SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended February 28, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________________ to __________________.
Commission file number 0-18352
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
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DELAWARE 59-2223025
------------------------- -----------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1954 AIRPORT ROAD, SUITE 200, ATLANTA, GA 30341
- ----------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 455-7575
--------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of the registrant's common stock outstanding as of
March 31, 1999 was 2,440,698.
<PAGE>
FORM 10-Q
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
Part I FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of
May 31, 1998 and February 28, 1999 3
Condensed Consolidated Statements of Earnings
for the Three Months and Nine Months
Ended February 28, 1998 and February 28, 1999 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended February 28, 1998 and 1999 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Part II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
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<PAGE>
FORM 10-Q
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 28,
May 31, 1999
1998* (UNAUDITED)
---------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 438,403 $ 913,742
Accounts receivable, net of allowance for doubtful
accounts of approximately $514,000 at May 31, 1998
and $644,000 at February 28, 1999 1,179,760 2,902,635
Inventories 11,744,924 14,221,723
Deferred tax benefit - current 1,202,345 1,202,345
Other current assets 194,618 253,429
---------- ----------
Total current assets 14,760,050 19,493,874
Investments 92,194 -
Property and equipment
Aircraft and engines held for lease 7,347,954 6,490,855
Leasehold improvements 65,881 99,197
Machinery and equipment 931,092 962,060
---------- ----------
8,344,927 7,552,112
Accumulated depreciation 1,969,138 2,794,238
---------- ----------
Property and equipment, net 6,375,789 4,757,874
Other assets
Investment in unconsolidated joint venture - 2,130,695
Deferred debt costs, net 513,222 473,537
Deferred tax benefit 1,760,565 812,232
Deposits and other assets 134,533 44,822
---------- ----------
Total other assets 2,408,320 3,461,286
---------- ----------
$ 23,636,353 $ 27,713,034
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term obligations $ 1,351,805 $ 2,641,323
Accounts payable 247,982 1,279,521
Accrued expenses 2,932,016 1,289,505
---------- ----------
Total current liabilities 4,531,803 5,210,349
Long-term obligations, less current maturities 8,296,063 10,837,725
Commitments and contingencies
Stockholders' equity
Preferred stock - $.001 par value; authorized
2,000,000 shares; 0 shares outstanding at
May 31, 1998 and February 28, 1999. - -
Common stock - $.001 par value; authorized
20,000,000 shares; issued and outstanding
2,562,667 shares at May 31, 1998 and
2,653,723 shares at February 28, 1999. 2,562 2,653
Additional paid-in capital 13,511,610 13,793,381
Unrealized loss on equity security (22,545) -
Common stock in treasury, at cost - 211,225
shares in 1999 - (986,855)
Accumulated deficit (2,683,140) (1,144,219)
---------- ----------
Total stockholders' equity 10,808,487 11,644,960
---------- ----------
$ 23,636,353 $ 27,713,034
========== ==========
</TABLE>
*Condensed from audited Financial Statements
The accompanying notes are an integral part of these condensed financial
statements.
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<PAGE>
FORM 10-Q
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
1998 1999 1998 1999
----------- ------------ ---------- -----------
Revenues
<S> <C> <C> <C> <C>
Net sales $ 5,839,739 $ 4,435,864 $ 16,272,348 $ 14,265,975
Lease and service revenue 589,702 1,293,517 1,816,380 2,874,315
----------- ------------ ---------- -----------
Total revenues 6,429,441 5,729,381 18,088,728 17,140,290
Cost of sales 3,763,506 2,934,173 10,474,757 9,693,079
Selling, general and administrative
expenses 1,174,042 1,627,168 3,250,998 3,787,906
Depreciation and amortization 272,579 279,442 792,892 875,114
----------- ------------ ---------- -----------
Total operating costs 5,210,127 4,840,783 14,518,647 14,356,099
Equity in net earnings of
unconsolidated joint venture - 357,589 - 705,695
----------- ------------ ---------- -----------
Earnings from operations 1,219,314 1,246,187 3,570,081 3,489,886
Interest expense 460,538 359,723 1,351,619 1,011,751
Interest and other (income) expense 321,132 (16,006) 308,125 (6,620)
----------- ------------ ---------- -----------
Earnings before income taxes 437,644 902,470 1,910,337 2,484,755
Provision for (benefit from) income
taxes (1,275,000) 347,066 (1,699,999) 948,333
----------- ------------ ---------- -----------
Net earnings $ 1,712,644 $ 555,404 $ 3,610,336 $ 1,536,422
=========== ============ ========== ==========
Per share data:
Earnings per share available for
common stockholders - Basic $ 0.70 $ 0.22 $ 1.48 $ 0.60
Weighted average number of common
stock outstanding - Basic 2,463,306 2,541,111 2,441,741 2,558,051
=========== ============ ========== ==========
Earnings per share available for
common stockholders - Diluted $ 0.61 $ 0.21 $ 1.27 $ 0.56
Weighted average number of common
stock outstanding - Diluted 2,815,483 2,708,302 2,841,477 2,751,896
=========== ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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<PAGE>
FORM 10-Q
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
February 28, February 28,
1998 1999
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 3,610,336 $ 1,536,422
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 514,011 875,114
Loss on sale of investment - 20,074
Undistributed equity in earnings of joint
venture - 705,695
Provision for income taxes - deferred - 948,333
Changes in assets and liabilities (4,832,536) (3,044,338)
----------- -----------
Total adjustments (4,318,525) (495,122)
Net cash provided by (used in)
operating activities (708,189) 1,041,300
Cash flows from investing activities:
Capital equipment and leasehold improvements (47,956) (64,284)
Investment in unconsolidated joint venture - (1,514,000)
Proceeds from sale of investment - 94,665
Additions to aircraft and engines held for
lease, net (433,496) (1,949,917)
----------- -----------
Net cash used in investing activities (481,452) (3,433,536)
Cash flows from financing activities:
Net increase in debt obligations 839,157 3,831,180
Proceeds from exercise of employee stock options 205,625 23,250
Payment of offering costs (31,859) -
Repurchase of common stock - (986,855)
----------- -----------
Net cash provided by financing activities 1,012,923 2,867,575
----------- -----------
Net (decrease) increase in cash (176,718) 475,339
Cash and cash equivalents at beginning of period 465,725 438,403
----------- -----------
Cash and cash equivalents at end of period $ 289,007 $ 913,742
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain adjustments
(consisting only of normal and recurring adjustments) necessary to
present fairly International Airline Support Group, Inc.'s condensed
consolidated balance sheets as of May 31, 1998 and February 28,
1999, the condensed consolidated statements of earnings for the
three and nine months ended February 28, 1998 and February 28, 1999,
and the condensed consolidated statements of cash flows for the nine
months ended February 28, 1998 and February 28, 1999.
The accounting policies followed by the Company are described
in the May 31, 1998 financial statements.
The results of operations for the three and nine months ended
February 28, 1999 are not necessarily indicative of the results to
be expected for the full year.
2. Inventories consisted of the following:
MAY 31,1998 FEBRUARY 28,1999
----------- ----------------
Aircraft parts $11,294,924 $10,421,723
Aircraft and Engines
available for sale 450,000 3,800,000
----------- -----------
$11,744,924 $14,221,723
=========== ===========
3. Earnings Per Share
The Company's basic earnings per share is calculated by
dividing net earnings by the weighted average shares outstanding
during the period. The computation of diluted earnings per share
includes all dilutive common stock equivalents in the weighted
average shares outstanding.
Financial Accounting Standards Board (FASB) Statement 128
"Earnings Per Share" was adopted by the Company on January 1, 1998
and requires the dual presentation of basic and diluted earnings per
share on the face of the statement of earnings. The reconciliation
between the computation is as follows:
Three Months
Ended Net Basic Basic Diluted Diluted
FEBRUARY 28, EARNINGS SHARES EPS SHARES EPS
----------- ---------- --------- ----- --------- -----
1998 $1,712,644 2,463,306 $0.70 2,815,483 $0.61
1999 $ 555,404 2,541,111 $0.22 2,708,302 $0.21
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<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months
Ended Net Basic Basic Diluted Diluted
FEBRUARY 28, EARNINGS SHARES EPS SHARES EPS
------------ ---------- --------- ----- --------- -------
1998 $3,610,336 2,441,741 $1.48 2,841,477 $1.27
1999 $1,536,422 2,558,051 $0.60 2,751,896 $0.56
Included in diluted shares are common stock equivalents relating
to stock options of 167,191 and 352,177 for the three months ended
February 28, 1999 and 1998, respectively, and 193,845 and 399,736
for the nine months ended February 28, 1999 and 1998, respectively.
4. 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. The Credit Agreement was amended on
various occasions to create new term loan facilities totaling $6.85
million and increasing the revolving credit to $14 million
(collectively referred to as the "Credit Facility"). 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.
5. Supplemental Cash Flow Disclosures:
Cash payments for interest were $1,547,000 and $891,000 for the
nine months ended February 28, 1998 and February 28, 1999,
respectively. Cash and cash equivalents include $712,000 of
restricted cash at February 28, 1999. 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.
1. Joint Venture
On September 16, 1998, the Company entered into a joint venture
(the "Air41 Joint Venture") for the acquisition of 20 DC-9-41H
aircraft from Scandinavian Airlines System ("SAS"). The aircraft
were leased back to SAS and the leases had an average term of 39
months. The Company's original investment in the Air41 Joint
Venture was approximately $1.5 million. The Company's Air41 Joint
Venture partner is AirCorp, Inc., a privately held company. The
aircraft were financed through the joint venture, utilizing non-
recourse debt to the partners. The Air41 Joint Venture is accounted
for under the equity method and the leases are treated as operating
leases.
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<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Joint Venture (cont.)
The Company is exploring opportunities for the aircraft after
the end of the term of the leases with SAS. Such opportunities
include releasing the aircraft with SAS, leasing the aircraft to one
or more different lessee(s), selling the aircraft, parting out the
aircraft, or directly placing the aircraft into either passenger or
cargo service, whereby the Company may have a principal interest in
an airline. At this time, the Company has no firm commitment for
the aircraft after the SAS leases expire.
7. Treasury Stock
In the third quarter of 1999, the Company began acquiring
shares of its common stock in connection with a stock repurchase
program announced in December 1998. That program, approved by the
Company's Board of Directors and lender, authorized the Company to
purchase up to $1 million of common shares from time to time.
During the three months ended February 28, 1999, the Company
repurchased 211,225 shares of its common stock at an average price
of $4.67. On March 8, 1999, the Company purchased an additional
1,800 shares at $4.375, bringing the Company's total expenditure for
share repurchase to $994,783. The Company's lender has approved a
waiver granting permission for the Company to repurchase up to
another $1,000,000 of its common stock, although the Company has not
made any decision regarding the timing, or number of shares, if any,
of any additional share repurchases.
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<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following is management's discussion and analysis of certain
significant factors which have affected the Company's operating
results and financial position during the periods included in the
accompanying condensed consolidated financial statements.
RESULTS OF OPERATIONS:
REVENUES
Total revenue for the three and nine months ended February 28,
1999 was $5.7 million and $17.1 million, respectively, compared to
$6.4 million and $18.1 million, respectively, during the three and
nine months ended February 28, 1998. Net sales for the three and
nine months ended February 28, 1999 were $4.4 million and $14.3
million, respectively, compared to $5.8 million and $16.3 million,
respectively, during the three and nine months ended February 28,
1998. Net sales include parts sales as well as aircraft and engine
sales. Aircraft and engine sales are unpredictable transactions and
may fluctuate significantly from year to year, 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, as well as the overall market for used aircraft or engines.
Total revenue and net sales were lower due to lower net sales,
primarily due to lower aircraft and engine sales during the three
and nine month period. Lease and service revenue increased to $1.3
million and $2.9 million, respectively, for the three and nine
months ended February 28, 1999 from $590,000 and $1.8 million,
respectively, for the three and nine months ended February 28, 1998,
primarily due to the addition of service revenue relating to
consulting work performed for various commuter airlines and the
recognition of supplemental lease revenue. Under the equity method
of accounting, lease revenue from the Air41 Joint Venture is not
included in the Company's revenue.
COST OF SALES
Cost of sales decreased 22.0% from $3.8 million during the
three months ended February 28, 1998 to $2.9 million during the
three months ended February 28, 1999, primarily as a result of lower
revenues. Cost of sales decreased 7.5% from $10.5 million during the
nine months ended February 28, 1998 to $9.7 million during the nine
months ended February 28, 1999, primarily as a result of lower
revenues. As a percentage of total revenues, cost of sales for the
three and nine months ended February 28, 1999 was 51% and 57%,
respectively, compared to 59% and 58% for the three and nine months
ended February 28, 1998, respectively. The decrease in the cost of
sales as a percentage of revenues is in large part due to lower cost
of goods sold for parts and increased lease and service revenue,
which typically has no cost of sales.
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<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased from
$1.2 million and $3.3 million during the three and nine months ended
February 28, 1998, respectively, to $1.6 million and $3.8 million
during the three and nine months ended February 28, 1999,
respectively. This increase is due, in part, to higher levels of
insurance costs, rent expense, professional fees, and salary and
bonuses.
EQUITY IN NET EARNINGS OF UNCONSOLIDATED JOINT VENTURE
Equity in Net Earnings of Unconsolidated Joint Venture for the three
and nine months ended February 28, 1999 was $357,589 and $705,695,
respectively, compared to $0 during the three and nine months ended
February 28, 1998. This increase was due to the Air41 Joint Venture
entered into during September 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the three and nine months
ended February 28, 1998 totaled $273,000 and $793,000, respectively,
compared to $279,000 and $875,000 for the three and nine months
ended February 28, 1999, respectively. The increase in depreciation
and amortization for the nine-month period was due to an increase in
assets held for lease with the addition of certain Pratt & Whitney
JT8D engines under lease. There were relatively no changes in the
depreciation for the three-month period as two aircraft were
returned off lease during the period.
INTEREST EXPENSE
Interest expense for the three and nine months ended February
28, 1998 was $461,000 and $1.4 million, respectively, compared to
$360,000 and $1.0 million for the three and nine months ended
February 28, 1999, respectively. The decrease in interest expense
from 1998 to 1999 was due to a decrease in total debt outstanding
during this period from $14.6 million at February 28, 1998 to $13.5
million at February 28, 1999 and lower costs of funds.
INTEREST AND OTHER (INCOME) EXPENSE
Interest and other (income) expense for the three and nine
months ended February 28, 1999 was ($16,000) and ($7,000),
respectively, compared to $321,000 and $308,000 for the three and
nine months ended February 28, 1998, respectively. The decrease in
other expenses from 1998 to 1999 was due to $325,000 in expenses
relating to the withdrawn secondary offering in the third quarter of
fiscal 1998.
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<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
INCOME TAXES
Income taxes have been provided at the Company's estimated
effective tax rate of approximately 38% for fiscal 1999. In the
prior year, the Company recognized deferred tax benefits as the
realization of such benefits was determined to be more likely than
not because of the Company's consistent profitability. The
realization of the tax benefits was accomplished through a reduction
in the valuation allowance that had been previously established
against the Company's deferred tax assets.
EARNINGS BEFORE TAXES
Income before taxes increased from $438,000 and $1,910,000
during the three and nine months ended February 28, 1998,
respectively, to $902,000 and $2,485,000 during the three and nine
months ended February 28, 1999, respectively. Earnings for the three
and nine months ended February 28, 1999 were benefited by equity in
net earnings of unconsolidated joint venture, the Air41 Joint
Venture, of $358,000 and $706,000, respectively. Net earnings
decreased from $1.7 million and $3.6 million during the three and
nine months ended February 28, 1998, respectively, to $555,000 and
$1.5 million during the three and nine months ended February 28,
1999, respectively, primarily due to last year's benefit from income
taxes of $1.3 million and $1.7 million for the three and nine months
ended February 28, 1998, respectively, compared to a provision for
income taxes of $347,000 and $948,000 for the three and nine months
ended February 28, 1999, respectively. Earnings per share - diluted
for the third quarter of fiscal 1999 was $0.21, based on 2,708,302
weighted average shares outstanding, compared to earnings per share -
diluted for the third quarter of fiscal 1998 of $0.61, based on
2,815,483 weighted average shares outstanding. Earnings per share -
diluted for the first nine months of fiscal 1999 was $0.56, based on
2,751,896 weighted average shares outstanding, compared to earnings
per share - diluted for the first nine months of fiscal 1998 of $1.27
per share - diluted, based on 2,841,477 weighted average shares
outstanding. On a pro forma basis, adjusted as if the Company had
been a full taxpayer in fiscal 1998, earnings per share - diluted for
the third quarter and the first nine months of fiscal 1998 would have
been $0.10 and $0.41, respectively.
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<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
TREASURY STOCK
In the third quarter of 1999, the Company began acquiring shares
of its common stock in connection with a stock repurchase program
announced in December 1998. That program authorized the Company to
purchase up to $1 million of common shares from time to time. During
the three months ended February 28, 1999, the Company repurchased
211,225 shares of its common stock at an average price of $4.67. On
March 8, 1999, the Company purchased an additional 1,800 shares at
$4.375, bringing the Company's total expenditure for share repurchase
to $994,783. The Company's lender has approved a waiver granting
permission for the Company to repurchase up to another $1,000,000 of
its common stock, although the Company has not made any decision
regarding the timing, or number of shares, if any, of any additional
share repurchases.
LIQUIDITY AND CAPITAL RESOURCES
The Credit Agreement originally entered into by the Company in
October of 1996 provided for a $3 million term loan and up to an $11
million revolving credit. The Credit Agreement has been amended to
create new term loan facilities totaling $6.85 million (collectively
referred to as the "Credit Facility") and to increase the revolving
credit to $14 million. The revolving credit facility matures in
October 2001 and the term loans mature between March 2000 and October
2001. The interest rate that the Company is assessed is subject to
fluctuation and may change based upon certain financial covenants.
As of March 15, 1999, the interest rate under the Credit Facility was
the lender's base rate minus 0.25% (7.50%). 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.
Net cash provided by (used in) operating activities for the nine
months ended February 28, 1999 and February 28, 1998 were $1,041,000
and ($4,319,000) million, respectively. The cash provided by
operations for the nine months ended February 28, 1999 was offset
primarily by an increase in accounts receivables and inventory. The
cash used in operating activities for nine months ended February 28,
1998 was due, in part, to the acquisition of two DC-9-51 aircraft
that were held for sale.
Net cash used for investing activities for the nine months ended
February 28, 1999 amounted to $3,434,000 compared to $481,000 for the
nine months ended February 28, 1998. The net cash used for investing
activities for the nine months ended February 28, 1999 was primarily
the result of an investment in the Air41 Joint Venture and the
addition of certain Pratt & Whitney JT8D engines held for lease. The
net cash used for investing activities for the nine months ended
February 28, 1998 was primarily the result of the acquisition of an
engine held for lease.
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<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONT.)
Net cash provided by financing activities for nine months ended
February 28, 1999 amounted to $2,868,000 compared to $1.0 million for
the nine months ended February 28, 1998. The net cash provided by
financing activities for the nine months ended February 28, 1999 was
primarily the result of a net increase in debt obligations of $3.8
million due to the borrowing of funds for the acquisition of certain
Pratt & Whitney JT8D engines and the investment in the Air41 Joint
Venture. The net cash provided by financing activities for the nine
months ended February 28, 1998 was the result of a net increase in
debt obligations of $840,000 due to the borrowing of $4.0 million for
the acquisition of two DC-9-51 aircraft, offset by the partial
repayment of other term loans and the revolving credit.
At March 31, 1999, the Company was permitted to borrow up to an
additional $4.7 million pursuant to the revolving credit facility.
The Company believes that amounts available to be borrowed pursuant
to the Credit Agreement and cash flow from operations will be
sufficient to meet the requirements of the Company's business for the
foreseeable future. The Company had no material commitments for
capital expenditures as of February 28, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS
130 establishes standards for reporting and display of comprehensive
income and its components in financial statements. Differences
between net earnings and comprehensive earnings for the three and
nine months ended February 28, 1999 and 1998 were insignificant and,
therefore, have not been separately disclosed.
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131 (SFAS 131), "Disclosures About Segments of an
Enterprise and Related Information." The Company does not believe
that this new standard will have a significant effect on its
consolidated financial statements and/or disclosures.
YEAR 2000 ISSUES
The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable
year. These programs can fail by misinterpreting dates beyond the
year 1999, which could cause possible miscalculations, and a
disruption in the operation of such systems. This is commonly
referred to as the Year 2000 issue.
The Company has identified four major areas of concern regarding
Year 2000: Internal Information Systems, External Facilities,
Materials Held for Sale, and Outside Vendors Information Systems and
Materials.
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<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
YEAR 2000 ISSUES (CONT.)
INTERNAL INFORMATION SYSTEMS
The Company has developed a plan to address issues related to the
impact of the Year 2000 problem on its Internal Information
Technology ("IT"). Starting in fiscal 1997 the Company began the
process of upgrading or replacing all personal computers. This
process was completed in the third quarter of fiscal 1998. At the
same time all critical software systems were assessed for Year 2000
compliance. The inventory system, which is written in PICK, required
no further action. The accounting package required a "patch" which
sets an assumption for dates between 1975 and 2035. The Company
anticipates no further requirements on the part of either of these
packages. The Company primarily uses Microsoft Operating Systems and
productivity packages. Microsoft continues to find and fix Year 2000
issues as they appear throughout its product line. To date all
patches have been applied to the Windows NT Servers. The Windows 95
and 98 machines will be patched with all current updates in the
second quarter of calendar 1999. The Company has one Unix based
system that, while not Year 2000 compliant, is scheduled for
retirement in the second quarter of calendar 1999.
Incremental costs, which include consulting costs and costs
associated with internal resources to modify existing systems in
order to achieve Year 2000 compliance, are charged to expense as
incurred. The Company does not expect the financial impact of making
the required system changes to be material to the Company's
consolidated financial position, results of operations or cash flows
which are being funded through operating cash flows. The anticipated
costs of the project and the dates on which the Company believes it
will complete the Year 2000 modifications and assessments are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of
certain resources. There can be no guarantee that these estimates
will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and
cost of personnel trained in this area and the ability to locate and
correct the remaining relevant systems.
EXTERNAL FACILITIES
The Company has not completed the assessment of Year 2000 issues
relating to its facilities. However, the owners of its facilities
are taking the steps the Company believes are appropriate to assure
uninterrupted access to these facilities and uninterrupted fire
protection and security services. The Company has received no
assurances regarding the uninterrupted services provided by the
public utilities, financial institutions and other similar entities
upon which it relies.
- 14 -
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
YEAR 2000 ISSUES (CONT.)
MATERIALS HELD FOR SALE
Like all other companies in the aircraft parts redistribution
industry, the Company lists parts to indicate their condition. The
parts are categorized as "serviceable", "as removed", or
"unserviceable". The Company makes no representation or warranty
with respect to the parts it sells. Specifically, the Company makes
no representation or warranty regarding whether there are Year 2000
issues with respect to any of the parts available for sale. All
parts purchasers' concerns about the Year 2000 issue are therefore
directed to the manufacturer of such part.
OUTSIDE VENDORS INFORMATION SYSTEMS AND MATERIALS
With respect to the Company's suppliers and vendors, the Company
is beginning the process of contacting suppliers and vendors to
assess the potential impact on operations if such third parties are
not successful in ensuring that their systems are Year 2000 compliant
in a timely manner. The Company's Year 2000 issues and any potential
business interruptions, costs, damages or losses related thereto, are
also dependent upon the Year 2000 compliance of other third parties
such as governmental agencies (e.g., Federal Aviation
Administration). To date, the Company is unable to determine whether
it will be materially affected by the failure of any of its
suppliers, vendors or other third parties to be Year 2000 compliant.
The Company believes that its compliance efforts have and will reduce
the impact on the Company of any such failures. Failure of any third
parties with which the Company interacts to achieve Year 2000
compliance could have a material adverse effect on the Company's
business, financial condition and results of operations.
Risk assessment, readiness evaluation, action plans and
contingency plans related to the Company's suppliers, vendors and
other third parties are expected to be completed by September 1999.
The Company's risk management program includes emergency backup and
recovery procedures to be followed in the event of failure of a
business critical system. These procedures will be expanded to
include specific procedures for the potential Year 2000 issue.
Contingency plans to protect the Company from Year 2000 related
interruptions are also being developed and are expected to be
completed by August 1999. These plans will include development of
backup procedures, identification of alternate suppliers, possible
increases in inventory levels and other appropriate measures.
- 15 -
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
FORWARD LOOKING STATEMENTS
This Form 10-Q contains statements that may constitute "forward-
looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Those statements include
statements regarding the capital spending and future financing plans
of the Company and reflect the intent, belief or current expectations
of the Company and members of its management team. Prospective
investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. The Company
undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over
time.
- 16 -
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is from time to time subject to legal proceedings
and claims that arise in the ordinary course of its business. On the
date hereof, no such proceedings are pending and no such claims have
been asserted.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION PAGE NUMBER OR METHOD
OF FILING
<S> <C> <C> <C>
2.4 Credit Agreement between BNY Incorporated by
Financial Corporation and the reference to Exhibit
Registrant, as amended. 2.4 to Amendment No. 2
to the Company's
Registration Statement
on Form S-4 filed
August 29, 1996 (File
No. 333-08065).
3.1 Amended and Restated Certificate Incorporated by
of Incorporation of the reference to Exhibit
Registrant. 3.1 to the Company's
Annual report on Form
10-K for the fiscal
year ended May 31, 1996
(the "1996 Form 10-K").
3.2 Restated and Amended Bylaws of Incorporated by
the Registrant, as amended. 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.
- 17 -
<PAGE>
10.1.1 Employment Agreement, dated as of Incorporated by
December 1, 1995, between the reference to Exhibit
Registrant and Alexius A. Dyer 10.1.1 to the to
III, as amended on October 3, Amendment No. 2 to the
1996. Company's Registration
Statement on Form S-4
filed August 29, 1996
(File No. 333-08065).
10.1.2 Employment Agreement, dated as of Incorporated by
October 3, 1996, between the reference to Exhibit
Registrant and George Murnane 10.1.2 to the Company's
III. Quarterly Report for
the quarter ended
February 28, 1997.
10.2.1 1996 Long-Term Incentive and Incorporated by
Share Award Plan. reference to Appendix B
to the Proxy Statement/
Prospectus included in
the Company's
Registration Statement
on Form S-4 (File No.
333-08065) filed on
July 12, 1996.
10.2.5 Form of Option Certificate Incorporated by
(Employee Non-Qualified Stock reference to Exhibit
Option). 10.2.5 to the 1996 Form
10-K.
10.2.6 Form of Option Certificate Incorporated by
(Director Non-Qualified Stock reference to Exhibit
Option). 10.2.6 to the 1996 Form
10-K.
- 18 -
<PAGE>
10.2.7 Form of Option Certificate Incorporated by
(Incentive Stock Option). reference to Exhibit
10.2.7 to the 1996 Form
10-K.
10.16 Contract for Sale and Purchase Incorporated by
dated January 31, 1997, between reference to Exhibit
the Registrant and American 10.16 to the Company's
Connector Corporation. 1997 Form 10-K.
10.17 Office Lease Agreement dated Incorporated by
January 31, 1997 between the reference to Exhibit
Registrant and Globe Corporate 10.17 to the Company's
Center. 1997 Form 10-K.
10.18 Lease Agreement dated March 31, Incorporated by
1997, between the Registrant and reference to Exhibit
Port 95-4, Ltd. 10.18 to the Company's
1997 Form 10-K.
27 Financial Data Schedule Page No. 21
</TABLE>
(b) REPORTS ON FORM 8-K
None
- 19 -
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
(Registrant)
/S/GEORGE MURNANE III APRIL 1, 1999
George Murnane III Date
Executive Vice President and
Chief Financial Officer
- 20 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> May-31-1999
<PERIOD-END> Feb-28-1999
<CASH> 913,742
<SECURITIES> 0
<RECEIVABLES> 3,546,635
<ALLOWANCES> 644,000
<INVENTORY> 14,221,723
<CURRENT-ASSETS> 19,493,874
<PP&E> 7,552,112
<DEPRECIATION> 2,794,238
<TOTAL-ASSETS> 27,713,034
<CURRENT-LIABILITIES> 5,210,349
<BONDS> 10,837,725
<COMMON> 2,653
0
0
<OTHER-SE> 11,642,307
<TOTAL-LIABILITY-AND-EQUITY> 27,713,034
<SALES> 14,265,975
<TOTAL-REVENUES> 17,140,290
<CGS> 9,693,079
<TOTAL-COSTS> 14,356,099
<OTHER-EXPENSES> (705,695)
<LOSS-PROVISION> 101,992
<INTEREST-EXPENSE> 1,005,131
<INCOME-PRETAX> 2,484,755
<INCOME-TAX> 948,333
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,536,422
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.56
</TABLE>
