-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Aqt3+CBqzFmknsByxCOfhj1kxLYbGn6qSOz1ldB5+6mrmxo0BfkcFwHRhm3r7sln 2RyrBs63o91HciqnzFZ2Pw== /in/edgar/work/20000830/0000859307-00-000011/0000859307-00-000011.txt : 20000922 0000859307-00-000011.hdr.sgml : 20000922 ACCESSION NUMBER: 0000859307-00-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000830 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL AIRLINE SUPPORT GROUP INC CENTRAL INDEX KEY: 0000859307 STANDARD INDUSTRIAL CLASSIFICATION: [5080 ] IRS NUMBER: 592223025 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12893 FILM NUMBER: 713531 BUSINESS ADDRESS: STREET 1: 1954 AIRPORT ROAD STREET 2: SUITE 200 CITY: ATLANTA STATE: GA ZIP: 30341 BUSINESS PHONE: 7704557575 MAIL ADDRESS: STREET 1: 1954 AIRPORT ROAD STREET 2: SUITE 200 CITY: ATLANTA STATE: GA ZIP: 30341 10-K 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended MAY 31, 2000 -------------- [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________________ to _______________________ Commission File Number 0-18352 ------- INTERNATIONAL AIRLINE SUPPORT GROUP, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 59-2223025 --------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1954 Airport Road, Suite 200, Atlanta, Georgia 30341 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (770) 455-7575 -------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of class Name of each exchange on which registered Common Stock, $.001 par value American Stock Exchange ----------------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At August 10, 2000, the aggregate market value of common stock held by non-affiliates of the Registrant was approximately $4,036,701. The number of shares of the Registrant's Common Stock outstanding as of August 10, 2000 was 2,190,198. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the 2000 Annual Meeting of the Company's Stockholders are incorporated by reference in Parts III and IV. INTERNATIONAL AIRLINE SUPPORT GROUP INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MAY 31, 2000 TABLE OF CONTENTS ----------------- PAGE ---- PART I Item 1. Business 1 Item 2. Properties 13 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 15 Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 20 Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 PART III Item 10. Directors and Executive Officers of the Registrant 21 Item 11. Executive Compensation 21 Item 12. Security Ownership of Certain Beneficial Owners and Management 21 Item 13. Certain Relationships and Related Transactions 21 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22 SIGNATURES 2 [THIS PAGE INTENTIONALLY LEFT BLANK] 4 PART I ITEM 1. BUSINESS. - ------- -------- THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), INCLUDING THE PLANS AND OBJECTIVES OF MANAGEMENT FOR THE BUSINESS, OPERATIONS AND FINANCIAL PERFORMANCE OF THE COMPANY. THE FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS SET FORTH IN THIS ANNUAL REPORT MAY INCLUDE OR RELATE TO, AMONG OTHER THINGS, (I) INCREASING THE COMPANY'S MARKET SHARE OF PARTS FOR CERTAIN COMMERCIAL JET AND COMMUTER AIRCRAFT, WHILE MAINTAINING ITS POSITION AS A LEADING REDISTRIBUTOR OF PARTS FOR MD-80 AND DC-9 AIRCRAFT, (II) POTENTIAL ACQUISITIONS OF ADDITIONAL INVENTORIES OF AIRCRAFT SPARE PARTS AND THE ACQUISITION OF OTHER COMPANIES, ASSETS OR PRODUCT LINES THAT WOULD COMPLEMENT OR EXPAND THE COMPANY'S EXISTING AIRCRAFT SPARE PARTS BUSINESS, (III) DEMAND AMONG THE COMPANY'S PRINCIPAL CUSTOMERS, INCLUDING CARGO CARRIERS AND REGIONAL COMMERCIAL AIRLINES, FOR THE COMPANY'S INVENTORY OF PARTS, (IV) THE DEMAND FOR DC-9 AIRCRAFT, WHICH WILL DETERMINE THE SUCCESS OF THE COMPANY'S JOINT VENTURE'S EFFORTS TO REMARKET ITS AIRCRAFT; (V) THE SIZE AND GROWTH RATE OF THE AIRCRAFT PARTS REDISTRIBUTION INDUSTRY AND THE AIRCRAFT AND ENGINE LEASING INDUSTRY, (VI) INCREASES OR CHANGES IN GOVERNMENT REGULATIONS REGARDING THE AVIATION INDUSTRY, (VII) COMPETITION FROM OTHER AIRCRAFT PARTS REDISTRIBUTORS, (VIII) PROPOSED EXPANSION OF THE COMPANY'S PRODUCT LINE AND (IX) OPERATION OF A PART 135 AIR CARRIER. SEE "CAUTIONARY STATEMENTS" HEREIN. THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN ARE BASED UPON CURRENT EXPECTATIONS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED UPON ASSUMPTIONS THAT THE COMPANY WILL CONTINUE TO MANAGE ITS INVENTORY EFFECTIVELY, THAT COMPETITIVE CONDITIONS WITHIN THE AIRCRAFT PARTS REDISTRIBUTION INDUSTRY WILL NOT CHANGE MATERIALLY OR ADVERSELY, THAT DEMAND FOR AIRCRAFT SPARE PARTS WILL REMAIN STRONG, THAT THE COMPANY WILL BE ABLE TO ENTER INTO NEW LEASES OF AIRCRAFT AS EXISTING LEASES EXPIRE, THAT THE COMPANY'S JOINT VENTURE WILL BE ABLE TO REMARKET ITS AIRCRAFT AS THEY COME OFF LEASE ON FINANCIAL TERMS THAT WILL PERMIT THE JOINT VENTURE TO SERVICE ITS INDEBTEDNESS, THAT THE COMPANY WILL BE ABLE TO PURCHASE AIRCRAFT THAT ARE SUBJECT TO LEASES, THAT THE COMPANY WILL BE ABLE TO OPERATE ITS RECENTLY ACQUIRED AIR CARGO SUBSIDIARY PROFITABLY AND THAT THERE WILL BE NO MATERIAL ADVERSE CHANGE IN THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS AND FUTURE BUSINESS DECISIONS, ALL OF WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MOST OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, ANY OF THE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE, THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN SUCH FORWARD-LOOKING INFORMATION WILL BE REALIZED. IN ADDITION, AS DISCLOSED ABOVE, THE BUSINESS AND OPERATIONS OF THE COMPANY ARE SUBJECT TO SUBSTANTIAL RISKS THAT INCREASE THE UNCERTAINTY INHERENT IN SUCH FORWARD-LOOKING STATEMENTS. ANY OF THE OTHER FACTORS DISCLOSED ABOVE COULD CAUSE THE COMPANY'S REVENUES OR NET EARNINGS, OR GROWTH IN REVENUES OR NET EARNINGS, TO DIFFER MATERIALLY FROM PRIOR RESULTS. FURTHERMORE, A CHANGE IN THE MARKET FOR AIRCRAFT AND ENGINE PARTS COULD RESULT IN THE COMPANY'S INVENTORY BEING OVERVALUED AND COULD REQUIRE THE COMPANY TO WRITE DOWN ITS INVENTORY VALUATIONS IN ORDER TO BRING THEM IN LINE WITH THE REVISED FAIR MARKET VALUE. THERE IS NO ASSURANCE THAT A WRITE-DOWN WOULD NOT ADVERSELY AFFECT THE COMPANY'S BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION. GROWTH IN ABSOLUTE AMOUNTS OF COST OF SALES AND GENERAL AND ADMINISTRATIVE EXPENSES OR THE OCCURRENCE OF EXTRAORDINARY EVENTS COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE RESULTS CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS. BUDGETING AND OTHER MANAGEMENT DECISIONS ARE SUBJECTIVE IN MANY RESPECTS AND THUS SUSCEPTIBLE TO INTERPRETATIONS AND PERIODIC REVISIONS BASED ON ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENTS, THE IMPACT OF WHICH MAY CAUSE THE COMPANY TO ALTER ITS MARKETING, CAPITAL EXPENDITURE OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING INFORMATION INCLUDED HEREIN, THE INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED. GENERAL The Company is a leading redistributor of aftermarket aircraft spare parts used primarily for McDonnell Douglas MD-80 and DC-9 aircraft and commuter turboprop aircraft. According to the World Jet Inventory Year-End 1999 (the "World Jet Inventory"), MD-80 and DC-9 aircraft accounted for approximately 13.2% of the commercial jet aircraft in service worldwide at December 31, 1999. According to a November 1999 report published by Speednews, Inc., Embraer EMB-120 aircraft accounted for approximately 13% of the turboprop aircraft in service at the top worldwide regional airline fleets. Management believes that the Company has one of the most extensive inventories of aftermarket MD-80, DC-9 and Embraer EMB-120 Brasilia parts in the industry. In addition, the Company provides aircraft spare parts for Boeing, Lockheed, Airbus and other McDonnell Douglas and commuter turboprop aircraft. The aircraft spare parts distributed by the Company, including avionics, rotable and expendable airframe and engine parts, are sold to a wide variety of domestic and international air cargo carriers, major commercial and regional passenger airlines, maintenance and repair facilities and other redistributors. The wide variety of aircraft spare parts distributed by the Company are acquired through purchase or consignment of surplus or bulk inventories from airlines, purchases from other redistributors and disassembly of aircraft. In addition to being a provider of aircraft spare parts, the Company leverages its industry expertise to purchase, sell and lease aircraft and engines. The Company has periodically acquired, leased and sold a variety of narrow-body commercial jet aircraft, such as Boeing 727 and 737 and McDonnell Douglas MD-80 and DC-9 aircraft, and commuter turboprop aircraft, such as Embraer EMB-120 aircraft. The Company currently owns six Embraer EMB-120 aircraft, three of which are leased, and two Pratt & Whitney JT8D series engines, both of which are leased. The Company derives revenue from lease payments and seeks to sell spare parts to the lessee both for the leased aircraft and other aircraft in the lessee's fleet. Upon return of the aircraft, the Company either re-leases, sells or disassembles the aircraft for parts in order to achieve the highest utilization of the asset. The Company believes that its aircraft trading activities and its parts redistribution business complement one another. Therefore, the Company is increasing its focus on aircraft trading and leasing activities. The Company also owns a 50% interest in a joint venture that leases 20 DC-9-41H aircraft. Nineteen of the aircraft are leased to Scandinavian Airlines System ("SAS"); one is leased to a U.S.-based charter operator. The joint venture expects to derive revenue from lease payments with respect to such aircraft and from the re-lease or sale of them following the expiration of the leases with SAS. The Company believes that its investment in this joint venture complements its parts redistribution and aircraft sales and leasing businesses by providing a high quality source of aircraft for further releasing, sales and/or parting out. The Company's other business activities include the operation of a regional airline and providing advisory services to air carriers on parts-inventory disposition. The Company's air cargo operations and advisory services complement its parts sales and aircraft trading and leasing activities by enhancing the Company's reputation as an industry expert in commercial jet and turboprop parts and operations. The Company's strategy is to capitalize upon its position as a leading redistributor of MD-80, DC-9 and commuter turboprop aircraft spare parts and broaden its product lines to include other high-use aircraft as the world fleet grows. Key elements of the Company's strategy include: - - Expand Aircraft and Engine Trading and Leasing - - Broaden Product Line - - Increase Sales to Cargo Carriers, Regional Commercial Airlines and Commuter Airlines - - Utilize Consignment Agreements to Acquire Inventory - - Seek Additional Bulk Purchase Opportunities - - Maintain Market Share of Parts for MD-80 and DC-9 Aircraft - - Continued Commitment to Quality and Technological Innovation - - Expand Air Carrier Operations - - Pursue Strategic Acquisitions COMPANY HISTORY The Company was founded in 1982 in Miami, Florida. Initially the Company focused on parting out DC-8 aircraft and reselling the resulting spare parts. Based upon the Company's success in parting out DC-8 aircraft, in 1991 the Company began purchasing and parting out DC-9 and MD-80 aircraft. Beginning in 1992, the Company began purchasing and parting out Boeing 727 aircraft. Since its founding, the Company has acquired over 50 aircraft for parting out. The Company has also engaged in aircraft and engine trading throughout its history. During fiscal 1999 and the first half of fiscal 2000, the Company expanded its core aftermarket parts business by acquiring significant parts inventories for McDonnell Douglas DC-10, Boeing 747 and Embraer EMB-120 aircraft. The Company also expanded its aircraft trading activities during fiscal 1999 and 2000, completing the purchase of eight and the sale of two EMB-120 aircraft. During fiscal 2000, the Company established a presence in Europe, establishing a sales office in France and a distribution center in the Netherlands. INDUSTRY OVERVIEW The Company believes that the annual worldwide market for aircraft spare parts is approximately $11 billion, of which approximately $1.3 billion represents sales of aircraft spare parts to the redistribution market. The Company believes that this market will continue to grow due to the following factors: Increase in the Number of Older Commercial Aircraft. Increased demand for air travel and the need for aircraft operators to reduce operating and capital costs have prompted many airlines to extend the useful life of older equipment. According to the World Jet Inventory, at December 31, 1999, the average age of the worldwide jet fleet was 13.1 years. The installation of FAA-approved hush-kits and extended life maintenance programs have also increased the useful life of many older aircraft. As a result, most aircraft types have had longer service lives than originally certified. In addition, many foreign and domestic aircraft operators and cargo carriers are increasing their fleets through the acquisition of less expensive used aircraft. As older aircraft are transitioned from major domestic passenger airlines to lower cost international and regional domestic passenger airlines and cargo carriers, used aircraft have enjoyed longer service lives than originally anticipated. Older aircraft typically require more maintenance and replacement parts than new aircraft. Reduction in Number of Approved Suppliers. Cost considerations cause many aircraft operators to reduce the size of their spare parts inventories, while efficiency and quality concerns may cause aircraft operators to maintain relationships with a more limited number of approved suppliers. Quality concerns are causing aircraft operators to demand that their suppliers be quality certified by organizations such as the Airline Suppliers Association ("ASA") or the International Standards Organization ("ISO") and at least one major commercial airline has begun to demand that its suppliers carry product liability insurance. In addition, as aircraft operators adopt just-in-time inventory procurement processes, inventory storage is increasingly handled by suppliers such as the Company. The Company believes that these trends will continue in the future and will benefit well-positioned aircraft parts suppliers such as the Company. Increased Inventory Consignment. Certain of the Company's customers adjust inventory levels on a periodic basis by disposing of excess aircraft spare parts. Traditionally, larger airlines have used internal sales agents to manage such dispositions. The Company believes that major airlines and other owners of aircraft spare parts, in order to concentrate on their core businesses and to more effectively monetize their excess parts and inventories, are increasingly entering into long-term consignment agreements with redistributors. By consigning inventories through a redistributor such as the Company, customers are able to offer their aircraft spare parts to a larger number of prospective inventory buyers, allowing the customer to maximize the value of its inventory. Consignment also enables a consignee to offer for sale significant parts and inventory at minimal capital cost. Modernization of Commuter Fleets. Many of the larger regional commuter airlines are modernizing their fleets by retiring their turboprop aircraft and acquiring short-range commuter jet aircraft. As a result, the retired commuter turboprop aircraft and related spare parts inventories are available for purchase at favorable prices. The Company believes that smaller regional commuter airlines will upgrade their fleets by replacing the small turboprop aircraft they currently operate with larger, more efficient turboprop aircraft being retired by the larger regional commuter airlines. Accordingly, the Company believes that small regional commuter airlines are potential customers for the aircraft and related spare parts being retired by the larger regional commuter airlines. The Company also believes that there is a significant opportunity for the redeployment of certain types of the commuter turboprop aircraft as cargo aircraft. COMPANY STRATEGY The Company's strategy is to capitalize upon its position as a leading redistributor of MD-80, DC-9 and commuter turboprop aircraft spare parts and to broaden its product lines to include other high-use aircraft as the world fleet grows. Key elements of the Company's strategy include: Expand Aircraft and Engine Trading and Leasing. The Company believes that due to the increasing costs of commercial aircraft, the anticipated growth of the worldwide aircraft fleet, and the emergence of new regional airlines, aircraft operators will increasingly turn to operating leases as an alternative method to finance their aircraft and engine needs. The Company believes that leasing used commercial aircraft and engines should grow due to the emphasis on airline cost reduction, the desire of airlines for fleet flexibility and the growth in air travel. In addition, several smaller and regional airlines have recently chosen to lease inventories of aircraft spare parts in order to preserve capital while maintaining adequate spare parts support. The Company has periodically acquired, leased and sold a variety of aircraft and engines. The Company derives revenue from lease payments and seeks to sell spare parts to the lessee both for the leased aircraft as well as other aircraft in the lessee's fleet. Upon return of the aircraft, the Company either re-leases, sells or disassembles the aircraft for parts in order to achieve the highest utilization of the asset. In the case of aircraft that are disassembled for parts, the lease revenues reduce the Company's cost of the aircraft and, therefore, the parts acquired from disassembly of the aircraft. The Company purchases aircraft and engines for resale when it believes the aircraft or engines can be purchased at an attractive price and resold within a relatively brief period of time. The Company has determined that its spare parts sales opportunities are enhanced by providing existing and new customers with whole aircraft and engines through sale and lease transactions. Therefore, the Company believes that its aircraft trading activities and its parts redistribution business complement one another. The Company has increased its aircraft trading and leasing activities and intends to do so further. Broaden Product Line. The Company has recently expanded its product line to include aftermarket parts for Airbus A-300, McDonnell Douglas DC-10 and Boeing 747 aircraft and certain commuter aircraft including Embraer, Shorts, Saab, de Havilland, British Aerospace and ATR aircraft. In addition, the Company intends to expand further its product line to include parts for other aircraft that are likely to be converted to freighters, such as Boeing 767 and 757 aircraft. As fleets of these aircraft age and as air cargo carriers transition larger portions of their fleets to wide-body aircraft, the Company will seek to capitalize on the demand for parts resulting from the aging and continued use of these aircraft models. Several air cargo carriers currently utilize DC-10, 767, 747 and A-300 series aircraft, and the Company believes use of these models will continue to increase. The Company believes that a significant number of these aircraft types have been or will be converted to cargo use and that its relationship with cargo carriers will provide an advantage in supplying parts for these aircraft to such customers. The Company also believes that there is a significant opportunity for the redeployment of the Embraer EMB-120 and ATR aircraft as cargo aircraft, as commuter carriers convert their fleets to small jet aircraft. The Company has acquired service bulletin kits that will permit the conversion of 20 EMB-120 aircraft to either full cargo or quick-change configurations. The Company has converted one of the six EMB-120 aircraft that it owns to full cargo configuration. The Company intends to convert its remaining EMB-120 aircraft if customer demand for the EMB-120 cargo variant justifies the conversion cost. Increase Sales to Cargo Carriers, Regional Commercial Airlines and Commuter Airlines. Cargo carriers, regional commercial airlines and commuter airlines are among the Company's principal customers. Cargo carriers are important customers because the fleets of such operators typically consist of older aircraft of the type for which the Company maintains an extensive inventory of parts. Additionally, such customers typically do not maintain extensive inventories of spare parts. Regional commercial airlines are important customers because such airlines favor narrow-body aircraft, such as MD-80 and DC-9 aircraft, for which the Company is a primary source of spare parts. The smaller commuter airlines are important customers because their fleets consist primarily of the turboprop aircraft being retired by the larger commuter airlines. The Company has acquired an extensive inventory of aftermarket parts for several popular commuter turboprop aircraft types. The Company will direct its marketing activities to broadening its customer base of cargo, regional and commuter airlines in order to increase market share and leverage its core competencies. Utilize Consignment Agreements to Acquire Inventory. In recent years, the Company acquired most of its aircraft parts inventory by purchasing large numbers of parts in bulk from aircraft operators. The Company has recently begun to acquire inventory by means of strategic consignment arrangements. Pursuant to a consignment arrangement, an aircraft operator permits the Company to market and sell an inventory of aircraft parts. The Company receives a percentage of the sales price of a consigned part. Consignment arrangements allow the Company to obtain parts inventory on a favorable basis without committing its capital to purchasing inventory. The Company's margins on sales of consigned parts are, however, typically lower than margins realized on sales of parts acquired by other methods. During calendar year 1999, the Company completed three significant consignment agreements. The Company believes that its market presence, experience in evaluating parts inventories, sophisticated management information systems and capital strength will enable the Company to enter into additional consignment arrangements. Seek Additional Bulk Purchase Opportunities. The Company will continue to seek opportunities to purchase large spare parts inventories in bulk. The Company cannot predict when such opportunities will arise. Bulk purchase opportunities arise when airlines, in order to reduce capital requirements, sell large amounts of inventory in a single transaction, when inventories of aircraft spare parts are sold in conjunction with corporate restructurings or reorganizations or when an aircraft operator realigns its aircraft fleet, reducing the number of or exiting a particular aircraft model. Bulk inventory purchases allow the Company to obtain large inventories of aircraft spare parts at a lower cost than can ordinarily be obtained by purchasing parts on an individual basis. Therefore, the Company realizes higher gross margins on sales of parts acquired by bulk purchases, as opposed to other methods. However, bulk inventory purchases require a commitment of the Company's capital. The Company believes that it has the ability, due to its market presence, experience in evaluating parts inventories, sophisticated management information systems and capital strength, to complete large bulk purchase opportunities to the extent such purchases are considered favorable. Maintain Market Share of Parts for MD-80 and DC-9 Aircraft. Recently several of the Company's competitors have increased their inventories of parts for MD-80 and DC-9 aircraft. The Company intends to maintain its market share of parts for such aircraft despite such competition. According to the World Jet Inventory, MD-80 and DC-9 aircraft together accounted for approximately 13.2% of the commercial jet aircraft in service worldwide at December 31, 1999. Although the DC-9 is no longer in production, many of the DC-9's parts are interchangeable with the MD-80, which, although no longer in production, is still in widespread use. The Company believes that its experience and knowledge of the DC-9 gives it a competitive advantage in selling parts into the MD-80 marketplace. The Company intends to capitalize on the limited availability of new parts for such aircraft models by acquiring (i) pools of inventory from airlines that cease to operate such aircraft or that desire to reduce their levels of parts inventory and (ii) aircraft for disassembly when economically justified. The Company believes that its knowledge of the fleets of MD-80s and DC-9s currently in operation and its worldwide contacts in the commercial aviation industry will permit it to acquire other inventory pools and aircraft for disassembly on favorable terms in the future. Continued Commitment to Quality and Technological Innovation. The Company emphasizes adherence to high quality standards during each stage of its operations (product acquisition, documentation, inventory control and delivery). In August 1997, the ASA, an FAA-recognized independent quality assurance organization, accredited the Company as an aftermarket supplier. In addition, the Company believes it was one of the first aftermarket redistributors to bar-code its inventory and it has created and sponsors an industry-wide Internet parts locator service for its customers, which heightens awareness of the Company, enhances its position in the industry and increases sales of parts. Expand Air Carrier Operations. The global express-transportation market is estimated at more than $12 billion and growing at more than 25% annually. To date this market has been served by large, well capitalized, airfreight/logistics companies that have tended to focus on large, international and national, freight movements and have the financial wherewithal to meet the market's and their customer's growing requirements. The regional freight market, however, is highly fragmented; a large number of small, undercapitalized companies serve distinct market niches typically utilizing small converted older generation general aviation aircraft. The Company believes that these companies, many of which are family-owned and/or capital constrained, will be unable to meet the market's and their customer's growing requirements, providing a significant opportunity for a well capitalized company with new generation commercial aircraft. In order to capitalize on this opportunity, during the fourth quarter of fiscal 2000, the Company acquired a small regional airline that currently operates three piston light twin and two light turboprop Part 23 aircraft under an Air Carrier Certificate under Part 135 of the FAA regulations. The Company intends to expand the acquired airline's fleet with the addition of cargo and quick-change variants of the EMB-120. Although the Company expects the acquisition to be accretive, earnings could be negatively impacted due to the resulting investment in the airline and the intended expansion. The Company is evaluating the possibility of raising capital by issuing debt or equity securities of the subsidiary to finance the acquisition, continued operations and expansion of this subsidiary. Pursue Strategic Acquisitions. The Company competes in a fragmented market in which numerous small companies serve distinct market niches. The Company believes that small aftermarket parts redistributors, many of which are family-owned or capital constrained, are unable to provide the extensive inventory and quality control measures necessary to comply with applicable regulatory and customer requirements, and will provide acquisition opportunities for the Company. Similarly, the Company believes that many small aircraft leasing companies are potential acquisition targets. Acquisitions are expected to increase the Company's customer base, expand its product line both with respect to aircraft in which the Company currently specializes and into new aircraft types, to strengthen its relationships with existing customers through availability of additional inventory and permit the Company to expand its aircraft trading opportunities. AIRCRAFT SPARE PARTS Aircraft spare parts can be categorized by their ongoing ability to be repaired and returned to service. The general categories are as follows: (i) rotable; (ii) repairable and (iii) expendable. A rotable is a part which is removed periodically as dictated by an operator's maintenance program or on an as-needed basis and is typically repaired or overhauled and re-used an indefinite number of times. An important subset of rotables is life limited parts. A life limited rotable has a designated number of allowable flight hours and/or cycles (one take-off and landing generally constitutes one cycle) after which it is rendered unusable. A repairable is similar to a rotable except that it can only be repaired a limited number of times before it must be discarded. An expendable is generally a part which is used and not thereafter repaired for further use. Aircraft spare parts' conditions are classified within the industry as (i) factory new, (ii) new surplus, (iii) overhauled, (iv) serviceable and (v) as removed. A factory new or new surplus part is one that has never been installed or used. Factory new parts are purchased from manufacturers or their authorized distributors. New surplus parts are purchased from excess stock of airlines, repair facilities or other redistributors. An overhauled part has been completely disassembled, inspected, repaired, reassembled and tested by a licensed repair facility. An aircraft spare part is classified serviceable if it is repaired by a licensed repair facility rather than completely disassembled as in an overhaul. A part may also be classified serviceable if it is removed by the operator from an aircraft or engine while operating under an approved maintenance program and is functional and meets any manufacturer or time and cycle restrictions applicable to the part. With appropriate documentation, a factory new, new surplus, overhauled or serviceable part designation indicates that the part can be immediately utilized on an aircraft. A part in as removed condition requires functional testing, repair or overhaul by a licensed facility prior to being returned to service in an aircraft. The aircraft spare parts sold by the Company include avionics, rotable and expendable airframe and engine parts for commercial aircraft. Currently, the Company specializes in replacement parts for MD-80, DC-9 and commuter turboprop aircraft and management believes that the Company has one of the most extensive inventories of aftermarket MD-80, DC-9 and EMB-120 parts in the industry. Currently, the Company has approximately 85,000 inventory line items, many of which represent multiple unit quantities and relate to the MD-80, DC-9 and EMB-120 aircraft. Many of these parts, such as avionics and engine parts, can also be used by a wide variety of aircraft other than MD-80, DC-9 and EMB-120 aircraft. In addition to the Company's inventory of MD-80, DC-9 and EMB-120 parts, the Company's inventory also includes spare parts for Boeing 727, 737 and 747 aircraft, Lockheed L-1011 aircraft, McDonnell Douglas DC-8 and DC-10 aircraft, and Airbus, Shorts, Saab, de Havilland, British Aerospace and ATR aircraft and for the Pratt & Whitney JT8D engine series. OPERATIONS OF THE COMPANY The Company's core business is buying and selling aircraft spare parts. In addition, the Company engages in the sale and leasing of aircraft and engines, provides advisory services to air carriers and through a wholly-owned subsidiary, operates a regional air cargo airline. The Company believes that aircraft and engine trading, as well as air carrier operations, may become a more significant part of the Company's business in the future. Management believes these activities provide significant opportunities for expansion. Inventory Acquisition. The Company acquires parts inventory by means of strategic consignment arrangements, by purchasing individual parts from airlines, repair facilities or other redistributors, by purchasing excess inventory from aircraft operators or by purchasing aircraft for disassembly. The Company may also fill a customer order for a part not held in the Company's inventory by locating the part for the customer from another vendor, purchasing the part and then reselling the part to the customer. The Company obtains inventory on consignment from or purchases inventory in bulk from airlines that are eliminating certain portions of their spare parts inventory due to the retirement of an aircraft type from their fleets, implementing inventory reduction programs to reduce costs, downsizing their operations or ceasing to conduct business. Aircraft and Engine Sales and Leasing. The Company has determined that its spare parts sales opportunities are enhanced by providing existing and new customers with whole aircraft and engines through sale and lease transactions. Such transactions allow the Company to expand its customer base for spare parts and, through leasing, to reduce the cost basis in its aircraft and engines. The Company derives revenue from lease payments and seeks to sell spare parts to the lessee both for the leased aircraft as well as other aircraft in the lessee's fleet. Upon return of the aircraft, the Company either re-leases, sells or disassembles the aircraft for parts in order to achieve the highest utilization of the asset. The Company currently owns six Embraer EMB-120 aircraft, three of which are leased, and two JT8D engines, both of which are leased. The Company's aircraft leases are operating leases rather than finance leases and expire between July 2003 and August 2003. The Company's engine leases are "evergreen" leases which, although they have no termination date, are cancelable by either party upon specified notice, typically 30 to 90 days. Under an operating lease, the Company retains title to the aircraft or engine, thereby retaining the potential benefits and assuming the risk of the residual value of the aircraft or engine. Operating leases allow aircraft operators greater fleet and financial flexibility due to their shorter-term nature, the relatively small initial capital outlay necessary to obtain use of the aircraft or engine and off-balance sheet accounting treatment. The Company currently focuses on leasing commuter turboprop aircraft, particularly the EMB-120. The Company believes that there is an increasing demand by customers for operating leases, which are being used as an alternative to traditional financing arrangements. During the second quarter of fiscal 1999, the Company entered into a joint venture (the "Air 41 Joint Venture") for the acquisition of 20 DC-9-41H aircraft from SAS. The aircraft were leased back to SAS and the leases had an average term of 39 months. The Company's original investment in the Air 41 Joint Venture was approximately $1.4 million. The aircraft were financed through the joint venture, utilizing non-recourse debt to the partners. The Company's Air 41 Joint Venture partner is AirCorp, Inc., a privately held company. The Company is exploring opportunities for the aircraft after the end of the term of the leases with SAS. In this regard, the Air 41 Joint Venture has engaged an aircraft portfolio management firm to remarket the aircraft. Such opportunities include releasing the aircraft to SAS, leasing the aircraft to one or more different lessee(s), selling the aircraft, parting out the aircraft, or directly placing the aircraft into either passenger or cargo service. One of the aircraft was sold following the expiration of its lease to SAS. At this time, the Company has no firm commitment for the remaining 19 aircraft after the SAS leases expire. Air Carrier Operations. During the fourth quarter of fiscal 2000, the Company acquired a small regional airline that currently operates three piston light twin and two light turboprop Part 23 aircraft under an Air Carrier Certificate under Part 135 of the FAA regulations. Besides providing ad hoc charter operations to customers such as the Department of Defense, the airline is currently under contract to provide cargo services to certain clients, such as United Parcel Service and Corporate Express. The Company paid $125,000, plus certain contingent consideration, including assuming the debt relating to the aircraft, for the airline. The airline has become a wholly-owned subsidiary of the Company operating as North-South Airways ("NSA"). The Company intends to expand NSA's fleet with the addition of cargo and quick-change variants of the EMB-120. SALES AND MARKETING; CUSTOMERS The Company has developed a sales and marketing infrastructure which includes well-trained and knowledgeable sales personnel, computerized inventory management, listing of parts in electronic industry data bank catalogues and a home page on the Internet. Crucial to the successful marketing of the Company's inventory is the Company's ability to make timely delivery of spare parts in reliable condition. The Company believes aircraft operators are more sensitive to reliability and timeliness than price. During fiscal 2000 the Company established a presence in Europe by opening a sales office in Nantes, France, and a distribution center at Schipohl Airport in the Netherlands. The distribution center is managed for the Company by KLM Aerospace Logistics Group, which provides all shipping and logistics services necessary for the delivery of parts to the Company's European customers. In addition to directly marketing its inventory, the Company has created and sponsors an industry-wide internet parts locator service, which is found at http:\\www.ipls.com. The Company's internet service is a free service available to any potential customer and lists all of the inventory available for sale by the Company. In order to increase its value to potential customers, the Company's Internet service also lists the inventory of over 100 additional aftermarket parts redistributors, representing more than 1.2 million individual parts. Similarly, the Company lists its inventory in the Air Transport Association's computerized databank ("AIRS") and with the Inventory Locator Service ("ILS") proprietary computerized databank. Buyers of aircraft spare parts can access any of the databases described above, as well as other parts databases, to determine the companies which have the desired inventory available. Neither the Company's service, AIRS nor ILS list price information relating to particular parts. Market forces establish the price for aftermarket aircraft parts. No pricing service or price catalogue exists for aftermarket parts. Aftermarket aircraft parts prices are determined by referencing new parts catalogues with consideration given to existing supply and demand conditions. Often, aircraft operators will opt for quality aftermarket parts even when new parts are still in production. Aftermarket aircraft parts meet the same FAA standard as new parts, cost less than the same new parts and are often more readily available. The Company's customers include a wide variety of domestic and international air cargo carriers, major commercial, regional and commuter passenger airlines, maintenance and repair facilities and other redistributors. Management believes that its customer relationships are important to the Company's operational success. The Company maintains an adequate level of inventory in order to service its customers in a timely manner. Management believes that availability and timely delivery of quality spare parts are the primary factors considered by customers when making a spare parts purchase decision. Cargo carriers, regional commercial airlines and commuter airlines are among the Company's principal customers. Cargo carriers are important customers because the fleets of such operators typically consist of older aircraft of the type for which the Company maintains an extensive inventory of parts and because such customers typically do not maintain extensive inventories of spare parts. Regional commercial airlines are important customers because such airlines favor narrow-body aircraft, such as MD-80 and DC-9 aircraft, for which the Company is a primary source of spare parts. The smaller commuter airlines are important customers because their fleets consist primarily of the turboprop aircraft being retired by the larger commuter airlines. The Company has acquired an extensive inventory of aftermarket parts for several popular commuter turboprop aircraft types In fiscal 2000, one customer, Spirit Airlines, Inc., accounted for approximately 11% of the Company's parts sales. Excluding aircraft and engine sales, in fiscal 2000, no other customer accounted for more than 5% of the Company's total revenues. Each aircraft or engine sale is unique and the Company does not rely on previous customers for repeat business. Currently, the Company believes that it has no customer, the loss of which would have a material adverse effect on the Company's business, financial condition and results of operations. In a given period, a substantial portion of the Company's revenues may be attributable to the sale of one or more aircraft or engines. Such sales are unpredictable transactions dependent, in part, upon the Company's ability to purchase an aircraft or engine at an attractive price and resell it within a relatively brief period of time. The revenues from the sale of an aircraft or engine, the timing of inventory sales or a lease transaction during a given period may result in a customer being considered a major customer of the Company for that period. QUALITY ASSURANCE The Company adheres to stringent quality control standards and procedures in the purchase and sale of its products. In August 1997, the ASA accredited the Company's quality assurance system after the completion of an extensive facilities audit and numerous meetings with the Company's management. Parts procured from an accredited supplier convey assurance to the purchaser that the quality is as stated and the appropriate documentation is on file at the supplier's place of business. Furthermore, accreditation provides assurance that the supplier has implemented an appropriate quality assurance system and has demonstrated the ability to maintain that system. In addition, many of the Company's customers periodically audit the Company's operations to ensure compliance with such customer's quality standards. Because aircraft operators require a readily available and identifiable source of inventory meeting regulatory requirements, the Company has implemented a total quality assurance program. This program consists of numerous quality procedures, including the following: - - Inspection procedures mandating that procured aircraft, engines and parts be traceable to a source approved by the Company; - - Training and supervision of personnel to properly carry out the total quality assurance program; - - On-going quality review board meetings conducted by senior management to oversee the total quality assurance program GOVERNMENT REGULATION The aviation industry is highly regulated in the United States by the FAA and in other countries by similar regulatory agencies. These regulations are designed to ensure that all aircraft, engines and aircraft components are continuously maintained in proper condition for the safe operation of aircraft. Before spare parts are installed on an aircraft, they must meet certain standards as to their condition and have appropriate documentation. Parts owned or acquired by the Company may not meet currently applicable standards, or standards may change in the future, causing parts already contained in the Company's inventory to be scrapped or modified. While most of the Company's non-airline operations are not currently regulated directly by the FAA, the independent facilities that repair and overhaul the Company's products and the aircraft operators that ultimately utilize the Company's products are subject to extensive regulation. Accordingly, the Company must consider the regulatory requirements of its customers and provide them with parts that comply with airworthiness standards established by the FAA, together with required documentation which enables these customers to comply with other applicable regulatory requirements. The inspection, maintenance and repair procedures for the various types of aircraft, engines and aircraft components are prescribed by regulatory authorities and can be performed only by FAA-licensed repair facilities utilizing certified technicians. Compliance with applicable FAA and OEM standards are required prior to installation of a part on an aircraft. The Company only utilizes FAA-licensed repair facilities to repair and certify aircraft, engines and aircraft components. In September 1996, the FAA issued an advisory circular to support the implementation of a voluntary accreditation program for civil aircraft parts suppliers. This accreditation program establishes quality standards applicable to aftermarket suppliers, such as the Company, and designates FAA approved organizations such as the ASA to perform quality assurance audits for initial accreditation of aftermarket suppliers. Quality assurance audits are required on an on-going basis to maintain accreditation. In addition, many of the Company's customers periodically audit the Company's operations to ensure compliance with such customer's quality standards. The Company believes that ongoing quality assurance audits and strict adherence to its quality assurance system is essential to meeting the needs of its existing and future customers. In August 1997, the Company received accreditation from the ASA. Because the Company's sales consist largely of parts for older aircraft, regulations promulgated by the FAA governing noise emission standards for older aircraft and the FAA's Aging Aircraft Program Plan (the "Aging Aircraft Program") may increase the cost of operating such aircraft and have a material impact on the market for the Company's products. All stage two aircraft must install hush-kits pursuant to such noise emission standards or be phased out of operation in the United States by December 31, 1999 and in the European Union by April 1, 2002. The Aging Aircraft Program requires aircraft operators to perform structural modifications and inspections to address airframe fatigue and to implement corrosion prevention and control programs, which increase the operating and maintenance costs of older aircraft. Furthermore, the EPA and the various agencies of the European Union have sought the adoption of stricter standards limiting the emission of nitrous oxide from aircraft engines. The Company believes that notwithstanding the substantial costs imposed by noise emission standards and the Aging Aircraft Program on older aircraft, estimated by the Company to average less than $4 million per aircraft on aircraft such as the DC-9, certain aircraft operators will continue to utilize older aircraft due to the substantially greater cost of acquiring new replacement aircraft. The inability of the Company to supply its customers with spare parts on a timely basis, or any occurrence of the Company providing products which subsequently fail, may adversely affect the Company's relationships with its customers and have a material adverse effect on its business, financial condition and results of operations. The core operations of the Company may in the future be subject to FAA or other regulatory requirements. The Company closely monitors the FAA and industry trade groups in an attempt to understand how possible future regulations might impact the Company. There can also be no assurance that new and more stringent government regulations, if enacted, would not have a direct or indirect adverse effect on the Company. An important factor in the aircraft spare parts redistribution market relates to the documentation and traceability of an aircraft spare part. The Company requires all of its suppliers to provide adequate documentation as dictated by the Company's customers. The Company utilizes electronic data scanning and storage techniques to maintain complete copies of all documentation. Documentation required includes, where applicable, (i) a maintenance release from a certified FAA repair facility signed and dated by a licensed airframe and/or power plant mechanic or other certified inspector who repaired the aircraft spare part and an inspection to certify that the proper methods, materials and workmanship were used, (ii) a "tear-down" report detailing the discrepancies and corrective actions taken during the last shop repair, and (iii) an invoice or purchase order for an approved source. NSA has been subject to FAA regulation since the commencement of its business activities. Under the Federal Aviation Act of 1958, as amended, the FAA is concerned with safety and the regulation of flight operations generally, including equipment used, ground facilities, maintenance, communications and other matters. The FAA can suspend or revoke the authority of air carriers or their licensed personnel for failure to comply with its regulations and can ground aircraft if questions arise concerning airworthiness. NSA holds all operating, airworthiness and other FAA certificates that are currently required for the conduct of its business, although these certificates may be suspended or revoked for cause. PRODUCT LIABILITY The commercial aviation industry periodically experiences catastrophic losses. As a redistributor, the Company may be named as a defendant in a lawsuit as a result of such catastrophic loss if a part sold by the Company were installed in an incident-related aircraft. In this regard, the Company maintains product liability insurance in an amount the Company believes is sufficient. While the Company believes that it has liability insurance to protect it from such claims, and while no lawsuit has ever been filed against the Company based upon a product liability theory, no assurance can be given that claims will not arise in the future or that such insurance coverage will be adequate. However, an uninsured or partially insured claim, or a claim for which third-party indemnification is not available, could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, there can be no assurance that insurance coverage can be maintained in the future at an acceptable cost. Any such liability not covered by insurance could have a material adverse effect on the financial condition of the Company. NSA has secured public liability and property damage insurance in excess of minimum amounts required by the United States Department of Transportation. The Company has also obtained all-risk hull insurance on Company-owned aircraft and maintains cargo liability insurance. COMPETITION The aircraft spare parts redistribution market is highly competitive. The market consists of a limited number of well-capitalized companies selling a broad range of products and numerous small competitors serving distinct market niches. Certain of these competitors have substantially greater financial, marketing and other resources than the Company. The Company believes that current industry trends will benefit larger, well-capitalized companies. The Company believes that range and depth of inventories, quality and traceability of products, service and price are the key competitive factors in the industry. The principal companies with which the Company competes are AAR Corp., AGES, Aviation Sales Company, Kellstrom Industries Inc., The Memphis Group, Inc. and AVTEAM, all of which are significantly larger than the Company. Customers in need of aircraft parts have access, through on-line inventory catalogues, to a broad array of suppliers, including aircraft manufacturers, airlines and aircraft services companies, which may have the effect of increasing competition for, and lowering prices on, parts sales. NSA operates in highly competitive markets and competes with approximately 50 other contract cargo carriers in the United States. Accurate industry data is not available to indicate NSA's position within its marketplace, but management believes that NSA is currently one of the smaller contract carriers. NSA's competitors, however, typically utilize older generation and less efficient aircraft, and are not as well capitalized than the Company. Given the growth in the regional freight and passenger charter markets expected by management, access to capital will be critical to successfully compete in this industry. EMPLOYEES As of May 31, 2000, the Company had 38 employees. The Company is not a party to any collective bargaining agreement. The Company believes its relations with its employees are good. CAUTIONARY STATEMENTS This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Exchange Act, including the plans and objectives of management for the business, operations and financial performance of the Company. The forward-looking statements and associated risks set forth in this Annual Report may include or relate to, among other things, the factors set forth below, together with other information set forth in this Annual Report. Risks Associated with Leases. The Company currently leases three Embraer EMB-120 aircraft and two Pratt & Whitney JT8D series engines. The Company also owns a 50% interest in a joint venture that leases 20 DC-9-41H aircraft. The success of an operating lease depends in part upon having the aircraft and engines returned to the Company in marketable condition as required by the lease of such aircraft and engines. In addition, the financial return to the Company from a leased aircraft or engine depends in part on the re-lease of aircraft and engines on favorable terms on a timely basis, the ability to sell the aircraft or engines at favorable prices or realize sufficient value from the disassembly for parts of the aircraft or engines at the end of the lease term. Numerous factors, many of which are beyond the control of the Company, may have an impact on the Company's ability to re-lease or sell aircraft, engines and parts. These factors include general market conditions, regulatory changes (particularly those imposing environmental, maintenance and other requirements on the operation of aircraft and engines), changes in the supply or cost of aircraft and engines and technological development. Consequently, there can be no assurance that the Company's estimated residual value for aircraft or engines will be realized. If the Company is unable to re-lease, sell its aircraft or engines on favorable terms or realize sufficient value from the disassembly for parts of the aircraft or engines on a timely basis upon expiration of the related lease, its business, financial condition and results of operations may be adversely affected. In the event that a lessee defaults in the performance of its obligations, the Company may be unable to enforce its remedies under a lease. The Company's inability to collect lease payments when due or to repossess aircraft or engines in the event of a default by a lessee could have an adverse effect on the Company's business, financial condition and results of operations. If the Company were to acquire an aircraft or engines and such acquisitions were not financed by additional borrowing, it could result in a reduction of the Company's liquidity. Risks Regarding the Company's Inventory. The Company acquires inventory by purchasing individual parts from airlines, repair facilities or other redistributors, by purchasing excess inventory from aircraft operators, or by purchasing aircraft for disassembly. The Company also obtains parts inventory on consignment from airlines. The Company's business is substantially dependent on its ability to acquire inventory by one of these methods because its net sales are directly influenced by the level and composition of inventory available for sale. Because the size and composition of the Company's inventory is critical to its results of operations and because there is no organized market to procure surplus inventory, the Company's operations are materially dependent on the success of management in identifying potential sources of inventory and obtaining a consignment of the inventory on acceptable terms or purchasing it at acceptable prices. There can be no assurance that inventory will be available on acceptable terms or at the times required by the Company. In addition, once acquired, the market value of the Company's inventory could be adversely affected by factors beyond the Company's control, such as the sudden availability of additional inventory, a sudden decline in demand for the Company's parts due to a decline in use of certain aircraft types, regulatory changes mandating uneconomic improvements to items in inventory, or a decision by an OEM to begin manufacturing new parts that would compete with aftermarket parts. Any of such factors could result in the Company's inventory being overvalued and could require the Company to write down its inventory valuations in order to bring them in line with the revised fair market value. The failure to identify and acquire inventory in a timely fashion on acceptable terms or a decline in the value of the Company's inventory would have a material adverse effect on the Company's business, financial condition and results of operations. Concentration on MD-80 and DC-9 Aircraft. The Company's net sales are concentrated in the aftermarket for MD-80 and DC-9 aircraft, which aircraft at December 31, 1998 accounted for approximately 13.2% of the commercial jet aircraft in service worldwide according to the World Jet Inventory. Neither the DC-9 nor the MD-80 is still in production. Any decline in the use of MD-80 and DC-9 aircraft by aircraft operators, the unscheduled removal from service of large numbers of MD-80 and DC-9 aircraft or the grounding of such aircraft by governmental authorities for any reason could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, all DC-9 aircraft operated in the United States and European Union will need to be hush-kitted, relocated to other areas or removed from service by 2000 or 2002, respectively. In the event these aircraft are removed from service, demand for the Company's MD-80 and DC-9 parts could decline and the supply of spare parts may increase, which would have a material adverse effect on the Company's business, financial condition and results of operations. Broadening of Product Line. The Company has recently expanded its product line to include aftermarket parts for Airbus A-300, McDonnell Douglas DC-10, Boeing 747 aircraft and certain commuter turboprop aircraft including Embraer, Shorts, Saab, de Havilland, British Aerospace and ATR aircraft. In addition, the Company intends to broaden further its product line to include parts for other aircraft that are likely to be converted to freighters, such as Boeing 767 and 757 aircraft. The Company has limited experience with respect to the purchase and sale of spare parts for these aircraft models. There can be no assurance that the Company will have the same level of success in managing its parts inventories for such aircraft that it has had with parts for MD-80 and DC-9 aircraft. The failure to successfully broaden its product line could have a material adverse effect on the Company's ability to implement its growth strategy. Effects of the Economy on the Operations of the Company. The Company's customers include a wide variety of domestic and international air cargo carriers, major commercial, regional and commuter passenger airlines, maintenance and repair facilities and other redistributors. As a result, the Company's business can be impacted by the economic factors that affect the airline and air cargo industries. When such factors adversely affect the airline and air cargo industries, they tend to cause downward pressure on the pricing for aircraft spare parts and increase the credit risk associated with doing business with airlines and air cargo carriers. Additionally, factors such as the price of fuel affect the aircraft spare parts market for older aircraft, since older aircraft become less competitive with newer model aircraft as the price of fuel increases. There can be no assurance that economic and other factors which might affect the airline and air cargo industries will not have a material adverse effect on the Company's business, financial condition and results of operations. Risks Associated with Acquisitions. One of the Company's strategies for growth is to pursue acquisitions of aftermarket redistributors, small aircraft leasing companies and regional air carriers. Currently, the Company has no acquisition agreements, understandings or commitments for any acquisitions and, in order to consummate an acquisition, the Company would be required to receive the consent of the lender under its Credit Agreement. There can be no assurance that any such acquisitions will be completed on reasonable terms, if at all. Certain of the Company's competitors may also seek to acquire the same companies which the Company seeks to acquire. This may increase the price and related costs at which the Company could otherwise have acquired such companies, perhaps materially. The Company's inability to complete acquisitions on reasonable terms could limit the Company's ability to grow its business. The Company may expend significant funds to pursue and consummate acquisitions. Such use of funds would reduce the Company's working capital. In addition, the Company may fund acquisitions in whole or in part by issuing equity securities, and any such issuances, individually or in the aggregate, may be dilutive to holders of the Common Stock. Acquisitions also may result in the Company incurring additional debt and amortizing costs related to goodwill and other intangible assets, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company may experience difficulties in assimilating the operations, services and personnel of acquired companies and may be unable to sustain or improve the historical revenue and earnings levels of acquired companies, any of which may materially adversely affect the Company's business, financial condition and results of operations. In addition, to the extent it becomes necessary for the Company to fund the working capital requirements of acquired companies, the Company's working capital available for its currently existing operations would decrease. Acquisitions involve a number of additional risks, including the diversion of management's attention from ongoing business operations and the potential loss of key employees of acquired companies. There can be no assurance that the Company can successfully implement its acquisition strategy. The failure to consummate acquisitions on reasonable terms or the inability to successfully integrate and manage acquired operations and personnel could have a material adverse impact on the Company's business, financial condition and results of operations. Risks Associated with Air Carrier Operations. The Company's air carrier subsidiary operates in an industry that typically experiences lower average margins than the Company's other operations. The Company's ability to operate its air carrier subsidiary profitably depends on its ability to control costs, many of which are beyond the Company's control. Examples of costs that the Company is unable to control are fuel costs, which are affected by political and economic conditions throughout the world, and the costs of regulatory compliance. The Company believes that its existing financial resources are sufficient to permit it to implement its business plan for NSA. However, if the Company requires additional capital resources to fund the operations of NSA, it may be unable to obtain them on favorable terms, if at all. The Company's air carrier operations may also result in demands on the Company's management time and liquidity that may preclude the Company from pursuing more profitable parts sales opportunities. Reliance on Executive Officers. The continued success of the Company is dependent to a significant degree upon the services of its executive officers and upon the Company's ability to attract and retain qualified personnel experienced in the various phases of the Company's business. The ability of the Company to operate successfully could be jeopardized if one or more of its executive officers were unavailable and capable successors were not found. The Company does not maintain key man insurance on any of its executive officers. The Company has employment agreements with Alexius A. Dyer III, its Chairman of the Board, President and Chief Executive Officer, and George Murnane III, its Executive Vice President and Chief Operating Officer. The employment agreements between the Company and Messrs. Dyer and Murnane are individually terminable by each executive officer upon a change of control of the Company. ITEM 2. PROPERTIES. - ------- ---------- The Company's executive offices and operations are located at 1954 Airport Road, Suite 200, Atlanta, Georgia 30341, consisting of approximately 3,600 square feet of leased space pursuant to a lease expiring in January 2003. The Company leases approximately 29,500 square feet of warehouse facilities in Fort Lauderdale, Florida pursuant to a lease expiring in June 2002. All facilities are rented at competitive rates for their location and utility. The Company believes that its facilities are adequate for its needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS. - ------- ------------------ The Company is not now a defendant in any material litigation or other legal proceeding. The Company may become a defendant in legal proceedings in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------- ----------------------------------------------------------- None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER - ------- ------------------------------------------------------------------- MATTERS. - ------- The Company's Common Stock, which has been publicly traded since April 2, 1990, is listed and traded on the American Stock Exchange under the symbol "YLF." The following table sets forth the high and low closing prices of the Common Stock as reported on the American Stock Exchange for each quarter in fiscal 2000 and 1999. 2000 Fiscal Year High Low - ------------------ ---- --- First Quarter $ 4.625 $ 4.25 Second Quarter 4.4375 3.75 Third Quarter 3.75 3.125 Fourth Quarter 4.5 2.625 1999 Fiscal Year High Low - ------------------ ---- --- First Quarter $ 8.5 $ 5.875 Second Quarter 7.125 3.75 Third Quarter 5.5 3.25 Fourth Quarter 4.625 3.75 At August 10, 2000, there were 105 holders of record of the Company's Common Stock. The Company has never paid dividends on the Common Stock. The Company's secured credit facility prohibits the Company from paying dividends on the Common Stock as long as indebtedness issued pursuant to such facility remains outstanding. It unlikely that the Company will pay dividends on the Common Stock in the foreseeable future. - ------ ITEM 6. SELECTED FINANCIAL DATA. - ------- ------------------------- The selected consolidated financial data presented below for, and as of the end of, each of the fiscal years in the five-year period ended May 31, 2000, have been derived from the Company's audited consolidated financial statements. The consolidated financial statements of the Company as of May 31, 1999 and 2000 and for the three-year period ended May 31, 2000 and the accountant's reports thereon are included in Item 8 of this Form 10-K.
YEAR ENDED MAY 31, 1996 1997 1998 1999 2000 --------- -------- -------- -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: - ---------------- Net sales $21,410 $20,123 $25,648 $ 24,344 $ 23,480 Lease and service revenue 1,795 1,109 2,315 3,328 2,724 ------ ------ ------ ------ ------ Total revenue 23,205 21,232 27,963 27,672 26,204 Total operating expenses 18,528 17,423 23,186 24,406 24,247 Equity in earnings of joint venture -- -- -- 1,026 1,757 ------ ------ ------ ------ ------ Income from continuing operations 4,677 3,809 4,777 4,292 3,714 Interest expense, net 2,377 1,550 1,934 1,302 1,657 ------ ------ ------ ------ ------ Earnings before income taxes and extraordinary item 2,300 2,259 2,843 2,990 2,057 Provision (benefit) for income taxes 14 -- (2,820) 1,036 800 Earnings before extraordinary item 2,286 2,259 5,663 1,954 1,257 Extraordinary loss on extinguishment of debt -- (531) -- -- -- ------ ------ ------ ------ ------ Net earnings $ 2,286 $ 1,728 $ 5,663 $ 1,954 $ 1,257 ======== ======== ======== =========== ========== PER SHARE DATA: - ----------------- Earnings per common share - basic before effect of extraordinary item $ 15.27 $ 1.37 $ 2.29 $ .77 $ .57 Extraordinary item -- (0.32) -- -- -- ------ ------ ------ ------ ------ Net earnings $ 15.27 $ 1.05 $ 2.29 $ .77 $ .57 ======== ======== ======== =========== ========== Weighted average shares outstanding used in basic calculation 149,696 1,646,629 2,471,025 2,550,940 2,189,539 Earnings per common share - diluted before effect of extraordinary item $ 12.69 $1.25 $2.03 $ .72 $ .55 Extraordinary item -- (0.29) -- -- -- ------ ------ ------ ------ ------ Net earnings $ 12.69 $ 0.96 $2.03 $ .72 $ .55 ======== ======== ======== =========== ========== Weighted average shares outstanding used in diluted calculation 242,288 1,806,938 2,793,414 2,720,513 2,268,472
AT MAY 31, ----------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----- ----------- ---------- -------- (IN THOUSANDS) BALANCE SHEET DATA: - --------------------- Working capital (deficit) $(10,841) $ 9,141 $10,228 $11,524 $13,444 Total assets 16,132 21,287 23,636 23,976 35,183 Total debt 18,144 13,749 9,648 9,594 20,094 Stockholders' equity (deficit) (7,416) 4,660 10,808 11,263 12,468
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------ ----------------------------------------------------------------------- OF OPERATIONS. - -------------- OVERVIEW The Company is primarily engaged in the sale of aircraft, aircraft parts, leasing of aircraft and engines and related services. In addition, with the acquisition of NSA, the Company is engaged in the operation of a small regional airline. The Company's total revenue includes net parts sales revenue and lease and service revenue. Net sales revenue includes revenue from individual parts sales and revenue from aircraft and engine sales. Aircraft and engine sales are unpredictable transactions, dependent, in part, upon the Company's ability to purchase an aircraft or engine and resell it within a relatively brief period of time. In a given period, a substantial portion of the Company's revenue may be attributable to the sale of aircraft or engines. Cost of sales consists primarily of inventory, aircraft and engine costs and shipping charges. The cost of the inventory is determined on a specific identification basis and inventory is stated at the lower of cost or market. The Company's operating results are affected by many factors, including the timing of orders from large customers, the timing of aircraft and engine sales, the timing of expenditures to purchase parts inventory, aircraft and engines and the mix of parts contained in the Company's inventory. The Company does not obtain long-term purchase orders or commitments from its customers. Revenue from the sale of parts is recognized when products are shipped to the customer. Revenue from aircraft and engine sales is recognized when the Company has received consideration for the sale price, the risk of ownership has passed to the buyer, and collectibility is reasonably assured. Lease and service revenue are recognized on an accrual basis, unless collectibility is uncertain. RESULTS OF OPERATIONS FISCAL 2000 COMPARED WITH FISCAL 1999 Net sales decreased by 3.6% from $24.3 million in fiscal 1999 to $23.5 million in fiscal 2000. This decrease was primarily due to a decrease in parts sales, which was partially offset by an increase in aircraft and engine sales. During fiscal 2000, the Company sold nine engines as compared to fiscal 1999, during which the Company sold three engines. Lease and service revenue decreased 18.1% from $3.2 million in fiscal 1999 to $2.7 million in fiscal 2000, due primarily to fewer assets being on lease during fiscal 2000. Due primarily to the decrease in parts sales and lease and service revenue, partially offset by the increase in aircraft and engine sales, total revenue for fiscal 2000 decreased 5.3% to $26.2 million from $27.7 million for fiscal 1999. Cost of sales decreased 4.7% from $18.2 million in fiscal 1999 to $17.4 million in fiscal 2000. Cost of sales as a percentage of total revenue increased from 65.8% in fiscal 1999 to 66.2% in fiscal 2000. The slight increase in the cost of sales as a percentage of total revenue in fiscal 2000 compared to fiscal 1999 was due primarily to an increase in the cost of parts sold. As the Company enters into more consignment agreements and sells more parts on consignment, the Company anticipates that it will incur higher cost of sales as a percentage of revenues. These higher cost of sales should be partially offset by lower inventory costs, including interest. Selling, general and administrative expenses increased 14.7% from $5.1 million in fiscal 1999 to $5.8 million in fiscal 2000. This increase was due to higher expenses related to legal and professional fees; travel, entertainment, and marketing expenses; health care costs; and outside commissions as outside agents were involved in the sale of an aircraft and several engines, partially offset by lower compensation expenses. Another factor in the increase in selling, general and administrative expenses was a $173,000 increase in the Company's provision for doubtful accounts in fiscal 2000 as the Company recorded no provision for doubtful accounts in fiscal 1999. Depreciation was $1,147,000 in fiscal 1999 compared to $1,092,000 in fiscal 2000. The net decrease from fiscal 1999 to fiscal 2000 was due primarily to fewer assets being on lease during fiscal 2000. Equity in Net Earnings of Unconsolidated Joint Venture for fiscal 1999 was $1,026,000 compared to $1,757,000 during fiscal 2000. This increase was primarily due to a full year of earnings in fiscal 2000 versus nine months of earnings in fiscal 1999, a decrease in the interest expense of the Air 41 Joint Venture as the debt associated with the acquisition is reduced, and higher revenue from the re-lease of one of the aircraft. Interest expense increased 29.9% from $1,315,000 in fiscal 1999 to $1,708,000 in fiscal 2000. The increase in interest expense resulted from a higher outstanding average balance as the Company, among other things, financed the purchase of aircraft held for lease. Furthermore, interest rates increased during the period. Interest and other income for fiscal 2000 was $51,000 compared to other income of $13,000 in fiscal 1999. The Company's income tax expense in fiscal 2000 was $800,000 compared to $1,036,000 in fiscal 1999. Income taxes have been provided at the Company's estimated effective tax rate of approximately 39% for fiscal 2000 compared to 35% for fiscal 1999. Net earnings for fiscal 2000 were $1,257,000, or $0.57 per share - basic and $0.55 per share - diluted, compared to net earnings for fiscal 1999 of $1,954,000, or $0.77 per share - basic and $0.72 per share - diluted. In the third quarter of fiscal 1999, the Company began acquiring shares of its common stock in connection with a stock repurchase program announced in December 1998. During fiscal 1999, the Company repurchased 467,325 shares of its common stock at an average price of $4.16. During fiscal 2000, the Company repurchased 4,200 shares of its common stock at an average price of $4.39. FISCAL 1999 COMPARED WITH FISCAL 1998 Net sales decreased by 5.1% from $25.6 million in fiscal 1998 to $24.3 million in fiscal 1999. This decrease was primarily due to a decrease in aircraft and engine sales, which was partially offset by an increase in parts sales. During fiscal 1999, the Company acquired two aircraft and sold three aircraft, as compared to fiscal 1998, during which the Company acquired two aircraft and sold four aircraft. During fiscal 1999, the Company sold three engines as compared to fiscal 1998, during which the Company sold seven engines. Lease and service revenue increased to $3.2 million in fiscal 1999 from $2.3 million in fiscal 1998, due primarily to the Company's acquisition and lease of three spare engines during the first quarter of fiscal 1999. These engines remain on lease. Due primarily to the decrease in aircraft and engine sales, partially offset by the increase in parts sales and lease and service revenue, total revenue for fiscal 1999 decreased 1.0% to $27.7 million from $28.0 million for fiscal 1998. Cost of sales increased 8.4% from $16.8 million in fiscal 1998 to $18.2 million in fiscal 1999. Cost of sales as a percentage of total revenue increased from 60.0% in fiscal 1998 to 65.8% in fiscal 1999. The increase in the cost of sales as a percentage of total revenue was due primarily to an increase in the cost of aircraft and engine sales as a percent of revenue in fiscal 1999 compared to fiscal 1998, as well as an increase in the cost of the parts sold. As the Company enters into more consignment agreements, the Company anticipates that it will incur higher cost of sales. These higher cost of sales should be partially offset by lower inventory costs, including interest. Selling, general and administrative expenses decreased 5.3% from $5.3 million in fiscal 1998 to $5.1 million in fiscal 1999. This decrease was due primarily to lower expenses related to compensation, travel and entertainment, investor relations, and the Company's provision for doubtful accounts. Depreciation was $1,147,000 in fiscal 1999 compared to $1,060,000 in fiscal 1998. The net increase from fiscal 1998 to fiscal 1999 was due primarily to an increase in depreciation of engines held for lease, resulting from the engines acquired in the first quarter of fiscal 1999. Equity in Net Earnings of Unconsolidated Joint Venture for fiscal 1999 was $1,026,000 compared to $0 during fiscal 1998. This increase was due to the Air 41 Joint Venture, which was entered into during September 1998. Interest expense decreased 20.2% from $1,648,000 in fiscal 1998 to $1,315,000 in fiscal 1999. The reduction in interest expense resulted from a lower outstanding average balance and a reduction in the interest rate applicable to the outstanding balance. Interest and other expenses for fiscal 1998 were $286,000 compared to other income of $13,000 in fiscal 1999. Included in the interest and other expense for fiscal 1998 is $400,000 in expenses relating to a withdrawn secondary offering. The Company's income tax benefit for fiscal 1998 was $2.8 million, primarily due to a reduction in the valuation allowance applied against its deferred tax assets and the utilization of net operating loss carryforwards. The Company's income tax expense in fiscal 1999 was $1,036,000. Income taxes have been provided at the Company's estimated effective tax rate of approximately 35% for fiscal 1999. In the prior year, the Company recognized deferred tax benefits as the realization of such benefits was determined to be more likely than not because of the Company's consistent profitability. The realization of the tax benefits was accomplished through a reduction in the valuation allowance that had been previously established against the Company's deferred tax assets. Earnings before income taxes increased from $2,843,000 in fiscal 1998 to $2,990,000 in fiscal 1999. Earnings for fiscal 1999 were benefited by equity in net earnings of unconsolidated joint venture, the Air 41 Joint Venture, of $1,026,000. Net earnings for fiscal 1998 were $5,663,000, or $2.29 per share - basic and $2.03 per share - diluted, compared to net earnings for fiscal 1999 of $1,954,000, or $0.77 per share - basic and $0.72 per share - diluted. On a pro forma basis, adjusted as if the Company had been a full taxpayer in fiscal 1998, earnings per share - diluted for fiscal 1998 would have been $0.67. In the third quarter of 1999, the Company began acquiring shares of its common stock in connection with a stock repurchase program announced in December 1998. During fiscal 1999, the Company repurchased 467,325 shares of its common stock at an average price of $4.16. LIQUIDITY AND CAPITAL RESOURCES The Credit Agreement originally entered into by the Company in October of 1996 provided for a $3 million term loan and up to an $11 million revolving credit. The Credit Agreement has been amended to create several new term loan facilities and to increase the revolving credit to $14 million (collectively referred to as the "Credit Facility"). The revolving credit facility matures in October 2001 and the term loans mature on various dates through October 2001. The interest rate that the Company is assessed is subject to fluctuation and may change based upon certain financial covenants. As of May 31, 2000, the interest rate under the Credit Facility was the lender's base rate (9.50%) minus 0.25%. The Credit Facility is secured by substantially all of the assets of the Company and availability of amounts for borrowing is subject to certain limitations and restrictions. Such limitations and restrictions are discussed in the Company's Proxy Statement/Prospectus filed with the Securities and Exchange Commission on August 29, 1996. Net cash provided by (used in) operating activities for the fiscal years ended May 31, 1999 and 2000 amounted to $1.3 million and ($971,000), respectively. For fiscal 1999, the primary use of cash from operating activities was an increase in accounts receivable offset partially by a decrease in inventory. For fiscal 2000, the primary use of cash from operating activities, was an increase in inventories due to the purchase of aircraft, partially offset by a reduction in the parts inventory. Net cash provided by (used in) investing activities for fiscal 1999 and 2000 amounted to $834,000 and ($8,695,000), respectively. For fiscal 1999, the Company received proceeds from the sale of aircraft and engines that had been held for lease of $5,875,000. The primary use of funds for investing activities was the Company's investment in the Air 41 Joint Venture of $1,587,000 and capital expenditures for aircraft and engines of $3,786,000. For fiscal 2000, the primary use of funds was the purchase of aircraft held for lease. Net cash provided by (used in) financing activities for fiscal 1999 and 2000 amounted to ($1,713,000) and $9,484,000, respectively. For fiscal 1999, net of borrowings, the Company prepaid $54,000 under the Credit Facility. The primary use of cash in financing activities was the purchase of treasury stock for $1,947,000. The Company received $288,000 in proceeds from employees' exercise of stock options. For fiscal 2000, net of payments, the Company borrowed an additional $9.5 million under the Credit Facility. At May 31, 2000, the Company was permitted to borrow up to an additional $1.7 million pursuant to the Credit Facility. The Company believes that its working capital and amounts available under the Credit Facility will be sufficient to meet the requirements of the Company for the foreseeable future. FLUCTUATIONS IN OPERATING RESULTS The Company's operating results, both on an annual and a quarterly basis, are affected by many factors, including the timing of large orders from customers, the timing of expenditures to purchase inventory in anticipation of future sales, the Company's ability to obtain inventory on consignment on acceptable terms, the mix of available aircraft spare parts contained at any time in the Company's inventory, the timing of aircraft or engine sales or leases, unanticipated aircraft or engine lease terminations, default by any lessees and many other factors largely outside the Company's control. Since the Company typically does not obtain long-term purchase orders or commitments from its customers, it must anticipate the future volume of orders based upon the historic purchasing patterns of its customers and discussions with customers as to their future requirements. Cancellations, reductions or delays in orders by a customer or group of customers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, due to the value of a single aircraft or engine sale relative to the value of parts typically sold by the Company, any concentration of aircraft or engine sales in a particular quarter may obscure existing or developing trends in the Company's business, financial condition and results of operations. RECENT ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS No. 133, as amended by FAS 138, establishes standards for accounting and reporting for derivative instruments, and conforms the requirements for treatment of different types of hedging activities. This statement is effective for all fiscal years beginning after June 15, 2000. Management does not expect this standard to have a significant impact on the Company's operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ---------------------------------------------------------------- The Company's major market risk exposure is to changing interest rates. The Company's policy is to manage interest rate risk through the use of floating rate debt instruments. The Company has loans under a Credit Facility totaling approximately $20.1 million at May 31, 2000. The interest rate on the Credit Facility, which fluctuates based on certain financial ratios of the Company, was the lender's prime rate less .25% at May 31, 2000 (9.25%). An immediate increase of 10% in interest rates would increase the Company's annual interest expense by approximately $186,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- ----------------------------------------------- Information with respect to this Item is contained in the Company's consolidated financial statements and financial statement schedules indicated in the Index on Page F-1 of this Annual Report on Form 10-K and is incorporated herein by reference. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- ------------------------------------------------------------------- FINANCIAL DISCLOSURE. - ------ -------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- -------------------------------------------------------- The information contained under the heading "Information as to Directors and Executive Officers" in the Company's definitive proxy statement for its 2000 Annual Meeting of stockholders (the "2000 Proxy Statement") is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION. - -------- ----------------------- The information contained under the heading "Executive Compensation" in the 2000 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------- -------------------------------------------------------------------- The information contained under the headings "Directors and Executive Officers" and "Principal Stockholders" in the 2000 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- -------------------------------------------------- The information contained under the heading "Executive Compensation--Certain Transactions" in the 2000 Proxy Statement is incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KITEM - -------- --------------------------------------------------------------------- 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. - -- ----------------------------------------------------------------------- (a) Financial Statements Page or Method of Filing (1) Index to Consolidated Financial Statements F-1 (2) Report of Grant Thornton LLP F-2 (3) Consolidated Financial Statements and Notes to Consolidated Financial Statements of the Company, including Consolidated Balance Sheets as of May 31, 2000 and 1999 and related Consolidated Statements of Earnings, Consolidated Cash Flows and Consolidated Stockholders' Equity (Deficit) for each of the years in the three-year period ended May 31, 2000 F-3 (b) Financial Statements Schedules Page or Method of Filing (1) Schedule II. Valuation and Qualifying Accounts S-1 Schedules not listed above and columns within certain Schedules have been omitted because of the absence of conditions under which they are required or because the required material information is included in the Consolidated Financial Statements or Notes to the Consolidated Financial Statements included herein. (c) Exhibits --------
Exhibit NUMBER DESCRIPTION PAGE NUMBER OR METHOD OF FILING 2.4 Credit Incorporated by reference to Exhibit 2.4 to Agreement Amendment No. 2 to the Company's Registration between BNY Statement on Form S-4 filed on August 29, 1996 (File Financial No. 333-08065). Corporation and the Registrant (the "Credit Agreement"). 2.5 First Amendment, Incorporated by Reference. Waiver and Agreement, dated as of March 24, 1997, between BNY Financial Corporation and the Registrant and related to the Credit Agreement. 2.6 Second Incorporated by Reference. Amendment and Agreement, dated as of September 9, 1997, between BNY Financial Corporation and the Registrant and related to the Credit Agreement. 2.7 Third Amendment and Incorporated by Reference. Agreement, dated as of October 15, 1997, between BNY Financial Corporation and the Registrant and related to the Credit Agreement. 2.8 Fourth Amendment and Incorporated by Reference. Agreement, dated as of February 2, 1998, between BNY Financial Corporation and the Registrant and related to the Credit Agreement. 2.9 Fifth Amendment, Incorporated by Reference. dated as of July 16, 1998, between BNY Financial Corporation and the Registrant and related to the Credit Agreement. 2.10 Sixth Amendment, Incorporated by Reference dated as of May 30, 1998, between BNY Financial Corporation and the Registrant and related to the Credit Agreement. 2.11 Seventh Amendment, Incorporated by Reference. dated as of October 28, 1998, between BNY Financial Corporation and the Registrant and related to the Credit Agreement. 3.1 Amended and Incorporated by reference to Exhibit 3.1 to the Restated Company's Annual Report on Form 10-K for the fiscal Certificate year ended May 31, 1996 (the "1996 Form 10-K"). of Incorporation of the Registrant. 3.2 Restated and Incorporated by reference to Exhibit 3.2 to the 1996 Amended Form 10-K. Bylaws of the Registrant. 4.1 Specimen Incorporated by reference to Exhibit 4.1 to the 1996 Common Stock Form 10-K. Certificate. 10.1.1 Employment Incorporated by reference to Exhibit 10.1.1 to the Agreement, 1996 Form 10-K dated as of December 1, 1995, between the Registrant and Alexius A. Dyer III, as amended on October 3, 1996. 10.1.2 Employment Incorporated by reference to Exhibit 10.1.2 to the Agreement Company's Quarterly Report for the quarter ended dated as of February 28, 1997. October 3, 1996, between the Registrant and George Murnane III. 10.2.1 1996 Long- Incorporated by reference to Appendix B to the Proxy Term Statement/Prospectus included in the Company's Incentive and Registration Statement on Form S-4 (File Share Award No. 333-08065), filed on July 12, 1996. Plan. 16 10.2.2 401(k) Plan. Incorporated by reference to Exhibit 10-H to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1992 (the "1992 Form 10-K"). 10.2.3 Bonus Plan. Incorporated by reference to Exhibit 10.2.4 to the 1992 Form 10-K. 10.2.4 Cafeteria Incorporated by reference to Exhibit 10.2.5 of the Plan. Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1993. 10.2.5 Form of Incorporated by reference to Exhibit 10.2.5 to the Option 1996 Form 10-K. Certificate (Employee Non-Qualified Stock Option). 10.2.6 Form of Incorporated by reference to Exhibit 10.2.6 to the Option 1996 Form 10-K. Certificate (Director Non-Qualified Stock Option). 10.2.7 Form of Incorporated by reference to Exhibit 10.2.7 to the Option 1996 Form 10-K. Certificate (Incentive Stock Option). 10.14 Commission Incorporated by reference to Exhibit 10.14 to the Agreement 1996 Form 10-K. Dated December 1, 1995 between the Registrant and J.M. Associates, Inc. 10.15 Operating Incorporated by reference to Exhibit 10.14 to the Air41 LLC, Exhibit 10.15 to the 1999 Form 10-K dated as of September 9, 1998, by and between AirCorp, Inc. and the Company 10.16 Office Lease Incorporated by reference to Exhibit 10.17 to the Agreement 1997 Form 10-K. dated January 31, 1997 between the Registrant and Globe Corporate Center, as amended. 10.17 Lease Incorporated by reference to Exhibit 10.18 to the Agreement 1997 Form 10-K. dated March 31, 1997 between the Registrant and Port 95- 4, Ltd. 21 Subsidiaries Filed herewith. 23 Consent of Grant Thornton Filed herewith. 27 Financial Filed herewith. Data Schedule.
The Company did not file a Current Report on Form 8-K during the last quarter of the fiscal year covered by this Annual Report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized this 28th day of August, 2000. International Airline Support Group, Inc., a Delaware corporation By: /s/ A.A. Dyer III --------------------------- Alexius A. Dyer III Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - --------- ----- ---- /s/ A.A. Dyer III Chairman of the Board, Chief Executive Officer and - ---------------------- President and Director Alexius A. Dyer III (Principal Executive Officer) August 28, 2000 /s/ George Murnane III - --------------------------- George Murnane III Executive Vice President, Chief Operating Officer and Director August 28, 2000 /s/ James M. Isaacson Chief Financial Officer, Treasurer - -------------------------- James M. Isaacson and Secretary (Principal Financial Officer and Principal Accounting Officer) August 28, 2000 /s/ F. Dixon McElwee, Jr. - ------------------------------- F. Dixon McElwee, Jr. Director August 28, 2000 /s/ E. James Mueller - ------------------------- E. James Mueller Director August 28, 2000 [THIS PAGE INTENTIONALLY LEFT BLANK] INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY INDEX TO FINANCIAL STATEMENTS PAGE ---- Report of independent certified public accountants F-2 Consolidated balance sheets as of May 31, 2000 and 1999 F-3 Consolidated statements of earnings for the years ended May 31, 2000, 1999 and 1998 F-4 Consolidated statement of stockholders' equity (deficit) for the years ended May 31, 2000, 1999 and 1998 F-5 Consolidated statements of cash flows for the years ended May 31, 2000, 1999 and 1998 F-6 Notes to consolidated financial statements F-8 Schedule II - Valuation and qualifying accounts S-1 F-2 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES MAY 31, 2000, 1999 AND 1998 F-2 [Letterhead of Grant Thornton LLP] REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders International Airline Support Group, Inc. We have audited the accompanying consolidated balance sheets of International Airline Support Group, Inc. and Subsidiaries as of May 31, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years ended May 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Airline Support Group, Inc. and Subsidiary as of May 31, 2000 and 1999 and the consolidated results of its operations and its consolidated cash flows for each of the three years ended May 31, 2000, in conformity with accounting principles generally accepted in the United States. We have also audited Schedule II of International Airline Support Group, Inc. and Subsidiaries for each of the three years ended May 31, 2000. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ Grant Thornton LLP Miami, Florida July 21, 2000 The accompanying notes are an integral part of these statements. F-4 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
May 31, --------------------------- 2000 1999 ----------- ----------- Current assets Cash and cash equivalents $ 721,111 $ 892,283 Accounts receivable, net of allowance for doubtful accounts of $172,722 in 2000 and $342,420 in 1999 2,647,215 2,812,500 Inventories 12,807,512 11,131,059 Deferred tax benefit 1,053,888 1,128,302 Other current assets 583,626 134,274 ------- ------- Total current assets 17,813,352 16,098,418 Property and equipment Aircraft in operations 1,114,919 - Aircraft and engines held for lease 12,832,298 4,593,854 Leasehold improvements 176,594 157,175 Machinery and equipment 1,074,576 988,983 --------- ------- 15,198,387 5,740,012 Less accumulated depreciation 2,263,110 1,734,503 --------- --------- Property and equipment, net 12,935,277 4,005,509 Other assets Investment in joint venture 3,860,136 2,373,572 Deferred debt costs, net 228,066 360,406 Deferred tax benefit 345,883 1,071,959 Deposits and other assets - 66,155 - ------ 4,434,085 3,872,092 --------- --------- $ 35,182,714 $ 23,976,019 = ========== = ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term obligations $ 1,748,642 $ 1,455,600 Accounts payable 1,359,998 2,034,888 Accrued liabilities 1,261,147 1,084,332 --------- --------- Total current liabilities 4,369,787 4,574,820 Long-term obligations, less current maturities 18,345,079 8,138,059 Commitments and contingencies - - Stockholders' equity Preferred stock - $.001 par value; authorized 2,000,000 shares; no shares outstanding in 2000 and 1999, respectively - - Common stock - $.001 par value; authorized 20,000,000 shares; issued and outstanding 2,661,723 and 2,655,723 shares in 2000 and 1999, respectively 2,661 2,655 Additional paid-in capital 13,902,909 13,936,089 Retained earnings (accumulated deficit) 527,769 (728,824) Common stock in treasury, at cost - 471,525 and 467,325 shares in 2000 and 1999, respectively (1,965,491) (1,946,780) ---------- ---------- Total stockholders' equity 12,467,848 11,263,140 $ 35,182,714 $ 23,976,019 = ========== = ==========
The accompanying notes are an integral part of this statement. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended May 31, --------------------------------------------- 2000 1999 1998 ----------- ---------- ---------- Revenues Net sales $ 23,479,801 $ 24,344,083 $ 25,647,782 Lease and service revenue 2,724,365 3,327,859 2,314,830 ----------- ---------- ---------- Total revenues 26,204,166 27,671,942 27,962,612 Cost of sales 17,350,142 18,196,982 16,781,517 Selling, general and administrative expenses 5,805,426 5,062,525 5,344,171 Depreciation 1,091,816 1,146,912 1,060,397 --------- --------- --------- Total costs 24,247,384 24,406,419 23,186,085 Equity in net earnings of unconsolidated joint venture 1,757,114 1,026,359 - --------- --------- ---------- Income from operations 3,713,896 4,291,882 4,776,527 Interest expense 1,707,998 1,314,503 1,647,770 Interest and other (income) expense (51,185) (13,082) 286,018 ----------- ---------- ---------- Earnings before income taxes 2,057,083 2,990,461 2,842,739 Provision (benefit) for income taxes 800,490 1,036,145 (2,819,933) ----------- ---------- ---------- Net earnings $ 1,256,593 $ 1,954,316 $ 5,662,672 ========= ========= ========= Per share data: Earnings per common share - basic $ .57 $ .77 $ 2.29 Weighted average shares outstanding used in basic calculation 2,189,539 2,550,940 2,471,025 ========= ========= ========= Earnings per common share - diluted $ .55 $ .72 $ 2.03 Weighted average shares outstanding used in diluted calculation 2,268,472 2,720,513 2,793,414 ========= ========= =========
The accompanying notes are an integral part of this statement. F-7 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Unrealized Retained Common Common Stock Additional Loss on Earnings Stockin Number of Par Paid-In Equity (Accumulated Treasury, Shares Value Capital Security Deficit) at Cost Total --------- ---------- ------------- ------------- ---------- ---------- ----------- Balance at June 1, 1998 2,395,095 $ 2,395 $ 13,003,686 $ - $ (8,345,812) $ - $ 4,660,269 Exercise of stock options 167,572 167 507,924 - - - 508,091 Unrealized loss on equity security - - - (22,545) - - (22,545) Net earnings - - - - 5,662,672 - 5,662,672 --------- ---------- ------------- ------------- ---------- ---------- ------------ Balance at May 31, 1998 2,562,667 2,562 13,511,610 (22,545) (2,683,140) - 10,808,487 Exercise of stock options 93,056 93 288,394 - - - 288,487 Tax benefit from exercise of stock options - - 136,085 - - - 136,085 Repurchase of common stock - - - - - (1,946,780) (1,946,780) Sale of equity security - - - 22,545 - - 22,545 Net earnings - - - - 1,954,316 - 1,954,316 --------- ---------- ------------- ------------- ---------- ---------- ------------ Balance at May 31, 1999 2,655,723 2,655 13,936,089 - (728,824) (1,946,780) 11,263,140 Exercise of stock options 6,000 6 19,557 - - - 19,563 Repurchase of stock options - - (52,737) - - - (52,737) Repurchase of common stock - - - - - (18,711) (18,711) Net earnings - - - - 1,256,593 - 1,256,593 --------- ---------- ------------- ------------- ---------- ---------- ------------ Balance at May 31, 2000 $ 2,661,723 $ 2,661 $ 13,902,909 $ - $ 527,769 $ (1,965,491) $ 12,467,848 ======= ========== ========== ============ ============= ============= =============
The accompanying notes are an integral part of this statement. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 31, -------------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 1,256,593 $ 1,954,316 $ 5,662,672 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,423,653 1,299,728 1,159,731 Gain on sale of aircraft and engines held for lease (108,611) (865,276) (267,109) Unrealized loss on equity securities - 22,545 - Earnings of joint venture (1,757,114) (1,026,359) - Decrease (increase) in deferred tax benefit 800,490 898,754 (2,890,247) Decrease (increase) in accounts receivable 91,497 (1,632,740) 374,270 (Increase) decrease in inventories (1,676,453) 613,865 (99,640) (Increase) decrease in other current assets (449,352) 60,324 (95,833) Decrease (increase) in other assets 66,155 68,378 220,467 (Decrease) increase in accounts payable and accrued liabilities (617,418) (60,778) 104,669 -------- ---------- ---------- Net cash (used in) provided by operating activities (970,560) 1,332,757 4,168,980 Cash flows from investing activities: Distributions received from joint venture 360,000 240,000 - Cash acquired in acquisition 4,754 - - Capital expenditures, including aircraft held for lease (10,011,392) (3,786,356) (1,126,085) Sale (purchase) of investments - 92,194 (114,729) Investment in joint venture (89,450) (1,587,213) - Proceeds from sale of aircraft and engines held for lease 1,176,000 5,875,000 667,000 Purchase stock of Diamond Aviation (125,000) - - -------- ---------- ---------- Net cash provided by (used in) investing activities (8,685,088) 833,625 (573,814) Cash flows from financing activities: Net borrowings (payments) under line of credit 3,866,961 2,047,754 (2,391,856) Borrowings under term loans 7,300,000 2,576,000 3,100,000 Payments under term loans (1,630,600) (4,677,963) (4,807,347) Purchase of treasury stock (18,711) (1,946,780) - Repurchase of stock options (52,737) - - Proceeds from the exercise of stock options 19,563 288,487 508,091 Increase in deferred debt costs - - (31,376) -------- --------- ------- Net cash (used in) provided by financing activities 9,484,476 (1,712,502) (3,622,488) --------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (171,172) 453,880 (27,322) Cash and cash equivalents at beginning of year 892,283 438,403 465,725 --------- ---------- ---------- Cash and cash equivalents at end of year $ 721,111 $ 892,283 $ 438,403 ============= ============= ============= Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ 1,501,503 $ 1,161,687 $ 1,505,630 ============= =============== =============== Income taxes $ 20,000 $ 58,298 $ 139,995 ============= =============== =============== Non-cash investing and financing activities: Tax benefit resulting from exercise of stock options $ - $ 136,085 $ - ============= =============== =============== (continued) INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Years Ended May 31, -------------------------------------------- 2000 1999 1998 ---------- ---------- ---------- In May 2000, the Company purchased all of the outstanding stock of Diamond Aviation for approximately $125,000 in cash and approximately $880,000 in assumed debt. In conjunction with this acquisition, the Company recorded the following assets and liabilities: Cash $ 4,754 Accounts receivable $ 73,788 Aircraft in operations $ 1,114,919 Accounts payable and accrued expenses $ (114,758) Debt $ (1,078,703)
The accompanying notes are an integral part of these statements. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000, 1999 AND 1998 NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES International Airline Support Group, Inc. and Subsidiaries (the "Company") is primarily engaged in the sale of aircraft, aircraft parts, leasing of aircraft and engines and related services. In addition, with the acquisition of Diamond Aviation (Note B), the Company is engaged in the operation of a small regional airline. Since its inception in 1982, the Company has become a primary source of replacement parts for widely operated aircraft models such as the McDonnell Douglas MD-80 and DC-9, and Embraer EMB-120. a) Basis of Presentation ----------------------- The consolidated statements include the accounts of International Airline Support Group and its wholly-owned subsidiaries. The related entities are collectively referred to as the ("Company"). All material intercompany transactions and balances have been eliminated in the consolidation. b) Cash and Cash Equivalents ---------------------------- The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents c) Inventories ----------- Inventories are stated at the lower of cost or market. The cost of aircraft, engines and aircraft parts is determined on a specific identification basis. d) Property and Equipment ------------------------ Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets, less their estimated salvage values, to operations over their estimated life utilizing straight-line and accelerated methods. The estimated lives of the depreciable assets range from 3 to 12 years. Overhaul costs on aircraft held for lease are capitalized and depreciated over the estimated service life of the overhaul. For income tax purposes, accelerated methods of depreciation are generally used. Deferred income taxes are provided for the difference between depreciation expense for tax and financial reporting purposes. Subsequent to May 31, 2000, the Company transferred an aircraft with a cost of approximately $1.9 million from Aircraft and engines held for lease to Aircraft in operations. e) Deferred Debt Costs --------------------- The deferred debt costs relate to the costs associated with obtaining the Senior Secured Revolving Credit Loan Facility and the Senior Secured Term Loans. These costs are being amortized using the interest method over the life of the respective debt issue. Accumulated amortization at May 31, 2000 and 1999, was $524,083 and $391,743, respectively. (continued) NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued f) Earnings Per Share -------------------- Basic net earnings per share equals net earnings divided by the weighted average shares outstanding during the year. The computation of diluted net earnings per share includes dilutive common stock equivalents in the weighted average shares outstanding. The reconciliation between the computations is as follows:
Basic Basic Diluted Diluted Net Earnings Shares EPS Shares EPS ---------------- --------- ----------- ---------- ---------- 2000 $ 1,256,593 2,189,539 $ .57 2,268,472 $ .55 1999 $ 1,954,316 2,550,940 $ .77 2,720,513 $ .72 1998 $ 5,662,672 2,471,025 $ 2.29 2,793,414 $ 2.03
Included in diluted shares are common stock equivalents relating to options of 78,933, 169,573, and 322,389 for 2000, 1999 and 1998, respectively. g) Revenue Recognition -------------------- Revenue from the sale of parts is recognized when products are shipped to the customer. Revenue from aircraft and engine sales is recognized when the Company has received consideration for the sales price, the risk of ownership has passed to the buyer, and collectibility is reasonably assured. Lease and service revenue are recognized on an accrual basis, unless collectibility is uncertain. Included in net sales is revenue from the exchange of parts. This revenue is recognized when the Company has fulfilled all of its obligations under the exchange agreement. h) Employee Benefit Plan ----------------------- In fiscal 1992, the Company established a contributory 401(K) plan. The plan is a defined contribution plan covering all eligible employees of the Company, to which the Company makes certain discretionary matching contributions based upon the level of its employees' contributions. The amount charged to earnings in fiscal 2000, 1999 and 1998 was insignificant. The Company does not provide any health or other benefits to retirees. i) Fair Value of Financial Instruments --------------------------------------- The carrying value of cash and cash equivalents, trade receivables, and accounts payable approximate fair value due to the short-term maturities of these instruments. The carrying value of the debt under the Senior Facility approximates fair value as it is floating rate debt. j) Income Taxes ------------- Income taxes are provided based on earnings reported for tax return purposes in addition to a provision for deferred income taxes. Deferred income taxes are provided in order to reflect the tax consequences in future years of differences between the financial statement and tax basis of assets and liabilities at each year end. (continued) NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued k) Management Estimates --------------------- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods. Actual results could differ from those estimates. l) New Accounting Pronouncement ------------------------------ In June 1998, the FASB issued Statement of Financial Accounting Standards (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS No. 133, as amended by FAS 138, establishes standards for accounting and reporting for derivative instruments, and conforms the requirements for treatment of different types of hedging activities. This statement is effective for all fiscal years beginning after June 15, 2000. Management does not expect this standard to have a significant impact on the Company's operations. m) Business Segment and Geographic Area Information ----------------------------------------------------- The Company sells aircraft and aircraft parts, and leases aircraft to foreign and domestic customers. In addition, with the acquisition of Diamond Aviation (Note B), the Company is engaged in the operation of a small regional airline. Most of the Company's sales take place on an unsecured basis, and a majority of the sales are to aircraft operators. The Company's revenues are derived primarily from customers located in the United States and all of the Company's long-lived assets are located in the United States. One customer accounted for 12% of the Company's sales in fiscal 2000 and another customer accounted for 11% of the Company's sales in fiscal 2000. No customers accounted for more than 10% of the Company's sales in fiscal 1999 and 1998. n) Accounting for Stock Based Compensation ------------------------------------------- The Company accounts for non-qualified options issued to non-employees, under SFAS 123, "Accounting for Stock Based Compensation." The exercise price of all options granted by the Company equals the market price at the date of grant. Thus, no compensation expense is recognized. The Company's employee stock option plan is accounted for using the intrinsic value method under APB 25. The Company provides disclosure of certain pro forma information as if the fair value-based method had been applied in measuring compensation expense (see Note H). o) Reclassifications ----------------- Certain prior period amounts have been reclassified to conform with the current year presentation. NOTE B - ACQUISITION In April 2000, the Company purchased all of the outstanding stock of Diamond Aviation, doing business as North-South Airways (North-South), a small regional airline located in Statesboro, Georgia that operates under an Air Carrier Certificate under Part 135 of the regulations of the Federal Aviation Administration. The Company purchased North-South for approximately $125,000 in cash and approximately $880,000 in assumed debt. The acquisition has been accounted for as a purchase and accordingly, the assets and liabilities have been recorded at their estimated fair values at the date of acquisition. No goodwill was recorded as a result of this acquisition. The results of operations of Diamond Aviation are included in the accompanying consolidated statement of earnings as of the date of the acquisition. As the amounts are not material, the unaudited proforma consolidated results of operations of the Company as if the acquisition had occurred at the beginning of fiscal 2000 and 1999 are not disclosed. NOTE C - INVESTMENT IN JOINT VENTURE On September 16, 1998, the Company entered into a joint venture (the "Air41 Joint Venture") for the acquisition of 20 DC-9-41H aircraft from Scandinavian Airlines System ("SAS"). The aircraft were leased back to SAS and the leases had an average term of 39 months. The Company's original investment in the Air41 Joint Venture was $1.4 million, which represents a 50% ownership interest. The Company's Air41 Joint Venture partner is AirCorp, Inc., a privately held company. The aircraft purchases were financed through the joint venture, utilizing non-recourse debt to the partners. In connection with this financing, the Company had to post a $1.5 million letter of credit. The Company and its joint venture partner are collectively guarantors on the Air41 Joint Venture's obligation as the lessor of the aircraft. The Air41 Joint Venture is accounted for under the equity method and the leases are treated as operating leases. The joint venture partners are exploring opportunities for the aircraft after the end of the term of the leases with SAS. Such opportunities include releasing the aircraft with SAS, leasing the aircraft to one or more different lessee(s), selling the aircraft, parting out the aircraft, or directly placing the aircraft into either passenger or cargo service. In fiscal 2000, one of the aircraft came off of lease and was then leased to another unrelated party. At this time, the joint venture has no firm commitment for the other aircraft after the SAS leases expire. A condensed summary of the joint venture's operations follows: As of As of May 31, 2000 May 31, 1999 --------------- --------------- Partners' capital accounts $ 7,720,272 $ 4,747,144 =============== =============== Period from September 16, 1999 (Date of of Inception) Year Ended Through May 31, 2000 May 31, 2000 --------------- --------------- Revenues $ 14,475,000 $ 10,200,000 Expenses 10,960,773 8,147,282 ---------- --------- Net earnings $ 3,514,227 $ 2,052,718 ================ ================ Included in the Company's consolidated retained earnings is approximately $2,783,000 relating to the Company's share in the earnings of the Air41 Joint Venture. NOTE D - INVENTORIES Inventories at May 31, 2000 and 1999 consisted of the following: 2000 1999 ------------- ------------- Aircraft parts $ 7,382,143 $ 8,679,059 Aircraft and engines available for sale 5,425,369 2,452,000 --------------- --------------- $ 12,807,512 $ 11,131,059 ================ =============== NOTE E - LONG-TERM OBLIGATIONS Long-term obligations at May 31, 2000 and 1999 consisted of the following: 2000 1999 ------------ ------------- Senior Secured Revolving Credit Loans $ 11,009,490 $ 7,053,829 Term Loans 9,084,231 2,539,830 --------- --------- 20,093,721 9,593,659 Less: Current maturities 1,748,642 1,455,600 --------- --------- $ 18,345,079 $ 8,138,059 ================ =============== In October 1996 the Company entered into a Credit Agreement with the Bank of New York, which provided for a $3 million term loan (Term Loan-A) and up to an $11 million revolving credit. The Credit Facility is secured by substantially all of the assets of the Company and availability of amounts for borrowing is subject to certain limitations and restrictions. The interest rate on the Credit Facility which fluctuates based on certain financial ratios of the Company, was the lenders prime rate less .25% (9.25% at May 31, 2000). The revolving line of credit was increased to $13 million in March 1997 and to $14 million in fiscal 1998. As of May 31, 2000, the available line of credit is approximately $1.7 million. The credit agreement includes certain covenants which provide, among other things, restrictions relating to the maintenance of consolidated net worth and other financial ratios, as well as a restriction on the payment of dividends. During fiscal 1998, the Credit Agreement was amended twice to create two additional term loan facilities (term loans C and D) in the amounts of $1.5 million and $1.6 million and to add $1 million (for capital expenditures) to the revolving credit line. The two additional term loans were repaid in full in fiscal 1998. In fiscal 1999, the Company borrowed an additional $1.8 million on these additional term loans of which $900,000 was paid prior to end of fiscal 1999. During fiscal 2000, the Credit Agreement was amended twice to create an additional term loan facility (term loans E and F) in the amount of $7.3 million to finance the purchase of three aircraft. The scheduled maturities of long-term obligations in each of the next four years until maturity subsequent to May 31, 2000 are as follows: 2001 - $1,748,642 and 2002 - $18,345,078. NOTE F - COMMITMENTS AND CONTINGENCIES Leases ------ The Company leases warehouse facilities, office space, as well as certain equipment under long-term operating lease agreements. Rental expense under these leases for the years ended May 31, 2000, 1999 and 1998 was approximately $279,000, $286,900 and $280,000, respectively. At May 31, 2000, the future minimum payments on non-cancellable operating leases are as follows: 2001 - $287,406, 2002 - $274,061, 2003 - $50,442, and 2004 - $29,425. The Company currently leases aircraft and engines to customers under long-term operating lease agreements. In addition to minimum base rentals, the lease agreements often require additional rent based upon aircraft and engine usage. The net investment in aircraft and engines held for or leased to customers was approximately $11,513,000 and $3,749,000 at May 31, 2000 and 1999, respectively. At May 31, 2000, the future rental income under the long-term operating leases are as follows: 2001 - $1,344,000, 2002 - $1,263,000, 2003 - $1,020,000 and 2004 - $510,000. NOTE G - INCOME TAXES The provision (benefit) for income taxes for the years ended May 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998 ---------- ---------- ---------- Current provision: Federal $ - $ 76,138 $ 69,906 State - - - --------- ----------- ------------ - 76,138 69,906 Deferred provision 800,490 960,007 (2,889,839) --------- ----------- ------------ $ 800,490 $ 1,036,145 $ (2,819,933) ======= ========= ========== The tax effect of the Company's temporary differences and carry forwards is as follows: 2000 1999 ----------- ----------- Deferred tax (benefits) - current: Bad debt reserve (62,000) (129,000) Inventory capitalization (358,000) (311,000) Accrued payroll (86,000) (169,000) Accrued vacation (14,000) (15,000) Reserve for inventory (534,000) (504,000) -------- -------- $ (1,054,000) $ (1,128,000) ================= ================ Deferred tax liabilities (benefits) - non-current: Air41 Joint Venture $ 281,000 $ 210,000 Depreciation and amortization 3,879,000 513,000 Net operating loss carryforward - federal (3,923,000) (1,327,000) Net operating loss carryforward - state (388,000) (256,000) Minimum tax credit - federal (222,000) (303,000) Other, net 27,000 91,000 ------ ------ $ (346,000) $ (1,072,000) ============== ================
NOTE G - INCOME TAXES - Continued The Company recorded a valuation allowance equal to the amount of the deferred tax benefits at May 31, 1997. In fiscal 1998, the Company completely relieved the $2,586,000 valuation allowance as they determined that it was more likely than not that the Company would recognize the deferred tax benefits based on the Company's recent earnings history and management's estimate that future profits will be sufficient to realize these benefits. The following table summarizes the differences between the Company's effective tax rate and the statutory federal rate as follows: 2000 1999 1998 ------- ------- ------- Statutory federal rate 34.0% 34.0% 34.0% Tax expense(benefit) from net operating loss carryforward .7% - (134.2) State income taxes - 1.7 - Other 4.2% (1.1) 1.0 ------- -------- -------- Effective tax rate 38.9% 34.6% (99.2)% ====== ====== ======= The Company has net operating loss carryforwards for federal tax purposes of approximately $11.5 million. The net operating losses will expire in years 2010 through 2020. The Company also has a federal minimum tax credit carryover of approximately $222,000 which may be utilized in future years to the extent that the regular tax liability exceeds the alternative minimum tax. Certain provisions of the tax law may limit the net operating loss and credit carryforwards available for use in any given year in the event of a significant change in ownership interest. NOTE H - STOCK OPTIONS Under the terms of the Company's 1996 Stock Option Plan (the "Plan"), the Company has 967,782 shares of common stock reserved. As of May 31, 2000, 166,207 shares are available to be issued under the Plan. The exercise price of all options granted by the Company to the employees equals the market price at the date of the grant. No compensation expense has been recognized. The options, other than those issued to the executive officers, vest immediately and expire 10 years from the date of the grant. On December 3, 1998, the Company's Board of Directors approved and ratified the repricing of certain unexercised employee stock options granted under the Company's stock option plans. As a result, options granted to purchase 131,173 shares of the Company's common stock were repriced from $4.50 - $6.94 per share to $3.31 per share. The 131,173 shares are reflected in both the granted and cancelled captions in the accompanying table for fiscal year ending May 31, 1999. The pro forma effect on earnings from this repricing is included in the pro forma net earnings shown below. (continued) NOTE H - STOCK OPTIONS - Continued Had compensation expense for the Stock Option Plan and non-qualified options to employees been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net earnings and earnings per share would have been changed to the pro forma amounts below.
2000 1999 1998 ----------- ----------- ----------- Net earnings As reported $ 1,256,593 $ 1,954,316 $ 5,662,672 Pro forma $ 1,222,093 $ 1,743,076 $ 5,400,656 Basic earnings per share As reported $ .57 $ .77 $ 2.29 Pro forma $ .56 $ .68 $ 2.19 Diluted earnings per share As reported $ .55 $ .72 $ 2.03 Pro forma $ .54 $ .64 $ 1.93
The above pro forma disclosures may not be representative of the effects on reported net earnings for future years as certain options vest over several years and the Company may continue to grant options to employees. The fair value of each option grant is estimated on the date of grant using the binomial option-pricing model with the following weighted-average assumptions used for grants in fiscal 2000, 1999 and 1998, respectively: dividend yield of 0.0 percent for all years; expected volatility of 40 percent, 40 percent and 30 percent; risk-free interest rates of 6.50 percent; 5.50 percent and 6.0 percent; and expected holding periods of 4 years. A summary of the status of the Company's fixed stock options as of May 31, 2000, 1999 and 1998, and changes during the years ending on those dates is as follows:
May 31, 2000 May 31, 1999 May 31, 1998 ----------------- --------------- --------------- Weighted - Weighted - Weighted - Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- ------ ------- ------ -------- -------- Outstanding at beginning of year 593,154 3.12 563,210 $ 3.42 598,609 $ 2.99 Granted 25,000 3.44 254,173 3.31 137,173 4.82 Exercised (6,000) 3.26 (93,056) 3.10 (167,572) 3.03 Cancelled (82,207) 3.10 (131,173) 4.78 (5,000) 3.00 -------- ------ ------- ------ -------- -------- Outstanding at end of year 529,947 3.13 593,154 3.12 563,210 3.42 ======== ====== ======== ====== ======= ======= Options exercisable at end of year 447,185 437,174 415,012 Weighted-average fair value of options granted during the year $ 1.38 $ 1.28 $ 1.90
(continued) NOTE H - STOCK OPTIONS - Continued The following information applies to options outstanding at May 31, 2000:
Options Outstanding Options Exercisable -------------------- ----------------------- Weighted - Average Remaining Weighted - Weighted - Ranges of Contractual Average Average Exercise Prices Shares Life Exercise Price Shares Exercise Price ----------------- -------- ------------ ----------- ---------- -------------- $2.75 - $3.44 529,947 7.35 years $ 3.13 447,185 $ 3.16 ======== =======
NOTE I - STOCK REPURCHASE In the third quarter of 1999, the Company began acquiring shares of its common stock in connection with a stock repurchase program approved by the Board of Directors in December 1998. During fiscal 2000 and the six months ended May 31, 1999, the Company repurchased 4,200 and 467,325 shares, respectively of its common stock for a total expenditure of $18,711 and $1,946,780, respectively. The Company does not currently have a formal plan in place to purchase any additional shares; however, the Company is authorized by the Board to make further purchases if deemed to be in the best interests of the Company. Any such purchases must be also approved by the Company's bank. NOTE J - RELATED PARTY TRANSACTIONS Under the commission agreement entered into with the Company during fiscal 1994, an outside director is entitled to 3-4% of revenues generated from sales to customers brought in by the director plus a fixed monthly fee. The Company paid the outside director approximately $60,000, $96,000 and $96,000 for the years ended May 31, 2000, 1999 and 1998. In early fiscal 2001, the Company paid the outside director an additional $60,000. This agreement can be canceled by either party at any time. In connection with obtaining the Credit Agreement with the Bank of New York, the Company agreed to pay the placement agent a $250,000 placement fee. A director of the Company was a principal of the placement agent. In fiscal 1997, the Company paid the placement agent $200,000 of this fee, and the remaining $50,000 was paid in fiscal 1998. In addition, the Company paid this director $86,000 during both fiscal 1999 and 1998 for services rendered to the Company in connection with the identification and evaluation of acquisition opportunities. An executive of the Company's partner in the Air41 Joint Venture was also an executive of one of the Company's significant customers until the fourth quarter of fiscal 2000. Total sales to this significant customer were approximately $826,000, $1.6 million, and $2 million in fiscal 2000, 1999, and 1998, respectively. As of May 31, 2000 and 1999, the accounts receivable from this significant customer was approximately $157,000 and $109,000, respectively. During fiscal 1999, the Company purchased three engines from the Company's joint venture partner for $3,120,000. (continued) NOTE J - RELATED PARTY TRANSACTIONS - Continued An executive officer of the Company is a member of the Board of Directors of one of the Company's customers. The Company both purchases and sells inventory to this customer. Total sales to this customer were $80,000, $33,847 and $0 in fiscal 2000, 1999 and 1998, respectively. As of May 31, 2000 and 1999, the accounts receivable from this customer was approximately $20,000 and $69,000, respectively. Total purchases from this customer were approximately $1.6 million, $1.2 million and $0 in fiscal 2000, 1999 and 1998, respectively. In fiscal 1999, the Company received $250,000 of consulting income from this customer. As of May 31, 2000 and 1999, the Company has a payable to this customer of $104,288 and $756,049, respectively. NOTE K - FOURTH QUARTER ADJUSTMENTS In fiscal 1998, the Company recorded a fourth quarter tax benefit of approximately $1,100,000 as a result of adjusting the Company's estimated deferred tax assets. NOTE L - ACCRUED LIABILITIES Accrued liabilities at May 31, 2000 and 1999 consisted of the following items: 2000 1999 ----------- ----------- Customer deposits $ 189,554 $ 350,097 Accrued payroll 555,101 597,442 Accrued property taxes 88,795 48,214 Other 427,697 88,579 ------- ------ $ 1,261,147 $ 1,084,332 =============== =============== NOTE M - EMPLOYMENT AGREEMENTS In October 1996, the Company entered into employment agreements with two of its executive officers with a term of five years. The agreements provide the officers with a certain minimum annual salary plus bonus. The agreements provide the officers with an option to terminate their agreements and receive a lump sum payment equal to the officer's average annual compensation paid by the Company for the most recent two years upon a change in control of the Company. NOTE N - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Year Quarter Quarter Quarter Quarter Total --------------- ---------- ----------- ----------- ---------- --------- (In Thousands, Except for Per Share Information) 2000 ---- Revenues $ 8,999 $ 6,207 $ 5,359 $ 5,639 $ 26,204 Operating income 1,297 1,118 622 677 3,714 Net earnings available for common shareholders 597 454 116 90 1,257 Earnings per share - basic .27 .21 .05 .04 .57 Earnings per share - diluted .25 .20 .05 .04 .55* 1999 ---- Revenues $ 5,575 $ 5,836 $ 5,729 $ 10,532 $ 27,672 Operating income 1,017 1,226 1,246 803 4,292 Net earnings available for common shareholders 442 539 555 418 1,954 Earnings per share - basic .17 .21 .22 .17 .77 Earnings per share - diluted .16 .20 .21 .15 .72
* Difference of $.01 from statement of earnings for fiscal 2000 full year due to use of the average quarterly stock prices in the quarterly earnings per share - diluted calculations, while the fiscal 2000 full year earnings per share - - diluted calculation uses the average yearly stock price.
S-1 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MAY 31, 1998, 1999 AND 2000 COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- Additions ---------- Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period ----------- ----------- ----------- ---------- ---------- Year ended May 31, 1998 - ----------------------- Reserves deducted from assets to which they apply: Allowance for possible losses on accounts receivable $ 610,476 $ 74,648 $ 171,124(a) $ 514,000 ========== ========== ========== ========== Inventory obsolescense reserve $ 210,847 $ 752,717 $ - $ 963,564 ========== ========== ========== ========== Year ended May 31, 1999 - ----------------------- Reserves deducted from assets to which they apply: Allowance for possible losses on accounts receivable $ 514,000 $ - $ 171,580(a) $ 342,420 ========== ========== =========== ========== Inventory obsolescense reserve $ 963,564 $ 376,000 $ - $1,339,564 ========== ========== =========== ========== Year ended May 31, 2000 - ----------------------- Reserves deducted from assets to which they apply: Allowance for possible losses on accounts receivable $ 342,420 $ 172,893 $ 342,591(a) $ 172,722 ========== ========== ========== ========== Inventory obsolescense reserve $1,339,564 $ 107,518 $ - $1,447,082 ========== ========== ========== ========== (a) Write-off of accounts receivable against the reserve.
Atlanta-1854286 v1-8/26/00 11:54 AM Atlanta-1854286 v1-8/26/00 11:54 AM EXHIBIT 21 LIST OF SUBSIDIARIES -------------------- ISAG - Virgin Islands, Inc. United States Virgin Islands Diamond Aviation, Inc. Georgia d/b/a North-South Airways North-South Airways, Inc. Delaware EXHIBIT 23 AUDITOR'S CONSENT We have issued our report dated July 21, 2000, accompanying the consolidated financial statements and schedule appearing in the Annual Report of International Airline Support Group, Inc. and Subsidiaries on Form 10-K for the year ended May 31, 2000. We hereby consent to the incorporation by reference of the aforementioned report in the Registration Statements of International Airline Support Group, Inc. and Subsidiaries on Forms S-8 (Registration Nos. 333-13979, 333-41231 and 333-90523). /s/ Grant Thornton LLP Miami, Florida August 28, 2000 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 12-MOS May-31-2000 May-31-2000 721,111 0 2,819,937 172,722 12,807,512 17,813,352 15,198,387 2,263,110 35,182,714 4,369,787 18,345,079 2,661 0 0 13,902,909 35,182,714 23,479,801 2,724,365 17,350,142 24,247,384 0 172,893 1,707,998 2,057,083 800,490 0 0 0 0 1,256,593 0.57 0.55
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