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, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
____________________ to _______________________
Commission File Number 0-18352
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INTERNATIONAL AIRLINE SUPPORT GROUP, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 59-2223025
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1954 Airport Road, Suite 200,
Atlanta, Georgia 30341
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(Address of principal executive offices) (Zip Code)
(770) 455-7575
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on which
registered
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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 [ ]
At August 12, 1998, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $15,140,737.50.
The number of shares of the Registrant's Common Stock outstanding as of
August 12, 1998 was 2,563,967.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on September 21, 1998 are incorporated by reference in Parts III and
IV.
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]
INTERNATIONAL AIRLINE SUPPORT GROUP INC.
ANNUAL REPORT OF FORM 10-K
FOR THE YEAR ENDED MAY 31, 1998
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners
and Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 22
SIGNATURES
[THIS PAGE INTENTIONALLY LEFT BLANK]
PART I
ITEM 1. BUSINESS.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (THE "EXCHANGE ACT"), INCLUDING THE PLANS AND OBJECTIVES OF
MANAGEMENT FOR THE BUSINESS, OPERATIONS AND ECONOMIC PERFORMANCE OF THE
COMPANY. THE FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS SET FORTH IN THIS
ANNUAL REPORT MAY INCLUDE OR RELATE TO, AMONG OTHER THINGS, (I) INCREASING THE
COMPANY'S MARKET SHARE OF PARTS FOR MD-80 AND DC-9 AIRCRAFT, (II) POTENTIAL
ACQUISITIONS OF ADDITIONAL INVENTORIES OF AIRCRAFT SPARE PARTS AND THE
ACQUISITION OF OTHER COMPANIES, ASSETS OR PRODUCT LINES THAT WOULD COMPLEMENT
OR EXPAND THE COMPANY'S EXISTING AIRCRAFT SPARE PARTS BUSINESS, (III) DEMAND
AMONG THE COMPANY'S PRINCIPAL CUSTOMERS, INCLUDING CARGO CARRIERS AND REGIONAL
COMMERCIAL AIRLINES, FOR THE COMPANY'S INVENTORY OF PARTS, (IV) THE SIZE AND
GROWTH RATE OF THE AIRCRAFT PARTS REDISTRIBUTION INDUSTRY AND THE AIRCRAFT AND
ENGINE LEASING INDUSTRY, (V) INCREASES OR CHANGES IN GOVERNMENT REGULATIONS
REGARDING THE AVIATION INDUSTRY, (VI) COMPETITION FROM OTHER AIRCRAFT PARTS
REDISTRIBUTORS AND (VII) PROPOSED EXPANSION OF THE COMPANY'S PRODUCT LINE. SEE
"CAUTIONARY STATEMENTS" HEREIN.
THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN ARE BASED UPON CURRENT
EXPECTATIONS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THESE FORWARD-
LOOKING STATEMENTS ARE BASED UPON ASSUMPTIONS THAT THE COMPANY WILL CONTINUE TO
MANAGE ITS INVENTORY EFFECTIVELY, THAT COMPETITIVE CONDITIONS WITHIN THE
AIRCRAFT PARTS REDISTRIBUTION INDUSTRY WILL NOT CHANGE MATERIALLY OR ADVERSELY,
THAT DEMAND FOR AIRCRAFT SPARE PARTS WILL REMAIN STRONG AND THAT THERE WILL BE
NO MATERIAL ADVERSE CHANGE IN THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS
WITH RESPECT, AMONG OTHER THINGS, TO FUTURE ECONOMIC COMPETITIVE MARKET
CONDITIONS AND FUTURE BUSINESS DECISIONS, ALL OF WHICH ARE DIFFICULT OR
IMPOSSIBLE TO PREDICT ACCURATELY AND MOST OF WHICH ARE BEYOND THE CONTROL OF
THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, ANY OF THE ASSUMPTIONS COULD PROVE
INACCURATE AND, THEREFORE, THERE CAN BE NO ASSURANCE THAT THE RESULTS
CONTEMPLATED IN SUCH FORWARD-LOOKING INFORMATION WILL BE REALIZED. IN
ADDITION, AS DISCLOSED ABOVE, THE BUSINESS AND OPERATIONS OF THE COMPANY ARE
SUBJECT TO SUBSTANTIAL RISKS THAT INCREASE THE UNCERTAINTY INHERENT IN SUCH
FORWARD-LOOKING STATEMENTS. ANY OF THE OTHER FACTORS DISCLOSED ABOVE COULD
CAUSE THE COMPANY'S REVENUES OR NET EARNINGS, OR GROWTH IN REVENUES OR NET
EARNINGS, TO DIFFER MATERIALLY FROM PRIOR RESULTS. GROWTH IN ABSOLUTE AMOUNTS
OF COST OF SALES AND GENERAL AND ADMINISTRATIVE EXPENSES OR THE OCCURRENCE OF
EXTRAORDINARY EVENTS COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE
RESULTS CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS. BUDGETING AND OTHER
MANAGEMENT DECISIONS ARE SUBJECTIVE IN MANY RESPECTS AND THUS SUSCEPTIBLE TO
INTERPRETATIONS AND PERIODIC REVISIONS BASED ON ACTUAL EXPERIENCE AND BUSINESS
DEVELOPMENTS, THE IMPACT OF WHICH MAY CAUSE THE COMPANY TO ALTER ITS MARKETING,
CAPITAL EXPENDITURE OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN
THE FORWARD-LOOKING INFORMATION INCLUDED HEREIN, THE INCLUSION OF SUCH
INFORMATION SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY
OTHER PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
General
The Company is a leading redistributor of aftermarket aircraft spare
parts used primarily for McDonnell Douglas MD-80 and DC-9 aircraft. According
to the World Jet Inventory Year-End 1997 (the "World Jet Inventory"), MD-80 and
DC-9 aircraft accounted for approximately 15% of the commercial aircraft in
service worldwide at December 31, 1997. Management believes that the Company
has one of the most extensive inventories of aftermarket MD-80 and DC-9 parts
in the industry. In addition, the Company provides aircraft spare parts for
Boeing, Lockheed, Airbus and commuter aircraft. The aircraft spare parts
distributed by the Company, including avionics, rotable and expendable airframe
and engine parts, are sold to a wide variety of domestic and international air
cargo carriers, major commercial and regional passenger airlines, maintenance
and repair facilities and other redistributors. The wide variety of aircraft
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spare parts distributed by the Company are acquired through purchase or
consignment of surplus or bulk inventories from airlines, purchases from other
redistributors and disassembly of aircraft.
In addition to being a provider of aircraft spare parts, the Company
leverages its industry expertise to purchase, sell and lease aircraft and
engines. The Company has periodically acquired, leased and sold a variety of
narrow-body commercial jet aircraft, such as Boeing 727 and 737 and McDonnell
Douglas MD-80 and DC-9 aircraft, and has recently increased its focus on these
activities. The Company currently leases three Boeing 727 freighter aircraft
to a major cargo carrier and two Pratt & Whitney JT8D series engines to a
smaller cargo and charter passenger carrier. The Company derives revenue from
lease payments and seeks to sell spare parts to the lessee both for the leased
aircraft as well as other aircraft in the lessee's fleet. Upon return of the
aircraft, the Company either re-leases, sells or disassembles the aircraft for
parts in order to achieve the highest utilization of the asset.
COMPANY HISTORY
The Company was founded in 1982 and went public in April of 1990.
Initially the Company focused on parting out DC-8 aircraft and reselling the
resulting spare parts. Based upon the Company's success in parting out DC-8
aircraft, the Company began purchasing and parting out DC-9 and MD-80 aircraft
in 1991. Beginning in 1992, the Company began purchasing and parting out
Boeing 727 aircraft. Since its founding, the Company has acquired over 50
aircraft for parting out.
In 1993, the Company commenced a diversification program that included
the development of an FAA-approved maintenance and overhaul facility. After
sustaining a $17.4 million loss in fiscal 1994, primarily attributable to the
operation of this facility and lack of focus on the Company's core business, a
management realignment was undertaken pursuant to which Alexius A. Dyer III
became President of the Company. Thereafter, the Company sold the maintenance
and overhaul facility and returned its focus to the redistribution of
aftermarket spare parts. This successful redirection of operations was
followed by a restructuring of the Company's capital structure, which was
consummated on October 3, 1996 (the "Restructuring"). The redirection of
operations returned the Company to profitability, and the Restructuring
resulted in a significant reduction in the Company's leverage and interest
expense. The Company's strengthened financial condition and profitability can
be seen through the expansion of its gross margin as a percent of total
revenues, which increased from 29% in fiscal 1995 to 40% in fiscal 1998 as well
as 14 consecutive profitable quarters following the Company's refocus on its
aftermarket business.
INDUSTRY OVERVIEW
The Company believes that the annual worldwide market for aircraft spare
parts is approximately $10 billion, of which approximately $1.3 billion
represents sales of aircraft spare parts to the redistribution market. The
Company believes that this market will continue to grow due to the following
factors:
INCREASE IN THE NUMBER OF OLDER COMMERCIAL AIRCRAFT. Increased demand
for air travel and the need for aircraft operators to reduce operating and
capital costs have prompted many airlines to extend the useful life of older
equipment. The installation of FAA-approved hush-kits and extended life
maintenance programs have also increased the useful life of many older
aircraft. As a result, most aircraft types have had a longer service life than
originally certified. In addition, many foreign and domestic aircraft
operators and cargo carriers are increasing their fleets through the
acquisition of less expensive used aircraft. As older aircraft are
transitioned from major domestic passenger airlines to lower cost international
and regional domestic passenger airlines and cargo carriers, used aircraft have
enjoyed longer service lives than originally anticipated. Older aircraft
typically require more maintenance and replacement parts than new aircraft.
According to the World Jet Inventory, at December 31, 1997, the average age of
the worldwide jet fleet was 13.6 years and the Company believes the average age
will increase in the future.
LEASING. The Company believes that due to the increasing costs of
commercial jet aircraft, the anticipated growth of the worldwide aircraft
fleet, and the emergence of new regional airlines, aircraft operators will
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increasingly turn to operating leases as an alternative method to finance their
aircraft and engine needs. The Company believes that leasing of used
commercial jet aircraft and engines should grow due to the emphasis on airline
cost reduction, the desire of airlines for fleet flexibility and the growth in
air travel. In addition, several smaller and regional airlines have recently
chosen to lease inventories of aircraft spare parts in order to preserve
capital while maintaining adequate spare parts support.
REDUCTION IN NUMBER OF APPROVED SUPPLIERS. Cost considerations cause
many aircraft operators to reduce the size of their spare parts inventories,
while efficiency and quality concerns may cause aircraft operators to maintain
relationships with a more limited number of approved suppliers. Quality
concerns are causing aircraft operators to demand that their suppliers be
quality certified by organizations such as the Airline Suppliers Association
("ASA") or the International Standards Organization ("ISO") and at least one
major commercial airline has begun to demand its suppliers carry product
liability insurance. In addition, as aircraft operators adopt just-in-time
inventory procurement processes, inventory storage is increasingly handled by
suppliers such as the Company. The Company believes that these trends will
continue in the future and will benefit well-positioned aircraft parts
suppliers such as the Company.
INCREASED INVENTORY CONSIGNMENT. Certain of the Company's customers
adjust inventory levels on a periodic basis by disposing of excess aircraft
spare parts. Traditionally, larger airlines have used internal sales agents to
manage such dispositions. The Company believes that major airlines and other
owners of aircraft spare parts, in order to concentrate on their core
businesses and to more effectively monetize their excess parts and inventories,
are increasingly entering into long-term consignment agreements with
redistributors. By consigning inventories through a redistributor such as the
Company, customers are able to offer their aircraft spare parts to a larger
number of prospective inventory buyers, allowing the customer to maximize the
value of its inventory. Consignment also enables a consignee to offer for sale
significant parts and inventory at minimal capital cost.
COMPANY STRATEGY
The Company's strategy is to capitalize upon its position as a leading
redistributor of MD-80 and DC-9 aircraft spare parts and to broaden its product
lines to include other high-use aircraft as the world fleet grows. Key
elements of the Company's strategy include:
EXPAND AIRCRAFT AND ENGINE LEASING SERVICES. The Company believes that
airlines are becoming increasingly aware of the benefits of financing their
fleet equipment on an operating lease basis, including cost reduction and
flexibility regarding fleet size and composition. The Company believes that
leasing commercial aircraft and engines offers an effective use of the
Company's capital. The Company derives revenue from lease payments and seeks
to sell spare parts to the lessee both for the leased aircraft as well as other
aircraft in the lessee's fleet. Upon return of the aircraft, the Company
either re-leases, sells or disassembles the aircraft for parts in order to
achieve the highest utilization of the asset.
BROADEN PRODUCT LINE. The Company has recently expanded its product line
to include aftermarket parts for Airbus A-300 series aircraft and certain
commuter aircraft including Shorts, de Havilland and British Aerospace. In
addition, the Company intends to expand its product line to include parts for
McDonnell Douglas DC-10 and Boeing 767 aircraft. As fleets of these aircraft
age and as air cargo carriers transition larger portions of their fleets to
wide-body aircraft, the Company will seek to capitalize on the demand for parts
resulting from the aging and continued use of these aircraft models. Several
air cargo carriers currently utilize DC-10, 767 and A-300 series aircraft, and
the Company believes use of these models will continue to increase. The
Company believes that a significant number of these aircraft types have been or
will be converted to cargo use and that its relationship with cargo carriers
will provide an advantage in supplying parts for these aircraft to such
customers.
INCREASE SALES TO CARGO CARRIERS AND REGIONAL COMMERCIAL AIRLINES. Cargo
carriers and regional commercial airlines are among the Company's principal
customers. Cargo carriers are important customers because the fleets of such
operators typically consist of older aircraft of the type for which the Company
maintains an extensive inventory of parts. Additionally, such customers
typically do not maintain extensive inventories of spare parts. Regional
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commercial airlines are important customers because such airlines favor narrow-
body aircraft, such as MD-80 and DC-9 aircraft, for which the Company is a
primary source of spare parts. The Company will direct its marketing
activities to broadening its customer base of cargo and regional airlines in
order to increase market share and leverage its core competencies.
CAPITALIZE ON BULK PURCHASE OPPORTUNITIES. While there is no
predictability as to when opportunities will arise to purchase large
inventories in bulk, such opportunities periodically become available. Bulk
purchase opportunities arise when airlines, in order to reduce capital
requirements, sell large amounts of inventory in a single transaction, when
inventories of aircraft spare parts are sold in conjunction with corporate
restructurings or reorganizations or when an aircraft operator realigns its
aircraft fleet, reducing the number of or exiting a particular aircraft model.
Bulk inventory purchases allow the Company to obtain large inventories of
aircraft spare parts at a lower cost than can ordinarily be obtained by
purchasing spare parts on an individual basis, resulting generally in higher
gross margins on sales of such parts. Since fiscal 1996, the Company has
successfully completed two large bulk inventory purchases. The Company
believes that its market presence, experience in evaluating bulk purchases,
sophisticated management information systems and capital strength will enable
the Company to quickly analyze and complete large bulk purchase opportunities
to the extent that the economics of such purchases are considered favorable.
INCREASE MARKET SHARE OF PARTS FOR MD-80 AND DC-9 AIRCRAFT. The Company
intends to increase its market share of parts for MD-80 and DC-9 aircraft.
According to the World Jet Inventory, MD-80 and DC-9 aircraft together
accounted for approximately 15% of the commercial aircraft in service worldwide
at December 31, 1997. 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 of the DC-9, gives it a competitive advantage in
selling parts into the MD-80 marketplace. Boeing has indicated its intention
to cease production of the MD-80 around mid-1999 or when current production
commitments end. The Company intends to capitalize on the limited availability
of new parts for such aircraft models by acquiring (i) pools of inventory from
airlines that cease to operate such aircraft or that desire to reduce their
levels of parts inventory and (ii) aircraft for disassembly when economically
justified. The Company believes that its knowledge of the fleets of MD-80s and
DC-9s currently in operation and its worldwide contacts in the commercial
aviation industry will permit it to acquire other inventory pools and aircraft
for disassembly on favorable terms in the future.
CONTINUED COMMITMENT TO QUALITY AND TECHNOLOGICAL INNOVATION. The
Company emphasizes adherence to high quality standards during each stage of its
operations (product acquisition, documentation, inventory control and
delivery). In August 1997, the ASA, an FAA-recognized independent quality
assurance organization, accredited the Company as an aftermarket supplier. In
addition, the Company believes it was one of the first aftermarket
redistributors to bar-code its inventory and it has created and sponsors an
industry-wide Internet parts locator service for its customers, which heightens
awareness of the Company, enhances its position in the industry and increases
sales of parts.
PURSUE STRATEGIC ACQUISITIONS. The Company competes in a fragmented
market in which numerous small companies serve distinct market niches. The
Company believes that small aftermarket parts redistributors, many of which are
family-owned or capital constrained, are unable to provide the extensive
inventory and quality control measures necessary to comply with applicable
regulatory and customer requirements, and will provide acquisition
opportunities for the Company. Acquisitions are expected to increase the
Company's customer base, expand its product line both with respect to aircraft
in which the Company currently specializes and into new aircraft types, and to
strengthen its relationships with existing customers through availability of
additional inventory.
AIRCRAFT SPARE PARTS
Aircraft spare parts can be categorized by their ongoing ability to be
repaired and returned to service. The general categories are as follows: (i)
rotable; (ii) repairable; and (iii) expendable. A rotable is a part which is
removed periodically as dictated by an operator's maintenance program or on an
as-needed basis and is typically repaired or overhauled and re-used an
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indefinite number of times. An important subset of rotables is life limited
parts. A life limited rotable has a designated number of allowable flight
hours and/or cycles (one take-off and landing generally constitutes one cycle)
after which it is rendered unusuable. A repairable is similar to a rotable
except that it can only be repaired a limited number of times before it must be
discarded. An expendable is generally a part which is used and not thereafter
repaired for further use.
Aircraft spare parts' conditions are classified within the industry as
(i) factory new, (ii) new surplus, (iii) overhauled, (iv) serviceable, and (v)
as removed. A factory new or new surplus part is one that has never been
installed or used. Factory new parts are purchased from manufacturers or their
authorized distributors. New surplus parts are purchased from excess stock of
airlines, repair facilities or other redistributors. An overhauled part has
been completely disassembled, inspected, repaired, reassembled and tested by a
licensed repair facility. An aircraft spare part is classified serviceable if
it is repaired by a licensed repair facility rather than completely
disassembled as in an overhaul. A part may also be classified serviceable if
it is removed by the operator from an aircraft or engine while operating under
an approved maintenance program and is functional and meets any manufacturer or
time and cycle restrictions applicable to the part. With appropriate
documentation, a factory new, new surplus, overhauled or serviceable part
designation indicates that the part can be immediately utilized on an aircraft.
A part in as removed condition requires functional testing, repair or overhaul
by a licensed facility prior to being returned to service in an aircraft. The
aircraft spare parts sold by the Company include avionics, rotable and
expendable airframe and engine parts for commercial aircraft. Currently, the
Company specializes in replacement parts for MD-80 and DC-9 aircraft and
management believes that the Company has one of the most extensive inventories
of aftermarket MD-80 and DC-9 parts in the industry. As of May 31, 1998, the
Company had over 50,000 inventory line items, many of which represent multiple
unit quantities and relate to the MD-80 and DC-9 aircraft. Many of these parts
such as avionics and engine parts can also be used by a wide variety of
aircraft other than MD-80 and DC-9 aircraft. In addition to the Company's
inventory of MD-80 and DC-9 parts, the Company's inventory also includes spare
parts for Boeing 727, 737 and 747 aircraft, Lockheed L-1011 aircraft, McDonnell
Douglas DC-8 and DC-10 aircraft, Airbus, Shorts, de Havilland and British
Aerospace aircraft and for the Pratt & Whitney JT8D engine series.
OPERATIONS OF THE COMPANY
The Company's core business is the buying and selling of aircraft spare
parts. In addition, the Company has recently expanded its product line to
include the sale and leasing of aircraft and engines. The Company believes
that the leasing of aircraft and engines will become a more significant part of
the Company's business in the future and that it provides significant
opportunities for expansion.
INVENTORY ACQUISITION. The Company obtains most of its parts inventory
by purchasing individual parts from airlines, repair facilities or other
redistributors, by purchasing excess inventory from aircraft operators ("bulk
inventory purchases") or by purchasing aircraft for disassembly. The Company
may also fill a customer order for a part not held in the Company's inventory
by locating the part for the customer from another vendor, purchasing the part
and then reselling the part to the customer. The Company makes bulk inventory
purchases by bidding on the inventory of companies that are eliminating certain
portions of their spare parts inventory due to the retirement of an aircraft
type from their fleets, inventory reduction programs to reduce costs, the
downsizing of their operations or the dissolution of their businesses as a
whole.
AIRCRAFT AND ENGINE SALES AND LEASING. The Company has determined that
its spare parts sales opportunities are enhanced by providing existing and new
customers with whole aircraft and engines through sale and lease transactions.
Such transactions allow the Company to expand its customer base for spare parts
and, through leasing, to reduce the cost basis in its aircraft. The Company
derives revenue from lease payments and seeks to sell spare parts to the lessee
both for the leased aircraft as well as other aircraft in the lessee's fleet.
Upon return of the aircraft, the Company either re-leases, sells or
disassembles the aircraft for parts in order to achieve the highest utilization
of the asset.
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The Company currently leases three Boeing 727 freighter aircraft to a
major cargo carrier and two JT8D engines to a smaller cargo and passenger
carrier. All of the Company's aircraft leases are operating leases rather than
finance leases and expire between January and March 1999. The Company's engine
leases are "evergreen" leases which, although they have no termination date,
are cancelable by either party upon specified notice, typically 30 to 90 days.
Under an operating lease, the Company retains title to the aircraft or engine,
thereby retaining the potential benefits and assuming the risk of the residual
value of the aircraft or engine. Operating leases allow aircraft operators
greater fleet and financial flexibility due to their shorter-term nature, the
relatively small initial capital outlay necessary to obtain use of the aircraft
or engine and off-balance sheet accounting treatment. The Company focuses on
leasing to its customers older, narrow-body aircraft and the engines they use
for periods between six months to three years. The Company believes that there
is an increasing demand by customers for operating leases, which are being used
as an alternative to traditional financing arrangements.
EXCHANGE TRANSACTIONS. An "exchange transaction" generally involves a
high value/high turnover rotable part which an operator frequently replaces
when performing aircraft maintenance. In an exchange transaction, a customer
pays an exchange fee and returns a "core" unit to the Company within 14 days.
A "core" unit is the same part which is being delivered to the customer by the
Company, but in need of overhaul. The Company has the customer's core unit
overhauled and bills the customer for the overhaul charges and retains the
overhauled core unit in its inventory. If the "core" unit cannot be repaired,
it is returned to the customer and the exchange transaction is converted to an
outright sale at a sales price agreed upon at the time the exchange transaction
was negotiated. The Company continues to emphasize exchange transactions
because they are profitable and ensure that scarce parts remain in stock for
future sales.
SALES AND MARKETING; CUSTOMERS
The Company has developed a sales and marketing infrastructure which
includes well-trained and knowledgeable sales personnel, computerized inventory
management, listing of parts in electronic industry data bank catalogues and a
home page on the Internet. Crucial to the successful marketing of the
Company's inventory is the Company's ability to make timely delivery of spare
parts in reliable condition. The Company believes aircraft operators are more
sensitive to reliability and timeliness than price.
In addition to directly marketing its inventory, the Company has created
and sponsors an industry-wide internet parts locator service, which is found at
HTTP:\\WWW.IPLS.COM. The Company's internet service is a free service
available to any potential customer and lists all of the inventory available
for sale by the Company. In order to increase its value to potential
customers, the Company's Internet service also contains inventory of
approximately 60 additional aftermarket parts redistributors. Similarly, the
Company lists its inventory in the Air Transport Association's computerized
databank ("AIRS") and with the Inventory Locator Service ("ILS") proprietary
computerized databank. Buyers of aircraft spare parts can access any of the
databases described above, as well as other parts databases, to determine the
companies which have the desired inventory available. Neither the Company's
service, AIRS or ILS list price information relating to particular parts.
Market forces establish the price for aftermarket aircraft parts. No
pricing service or price catalogue exists for aftermarket parts. Aftermarket
aircraft parts prices are determined by referencing new parts catalogues with
consideration given to existing supply and demand conditions. Often, aircraft
operators will opt for quality aftermarket parts even when new parts are still
in production. Aftermarket aircraft parts meet the same FAA standard as new
parts, cost less than the same new parts and are often more readily available.
The Company's customers include a wide variety of domestic and
international air cargo carriers, major commercial and regional passenger
airlines, maintenance and repair facilities and other redistributors.
Management believes that its customer relationships are important to the
Company's operational success. The Company maintains an adequate level of
inventory in order to service its customers in a timely manner. Management
believes that availability and timely delivery of quality spare parts are the
primary factors considered by customers when making a spare parts purchase
decision. Cargo carriers and regional commercial airlines are among the
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Company's principal customers. Cargo carriers are important customers because
the fleets of such operators typically consist of older aircraft of the type
for which the Company maintains an extensive inventory of parts and because
such customers typically do not maintain extensive inventories of spare parts.
Regional commercial airlines are important customers because such airlines
favor narrow-body aircraft, such as MD-80 and DC-9 aircraft for which the
Company is a primary source of spare parts.
Excluding aircraft and engine sales, in fiscal 1998, no customers
accounted for more than 5% of the Company's total revenues. Each aircraft or
engine sale is unique and the Company does not rely on previous customers for
repeat aircraft business. Currently, the Company believes that it has no
customer, the loss of which would have a material adverse effect on the
Company's business, financial condition and results of operations. In a given
period, a substantial portion of the Company's revenues may be attributable to
the sale of one or more aircraft or engines. Such sales are unpredictable
transactions dependent, in part, upon the Company's ability to purchase an
aircraft or engine at an attractive price and resell it within a relatively
brief period of time. The revenues from the sale of an aircraft or engine, the
timing of inventory sales or a lease transaction during a given period may
result in a customer being considered a major customer of the Company for that
period.
QUALITY ASSURANCE
The Company adheres to stringent quality control standards and procedures
in the purchase and sale of its products. In August 1997, the ASA accredited
the Company as an aftermarket supplier after the completion of an extensive
facilities audit and numerous meetings with the Company's management. Parts
procured from an accredited supplier convey assurance to the purchaser that the
quality is as stated and the appropriate documentation is on file at the
supplier's place of business. Furthermore, accreditation provides assurance
that the supplier has implemented an appropriate quality assurance system and
has demonstrated the ability to maintain that system. In addition, many of the
Company's customers periodically audit the Company's operations to ensure
compliance with such customer's quality standards.
Because aircraft operators require a readily available and identifiable
source of inventory meeting regulatory requirements, the Company has
implemented a total quality assurance program. This program consists of
numerous quality procedures, including the following:
<circle> Inspection procedures mandating that procured aircraft, engines
and parts be traceable to a source approved by the Company
<circle> Training and supervision of personnel to properly carry out the
total quality assurance program
<circle> On-going quality review board meetings conducted by senior
management to oversee the total quality assurance program
GOVERNMENT REGULATION
The aviation industry is highly regulated in the United States by the FAA
and in other countries by similar regulatory agencies. These regulations are
designed to ensure that all aircraft, engines and aircraft components are
continuously maintained in proper condition for the safe operation of aircraft.
Before spare parts are installed on an aircraft, they must meet certain
standards as to their condition and have appropriate documentation. Parts
owned or acquired by the Company may not meet currently applicable standards,
or standards may change in the future, causing parts already contained in the
Company's inventory to be scrapped or modified. While the Company's operations
are not currently regulated directly by the FAA, the independent facilities
that repair and overhaul the Company's products and the aircraft operators that
ultimately utilize the Company's products are subject to extensive regulation.
Accordingly, the Company must consider the regulatory requirements of its
customers and provide them with parts that comply with airworthiness standards
established by the FAA and OEMs, together with required documentation which
7
enables these customers to comply with other applicable regulatory
requirements. The inspection, maintenance and repair procedures for the
various types of aircraft, engines and aircraft components are prescribed by
regulatory authorities and can be performed only by FAA-licensed repair
facilities utilizing certified technicians. Compliance with applicable FAA and
OEM standards are required prior to installation of a part on an aircraft. The
Company only utilizes FAA-licensed repair facilities to repair and certify
aircraft, engines and aircraft components.
In September 1996, the FAA issued an advisory circular to support the
implementation of a voluntary accreditation program for civil aircraft parts
suppliers. This accreditation program establishes quality standards applicable
to aftermarket suppliers, such as the Company, and designates FAA approved
organizations such as ASA to perform quality assurance audits for initial
accreditation of aftermarket suppliers. Quality assurance audits are required
on an on-going basis to maintain accreditation. In addition, many of the
Company's customers periodically audit the Company's operations to ensure
compliance with such customer's quality standards. The Company believes that
ongoing quality assurance audits and strict adherence to its quality assurance
system is essential to meeting the needs of its existing and future customers.
In August 1997, the Company received accreditation from the ASA.
Because the Company's sales consist largely of parts for older aircraft,
regulations promulgated by the FAA governing noise emission standards for older
aircraft and the FAA's Aging Aircraft Program Plan (the "Aging Aircraft
Program") may increase the cost of operating such aircraft and have a material
impact on the market for the Company's products. All stage 2 aircraft must
install hush-kits pursuant to such noise emission standards or be phased out of
operation in the United States by December 31, 1999 and in the European Union
by April 1, 2002. The Aging Aircraft Program requires aircraft operators to
perform structural modifications and inspections to address airframe fatigue
and to implement corrosion prevention and control programs, which increase the
operating and maintenance costs of older aircraft. Furthermore, the EPA and
the various agencies of the European Union have sought the adoption of stricter
standards limiting the emission of nitrous oxide from aircraft engines. The
Company believes that notwithstanding the substantial costs imposed by noise
emission standards and the Aging Aircraft Program on older aircraft, estimated
by the Company to average less than $4 million per aircraft on aircraft such as
the DC-9, certain aircraft operators will continue to utilize older aircraft
due to the substantially greater cost of acquiring new replacement aircraft.
The inability of the Company to supply its customers with spare parts on
a timely basis, or any occurrence of the Company providing products which
subsequently fail, may adversely affect the Company's relationships with its
customers and have a material adverse effect on its business, financial
condition and results of operations. The core operations of the Company may in
the future be subject to FAA or other regulatory requirements. The Company
closely monitors the FAA and industry trade groups in an attempt to understand
how possible future regulations might impact the Company. There can also be no
assurance that new and more stringent government regulations, if enacted, would
not have a direct or indirect adverse effect on the Company.
An important factor in the aircraft spare parts redistribution market
relates to the documentation and traceability of an aircraft spare part. The
Company requires all of its suppliers to provide adequate documentation as
dictated by the Company's customers. The Company utilizes electronic data
scanning and storage techniques to maintain complete copies of all
documentation. Documentation required includes, where applicable, (i) a
maintenance release from a certified airline repair facility signed and dated
by a licensed airframe and/or power plant mechanic who repaired the aircraft
spare part and an inspection to certify that the proper methods, materials and
workmanship were used, (ii) a "tear-down" report detailing the discrepancies
and corrective actions taken during the last shop repair, and (iii) an invoice
or purchase order for an approved source.
PRODUCT LIABILITY
The commercial aviation industry periodically experiences catastrophic
losses. As a redistributor, the Company may be named as a defendant in a
lawsuit as a result of such catastrophic loss if a part sold by the Company
were installed in an incident-related aircraft. In this regard, the Company
maintains product liability insurance in the amount of $10 million. While the
Company believes this amount to be adequate liability insurance to protect it
8
from such claims, and while no lawsuit has ever been filed against the Company
based upon a product liability theory, no assurance can be given that claims
will not arise in the future or that such insurance coverage will be adequate.
However, an uninsured or partially insured claim, or a claim for which third-
part indemnification is not available, could have a material adverse effect on
the Company's business, financial condition and results of operations.
Additionally, there can be no assurance that insurance coverages can be
maintained in the future at an acceptable cost. Any such liability not covered
by insurance could have a material adverse effect on the financial condition of
the Company.
COMPETITION
The aircraft spare parts redistribution market is highly competitive.
The market consists of a limited number of well-capitalized companies selling a
broad range of products and numerous small competitors serving distinct market
niches. Certain of these competitors have substantially greater financial,
marketing and other resources than the Company. The Company believes that
current industry trends will benefit larger, well-capitalized companies. The
Company believes that range and depth of inventories, quality and traceability
of products, service and price are the key competitive factors in the industry.
The principal companies with which the Company competes are AAR Corp., AGES,
Aviation Sales Company and Banner Aerospace, all of which are significantly
larger than the Company. Customers in need of aircraft parts have access,
through computer-generated inventory catalogues, to a broad array of suppliers,
including aircraft manufacturers, airlines and aircraft services companies,
which may have the effect of increasing competition for, and lowering prices
on, parts sales.
EMPLOYEES
As of May 31, 1998, the Company had 28 employees. The Company is not a
party to any collective bargaining agreement. The Company believes its
relations with its employees are good.
YEAR 2000 ISSUES
The Company has evaluated its major software and computer systems and
believes that it is Year 2000 compliant. The Company believes that it will not
incur any material expenses to ensure that its computer system and application
function beyond 1999.
CAUTIONARY STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE EXCHANGE ACT, INCLUDING THE PLANS AND
OBJECTIVES OF MANAGEMENT FOR THE BUSINESS, OPERATIONS AND ECONOMIC PERFORMANCE
OF THE COMPANY. THE FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS SET FORTH
IN THIS ANNUAL REPORT MAY INCLUDE OR RELATE TO, AMONG OTHER THINGS, THE FACTORS
SET FORTH BELOW, TOGETHER WITH OTHER INFORMATION SET FORTH IN THIS ANNUAL
REPORT.
RISKS REGARDING THE COMPANY'S INVENTORY. The Company obtains most of its
parts inventory by purchasing individual parts from airlines, repair facilities
or other redistributors, by purchasing excess inventory from aircraft
operators, or by purchasing aircraft for disassembly. The Company's business
is substantially dependent on its purchasing activities because its net parts
sales are directly influenced by the level and composition of inventory
available for sale. Because the size and composition of the Company's
inventory is critical to its results of operations and because there is no
organized market to procure surplus inventory, the Company's operations are
materially dependent on the success of management in identifying potential
sources of inventory and effecting timely purchases at acceptable prices.
There can be no assurance that inventory will be available on acceptable terms
or at the times required by the Company. In addition, once acquired, the
market value of the Company's inventory could be adversely affected by factors
beyond the Company's control, such as the sudden availability of additional
inventory, a sudden decline in demand for the Company's parts due to a decline
in use of certain aircraft types, regulatory changes mandating uneconomic
improvements to items in inventory, or a decision by an OEM to begin
9
manufacturing new parts that would compete with aftermarket parts. The failure
to identify and purchase inventory in a timely fashion at acceptable prices or
a decline in the value of the Company's inventory would have a material adverse
effect on the Company's business, financial condition and results of
operations.
CONCENTRATION ON MD-80 AND DC-9 AIRCRAFT. The Company's net parts sales
are concentrated in the aftermarket for MD-80 and DC-9 aircraft, which aircraft
at December 31, 1997 accounted for approximately 15% of the commercial aircraft
in service worldwide according to the World Jet Inventory. The DC-9 is no
longer in production and Boeing has indicated its intention to cease production
of the MD-80 around mid-1999 or when current production commitments end. Any
decline in the use of MD-80 and DC-9 aircraft by aircraft operators, the
unscheduled removal from service of large numbers of MD-80 and DC-9 aircraft or
the grounding of such aircraft by governmental authorities for any reason could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, all DC-9 aircraft operated in the
United States and European Union will need to be hush-kitted, relocated to
other areas or removed from service by 2000 or 2002, respectively. In the
event these aircraft are removed from service, demand for the Company's MD-80
and DC-9 parts could decline and the supply of spare parts may increase, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
BROADENING OF PRODUCT LINE. The Company has recently expanded its
product line to include aftermarket parts for Airbus A-300 series aircraft and
certain commuter aircraft including Shorts, de Havilland and British Aerospace
aircraft. In addition, the Company intends to broaden its product line to
include parts for McDonnell Douglas DC-10 and Boeing 767 aircraft. The Company
has limited experience with respect to the purchase and sale of spare parts for
these aircraft models. There can be no assurance that the Company will have
the same level of success in managing its parts inventories for such aircraft
that it has had with parts for MD-80 and DC-9 aircraft. The failure to
successfully broaden its product line could have a material adverse effect on
the Company's ability to implement its growth strategy.
EFFECTS OF THE ECONOMY ON THE OPERATIONS OF THE COMPANY. The Company's
customers consist of a wide variety of domestic and international air cargo
carriers, major commercial and regional passenger airlines, maintenance and
repair facilities and other redistributors. As a result, the Company's
business can be impacted by the economic factors that affect the airline and
air cargo industries. When such factors adversely affect the airline and air
cargo industries, they tend to cause downward pressure on the pricing for
aircraft spare parts and increase the credit risk associated with doing
business with airlines and air cargo carriers. Additionally, factors such as
the price of fuel affect the aircraft spare parts market for older aircraft,
since older aircraft become less competitive with newer model aircraft as the
price of fuel increases. There can be no assurance that economic and other
factors which might affect the airline and air cargo industries will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results, both
on an annual and a quarterly basis, are affected by many factors, including the
timing of large orders from customers, the timing of expenditures to purchase
inventory in anticipation of future sales, the timing of bulk inventory
purchases, the mix of available aircraft spare parts contained at any time in
the Company's inventory, the timing of aircraft or engine sales or leases,
unanticipated aircraft or engine lease terminations, default by any lessees and
many other factors largely outside the Company's control. Since the Company
typically does not obtain long-term purchase orders or commitments from its
customers, it must anticipate the future volume of orders based upon the
historic purchasing patterns of its customers and discussions with customers as
to their future requirements. Cancellations, reductions or delays in orders by
a customer or group of customers could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, due to the value of a single aircraft or engine sale relative to the
value of parts typically sold by the Company, any concentration of aircraft or
engine sales in a particular quarter may obscure existing or developing trends
in the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH LEASES. The Company currently leases three Boeing
727 freighter aircraft to a major cargo carrier and two Pratt & Whitney JT8D
series engines to a smaller cargo and charter passenger carrier. The success
10
of an operating lease depends in part upon having the aircraft and engines
returned to the Company in marketable condition as required by the lease of
such aircraft and engines. In addition, the financial return to the Company
from a leased aircraft or engine depends in part on the re-lease of aircraft
and engines on favorable terms on a timely basis, the ability to sell the
aircraft or engines at favorable prices or realize sufficient value from the
disassembly for parts of the aircraft or engines at the end of the lease term.
Numerous factors, many of which are beyond the control of the Company, may have
an impact on the Company's ability to re-lease or sell aircraft, engines and
parts. These factors include general market conditions, regulatory changes
(particularly those imposing environmental, maintenance and other requirements
on the operation of aircraft and engines), changes in the supply or cost of
aircraft and engines and technological development. Consequently, there can be
no assurance that the Company's estimated residual value for aircraft or
engines will be realized. If the Company is unable to re-lease, sell its
aircraft or engines on favorable terms or realize sufficient value from the
disassembly for parts of the aircraft or engines on a timely basis upon
expiration of the related lease, its business, financial condition and results
of operations may be adversely affected. In the event that a lessee defaults
in the performance of its obligations, the Company may be unable to enforce its
remedies under a lease. The Company's inability to collect lease payments when
due or to repossess aircraft or engines in the event of a default by a lessee
could have an adverse effect on the Company's business, financial condition and
results of operations. If the Company were to acquire an aircraft or engines
and such acquisitions were not financed by additional borrowing, it could
result in a reduction of the Company's liquidity.
RISKS ASSOCIATED WITH ACQUISITIONS. One of the Company's strategies for
growth is to pursue acquisitions of aftermarket redistributors. Currently, the
Company has no acquisition agreements, understandings or commitments for any
acquisitions and, in order to consummate an acquisition, the Company would be
required to receive the consent of the lender under its Credit Agreement.
There can be no assurance that any such acquisitions will be completed on
reasonable terms, if at all. Certain of the Company's competitors may also
seek to acquire the same companies which the Company seeks to acquire. This
may increase the price and related costs at which the Company could otherwise
have acquired such companies, perhaps materially. The Company's inability to
complete acquisitions on reasonable terms could limit the Company's ability to
grow its business.
The Company may expend significant funds to pursue and consummate
acquisitions. Such use of funds would reduce the Company's working capital.
In addition, the Company may fund acquisitions in whole or in part by issuing
equity securities, and any such issuances, individually or in the aggregate,
may be diluted to holders of the Common Stock. Acquisitions also may result in
the Company incurring additional debt and amortizing costs related to goodwill
and other intangible assets, either of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company may experience difficulties in assimilating the operations,
services and personnel of acquired companies and may be unable to sustain or
improve the historical revenue and earnings levels of acquired companies, any
of which may materially adversely affect the Company's business, financial
condition and results of operations. In addition, to the extent it becomes
necessary for the Company to fund the working capital requirements of acquired
companies, the Company's working capital available for its currently existing
operations would decrease. Acquisitions involve a number of additional risks,
including the diversion of management's attention from ongoing business
operations and the potential loss of key employees of acquired companies.
There can be no assurance that the Company can successfully implement is
acquisition strategy. The failure to consummate acquisitions on reasonable
terms or the inability to successfully integrate and manage acquired operations
and personnel could have a material adverse impact on the Company's business,
financial condition and results of operations.
RELIANCE ON EXECUTIVE OFFICERS. The continued success of the Company is
dependent to a significant degree upon the services of its executive officers
and upon the Company's ability to attract and retain qualified personnel
experienced in the various phases of the Company's business. The ability of
the Company to operate successfully could be jeopardized if one or more of its
executive officers were unavailable and capable successors were not found. The
Company does not maintain key man insurance on any of its executive officers.
The Company has employment agreements with Alexius A. Dyer III, its Chairman of
the Board, President and Chief Executive Officer, and George Murnane III, its
11
Executive Vice President and Chief Financial Officer. The employment
agreements between the Company and Messrs. Dyer and Murnane are individually
terminable by each executive officer upon a change of control of the Company.
ITEM 2. PROPERTIES.
The Company's executive offices and operations are located at 1954
Airport Road, Suite 200, Atlanta, Georgia 30341, consisting of approximately
3,600 square feet of leased space pursuant to a lease expiring in January 2000.
The Company leases approximately 29,500 square feet of warehouse facilities in
Fort Lauderdale, Florida pursuant to a lease expiring in June 2002. The
Company leases approximately 1,350 square feet of office space as a sales and
marketing office in Seattle, Washington pursuant to a lease expiring in March
2001. All facilities are rented at competitive rates for their location and
utility. The Company believes that its facilities are adequate for its needs
for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not now a defendant in any material litigation or other
legal proceeding. The Company may become a defendant in legal proceedings in
the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
12
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 for the first
three quarters of fiscal 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.
1998 FISCAL YEAR HIGH LOW
- ---------------- ---- ---
First Quarter $ 8 1/4 $ 4 1/4
Second Quarter 11 7 5/8
Third Quarter 8 1/2 5 15/16
Fourth Quarter 10 11/16 6 15/16
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, 1998, there were 112 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.
13
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,
1998, have been derived from the Company's audited consolidated financial
statements. The consolidated financial statements of the Company as of May 31,
1997 and 1998 and for the three-year period ended May 31, 1998 and the
accountant's reports thereon are included in Item 8 of this Form 10-K.
YEAR ENDED MAY 31,
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Net sales $16,747 $21,999 $21,410 $20,123 $25,648
Lease revenue 1,986 2,984 1,795 1,109 2,315
------- ------ ------ ------ ------
Total revenues 18,733 24,983 23,205 21,232 27,963
Total operating expenses 34,932 23,343 18,528 17,423 23,186
------- ------ ------ ------ ------
Income (loss) from continuing (16,199) 1,640 4,677 3,809 4,777
operations
Interest expense, net 2,866 2,254 2,377 1,550 1,934
------- ------ ------ ------ ------
Earnings (loss) before income
taxes, equity in earnings (loss)
of joint venture and (19,065) (614) 2,300 2,259 2,843
extraordinary item
Provision for income taxes (benefit) (2,476) -- 14 (2,820)
Equity in loss of joint venture (424) -- -- -- --
------- ------ ------ ------ ------
Earnings (loss) before extraordinary item (17,013) 2,286 2,259 5,663
Extraordinary loss on
extinguishment of debt (363) -- -- (531) --
------- ------ ------ ------ ------
Net earnings (loss) $(17,376) $ (614) $ 2,286 $ 1,728 $ 5,663
======= ===== ====== ====== ======
PER SHARE DATA:
Earnings (loss) per common share - $(113.65) $(4.10) $15.27 $1.37 $2.29
basic before effect of extraordinary
item
Extraordinary item (2.43) -- -- (0.32) --
------- ------ ------ ------ ------
Net earnings (loss) $(116.08) $(4.10) $15.27 $1.05 $2.29
======= ===== ====== ====== =========
Weighted average shares
outstanding used in basic 149,696 149,696 149,696 1,646,629 2,471,025
calculation
Earnings (loss) per common share - $(113.65) $(4.10) $12.69 $1.25 $2.03
diluted before effect of
extraordinary item
Extraordinary item (2.43) -- -- (0.29) --
------- ------ ------ ------ ------
Net earnings (loss) $(116.08) $(4.10) $12.69 $0.96 $2.03
======= ===== ====== ====== ======
Weighted average shares
outstanding used in diluted 149,696 149,696 242,288 1,806,938 2,793,414
calculation
14
AT MAY 31,
1994 1995 1996 1997 1998
-------- -------- -------- ------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit) $(18,312) $(13,489) $(10,841) $9,141 $10,228
Total assets 25,553 14,511 16,132 21,287 23,636
Total debt 26,173 20,336 18,144 13,749 9,648
Stockholders' equity (deficit) (9,088) (9,702) (7,416) 4,660 10,808
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company is a leading redistributor of aftermarket aircraft spare
parts used primarily for McDonnell Douglas MD-80 and DC-9 aircraft. According
to the World Jet Inventory, MD-80 and DC-9 aircraft accounted for approximately
15% of the commercial aircraft in service worldwide at December 31, 1997.
Management believes that the Company has one of the most extensive inventories
of aftermarket MD-80 and DC-9 parts in the industry. In addition, the Company
provides aircraft spare parts for Boeing, Lockheed, Airbus and commuter
aircraft. The aircraft spare parts distributed by the Company, including
avionics, rotable and expendable airframe and engine parts, are sold to a wide
variety of domestic and international air cargo carriers, major commercial and
regional passenger airlines, maintenance and repair facilities and other
redistributors. The wide variety of aircraft spare parts distributed by the
Company is acquired through purchase or consignment of surplus or bulk
inventories from airlines, purchase from other redistributors and disassembly
of aircraft.
In addition to being a provider of aircraft spare parts, the Company
leverages its industry expertise to purchase, sell and lease aircraft and
engines. The Company has periodically acquired, leased and sold a variety of
narrow-body commercial jet aircraft, such as Boeing 727 and 737 aircraft and
McDonnell Douglas DC-9 aircraft and has recently increased its focus on these
activities. The Company currently leases three Boeing 727 freighter aircraft
to a major cargo carrier and two Pratt & Whitney JT8D series engines to a
smaller cargo and charter passenger carrier. The Company derives revenue from
lease payments and seeks to sell spare parts to the lessee both for the leased
aircraft as well as other aircraft in the lessee's fleet. Upon return of the
aircraft, the Company either re-leases, sells or disassembles the aircraft for
parts in order to achieve the highest utilization of the asset. To the extent
the Company's emphasis on the purchase, lease and sale of aircraft and engines
increases, the Company's revenue mix, cost components, interest expense and,
accordingly, net earnings will be affected.
THE RESTRUCTURING
On October 3, 1996, the Company completed the Restructuring. Pursuant to
the Restructuring, the Company (i) effected a 1-for-27 reverse split of its
Common Stock; (ii) issued approximately 2,245,400 shares of its Common Stock,
after giving effect to the reverse split, in exchange for the entire $10.0
million principal amount outstanding of, and related accrued interest on, its
Debentures; and (iii) redeemed its Senior Notes with the proceeds of an advance
under its Credit Agreement.
15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues as included in the Consolidated Statements of Earnings of the
Company represented by net parts sales and lease revenues.
YEAR ENDED MAY 31,
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
--------------------------------------------------------------------------------------
1996 % 1997 % 1998 %
---- ---- ------ ---- ------ ----
Net parts sales $21,410 92.2% $20,123 94.8% $25,648 91.7%
Lease revenues 1,795 7.8% 1,109 5.2% 2,315 8.3%
------- ------ ------ ----- ------ -----
Total revenues $23,205 100.0% $21,232 100.0% $27,963 100.0%
======= ===== ====== ===== ====== ======
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain items included in the Consolidated
Statements of Earnings of the Company:
YEAR ENDED MAY 31,
-----------------------------------------
1996 1997 1998
---------- ------- --------
Total revenues........................ 100.0% 100.0% 100.0%
------- ----- -----
Cost of sales......................... 56.9 59.7 60.0
Selling, general and
administrative
expenses.............................. 16.9 18.0 18.8
Provision for doubtful accounts ...... 2.0 0.6 0.3
Depreciation.......................... 4.0 3.7 3.8
Interest expense...................... 10.4 7.6 5.9
Interest and other (income) expense... (0.1) (0.3) 1.0
Provision (benefit) for income
taxes................................ * ----- (10.1)
Extraordinary loss on debt
restructuring......................... ----- 2.5 -----
---------- ------- --------
Net earnings.......................... 9.9% 8.1% 20.3%
========== ======= ========
- ------------------
* Less than 0.1%.
FISCAL 1998 COMPARED WITH FISCAL 1997
Total revenues for fiscal 1998 increased 31.7% to $28.0 million from
$21.2 million for fiscal 1997. This increase was primarily due to an increase
in aircraft and engine sales. Aircraft and engine sales are unpredictable
16
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 1998,
the Company acquired two aircraft and sold four aircraft, as compared to fiscal
1997, during which the Company acquired three aircraft and sold two aircraft.
During fiscal 1998, the Company sold seven engines as compared to fiscal 1997,
during which the Company sold four engines. Lease revenue increased to $2.3
million in fiscal 1998 from $1.1 million in fiscal 1997, due primarily to the
Company's acquisition and lease of three aircraft during the fourth quarter of
fiscal 1997 which were on lease for all of fiscal 1998.
Cost of sales increased 32.3% from $12.7 million in fiscal 1997 to $16.8
million in fiscal 1998. Cost of sales as a percentage of total revenues
increased from 59.7% in fiscal 1997 to 60.0% in fiscal 1998. The increase in
the cost of sales as a percentage of total revenues was due primarily to a
change in the mix of sales as well as an increase in the cost of aircraft and
engine sales as a percent of revenues in fiscal 1998 compared to fiscal 1997.
Selling, general and administrative expenses increased 38% to $5.3
million in fiscal 1998 compared to $3.8 million in fiscal 1997. This increase
was due primarily to expenses related to increased revenues, as expenses for
fiscal 1998 amounted to 18.8% of total revenues compared to 18.0% of total
revenues in fiscal 1997, such as increased rent expense, insurance costs,
professional fees, investor relations costs, marketing expenses and employee
compensation.
Provision for doubtful accounts was $75,000 in fiscal 1998 compared to
$123,000 in fiscal 1997. This decrease in expense for fiscal 1998 was
primarily related to the recovery of a certain doubtful account during the
first quarter of fiscal 1998. In fiscal 1997, the Company instituted a policy
to record a provision of approximately 1% of net part sales.
Depreciation was $1,060,000 in fiscal 1998 compared to $792,000 in fiscal
1997. The net increase from fiscal 1997 to fiscal 1998 was due primarily to an
increase in depreciation of aircraft held for lease, resulting from the
aircraft acquired in the fourth quarter of fiscal 1997.
Interest expense in fiscal 1998 and fiscal 1997 was $1.6 million.
Interest and other expenses for fiscal 1998 was $286,000 compared to other
income of $61,000 in fiscal 1997. Included in the interest and other expense
for fiscal 1998 is $400,000 in expenses relating to the withdrawn secondary
offering.
The Company's benefit for income taxes for fiscal 1998 was $2.8 million,
primarily due to a reduction in the valuation allowance applied against its
deferred tax assets and the utilization of net operating loss carryforwards.
The Company's income tax expense in fiscal 1997 was zero primarily as a result
of the utilization of net operating loss carryforwards to offset taxes that
would otherwise have been payable.
Net earnings for fiscal 1998 were $5,663,000, or $2.29 per share - basic
and $2.03 per share - diluted, compared to net earnings before an extraordinary
loss for fiscal 1997 of $2,259,000, or $1.37 per share - basic and $1.25 per
share -diluted. 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 during fiscal 1997. Net earnings, after considering
the extraordinary loss, were $1,728,000 or $1.05 per share - basic and $.96 per
share - diluted, for fiscal 1997.
FISCAL 1997 COMPARED WITH FISCAL 1996
Net parts sales increased by 3% or $515,000, from $17.9 million in fiscal
1996 to $18.4 million in fiscal 1997. Aircraft and engine sales decreased to
$1.7 million in fiscal 1997, compared to $3.5 million in fiscal 1996. During
fiscal 1997, the Company acquired three aircraft and sold 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
17
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 3.9% 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 for doubtful accounts was $123,000 in fiscal 1997 compared to
$464,000 in fiscal 1996. During fiscal 1996, the Company instituted a policy
whereby it records a provision of approximately 2% of total revenues for
estimated future write-offs of accounts receivable. For fiscal 1997, the
Company revised the policy to record a provision of approximately 1% of net
part sales.
Depreciation was $792,000 in fiscal 1997 compared to $934,000 in fiscal
1996. Included in fiscal 1996 depreciation is a writedown of $190,000 to the
Company's headquarters facility to reduce its cost to estimated market value.
The sale of the building was consummated in March 1997. The net reduction from
fiscal 1996 to fiscal 1997 was due primarily to a decrease in depreciation of
aircraft held for lease, resulting from the sale of certain of the Company's
aircraft which were previously held for lease during fiscal 1996.
Interest expense in fiscal 1997 was $1.6 million, compared to $2.4
million in fiscal 1996. The decrease in interest expense from fiscal 1996 to
fiscal 1997 was due to a net reduction in total debt outstanding, to $13.7
million at May 31, 1997 compared to $18.1 million at May 31, 1996. Interest and
other income for fiscal 1997 was $61,000, compared to $34,000 in fiscal 1996.
In connection with the Restructuring, the Company recorded an extraordinary
loss of $530,596 relating to the exchange of shares of its Common Stock for the
Debentures.
The Company's income tax expense in fiscal 1997 was zero primarily as a
result of the utilization of net operating loss carryforwards to offset taxes
that would otherwise have been payable. The Company has continued to maintain
approximately a 100% valuation allowance against its existing deferred tax
assets due to the Company's previous financial problems and its relatively
short history of profitability. If the Company remains profitable, and there
can be no assurance of such profitability, the Company expects to further
reduce the allowance in the future. The fiscal 1996 expense of $14,000 related
to amendments of certain prior year state and federal tax returns.
Net earnings before an extraordinary loss for fiscal 1997 were
$2,259,000, or $1.37 per share - basic, compared to a net of $2,286,000, or
$15.27 per share - basic, during fiscal 1996. On a diluted basis, earnings per
share before an extraordinary item were $1.25 and $12.69 per share during
fiscal 1997 and 1996, respectively. Net earnings, after considering an
18
extraordinary loss, were $1,728,493 or $1.05 per share - basic and $.96 per
share - diluted for fiscal 1997.
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 facility. During the fourth fiscal quarter of 1997 the Credit
Agreement was amended to create a new term loan facility of $3.75 million and
to increase the revolving credit line to $13 million. During the second
quarter of fiscal 1998, the Credit Agreement was amended twice to create two
additional term loan facilities in the amounts of $1.5 million and $1.6 million
and to add a $1.0 million to the revolving credit line (the Credit Agreement
and amendments are collectively referred to as the "Credit Facility"). As of
August 12, 1998, the interest rate under the Credit Facility, which fluctuates
based on certain financial ratios of the Company, was lender's base rate minus
.75%. The revolving credit facility matures in October 2001 and the term loans
mature between March 2000 and October 2001. 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, 1998 and 1997 amounted to $4.2 million and $582,000, respectively. For
fiscal 1998, the primary use of cash from operating activities, excluding the
purchase of two aircraft that were subsequently sold during the same fiscal
year, was an increase in inventories of $100,000. 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 years ended May 31,
1998 and 1997 amounted to $574,000 and $5.4 million, respectively. For fiscal
1998, the primary use of funds was the purchase of engines held for lease. The
Company received proceeds from the sale of an aircraft held for lease of
$667,000. For fiscal 1997, the primary use of 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 used in financing activities for the fiscal year ended May 31,
1998 amounted to $3.6 million. Net of borrowings, the Company repaid $4.0
million under the Company's term loans and revolving line of credit. The
Company received $508,000 in proceeds from employees' exercise of stock
options. 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. 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.
At May 31, 1998, the Company was permitted to borrow up to an additional
$6.5 million pursuant to the Credit Facility. The Company believes that its
working capital and amounts available under the Credit Facility will be
sufficient to meet the requirements of the Company for the foreseeable future.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results, both on an annual and a quarterly basis,
are affected by many factors, including the timing of large orders from
customers, the timing of expenditures to purchase inventory in anticipation of
future sales, the timing of bulk inventory purchases, the mix of available
aircraft spare parts contained at any time in the Company's inventory, the
timing of aircraft or engine sales or leases, unanticipated aircraft or engine
lease terminations, default by any lessees and many other factors largely
outside the Company's control. Since the Company typically does not obtain
long-term purchase orders or commitments from its customers, it must anticipate
the future volume of orders based upon the historic purchasing patterns of its
customers and discussions with customers as to their future requirements.
Cancellations, reductions or delays in orders by a customer or group of
19
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, due to the value of
a single aircraft or engine sale relative to the value of parts typically sold
by the Company, any concentration of aircraft or engine sales in a particular
quarter may obscure existing or developing trends in the Company's business,
financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 130 (SFAS 130), "Reporting Comprehensive
Income," and No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise
and Related Information." These statements are effective for fiscal years
commencing after December 15, 1997. The Company will be required to comply
with the provisions of these statements in fiscal 1999. The Company does not
expect these new standards to have a material impact on its consolidated
financial statements and/or disclosures.
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 22 of this Annual Report on Form 10-K and is incorporated
herein by reference.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
20
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 21, 1998 (the "1998
Proxy Statement") is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in
the 1998 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 1998 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 1998 Proxy Statement is incorporated by reference.
21
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 Notes Page F-3
to Consolidated Financial Statements of the
Company, including Consolidated Balance Sheets as
of May 31, 1998 and 1997 and related Consolidated
Statements of Earnings, Consolidated Cash Flows
and Consolidated Stockholders' Equity (Deficit)
for each of the years in the three-year period
ended May 31, 1998
(b) FINANCIAL STATEMENTS SCHEDULES PAGE OR METHOD OF FILING
(1) 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 to
Corporation and the Registrant, as amended. 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 Incorporation Incorporated by reference to Exhibit
of the Registrant. 3.1 to the Company's Annual Report
on Form 10-K for the fiscal year
ended May 31, 1996 (the "1996
Form 10-K").
22
3.2 Restated and Amended Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to the 1996 Form 10-K.
4.1 Specimen Common Stock Certificate. Incorporated by reference to Exhibit
4.1 to the 1996 Form 10-K.
10.1.1 Employment Agreement, dated as of December 1, Incorporated by reference to Exhibit
1995, between the Registrant and Alexius A. Dyer 10.1.1 to the 1996 Form 10-K
III, as amended on October 3, 1996.
10.1.2 Employment Agreement dated as of October 3, 1996, Incorporated by reference to
between the Registrant and George Murnane III. Exhibit 10.1.2 to the Company's
Quarterly Report for the quarter
ended February 28, 1997.
10.2.1 1996 Long-Term Incentive and Share Award Plan. Incorporated by reference to
Appendix B to the Proxy
Statement/Prospectus included in the
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 Non- Incorporated by reference to
Qualified Stock Option). Exhibit 10.2.5 to the 1996
Form 10-K.
10.2.6 Form of Option Certificate (Director Non- Incorporated by reference to
Qualified Stock Option). Exhibit 10.2.6 to the 1996
Form 10-K.
10.2.7 Form of Option Certificate (Incentive Stock Incorporated by reference to
Option). Exhibit 10.2.7 to the 1996
Form 10-K.
10.14 Commission Agreement dated December 1, 1995 Incorporated by reference to
between the Registrant and J.M. Associates, Inc. Exhibit 10.14 to the 1996 Form 10-K.
23
10.15 Aircraft Parts Purchase Agreement, dated May 16, Incorporated by reference to
1996, between Paxford Int'l, Inc. and the Exhibit 10.15 to the Company's
Registrant. Registration Statement on Form S- 4
(File No. 333-08065) filed on July
12, 1996.
10.16 Contract for Sale and Purchase dated January 10, Incorporated by reference to Exhibit
1997 between the Registrant and American 10.16 to the Company's Annual Report
Connector Corporation on Form 10-K for the fiscal year
ended May 31, 1997 (the "1997
Form 10-K").
10.17 Office Lease Agreement dated January 31, 1997 Incorporated by reference to Exhibit
between the Registrant and Globe Corporate 10.17 to the 1997 Form 10-K.
Center, as amended.
10.18 Lease Agreement dated March 31, 1997 between the Incorporated by reference to Exhibit
Registrant and Port 95-4, Ltd. 10.18 to the 1997 Form 10-K.
11 Statement regarding computation of per share Filed herewith.
earnings.
21 Subsidiaries. Filed herewith.
23 Consent of Grant Thornton LLP to incorporation by Filed herewith.
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.
24
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, 1998.
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.
TITLE DATE
SIGNATURE --------------- ---------------
- -------------------
/S/ A.A. DYER III Chairman of the Board, Chief Executive August 18, 1998
Alexius A. Dyer III Officer and President and Director
(Principal Executive Officer)
/S/ GEORGE MURNANE III Executive Vice President, Chief August 18, 1998
George Murnane III Financial Officer and Director
(Principal Financial Officer)
/S/ JAMES M. ISAACSON Vice President of Finance, Treasurer August 18, 1998
James M. Isaacson and Secretary (Principal Accounting
Officer)
/S/ KYLE R. KIRKLAND Director August 18, 1998
Kyle R. Kirkland
/S/ E. JAMES MUELLER Director August 18, 1998
E. James Mueller
25
[THIS PAGE INTENTIONALLY LEFT BLANK]
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of independent certified public accountants F-2
Consolidated balance sheets as of May 31, 1998 and 1997 F-3
Consolidated statements of earnings for the years ended
May 31, 1998, 1997 and 1996 F-4
Consolidated statements of stockholders' equity (deficit)
for the years ended May 31, 1998, 1997 and 1996 F-5
Consolidated statements of cash flow for the years
ended May 31, 1998, 1997 and 1996 F-6
Notes to consolidated financial statements F-7
Schedule II - Valuation and qualifying accounts S-1
F-1
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
International Airline Support Group, Inc.
We have audited the accompanying consolidated balance sheets of International
Airline Support Group, Inc. and Subsidiary as of May 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended May 31, 1998. 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 Subsidiary as of May 31, 1998 and 1997 and the
consolidated results of its operations and its consolidated cash flows for each
of the three years in the period ended May 31, 1998, in conformity with
generally accepted accounting principles.
We have also audited Schedule II of International Airline Support Group, Inc.
and Subsidiary for each of the three years in the period ended May 31, 1998.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
Fort Lauderdale, Florida
July 15, 1998
F-2
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MAY 31, 1998 AND 1997
ASSETS
1998 1997
--------- ----------
Current assets
Cash and cash equivalents (Note A) $ 438,403 $ 465,725
Accounts receivable, net of allowance for doubtful accounts
of approximately $514,000 in 1998 and $610,000 in 1997 1,179,760 1,354,030
Inventories (Notes A, C and D) 11,744,924 11,645,284
Deferred tax benefit - current, net of valuation allowance
of $0 in 1998 and $772,000 in 1997 (Note F) 1,202,345 -
Other current assets 194,618 98,285
---------- ----------
Total current assets 14,760,050 13,563,324
Investments (Note A) 92,194 -
Property and equipment (Notes A, D and E)
Aircraft held for lease 7,347,954 6,914,458
Leasehold improvements 65,881 21,567
Machinery and equipment 931,092 908,590
---------- ----------
8,344,927 7,844,615
Less accumulated depreciation 1,969,138 1,186,444
---------- ----------
Property and equipment, net 6,375,789 6,658,171
---------- ----------
Other assets
Deferred debt costs, net (Note A) 513,222 638,012
Deferred tax benefit, net of valuation allowance of
$0 in 1998 and $1,814,000 in 1997 (Note F) 1,760,565 72,663
Deposits and other assets 134,533 355,000
---------- ----------
2,408,320 1,065,675
---------- ----------
$ 23,636,353 $ 21,287,170
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term obligations (Note D) $ 1,351,805 $ 1,542,488
Accounts payable 247,982 645,480
Accrued liabilities (Note L) 2,932,016 2,234,350
---------- ----------
Total current liabilities 4,531,803 4,422,318
Long-term obligations, less current maturities (Note D) 8,296,063 12,204,583
Commitments and contingencies (Note E) - -
Stockholders' equity (Note G)
Preferred stock - $.001 par value; authorized 2,000,000
shares; no shares outstanding in 1998 and 1997,
respectively - -
Common stock - $.001 par value; authorized 20,000,000
shares; issued and outstanding 2,562,667 and 2,395,095
shares in 1998 and 1997, respectively 2,562 2,395
Additional paid-in capital 13,511,610 13,003,686
Unrealized loss on equity security (22,545) -
Accumulated deficit (2,683,140) (8,345,812)
---------- ----------
Total stockholders' equity 10,808,487 4,660,269
---------- ----------
$ 23,636,353 $ 21,287,170
========== ==========
</TABLE
The accompanying notes are an intergral part of these statements.
F-3
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 1998, 1997 AND 1996
1998 1997 1996
---------- ----------- ------------
Revenues
Net sales $ 25,647,782 $ 20,123,196 $ 21,410,201
Lease revenue 2,314,830 1,108,702 1,794,768
---------- ----------- ------------
Total revenues 27,962,612 21,231,898 23,204,969
Cost of sales 16,781,517 12,679,915 13,207,671
Selling, general and administrative expenses 5,269,523 3,828,020 3,921,795
Provision for doubtful accounts 74,648 123,399 464,099
Depreciation 1,060,397 791,517 933,976
---------- ----------- ------------
Total operating costs 23,186,085 17,422,851 18,527,541
---------- ----------- ------------
Income from operations 4,776,527 3,809,047 4,677,428
Interest expense 1,647,770 1,610,590 2,411,469
Interest and other (income) expense 286,018 (60,632) (34,058)
---------- ----------- ------------
Earnings before income taxes and
extraordinary loss 2,842,739 2,259,089 2,300,017
Provision (Benefit) for income taxes (Note F) (2,819,933) - 14,048
---------- ----------- ------------
Earnings before extraordinary loss 5,662,672 2,259,089 2,285,969
Extraordinary loss on debt restructuring (Note B) - 530,596 -
---------- ----------- ------------
Net earnings $ 5,662,672 $ 1,728,493 $ 2,285,969
========== ========== ============
Per share data:
Earnings per common share - basic
before effect of extraordinary item $ 2.29 $ 1.37 $ 15.27
Extraordinary item - (.32) -
---------- ----------- ------------
Net earnings $ 2.29 $ 1.05 $ 15.27
========== ========== ============
Weighted average shares outstanding used in
basic calculation 2,471,025 1,646,629 149,696
========== ========== ============
Earnings per common share - diluted
before effect of extraordinary item $ 2.03 $ 1.25 $ 12.69
Extraordinary item - (.29) -
---------- ----------- ------------
Net earnings $ 2.03 $ .96 $ 12.69
========== ========== ============
Weighted average shares outstanding used in
diluted calculation 2,793,414 1,806,938 242,288
========== ========== ============
The accompanying notes are an intergral part of these statements.
F-4
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Unrealized
COMMON STOCK Additional Loss on
Number of Par Paid-In Equity Accumulated
SHARES VALUE CAPITAL SECURITY DEFICIT TOTAL
--------- ------- --------- -------- -------------- -------------
Balance at June 1, 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
Exercise of stock options 167,572 167 507,924 - - 508,091
Unrealized loss on equity
security - - - (22,545) - (22,545)
Net earnings - - - - 5,662,672 5,662,672
--------- ------- --------- -------- -------------- -------------
Balance at May 31, 1998 2,562,667 $ 2,562 $ 13,511,610 $ (22,545) $ (2,683,140) $ 10,808,487
========= ======= ============ ========== ============= ============
The accompanying notes are an intergral part of this statement.
F-5
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1998, 1997 AND 1996
1998 1997 1996
--------- -------- ---------
Cash flows from operating activities:
Net earnings $ 5,662,672 $ 1,728,493 $ 2,285,969
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,159,731 1,010,302 1,372,979
Gain on sale of aircraft held for lease (267,109) - (864,795)
Loss on restructuring - 530,596 -
(Increase) in deferred tax benefit (2,890,247) (66,428) -
Decrease in accounts receivable 374,270 640,461 577,770
Decrease in notes receivable - - 313,490
(Increase) in inventories (99,640) (2,433,481) (3,030,045)
(Increase) in other current assets (95,833) (29,487) (37,318)
Decrease (increase) in other assets 220,467 (303,500) (51,500)
Increase (decrease) in accounts payable and
accrued liabilities 104,669 (494,754) 1,527,750
--------- -------- ---------
Net cash provided by operating activities 4,168,980 582,202 2,094,300
Cash flows from investing activities:
Capital expenditures (1,126,085) (6,197,955) (875,281)
Purchase of investments (114,729) - -
Proceeds from sale of aircraft held for lease 667,000 - 1,450,000
Proceeds from sale of land and building - 750,000 -
--------- -------- ---------
Net cash (used in) provided by
investing activities (573,814) (5,447,955) 574,719
Cash flows from financing activities:
Net borrowings (payments) under line of credit (2,391,856) 7,397,930 -
Borrowings under term loans 3,100,000 6,750,000 -
Payments under term loans (4,807,347) (403,331) -
Proceeds from the exercise of stock options 508,091 - -
Increase in deferred restructuring costs - (540,641) (334,860)
Increase in deferred debt costs (31,376) (675,785) (50,000)
Repayments of debt obligations - (8,136,969) (2,192,216)
--------- -------- ---------
Net cash (used in) provided by
financing activities (3,622,488) 4,391,204 (2,577,076)
--------- -------- ---------
Net increase (decrease) in cash and
cash equivalents (27,322) (474,549) 91,943
Cash and cash equivalents at beginning of year 465,725 940,274 848,331
--------- -------- ---------
Cash and cash equivalents at end of year $ 438,403 $ 465,725 $ 940,274
========= ========= =========
Supplemental disclosures of cash flow
information (Note I):
Cash paid during the year for:
Interest $ 1,505,630 $ 1,321,259 $ 1,206,028
========= ========= =========
Income taxes $ 139,995 $ 1,400 $ 36,910
========= ========= =========
The accompanying notes are an intergral part of these statements.
F-6
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES
International Airline Support Group, Inc. and Subsidiary (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.
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 in cash and cash equivalents at May 31, 1998 and May 31, 1997 is
$225,496 and $90,564, respectively 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 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, 1998 and 1997, was $238,927 and $87,773, respectively.
e) EARNINGS PER SHARE
The Company adopted Financial Accounting Standards No. 128 (FAS 128),
"Earnings Per Share" in fiscal 1998. FAS 128 requires dual presentation of
basic and diluted earnings per share on the face of the statement of
earnings as well as the restatement of prior periods presented.
Basic net earnings per share equals net earnings divided by the weighted
average shares outstanding during the year. The computation of diluted net
earnings per share includes dilutive common stock equivalents in the
weighted average shares outstanding. The reconciliation between the
computations is as follows:
Basic Basic Diluted Diluted
NET EARNINGS SHARES EPS SHARES EPS
------------ --------- ------ --------- -------
1998 $ 5,662,672 2,471,025 $ 2.29 2,793,414 $ 2.03
1997 $ 1,728,493 1,646,629 $ 1.05 1,806,938 $ .96
1996 $ 2,285,969 149,696 $ 15.27 242,288 $ 12.69
(continued)
F-7
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES - Continued
e) EARNINGS PER SHARE - Continued
Included in diluted shares are common stock equivalents relating to options
and convertible debt of 322,389, 160,309, and 92,592 for 1998, 1997 and
1996, respectively.
Basic and diluted earnings per share for 1997 are $1.05 and $.96,
respectively, after the effect of the extraordinary charge of $530,596 or
$.29 per share related to the loss on debt restructuring (Note B).
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 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 1998, 1997 and 1996 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
the date of the financial statements and revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
k) NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 (SFAS 130), "Reporting Comprehensive
Income," and No. 131 (SFAS 131), "Disclosures About Segments of an
Enterprise and Related Information." These statements are effective for
fiscal years commencing after December 15, 1997. The Company will be
required to comply with the provisions of these statements in fiscal 1999.
The Company does not expect these new standards to have a material impact on
its consolidated financial statements and/or disclosures.
(continued)
F-8
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES - Continued
l) INVESTMENTS
Investments at May 31, 1998 represent equity securities, and are classified
as available-for-sale as of May 31, 1998. Investments classified as
available-for-sale are recorded at fair value and any temporary difference
between an investment's costs and its fair value is presented as a separate
component of stockholders' equity.
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 - INVENTORIES
Inventories at May 31, 1998 and 1997 consisted of the following:
1998 1997
---------- -----------
Aircraft parts $ 11,294,924 $ 10,758,867
Aircraft and engine available for sale 450,000 886,417
---------- -----------
$ 11,744,924 $ 11,645,284
========== ===========
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at May 31, 1998 and 1997 consisted of the following:
1998 1997
---------- -----------
Senior Secured Revolving Credit Loans $ 5,006,075 $ 7,397,931
Senior Secured Term Loan - A 2,081,793 2,766,669
Senior Secured Term Loan - B 2,560,000 3,580,000
F-9
(continued)
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
NOTE D - LONG-TERM OBLIGATIONS - Continued
1998 1997
---------- -----------
Notes payable due in equal monthly
installments through October 1997, bearing
interest at 9.5% to 11.5% collateralized by
equipment $ - $ 2,471
---------- -----------
9,647,868 13,747,071
Less: Current maturities 1,351,805 1,542,488
---------- -----------
$ 8,296,063 $ 12,204,583
========= ==========
In October 1996 the Company entered into a Credit Agreement with the Bank of
New York, which provides for a $3 million term loan (Term Loan-A) and up to
an $11 million revolving credit. The Credit Facility is secured by
substantially all of the assets of the Company and availability of amounts
for borrowing is subject to certain limitations and restrictions. The
interest rate on the Credit Facility, which fluctuates based on certain
financial ratios of the Company, was the lender's prime rate less .25% at
May 31, 1998 (8.25%). The revolving line of credit was increased to $13
million in March 1997. As of May 31, 1998, the available line of credit is
approximately $6,500,000. 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 (Term Loan-B)
with the Bank of New York under the Credit Facility for an additional
$3,750,000. The Term Loan is collateralized by certain aircraft purchased
by the Company with the proceeds from the loan.
During fiscal 1998, the Credit Agreement was amended twice to create two
additional term loan facilities in the amounts of $1.5 million and $1.6
million and to add $1 million (for capital expenditures) to the revolving
credit line. The two additional term loans were repaid in full in fiscal
1998.
The scheduled maturities of long-term obligations in each of the next four
years until maturity subsequent to May 31, 1998 are as follows: 1999 -
$1,351,805, 2000 - $2,256,664, 2001 -$766,660, and 2002 - $5,272,739.
NOTE E - COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases warehouse facilities as well as certain equipment under
long-term operating lease agreements. Rental expense under these leases for
the years ended May 31, 1998, 1997 and 1996 was approximately $280,000,
$36,000 and $53,000, respectively. At May 31, 1998, the future minimum
payments on non-cancellable operating leases are as follows: 1999 -
$286,861, 2000 - $276,500, 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 $6,230,200 and $6,124,000 at May 31, 1998 and
1997, respectively. Future minimum rentals at May 31, 1998, under the long-
term operating lease agreements is $1,098,878 in 1999.
(continued)
F-10
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
NOTE E - COMMITMENTS AND CONTINGENCIES - Continued
LITIGATION
The Company is subject to certain legal proceedings which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability, if any, is not likely to have a material effect on the
financial position of the Company. However, as the outcome of litigation or
other legal claims is difficult to predict, significant changes in the
estimated exposures could occur.
NOTE F - INCOME TAXES
The provision (benefit) for income taxes for the years ended May 31, 1998,
1997 and 1996 is as follows:
1998 1997 1996
------------ ----------- ----------
Current provision:
Federal $ 69,906 $ 72,663 $ 14,048
State - - -
------------ ----------- ----------
69,906 72,663 14,048
Deferred provision (2,889,839) (72,663) -
------------ ----------- ----------
$ (2,819,933) $ - $ 14,048
============ =========== ==========
The tax effect of the Company's temporary differences and carryforwards is
as follows:
1998 1997
----------- -----------
Deferred tax (benefits) - current:
Reserve for overhaul costs $ (82,000) $ (103,000)
Bad debt reserve (193,000) (257,000)
Inventory capitalization (191,000) (187,000)
Accrued payroll (358,000) (131,000)
Accrued vacation (15,000) (15,000)
Reserve for inventory (363,000) (79,000)
----------- -----------
$ (1,202,000) $ (772,000)
=========== ===========
1998 1997
----------- -----------
Deferred tax liabilities
(benefits) - non-current:
Depreciation and amortization $ 553,000 $ (647,000)
Aircraft - capitalized maintenance 36,000 36,000
Restructuring charges (2,000) (135,000)
Net operating loss carryforward - federal (1,806,000) (759,000)
Net operating loss carryforward - state (307,000) (177,000)
Minimum tax credit - federal (227,000) (196,000)
Other, net (8,000) (8,000)
----------- -----------
$ (1,761,000) $(1,886,000)
=========== ===========
F-11
(continued)
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
NOTE F - INCOME TAXES - Continued
The Company recorded a valuation allowance equal to the amount of the
deferred tax benefits at May 31, 1997. In fiscal 1998, the Company
completely relieved the $2,586,000 valuation allowance and they determined
that it was more likely than not that the Company would recognize the
deferred tax benefits based on the Company's recent earnings history and
management's estimate that future profits will be sufficient to realize
these benefits.
The following table summarizes the differences between the Company's
effective tax rate and the statutory federal rate as follows:
1998 1997 1996
----- ---- ----
Statutory federal rate 34.0% 34.0% 34.0%
Tax benefit from net operating
loss carryforward (134.2) (30.7) (33.4)
Other 1.0 (3.3) -
----- ---- ----
Effective tax rate (99.2)% -% 0.6%
====== ==== ====
The Company has net operating loss carryforwards for federal tax purposes of
approximately $5.3 million. The net operating losses will expire in years
2010 and 2011. The amount of the prior year net operating loss carryforward
was an estimate based on the estimated amount of taxable income generated by
the cancellation of indebtedness (COD) incurred in the Company's financial
restructuring in fiscal year 1997. Subsequently, it was determined that the
COD income was a nominal amount resulting in a larger net operating loss
carryforward which had the effect of creating a tax benefit in fiscal 1998
of approximately $1,109,000. The Company also has a federal minimum tax
credit carryover of approximately $227,000 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 - 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. In fiscal 1998,
the stockholders approved the issuance of an additional 115,000 shares of
common stock under this plan. These shares were issued in fiscal 1998 at
exercise prices ranging from $4.50 - $6.64 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 in fiscal 1998 and
fiscal 1997 equals the market price at the date of the grant. No
compensation expense has been recognized.
(continued)
F-12
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
NOTE G - STOCK OPTIONS - Continued
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
earnings and earnings per share would have been changed to the pro forma
amounts below.
1998 1997 1996
----------- ---------- ---------
Net earnings
As reported $ 5,662,672 $ 1,728,493 $ 2,285,969
Pro forma $ 5,400,656 $ 1,150,122 $ 2,285,969
Basic earnings per share
As reported $ 2.29 $ 1.05 $ 15.27
Pro forma $ 2.19 $ .70 $ 15.27
Diluted earnings per share
As reported $ 2.03 $ .96 $ 12.69
Pro forma $ 1.93 $ .63 $ 9.43
The above pro forma disclosures may not be representative of the effects on
reported net earnings for future years as certain options vest over several
years and the Company may continue to grant options to employees.
The fair value of each option grant is estimated on the date of grant using
the binomial option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1998 and fiscal 1997, respectively:
dividend yield of 0.0 percent for all years; expected volatility of 40
percent and 30 percent; risk-free interest rates of 6 percent and 6.25
percent; and expected holding periods of 4 years.
A summary of the status of the Company's fixed stock options as of May 31,
1998 and 1997, and changes during the years ending on those dates is as
follows:
MAY 31, 1998 MAY 31, 1997
------------- -------------
Weighted - Weighted -
Average Average
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- ---------- --------------
Outstanding at
beginning of year 598,609 $ 2.99 269,500 $ .70
Granted 137,173 4.82 598,609 2.99
Exercised (167,572) 3.03 -
Expired - -
Cancelled (5,000) 3.00 (269,500) .70
--------- ----------
Outstanding at
end of year 563,210 3.42 598,609 2.99
========= ==========
Options
exercisable at
end of year 415,012 392,430
Weighted-average
fair value of
options granted
during the year $ 1.90 $ .97
F-13
(continued)
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
NOTE G - STOCK OPTIONS - Continued
The following information applies to options outstanding at May 31, 1998:
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 - $3.00 431,537 8.44 $ 2.99 283,339 $ 2.99
$4.50 - $5.94 119,673 9.05 4.62 119,673 4.62
$6.94 - $6.94 12,000 9.79 6.94 12,000 6.94
------- -------
563,210 8.60 3.42 415,012 3.57
======== =======
NOTE H - 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, 1998, 1997 and
1996.
(IN THOUSANDS)
1998 1997 1996
-------- -------- --------
United States $ 25,419 $ 18,067 $ 19,800
Africa and Middle East 1,042 402 623
Europe 375 319 177
Latin America 517 408 2,454
Canada 95 133 -
Asia 515 1,903 151
-------- -------- --------
$ 27,963 $ 21,232 $ 23,205
======== ======== ========
No customer accounted for more than 10% of the Company's sales in fiscal
1998 and 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 fiscal 1998 and 1997. No other customer accounted for
more than 10% of the Company's sales in fiscal 1996.
F-14
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
NOTE I - 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 1998 and 1997, as derived from the
change in balance sheet amounts, has been adjusted for the following items:
1998 1997 1996
------ --------- ---------
Net increase in inventory $ 99,640 $ 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 $ 99,640 $ 2,433,481 $ 3,030,045
========= =========== ===========
NOTE J - RELATED PARTY TRANSACTIONS
Under a commission agreement entered into with the Company in 1994, a
director is entitled to 3-4% of revenues generated from sales to customers
brought in by the director. The Company paid commissions of approximately
$96,000, $6,000 and $85,000 for the years ended May 31, 1998, 1997 and 1996.
In connection with obtaining the Credit Agreement with the Bank of New York,
the Company agreed to pay the placement agent a $250,000 placement fee. A
director of the Company was a principal of the placement agent. In fiscal
1997, the Company paid the placement agent $200,000 of this fee, and the
remaining $50,000 was paid in fiscal 1998. In addition, during fiscal 1998
the Company paid this director $86,000 for services rendered to the Company
in connection with identification and evaluation of acquisition
opportunities.
NOTE K - FOURTH QUARTER ADJUSTMENTS
In fiscal 1998, the Company recorded a fourth quarter tax benefit of
approximately $1,100,000 as a result of adjusting the Company's estimated
deferred tax assets.
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.
(continued)
F-15
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
NOTE K - FOURTH QUARTER ADJUSTMENTS - Continued
In fiscal 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 L - ACCRUED LIABILITIES
Accrued liabilities consist of the following items:
1998 1997
--------- ---------
Customer deposits $ 110,902 $ 361,153
Accrued repair costs 582,319 507,161
Accrued legal costs 209,550 10,000
Accrued interest - 9,014
Accrued payroll 1,019,883 559,270
Accrued property taxes 13,270 28,695
Accrued commissions - 167,741
Accrued offering expenses 129,032 -
Reserve for repair of leased aircraft 698,818 579,143
Other 168,242 12,173
--------- ---------
$ 2,932,016 $ 2,234,350
========= =========
NOTE M - 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.
F-16
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1996, 1997 AND 1998
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, 1996
- -----------------------
<C<
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
======== ======== ========= ========== ========
YEAR ENDED MAY 31, 1998
- -----------------------
Reserves deducted from assets to which they apply:
Allowance for possible losses on
accounts receivable $ 610,476 $ 74,648 $ - $ 171,124(a) $ 514,000
======== ======== ========= ========== ========
(a) Write-off of accounts receivable against the reserve.
S-1