-----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, N4TrANeT7WB1Ho8oQqEi7BAQOLrpwIgAcmsk8aDEnx7tnYIUWGfsVPtWSXrYaxAK ZEgjuBc2EI7SkK03Db0WJA== 0000859307-02-000002.txt : 20020413 0000859307-02-000002.hdr.sgml : 20020413 ACCESSION NUMBER: 0000859307-02-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011130 FILED AS OF DATE: 20020114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL AIRLINE SUPPORT GROUP INC CENTRAL INDEX KEY: 0000859307 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 592223025 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12893 FILM NUMBER: 2508859 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-Q 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended November 30, 2001 or [ ] 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. ----------------------------------------- Delaware 59-2223025 -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1954 Airport Road, Suite 200, Atlanta, GA 30341 - ----------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (770) 455-7575 --------------- 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 __ --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The number of shares of the Company's common stock outstanding as of January 7, 2002 was 2,181,497. FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY INDEX Page No. --------- Part I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of May 31, 2001 and November 30, 2001 3 Condensed Consolidated Statements of Operations for the Three Months and Six months Ended November 30, 2000 and November 30, 2001 4 Condensed Consolidated Statements of Cash Flows for the Six months Ended November 30, 2000 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 Part II OTHER INFORMATION Item 1. Legal Proceedings 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote Of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 18 FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS
May 31, November 30 2001* 2001 ------------------ -------------- (unaudited) Current assets Cash and cash equivalents $ 70,290 $ 161,586 Accounts receivable, net of allowance for doubtful accounts of approximately $301,424 at May 31, 2001 and $348,570 at November 30, 2001 2,558,176 1,617,802 Inventories 12,471,871 9,601,159 Deferred tax benefit - current 1,088,953 1,016,250 Other current assets 198,449 426,952 Current portion note receivable - related party 78,454 141,818 --------- --------- Total current assets 16,466,193 12,965,567 Property and equipment Aircraft and engines held for lease 13,973,285 17,140,844 Leasehold improvements 166,991 166,991 Machinery and equipment 1,089,341 1,114,832 --------- --------- 15,229,617 18,422,667 Accumulated depreciation (2,643,867) (2,674,869) ----------- ----------- Property and equipment, net 12,585,750 15,747,798 Other assets Investment in joint ventures 5,559,057 - Note Receivable - related party 725,714 650,456 Deferred debt costs, net 232,373 136,269 Deferred tax benefit 83,745 2,309,338 Deposits and other assets 152,440 3,950 --------- ---------- Total other assets 6,753,329 3,100,013 --------- --------- $ 35,805,272 $ 31,813,378 = ========== = ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term obligations $ 2,387,642 $ 20,691,427 Accounts payable 1,965,179 1,457,092 Accrued expenses 785,867 670,044 ------- ------- Total current liabilities 5,138,688 22,818,563 Long-term obligations, less current maturities 18,004,574 - Commitments and contingencies - - Stockholders' equity Preferred stock - $.001 par value; authorized 2,000,000 shares; 0 shares outstanding at May 31, 2001 and November 30, 2001. - - Common stock - $.001 par value; authorized 20,000,000 shares; issued and outstanding 2,661,723 shares at May 31, 2001 and November 30, 2001 2,661 2,661 Additional paid-in capital 13,902,909 13,902,909 Deferred Compensation - (76,109) Retained earnings (accumulated deficit) 871,230 (2,805,770) Common stock held in treasury, at cost - 640,226 shares at May 31, 2001 and 480,226 shares at November 30, 2001 (2,114,790) (2,028,876) ---------- ---------- Total stockholders' equity 12,662,010 8,994,815 ---------- ----------- $ 35,805,272 $ 31,813,378 = ========== = ==========
*Condensed from audited Financial Statements The accompanying notes are an integral part of these condensed financial statements 3 FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended November 30, November 30, 2000 2001 2000 2001 ----------- ----------- ----------- ------------ Revenues Net sales $ 3,648,533 $ 3,671,601 $ 9,828,730 $ 7,599,459 Aircraft operations - - 171,579 - Lease and service revenue 1,026,302 545,250 1,444,696 1,273,882 --------- --------- --------- --------- Total revenues 4,674,835 4,216,851 11,445,005 8,873,341 Cost of sales 2,660,639 2,781,364 7,672,877 5,680,490 Selling, general and administrative expenses 1,449,083 1,129,277 2,886,053 2,293,490 Depreciation and amortization 295,444 248,059 515,751 484,998 ------- ------- ------- ------- Total operating costs 4,405,166 4,158,699 11,074,681 8,458,978 Equity in net earnings of unconsolidated subsidiaries 457,720 185,037 928,235 341,418 Impairment of investment in joint venture - (6,024,320) - (6,024,320) ---------- ----------- ---------- ----------- Earnings (loss) from operations 727,389 (5,781,131) 1,298,559 (5,268,539) Interest expense 481,999 351,264 1,013,659 767,551 Interest income and other (income) expenses 26,499 (194,983) (51,682) (206,200) ------ --------- -------- --------- Earnings (loss) before income taxes 218,891 (5,937,412) 336,582 (5,829,890) Provision (benefit) for income taxes 101,915 (2,259,591) 149,922 (2,152,890) ------- ----------- ------- ----------- Net earnings (loss) $ 116,976 (3,677,821) $ 186,660 (3,677,000) = ======= =========== = ======= =========== Per share data: Earnings (loss) per share Available for common stockholders - basic $ 0.05 $ (1.69) $ 0.09 $ (1.75) Weighted average number of Common stock outstanding - basic 2,190,198 2,181,497 2,190,198 2,101,060 ========= ========= ========= ========= Earnings (loss) per share Available for common Stockholders - diluted $ 0.05 $ (1.69) $ 0.09 $ (1.75) Weighted average number of common stock outstanding - diluted 2,191,092 2,181,497 2,190,795 2,101,060 ========= ========= ========= =========
The accompanying notes are an integral part of these condensed financial statements 4 FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended November 30, 2000 2001 ------------ ------------ Cash flows from operating activities: Net earnings (loss) $ 186,660 $ (3,677,001) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Impairment of investment in joint venture - 6,024,320 Depreciation and amortization 515,751 484,998 Equity in net earnings of unconsolidated subsidiaries (928,235) (341,418) Provision (benefit) for income taxes 149,922 (2,152,890) Changes in other assets and liabilities 2,176,010 (263,138) --------- -------- Total adjustments 1,913,448 3,751,872 Net cash provided by operating activities 2,100,108 74,871 Cash flows from investing activities: Capital equipment additions (15,858) (25,491) Investment in unconsolidated joint ventures (287,649) (28,133) Distributions received from joint venture, net 180,000 121,020 Additions to aircraft and engines held for lease, net (2,871,428) (350,182) ----------- --------- Net cash used in investing activities (2,994,935) (282,786) Cash flows from financing activities: Net increase in debt obligations 875,012 299,211 ------- ------- Net cash provided by financing activities 875,012 299,211 ------- ------- Net increase (decrease) in cash (19,815) 91,296 Cash and cash equivalents at beginning of period 721,111 70,290 ------- ------- Cash and cash equivalents at end of period $ 701,296 161,586 = ======= =======
The accompanying notes are an integral part of these condensed financial statements 5 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain adjustments (consisting only of normal and recurring adjustments) necessary to present fairly International Airline Support Group, Inc. and Subsidiaries' condensed consolidated balance sheets as of May 31, 2001 and November 30, 2001, the condensed consolidated statements of earnings for the three and six months ended November 30, 2000 and November 30, 2001, and the condensed consolidated statements of cash flows for the six months ended November 30, 2000 and November 30, 2001. The accounting policies followed by the Company are described in the May 31, 2001 financial statements. The results of operations for the three and six months ended November 30, 2001 are not necessarily indicative of the results to be expected for the full year. 2. Inventories consisted of the following: May 31,2001 November 30,2001 ------------ ----------------- Aircraft parts $ 6,644,053 $ 7,245,930 Aircraft and Engines available for sale 5,827,818 2,355,229 ------------ ----------- $12,471,871 $ 9,601,159 ============ =========== 3. Earnings (Loss) Per Share: The Company's basic earnings (loss) per share are calculated by dividing net earnings (loss) by the weighted average shares outstanding during the period. The computation of diluted earnings (loss) per share includes all dilutive common stock equivalents in the weighted average shares outstanding. Financial Accounting Standards Board (FASB) Statement 128 "Earnings Per Share" was adopted by the Company on January 1, 1998 and requires the dual presentation of basic and diluted earnings per share on the face of the statement of earnings. The reconciliation between the computations is as follows: Three Months Ended Net Basic Basic Diluted Diluted November 30, Earnings (loss) Shares EPS Shares EPS - ------------- --------------- ------ --- ------ --- 2000 $ 116,976 2,190,198 $ 0.05 2,191,092 $ 0.05 2001 $ (3,677,821) 2,181,497 $(1.69) 2,181,497 $(1.69) Six Months Ended Net Basic Basic Diluted Diluted November 30, Earnings (loss) Shares EPS Shares EPS - ------------- ---------------- ------ --- ------ --- 2000 $ 186,660 2,190,198 $ 0.09 2,190,795 $ 0.09 2001 $ (3,677,001) 2,101,060 $(1.75) 2,101,060 $(1.75) INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Earnings Per Share (cont.): Stock options to purchase 50,000 shares of the Company's common stock at exercise prices ranging from $0.80 to $1.25 have been excluded from the diluted share calculation for the three and six months ended November 30, 2001 as the exercise prices are greater than the Company's average stock price during the period. In August 2001, the Board of Directors approved the adoption of a Restricted Stock Plan (the "Plan") to make restricted stock grants to employees of the Company. The Board reserved 167,800 shares of the Company's common stock to be issued under the Plan. On September 1, 2001, the Company issued 160,000 shares of the Company's common stock under the Plan from the Company's treasury stock. The stock issued pursuant to the Plan vests if the employee participating in the Plan remains in the Company's employ on the fifth anniversary of the date of the grant to the employee. If the employee ceases to be an employee of the Company prior to the fifth anniversary date, the employee forfeits the shares of restricted stock issued to him or her, with certain exceptions. Accordingly, the Company recorded Deferred Compensation of $85,914 upon issuance of the stock and amortized $9,805 into expense during the three months ended November 30, 2001 4. Credit Facility: 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 and the term loan facilities mature on December 2005. The interest rate that the Company is assessed is subject to fluctuation and may change based upon certain financial covenants. As of January 7, 2002, the interest rate under the Credit Facility was the lender's base rate minus 0.25% (4.50%). 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 and in the Amendments to the Credit Facility filed on various dates as listed below in Item 6. Exhibits and Reports on Form 8-K. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Credit Facility (cont.): As of the date hereof, the Company was not in compliance with the covenant set forth in the Credit Agreement that requires the Company to maintain a specified amount of consolidated tangible net worth. The Company was not in compliance with the covenant because of the impairment of its investment in the Air 41 Joint Venture (as defined below). Had Air 41 not written down its investment in its aircraft, the Company would be in compliance with all of the covenants in its Credit Agreement. The circumstances resulting in the impairment are described below in Note 7--Unconsolidated Subsidiaries and Note 8--Recent Events. As a result of the default, $18,094,835 of the Company's total long-term debt has been classified as a current liability in the accompanying balance sheet at November 30, 2001. The Company is negotiating an amendment to the Credit Agreement that, among other things, would cure the default by reducing the amount of consolidated tangible net worth that the Company is required to maintain. The Company believes that the amendment will be executed in the near future. The Company's senior lender has agreed that it will not refuse to extend credit to the Company under the revolving credit facility due to the occurrence of the default. If the amendment is not executed by the lender the Company's liquidity would be significantly impacted which could result in the inability of the Company to satisfy its obligations in the normal course of business. 5. Supplemental Cash Flow Disclosures: Cash payments for interest were $851,000 and $634,000 for the six months ended November 30, 2000 and November 30, 2001, respectively. Cash and cash equivalents include $54,000 and $84,000 of restricted cash at May 31, 2001 and November 30, 2001, respectively. Restricted cash includes customer receipts deposited into the Company's lockbox account, which are applied the next business day against the outstanding amount of the Credit Facility, and customer deposits on aircraft and engines leases. 6. Related Party Transactions: The Company had notes receivables from an affiliate in the principal amount of $792,274 as of November 30, 2001, relating to loans provided to North-South Airways, which are secured by aircraft operated by the airline. The loans are priced at market rates, ranging from 8.75% to 9.50%, with monthly principal payments extending through August 2004. For more information, see Note 7 - Unconsolidated Subsidiaries. As of November 30, 2001, the Company leased five EMB-120 aircraft to North-South Airways. The leases originated from September 2000 to November 2001 and have three-year terms. The leases contain similar terms and conditions to other EMB-120 aircraft leases completed by the Company. Total lease revenue from these aircraft leases was $450,000 for the six months ended November 30, 2001. As of November 30, 2001 and May 31, 2001, the Company had receivables due from North-South Airways, in addition to the notes discussed in the previous paragraph, of $185,000 and $80,000, respectively, related to advances made by the Company. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Unconsolidated Subsidiaries: On September 16, 1998, the Company entered into a joint venture (the "Air 41 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 Air 41 Joint Venture was approximately $1.5 million. The Company's Air 41 Joint Venture partner is AirCorp, Inc., a privately held company. The aircraft were financed through the joint venture, utilizing non-recourse debt to the partners. Substantially all of the Air 41 Joint Venture's cash flow is pledged to service the non-recourse debt. The Air 41 Joint Venture is accounted for under the equity method and the leases are treated as operating leases. As a result of the recent events discussed below in Note 8--Recent Events, the Company decided to record an impairment charge of $6,024,320 related to its Air 41 Joint Venture. Before the $6,024,320 write down in the aircraft of the Air 41 Joint Venture, Equity in Net Earnings of Unconsolidated Joint Ventures related to the Air 41 Joint Venture for the first six months of fiscal 2002 was $600,000. This write down was a non-cash charge. The Air 41 Joint Venture is in discussion with a number of carriers for the re-lease of these aircraft as they are returned off-lease, however there can be no assurance that any of these aircraft will be able to be re-leased on as favorable terms, if at all. Should the Air 41 Joint Venture be unable to re-lease or sell these aircraft, the Company's stated operating income would be significantly impacted. Furthermore, because substantially all of the Air 41 Joint Venture's cash flow is pledged to service its debt, the Company does not expect to receive cash distributions from the Air 41 Joint Venture in the near future. The Company is exploring opportunities for the aircraft after the end of the term of the leases with SAS. Such opportunities include leasing the aircraft to one or more different lessees, selling the aircraft, parting out the aircraft, or directly placing the aircraft into either passenger or cargo service whereby the Company may have a principal interest in an airline. At this time, other than as previously mentioned, the Company has one commitment for the aircraft after the SAS leases expire. During the second quarter of fiscal 2001, the Company's regional airline subsidiary, doing business as North-South Airways, sold additional shares of stock raising approximately $1,000,000. This sale of stock reduced the Company's ownership interest in North-South Airways from 100% to approximately 35%. Accordingly commencing September 1, 2000, the Company is accounting for its investment in North-South Airways under the equity method. Equity in Net Loss of Unconsolidated Joint Ventures related to North-South Airways was $259,000 for the six months ended November 30, 2001. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. Recent Events The aviation industry has been negatively impacted by the September 11, 2001 terrorist attack on the United States. As a result, many airlines are facing extremely difficult financial situations and have significantly reduced the number of flights and aircraft operated. Accordingly, many aspects of the Company's business have been impacted and the Company is evaluating their long-term effect. The lasting results of the terrorist attack on the aviation industry have adversely affected the Company's operating results by 1) reducing aircraft parts sales from historical levels, 2) making it difficult to attract and retain employees and 3) limiting the Company's access to capital at competitive rates. The Company is unable to predict how long the results of the terrorist attacks and downturn in market conditions will adversely affect the Company's operations. Given the recent events, the Air 41 Joint Venture has evaluated the market value of its aircraft and determined that their value was negatively impacted by the events described above. As a result of such impairment, the Air 41 Joint Venture has written down the carrying value of its aircraft which is reflected as a write down to the investment in IASG's unconsolidated subsidiaries. As of November 30, 2001, the Company's investment in the Air 41 Joint Venture was completely written off. Although there is no cash flow impact, the write down to the Air 41 Joint Venture has a negative impact on the Company's statement of operations and overall net worth. As of November 30, 2001, six of the AIR 41 Joint Venture aircraft were off lease and an additional four are scheduled to come off lease during the remaining portion of fiscal 2002. Although it is actively marketing these aircraft in anticipation of their return off-lease, the Air 41 Joint Venture currently has only one commitment related to the disposition of these aircraft. 9. Net Operating Loss Carryforwards: As of November 30, 2001, the Company had net operating loss carryforwards for federal tax purposes of approximately $11.3 million, which results in a deferred tax asset of approximately $4.2 million. The Company's policy is to record a valuation allowance against its deferred tax assets if the Company believes that it is more likely than not that it will not recognize the deferred tax benefits. Based on the Company's recent earnings history and management's estimate of future profits, the Company believes that it is more likely than not that its future profits and the expected timing of temporary difference reversals will be sufficient to realize these benefits. However, management will continue to monitor the realizability of these benefits. If in the future the Company no longer believes that it is more likely than not that it will recognize the deferred tax benefits, a valuation allowance will be recorded, which could have a significant impact on the Company's statement of earnings and net worth. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 10. New Accounting Pronouncements: In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill to be tested for impairment under certain circumstances and written off when impaired rather than being amortized as previous standards required. The adoption of SFAS 141 did not have a material effect on the Company's operating results or financial position and, as the Company has no goodwill or intangibles generated as a result of a business combination, the adoption of SFAS 142 is not expected to have an impact on the Company's operations. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 144 retained substantially all of the requirements of SFAS No. 121 while resolving certain implementation issues. SFAS No. 144 is effective for fiscal 2003, with early application encouraged. The adoption of SFAS No. 144 is not expected to have an impact on the Company's operations. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following is management's discussion and analysis of certain significant factors which have affected the Company's operating results and financial position during the periods included in the accompanying condensed consolidated financial statements. RESULTS OF OPERATIONS: - ------------------------ Revenues - -------- Total revenue for the three and six months ended November 30, 2001 was $4.2 million and $8.9 million, respectively, compared to $4.7 million and $11.4 million, respectively, during the three and six months ended November 30, 2000. Net sales for the three and six months ended November 30, 2001 were $3.7 million and $7.6 million, respectively, compared to $3.6 million and $9.8 million, respectively, during the three and six months ended November 30, 2000, primarily relating to a decrease in parts sales and aircraft and engine sales. Net sales have been negatively impacted due to increased pricing pressure arising from the financial difficulties of many airlines and other spare parts redistributors. The airlines have faced significant declines in traffic, while banks are electing to liquidate insolvent competitors as opposed to reorganization. The Company has attempted to offset and mitigate these negative sales trends by expanding its product lines, but no assurances can be made that sales revenue will increase in the short term. Although the events of September 11, 2001 have certainly exacerbated these negative trends, the Company was already experiencing these trends due to an overall slowdown in the aviation industry as a whole causing decreased demand for the Company's inventory sales. Net sales for the three months ended November 30, 2001 were slightly higher than the three months ended November 30, 2000 due to higher aircraft and engine sales. Aircraft and engine sales are unpredictable transactions and may fluctuate significantly from year to year, dependent, in part, upon the Company's ability to purchase an aircraft or engine at an attractive price and resell it within a relatively brief period of time, as well as the overall market for used aircraft or engines. Lease and service revenue decreased to $545,000 for the three months ended November 30, 2001 from $1,026,000 for the three months ended November 30, 2000, primarily due to fewer assets being under lease. Lease and service revenue decreased to $1.3 million for the six months ended November 30, 2001 from $1.4 million for the six months ended November 30, 2000, primarily due to fewer assets under lease during the second three months of fiscal 2002. Under the equity method of accounting, lease revenue from the Air 41 Joint Venture is not included in the Company's revenue. There was no revenue from aircraft operations for the three or six months ended November 30, 2001, because commencing September 1, 2000, the Company began accounting for its investment in North-South Airways under the equity method. Cost of Sales - --------------- Cost of sales increased 4.5% from $2.7 million during the three months ended November 30, 2000 to $2.8 million during the three months ended November 30, 2001. This increase was due to the slight increase in sales during this period. For the six months ended November 30, 2001, cost of sales decreased 26% from $7.7 million during the six months ended November 30, 2000 to $5.7 million during the six months ended November 30, 2001. The decrease was due primarily to a corresponding decrease in revenue. As a percentage of total revenues, cost of sales for the three and six months ended November 30, 2000 was 57% and 67%, respectively, compared to 66% and 64% during the three and six months ended November 30, 2001, respectively. The increase in cost of sales as a percentage of total revenue for the three-month period is due to aircraft and engine sales, which typically carry a lower margin than part sales, being a higher percentage of total sales during the six-month period in 2001 than the corresponding period in 2000. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES Selling, General and Administrative Expenses - ------------------------------------------------ Selling, general and administrative expenses decreased 22.8% from $1.4 million during the three months ended November 30, 2000 to $1.1 million during the three months ended November 30, 2001. Selling, general and administrative expenses decreased 20.5% from $2.9 million during the six months ended November 30, 2000 to $2.3 million during the six months ended November 30, 2001. The decrease in selling, general and administrative expenses for fiscal 2002 was primarily due to decreases in accrued bonuses, travel and entertainment expenses, telephone expenses, professional fees, advertising and promotion expenses, and the provision for doubtful accounts, partially offset by higher insurance costs and owned aircraft expenses. Impairment of Investment in Joint Venture - ---------------------------------------------- Given the events of September 11, 2001, the Air 41 Joint Venture evaluated the market value of its aircraft and determined that their value was negatively impacted by these events. As a result of such impairment, the Air 41 Joint Venture has written down the carrying value of its aircraft, which is reflected as a write down to the investment in IASG's joint venture and an impairment charge of $6,024,000 (see Recent Events). Depreciation and Amortization - ------------------------------- Depreciation and amortization for the three and six months ended November 30, 2001 totaled $248,000 and $485,000, respectively, compared to $295,000 and $516,000, respectively, for the three and six months ended November 30, 2000, respectively. This decrease was due to having fewer aircraft on lease in fiscal 2002. Interest Expense - ----------------- Interest expense for the three and six months ended November 30, 2000 was $482,000 and $1,014,000, respectively, compared to $351,000 and $768,000 for the three and six months ended November 30, 2001, respectively. This decrease in interest expense was due to lower interest rates during these periods. Net Earnings - ------------- As a result of the above, Earnings per share - diluted for the second quarter of fiscal 2001 were $0.05, based on 2,191,092 weighted average shares outstanding, compared to loss per share - diluted for the second quarter of fiscal 2002 of $(1.69), based on 2,181,497 weighted average shares outstanding. Earnings per share - diluted for the first six months of fiscal 2001 were $0.09 per share - diluted, based on 2,190,795 weighted average shares outstanding, compared to loss per share - diluted for the first six months of fiscal 2002 of $(1.75) per share - diluted, based on 2,101,060 weighted average shares outstanding. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES 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 and the term loan mature on December 2005. The interest rate that the Company is assessed is subject to fluctuation and may change based upon certain financial covenants. As of January 7, 2001, the interest rate under the Credit Facility was the lender's base rate minus 0.25% (4.50%). The Credit Facility is secured by substantially all of the assets of the Company and the 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 and in the Amendments to the Credit Facility filed on various dates as listed below in Item 6. Exhibits and Reports on Form 8-K. As of the date hereof, the Company was not in compliance with the covenant set forth in the Credit Agreement that requires the Company to maintain a specified amount of consolidated tangible net worth. The Company was not in compliance with the covenant because of the impairment of its investment in the Air 41 Joint Venture. Had Air 41 not written down its investment in its aircraft, the Company would be in compliance with all of the covenants in its Credit Agreement. The circumstances resulting in the impairment are described above under the caption "Impairment of Investment in Joint Venture." As a result of the default, $18,094,835 of the Company's total long-term debt has been classified as a current liability in the accompanying balance sheet at November 30, 2001. The Company is negotiating an amendment to the Credit Agreement that, among other things, would cure the default by reducing the amount of consolidated tangible net worth that the Company is required to maintain. The Company believes that the amendment will be executed in the near future. The Company's senior lender has agreed that it will not refuse to extend credit to the Company under the revolving credit facility due to the occurrence of the default. If the amendment is not executed by the lender the Company's liquidity would be significantly impacted which could result in the inability of the Company to satisfy its obligations in the normal course of business. Net cash provided by operating activities for the six months ended November 30, 2001 and November 30, 2000 was $74,000 and $2,100,000, respectively. The cash provided by operating activities for six months ended November 30, 2000 was due primarily to a reduction in accounts receivables, a decrease in inventories and an increase in accounts payable. The cash provided by operating activities for the six months ended November 30, 2001 was due primarily to the net earnings for the period before the non-cash charge for the impairment of investment. Net cash used for investing activities for the six months ended November 30, 2000 amounted to $2,995,000 compared to $283,000 for the six months ended November 30, 2001. The net cash used for investing activities for the six months ended November 30, 2000 was primarily the result of the purchase of an aircraft. The net cash used for investing activities for the six months ended November 30, 2001 was the result of the capitalized expenses incurred for the aircraft purchased. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES Liquidity and Capital Resources (cont.) - ------------------------------------------- Net cash provided by financing activities for the six months ended November 30, 2000 amounted to $875,000 compared to $299,000 for the six months ended November 30, 2001. The net cash provided by financing activities for the six months ended November 30, 2000 was primarily the result of the borrowing of funds to purchase an aircraft. The net cash provided by financing activities for the six months ended November 30, 2001 was primarily the result of the increase of the revolving loan balance. At January 9, 2002, the Company was permitted to borrow up to an additional $2.5 million pursuant to the revolving credit facility. As operations are currently conducted, the Company believes that amounts available to be borrowed pursuant to the Credit Agreement and its working capital will be sufficient to meet the requirements of the Company's business. The Company had no material commitments for capital expenditures as of November 30, 2001. As of November 30, 2001, the Company had net operating loss carryforwards for federal tax purposes of approximately $11.3 million, which results in a deferred tax asset of approximately $4.2 million. The Company's policy is to record a valuation allowance against its deferred tax assets if the Company believes that it is more likely than not that it will not recognize the deferred tax benefits. Based on the Company's recent earnings history and management's estimate of future profits, the Company believes that it is more likely than not that its future profits and the expected timing of temporary difference reversals will be sufficient to realize these benefits. However, management will continue to monitor the realizability of these benefits. If in the future the Company no longer believes that it is more likely than not that it will recognize the deferred tax benefits, a valuation allowance will be recorded, which could have a significant impact on the Company's statement of earnings and net worth. Recent Events - -------------- The aviation industry has been negatively impacted by the September 11, 2001 terrorist attack on the United States. As a result, many airlines are facing extremely difficult financial situations and have significantly reduced the number of flights and aircraft operated. Accordingly, many aspects of the Company's business have been impacted and the Company is evaluating their long-term effect. The lasting results of the terrorist attack on the aviation industry have already affected the Company's operating results by 1) reducing aircraft parts sales from historical levels, 2) making it difficult to attract and retain employees and 3) limiting the Company's access to capital at competitive rates. The Company is unable to predict how long the results of the terrorist attacks and downturn in market conditions will adversely affect the Company's operations. As of November 30, 2001, six of the AIR 41 Joint Venture aircraft were off lease and an additional four are scheduled to come off lease during the remaining portion of fiscal 2002. Although it is actively marketing these aircraft in anticipation of their return off-lease, the AIR 41 Joint Venture currently has only one commitment related to the disposition of these aircraft. Given the recent events, the Air 41 Joint Venture evaluated the market value of its aircraft and determined that their value was negatively impacted by the events described above. As a result of such impairment, the Air 41 Joint Venture has written down the carrying value of its aircraft, which is reflected as a write down to the investment in IASG's unconsolidated subsidiaries. As of November 30, 2001, the Company's investment in the Air 41 Joint Venture was completely written off. Although there is no cash flow impact, the write down to the Air 41 Joint Venture has a negative impact on the Company's statement of earnings and overall net worth. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES New Accounting Pronouncements - ------------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill to be tested for impairment under certain circumstances and written off when impaired rather than being amortized as previous standards required. The adoption of SFAS 141 did not have a material effect on the Company's operating results or financial position and, as the Company has no goodwill or intangibles generated as a result of a business combination, the adoption of SFAS 142 is not expected to have an impact on the Company's operations. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 144 retained substantially all of the requirements of SFAS No. 121 while resolving certain implementation issues. SFAS No. 144 is effective for fiscal 2003, with early application encouraged. The adoption of SFAS No. 144 is not expected to have an impact on the Company's operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risks that may impact the Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows due to changing interest rates. The Company does not currently participate in any significant hedging activities, nor does it currently utilize any significant derivative financial instruments. However, interest rate fluctuations expose the Company's variable-rate debt to changes in interest expense and cash flows. The Company's variable-rate debt, primarily short-term secured borrowings, amounted to approximately $19.1 million at November 30, 2001. Based on outstanding borrowings at quarter-end, a 10% adverse change in market interest rates at November 30, 2001 would result in additional after-tax interest expense of approximately $21,000 and $42,000 for the three and six months ended November 30, 2001, respectively. ------ INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES Forward Looking Statements - ---------------------------- This Form 10-Q may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 and within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information currently available to the Company, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, including: the impact of the events of September 11, 2001 on the economy, the aviation/aerospace industry and the Company; general economic conditions; ability to acquire inventory at favorable prices; integration of acquisitions; marketplace competition; economic and aviation/aerospace market stability and Company profitability. Should one or more of these risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. These events and uncertainties are difficult or impossible to predict accurately and many are beyond the Company's control. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements reflecting changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. The Company assumes no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is from time to time subject to legal proceedings and claims that arise in the ordinary course of its business. On the date hereof, no such proceedings are pending and no such claims have been asserted. Item 3. DEFAULTS UPON SENIOR SECURITIES As of the date hereof, the Company was not in compliance with the covenant set forth in the Credit Agreement that requires the Company to maintain a specified amount of consolidated tangible net worth. The Company was not in compliance with the covenant because of the impairment of its investment in the Air 41 Joint Venture. Had Air 41 not written down its investment in its aircraft, the Company would be in compliance with all of the covenants in its Credit Agreement. As a result of the default, $18,094,835 of the Company's total long-term debt has been classified as a current liability in the accompanying balance sheet at November 30, 2001. The Company is negotiating an amendment to the Credit Agreement that, among other things, would cure the default by reducing the amount of consolidated tangible net worth that the Company is required to maintain. The Company believes that the amendment will be executed in the near future. The Company's senior lender has agreed that it will not refuse to extend credit to the Company under the revolving credit facility due to the occurrence of the default. If the amendment is not executed by the lender the Company's liquidity would be significantly impacted which could result in the inability of the Company to satisfy its obligations in the normal course of business Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Registrant conducted an annual meeting of its stockholders on October 19, 2001. The Registrant did not solicit proxies at this meeting. As there did not exist a quorum at the Annual Meeting, no matters were acted upon. Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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. - 14 - EXHIBIT NUMBER DESCRIPTION PAGE NUMBER OR METHOD OF FILING 2.12 Eight Amendment and Agreement Incorporated by Reference. dated as of December 8, 1998, by and among BNY Financial Corporation and the Registrant and related to the Credit Agreement. 2.13 Ninth Amendment and Agreement Incorporated by Reference. dated as of July 1, 1999, by and between the Registered and BNY Factoring LLC, as successor in interest to BNY Financial Corporation and related to the Credit Agreement. 2.14 Tenth Amendment and Agreement Incorporated by Reference. dated as of November 17, 1999, by and between the Registered and GMAC Commercial Credit LLC, as successor in interest By merger to BNY Financial Corporation And related to the Credit Agreement. 2.15 Eleventh Amendment, Waiver and Incorporated by Reference. Agreement dated as of January 5, 2001, by and between the Registered and GMAC Commercial Credit LLC, as successor in interest By merger to BNY Financial Corporation 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. - 15 - EXHIBIT NUMBER DESCRIPTION PAGE NUMBER OR METHOD OF FILING 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. 10.18 Securities Purchase Filed herewith Agreement, dated September, 18, 2000, among Diamond Aviation, Inc., the Registrant And the purchasers named therein. 10.19 Stockholders Agreement, dated September 18, 2000, among Diamond Aviation, Inc., and The stockholders therof.
(b) Reports on Form 8-K ---------------------- None INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. - -------------------------------------------- (Registrant) /s/ John Wang January 14, 2002 - ----------------------- ------------------ John Wang Date VP Finance and Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----