SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended MAY 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to
_______________________
Commission File Number 0-18352
INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 59-2223025
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
1954 Airport Road, Suite 200,
Atlanta, Georgia 30341
(Address of principal executive offices) (Zip Code)
(770) 455-7575
(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
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 12, 1997, the aggregate market value of common stock held
by non-affiliates of the Registrant was approximately $19,415,203.50.
The number of shares of the Registrant's Common Stock outstanding
as of August 12, 1997 was 2,395,095.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of
Stockholders to be held on September 22, 1997 are incorporated by reference in
Parts III and IV.
INTERNATIONAL AIRLINE SUPPORT GROUP INC.
ANNUAL REPORT OF FORM 10-K
FOR THE YEAR ENDED MAY 31, 1997
TABLE OF CONTENTS
PAGE
PART I............................................................1
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II...........................................................8
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters........................................8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations 10
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accountingand Financial Disclosure..................14
PART III.........................................................15
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................15
Item 13. Certain Relationships and Related Transactions 15
PART IV..........................................................16
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................16
SIGNATURES.......................................................19
[THIS PAGE INTENTIONALLY LEFT BLANK]
PART I
ITEM 1. BUSINESS.
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS ARE
BASED ON CURRENT EXPECTATIONS. THESE STATEMENTS ARE FORWARD LOOKING IN NATURE
AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER
MATERIALLY. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY ARE THE FOLLOWING: BUSINESS CONDITIONS AND THE GENERAL ECONOMY,
COMPETITIVE FACTORS SUCH AS THE DEMAND FOR OLDER AIRCRAFT, THE COMPANY'S
ABILITY TO MAINTAIN INVENTORY THAT MEETS APPLICABLE REGULATORY STANDARDS AND
CLIENT DEMAND, THE AVAILABILITY OF NEW PARTS AND GENERAL RISKS OF INVENTORY
OBSOLESCENCE, THE ONGOING TREND FOR CUSTOMERS TO USE FEWER SUPPLIERS CAUSING A
LOSS OF CUSTOMERS, THE LOSS OF A PRINCIPAL CUSTOMER IN A GIVEN PERIOD IF THE
COMPANY IS UNABLE TO REPLACE SALES TO SUCH CUSTOMER AND THE OTHER RISK FACTORS
DESCRIBED IN THE COMPANY'S REPORTS FILED FROM TIME TO TIME WITH THE SECURITIES
AND EXCHANGE COMMISSION. THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE
UNDUE RELIANCE ON ANY SUCH FORWARD LOOKING STATEMENTS, WHICH STATEMENTS ARE
MADE PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND, AS
SUCH, SPEAK ONLY AS OF THE DATE MADE.
General
International Airline Support Group, Inc. (the "Company") is a
worldwide supplier of spare parts to the aviation redistribution market. The
Company sells spare parts to major commercial passenger airlines, air cargo
carriers, maintenance and repair facilities and other redistributors. The
parts sold by the Company include avionics, rotable and expendable airframe and
engine components for commercial aircraft, including Airbus, Boeing and
McDonnell-Douglas aircraft and Pratt & Whitney and Rolls-Royce jet engines.
During the year ended May 31, 1997 ("fiscal 1997"), the Company supplied parts
to over 671 customers worldwide, 625 of whom were domestic customers and 46 of
whom were foreign customers. Currently, the Company specializes in replacement
parts for McDonnell-Douglas MD-80 and DC-9 aircraft. Management believes that
the Company has one of the most extensive inventories of aftermarket MD-80 and
DC-9 parts in the industry.
The Company became a supplier of aircraft parts in the early 1980s
by parting out Douglas DC-8 aircraft and reselling the resulting spare parts.
Based upon the Company's success in parting out DC-8 aircraft, which was last
produced in 1982, the Company began purchasing and parting out DC-9 aircraft in
1991. Production of DC-9 aircraft ceased in 1982. The DC-8 and DC-9 aircraft
have life expectancies that have exceeded the manufacturer's original
estimates. Beginning in 1992, the Company began purchasing and parting out
Boeing 727 aircraft. The Company has acquired thirty-eight DC-8, eight DC-9,
and six Boeing 727 aircraft for parting out since beginning operations. In
addition, the Company purchased the original testbed MD-80 from McDonnell-
Douglas and parted it out. The Company's extensive inventory of DC-9 parts
also enables it to sell parts to operators of the MD-80 because a substantial
number of DC-9 parts may be used on the MD-80.
The Company believes that the annual worldwide market for aircraft
spare parts is approximately $10 billion, of which approximately $1.3 billion
represents sales of aircraft spare parts to the redistribution market and that
the Company's sales represented approximately 2% of such market during fiscal
1997. The redistribution market is highly fragmented, with a limited number of
large, well capitalized companies selling a broad range of aircraft spare
parts, and numerous smaller competitors serving distinct market niches. The
Company believes that significant trends affecting the redistribution market
will continue to increase its overall size while reducing the number of
competitors. Factors causing the expansion of the redistribution market
include the increasing size and age of the world-wide airline fleet and the
increasing pressures on airlines and maintenance and repair facilities to
control their costs.
COMPANY STRATEGY
The Company's operating strategy has two components. First, the
Company intends to increase its revenues and operating income through continued
customer penetration in its existing markets and expansion into new markets.
The Company intends to achieve this by continuing to increase its share of the
market for spare parts for certain widely operated aircraft models, including,
in particular, the DC-9 and the MD-80. Although the DC-9 is no longer in
production, many of the DC-9's parts are interchangeable with the MD-80, which,
given the Company's experience and knowledge with the DC-9, gives it a
competitive advantage. The Company intends to capitalize on the limited
availability of spare parts for such aircraft models by acquiring (i) pools of
inventory from airlines that cease to operate such aircraft or that desire to
reduce their levels of parts inventory and (ii) aircraft for parting out when
the purchase price justifies doing so. In this regard, the Company purchased an
inventory of MD-80 parts from an airline in December 1996 for total
consideration of approximately $1.4 million. This inventory became available
following the airline's decision to eliminate the MD-80 aircraft type from its
fleet. The Company believes that its knowledge of the fleets of DC-9 and MD-80
aircraft currently in operation and its worldwide contacts in the commercial
aviation industry will permit it to acquire other inventory pools and aircraft
for parting out on favorable terms in the future.
The second component of the Company's operating strategy is to
achieve revenue and earnings growth by acquiring other companies engaged in the
sale of aircraft parts as well as companies with product lines that would
complement the Company's existing redistribution business. The Company
competes in a fragmented market in which numerous small companies serve
distinct market niches. The Company believes that small aircraft parts
redistributors, many of which are family owned and capital constrained, are
unable to provide the extensive inventory and quality control necessary to
comply with applicable regulatory and customer requirements and will provide
acquisition opportunities for the Company. The Company believes that such
acquisitions will permit it to expand its customer base by selling aircraft
parts to airlines and others that are not now customers, to expand its product
line with respect to aircraft in which the Company currently specializes, to
strengthen its relationships with existing customers and to expand the types of
aircraft in which the Company specializes.
INDUSTRY OVERVIEW
GENERAL. The Company believes that the world-wide aircraft fleet
is both growing and getting older. The World Jet Airplane Inventory for
calendar 1996 estimated that the combined aircraft fleets of aircraft operators
throughout the world at December 31, 1996 consisted of 12,814 jet aircraft, the
average age of which was 13.5 years. A significant number of the spare parts
used in these aircraft are supplied by different types of companies, including
original equipment manufacturers ("OEMs") and numerous redistributors, such as
the Company, fixed-base operators, FAA-certified overhaul facilities, traders
and brokers. Management believes that the fragmented nature of the aircraft
spare parts industry creates opportunities for small well-capitalized and
financed companies with proven infrastructures to exploit niche markets in
certain types of aircraft, such as the DC-9 and MD-80.
From time to time economic factors prompt many airlines to defer
aircraft procurement programs and extend the useful life of older equipment.
Currently, many aircraft operators are (i) operating under deferred delivery
schedules for new aircraft, pursuant to which they accept new aircraft for
delivery but at a slower pace than originally ordered, and (ii) retaining their
older aircraft. As a result, the worldwide jet aircraft fleet is both growing
and increasing in age. Certain U.S. and European operators have implemented
measures such as the installation of FAA-approved hush kits and extended-life
maintenance programs to extend the useful lives of older aircraft in their
fleets. In addition, many foreign and domestic start-up aircraft operators are
establishing their fleets through the acquisition of less expensive second-
generation aircraft even though such older aircraft typically require more
maintenance and replacement parts than new aircraft.
During the last several years, several start-up, low-cost airlines
using DC-9s and/or MD-80s, including ValuJet Airlines, Inc. ("ValuJet"), Spirit
Airlines and Reno Air, emerged as a result of the deregulation of the aircraft
industry and the availability of low-cost aircraft. The start-up airlines
generally offer service on specific high-traffic, short-haul routes rather than
attempting to compete with the extensive hub-and-spoke systems used by the
major carriers to obtain long-haul traffic. Second generation aircraft (such
as the DC-9) are able to operate profitably on these high-traffic, short-haul
routes. The emergence of these airlines has enhanced the value of the
Company's existing inventory because, in order to assure reliable operations,
such airlines need to maintain a minimum supply of spare parts or establish
relationships with spare parts suppliers. Because of the Company's position as
a primary source of DC-9 and MD-80 spare parts and because these airlines
generally lack the resources to maintain extensive supplies of spare parts, the
Company believes that it will continue to be an active parts supplier for such
airlines.
In addition to the growth in the number of older aircraft in
service, cost and availability considerations are causing airlines to reduce
the size of their spare parts inventories and, therefore, to utilize aircraft
spare parts sold by redistributors to provide parts that are no longer in
production. As airlines adopt just-in-time inventory procurement processes,
inventory storage and handling devolves to suppliers such as the Company, thus
increasing the percentage of parts sold by redistributors relative to those
sold by parts manufacturers. Furthermore, in order to reduce purchasing costs,
airlines have been reducing the number of "approved" suppliers.
As a result of these supplier reductions, there has been and the
Company believes there will continue to be a consolidation in the
redistribution market even as the redistribution market is expected to grow.
The Company believes that only those redistributors with extensive inventories,
adequate capital and the ability to comply with applicable regulatory and
customer requirements regarding part quality and traceability will be able to
capitalize on these trends. The Company currently maintains an inventory of
over 52,790 line items consisting of more than 560,138 parts, which the Company
believes will enhance its ability to respond well to such market trends.
AVAILABILITY OF REPLACEMENT PARTS. Aircraft and parts
manufacturers typically provide their customers with replacement parts
throughout the production life of the aircraft. Other sources for new aircraft
parts include authorized subcontractors for the OEMs, new parts distributors
and aircraft operators with excess inventories. Once an aircraft is no longer
in production, a manufacturer will continue to supply spare parts to its
customers for an extended period of time, which varies among aircraft types.
However, manufacturers generally have no obligation to supply or maintain parts
for an aircraft operator that was not the original purchaser of the aircraft.
As OEMs cease manufacturing replacement parts, and as other sources
of new parts become increasingly scarce, aircraft operators must locate
alternative sources for quality aftermarket parts to maintain the reliable
operation of their aircraft. Often, aircraft operators will opt for quality
aftermarket parts even when new parts are still in production. Aftermarket
aircraft parts must meet the same FAA standards as new parts but generally cost
less than new parts, and are often more readily available.
NOISE ABATEMENT REGULATIONS. The FAA classifies aircraft in three
groups, Stage 1, Stage 2 and Stage 3, in order of decreasing noise
characteristics. In 1980 the FAA adopted a rule prohibiting the operation of
Stage 1 aircraft in or to the United States. In response to a Congressional
requirement, the FAA submitted a report to Congress in April 1986 which
presented various approaches to encourage or require the replacement of Stage 2
aircraft with Stage 3 aircraft. The FAA noise abatement regulations that were
adopted require aircraft operators to phase out their noisier aircraft
gradually by either replacing them with quieter Stage 3 aircraft or equipping
them with hush kits to comply with noise abatement regulations according to the
following schedule: by December 31, 1994, each aircraft operator was required
either to reduce the number of Stage 2 aircraft it operated by 25% or operate a
fleet composed of not less than 55% Stage 3 aircraft; by December 31, 1996,
each aircraft operator must either reduce its Stage 2 aircraft by 50% or
operate a fleet composed of not less than 65% Stage 3 aircraft; by December 31,
1998 at least 75% of an aircraft operator's Stage 2 aircraft must be
eliminated, or its overall fleet must be composed of 75% Stage 3 aircraft; and
by December 31, 1999, 100% of the fleet must be composed of Stage 3 aircraft,
subject to certain waivers.
OPERATIONS OF THE COMPANY
INVENTORY ACQUISITION. The Company obtains most of its parts
inventory by purchasing excess inventory from aircraft operators or by
purchasing aircraft for parting out. 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. A number of factors influence the relative importance to
the Company during a particular fiscal year of the two principal sources of
inventory. For example, several low-cost airlines commenced operations during
fiscal 1994 through 1996. During this period, the Company competed for
aircraft with such airlines, which often use narrow-body aircraft such as the
DC-9. Opportunities to purchase part-out aircraft during this period were
curtailed by such competition, which caused the sales prices for such aircraft
to increase. The Company acquires aircraft for parting out if its initial
estimate of the timing and value of parts sales for such aircraft would allow
the Company to recover the purchase price within 180 days through the sale of a
portion of the parts, and to sell the remaining parts for amounts in excess of
the purchase price over the subsequent five years. More recently, the growth
of low-cost airlines has slowed, creating more opportunities for the Company to
acquire aircraft at part-out prices.
The purchase and dismantling of an aircraft and the resale of the
dismantled parts for use on other aircraft is commonly called "parting out."
When the Company acquires an aircraft for parting out, the aircraft is
delivered to an inventory storage facility. The aircraft is then removed from
the U.S. registry. The seller of the aircraft will often provide the Company
with a computerized data base listing all the parts and equipment on the
aircraft which is verified by the Company. If a computerized listing of parts
is not available, the Company will conduct its own inventory of the aircraft to
be parted out. The parts and equipment are catalogued and all the relevant
information regarding the parts, including each part's repair history, is
entered into the Company's computer database. Management believes that it is
essential that such information be immediately available in order to facilitate
sales by the Company's sales personnel. In certain instances, parts which are
in high demand are pre-sold prior to the delivery of the aircraft to the
Company. High value parts such as engines and engine components are also often
pre-sold. Pre-selling allows the Company to recover a significant amount of
its investment within a short time from the date of the aircraft delivery.
An aircraft purchased for parting out is often in the same
condition as the aircraft that will utilize the spare parts. Sellers are
usually motivated to dispose of their aircraft at part out prices for a variety
of reasons, including the seller's need for immediate liquidity or inability to
economically lease the aircraft to third parties. Additionally, such aircraft
may require extensive maintenance or overhaul or may require government-
mandated improvements which are uneconomical for the seller to perform.
In addition to purchasing whole aircraft, the Company also acquires
spare parts by bidding on the inventory of companies that are eliminating
certain portions of their spare parts inventories due to the retirement of an
aircraft type from their fleets, inventory reduction programs to reduce costs,
the downsizing of their operations or the dissolution of their businesses as a
whole. Major passenger carriers may eliminate a type of aircraft to simplify
maintenance of their fleet, to achieve other operational efficiencies or to
reduce carrying costs attributable to inventory.
Modern aircraft design emphasizes the use of components that may be
reused repeatedly after inspection and overhaul. Because of the reusable
nature of such "rotable" parts, sales of rotable parts offer greater profit
potential than the nonreusable "consumable" parts. Vendors offer rotable parts
in different conditions, designated by industry standards. A component may be
sold in "serviceable" condition, meaning that the unit may be installed on an
aircraft without further inspection. "As removed - not for failure" designates
a component that was removed from an aircraft for some reason other than
malfunction and may be reinstalled after inspection. The remaining condition,
"unserviceable," designates the need for the part to be overhauled prior to
inspection and installation. The FAA requires rotable and other spare parts to
be inspected at FAA-certified repair facilities prior to installation on an
aircraft. However, the FAA does not prohibit the sale of aftermarket parts
that have not been inspected and certified.
PRODUCT LINES. Historically, the Company maintained a large
inventory of aftermarket parts for the DC-8 aircraft. The DC-8, an early model
Stage 1 aircraft, has not been produced since 1982. The FAA's enactment of
noise abatement restrictions in 1980 grounded all DC-8s powered by JT3 and JT4
class engines in use in the United States and required such aircraft to be
refitted with modern, quieter engines. Because of the expense involved in
installing new engines, the use of DC-8 aircraft in the United States declined.
Certain devices known as "hush kits" were invented in order to bring the JT3
engines within acceptable noise limits. In late 1985, the FAA approved the
first hush kit for certain JT3 engines and an additional hush kit was approved
for other JT3 engines in 1987. The effect of these changes was to create new
demand for DC-8 parts because a DC-8 equipped with a hush kit is among the
lowest cost aircraft to operate per ton mile. Accordingly, the Company
believes that the DC-8s will continue to be used by freight carriers and other
operators and that the sale of DC-8 parts will continue to be a source of
revenues in the foreseeable future. However, it is expected that sales of DC-8
parts will continue to decline in correspondence with the decrease of DC-8s in
operation.
Because of the limited number of DC-8s in operation, the Company
began expanding its inventory to include parts for Stage 2 aircraft, such as
the DC-9 aircraft. Currently, the Company specializes in replacement parts for
MD-80 and DC-9 aircraft. The noise abatement regulations issued by the FAA
require aircraft operators to phase out their noisier Stage 2 jets by the year
2000 unless they are retrofitted with hush kits to bring them into compliance
with the Stage 3 noise requirements. The Company believes that retrofitting
with hush kits as well as the extended life maintenance programs instituted by
many aircraft operators will increase the useful life of DC-9s. In addition to
the Company's inventory of McDonnell Douglas DC-8, DC-9 and MD-80 parts, the
Company's inventory also includes spare parts for the Boeing 727, 737, and 747
aircraft and the Lockheed L1011 aircraft and for the Pratt & Whitney JT-8D
engine series.
MARKETING. The Company has developed a sales and marketing
infrastructure which includes well-trained and knowledgeable sales personnel,
computerized inventory management, listing of parts in electronic industry data
bank catalogues and a home page on the Internet. Crucial to the successful
marketing of the Company's inventory is the Company's ability to make timely
delivery of spare parts in reliable condition. The Company believes aircraft
operators are more sensitive to reliability and timeliness than price.
Market forces establish the price for aftermarket aircraft parts.
No pricing service or catalogue exists for aftermarket components. Aftermarket
aircraft parts prices are determined by referencing new parts catalogues with
consideration given to existing supply and demand conditions. Often, aircraft
operators will opt for quality aftermarket parts even when new parts are still
in production. Aftermarket aircraft parts that meet the same FAA standards as
new parts cost less than the same new parts and are often more readily
available.
In addition to directly marketing its inventory, the Company lists
its inventory in the Air Transport Association's computerized data bank
("AIRS") and with the Inventory Locator Service ("ILS"), a proprietary
computerized data bank. Both of these data bases are 24 hour electronic
"marketplaces" where aircraft parts transactions take place.
CUSTOMERS
GENERAL. The Company's customer base includes major passenger and
cargo operators, smaller aircraft operators, overhaul facilities, FAA-certified
repair facilities and other redistributors who may in turn resell to end users.
Management believes that its customer relationships are important to the
Company's operational success. The Company has established relationships with
many domestic and foreign aircraft operators and maintains an adequate level of
inventory in order to service such customers in a timely manner. Management
believes that availability and timely delivery of quality spare parts are the
primary factors considered by customers when making a spare parts purchase
decision. The low-cost, start-up airlines and cargo airlines are among the
Company's principal customers. The low-cost, start-up airlines are important
customers because the Company is the primary source of spare parts for the MD-
80 and DC-9 model aircraft, which are favored by such airlines, and because
such airlines lack the resources to maintain extensive supplies of spare parts.
The cargo airlines are important customers because the fleets of such airlines
consist of older aircraft of the type for which the Company maintains an
extensive inventory of parts and because such airlines typically do not
maintain extensive supplies of spare parts.
In addition to selling parts, the Company also sells entire
aircraft from time to time. In a given period, a substantial portion of the
Company's revenues may be attributable to the sale of aircraft. Such sales are
unpredictable transactions, dependent, in part, upon the Company's ability to
purchase an aircraft and resell it within a relatively brief period of time.
The revenues from the sale of aircraft during a given period may result in the
purchaser of the aircraft being considered a major customer of the Company for
that period. The Company does not expect to make repeat aircraft sales to a
given customer; therefore, changes in the identity of major customers are
frequently due to the occurrence of aircraft sales.
MAJOR CUSTOMERS. In fiscal 1997, no customer accounted for 10% or
more of the Company's revenues. The Company believes that it has no customer,
the loss of which would have a material adverse effect on the Company's
business, results of operations and financial condition.
GEOGRAPHIC DISTRIBUTION OF CUSTOMERS. The Company sells aircraft
and aircraft parts and leases aircraft to foreign and domestic customers. The
Notes to the Consolidated Financial Statements of the Company, which are set
forth elsewhere in this Annual Report on Form 10-K, provide certain information
with respect to the geographic areas in which the Company has derived revenue
during the three fiscal years ended on May 31, 1997.
ADDITIONAL SERVICES
AIRCRAFT AND ENGINE SALES AND LEASING. The Company has determined
that its spare parts sales opportunities are enhanced by providing its existing
and new customers with whole aircraft and engines through sale transactions.
Such transactions allow the Company to expand its customer base for spare parts
and to reduce the cost basis in its aircraft. The Company currently owns five
aircraft, three of which are subject to leases expiring in the first quarter of
calendar year 1999. The Company expects to continue to broker sales of
aircraft and engines when opportunities to do so arise.
EXCHANGE TRANSACTIONS. An "exchange transaction" generally involves
a high value, high turnover rotable part which an operator frequently replaces
when performing aircraft maintenance. In an exchange transaction, a customer
typically pays an exchange fee and returns a "core" unit to the Company within
14 days. A "core" unit is the same part which is being delivered to the
customer by the Company, but in need of overhaul. The Company has the
customer's core unit overhauled and bills the customer for the overhaul charges
and retains the overhauled core unit in its inventory. The Company continues
to emphasize exchange transactions because they are profitable and ensure that
scarce parts remain in stock for future sales.
GOVERNMENT REGULATION
The aviation industry is highly regulated in the United States by
the FAA and in other countries by similar agencies. While the Company's
business is not regulated, the aircraft spare parts which it sells to its
customers must be accompanied by documentation that enables the customer to
comply with applicable regulatory requirements. There can be no assurance that
new and more stringent government regulations will not be adopted in the future
or that any such new regulations, if enacted, would not have an adverse impact
on the Company.
PRODUCT LIABILITY
The Company's business exposes it to possible claims for personal
injury or death which may result from the failure of an aircraft spare part
sold by it. In this regard, the Company maintains liability insurance in the
amount of $10 million. While the Company maintains what it believes to be
adequate liability insurance to protect it from such claims, and while no
lawsuit has ever been filed against the Company based upon a products liability
theory, no assurance can be given that claims will not arise in the future or
that such insurance coverage will be adequate. Additionally, there can be no
assurance that insurance coverages can be maintained in the future at an
acceptable cost. Any such liability not covered by insurance could have a
material adverse effect on the financial condition of the Company.
COMPETITION
The aircraft spare parts redistribution market is highly
fragmented. Customers in need of aircraft parts have access, through computer-
generated inventory catalogues, to a broad array of suppliers, including
aircraft manufacturers, airlines and aircraft service companies. The dominant
companies in the aircraft parts aftermarket are AAR Corp., The AGES Group,
Aviation Sales Company and Banner Aerospace, Inc. These companies are larger
than the Company and have greater financial resources. The Company also
competes with numerous smaller, independent dealers, which generally
participate in niche markets. Competition in the redistribution market is
generally based on price, availability and quality of product, including
traceability.
EMPLOYEES
As of August 12, 1997, the Company had 25 employees. The Company
is not a party to any collective bargaining agreement. The Company believes
its relations with its employees are good.
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 2000.
The Company leases approximately 29,500 square feet of warehouse facilities in
Fort Lauderdale, Florida pursuant to a lease expiring in March 2002. The
Company consummated the sale of its previous corporate offices and adjacent
warehouse in March 1997.
The Company's property, as well as substantially all the other
assets of the Company, are subject to the lien securing amounts advanced
pursuant to the Company's secured credit facility.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not now a party to any litigation or other legal
proceeding. The Company may become a defendant in legal proceedings in the
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this Annual Report on
Form 10-K.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock has been publicly traded since April 2,
1990. Prior to April 21, 1997, sales of the Common Stock were reported through
the National Quotation Bureau's National Daily Quotation Price Sheets.
Effective April 21, 1997 the Common Stock was listed and traded on the American
Stock Exchange under the symbol "YLF." The following table sets forth the high
and low bid quotations as reported by the National Quotation Bureau from
June 1, 1995 through April 18, 1997 and the high and low closing prices of the
Common Stock as reported on the American Stock Exchange thereafter, in each
case, as adjusted to give effect to a 1-for-27 reverse stock split consummated
on October 3, 1996.
1996 FISCAL YEAR
HIGH LOW
-------- --------
First Quarter $ 11 13/16 $ 7 19/32
Second Quarter 7 19/32 4 7/32
Third Quarter 5 1/16 3 3/8
Fourth Quarter 5 29/32 3 3/8
1997 FISCAL YEAR HIGH LOW
-------- ---------
First Quarter 5 29/32 5 1/16
Second Quarter 5 29/32 3
Third Quarter 3 5/8 2 3/4
Fourth Quarter 4 1/2 3
At May 31, 1997, there were 110 holders of record of the Company's
Common Stock and no holders of the Company's Preferred 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.
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, 1997 have been derived from the Company's audited consolidated
financial statements. The consolidated financial statements of the Company as
of May 31, 1996 and 1997 and for the three-year period ended May 31, 1997 and
the accountant's reports thereon are included in Item 8 of this Form 10-K.
YEAR ENDED MAY 31,
1993 1994 1995 1996 1997
------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Net sales $32,032 $16,747 $21,999 $21,410 $20,123
Lease revenue 1,473 1,986 2,984 1,795 1,109
------- -------- ------- ------ ------
Total revenues 33,505 18,733 24,983 23,205 21,232
Total operating expenses 29,456 34,932 23,343 18,528 17,423
------- -------- ------- ------ ------
Income (loss) from 4,049 (16,199) 1,640 4,677 3,809
continuing operations
Interest expense, net 2,503 2,866 2,254 2,377 1,550
------- -------- ------- ------ ------
Earnings (loss) before 1,546 (19,065) (614) 2,300 2,259
income taxes, equity
in earnings (loss) of
joint venture and
extraordinary item
Provision for income 510 (2,476) -- 14 --
taxes (benefit)
Equity in loss of joint (59) (424) -- -- --
venture
------- -------- ------- ------ ------
Earnings (loss) before 977 (17,013) (614) 2,286 2,259
extraordinary item
------- -------- ------- ------ ------
Extraordinary loss on -- (363) -- -- (531)
extinguishment of debt
------- -------- ------- ------ ------
Net earnings (loss) $977 $(17,376) $(614) $2,286 $1,728
======= ======== ======= ====== ======
PER SHARE DATA:
Primary earnings (loss) per common
and common equivalent
shares
Earnings (loss) before $6.59 $(113.65) $(4.10) $15.27 $1.25
extraordinary item
Extraordinary item -- (2.43) -- -- (0.29)
------- ------- ------- ------- ---------
Net earnings (loss) $6.59 $(116.08) $(4.10) $15.27 $0.96
======= ======= ======= ======= =========
Weighted average shares outstanding 148,054 149,696 149,696 149,696 1,806,938
used in primary calculation
Fully-diluted earnings (loss) per
common and common equivalent shares
Earnings (loss) before $6.59 $(113.65) $(4.10) $12.69 $1.25
extraordinary item
Extraordinary item -- (2.43) -- -- (0.29)
------- ------- ------- ------- ---------
Net earnings (loss) $6.59 $(116.08) $(4.10) $12.69 $0.96
======= ======= ======= ======= =========
Weighted average shares outstanding 148,054 149,696 149,696 242,228 1,806,938
used in fully-diluted calculation
AT MAY 31,
1993 1994 1995 1996 1997
------- ------- ------- -------- -----
BALANCE SHEET DATA:
Working capital $17,088 $(18,312) $(13,489) $(10,841) $9,143
(deficit)
Total assets 35,709 25,553 14,511 16,132 21,287
Total debt 23,484 26,173 20,335 18,144 13,749
Stockholder's 8,173 (9,088) (9,702) (7,416) 4,660
equity (deficit)
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 engines, aircraft parts, leasing of aircraft and related services.
The Company's total revenues include net parts sales revenues and lease
revenue. Net parts sales revenues includes revenues from 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 revenues
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 aircraft parts 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 the sale price and the buyer has taken
delivery of the aircraft. Lease revenue is recognized on an accrual basis,
unless collectability is uncertain.
On October 3, 1996, the Company completed a restructuring
of its capital structure (the "Restructuring"). Pursuant to the Restructuring,
the Company (i) effected a 1-for-27 reverse split of its Common Stock; (ii)
issued approximately 2,245,400 shares of its Common Stock, after giving effect
to the reverse split, in exchange for the entire $10,000,000 principal amount
outstanding of, and related accrued interest on, its 8% Convertible Debentures
due 2003 (the "Debentures"); and (iii) redeemed the entire $7,700,000 principal
amount outstanding of its 12% Senior Notes due July 17, 1997 (the "Senior
Notes") with the proceeds of an advance under a credit agreement entered into
on October 3, 1996 (the "Credit Agreement"). The terms of the Restructuring
and impact on the Company's liquidity and capital resources are discussed in
the Company's Proxy Statement/Prospectus filed with the Securities and Exchange
Commission on August 29, 1996.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED WITH FISCAL 1996.
Net parts sales increased by 3% or $515,000, from $17.9
million in fiscal 1996 to $18.4 million in fiscal 1997. Aircraft and engine
sales decreased to $1.7 million in fiscal 1997, compared to $3.5 million in
fiscal 1996. Aircraft and engine sales are unpredictable transactions and may
fluctuate significantly from year to year, dependent, in part, upon the
Company's ability to purchase an aircraft or engine at an attractive price and
resell it within a relatively brief period of time, as well as the overall
market for used aircraft or engines. During fiscal 1997, the Company acquired
three aircraft and sold or traded two aircraft, as compared to fiscal 1996,
during which the Company sold three aircraft and acquired one. Lease revenue
decreased to $1.1 million in fiscal 1997 from $1.8 million in fiscal 1996, as
certain leases that were in existence during the prior year were terminated and
not renewed. Going forward, however, the Company's lease revenues will be
positively affected by the Company's acquisition and lease of three aircraft
during the fourth quarter of fiscal 1997. Although the Company was able to
replace reduced sales to one large customer, the increase in parts sales was
insufficient to offset the decrease in aircraft sales and lease revenues and,
as a result, total revenues for fiscal 1997 decreased 8.6% to $21.2 million
from $23.2 million for fiscal 1996.
Fiscal 1996 revenues were increased as a result of the
settlement of certain disputes with a customer. Pursuant to the settlement,
the customer paid the Company $660,000 and the Company canceled a note
receivable from the customer. The Company also released all claims it had
against the customer, which included, among other things, claims for the
purchase price of parts purchased by the customer on open account or pursuant
to a consignment arrangement. The customer released certain claims it had
against the Company as part of the settlement. The transaction resulted in a
net gain to the Company of approximately $345,000, consisting of the excess of
cash received over the net carrying value of the note receivable and cost of
inventory. The Company recorded as net sales the cost of the inventory plus
the amount of the net gain.
Cost of sales decreased 4.9% from $13.2 million in fiscal
1996 to $12.7 million in fiscal 1997. Cost of sales as a percentage of total
revenues increased from 56.9% in fiscal 1996 to 59.7% in fiscal 1997,
respectively. The increase in cost of sales as a percentage of total revenues
from fiscal 1996 to fiscal 1997 was primarily due to lower aircraft and engine
sales, which typically have a lower cost of sales. Cost of aircraft and engine
sales was 49.9% of aircraft and engine revenues in fiscal 1997 compared to
45.5% in fiscal 1996. Cost of parts sales as a percentage of total parts sales
was 63.6% in fiscal 1997 compared to 62.9% in fiscal 1996.
Selling, general and administrative expenses decreased
$94,000, amounting to $3.8 million, or 18.0% of total revenues in fiscal 1997,
compared to $3.9 million, or 16.9% of total revenues in fiscal 1996.
Provision (recovery) for doubtful accounts was $123,000 in
fiscal 1997 compared to $464,000 in fiscal 1996. During fiscal 1996, the
Company instituted a policy whereby it records a provision of approximately 2%
of total revenues for estimated future write-off's of accounts receivable. For
fiscal 1997, the Company revised the policy to record a provision of
approximately 1% of net part sales.
Depreciation was $792,000 in fiscal 1997 compared to
$934,000 in fiscal 1996. Included in fiscal 1996 depreciation is a writedown
of $190,000 to the Company's headquarters facility to reduce its cost to
estimated market value. The sale of the building was consummated in March
1997. The net reduction from fiscal 1996 to fiscal 1997 was due primarily to a
decrease in depreciation of aircraft held for lease, resulting from the sale of
certain of the Company's aircraft which were previously held for lease during
fiscal 1996.
Interest expense in fiscal 1997 was $1.6 million, compared
to $2.4 million in fiscal 1996. The decrease in interest expense from fiscal
1996 to fiscal 1997 was due to a net reduction in total debt outstanding, to
$13.7 million at May 31, 1997 compared to $18.1 million at May 31, 1996.
Interest and other income for fiscal 1997 was $61,000, compared to $34,000 in
fiscal 1996. In connection with the Restructuring, the Company recorded an
extraordinary loss of $530,596 relating to the exchange of shares of its Common
Stock for the Debentures.
The Company's income tax expense in fiscal 1997 was zero
primarily as a result of the utilization of net operating loss carryforwards to
offset taxes that would otherwise have been payable. The Company has continued
to maintain approximately a 100% valuation allowance against its existing
deferred tax assets due to the Company's previous financial problems and its
relatively short history of profitability. If the Company remains profitable,
and there can be no assurance of such profitability, the Company expects to
further reduce the allowance in the future. The fiscal 1996 expense of $14,000
related to amendments of certain prior year state and federal tax returns.
Net earnings before an extraordinary loss for fiscal 1997
were $2,259,000, or $1.25 per share, compared to a net earnings of $2,286,000,
or $15.27 per share, during fiscal 1996. On a fully-diluted basis, earnings
per share were $12.69 per share during fiscal 1996. Net earnings, after
considering an extraordinary loss, were $1,728,493 or $.96 per share, for
fiscal 1997.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). SFAS 128 establishes new standards for computing and
presenting earnings per share ("EPS"). Specifically, SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS, requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with a complex capital structure and requires a reconciliation of
the numerator and denominator of the diluted EPS computation. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997; earlier application is not permitted. At this time, management has not
determined the impact of SFAS No. 128 on the earnings per share amounts
presented in the Consolidated Statement of Operations set forth elsewhere in
this Annual Report on Form 10-K.
FISCAL 1996 COMPARED WITH FISCAL 1995.
Net parts sales increased by 37% or $5.1 million, from
$13.8 million in fiscal 1995 to $18.9 million in fiscal 1996. The increase in
net parts sales is primarily attributable in part to the Company's sales to
ValuJet, which sales amounted to $4.8 million in fiscal 1996 compared to $1.4
million in 1995. Additionally, an improved operating environment within the
airline industry led to increased parts sales to new and existing customers.
Aircraft sales decreased to $2.5 million in fiscal 1996, compared to $8.1
million in fiscal 1995. Aircraft sales are unpredictable transactions and may
fluctuate significantly from year to year, dependent, in part, upon the
Company's ability to purchase an aircraft at an attractive price and resell it
within a relatively brief period of time, as well as the overall market for
used aircraft. During fiscal 1996, the Company acquired one aircraft and sold
three aircraft, as compared to fiscal 1995, during which the Company sold eight
aircraft and acquired none. Lease revenue deceased to $1.8 million in fiscal
1996 from $3.0 million in fiscal 1995, as certain leases that were in existence
during the prior year were terminated and not renewed (two of the aircraft
under such terminated leases were sold during fiscal 1996). The increase in
parts sales was insufficient to offset the decrease in aircraft sales and lease
revenue and, as a result, total revenues for fiscal 1996 decreased 7% to $23.2
million from $25.0 million for fiscal 1995.
Fiscal 1996 lease revenues included $139,000 in revenues
arising from a fiscal 1995 transaction. During fiscal 1995, the Company
accepted lease payments from a foreign customer in the customer's local
currency because conversion restrictions precluded the customer from obtaining
and paying U.S. dollars. Due to uncertainties regarding when and at what rate
the local currency could be converted to U.S. dollars, the Company valued the
local currency at an estimated value of $200,000 as of May 31, 1995 (included
in cash), such amount being less than the then current U.S. equivalent amount
at the official exchange rate. The Company subsequently was able to convert
the funds to U.S. dollars in the amount of $339,000, resulting in a gain of
$139,000, which was included in lease revenues during fiscal 1996.
In addition, fiscal 1996 revenues were increased as a
result of the settlement of certain disputes with a customer. Pursuant to the
settlement, the customer paid the Company $660,000 and the Company canceled a
note receivable from the customer. The Company also released all claims it had
against the customer, which included, among other things, claims for the
purchase price of parts purchased by the customer on open account or pursuant
to a consignment arrangement. The customer released certain claims it had
against the Company as part of the settlement. The transaction resulted in a
net gain to the Company of approximately $345,000, consisting of the excess of
cash received over the net carrying value of the note receivable and cost of
inventory. The Company recorded as net sales the cost of the inventory plus
the amount of the net gain.
Cost of sales decreased 25.4% from $17.7 million in fiscal
1995 to $13.2 million in fiscal 1996, primarily as a result of lower sales. In
addition, cost of sales as a percentage of total revenues also decreased from
70.9% to 56.9% in fiscal 1995 and fiscal 1996, respectively. The decrease in
cost of sales as a percentage of total revenues from fiscal 1995 to fiscal 1996
was primarily due to higher margin aircraft sales in fiscal 1996 as compared to
fiscal 1995. Cost of aircraft sales was 34.8% of aircraft sales revenues in
fiscal 1996 compared to 98.6% in fiscal 1995. The cost of aircraft sales
during fiscal 1995 was in excess of normal levels as the result of the sale at
cost of three DC-9 aircraft. Cost of parts sales as a percentage of total
parts sales was 63.4% in fiscal 1996 compared to 66.0% in fiscal 1995.
Selling, general and administrative expenses decreased $.5
million, amounting to $3.9 million, or 16.9% of total revenues in fiscal 1996,
compared to $4.4 million, or 17.4% of total revenues in fiscal 1995, primarily
as a result of the Company's ongoing cost reduction program.
Provision (recovery) for doubtful accounts was $464,000 in
fiscal 1996 compared to $(335,000) in fiscal 1995. During fiscal 1995, the
Company, primarily through litigation, recovered approximately $700,000 of
accounts receivable which had been written off or reserved during fiscal 1994.
The recoveries were offset during fiscal 1995 by a provision for doubtful
accounts of $350,000. During fiscal 1996, the Company instituted a policy
whereby it records a provision of approximately 2% of total revenues for
estimated future write-off's of accounts receivable. There were no other
significant provisions or recoveries made during fiscal 1996.
Depreciation was $934,000 in fiscal 1996 compared to $1.1
million in fiscal 1995. Included in fiscal 1996 depreciation is a writedown of
$190,000 to the Company's headquarters facility to reduce its cost to estimated
market value. The net reduction from fiscal 1995 to fiscal 1996 was due
primarily to a decrease in depreciation of aircraft held for lease, resulting
from the sale of certain of the Company's aircraft which were previously held
for lease during fiscal 1995.
The Company incurred losses from its service center
subsidiary of $676,000 in fiscal 1995. The amounts recorded relate to the
Company's wholly owned subsidiary, International Airline Service Center, Inc.,
which ceased operations in fiscal 1995.
Interest expense in fiscal 1996 was $2.4 million, compared
to $2.9 million in fiscal 1995. The decrease in interest expense from fiscal
1995 to fiscal 1996 was due to a net reduction in total debt outstanding, to
$18.1 million at May 31, 1996 compared to $20.3 million at May 31, 1995.
Interest and other income for fiscal 1996 was $34,000,
compared to $.6 million in fiscal 1995. Included in the fiscal 1995 amounts
were several non-recurring transactions, including approximately $340,000 of
interest income collected on notes receivable (such notes were retired during
the first quarter of fiscal 1996), a $66,000 gain on the sale of certain land
located in Kentucky, and approximately $120,000 received in connection with
consulting and other services provided to an insurance company.
During fiscal 1995, the Company incurred unusual and
nonrecurring items of $177,000. Included in these unusual and nonrecurring
items is an expense of $180,000 incurred in connection with certain
transactions between the Company and former officers of the Company, and a gain
of $375,000 relating to settlement of litigation which had previously been
accrued in an amount in excess of the settlement amount. There were no unusual
and nonrecurring items in fiscal 1996.
Although the Company had net operating loss carryforwards
sufficient to offset income, during fiscal 1996 it recorded a provision for
income taxes of $14,000. The Company has fully exhausted its carryback
benefits and recorded a 100% valuation allowance against the deferred tax asset
for net operating loss carryforwards. The $14,000 provision recorded in fiscal
1996 relates to alternative minimum taxes and amendments of certain prior year
state and federal tax returns.
Net earnings during fiscal 1996 were $2,286,000, or $15.27
per share, compared to a net loss of $614,000, or $4.10 per share, during
fiscal 1995. On a fully-diluted basis, earnings (loss) per share were $12.69
and $(4.10) per share during fiscal 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Credit Agreement entered into by the Company in
connection with the Restructuring provided for a $3 million term loan and up to
an $11 million revolving credit. During the fourth fiscal quarter of 1997 the
Credit Agreement was amended to create a new term loan facility of $3.75
million (collectively referred to as the "Credit Facility"). 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 operating activities for the fiscal
years ended May 31, 1997 and 1996 amounted to $582,000 and $2.1 million,
respectively. The primary use of cash in fiscal 1997 from operating activities
was an increase in inventories of $2.4 million and a decrease in accounts
payable and accrued expenses of $500,000.
Net cash used for investing activities for the fiscal year
ended May 31, 1997 amounted to $5.4 million. The primary usage of the funds
was the purchase of three aircraft, which are on lease to a major cargo
carrier. The Company received proceeds of $750,000 from the sale of its
headquarters facility in Miami during the fourth quarter of fiscal 1997. Net
cash provided by investing activities for fiscal 1996 amounted to $575,000.
The primary source of such funds was proceeds of $1.45 million from the sale of
aircraft held for lease.
Net cash provided by financing activities for the fiscal
year ended May 31, 1997 amounted to $4.4 million. The Company borrowed $6.75
million under term loans under which the Company's five aircraft and certain
engines are pledged as collateral. During fiscal 1997, the Company repaid $8.1
million of debt obligations including $7.7 million of Senior Notes pursuant to
the Restructuring. For fiscal 1997, the Company had net borrowings under the
Credit Facility of $7.4 million. Net cash used in financing activities for the
fiscal year ended May 31, 1996 amounted to $2.6 million dollars.
At May 31, 1997, the Company was permitted to borrow up to
an additional $2.9 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. As of August 12, 1997, the Company was permitted to borrow
up to an additional $4.4 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information with respect to this Item is contained in the
Company's consolidated financial statements and financial statement schedules
indicated in the Index on Page F-1 of this Annual Report on Form 10-K and is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
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 annual meeting of stockholders to be held on September 22,
1997 (the "1997 Proxy Statement") is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The information contained under the heading "Executive
Compensation" in the 1997 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 1997 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 1997 Proxy Statement is incorporated
by reference.
PART IV
ITEM 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 Page F-1
(2) Report of Grant Thornton LLP Page F-2
(3) Consolidated Financial Statements and Page F-3
Notes to Consolidated Financial Statements
of the Company, including Consolidated
Balance Sheets as of May 31, 1997 and 1996
and related Consolidated Statements of
Operations, Consolidated Cash Flows and
Consolidated Stockholders' Equity
(Deficit) for each of the years in the
three-year period ended May 31, 1997
(b) FINANCIAL STATEMENTS SCHEDULES PAGE OR METHOD OF FILING
(1) Report of Grant Thornton LLP as to Included in the report
Consolidated Financial Statement Schedules listed in (a)(2) above
for fiscal years ended May 31, 1997, 1996
and 1995
(2) Schedule II. Valuation and Qualifying Page S-1
Accounts
SCHEDULES NOT LISTED ABOVE AND COLUMNS WITHIN CERTAIN SCHEDULES HAVE
BEEN OMITTED BECAUSE OF THE ABSENCE OF CONDITIONS UNDER WHICH THEY ARE REQUIRED
OR BECAUSE THE REQUIRED MATERIAL INFORMATION IS INCLUDED IN THE CONSOLIDATED
FINANCIAL STATEMENTS OR NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED
HEREIN.
(C) Exhibits
Exhibit
NUMBER DESCRIPTION PAGE NUMBER OR METHOD OF
FILING
2.4 Credit Agreement between BNY Financial Incorporated by reference
Corporation and the Registrant, as amended. to Exhibit 2.4 to Amendment
No. 2 to the Company's
Registration Statement
on Form S-4 filed on
August 29, 1996
(File No. 333-08065).
3.1 Amended and Restated Certificate of Incorporated by reference
Incorporation of the Registrant. to Exhibit 3.1 to the
Company's Annual Report on
Form 10-K for the
fiscal year ended May 31,
1996 (the "1996 Form 10-K").
3.2 Restated and Amended Bylaws of the Incorporated by reference
Registrant. to Exhibit 3.2 to the 1996
Form 10-K.
4.1 Specimen Common Stock Certificate. Incorporated by reference
to Exhibit 4.1 to the 1996
Form 10-K.
10.1.1 Employment Agreement, dated as of Incorporated by reference
December 1, 1995, between the Registrant to Exhibit 10.1.1 to the
and Alexius A. Dyer III, as amended on 1996 Form 10-K
October 3, 1996.
10.1.2 Employment Agreement dated as of Incorporated by reference
October 3, 1996, between the Registrant to Exhibit 10.1.2 to the
and George Murnane III. Company's Quarterly Report
for the quarter ended
February 28, 1997.
10.2.1 1996 Long-Term Incentive and Share Incorporated by reference
Award Plan. to Appendix B to the Proxy
Statement/Prospectus
included in the Company's
Registration Statement on
Form S-4 (File No.
333-08065), filed on July
12, 1996.
10.2.2 401(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 Plan. Incorporated by reference
to Exhibit 10.2.5 of the
Company's Annual Report on
Form 10-K for the fiscal
year ended May 31, 1993.
10.2.5 Form of Option Certificate (Employee Incorporated by reference
Non-Qualified Stock Option). to Exhibit 10.2.5 to the
1996 Form 10-K.
10.2.6 Form of Option Certificate (Director Incorporated by reference
Non-Qualified Stock Option). to Exhibit 10.2.6 to the
1996 Form 10-K.
10.2.7 Form of Option Certificate (Incentive Incorporated by reference
Stock Option). to Exhibit 10.2.7 to the
1996 Form 10-K.
10.14 Commission Agreement dated December 1, Incorporated by reference
1995 between the Registrant and J.M. to Exhibit 10.14 to the
Associates, Inc. 1996 Form 10-K.
10.15 Aircraft Parts Purchase Agreement, Incorporated by reference
dated May 16, 1996, between Paxford Int'l, to Exhibit 10.15 to the
Inc. and the Registrant. Company's Registration
Statement on Form S- 4
(File No. 333-08065) filed
on July 12, 1996.
10.16 Contract for Sale and Purchase dated Filed herewith.
January 10, 1997 between the Registrant and
American Connector Corporation
10.17 Office Lease Agreement dated January Filed herewith.
31, 1997 between the Registrant and Globe
Corporate Center, as amended.
10.18 Lease Agreement dated March 31, 1997 Filed herewith.
between the Registrant and Port 95-4, Ltd.
11 Statement regarding computation of per Filed herewith.
share earnings.
21 Subsidiaries. Filed herewith.
23 Consent of Grant Thornton LLP to Filed herewith.
incorporation by reference.
27 Financial Data Schedule. Filed herewith.
(d) REPORTS ON FORM 8-K.
The Company did not file a Current Report on Form 8-K
during the last quarter of the fiscal year covered by this Annual Report.
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 18th day of August, 1997.
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 August 18,
Alexius A. Dyer III Executive Officer and President 1997
and Director
(Principal Executive Officer)
/S/ GEORGE MURNANE III Executive Vice President, August 18,
George Murnane III Chief Financial Officer 1997
and Director
(Principal Financial Officer)
/S/ JAMES M. ISAACSON Vice President of Finance, August 18,
James M. Isaacson Treasurer and Secretary 1997
(Principal Accounting Officer)
/S/ KYLE R. KIRKLAND Director August 18,
Kyle R. Kirkland 1997
/S/ E. JAMES MUELLER Director August 18,
E. James Mueller 1997
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of independent certified public accountants F-2
Consolidated balance sheets as of May 31, 1997 and 1996 F-3
Consolidated statements of operations for the years ended
May 31, 1997, 1996 and 1995 F-4
Consolidated statements of stockholders' equity (deficit)
for the years ended May 31, 1997, 1996 and 1995 F-5
Consolidated statements of cash flows for the years ended
May 31, 1997, 1996 and 1995 F-6
Notes to consolidated financial statements F-7
F-2
FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
INTERNATIONAL AIRLINE SUPPORT
GROUP, INC. AND SUBSIDIARIES
MAY 31, 1997, 1996 AND 1995
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
International Airline Support
Group, Inc.
We have audited the accompanying consolidated balance sheets of International
Airline Support Group, Inc. and Subsidiaries as of May 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
May 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of International
Airline Support Group, Inc. and Subsidiaries as of May 31, 1997 and 1996 and
the consolidated results of its operations and its consolidated cash flows for
each of the three years in the period ended May 31, 1997, in conformity with
generally accepted accounting principles.
We have also audited Schedule II of International Airline Support Group, Inc.
and Subsidiaries for each of the three years in the period ended May 31, 1997.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
Fort Lauderdale, Florida
July 21, 1997
F-3
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1997 AND 1996
ASSETS
1997 1996
-------- --------
Current assets
Cash and cash equivalents (Note A) $ 465,725 $ 940,274
Accounts receivable, net of allowance for doubtful accounts
of approximately $610,000 in 1997 and $735,000 in 1996 1,354,030 2,014,691
Inventories (Notes A, C and D) 11,645,284 9,277,315
Deferred tax benefit - current, net of valuation allowance
of $772,000 in 1997 and $960,000 in 1996 (Note F) - -
Other current assets 98,285 68,798
-------- --------
Total current assets 13,563,324 12,301,078
Property and equipment (Notes A, D, E)
Aircraft held for lease 6,914,458 2,974,760
Leasehold improvements 21,567 36,815
Machinery and equipment 908,590 972,507
-------- --------
7,844,615 3,984,082
Less accumulated depreciation 1,186,444 2,051,620
Land and building held for sale, net - 750,000
Property and equipment, net 6,658,171 2,682,462
-------- --------
Other assets
Deferred debt costs, net (Note A) 638,012 762,431
Deferred tax benefit, net of valuation allowance of
$1,814,000 in 1997 and $3,011,000 in 1996 (Note F) 72,663 -
Deferred restructuring fees - 334,860
Deposits and other assets 355,000 51,500
-------- --------
1,065,675 1,148,791
-------- --------
$ 21,287,170 $16,132,331
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current maturities of long-term obligations (Note D) $ 1,542,488 $ 3,695,108
Long-term obligations in default classified as current - 14,041,667
Income tax payable 156,096 72,249
Accounts payable 486,854 2,171,496
Accrued liabilities (Note M) 2,234,350 3,160,982
-------- --------
Total current liabilities 4,419,788 23,141,502
Long-term obligations, less current maturities (Notes D) 12,207,113 406,760
Commitments and contingencies (Notes E) - -
Stockholders' equity (deficit) (Notes G and H)
Preferred Stock - $.001 par value; authorized 2,000,000
shares and 500,000 shares; no shares outstanding in 1997
and 1996 respectively - -
Common stock - $.001 par value; authorized 20,000,000
shares; issued and outstanding 2,395,095
and 4,041,779 shares in 1997 and 1996 respectively 2,395 4,042
Additional paid-in capital 13,003,686 2,654,332
Accumulated deficit (8,345,812)(10,074,305)
-------- --------
Total stockholders' equity (deficit) 4,660,269 (7,415,931)
-------- --------
$ 21,287,170 $16,132,331
========== ==========
F-4
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
1997 1996 1995
---------- ---------- -----------
Revenues
Net sales $ 20,123,196 $ 21,410,201 $ 21,998,869
Lease revenue 1,108,702 1,794,768 2,984,218
---------- ---------- -----------
Total revenues 21,231,898 23,204,969 24,983,087
Cost of sales 12,679,915 13,207,671 17,712,427
Selling, general and administrative expenses 3,828,020 3,921,795 4,358,119
Provision (recovery) for doubtful accounts 123,399 464,099 (334,571)
Depreciation 791,517 933,976 1,108,363
Unusual and nonrecurring items (Note N) - - (177,115)
Losses of service center subsidiary (Note O) - - 675,860
---------- ---------- -----------
Total operating costs 17,422,851 18,527,541 23,343,083
Income from operations 3,809,047 4,677,428 1,640,004
Interest expense 1,610,590 2,411,469 2,856,787
Interest and other income (60,632) (34,058) (602,943)
---------- ---------- -----------
Earnings (loss) before income taxes and
extraordinary loss 2,259,089 2,300,017 (613,840)
Provision for income taxes (Note F) - 14,048 -
---------- ---------- -----------
Earnings (loss) before extraordinary loss 2,259,089 2,285,969 (613,840)
Extraordinary loss on debt restructuring (Note B) 530,596 - -
Net earnings (loss) $ 1,728,493 $ 2,285,969 $ (613,840)
========== ========== ===========
Per share data:
Primary earnings (loss) per common and common
equivalent share
Earnings (loss) before extraordinary item $ 1.25 $ 15.27 $ (4.10)
Extraordinary item (.29) - -
---------- ---------- -----------
Net earnings (loss) $ .96 $ 15.27 $ (4.10)
========== ========== ===========
Weighted average shares outstanding used in
primary calculation 1,806,938 149,696 149,696
========== ========== ===========
Fully-diluted earnings (loss) per common and common
equivalent share
Earnings (loss) before extraordinary item $ 1.25 $ 12.69 $ (4.10)
Extraordinary item (.29) - -
---------- ---------- -----------
Net earnings (loss) $ .96 $ 12.69 $ (4.10)
========== ========== ===========
Weighted average shares outstanding used in
fully-diluted calculation 1,806,938 242,288 149,696
========== ========== ===========
F-5
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK Additional
Number of Par Paid-In Accumulated
SHARES VALUE CAPITAL DEFICIT TOTAL
--------- -------- --------- ---------- ---------
Balance at June 1, 1994 4,041,779 $ 4,042 $ 2,654,332 $ (11,746,434) $ (9,088,060)
Net loss - - - (613,840) (613,840)
--------- -------- --------- ---------- ---------
Balance at May 31, 1995 4,041,779 4,042 2,654,332 (12,360,274) (9,701,900)
Net earnings - - - 2,285,969 2,285,969
--------- -------- --------- ---------- ---------
Balance at May 31, 1996 4,041,779 4,042 2,654,332 (10,074,305) (7,415,931)
1-for - 27 reverse Stock
Split (Note B) (3,892,084) (3,892) - - (3,892)
Issuance of Common Stock in
exchange for
extinguishment of
Subordinated
Debentures (Note B) 2,245,400 2,245 11,224,755 - 11,227,000
Costs incurred related to
stock issuance (Note B) - - (875,401) - (875,401)
--------- -------- --------- ---------- ---------
Net earnings - - - 1,728,493 1,728,493
Balance at May 31, 1997 2,395,095 $ 2,395 $ 13,003,686 $ (8,345,812) $ 4,660,269
========= ======== ========= ========== =========
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of these statements.
F-6
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
1997 1996 1995
--------- --------- --------
Cash flows from operating activities:
Net earnings (loss) $ 1,728,493 $ 2,285,969 $ (613,840)
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,010,302 1,372,979 1,693,301
Depreciation - service center - - 196,322
Gain on sale of aircraft held for lease - (864,795) -
Gain on Express One transaction - - (70,631)
Loss on Wellman transaction - - 33,575
Loss on restructuring 530,596 - -
(Increase) in deferred tax benefit (66,428) - (23,696)
Decrease in accounts receivable 640,461 577,770 1,224,560
Decrease in notes receivable - 313,490 806,510
Decrease in income tax refund - - 1,930,000
(Increase) decrease in inventories (2,433,481) (3,030,045) 4,910,834
(Increase) decrease in other current assets (29,487) (37,318) 154,271
(Increase) decrease in other assets (303,500) (51,500) 178,322
(Decrease) increase in accounts payable
and accrued expenses (494,754) 1,527,750 (4,591,430)
--------- --------- --------
Net cash provided by operating activities 582,202 2,094,300 5,828,098
Cash flows from investing activities:
Capital expenditures (6,197,955) (875,281) (135,936)
Proceeds from sale of aircraft held for lease - 1,450,000 -
Proceeds from sale of land and building 750,000 - -
--------- --------- --------
Net cash provided by (used in)
investing activities (5,447,955) 574,719 (135,936)
Cash flows from financing activities:
Net borrowings under line of credit 7,397,930 - -
Borrowings under term loans 6,750,000 - -
Payments under term loans (403,331) - -
Increase in deferred restructuring costs (540,641) (334,860) -
Increase in deferred debt costs (675,785) (50,000) -
Repayments of debt obligations (8,136,969) (2,192,216) (4,939,621)
--------- --------- --------
Net cash (used in) provided by
financing activities 4,391,204 (2,577,076) (4,939,621)
Net increase (decrease) in cash and
cash equivalents (474,549) 91,943 752,541
Cash and cash equivalents at beginning of year 940,274 848,331 95,790
--------- --------- --------
Cash and cash equivalents at end of year $ 465,725 $ 940,274 $ 848,331
========= ========= =========
Supplemental disclosures of cash flow
information (Note J):
Cash paid during the year for:
Interest $ 1,321,259 $ 1,206,028 $ 2,167,279
========= ========= =========
Income taxes $ 1,400 $ 36,910 $ -
========= ========= =========
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of these statements.
F-7
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES
International Airline Support Group, Inc. and Subsidiaries (the "Company")
is primarily engaged in the sale of aircraft, aircraft parts, leasing of
aircraft and related services. Since its inception in 1982, the Company has
become a primary source of replacement parts for widely operated aircraft
models such as the McDonnell Douglas MD-80 and DC-9. The Company supplies
parts to over 600 customers worldwide.
a) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less at the time of purchase to be cash equivalents.
Included as cash equivalents at May 31, 1996 is $1,100,000 in certificates
of deposit with a stated maturity of seven days. Included in cash and cash
equivalents at May 31, 1997 is $90,564 of restricted cash representing
maintenance reserves received on certain aircraft held for lease.
b) INVENTORIES
Inventories are stated at the lower of cost or market. The cost of aircraft
and aircraft parts is determined on a specific identification basis.
c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated life utilizing
straight-line and accelerated methods. The estimated lives of the
depreciable assets range from 3 to 7 years. Overhaul costs on aircraft held
for lease are capitalized and depreciated over the estimated service life of
the overhaul. For income tax purposes, accelerated methods of depreciation
are generally used. Deferred income taxes are provided for the difference
between depreciation expense for tax and financial reporting purposes.
d) DEFERRED DEBT COSTS
The deferred debt costs as of May 31, 1996 relate to the costs associated
with obtaining the Company's Senior Secured Notes and Convertible
Subordinated Debentures. However, in Fiscal 1997, these obligations were
settled and accordingly, the remaining unamortized balance of the deferred
debt costs were written off to amortization expense and extraordinary loss
on debt restructuring.
The deferred debt costs as of May 31, 1997 relate to the costs associated
with obtaining the Senior Secured Revolving Credit Loan Facility and the
Senior Secured Term Loans. These costs are being amortized using the
interest method over five years, the life of the respective debt issue.
Accumulated amortization at May 31, 1997 and 1996, was approximately $87,773
and $1,307,000, respectively.
(continued)
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES - Continued
e) EARNINGS PER SHARE
Primary earnings (loss) per share is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding and
common stock equivalents. Stock options and warrants are considered common
stock equivalents unless their inclusion would be antidilutive. For the
purpose of computing common stock equivalents for stock options and
warrants, the modified treasury stock method was not used as the effect
would be antiditulive. The Company's Convertible Subordinated Debentures
("Debentures") are not considered common stock equivalents for the purpose
of computing primary earnings per share as the effective yield on the
securities exceeded 66-2/3% of the average Aa corporate bond rate at the
time of issuance.
Earnings per share for fiscal 1997 is computed using the treasury stock
method. Fully diluted earnings (loss) per shares is computed for fiscal
1996 as if the Debentures were converted into common stock as of the
beginning of the period (see Note D). Stock options and warrants are not
considered common stock equivalents for the purpose of computing fully
diluted earnings (loss) per share as the effect would be antidilutive under
the modified treasury stock method. The Debentures and stock options and
warrants are not considered common stock equivalents in fiscal year 1995 due
to the net losses for those periods.
f) REVENUE RECOGNITION
Revenue from the sale of parts is recognized when products are shipped to
the customer. Revenue from the sale of aircraft is recognized when all
consideration has been received and the buyer has taken delivery and
acceptance of the aircraft. Lease revenue is recognized on an accrual
basis, unless collectibility is uncertain.
g) EMPLOYEE BENEFIT PLAN
In fiscal 1992, the Company established a contributory 401(K) plan. The
plan is a defined contribution plan covering all eligible employees of the
Company, to which the Company makes certain discretionary matching
contributions based upon the level of its employees' contributions. The
amount charged to earnings in fiscal 1997, 1996 and 1995 were insignificant.
The Company does not provide any health or other benefits to retirees.
h) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade receivables, and
accounts payable approximate fair value due to the short-term maturities of
these instruments.
i) INCOME TAXES
Income taxes are provided based on earnings reported for tax return purposes
in addition to a provision for deferred income taxes. Deferred income taxes
are provided in order to reflect the tax consequences in future years of
differences between the financial statement and tax basis of assets and
liabilities at each year end.
j) MANAGEMENT ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
May 31, 1997 and 1996 and revenues and expenses during the periods then
ended. The actual outcome of the estimates could differ from these
estimates made in the preparation of the financial statements.
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES - Continued
k) LAND AND BUILDING HELD FOR SALE
The land and building (the "property") held for sale represented the
Company's corporate offices and adjacent warehouse located in Miami,
Florida. As of May 31, 1996, the property was written down to $750,000.
Included in depreciation expense for the year ended May 31, 1996 is
approximately $190,000 relating to this write down. In fiscal 1997, the
Company sold the property for approximately $750,000, after related selling
expenses.
l) NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS 128 establishes new standards for computing and presenting
earnings per share ("EPS"). Specifically, SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS, requires dual
presentation of basic and diluted EPS on the face of the income statement
for all entities with a complex capital structure and requires a
reconciliation of the numerator and denominator of the diluted EPS
computation. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997; earlier application is not
permitted. At this time, management has not determined the impact of SFAS
No. 128 on the earnings per share amounts presented in the accompanying
statements of operations.
m) RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
NOTE B - RESTRUCTURING OF CAPITAL
On October 3, 1996, the Company completed a restructuring of its capital
structure. Pursuant to the restructuring, the Company effected a 1-for-27
reverse split of its common stock, issued approximately 2,245,400 shares of
common stock in exchange for the entire $10 million principal amount
outstanding and related accrued interest of its 8% Convertible Debentures of
$1,227,000, and redeemed the entire $7.7 million principal amount
outstanding of its 12% Senior Notes with the proceeds of an advance under a
credit agreement entered into on October 3, 1996 with the Bank of New York
(See Note D). Consummation of the restructuring cured all defaults with
respect to the Debentures and the Senior Notes. Upon completion of the
restructuring, costs incurred related to the restructuring and issuance of
common stock of $875,401 were recorded as an offset to paid in capital. The
transaction resulted in an after tax charge of $530,596, which has been
recorded as an extraordinary item.
NOTE C - INVENTORY
Inventories at May 31, 1997 and 1996 consisted of the following:
1997 1996
---------- ----------
Aircraft parts $ 10,758,867 $ 7,938,049
Aircraft available for sale 886,417 1,339,266
========== ==========
$ 11,645,284 $ 9,277,315
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at May 31, 1997 and 1996 consisted of the following:
1997 1996
-------- ----------
12% Senior Secured Notes $ - $ 7,700,000
8% Convertible Subordinated Debentures - 10,000,000
Mortgage note payable to bank - 429,260
Senior Secured Revolving Credit Loans 7,397,931 -
Senior Secured Term Loan - A 2,766,669 -
Senior Secured Term Loan - B 3,580,000 -
Notes payable due in equal monthly
installments through October 1997,
bearing interest at 9.5% to 11.5%
collateralized by equipment 2,471 8,000
Capitalized lease obligations 2,530 6,275
-------- --------
13,749,601 18,143,535
Less: Current maturities and
long-term obligations in
default classified as current 1,542,488 17,736,775
-------- ---------
$ 12,207,113 $ 406,760
========== =========
In October 1996 the Company entered into a Credit Agreement with the Bank
of New York, which provides for a $3 million term loan and up to an $11
million revolving credit. The Credit Facility is secured by substantially
all of the assets of the Company and availability of amounts for borrowing
is subject to certain limitations and restrictions. The interest rate is the
higher of the prime rate plus 2% or the federal funds effective rate plus
2.5% per annum. The revolving line of credit was increased to $13 million
in March 1997. As of May 31, 1997, the available line of credit is
$2,912,260. The credit agreement includes certain covenants which provide,
among other things, restrictions relating to the maintenance of consolidated
net worth and other financial ratios, as well as a restriction on the
payment of dividends.
In March 1997, the Company entered into a Second Term Loan with the Bank
of New York for an additional $3,750,000. The Term Loan is collateralized by
certain aircraft purchased by the Company with the proceeds from the loan.
The interest rate is the higher of the prime rate plus 2% or the federal
funds effective rate plus 2.5% per annum.
(continued)
NOTE D - LONG-TERM OBLIGATIONS - Continued
In July 1992, the Company issued $18.0 million of five (5) year 12% Senior
Secured Notes ("Notes") due July 1997. In October 1996, the Company paid
the remaining outstanding principal on these Notes.
In September 1993, the Company issued $10.0 million in Convertible
Subordinated Debentures ("Debentures"), due August 2003, through a private
placement offering. The Debentures were redeemed in whole on October 3,
1996 as part of the Company's restructuring of capital (see Note B).
Pursuant to the restructuring, the Company issued approximately 2,245,400
shares of common stock in exchange for the entire $10 million principal
amount outstanding and the related accrued interest of $1,227,000.
In September 1992, the Company entered into a promissory note and mortgage
and security agreement with a bank. In fiscal 1997, the Company sold the
land and building in Miami, and with the proceeds from the sale, paid the
remaining balance on the promissory note.
The scheduled maturities of long-term obligations in each of the next five
years subsequent to May 31, 1997 are as follows: 1998 - $1,542,488, 1999 -
$1,516,664, 2000 - $2,256,664, 2001 -$766,660, and 2002 - $7,662,124.
NOTE E - LEASES
The Company leases warehouse and hangar facilities as well as certain
equipment under long-term operating lease agreements. Rental expense under
these leases for the years ended May 31, 1997, 1996 and 1995 was
approximately $36,000, $53,000 and $220,000, respectively. At May 31, 1997,
the future minimum payments on non-cancellable operating leases are as
follows: 1998 - $244,669, 1999 - $249,625, 2000 - $236,167, 2001 -$205,977,
and 2002 - $210,961.
The Company currently leases aircraft and engines to customers under long-
term operating lease agreements. In addition to minimum base rentals, the
lease agreement requires additional rent based upon aircraft and engine
usage. The net investment in aircraft and engines held for or leased to
customers was approximately $6,124,000 and $1,849,000 at May 31, 1997 and
1996, respectively.
NOTE F - INCOME TAXES
The provision for income taxes for the years ended May 31, 1997, 1996 and
1995 is as follows:
1997 1996 1995
--------- ---------- ---------
Current provision:
Federal $ 72,663 $ 14,048 $ -
State - - -
--------- ---------- ---------
72,663 14,048 -
Deferred provision (72,663) - -
$ - $ 14,048 $ -
========= ========= =========
(continued)
NOTE F - INCOME TAXES - Continued
The tax effect of the Company's temporary differences and carryforwards is
as follows:
1997 1996
----------- -----------
Deferred tax (benefits) - current:
Reserve for overhaul costs $ (103,000) $ (332,000)
Bad debt reserve (257,000) (276,000)
Inventory capitalization (187,000) (145,000)
Accrued payroll (131,000) -
Accrued legal settlement costs - (1,000)
Accrued vacation (15,000) (15,000)
Accrued - other - (4,000)
Accrued repair costs - (187,000)
Reserve for inventory (79,000) -
----------- -----------
$ (772,000) $ (960,000)
1997 1996
----------- -----------
Deferred tax liabilities
(benefits) - non-current:
Depreciation and amortization $ (647,000) $ (17,000)
Aircraft - capitalized maintenance 36,000 36,000
Restructuring charges (135,000) (160,000)
Net operating loss carryforward - federal (759,000) (2,467,000)
Net operating loss carryforward - state (177,000) (260,000)
Minimum tax credit - federal (196,000) (135,000)
Other, net (8,000) (8,000)
----------- -----------
$ (1,886,000)$(3,011,000)
The Company has recorded valuation allowances equal to the amount of the
deferred tax benefits at May 31, 1996 and 1997. The valuation allowance has
decreased by $1,385,000 in fiscal 1997.
The following table summarizes the differences between the Company's
effective tax rate and the statutory federal rate as follows:
1997 1996 1995
----- ----- -----
Statutory federal rate 34.0% 34.0% (34.0)%
Operating losses with no current
tax benefit -. -. 34.0
Tax benefit from net operating loss
carryforward (30.7) (33.4) -.
Other (3.3) -. -.
----- ----- -----
Effective tax rate -. % 0.6% -. %
===== ===== =====
The Company has net operating loss carryforwards for federal tax purposes of
approximately $2.0 million. The net operating losses will expire at various
points through the year 2010. The Company has a federal minimum tax credit
carryover of approximately $195,000 which may be utilized in future years to
the extent that the regular tax liability exceeds the alternative minimum
tax. Certain provisions of the tax law may limit the net operating loss and
credit carryforwards available for use in any given year in the event of a
significant change in ownership interest.
NOTE G - COMMON AND PREFERRED STOCK
In July 1993, the Company amended the Articles of Incorporation to authorize
the issuance of up to 500,000 shares of preferred stock. No such stock has
been issued.
In October 1996, the Company amended the Articles of Incorporation to
authorize the issuance of up to 2,000,000 shares of preferred stock. No such
stock has been issued.
NOTE H - STOCK OPTIONS
The Stockholders in October 1989 approved a Stock Option Plan pursuant to
which 350,000 shares of the Company's common stock were reserved for the
grant of options to employees and directors of the Company or its
subsidiaries. The issuance of the options and the form of the options shall
be at the discretion of the Company's Compensation Committee. However, upon
the completion of the restructuring of the Company's capital in October
1996, the Company terminated this plan and the stockholders concurrently
approved a New Stock Option Plan, pursuant to which 598,782 shares of common
stock were reserved. In fiscal 1997, options were granted to purchase
598,609 shares of common stock at exercise prices ranging from $2.75 - $3.00
per share and expire 10 years from the date of the grant. Prior to May 31,
1996, the Company accounted for such options under APB Opinion 25 and
related Interpretations. Commencing June 1, 1996, the Company accounts for
non-qualified options issued to non-employees, under SFAS 123, Accounting
for Stock Based Compensation.
The exercise price of all options granted by the Company equals the market
price at the date of the grant. No compensation expense has been recognized.
Had compensation cost for the Stock Option Plan and non-qualified options to
employees been determined based on the fair value of the options at the
grant dates consistent with the method of SFAS 123, the Company's net income
and earnings per share would have been changed to the pro forma amounts
below. Disclosure of such amounts is not required for the fiscal year ended
May 31, 1995 and accordingly is not presented below.
1997 1996
----------- -----------
Net income
As reported $ 1,728,493 $ 2,285,969
Pro forma $ 1,150,122 $ 2,285,969
Primary earnings per share
As reported $ .96 $ 15.27
Pro forma $ .63 $ 15.27
The above pro forma disclosures may not be representative of the effects on
reported net income for future years as certain options vest over several
years and the Company may continue to grant options to employees.
The fair value of each option grant is estimated on the date of grant using
the binomial option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1997 and fiscal 1996, respectively:
dividend yield of 0.0 percent for all years; expected volatility of 30
percent; risk-free interest rates of 6.25 percent; and expected holding
periods of 4 years.
(continued)
NOTE H - STOCK OPTIONS - Continued
A summary of the status of the Company's fixed stock options as of May 31,
1997 and 1996, and changes during the years ending on those dates is as
follows:
MAY 31, 1997 MAY 31, 1996
Weighted - Weighted-
Average Average
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- ------ --------------
Outstanding at beginning of
year 269,500 $ .70 295,000 $ .65
Granted 598,609 2.99 -
Exercised - -
Expired - -
Cancelled (269,500) .70 (25,500) .19
--------- ------ -------- -------
Outstanding at end of year 598,609 2.99 269,500 .70
Options exercisable at end of
year 392,430 269,500
Weighted-average fair value
of options granted during
the year $ .97 $ -
The following information applies to options outstanding at May 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted -
Average
Remaining Weighted - Weighted -
Ranges of Contractual Average Average
EXERCISE PRICES SHARES LIFE EXERCISE PRICE SHARES EXERCISE PRICE
---------------- ------ -------- -------------- ------ ------------
$2.75 - $3.00 598,609 9.4 years $ 2.99 392,430 $ 2.98
NOTE I - SALES TO MAJOR CUSTOMERS/FOREIGN AND DOMESTIC
The Company sells aircraft and aircraft parts, and leases aircraft to
foreign and domestic customers. Most of the Company's sales take place on
an unsecured basis, and a majority of the sales are to aircraft operators.
The information with respect to sales and lease revenue, by geographic
area, is presented in the table below for the years ended May 31, 1997, 1996
and 1995.
(IN THOUSANDS)
1997 1996 1995
------- ------- -------
United States $ 18,067 $ 19,800 $ 18,048
Africa and Middle East 402 623 1,204
Europe 319 177 1,350
Latin America 408 2,454 4,347
Canada 133 - 34
Asia 1,903 151 -
------- ------- -------
$ 21,232 $ 23,205 $ 24,983
======= ======= =======
NOTE I - SALES TO MAJOR CUSTOMERS/FOREIGN AND DOMESTIC - Continued
No customer accounted for more than 10% of the Company's sales in fiscal
1997. The Company had part sales to a domestic customer which accounted for
approximately 21% of net sales in fiscal 1996 and less than 10% of net sales
in both fiscal 1997 and 1995. No other customer accounted for more than 10%
of the Company's sales in fiscal 1996.
The Company had sales to a Venezuelan customer which accounted for
approximately 11% of net sales in fiscal 1995. There were no sales to this
customer in fiscal 1997 or fiscal 1996. Additionally, the Company sold 3
aircraft to a United States customer which represented 23% of net sales in
fiscal 1995. The Company did not have any sales to this customer in
previous fiscal years.
The Company's allowance for doubtful accounts is based on management's
estimates of the creditworthiness of its customers, and, in the opinion of
management is believed to be set in an amount sufficient to respond to
normal business conditions. Should such conditions deteriorate or any major
credit customer default on its obligations to the Company, this allowance
may need to be increased which may have an adverse impact upon the Company's
earnings.
NOTE J - SUPPLEMENTAL CASH FLOW DISCLOSURE
In fiscal 1997, the Company completed a restructuring of its capital (See
Note B). In conjunction with this restructuring, the Company incurred the
following noncash financing activity:
Decrease in Subordinated Debentures $ 10,000,000
Decrease in Accrued Interest 1,224,755
Decrease in Common Stock 2,245
Increase in Paid in Capital (10,892,140)
Decrease in Deferred Restructuring Fees (334,860)
In fiscal 1997, the Company exchanged an aircraft with a net book value
of $237,552 for certain inventory. No gain or loss was recorded on the
exchange.
The net change in inventory in fiscal 1997 and 1996, as derived from the
change in balance sheet amounts, has been adjusted for the following items:
1997 1996
---------- ----------
Net increase in inventory $ 2,367,969 $ 2,780,045
Write-down of aircraft - 250,000
Transfer of aircraft from inventory
to held for lease 303,064 -
Exchange of aircraft held for lease
for inventory (237,552) -
---------- ----------
Cash flow impact from change in
inventory $ 2,433,481 $ 3,030,045
=========== ==========
NOTE K - RELATED PARTY TRANSACTIONS
In connection with obtaining the Credit Agreement with the Bank of New
York, the Company agreed to pay the placement agent a $250,000 placement
fee. A director of the Company was a principal of the placement agent. In
fiscal 1997, the Company paid the placement agent $200,000 of this fee, and
the remaining $50,000 will be paid in fiscal 1998.
NOTE L - FOURTH QUARTER ADJUSTMENTS
In fiscal 1997, the Company recorded a fourth quarter tax benefit of
approximately $102,000 as a result of adjusting the estimated effective tax
rate used during the year.
In 1996, the Company recorded a fourth quarter adjustment in the amount
of approximately $385,000 which related to capitalizing the costs incurred
as a result of the planned restructuring (see Note B). Approximately
$306,000 of these costs were expensed in the first three quarters of fiscal
1996.
NOTE M - ACCRUED LIABILITIES
Accrued liabilities consist of the following items:
1997 1996
-------- --------
Customer deposits $ 361,153 $ 367,669
Accrued repair costs 507,161 187,157
Accrued legal costs 10,000 -
Accrued interest 9,014 1,165,468
Accrued payroll 559,270 399,886
Accrued property taxes 28,695 31,144
Accrued commissions 167,741 167,741
Reserve for repair of leased aircraft 579,143 480,308
Other 12,173 361,609
-------- --------
$ 2,234,350 $ 3,160,982
NOTE N - WELLMAN TRANSACTION
In January 1995, the Company entered into an agreement with the former
Chairman and former Secretary of the Company whereby the Company transferred
all of the outstanding stock of Brent Aviation, a wholly-owned subsidiary,
to an affiliate of the former employees. In addition, the Company also
transferred certain spare parts, components, inventory and equipment for B-
727 series aircraft, and a McDonnell Douglas DC-4 aircraft. In
consideration, the Company received $230,000 and agreed to lease a B-727 to
the affiliate on a month-to-month basis.
In addition, the employees resigned from all positions as officers or
directors, granted a proxy to the Company enabling the Company's directors
to vote 1.98 million shares of common stock held by the employees for a
period of two years, and agreed not to compete or interfere with any of the
businesses of the Company and its remaining subsidiaries for a period of two
years. The Company further agreed to pay the former Secretary one year's
salary as severance. The Company also agreed to terminate its leasehold
interest in a facility located at Grayson County, Texas Airport, allowing
Brent Aviation to lease such facility for its operations.
NOTE O - DISPOSAL OF SERVICE CENTER OPERATIONS
In June 1994, the Company's Board of Directors unanimously voted to cease
operations and to sell or otherwise dispose of the Company's wholly-owned
subsidiary, International Airline Service Center, Inc. ("IASC"), which was
an FAA certified repair facility engaged in the performance of maintenance
check required by the FAA on narrow body aircraft, following the sale of
certain of the Company's aircraft being serviced under contract by IASC.
During the third quarter of 1995, IASC fulfilled its obligations to
service the aircraft and ceased operations. On January 31, 1995, IASC
entered into an agreement with a third party, pursuant to which IASC
assigned its interest in a certain equipment lease with a net book value of
$826,965 at May 31, 1995, to the third party, and the third party assumed
IASC's interests and obligations under such lease. IASC's interest in the
lease as of May 31, 1995 was $897,596. Thus a gain of $70,631 was
recognized as a result of the transaction. Pursuant to the transaction,
IASC disposed of substantially all of its operating assets.
NOTE P - EMPLOYMENT AGREEMENTS
In October 1996, the Company entered into employment agreements with two
of its executive officers for a period of five years. The agreements
provide the employees with a certain minimum annual salary plus bonus. The
agreements provide the employees with an option to terminate their
agreements and receive a lump sum payment equal to the employee's average
annual compensation paid by the Company for the most recent two years upon a
change in control of the Company.
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1995, 1996 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
YEAR ENDED MAY 31, 1995
Reserves deducted from assets to which they apply:
Allowance for possible losses on
accounts receivable $ 940,214 $ 406,147 $ - $ 727,176 (a) $ 619,185
YEAR ENDED MAY 31, 1996
Reserves deducted from assets to which they apply:
Allowance for possible losses on
accounts receivable $ 619,185 $ 482,375 $ - $ 366,874 (a) $ 734,686
YEAR ENDED MAY 31, 1997
Reserves deducted from assets to which they apply:
Allowance for possible losses on
accounts receivable $ 734,686 $ 123,375 $ - $ 247,585 (a) $ 610,476
(a) Write-off of accounts receivable against the reserve.