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, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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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)
8095 N.W. 64th Street, Miami, Florida 33166
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 593-2658
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Securities registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title or Class on which registered
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Common Stock, $.001 par value None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At August 11, 1995, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $804,940.
The number of shares of the Registrant's Common Stock outstanding as
of August 11, 1995 was 4,041,779.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
INTERNATIONAL AIRLINE SUPPORT GROUP INC.
ANNUAL REPORT OF FORM 10-K
FOR THE YEAR ENDED MAY 31, 1995
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . I-3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . I-9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . .I-10
Item 4. Submission of Matters to a Vote of Security Holders . . . . .I-10
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters . . . . . . . . . . . . . . .II-1
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . .II-1
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . .II-3
Item 8. Financial Statements and Supplementary Data . . . . . . . . .II-8
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . . . .II-8
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . III-1
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . III-2
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . III-5
Item 13. Certain Relationships and Related Transactions. . . . . . . III-7
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . IV-1
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-5
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PART I
ITEM 1. BUSINESS.
GENERAL
International Airline Support Group, Inc. ("IASG" or the "Company") is a
worldwide supplier of spare parts and equipment to the aviation industry. Since
its inception in 1982, the Company has become a primary source of replacement
parts for widely operated aircraft models which are no longer in production,
such as the McDonnell Douglas DC-8 ("DC-8") and DC-9 ("DC-9"). Currently, the
Company specializes in replacement parts for the DC-9 aircraft. Management
believes that the Company has one of the most extensive inventories of after-
market DC-9 parts in the industry. For the fiscal year ended May 31, 1995, IASG
supplied parts to over 500 customers worldwide.
RECENT DEVELOPMENTS
On January 31, 1995, IASG entered into a Purchase Agreement with
Richard R. Wellman and Lynda Wellman (the "Wellmans") and an entity
affiliated with the Wellmans, Custom Air Holdings, Inc., a Nevada corporation
("Custom Air"), pursuant to which IASG transferred to Custom Air (i) all of
the outstanding shares of common stock of Brent Aviation, Inc., which was a
wholly-owned subsidiary of IASG ("Brent"), (ii) certain spare parts,
components, inventory and equipment for Boeing 727 series aircraft, and (iii)
a McDonnell Douglas DC-4 aircraft. In consideration for the foregoing,
Custom Air paid IASG $230,000 and agreed to lease a Boeing B-727-100
freighter airplane on a month-to-month basis. In addition, the Wellmans
resigned from all positions as officers or directors held by them with IASG
and its subsidiaries, granted a proxy to IASG enabling IASG's directors to
vote 1,980,000 shares of common stock of IASG held by the Wellmans for a
period of two years, and agreed not to compete or interfere with any of the
businesses of IASG and its remaining subsidiaries for a period of two years.
IASG agreed to pay Lynda Wellman severance equivalent to her current salary
for a period of one year. IASG further agreed to terminate its leasehold
interest in a facility located at the Grayson County, Texas Airport, allowing
Brent to lease such facility for its operations.
On January 31, 1995, International Airline Service Center, Inc., which is a
wholly-owned subsidiary of the Company ("IASC"), entered into an agreement with
Express One International, Inc., a Delaware corporation ("Express One"),
pursuant to which IASC assigned its interest in a certain equipment lease with
CIT Group/Equipment Financing, Inc. to Express One, and Express One assumed
IASC's interests and obligations under such lease. In addition, IASC
transferred to Express One certain additional assets that served as collateral
under the CIT lease. Pursuant to the transaction, IASC disposed of
substantially all of its operating assets. IASC also agreed to terminate two
leases relating to a warehouse and hanger at the Grayson County, Texas Airport,
allowing Express One to lease such facilities for its operations.
On May 26, 1995, IASG received a notice of payment blockage from the holder
(the "Majority Noteholder") of a majority of the outstanding principal amount of
the Company's 12% Senior Secured Notes due July 17, 1997 (the "Senior Notes").
Citing a continuing Event of Default under the agreement governing the Senior
Notes as a result of the Company's noncompliance with certain financial
covenants, the Majority Noteholder demanded that the scheduled interest payment
which would otherwise have been payable on May 31, 1995 to holders of the
Company's 8% Convertible Subordinated Debentures due August 31, 2003 (the
"Subordinated Debentures") not be paid. As a result of the Company's receipt of
the notice of payment blockage, the Company did not make its scheduled May 31,
1995 interest payment to the holders of the Subordinated Debentures and is
prohibited from making any other payments with respect to the Subordinated
Debentures until the earlier of (i) the expiration of a 180-day period
commencing upon the date of the Company's receipt of such notice (the "Payment
Blockage Period") or (ii) the receipt by the Company of written notice from the
Majority Noteholder terminating such Payment Blockage Period. The aggregate
interest payment due on May 31, 1995 was $200,000. The Company did not make its
scheduled July 17, 1995 principal payment to the holders of the Senior Notes.
The aggregate principal payment due on July 17, 1995 was approximately $1.8
million.
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The failure to make the May 31, 1995 interest payment to the holders of the
Subordinated Debentures and the July 17, 1995 principal payment to the holders
of the Senior Notes constitutes an Event of Default under the agreements
governing the Senior Notes and the Subordinated Debentures. If the Company
remains in default under the terms of the Senior Notes and the Subordinated
Debentures, the holders of such instruments could accelerate the debt, resulting
in principal of approximately $20 million becoming immediately due and payable.
The Company would have no ability to repay such indebtedness if it were to be
accelerated. The foregoing circumstances could require the Company to cease
operations or to seek protection from its creditors through judicial
reorganization proceedings.
The Company has conducted preliminary negotiations with certain major
holders of the Senior Notes and the Subordinated Debentures. There can be no
assurance that the Company will be able to consummate a restructuring of its
indebtedness.
COMPANY STRATEGY
The Company's strategy is to capitalize on the limited availability of
spare and replacement parts for certain widely operated aircraft models which
are no longer in production. In the 1980s, management implemented this strategy
by parting out DC-8 aircraft and reselling the resulting spare parts. Based
upon the Company's success in parting out DC-8 aircraft, which ceased production
in 1972, the Company began purchasing and parting out DC-9 aircraft in 1991.
Production of DC-9 aircraft ceased in 1982. The DC-8 and DC-9 aircraft have
life expectancies that exceed the manufacturer's original estimates. The
Company currently specializes in replacement parts for DC-9 aircraft. Beginning
in 1992, the Company began purchasing and parting out Boeing 727 aircraft. IASG
has acquired thirty-eight DC-8, eight DC-9, and six Boeing 727 aircraft for
parting out since the Company began operations. In addition, the Company
purchased the original testbed MD-80 from McDonnell Douglas and parted it out.
The Company's extensive inventory of DC-9 parts also enables it to obtain sales
from operators of the MD-80 because a substantial number of DC-9 parts may be
used on the MD-80.
Traditionally, the Company obtained most of its parts inventory by parting
out high quality aircraft. Although management expects that, if financing is
available, it may acquire additional aircraft for parting out aircraft,
management believes that the principal source of its inventory acquisitions
during the next fiscal year will be purchases of excess inventory from aircraft
operators. In the past, the Company acquired aircraft for parting out only if
its initial estimate of the timing and value of parts sales for such aircraft
would allow the Company to recover the purchase price within 180 days through
the sale of a portion of parts, and to sell the remaining parts for amounts in
excess of the purchase price over the subsequent five years. Aircraft that are
available at part out prices are increasingly difficult to locate because of,
among other things, the continued trend of start-up, low-cost airlines that use
narrow-body aircraft such as the DC-9. However, the emergence of the start-up,
low-cost airlines has enhanced the value of the Company's existing inventory
because in order to assure reliable operations, the airlines need to maintain a
minimum supply of spare parts or establish relationships with spare parts
suppliers. Because of IASG's position as a primary source of spare parts for
the DC-9 aircraft and because the start-up airlines generally lack the resources
to maintain extensive supplies of spare parts, the Company believes that it will
continue to be an active supplier for the start-up airlines.
In addition to its DC-8 and DC-9 spare parts, the Company maintains
inventories of spare parts for the Boeing 727, 737 and 747 aircraft, the
McDonnell Douglas MD-80 aircraft and the Lockheed L1011 and L100/C130. The
Company also generates additional revenues by brokering third party spare parts
on behalf of customers and by arranging for the repair or exchange of customers'
spare parts with FAA-certified repair facilities.
Management believes that its customer relationships are important to the
Company's operational success. The Company has established relationships with
many domestic and foreign aircraft operators and, subject to the availability of
financing, maintains an adequate level of inventory in order to service such
customers in a timely manner. Management believes that availability and timely
delivery of spare parts are the primary factors considered by customers when
making a spare parts purchase decision.
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INDUSTRY OVERVIEW
GENERAL. According to the World Jet Airplane Inventory for year-end 1994,
the combined aircraft fleets of aircraft operators throughout the world at
December 31, 1994 consisted of approximately 12,112 jet aircraft, the average
age of which is currently 12.7 years. A significant number of the spare parts
used in these aircraft are supplied by different types of companies, including
original equipment manufacturers ("OEMs") and numerous distributors, fixed-base
operators, FAA-certified overhaul facilities, traders and brokers. Management
believes that the fragmented nature of the aircraft spare parts industry creates
opportunities for small well-financed companies with proven infrastructures to
exploit niche markets in certain types of aircraft, such as the DC-8 and DC-9.
To date, the larger companies in the aircraft aftermarket have focused their
resources on newer aircraft models.
Economic factors have prompted many airlines to defer aircraft procurement
programs and extend the useful life of older equipment. Consequently, many
aircraft operators are postponing, deferring or canceling orders for new
aircraft and are retaining their older aircraft. Certain U.S. and European
operators have implemented measures such as the installation of FAA-approved
hush kits and extended life maintenance programs to extend the useful lives of
older aircraft in their fleets. In addition, many foreign and domestic start-up
aircraft operators are establishing their fleets through the acquisition of the
less expensive second generation aircraft even though such older aircraft
typically require more maintenance and replacement parts than new aircraft.
Furthermore, increased competition in the airline industry has led to the
emergence of several start-up low-cost airlines, including ValuJet, Spirit
Airlines and Reno Air. The start-up airlines generally offer service on
specific high traffic, short-haul routes rather than attempting to compete with
the extensive hub-and-spoke systems used by the major carriers to obtain long-
haul traffic. Second generation aircraft (such as the DC-9) are able to operate
profitably on the high-traffic, short-haul routes.
AVAILABILITY OF REPLACEMENT PARTS. Aircraft and parts manufacturers
typically provide their customers with replacement parts throughout the
production life of the aircraft. Other sources for new aircraft parts include
authorized subcontractors for the OEMs, new parts distributors and aircraft
operators with excess inventories. Once an aircraft is no longer in production,
a manufacturer will continue to supply spare parts to its customers for an
extended period of time, which varies among aircraft types. For example, spare
parts for the DC-8 aircraft were available from the aircraft manufacturer until
1987, 15 years after the DC-8 model type ceased production. However,
manufacturers generally have no obligation to supply or maintain parts for an
aircraft operator which was not the original purchaser of the aircraft.
As OEMs cease manufacturing replacement parts, and as other sources of new
parts become increasingly more scarce, aircraft operators must locate
alternative sources for quality used parts to maintain the reliable operation of
their aircraft. Often, aircraft operators will opt for quality used parts even
when new parts are still in production. Used aircraft parts must meet the same
FAA standards as new parts but generally cost less than the same new parts, and
are often available with shorter lead times.
Major U.S. carriers are reducing the size of their surplus parts
inventories. These inventory reductions have increased many carriers' reliance
on aftermarket suppliers to provide parts which are no longer in production. As
airlines continue to push for a just-in-time inventory procurement process,
inventory storage and handling devolves to suppliers such as IASG.
NOISE ABATEMENT REGULATIONS. The FAA classifies aircraft in three groups,
Stage 1, Stage 2 and Stage 3, in order of decreasing noise characteristics. In
1980 the FAA adopted a rule prohibiting the operation of Stage 1 aircraft in or
to the United States. In response to a Congressional requirement, the FAA
submitted a report to Congress in April 1986 which presented various approaches
to encourage or require the replacement of Stage 2 aircraft with Stage 3
aircraft. The FAA noise abatement regulations that were adopted require
aircraft operators to phase out their noisier aircraft gradually by either
replacing them with quieter Stage 3 aircraft or equipping them with hush kits to
comply with noise abatement regulations according to the following schedule: by
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December 31, 1994, each aircraft operator was required either to reduce the
number of Stage 2 aircraft it operated by 25% or operate a fleet composed of not
less than 55% Stage 3 aircraft; by December 31, 1996, each aircraft operator
must either reduce its Stage 2 aircraft by 50% or operate a fleet composed of
not less than 65% Stage 3 aircraft; by December 31, 1998 at least 75% of an
aircraft operator's Stage 2 aircraft must be eliminated, or its overall fleet
must be composed of 75% Stage 3 aircraft; and by December 31, 1999, 100% of the
fleet must be composed of Stage 3 aircraft, subject to certain waivers.
OPERATIONS OF THE COMPANY
"PARTING OUT" AND INVENTORY ACQUISITION. The purchase and dismantling of
an aircraft and the resale of the dismantled parts for use on other aircraft is
commonly called "parting out." Traditionally, the Company obtained most of its
spare parts inventory by parting out high quality aircraft. When the Company
acquires an aircraft for parting out, the aircraft is delivered to an inventory
storage facility. The aircraft is then removed from the U.S. registry. The
seller of the aircraft will often provide the Company with a computerized data
base listing all the parts and equipment on the aircraft which is verified by
the Company. If a computerized listing of parts is not available, the Company
will conduct its own inventory of the aircraft to be parted out. The parts and
equipment are catalogued and all the relevant information regarding the parts,
including each part's repair history, is entered into the Company's computer
database. Management believes that it is essential that such information be
immediately available in order to facilitate sales by the Company's sales
personnel. In certain instances, parts which are in high demand are pre-sold
prior to the delivery of the aircraft to the Company. High value parts such as
engines and engine components are also often pre-sold. Pre-selling allows the
Company to recover a significant amount of its investment within a short time
from the date of the aircraft delivery.
An aircraft purchased for parting out is generally in the same condition as
the aircraft that will utilize the spare parts. Sellers are usually motivated to
dispose of their aircraft at part out prices for a variety of reasons, including
the seller's need for immediate liquidity or inability to economically lease the
aircraft to third parties. Additionally, such aircraft may require extensive
maintenance or overhaul or may require government-mandated improvements which
are uneconomical for the sellers to perform.
In addition to purchasing whole aircraft, the Company also acquires spare
parts by bidding on the inventory of companies that are eliminating certain
portions of their spare parts inventory due to the retirement of an aircraft
type from their fleet, the downsizing of operations or the dissolution of its
business as a whole. Management believes that its principal source of inventory
acquisitions during the next fiscal year will be from such sales.
Modern aircraft design emphasizes the use of components that may be reused
hundreds of times after inspection and overhaul. Because of the reusable nature
of such "rotable" parts, sales of rotable parts offer greater profit potential
than the nonreusable "consumable" parts. Vendors offer rotable parts in
different conditions, designated by industry standards. A component may be sold
in "serviceable" condition, meaning that the unit may be installed on an
aircraft without further inspection. "As removed - not for failure" designates
a component that was removed from an aircraft for some reason other than
malfunction and may be reinstalled after inspection. The remaining condition,
"unserviceable," designates the need for the part to be overhauled prior to
inspection and installation. The FAA requires rotables and other spare parts to
be inspected at FAA-certified repair facilities prior to installation on an
aircraft. However, the FAA does not prohibit the sale of used parts that have
not been inspected and certified.
PRODUCT LINES. Historically, the Company maintained a large inventory of
used parts for the DC-8 aircraft. The DC-8, an early model Stage 1 aircraft,
has not been produced since 1972. The FAA's enactment of noise abatement
restrictions in 1980 grounded all DC-8s powered by JT3 and JT4 engines in use in
the United States and required such aircraft to be refitted with modern, quieter
engines. Because of the expense involved in installing new engines, the use of
DC-8 aircraft in the United States diminished. Certain devices known as "hush
kits" were invented in order to bring the JT3 engines within acceptable noise
limits. In late 1985, the FAA approved the first hush kit for certain JT3
engines. Another hush kit was approved for other JT3 engines in 1987. The
effect of these changes was to create new demand for the DC-8 parts because a
hushed DC-8 is among the lowest cost aircraft to operate per ton mile.
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Accordingly, the Company believes that the DC-8s will continue to be used by
freight carriers and other operators and that the sale of DC-8 parts will
continue to be a source of revenues in the foreseeable future. However, it is
expected that sales of DC-8 parts will continue to decline in correspondence
with the decrease of DC-8s in operation.
Because of the limited number of DC-8s in operation, the Company began
expanding its inventory to include parts for Stage 2 aircraft, such as the DC-9
aircraft. Currently, the Company specializes in replacement parts for DC-9
aircraft. The noise abatement regulations issued by the FAA require aircraft
operators to phase out their noisier Stage 2 jets by the year 2000 unless they
are retrofitted with hush kits to bring them into compliance with the Stage 3
noise requirements. The Company believes that retrofitting with hush kits as
well as the extended life maintenance programs instituted by many aircraft
operators will increase the useful life of the DC-9s. In addition to the
Company's inventory of McDonnell Douglas DC-8 and DC-9 parts, the Company's
inventory also includes spare parts for the Boeing 727, 737, and 747 aircraft,
the McDonnell Douglas MD-80 aircraft and the Lockheed L1011 and L100/C130
aircraft and for the Pratt & Whitney JT-8D engine series.
MARKETING. The Company has developed a sales and marketing infrastructure
which includes well-trained and knowledgeable sales personnel, computerized
inventory management and listing of parts in electronic industry data bank
catalogues. Key to the successful marketing of the Company's inventory is
IASG'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. Rather than purchase new parts, the Company believes
aircraft operators will purchase less expensive overhauled parts from a trusted
vendor.
The Company's account executives are experienced and knowledgeable about
the market segment in which the Company participates. Account executives
understand maintenance requirements, parts for the aircraft type utilized in
their markets, as well as list prices and fair values of most items sold.
Furthermore, they are familiar with alternative sources for parts not
inventoried by the Company.
Market forces establish the price for used aircraft parts. No pricing
service or catalogue exists for used components. Used 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 used parts even when new parts are still in production. Used aircraft
parts that meet the same FAA standards as new parts cost less than the same new
parts and are often available in shorter lead times.
In addition to directly marketing its inventory, IASG lists its inventory
in the Air Transport Association's computerized data bank ("AIRS") and with the
Inventory Locator Service ("ILS"), a proprietary computerized data bank. Both
of these data bases are 24 hour electronic "marketplaces" where aircraft parts
transactions take place.
CUSTOMERS
GENERAL. The Company's parts customers operate in a segment of the airline
industry that is very volatile. A number of carriers that use the types of
aircraft for which the Company stocks parts fail each year. Consequently, the
identity of the Company's major customers frequently changes. The loss of a
major parts customer could have an adverse impact on the Company's sales of
parts for a given period. However, the Company believes that the overall level
of its parts sales is determined more by the number of aircraft of the types for
which it stocks parts that are in service than by the identity of the operators
of such aircraft.
In addition to selling parts, the Company also sells entire aircraft from
time to time. In a given period, a substantial portion of the Company's
revenues may be attributable to the sale of aircraft. Such sales are
unpredictable transactions, dependent, in part, upon the Company's ability to
purchase an aircraft and resell it within a relatively brief period of time.
The revenues from the sale of aircraft during a given period may result in the
purchaser of the aircraft being considered a major customer of the Company for
that period. The Company does not expect to make repeat aircraft sales to a
given customer; therefore, changes in the identity of major customers are
frequently due to the occurrence of aircraft sales.
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CUSTOMER PROFILE. IASG's customer base includes aircraft operators,
overhaul facilities and other parts suppliers who may in turn resell to end
users. The Company's customers range from major passenger and cargo operators
to smaller aircraft operators and FAA-certified repair facilities. Certain
aircraft operators often buy through competitors instead of directly through
IASG because of the operator's existing relationship with the competitor or the
competitor's ability to overhaul the part sought.
MAJOR CUSTOMERS. Transafrik Corp., a cargo carrier operating in Africa,
accounted for a significant amount of the Company's revenue prior to fiscal
1994. In fiscal 1994, sales to Transafrik declined significantly. Transafrik
accounted for less than one percent of the Company's total revenue in fiscal
1995, compared to 9%, 18% and 25% of total revenue in fiscal 1994, 1993 and
1992, respectively. During fiscal 1994, Transafrik underwent a change in
ownership and made other significant management and operational changes,
including a downsizing of its fleet and changes in fleet mix. To reduce the
Company's future vulnerability to a decrease in sales to any single customer,
the Company's marketing focus is on the identification and solicitation of new
customers. As a result, the Company obtained approximately 80 new parts
customers during fiscal 1995.
The following table lists the Company's customers which, based upon net
revenues, accounted for more than 10% of net revenues for the fiscal years ended
May 31, 1995 and 1994:
Percentage of
Customer Net Revenues (000'S) Total Net Revenues
-------- -------------------- ------------------
1995:
----
Aeroservicios Carabobo C.A. $2,716 10.9
Ajax Leasing Ltd. $5,625 22.5
1994:
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ADC Airlines $3,182 16.0
Prior to fiscal 1993, no customer accounted for more than 10% of the
Company's net revenues, other than Transafrik. During fiscal 1993, 1994 and
1995, 60%, 52% and 28%, respectively, of the Company's net revenues were made to
customers in foreign countries.
ADDITIONAL SERVICES
AIRCRAFT AND ENGINE SALES AND LEASING. The Company has determined that its
spare parts sales opportunities are enhanced by providing its existing and new
customers with whole aircraft and engines through sale transactions. Such
transactions allow the Company to expand its customer base for spare parts and
to reduce the cost basis in its aircraft. The Company currently owns five
aircraft. As of May 31, 1995, two of the aircraft were subject to leases. One
was on a month-to-month lease and the lease of the other expires in October
1995. In order to reduce debt and return to its core operations, the Company
intends to sell its aircraft as soon as practicable, with the exception of one
of such aircraft which the Company may part out. The Company expects to
continue to broker sales of aircraft and engines when opportunities to do so
arise.
EXCHANGE TRANSACTIONS. An "exchange transaction" generally involves a high
value/high turnover rotable part which an operator frequently replaces when
performing aircraft maintenance. In an exchange transaction, a customer pays an
exchange fee and returns a "core" unit to IASG within 14 days. A "core" unit is
the same part which is being delivered to the customer by IASG, but in need of
overhaul. IASG has the customer's core unit overhauled and bills the customer
for the overhaul charges and retains the overhauled core unit in its inventory.
The Company continues to emphasize exchange transactions because they are
profitable and ensure that scarce parts remain in stock for future sales.
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BROKERED TRANSACTIONS. In a "brokered transaction" the Company fills a
customer order for a part not held in the Company's inventory. The Company
locates the part for the customer from another vendor and then resells the part
to the customer. During fiscal 1995, brokered transactions accounted for 19% of
total revenues, as compared to 13% of total revenues during fiscal 1994.
REGULATION
The United States aviation industry is regulated by the FAA. The FAA
requires aircraft parts to be repaired by FAA-certified repair stations prior to
installation. Because of concerns regarding maintenance procedures, it is
possible that the FAA will promulgate new and more stringent regulations
relating to the ability to trace the repair history of individual parts. If this
were to occur, it could have a material adverse impact upon the Company's
business; however, the Company has attempted to anticipate the focus of such new
regulations and has added resources and implemented procedures to address these
potential requirements. On July 14, 1995, the FAA issued a proposal regarding a
voluntary accreditation program for dealers of civil aircraft parts. Pursuant
to the proposal, a dealer of civil aircraft parts, such as the Company, could
obtain accreditation of its quality control systems. The Company is evaluating
this proposal.
PRODUCT LIABILITY
Claims paid by aircraft and aircraft parts manufacturers have risen
dramatically in the past 10 years; however, no lawsuit has ever been filed
against the Company based upon a products liability theory. The Company is not
aware of a corresponding increase in claims against businesses similar to the
Company which sell but do not manufacture new and used aircraft parts. The
Company maintains liability insurance in the amount of $10 million. In
addition, the Company's policy is to require lessees of its aircraft to maintain
liability insurance covering the Company as an additional insured.
Nevertheless, there can be no assurances that such insurance will be adequate to
protect the Company in the event a claim is brought against the Company.
COMPETITION
The Company competes with several other companies, none of which accounts
for a significant amount of the spare parts market for narrow-bodied aircraft.
Customers in need of aircraft parts have access, through computer-generated
inventory catalogues, to a broad array of suppliers including major aircraft
manufacturers, airlines and aircraft services companies, many of which have
greater financial resources and some of which have larger inventories and more
established reputations than the Company. The Company has established
relationships with many domestic and foreign aircraft operators and maintains
such relationships by having the necessary parts available and by delivering
such parts in a timely manner.
The dominant companies in the aircraft parts aftermarket are AAR Corp.,
Aviation Sales and Banner Aerospace. The companies are larger than IASG and
have more substantial financial resources.
EMPLOYEES
As of May 31, 1995, IASG had approximately 24 employees. Of these, one is
an executive officer, six are sales personnel, ten are accounting, finance, data
processing, and administrative personnel, one is a quality assurance specialist
and the remainder are inventory and warehouse operations personnel. The Company
is not a party to any collective bargaining agreement. The Company believes its
relations with its employees are good.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 8095 N.W. 64th
Street, Miami, Florida. The Company purchased its 15,000 square foot office and
warehouse building in September 1992, for approximately $750,000, partially
funded with mortgage financing of $520,000. The mortgage note bears interest at
1.0% above the prime rate and requires monthly principal payments of $2,180
together with outstanding interest until
I-9
September 18, 1997, at which time the remaining outstanding principal and all
accrued interest is due and payable in full. As of May 31, 1995, the balance
due on this mortgage note was $455,420.
The Company is a party to one five-year lease agreement with a five-year
renewal option, for certain property located in Grayson County, Texas (the
"Texas Property"). If the renewal option is not exercised, such lease will
expire in June, 1996. The aggregate fixed annual rental is approximately
$49,000. The facility consists of approximately 23,450 square feet of
warehouse, ramp and apron space. The Texas Property is used to store the
Company's part-out aircraft and for warehousing certain parts.
Management believes that its properties are adequate for its present and
current foreseeable operations. All of the properties owned or leased by the
Company, as well as substantially all the other assets of the Company, are
subject to the lien of holders of the Senior Notes. In addition, the Company's
headquarters are also subject to the lien of its mortgage lender.
ITEM 3. LEGAL PROCEEDINGS.
In July 1993, Viglass Aviation ("Viglass") filed a complaint against the
Company in the Circuit Court of the 11th Judicial Circuit in and for Dade
County, Florida (Case No. 93-14256CA20), claiming that Viglass was entitled to
payment of $681,750 under a commission agreement with the Company relating to
the sale of certain aircraft to one of the Company's significant customers. The
Company disputes this claim, maintaining that the sale occurred outside the
provisions of the commission agreement. The Company filed a motion to hold the
plaintiffs in contempt for failure to comply with discovery demands. This
motion remains in abeyance pending settlement negotiations between the parties.
On February 28, 1994, a complaint entitled Ullman et al. v. International
Airline Support Group, Inc., et al. (Case No. 94-0379), was filed in the United
States District Court for the Southern District of Florida. The complaint
alleged actionable misrepresentations and non-disclosures by the Company and
certain directors under the federal securities laws, as well as claims for
common law fraud and breach of fiduciary duty. The plaintiffs brought the
action on behalf of a class of similarly situated purchasers of ISAG stock.
During the first quarter of fiscal 1996, the Company settled the individual
claims of the named plaintiffs and the case was dismissed. In the opinion of
management, the amount paid in settlement of this claim will not have a material
adverse effect on the Company's financial position or results of operations.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business and which have not been finally
adjudicated. The actions, when ultimately concluded and determined, will not,
in the opinion of management, have a material adverse affect upon the financial
position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
I-10
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.
From April 2, 1990 through July 22, 1994, the Common Stock was listed and traded
on the Nasdaq/National Market System under the symbol ISAG. Effective July 22,
1994, the Nasdaq Qualifications Committee delisted the Company's Common Stock
from quotation on the Nasdaq/National Market System. Since that time, the
Common Stock has been traded through the National Quotation Bureau's National
Daily Quotation Price Sheets (the "Pink Sheets"). The following table sets
forth the high and low closing prices of the Common Stock for the fiscal periods
indicated below as reported by Nasdaq/National Market System, prior to July 22,
1994, and the high and low bid quotations as reported by the National Quotation
Bureau thereafter.
1994 Fiscal Year High Low
---------------- ---- ---
First Quarter $ 5-1/2 $ 2-7/8
Second Quarter 4-1/8 2-3/4
Third Quarter 3-1/4 1-3/8
Fourth Quarter 1-3/4 15/16
1995 FISCAL YEAR
----------------
First Quarter
(through July 22) 15/16 5/16
First Quarter
(from July 22) 3/8 1/4
Second Quarter 3/8 1/16
Third Quarter 13/32 1/32
Fourth Quarter 1/2 5/32
At May 31, 1995, there were 124 holders of record of the Company's Common
Stock and no holders of the Company's Preferred Stock.
The Company has not paid dividends on the Common Stock. The Company's
financial condition and the existence of defaults pursuant to the Senior Notes
and the Subordinated Debentures make it unlikely that the Company will be able
to pay dividends on the Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below for, and as of the
end of, each of the fiscal years in the five year period ended May 31, 1995 have
been derived from the Company's consolidated financial statements. The
consolidated financial statements of the Company for the fiscal years ended
May 31, 1995, 1994, 1993 and 1992 were audited by Grant Thornton L.L.P.,
independent certified public accountants. The consolidated financial statements
of the Company for the fiscal year ended May 31, 1991 were audited by Wachsman,
Rappaport and Fink, P.A., independent certified public accountants. The
consolidated financial statements of the Company as of May 31, 1995 and 1994 and
for the three-year period ended May 31, 1995 and the accountant's reports
thereon are included in Item 8 of this Form 10-K.
II-1
Fiscal Year Ended May 31,
(In thousands, except per share data)
-------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
EARNINGS STATEMENT DATA:
Revenues
- --------
Net sales $21,999 $16,747 $32,031 $26,526 $21,521
Lease revenue 2,984 1,986 1,473 -- --
----- ----- ----- -- --
Total revenues 24,983 18,733 33,504 26,526 21,521
Cost of sales 17,713 22,104 21,493 16,310 14,920
Selling, general and
administrative expenses 4,358 6,943 6,469 5,281 3,230
Provision (recovery) for
doubtful accounts (335) 1,488 493 374 517
Interest expense 2,272 2,563 2,163 871 513
Depreciation and
amortization 1,693 2,866 1,406 201 164
Interest and other
income (603) (88) (66) (94) (55)
Unusual and non-recurring
items (177) -- -- -- --
Losses of service center
subsidiary 676 1,922 -- -- --
Earnings (loss) before
income taxes, equity
in earnings (loss) of
joint venture and
extraordinary item (614) (19,065) 1,546 3,583 2,232
Provision for income taxes
(benefit) -- (2,475) 510 1,370 941
Equity in earnings (loss)
of joint venture -- (423) (59) (229) 121
Extraordinary loss on
extinguishment of debt -- (363) -- -- --
----- ----- --- --- ---
Net earnings (loss) $(614) $(17,376) $ 977 $1,984 $1,412
----- -------- ---- ----- -----
Earnings (loss) per common
share before extraordinary
items (.15) (4.21) .24 .52 .37
Extraordinary item -- (.09) -- -- --
--- ----- --- --- ---
EarningS (loss) per common
share $(.15) $(4.30) $0.24 $0.52 $0.37
----- ------ ---- ---- ----
Weighted average number of
common shares outstanding 4,042 4,042 3,997 3,850 3,825
II-2
At May 31
---------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital (deficit) $(13,295) $(18,312) $17,087 $2,938 $1,748
Total assets 14,511 25,553 35,709 20,303 14,319
Short-term debt 3,279 3,531 4,905 7,296 4,863
Long-term debt in technical
default classified as current 16,617 22,157 -- -- --
Long-term debt 440 485 18,579 309 57
Stockholders' equity (deficit) (9,702) (9,088) 8,173 7,081 4,529
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
INTRODUCTION. As of May 31, 1994, the Company operated an FAA-certified
repair facility located adjacent to the Company's warehouse facilities in
Sherman, Texas. The principal business of this facility, which was opened by
the Company during fiscal 1994, was to perform FAA-required maintenance checks
on certain narrow body aircraft. At May 31, 1994, this facility employed
approximately 60 people. During fiscal 1994, the wholly owned subsidiary that
operated the facility incurred costs and expenses of $2.4 million while
generating revenues of only $525,000.
During fiscal 1995, the Company disposed of the repair facility (after
incurring losses on the repair facility during fiscal 1995 of $675,000) and sold
a subsidiary that was engaged in air cargo transport. As a result of these
actions, in fiscal 1995, the Company returned to its core business, the sale of
aircraft parts. During fiscal 1995, the Company also implemented further cost
reduction measures with respect to its core business.
Although the Company experienced significant improvement in its core
business during fiscal 1995, the Company is in default in the payment of
principal and interest on the Senior Notes and Subordinated Debentures, as noted
below, under "Liquidity and Capital Resources." As a result of such defaults,
the Company is unable to secure the financing necessary to replenish its parts
inventory. Unless the Company obtains funds for significant additional
inventory purchases, it will be unable to sustain operation of its core business
at present levels.
The Company is attempting to sell aircraft to obtain cash with which to
make certain principal payments on the Senior Notes. However, the Company does
not expect that it will be able to resume making payments on the Subordinated
Debentures. The Company intends to present a restructuring proposal to the
holders of the Senior Notes and the Subordinated Debentures during the second
quarter of fiscal 1996. Unless the Company's capitalization is restructured,
management does not believe that the Company will be able to continue as a going
concern in its present form. There can be no assurance that the Company will be
able to consummate a restructuring of its indebtedness. As a result of the
matters described above, the Company's independent public accountants included
in their report on the Company's consolidated financial statements for fiscal
1995 an explanatory paragraph that describes the uncertainty about the Company's
ability to continue as a going concern in its present form.
INVENTORY ACCOUNTING. Inventories are valued at the lower of cost or
market. The cost of aircraft spare parts purchased in lots, as opposed to whole
aircraft purchases, is determined on a specific identification basis. As of May
31, 1995, such parts represented approximately 42% of the inventory cost value.
The cost of parts acquired through whole aircraft purchases is assigned to
the pool of parts (the aircraft) based on the purchase price of the aircraft.
As parts are sold from the pool, the amount of cost amortized is based upon the
relationship of the cost basis of the pool to the estimated sales value of the
pool. As parts sales
II-3
take place, the costs are charged to cost of sales based on the estimated cost
of sales percentage. As of May 31, 1995, such parts represented approximately
20% of the inventory cost value.
Certain aircraft held for sale, which were previously leased, are accounted
for as inventory. As of May 31, 1995, such aircraft represented approximately
38% of the inventory cost value.
The revenue estimates for the pool of parts (the aircraft) is determined by
management based upon the individual sales values of all the parts in the pool.
The revenue estimates are then projected by quarter over a five-year period
beginning with the date on which management determines the aircraft is to be
parted out. Management monitors its initial estimates and may make adjustments
if warranted by market conditions. If the actual revenue exceeds the quarterly
estimates, no amortization adjustment is required. The amortization schedule is
established to write the pool of parts to zero over a five-year period even
though there may be parts in the pool remaining for future sale after such
period.
GENERAL FINANCIAL INFORMATION. The following table sets forth percentage
relationships of expense items to total revenues for the periods indicated:
Percentage of Total Revenues
Years ended May 31,
-------------------
1995 1994 1993
---- ---- ----
Total revenues 100.0% 100.0% 100.0%
----- ------- -------
Cost of goods sold 70.9 118.0 64.2
Selling, general and administrative expenses 17.4 37.1 19.3
Provision for bad debts (1.3) 7.9 1.5
Interest expense 9.1 13.7 6.4
Depreciation and amortization expense 6.8 15.2 4.2
Interest and other income (2.4) ( .5) ( .2)
Unusual and nonrecurring items ( .7) -- --
Loss on discontinued subsidiary 2.7 10.3 --
----- ------ -----
Operating earnings (2.5) (101.8) 4.6
Income tax expense (benefit) -- (13.2) 1.5
Joint venture (loss) income -- (2.3) (0.2)
Extraordinary loss -- (1.9) --
----- ------- -------
Net earnings (2.5)% (92.8)% 2.9%
----- ------- -------
----- ------- -------
RESULTS OF OPERATIONS
FISCAL 1995 COMPARED WITH FISCAL 1994.
Total revenues for the fiscal year ended May 31, 1995 ("fiscal 1995")
increased 33.4% from total revenues for the fiscal year ended May 31, 1994
("fiscal 1994"), to $25.0 million from $18.7 million. The increase in total
revenues is primarily attributable to an increase in aircraft sales, from $4.1
million in fiscal 1994 to $8.2 million in fiscal 1995. During fiscal 1995, the
Company sold three DC-9 aircraft to a leasing company for $5.6 million pursuant
to a contract entered into during fiscal 1994. Aircraft sales are unpredictable
transactions and may fluctuate significantly from year to year, dependant, in
part, upon the Company's ability to purchase an aircraft and resell it within a
relatively brief period of time. Lease revenue increased to $3.0 million in
fiscal 1995 from $2.0 million in fiscal 1994.
Cost of sales decreased 19.9% from $22.1 million in fiscal 1994 to $17.7
million in fiscal 1995, while cost of sales as a percentage of revenues
decreased from 118.0% in fiscal 1994 to 70.9% in fiscal 1995. During fiscal
1994, the Company recorded charges to cost of sales totalling $9.5 million for
writedowns and valuation
II-4
adjustments to certain parts inventory and aircraft (see Results of Operations -
Fiscal 1994 Compared With Fiscal 1993), thus making a comparison of cost of sale
percentages between fiscal 1994 and fiscal 1995 not meaningful. During fiscal
1995, the Company realized no profit on the $5.6 million sale of three DC-9
aircraft to a leasing company because the carrying value of such aircraft
equalled the sales price. Excluding the $5.6 million from sales and cost of
sales during fiscal 1995, the Company's cost of sales as a percentage of fiscal
1995 revenues was 60% compared to 64.0% and 61.2% in fiscal 1993 and 1992,
respectively.
Selling, general and administrative expenses ("SG&A") for fiscal 1995
decreased 37.2% to $4.4 million in fiscal 1995 compared to $6.9 million in
fiscal 1994. As a percentage of revenues, SG&A expense was 17.4% in fiscal 1995
compared to 37.1% in fiscal 1994. The reduction in SG&A expense of $2.6 million
from fiscal 1994 to fiscal 1995 was due to several factors, including reductions
in the number of management personnel and ongoing efforts to reduce operating
costs. Payroll and commissions costs were $1.3 million in fiscal 1995 compared
to $2.2 million in fiscal 1994. Travel and entertainment costs were $261,000 in
fiscal 1995 compared to $610,000 in fiscal 1994. Additionally, in the fourth
quarter of fiscal 1994 the Company accrued a charge of $825,000 in connection
with an unfavorable judgment arising from a lawsuit relating to commissions owed
on the sale of an aircraft in 1989.
Provision (recovery) for doubtful accounts was $(335,000) in fiscal 1995
compared to $1.5 million in fiscal 1994. During fiscal 1995, the Company,
primarily through litigation, recovered approximately $700,000 of accounts
receivable which had been written off or reserved during fiscal 1994. The
recoveries were offset during fiscal 1995 by a provision for doubtful accounts
of $350,000. During fiscal 1994, the Company wrote off approximately $900,000
of accounts receivable which were determined to be uncollectible, and reserved
additional funds for accounts that may not be collectible.
Interest expense for fiscal 1995 was $2.3 million compared to $2.6 million
in fiscal 1994. The decrease in interest expense is due to a net reduction in
total debt outstanding, from $26.2 million at May 31, 1994 to $20.3 million at
May 31, 1995. During fiscal 1995, the Company repaid $4.7 million of the
principal due on the Senior Notes.
Depreciation and amortization was $1.7 million in fiscal 1995 compared to
$2.9 million in fiscal 1994. The net reduction of $1.2 million from 1994 to
1995 was due primarily to a decrease in depreciation of aircraft held for lease,
as several of the Company's aircraft that were being depreciated in fiscal 1994
were sold either during the latter part of fiscal 1994 or during fiscal 1995.
Interest and other income was $603,000 for fiscal 1995 compared to $88,000
for fiscal 1994. Included in interest and other income during fiscal 1995 is
approximately $340,000 interest income collected on notes receivable, a $66,000
gain on the sale of certain land located in Kentucky, and approximately $120,000
received in connection with consulting and other services provided to an
insurance company.
Included in unusual and non-recurring items is an expense of $180,000
incurred in connection with the transactions between the Company and Richard R.
Wellman and Lynda Wellman and an affiliate of the Wellmans and a gain of
$375,000 relating to settlement of litigation which had previously been accrued
in an amount in excess of the settlement amount.
Loss of service center subsidiary was approximately $675,000 in fiscal 1995
compared to a loss of $1.9 million in fiscal 1994.
The net loss for fiscal 1995 was $614,000, or $(.15) per share, compared to
a net loss of $17.4 million or $(4.30) per share for fiscal 1994.
FISCAL 1994 COMPARED WITH FISCAL 1993.
Total revenues for fiscal 1994 decreased 43.9% from total revenues for
fiscal 1993, to $18.8 million from $33.5 million. The decrease in total
revenues was primarily attributable to a 72% decrease in aircraft sales, from
II-5
$14.9 million in fiscal 1993 to $4.1 million in fiscal 1994. The reduction in
aircraft sales from fiscal 1993 to fiscal 1994 was based on several factors,
including the Company's weak cash position, which decreased the Company's
ability to purchase aircraft and inventory for resale, and overall weakness in
the market for used aircraft and parts. The decrease in total revenues was also
attributable to a reduction in parts and engine sales to Transafrik, a cargo
carrier operating in Africa. Parts and engine sales to Transafrik decreased 75%
from $6.0 million in fiscal 1993 to $1.5 million in fiscal 1994. During fiscal
1994 Transafrik underwent a change in ownership and made other significant
management and operational changes, including a down sizing of its fleet and
certain changes in fleet mix. Transafrik is headquartered in Angola. The
Company experienced difficulty in obtaining current information regarding
Transafrik due to conditions prevailing in Angola, namely the on-again, off-
again civil war and the existence of a Marxist government. In addition, the
Company experienced a number of changes in senior management during the first
half of calendar 1994. The Company's Chief Financial Officer resigned in early
February, 1994. The Company's President, who was the Company's primary contact
with Transafrik, was terminated not long thereafter. Due to such management
changes, it is difficult to say with certainty when the Company became aware of
the circumstances that the Company believes resulted in a loss of business from
Transafrik. The Company believes that it disclosed the circumstances as soon as
practicable following the Company's current senior management becoming aware of
them.
The Company's decrease in total revenues was in small part offset by an
increase in lease revenue of $500,000 from $1.5 million in fiscal 1993 to $2.0
million in fiscal 1994.
Cost of sales increased 2.8% from $21.5 million in fiscal 1993 to $22.1
million in fiscal 1994, while cost of sales as a percentage of total revenues
increased to 117.4% in fiscal 1994 from 64% in fiscal 1993. The increase in
cost of sales from fiscal 1993 to fiscal 1994 is a result of several factors,
including lower profits realized on aircraft sales due to weak market
conditions, and charges of $3.1 million and $2.0 million for decreasing the
carrying value of certain inventory due to continuing poor market conditions and
changes in sales estimates and related inventory values. These write-downs
included parts costed under both the specific identification method and the
pooling method. The write-downs were due to a change in emphasis of sales from
certain older product lines, including DC-8 and other parts, and a close
examination of the realizability of asset values in light of weak market
conditions. In connection with the write-downs of inventory, the amount of cost
being amortized upon the sale of inventory accounted for under the pooling
method has been increased based on management's evaluation of the adjusted cost
basis of the pool to the estimated sales value of the pool.
As a result of weak demand in the marketplace and the Company's need to
increase its liquidity to meet its obligations as they become due, the Company
recorded a $2.1 million charge to cost of sales for losses from the sale or loss
of aircraft. This charge related primarily to one B-727 sold in April 1994 to
its lessee at an amount substantially below cost to raise cash, and another
B-727 that was written off entirely because the Nigerian lessee defaulted under
the lease and it was doubtful that the Company could recover possession of the
aircraft. The Company did recover the aircraft in June 1995.
In addition, during the fourth quarter, the Company accrued to cost of
sales a charge of $2.4 million for three DC-9-15F aircraft to reflect net
realizability of the aircraft. The unanticipated cost of overhauling these
aircraft for delivery eliminated the economic benefit that the Company had
negotiated under their sales contract. One of these aircraft was sold in June
1994, another was sold in early October 1994, and the third aircraft was sold in
November 1994.
SG&A expense for fiscal 1994 increased 7.3% to $6.9 million from $6.5
million for fiscal 1993. As a percentage of revenues, SG&A expense increased
from 19.3% during fiscal 1993 to 36.9% during fiscal 1994. The increase in
SG&A's expense as a percentage of revenues was due primarily to a 42% decrease
in revenues without a corresponding decrease in SG&A expense. The Company
incurred substantial expenses related to settlement of litigation (including a
charge of $825,000 in connection with an unfavorable judgment arising from a
lawsuit relating to commissions owed on the sale of an aircraft in 1989),
severance payments and other charges.
Provisions for doubtful accounts for fiscal 1994 increased 202% to $1.4
million for fiscal 1994, from $500,000 in fiscal 1993. During the third
quarter, the Company wrote off $900,000 of amounts receivable which
II-6
were determined to be uncollectible, and reserved additional funds for accounts
that may not be collectible. The Company has legal and collection proceedings
against some of these accounts.
Interest expense for fiscal 1994 totaled $2.6 million compared with $2.2
million for fiscal 1993. The increase in interest expense was the result of the
issuance of the Senior Notes and the Subordinated Debentures.
Depreciation and amortization expense for fiscal 1994 increased from $1.4
million in fiscal 1993 to $2.9 million in fiscal 1994. The increase in
depreciation expense for fiscal 1994 of $1.5 million over fiscal 1993 was
primarily attributable to the depreciation costs associated with the higher
volume of aircraft leased by the Company to third parties and an acceleration of
depreciation of overhaul costs of aircraft to more closely match the estimated
service life of the overhaul. In addition, depreciation of property and
equipment increased by approximately $300,000 in connection with the operation
of the maintenance facility in Texas.
Losses of service center subsidiary were approximately $1.9 million in
fiscal 1994.
Equity in loss of joint venture was $423,000 in fiscal 1994 compared to
$59,000 in fiscal 1993. The 1994 amount includes the Company's share of the
joint venture operating losses of $280,000 and a loss of $143,000 upon
dissolution of the venture. The fiscal 1993 amount consisted of the Company's
share of that joint venture's operating losses.
Extraordinary loss on the extinguishment of debt of $363,000 in fiscal 1994
is net of tax and consists of a 6% prepayment penalty and write-off of deferred
debt issuance costs in connection with the early retirement of a portion of the
Senior Notes.
In August 1993, the Company entered into a management agreement with a
domestic corporation in Mojave, California for a period of four months from
September 1, 1993 to December 31, 1993. Pursuant to this agreement, the Company
engaged in selling the parts of part-out consignment aircraft from various
parties. During the contract period, the Company incurred a net loss of $47,906
related to these services, which was included in SG&A expense for fiscal 1994.
The domestic corporation with which the Company entered the management
arrangement was not affiliated with Company. Pursuant to the management
arrangement, the Company received commissions based on sales of consigned parts.
The Company's expenses of providing the management services, consisting
principally of personnel costs, exceeded the Company's revenue from the
contract. Therefore, the Company elected not to renew the management
arrangement after the expiration of the initial four-month term.
The net loss for fiscal 1994 was $17.4 million, or $(4.30) per share,
representing a decrease from net earnings of $1.0 million or $.24 per share for
fiscal 1993. For fiscal 1994, IASC incurred losses of $1.9 million or $(.48)
per share of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1995, the Company's total long-term debt amounted to $20.3
million, consisting of $9.9 million principal amount of the Senior Notes, $10.0
million principal amount of the Subordinated Debentures and $400,000 principal
amount of a mortgage loan secured by its corporate headquarters. The entire
principal amount of the Senior Notes and the Subordinated Debentures are
classified as current at May 31, 1995, because of the existence of defaults
under the governing documents. The Senior Notes, which were issued during
fiscal 1994, bear interest at the fixed rate of 12% per annum, payable
quarterly. The Senior Notes mature in 1997. The Subordinated Debentures, which
were issued during fiscal 1994, bear interest at the fixed rate of 8% per annum,
payable quarterly and are convertible into shares of the Company's Common Stock
at $4.00 per share. The Subordinated Debentures mature in 2003.
On May 26, 1995, the Company received a notice of payment blockage from the
holder (the "Majority Noteholder") of a majority of the outstanding principal
amount of the Senior Notes. Citing a continuing Event of Default under the
agreement governing the Senior Notes as a result of the Company's noncompliance
with
II-7
certain financial covenants, the Majority Noteholder demanded that the scheduled
interest payment which would otherwise have been payable on May 31, 1995 to
holders of the Subordinated Debentures not be paid. As a result of the
Company's receipt of the notice of payment blockage, the Company did not make
its scheduled May 31, 1995 interest payment to the holders of the Subordinated
Debentures and is prohibited from making any other payments with respect to the
Subordinated Debentures until the earlier of (i) the expiration of a 180-day
period commencing upon the date of the Company's receipt of such notice (the
"Payment Blockage Period") or (ii) the receipt by the Company of written notice
from the Majority Noteholder terminating such Payment Blockage Period. The
aggregate interest payment due on May 31, 1995 was $200,000. The Company did
not make its scheduled July 17, 1995 principal payment to the holders of the
Senior Notes. The aggregate principal payment due on July 17, 1995 was
approximately $1.8 million.
The failure to make the May 31, 1995 interest payment to the holders of the
Subordinated Debentures and the July 17, 1995 principal payment to the holders
of the Senior Notes constitutes an Event of Default under the agreements
governing the Senior Notes and Subordinated Debentures. If the Company remains
in default under the terms of the Senior Notes and Subordinated Debentures, the
holders of such instruments could accelerate the debt, resulting in principal of
approximately $20 million becoming immediately due and payable. The Company
would have no ability to repay such indebtedness if it were to be accelerated.
The foregoing circumstances could require the Company to cease operations or to
seek protection from its creditors through judicial reorganization proceedings.
At May 31, 1995, the Company had a working capital deficit of $13.3
million and a current ratio of .44 to 1.0, compared to a working capital deficit
of $18.3 million and a current ratio of .46 to 1.0 at May 31, 1994. The $5.0
million reduction in the working capital deficit was the result of proceeds
from the sale of certain aircraft (that were previously leased), being used
to pay down current liabilities. This is reflected in the Company's cash
flows which show cash flow provided by operating activities of approximately
$5.8 million, but cash flows from financing activities using approximately
$4.9 million. In fiscal 1996, the Company expects to continue to sell
aircraft held for lease when the leases expire and to use the proceeds for
debt repayment.
The Company does not have any bank lines of credit or other sources of
liquidity beyond cash flows from operating activities due to profitable
operations, if any, or further asset sales. However, the Company does not
currently have any significant commitments for capital outlays.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information with respect to this Item is contained in the Company's
consolidated financial statements and financial statement schedules indicated in
the Index on Page F-1 of this Annual Report on Form 10-K and is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
II-8
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company as of May 31, 1995. A summary
of the background and experience of each of these individuals is set forth
following the table.
Name Age Position Held Director Since
---- --- ------------- --------------
Alexius A. Dyer III(1) 39 Chairman of the Board, President 1992
and Chief Executive Officer
Kyle R. Kirkland (2)(3) 33 Director 1992
E. James Mueller(1)(2)(3) 49 Director 1991
<FN>
- ------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
ALEXIUS A. DYER III has been the Chief Executive Officer of the Company and
Chairman of the Company's Board of Directors since February 1995. Mr. Dyer has
been a director of the Company since 1992. Mr. Dyer served as President of the
Company from February 1994 to February 1995. From February 1991 to February
1994, Mr. Dyer served as Executive Vice President of Capital Markets of the
Company. Additionally, during 1991, he served as the President and director of
the Company's subsidiary, Barnstorm Leasing, Inc., which was merged into the
Company in July 1992. From January 1990 to February 1991, Mr. Dyer served as
the Vice President of Meridian Aviation Capital, a Georgia-based aircraft
leasing company offering products and services to the global airline industry.
KYLE R. KIRKLAND has been a director of the Company since July 1992. Mr.
Kirkland was appointed to the Board in connection with the Company's issuance of
the Senior Notes. Mr. Kirkland has served as the President of Kirkland Messina,
Inc., an investment banking firm, since March 1994. Mr. Kirkland was employed
as Senior Vice President of Dabney/Resnick, Inc. ("Dabney") from June 1991 until
February 1994. Dabney acted as the placement agent for the Senior Notes and the
Subordinated Debentures. Mr. Kirkland was employed as an investment banker with
Canyon Partners, Inc. and with Drexel Burnham Lambert, Inc. from March 1990
through June 1991 and from July 1988 through March 1990, respectively. Mr.
Kirkland is also a director of Image Entertainment, Inc. and Selmer Company.
E. JAMES MUELLER has been a director of the Company since 1991. Mr.
Mueller has been a principal with J.M. Associates, Inc., a business development
consulting firm, since January 1992. From June 1978 through December 1991, Mr.
Mueller was the Vice President of Sales/Marketing of Air Cargo Associates, Inc.,
a Connecticut airline charter brokerage/sales corporation. J.M. Associates,
Inc. provides the Company with consulting services. See "Certain Relationships
and Related Transactions."
COMMITTEES OF THE BOARD
The Compensation Committee of the Board of Directors reviews all aspects of
compensation of executive officers of the Company and makes recommendations on
such matters to the full Board of Directors. The Compensation Committee was
created by action of the Board of Directors after the end of the 1992 fiscal
year. During the fiscal year ended May 31, 1995, the Compensation Committee met
two times.
III-1
The Audit Committee makes recommendations to the Board concerning the
selection of outside auditors, reviews the financial statements of the Company
and considers such other matters in relation to the internal and external audit
of the financial affairs of the Company as may be necessary or appropriate in
order to facilitate accurate and timely financial reporting. The Audit Committee
also reviews proposals for major transactions. During the fiscal year ended
May 31, 1995, the Audit Committee met one time.
The Board of Directors also created an Executive Committee after the end of
the Company's 1992 fiscal year. During the fiscal year ended May 31, 1995, the
Executive Committee did not meet.
The Company does not maintain a standing nominating committee or other
committee performing similar functions.
During the fiscal year ended May 31, 1995, the Board of Directors of the
Company met on ten occasions. Each of the directors attended in excess of
75% of the meetings of the Board of Directors and 75% of all meetings held by
all committees of the Board on which he served.
FAILURE TO FILE REPORTS
During fiscal year 1995, Mr. Robert K. Norris, the Vice President - Finance
of the Company, failed to file one report required by Section 16(a) of the
Securities Exchange Act of 1934, as amended, on a timely basis. The report not
filed on a timely basis was Mr. Norris' Form 3, his initial statement of
beneficial ownership of the Company's Common Stock. No transactions were
reported late because of Mr. Norris' failure to file his Form 3 on a timely
basis.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following sets forth certain information regarding the aggregate cash
compensation paid to or earned by the Company's Chief Executive Officer and
Mr. Richard R. Wellman, who served as the Company's Chief Executive Officer for
a portion of fiscal 1995, during the periods indicated:
III-2
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation
Compensation Awards
------------ -------------
Name and All Other
Principal Position Year Salary ($) Bonus ($)(1) Options/SARS(#) Compensation ($)
------------------- ---- ---------- ------------ -------------- -------------------
Alexius A. Dyer III 1995 $133,108 0 107,000 0
President and Chief 1994 108,865 20,000 0 0
Executive Officer 1993 109,615 15,750 5,000 0
Richard R. Wellman(2) 1995 $38,523 0 0 0
1994 75,800 0 0 0
1993 20,800 2,080 10,000 0
<FN>
- -------------------------
(1) All officers are eligible to participate in the
Company's bonus plan. Awards are based upon certain
performance criteria relating to the Company's net
sales.
(2) Mr. Wellman was Chief Executive Officer of the Company
until January 31, 1995, when he resigned from his
position as such. Effective upon his resignation, Mr.
Wellman's employment agreement with the Company was
terminated by mutual consent.
III-3
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Percent
Number of of Total Potential Realizable
Securities Option/SARs Value at Assumed
Underlying Granted to Exercise or Annual Rates of Stock
Option/SARs Employees in Base Price Expiration Price Appreciation for
Name Granted (#) Fiscal Year ($/sh) Date Option Term (5 years)*
---- ----------- ------------ ----------- ----------- ------------------------
5%($) 10%($)
----- ------
Alexius A. Dyer III, 107,000 40% $0.19 12/27/99 $5,616.75 $12,411.68
President and Chief
Executive Officer
- ------------------------
* The gains under these columns result from calculations assuming 5% and 10%
growth rates as set by the Securities and Exchange Commission and are not
intended to forecast future price appreciation of the Common Stock of the
Company. The gains reflect a future value based upon growth at the prescribed
rates. The Company did not use an alternate formula for a grant-date
valuation, an approach which would state gains at present, and therefore
lower value. The Company is not aware of any formula that will determine with
reasonable accuracy a present value based on future unknown or volatile
factors.
III-4
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUE
Shown below is information with respect to all unexercised options to
purchase the Company's Common Stock granted to the Named Officers through the
end of the last fiscal year under the Company's option plans. No options
were exercised during fiscal year 1995.
Shares Value of Unexercised
Acquired Number of Unexercised In-the-Money Options at
by Value Options at FY-End FY-End ($)
Name Exercise Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
---- -------- ------------ ------------------------- ---------------------------
Alexius A. Dyer III 0 0 140,334/66,666(2) $39,875.00
<FN>
(1) Represents the market value of the underlying Common
Stock at fiscal year end minus the exercise price.
(2) Includes 33,334 shares of Common Stock that may be
acquired pursuant to the vested portion of a Stock
Purchase Warrant granted to Mr. Dyer on October 15,
1993. The exercise price is $3.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee, Kyle R. Kirkland and E. James
Mueller, have never been employees of the Company. No interlocks existed and
no insiders participated in the Compensation Committee's deliberations or
decisions regarding fiscal year 1995 salaries.
COMPENSATION OF DIRECTORS
The non-employee members of the Company's Board of Directors received a
$25,000 fee for their service on the Board during the 1995 fiscal year
pursuant to a Director's Compensation Plan, which was adopted during the 1995
fiscal year. During the 1994 fiscal year, non-employee members of the Board
of Directors received options to purchase 15,000 shares of Common Stock upon
their appointment or election to the Board. Such grants vest in increments
of 5,000 shares per year. Additional grants of 15,000 shares are made upon
election to the Board after all previous grants have vested. These additional
grants also vest in 5,000 share increments. The exercise price of all grants
is the fair market value of the Common Stock at the date of grant. Directors
are also reimbursed for expenses incurred in connection with the attendance
of Board meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS AND STOCKHOLDINGS OF MANAGEMENT
The following table sets forth certain information regarding each person
known to the Company who may be considered a beneficial owner of more than 5%
of the outstanding shares of the Company's Common Stock as of May 31, 1995:
III-5
Shares Percentage of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
------------------------- ------------------ -------------------
LYNDA WELLMAN(1) 1,999,700 49.48
RICHARD R. WELLMAN(1)
7540 Loch Ness Drive
Miami Lakes, Florida 33014
SUN LIFE INSURANCE COMPANY OF AMERICA(2) 514,865 12.74
11601 Wilshire Boulevard, 12th Floor
Los Angeles, California 90025-1748
- ---------------------------
<FN>
(1) For purposes of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), Mr. and Mrs. Wellman are deemed to be the beneficial
owners of the Common Stock owned by the other. Mr. and Mrs. Wellman
executed an irrevocable proxy, in connection with their resignation of
their positions with the Company on January 31, 1995, authorizing the
Board Of Directors of the Company to vote 1,980,000 shares of the Company's
Common Stock owned by the Wellmans. Mr. and Mrs. Wellman have notified the
Company that they consider the proxy terminated as a result of the
Company's failure to make timely payments of certain amounts due Ms.
Wellman as severance payments. The Company disputes the Wellmans' assertion
that the proxy has been terminated.
(2) Sun Life Insurance Company of America ("Sun Life"), a subsidiary of
SunAmerica Corporation ("SunAmerica"), is the registered owner of
exercisable warrants to purchase 514,865 shares of the Company's Common
Stock at an exercise price of $5.3875. Sun Life acquired the warrants in
connection with its purchase of Senior Notes. Under the Exchange Act,
SunAmerica may be deemed the beneficial owner of the shares described
herein.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1995 by the
Company's Chief Executive Officer, who is the only officer of the Company
whose salary exceeds $100,000, and each of the Company's directors and by all
directors and executive officers as a group:
III-6
Shares Percentage of
Name of Beneficial Owner or Identity of Group (1) Beneficially Owned Outstanding Shares
------------------------------------------------- ------------------ -------------------
Alexius A. Dyer, III 141,334(2) 3.50
E. James Mueller 15,000(3) *
Kyle R. Kirkland 107,237(4) 2.65
All Directors and Executive
Officers as a Group (3 persons) 257,385 6.37
- ------------------
<FN>
* Less than one percent of the shares of Common Stock outstanding.
(1) The address for each person listed in this table is c/o International
Airline Support Group, Inc., 8095 N.W. 64th Street, Miami, Florida 33166.
(2) Includes 107,000 shares of Common Stock that may be obtained by Mr. Dyer
upon exercise by him of options granted to him pursuant to the Employee
Stock Option Plan and 33,334 shares of Common Stock that may be acquired
pursuant to the vested portion of a Stock Purchase Warrant granted to Mr.
Dyer on October 15, 1993. The exercise prices for the options and warrants
are $.19 and $3.00 per share, respectively.
(3) Represents shares that may be obtained by Mr. Mueller upon exercise by him
of options granted to him pursuant to the Non-Employee Directors Stock
Option Plan. The exercise price is $4.625 per share.
(4) Represents shares that may be obtained by Mr. Kirkland upon exercise of
options granted to him pursuant to the Non-Employee Directors Stock Option
Plan and upon the exercise of warrants granted to him as an officer of the
placement agent for the Senior Notes. The exercise prices for the options
and warrants are $5.125 and $5.3875 per share, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 31, 1995, IASG entered into a Purchase Agreement with Richard R.
Wellman and Lynda Wellman (the "Wellmans") and an entity affiliated with the
Wellmans, Custom Air Holdings, Inc., a Nevada corporation ("Custom Air"),
pursuant to which IASG transferred to Custom Air (i) all of the outstanding
shares of common stock of Brent Aviation, Inc., which was a wholly-owned
subsidiary of IASG ("Brent"), (ii) certain spare parts, components, inventory
and equipment for Boeing 727 series aircraft, and (iii) A McDonnell Douglas DC-4
aircraft. In consideration for the foregoing, Custom Air paid IASG $230,000 and
agreed to lease a Boeing B-727-100 freighter airplane on a month-to-month basis.
In addition, the Wellmans resigned from all positions as officers or directors
held by them with IASG and its subsidiaries, granted a proxy to IASG enabling
IASG's directors to vote 1,980,000 shares of common stock of IASG held by the
Wellmans for a period of two years, and agreed not to compete or interfere with
any of the businesses of IASG and its remaining subsidiaries for a period of two
years. IASG agreed to pay Lynda Wellman severance equivalent to her current
salary for a period of one year. IASG further agreed to terminate its leasehold
interest in a facility located at the Grayson County, Texas Airport, allowing
Brent to lease such facility for its operations.
III-7
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 L.L.P. Page F-2
(3) Consolidated Financial Statements and Notes to Page F-3
Consolidated Financial Statements of the
Company, including Consolidated Balance Sheets
as of May 31, 1995 and 1994 and related
Consolidated Statements of Operations,
Consolidated Cash Flows and Consolidated
Stockholders' Equity (Deficiency) for each of
the years in the three-year period ended
May 31, 1995
(b) FINANCIAL STATEMENTS SCHEDULES
PAGE OR METHOD OF FILING
(1) Report of Grant Thornton L.L.P. as to Included in the report
Consolidated Financial Statement Schedules for listed in (a)(ii) above
fiscal years ended May 31, 1995, 1994 and 1993
(2) Schedule II. Valuation and Qualifying Page S-1
Accounts
Schedules not listed above and columns within certain Schedules have been
omitted because of the absence of conditions under which they are required or
because the required material information is included in the Consolidated
Financial Statements or Notes to the Consolidated Financial Statements included
herein.
IV-1
(c) EXHIBITS
Page Number or
Exhibit Number Description Method of Filing
- -------------- ----------- ----------------
3.1 Articles of Incorporation of the Incorporated by reference to
Company, as amended Exhibit 3.1 of the Company's Annual
Report on Form 10-K for the fiscal
year ended May 31, 1993 (the "1993
Form 10-K")
3.2 Amended and Restated Bylaws of the Incorporated by reference to
Company Exhibit 3.2 of the 1993 Form 10-K
4.1 Form of Certificate for Common Stock Incorporated by reference to
Exhibit 4.1 of the 1993 Form 10-K
4.2 Form of Warrant issued to holders of Incorporated by reference to
Senior Notes Exhibit 4-A to the Company's Form 8-K
dated July 17, 1992 (the "July 1992
Form 8-K")
4.3 Form of 8% Convertible Subordinated Incorporated by reference to
Debentures due August 31, 2003 Exhibit 4.3 of the 1993 Form 10-K
10.1.1 Lease Agreement dated June 14, 1991 Incorporated by reference to
between The County of Grayson, Texas Exhibit 10.1.1 of the 1993 Form 10-K
and International Airline Support
Group, Inc.
10.2.1 Employee Stock Option Plan Incorporated by reference to
Exhibit 10.2.1 of the 1993 Form 10-K
10.2.2 Non-Employee Director Stock Option Plan Incorporated by reference to
Exhibit 10.2.2 of the 1993 Form 10-K
10.2.3 401(k) Plan Incorporated by reference to
Exhibit 10-H of the Company's Annual
Report on Form 10-K for the fiscal
year ended May 31, 1992 (the "1992
Form 10-K")
10.2.4 Bonus Plan Incorporated by reference to
Exhibit 10.2.4 of the 1993 Form 10-K
IV-2
10.2.5 Cafeteria Plan Incorporated by reference to
Exhibit 10.2.5 of the 1993 Form 10-K
10.3.1 Form of Securities Purchase Incorporated by reference to
Agreement dated as of July 17, 1992 Exhibit 10-A to the Company's
among the Company and the Purchasers July 1992 Form 8-K
listed therein, as amended
10.3.2 Consent, Amendment and Waiver dated Incorporated by reference to
as of September 8, 1993 among the Exhibit 10.9.2 of the 1993 Form 10-K
Company and the parties listed
therein
10.3.3 Letter Agreement dated March 23, Incorporated by reference to Exhibit
1992, between Dabney/Resnick and 10.4.3 of the Company's amended
Wagner, Inc. and International Annual Report on Form 10-K for the
Airline Support Group, Inc., fiscal year ended May 31, 1994 (the
relating to placement of the "1994 Form 10-K/A")
Company's 12% Senior Secured Notes
10.4 Representative Indemnity Agreement Incorporated by reference to
between the Company and its Exhibit 10.12 of the 1993 Form 10-K
Directors and Executive Officers
10.5.1 Securities Purchase Agreement dated Incorporated by reference to
as of September 8, 1993 among the Exhibit 10.13 of the 1993 Form 10-K
Company and the Purchasers listed
therein
10.5.2 Letter Agreement dated March 25, Incorporated by reference to
1993, between Dabney/Resnick and Exhibit 10.6.2 of the 1994 Form 10-
Wagner, Inc. and International K/A
Airline Support Group, Inc.,
relating to placement of the
Company's 8% Convertible
Subordinated Debentures
10.6 Form of Registration Rights Incorporated by reference to
Agreement dated as of September 8, Exhibit 10.14 of the 1993 Form 10-K
1993, among the Company and the
Purchasers listed therein
10.7.1 Joint Venture Agreement dated Incorporated by reference to
August 20, 1992 between the Company Exhibit 10.7 of the 1993 Form 10-K
and R.T. Leasing, Inc.
IV-3
10.7.2 Settlement Agreement, dated Incorporated by reference to
February 10, 1994, between Aircraft Exhibit 10.9 of the 1994
Partners, Ltd., International Airline Form 10-K/A
Support Leases, Inc., R.T. Leasing, Inc.,
A.P. Number 1, Inc. and Richard R. Wellman
Group, Inc., International Air
10.7.3 Settlement Stipulation, dated January 31, Filed herewith
1995, among Admark International Ltd.,
Plaintiff and Norville Trading Company Ltd.,
International Airline Support Group, Inc.
and Richard R. Wellman, Defendants
10.8 Aircraft Purchase Agreement, dated Incorporated by reference to
December 30, 1993, between Dana Messina and Exhibit 10.9 of the 1994 Form
International Airline Support Group, Inc. 10-K/A
10.9.1 Purchase Agreement, dated January 1995, among Incorporated by reference to
International Airline Support Group, Inc., Exhibit 10.1 to the Company's Form
Richard R. Wellman, Lynda Wellman and Custom 10-Q/A for the quarter ended
Air Holdings, Inc., including as an exhibit August 31, 1994
the "General Proxy" executed by Richard R.
Wellman and Lynda Wellman
10.10 Assignment and Assumption Agreement, dated Incorporated by reference to
January 31, 1995, between International Exhibit 10.2 to the Company's Form
Airline Service Center, Inc. and Express One 10-Q/A for the quarter ended
International, Inc. August 31, 1994
10.11 Notice of Payment Blockage, dated May 25, 1995 Filed herewith
21 Subsidiaries of Registrant Filed herewith
23 Consent of Grant Thornton L.L.P. Filed herewith
27 Financial Data Schedule Filed herewith
(d) REPORTS ON FORM 8-K.
A Report on Form 8-K dated May 26, 1995 was filed by the Company relating
to the Company's nonpayment of its scheduled May 31, 1995 interest payment to
the holders of the Debentures as a result of the Company's receipt of a notice
of payment blockage from the holder of a majority of the outstanding principal
amount of the Company's Senior Notes.
IV-4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized this 28th
day of August, 1995
International Airline Support Group, Inc.,
a Delaware Corporation
By: /S/ ALEXIUS A. DYER III
_______________________________________
Alexius A. Dyer III
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
Signature Title Date
/S/ ALEXIUS A. DYER III
_______________________ President and Director August 28, 1995
Alexius A. Dyer III (Principal Executive Officer)
/S/ ROBERT K. NORRIS
________________________ Vice President-Finance (Principal August 28, 1995
Robert K. Norris Financial and Accounting Officer)
/S/ KYLE R. KIRKLAND
________________________ Director August 28, 1995
Kyle R. Kirkland
/S/ E. JAMES MUELLER
_________________________ Director August 28, 1995
E. James Mueller
IV-5
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Report of independent certified public accountants . . . . . . . . . . F-2
Consolidated balance sheets as of May 31, 1995 and 1994. . . . . . . . F-3
Consolidated statements of operations for the years ended
May 31, 1995, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated statements of stockholders' equity (deficit) for
the years ended May 31, 1995, 1994 and 1993. . . . . . . . . . . . . . F-5
Consolidated statements of cash flows for the years ended
May 31, 1995, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . F-6
Notes to consolidated financial statements . . . . . . . . . . . . . . F-7
F-1
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
International Airline Support Group, Inc.
We have audited the accompanying consolidated balance sheets of International
Airline Support Group, Inc. and Subsidiaries as of May 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended May 31, 1995.
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 from material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the consolidated financial position
of International Airline Support Group, Inc. and Subsidiaries as of
May 31, 1995 and 1994 and the consolidated results of their operations
and their consolidated cash flows for each of the three years in the
period ended May 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note B,
the Company has incurred significant operating losses and the Company
is in default under its debt agreements which could result in the
lenders demanding payment under the Company's long-term debt agreements,
raising substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note B. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
We have also audited Schedule II of International Airline Support Group,
Inc. and Subsidiaries for each of the three years in the period ended
May 31, 1995. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
Miami, Florida
July 21, 1995
F-2
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1995 AND 1994
ASSETS
1995 1994
---- ----
Current assets
Cash $ 848,331 $ 95,790
Accounts receivable, net of allowance for doubtful
accounts of $ 619,000 in 1995 and $940,000 in 1994 2,592,463 3,817,023
Notes receivable (Note A) 313,490 1,120,000
Income tax refund receivable - 1,930,000
Inventories (Notes A, C and D) 6,497,270 8,719,774
Deferred tax benefit - current, net of valuation
allowance of $1,146,000 in 1995 and $2,190,000 in
1994 (Note F) - -
Other current assets 31,480 162,055
------------ ------------
Total current assets 10,283,034 15,844,642
Property and equipment (Notes A and E)
Land 330,457 330,457
Aircraft held for lease 3,289,613 7,227,835
Building and leasehold improvements 715,772 789,340
Machinery and equipment 940,948 2,191,999
------------ ------------
5,276,790 10,539,631
Less accumulated depreciation 1,980,927 2,233,680
------------ ------------
3,295,863 8,305,951
------------ ------------
Other assets
Deferred debt costs, net (Note A) 931,932 1,224,401
Deferred tax benefit, net of valuation allowance of
$3,894,000 in 1995 and $3,095,000 in 1994 (Note F) - -
Deposits and other assets - 178,322
------------ ------------
931,932 1,402,723
------------ ------------
$ 14,510,829 $ 25,553,316
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current maturities of long-term obligations (Note D) $ 1,812,040 $ 3,531,228
Long-term obligations in default classified
as current (Notes B and D) 18,083,334 22,156,720
Bank overdrafts - 410,570
Accounts payable 1,650,078 4,086,998
Accrued expenses (Note P) 2,226,900 3,970,840
------------ ------------
Total current liabilities 23,772,352 34,156,356
Long-term obligations, less current maturities
(Notes B and D) 440,377 485,020
Commitments and contingencies (Notes E, M, N and Q) - -
Stockholders' equity (deficit) (Notes G and H)
Preferred Stock - $.001 par value,
authorized 500,000 shares;
0 shares outstanding in 1995 and 1994. - -
Common stock - $.001 par value;
authorized 20,000,000 shares;
issued and outstanding 4,041,779
shares in 1995 and 1994. 4,042 4,042
Additional paid-in capital 2,654,332 2,654,332
Accumulated deficit (12,360,274) (11,746,434)
------------ ------------
Total stockholders' deficit (9,701,900) (9,088,060)
------------ ------------
$ 14,510,829 $ 25,553,316
============ ============
The accompanying notes are an integral part of these statements.
F-3
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1995, 1994 AND 1993
1995 1994 1993
---- ---- ----
Revenues
Net sales $21,998,869 $16,746,932 $32,031,596
Lease revenue 2,984,218 1,986,450 1,473,038
----------- ------------ -----------
Total revenues 24,983,087 18,733,382 33,504,634
Cost of sales (Note O) 17,712,427 22,104,131 21,493,792
Selling, general and administrative expenses
(Notes O and P) 4,358,119 6,943,147 6,469,160
Provision (recovery) for doubtful accounts (334,571) 1,487,969 493,234
Interest expense 2,271,849 2,562,681 2,162,994
Depreciation and amortization 1,693,301 2,865,610 1,405,720
Interest and other income (602,943) (87,600) (65,828)
Unusual and nonrecurring items (Note Q) (177,115) - -
Losses of service center subsidiary (Note R) 675,860 1,922,086 -
----------- ------------ -----------
25,596,927 37,798,024 31,959,072
----------- ------------ -----------
Earnings (loss) before income taxes,
equity in loss of joint venture, and
extraordinary item (613,840) (19,064,642) 1,545,562
Provision for income taxes (benefit) (Note F) - (2,475,185) 510,000
----------- ------------ -----------
Earnings (loss) before equity in loss
of joint venture and extraordinary item, (613,840) (16,589,457) 1,035,562
Equity in loss of joint venture (Note J) - (423,224) (58,543)
----------- ------------ -----------
Earnings (loss) before extraordinary item (613,840) (17,012,681) 977,019
Extraordinary loss on the extinguishment of debt
(Note D) - (363,022) -
----------- ------------ -----------
Net (loss) earnings $ (613,840) $(17,375,703) $ 977,019
=========== ============ ===========
Per share data (Note A):
Weighted average shares outstanding 4,041,779 4,041,779 3,997,458
=========== ============ ===========
Earnings (loss) per common share
and common equivalent shares
Earnings (loss) before extraordinary item $ (.15) $ (4.21) $ .24
Extraordinary item - (.09) -
------ ------- -----
Net (loss) earnings $ (.15) $ (4.30) $ .24
====== ======= =====
The accompanying notes are an integral part of these statements.
F-4
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MAY 31, 1995, 1994 AND 1993
COMMON STOCK
----------------- Additional Retained
Number of Par Paid-In Earnings
Shares Value Capital (Deficit) Total
------ ----- ------- --------- -----
Balance at June 1, 1992 3,974,112 $3,974 $2,424,579 $4,652,250 $7,080,803
Issuance of common stock 35,000 35 115,451 - 115,486
Net earnings - - - 977,019 977,019
--------- ------ ---------- ------------ ----------
Balance at May 31, 1993 4,009,112 4,009 2,540,030 5,629,269 8,173,308
Issuance of common stock 32,667 33 114,302 - 114,335
Net loss - - - (17,375,703) (17,375,703)
--------- ------ ---------- ------------- ----------
Balance at May 31, 1994 4,041,779 4,042 2,654,332 (11,746,434) (9,088,060)
Net loss - - - (613,840) (613,840)
--------- ------ ---------- ------------ -----------
Balance at May 31, 1995 4,041,779 $4,042 $2,654,332 $(12,360,274) $(9,701,900)
========= ====== ========== ============ ===========
The accompanying notes are an integral part of these statements.
F-5
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1995, 1994 AND 1993
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $ (613,840) $(17,375,703) $ 977,019
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,693,301 3,150,062 1,405,720
Depreciation - service center 196,322 - -
Gain on Express One transaction (Note R) (70,631) - -
Loss on Wellman transaction 33,575 - -
(Increase) decrease in deferred tax benefit (23,696) 69,000 (332,000)
Equity in loss of joint venture - 423,224 58,543
Decrease (increase) in accounts receivable 1,224,560 (83,108) 281,738
Decrease (increase) in notes receivable 806,510 800,000 (1,920,000)
Decrease (increase) in income tax refund 1,930,000 (1,930,000) -
Decrease (increase) in inventories 4,910,834 8,243,147 (8,631,990)
Decrease (increase) in other current assets 154,271 981,557 (1,098,118)
(Increase) in deferred debt costs - (341,326) (1,237,980)
Decrease (increase) in other assets 178,322 (112,999) (9,026)
(Decrease) increase in accounts payable
and accrued expenses (4,591,430) 5,012,896 134,576
(Decrease) increase in income taxes payable - (211,666) (1,788,676)
$(0,000,000) $(00,000,000) $(00,000,000)
----------- ------------ ------------
Total adjustments 6,441,938 16,000,787 (13,137,213)
----------- ------------ ------------
Net cash provided by (used in) operating activities 5,828,098 (1,374,916) (12,160,194)
Cash flows from investing activities:
Proceeds from maturity of restricted
certificates of deposit - 356,115 1,350,000
Purchase of restricted certificate of deposit - - (350,000)
Capital expenditures (135,936) (3,635,919) (1,960,700)
Proceeds from sale of aircraft held for lease - 1,000,000 -
Investments in joint ventures - - (5,000)
Decrease (increase) in due from affiliates - - 25,445
----------- ------------ ------------
Net cash used in investing activities (135,936) (2,279,804) (940,255)
Cash flows from financing activities:
Net payments under line of credit - (1,000,000) (2,918,463)
Proceeds from issuance of common stock - - 115,486
Borrowings under notes and leases - 10,000,000 19,515,783
Repayments of debt obligations (4,939,621) (5,760,432) (3,312,238)
----------- ------------ ------------
Net cash (used in) provided by financing activities (4,939,621) 3,239,568 13,400,568
----------- ------------ ------------
Net increase (decrease) in cash 752,541 (415,152) 300,119
Cash at beginning of period 95,790 510,942 210,823
----------- ------------ ------------
Cash at end of period $ 848,331 $ 95,790 $ 510,942
=========== ============ ============
Supplemental disclosures of cash flow information (Note K):
Cash paid during the year for:
Interest $ 2,167,279 $ 2,736,233 $ 1,843,630
=========== ============ ============
Income Taxes $ - $ - $ 2,633,626
=========== ============ ============
The accompanying notes are an integral part of these statements.
F-6
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
International Airline Support Group, Inc. and Subsidiaries (the "Company")
is primarily engaged in the sale of aircraft, aircraft parts, leasing of
aircraft and related services. The Company previously was engaged in other
activities through the Company's wholly-owned subsidiary, International Airline
Service, Inc. Center ("Service Center"), which was an FAA certified repair
facility engaged in the performance of maintenance checks required by the FAA
on narrow body aircraft (see Note R). The Company's other wholly-owned
subsidiary, Brent Aviation, Inc. d/b/a Custom Air Transport was previously
engaged in the flight operation of cargo aircraft (see Note Q).
a) CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. Investments in
nonconsolidated entities are reported on the equity method.
b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents.
c) INVENTORIES
Inventories are stated at the lower of cost or market. The cost of aircraft
parts is determined on a specific identification basis for those parts
purchased individually or in lots where specific identification is practical.
For parts acquired through whole aircraft purchases, the costs are assigned to
pools which are then amortized as part sales take place. The amortization is
then based upon the actual sales, except in any periods where sales are lower
than expected, the estimated sales per the initial sales projection are used
(which has a maximum life of 5 years). The amount of cost amortized is based
upon the gross profit percentage as calculated from the estimated sales value
of the parts. The sales value estimates are monitored by management, and
adjusted periodically as necessary. Certain aircraft, which were previously
leased have been classified as held for sale and are included in inventory.
At May 31, 1995 and 1994, approximately 80% and 72%, respectively, of the
ending inventory (including aircraft held for sale) was costed under the
specific identification method, and the remaining 20% and 28%, respectively,
was costed under the pooling method.
d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated life utilizing
straight-line and accelerated methods. The estimated lives of the depreciable
assets range from 5 to 31.5 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.
F-7
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- Continued
e) NOTES RECEIVABLE
In fiscal 1993, the Company sold certain aircraft to an African airline in
exchange for notes receivable totalling $2,590,000. In December 1994, the
remaining balance due on one of the notes was paid. A new note was executed for
$937,466 representing the current principal balance on the remaining note plus
balances due on trade accounts receivable. In addition, the note provides for
an additional $250,000 of future part sales, none of which were delivered as
of May 31, 1995. The new note bears interest at a rate of 12%, and requires
monthly payments of $70,000 until paid. Due to certain economic conditions in
Nigeria, the Company is deferring the recognition of interest income on this
note until the collection of such interest. The note is collateralized by the
aircraft sold.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
which relates to "Accounting for Creditors For Impairment of a Loan". This
Statement, which is effective for fiscal years beginning after December 15,
1994, requires that impaired loans or notes receivable be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or fair value of the collateral. Management does not anticipate
that the adoption of SFAS No. 114 will have a significant effect on the overall
financial condition or operations of the Company. The Company intends to adopt
SFAS No. 114 on June 1, 1995, as required.
f) DEFERRED DEBT COSTS
Deferred debt costs principally relate to the costs associated with obtaining
the Company's Senior Secured Notes and Convertible Subordinated Debentures.
These costs are being amortized using the interest method over the life of the
respective debt issue. Accumulated amortization at May 31, 1995 and 1994, was
approximately $1,094,000 and $802,000, respectively.
g) EARNINGS PER SHARE
Earnings per share is computed by dividing the net earnings (loss) by the
weighted average number of common shares outstanding and common stock
equivalents. Stock options and warrants are considered common stock equivalents
unless their inclusion would be anti-dilutive. The Company's Convertible
Subordinated Debentures are not considered common stock equivalents as their
inclusion would be anti-dilutive and the effective yield on the securities
exceeded 66-2/3% of the average Aa corporate bond rate at the time of issuance.
h) REVENUE RECOGNITION
Revenue from the sale of parts is recognized when products are shipped to the
customer. Revenue from the sale of aircraft is recognized when all
consideration has been received and the buyer has taken delivery and
acceptance of the aircraft. Lease revenue is recognized on an accrual basis,
unless collectibility is uncertain.
i) EMPLOYEE BENEFIT PLAN
The Company established in fiscal 1992 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 1995, 1994 and 1993 were insignificant. The Company does not provide any
health or other benefits to retirees.
F-8
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- Continued
j) RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified
to conform to the current year presentation.
k) UNINSURED CASH BALANCES
Cash balances in financial institution accounts are secured by the Federal
Deposit Insurance Corporation (FDIC) for amounts up to $100,000, per customer.
At May 31, 1995, the Companys uninsured cash balances approximated $803,000.
l) 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 on assets and
liabilities at each year end.
NOTE B - GOING CONCERN
Primarily as a result of the net losses experienced in fiscal 1995 and 1994,
and the classification of most indebtedness as current, the Company has a
significant deficit in working capital and stockholders' equity. Currently, the
Company is in noncompliance with certain financial and other covenants under
the loan agreements relating to the 12% Senior Secured Notes ("Notes"),
issued July 1992, and the 8% Convertible Subordinated Debentures
("Debentures"), issued September 1993 (see Long-Term Obligations Note D).
The Notes are secured by substantially all of the assets of the Company and
the Debentures are unsecured and are subordinated in right of payment to the
Notes.
Excluding amounts scheduled to be repaid in fiscal 1996 under the terms of the
agreements, $18,083,334 is subject to accelerated maturity and, as such, has
been classified as a current liability in the Consolidated Balance Sheets at
May 31, 1995. The Company intends to present a restructuring proposal to the
holders of the Notes and the Debentures during the second quarter of fiscal
1996. There can be no assurance that the Company will be able to consummate a
restructuring of its indebtedness. If the lenders were to accelerate maturity,
the Company would not have sufficient funds to repay the debt obligations.
As a result of the factors, there exists substantial doubt about the Company's
ability to continue in existence. However, in 1995, the Company took a number
of cost-cutting steps to reduce its operating losses including ceasing the
operations of its Service Center (see Note R), personnel reductions and the
elimination of other costs.
NOTE C - INVENTORY
Inventories at May 31, 1995 and 1994 consisted of the following:
1995 1994
---- ----
Aircraft parts $4,063,352 $5,624,922
Aircraft available for sale 2,433,918 3,094,852
---------- ----------
$6,497,270 $8,719,774
========== ==========
F-9
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS - CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at May 31, 1995 and 1994 consisted of the following:
1995 1994
---- ----
12% Senior Secured Notes $ 9,850,000 $14,550,000
8% Convertible Subordinated Debentures 10,000,000 10,000,000
Mortgage note payable to bank 455,420 481,580
Notes payable due in equal monthly installments
through October 1997, bearing interest at 9.5% to
11.5% collateralized by equipment 16,363 31,823
Capitalized lease obligations (Note E) 13,968 1,109,565
----------- -----------
20,335,751 26,172,968
Less: Current maturities and long-term obligations
in default classified as current 19,895,374 25,687,948
----------- -----------
$ 440,377 $ 485,020
=========== ===========
In July 1992, the Company issued $18.0 million of five (5) year 12% Senior
Secured Notes ("Notes") due July 1997. In September of 1993, the note
agreement was amended, to require a payment of $3,450,000 with the proceeds
from the issuance of the Convertible Subordinated Debentures ("Debentures")
and subsequent sinking fund payments of $3,233,333 in July 1994 and 1995 and
$4,041,667 in July 1996 and 1997. In connection with this extinguishment, the
Company recorded as an extraordinary item the loss on retirement of debt. Such
costs included a 6% prepayment penalty as well as that portion of the deferred
debt issuance costs associated with the Notes retired. During fiscal 1995 the
Company prepaid, without penalty, $1,466,333 of the amount due in July 1995.
The notes are secured by substantially all the assets of the Company. Warrants
to purchase 1,093,528 shares of common stock were issued to the Noteholders
at an exercise price of $5.375. The warrants have a five year term and carry
restrictions regarding exercise and registration of the underlying shares. The
security purchase agreement contains restrictive covenants requiring the
Company to maintain a minimum net worth as well as certain financial ratios,
restricts dividends and limits capital expenditures, indebtedness, liens,
certain business activities and inventory purchases. The Company is in default
of the loan agreement.
In September 1993, the Company issued $10.0 million in Convertible Subordinated
Debentures ("Debentures"), due August 2003, through a private placement
offering. The Debentures may be redeemed in whole or in part after August
1996, upon 30 days notice by the Company. The Debentures are convertible to
the Company's common stock at a price of $4.00 per share (2,500,000 shares).
The Debentures conversion options carry restrictions regarding conversion
and registration of the underlying shares. The Debenture holders have certain
demand and piggy-back registration rights on the underlying shares. The
Debentures have a fixed annual interest rate of 8%, with such interest payable
quarterly. The securities purchase agreement contains restrictive covenants
requiring the Company to maintain a certain level of consolidated net worth
and certain financial ratios related to interest expense coverage. The Company
is in default of the loan agreement.
In May 1995, the Company received a notice of payment blockage from the holder
of a majority of the Notes. The payment blockage has prevented the Company
from making the scheduled interest payment on the Debentures, which was due
May 31, 1995. The Company also did not make its scheduled July 1995 principal
payment to the holders of the Notes.
F-10
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE D - LONG-TERM OBLIGATIONS - Continued
In September 1992, the Company entered into a promissory note and mortgage and
security agreement with a bank. The promissory note is payable in equal monthly
installments of $2,180 plus interest through September 1997 when the remaining
balance is due. The note has an interest rate of 1% above the bank's prime
rate. The note is secured by a first mortgage on the land and building in
Miami, Florida. The land and building has a total cost of approximately
$1,009,000. This property also has a junior mortgage filed by the Senior
Secured Noteholders.
The maturities of long-term obligations in each of the next five years
subsequent to May 31, 1995 are as follows: 1996 - $1,812,040, 1997 -
$4,084,204, 1998 - $4,439,507, 1999 - $0, 2000 - $0, and thereafter
$10,000,000. However, the Company is in default under the terms of the
securities purchase agreement for the 12% Senior Secured Notes, and the 8%
Convertible Subordinated Debentures. If the holders were to demand repayment,
$18,083,334, which is scheduled to be paid subsequent to May 31, 1996, would
be due in fiscal 1996.
NOTE E - LEASES
The Company conducts a portion of its operations utilizing leased equipment
which has been capitalized. Substantially all of the fixed assets of the
Service Center were acquired through a leasing arrangement which was classified
as a capitalized lease. In January 1995, the Company was released from all
obligations under this lease in connection with the transfer of assets from the
Service Center, as discussed in Note R. Following is a schedule of future
minimum rental payments under capital leases together with the present value
of future minimum rentals as of May 31, 1995.
Year ended May 31, 1995 $18,770
Amount representing interest 4,802
-------
Present value of future minimum lease payments 13,968
Current maturities 3,606
-------
Long term obligations under capital leases $10,362
=======
Capitalized equipment leases are accounted for and amortized as company-owned
equipment. The following is a schedule of leased equipment under capital leases:
1995 1994
---- ----
Equipment $298,279 $1,412,904
Less: Accumulated amortization 279,863 482,051
-------- ----------
$ 18,416 $ 930,853
======== ==========
The Company leases warehouse and hangar facilities as well as certain equipment
under long-term operating lease agreements which expire at varying times over
the next five years. Rental expense under these leases for the years ended
May 31, 1995, 1994 and 1993 was approximately $220,000, $242,000 and $203,000,
respectively.
At May 31, 1995, future minimum payments on non-cancellable operating leases
are $47,900 in fiscal 1996.
F-11
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE E - LEASES - Continued
The Company leases aircraft to customers under various operating leases one of
which is month to month and the other expires in October 1995. In addition to
minimum base rentals, the lease agreements require additional rent based upon
aircraft usage. Future minimum rentals at May 31, 1995, on non-cancellable
operating leases will be $180,000 in fiscal year 1996. The net investment in
aircraft held for or leased to customers was $2,210,202 and $6,126,138 at
May 31, 1995 and 1994, respectively.
NOTE F - INCOME TAXES
The provision for income taxes for the years ended May 31, 1995, 1994 and
1993:
1995 1994 1993
---- ---- ----
Current provision:
Federal $ - $ (2,544,185) $ 732,000
State - - 110,000
----------- ------------ ---------
- (2,544,185) 842,000
Deferred provision (benefit) - 69,000 (332,000)
----------- ------------ ---------
$ - $ (2,475,185) $ 510,000
=========== ============ =========
The tax effect of the Company's temporary differences and carryforwards are
as follows:
1995 1994
---- ----
Deferred tax liabilities (benefits) -- current:
Reserve for overhaul costs $ (545,000) $ (316,000)
Bad debt reserve (233,000) (354,000)
Inventory capitalization (188,000) (256,000)
Inventory writedown - (912,000)
Accrued payroll (37,000) (29,000)
Accrued legal settlement costs (116,000) (310,000)
Accrued vacation (16,000) (13,000)
Accrued - other (11,000) -
----------- -----------
$(1,146,000) $(2,190,000)
1995 1994
---- ----
Deferred tax liabilities (benefits) - non-current:
Inventory capitalization $ - $ (10,000)
Depreciation 226,000 23,000
Aircraft - capitalized maintenance 36,000 36,000
Restructuring charges (702,000) (1,279,000)
Accrued interest income (106,000) (106,000)
Net operating loss carryforward - federal (2,941,000) (1,315,000)
Net operating loss carryforward - state (277,000) (315,000)
Minimum tax credit - federal (122,000) (122,000)
Other, net (8,000) (7,000)
----------- -----------
$(3,894,000) $(3,095,000)
The Company has recorded valuation allowances equal to the amount of the
deferred tax benefits at May 31, 1995 and 1994.
F-12
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE F - INCOME TAXES - Continued
The following table summarizes the differences between the Company's effective
tax rate and the statutory federal rate as follows:
1995 1994 1993
Statutory federal rate (34.0)% (34.0)% 34.0%
Operating losses with no current tax benefit 34.0 19.6 -
Increase in taxes resulting from State income tax
less federal income tax benefit - - 3.6
Foreign Sales Corporation (FSC) - - (6.0)
Penalties and other non-deductible items - - 1.4
----- ----- ----
- (14.4)% 33.0%
===== ====== ====
The Company has net operating loss carryforwards for federal and state purposes
of approximately $8.7 and $7.6 million, respectively. The net operating losses
will expire in the year 2010. The Company has a federal minimum tax credit
carryover of approximately $122,000 which may be utilized in future years to
the extent that regular tax liability exceeds the alternative minimum tax.
Certain provisions of the tax law may limit the net operating loss and credit
carryforwards available for use in any given year in the event of a significant
change in ownership interest.
NOTE G - COMMON AND PREFERRED STOCK
In July 1993, the Company amended the Articles of Incorporation to authorize
the issuance of up to 500,000 shares of preferred stock. No such stock has
been issued.
In June of 1993, the Company issued 32,667 shares of common stock to an
individual in exchange for certain aircraft parts included in the Company's
inventory.
NOTE H - STOCK OPTIONS AND WARRANTS
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. Information with respect
to stock options under the plan is as follows:
Number of Shares
--------------------------------------
Reserved Outstanding Available
-------- ----------- ---------
Balance June 1, 1993 315,000 221,500 93,500
Expired - (71,000) 71,000
-------- --------- -------
Balance May 31, 1994 315,000 150,500 164,500
Granted - 265,000 (265,000)
Expired - (54,000) 54,000
Canceled - (66,500) 66,500
-------- --------- -------
Balance May 31, 1995 315,000 295,000 20,000
======== ========= =======
F-13
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE H - STOCK OPTIONS AND WARRANTS - Continued
Effective in December 1994, the outstanding employee stock options were
canceled and new options were issued through an Incentive Stock Option
Agreement. Options were granted to purchase 265,000 shares at an exercise
price of $.19, which equalled the fair market value of the Company's stock
on the effective date of the grant. All options granted were fully vested at
May 31, 1995, and expire in December 1999. Included in the above table are
options granted to directors to purchase 30,000 shares at exercise prices
ranging from $4.625 to $5.125 per share. At May 31, 1995, options to purchase
24,000 shares were vested.
In April 1992, the Company granted a lender options to purchase 100,000 and
50,000 shares with exercise prices of $4.875 and $4.625, respectively. The
options expire in October 1996.
In connection with the settlement of a legal dispute arising from a loan to
the Company, in April 1992, the Company issued an option to the lender to
purchase 200,000 shares at $3.25 per share. The option price approximated
the market price on the date of the grant.
NOTE I - SALES TO MAJOR CUSTOMERS/FOREIGN AND DOMESTIC
The Company sells aircraft and aircraft parts, and leases aircraft to foreign
and domestic customers. Most of the Company's sales take place on an unsecured
basis, and a majority of the sales are to aircraft operators. The information
with respect to sales and lease revenue, by geographic area, is presented in
the table below for the years ended May 31, 1995, 1994 and 1993.
(In Thousands)
1995 1994 1993
---- ---- ----
United States $18,048 $10,978 $13,245
Africa and Middle East 1,204 5,249 14,354
Europe 1,350 374 4,514
Latin America 4,347 2,178 1,102
Canada 34 558 307
Asia - 9 48
------- ------- -------
$24,983 $19,346 $33,570
======= ======= =======
The Company had sales to a Venezuelan customer which accounted for
approximately 11% of net sales in fiscal 1995 and less than 10% in fiscal
years 1994 and 1993. Additionally, the Company sold 3 aircraft to a United
States customer which represented 23% of net sales in fiscal 1995. The Company
did not have any sales to this customer in previous fiscal years. The Company
had sales to one African customer which accounted for less than 1%, 10% and 18%
of net sales during the years ended May 31, 1995, 1994, and 1993, respectively.
The Company also had sales to another African customer which accounted for 6%
and 16% of net sales for fiscal 1995 and 1994, respectively. In 1993, the
Company had sales to a Czechoslovakian customer and a United States customer
each of which accounted for 11%, of 1993 net sales.
F-14
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE J - INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
The Company had a 50% interest in A.P. Number 1, Inc., a joint venture
corporation created to purchase, sell and lease aircraft and engines. In
fiscal 1993, the Company advanced $5,000 and executed as co-maker, together
with the Company's Joint Venture partner, a promissory note for $2,900,000
due October 31, 1993. The promissory note was also signed as co-maker by the
Chairman of the Company personally. The proceeds of the loan were advanced to
the joint venture without any specific terms regarding repayment of principal
or payment of interest, and the funds were used to purchase three aircraft. The
joint venture's operations were not successful, and the joint venture was not
able to make the required payments under the terms of the note. The Company was
in default under the terms of the note due to nonpayment of principal and
interest and in February 1994, the Company agreed upon a settlement with the
lender, whereby the lender received title to the three (3) aircraft and
$500,000 from the Company. All remaining liabilities have been satisfied and
the joint venture has been dissolved. The Company's loss relating to the joint
venture, as shown in the statement of operations for fiscal 1994, includes its
share of the joint venture operating losses ($280,000) and its loss upon
dissolution ($143,224).
Summarized financial information for the joint venture for the year ended
May 31, 1993 was as follows:
1993
----
Total assets $2,721,329
Total liabilities $2,894,416
Net loss $ 183,057
NOTE K - SUPPLEMENTAL CASH FLOW DISCLOSURE
During fiscal 1994, the Company acquired approximately $1,140,000 in equipment
under a leasing arrangement which was classified as a capital lease obligation
at May 31, 1994.
The net change in inventory in fiscal 1995 and 1994, as derived from the change
in balance sheet amounts, has been adjusted for the following items:
1995 1994
---- ----
Net decrease in inventory $(2,222,504) $(9,901,144)
Transfer of aircraft from inventory
to held for lease - 4,070,430
Transfer of aircraft from held for lease
to inventory (2,688,330) (250,000)
Write-down of inventory through restructuring charge - (2,449,458)
Reduction in carrying value of aircraft leased and
depreciated in fiscal 1994 and classified as
inventory at May 31, 1994 - 287,025
----------- -----------
Cash flow impact from change in inventory $(4,910,834) $(8,243,147)
In fiscal 1994, the Company issued 32,667 shares of common stock in exchange
for certain inventory.
During the year ended May 31, 1993, the Company sold three aircraft to several
customers for $3,700,000 of which the Company received $1,100,000 in cash,
$125,000 in receivables and $2,475,000 in aircraft, which were classified in
inventory and aircraft held for lease.
F-15
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE L - RELATED PARTY TRANSACTIONS
During the year ended May 31, 1994, the Company sold an aircraft for $400,000
to a business partner of an outside director of the Company based upon
management's best estimate of the aircraft's fair market value. The
Company recorded a loss of approximately $106,000 on this transaction.
During the year ended May 31, 1993, the Company paid an outside director of the
Company a total of $203,000, including interest of $23,000, to repay a
short-term unsecured loan made to the Company during the same year.
In fiscal 1994 and 1995, the Company paid approximately $54,000 and $33,000,
respectively, to a director for certain consulting services. This consulting
agreement, which originated in fiscal 1993, was terminated in 1994, and a
commission agreement was entered into. Under the commission agreement, the
director is entitled to 3-4% of revenues generated from sales to customers
brought in by the director. No amounts have been earned by the director under
this new agreement.
In connection with the issuance of the Senior Secured Notes, the Company's
placement agent received a $720,000 placement fee, together with a warrant
to purchase 273,382 shares of common stock at $5.3875 per share. In
connection with the issuance of the Convertible Subordinated Debentures,
this same placement agent received a $600,000 placement fee. A director
of the Company was an employee of the placement agent.
The Company previously rented an aircraft used in corporate travel from an
entity controlled by a former officer/director of the Company. The total rent
paid in fiscal 1993 was approximately $81,000. The Company also rented a
condominium unit from an entity controlled by this officer/director. Total
rent paid in fiscal 1994 and 1993 was approximately $9,000 and $18,000,
respectively.
NOTE M - COMMITMENTS AND CONTINGENCIES
On February 28, 1994, a complaint titled Ullman et al v. International Airline
Support Group, Inc. et al. was filed in the United States District Court for
the Southern District of Florida (Case No. 94-0379), alleging certain
actionable misrepresentations and non-disclosures by the Company and certain
directors under the federal securities laws, as well as claims for common law
fraud and breach of fiduciary duty. The plaintiffs allege damages due to
declines in the market price of the Company's common stock and seek to have
the action certified as a class-action complaint. The complaint seeks
unspecified damages. The plaintiffs' original complaint was dismissed by the
Court with leave to re-plead such complaint. In August 1994, an amended
complaint was filed. On June 1, 1995, the plaintiffs and the Company reached
an agreement in principle to settle the litigation.
The Company is also a defendant in various lawsuits which arise in the ordinary
course of business. In the opinion of management, based on advice of legal
counsel, the ultimate resolution of the remaining lawsuits will not have a
material effect on the financial statements.
NOTE N - FOURTH QUARTER ADJUSTMENTS
The Company recorded a fourth quarter adjustment in 1994 in the amount of
approximately $2,476,000 which related to reducing certain estimated tax
benefits recorded in the third quarter, for which a 100% valuation allowance
was established at year-end. Also, an adjustment was made for $110,000
reversing an inventory part included erroneously twice in inventory in
the first, second, and third quarters. Also in the fourth quarter, certain
charges recorded initially as restructuring charges in the third quarter
were re-classified to cost of goods sold.
F-16
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE N - FOURTH QUARTER ADJUSTMENTS - Continued
In the fourth quarter of fiscal 1993, the Company recorded an accrual of
approximately $200,000 at May 31, 1993 relating to the settlement of
certain litigation. The Company also increased its allowance for doubtful
accounts by $215,000 in the fourth quarter of fiscal 1993 due to concerns
about the collectibility of receivable balances from various customers.
NOTE O - COST OF SALES
In the third quarter of fiscal 1994, the Company adopted a restructuring
program designed to reduce costs, improve liquidity, and increase
stockholder value. The restructuring program included the termination
of the Company's President, other reductions in personnel, the sale of
certain fixed assets and an intensive review of the Company's product
lines and inventories.
Cost of sales for fiscal 1994 includes charges aggregating $9.6 million
relating to the following:
1. Reductions of approximately $2.0 million in the carrying amount of the
Company's inventory part pools resulting from changes in sales
estimates and related inventory values, reflecting the deteriorating
economic conditions in the industry.
2. In March 1994, the Company entered into an agreement to sell three
aircraft upon completion of certain repairs and maintenance that
was expected to be completed in fiscal 1995. The Company recorded
a provision of approximately $2.4 million at May 31, 1994, for the
estimated excess of the final cost of the repairs and maintenance
over the sales price, after overhauling the aircraft to meet the
customer's contract specifications.
3. Writedowns approximating $3.1 million relating to weak current market
conditions and the review of realizability of Company assets performed
during the Company's restructuring program.
4. Losses totaling approximately $2.1 million relating to the sale of a
leased aircraft and the write-off of another aircraft due to a default
by the lessee under the terms of the lease. In June 1995, the Company
recovered this aircraft.
NOTE P - ACCRUED LIABILITIES
Accrued liabilities consist of the following items:
1995 1994
---- ----
Customer deposits $ 426,453 $ 558,900
Accrued repair costs 224,406 585,510
Accrued legal costs 60,000 825,000
Accrued interest 399,030 294,460
Accrued payroll 282,834 329,255
Accrued commissions 159,536 -
Advance payment on customer account - 600,000
Reserve for repair of leased aircraft 570,940 579,450
Other 103,701 198,265
---------- ----------
$2,226,900 $3,970,840
========== ==========
F-17
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MAY 31, 1995, 1994 AND 1993
NOTE P - ACCRUED LIABILITIES - Continued
In November 1994, the Company received an unfavorable judgment arising from a
lawsuit relating to commissions owed on the sale of an aircraft in 1989.
Accordingly, the Company recorded an accrual of $825,000 at May 31, 1994
relating to this settlement, as reflected in the above table. In January 1995,
a settlement on the judgment was reached whereby the Company agreed to pay
$520,000 over three years. The present value of the settlement amount was
$467,997. The difference between this amount and the prior year accrual of
$825,000 is included in unusual and nonrecurring items in the Consolidated
Statements of Operations. The remaining balance of this payable of $308,875
is included in accounts payable at May 31, 1995.
NOTE Q - WELLMAN TRANSACTION
In January of 1995, the Company entered into an agreement with the former
President and former Secretary of the Company whereby the Company transferred
all of the outstanding stock of Brent Aviation, a wholly-owned subsidiary, to
an affiliate of the former employees. In addition, the Company also
transferred certain spare parts, components, inventory and equipment for
B-727 series aircraft, and a McDonnell Douglas DC-4 aircraft. In consideration,
the Company received $230,000 and agreed to lease a B-727 to the affiliate on a
month-to-month basis. In addition, the employees resigned from all positions
as officers or directors, granted a proxy to the Company enabling the Company's
directors to vote 1.98 million shares of common stock held by the employees for
a period of two years, and agreed not to compete or interfere with any of the
businesses of the Company and its remaining subsidiaries for a period of two
years. The Company further agreed to pay the former secretary one year's salary
as severance. As of May 31, 1995, $95,000 of the accrued severance was unpaid
and is recorded in accrued liabilities. The Company also agreed to terminate
its leasehold interest in a facility located at Grayson County, Texas Airport,
allowing Brent Aviation to lease such facility for its operations.
In June 1995, the counsel of the employees notified the Company that the
employees were alleging that the Company was in default to such parties in
the performance of certain of its obligations to them pursuant to the Purchase
Agreement. Counsel for employees has not threatened to institute litigation
against the Company. The Company responded by raising defenses to the alleged
breaches and alleging breaches by the employees of their obligations
to the Company. As of the current date, a settlement had not been reached.
NOTE R - DISPOSAL OF SERVICE CENTER OPERATIONS
In June 1994, the Company's Board of Directors unanimously voted to cease
operations and to sell or otherwise dispose of the Company's wholly-owned
subsidiary, International Airline Service Center ("IASC"), which was an
FAA certified repair facility for the performance of maintenance check required
by the FAA on narrow body aircraft, following the sale of certain of the
Company's aircraft being serviced under contract by IASC. During the third
quarter of 1995, IASC fulfilled its obligations to service the aircraft and
ceased operations. On January 31, 1995, IASC entered into an agreement with a
third party, pursuant to which IASC assigned its interest in a certain
equipment lease with a net book value of $826,965 at May 31, 1995, to the
third party, and the third party assumed IASC's interests and obligations under
such lease. IASC interest in the lease as of May 31, 1995 was $897,596. Thus a
gain of $70,631 was recognized as a result of the transaction. Pursuant to the
transaction, IASC disposed of substantially all of its operating assets.
As of May 31, 1995, IASC had an insignificant amount of assets and liabilities
recorded on its books.
F-18
INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1995, 1994 AND 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- ---------- -------- ---------- ----------
YEAR ENDED MAY 31, 1995
Reserves deducted from assets to
which they apply:
Allowance for possible losses on
accounts receivable $940,214 $ 406,147 $ - $727,176(a) $619,185
======== ========== ======= ======== ========
YEAR ENDED MAY 31, 1994
Reserves deducted from assets to
which they apply:
Allowance for possible losses on
accounts receivable $450,000 $1,337,969 $28,850 $876,605(a) $940,214
======== ========== ======= ======== ========
YEAR ENDED MAY 31, 1993
Reserves deducted from assets to
which they apply:
Allowance for possible losses on
accounts receivable $ 87,427 $ 586,843 $18,728 $242,998(a) $450,000
======== ========== ======= ======== ========
(a) Write-off of accounts receivable against the reserve.
S-1