-----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, OOdXuBkWHyhxegWWdpPk8XM7VO19BDKJm98bhZRSsAs/hgOMiUl6WH3ELAt9oXfs xvItbTLEnKHP0weWiWaJ3A== 0000859307-99-000006.txt : 19990403 0000859307-99-000006.hdr.sgml : 19990403 ACCESSION NUMBER: 0000859307-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990401 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: SEC FILE NUMBER: 001-12893 FILM NUMBER: 99585782 BUSINESS ADDRESS: STREET 1: 1954 AIRPORT RD STREET 2: STE 200 CITY: ATLANTA STATE: GA ZIP: 30341 BUSINESS PHONE: 3055932658 MAIL ADDRESS: STREET 1: 8095 NW 64TH STREET CITY: MIAMI STATE: FL ZIP: 33166 10-Q 1 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 February 28, 1999 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 registrant's common stock outstanding as of March 31, 1999 was 2,440,698. FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES INDEX PAGE NO. Part I FINANCIAL INFORMATION Item 1. Unaudited Financial Statements Condensed Consolidated Balance Sheets as of May 31, 1998 and February 28, 1999 3 Condensed Consolidated Statements of Earnings for the Three Months and Nine Months Ended February 28, 1998 and February 28, 1999 4 Condensed Consolidated Statements of Cash Flows for the Nine Months ended February 28, 1998 and 1999 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II OTHER INFORMATION Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 - 2 - FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
February 28, May 31, 1999 1998* (UNAUDITED) ---------- ---------- Current assets Cash and cash equivalents $ 438,403 $ 913,742 Accounts receivable, net of allowance for doubtful accounts of approximately $514,000 at May 31, 1998 and $644,000 at February 28, 1999 1,179,760 2,902,635 Inventories 11,744,924 14,221,723 Deferred tax benefit - current 1,202,345 1,202,345 Other current assets 194,618 253,429 ---------- ---------- Total current assets 14,760,050 19,493,874 Investments 92,194 - Property and equipment Aircraft and engines held for lease 7,347,954 6,490,855 Leasehold improvements 65,881 99,197 Machinery and equipment 931,092 962,060 ---------- ---------- 8,344,927 7,552,112 Accumulated depreciation 1,969,138 2,794,238 ---------- ---------- Property and equipment, net 6,375,789 4,757,874 Other assets Investment in unconsolidated joint venture - 2,130,695 Deferred debt costs, net 513,222 473,537 Deferred tax benefit 1,760,565 812,232 Deposits and other assets 134,533 44,822 ---------- ---------- Total other assets 2,408,320 3,461,286 ---------- ---------- $ 23,636,353 $ 27,713,034 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term obligations $ 1,351,805 $ 2,641,323 Accounts payable 247,982 1,279,521 Accrued expenses 2,932,016 1,289,505 ---------- ---------- Total current liabilities 4,531,803 5,210,349 Long-term obligations, less current maturities 8,296,063 10,837,725 Commitments and contingencies Stockholders' equity Preferred stock - $.001 par value; authorized 2,000,000 shares; 0 shares outstanding at May 31, 1998 and February 28, 1999. - - Common stock - $.001 par value; authorized 20,000,000 shares; issued and outstanding 2,562,667 shares at May 31, 1998 and 2,653,723 shares at February 28, 1999. 2,562 2,653 Additional paid-in capital 13,511,610 13,793,381 Unrealized loss on equity security (22,545) - Common stock in treasury, at cost - 211,225 shares in 1999 - (986,855) Accumulated deficit (2,683,140) (1,144,219) ---------- ---------- Total stockholders' equity 10,808,487 11,644,960 ---------- ---------- $ 23,636,353 $ 27,713,034 ========== ==========
*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 SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended Nine Months Ended February 28, February 28, 1998 1999 1998 1999 ----------- ------------ ---------- ----------- Revenues Net sales $ 5,839,739 $ 4,435,864 $ 16,272,348 $ 14,265,975 Lease and service revenue 589,702 1,293,517 1,816,380 2,874,315 ----------- ------------ ---------- ----------- Total revenues 6,429,441 5,729,381 18,088,728 17,140,290 Cost of sales 3,763,506 2,934,173 10,474,757 9,693,079 Selling, general and administrative expenses 1,174,042 1,627,168 3,250,998 3,787,906 Depreciation and amortization 272,579 279,442 792,892 875,114 ----------- ------------ ---------- ----------- Total operating costs 5,210,127 4,840,783 14,518,647 14,356,099 Equity in net earnings of unconsolidated joint venture - 357,589 - 705,695 ----------- ------------ ---------- ----------- Earnings from operations 1,219,314 1,246,187 3,570,081 3,489,886 Interest expense 460,538 359,723 1,351,619 1,011,751 Interest and other (income) expense 321,132 (16,006) 308,125 (6,620) ----------- ------------ ---------- ----------- Earnings before income taxes 437,644 902,470 1,910,337 2,484,755 Provision for (benefit from) income taxes (1,275,000) 347,066 (1,699,999) 948,333 ----------- ------------ ---------- ----------- Net earnings $ 1,712,644 $ 555,404 $ 3,610,336 $ 1,536,422 =========== ============ ========== ========== Per share data: Earnings per share available for common stockholders - Basic $ 0.70 $ 0.22 $ 1.48 $ 0.60 Weighted average number of common stock outstanding - Basic 2,463,306 2,541,111 2,441,741 2,558,051 =========== ============ ========== ========== Earnings per share available for common stockholders - Diluted $ 0.61 $ 0.21 $ 1.27 $ 0.56 Weighted average number of common stock outstanding - Diluted 2,815,483 2,708,302 2,841,477 2,751,896 =========== ============ ========== ==========
The accompanying notes are an integral part of these condensed financial statements. - 4 - FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months ended February 28, February 28, 1998 1999 ----------- ----------- Cash flows from operating activities: Net earnings $ 3,610,336 $ 1,536,422 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 514,011 875,114 Loss on sale of investment - 20,074 Undistributed equity in earnings of joint venture - 705,695 Provision for income taxes - deferred - 948,333 Changes in assets and liabilities (4,832,536) (3,044,338) ----------- ----------- Total adjustments (4,318,525) (495,122) Net cash provided by (used in) operating activities (708,189) 1,041,300 Cash flows from investing activities: Capital equipment and leasehold improvements (47,956) (64,284) Investment in unconsolidated joint venture - (1,514,000) Proceeds from sale of investment - 94,665 Additions to aircraft and engines held for lease, net (433,496) (1,949,917) ----------- ----------- Net cash used in investing activities (481,452) (3,433,536) Cash flows from financing activities: Net increase in debt obligations 839,157 3,831,180 Proceeds from exercise of employee stock options 205,625 23,250 Payment of offering costs (31,859) - Repurchase of common stock - (986,855) ----------- ----------- Net cash provided by financing activities 1,012,923 2,867,575 ----------- ----------- Net (decrease) increase in cash (176,718) 475,339 Cash and cash equivalents at beginning of period 465,725 438,403 ----------- ----------- Cash and cash equivalents at end of period $ 289,007 $ 913,742 =========== ===========
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.'s condensed consolidated balance sheets as of May 31, 1998 and February 28, 1999, the condensed consolidated statements of earnings for the three and nine months ended February 28, 1998 and February 28, 1999, and the condensed consolidated statements of cash flows for the nine months ended February 28, 1998 and February 28, 1999. The accounting policies followed by the Company are described in the May 31, 1998 financial statements. The results of operations for the three and nine months ended February 28, 1999 are not necessarily indicative of the results to be expected for the full year. 2. Inventories consisted of the following: MAY 31,1998 FEBRUARY 28,1999 ----------- ---------------- Aircraft parts $11,294,924 $10,421,723 Aircraft and Engines available for sale 450,000 3,800,000 ----------- ----------- $11,744,924 $14,221,723 =========== =========== 3. Earnings Per Share The Company's basic earnings per share is calculated by dividing net earnings by the weighted average shares outstanding during the period. The computation of diluted earnings 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 computation is as follows: Three Months Ended Net Basic Basic Diluted Diluted FEBRUARY 28, EARNINGS SHARES EPS SHARES EPS ----------- ---------- --------- ----- --------- ----- 1998 $1,712,644 2,463,306 $0.70 2,815,483 $0.61 1999 $ 555,404 2,541,111 $0.22 2,708,302 $0.21 - 6 - INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Nine Months Ended Net Basic Basic Diluted Diluted FEBRUARY 28, EARNINGS SHARES EPS SHARES EPS ------------ ---------- --------- ----- --------- ------- 1998 $3,610,336 2,441,741 $1.48 2,841,477 $1.27 1999 $1,536,422 2,558,051 $0.60 2,751,896 $0.56 Included in diluted shares are common stock equivalents relating to stock options of 167,191 and 352,177 for the three months ended February 28, 1999 and 1998, respectively, and 193,845 and 399,736 for the nine months ended February 28, 1999 and 1998, respectively. 4. Credit Facility On October 3, 1996, the Company entered into the Credit Agreement, which provided for a $3 million term loan and up to an $11 million revolving credit. The Credit Agreement was amended on various occasions to create new term loan facilities totaling $6.85 million and increasing the revolving credit to $14 million (collectively referred to as the "Credit Facility"). The Credit Facility is secured by substantially all of the assets of the Company and availability of amounts for borrowing is subject to certain limitations and restrictions. Such limitations and restrictions are discussed in the Company's Proxy Statement/Prospectus filed with the Securities and Exchange Commission on August 29, 1996. 5. Supplemental Cash Flow Disclosures: Cash payments for interest were $1,547,000 and $891,000 for the nine months ended February 28, 1998 and February 28, 1999, respectively. Cash and cash equivalents include $712,000 of restricted cash at February 28, 1999. 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. 1. 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 approximately $1.5 million. The Company's Air41 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. The Air41 Joint Venture is accounted for under the equity method and the leases are treated as operating leases. - 7 - INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. Joint Venture (cont.) The Company is 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, whereby the Company may have a principal interest in an airline. At this time, the Company has no firm commitment for the aircraft after the SAS leases expire. 7. Treasury Stock 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. That program, approved by the Company's Board of Directors and lender, authorized the Company to purchase up to $1 million of common shares from time to time. During the three months ended February 28, 1999, the Company repurchased 211,225 shares of its common stock at an average price of $4.67. On March 8, 1999, the Company purchased an additional 1,800 shares at $4.375, bringing the Company's total expenditure for share repurchase to $994,783. The Company's lender has approved a waiver granting permission for the Company to repurchase up to another $1,000,000 of its common stock, although the Company has not made any decision regarding the timing, or number of shares, if any, of any additional share repurchases. - 8 - 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 nine months ended February 28, 1999 was $5.7 million and $17.1 million, respectively, compared to $6.4 million and $18.1 million, respectively, during the three and nine months ended February 28, 1998. Net sales for the three and nine months ended February 28, 1999 were $4.4 million and $14.3 million, respectively, compared to $5.8 million and $16.3 million, respectively, during the three and nine months ended February 28, 1998. Net sales include parts sales as well as 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. Total revenue and net sales were lower due to lower net sales, primarily due to lower aircraft and engine sales during the three and nine month period. Lease and service revenue increased to $1.3 million and $2.9 million, respectively, for the three and nine months ended February 28, 1999 from $590,000 and $1.8 million, respectively, for the three and nine months ended February 28, 1998, primarily due to the addition of service revenue relating to consulting work performed for various commuter airlines and the recognition of supplemental lease revenue. Under the equity method of accounting, lease revenue from the Air41 Joint Venture is not included in the Company's revenue. COST OF SALES Cost of sales decreased 22.0% from $3.8 million during the three months ended February 28, 1998 to $2.9 million during the three months ended February 28, 1999, primarily as a result of lower revenues. Cost of sales decreased 7.5% from $10.5 million during the nine months ended February 28, 1998 to $9.7 million during the nine months ended February 28, 1999, primarily as a result of lower revenues. As a percentage of total revenues, cost of sales for the three and nine months ended February 28, 1999 was 51% and 57%, respectively, compared to 59% and 58% for the three and nine months ended February 28, 1998, respectively. The decrease in the cost of sales as a percentage of revenues is in large part due to lower cost of goods sold for parts and increased lease and service revenue, which typically has no cost of sales. - 9 - INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased from $1.2 million and $3.3 million during the three and nine months ended February 28, 1998, respectively, to $1.6 million and $3.8 million during the three and nine months ended February 28, 1999, respectively. This increase is due, in part, to higher levels of insurance costs, rent expense, professional fees, and salary and bonuses. EQUITY IN NET EARNINGS OF UNCONSOLIDATED JOINT VENTURE Equity in Net Earnings of Unconsolidated Joint Venture for the three and nine months ended February 28, 1999 was $357,589 and $705,695, respectively, compared to $0 during the three and nine months ended February 28, 1998. This increase was due to the Air41 Joint Venture entered into during September 1998. DEPRECIATION AND AMORTIZATION Depreciation and amortization for the three and nine months ended February 28, 1998 totaled $273,000 and $793,000, respectively, compared to $279,000 and $875,000 for the three and nine months ended February 28, 1999, respectively. The increase in depreciation and amortization for the nine-month period was due to an increase in assets held for lease with the addition of certain Pratt & Whitney JT8D engines under lease. There were relatively no changes in the depreciation for the three-month period as two aircraft were returned off lease during the period. INTEREST EXPENSE Interest expense for the three and nine months ended February 28, 1998 was $461,000 and $1.4 million, respectively, compared to $360,000 and $1.0 million for the three and nine months ended February 28, 1999, respectively. The decrease in interest expense from 1998 to 1999 was due to a decrease in total debt outstanding during this period from $14.6 million at February 28, 1998 to $13.5 million at February 28, 1999 and lower costs of funds. INTEREST AND OTHER (INCOME) EXPENSE Interest and other (income) expense for the three and nine months ended February 28, 1999 was ($16,000) and ($7,000), respectively, compared to $321,000 and $308,000 for the three and nine months ended February 28, 1998, respectively. The decrease in other expenses from 1998 to 1999 was due to $325,000 in expenses relating to the withdrawn secondary offering in the third quarter of fiscal 1998. - 10 - INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES INCOME TAXES Income taxes have been provided at the Company's estimated effective tax rate of approximately 38% 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 TAXES Income before taxes increased from $438,000 and $1,910,000 during the three and nine months ended February 28, 1998, respectively, to $902,000 and $2,485,000 during the three and nine months ended February 28, 1999, respectively. Earnings for the three and nine months ended February 28, 1999 were benefited by equity in net earnings of unconsolidated joint venture, the Air41 Joint Venture, of $358,000 and $706,000, respectively. Net earnings decreased from $1.7 million and $3.6 million during the three and nine months ended February 28, 1998, respectively, to $555,000 and $1.5 million during the three and nine months ended February 28, 1999, respectively, primarily due to last year's benefit from income taxes of $1.3 million and $1.7 million for the three and nine months ended February 28, 1998, respectively, compared to a provision for income taxes of $347,000 and $948,000 for the three and nine months ended February 28, 1999, respectively. Earnings per share - diluted for the third quarter of fiscal 1999 was $0.21, based on 2,708,302 weighted average shares outstanding, compared to earnings per share - diluted for the third quarter of fiscal 1998 of $0.61, based on 2,815,483 weighted average shares outstanding. Earnings per share - diluted for the first nine months of fiscal 1999 was $0.56, based on 2,751,896 weighted average shares outstanding, compared to earnings per share - diluted for the first nine months of fiscal 1998 of $1.27 per share - diluted, based on 2,841,477 weighted average shares outstanding. On a pro forma basis, adjusted as if the Company had been a full taxpayer in fiscal 1998, earnings per share - diluted for the third quarter and the first nine months of fiscal 1998 would have been $0.10 and $0.41, respectively. - 11 - INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES TREASURY STOCK 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. That program authorized the Company to purchase up to $1 million of common shares from time to time. During the three months ended February 28, 1999, the Company repurchased 211,225 shares of its common stock at an average price of $4.67. On March 8, 1999, the Company purchased an additional 1,800 shares at $4.375, bringing the Company's total expenditure for share repurchase to $994,783. The Company's lender has approved a waiver granting permission for the Company to repurchase up to another $1,000,000 of its common stock, although the Company has not made any decision regarding the timing, or number of shares, if any, of any additional share repurchases. 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 new term loan facilities totaling $6.85 million (collectively referred to as the "Credit Facility") and to increase the revolving credit to $14 million. The revolving credit facility matures in October 2001 and the term loans mature between March 2000 and October 2001. The interest rate that the Company is assessed is subject to fluctuation and may change based upon certain financial covenants. As of March 15, 1999, the interest rate under the Credit Facility was the lender's base rate minus 0.25% (7.50%). 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. Net cash provided by (used in) operating activities for the nine months ended February 28, 1999 and February 28, 1998 were $1,041,000 and ($4,319,000) million, respectively. The cash provided by operations for the nine months ended February 28, 1999 was offset primarily by an increase in accounts receivables and inventory. The cash used in operating activities for nine months ended February 28, 1998 was due, in part, to the acquisition of two DC-9-51 aircraft that were held for sale. Net cash used for investing activities for the nine months ended February 28, 1999 amounted to $3,434,000 compared to $481,000 for the nine months ended February 28, 1998. The net cash used for investing activities for the nine months ended February 28, 1999 was primarily the result of an investment in the Air41 Joint Venture and the addition of certain Pratt & Whitney JT8D engines held for lease. The net cash used for investing activities for the nine months ended February 28, 1998 was primarily the result of the acquisition of an engine held for lease. - 12 - INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES (CONT.) Net cash provided by financing activities for nine months ended February 28, 1999 amounted to $2,868,000 compared to $1.0 million for the nine months ended February 28, 1998. The net cash provided by financing activities for the nine months ended February 28, 1999 was primarily the result of a net increase in debt obligations of $3.8 million due to the borrowing of funds for the acquisition of certain Pratt & Whitney JT8D engines and the investment in the Air41 Joint Venture. The net cash provided by financing activities for the nine months ended February 28, 1998 was the result of a net increase in debt obligations of $840,000 due to the borrowing of $4.0 million for the acquisition of two DC-9-51 aircraft, offset by the partial repayment of other term loans and the revolving credit. At March 31, 1999, the Company was permitted to borrow up to an additional $4.7 million pursuant to the revolving credit facility. The Company believes that amounts available to be borrowed pursuant to the Credit Agreement and cash flow from operations will be sufficient to meet the requirements of the Company's business for the foreseeable future. The Company had no material commitments for capital expenditures as of February 28, 1999. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. Differences between net earnings and comprehensive earnings for the three and nine months ended February 28, 1999 and 1998 were insignificant and, therefore, have not been separately disclosed. In June 1997, the FASB issued Statement of Financial Accounting Standard No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related Information." The Company does not believe that this new standard will have a significant effect on its consolidated financial statements and/or disclosures. YEAR 2000 ISSUES The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. These programs can fail by misinterpreting dates beyond the year 1999, which could cause possible miscalculations, and a disruption in the operation of such systems. This is commonly referred to as the Year 2000 issue. The Company has identified four major areas of concern regarding Year 2000: Internal Information Systems, External Facilities, Materials Held for Sale, and Outside Vendors Information Systems and Materials. - 13 - INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES YEAR 2000 ISSUES (CONT.) INTERNAL INFORMATION SYSTEMS The Company has developed a plan to address issues related to the impact of the Year 2000 problem on its Internal Information Technology ("IT"). Starting in fiscal 1997 the Company began the process of upgrading or replacing all personal computers. This process was completed in the third quarter of fiscal 1998. At the same time all critical software systems were assessed for Year 2000 compliance. The inventory system, which is written in PICK, required no further action. The accounting package required a "patch" which sets an assumption for dates between 1975 and 2035. The Company anticipates no further requirements on the part of either of these packages. The Company primarily uses Microsoft Operating Systems and productivity packages. Microsoft continues to find and fix Year 2000 issues as they appear throughout its product line. To date all patches have been applied to the Windows NT Servers. The Windows 95 and 98 machines will be patched with all current updates in the second quarter of calendar 1999. The Company has one Unix based system that, while not Year 2000 compliant, is scheduled for retirement in the second quarter of calendar 1999. Incremental costs, which include consulting costs and costs associated with internal resources to modify existing systems in order to achieve Year 2000 compliance, are charged to expense as incurred. The Company does not expect the financial impact of making the required system changes to be material to the Company's consolidated financial position, results of operations or cash flows which are being funded through operating cash flows. The anticipated costs of the project and the dates on which the Company believes it will complete the Year 2000 modifications and assessments are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area and the ability to locate and correct the remaining relevant systems. EXTERNAL FACILITIES The Company has not completed the assessment of Year 2000 issues relating to its facilities. However, the owners of its facilities are taking the steps the Company believes are appropriate to assure uninterrupted access to these facilities and uninterrupted fire protection and security services. The Company has received no assurances regarding the uninterrupted services provided by the public utilities, financial institutions and other similar entities upon which it relies. - 14 - INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES YEAR 2000 ISSUES (CONT.) MATERIALS HELD FOR SALE Like all other companies in the aircraft parts redistribution industry, the Company lists parts to indicate their condition. The parts are categorized as "serviceable", "as removed", or "unserviceable". The Company makes no representation or warranty with respect to the parts it sells. Specifically, the Company makes no representation or warranty regarding whether there are Year 2000 issues with respect to any of the parts available for sale. All parts purchasers' concerns about the Year 2000 issue are therefore directed to the manufacturer of such part. OUTSIDE VENDORS INFORMATION SYSTEMS AND MATERIALS With respect to the Company's suppliers and vendors, the Company is beginning the process of contacting suppliers and vendors to assess the potential impact on operations if such third parties are not successful in ensuring that their systems are Year 2000 compliant in a timely manner. The Company's Year 2000 issues and any potential business interruptions, costs, damages or losses related thereto, are also dependent upon the Year 2000 compliance of other third parties such as governmental agencies (e.g., Federal Aviation Administration). To date, the Company is unable to determine whether it will be materially affected by the failure of any of its suppliers, vendors or other third parties to be Year 2000 compliant. The Company believes that its compliance efforts have and will reduce the impact on the Company of any such failures. Failure of any third parties with which the Company interacts to achieve Year 2000 compliance could have a material adverse effect on the Company's business, financial condition and results of operations. Risk assessment, readiness evaluation, action plans and contingency plans related to the Company's suppliers, vendors and other third parties are expected to be completed by September 1999. The Company's risk management program includes emergency backup and recovery procedures to be followed in the event of failure of a business critical system. These procedures will be expanded to include specific procedures for the potential Year 2000 issue. Contingency plans to protect the Company from Year 2000 related interruptions are also being developed and are expected to be completed by August 1999. These plans will include development of backup procedures, identification of alternate suppliers, possible increases in inventory levels and other appropriate measures. - 15 - INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES FORWARD LOOKING STATEMENTS This Form 10-Q contains statements that may constitute "forward- looking statements" 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. Those statements include statements regarding the capital spending and future financing plans of the Company and reflect the intent, belief or current expectations of the Company and members of its management team. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. - 16 - 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 6. EXHIBITS AND REPORTS ON FORM 8-K (c) EXHIBITS
Exhibit NUMBER DESCRIPTION PAGE NUMBER OR METHOD OF FILING 2.4 Credit Agreement between BNY Incorporated by Financial Corporation and the reference to Exhibit Registrant, as amended. 2.4 to Amendment No. 2 to the Company's Registration Statement on Form S-4 filed August 29, 1996 (File No. 333-08065). 3.1 Amended and Restated Certificate Incorporated by of Incorporation of the reference to Exhibit Registrant. 3.1 to the Company's Annual report on Form 10-K for the fiscal year ended May 31, 1996 (the "1996 Form 10-K"). 3.2 Restated and Amended Bylaws of Incorporated by the Registrant, as amended. reference to Exhibit 3.2 to the 1996 Form 10-K. 4.1 Specimen Common Stock Certificate Incorporated by reference to Exhibit 4.1 to the 1996 Form 10-K. - 17 - 10.1.1 Employment Agreement, dated as of Incorporated by December 1, 1995, between the reference to Exhibit Registrant and Alexius A. Dyer 10.1.1 to the to III, as amended on October 3, Amendment No. 2 to the 1996. Company's Registration Statement on Form S-4 filed August 29, 1996 (File No. 333-08065). 10.1.2 Employment Agreement, dated as of Incorporated by October 3, 1996, between the reference to Exhibit Registrant and George Murnane 10.1.2 to the Company's III. Quarterly Report for the quarter ended February 28, 1997. 10.2.1 1996 Long-Term Incentive and Incorporated by Share Award Plan. reference to Appendix B to the Proxy Statement/ Prospectus included in the Company's Registration Statement on Form S-4 (File No. 333-08065) filed on July 12, 1996. 10.2.5 Form of Option Certificate Incorporated by (Employee Non-Qualified Stock reference to Exhibit Option). 10.2.5 to the 1996 Form 10-K. 10.2.6 Form of Option Certificate Incorporated by (Director Non-Qualified Stock reference to Exhibit Option). 10.2.6 to the 1996 Form 10-K. - 18 - 10.2.7 Form of Option Certificate Incorporated by (Incentive Stock Option). reference to Exhibit 10.2.7 to the 1996 Form 10-K. 10.16 Contract for Sale and Purchase Incorporated by dated January 31, 1997, between reference to Exhibit the Registrant and American 10.16 to the Company's Connector Corporation. 1997 Form 10-K. 10.17 Office Lease Agreement dated Incorporated by January 31, 1997 between the reference to Exhibit Registrant and Globe Corporate 10.17 to the Company's Center. 1997 Form 10-K. 10.18 Lease Agreement dated March 31, Incorporated by 1997, between the Registrant and reference to Exhibit Port 95-4, Ltd. 10.18 to the Company's 1997 Form 10-K. 27 Financial Data Schedule Page No. 21
(b) REPORTS ON FORM 8-K None - 19 - 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/GEORGE MURNANE III APRIL 1, 1999 George Murnane III Date Executive Vice President and Chief Financial Officer - 20 - EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS May-31-1999 Feb-28-1999 913,742 0 3,546,635 644,000 14,221,723 19,493,874 7,552,112 2,794,238 27,713,034 5,210,349 10,837,725 2,653 0 0 11,642,307 27,713,034 14,265,975 17,140,290 9,693,079 14,356,099 (705,695) 101,992 1,005,131 2,484,755 948,333 0 0 0 0 1,536,422 0.60 0.56
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