SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended MAY 31, 2000
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[ ] 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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(Exact name of Registrant as specified in its charter)
Delaware 59-2223025
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1954 Airport Road, Suite 200,
Atlanta, Georgia 30341
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(Address of Principal Executive Offices) (Zip Code)
(770) 455-7575
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on which registered
Common Stock, $.001 par value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At August 10, 2000, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $4,036,701.
The number of shares of the Registrant's Common Stock outstanding as of
August 10, 2000 was 2,190,198.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2000 Annual Meeting of the
Company's Stockholders are incorporated by reference in Parts III and IV.
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INTERNATIONAL AIRLINE SUPPORT GROUP INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MAY 31, 2000
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business 1
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 22
SIGNATURES
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4
PART I
ITEM 1. BUSINESS.
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"), INCLUDING THE PLANS AND OBJECTIVES OF MANAGEMENT
FOR THE BUSINESS, OPERATIONS AND FINANCIAL PERFORMANCE OF THE COMPANY. THE
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS SET FORTH IN THIS ANNUAL REPORT
MAY INCLUDE OR RELATE TO, AMONG OTHER THINGS, (I) INCREASING THE COMPANY'S
MARKET SHARE OF PARTS FOR CERTAIN COMMERCIAL JET AND COMMUTER AIRCRAFT, WHILE
MAINTAINING ITS POSITION AS A LEADING REDISTRIBUTOR 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
DEMAND FOR DC-9 AIRCRAFT, WHICH WILL DETERMINE THE SUCCESS OF THE COMPANY'S
JOINT VENTURE'S EFFORTS TO REMARKET ITS AIRCRAFT; (V) THE SIZE AND GROWTH RATE
OF THE AIRCRAFT PARTS REDISTRIBUTION INDUSTRY AND THE AIRCRAFT AND ENGINE
LEASING INDUSTRY, (VI) INCREASES OR CHANGES IN GOVERNMENT REGULATIONS REGARDING
THE AVIATION INDUSTRY, (VII) COMPETITION FROM OTHER AIRCRAFT PARTS
REDISTRIBUTORS, (VIII) PROPOSED EXPANSION OF THE COMPANY'S PRODUCT LINE AND (IX)
OPERATION OF A PART 135 AIR CARRIER. SEE "CAUTIONARY STATEMENTS" HEREIN.
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, THAT THE
COMPANY WILL BE ABLE TO ENTER INTO NEW LEASES OF AIRCRAFT AS EXISTING LEASES
EXPIRE, THAT THE COMPANY'S JOINT VENTURE WILL BE ABLE TO REMARKET ITS AIRCRAFT
AS THEY COME OFF LEASE ON FINANCIAL TERMS THAT WILL PERMIT THE JOINT VENTURE TO
SERVICE ITS INDEBTEDNESS, THAT THE COMPANY WILL BE ABLE TO PURCHASE AIRCRAFT
THAT ARE SUBJECT TO LEASES, THAT THE COMPANY WILL BE ABLE TO OPERATE ITS
RECENTLY ACQUIRED AIR CARGO SUBSIDIARY PROFITABLY 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 JUDGMENTS
WITH RESPECT TO, AMONG OTHER THINGS, FUTURE ECONOMIC, COMPETITIVE AND 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. FURTHERMORE, A CHANGE IN THE MARKET FOR AIRCRAFT
AND ENGINE PARTS COULD RESULT IN THE COMPANY'S INVENTORY BEING OVERVALUED AND
COULD REQUIRE THE COMPANY TO WRITE DOWN ITS INVENTORY VALUATIONS IN ORDER TO
BRING THEM IN LINE WITH THE REVISED FAIR MARKET VALUE. THERE IS NO ASSURANCE
THAT A WRITE-DOWN WOULD NOT ADVERSELY AFFECT THE COMPANY'S BUSINESS, OPERATING
RESULTS OR FINANCIAL CONDITION. 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.
GENERAL
The Company is a leading redistributor of aftermarket aircraft spare parts
used primarily for McDonnell Douglas MD-80 and DC-9 aircraft and commuter
turboprop aircraft. According to the World Jet Inventory Year-End 1999 (the
"World Jet Inventory"), MD-80 and DC-9 aircraft accounted for approximately
13.2% of the commercial jet aircraft in service worldwide at December 31, 1999.
According to a November 1999 report published by Speednews, Inc., Embraer
EMB-120 aircraft accounted for approximately 13% of the turboprop aircraft in
service at the top worldwide regional airline fleets.
Management believes that the Company has one of the most extensive
inventories of aftermarket MD-80, DC-9 and Embraer EMB-120 Brasilia parts in
the industry. In addition, the Company provides aircraft spare parts for
Boeing, Lockheed, Airbus and other McDonnell Douglas and commuter turboprop
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 are acquired through purchase or consignment of surplus or bulk
inventories from airlines, purchases from other redistributors and disassembly
of 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 McDonnell
Douglas MD-80 and DC-9 aircraft, and commuter turboprop aircraft, such as
Embraer EMB-120 aircraft. The Company currently owns six Embraer EMB-120
aircraft, three of which are leased, and two Pratt & Whitney JT8D series
engines, both of which are 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 its aircraft trading activities and its parts redistribution business
complement one another. Therefore, the Company is increasing its focus on
aircraft trading and leasing activities.
The Company also owns a 50% interest in a joint venture that leases 20
DC-9-41H aircraft. Nineteen of the aircraft are leased to Scandinavian Airlines
System ("SAS"); one is leased to a U.S.-based charter operator. The joint
venture expects to derive revenue from lease payments with respect to such
aircraft and from the re-lease or sale of them following the expiration of the
leases with SAS. The Company believes that its investment in this joint venture
complements its parts redistribution and aircraft sales and leasing businesses
by providing a high quality source of aircraft for further releasing, sales
and/or parting out.
The Company's other business activities include the operation of a regional
airline and providing advisory services to air carriers on parts-inventory
disposition. The Company's air cargo operations and advisory services
complement its parts sales and aircraft trading and leasing activities by
enhancing the Company's reputation as an industry expert in commercial jet and
turboprop parts and operations.
The Company's strategy is to capitalize upon its position as a leading
redistributor of MD-80, DC-9 and commuter turboprop aircraft spare parts and
broaden its product lines to include other high-use aircraft as the world fleet
grows. Key elements of the Company's strategy include:
- Expand Aircraft and Engine Trading and Leasing
- Broaden Product Line
- Increase Sales to Cargo Carriers, Regional Commercial Airlines and
Commuter Airlines
- Utilize Consignment Agreements to Acquire Inventory
- Seek Additional Bulk Purchase Opportunities
- Maintain Market Share of Parts for MD-80 and DC-9 Aircraft
- Continued Commitment to Quality and Technological Innovation
- Expand Air Carrier Operations
- Pursue Strategic Acquisitions
COMPANY HISTORY
The Company was founded in 1982 in Miami, Florida. Initially the Company
focused on parting out DC-8 aircraft and reselling the resulting spare parts.
Based upon the Company's success in parting out DC-8 aircraft, in 1991 the
Company began purchasing and parting out DC-9 and MD-80 aircraft. Beginning in
1992, the Company began purchasing and parting out Boeing 727 aircraft. Since
its founding, the Company has acquired over 50 aircraft for parting out. The
Company has also engaged in aircraft and engine trading throughout its history.
During fiscal 1999 and the first half of fiscal 2000, the Company expanded its
core aftermarket parts business by acquiring significant parts inventories for
McDonnell Douglas DC-10, Boeing 747 and Embraer EMB-120 aircraft. The Company
also expanded its aircraft trading activities during fiscal 1999 and 2000,
completing the purchase of eight and the sale of two EMB-120 aircraft. During
fiscal 2000, the Company established a presence in Europe, establishing a sales
office in France and a distribution center in the Netherlands.
INDUSTRY OVERVIEW
The Company believes that the annual worldwide market for aircraft spare
parts is approximately $11 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 the following
factors:
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.
According to the World Jet Inventory, at December 31, 1999, the average age of
the worldwide jet fleet was 13.1 years. 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 longer
service lives 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 regional
domestic passenger airlines and cargo carriers, used aircraft have enjoyed
longer service lives than originally anticipated. Older aircraft typically
require more maintenance and replacement parts than new aircraft.
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 Airline Suppliers Association
("ASA") or the International Standards Organization ("ISO") and at least one
major commercial airline has begun to demand that 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 monetize 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 its inventory.
Consignment also enables a consignee to offer for sale significant parts and
inventory at minimal capital cost.
Modernization of Commuter Fleets. Many of the larger regional commuter
airlines are modernizing their fleets by retiring their turboprop aircraft and
acquiring short-range commuter jet aircraft. As a result, the retired commuter
turboprop aircraft and related spare parts inventories are available for
purchase at favorable prices. The Company believes that smaller regional
commuter airlines will upgrade their fleets by replacing the small turboprop
aircraft they currently operate with larger, more efficient turboprop aircraft
being retired by the larger regional commuter airlines. Accordingly, the
Company believes that small regional commuter airlines are potential customers
for the aircraft and related spare parts being retired by the larger regional
commuter airlines. The Company also believes that there is a significant
opportunity for the redeployment of certain types of the commuter turboprop
aircraft as cargo aircraft.
COMPANY STRATEGY
The Company's strategy is to capitalize upon its position as a leading
redistributor of MD-80, DC-9 and commuter turboprop 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:
Expand Aircraft and Engine Trading and Leasing. The Company believes that
due to the increasing costs of commercial 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 used commercial 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.
The Company has periodically acquired, leased and sold a variety of
aircraft and engines. 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. In the case of aircraft that are disassembled
for parts, the lease revenues reduce the Company's cost of the aircraft and,
therefore, the parts acquired from disassembly of the aircraft. The Company
purchases aircraft and engines for resale when it believes the aircraft or
engines can be purchased at an attractive price and resold within a relatively
brief period of time. 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. Therefore, the
Company believes that its aircraft trading activities and its parts
redistribution business complement one another. The Company has increased its
aircraft trading and leasing activities and intends to do so further.
Broaden Product Line. The Company has recently expanded its product line
to include aftermarket parts for Airbus A-300, McDonnell Douglas DC-10 and
Boeing 747 aircraft and certain commuter aircraft including Embraer, Shorts,
Saab, de Havilland, British Aerospace and ATR aircraft. In addition, the
Company intends to expand further its product line to include parts for other
aircraft that are likely to be converted to freighters, such as Boeing 767 and
757 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 currently
utilize DC-10, 767, 747 and A-300 series aircraft, and the Company believes use
of these models will continue to 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. The Company
also believes that there is a significant opportunity for the redeployment of
the Embraer EMB-120 and ATR aircraft as cargo aircraft, as commuter carriers
convert their fleets to small jet aircraft. The Company has acquired service
bulletin kits that will permit the conversion of 20 EMB-120 aircraft to either
full cargo or quick-change configurations. The Company has converted one of the
six EMB-120 aircraft that it owns to full cargo configuration. The Company
intends to convert its remaining EMB-120 aircraft if customer demand for the
EMB-120 cargo variant justifies the conversion cost.
Increase Sales to Cargo Carriers, Regional Commercial Airlines and Commuter
Airlines. Cargo carriers, regional commercial airlines and commuter 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. Additionally, 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
smaller commuter airlines are important customers because their fleets consist
primarily of the turboprop aircraft being retired by the larger commuter
airlines. The Company has acquired an extensive inventory of aftermarket parts
for several popular commuter turboprop aircraft types. The Company will direct
its marketing activities to broadening its customer base of cargo, regional and
commuter airlines in order to increase market share and leverage its core
competencies.
Utilize Consignment Agreements to Acquire Inventory. In recent years, the
Company acquired most of its aircraft parts inventory by purchasing large
numbers of parts in bulk from aircraft operators. The Company has recently
begun to acquire inventory by means of strategic consignment arrangements.
Pursuant to a consignment arrangement, an aircraft operator permits the Company
to market and sell an inventory of aircraft parts. The Company receives a
percentage of the sales price of a consigned part. Consignment arrangements
allow the Company to obtain parts inventory on a favorable basis without
committing its capital to purchasing inventory. The Company's margins on sales
of consigned parts are, however, typically lower than margins realized on sales
of parts acquired by other methods. During calendar year 1999, the Company
completed three significant consignment agreements. The Company believes that
its market presence, experience in evaluating parts inventories, sophisticated
management information systems and capital strength will enable the Company to
enter into additional consignment arrangements.
Seek Additional Bulk Purchase Opportunities. The Company will continue to
seek opportunities to purchase large spare parts inventories in bulk. The
Company cannot predict when such opportunities will arise. 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 parts on an
individual basis. Therefore, the Company realizes higher gross margins on sales
of parts acquired by bulk purchases, as opposed to other methods. However, bulk
inventory purchases require a commitment of the Company's capital. The Company
believes that it has the ability, due to its market presence, experience in
evaluating parts inventories, sophisticated management information systems and
capital strength, to complete large bulk purchase opportunities to the extent
such purchases are considered favorable.
Maintain Market Share of Parts for MD-80 and DC-9 Aircraft. Recently
several of the Company's competitors have increased their inventories of parts
for MD-80 and DC-9 aircraft. The Company intends to maintain its market share
of parts for such aircraft despite such competition. According to the World Jet
Inventory, MD-80 and DC-9 aircraft together accounted for approximately 13.2% of
the commercial jet aircraft in service worldwide at December 31, 1999. Although
the DC-9 is no longer in production, many of the DC-9's parts are
interchangeable with the MD-80, which, although no longer in production, is
still in widespread use. The Company believes that its experience and knowledge
of the DC-9 gives it a competitive advantage in selling parts into the MD-80
marketplace. 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.
Continued 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. 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.
Expand Air Carrier Operations. The global express-transportation market is
estimated at more than $12 billion and growing at more than 25% annually. To
date this market has been served by large, well capitalized,
airfreight/logistics companies that have tended to focus on large, international
and national, freight movements and have the financial wherewithal to meet the
market's and their customer's growing requirements. The regional freight
market, however, is highly fragmented; a large number of small, undercapitalized
companies serve distinct market niches typically utilizing small converted older
generation general aviation aircraft. The Company believes that these
companies, many of which are family-owned and/or capital constrained, will be
unable to meet the market's and their customer's growing requirements, providing
a significant opportunity for a well capitalized company with new generation
commercial aircraft. In order to capitalize on this opportunity, during the
fourth quarter of fiscal 2000, the Company acquired a small regional airline
that currently operates three piston light twin and two light turboprop Part 23
aircraft under an Air Carrier Certificate under Part 135 of the FAA regulations.
The Company intends to expand the acquired airline's fleet with the addition of
cargo and quick-change variants of the EMB-120. Although the Company expects
the acquisition to be accretive, earnings could be negatively impacted due to
the resulting investment in the airline and the intended expansion. The Company
is evaluating the possibility of raising capital by issuing debt or equity
securities of the subsidiary to finance the acquisition, continued operations
and expansion of this subsidiary.
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 or 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. Similarly, the Company believes that many small aircraft
leasing companies are potential acquisition targets. 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, to strengthen its relationships with existing customers through
availability of additional inventory and permit the Company to expand its
aircraft trading opportunities.
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 program 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. With appropriate documentation, 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. 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, DC-9 and commuter turboprop aircraft and management
believes that the Company has one of the most extensive inventories of
aftermarket MD-80, DC-9 and EMB-120 parts in the industry. Currently, the
Company has approximately 85,000 inventory line items, many of which represent
multiple unit quantities and relate to the MD-80, DC-9 and EMB-120 aircraft.
Many of these parts, such as avionics and engine parts, can also be used by a
wide variety of aircraft other than MD-80, DC-9 and EMB-120 aircraft. In
addition to the Company's inventory of MD-80, DC-9 and EMB-120 parts, the
Company's inventory also includes spare parts for Boeing 727, 737 and 747
aircraft, Lockheed L-1011 aircraft, McDonnell Douglas DC-8 and DC-10 aircraft,
and Airbus, Shorts, Saab, de Havilland, British Aerospace and ATR aircraft and
for the Pratt & Whitney JT8D engine series.
OPERATIONS OF THE COMPANY
The Company's core business is buying and selling aircraft spare parts. In
addition, the Company engages in the sale and leasing of aircraft and engines,
provides advisory services to air carriers and through a wholly-owned
subsidiary, operates a regional air cargo airline. The Company believes that
aircraft and engine trading, as well as air carrier operations, may become a
more significant part of the Company's business in the future. Management
believes these activities provide significant opportunities for expansion.
Inventory Acquisition. The Company acquires parts inventory by means of
strategic consignment arrangements, by purchasing individual parts from
airlines, repair facilities or other redistributors, by purchasing excess
inventory from aircraft operators 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 obtains
inventory on consignment from or purchases inventory in bulk from airlines that
are eliminating certain portions of their spare parts inventory due to the
retirement of an aircraft type from their fleets, implementing inventory
reduction programs to reduce costs, downsizing their operations or ceasing to
conduct business.
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 and engines. 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 owns six Embraer EMB-120 aircraft, three of which are
leased, and two JT8D engines, both of which are leased. The Company's aircraft
leases are operating leases rather than finance leases and expire between July
2003 and August 2003. The Company's engine leases are "evergreen" leases
which, although they have no termination date, are cancelable 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 currently focuses on leasing commuter
turboprop aircraft, particularly the EMB-120. 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.
During the second quarter of fiscal 1999, the Company entered into a joint
venture (the "Air 41 Joint Venture") for the acquisition of 20 DC-9-41H aircraft
from 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 Air 41 Joint
Venture was approximately $1.4 million. The aircraft were financed through the
joint venture, utilizing non-recourse debt to the partners. The Company's Air
41 Joint Venture partner is AirCorp, Inc., a privately held company. The
Company is exploring opportunities for the aircraft after the end of the term of
the leases with SAS. In this regard, the Air 41 Joint Venture has engaged an
aircraft portfolio management firm to remarket the aircraft. Such opportunities
include releasing the aircraft to 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. One of the
aircraft was sold following the expiration of its lease to SAS. At this time,
the Company has no firm commitment for the remaining 19 aircraft after the SAS
leases expire.
Air Carrier Operations. During the fourth quarter of fiscal 2000, the
Company acquired a small regional airline that currently operates three piston
light twin and two light turboprop Part 23 aircraft under an Air Carrier
Certificate under Part 135 of the FAA regulations. Besides providing ad hoc
charter operations to customers such as the Department of Defense, the airline
is currently under contract to provide cargo services to certain clients, such
as United Parcel Service and Corporate Express. The Company paid $125,000, plus
certain contingent consideration, including assuming the debt relating to the
aircraft, for the airline. The airline has become a wholly-owned subsidiary of
the Company operating as North-South Airways ("NSA"). The Company intends to
expand NSA's fleet with the addition of cargo and quick-change variants of the
EMB-120.
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.
During fiscal 2000 the Company established a presence in Europe by opening
a sales office in Nantes, France, and a distribution center at Schipohl Airport
in the Netherlands. The distribution center is managed for the Company by KLM
Aerospace Logistics Group, which provides all shipping and logistics services
necessary for the delivery of parts to the Company's European customers.
In addition to directly marketing its inventory, the Company has created
and sponsors an industry-wide internet parts locator service, which is found at
http:\\www.ipls.com. The Company's internet service is a free service available
to any potential customer and lists all of the inventory available for sale by
the Company. In order to increase its value to potential customers, the
Company's Internet service also lists the inventory of over 100 additional
aftermarket parts redistributors, representing more than 1.2 million individual
parts. 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. Buyers of aircraft spare
parts can access any of the databases described above, as well as other parts
databases, to determine the companies which have the desired inventory
available. Neither the Company's service, AIRS nor 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 and are often more readily available.
The Company's customers include a wide variety of domestic and
international air cargo carriers, major commercial, regional and commuter
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, regional commercial airlines and commuter 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 smaller commuter
airlines are important customers because their fleets consist primarily of the
turboprop aircraft being retired by the larger commuter airlines. The Company
has acquired an extensive inventory of aftermarket parts for several popular
commuter turboprop aircraft types
In fiscal 2000, one customer, Spirit Airlines, Inc., accounted for
approximately 11% of the Company's parts sales. Excluding aircraft and engine
sales, in fiscal 2000, no other customer accounted for more than 5% of the
Company's total revenues. Each aircraft or engine sale is unique and the
Company does not rely on previous customers for repeat business. 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's quality assurance system after the completion of an extensive
facilities audit and numerous meetings with the Company's management. 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;
- On-going quality review board meetings conducted by senior management to
oversee the total quality assurance program
GOVERNMENT 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.
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 most of the Company's
non-airline 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, 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 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 the 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.
In August 1997, the Company received accreditation from the ASA.
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") may increase the cost of operating such aircraft and have a material
impact on the market for the Company's products. All stage two 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 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. 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. 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.
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 FAA repair facility signed and dated by a
licensed airframe and/or power plant mechanic or other certified inspector 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.
NSA has been subject to FAA regulation since the commencement of its
business activities. Under the Federal Aviation Act of 1958, as amended, the
FAA is concerned with safety and the regulation of flight operations generally,
including equipment used, ground facilities, maintenance, communications and
other matters. The FAA can suspend or revoke the authority of air carriers or
their licensed personnel for failure to comply with its regulations and can
ground aircraft if questions arise concerning airworthiness. NSA holds all
operating, airworthiness and other FAA certificates that are currently required
for the conduct of its business, although these certificates may be suspended or
revoked for cause.
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 an amount the Company believes is
sufficient. While the Company believes that it has 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. 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. Additionally, there can be no assurance that insurance coverage 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.
NSA has secured public liability and property damage insurance in excess of
minimum amounts required by the United States Department of Transportation. The
Company has also obtained all-risk hull insurance on Company-owned aircraft and
maintains cargo liability insurance.
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 products, 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, Kellstrom Industries Inc., The Memphis Group, Inc. and
AVTEAM, all of which are significantly larger than the Company. Customers in
need of aircraft parts have access, through on-line 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.
NSA operates in highly competitive markets and competes with approximately
50 other contract cargo carriers in the United States. Accurate industry data
is not available to indicate NSA's position within its marketplace, but
management believes that NSA is currently one of the smaller contract carriers.
NSA's competitors, however, typically utilize older generation and less
efficient aircraft, and are not as well capitalized than the Company. Given the
growth in the regional freight and passenger charter markets expected by
management, access to capital will be critical to successfully compete in this
industry.
EMPLOYEES
As of May 31, 2000, the Company had 38 employees. The Company is not a
party to any collective bargaining agreement. The Company believes its
relations with its employees are good.
CAUTIONARY STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Exchange Act, including the plans and objectives of
management for the business, operations and financial performance of the
Company. The forward-looking statements and associated risks set forth in this
Annual Report may include or relate to, among other things, the factors set
forth below, together with other information set forth in this Annual Report.
Risks Associated with Leases. The Company currently leases three Embraer
EMB-120 aircraft and two Pratt & Whitney JT8D series engines. The Company also
owns a 50% interest in a joint venture that leases 20 DC-9-41H aircraft. 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. In addition, the financial return to the Company
from a leased aircraft or engine depends in part 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. 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 development. 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 borrowing, it could result in a
reduction of the Company's liquidity.
Risks Regarding the Company's Inventory. The Company acquires inventory by
purchasing individual parts from airlines, repair facilities or other
redistributors, by purchasing excess inventory from aircraft operators, or by
purchasing aircraft for disassembly. The Company also obtains parts inventory
on consignment from airlines. The Company's business is substantially dependent
on its ability to acquire inventory by one of these methods because its net
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 obtaining a consignment of the inventory on acceptable terms or
purchasing it 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. Any of such factors could result in the Company's inventory being
overvalued and could require the Company to write down its inventory valuations
in order to bring them in line with the revised fair market value. The failure
to identify and acquire inventory in a timely fashion on acceptable terms 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.
Concentration on MD-80 and DC-9 Aircraft. The Company's net sales are
concentrated in the aftermarket for MD-80 and DC-9 aircraft, which aircraft at
December 31, 1998 accounted for approximately 13.2% of the commercial jet
aircraft in service worldwide according to the World Jet Inventory. Neither the
DC-9 nor the MD-80 is still in production. 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 operated in the United States and European Union
will need to be hush-kitted, relocated to other areas or removed from service by
2000 or 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.
Broadening of Product Line. The Company has recently expanded its product
line to include aftermarket parts for Airbus A-300, McDonnell Douglas DC-10,
Boeing 747 aircraft and certain commuter turboprop aircraft including Embraer,
Shorts, Saab, de Havilland, British Aerospace and ATR aircraft. In addition,
the Company intends to broaden further its product line to include parts for
other aircraft that are likely to be converted to freighters, such as Boeing 767
and 757 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.
Effects of the Economy on the Operations of the Company. The Company's
customers include a wide variety of domestic and international air cargo
carriers, major commercial, regional and commuter 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.
Risks Associated with Acquisitions. One of the Company's strategies for
growth is to pursue acquisitions of aftermarket redistributors, small aircraft
leasing companies and regional air carriers. 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 would 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 would 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.
Risks Associated with Air Carrier Operations. The Company's air carrier
subsidiary operates in an industry that typically experiences lower average
margins than the Company's other operations. The Company's ability to operate
its air carrier subsidiary profitably depends on its ability to control costs,
many of which are beyond the Company's control. Examples of costs that the
Company is unable to control are fuel costs, which are affected by political and
economic conditions throughout the world, and the costs of regulatory
compliance. The Company believes that its existing financial resources are
sufficient to permit it to implement its business plan for NSA. However, if the
Company requires additional capital resources to fund the operations of NSA, it
may be unable to obtain them on favorable terms, if at all. The Company's air
carrier operations may also result in demands on the Company's management time
and liquidity that may preclude the Company from pursuing more profitable parts
sales opportunities.
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 Operating Officer. The 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.
ITEM 2. 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 2003. The
Company leases approximately 29,500 square feet of warehouse facilities in Fort
Lauderdale, Florida pursuant to a lease expiring in June 2002. All 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------- -----------------------------------------------------------
None.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
------- -------------------------------------------------------------------
MATTERS.
-------
The Company's Common Stock, which has been publicly traded since April 2,
1990, is listed and traded on the American Stock Exchange under the symbol
"YLF." The following table sets forth the high and low closing prices of the
Common Stock as reported on the American Stock Exchange for each quarter in
fiscal 2000 and 1999.
2000 Fiscal Year High Low
------------------ ---- ---
First Quarter $ 4.625 $ 4.25
Second Quarter 4.4375 3.75
Third Quarter 3.75 3.125
Fourth Quarter 4.5 2.625
1999 Fiscal Year High Low
------------------ ---- ---
First Quarter $ 8.5 $ 5.875
Second Quarter 7.125 3.75
Third Quarter 5.5 3.25
Fourth Quarter 4.625 3.75
At August 10, 2000, there were 105 holders of record of the Company's
Common Stock.
The Company has never paid dividends on the Common Stock. The Company's
secured credit facility prohibits the Company from paying dividends on the
Common Stock as long as indebtedness issued pursuant to such facility remains
outstanding. It unlikely that the Company will pay dividends on the Common
Stock in the foreseeable future.
<PAGE>
------
ITEM 6. SELECTED FINANCIAL DATA.
------- -------------------------
The selected consolidated financial data presented below for, and as of the
end of, each of the fiscal years in the five-year period ended May 31, 2000,
have been derived from the Company's audited consolidated financial statements.
The consolidated financial statements of the Company as of May 31, 1999 and 2000
and for the three-year period ended May 31, 2000 and the accountant's reports
thereon are included in Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1996 1997 1998 1999 2000
--------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
----------------
<S> <C> <C> <C> <C> <C>
Net sales $21,410 $20,123 $25,648 $ 24,344 $ 23,480
Lease and service revenue 1,795 1,109 2,315 3,328 2,724
------ ------ ------ ------ ------
Total revenue 23,205 21,232 27,963 27,672 26,204
Total operating expenses 18,528 17,423 23,186 24,406 24,247
Equity in earnings of joint venture -- -- -- 1,026 1,757
------ ------ ------ ------ ------
Income from continuing operations 4,677 3,809 4,777 4,292 3,714
Interest expense, net 2,377 1,550 1,934 1,302 1,657
------ ------ ------ ------ ------
Earnings before income taxes
and extraordinary item 2,300 2,259 2,843 2,990 2,057
Provision (benefit) for income taxes 14 -- (2,820) 1,036 800
Earnings before extraordinary item 2,286 2,259 5,663 1,954 1,257
Extraordinary loss on extinguishment of debt -- (531) -- -- --
------ ------ ------ ------ ------
Net earnings $ 2,286 $ 1,728 $ 5,663 $ 1,954 $ 1,257
======== ======== ======== =========== ==========
PER SHARE DATA:
-----------------
Earnings per common share - basic
before effect of extraordinary item $ 15.27 $ 1.37 $ 2.29 $ .77 $ .57
Extraordinary item -- (0.32) -- -- --
------ ------ ------ ------ ------
Net earnings $ 15.27 $ 1.05 $ 2.29 $ .77 $ .57
======== ======== ======== =========== ==========
Weighted average shares outstanding used
in basic calculation 149,696 1,646,629 2,471,025 2,550,940 2,189,539
Earnings per common share - diluted before
effect of extraordinary item $ 12.69 $1.25 $2.03 $ .72 $ .55
Extraordinary item -- (0.29) -- -- --
------ ------ ------ ------ ------
Net earnings $ 12.69 $ 0.96 $2.03 $ .72 $ .55
======== ======== ======== =========== ==========
Weighted average shares outstanding used
in diluted calculation 242,288 1,806,938 2,793,414 2,720,513 2,268,472
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AT MAY 31,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----- ----------- ---------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
---------------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $(10,841) $ 9,141 $10,228 $11,524 $13,444
Total assets 16,132 21,287 23,636 23,976 35,183
Total debt 18,144 13,749 9,648 9,594 20,094
Stockholders' equity (deficit) (7,416) 4,660 10,808 11,263 12,468
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------ -----------------------------------------------------------------------
OF OPERATIONS.
--------------
OVERVIEW
The Company is primarily engaged in the sale of aircraft, aircraft parts,
leasing of aircraft and engines and related services. In addition, with the
acquisition of NSA, the Company is engaged in the operation of a small regional
airline. The Company's total revenue includes net parts sales revenue and lease
and service revenue. Net sales revenue includes revenue from individual parts
sales and revenue from aircraft and engine sales. Aircraft and engine sales are
unpredictable transactions, dependent, in part, upon the Company's ability to
purchase an aircraft or engine and resell it within a relatively brief period of
time. In a given period, a substantial portion of the Company's revenue may be
attributable to the sale of aircraft or engines. Cost of sales consists
primarily of inventory, aircraft and engine costs and shipping charges. The
cost of the inventory is determined on a specific identification basis and
inventory is stated at the lower of cost or market. The Company's operating
results are affected by many factors, including the timing of orders from large
customers, the timing of aircraft and engine sales, the timing of expenditures
to purchase parts inventory, aircraft and engines and the mix of parts contained
in the Company's inventory. The Company does not obtain long-term purchase
orders or commitments from its customers.
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 consideration for the sale price, the risk of ownership has
passed to the buyer, and collectibility is reasonably assured. Lease and
service revenue are recognized on an accrual basis, unless collectibility is
uncertain.
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED WITH FISCAL 1999
Net sales decreased by 3.6% from $24.3 million in fiscal 1999 to $23.5
million in fiscal 2000. This decrease was primarily due to a decrease in parts
sales, which was partially offset by an increase in aircraft and engine sales.
During fiscal 2000, the Company sold nine engines as compared to fiscal 1999,
during which the Company sold three engines. Lease and service revenue
decreased 18.1% from $3.2 million in fiscal 1999 to $2.7 million in fiscal 2000,
due primarily to fewer assets being on lease during fiscal 2000. Due primarily
to the decrease in parts sales and lease and service revenue, partially offset
by the increase in aircraft and engine sales, total revenue for fiscal 2000
decreased 5.3% to $26.2 million from $27.7 million for fiscal 1999.
Cost of sales decreased 4.7% from $18.2 million in fiscal 1999 to $17.4
million in fiscal 2000. Cost of sales as a percentage of total revenue
increased from 65.8% in fiscal 1999 to 66.2% in fiscal 2000. The slight
increase in the cost of sales as a percentage of total revenue in fiscal 2000
compared to fiscal 1999 was due primarily to an increase in the cost of parts
sold. As the Company enters into more consignment agreements and sells more
parts on consignment, the Company anticipates that it will incur higher cost of
sales as a percentage of revenues. These higher cost of sales should be
partially offset by lower inventory costs, including interest.
Selling, general and administrative expenses increased 14.7% from $5.1
million in fiscal 1999 to $5.8 million in fiscal 2000. This increase was due to
higher expenses related to legal and professional fees; travel, entertainment,
and marketing expenses; health care costs; and outside commissions as outside
agents were involved in the sale of an aircraft and several engines, partially
offset by lower compensation expenses. Another factor in the increase in
selling, general and administrative expenses was a $173,000 increase in the
Company's provision for doubtful accounts in fiscal 2000 as the Company recorded
no provision for doubtful accounts in fiscal 1999.
Depreciation was $1,147,000 in fiscal 1999 compared to $1,092,000 in fiscal
2000. The net decrease from fiscal 1999 to fiscal 2000 was due primarily to
fewer assets being on lease during fiscal 2000.
Equity in Net Earnings of Unconsolidated Joint Venture for fiscal 1999 was
$1,026,000 compared to $1,757,000 during fiscal 2000. This increase was
primarily due to a full year of earnings in fiscal 2000 versus nine months of
earnings in fiscal 1999, a decrease in the interest expense of the Air 41 Joint
Venture as the debt associated with the acquisition is reduced, and higher
revenue from the re-lease of one of the aircraft.
Interest expense increased 29.9% from $1,315,000 in fiscal 1999 to
$1,708,000 in fiscal 2000. The increase in interest expense resulted from a
higher outstanding average balance as the Company, among other things, financed
the purchase of aircraft held for lease. Furthermore, interest rates increased
during the period. Interest and other income for fiscal 2000 was $51,000
compared to other income of $13,000 in fiscal 1999.
The Company's income tax expense in fiscal 2000 was $800,000 compared to
$1,036,000 in fiscal 1999. Income taxes have been provided at the Company's
estimated effective tax rate of approximately 39% for fiscal 2000 compared to
35% for fiscal 1999.
Net earnings for fiscal 2000 were $1,257,000, or $0.57 per share - basic
and $0.55 per share - diluted, compared to net earnings for fiscal 1999 of
$1,954,000, or $0.77 per share - basic and $0.72 per share - diluted.
In the third quarter of fiscal 1999, the Company began acquiring shares of
its common stock in connection with a stock repurchase program announced in
December 1998. During fiscal 1999, the Company repurchased 467,325 shares of
its common stock at an average price of $4.16. During fiscal 2000, the Company
repurchased 4,200 shares of its common stock at an average price of $4.39.
FISCAL 1999 COMPARED WITH FISCAL 1998
Net sales decreased by 5.1% from $25.6 million in fiscal 1998 to $24.3
million in fiscal 1999. This decrease was primarily due to a decrease in
aircraft and engine sales, which was partially offset by an increase in parts
sales. During fiscal 1999, the Company acquired two aircraft and sold three
aircraft, as compared to fiscal 1998, during which the Company acquired two
aircraft and sold four aircraft. During fiscal 1999, the Company sold three
engines as compared to fiscal 1998, during which the Company sold seven engines.
Lease and service revenue increased to $3.2 million in fiscal 1999 from $2.3
million in fiscal 1998, due primarily to the Company's acquisition and lease of
three spare engines during the first quarter of fiscal 1999. These engines
remain on lease. Due primarily to the decrease in aircraft and engine sales,
partially offset by the increase in parts sales and lease and service revenue,
total revenue for fiscal 1999 decreased 1.0% to $27.7 million from $28.0 million
for fiscal 1998.
Cost of sales increased 8.4% from $16.8 million in fiscal 1998 to $18.2
million in fiscal 1999. Cost of sales as a percentage of total revenue
increased from 60.0% in fiscal 1998 to 65.8% in fiscal 1999. The increase in
the cost of sales as a percentage of total revenue was due primarily to an
increase in the cost of aircraft and engine sales as a percent of revenue in
fiscal 1999 compared to fiscal 1998, as well as an increase in the cost of the
parts sold. As the Company enters into more consignment agreements, the Company
anticipates that it will incur higher cost of sales. These higher cost of sales
should be partially offset by lower inventory costs, including interest.
Selling, general and administrative expenses decreased 5.3% from $5.3
million in fiscal 1998 to $5.1 million in fiscal 1999. This decrease was due
primarily to lower expenses related to compensation, travel and entertainment,
investor relations, and the Company's provision for doubtful accounts.
Depreciation was $1,147,000 in fiscal 1999 compared to $1,060,000 in fiscal
1998. The net increase from fiscal 1998 to fiscal 1999 was due primarily to an
increase in depreciation of engines held for lease, resulting from the engines
acquired in the first quarter of fiscal 1999.
Equity in Net Earnings of Unconsolidated Joint Venture for fiscal 1999 was
$1,026,000 compared to $0 during fiscal 1998. This increase was due to the Air
41 Joint Venture, which was entered into during September 1998.
Interest expense decreased 20.2% from $1,648,000 in fiscal 1998 to
$1,315,000 in fiscal 1999. The reduction in interest expense resulted from a
lower outstanding average balance and a reduction in the interest rate
applicable to the outstanding balance. Interest and other expenses for fiscal
1998 were $286,000 compared to other income of $13,000 in fiscal 1999. Included
in the interest and other expense for fiscal 1998 is $400,000 in expenses
relating to a withdrawn secondary offering.
The Company's income tax benefit for fiscal 1998 was $2.8 million,
primarily due to a reduction in the valuation allowance applied against its
deferred tax assets and the utilization of net operating loss carryforwards.
The Company's income tax expense in fiscal 1999 was $1,036,000. Income taxes
have been provided at the Company's estimated effective tax rate of
approximately 35% 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 income taxes increased from $2,843,000 in fiscal 1998 to
$2,990,000 in fiscal 1999. Earnings for fiscal 1999 were benefited by equity in
net earnings of unconsolidated joint venture, the Air 41 Joint Venture, of
$1,026,000. Net earnings for fiscal 1998 were $5,663,000, or $2.29 per share -
basic and $2.03 per share - diluted, compared to net earnings for fiscal 1999 of
$1,954,000, or $0.77 per share - basic and $0.72 per share - diluted. On a pro
forma basis, adjusted as if the Company had been a full taxpayer in fiscal 1998,
earnings per share - diluted for fiscal 1998 would have been $0.67.
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. During fiscal 1999, the Company repurchased 467,325 shares of its common
stock at an average price of $4.16.
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 several new term loan
facilities and to increase the revolving credit to $14 million (collectively
referred to as the "Credit Facility"). The revolving credit facility matures in
October 2001 and the term loans mature on various dates through October 2001.
The interest rate that the Company is assessed is subject to fluctuation and may
change based upon certain financial covenants. As of May 31, 2000, the interest
rate under the Credit Facility was the lender's base rate (9.50%) minus 0.25%.
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 fiscal years
ended May 31, 1999 and 2000 amounted to $1.3 million and ($971,000),
respectively. For fiscal 1999, the primary use of cash from operating
activities was an increase in accounts receivable offset partially by a decrease
in inventory. For fiscal 2000, the primary use of cash from operating
activities, was an increase in inventories due to the purchase of aircraft,
partially offset by a reduction in the parts inventory.
Net cash provided by (used in) investing activities for fiscal 1999 and
2000 amounted to $834,000 and ($8,695,000), respectively. For fiscal 1999, the
Company received proceeds from the sale of aircraft and engines that had been
held for lease of $5,875,000. The primary use of funds for investing activities
was the Company's investment in the Air 41 Joint Venture of $1,587,000 and
capital expenditures for aircraft and engines of $3,786,000. For fiscal 2000,
the primary use of funds was the purchase of aircraft held for lease.
Net cash provided by (used in) financing activities for fiscal 1999 and
2000 amounted to ($1,713,000) and $9,484,000, respectively. For fiscal 1999,
net of borrowings, the Company prepaid $54,000 under the Credit Facility. The
primary use of cash in financing activities was the purchase of treasury stock
for $1,947,000. The Company received $288,000 in proceeds from employees'
exercise of stock options. For fiscal 2000, net of payments, the Company
borrowed an additional $9.5 million under the Credit Facility.
At May 31, 2000, the Company was permitted to borrow up to an additional
$1.7 million pursuant to the Credit Facility. The Company believes that its
working capital and amounts available under the Credit Facility will be
sufficient to meet the requirements of the Company for the foreseeable future.
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 large orders from
customers, the timing of expenditures to purchase inventory in anticipation of
future sales, the Company's ability to obtain inventory on consignment on
acceptable terms, 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 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 PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS No. 133, as amended by FAS 138,
establishes standards for accounting and reporting for derivative instruments,
and conforms the requirements for treatment of different types of hedging
activities. This statement is effective for all fiscal years beginning after
June 15, 2000. Management does not expect this standard to have a significant
impact on the Company's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------- ----------------------------------------------------------------
The Company's major market risk exposure is to changing interest rates.
The Company's policy is to manage interest rate risk through the use of floating
rate debt instruments. The Company has loans under a Credit Facility totaling
approximately $20.1 million at May 31, 2000. The interest rate on the Credit
Facility, which fluctuates based on certain financial ratios of the Company, was
the lender's prime rate less .25% at May 31, 2000 (9.25%). An immediate
increase of 10% in interest rates would increase the Company's annual interest
expense by approximately $186,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------- -----------------------------------------------
Information with respect to this Item is contained in the Company's
consolidated financial statements and financial statement schedules indicated in
the Index on Page F-1 of this Annual Report on Form 10-K and is incorporated
herein by reference.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- -------------------------------------------------------------------
FINANCIAL DISCLOSURE.
------ --------------
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------- --------------------------------------------------------
The information contained under the heading "Information as to Directors
and Executive Officers" in the Company's definitive proxy statement for its 2000
Annual Meeting of stockholders (the "2000 Proxy Statement") is incorporated by
reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
-------- -----------------------
The information contained under the heading "Executive Compensation" in the
2000 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
-------- --------------------------------------------------------------------
The information contained under the headings "Directors and Executive
Officers" and "Principal Stockholders" in the 2000 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-------- --------------------------------------------------
The information contained under the heading "Executive
Compensation--Certain Transactions" in the 2000 Proxy Statement is incorporated
by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KITEM
-------- ---------------------------------------------------------------------
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
-- -----------------------------------------------------------------------
(a) Financial Statements Page or Method of Filing
(1) Index to Consolidated Financial Statements F-1
(2) Report of Grant Thornton LLP F-2
(3) Consolidated Financial Statements and Notes to Consolidated Financial
Statements of the Company, including Consolidated Balance Sheets as of May 31,
2000 and 1999 and related Consolidated Statements of Earnings, Consolidated Cash
Flows and Consolidated Stockholders' Equity (Deficit) for each of the years in
the three-year period ended May 31, 2000 F-3
(b) Financial Statements Schedules Page or Method of Filing
(1) Schedule II. Valuation and Qualifying Accounts S-1
Schedules not listed above and columns within certain Schedules have been
omitted because of the absence of conditions under which they are required or
because the required material information is included in the Consolidated
Financial Statements or Notes to the Consolidated Financial Statements included
herein.
(c) Exhibits
--------
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION PAGE NUMBER OR METHOD OF FILING
<S> <C> <C>
2.4 Credit Incorporated by reference to Exhibit 2.4 to
Agreement Amendment No. 2 to the Company's Registration
between BNY Statement on Form S-4 filed on August 29, 1996 (File
Financial No. 333-08065).
Corporation
and the
Registrant
(the "Credit
Agreement").
2.5 First
Amendment, Incorporated by Reference.
Waiver and Agreement,
dated as of March 24,
1997, between BNY Financial
Corporation and the
Registrant and related
to the Credit Agreement.
2.6 Second Incorporated by Reference.
Amendment and Agreement,
dated as of September 9,
1997, between BNY Financial
Corporation and the Registrant
and related to the Credit
Agreement.
<PAGE>
2.7 Third
Amendment and Incorporated by Reference.
Agreement, dated as of
October 15, 1997, between
BNY Financial Corporation
and the Registrant
and related to the Credit
Agreement.
2.8 Fourth
Amendment and Incorporated by Reference.
Agreement, dated as of
February 2, 1998, between
BNY Financial Corporation
and the Registrant and
related to the Credit
Agreement.
2.9 Fifth
Amendment, Incorporated by Reference.
dated as of July 16, 1998,
between BNY Financial
Corporation and the
Registrant and related
to the Credit Agreement.
2.10 Sixth
Amendment, Incorporated by Reference
dated as of May 30, 1998,
between BNY Financial
Corporation and the
Registrant and related
to the Credit Agreement.
2.11 Seventh
Amendment, Incorporated by Reference.
dated as of October 28,
1998, between BNY Financial
Corporation and the Registrant
and related to the Credit
Agreement.
3.1 Amended and Incorporated by reference to Exhibit 3.1 to the
Restated Company's Annual Report on Form 10-K for the fiscal
Certificate year ended May 31, 1996 (the "1996 Form 10-K").
of
Incorporation
of the
Registrant.
3.2 Restated and Incorporated by reference to Exhibit 3.2 to the 1996
Amended Form 10-K.
Bylaws of the
Registrant.
4.1 Specimen Incorporated by reference to Exhibit 4.1 to the 1996
Common Stock Form 10-K.
Certificate.
10.1.1 Employment Incorporated by reference to Exhibit 10.1.1 to the
Agreement, 1996 Form 10-K
dated as of
December 1,
1995, between
the
Registrant
and Alexius
A. Dyer III,
as amended on
October 3,
1996.
10.1.2 Employment Incorporated by reference to Exhibit 10.1.2 to the
Agreement Company's Quarterly Report for the quarter ended
dated as of February 28, 1997.
October 3,
1996, between
the
Registrant
and George
Murnane III.
10.2.1 1996 Long- Incorporated by reference to Appendix B to the Proxy
Term Statement/Prospectus included in the Company's
Incentive and Registration Statement on Form S-4 (File
Share Award No. 333-08065), filed on July 12, 1996.
Plan.
16
<PAGE>
10.2.2 401(k) Plan. Incorporated by reference to Exhibit 10-H to the
Company'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 Incorporated by reference to Exhibit 10.2.5 of the
Plan. Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 1993.
10.2.5 Form of Incorporated by reference to Exhibit 10.2.5 to the
Option 1996 Form 10-K.
Certificate
(Employee
Non-Qualified
Stock
Option).
10.2.6 Form of Incorporated by reference to Exhibit 10.2.6 to the
Option 1996 Form 10-K.
Certificate
(Director
Non-Qualified
Stock
Option).
10.2.7 Form of Incorporated by reference to Exhibit 10.2.7 to the
Option 1996 Form 10-K.
Certificate
(Incentive
Stock
Option).
10.14 Commission Incorporated by reference to Exhibit 10.14 to the
Agreement 1996 Form 10-K.
Dated
December 1,
1995 between
the
Registrant
and J.M.
Associates,
Inc.
10.15 Operating Incorporated by reference to Exhibit 10.14 to the
Air41 LLC, Exhibit 10.15 to the 1999 Form 10-K
dated as of
September 9,
1998, by and
between
AirCorp, Inc.
and the
Company
10.16 Office Lease Incorporated by reference to Exhibit 10.17 to the
Agreement 1997 Form 10-K.
dated January
31, 1997
between the
Registrant
and Globe
Corporate
Center, as
amended.
10.17 Lease Incorporated by reference to Exhibit 10.18 to the
Agreement 1997 Form 10-K.
dated March
31, 1997
between the
Registrant
and Port 95-
4, Ltd.
21 Subsidiaries Filed herewith.
23 Consent of Grant Thornton Filed herewith.
27 Financial Filed herewith.
Data
Schedule.
</TABLE>
The Company did not file a Current Report on Form 8-K during the last
quarter of the fiscal year covered by this Annual Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized this 28th day
of August, 2000.
International Airline Support Group, Inc.,
a Delaware corporation
By: /s/ A.A. Dyer III
---------------------------
Alexius A. Dyer III
Chairman of the Board, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ A.A. Dyer III Chairman of the Board, Chief Executive Officer and
----------------------
President and Director
Alexius A. Dyer III (Principal Executive Officer) August 28, 2000
/s/ George Murnane III
---------------------------
George Murnane III Executive Vice President, Chief Operating Officer and
Director August 28, 2000
/s/ James M. Isaacson Chief Financial Officer, Treasurer
--------------------------
James M. Isaacson and Secretary (Principal Financial Officer and
Principal Accounting Officer) August 28, 2000
/s/ F. Dixon McElwee, Jr.
-------------------------------
F. Dixon McElwee, Jr. Director August 28, 2000
/s/ E. James Mueller
-------------------------
E. James Mueller Director August 28, 2000
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of independent certified public accountants F-2
Consolidated balance sheets as of May 31, 2000
and 1999 F-3
Consolidated statements of earnings for the years ended
May 31, 2000, 1999 and 1998 F-4
Consolidated statement of stockholders' equity (deficit)
for the years ended May 31, 2000, 1999 and 1998 F-5
Consolidated statements of cash flows for the years ended
May 31, 2000, 1999 and 1998 F-6
Notes to consolidated financial statements F-8
Schedule II - Valuation and qualifying accounts S-1
<PAGE>
F-2
FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
INTERNATIONAL AIRLINE SUPPORT
GROUP, INC. AND SUBSIDIARIES
MAY 31, 2000, 1999 AND 1998
<PAGE>
F-2
[Letterhead of Grant Thornton LLP]
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
International Airline Support Group, Inc.
We have audited the accompanying consolidated balance sheets of International
Airline Support Group, Inc. and Subsidiaries as of May 31, 2000 and 1999, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years ended May 31, 2000. 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 auditing standards generally accepted
in the United States. 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 Subsidiary as of May 31, 2000 and 1999 and the
consolidated results of its operations and its consolidated cash flows for each
of the three years ended May 31, 2000, in conformity with accounting principles
generally accepted in the United States.
We have also audited Schedule II of International Airline Support Group, Inc.
and Subsidiaries for each of the three years ended May 31, 2000. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
Miami, Florida
July 21, 2000
<PAGE>
The accompanying notes are an integral part of these statements.
F-4
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 721,111 $ 892,283
Accounts receivable, net of
allowance for doubtful accounts
of $172,722 in 2000 and
$342,420 in 1999 2,647,215 2,812,500
Inventories 12,807,512 11,131,059
Deferred tax benefit 1,053,888 1,128,302
Other current assets 583,626 134,274
------- -------
Total current assets 17,813,352 16,098,418
Property and equipment
Aircraft in operations 1,114,919 -
Aircraft and engines held for lease 12,832,298 4,593,854
Leasehold improvements 176,594 157,175
Machinery and equipment 1,074,576 988,983
--------- -------
15,198,387 5,740,012
Less accumulated depreciation 2,263,110 1,734,503
--------- ---------
Property and equipment, net 12,935,277 4,005,509
Other assets
Investment in joint venture 3,860,136 2,373,572
Deferred debt costs, net 228,066 360,406
Deferred tax benefit 345,883 1,071,959
Deposits and other assets - 66,155
- ------
4,434,085 3,872,092
--------- ---------
$ 35,182,714 $ 23,976,019
= ========== = ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of
long-term obligations $ 1,748,642 $ 1,455,600
Accounts payable 1,359,998 2,034,888
Accrued liabilities 1,261,147 1,084,332
--------- ---------
Total current liabilities 4,369,787 4,574,820
Long-term obligations, less current
maturities 18,345,079 8,138,059
Commitments and contingencies - -
Stockholders' equity
Preferred stock - $.001 par
value; authorized 2,000,000 shares;
no shares outstanding in 2000
and 1999, respectively - -
Common stock - $.001 par value;
authorized 20,000,000 shares;
issued and outstanding 2,661,723
and 2,655,723 shares in 2000
and 1999, respectively 2,661 2,655
Additional paid-in capital 13,902,909 13,936,089
Retained earnings (accumulated deficit) 527,769 (728,824)
Common stock in treasury, at cost
- 471,525 and 467,325 shares
in 2000 and 1999, respectively (1,965,491) (1,946,780)
---------- ----------
Total stockholders' equity 12,467,848 11,263,140
$ 35,182,714 $ 23,976,019
= ========== = ==========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Years Ended May 31,
---------------------------------------------
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Revenues
Net sales $ 23,479,801 $ 24,344,083 $ 25,647,782
Lease and service revenue 2,724,365 3,327,859 2,314,830
----------- ---------- ----------
Total revenues 26,204,166 27,671,942 27,962,612
Cost of sales 17,350,142 18,196,982 16,781,517
Selling, general and administrative expenses 5,805,426 5,062,525 5,344,171
Depreciation 1,091,816 1,146,912 1,060,397
--------- --------- ---------
Total costs 24,247,384 24,406,419 23,186,085
Equity in net earnings of unconsolidated
joint venture 1,757,114 1,026,359 -
--------- --------- ----------
Income from operations 3,713,896 4,291,882 4,776,527
Interest expense 1,707,998 1,314,503 1,647,770
Interest and other (income) expense (51,185) (13,082) 286,018
----------- ---------- ----------
Earnings before income taxes 2,057,083 2,990,461 2,842,739
Provision (benefit) for income taxes 800,490 1,036,145 (2,819,933)
----------- ---------- ----------
Net earnings $ 1,256,593 $ 1,954,316 $ 5,662,672
========= ========= =========
Per share data:
Earnings per common share - basic $ .57 $ .77 $ 2.29
Weighted average shares outstanding
used in basic calculation 2,189,539 2,550,940 2,471,025
========= ========= =========
Earnings per common share - diluted $ .55 $ .72 $ 2.03
Weighted average shares outstanding used
in diluted calculation 2,268,472 2,720,513 2,793,414
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
F-7
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Unrealized Retained Common
Common Stock Additional Loss on Earnings Stockin
Number of Par Paid-In Equity (Accumulated Treasury,
Shares Value Capital Security Deficit) at Cost Total
--------- ---------- ------------- ------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1,
1998 2,395,095 $ 2,395 $ 13,003,686 $ - $ (8,345,812) $ - $ 4,660,269
Exercise of stock
options 167,572 167 507,924 - - - 508,091
Unrealized loss on
equity security - - - (22,545) - - (22,545)
Net earnings - - - - 5,662,672 - 5,662,672
--------- ---------- ------------- ------------- ---------- ---------- ------------
Balance at May 31,
1998 2,562,667 2,562 13,511,610 (22,545) (2,683,140) - 10,808,487
Exercise of stock
options 93,056 93 288,394 - - - 288,487
Tax benefit from
exercise of stock
options - - 136,085 - - - 136,085
Repurchase of common
stock - - - - - (1,946,780) (1,946,780)
Sale of equity
security - - - 22,545 - - 22,545
Net earnings - - - - 1,954,316 - 1,954,316
--------- ---------- ------------- ------------- ---------- ---------- ------------
Balance at May 31,
1999 2,655,723 2,655 13,936,089 - (728,824) (1,946,780) 11,263,140
Exercise of stock
options 6,000 6 19,557 - - - 19,563
Repurchase of stock
options - - (52,737) - - - (52,737)
Repurchase of common
stock - - - - - (18,711) (18,711)
Net earnings - - - - 1,256,593 - 1,256,593
--------- ---------- ------------- ------------- ---------- ---------- ------------
Balance at May
31, 2000 $ 2,661,723 $ 2,661 $ 13,902,909 $ - $ 527,769 $ (1,965,491) $ 12,467,848
======= ========== ========== ============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,256,593 $ 1,954,316 $ 5,662,672
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,423,653 1,299,728 1,159,731
Gain on sale of aircraft and engines held for lease (108,611) (865,276) (267,109)
Unrealized loss on equity securities - 22,545 -
Earnings of joint venture (1,757,114) (1,026,359) -
Decrease (increase) in deferred tax benefit 800,490 898,754 (2,890,247)
Decrease (increase) in accounts receivable 91,497 (1,632,740) 374,270
(Increase) decrease in inventories (1,676,453) 613,865 (99,640)
(Increase) decrease in other current assets (449,352) 60,324 (95,833)
Decrease (increase) in other assets 66,155 68,378 220,467
(Decrease) increase in accounts payable and
accrued liabilities (617,418) (60,778) 104,669
-------- ---------- ----------
Net cash (used in) provided by operating activities (970,560) 1,332,757 4,168,980
Cash flows from investing activities:
Distributions received from joint venture 360,000 240,000 -
Cash acquired in acquisition 4,754 - -
Capital expenditures, including aircraft held for lease (10,011,392) (3,786,356) (1,126,085)
Sale (purchase) of investments - 92,194 (114,729)
Investment in joint venture (89,450) (1,587,213) -
Proceeds from sale of aircraft and engines held
for lease 1,176,000 5,875,000 667,000
Purchase stock of Diamond Aviation (125,000) - -
-------- ---------- ----------
Net cash provided by (used in) investing activities (8,685,088) 833,625 (573,814)
Cash flows from financing activities:
Net borrowings (payments) under line of credit 3,866,961 2,047,754 (2,391,856)
Borrowings under term loans 7,300,000 2,576,000 3,100,000
Payments under term loans (1,630,600) (4,677,963) (4,807,347)
Purchase of treasury stock (18,711) (1,946,780) -
Repurchase of stock options (52,737) - -
Proceeds from the exercise of stock options 19,563 288,487 508,091
Increase in deferred debt costs - - (31,376)
-------- --------- -------
Net cash (used in) provided by financing activities 9,484,476 (1,712,502) (3,622,488)
--------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (171,172) 453,880 (27,322)
Cash and cash equivalents at beginning of year 892,283 438,403 465,725
--------- ---------- ----------
Cash and cash equivalents at end of year $ 721,111 $ 892,283 $ 438,403
============= ============= =============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 1,501,503 $ 1,161,687 $ 1,505,630
============= =============== ===============
Income taxes $ 20,000 $ 58,298 $ 139,995
============= =============== ===============
Non-cash investing and financing activities:
Tax benefit resulting from exercise of stock options $ - $ 136,085 $ -
============= =============== ===============
(continued)
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended May 31,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
In May 2000, the Company purchased all of the outstanding stock
of Diamond Aviation for approximately $125,000 in cash and
approximately $880,000 in assumed debt. In conjunction with
this acquisition, the Company recorded the following assets
and liabilities:
Cash $ 4,754
Accounts receivable $ 73,788
Aircraft in operations $ 1,114,919
Accounts payable and accrued expenses $ (114,758)
Debt $ (1,078,703)
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
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 engines and related services. In addition, with the acquisition of
Diamond Aviation (Note B), the Company is engaged in the operation of a small
regional airline. 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, and Embraer EMB-120.
a) Basis of Presentation
-----------------------
The consolidated statements include the accounts of International
Airline Support Group and its wholly-owned subsidiaries. The related entities
are collectively referred to as the ("Company"). All material intercompany
transactions and balances have been eliminated in the consolidation.
b) Cash and Cash Equivalents
----------------------------
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents
c) Inventories
-----------
Inventories are stated at the lower of cost or market. The cost of
aircraft, engines and aircraft parts is determined on a specific identification
basis.
d) Property and Equipment
------------------------
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided for in amounts sufficient to relate the
cost of depreciable assets, less their estimated salvage values, to operations
over their estimated life utilizing straight-line and accelerated methods. The
estimated lives of the depreciable assets range from 3 to 12 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.
Subsequent to May 31, 2000, the Company transferred an aircraft with a
cost of approximately $1.9 million from Aircraft and engines held for lease to
Aircraft in operations.
e) Deferred Debt Costs
---------------------
The deferred debt costs 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 the life
of the respective debt issue. Accumulated amortization at May 31, 2000 and
1999, was $524,083 and $391,743, respectively.
(continued)
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES - Continued
f) Earnings Per Share
--------------------
Basic net earnings per share equals net earnings divided by the
weighted average shares outstanding during the year. The computation of diluted
net earnings per share includes dilutive common stock equivalents in the
weighted average shares outstanding. The reconciliation between the
computations is as follows:
<TABLE>
<CAPTION>
Basic Basic Diluted Diluted
Net Earnings Shares EPS Shares EPS
---------------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
2000 $ 1,256,593 2,189,539 $ .57 2,268,472 $ .55
1999 $ 1,954,316 2,550,940 $ .77 2,720,513 $ .72
1998 $ 5,662,672 2,471,025 $ 2.29 2,793,414 $ 2.03
</TABLE>
Included in diluted shares are common stock equivalents relating to
options of 78,933, 169,573, and 322,389 for 2000, 1999 and 1998, respectively.
g) Revenue Recognition
--------------------
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 consideration for the sales price, the risk of ownership
has passed to the buyer, and collectibility is reasonably assured. Lease and
service revenue are recognized on an accrual basis, unless collectibility is
uncertain.
Included in net sales is revenue from the exchange of parts. This
revenue is recognized when the Company has fulfilled all of its obligations
under the exchange agreement.
h) Employee Benefit Plan
-----------------------
In fiscal 1992, the Company established a contributory 401(K) plan.
The plan is a defined contribution plan covering all eligible employees of the
Company, to which the Company makes certain discretionary matching contributions
based upon the level of its employees' contributions. The amount charged to
earnings in fiscal 2000, 1999 and 1998 was insignificant. The Company does not
provide any health or other benefits to retirees.
i) 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. The carrying value of the debt under the Senior Facility
approximates fair value as it is floating rate debt.
j) 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.
(continued)
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES - Continued
k) 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 and
the disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
l) New Accounting Pronouncement
------------------------------
In June 1998, the FASB issued Statement of Financial Accounting
Standards (FAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." FAS No. 133, as amended by FAS 138, establishes standards for
accounting and reporting for derivative instruments, and conforms the
requirements for treatment of different types of hedging activities. This
statement is effective for all fiscal years beginning after June 15, 2000.
Management does not expect this standard to have a significant impact on the
Company's operations.
m) Business Segment and Geographic Area Information
-----------------------------------------------------
The Company sells aircraft and aircraft parts, and leases aircraft to
foreign and domestic customers. In addition, with the acquisition of Diamond
Aviation (Note B), the Company is engaged in the operation of a small regional
airline. Most of the Company's sales take place on an unsecured basis, and a
majority of the sales are to aircraft operators. The Company's revenues are
derived primarily from customers located in the United States and all of the
Company's long-lived assets are located in the United States. One customer
accounted for 12% of the Company's sales in fiscal 2000 and another customer
accounted for 11% of the Company's sales in fiscal 2000. No customers accounted
for more than 10% of the Company's sales in fiscal 1999 and 1998.
n) Accounting for Stock Based Compensation
-------------------------------------------
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 grant. Thus, no compensation expense is recognized. The Company's
employee stock option plan is accounted for using the intrinsic value method
under APB 25. The Company provides disclosure of certain pro forma information
as if the fair value-based method had been applied in measuring compensation
expense (see Note H).
o) Reclassifications
-----------------
Certain prior period amounts have been reclassified to conform with the current
year presentation.
<PAGE>
NOTE B - ACQUISITION
In April 2000, the Company purchased all of the outstanding stock of
Diamond Aviation, doing business as North-South Airways (North-South), a small
regional airline located in Statesboro, Georgia that operates under an Air
Carrier Certificate under Part 135 of the regulations of the Federal Aviation
Administration. The Company purchased North-South for approximately $125,000 in
cash and approximately $880,000 in assumed debt. The acquisition has been
accounted for as a purchase and accordingly, the assets and liabilities have
been recorded at their estimated fair values at the date of acquisition. No
goodwill was recorded as a result of this acquisition. The results of
operations of Diamond Aviation are included in the accompanying consolidated
statement of earnings as of the date of the acquisition. As the amounts are not
material, the unaudited proforma consolidated results of operations of the
Company as if the acquisition had occurred at the beginning of fiscal 2000 and
1999 are not disclosed.
NOTE C - INVESTMENT IN 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 $1.4 million, which represents a 50% ownership interest.
The Company's Air41 Joint Venture partner is AirCorp, Inc., a privately held
company. The aircraft purchases were financed through the joint venture,
utilizing non-recourse debt to the partners. In connection with this financing,
the Company had to post a $1.5 million letter of credit. The Company and its
joint venture partner are collectively guarantors on the Air41 Joint Venture's
obligation as the lessor of the aircraft. The Air41 Joint Venture is accounted
for under the equity method and the leases are treated as operating leases.
The joint venture partners are 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. In fiscal 2000, one of the
aircraft came off of lease and was then leased to another unrelated party. At
this time, the joint venture has no firm commitment for the other aircraft after
the SAS leases expire. A condensed summary of the joint venture's operations
follows:
As of As of
May 31, 2000 May 31, 1999
--------------- ---------------
Partners' capital accounts $ 7,720,272 $ 4,747,144
=============== ===============
Period from
September 16,
1999 (Date of
of Inception)
Year Ended Through
May 31, 2000 May 31, 2000
--------------- ---------------
Revenues $ 14,475,000 $ 10,200,000
Expenses 10,960,773 8,147,282
---------- ---------
Net earnings $ 3,514,227 $ 2,052,718
================ ================
Included in the Company's consolidated retained earnings is approximately
$2,783,000 relating to the Company's share in the earnings of the Air41 Joint
Venture.
NOTE D - INVENTORIES
Inventories at May 31, 2000 and 1999 consisted of the following:
2000 1999
------------- -------------
Aircraft parts $ 7,382,143 $ 8,679,059
Aircraft and engines
available for sale 5,425,369 2,452,000
--------------- ---------------
$ 12,807,512 $ 11,131,059
================ ===============
NOTE E - LONG-TERM OBLIGATIONS
Long-term obligations at May 31, 2000 and 1999 consisted of the following:
2000 1999
------------ -------------
Senior Secured Revolving
Credit Loans $ 11,009,490 $ 7,053,829
Term Loans 9,084,231 2,539,830
--------- ---------
20,093,721 9,593,659
Less: Current maturities 1,748,642 1,455,600
--------- ---------
$ 18,345,079 $ 8,138,059
================ ===============
In October 1996 the Company entered into a Credit Agreement with the Bank
of New York, which provided for a $3 million term loan (Term Loan-A) 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
on the Credit Facility which fluctuates based on certain financial ratios of the
Company, was the lenders prime rate less .25% (9.25% at May 31, 2000). The
revolving line of credit was increased to $13 million in March 1997 and to $14
million in fiscal 1998. As of May 31, 2000, the available line of credit is
approximately $1.7 million. 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.
During fiscal 1998, the Credit Agreement was amended twice to create two
additional term loan facilities (term loans C and D) in the amounts of $1.5
million and $1.6 million and to add $1 million (for capital expenditures) to the
revolving credit line. The two additional term loans were repaid in full in
fiscal 1998. In fiscal 1999, the Company borrowed an additional $1.8 million on
these additional term loans of which $900,000 was paid prior to end of fiscal
1999.
During fiscal 2000, the Credit Agreement was amended twice to create an
additional term loan facility (term loans E and F) in the amount of $7.3 million
to finance the purchase of three aircraft.
The scheduled maturities of long-term obligations in each of the next four
years until maturity subsequent to May 31, 2000 are as follows: 2001 -
$1,748,642 and 2002 - $18,345,078.
NOTE F - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases warehouse facilities, office space, as well as certain
equipment under long-term operating lease agreements. Rental expense under
these leases for the years ended May 31, 2000, 1999 and 1998 was approximately
$279,000, $286,900 and $280,000, respectively. At May 31, 2000, the future
minimum payments on non-cancellable operating leases are as follows: 2001 -
$287,406, 2002 - $274,061, 2003 - $50,442, and 2004 - $29,425.
The Company currently leases aircraft and engines to customers under
long-term operating lease agreements. In addition to minimum base rentals, the
lease agreements often require additional rent based upon aircraft and engine
usage. The net investment in aircraft and engines held for or leased to
customers was approximately $11,513,000 and $3,749,000 at May 31, 2000 and 1999,
respectively. At May 31, 2000, the future rental income under the long-term
operating leases are as follows: 2001 - $1,344,000, 2002 - $1,263,000, 2003 -
$1,020,000 and 2004 - $510,000.
NOTE G - INCOME TAXES
The provision (benefit) for income taxes for the years ended May 31, 2000,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current provision:
Federal $ - $ 76,138 $ 69,906
State - - -
--------- ----------- ------------
- 76,138 69,906
Deferred provision 800,490 960,007 (2,889,839)
--------- ----------- ------------
$ 800,490 $ 1,036,145 $ (2,819,933)
======= ========= ==========
The tax effect of the Company's temporary differences and carry forwards is
as follows:
2000 1999
----------- -----------
Deferred tax (benefits) - current:
Bad debt reserve (62,000) (129,000)
Inventory capitalization (358,000) (311,000)
Accrued payroll (86,000) (169,000)
Accrued vacation (14,000) (15,000)
Reserve for inventory (534,000) (504,000)
-------- --------
$ (1,054,000) $ (1,128,000)
================= ================
Deferred tax liabilities
(benefits) - non-current:
Air41 Joint Venture $ 281,000 $ 210,000
Depreciation and amortization 3,879,000 513,000
Net operating loss
carryforward - federal (3,923,000) (1,327,000)
Net operating loss
carryforward - state (388,000) (256,000)
Minimum tax credit - federal (222,000) (303,000)
Other, net 27,000 91,000
------ ------
$ (346,000) $ (1,072,000)
============== ================
</TABLE>
NOTE G - INCOME TAXES - Continued
The Company recorded a valuation allowance equal to the amount of the
deferred tax benefits at May 31, 1997. In fiscal 1998, the Company completely
relieved the $2,586,000 valuation allowance as they determined that it was more
likely than not that the Company would recognize the deferred tax benefits based
on the Company's recent earnings history and management's estimate that future
profits will be sufficient to realize these benefits.
The following table summarizes the differences between the Company's
effective tax rate and the statutory federal rate as follows:
2000 1999 1998
------- ------- -------
Statutory federal rate 34.0% 34.0% 34.0%
Tax expense(benefit) from
net operating loss carryforward .7% - (134.2)
State income taxes - 1.7 -
Other 4.2% (1.1) 1.0
------- -------- --------
Effective tax rate 38.9% 34.6% (99.2)%
====== ====== =======
The Company has net operating loss carryforwards for federal tax purposes
of approximately $11.5 million. The net operating losses will expire in years
2010 through 2020. The Company also has a federal minimum tax credit carryover
of approximately $222,000 which may be utilized in future years to the extent
that the regular tax liability exceeds the alternative minimum tax. Certain
provisions of the tax law may limit the net operating loss and credit
carryforwards available for use in any given year in the event of a significant
change in ownership interest.
NOTE H - STOCK OPTIONS
Under the terms of the Company's 1996 Stock Option Plan (the "Plan"), the
Company has 967,782 shares of common stock reserved. As of May 31, 2000,
166,207 shares are available to be issued under the Plan. The exercise price of
all options granted by the Company to the employees equals the market price at
the date of the grant. No compensation expense has been recognized. The
options, other than those issued to the executive officers, vest immediately and
expire 10 years from the date of the grant.
On December 3, 1998, the Company's Board of Directors approved and ratified
the repricing of certain unexercised employee stock options granted under the
Company's stock option plans. As a result, options granted to purchase 131,173
shares of the Company's common stock were repriced from $4.50 - $6.94 per share
to $3.31 per share. The 131,173 shares are reflected in both the granted and
cancelled captions in the accompanying table for fiscal year ending May 31,
1999. The pro forma effect on earnings from this repricing is included in the
pro forma net earnings shown below.
(continued)
NOTE H - STOCK OPTIONS - Continued
Had compensation expense 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
earnings and earnings per share would have been changed to the pro forma amounts
below.
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net earnings
As reported $ 1,256,593 $ 1,954,316 $ 5,662,672
Pro forma $ 1,222,093 $ 1,743,076 $ 5,400,656
Basic earnings per share
As reported $ .57 $ .77 $ 2.29
Pro forma $ .56 $ .68 $ 2.19
Diluted earnings per share
As reported $ .55 $ .72 $ 2.03
Pro forma $ .54 $ .64 $ 1.93
</TABLE>
The above pro forma disclosures may not be representative of the effects on
reported net earnings 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 2000, 1999 and 1998, respectively:
dividend yield of 0.0 percent for all years; expected volatility of 40 percent,
40 percent and 30 percent; risk-free interest rates of 6.50 percent; 5.50
percent and 6.0 percent; and expected holding periods of 4 years.
A summary of the status of the Company's fixed stock options as of May 31,
2000, 1999 and 1998, and changes during the years ending on those dates is as
follows:
<TABLE>
<CAPTION>
May 31, 2000 May 31, 1999 May 31, 1998
----------------- --------------- ---------------
Weighted - Weighted - Weighted -
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ------ ------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 593,154 3.12 563,210 $ 3.42 598,609 $ 2.99
Granted 25,000 3.44 254,173 3.31 137,173 4.82
Exercised (6,000) 3.26 (93,056) 3.10 (167,572) 3.03
Cancelled (82,207) 3.10 (131,173) 4.78 (5,000) 3.00
-------- ------ ------- ------ -------- --------
Outstanding at
end of year 529,947 3.13 593,154 3.12 563,210 3.42
======== ====== ======== ====== ======= =======
Options exercisable
at end of year 447,185 437,174 415,012
Weighted-average
fair value of options
granted during
the year $ 1.38 $ 1.28 $ 1.90
</TABLE>
(continued)
NOTE H - STOCK OPTIONS - Continued
The following information applies to options outstanding at May 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------- -----------------------
Weighted -
Average
Remaining Weighted - Weighted -
Ranges of Contractual Average Average
Exercise Prices Shares Life Exercise Price Shares Exercise Price
----------------- -------- ------------ ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
$2.75 - $3.44 529,947 7.35 years $ 3.13 447,185 $ 3.16
======== =======
</TABLE>
NOTE I - STOCK REPURCHASE
In the third quarter of 1999, the Company began acquiring shares of its
common stock in connection with a stock repurchase program approved by the Board
of Directors in December 1998. During fiscal 2000 and the six months ended May
31, 1999, the Company repurchased 4,200 and 467,325 shares, respectively of its
common stock for a total expenditure of $18,711 and $1,946,780, respectively.
The Company does not currently have a formal plan in place to purchase any
additional shares; however, the Company is authorized by the Board to make
further purchases if deemed to be in the best interests of the Company. Any
such purchases must be also approved by the Company's bank.
NOTE J - RELATED PARTY TRANSACTIONS
Under the commission agreement entered into with the Company during fiscal
1994, an outside director is entitled to 3-4% of revenues generated from sales
to customers brought in by the director plus a fixed monthly fee. The Company
paid the outside director approximately $60,000, $96,000 and $96,000 for the
years ended May 31, 2000, 1999 and 1998. In early fiscal 2001, the Company paid
the outside director an additional $60,000. This agreement can be canceled by
either party at any time.
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 was paid in fiscal 1998. In addition, the Company paid this
director $86,000 during both fiscal 1999 and 1998 for services rendered to the
Company in connection with the identification and evaluation of acquisition
opportunities.
An executive of the Company's partner in the Air41 Joint Venture was also
an executive of one of the Company's significant customers until the fourth
quarter of fiscal 2000. Total sales to this significant customer were
approximately $826,000, $1.6 million, and $2 million in fiscal 2000, 1999, and
1998, respectively. As of May 31, 2000 and 1999, the accounts receivable from
this significant customer was approximately $157,000 and $109,000, respectively.
During fiscal 1999, the Company purchased three engines from the Company's joint
venture partner for $3,120,000.
(continued)
NOTE J - RELATED PARTY TRANSACTIONS - Continued
An executive officer of the Company is a member of the Board of Directors
of one of the Company's customers. The Company both purchases and sells
inventory to this customer. Total sales to this customer were $80,000, $33,847
and $0 in fiscal 2000, 1999 and 1998, respectively. As of May 31, 2000 and
1999, the accounts receivable from this customer was approximately $20,000 and
$69,000, respectively. Total purchases from this customer were approximately
$1.6 million, $1.2 million and $0 in fiscal 2000, 1999 and 1998, respectively.
In fiscal 1999, the Company received $250,000 of consulting income from this
customer. As of May 31, 2000 and 1999, the Company has a payable to this
customer of $104,288 and $756,049, respectively.
NOTE K - FOURTH QUARTER ADJUSTMENTS
In fiscal 1998, the Company recorded a fourth quarter tax benefit of
approximately $1,100,000 as a result of adjusting the Company's estimated
deferred tax assets.
NOTE L - ACCRUED LIABILITIES
Accrued liabilities at May 31, 2000 and 1999 consisted of the following
items:
2000 1999
----------- -----------
Customer deposits $ 189,554 $ 350,097
Accrued payroll 555,101 597,442
Accrued property taxes 88,795 48,214
Other 427,697 88,579
------- ------
$ 1,261,147 $ 1,084,332
=============== ===============
NOTE M - EMPLOYMENT AGREEMENTS
In October 1996, the Company entered into employment agreements with two of
its executive officers with a term of five years. The agreements provide the
officers with a certain minimum annual salary plus bonus. The agreements
provide the officers with an option to terminate their agreements and receive a
lump sum payment equal to the officer's average annual compensation paid by the
Company for the most recent two years upon a change in control of the Company.
<PAGE>
NOTE N - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Year Quarter Quarter Quarter Quarter Total
--------------- ---------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(In Thousands, Except for Per Share Information)
2000
----
Revenues $ 8,999 $ 6,207 $ 5,359 $ 5,639 $ 26,204
Operating income 1,297 1,118 622 677 3,714
Net earnings available
for common shareholders 597 454 116 90 1,257
Earnings per share - basic .27 .21 .05 .04 .57
Earnings per share - diluted .25 .20 .05 .04 .55*
1999
----
Revenues $ 5,575 $ 5,836 $ 5,729 $ 10,532 $ 27,672
Operating income 1,017 1,226 1,246 803 4,292
Net earnings available
for common shareholders 442 539 555 418 1,954
Earnings per share - basic .17 .21 .22 .17 .77
Earnings per share - diluted .16 .20 .21 .15 .72
</TABLE>
* Difference of $.01 from statement of earnings for fiscal 2000 full year
due to use of the average quarterly stock prices in the quarterly earnings per
share - diluted calculations, while the fiscal 2000 full year earnings per share
- diluted calculation uses the average yearly stock price.
<TABLE>
<CAPTION>
S-1
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1998, 1999 AND 2000
<S> <C> <C> <C> <C>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
----------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
----------- ----------- ----------- ---------- ----------
Year ended May 31, 1998
-----------------------
Reserves deducted from assets to which they apply:
Allowance for possible losses on accounts receivable $ 610,476 $ 74,648 $ 171,124(a) $ 514,000
========== ========== ========== ==========
Inventory obsolescense reserve $ 210,847 $ 752,717 $ - $ 963,564
========== ========== ========== ==========
Year ended May 31, 1999
-----------------------
Reserves deducted from assets to which they apply:
Allowance for possible losses on accounts receivable $ 514,000 $ - $ 171,580(a) $ 342,420
========== ========== =========== ==========
Inventory obsolescense reserve $ 963,564 $ 376,000 $ - $1,339,564
========== ========== =========== ==========
Year ended May 31, 2000
-----------------------
Reserves deducted from assets to which they apply:
Allowance for possible losses on accounts receivable $ 342,420 $ 172,893 $ 342,591(a) $ 172,722
========== ========== ========== ==========
Inventory obsolescense reserve $1,339,564 $ 107,518 $ - $1,447,082
========== ========== ========== ==========
(a) Write-off of accounts receivable against the reserve.
</TABLE>
Atlanta-1854286 v1-8/26/00 11:54 AM
Atlanta-1854286 v1-8/26/00 11:54 AM
EXHIBIT 21
LIST OF SUBSIDIARIES
--------------------
ISAG - Virgin Islands, Inc. United States Virgin
Islands
Diamond Aviation, Inc. Georgia
d/b/a North-South Airways
North-South Airways, Inc. Delaware
EXHIBIT 23
AUDITOR'S CONSENT
We have issued our report dated July 21, 2000, accompanying the
consolidated financial statements and schedule appearing in the Annual Report of
International Airline Support Group, Inc. and Subsidiaries on Form 10-K for the
year ended May 31, 2000. We hereby consent to the incorporation by reference of
the aforementioned report in the Registration Statements of International
Airline Support Group, Inc. and Subsidiaries on Forms S-8 (Registration Nos.
333-13979, 333-41231 and 333-90523).
/s/ Grant Thornton LLP
Miami, Florida
August 28, 2000
