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the
financial position of the Company and its consolidated subsidiaries
and the results of operations and cash flows as of the dates and
periods therein specified. Such financial statements and schedules
have been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied throughout the periods
involved (except as otherwise noted therein). The selected financial
data set forth under the captions "Summary Consolidated Financial
Data" and "Capitalization" in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) fairly
present, in accordance with GAAP, as applicable, on the basis stated
in the Prospectus (or such Preliminary Prospectus), the information
included therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(x) Grant Thornton LLC, which has audited certain financial
statements of the Company and its consolidated subsidiaries and
delivered their report with respect to the audited consolidated
financial statements included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), are independent public accountants as
required by the Act and the applicable rules and regulations
thereunder.
(xi) The execution and delivery of this Agreement, the Warrant
Agreement and the Representatives' Warrants have been duly authorized
by the Company; this Agreement, the Warrant Agreement and the
Representatives' Warrants have been duly executed and delivered by the
Company and are the valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective
terms, except as such enforceability may be limited by the effect of
bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to rights and remedies of creditors or by general
equitable principles.
(xii) No legal or governmental proceedings are pending to
which the Company or any of its subsidiaries is a party or to which
the property of the Company or any of its subsidiaries is subject
that are required to be described in the Registration Statement or
the Prospectus and are not described therein (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), and,
to the Company's knowledge, no such proceedings have been threatened
against the Company or any of its subsidiaries or with respect to
any of their respective properties; and no contract or other
document is required to be described in the
-5-
<PAGE>
Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement that is not described therein (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus) or filed as required.
(xiii) The issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement and of the
Representatives' Warrants to the Representatives by the Company
pursuant to the Warrant Agreement; the execution and delivery of this
Agreement, the Warrant Agreement and the Representatives' Warrants by
the Company; the compliance by the Company with the provisions of this
Agreement, the Warrant Agreement and the Representatives' Warrants;
and the consummation of all transactions contemplated therein do not
(A) require the consent, approval, authorization, registration or
qualification of or with any court, government or governmental
authority, domestic or foreign, except such as have been obtained,
such as may be required under state securities or blue sky laws, such
as may be required by the National Association of Securities Dealers,
Inc. (the "NASD") and, if the Registration Statement filed with
respect to the Securities (as amended) is not effective under the Act
as of the time of execution hereof, such as may be required (and shall
be obtained as provided in this Agreement) under the Act, or (B)
conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the
Company or any of its subsidiaries, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company or any of its
subsidiaries, which would have a Material Adverse Effect.
(xiv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), neither the Company nor any of its
subsidiaries has sustained any loss or interference with their
respective businesses or properties having or resulting in a Material
Adverse Effect from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding and there has not been
any event, circumstance, or development that results in, or that the
Company believes would result in, a Material Adverse Effect, except in
each case as described in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(xv) The Company has not, directly or indirectly (except for the
sale of Securities under this Agreement), (i) taken any action
designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone
any compensation for soliciting purchases of, the Securities or (B)
paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company.
-6-
<PAGE>
(xvi) (a) The Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
their respective businesses except where the failure to possess any
such item would not have a Material Adverse Effect, and (b) neither
the Company nor any such subsidiary has received any notice of
proceedings relating to the revocation or modification of any such
certificate, authorization or permit that, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
have a Material Adverse Effect, except as described in the Prospectus
(or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xvii) The Company is not an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and this
transaction will not cause the Company to become an investment company
subject to registration under the 1940 Act.
(xviii) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a Material Adverse Effect) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty
levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is
currently being contested in good faith or as described in or
contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xix) Except for the shares of capital stock of each of the
subsidiaries owned by the Company, neither the Company nor any such
subsidiary owns any shares of stock or any other equity securities of
any corporation or has any equity interest in any firm, partnership,
association or other entity. All shares of stock or other equity
securities of the subsidiaries are wholly-owned directly or indirectly
by the Company.
(xx) The books, records and accounts of the Company and each of
its subsidiaries accurately and fairly reflect, in reasonable detail,
the transactions in and dispositions of the assets of the Company and
each of its subsidiaries, respectively. The Company and each of its
subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (A) transactions are
executed in accordance with management's general or specific
authorizations; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(C) access to assets is permitted only in accordance with management's
general or specific authorization; and (D) the recorded accountability
for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
(xxi) Except as described in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), no default exists and no event has
occurred that, with notice or lapse of time or both, would constitute
a default, in the due performance and observance of any term,
-7-
<PAGE>
covenant or condition of any contract, indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or any of their respective properties is bound or may
be affected, in any respect that would have a Material Adverse Effect.
The agreements to which the Company or any of its subsidiaries is a
party described in the Registration Statements are valid agreements,
enforceable by the Company or such subsidiary, except as the
enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles and, to the best of the Company's knowledge, the other
contracting party or parties thereto are not in material breach or
material default under any of such agreements.
(xxii) The Company has not distributed and, prior to the later
of (A) the Firm Closing Date or any Option Closing Date and (B) the
completion of the distribution of the Securities, will not distribute
any written offering material in connection with the offering and sale
of the Securities other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or Term
Sheet or any amendment or supplement thereto, or other materials, if
any, permitted by the Act.
(xxiii) The description of the Company's and its subsidiaries'
real property contained in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), is true and complete in all material respects
and the Company and its subsidiaries have good and marketable title to
all real and personal property owned by each of them, in each case
free and clear of any security interests, liens, encumbrances,
equities, claims and other defects, except for those relating to debts
of the Company or such subsidiary described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and those that do
not interfere with the use made or proposed to be made of such
property by the Company or such subsidiary, and any real property and
buildings held under lease by the Company or any such subsidiary are
held under valid, subsisting and enforceable leases (except as
enforceability may be limited by the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to rights
and remedies of creditors or by general equitable principles), with
such exceptions as are not material and do not interfere with the use
made or proposed to be made of such property and buildings by the
Company or such subsidiary, in each case except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). The Company and
its subsidiaries own or lease all such properties as are necessary to
its operations as now conducted and as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xxiv) No labor dispute with the employees of the Company or
any of its subsidiaries exists or to the Company's knowledge, is
threatened or imminent that could result in a Material Adverse Effect,
except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), and the Company is not aware of an existing, imminent or
threatened
-8-
<PAGE>
labor disturbance by the employees of any principal suppliers,
manufacturers, contractors or others that could result in a Material
Adverse Effect, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxv) The Company and its subsidiaries own or possess all
material trademarks, service marks, trade names, licenses, copyrights
and proprietary or other confidential information currently employed
by them in connection with their respective businesses, and neither
the Company nor any such subsidiary has received any notice of
infringement of or conflict with asserted rights of any third party
with respect to any of the foregoing which, singly or in the
aggregate, if the subject of unfavorable decisions, rulings or
findings, would have a Material Adverse Effect, except as described in
the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus). The description of the Company's
lease, consignment and sale agreements contained in the Registration
Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), is true and
complete in all material respects. All such lease, consignment and
sale agreements are valid, binding and in full force and effect and
neither the Company nor any subsidiary is, or has received any notice
that it is, in default (or with the giving of notice or lapse of time
or both, would be in default) under any such lease, consignment and
sale agreements.
(xxvi) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; and neither the Company nor any
such subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a
Material Adverse Effect, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxvii) The Common Stock is registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and is traded on the American Stock Exchange and,
upon notice of issuance, the Securities will be traded on the American
Stock Exchange, and the Company has taken no action designed to, or
likely to have the effect of, terminating the registration of the
Common Stock under the Exchange Act or delisting the Common Stock from
the American Stock Exchange or that could in the future cause the
Common Stock to be delisted from the American Stock Exchange, nor has
the Company received any notification that the Commission or NASD is
contemplating terminating such registration or listing. The Company
has timely filed all reports required to be filed by it under the
Exchange Act.
(xxviii) The Company has not at any time during the last five
(5) years (A) made any unlawful contribution to any candidate for
foreign office or failed to disclose fully any contribution in
violation of law, or (B) made any payment to any federal or state
governmental officer or official, or other person charged with similar
-9-
<PAGE>
public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction
thereof.
(xxix) Any pro forma financial or other information and
related notes included in the Registration Statement, each Preliminary
Prospectus and the Prospectus comply (or, if the Prospectus has not
been filed with the Commission, as to the Prospectus, will comply) in
all material respects with the requirements of the Act and the rules
and regulations of the Commission thereunder and present fairly the
pro forma information shown, as of the dates and for the periods
covered by such pro forma information. Such pro forma information,
including any related notes and schedules, has been prepared on a
basis consistent with the historical financial statements and other
historical information, as applicable, included in the Registration
Statement, the Preliminary Prospectus and the Prospectus, except for
the pro forma adjustments specified therein, and give effect to
assumptions made on a reasonable basis to give effect to historical
and, if applicable, proposed transactions described in the
Registration Statement, each Preliminary Prospectus and the
Prospectus.
(xxx) Except as set forth in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no outstanding loans, advances or guaranties of
indebtedness by the Company or its subsidiaries to or for the benefit
of any of (i) its "affiliates," as such term is defined in the Act and
the rules and regulations thereof or (ii) any of the members of the
families of any of them.
(xxxi) The Company and its subsidiaries have no liability,
absolute or contingent, relating to: (A) public health or safety; (B)
worker health or safety; (C) product defect or warranty (except, as to
product defect or warranty, as is disclosed in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus)); or (D) pollution, damage to
or protection of the environment, including, without limitation,
relating to damage to natural resources, emissions, discharges,
releases or threatened releases of hazardous materials into the
environment (including, further without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or
otherwise relating to the manufacture, processing, use, treatment,
storage, generation, disposal, transport or handling of any hazardous
materials. As used herein, "hazardous material" includes chemical
substances, wastes, pollutants, contaminants, hazardous or toxic
substances, constituents, materials or wastes, whether solid, gaseous
or liquid in nature.
(b) Any certificate signed by any officer of the Company and
delivered to the Representatives or to counsel for the Representatives
shall be deemed a representation and warranty by the Company, respectively,
to each Underwriter, as to the matters covered thereby.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein
set forth, (i) the Company agrees to issue and sell 1,750,000 Firm
Securities, (ii) each of the Underwriters agrees to
-10-
<PAGE>
purchase from the Company at a purchase price of [$ ] per share,
an aggregate number of Firm Securities set forth opposite the name of such
Underwriter in Schedule 1 hereto. One or more certificates in definitive
form for the Firm Securities that the several Underwriters have agreed to
purchase hereunder from the Company, in such denomination or denominations
and registered in such name or names as the Representatives request upon
notice to the Company at least 48 hours prior to the Firm Closing Date,
shall be delivered by or on behalf of the Company to the Representatives
for the respective accounts of the Underwriters, against payment by or on
behalf of the Underwriters of the aggregate purchase price therefor by wire
transfer in same day funds (the "Wired Funds") to the account of the
Company. Such delivery of and payment for the Firm Securities shall be
made at the offices of Cruttenden Roth Incorporated, 18301 Von Karman,
Suite 100, Irvine, California 92715, at 6:30 a.m., Pacific time, on
December _____, 1997, or at such other place, time or date as the
Representatives and the Company may agree upon or as the Representatives
may determine pursuant to Section 9 hereof, such time and date of delivery
against payment being herein referred to as the "Firm Closing Date." The
Company will make such certificate or certificates for the Firm Securities
available for checking and packaging by the Representatives at the offices
of the Company's transfer agent or registrar at least 24 hours prior to the
Firm Closing Date or, if available, will coordinate the transfer of the
Firm Securities to the Underwriters through the book-entry facilities of
the Depository Trust Company.
(b) For the sole purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Securities as
contemplated by the Prospectus, on the basis of the covenants and
agreements of the Underwriters contained in this Agreement and subject to
the terms and conditions set forth in this Agreement, the Company hereby
grants to the several Underwriters an option to purchase the Option
Securities. The purchase price to be paid for any Option Securities shall
be the same price per share as the price per share for the Firm Securities
set forth above in paragraph (a) of this Section 3. The option granted
hereby may be exercised as to all or any part of the Option Securities from
time to time within 45 days after the date of the Prospectus (or, if such
45th day shall be a Saturday or Sunday or a holiday, on the next business
day thereafter when the American Stock Exchange is open). The Underwriters
shall not be under any obligation to purchase any of the Option Securities
prior to the exercise of such option. The Representatives may from time to
time exercise the option granted hereby by giving notice in writing or by
telephone (confirmed within 24 hours in writing) to the Company setting
forth the aggregate number of Option Securities as to which the several
Underwriters are then exercising the option and the date and time for
delivery of and payment for such Option Securities. Any such date of
delivery shall be determined by the Representatives but shall not be
earlier than two business days or later than five business days after such
exercise of the option and, in any event, shall not be earlier than the
Firm Closing Date. The time and date set forth in such notice, or such
other time on such other date as the Representatives and the Company may
agree upon or as the Representatives may determine pursuant to Section 9
hereof, is herein called the "Option Closing Date" with respect to such
Option Securities. Upon exercise of the option as provided herein, the
Company shall become obligated to sell to each of the several Underwriters,
and, subject to the terms and conditions herein set forth, each of the
Underwriters (severally and not jointly) shall become obligated to purchase
from the Company, the same percentage of the total number of the Option
Securities as to which the several Underwriters are then exercising the
option as such Underwriter is obligated to
-11-
<PAGE>
purchase of the aggregate number of Firm Securities, as adjusted by the
Representatives in such manner as it deems advisable to avoid fractional
shares. If the option is exercised as to all or any portion of the Option
Securities, one or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
paragraph (a) of this Section 3, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph 3(b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) It is understood that you, individually and not as the
Representatives, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall
relieve such Underwriter or Underwriters from any of its or their
obligations hereunder.
(d) The Company hereby acknowledges that the wire transfer by or on
behalf of the Underwriters of the purchase price for any Securities does
not constitute closing of a purchase and sale of the Securities. Only
execution and delivery of a receipt (by facsimile or otherwise) for the
Securities by the Underwriters indicates completion of the closing of a
purchase of the Securities from the Company. Furthermore, in the event
that the Underwriters wire funds to the Company prior to the completion of
the closing of a purchase of Securities, the Company hereby acknowledge
that until the Underwriters execute and deliver a receipt for the
Securities, by facsimile or otherwise, the Company will not be entitled to
the wired funds and shall return the wired funds received by it to the
Underwriters as soon as practicable (by wire transfer of same-day funds)
upon demand. In the event that the closing of a purchase of Securities is
not completed and the wired funds are not returned by the Company to the
Underwriters on the same day the wired funds were received by the Company,
the Company agrees to pay to the Underwriters in respect of each day the
wired funds are not returned by it, in same-day funds, interest at the
Prime Rate as stated in the Wall Street Journal on the date hereof on the
amount of such wire funds received by them.
4. Offering by the Underwriters. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. Covenants of the Company. The Company covenants and agrees with each
of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, to
become effective as promptly as possible. If required, the Company will
file the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto with the Commission in the manner and
within the time period required by Rules 434 and 424(b) under the Act.
During any time when a prospectus relating to the Securities is required to
be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the rules and regulations of
the Commission thereunder to the extent necessary to permit the continuance
of sales of or dealings in the Securities in accordance with the provisions
hereof
-12-
<PAGE>
and of the Prospectus, as then amended or supplemented, and (ii) will not
file with the Commission the Prospectus, Term Sheet or the amendment
referred to in the second sentence of Section 2(a)(i) hereof, any amendment
or supplement to such Prospectus, Term Sheet or any amendment to the
Registration Statement of which the Representatives shall not previously
have been advised and furnished with a copy for a reasonable period of time
prior to the proposed filing and as to which filing the Representatives
shall not have given its consent. The Company will prepare and file with
the Commission, in accordance with the rules and regulations of the
Commission, promptly upon request by the Representatives or counsel for the
Representatives, any amendments to the Registration Statement or amendments
or supplements to the Prospectus that may be deemed necessary or advisable
in connection with the distribution of the Securities by the several
Underwriters, and will use its best efforts to cause any such amendment to
the Registration Statement to be declared effective by the Commission as
promptly as possible. The Company will advise the Representatives,
promptly after receiving notice thereof, of the time when the Registration
Statement or any amendment thereto has been filed or declared effective or
the Prospectus or any amendment or supplement thereto has been filed and
will provide to the Representatives copies of each such filing.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, (iii) the institution, threatening or
contemplation of any proceeding for any such purpose, or (iv) any request
made by the Commission for amending the Registration Statement, for
amending or supplementing the Prospectus or for additional information.
The Company will use its best efforts to prevent the issuance of any such
stop order and, if any such stop order is issued, to obtain the withdrawal
thereof as promptly as possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities; provided, however, that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction. If, after the public offering of the Securities by the
Underwriters and during such period, the Underwriters propose to vary the
terms of offering thereof by reason of changes in general market conditions
or otherwise, the Representatives will advise the Company in writing of the
proposed variation and if, in the opinion either of counsel for the Company
or counsel for the Representatives, such proposed variation requires that
the Prospectus be supplemented or amended, the Company will forthwith
prepare and file with the Commission a supplement to the Prospectus or an
amended Prospectus setting forth such variation. The Company authorizes
the Underwriters and all dealers to whom any of the Securities may be sold
by the Underwriters to use the Prospectus, as from time to time so amended
or supplemented, in connection with the sale of the Securities in
accordance with the applicable provisions of the Act and the rules and
regulations thereunder for such period.
-13-
<PAGE>
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the
Act or (ii) the Option Closing Date, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if for any other reason it
is necessary at any time to amend or supplement the Prospectus to comply
with the Act or the rules or regulations of the Commission thereunder, the
Company will promptly notify the Representatives thereof and, subject to
Section 5(a) hereof, will prepare and file with the Commission, at the
Company's expense, an amendment to the Registration Statement or an
amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Representatives a signed copy of the
registration statement originally filed with respect to the Securities and
each amendment thereto (in each case including exhibits thereto), (ii) to
each other Underwriter, a conformed copy of such registration statement and
each amendment thereto (in each case without exhibits thereto) and (iii) so
long as a prospectus relating to the Securities is required to be delivered
under the Act, as many copies of each Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto as the Representatives
may reasonably request; without limiting the application of clause (iii) of
this sentence, the Company shall, as soon as practicable following the
determination of the public offering price, deliver to the Underwriters,
without charge, as many copies of the Prospectus and any amendment or
supplement thereto as the Representatives may reasonably request for
purposes of confirming orders that are expected to settle on the Firm
Closing Date. The Company will provide or cause to be provided to each of
the Representatives, and to each Underwriter that so requests in writing, a
copy of each report on Form SR filed by the Company as required by Rule 463
under the Act.
(f) The Company, as soon as practicable, will make generally
available to its security holders and to the Representatives a consolidated
earnings statement of the Company and its subsidiaries that satisfies the
provisions of Section 11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the prior
written consent of the Representatives on behalf of the Underwriters,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer
of sale, contract of sale, pledge, grant of any option to purchase or other
sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common
Stock for a period of 180 days after the date hereof, except pursuant to
this Agreement, issuances pursuant to warrants and options outstanding
prior to the date hereof, stock options granted under the company's stock
option plan to officers, employees, directors and consultants at an
exercise price equal to fair market value and any stock issued on exercise
thereof or issuances in connection with an acquisition. If the Company
plans to issue any Common Stock or other securities in
-14-
<PAGE>
connection with an acquisition, the Company shall provide the
Representatives with three days' advance written notice of its intention to
so issue such securities including the terms of any such proposed
transaction.
(i) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale
of the Securities or (ii) for a period of 180 days after the date hereof
(A) sell, bid for, purchase, or pay anyone any compensation for soliciting
purchases of, the Securities or (B) pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company. The Company will not, directly or indirectly, without the prior
written consent of the Representatives on behalf of the Underwriters,
offer, purchase, offer to purchase, contract to purchase, grant any option
to sell or otherwise purchase or acquire (or announce any offer, purchase,
offer of purchase, contract to purchase, grant of any option to sell or
other purchase or acquisition of) any shares of Common Stock or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock for a period of 180 days after the date hereof.
(j) The Company will obtain the lockup agreements described in
Section 7(e) hereof prior to the Firm Closing Date.
(k) The Company will cause the Securities to be duly traded on the
American Stock Exchange prior to the Firm Closing Date. The Company will
use its best efforts to ensure that the Securities continue to be traded on
the American Stock Exchange following the Firm Closing Date.
(l) During a period of five years commencing with the date of this
Agreement, the Company will promptly furnish to the Representatives and to
each Underwriter who may so request in writing copies of (i) all periodic
and special reports furnished by it to stockholders of the Company, (ii)
all information, documents and reports filed by it with the Commission, the
American Stock Exchange, or the NASD, (iii) all press releases and material
news items or articles in respect of the Company, its products or affairs
released or prepared by the Company (other than promotional and marketing
materials disseminated solely to customers and potential customers of the
Company in the ordinary course of business) and (iv) any additional
information concerning the Company or its business which the
Representatives may reasonably request.
(m) The Company will use its best efforts to maintain insurance of
the types and in the amounts which it deems adequate for its business
consistent with insurance coverage maintained by companies of similar size
and engaged in similar businesses including, but not limited to, general
liability insurance covering products sold or distributed by the Company,
all real and personal property owned or leased by the Company and its
subsidiaries, and against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against.
(n) On the Closing Date, the Company will sell to the
Representatives, at a purchase price of $0.001 per warrant, warrants to
purchase 175,000 shares of Common Stock. Such Representatives' Warrants
will be issued pursuant to the terms of the Warrant
-15-
<PAGE>
Agreement and will have an exercise price equal to [$________], subject to
adjustment, will be exercisable during the period beginning on the first
anniversary of the Effective Date and ending on the fifth anniversary of
the Effective Date and will contain customary anti-dilution and
registration rights provisions.
6. Expenses. The Company will pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the Registration Statement originally filed with
respect to the Securities and any amendment thereto, any Preliminary Prospectus
and the Prospectus and any amendment or supplement thereto, this Agreement and
any blue sky memoranda, (ii) all arrangements relating to the delivery to the
Underwriters of copies of the foregoing documents, (iii) the fees and
disbursements of the counsel, the accountants and any other experts or advisors
retained by the Company, (iv) preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Securities, including transfer
agent's and registrar's fees, (v) the qualification of the Securities under
state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Representatives relating thereto, (vi) the
filing fees of the Commission and the NASD relating to the Securities, (vii) any
additional listing fees of the Securities on the American Stock Exchange, (viii)
the Company's travel expenses in connection with meetings with the brokerage
community and institutional investors and expenses associated with hosting such
meetings, including meeting rooms, meals, facilities and ground transportation
expenses, as well as any related expense for roadshow presentations transmitted
over the Internet, and (ix) the cost of preparing four bound volumes of the
public offering documents for the Representatives and their counsel. If the
sale of the Securities provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth in Section 7 hereof
is not satisfied, because this Agreement is terminated pursuant to Section 11
hereof or because of any failure, refusal or inability on the part of the
Company to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder other than by reason of a default by any of the
Underwriters, the Company will reimburse the Representatives upon demand for all
reasonable out-of-pocket expenses (including counsel fees and disbursements)
that shall have been incurred by it in connection with the proposed purchase and
sale of the Securities. The Company shall not in any event be liable to any of
the Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement. If the sale of the Securities provided for herein is
consummated, the Underwriters shall pay all of their own out-of-pocket expenses
(other than fees and disbursements of their counsel for blue sky services) and
the Company shall have no obligation therefor.
7. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the sole discretion of the Representatives, to the accuracy of the
representations and warranties of the Company contained herein as of the date
hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing
Date, to the accuracy of the statements of the Company's officers made pursuant
to the provisions hereof, to the performance by the Company of its covenants and
agreements hereunder and to the following additional conditions:
(a) If the Registration Statement or any amendment thereto filed
prior to the Firm Closing Date has not been declared effective as of the
time of execution hereof, the Registration Statement or such amendment
shall have been declared effective not later than
-16-
<PAGE>
the earlier of (i) 11:00 A.M., Pacific time, on the date on which the
amendment to the Registration Statement originally filed with respect to
the Securities or to the Registration Statement, as the case may be,
containing information regarding the offering price of the Securities has
been filed with the Commission, and (ii) such later time and date as shall
have been consented to by the Representatives; if required, the Prospectus
or any Term Sheet that constitutes a part thereof and any amendment or
supplement thereto shall have been filed with the Commission in the manner
and within the time period required by Rules 434 and 424(b) under the Act;
no stop order suspending the effectiveness of the Registration Statement or
any amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of
the Company or the Representatives, shall be contemplated by the
Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an opinion, dated the
Firm Closing Date, of King & Spaulding, counsel for the Company, dated the
Closing Date (and stating that it may be relied on by Berliner Zisser
Walter & Gallegos, P.C., counsel to the Representatives, in rendering their
opinion), to the effect that:
(i) the Company and each of its subsidiaries listed in Schedule
2 hereto (the "Subsidiaries") have been duly organized and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing
under the laws of all other jurisdictions where the ownership or
leasing of their respective properties or the conduct of their
respective businesses requires such qualification, except where the
failure to be so qualified does not or would not have a Material
Adverse Effect;
(ii) the Company and each of the Subsidiaries have corporate
power to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement and
the Prospectus, and the Company has the corporate power to enter into
this Agreement and to carry out all the terms and provisions hereof to
be carried out by it;
(iii) the issued and outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued,
are fully paid and nonassessable and are owned by the Company free and
clear of any perfected security interests (other than those disclosed
in the Prospectus) and the Prospectus accurately describes, to the
extent so described, any material corporation, association, or other
entity owned or controlled, directly or indirectly, by the Company;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued and
outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable,
and were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities; the
Firm Securities have been duly authorized by all necessary corporate
action of the Company and, when issued and delivered to and paid for
by the Underwriters pursuant to this Agreement, will
-17-
<PAGE>
be validly issued, fully paid and nonassessable; no holders of
outstanding shares of capital stock of the Company are entitled as
such to any preemptive or other rights to subscribe for any of the
Securities; no holders of securities of the Company are entitled to
have such securities registered under the Registration Statement
except for those which have been so registered; the statements set
forth under the heading "Description of Capital Stock" in the
Prospectus, insofar as such statements purport to summarize certain
provisions of the capital stock of the Company, provide a fair summary
of such provisions; and the statements set forth under the headings
"Risk Factors - Shares Eligible for Future Sale, " "Risk Factors -
Impact of Government Regulation;" "Risk Factors - Risks Associated
with Leases," "Risk Factors - Product Liability," and "Risk Factors -
Anti-Takeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law; "Blank Check" Preferred Stock," "Business - Operations
of the Company," "Business -- Regulation," "Business - Product
Liability," "Management - Stock Option Plan," "Management - Certain
Transactions," "Shares Eligible for Future Sale," "Description of
Capital Stock - Limitation of Liability and Indemnification,"
"Description of Capital Stock - Anti-Takeover Effects of Certain
Provisions of the Company's Restated Certificate of Incorporation and
Bylaws," in the Prospectus, insofar as such statements constitute a
summary of the legal matters, documents or proceedings referred to
therein, provide a fair and accurate summary of such legal matters,
documents and proceedings in all material respects;
(v) the execution and delivery of this Agreement and the Warrant
Agreement have been duly authorized by all necessary corporate action
of the Company, and this Agreement and the Warrant Agreement have been
duly executed and delivered by the Company and, assuming due
authorization, execution and delivery by you, are binding agreements
of the Company, enforceable in accordance with their terms, except
insofar as indemnification provisions may be limited by applicable law
and to which counsel need not express any opinion and except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(vi) no legal or governmental proceedings are pending to which
the Company or any of the Subsidiaries is a party or to which the
property of the Company or any of the Subsidiaries is subject that are
required to be described in the Registration Statement or the
Prospectus and are not described therein and, to counsel's knowledge,
no such proceedings have been threatened against the Company or any of
the Subsidiaries or with respect to any of their respective
properties; no contract or other document is required to be described
in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement that is not described therein or
filed as required;
(vii) to counsel's knowledge, subsequent to the respective
dates as of which information is given in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), (A) the Company and its
Subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in
the ordinary course of business; and (B) the Company has not purchased
any of its outstanding
-18-
<PAGE>
capital stock, nor declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock, except in each case as
described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus);
(viii) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement and of
warrants to the Representatives by the Company pursuant to the Warrant
Agreement; the compliance by the Company with the other provisions of
this Agreement and the Warrant Agreement; and the consummation of the
other transactions contemplated in such agreements do not (A) require
the consent, approval, authorization, registration or qualification of
or with any governmental authority, except such as have been obtained
and such as may be required under state securities or blue sky laws
and by the NASD, or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, any material contract, indenture, mortgage, deed of
trust, lease or other agreement or instrument known to such counsel to
which the Company or any of the Subsidiaries is a party or by which
the Company or any of the Subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the
Company or any of the Subsidiaries, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental
authority or any arbitrator having jurisdiction over the Company or
any of the Subsidiaries; and no further approval or authorization of
the stockholders or the Board of Directors of the Company is required
for (Y) the issuance and sale of the Securities to be sold by the
Company pursuant to this Agreement or (Z) the issuance and sale of the
shares of Common Stock issuable upon exercise of the Warrant
Agreement;
(ix) the Registration Statement is effective under the Act; any
required filing of the Prospectus, or any Term Sheet that constitutes
a part thereof, pursuant to Rules 434 and 424(b) has been made in the
manner and within the time period required by Rules 434 and 424(b);
and no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no proceedings
for that purpose have been instituted or, to such counsel's knowledge,
are threatened or are contemplated by the Commission;
(x) the Registration Statement originally filed with respect to
the Securities and each amendment thereto, and the Prospectus (in each
case, other than the financial statements and other financial and
statistical information contained therein, as to which such counsel
need express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the rules and
regulations of the Commission thereunder;
(xi) if the Company elects to rely on Rule 434, the Prospectus is
not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto
(including such information that is permitted to be omitted pursuant
to Rule 430A);
-19-
<PAGE>
(xii) the Company is not, and the transactions contemplated
by this Agreement will not cause the Company to become, an investment
company subject to registration under the 1940 Act;
(xiii) the specimen stock certificate of the Company filed as
an exhibit to the Registration Statement or incorporated by reference
from prior filings made under or pursuant to the Act is in due and
proper form to evidence shares of Common Stock, has been duly
authorized and approved by the Board of Directors of the Company and
complies with all legal requirements applicable under the Delaware
General Corporation Law;
(xiv) the descriptions in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes
are accurate and fairly present the information required to be
presented by the Act and the applicable rules and regulations
(provided that counsel need not express any opinion as to their
completeness);
(xv) except as described in the Prospectus, no holders of Common
Stock or other securities of the Company have registration rights with
respect to securities of the Company; and
(xvi) counsel has no reason to believe that the offer and sale
of all securities of the Company made within the last three years
as set forth in Item 15 of the Registration Statement were not exempt
from the registration requirements of the Act, pursuant to the
provisions set forth in such Item, and from the registration or
qualification requirements of all relevant state securities laws.
Such counsel shall also state that such counsel has participated in conferences
with officers and other representatives of the Company, the independent public
accountants of the Company, the Representatives and counsel to the
Representatives, at which conferences the contents of the Registration Statement
and the Prospectus and related matters were discussed and, they have no reason
to believe that the Registration Statement, as of its effective date, contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, as of its date or the date of such opinion,
included or includes any untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(except such counsel need express no view as to the consolidated financial
statements and notes thereto, schedules and reports thereon, and other financial
data included in the Registration Statement or Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of fact, to
the extent such counsel deem(s) proper, on certificates or opinions of
responsible officers of the Company and public officials, and may limit its
opinions to the laws of the United States of America and the States of Georgia,
Florida and Delaware, as appropriate.
References to the Registration Statement and the Prospectus in this paragraph
(b) shall include any amendment or supplement thereto at the date of such
opinion.
-20-
<PAGE>
(c) The Representatives shall have received from Grant Thornton LLP a
letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representatives, to the
effect that:
(i) they are independent accountants with respect to the Company
and its consolidated subsidiaries within the meaning of the Act and
the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and the as adjusted financial data examined by them and
included in the Registration Statement and the Prospectus comply in
form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations;
(iii) on the basis of carrying out certain specified
procedures (which do not constitute an examination made in accordance
with generally accepted auditing standards) that would not necessarily
reveal matters of significance with respect to the comments set forth
in this paragraph (iii), a reading of the minute books of the
stockholders, the board of directors and any committees thereof of the
Company and each of its consolidated subsidiaries, and inquiries of
certain officials of the Company and its consolidated subsidiaries who
have responsibility for financial and accounting matters, nothing came
to their attention that caused them to believe that at a specific date
not more than five business days prior to the date of such letter,
there were any changes in the capital stock or total debt of the
Company and its consolidated subsidiaries or any decreases in total
assets or stockholders' equity of the Company and its consolidated
subsidiaries, in each case compared with amounts shown on the May 31,
1997 consolidated balance sheet included in the Registration Statement
and the Prospectus, or for the period from June 1, 1997 to such
specified date there were any decreases, as compared with the same
period in the prior year, in total revenues, net earnings or net
earnings per share, respectively, of the Company and its consolidated
subsidiaries, except in all instances for changes, decreases or
increases set forth in such letter;
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages
and financial information that are derived from the general accounting
records of the Company and its consolidated subsidiaries and are
included in the Registration Statement and the Prospectus, and have
compared such amounts, percentages and financial information with such
records of the Company and its consolidated subsidiaries and with
information derived from such records and have found them to be in
agreement, excluding any questions of legal interpretation; and
(v) their review of the system of internal controls of the
Company and its consolidated subsidiaries, to the extent they deemed
necessary in establishing the scope of their examination of the
Company's financial statements as of May 31, 1997 did not disclose any
weaknesses in internal controls that they considered to be material
weaknesses.
-21-
<PAGE>
In the event that the letters referred to above set forth any
such changes, decreases or increases which, in the reasonable
discretion of the Representatives, are likely to result in a Material
Adverse Effect, it shall be a further condition to the obligations of
the Underwriters that such letters shall be accompanied by a written
explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary.
References to the Registration Statement and the Prospectus in
this paragraph (c) with respect to either letter referred to above
shall include any amendment or supplement thereto by the date of such
letter.
(d) The Representatives shall have received a certificate, dated the
Firm Closing Date, of Alexius A. Dyer, III and George Murnane, III in their
capacities as the Chief Executive Officer and Chief Financial Officer,
respectively, of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm
Closing Date; the Registration Statement, as amended as of the Firm
Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented
as of the Firm Closing Date, does not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company has
performed all covenants and agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to the Firm Closing
Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and
no proceedings for that purpose have been instituted or, to the best
of the Company's knowledge, threatened or are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has sustained any loss
or interference with their respective businesses or properties having
or resulting in a Material Adverse Effect from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding, and
there has not been any event, circumstance, or development that
results in, or that the Company reasonably believes will result in, a
Material Adverse Effect, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto).
(e) The Representatives shall have received from each officer and
director of the Company and the persons and entities listed in Schedule 3
an agreement to the effect that such person or entity will not, except to
the extent otherwise specifically permitted by the terms of each such
person's or entity's agreement, directly or indirectly, without the prior
written consent of the Representatives, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale,
-22-
<PAGE>
contract of sale, pledge, grant of an option to purchase or other sale or
disposition) of any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock for a
period of 180 days after the date of this Agreement; provided, however,
that intra-family transfers or transfers to trust for estate planning
purposes shall not be so restricted.
(f) On or before the Firm Closing Date, the Representatives and their
counsel shall have received such further certificates, documents or other
information as they may have reasonably requested from the Company.
(g) Upon consummation of the offering of the Securities, the
Securities shall have been included for trading on the American Stock
Exchange.
(h) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Berliner Zisser Walter & Gallegos, P.C., counsel for
the Representatives, with respect to the issuance and sale of the Firm
Securities, the Registration Statement and Prospectus, and such other
related matters as the Representatives may reasonably require, and the
Company shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.
(i) The Company shall have executed and delivered a Warrant Agreement
in a form satisfactory to the Representatives (the "Warrant Agreement"),
and there shall have been tendered to the Representatives all of the
Representatives' Warrants described in Section 5(n) hereof to be purchased
by the Representatives on the Closing Date.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Representatives. The Company shall furnish to the
Representatives such conformed copies of such opinions, certificates, letters
and documents in such quantities as the Representatives and counsel for the
Representatives shall reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
against any losses, claims, damages or liabilities to which such
Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon:
(i) any breach by the Company of its representations or
warranties set forth in Section 2(a) and (b) of this Agreement;
-23-
<PAGE>
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other
document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the
Securities under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange
(each, an "Application");
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio, visual, electronic or
electronically transmitted materials produced by the Company or at its
direction and used in connection with the marketing of the Securities,
including without limitation, slides, videos, films, Internet
presentations, tape recordings, and, such party or parties, as the
case may be, will reimburse, as incurred, each Underwriter and each
such controlling person for any legal or other expenses reasonably
incurred by such Underwriter or such controlling person in connection
with investigating, defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or
action;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or
any Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein; and provided, further, that the Company will not
be liable to any Underwriter or any person controlling such Underwriter with
respect to any such untrue statement or omission made in any Preliminary
Prospectus that is corrected in the Prospectus (or any amendment or supplement
thereto) if the person asserting any such loss, claim, damage or liability
purchased Securities from such Underwriter but was not sent or given a copy of
the Prospectus (as amended or supplemented) at or prior to the written
confirmation of the sale of such Securities to such person in any case where
such delivery of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or supplemented)
was a result of noncompliance by the Company with Section 5(d) and (e) of this
Agreement. This indemnity agreement will be in addition to any liability that
the Company may otherwise have. The Company shall not, without the prior
written consent of the Representatives, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any Underwriter or any person who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to
such claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of all of the Underwriters and such
controlling persons from all liability arising out of such claim, action, suit
or proceeding.
-24-
<PAGE>
In addition to its other obligations under this Section 8(a), the Company
agrees that, as an interim measure during the pendency of any claim, action,
investigation, inquiry, or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in this
Section 8(a), it will reimburse the Representatives and each Underwriter on a
monthly basis for all reasonable legal fees or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry, or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Representatives or Underwriters for such expenses
and the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Representatives and
the Underwriters shall promptly return it to the party or parties that made such
payment, together with interest, compounded daily, determined on the basis of
the prime rate (or other commercial lending rate for borrowers of the highest
credit standing) announced from time to time by Bank of America (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the
Representatives and Underwriters within 30 days of a request for reimbursement
shall bear interest at the Prime Rate from the date of such request. This
indemnity agreement shall be in addition to any liabilities which the Company
may otherwise have.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, against any losses, claims, damages or liabilities to which
the Company or any such director, officer or controlling person of the
Company may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application or (ii) the omission or
the alleged omission to state therein a material fact required to be stated
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for
use therein; and, subject to the limitation set forth immediately preceding
this clause, will reimburse, as incurred, any legal or other expenses
reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending any such
loss, claim, damage, liability or any action in respect thereof. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party,
except to the extent that the indemnifying party demonstrates it has been
irreparably prejudiced by such failure to receive notice.
-25-
<PAGE>
(d) In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded or shall have been advised by its counsel that there may be one
or more legal defenses available to it and/or other indemnified parties
that conflict with those available to the indemnifying party, the
indemnifying party shall not have the right to direct the defense of such
action on behalf of such indemnified party or parties and such indemnified
party or parties shall have the right to select separate counsel to defend
such action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof and approval by such indemnified party of
counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying
party shall not be liable for the expenses of more than one separate
counsel (in addition to local counsel) in any one action or separate but
substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the
Representatives in the case of paragraph (a) of this Section 8,
representing the indemnified parties under such paragraph (a) who are
parties to such action or actions) or (ii) the indemnifying party does not
promptly retain counsel satisfactory to the indemnified party or (iii) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. After such
notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the
consent of the indemnifying party.
(e) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 is unavailable or insufficient,
for any reason, to hold harmless an indemnified party in respect of any
losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect (i) the relative benefits received by the
indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Securities or (ii) if the allocation
provided by the foregoing clause (i) is not permitted by applicable law,
not only such relative benefits but also the relative fault of the
indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged
statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on
the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts
and commissions received by the Underwriters. The relative
-26-
<PAGE>
fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters, the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission, and any other equitable
considerations appropriate in the circumstances. The Company and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if
the Underwriters were treated as one entity for such purpose) or by any
other method of allocation that does not take into account the equitable
considerations referred to above in this paragraph (e). Notwithstanding
any other provision of this paragraph (e), no Underwriter shall be
obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or
any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
hereunder are several in proportion to their respective underwriting
obligations and not joint, and as between themselves, contributions among
Underwriters shall be governed by the provisions of the Representatives'
Agreement Among Underwriters. For the purposes of this paragraph 8(e),
each person, if any, who controls an Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act shall have the same
rights to contribution as such Underwriter, and each director of the
Company, each officer of the Company who signed the Registration Statement,
and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, shall have the
same rights to contribution as the Company.
9. Default of Underwriters. If one or more Underwriters default in their
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, then the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof. In the event of any default by one or more Underwriters
as described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that
-27-
<PAGE>
any necessary changes may be made in the arrangements or documents for the
purchase and delivery of the Firm Securities or Option Securities, as the case
may be. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 9. Nothing herein shall
relieve any defaulting Underwriter from liability for its default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers, and
the several Underwriters set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (i) any investigation made by or on behalf of the Company,
any of its officers or directors, any Underwriter or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing
Date or the related Option Closing Date, respectively, in the event that
the Company shall have failed, refused or been unable to perform all
obligations and satisfy all conditions on its part to be performed or
satisfied hereunder at or prior thereto or, if at or prior to the Firm
Closing Date or, such Option Closing Date, respectively,
(i) after the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or development involving a prospective adverse change in or
affecting particularly the business, properties, condition (financial
or otherwise), results of operations or prospects of the Company,
whether or not arising in the ordinary course of business, occurs
which would, in the Representatives' sole judgment, make the offering
or the delivery of the Securities impracticable or inadvisable;
(ii) trading in the Common Stock shall have been suspended by the
Commission or the American Stock Exchange or minimum or maximum prices
shall have been established on the American Stock Exchange;
(iii) a banking moratorium shall have been declared by New
York or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended
as of the date hereof.
-28-
<PAGE>
(b) Termination of this Agreement pursuant to this Section 11 shall
be without liability of any party to any other party except as provided in
Section 10 hereof.
12. Information Supplied by Underwriters. The statements set forth in (a)
the last paragraph on the front cover page of any Preliminary Prospectus or the
Prospectus, (b) under the heading "Underwriting" in any Preliminary Prospectus
or the Prospectus and (c) on page 2 in any Preliminary Prospectus or the
Prospectus pertaining to stabilization (to the extent such statements relate to
the Underwriters) constitute the only information furnished by any Underwriter
through the Representatives to the Company for the purposes of Section 8 hereof.
The Underwriters confirm that such statements (to such extent) are correct.
13. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Cruttenden Roth Incorporated,
18301 Von Karman, Suite 100, Irvine, California 92715, with a copy to Scott &
Stringfellow, Inc., 909 East Main Street, Richmond, Virginia 23219, and if sent
to the Company, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to the Company at 1954 Airport Road, Suite
200, Atlanta, Georgia 30341, Attention: Chief Executive Officer.
14. Successors. This Agreement shall inure to the benefit of and shall be
binding upon the several Underwriters, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (a)
the indemnities of the Company contained in Section 8 of this Agreement shall
also be for the benefit of any person or persons who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
and (b) the indemnities of the Underwriters contained in Section 8 of this
Agreement shall also be for the benefit of the directors of the Company and the
officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act. No purchaser of Securities from any
Underwriter shall be deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of California, and
by execution and delivery of this Agreement, the Company accepts for itself and
in connection with their respective properties, generally and unconditionally,
the nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement. The Company designates and appoints
Alexius A. Dyer, III and such other persons as may hereafter be selected by the
Company irrevocably agreeing in writing to so serve, as its agent to receive on
its behalf service of all process in any such proceedings in any such court,
such service being hereby acknowledged by the Company to be effective and
binding service in
-29-
<PAGE>
every respect. A copy of any such process so served shall be mailed by
registered mail to the Company at its address provided in Section 13 hereof;
provided, however, that, unless otherwise provided by applicable law, any
failure to mail such copy shall not affect the validity of service of such
process. If any agent appointed by the Company refuses to accept service, the
Company hereby agrees that service of process sufficient for personal
jurisdiction in any action against the Company in the State of California may be
made by registered or certified mail, return receipt requested, to the Company
at its address provided in Section 13 hereof, and the Company hereby
acknowledges that such service shall be effective and binding in every respect.
Nothing herein shall affect the right to serve process in any other manner
permitted by law or shall limit the right of any Underwriter to bring
proceedings against the Company in the courts of any other jurisdiction.
17. No Rule of Construction. The parties acknowledge that this Agreement
was initially prepared by the Representatives, and that all parties have read
and negotiated the language used in this Agreement. The parties agree that,
because all parties participated in negotiating and drafting this Agreement, no
rule of construction shall apply to this Agreement which construes ambiguous
language in favor of or against any party by reason of that party's role in
drafting this Agreement.
18. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
If the foregoing correctly sets forth our understanding please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and each of the
several Underwriters.
Very truly yours,
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
By: ____________________________________________
Alexius A. Dyer, III
Chief Executive Officer
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
CRUTTENDEN ROTH INCORPORATED SCOTT & STRINGFELLOW, INC.
By: ________________________________ By: _______________________________
Name: _________________________ Name: _________________________
Title: ________________________ Title: ________________________
For themselves and as Representatives.
-30-
<PAGE>
Schedule 1
UNDERWRITERS
NUMBER OF
FIRM SECURITIES
UNDERWRITERS TO BE PURCHASED
- ------------ ---------------
Cruttenden Roth Incorporated...........................
------------
Scott & Stringfellow, Inc. ............................
------------
Total........................................... 1,750,000
------------
------------
-31-
<PAGE>
Schedule 2
SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---- -----------------------------
IASG - Virgin Islands, Inc. United States
Virgin Islands
-32-
<PAGE>
Schedule 3
PERSONS AND ENTITIES SUBJECT TO LOCK-UP AGREEMENTS
Name
-------------------------
Alexius A. Dyer, III
George Murnane, III
James M. Isaacson
Kyle R. Kirkland
E. James Mueller
-33-
<PAGE>
EXECUTION COPY
FIRST AMENDMENT, WAIVER AND AGREEMENT
FIRST AMENDMENT, WAIVER AND AGREEMENT, dated as of March 24, 1997 (this
"Amendment"), to the Existing Credit Agreement (as hereinafter defined), by and
among INTERNATIONAL AIRLINE SUPPORT GROUP, INC., a Delaware corporation (the
"Borrower"), and BNY FINANCIAL CORPORATION, a New York corporation (the
"Lender").
RECITALS
The Borrower and the Lender have entered into the Existing
Credit Agreement, pursuant to which the Lender is providing to the Borrower (i)
an $11,000,000.00 revolving credit facility (the "Revolver Facility") and a
$3,000,000.00 term loan facility (as specifically defined below, the "Term Loan
A Facility"), which is secured by accounts receivable, inventory and other
collateral of the Borrower. The Borrower has requested that the Lender provide
an additional $3,750,000.00 term loan facility (as specifically defined below,
the "Term Loan B Facility") for the acquisition of three (3) Boeing 727-100
aircraft (bearing manufacturer's serial numbers 18892, 18903 and 18905,
respectively) (the "Aircraft Acquisition"). The Borrower has also requested
that the Lender increase the maximum amount available under the Revolver
Facility to $13,000,000.00. Subject to the terms and conditions hereof, the
Lender is willing (i) to provide the Term Loan B Facility to the Borrower, (ii)
to increase the maximum amount available under the Revolver Facility to
$13,000,000.00 and (iii) to amend and waive certain provisions of the Existing
Credit Agreement in order to effectuate the foregoing.
In consideration of the foregoing and of the mutual covenants
and undertakings herein contained, the parties hereto hereby agree that the
Existing Credit Agreement is amended as hereinafter provided.
ARTICLE I
Definitions
1. Definitions. (a) In addition to the definitions set
forth in the heading and the recitals to this Amendment, the following
definitions shall apply to this Amendment:
"Agreement": means the Credit Agreement, dated as of September
30, 1996, between the Borrower and the Lender, as amended, supplemented or
otherwise modified from time to time up to and including this Amendment.
1
<PAGE>
"Existing Credit Agreement": means the Credit Agreement, dated
as of September 30, 1996, between the Borrower and the Lender, as the same may
have been amended, supplemented or modified from time to time up to but not
including the effectiveness of this Amendment.
"First Amendment Documents": the First Amendment, Amendment No.
1 to Borrower Security Agreement, the Pledge Agreement, the Emery Consent and
Agreement, the Term Loan B Aircraft Chattel Mortgages, the Emery Leases, the
Emery Aircraft Lease Supplements, Term Note B, and any other agreements,
instruments and documents executed or delivered pursuant to or in connection
with the First Amendment and the transactions contemplated thereby.
(b) Unless otherwise indicated, capitalized terms that are used
but not defined herein shall have the meanings ascribed to them in the Existing
Credit Agreement.
ARTICLE II
Representations
1. Representations. (a) The Borrower hereby represents
and warrants as follows:
(i) It (A) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, (B) has the
power and authority, and the legal right, to own and operate its property, to
lease the property it operates as lessee and to conduct the business in which it
is currently engaged, (C) is duly qualified and in good standing under the laws
of each jurisdiction where its ownership, lease or operation of property or the
conduct of its business requires such qualification and (D) is in compliance
with all Requirements of Law except to the extent that the failure to comply
therewith reasonably could not, in the aggregate, be expected to have a Material
Adverse Effect.
(ii) It has the power and authority, and the legal right, to
make, deliver and perform this Amendment and the other First Amendment Documents
to which it is a party and to borrow under the Agreement and has taken all
necessary action to authorize the borrowings on the terms and conditions of the
Agreement and this Amendment and to authorize the execution, delivery and
performance of the First Amendment Documents to which it is a party. No consent
or authorization of, filing with, notice to or other act by or in respect of,
any Governmental Authority or any other Person is required in connection with
the borrowings under the Agreement or with the execution, delivery, performance,
validity or enforceability of the First Amendment Documents to which it is a
party. Each First Amendment Document to which the Borrower is a party has been
or will be duly executed and delivered on behalf of the Borrower. Each First
Amendment Document to which the Borrower is a party when executed and delivered
will constitute a legal, valid and binding obligation of the Borrower
enforceable against it in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
(iii) The conditions contained in Article V hereof have been satisfied.
2
<PAGE>
(b) The Borrower represents that each of the Credit Documents is on the
date hereof in full force and effect.
ARTICLE III
Amendments to Existing Credit Agreement
1. Amendments to Section 1. (a) Section 1.1 of the
Existing Credit Agreement is hereby amended by inserting the following new
definitions therein in alphabetical order:
"Amendment No. 1 to Borrower Security Agreement":
that certain Amendment No. 1 to Borrower Security Agreement, dated as
of the First Amendment Effective Date, from the Borrower to the
Lender.
"Emery": Emery Worldwide Airlines, Inc., a Nevada
corporation corporation.
"Emery Aircraft Lease Supplements": the collective
reference to the Lease Assignment Assumption and Releases, dated as of
March 24, 1997 by and among AAR Engine Group, Inc., the Borrower and
Emery, pursuant to which the Borrower becomes the lessor under each of
the Emery Leases.
"Emery Consent and Agreement": that certain
Consent and Agreement, dated as of the date hereof, by and among
Emery, the Borrower and the Lender, in respect of the Emery Leases.
"Emery Leases": the collective reference to each
Aircraft Lease Agreement in respect of a Term Loan B Aircraft, dated
as of February 17, 1994, September 22, 1993 and September 23, 1993,
respectively, and each of which is between Emery (as lessee) and the
Borrower (as successor lessor), as the same may be amended,
supplemented or modified from time to time.
"First Amendment": that certain First Amendment,
Waiver and Agreement, dated as of March 24, 1997, between the Borrower
and the Lender.
"First Amendment Documents": the First Amendment,
Amendment No. 1 to Borrower Security Agreement, the Pledge Agreement,
the Emery Consent and Agreement, the Term Loan B Aircraft Chattel
Mortgages, the Emery Leases, the Emery Aircraft Lease Supplements,
Term Note B, and any other agreements, instruments and documents
executed or delivered pursuant to or in connection with the First
Amendment and the transactions contemplated thereby.
3
<PAGE>
"First Amendment Effective Date": the date on
which all of the conditions precedent to the effectiveness of the
First Amendment set forth in Article V of the First Amendment are
first satisfied or waived.
"Pledge Agreement": that certain Borrower Pledge
Agreement, dated as of the First Amendment Effective Date, from the
Borrower to the Lender pursuant to which the Borrower pledges to the
Lender 100% of the outstanding Capital Stock of IASG-Virgin Islands,
Inc., its wholly-owned subsidiary.
"Term Loan A": as defined in Section 2.3(a)
(together with any advance made in connection with the substitution of
a Term Loan A Aircraft or a Term Loan A Aircraft Engine pursuant to
Section 2.5(a)).
"Term Loan A Aircraft": means each Aircraft owned
from time to time by the Borrower and listed as a Term Loan A Aircraft
and described on Schedule I hereto, as the same may be amended or
modified from time to time in accordance with this Agreement.
"Term Loan A Aircraft Engine": means each Aircraft
Engine owned from time to time by the Borrower and listed as a Term
Loan A Aircraft Engine and described on Schedule I hereto, as the same
may be amended or modified from time to time in accordance with this
Agreement.
"Term Loan A Borrowing Base": at any time, an
amount equal to (i) 80% (or such other percentage as the Lender shall
determine in its sole discretion) of the Forced Liquidation Value,
after deduction of any applicable Collateral Reserves, at such time,
of all Term Loan A Aircraft domiciled in jurisdictions other than
Kenya and all Term Loan A Aircraft Engines and (ii) 50% (or such other
percentage as the Lender shall determine in its sole discretion) of
the Forced Liquidation Value, after deduction of any applicable
Collateral Reserves, at such time, of all Term Loan A Aircraft
domiciled in Kenya.
"Term Loan A Facility": at any time, the
obligation of the Lender to make Term Loan A in accordance with the
provisions of this Agreement, which shall not exceed an amount equal
to $3,000,000.00 minus the aggregate amount of repayments of principal
then required to have been made in accordance with Schedule 2.3A.
"Term Loan B": as defined in Section 2.3(b)
(together with any advance made in connection with the substitution of
a Term Loan B Aircraft or a Term Loan B Aircraft Engine pursuant to
Section 2.5(b)).
"Term Loan B Aircraft": means each Aircraft owned
from time to time by the Borrower and listed as a Term Loan B Aircraft
and described on Schedule I hereto,
4
<PAGE>
as the same may be amended or modified from time to time in accordance
with this Agreement.
"Term Loan B Aircraft Engine": means each Aircraft
Engine owned from time to time by the Borrower and listed as a Term
Loan B Aircraft Engine and described on Schedule I hereto, as the same
may be amended or modified from time to time in accordance with this
Agreement.
"Term Loan B Aircraft Chattel Mortgages": the
collective reference to each Aircraft Chattel Mortgage, dated as of
the First Amendment Effective Date, from the Borrower to the Lender
with respect to a Term Loan B Aircraft.
"Term Loan B Borrowing Base": at any time, an
amount equal to 80% (or such other percentage as the Lender shall
determine in its sole discretion) of the Forced Liquidation Value,
after deduction of any applicable Collateral Reserves, at such time,
of all Term Loan B Aircraft and all Term Loan B Aircraft Engines.
"Term Loan B Facility": at any time, the
obligation of the Lender to make Term Loan B in accordance with the
provisions of this Agreement, which shall not exceed an amount equal
to $3,750,000.00 minus the aggregate amount of repayments of principal
then required to have been made in accordance with Schedule 2.3B.
"Term Loan Borrowing Bases": the collective
reference to the Term Loan A Borrowing Base and the Term Loan B
Borrowing Base.
"Term Loan Facilities": the collective reference
to the Term Loan A Facility and the Term Loan B Facility.
"Term Loans": the collective reference to Term
Loan A and Term Loan B.
"Term Note A": a promissory note of the Borrower
evidencing Term Loan A, in form and substance acceptable to the
Lender.
"Term Note B": a promissory note of the Borrower
evidencing Term Loan B, in form and substance acceptable to the
Lender.
(b) The definition of the term "Approved Aircraft" in Section
1.1 of the Existing Credit Agreement is hereby deleted in its entirety and
replaced by the following:
""Approved Aircraft": means the collective
reference to the Term Loan A Aircraft, the Term Loan A Aircraft
Engines, the Term Loan B Aircraft and the Term Loan B Aircraft
Engines."
5
<PAGE>
(c) The definition of the term "Credit Documents" in Section 1.1
of the Existing Credit Agreement is hereby deleted in its entirety and replaced
by the following:
""Credit Documents": this Agreement, the First
Amendment, the Security Documents, the Republic Intercreditor
Agreement, each Consent and Agreement, Term Note A, Term Note B, any
Revolver Note and any other documents, agreements or instruments
executed and delivered to the Lender pursuant to Section 6.11."
(d) The definition of the term "Facilities" in Section 1.1 of
the Existing Credit Agreement is hereby deleted in its entirety and replaced by
the following:
""Facilities": the collective reference to the
Revolver Facility and the Term Loan Facilities."
(e) Clause I of the definition of "Revolver Borrowing Base" in
Section 1.1 of the Existing Credit Agreement is hereby deleted in its entirety
and replaced by the following:
"I. the sum of (a) 85% (or such other percentage
as the Lender shall determine in its sole and absolute discretion) of
the total outstanding balance, after subtracting any Collateral
Reserves, of then Eligible Accounts and Eligible Lease Payment
Receivables, (b) 100% (or such other percentage as the Lender shall
determine in its sole and absolute discretion) of the aggregate amount
of all maintenance reserves held in a restricted account pursuant to
Section 3.5(f), and (c) the least of (i) 100% (or such other
percentage as the Lender shall determine in its sole and absolute
discretion) of the total cost, after subtracting any Collateral
Reserves, of then Eligible Inventory plus $500,000.00, (ii) 75% (or
such other percentage as the Lender shall determine in its sole and
absolute discretion) of the Forced Liquidation Value, after
subtracting any Collateral Reserves, of such Eligible Inventory and
(iii) $9,500,000.00;"
(f) The definition of "Revolver Facility" in Section 1.1 of the
Existing Credit Agreement is hereby amended by deleting in the third line
thereof the number "$11,000,000.00" and replacing it with the number
"$13,000,000.00".
(g) The definition of "Revolver Reserve" in Section 1.1 of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
""Revolver Reserve": as of any date, an amount
equal to the lesser of (i) the amount, if any, by which the sum
determined in accordance with clause I of the definition of Revolver
Borrowing Base on such date exceeds the aggregate outstanding Revolver
Advances on such date and (ii) the amount, if any, by which the sum of
the Term Loan A Facility (without regard to any Term Loan A borrowings
made prior to or on such date) on such date and the Term Loan B
Facility (without regard to any Term Loan B
6
<PAGE>
borrowings made prior to or on such date) on such date exceeds the sum
of the Term Loan A Borrowing Base on such date and the Term Loan B
Borrowing Base on such date."
(h) The definition of "Security Documents" in Section 1.1 of the
Existing Credit Agreement is hereby amended by adding in the second line thereof
the words "Amendment No. 1 to Borrower Security Agreement, the Pledge
Agreement," after the words "Borrower Security Agreement,".
(i) The term "Term Loan Borrowing Base" and its related
definition in Section 1.1 of the Existing Credit Agreement are hereby deleted in
their entirety.
(j) The term "Term Loan Facility" and its related definition in
Section 1.1 of the Existing Credit Agreement are hereby deleted in their
entirety.
(k) The term "Term Note" and its related definition in Section
1.1 of the Existing Credit Agreement are hereby deleted in their entirety.
2. Amendments to Section 2.3. Section 2.3 of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"2.3 Term Loan Facilities. (a) Subject to the
terms and conditions hereof, the Lender agrees to make a term loan to
the Borrower in one advance (such advance, together with any advances
made in connection with the substitution of Term Loan A Aircraft or a
Term Loan A Aircraft Engine pursuant to Section 2.5(a) hereof, "Term
Loan A") on the Closing Date in the principal amount of the lesser of
(a) the Term Loan A Facility on such date and (b) the Term Loan A
Borrowing Base on such date plus the Revolver Reserve on such date
(without regard to the Term Loan B Facility or the Term Loan B
Borrowing Base). Term Loan A shall be dated the Closing Date, stated
to mature in the installments and amounts payable on the dates set
forth in Schedule 2.3A hereto, and bear interest for the period from
the Closing Date on the unpaid principal amount thereof at the
applicable interest rates per annum specified in Section 3.1. All
payments of principal thereof shall reduce the Term Loan A Facility on
a dollar-for-dollar basis.
(b) Subject to the terms and conditions hereof,
the Lender agrees to make a term loan to the Borrower in one advance
(such advance, together with any advances made in connection with the
substitution of Term Loan B Aircraft or Term Loan B Aircraft Engines
pursuant to Section 2.5(b) hereof, "Term Loan B") on the First
Amendment Effective Date in the principal amount of the lesser of (a)
the Term Loan B Facility on such date and (b) the Term Loan B
Borrowing Base on such date. Term Loan B shall be dated the First
Amendment Effective Date, stated to mature in the installments and
amounts payable on the dates set forth in Schedule 2.3B hereto, and
bear interest for the period from the First Amendment Effective Date
on the unpaid principal amount
7
<PAGE>
thereof at the applicable interest rates per annum specified in
Section 3.1. Notwithstanding the foregoing, no payment of principal
of Term Loan B scheduled to be made during the period commencing with
and including month 25 and ending with and including month 35, in each
case as set forth on Schedule 2.3B shall be required if at the time
such payment is scheduled to be made the Forced Liquidation Value of
the Term Loan B Aircraft and the Term Loan B Aircraft Engines equals
or exceeds 125% of the outstanding principal balance of Term Loan B.
All payments of principal thereof shall reduce the Term Loan B
Facility on a dollar-for-dollar basis."
3. Amendments to Section 2.4. Section 2.4 of the Existing
Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"2.4 Procedure for Term Loan Borrowing. The
Borrower shall give the Lender irrevocable notice, which notice must
be received by the Lender prior to 12:00 noon, New York City time, on
the requested Borrowing Date for each Term Loan, other than any
advance requested to be made in connection with the substitution of
Approved Aircraft pursuant to Section 2.5 (each such advance, a
"Substitution Advance"), and at least ten (10) Business Days prior to
the requested Borrowing Date for any Substitution Advance, in each
case requesting that the Lender make such advance on the requested
Borrowing Date. The amount of each such advance (including any
Substitution Advance) shall be made available to the Borrower by wire
transfer of immediately available funds to the Borrower's account at
First Union National Bank, Jacksonville, Florida, Account No.
2090000628791, ABA No. 063-000-021."
8
<PAGE>
4. Amendments to Section 2.5. Section 2.5 of the Existing
Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"2.5 Discretionary Term Loan Advance Upon
Substitution of Approved Aircraft. (a) At the request of the Borrower
and after substitution of a Term Loan A Aircraft or a Term Loan A
Aircraft Engine (the "Substitute Term Loan A Aircraft or Engine") for
a Term Loan A Aircraft or a Term Loan A Aircraft Engine which has been
sold or has suffered an Event of Loss within six months after
repayment of Term Loan A to the extent and as required by Section
3.3(d) hereof, the Lender may make an advance in an amount equal to
the lesser of (i) 80% (or such other percentage as the Lender shall
determine in its sole discretion) of the Forced Liquidation Value of
the Substitute Term Loan A Aircraft or Engine, less any applicable
Collateral Reserve, and (ii) the amount, if any, by which (A)
$3,000,000.00 minus all repayments of principal made, or required to
have been made on or prior to the date of such advance in accordance
with Schedule 2.3A hereto exceeds (B) the outstanding principal
balance of Term Loan A on such date (prior to the making of such
advance). Each such advance, if any, shall be made in the sole and
absolute discretion of the Lender and shall be deemed to comprise part
of Term Loan A for all purposes hereunder and shall increase the Term
Loan A Facility on a dollar-for-dollar basis. From and after the
making of such advance the outstanding principal balance of Term Loan
A shall include the amount of such advance, interest shall be payable
on such amount, and the amount of each remaining scheduled principal
repayment shall be increased by an amount equal to (x) the amount of
such advance times (y) a fraction the numerator of which is an amount
equal to such scheduled principal repayment and the denominator of
which is the aggregate amount of all remaining scheduled principal
repayments.
(b) At the request of the Borrower and after
substitution of a Term Loan B Aircraft or a Term Loan B Aircraft
Engine (the "Substitute Term Loan B Aircraft or Engine") for a Term
Loan B Aircraft or a Term Loan B Aircraft Engine which has been sold
or has suffered an Event of Loss within six months after repayment of
Term Loan B to the extent and as required by Section 3.3(d) hereof,
the Lender may make an advance in an amount equal to the lesser of (i)
80% (or such other percentage as the Lender shall determine in its
sole discretion) of the Forced Liquidation Value of the Substitute
Term Loan B Aircraft or Engine, less any applicable Collateral
Reserve, and (ii) the amount, if any, by which (A) $3,750,000.00 minus
all repayments of principal made, or required to have been made on or
prior to the date of such advance in accordance with Schedule 2.3B
hereto exceeds (B) the outstanding principal balance of Term Loan B on
such date (prior to the making of such advance). Each such advance,
if any, shall be made in the sole and absolute discretion of the
Lender and shall be deemed to comprise part of Term Loan B
9
<PAGE>
for all purposes hereunder and shall increase the Term Loan B Facility
on a dollar-for-dollar basis. From and after the making of such
advance the outstanding principal balance of Term Loan B shall include
the amount of such advance, interest shall be payable on such amount,
and the amount of each remaining scheduled principal repayment shall
be increased by an amount equal to (x) the amount of such advance
times (y) a fraction the numerator of which is an amount equal to such
scheduled principal repayment and the denominator of which is the
aggregate amount of all remaining scheduled principal repayments."
10
<PAGE>
5. Amendments to Section 3.2(b). Section 3.2(b) of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"(b) The Borrower may at any time and from time to
time prepay either or both of the Term Loans, in whole or in part,
without premium or penalty after giving to the Lender notice, which
must be received by the Lender no later than 12:00 noon, New York City
time on the date of such prepayment and which must specify the date
and amount of prepayment and identify the Term Loan as to which such
prepayment relates. If any such notice is given, the amount specified
in such notice shall be due and payable on the date specified therein
with respect to the Term Loan specified therein and the amount of such
payments shall be applied against scheduled repayments of principal
thereof on a pro rata basis and shall reduce the related Term Loan
Facility on a dollar-for-dollar basis."
6. Amendments to Section 3.3. Paragraphs (b), (c) and (d)
of Section 3.3 of the Existing Credit Agreement are hereby deleted in their
entirety and replaced by the following:
"(b) (i) If on any date on which a Borrowing Base
Certificate is required to be delivered pursuant to Section 6.2(c),
the aggregate outstanding principal amount of the Term Loans exceeds
an amount equal to the sum of the Term Loan Borrowing Bases and the
Revolver Reserve, the Borrower shall immediately prepay the Term Loans
in an aggregate amount equal to the amount of such excess. The amount
of such payment shall reduce the Term Loan Facilities on a
dollar-for-dollar basis and shall be applied (A) first against
the repayment of Term Loan A to the extent that the outstanding
principal amount of Term Loan A exceeds the Term Loan A Borrowing
Base, and then against the repayment of Term Loan B, and (B) in
each such case, against scheduled repayments of principal on a pro
rata basis.
(ii) Without in any way limiting the provisions of
clause (i) of this Section 3.3(b), if at any time during the period
commencing with and including month 25 and ending with and including
month 35, in each case as set forth on Schedule 2.3B hereto, the
outstanding principal amount of Term Loan B exceeds the sum of (i) the
Term Loan B Borrowing Base and (ii) the excess if any of the Term Loan
A Borrowing Base over the outstanding principal amount of Term Loan A,
the Borrower shall immediately prepay Term Loan B in an amount equal
to such deficiency.
(c) Notwithstanding the provisions of paragraphs
(a) and (b) of this Section and subject to Section 3.1(b), the Lender
may, in its sole and absolute discretion and without waiver of any
right hereunder, permit the amount of the Revolver Advances to exceed
the Revolver Borrowing Base for such time and upon such terms and
conditions as it may determine.
(d) The Borrower shall (A) immediately upon each
sale of an Approved Aircraft either substitute, with the consent of
the Lender (in its sole and absolute discretion), Approved Aircraft
having an aggregate Forced Liquidation Value at least equal
11
<PAGE>
to the Forced Liquidation Value of such sold Approved Aircraft or
prepay the related Term Loan in an amount equal to the lesser of (x)
100% of the Net Proceeds thereof and (y) the sum of the Revolver
Reserve and the amount by which the related Term Loan Borrowing Base
is reduced by such sale, and (B) within two (2) Business Days after
the occurrence of any Event of Loss with respect to an Approved
Aircraft prepay the related Term Loan in an amount equal to the lesser
of (x) the greater of 100% of the Forced Liquidation Value of such
Approved Aircraft immediately prior to such Event of Loss and the
insurance proceeds received or to be received in respect thereof and
(y) the sum of the Revolver Reserve and the amount by which the
related Term Loan Borrowing Base is reduced by such Event of Loss.
Amounts so paid shall be applied to the scheduled repayments of
principal on a pro rata basis and shall reduce the applicable Term
Loan Facility on a dollar-for-dollar basis."
7. Amendments to Section 3.5(e). The THIRD and FOURTH
enumerated paragraphs of Section 3.5(e) of the Existing Credit Agreement are
hereby deleted in their entirety and replaced by the following:
"THIRD, to the payment in full of the outstanding
principal of the Revolver Advances and, upon the occurrence and during
the continuance of an Event of Default, at the option of the Lender,
to the payment in full of the outstanding principal of either or both
of the Term Loans;
FOURTH, to the payment in full of all other
Obligations then due and payable (including, without limitation, any
installment of principal of either or both of the Term Loans then due
and payable); and"
8. Amendments to Section 3.5(f). Clauses (ii) and (iii)
of Section 3.5(f) of the Existing Credit Agreement are hereby amended by
deleting the term "Term Loan Borrowing Base" wherever it occurs therein and
replacing it with the term "Term Loan Borrowing Bases" in each such case.
12
<PAGE>
9. Amendments to Section 3.5(g). Section 3.5(g) of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"(g) The Borrower agrees that, upon the request by
the Lender, the Borrower will execute and deliver to the Lender (i) a
promissory note of the Borrower evidencing Term Loan A of the Lender,
in form and substance acceptable to the Lender ("Term Note A"), (ii) a
promissory note of the Borrower evidencing Term Loan B of the Lender,
in form and substance acceptable to the Lender ("Term Note B"), and/or
(iii) a promissory note of the Borrower evidencing the Revolver
Advances of the Lender in form and substance acceptable to the Lender
(a "Revolver Note")."
10. Amendments to Section 3.9(a). Section 3.9(a) of the
Existing Credit Agreement is hereby amended by deleting in the last line thereof
the words "the Term Loan" and replacing them with the words "Term Loan A".
11. Amendments to Section 5.1(e). Section 5.1(e) to the
Existing Credit Agreement is hereby amended by deleting in the second line
thereof the words "the Term Loan" and replacing them with the words "Term Loan
A".
12. Amendments to Section 6.2(c). Section 6.2(c) is hereby
deleted in its entirety and replaced by the following:
"(c) prior to 2:00 p.m., New York City time on
each Business Day, a Borrowing Base Certificate showing the Revolver
Borrowing Base, the Term Loan A Borrowing Base and the Term Loan B
Borrowing Base (but only, (i) in the case of the Term Loan A Borrowing
Base, in connection with the delivery of the first such certificate
hereunder and in each case that the Term Loan A Borrowing Base changes
from the amount thereof most recently reported and (ii) in the case of
the Term Loan B Borrowing Base, in connection with the delivery of
such certificate on the First Amendment Effective Date and in each
case that the Term Loan B Borrowing Base changes from the amount
thereof most recently reported), in each case as of the immediately
preceding Business Day, certified as complete and correct by a
Responsible Officer or any vice president on behalf of the Borrower,
which Borrowing Base Certificate shall disclose daily updates of the
amount of Eligible Accounts and Eligible Lease Payment Receivables,
weekly updates of the amount of Eligible Inventory and the Forced
Liquidation Value of Approved Aircraft when required;"
13
<PAGE>
13. Amendments to Section 9.2. Section 9.2 of the Existing
Credit Agreement is hereby amended by deleting the Borrower's address for
notices in its entirety and replacing it with the following:
"International Airline Support Group, Inc.
1954 Airport Road, Suite 200
Atlanta, Georgia 30341
Attention: Chief Financial
Officer
Fax: (770) 455-7550"
14. Amendments to Schedule I. Schedule I to the Existing Credit
Agreement is hereby amended in its entirety to read as is set forth on Schedule
I hereto.
15. Amendments to Schedule 1.1. Schedule 1.1 to the Existing
Credit Agreement is hereby amended in its entirety to read as is set forth on
Schedule 1.1 hereto.
16. Amendments to Schedule 2.3. Schedule 2.3 to the Existing
Credit Agreement is hereby deleted in its entirety and replaced with Schedule
2.3A, which shall read as is set forth on Schedule 2.3A hereto, and Schedule
2.3B, which shall read as is set forth on Schedule 2.3B hereto.
17. Amendments to Schedule 4.19. Schedule 4.19 to the Existing
Credit Agreement is hereby amended in its entirety to read as is set forth on
Schedule 4.19 hereto.
ARTICLE IV
Waiver
1. Waiver. The Lender hereby waives any Default or Event
of Default arising as a result of the failure by the Borrower to comply with or
to satisfy the requirements of Section 7.18 of the Existing Credit Agreement,
but only with respect to the Aircraft Acquisition.
ARTICLE V
Conditions to Effectiveness
This Amendment, and the modifications to the Credit Agreement
provided for herein, shall become
14
<PAGE>
effective on the date (the "First Amendment Effective Date") on which all of the
following conditions have been (or are concurrently being) satisfied:
1. The following documents shall have been executed and
delivered by each party thereto:
(i) this Amendment;
(ii) Amendment No. 1 to Borrower Security Agreement;
(iii) the Term Loan B Aircraft Chattel Mortgages;
(iv) the Emery Aircraft Lease Supplements;
(v) the Emery Consent and Agreement;
(vi) the Term B Note;
(vii) the Pledge Agreement; and
(viii) all Uniform Commercial Code financing statements on Form
UCC-1 and UCC-3 required by the Lender.
2. The Lender shall have received executed legal opinions
of King & Spalding, special counsel to the Borrower, in form and substance
satisfactory to the Lender and taking into account this Amendment and the
matters contemplated hereby (including, without limitation, opinions with
respect to the validity of the First Amendment Documents and the effectiveness
of UCC filings in each state where Collateral described therein is located).
Such legal opinion shall cover such matters incident to the transactions
contemplated by this Amendment and the other First Amendment Documents as the
Lender may reasonably require.
3. The Lender shall have received the executed legal
opinion of Daugherty, Fowler & Peregrin, special FAA counsel to the Borrower, in
form and substance satisfactory to the Lender taking into account this Amendment
and the matters contemplated hereby (including, without limitation, opinions as
to the effectiveness of the filing of the Term Loan B Aircraft Chattel Mortgages
and the Emery Aircraft Lease Supplements with the FAA). Such legal opinion
shall cover such matters incident to the transactions contemplated by this
Amendment and the other First Amendment Documents as the Lender may reasonably
require.
4. The Lender shall have received a copy, in form and
substance reasonably satisfactory to the Lender, of the
15
<PAGE>
corporate resolutions of the Borrower, authorizing the Aircraft Acquisition and
the execution, delivery and performance of this Amendment and the other First
Amendment Documents to which the Borrower is a party, certified by the Secretary
or an Assistant Secretary of the Borrower as of the First Amendment Effective
Date, which certificates shall state that the resolutions or authorizations
thereby certified have not been amended, modified, revoked or rescinded as of
the date of such certificate.
5. The Lender shall have received a certificate of the
Secretary or an Assistant Secretary of the Borrower, dated the First Amendment
Effective Date, as to the incumbency and signature of the officer(s) of the
Borrower executing each First Amendment Document to which it is a party and any
certificate or other document to be delivered by it pursuant hereto, together
with evidence of the incumbency of such Secretary or Assistant Secretary.
6. The Lender shall have received certificates from the
Borrower, stating that its Governing Documents have not been amended since
September 30, 1996.
7. The Lender shall have received copies of certificates
dated as of a recent date from the Secretary of State or other appropriate
authority of such jurisdiction, evidencing the good standing of the Borrower in
the State of its organization and in each State where the ownership, lease or
operation of property or the conduct of business requires it to qualify as a
foreign corporation or other entity except where the failure to so qualify would
not have a Material Adverse Effect.
8. The Lender shall have received all chattel paper
original copies of the Emery Leases and all documents required to be delivered
under Article Three of each of the Term Loan B Aircraft Chattel Mortgages.
9. Each of the representations and warranties made by the
Borrower in or pursuant to the Credit Documents shall be true and correct in all
material respects on and as of the First Amendment Effective Date as if made on
and as of such date (except to the extent the same relate to another, earlier
date, in which case they shall be true and correct in all material respects as
of such earlier date).
16
<PAGE>
10. Except as provided for in Article IV, no Default or Event of
Default shall have occurred and be continuing.
11. All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the transactions
contemplated by the First Amendment Documents, the Existing Credit Agreement,
the Credit Agreement and the other Credit Documents shall be reasonably
satisfactory in form and substance to the Lender, and the Lender shall have
received such other documents in respect of any aspect or consequence of the
transactions contemplated hereby or thereby as it shall reasonably request.
12. The Lender shall have received a Borrowing Base Certificate
showing the Revolver Borrowing Base, the Term Loan A Borrowing Base and the Term
Loan B Borrowing Base, in each case as of the Business Day immediately preceding
the First Amendment Effective Date, with appropriate insertions and dated the
First Amendment Effective Date, satisfactory in form and substance to the
Lender, executed by a Responsible Officer or any Vice President of the Borrower.
13. The Lender shall have received evidence in form and
substance satisfactory to it that all of the requirements of Section 6.6 of the
Existing Credit Agreement and Section 5(o) of the Borrower Security Agreement
shall have been satisfied with respect to the Term Loan B Aircraft.
14. The Lender shall have received evidence in form and
substance satisfactory to it that all filings, recordings, registrations and
other actions, including, without limitation, the filing of duly executed
Aircraft Chattel Mortgages with the FAA and financing statements on forms UCC-1,
necessary or, in the opinion of the Lender, desirable to perfect the Liens
created by the Security Documents with respect to the Term Loan B Aircraft shall
have been completed.
15. The Lender shall have received each additional document,
instrument, legal opinion or item of information reasonably requested by the
Lender, including, without limitation, a copy of any debt instrument, security
agreement or other material contract to which the Borrower is be a party.
17
<PAGE>
ARTICLE VIII.
Miscellaneous
1. Closing Fee; Payment of Expenses. (a) On the First
Amendment Effective Date, the Borrower shall pay to the Lender in immediately
available funds a fee equal to $50,000.00 (which shall be in addition to all
fees paid to the Lender prior to the execution and delivery of this Amendment).
The Lender is hereby authorized to withhold the amount of such fee from the
proceeds of Term Loan B.
(b) Without limiting its obligations under Section 9.5 of
the Existing Agreement, the Borrower agrees to pay or reimburse the Lender for
all of its reasonable costs and expenses incurred in connection with this
Amendment and the other First Amendment Documents, including, without
limitation, the reasonable costs and expenses of Cadwalader, Wickersham & Taft,
counsel to the Lender and expressly acknowledge that their obligations hereunder
constitute "Obligations" within the meaning of the Existing Credit Agreement.
2. No Other Amendments; Confirmation. Except as expressly
amended, modified and supplemented hereby and by the documents related hereto,
the provisions of the Existing Credit Agreement and the other Credit Documents
shall remain in full force and effect.
3. Acknowledgment. The Borrower hereby acknowledges that
the Emery Consent and Agreement constitutes a Consent and Agreement under the
Agreement and each of the Term Loan B Aircraft Chattel Mortgages constitutes an
Aircraft Chattel Mortgage under the Agreement.
4. Affirmation by Borrower. The Borrower hereby consents
to the execution and delivery of this Amendment and each of the other First
Amendment Documents to which Borrower is a party and reaffirms its obligations
under the Credit Documents.
5. Governing Law; Counterparts. (a) This Amendment and
the rights and obligations of the parties hereto shall be governed by, and
construed and interpreted in accordance with, the laws of the State of New York.
(b) This Amendment may be executed by one or more of the
parties hereto
18
<PAGE>
on any number of separate counterparts, and all of said counterparts taken
together shall be deemed to constitute one and the same instrument. A set of
the counterparts of this Amendment signed by all the parties shall be lodged
with the Borrower and the Lender. This Amendment may be delivered by facsimile
transmission of the relevant signature pages hereof.
[SIGNATURE PAGE FOLLOWS ]
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered as of the day and year first above
written.
INTERNATIONAL AIRLINE SUPPORT
GROUP, INC.
By
______________________________
Name:
Title:
BNY FINANCIAL CORPORATION
By
______________________________
Name:
Title:
20
<PAGE>
Exhibit 2.4.2
EXECUTION COPY
SECOND AMENDMENT AND AGREEMENT
SECOND AMENDMENT AND AGREEMENT, dated as of September 9, 1997 (this
"Amendment"), to the Existing Credit Agreement (as hereinafter defined), by
and among INTERNATIONAL AIRLINE SUPPORT GROUP, INC., a Delaware corporation
(the "Borrower"), and BNY Financial Corporation, a New York corporation (the
"Lender").
RECITALS
The Borrower and the Lender have entered into the Existing Credit
Agreement, pursuant to which the Lender is providing to the Borrower (i) a
$13,000,000.00 revolving credit facility (the "Revolver Facility"), a
$3,000,000.00 term loan facility (the "Term Loan A Facility"), and a
$3,750,000.00 term loan facility (the "Term Loan B Facility") which is
secured by accounts receivable, inventory and other collateral of the
Borrower. The Borrower has requested that the Lender provide an additional
$1,500,000.00 term loan facility (as more specifically defined below, the
"Term Loan C Facility") for the acquisition of one (1) McDonnell Douglas
DC-9-51 aircraft (bearing manufacturer's serial number 47663) (the "Aircraft
Acquisition"). Subject to the terms and conditions hereof, the Lender is
willing to provide the Term Loan C Facility to the Borrower and to amend
certain provisions of the Existing Credit Agreement in order to effectuate
the foregoing.
In consideration of the foregoing and of the mutual covenants and
undertakings herein contained, the parties hereto hereby agree that the
Existing Credit Agreement is amended as hereinafter provided.
ARTICLE I
Definitions
1. Definitions. (a) In addition to the definitions set forth in
the heading and the recitals to this Amendment, the following definitions
shall apply to this Amendment:
"Agreement": means the Credit Agreement, dated as of September 30, 1996,
between the Borrower and the Lender, as amended by the First Amendment,
Waiver and Agreement, dated as of March 24, 1997, between the Borrower and
the Lender, as further amended, supplemented or otherwise modified from time
to time up to and including this Amendment.
"Existing Credit Agreement": means the Credit Agreement, dated as of
September 30, 1996, between the Borrower and the Lender, as amended by the
First Amendment, Waiver and Agreement, dated as of March 24, 1997, between
the Borrower and
<PAGE>
the Lender, as the same may have been further amended, supplemented or
modified from time to time up to but not including the effectiveness of this
Amendment.
"Second Amendment Documents": this Amendment, the Sun Jet Consent and
Agreement (as defined in Article III, Section 1 hereof), the Term Loan C
Aircraft Chattel Mortgage (as defined in Article III, Section 1 hereof), the
Sun Jet Lease (as defined in Article III, Section 1 hereof), the Sun Jet
Aircraft Lease Supplement and Receipt (as defined in Article III, Section 1
hereof), Term Note C (as defined in Article III, Section 1 hereof), and any
other agreements, instruments and documents executed or delivered pursuant to
or in connection with this Amendment and the transactions contemplated
thereby.
(b) Unless otherwise indicated, capitalized terms that are used but not
defined herein shall have the meanings ascribed to them in the Existing
Credit Agreement.
ARTICLE II
Representations
1. Representations. (a) The Borrower hereby represents and warrants
as follows:
(i) It (A) is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, (B) has the power and
authority, and the legal right, to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged, (C) is duly qualified and in good standing under the laws
of each jurisdiction where its ownership, lease or operation of property or
the conduct of its business requires such qualification and (D) is in
compliance with all Requirements of Law except to the extent that the failure
to comply therewith reasonably could not, in the aggregate, be expected to
have a Material Adverse Effect.
(ii) It has the power and authority, and the legal right, to make,
deliver and perform this Amendment and the other Second Amendment Documents
to which it is a party and to borrow under the Agreement and has taken all
necessary action to authorize the borrowings on the terms and conditions of
the Agreement and this Amendment and to authorize the execution, delivery and
performance of the Second Amendment Documents to which it is a party. No
consent or authorization of, filing with, notice to or other act by or in
respect of, any Governmental Authority or any other Person is required in
connection with the borrowings under the Agreement or with the execution,
delivery, performance, validity or enforceability of the Second Amendment
Documents to which it is a party. Each Second Amendment Document to which
the Borrower is a party has been or will be duly executed and delivered on
behalf of the Borrower. Each Second Amendment Document to which the Borrower
is a party when executed and delivered will constitute a legal, valid and
binding obligation of the Borrower enforceable against it in accordance with
its terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of
good faith and fair dealing.
-2-
<PAGE>
(iii) The conditions contained in Article IV hereof have been satisfied.
(b) The Borrower represents that each of the Credit Documents is on the
date hereof in full force and effect.
ARTICLE III
Amendments to Existing Credit Agreement
1. Amendments to Section 1. (a) Section 1.1 of the Existing Credit
Agreement is hereby amended by inserting the following new definitions therein
in alphabetical order:
"Second Amendment": that certain Second Amendment and Agreement, dated
as of September 9, 1997, between the Borrower and the Lender.
"Second Amendment Documents": the Second Amendment, the Sun Jet
Consent and Agreement, the Term Loan C Aircraft Chattel Mortgage, the Sun
Jet Lease, the Sun Jet Aircraft Lease Supplement and Receipt, Term Note C,
and any other agreements, instruments and documents executed or delivered
pursuant to or in connection with the Second Amendment and the transactions
contemplated thereby.
"Second Amendment Effective Date": the date on which all of the
conditions precedent to the effectiveness of the Second Amendment set forth
in Article IV of the Second Amendment are first satisfied or waived.
"Sun Jet": means Sun Jet International, Inc., a Delaware corporation.
"Sun Jet Aircraft Lease Supplement and Receipt": the collective
reference to the Lease Supplement and Receipt, dated as of the date of its
execution and delivery between the Borrower and Sun Jet.
"Sun Jet Consent and Agreement": that certain Consent and Agreement,
dated as of the date hereof, by and among Sun Jet, the Borrower and the
Lender, in respect of the Sun Jet Lease.
"Sun Jet Lease": the Aircraft Lease Agreement in respect of the Term
Loan C Aircraft, dated as of August 8, 1997, and between Sun Jet (as
lessee) and the Borrower (as lessor), as the same may be amended,
supplemented or modified from time to time.
"Term Loan C": as defined in Section 2.3(c) (together with any advance
made in connection with the substitution of a Term Loan C Aircraft or a
Term Loan C Aircraft Engine pursuant to Section 2.5(c)).
"Term Loan C Aircraft": means each Aircraft owned from time to time by
the Borrower and listed as a Term Loan C Aircraft and described on Schedule
I hereto, as the same may be amended or modified from time to time in
accordance with this Agreement.
-3-
<PAGE>
"Term Loan C Aircraft Chattel Mortgage": the Aircraft Chattel
Mortgage, dated as of the Second Amendment Effective Date, from the
Borrower to the Lender with respect to a Term Loan C Aircraft.
"Term Loan C Aircraft Engine": means each Aircraft Engine owned from
time to time by the Borrower and listed as a Term Loan C Aircraft Engine
and described on Schedule I hereto, as the same may be amended or modified
from time to time in accordance with this Agreement.
"Term Loan C Borrowing Base": at any time, an amount equal to 60% (or
such other percentage as the Lender shall determine in its sole discretion)
of the Forced Liquidation Value, after deduction of any applicable
Collateral Reserves, at such time, of all Term Loan C Aircraft.
"Term Loan C Facility": at any time, the obligation of the Lender to
make Term Loan C in accordance with the provisions of this Agreement, which
shall not exceed an amount equal to $1,500,000.00 minus the aggregate
amount of repayments of principal then required to have been made in
accordance with Schedule 2.3C.
"Term Note C": a promissory note of the Borrower evidencing Term Loan
C, in form and substance acceptable to the Lender.
(b) The definition of the term "Approved Aircraft" in Section 1.1 of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
""Approved Aircraft": means the collective reference to the Term Loan
A Aircraft, the Term Loan A Aircraft Engines, the Term Loan B Aircraft, the
Term Loan B Aircraft Engines, the Term Loan C Aircraft and the Term Loan C
Aircraft Engines."
(c) The definition of the term "Credit Documents" in Section 1.1 of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
""Credit Documents": this Agreement, the First Amendment, the Second
Amendment, the Security Documents, each Consent and Agreement, Term Note A,
Term Note B, Term Note C, any Revolver Note and any other documents,
agreements or instruments executed and delivered to the Lender pursuant to
Section 6.11."
(d) The definition of "Revolver Reserve" in Section 1.1 of the Existing
Credit Agreement is hereby deleted in its entirety and replaced by the
following:
""Revolver Reserve": as of any date, an amount equal to the lesser of
(i) the amount, if any, by which the sum determined in accordance with
clause I of the definition of Revolver Borrowing Base on such date exceeds
the aggregate outstanding Revolver Advances on such date and (ii) the
amount, if any, by which the sum of the Term Loan A Facility (without
regard to any Term Loan A borrowings made prior to
-4-
<PAGE>
or on such date) on such date, the Term Loan B Facility (without regard to
any Term Loan B borrowings made prior to or on such date) on such date and
the Term Loan C Facility (without regard to any Term Loan C borrowings made
prior to or on such date) on such date exceeds the sum of the Term Loan A
Borrowing Base on such date, the Term Loan B Borrowing Base and the Term
Loan C Borrowing Base on such date."
(e) The definition of "Term Loan Borrowing Bases" in Section 1.1 of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"Term Loan Borrowing Bases": the collective reference to the Term Loan
A Borrowing Base, the Term Loan B Borrowing Base and the Term Loan C
Borrowing Base.
(f) The definition of "Term Loan Facilities" in Section 1.1 of the Existing
Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"Term Loan Facilities": the collective reference to the Term Loan A
Facility, the Term Loan B Facility and the Term Loan C Facility.
(f) The definition of "Term Loans" in Section 1.1 of the Existing Credit
Agreement is hereby deleted in its entirety and replaced by the following:
"Term Loans": the collective reference to Term Loan A, Term Loan B and
Term Loan C.
2. Amendments to Section 2.3. (a) subsection (a) of Section 2.3
of the Existing Credit Agreement is hereby amended by deleting the parenthetical
in the seventh line thereof in its entirety and replacing it with the following:
"(without regard to the Term Loan B Facility, the Term Loan B Borrowing Base,
the Term Loan C Facility or the Term Loan C Borrowing Base)"
(b) Section 2.3 of the Existing Credit Agreement is hereby amended by
deleting subsection (b) in its entirety and replacing it with the following:
"(b) Subject to the terms and conditions hereof, the Lender agrees to
make a term loan to the Borrower in one advance (such advance, together
with any advances made in connection with the substitution of Term Loan B
Aircraft or Term Loan B Aircraft Engines pursuant to Section 2.5(b) hereof,
"Term Loan B") on the First Amendment Effective Date in the principal
amount of the lesser of (a) the Term Loan B Facility on such date and (b)
the Term Loan B Borrowing Base on such date. Term Loan B shall be dated
the First Amendment Effective Date, stated to mature in the installments
and amounts payable on the dates set forth in Schedule 2.3B hereto, and
bear interest for the period from the First Amendment Effective Date on the
unpaid principal amount thereof at the applicable interest rates per annum
specified in Section 3.1. All payments of principal thereof shall reduce
the Term Loan B Facility on a dollar-for-dollar basis.
-5-
<PAGE>
(c) Subject to the terms and conditions hereof, the Lender agrees to
make a term loan to the Borrower in one advance (such advance, together
with any advances made in connection with the substitution of Term Loan C
Aircraft or Term Loan C Aircraft Engines pursuant to Section 2.5(c) hereof,
"Term Loan C") on the Second Amendment Effective Date in the principal
amount of the lesser of (a) the Term Loan C Facility on such date and (b)
the Term Loan C Borrowing Base on such date. Term Loan C shall be dated
the Second Amendment Effective Date, stated to mature in the installments
and amounts payable on the dates set forth in Schedule 2.3C hereto, and
bear interest for the period from the Second Amendment Effective Date on
the unpaid principal amount thereof at the applicable interest rates per
annum specified in Section 3.1. All payments of principal thereof shall
reduce the Term Loan C Facility on a dollar-for-dollar basis."
3. Amendments to Section 2.5. Section 2.5 of the Existing Credit
Agreement is hereby amended by inserting the following as subsection (c) at the
end of such Section:
"(c) At the request of the Borrower and after substitution of a Term
Loan C Aircraft or a Term Loan C Aircraft Engine (the "Substitute Term Loan
C Aircraft or Engine") for a Term Loan C Aircraft or a Term Loan C Aircraft
Engine which has been sold or has suffered an Event of Loss within six
months after repayment of Term Loan C to the extent and as required by
Section 3.3(d) hereof, the Lender may make an advance in an amount equal to
the lesser of (i) 60% (or such other percentage as the Lender shall
determine in its sole discretion) of the Forced Liquidation Value of the
Substitute Term Loan C Aircraft or Engine, less any applicable Collateral
Reserve, and (ii) the amount, if any, by which (A) $1,500,000.00 minus all
repayments of principal made, or required to have been made on or prior to
the date of such advance in accordance with Schedule 2.3C hereto exceeds
(B) the outstanding principal balance of Term Loan C on such date (prior to
the making of such advance). Each such advance, if any, shall be made in
the sole and absolute discretion of the Lender and shall be deemed to
comprise part of Term Loan C for all purposes hereunder and shall increase
the Term Loan C Facility on a dollar-for-dollar basis. From and after the
making of such advance the outstanding principal balance of Term Loan C
shall include the amount of such advance, interest shall be payable on such
amount, and the amount of each remaining scheduled principal repayment
shall be increased by an amount equal to (x) the amount of such advance
times (y) a fraction the numerator of which is an amount equal to such
scheduled principal repayment and the denominator of which is the aggregate
amount of all remaining scheduled principal repayments."
-6-
<PAGE>
4. Amendments to Section 3.2(b). Section 3.2(b) of the Existing
Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"(b) The Borrower may at any time and from time to time prepay any or
all of the Term Loans, in whole or in part, without premium or penalty
after giving to the Lender notice, which must be received by the Lender no
later than 12:00 noon, New York City time on the date of such prepayment
and which must specify the date and amount of prepayment and identify the
Term Loan as to which such prepayment relates. If any such notice is
given, the amount specified in such notice shall be due and payable on the
date specified therein with respect to the Term Loan specified therein and
the amount of such payments shall be applied against scheduled repayments
of principal thereof on a pro rata basis and shall reduce the related Term
Loan Facility on a dollar-for-dollar basis."
5. Amendments to Section 3.3. Paragraph (b) of Section 3.3 of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"(b) (i) If on any date on which a Borrowing Base Certificate is
required to be delivered pursuant to Section 6.2(c), the aggregate
outstanding principal amount of the Term Loans exceeds an amount equal to
the sum of the Term Loan Borrowing Bases and the Revolver Reserve, the
Borrower shall immediately prepay the Term Loans in an aggregate amount
equal to the amount of such excess. The amount of such payment shall
reduce the Term Loan Facilities on a dollar-for-dollar basis and shall be
applied (A) first against the repayment of Term Loan A to the extent that
the outstanding principal amount of Term Loan A exceeds the Term Loan A
Borrowing Base, then against the repayment of Term Loan B to the extent
that the outstanding principal amount of Term Loan B exceeds the Term Loan
B Borrowing Base, and then against the repayment of Term Loan C, and (B) in
each such case, against scheduled repayments of principal on a pro rata
basis.
(ii) Without in any way limiting the provisions of clause (i) of this
Section 3.3(b), if at any time during the period commencing with and
including month 25 and ending with and including month 35, in each case as
set forth on Schedule 2.3B hereto, the outstanding principal amount of Term
Loan B exceeds the sum of (i) the Term Loan B Borrowing Base, (ii) the
excess if any of the Term Loan A Borrowing Base over the outstanding
principal amount of Term Loan A and (iii) the excess, if any, of the Term
Loan C Borrowing Base over the outstanding principal amount of Term Loan C,
the Borrower shall immediately prepay Term Loan B in an amount equal to
such deficiency.
(iii) Without in any way limiting the provisions of clause (i) of this
Section 3.3(b), if at any time during the period commencing with and
including month 22 and ending with and including month 26, in each case as
set forth on Schedule 2.3C hereto, the outstanding principal amount of Term
Loan C exceeds the sum of (i) the Term Loan C Borrowing Base, (ii) the
excess if any of the Term Loan A Borrowing Base over the outstanding
principal amount of Term Loan A and (iii) the excess if any
-7-
<PAGE>
of the Term Loan B Borrowing Base over the outstanding principal amount of
Term Loan B, the Borrower shall immediately prepay Term Loan C in an amount
equal to such deficiency."
6. Amendments to Section 3.5(e). The THIRD and FOURTH enumerated
paragraphs of Section 3.5(e) of the Existing Credit Agreement are hereby deleted
in their entirety and replaced by the following:
"THIRD, to the payment in full of the outstanding principal of the
Revolver Advances and, upon the occurrence and during the continuance of an
Event of Default, at the option of the Lender, to the payment in full of
the outstanding principal of any or all of the Term Loans;
FOURTH, to the payment in full of all other Obligations then due and
payable (including, without limitation, any installment of principal of any
or all of the Term Loans then due and payable); and"
7. Amendments to Section 3.5(f). Subsections (ii) and (iii) of
Section 3.5(f) of the Existing Credit Agreement are hereby deleted in their
entirety and replaced by the following:
"(ii) if, after termination of such Aircraft Lease, return to the
Borrower of the related Aircraft and receipt by the Lender of an Appraisal
with respect thereto, (x) the amount of Loans outstanding does not exceed
the sum of the Term Loan Borrowing Bases and the Revolver Borrowing Base,
(y) no Event of Default shall have occurred and be continuing, and (z)
Borrower certifies in writing to Lender that it does not intend to take the
related Aircraft out of service and/or part out such Aircraft, the Lender
shall, upon request of the Borrower, pay such funds to the Borrower if and
to the extent required by such Aircraft Lease; and
(iii) if, after termination of such Aircraft Lease such funds are not
required to be paid to the lessee thereunder and (x) the amount of Loans
outstanding exceeds the sum of the Term Loan Borrowing Base and the
Revolver Borrowing Base, (y) an Event of Default shall have occurred and be
continuing, or (z) Borrower fails to certify in writing to the Lender that
it does not intend to take the related Aircraft out of service and/or part
out such Aircraft, the Lender shall apply such funds in accordance with the
provisions of paragraph (e) of this Section 3.5."
-8-
<PAGE>
8. Amendments to Section 3.5(g). Section 3.5(g) of the Existing
Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"(g) The Borrower agrees that, upon the request by the Lender, the
Borrower will execute and deliver to the Lender (i) a promissory note of
the Borrower evidencing Term Loan A of the Lender, in form and substance
acceptable to the Lender ("Term Note A"), (ii) a promissory note of the
Borrower evidencing Term Loan B of the Lender, in form and substance
acceptable to the Lender ("Term Note B"), (iii) a promissory note of the
Borrower evidencing Term Loan C of the Lender, in form and substance
acceptable to the Lender ("Term Note C"), and/or (iv) a promissory note of
the Borrower evidencing the Revolver Advances of the Lender in form and
substance acceptable to the Lender (a "Revolver Note")."
9. Amendments to Section 6.2(c). Section 6.2(c) is hereby deleted in
its entirety and replaced by the following:
"(c) prior to 2:00 p.m., New York City time on each Business Day, a
Borrowing Base Certificate showing the Revolver Borrowing Base, the Term
Loan A Borrowing Base, the Term Loan B Borrowing Base and the Term Loan C
Borrowing Base (but only, (i) in the case of the Term Loan A Borrowing
Base, in connection with the delivery of the first such certificate
hereunder and in each case that the Term Loan A Borrowing Base changes from
the amount thereof most recently reported, (ii) in the case of the Term
Loan B Borrowing Base, in connection with the delivery of such certificate
on the First Amendment Effective Date and in each case that the Term Loan B
Borrowing Base changes from the amount thereof most recently reported), and
(iii) in the case of the Term Loan C Borrowing Base, in connection with the
delivery of such certificate on the Second Amendment Effective Date and in
each case that the Term Loan C Borrowing Base changes from the amount
thereof most recently reported), in each case as of the immediately
preceding Business Day, certified as complete and correct by a Responsible
Officer or any vice president on behalf of the Borrower, which Borrowing
Base Certificate shall disclose daily updates of the amount of Eligible
Accounts and Eligible Lease Payment Receivables, weekly updates of the
amount of Eligible Inventory and the Forced Liquidation Value of Approved
Aircraft when required;"
10. Amendments to Schedule I. Schedule I to the Existing Credit Agreement
is hereby amended in its entirety to read as is set forth on Schedule I hereto.
11. Amendments to Schedule 1.1. Schedule 1.1 to the Existing Credit
Agreement is hereby amended in its entirety to read as is set forth on Schedule
1.1 hereto.
12. Amendments to Schedules 2.3A and 2.3B. Schedules 2.3A and 2.3B are
hereby amended to include Schedule 2.3C, which shall read as is set forth on
Schedule 2.3C hereto.
-9-
<PAGE>
ARTICLE IV.
Conditions to Effectiveness
This Amendment, and the modifications to the Credit Agreement provided
for herein, shall become effective on the date (the "Second Amendment
Effective Date") on which all of the following conditions have been (or are
concurrently being) satisfied:
1. The following documents shall have been executed and delivered by
each party thereto:
(i) this Amendment;
(ii) the Term Loan C Aircraft Chattel Mortgage;
(iii) the Sun Jet Aircraft Lease;
(iv) the Sun Jet Consent and Agreement;
(v) the Term Note C; and
(vi) all Uniform Commercial Code financing statements on Form UCC-1 and
UCC-3 required by the Lender.
2. The Lender shall have received executed legal opinions of King
& Spalding, special counsel to the Borrower, in form and substance
satisfactory to the Lender and taking into account this Amendment and the
matters contemplated hereby (including, without limitation, opinions with
respect to the validity of the Second Amendment Documents and the
effectiveness of UCC filings in each state where Collateral described therein
is located). Such legal opinion shall cover such matters incident to the
transactions contemplated by this Amendment and the other Second Amendment
Documents as the Lender may reasonably require.
3. The Lender shall have received the executed legal opinion of
Crowe & Dunlevy, special FAA counsel to the Borrower, in form and substance
satisfactory to the Lender taking into account this Amendment and the matters
contemplated hereby (including, without limitation, opinions as to the
effectiveness of the filing of the Term Loan C Aircraft Chattel Mortgage and
the Sun Jet Aircraft Lease with the FAA). Such legal opinion shall cover
such matters incident to the transactions contemplated by this Amendment and
the other Second Amendment Documents as the Lender may reasonably require.
4. The Lender shall have received a copy, in form and substance
reasonably satisfactory to the Lender, of the corporate resolutions of the
Borrower, authorizing the Aircraft Acquisition and the execution, delivery
and performance of this Amendment and the other Second Amendment Documents to
which the Borrower is a party, certified by the Secretary or an Assistant
Secretary of the Borrower as of the Second Amendment Effective Date, which
certificates shall state that the resolutions or authorizations thereby
certified have not been amended, modified, revoked or rescinded as of the
date of such certificate.
-10-
<PAGE>
5. The Lender shall have received a certificate of the Secretary
or an Assistant Secretary of the Borrower, dated the Second Amendment
Effective Date, as to the incumbency and signature of the officer(s) of the
Borrower executing each Second Amendment Document to which it is a party and
any certificate or other document to be delivered by it pursuant hereto,
together with evidence of the incumbency of such Secretary or Assistant
Secretary.
6. The Lender shall have received certificates from the Borrower,
stating that its Governing Documents have not been amended since September
30, 1996.
7. The Lender shall have received copies of certificates dated as
of a recent date from the Secretary of State or other appropriate authority
of such jurisdiction, evidencing the good standing of the Borrower in the
State of its organization and in each State where the ownership, lease or
operation of property or the conduct of business requires it to qualify as a
foreign corporation or other entity except where the failure to so qualify
would not have a Material Adverse Effect.
8. The Lender shall have received all chattel paper original
copies of the Sun Jet Lease and all documents required to be delivered under
Article Three of the Term Loan C Aircraft Chattel Mortgage.
9. Each of the representations and warranties made by the Borrower
in or pursuant to the Credit Documents shall be true and correct in all
material respects on and as of the Second Amendment Effective Date as if made
on and as of such date (except to the extent the same relate to another,
earlier date, in which case they shall be true and correct in all material
respects as of such earlier date).
10. No Default or Event of Default shall have occurred and be continuing.
11. All corporate and other proceedings, and all documents, instruments
and other legal matters in connection with the transactions contemplated by
the Second Amendment Documents, the Existing Credit Agreement, the Credit
Agreement and the other Credit Documents shall be reasonably satisfactory in
form and substance to the Lender, and the Lender shall have received such
other documents in respect of any aspect or consequence of the transactions
contemplated hereby or thereby as it shall reasonably request.
12. The Lender shall have received a Borrowing Base Certificate showing
the Revolver Borrowing Base, the Term Loan A Borrowing Base, the Term Loan B
Borrowing Base, and the Term Loan C Borrowing Base, in each case as of the
Business Day immediately preceding the Second Amendment Effective Date, with
appropriate insertions and dated the Second Amendment Effective Date,
satisfactory in form and substance to the Lender, executed by a Responsible
Officer or any Vice President of the Borrower.
13. The Lender shall have received evidence in form and substance
satisfactory to it that all of the requirements of Section 6.6 of the
Existing Credit Agreement
-11-
<PAGE>
and Section 5(o) of the Borrower Security Agreement shall have been satisfied
with respect to the Term Loan C Aircraft.
14. The Lender shall have received evidence in form and substance
satisfactory to it that all filings, recordings, registrations and other
actions, including, without limitation, the filing of a duly executed
Aircraft Chattel Mortgage with the FAA and financing statements on forms
UCC-1, necessary or, in the opinion of the Lender, desirable to perfect the
Liens created by the Security Documents with respect to the Term Loan C
Aircraft shall have been completed.
15. The Lender shall have received each additional document, instrument,
legal opinion or item of information reasonably requested by the Lender,
including, without limitation, a copy of any debt instrument, security
agreement or other material contract to which the Borrower is be a party.
ARTICLE V.
Miscellaneous
1. Closing Fee; Payment of Expenses. (a) On the First Amendment
Effective Date, the Borrower shall pay to the Lender in immediately available
funds a fee equal to $15,000.00 (which shall be in addition to all fees paid
to the Lender prior to the execution and delivery of this Amendment). The
Lender is hereby authorized to withhold the amount of such fee from the
proceeds of Term Loan C.
(b) Without limiting its obligations under Section 9.5 of the
Existing Agreement, the Borrower agrees to pay or reimburse the Lender for
all of its reasonable costs and expenses incurred in connection with this
Amendment and the other Second Amendment Documents, including, without
limitation, the reasonable costs and expenses of Cadwalader, Wickersham &
Taft, counsel to the Lender and expressly acknowledge that their obligations
hereunder constitute "Obligations" within the meaning of the Existing Credit
Agreement.
2. Sun Jet Aircraft Lease Supplement and Receipt. Borrower hereby
agrees that that it shall deliver to the Lender an original executed copy of
the Sun Jet Aircraft Lease Supplement and Receipt immediately upon its
execution and delivery by the Borrower and Sun Jet.
3. No Other Amendments; Confirmation. Except as expressly
amended, modified and supplemented hereby and by the documents related
hereto, the provisions of the Existing Credit Agreement and the other Credit
Documents shall remain in full force and effect.
4. Acknowledgment. The Borrower hereby acknowledges that the Sun
Jet Consent and Agreement constitutes a Consent and Agreement under the
Agreement and the Term Loan C Aircraft Chattel Mortgage constitutes an
Aircraft Chattel Mortgage under the Agreement.
-12-
<PAGE>
5. Affirmation by Borrower. The Borrower hereby consents to the
execution and delivery of this Amendment and each of the other Second
Amendment Documents to which Borrower is a party and reaffirms its
obligations under the Credit Documents.
6. Governing Law; Counterparts. (a) This Amendment and the
rights and obligations of the parties hereto shall be governed by, and
construed and interpreted in accordance with, the laws of the State of New
York.
(b) This Amendment may be executed by one or more of the parties
hereto on any number of separate counterparts, and all of said counterparts
taken together shall be deemed to constitute one and the same instrument. A
set of the counterparts of this Amendment signed by all the parties shall be
lodged with the Borrower and the Lender. This Amendment may be delivered by
facsimile transmission of the relevant signature pages hereof.
[SIGNATURE PAGE FOLLOWS ]
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered as of the day and year first above written.
INTERNATIONAL AIRLINE SUPPORT
GROUP, INC.
By ____________________________________
Name:
Title:
BNY FINANCIAL CORPORATION
By ____________________________________
Name:
Title:
-14-
<PAGE>
Exhibit 2.4.3
EXECUTION COPY
THIRD AMENDMENT AND AGREEMENT
THIRD AMENDMENT AND AGREEMENT, dated as of October 15, 1997 (this
"Amendment"), to the Existing Credit Agreement (as hereinafter defined), by and
among INTERNATIONAL AIRLINE SUPPORT GROUP, INC., a Delaware corporation (the
"Borrower"), and BNY Financial Corporation, a New York corporation (the
"Lender").
RECITALS
The Borrower and the Lender have entered into the Existing Credit
Agreement, pursuant to which the Lender is providing to the Borrower (i) a
$13,000,000.00 revolving credit facility (the "Revolver Facility"), (ii) a
$3,000,000.00 term loan facility (the "Term Loan A Facility"), (iii) a
$3,750,000.00 term loan facility (the "Term Loan B Facility") and (iv) a
$1,500,000.00 term loan facility (the "Term Loan C Facility") which are secured
by accounts receivable, inventory and other collateral of the Borrower. The
Borrower has requested that the Lender provide an additional $1,600,000.00 term
loan facility (as more specifically defined below, the "Term Loan D Facility")
for the acquisition of one (1) McDonnell Douglas DC-9-51 aircraft (bearing
manufacturer's serial number 47667) (the "Aircraft Acquisition"). Subject to
the terms and conditions hereof, the Lender is willing to provide the Term Loan
D Facility to the Borrower and to amend certain provisions of the Existing
Credit Agreement in order to effectuate the foregoing.
In consideration of the foregoing and of the mutual covenants and
undertakings herein contained, the parties hereto hereby agree that the Existing
Credit Agreement is amended as hereinafter provided.
ARTICLE I
Definitions
1. Definitions. (a) In addition to the definitions set forth in the
heading and the recitals to this Amendment, the following definitions shall
apply to this Amendment:
"Agreement": means the Credit Agreement, dated as of September 30, 1996,
between the Borrower and the Lender, as amended by the First Amendment, Waiver
and Agreement, dated as of March 24, 1997, between the Borrower and the Lender
and the Second Amendment, Waiver and Agreement, dated as of September 9, 1997,
between the Borrower and the Lender, as further amended, supplemented or
otherwise modified from time to time up to and including this Amendment.
"Existing Credit Agreement": means the Credit Agreement, dated as of
September 30, 1996, between the Borrower and the Lender, as amended by the
First
<PAGE>
Amendment, Waiver and Agreement, dated as of March 24, 1997, between the
Borrower and the Lender and the Second Amendment, Waiver and Agreement, dated as
of September 9, 1997, between the Borrower and the Lender, as the same may have
been further amended, supplemented or modified from time to time up to but not
including the effectiveness of this Amendment.
"Third Amendment Documents": this Amendment, the Sun Jet Consent and
Agreement (as defined in Article III, Section 1 hereof), the Term Loan D
Aircraft Chattel Mortgage (as defined in Article III, Section 1 hereof), the Sun
Jet Lease (as defined in Article III, Section 1 hereof), the Sun Jet Aircraft
Lease Supplement and Receipt (as defined in Article III, Section 1 hereof), Term
Note D (as defined in Article III, Section 1 hereof), and any other agreements,
instruments and documents executed or delivered pursuant to or in connection
with this Amendment and the transactions contemplated thereby.
(b) Unless otherwise indicated, capitalized terms that are used but not
defined herein shall have the meanings ascribed to them in the Existing Credit
Agreement.
ARTICLE II
Representations
1. Representations. (a) The Borrower hereby represents and warrants
as follows:
(i) It (A) is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, (B) has the power and
authority, and the legal right, to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged, (C) is duly qualified and in good standing under the laws of
each jurisdiction where its ownership, lease or operation of property or the
conduct of its business requires such qualification and (D) is in compliance
with all Requirements of Law except to the extent that the failure to comply
therewith reasonably could not, in the aggregate, be expected to have a Material
Adverse Effect.
(ii) It has the power and authority, and the legal right, to make,
deliver and perform this Amendment and the other Third Amendment Documents to
which it is a party and to borrow under the Agreement and has taken all
necessary action to authorize the borrowings on the terms and conditions of the
Agreement and this Amendment and to authorize the execution, delivery and
performance of the Third Amendment Documents to which it is a party. No consent
or authorization of, filing with, notice to or other act by or in respect of,
any Governmental Authority or any other Person is required in connection with
the borrowings under the Agreement or with the execution, delivery, performance,
validity or enforceability of the Third Amendment Documents to which it is a
party. Each Third Amendment Document to which the Borrower is a party has been
or will be duly executed and delivered on behalf of the Borrower. Each Third
Amendment Document to which the Borrower is a party when executed and delivered
will constitute a legal, valid and binding obligation of the Borrower
enforceable against it in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
-2-
<PAGE>
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
(iii) The conditions contained in Article IV hereof have been satisfied.
(b) The Borrower represents that each of the Credit Documents is on the
date hereof in full force and effect.
ARTICLE III
Amendments to Existing Credit Agreement
1. Amendments to Section 1. (a) Section 1.1 of the Existing Credit
Agreement is hereby amended by inserting the following new definitions therein
in alphabetical order:
"Third Amendment": that certain Third Amendment and Agreement, dated
as of October ___, 1997, between the Borrower and the Lender.
"Third Amendment Documents": the Third Amendment, the Sun Jet Consent
and Agreement, the Term Loan D Aircraft Chattel Mortgage, the Sun Jet
Lease, the Sun Jet Aircraft Lease Supplement and Receipt, Term Note D, and
any other agreements, instruments and documents executed or delivered
pursuant to or in connection with the Third Amendment and the transactions
contemplated thereby.
"Third Amendment Effective Date": the date on which all of the
conditions precedent to the effectiveness of the Third Amendment set forth
in Article IV of the Third Amendment are first satisfied or waived.
"Sun Jet": means Sun Jet International, Inc., a Delaware corporation.
"Sun Jet Aircraft Lease Supplement and Receipt": the collective
reference to the Lease Supplement and Receipt, dated as of the date of its
execution and delivery between the Borrower and Sun Jet.
"Sun Jet Consent and Agreement": that certain Consent and Agreement,
dated as of the date hereof, by and among Sun Jet, the Borrower and the
Lender, in respect of the Sun Jet Lease.
"Sun Jet Lease": the Aircraft Lease Agreement in respect of the Term
Loan D Aircraft, dated as of September 5, 1997, and between Sun Jet (as
lessee) and the Borrower (as lessor), as amended by that certain Amendment
No. 1 to Aircraft Lease Agreement dated as of September 16, 1997, as the
same may be further amended, supplemented or modified from time to time.
"Term Loan D": as defined in Section 2.3(c) (together with any advance
made in connection with the substitution of a Term Loan D Aircraft or a
Term Loan D Aircraft Engine pursuant to Section 2.5(c)).
-3-
<PAGE>
"Term Loan D Aircraft": means each Aircraft owned from time to time by
the Borrower and listed as a Term Loan D Aircraft and described on Schedule
I hereto, as the same may be amended or modified from time to time in
accordance with this Agreement.
"Term Loan D Aircraft Chattel Mortgage": the Aircraft Chattel
Mortgage, dated as of the Third Amendment Effective Date, from the Borrower
to the Lender with respect to a Term Loan D Aircraft.
"Term Loan D Aircraft Engine": means each Aircraft Engine owned from
time to time by the Borrower and listed as a Term Loan D Aircraft Engine
and described on Schedule I hereto, as the same may be amended or modified
from time to time in accordance with this Agreement.
"Term Loan D Borrowing Base": at any time, an amount equal to 80% (or
such other percentage as the Lender shall determine in its sole discretion)
of the Forced Liquidation Value, after deduction of any applicable
Collateral Reserves, at such time, of all Term Loan D Aircraft.
"Term Loan D Facility": at any time, the obligation of the Lender to
make Term Loan D in accordance with the provisions of this Agreement, which
shall not exceed an amount equal to $1,600,000.00 minus the aggregate
amount of repayments of principal then required to have been made in
accordance with Schedule 2.3C.
"Term Note D": a promissory note of the Borrower evidencing Term Loan
D, in form and substance acceptable to the Lender.
(b) The definition of the term "Approved Aircraft" in Section 1.1 of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
""Approved Aircraft": means the collective reference to the Term Loan
A Aircraft, the Term Loan A Aircraft Engines, the Term Loan B Aircraft, the
Term Loan B Aircraft Engines, the Term Loan C Aircraft, the Term Loan C
Aircraft Engines, the Term Loan D Aircraft and the Term Loan D Aircraft
Engines."
(c) The definition of the term "Credit Documents" in Section 1.1 of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
""Credit Documents": this Agreement, the First Amendment, the Second
Amendment, the Third Amendment, the Security Documents, each Consent and
Agreement, Term Note A, Term Note B, Term Note C, Term Note D, any Revolver
Note and any other documents, agreements or instruments executed and
delivered to the Lender pursuant to Section 6.11."
(d) The definition of "Revolver Reserve" in Section 1.1 of the Existing
Credit Agreement is hereby deleted in its entirety and replaced by the
following:
-4-
<PAGE>
""Revolver Reserve": as of any date, an amount equal to the lesser of
(i) the amount, if any, by which the sum determined in accordance with
clause I of the definition of Revolver Borrowing Base on such date exceeds
the aggregate outstanding Revolver Advances on such date and (ii) the
amount, if any, by which the sum of the Term Loan A Facility (without
regard to any Term Loan A borrowings made prior to or on such date) on such
date, the Term Loan B Facility (without regard to any Term Loan B
borrowings made prior to or on such date) on such date, the Term Loan C
Facility (without regard to any Term Loan C borrowings made prior to or on
such date) and the Term Loan D Facility (without regard to any Term Loan D
borrowings made prior to or on such date) on such date exceeds the sum of
the Term Loan A Borrowing Base on such date, the Term Loan B Borrowing
Base, the Term Loan C Borrowing Base and the Term Loan D Borrowing Base on
such date."
(e) The definition of "Term Loan Borrowing Bases" in Section 1.1 of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"Term Loan Borrowing Bases": the collective reference to the Term Loan
A Borrowing Base, the Term Loan B Borrowing Base, the Term Loan C Borrowing
Base and the Term Loan D Borrowing Base.
(f) The definition of "Term Loan Facilities" in Section 1.1 of the Existing
Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"Term Loan Facilities": the collective reference to the Term Loan A
Facility, the Term Loan B Facility, the Term Loan C Facility and the Term
Loan D Facility.
(f) The definition of "Term Loans" in Section 1.1 of the Existing Credit
Agreement is hereby deleted in its entirety and replaced by the following:
"Term Loans": the collective reference to Term Loan A, Term Loan B,
Term Loan C and Term Loan D.
2. Amendments to Section 2.3. (a) subsection (a) of Section
2.3 of the Existing Credit Agreement is hereby amended by deleting the
parenthetical in the seventh line thereof in its entirety and replacing it
with the following: "(without regard to the Term Loan B Facility, the Term
Loan B Borrowing Base, the Term Loan C Facility, the Term Loan C Borrowing
Base, the Term Loan D Facility or the Term Loan D Borrowing Base)"
(b) Section 2.3 of the Existing Credit Agreement is hereby amended by
inserting the following as subsection (d) at the end of such Section:
"(d) Subject to the terms and conditions hereof, the Lender agrees to
make a term loan to the Borrower in one advance (such advance, together
with any advances made in connection with the substitution of Term Loan D
Aircraft or Term Loan D Aircraft Engines pursuant to Section 2.5(c) hereof,
"Term Loan D") on the Third Amendment Effective Date in the principal
amount of the lesser of (a) the Term
-5-
<PAGE>
Loan D Facility on such date and (b) the Term Loan D Borrowing Base on such
date. Term Loan D shall be dated the Third Amendment Effective Date,
stated to mature in the installments and amounts payable on the dates set
forth in Schedule 2.3D hereto, and bear interest for the period from the
Third Amendment Effective Date on the unpaid principal amount thereof at
the applicable interest rates per annum specified in Section 3.1. All
payments of principal thereof shall reduce the Term Loan D Facility on a
dollar-for-dollar basis."
3. Amendments to Section 2.5. Section 2.5 of the Existing Credit
Agreement is hereby amended by inserting the following as subsection (d) at the
end of such Section:
"(d) At the request of the Borrower and after substitution of a Term
Loan D Aircraft or a Term Loan D Aircraft Engine (the "Substitute Term
Loan D Aircraft or Engine") for a Term Loan D Aircraft or a Term Loan D
Aircraft Engine which has been sold or has suffered an Event of Loss
within six months after repayment of Term Loan D to the extent and as
required by Section 3.3(d) hereof, the Lender may make an advance in an
amount equal to the lesser of (i) 80% (or such other percentage as the
Lender shall determine in its sole discretion) of the Forced Liquidation
Value of the Substitute Term Loan D Aircraft or Engine, less any applicable
Collateral Reserve, and (ii) the amount, if any, by which (A) $1,600,000.00
minus all repayments of principal made, or required to have been made on or
prior to the date of such advance in accordance with Schedule 2.3D hereto
exceeds (B) the outstanding principal balance of Term Loan D on such date
(prior to the making of such advance). Each such advance, if any, shall be
made in the sole and absolute discretion of the Lender and shall be deemed
to comprise part of Term Loan D for all purposes hereunder and shall
increase the Term Loan D Facility on a dollar-for-dollar basis. From and
after the making of such advance the outstanding principal balance of Term
Loan D shall include the amount of such advance, interest shall be payable
on such amount, and the amount of each remaining scheduled principal
repayment shall be increased by an amount equal to (x) the amount of such
advance times (y) a fraction the numerator of which is an amount equal to
such scheduled principal repayment and the denominator of which is the
aggregate amount of all remaining scheduled principal repayments."
4. Amendments to Section 3.3. Paragraph (b) of Section 3.3 of the
Existing Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"(b) (i) If on any date on which a Borrowing Base Certificate is
required to be delivered pursuant to Section 6.2(c), the aggregate
outstanding principal amount of the Term Loans exceeds an amount equal
to the sum of the Term Loan Borrowing Bases and the Revolver Reserve, the
Borrower shall immediately prepay the Term Loans in an aggregate amount
equal to the amount of such excess. The amount of such payment shall reduce
the Term Loan Facilities on a dollar-for-dollar basis and shall be applied
(A) first against the repayment of Term Loan A to the extent that the
-6-
<PAGE>
outstanding principal amount of Term Loan A exceeds the Term Loan A
Borrowing Base, then against the repayment of Term Loan B to the extent
that the outstanding principal amount of Term Loan B exceeds the Term Loan
B Borrowing Base, then against the repayment of Term Loan C to the extent
that the outstanding principal amount of Term Loans C exceeds the Term Loan
C Borrowing Base, and then against the repayment of Term Loan D, and (B) in
each such case, against scheduled repayments of principal on a pro rata
basis.
(ii) Without in any way limiting the provisions of clause (i) of this
Section 3.3(b), if at any time during the period commencing with and
including month 25 and ending with and including month 35, in each case as
set forth on Schedule 2.3B hereto, the outstanding principal amount of Term
Loan B exceeds the sum of (i) the Term Loan B Borrowing Base, (ii) the
excess if any of the Term Loan A Borrowing Base over the outstanding
principal amount of Term Loan A, (iii) the excess, if any, of the Term Loan
C Borrowing Base over the outstanding principal amount of Term Loan C, and
(iv) the excess, if any, of the Term Loan D Borrowing Base over the
outstanding principal amount of Term Loan D, the Borrower shall immediately
prepay Term Loan B in an amount equal to such deficiency.
(iii) Without in any way limiting the provisions of clause (i) of this
Section 3.3(b), if at any time during the period commencing with and
including month 22 and ending with and including month 26, in each case as
set forth on Schedule 2.3C hereto, the outstanding principal amount of Term
Loan C exceeds the sum of (i) the Term Loan C Borrowing Base, (ii) the
excess if any of the Term Loan A Borrowing Base over the outstanding
principal amount of Term Loan A, (iii) the excess if any of the Term Loan B
Borrowing Base over the outstanding principal amount of Term Loan B, and
(iv) the excess if any of the Term Loan D Borrowing Base over the
outstanding principal amount of Term Loan D, the Borrower shall immediately
prepay Term Loan C in an amount equal to such deficiency.
(iv) Without in any way limiting the provisions of clause (i) of this
Section 3.3(b), if at any time during the period commencing with and
including month 22 and ending with and including month 26, in each case as
set forth on Schedule 2.3D hereto, the outstanding principal amount of Term
Loan D exceeds the sum of (i) the Term Loan D Borrowing Base, (ii) the
excess if any of the Term Loan A Borrowing Base over the outstanding
principal amount of Term Loan A, (iii) the excess if any of the Term Loan B
Borrowing Base over the outstanding principal amount of Term Loan B, and
(iv) the excess if any of the Term Loan C Borrowing Base over the
outstanding principal amount of Term Loan C, the Borrower shall immediately
prepay Term Loan D in an amount equal to such deficiency."
5. Amendments to Section 3.5(g). Section 3.5(g) of the Existing
Credit Agreement is hereby deleted in its entirety and replaced by the
following:
"(g) The Borrower agrees that, upon the request by the Lender, the
Borrower will execute and deliver to the Lender (i) a promissory note of
the Borrower
-7-
<PAGE>
evidencing Term Loan A of the Lender, in form and substance acceptable to
the Lender ("Term Note A"), (ii) a promissory note of the Borrower
evidencing Term Loan B of the Lender, in form and substance acceptable to
the Lender ("Term Note B"), (iii) a promissory note of the Borrower
evidencing Term Loan C of the Lender, in form and substance acceptable to
the Lender ("Term Note C"), (iv) a promissory note of the Borrower
evidencing Term Loan D of the Lender, in form and substance acceptable to
the Lender ("Term Note D"), and/or (v) a promissory note of the Borrower
evidencing the Revolver Advances of the Lender in form and substance
acceptable to the Lender (a "Revolver Note")."
6. Amendments to Section 6.2(c). Section 6.2(c) is hereby deleted in
its entirety and replaced by the following:
"(c) prior to 2:00 p.m., New York City time on each Business Day, a
Borrowing Base Certificate showing the Revolver Borrowing Base, the Term
Loan A Borrowing Base, the Term Loan B Borrowing Base, the Term Loan C
Borrowing Base and the Term Loan D Borrowing Base (but only, (i) in the
case of the Term Loan A Borrowing Base, in connection with the delivery of
the first such certificate hereunder and in each case that the Term Loan A
Borrowing Base changes from the amount thereof most recently reported, (ii)
in the case of the Term Loan B Borrowing Base, in connection with the
delivery of such certificate on the First Amendment Effective Date and in
each case that the Term Loan B Borrowing Base changes from the amount
thereof most recently reported), (iii) in the case of the Term Loan C
Borrowing Base, in connection with the delivery of such certificate on the
Second Amendment Effective Date and in each case that the Term Loan C
Borrowing Base changes from the amount thereof most recently reported and
(iv) in the case of the Term Loan D Borrowing Base, in connection with the
delivery of such certificate on the Third Amendment Effective Date and in
each case that the Term Loan D Borrowing Base changes from the amount
thereof most recently reported), in each case as of the immediately
preceding Business Day, certified as complete and correct by a Responsible
Officer or any vice president on behalf of the Borrower, which Borrowing
Base Certificate shall disclose daily updates of the amount of Eligible
Accounts and Eligible Lease Payment Receivables, weekly updates of the
amount of Eligible Inventory and the Forced Liquidation Value of Approved
Aircraft when required;"
7. Amendments to Schedule I. Schedule I to the Existing Credit Agreement
is hereby amended in its entirety to read as is set forth on Schedule I hereto.
8. Amendments to Schedule 1.1. Schedule 1.1 to the Existing Credit
Agreement is hereby amended in its entirety to read as is set forth on Schedule
1.1 hereto.
9. Amendments to Schedules 2.3A, 2.3B and 2.3C. Schedules 2.3A, 2.3B and
2.3C are hereby amended to include Schedule 2.3D, which shall read as is set
forth on Schedule 2.3D hereto.
-8-
<PAGE>
ARTICLE IV.
Conditions to Effectiveness
This Amendment, and the modifications to the Credit Agreement provided for
herein, shall become effective on the date (the "Third Amendment Effective
Date") on which all of the following conditions have been (or are concurrently
being) satisfied:
1. The following documents shall have been executed and delivered by
each party thereto:
(i) this Amendment;
(ii) the Term Loan D Aircraft Chattel Mortgage;
(iii) the Sun Jet Aircraft Lease;
(iv) the Sun Jet Consent and Agreement;
(v) the Term Note D; and
(vi) all Uniform Commercial Code financing statements on Form UCC-1 and
UCC-3 required by the Lender.
2. The Lender shall have received executed legal opinions of King &
Spalding, special counsel to the Borrower, in form and substance satisfactory to
the Lender and taking into account this Amendment and the matters contemplated
hereby (including, without limitation, opinions with respect to the validity of
the Third Amendment Documents and the effectiveness of UCC filings in each state
where Collateral described therein is located). Such legal opinion shall cover
such matters incident to the transactions contemplated by this Amendment and the
other Third Amendment Documents as the Lender may reasonably require.
3. The Lender shall have received the executed legal opinion of
Crowe & Dunlevy, special FAA counsel to the Borrower, in form and substance
satisfactory to the Lender taking into account this Amendment and the matters
contemplated hereby (including, without limitation, opinions as to the
effectiveness of the filing of the Sun Jet Aircraft Lease with the FAA). Such
legal opinion shall cover such matters incident to the transactions contemplated
by this Amendment and the other Third Amendment Documents as the Lender may
reasonably require.
4. The Lender shall have received a copy, in form and substance
reasonably satisfactory to the Lender, of the corporate resolutions of the
Borrower, authorizing the Aircraft Acquisition and the execution, delivery and
performance of this Amendment and the other Third Amendment Documents to which
the Borrower is a party, certified by the Secretary or an Assistant Secretary of
the Borrower as of the Third Amendment Effective Date, which certificates shall
state that the resolutions or authorizations thereby certified have not been
amended, modified, revoked or rescinded as of the date of such certificate.
-9-
<PAGE>
5. The Lender shall have received a certificate of the Secretary or
an Assistant Secretary of the Borrower, dated the Third Amendment Effective
Date, as to the incumbency and signature of the officer(s) of the Borrower
executing each Third Amendment Document to which it is a party and any
certificate or other document to be delivered by it pursuant hereto, together
with evidence of the incumbency of such Secretary or Assistant Secretary.
6. The Lender shall have received certificates from the Borrower,
stating that its Governing Documents have not been amended since September 30,
1996.
7. The Lender shall have received copies of certificates dated as of
a recent date from the Secretary of State or other appropriate authority of such
jurisdiction, evidencing the good standing of the Borrower in the State of its
organization and in each State where the ownership, lease or operation of
property or the conduct of business requires it to qualify as a foreign
corporation or other entity except where the failure to so qualify would not
have a Material Adverse Effect.
8. The Lender shall have received all chattel paper original copies
of the Sun Jet Lease and all documents required to be delivered under Article
Three of the Term Loan D Aircraft Chattel Mortgage.
9. Each of the representations and warranties made by the Borrower
in or pursuant to the Credit Documents shall be true and correct in all material
respects on and as of the Third Amendment Effective Date as if made on and as of
such date (except to the extent the same relate to another, earlier date, in
which case they shall be true and correct in all material respects as of such
earlier date).
10. No Default or Event of Default shall have occurred and be continuing.
11. All corporate and other proceedings, and all documents, instruments
and other legal matters in connection with the transactions contemplated by the
Third Amendment Documents, the Existing Credit Agreement, the Credit Agreement
and the other Credit Documents shall be reasonably satisfactory in form and
substance to the Lender, and the Lender shall have received such other documents
in respect of any aspect or consequence of the transactions contemplated hereby
or thereby as it shall reasonably request.
12. The Lender shall have received a Borrowing Base Certificate showing
the Revolver Borrowing Base, the Term Loan A Borrowing Base, the Term Loan B
Borrowing Base, the Term Loan C Borrowing Base, and the Term Loan D Borrowing
Base, in each case as of the Business Day immediately preceding the Third
Amendment Effective Date, with appropriate insertions and dated the Third
Amendment Effective Date, satisfactory in form and substance to the Lender,
executed by a Responsible Officer or any Vice President of the Borrower.
13. The Lender shall have received evidence in form and substance
satisfactory to it that all of the requirements of Section 6.6 of the Existing
Credit Agreement
-10-
<PAGE>
and Section 5(o) of the Borrower Security Agreement shall have been satisfied
with respect to the Term Loan D Aircraft.
14. The Lender shall have received evidence in form and substance
satisfactory to it that all filings, recordings, registrations and other
actions, including, without limitation, the filing of financing statements on
forms UCC-1, necessary or, in the opinion of the Lender, desirable to perfect
the Liens created by the Security Documents with respect to the Term Loan D
Aircraft shall have been completed.
15. The Lender shall have received each additional document, instrument,
legal opinion or item of information reasonably requested by the Lender,
including, without limitation, a copy of any debt instrument, security agreement
or other material contract to which the Borrower is be a party.
ARTICLE V.
Miscellaneous
1. Closing Fee; Payment of Expenses. (a) On the Third Amendment
Effective Date, the Borrower shall pay to the Lender in immediately available
funds a fee equal to $16,000.00 (which shall be in addition to all fees paid to
the Lender prior to the execution and delivery of this Amendment). The Lender
is hereby authorized to withhold the amount of such fee from the proceeds of
Term Loan D.
(b) Without limiting its obligations under Section 9.5 of the
Existing Agreement, the Borrower agrees to pay or reimburse the Lender for all
of its reasonable costs and expenses incurred in connection with this Amendment
and the other Third Amendment Documents, including, without limitation, the
reasonable costs and expenses of Cadwalader, Wickersham & Taft, counsel to the
Lender and expressly acknowledge that their obligations hereunder constitute
"Obligations" within the meaning of the Existing Credit Agreement.
2. Sun Jet Aircraft Lease Supplement and Receipt. Borrower hereby
agrees that that it shall deliver to the Lender an original executed copy of the
Sun Jet Aircraft Lease Supplement and Receipt immediately upon its execution and
delivery by the Borrower and Sun Jet.
3. No Other Amendments; Confirmation. Except as expressly amended,
modified and supplemented hereby and by the documents related hereto, the
provisions of the Existing Credit Agreement and the other Credit Documents shall
remain in full force and effect.
4. Acknowledgment. The Borrower hereby acknowledges that the Sun
Jet Consent and Agreement constitutes a Consent and Agreement under the
Agreement and the Term Loan D Aircraft Chattel Mortgage constitutes an Aircraft
Chattel Mortgage under the Agreement.
-11-
<PAGE>
5. Affirmation by Borrower. The Borrower hereby consents to the
execution and delivery of this Amendment and each of the other Third Amendment
Documents to which Borrower is a party and reaffirms its obligations under the
Credit Documents.
6. Governing Law; Counterparts. (a) This Amendment and the rights
and obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
(b) This Amendment may be executed by one or more of the parties
hereto on any number of separate counterparts, and all of said counterparts
taken together shall be deemed to constitute one and the same instrument. A set
of the counterparts of this Amendment signed by all the parties shall be lodged
with the Borrower and the Lender. This Amendment may be delivered by facsimile
transmission of the relevant signature pages hereof.
[SIGNATURE PAGE FOLLOWS ]
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
By ____________________________________
Name:
Title:
BNY FINANCIAL CORPORATION
By ____________________________________
Name:
Title:
-13-
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
INTERNATIONAL AIRLINE SUPPORT GROUP, INC., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation") hereby certifies:
FIRST: That the Board of Directors of the Corporation duly adopted the
following resolution proposing and declaring advisable an amendment to the
Certificate of Incorporation of the Corporation to elect the applicablility of
Section 203 of the Delaware Code:
"RESOLVED, that the Corporation amend its Certificate of Incorporation
by deleting in its entirety the text of the Ninth Article of the
Certificate of Incorporation and substituting in lieu thereof the
following:
The provisions of Section 203 of the Delaware General Corporation Law, as
in effect on the date hereof and as amended hereafter, shall be applicable
to the Corporation."
SECOND: That the amendments have been adopted by an affirmative vote of a
majority of the stockholders of the Corporation in accordance with the
provisions of Section 242(b)(2) of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused its duly authorized officers
to execute this Certificate as of this 22nd day of September, 1997.
INTERNATIONAL AIRLINE SUPPORT
GROUP, INC.
By:______________________________
James M. Isaacson
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
INTERNATIONAL AIRLINE SUPPORT GROUP, INC., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation") hereby certifies:
FIRST: That the Board of Directors of the Corporation duly adopted the
following resolution proposing and declaring advisable an amendment to the
Certificate of Incorporation of the Corporation to provide for staggered terms
for members of the Corporation's Board of Directors:
"RESOLVED, that the Corporation amend its Certificate of Incorporation
by deleting adding the following Article XII to the Certificate of
Incorporation:
ARTICLE XII
The directors of the Corporation shall be divided into three classes,
designated as Class A, Class B and Class C. In the event that the number
of directors shall not be evenly divisible by three, the Board of Directors
shall determine in which class or classes the remaining director or
directors, as the case may be, shall be included. The term of office of
each director shall be three years; provided, however, that, the term of
office of the directors in Class A shall expire at the first annual meeting
of the stockholders after the date of this Restated Certificate of
Incorporation, the term of the office of the directors in Class B shall
expire at the second annual meeting after the date of filing of this
Restated Certificate of Incorporation, and the term of office of the
directors in Class C shall expire at the third annual meeting after the
date of filing of this Restated Certificate of Incorporation. At each
annual meeting of stockholders, directors shall be elected for a full term
of three years to succeed those whose terms expire. A director of the
Corporation may be removed only for cause. Such removal for cause may be
effected only by the resolution of all other Board members, stating such
cause, or by the affirmative vote of all other Board members or the holders
of at least 75% of the voting power of all of the then outstanding shares
of Common Stock, voting together as a single class. No director so removed
may be reinstated so long as the cause for removal continues to exist.
"Cause," within the meaning of this Article XII, shall be limited to
criminal acts and gross negligence."
SECOND: That the amendments have been adopted by an affirmative vote of a
majority of the stockholders of the Corporation in accordance with the
provisions of Section 242(b)(2) of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its duly authorized officers
to execute this Certificate as of this 22nd day of September, 1997.
INTERNATIONAL AIRLINE SUPPORT
GROUP, INC.
By: ___________________________
James M. Isaacson
Secretary
<PAGE>
WARRANT AGREEMENT
This WARRANT AGREEMENT ("Agreement") dated as of November ___, 1997 is by
and between among International Airline Support Group, Inc., a Delaware
corporation (the "Company"), and Cruttenden Roth Incorporated and Scott &
Stringfellow, Inc. ( the "Representatives").
WHEREAS, the Representatives have agreed pursuant to the Underwriting
Agreement dated December ___, 1997 (the "Underwriting Agreement") to act as the
representative of the several underwriters in connection with the proposed
public offering by the Company of up to 2,012,500 shares in the aggregate of
Common Stock, 262,500 of such shares covered by an over-allotment option (the
"Public Offering"); and
WHEREAS, pursuant to Section 5(n) of the Underwriting Agreement, the
Company has agreed to issue warrants to the Representatives (the "Warrants") to
purchase, at a price of $0.001 per warrant, up to an aggregate of 175,000 shares
(hereinafter, and as the number thereof may be adjusted hereto, the "Warrant
Shares"), of the Company's Common Stock, $.001 par value per share (the "Common
Stock"), each Warrant initially entitling the holder thereof to purchase one
share of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein and in the Underwriting Agreement set forth and for other good and
valuable consideration, the parties hereto agree as follows:
1. Issuance of Warrants: Form of Warrant. The Company will issue and
deliver to the Representatives, Warrants to purchase 175,000 Warrant Shares on
the Closing Date referred to in the Underwriting Agreement in consideration for,
and as part of the Representatives' compensation in connection with, the
Representatives acting as the representative of the several underwriters for the
Public Offering pursuant to the Underwriting Agreement. The text of the Warrants
and of the form of election to purchase shares shall be substantially as set
forth in Exhibit A attached hereto. The Warrants shall be executed on behalf of
the Company by the manual or facsimile signature of the present or any future
Chairman of the Board, President or Chief Executive Officer of the Company,
under its corporate seal, affixed or in facsimile, attested by the manual or
facsimile signature of the Secretary or an Assistant Secretary of the Company.
Warrants bearing the manual or facsimile signatures of individuals who were
at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any one of them shall have ceased to
hold such offices prior to the delivery of such Warrants or did not hold such
offices on the date of this Agreement. Warrants shall be dated as of the date of
execution thereof by the Company either upon initial issuance or upon division,
exchange, substitution or transfer.
2. Registration. The Warrants shall be numbered and shall be registered
on the books of the Company (the "Warrant Register") as they are issued. The
Company shall be entitled to treat the registered holder of any Warrant on the
Warrant Register (the "Holder") as the owner in fact therefor for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Warrant on the part of any other person, and shall not be liable for any
registration or transfer of Warrants which are registered or are to be
registered in the name of a fiduciary or the nominee of a fiduciary unless made
with the actual knowledge that a fiduciary or nominee is
<PAGE>
committing a breach of trust in requesting such registration or transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. Warrants to purchase 175,000 shares shall be registered initially in the
names of "Cruttenden Roth Incorporated" or "Scott & Stringfellow, Inc." or in
such other denominations as the Representatives may request in writing to the
Company.
3. Exchange of Warrant Certificates. Subject to any restriction upon
transfer set forth in this Agreement, each Warrant certificate may be exchanged
for another certificate or certificates entitling the Holder thereof to purchase
a like aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitled such Holder to purchase. Any Holder desiring to
exchange a Warrant certificate or certificates shall make such request in
writing delivered to the Company, and shall surrender, properly endorsed, the
certificate or certificates to be so exchanged. Thereupon, the Company shall
execute and deliver to the person entitled thereto a new Warrant certificate or
certificates, as the case may be, as so requested.
4. Transfer of Warrants. Until December ___, 1998, the Warrants will not
be sold, transferred, assigned or hypothecated except to bona fide officers and
partners of the Representatives who agree in writing to be bound by the terms
hereof. The Warrants shall be transferable only on the Warrant Register upon
delivery thereof duly endorsed by the Holder or by the Holder's duly authorized
attorney or representative, or accompanied by proper evidence of succession,
assignment or authority to transfer. In all cases of transfer by an attorney,
the original power of attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited with the Company. In case of transfer by
executors, administrators, guardians or other legal representatives, duly
authenticated evidence of their authority shall be produced and may be required
to be deposited with the Company in its discretion. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto.
5. Term of Warrants; Exercise of Warrants.
5.1(a) Each Warrant entitles the registered owner thereof to
purchase one share of Common Stock at any time from 10:00 a.m.,
Pacific time, on December ___, 1998 (the "Initiation Date") until 6:00
p.m., Pacific time, on December ___, 2002 (the "Expiration Date") at a
purchase price of [$_____], subject to adjustment (the "Warrant
Price"). Notwithstanding the foregoing, if at 6:00 p.m., Pacific time
on the Expiration Date, any Holder or Holders of the Warrants have not
exercised their Warrants and the Closing Price (as defined below) for
the Common Stock on the Expiration Date is greater than the Warrant
Price, then each such unexercised Warrant shall be automatically
converted into a number of shares of Common Stock of the Company equal
to: (A) the number of shares of Common Stock then issuable upon
exercise of a Warrant multiplied by (B) a fraction (1) the numerator
of which is the difference between the Closing Price for the Common
Stock on the Expiration Date and the Warrant Price and (2) the
denominator of which is the Closing Price for the Warrant Stock on the
Expiration Date.
(b) Upon written request of any Holder, and in lieu of payment
for the Warrant Shares by check in accordance with Section 5.1(a)
hereof, any Holder may exercise the Warrants (or any portion thereof
held by such Holder) for and receive the number of Warrant Shares
equal to a fraction, the numerator of which equals (i) the difference
between the Warrant Price per share and the average of the Closing
-2-
<PAGE>
Price of the Common Stock for the ten (10) trading days preceding the
date of exercise (the "Current Market Price"), multiplied by (ii) the
number of Warrant Shares to be purchased; the denominator of which
equals the Current Market Price. This provision shall apply solely in
the event a public trading market exists with respect to the Common
Stock. The rights granted to each Holder in this Section 5(b) are
exercisable at any time after the Initiation Date and up to the
Expiration Date at the sole election of each Holder. The provisions
of Section 5.1(a) will apply as of the Expiration Date.
5.2 The Warrant Price and the number of Warrant Shares issuable upon
exercise of Warrants are subject to adjustment upon the occurrence of
certain events, pursuant to the provisions of Section 11 of this Agreement.
Subject to the provisions of this Agreement, each Holder of Warrants shall
have the right, which may be exercised as expressed in such Warrants, to
purchase from the Company (and the Company shall issue and sell to such
Holder of Warrants) the number of fully paid and nonassessable Warrant
Shares specified in such Warrants, upon surrender to the Company, or its
duly authorized agent, of such Warrants, with the form of election to
purchase on the reverse thereof duly filled in and signed, and upon payment
to the Company of the Warrant Price, as adjusted in accordance with the
provisions of Section 11 of this Agreement, for the number of Warrant
Shares in respect of which such Warrants are then exercised. Payment of
such Warrant Price shall be made in cash or by certified or official bank
check, or a combination thereof. No adjustment shall be made for any
dividends on any Warrant Shares of stock issuable upon exercise of a
Warrant.
5.3 Upon such surrender of Warrants, and payment of the Warrant Price
as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the Holder of such
Warrants and in such name or names as such registered Holder may designate,
a certificate or certificates for the number of full Warrant Shares so
purchased upon the exercise of such Warrants, together with cash, as
provided in Section 12 of this Agreement, in respect of any fraction of a
share otherwise issuable upon such surrender and, if the number of Warrants
represented by a Warrant Certificate shall not be exercised in full, a new
Warrant Certificate, executed by the Company for the balance of the number
of whole Warrant Shares represented by the Warrant Certificate.
5.4 If permitted by applicable law, such certificate or certificates
shall be deemed to have been issued and any person so designated to be
named therein shall be deemed to have become a holder of record of such
shares as of the date of the surrender of such Warrants and payment of the
Warrant Price as aforesaid. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the registered Holders
thereof, either as an entirety or from time to time for only part of the
shares specified therein.
6. Compliance with Government Regulations. The Company covenants that if
any shares of Common Stock required to be reserved for purposes of exercise or
conversion of Warrants require, under any Federal or state law or applicable
governing rule or regulation of any national securities exchange, registration
with or approval of any governmental authority, or listing on any such national
securities exchange before such shares may be issued upon exercise, the Company
will in good faith and as expeditiously as possible endeavor to cause such
shares to be duly registered,
-3-
<PAGE>
approved or listed on the relevant national securities exchange, as the case may
be; provided, however, that (except to the extent legally permissible with
respect to Warrants of which the Representatives is the Holder) in no event
shall such shares of Common Stock be issued, and the Company is hereby
authorized to suspend the exercise of all Warrants, for the period during which
such registration, approval or listing is required but not in effect.
7. Payment of Taxes. The Company will pay all documentary stamp taxes, if
any, attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants; provided, however, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any transfer involved in the
issue or delivery of any Warrants or certificate for Warrant Shares in a name
other than that of the registered Holder of such Warrants.
8. Mutilated or Missing Warrants. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest; but only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction of such Warrant and, if requested, indemnity or bond also
reasonably satisfactory to the Company. An applicant for such substitute
Warrants shall also comply with such other reasonable regulations and pay such
other reasonable charges as the Company may prescribe.
9. Reservation of Warrant Shares. There have been reserved out of the
authorized and unissued shares of Common Stock a number of shares sufficient to
provide for the exercise of the rights of purchase represented by the Warrants
and the transfer agent for the Common Stock ("Transfer Agent") and every
subsequent Transfer Agent for any shares of the Company's capital stock issuable
upon the exercise of any of the rights of purchase aforesaid are hereby
irrevocably authorized and directed at all times until the Expiration Date to
reserve such number of authorized and unissued shares as shall be required for
such purpose. The Company will keep a copy of this Agreement on file with the
Transfer Agent and with every subsequent Transfer Agent for any shares of the
Company's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants. The Company will supply such Transfer Agent with
duly executed stock certificates for such purposes and will itself provide or
otherwise make available any cash which may be issuable as provided in Section
12 of this Agreement. The Company will furnish to such Transfer Agent a copy of
all notices of adjustments, and certificates related thereto, transmitted to
each Holder pursuant to Section 11.2 of this Agreement. All Warrants surrendered
in the exercise of the rights thereby evidenced shall be cancelled.
10. Obtaining Stock Exchange Listings. The Company will from time to time
take all action which may be necessary so that the Warrant Shares, immediately
upon their issuance upon the exercise of Warrants, will be listed on the
principal securities exchanges and markets within the United States of America,
if any, on which other shares of Common Stock are then listed.
11. Adjustment of Warrant Price and Number of Warrant Shares. The number
and kind of securities purchasable upon the exercise of each Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events as hereinafter defined. For purposes of this Section
11, "Common Stock" means shares now or hereafter authorized of any class of
common stock of the Company and any other stock of the Company, however
designated, that
-4-
<PAGE>
has the right (subject to any prior rights of any class or series of preferred
stock) to participate in any distribution of the assets or earnings of the
Company without limit as to per share amount.
11.1 Mechanical Adjustments. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Warrant Price shall be subject to
adjustment as follows:
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock, (iii) combine its
outstanding shares of Common Stock or (iv) issue by reclassification
of its shares of Common Stock other securities of the Company
(including any such reclassification in connection with a
consolidation or merger in which the Company is the surviving
corporation), the number of Warrant Shares purchasable upon exercise
of each Warrant immediately prior thereto shall be adjusted so that
the Holder of each Warrant shall be entitled to receive the kind and
number of Warrant Shares or other securities of the Company which he
would have owned or would have been entitled to receive after the
happening of any of the events described above, had such Warrants been
exercised immediately prior to the happening of such event or any
record date with respect thereto. An adjustment made pursuant to this
paragraph (a) shall become effective immediately after the effective
date of such event retroactive to the record date, if any, for such
event. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) In case the Company shall distribute to all holders of its
shares of Common Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the
surviving corporation) evidences of its indebtedness or assets
(excluding cash dividends or distributions payable out of consolidated
earnings or earned surplus and dividends or distributions referred to
in paragraph (a) above or in the paragraph immediately following this
paragraph) or rights, options or warrants, or convertible or
exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock, then in each case the number of
Warrant Shares thereafter purchasable upon the exercise of each
Warrant shall be determined by multiplying the number of Warrant
Shares theretofore purchasable upon the exercise of each Warrant by a
fraction, the numerator of which shall be the then current market
price per share of Common Stock (as defined in paragraph (c) below) on
the date of such distribution, and the denominator of which shall be
the then current market price per share of Common Stock, less the then
fair value (as reasonably determined by the Board of Directors of the
Company) of the portion of the assets or evidences of indebtedness so
distributed or of such subscription rights, options or warrants, or of
such convertible or exchangeable securities applicable to one share of
Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective on the date of
distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
In the event of a distribution by the Company to all holders of
its shares of Common Stock of a subsidiary or securities convertible
into or exercisable for such stock, then in lieu of an adjustment in
the number of Warrant Shares purchasable upon the exercise of each
Warrant, the Holder of each Warrant, upon the exercise
-5-
<PAGE>
thereof at any time after such distribution, shall be entitled to
receive from the Company, such subsidiary or both, as the Company
shall determine, the stock or other securities to which such Holder
would have been entitled if such Holder had exercised such Warrant
immediately prior thereto, all subject to further adjustment as
provided in this Section 11.1; provided, however, that no adjustment
in respect of dividends or interest on such stock or other securities
shall be made during the term of a Warrant or upon the exercise of a
Warrant.
(c) For the purpose of any computation under paragraph (b) of
this Section, the current market price per share of Common Stock at
any date shall be the average of the daily Closing Prices for 20
consecutive trading days commencing 30 trading days before the date of
such computation. The selling price for each day (the "Closing Price")
shall be the last such reported sales price regular way or, in case no
such reported sale takes place on such day, the average of the closing
bid and asked prices regular way for such day, in each case on the
principal national securities exchange on which the shares of Common
Stock are listed or admitted to trading or, if not listed or admitted
to trading, the average of the closing bid and asked prices of the
Common Stock in the over-the counter market as reported by the Nasdaq
National Market System or Nasdaq SmallCap System or if not approved
for quotation on the Nasdaq National Market System or Nasdaq SmallCap
System, the average of the closing bid and asked prices as furnished
by two members of the National Association of Securities Dealers, Inc.
selected from time to time by the Company for that purpose.
(d) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant;
provided, however, that any adjustments which by reason of this
paragraph (d) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations
shall be made to the nearest one-thousandth of a share.
(e) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant
Price payable upon exercise of each Warrant shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by
a fraction, the numerator of which shall be the number of Warrant
Shares purchasable upon the exercise of each Warrant immediately prior
to such adjustment, and the denominator of which shall be the number
of Warrant Shares purchasable immediately thereafter.
(f) No adjustment in the number of Warrant Shares purchasable
upon the exercise of each Warrant need be made under paragraph (b) if
the Company issues or distributes to each Holder of Warrants the
rights, options, warrants or convertible or exchangeable securities,
or evidences of indebtedness or assets referred to in those paragraphs
which each Holder of Warrants would have been entitled to receive had
the Warrants been exercised prior to the happening of such event or
the record date with respect thereto. No adjustment need be made for a
change in the par value of the Warrant Shares.
-6-
<PAGE>
(g) In the event that at any time, as a result of an adjustment
made pursuant to paragraph (a) above, the Holders shall become
entitled to purchase any securities of the Company other than shares
of Common Stock, thereafter the number of such other shares so
purchasable upon exercise of each Warrant and the Warrant Price of
such shares shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in this
Section 11, and the other provisions of this Agreement, with respect
to the Warrant and Warrant Shares, shall apply as nearly equivalent as
practicable on like terms to such other securities.
(h) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges for which an adjustment was made
hereunder, if any thereof shall not have been exercised, the Warrant
Price and the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall, upon such expiration, be readjusted
and shall thereafter be such as it would have been had it been
originally adjusted (or had the original adjustment not been required,
as the case may be) as if (i) the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or
sold upon the exercise of such rights, options, warrants or conversion
or exchange rights and (ii) such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company
upon such exercise plus the aggregate consideration, if any, actually
received by the Company for the issuance, sale or grant of all such
rights, options, warrants or conversion or exchange rights whether or
not exercised; provided, however, that no such readjustment shall have
the effect of increasing the Warrant Price or decreasing the number of
shares of Common Stock purchasable upon the exercise of each Warrant
by an amount in excess of the amount of the adjustment initially made
in respect to the issuance, sale or grant of such rights, options,
warrants or conversion or exchange rights.
11.2 Notice of Adjustment. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Warrant Price of such
Warrant Shares is adjusted, as herein provided, the Company shall promptly
mail by first class, postage prepaid, to each Holder notice of such
adjustment or adjustments and a certificate of a firm of independent public
accountants selected by the Board of Directors of the Company (who may be
the regular accountants employed by the Company) setting forth the number
of Warrant Shares purchasable upon the exercise of each Warrant and the
Warrant Price of such Warrant Shares after such adjustment, setting forth a
brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made.
11.3 No Adjustment for Dividends. Except as provided in Section 11.1,
no adjustments in respect of any dividends shall be made during the term of
a Warrant or upon the exercise of a Warrant.
11.4 Preservation of Purchase Rights Upon Merger, Consolidation etc.
In case of any consolidation of the Company with or merger of the Company
into another corporation or in case of any sale, transfer or lease to
another corporation of all or substantially all the property of the
Company, the Company or such successor or purchasing corporation, as the
case may be, shall execute with each Holder an agreement that each
-7-
<PAGE>
Holder shall have the right thereafter upon payment of the Warrant Price in
effect immediately prior to such action to purchase upon exercise of each
Warrant the kind and amount of shares and other securities, cash and
property which he would have owned or would have been entitled to receive
after the happening of such consolidation, merger, sale, transfer or lease
had such Warrant been exercised immediately prior to such action; provided,
however, that no adjustment in respect of dividends, interest or other
income on or from such shares or other securities, cash and property shall
be made during the term of a Warrant or upon the exercise of a Warrant.
Such agreement shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 11. The provisions of this Section 11.4 shall similarly apply to
successive consolidations, mergers, sales transfer or leases.
11.5 Statements on Warrants. Irrespective of any adjustments in the
Warrant Price or the number or kind of shares purchasable upon the exercise
of the Warrants, Warrants theretofore or thereafter issued may continue to
express the same price and number and kind of shares as are stated in the
Warrants initially issuable pursuant to this Agreement.
12. Fractional Interests. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same holder, the
number of full Warrant Shares which shall be issuable upon the exercise thereof
shall be computed on the basis of the aggregate number of Warrant Shares
purchasable on exercise of the Warrants so presented. If any fraction of a
Warrant Share would, except for the provisions of this Section 12, be issuable
on the exercise of any Warrant (or specified portion thereof), the Company shall
pay an amount in cash equal to the closing price for one share of the Common
Stock, as defined in paragraph (c) of Section 11.1, on the trading day
immediately preceding the date the Warrant is presented for exercise, multiplied
by such faction.
13. Registration Under the Securities Act of 1933. The Representatives
represent and warrant to the Company that they will not dispose of the Warrants
or the Warrant Shares except pursuant to (i) an effective registration statement
under the Securities Act of 1933, as amended (the "Act"), including a
post-effective amendment to the Registration Statement, (ii) Rule 144 under the
Act (or any similar rule under the Act relating to the disposition of
securities), or (iii) an opinion of counsel, reasonably satisfactory to counsel
of the Company, that an exemption from such registration is available.
14. Certificate to Bear Legends. The Warrant shall be subject to a
stop-transfer order and the certificate or certificates therefore shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.
The Warrant Shares or other securities issued upon exercise of the Warrant
shall be subject to a stop-transfer order and the certificate or certificates
evidencing any such Warrant Shares or securities shall bear the following
legend:
-8-
<PAGE>
THE SHARES OR OTHER SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
15. Registration Rights.
15.1 Demand Registration Rights. The Company covenants and agrees
with the Representatives and any subsequent Holders of the Warrants and/or
Warrants Shares that, on one occasion, within 60 days after receipt of a
written request from the Representatives or from Holders of more than 25%
in interest of the aggregate of Warrants and/or Warrant Shares issued
pursuant to this Agreement that the Representatives or such Holders of the
Warrants and/or Warrant Shares desires and intends to transfer more than
25% in interest of the aggregate number of the Warrants and/or Warrant
Shares under such circumstances that a public offering, within the meaning
of the Act, will be involved, the Company shall, on that one occasion, file
a registration statement (and use its best efforts to cause such
registration statement to become effective under the Act at the Company's
expense) with respect to the offering and sale or other disposition of the
Warrant Shares (the "Offered Warrant Shares"); provided, however, that the
Company shall have no obligation to comply with the foregoing provisions of
this Section 15.1 if in the opinion of counsel to the Company reasonably
acceptable to the Holder or Holders, from whom such written requests have
been received, registration under the Act is not required for the transfer
of the Offered Warrant Shares in the manner proposed by such person or
persons or that a post-effective amendment to an existing registration
statement would be legally sufficient for such transfer (in which latter
event the Company shall promptly file such post-effective amendment (and
use its best efforts to cause such amendment to become effective under the
Act)). Notwithstanding the foregoing, the Company shall not be obligated to
file a registration statement with respect to the Offered Warrant Shares on
more than one occasion.
The Company may defer the preparation and filing of a registration
statement for up to 90 days after the request for registration is made if
the Board of Directors determines in good faith that such registration or
post-effective amendment would materially adversely affect or otherwise
materially interfere with a proposed or pending transaction by the Company,
including without limitation a material financing or a corporate
reorganization, or during any period of time in which the Company is in
possession of material inside information concerning the Company or its
securities, which information the Company determines in good faith is not
ripe for disclosure.
The Company shall not honor any request to register Warrant Shares
pursuant to this Section 15.1 received later than five (5) years from the
effective date of the Company's Registration Statement on Form S-1 (File
No. 333-________) (the "Effective Date"). The Company shall not be required
(i) to maintain the effectiveness of the registration statement beyond the
earlier to occur of 90 days after the effective date of the registration
statement or the date on which all of the Offered Warrant Shares have been
sold (the "Termination Date"); provided, however, that if at the
Termination Date the Offered Warrant Shares are covered by a registration
statement which also covers other securities and which is required to
remain in effect beyond the Termination Date, the Company shall maintain in
effect such
-9-
<PAGE>
registration statement as it relates to Offered Warrant Shares for so long
as such registration statement (or any substitute registration statement)
remains or is required to remain in effect for any such other securities,
or (ii) to cause any registration statement with respect to the Warrant
Shares to become effective prior to the Initiation Date. All expenses of
registration pursuant to this Section 15.1 shall be borne by the Company
(excluding underwriting discounts and commissions on Warrant Shares not
sold by the Company).
The Company shall be obligated pursuant to this Section 15.1 to
include in the registration statement Warrant Shares that have not yet been
purchased by a Holder of Warrants so long as such Holder of Warrants
submits an undertaking to the Company that such Holder intends to exercise
Warrants representing the number of Warrant Shares to be included in such
registration statement prior to the consummation of the public offering
with respect to such Warrant Shares. In addition, such Holder of Warrants
is permitted to pay the Company the Warrant Price for such Warrant Shares
upon the consummation of the public offering with respect to such Warrant
Shares.
15.2 Piggy-back Registration Rights. The Company covenants and agrees
with the Holders and any subsequent Holders of the Warrants and/or Warrant
Shares that in the event the Company proposes to file a registration
statement under the Act with respect to any class of security (other than
in connection with an exchange offer, a non-cash offer or a registration
statement on Form S-8 or other unsuitable registration statement form)
which becomes or which the Company believes will become effective at any
time after the Initiation Date then the Company shall in each case give
written notice of such proposed filing to the Holders of Warrants and
Warrant Shares at least 30 days before the proposed filing date and such
notice shall offer to such Holders the opportunity to include in such
registration statement such number of Warrant Shares as they may request,
unless, in the opinion of counsel to the Company reasonably acceptable to
any such holder of Warrants or Warrant Shares who wishes to have Warrant
Shares included in such registration statement, registration under the Act
is not required for the transfer of such Warrants and/or Warrant Shares in
the manner proposed by such Holders. The Company shall not honor any such
request to register any such Warrant Shares if the request is received
later than six (6) years from the Effective Date, and the Company shall not
be required to honor any request (a) to register any such Warrant Shares if
the Company is not notified in writing of any such request pursuant to this
Section 15.2 within at least 20 days after the Company has given notice to
the Holders of the filing, or (b) to register Warrant Shares that represent
in the aggregate fewer than 25% of the aggregate number of Warrant Shares.
The Company shall permit, or shall cause the managing underwriter of a
proposed offering to permit, the Holders of Warrant Shares requested to be
included in the registration (the "Piggy-back Shares ") to include such
Piggy-back Shares in the proposed offering on the same terms and conditions
as applicable to securities of the Company included therein or as
applicable to securities of any person other than the Company and the
Holders of Piggy-back Shares if the securities of any such person are
included therein. Notwithstanding the foregoing, if any such managing
underwriter shall advise the Company in writing that it believes that the
distribution of all or a portion of the Piggy-back Shares requested to be
included in the registration statement concurrently with the securities
being registered by the Company would materially adversely affect the
distribution of such securities by the Company for its own account, then
the Holders of such Piggy-back Shares shall delay their offering and sale
of Piggyback Shares (or the portion thereof so designated by such managing
underwriter) for such period, not to exceed 120
-10-
<PAGE>
days, as the managing underwriter shall request provided that no such delay
shall be required as to Piggy-back Shares if any securities of the Company
are included in such registration statement for the account of any person
other than the Company and the Holders of Piggy-back Shares. In the event
of such delay, the Company shall file such supplements, post-effective
amendments or separate registration statement, and take any such other
steps as may be necessary to permit such Holders to make their proposed
offering and sale for a period of 90 days immediately following the end of
such period of delay ("Piggy-back Termination Date"); provided, however,
that if at the Piggy-back Termination Date the Piggyback Shares are covered
by a registration statement which is, or required to remain, in effect
beyond the Piggy-back Termination Date, the Company shall maintain in
effect the registration statement as it relates to the Piggy-back Shares
for so long as such registration statement remains or is required to remain
in effect for any of such other securities. All expenses of registration
pursuant to this Section 15.2 shall be borne by the Company, except that
underwriting commissions and expenses attributable to the Piggy-back Shares
and fees and disbursements of counsel (if any) to the Holders requesting
that such Piggy-back Shares be offered will be borne by such Holders.
The Company shall be obligated pursuant to this Section 15.2 to
include in the Piggy-back Offering, Warrant Shares that have not yet been
purchased by a holder of Warrants so long as such Holder of Warrants
submits an undertaking to the Company that such Holder intends to exercise
Warrants representing the number of Warrant Shares to be included in such
Piggy-back Offering prior to the consummation of such Piggy-back Offering.
In addition, such Holder of Warrants is permitted to pay the Company the
Warrant Price for such Warrant Shares upon the consummation of the
Piggy-back Offering.
If the Company decides not to proceed with a Piggy-back Offering, the
Company has no obligation to proceed with the offering of the Piggy-back
Shares, unless the Holders of the Warrants and/or Warrant Shares otherwise
comply with the provisions of Section 15.1 hereof (without regard to the 60
days' written request required thereby). Notwithstanding any of the
foregoing contained in this Section 15.2, the Company's obligation to offer
registration rights to the Piggy-back Shares pursuant to this Section 15.2
shall terminate two (2) years after the Expiration Date.
15.3 In connection with the registration of Warrants Shares in
accordance with Section 15.1 and 15.2 above, the Company agrees to:
(a) Use its best efforts to register or qualify the Warrant
Shares for offer or sale under the state securities or Blue Sky laws
of such states which the Holders of such Warrant Shares shall
designate, until the dates specified in Section 15.1 and 15.2 above in
connection with registration under the Act; provided, however, that in
no event shall the Company be obligated to quality to do business in
any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any
jurisdiction where it is not now so subject or to register or get a
license as a broker or dealer in securities in any jurisdiction where
it is not so registered or licensed or to register or qualify the
Warrant Shares for offer or sale under the state securities or Blue
Sky laws of any state other than the states in which some or all of
the shares offered or sold in the Public Offering were registered or
qualified for offer and sale.
-11-
<PAGE>
(b) (i) In the event of any post-effective amendment or
other registration with respect to any Warrant Shares pursuant to
Section 15.1 or 15.2 above, the Company will indemnify and hold
harmless any Holder whose Warrant Shares are being so registered,
and each person, if any, who controls such Holder within the
meaning of the Act, against any losses, claims, damages or
liabilities, joint or several, to which such Holder or such
controlling person may be subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact
contained, on the effective date thereof, in any such
registration statement, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement
thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading; and will reimburse each such Holder and each such
controlling person for any legal or other expenses reasonably
incurred by such Holder or such controlling person in connection
with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not
be liable in such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged
omission made in any such registration statement, any preliminary
prospectus or final prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with written
information furnished by such Holder expressly for use in the
preparation thereof. The Company will not be liable to a claimant
to the extent of any misstatement corrected or remedied in any
amended prospectus if the Company timely delivers a copy of such
amended prospectus to such indemnified person and such
indemnified person does not timely furnish such amended
prospectus to such claimant. The Company shall not be required to
indemnify any Holder or controlling person for any payment made
to any claimant in settlement of any suit or claim unless such
payment is approved by the Company.
(ii) Each Holder of Warrants and/or Warrant Shares who
participates in a registration pursuant to Section 15.1 or 15.2
will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed any such
registration statement, and each person, if any, who controls the
Company within the meaning of the Act, against any losses,
claims, damages or liabilities to which the Company, or any such
director, officer or controlling person may become subject under
the Act, or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are
based upon any untrue or alleged untrue
-12-
<PAGE>
statement of any material fact contained in any such registration
statement, any preliminary prospectus or final prospectus, or any
amendment or supplement thereto, or arise out of or are based
upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made
in any such registration statement, any preliminary prospectus or
final prospectus, or any amendment or supplement thereto, in
reliance upon and in conformity with written information
furnished by such Holder expressly for use in the preparation
thereof; and will reimburse any legal or other expenses
reasonably incurred by the Company, or any such director, officer
or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this
subparagraph (ii) shall not apply to amounts paid to any claimant
in settlement of any suit or claim unless such payment is first
approved by such Holder.
(iii) In order to provide for just and equitable
contribution in any action in which a claim for indemnification
is made pursuant to this clause (b)(iii) of Section 15.3 but is
judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time
to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding
the fact that this clause (b)(iii) of Section 15.3 provides for
indemnification in such case, all the parties hereto shall
contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from
others) in such proportion so that each Holder whose Warrant
Shares are being registered is responsible pro rata for the
portion represented by the public offering price received by such
Holder from the sale of such Holder's Warrant Shares, and the
Company is responsible for the remaining portion; provided,
however, that (i) no Holder shall be required to contribute any
amount in excess of the public offering price received by such
Holder from the sale of such Holder's Warrant Shares and (ii) no
person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. This subsection (b)(iii) shall not be
operative as to any Holder of Warrant Shares to the extent that
the Company has received indemnity under this clause (b)(iii) of
Section 15.3.
16. No Rights as Stockholder; Notices to Holders. Nothing contained in
this Agreement or in any of the Warrants shall be construed as conferring upon
the Holders or their transferee(s) the right to vote or to receive dividends or
to consent to or receive notice as stockholders in respect of any meeting of
stockholders for the election of directors of the Company or any other matter or
any rights whatsoever as stockholders of the Company. If, however, at any time
prior to the expiration of the Warrants and prior to their exercise, any of the
following events shall occur:
(a) the Company shall declare any dividend payable in any securities
upon its shares of Common Stock or make any distribution (other than a cash
dividend) to the holders of its shares of Common Stock; or
(b) the Company shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into
or exchangeable for shares of Common Stock or any right to subscribe to or
purchase any thereof; or
-13-
<PAGE>
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation, merger, sale, transfer or lease of
all or substantially all of its property, assets and business as an
entirety) shall be proposed,
then in any one or more of said events the Company shall (i) give notice in
writing of such event to the Holders, as provided in Section 17 hereof and (ii)
if there are more than 100 Holders, cause notice of such event to be published
once in The Wall Street Journal (national edition), such giving of notice and
publication to be completed at least 20 days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution or subscription rights, or
for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
publish, mail or receive such notice or any defect therein or in the publication
or mailing thereof shall not affect the validity of any action taken in
connection with such dividend, distribution or subscription rights, or such
proposed dissolution, liquidation or winding up.
17. Notices. Any notice pursuant to this Agreement to be given or made by
the registered Holder of any Warrant to or on the Company shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed as
follows:
International Airline Support Group, Inc.
1954 Airport Road
Suite 200
Atlanta, Georgia 30341
Attn: President
Notices or demands authorized by this Agreement to be given or made by the
Company to the registered Holder of any Warrant shall be sufficiently given or
made (except as otherwise provided in this Agreement) if sent by first-class
mail, postage prepaid, addressed to such Holder at the address of such Holder as
shown on the Warrant Register.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
principles of conflicts of laws.
19. Supplements and Amendments. The Company and the Representatives may
from time to time supplement or amend this Agreement in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Representatives may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
adversely affect the interests of the Holders. This Agreement may also be
supplemented or amended from time to time by a writing executed by or on behalf
of the Company and all of the Holders.
20. Successor. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Holders shall bind and inure to the
benefit of their respective successors and assigns hereunder. Assignments by the
Holders of their rights hereunder shall be made in accordance with Section 4
hereof.
-14-
<PAGE>
21. Merger or Consolidation of the Company. So long as Warrants remain
outstanding, the Company will not merge or consolidate with or into, or sell,
transfer or lease all or substantially all of its property to, any other
corporation unless the successor or purchasing corporation, as the case may be
(if not the Company), shall expressly assume, by supplemental agreement executed
and delivered to the Holders, the due and punctual performance and observance of
each and every covenant and condition of this Agreement to be performed and
observed by the Company.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Holders, any legal or equitable right, remedy or claim under this Agreement, but
this Agreement shall be for the sole and exclusive benefit of the Company and
the Holders of the Warrants and Warrant Shares.
23. Captions. The captions of the sections and subsections of this
Agreement have been inserted for convenience only and shall have no substantive
effect.
24. Counterparts. This Agreement may be executed in any number of
counterparts each of which when so executed shall be deemed to be an original;
but such counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
CRUTTENDEN ROTH INCORPORATED
Attest:
By: ________________________________
_________________________ Name: ______________________________
Title: _____________________________
SCOTT & STRINGFELLOW, INC.
Attest:
By: ________________________________
_________________________ Name: ______________________________
Title: _____________________________
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
Attest:
By: ________________________________
_________________________ Name: ______________________________
Title: _____________________________
-15-
<PAGE>
EXHIBIT A
[Form of Warrant Certificate]
EXERCISABLE ON OR BEFORE DECEMBER ___, 2002
No. 175,000 Warrants
Warrant Certificate
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
This Warrant Certificate certifies that _____________________, or
registered assigns, is the registered holder of Warrants expiring December ___,
2002 (the "Warrants") to purchase Common Stock, $0.001 par value per share (the
"Common Stock"), of International Airline Support Group, Inc., a Delaware
corporation (the "Company"). Each Warrant entitles the holder upon exercise to
receive from the Company from 10:00 a.m., Pacific time, on December ___, 1998
through and until 6:00 p.m., Pacific time, on December ____, 2002, one fully
paid and nonassessable share of Common Stock (a "Warrant Share") at the initial
exercise price (the "Warrant Price") of [$_____] payable in lawful money of the
United States of America upon surrender of this Warrant Certificate and payment
of the Warrant Price at the office of the Company designated for such purpose,
but only subject to the conditions set forth herein and in the Warrant Agreement
referred to on the reverse hereof. The Warrant Price and number of Warrant
Shares issuable upon exercise of the Warrants are subject to adjustment upon the
occurrence of certain events set forth in the Warrant Agreement.
No Warrant may be exercised after 6:00 p.m., Pacific time, on December ___,
2002 (the "Expiration Date"). Notwithstanding the foregoing, if at 6:00 p.m.,
Pacific time on the Expiration Date, any Holder or Holders of the Warrants have
not exercised their Warrants and the Closing Price (as defined in the Warrant
Agreement) for the Common Stock on the Expiration Date is greater than the
Warrant Price, then each such unexercised Warrant shall be automatically
converted into a number of shares of Common Stock of the Company equal to: (A)
the number of shares of Common Stock then issuable upon exercise of a Warrant
multiplied by (B) a fraction (1) the numerator of which is the difference
between the Closing Price for the Common Stock on the Expiration Date and the
Warrant Price and (2) the denominator of which is the Closing Price for the
Warrant Stock on the Expiration Date.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by the
Company.
-16-
<PAGE>
IN WITNESS WHEREOF, International Airline Support Group, Inc. has caused
this Warrant Certificate to be signed by its President and by its Secretary and
has caused its corporate seal to be affixed hereunto or imprinted hereon.
Dated: __________, 1997 INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
Attest:
By: ________________________________
_________________________ Name: ______________________________
Title: _____________________________
-17-
<PAGE>
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring December __, 2002 entitling the holder on
exercise to receive shares of Common Stock, $0.001 par value per share, of the
Company (the "Common Stock"), and are issued or to be issued pursuant to a
Warrant Agreement, dated as of December __, 1997 (the "Warrant Agreement"), duly
executed and delivered by the Company, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants. A copy of the Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.
The Warrants may be exercised at any time on or before December ___, 2002.
The holder of Warrants evidenced by this Warrant Certificate may exercise them
by surrendering this Warrant Certificate, with the form of election to purchase
set forth hereon properly completed and executed, together with payment of the
Warrant Price in cash at the office of the Company designated for such purpose.
In the event that upon any exercise of Warrants evidenced hereby the number of
Warrants exercised shall be less than the total number of Warrants evidenced
hereby, there shall be issued to the holder hereof or his assignee a new Warrant
Certificate evidencing the number of Warrants not exercised. No adjustment shall
be made for any dividends on any Common Stock issuable upon exercise of this
Warrant.
The Warrant Agreement provides that upon the occurrence of certain events
the number of shares of Common Stock issuable upon the exercise of each Warrant
shall be adjusted. If the number of shares of Common Stock issuable upon such
exercise is adjusted, the Warrant Agreement provides that the Warrant Price set
forth on the face hereof may, subject to certain conditions, be adjusted. No
fractions of a share of Common Stock will be issued upon the exercise of any
Warrants but the Company will pay the cash value thereof determined as provided
in the Warrant Agreement.
The holders of the Warrants are entitled to certain registration rights
with respect to the Common Stock purchasable upon exercise thereof. Said
registration rights are set forth in full in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Company by the
registered holder thereof in person or by legal representative or attorney duly
authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
certificate at the office of the Company, a new Warrant certificate or Warrant
certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to other transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
-18-
<PAGE>
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
-19-
<PAGE>
[Form of Election to Purchase]
(To be Executed upon Exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive ___________ shares of Common
Stock and herewith tenders payment for such shares to the order of International
Airline Support Group, Inc., in the amount of $___________ in accordance with
the terms hereof. The undersigned requests that a certificate for such shares be
registered in the name of ______________________________________________, whose
address is ___________________________________________________ and that such
shares be delivered to ____________________________ whose address is
____________________________________. If said number of shares is less than all
of the shares of Common Stock purchasable hereunder, the undersigned requests
that a new Warrant certificate representing the remaining balance of such shares
be registered in the name of ______________________________________, whose
address is ___________________________________________, and that such Warrant
certificate be delivered to _______________________, whose address is
_____________________________________________.
Signature:
Date:
Signature Guaranteed:
-20-
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Income (loss) before extraordinary items..................... $2,259,089 $2,285,969 $(613,840)
Extraordinary item........................................... (530,596) -- --
---------- ---------- ---------
Net earnings (loss)....................................... $1,728,493 2,285,969 $(613,840)
---------- ---------- ---------
---------- ---------- ---------
Weighted average shares issued and outstanding............... 1,646,629 149,696 149,696
---------- ---------- ---------
---------- ---------- ---------
Add: Dilutive effect of options
(as determined by the application
of the Treasury Stock Method)......................... 160,309 -- --
---------- ---------- ---------
1,806,938 149,696 149,696
---------- ---------- ---------
---------- ---------- ---------
Primary earnings (loss) per common and common
equivalent shares
Earnings (loss) before extraordinary item................ $ 1.25 $ 15.27 $ (4.10)
Extraordinary item....................................... (.29) -- --
---------- ---------- ---------
Net earnings (loss)................................... $ .96 $ 15.27 $ (4.10)
---------- ---------- ---------
---------- ---------- ---------
FULLY-DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary items,
as reported................................................ $2,259,089 $2,285,969 $(613,840)
Reduced interest expense due to assumed conversion
of Convertible Debentures.................................. -- 800,000 --
---------- ---------- ---------
Income before extraordinary items for computing
earnings (loss) per share............................. 2,259,089 3,085,969 (613,840)
Extraordinary item........................................... (530,596) -- --
---------- ---------- ---------
Net income for computing earnings (loss) per share...... 1,728,493 $3,085,969 $(613,840)
---------- ---------- ---------
---------- ---------- ---------
Weighted average common & common equivalent shares
as per primary calculation above.......................... 1,806,938 149,696 149,696
Common stock equivalents/Convertible Debentures
computed using if converted method........................ -- 93,485 --
---------- ---------- ---------
Weighted average shares for computing
fully-diluted earnings (loss) per share.............. 1,806,938 243,181 149,696
---------- ---------- ---------
---------- ---------- ---------
Fully-diluted earnings (loss) per common and common
equivalent shares
Earnings (loss) before extraordinary item.............. $ 1.25 $ 12.69 $ (4.10)
Extraordinary item..................................... (.29) -- --
---------- ---------- ---------
Net earnings (loss)................................. $ .96 $ 12.69 $ (4.10)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
<PAGE>
Exhibit 21
Subsidiaries
IASG-Virgin Islands, Inc.
<PAGE>
Exhibit 23.1
AUDITOR'S CONSENT
We have issued our report dated July 21, 1997, accompanying the consolidated
financial statements and schedule of International Airline Support Group,
Inc. and Subsidiaries for the year ended May 31, 1997 contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to
the use of our name as it appears under the caption "Experts".
Grant Thornton LLP
Fort Lauderdale, Florida
November 17, 1997
