-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, tLBsUtTc4xEubuJ5R2Uu5td6jRpFfPP8T2VJ5WsiY2+pvgURC9zeHYMAxNDs0HbT JLfEn3+UhV6JpOYTjSsE+g== 0000912057-95-007069.txt : 19950830 0000912057-95-007069.hdr.sgml : 19950830 ACCESSION NUMBER: 0000912057-95-007069 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950531 FILED AS OF DATE: 19950829 SROS: NONE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18352 FILM NUMBER: 95568505 BUSINESS ADDRESS: STREET 1: 8095 NW 64TH STREET CITY: MIAMI STATE: FL ZIP: 33166 BUSINESS PHONE: 3055932658 MAIL ADDRESS: STREET 1: 8095 NW 64TH STREET CITY: MIAMI STATE: FL ZIP: 33166 10-K 1 FORM-10K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended MAY 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ---------------- to --------------- Commission File Number 0-18352 ------- INTERNATIONAL AIRLINE SUPPORT GROUP, INC. - ------------------------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 59-2223025 - ----------------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S.Employer Identification No.) incorporation or organization) 8095 N.W. 64th Street, Miami, Florida 33166 - -------------------------------------- ----------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (305) 593-2658 ------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities Registered pursuant to Section 12(g) of the Act: Name of each exchange Title or Class on which registered - -------------------------------------- ----------------------------- Common Stock, $.001 par value None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At August 11, 1995, the aggregate market value of common stock held by non-affiliates of the Registrant was approximately $804,940. The number of shares of the Registrant's Common Stock outstanding as of August 11, 1995 was 4,041,779. DOCUMENTS INCORPORATED BY REFERENCE: NONE INTERNATIONAL AIRLINE SUPPORT GROUP INC. ANNUAL REPORT OF FORM 10-K FOR THE YEAR ENDED MAY 31, 1995 TABLE OF CONTENTS PAGE PART I Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . I-3 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . I-9 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . .I-10 Item 4. Submission of Matters to a Vote of Security Holders . . . . .I-10 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . . . . .II-1 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . .II-1 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . .II-3 Item 8. Financial Statements and Supplementary Data . . . . . . . . .II-8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . .II-8 PART III Item 10. Directors and Executive Officers of the Registrant. . . . . III-1 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . III-2 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . III-5 Item 13. Certain Relationships and Related Transactions. . . . . . . III-7 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . IV-1 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-5 I-1 [This Page Intentionally Left Blank] I-2 PART I ITEM 1. BUSINESS. GENERAL International Airline Support Group, Inc. ("IASG" or the "Company") is a worldwide supplier of spare parts and equipment to the aviation industry. Since its inception in 1982, the Company has become a primary source of replacement parts for widely operated aircraft models which are no longer in production, such as the McDonnell Douglas DC-8 ("DC-8") and DC-9 ("DC-9"). Currently, the Company specializes in replacement parts for the DC-9 aircraft. Management believes that the Company has one of the most extensive inventories of after- market DC-9 parts in the industry. For the fiscal year ended May 31, 1995, IASG supplied parts to over 500 customers worldwide. RECENT DEVELOPMENTS On January 31, 1995, IASG entered into a Purchase Agreement with Richard R. Wellman and Lynda Wellman (the "Wellmans") and an entity affiliated with the Wellmans, Custom Air Holdings, Inc., a Nevada corporation ("Custom Air"), pursuant to which IASG transferred to Custom Air (i) all of the outstanding shares of common stock of Brent Aviation, Inc., which was a wholly-owned subsidiary of IASG ("Brent"), (ii) certain spare parts, components, inventory and equipment for Boeing 727 series aircraft, and (iii) a McDonnell Douglas DC-4 aircraft. In consideration for the foregoing, Custom Air paid IASG $230,000 and agreed to lease a Boeing B-727-100 freighter airplane on a month-to-month basis. In addition, the Wellmans resigned from all positions as officers or directors held by them with IASG and its subsidiaries, granted a proxy to IASG enabling IASG's directors to vote 1,980,000 shares of common stock of IASG held by the Wellmans for a period of two years, and agreed not to compete or interfere with any of the businesses of IASG and its remaining subsidiaries for a period of two years. IASG agreed to pay Lynda Wellman severance equivalent to her current salary for a period of one year. IASG further agreed to terminate its leasehold interest in a facility located at the Grayson County, Texas Airport, allowing Brent to lease such facility for its operations. On January 31, 1995, International Airline Service Center, Inc., which is a wholly-owned subsidiary of the Company ("IASC"), entered into an agreement with Express One International, Inc., a Delaware corporation ("Express One"), pursuant to which IASC assigned its interest in a certain equipment lease with CIT Group/Equipment Financing, Inc. to Express One, and Express One assumed IASC's interests and obligations under such lease. In addition, IASC transferred to Express One certain additional assets that served as collateral under the CIT lease. Pursuant to the transaction, IASC disposed of substantially all of its operating assets. IASC also agreed to terminate two leases relating to a warehouse and hanger at the Grayson County, Texas Airport, allowing Express One to lease such facilities for its operations. On May 26, 1995, IASG received a notice of payment blockage from the holder (the "Majority Noteholder") of a majority of the outstanding principal amount of the Company's 12% Senior Secured Notes due July 17, 1997 (the "Senior Notes"). Citing a continuing Event of Default under the agreement governing the Senior Notes as a result of the Company's noncompliance with certain financial covenants, the Majority Noteholder demanded that the scheduled interest payment which would otherwise have been payable on May 31, 1995 to holders of the Company's 8% Convertible Subordinated Debentures due August 31, 2003 (the "Subordinated Debentures") not be paid. As a result of the Company's receipt of the notice of payment blockage, the Company did not make its scheduled May 31, 1995 interest payment to the holders of the Subordinated Debentures and is prohibited from making any other payments with respect to the Subordinated Debentures until the earlier of (i) the expiration of a 180-day period commencing upon the date of the Company's receipt of such notice (the "Payment Blockage Period") or (ii) the receipt by the Company of written notice from the Majority Noteholder terminating such Payment Blockage Period. The aggregate interest payment due on May 31, 1995 was $200,000. The Company did not make its scheduled July 17, 1995 principal payment to the holders of the Senior Notes. The aggregate principal payment due on July 17, 1995 was approximately $1.8 million. I-3 The failure to make the May 31, 1995 interest payment to the holders of the Subordinated Debentures and the July 17, 1995 principal payment to the holders of the Senior Notes constitutes an Event of Default under the agreements governing the Senior Notes and the Subordinated Debentures. If the Company remains in default under the terms of the Senior Notes and the Subordinated Debentures, the holders of such instruments could accelerate the debt, resulting in principal of approximately $20 million becoming immediately due and payable. The Company would have no ability to repay such indebtedness if it were to be accelerated. The foregoing circumstances could require the Company to cease operations or to seek protection from its creditors through judicial reorganization proceedings. The Company has conducted preliminary negotiations with certain major holders of the Senior Notes and the Subordinated Debentures. There can be no assurance that the Company will be able to consummate a restructuring of its indebtedness. COMPANY STRATEGY The Company's strategy is to capitalize on the limited availability of spare and replacement parts for certain widely operated aircraft models which are no longer in production. In the 1980s, management implemented this strategy by parting out DC-8 aircraft and reselling the resulting spare parts. Based upon the Company's success in parting out DC-8 aircraft, which ceased production in 1972, the Company began purchasing and parting out DC-9 aircraft in 1991. Production of DC-9 aircraft ceased in 1982. The DC-8 and DC-9 aircraft have life expectancies that exceed the manufacturer's original estimates. The Company currently specializes in replacement parts for DC-9 aircraft. Beginning in 1992, the Company began purchasing and parting out Boeing 727 aircraft. IASG has acquired thirty-eight DC-8, eight DC-9, and six Boeing 727 aircraft for parting out since the Company began operations. In addition, the Company purchased the original testbed MD-80 from McDonnell Douglas and parted it out. The Company's extensive inventory of DC-9 parts also enables it to obtain sales from operators of the MD-80 because a substantial number of DC-9 parts may be used on the MD-80. Traditionally, the Company obtained most of its parts inventory by parting out high quality aircraft. Although management expects that, if financing is available, it may acquire additional aircraft for parting out aircraft, management believes that the principal source of its inventory acquisitions during the next fiscal year will be purchases of excess inventory from aircraft operators. In the past, the Company acquired aircraft for parting out only if its initial estimate of the timing and value of parts sales for such aircraft would allow the Company to recover the purchase price within 180 days through the sale of a portion of parts, and to sell the remaining parts for amounts in excess of the purchase price over the subsequent five years. Aircraft that are available at part out prices are increasingly difficult to locate because of, among other things, the continued trend of start-up, low-cost airlines that use narrow-body aircraft such as the DC-9. However, the emergence of the start-up, low-cost airlines has enhanced the value of the Company's existing inventory because in order to assure reliable operations, the airlines need to maintain a minimum supply of spare parts or establish relationships with spare parts suppliers. Because of IASG's position as a primary source of spare parts for the DC-9 aircraft and because the start-up airlines generally lack the resources to maintain extensive supplies of spare parts, the Company believes that it will continue to be an active supplier for the start-up airlines. In addition to its DC-8 and DC-9 spare parts, the Company maintains inventories of spare parts for the Boeing 727, 737 and 747 aircraft, the McDonnell Douglas MD-80 aircraft and the Lockheed L1011 and L100/C130. The Company also generates additional revenues by brokering third party spare parts on behalf of customers and by arranging for the repair or exchange of customers' spare parts with FAA-certified repair facilities. Management believes that its customer relationships are important to the Company's operational success. The Company has established relationships with many domestic and foreign aircraft operators and, subject to the availability of financing, maintains an adequate level of inventory in order to service such customers in a timely manner. Management believes that availability and timely delivery of spare parts are the primary factors considered by customers when making a spare parts purchase decision. I-4 INDUSTRY OVERVIEW GENERAL. According to the World Jet Airplane Inventory for year-end 1994, the combined aircraft fleets of aircraft operators throughout the world at December 31, 1994 consisted of approximately 12,112 jet aircraft, the average age of which is currently 12.7 years. A significant number of the spare parts used in these aircraft are supplied by different types of companies, including original equipment manufacturers ("OEMs") and numerous distributors, fixed-base operators, FAA-certified overhaul facilities, traders and brokers. Management believes that the fragmented nature of the aircraft spare parts industry creates opportunities for small well-financed companies with proven infrastructures to exploit niche markets in certain types of aircraft, such as the DC-8 and DC-9. To date, the larger companies in the aircraft aftermarket have focused their resources on newer aircraft models. Economic factors have prompted many airlines to defer aircraft procurement programs and extend the useful life of older equipment. Consequently, many aircraft operators are postponing, deferring or canceling orders for new aircraft and are retaining their older aircraft. Certain U.S. and European operators have implemented measures such as the installation of FAA-approved hush kits and extended life maintenance programs to extend the useful lives of older aircraft in their fleets. In addition, many foreign and domestic start-up aircraft operators are establishing their fleets through the acquisition of the less expensive second generation aircraft even though such older aircraft typically require more maintenance and replacement parts than new aircraft. Furthermore, increased competition in the airline industry has led to the emergence of several start-up low-cost airlines, including ValuJet, Spirit Airlines and Reno Air. The start-up airlines generally offer service on specific high traffic, short-haul routes rather than attempting to compete with the extensive hub-and-spoke systems used by the major carriers to obtain long- haul traffic. Second generation aircraft (such as the DC-9) are able to operate profitably on the high-traffic, short-haul routes. AVAILABILITY OF REPLACEMENT PARTS. Aircraft and parts manufacturers typically provide their customers with replacement parts throughout the production life of the aircraft. Other sources for new aircraft parts include authorized subcontractors for the OEMs, new parts distributors and aircraft operators with excess inventories. Once an aircraft is no longer in production, a manufacturer will continue to supply spare parts to its customers for an extended period of time, which varies among aircraft types. For example, spare parts for the DC-8 aircraft were available from the aircraft manufacturer until 1987, 15 years after the DC-8 model type ceased production. However, manufacturers generally have no obligation to supply or maintain parts for an aircraft operator which was not the original purchaser of the aircraft. As OEMs cease manufacturing replacement parts, and as other sources of new parts become increasingly more scarce, aircraft operators must locate alternative sources for quality used parts to maintain the reliable operation of their aircraft. Often, aircraft operators will opt for quality used parts even when new parts are still in production. Used aircraft parts must meet the same FAA standards as new parts but generally cost less than the same new parts, and are often available with shorter lead times. Major U.S. carriers are reducing the size of their surplus parts inventories. These inventory reductions have increased many carriers' reliance on aftermarket suppliers to provide parts which are no longer in production. As airlines continue to push for a just-in-time inventory procurement process, inventory storage and handling devolves to suppliers such as IASG. NOISE ABATEMENT REGULATIONS. The FAA classifies aircraft in three groups, Stage 1, Stage 2 and Stage 3, in order of decreasing noise characteristics. In 1980 the FAA adopted a rule prohibiting the operation of Stage 1 aircraft in or to the United States. In response to a Congressional requirement, the FAA submitted a report to Congress in April 1986 which presented various approaches to encourage or require the replacement of Stage 2 aircraft with Stage 3 aircraft. The FAA noise abatement regulations that were adopted require aircraft operators to phase out their noisier aircraft gradually by either replacing them with quieter Stage 3 aircraft or equipping them with hush kits to comply with noise abatement regulations according to the following schedule: by I-5 December 31, 1994, each aircraft operator was required either to reduce the number of Stage 2 aircraft it operated by 25% or operate a fleet composed of not less than 55% Stage 3 aircraft; by December 31, 1996, each aircraft operator must either reduce its Stage 2 aircraft by 50% or operate a fleet composed of not less than 65% Stage 3 aircraft; by December 31, 1998 at least 75% of an aircraft operator's Stage 2 aircraft must be eliminated, or its overall fleet must be composed of 75% Stage 3 aircraft; and by December 31, 1999, 100% of the fleet must be composed of Stage 3 aircraft, subject to certain waivers. OPERATIONS OF THE COMPANY "PARTING OUT" AND INVENTORY ACQUISITION. The purchase and dismantling of an aircraft and the resale of the dismantled parts for use on other aircraft is commonly called "parting out." Traditionally, the Company obtained most of its spare parts inventory by parting out high quality aircraft. When the Company acquires an aircraft for parting out, the aircraft is delivered to an inventory storage facility. The aircraft is then removed from the U.S. registry. The seller of the aircraft will often provide the Company with a computerized data base listing all the parts and equipment on the aircraft which is verified by the Company. If a computerized listing of parts is not available, the Company will conduct its own inventory of the aircraft to be parted out. The parts and equipment are catalogued and all the relevant information regarding the parts, including each part's repair history, is entered into the Company's computer database. Management believes that it is essential that such information be immediately available in order to facilitate sales by the Company's sales personnel. In certain instances, parts which are in high demand are pre-sold prior to the delivery of the aircraft to the Company. High value parts such as engines and engine components are also often pre-sold. Pre-selling allows the Company to recover a significant amount of its investment within a short time from the date of the aircraft delivery. An aircraft purchased for parting out is generally in the same condition as the aircraft that will utilize the spare parts. Sellers are usually motivated to dispose of their aircraft at part out prices for a variety of reasons, including the seller's need for immediate liquidity or inability to economically lease the aircraft to third parties. Additionally, such aircraft may require extensive maintenance or overhaul or may require government-mandated improvements which are uneconomical for the sellers to perform. In addition to purchasing whole aircraft, the Company also acquires spare parts by bidding on the inventory of companies that are eliminating certain portions of their spare parts inventory due to the retirement of an aircraft type from their fleet, the downsizing of operations or the dissolution of its business as a whole. Management believes that its principal source of inventory acquisitions during the next fiscal year will be from such sales. Modern aircraft design emphasizes the use of components that may be reused hundreds of times after inspection and overhaul. Because of the reusable nature of such "rotable" parts, sales of rotable parts offer greater profit potential than the nonreusable "consumable" parts. Vendors offer rotable parts in different conditions, designated by industry standards. A component may be sold in "serviceable" condition, meaning that the unit may be installed on an aircraft without further inspection. "As removed - not for failure" designates a component that was removed from an aircraft for some reason other than malfunction and may be reinstalled after inspection. The remaining condition, "unserviceable," designates the need for the part to be overhauled prior to inspection and installation. The FAA requires rotables and other spare parts to be inspected at FAA-certified repair facilities prior to installation on an aircraft. However, the FAA does not prohibit the sale of used parts that have not been inspected and certified. PRODUCT LINES. Historically, the Company maintained a large inventory of used parts for the DC-8 aircraft. The DC-8, an early model Stage 1 aircraft, has not been produced since 1972. The FAA's enactment of noise abatement restrictions in 1980 grounded all DC-8s powered by JT3 and JT4 engines in use in the United States and required such aircraft to be refitted with modern, quieter engines. Because of the expense involved in installing new engines, the use of DC-8 aircraft in the United States diminished. Certain devices known as "hush kits" were invented in order to bring the JT3 engines within acceptable noise limits. In late 1985, the FAA approved the first hush kit for certain JT3 engines. Another hush kit was approved for other JT3 engines in 1987. The effect of these changes was to create new demand for the DC-8 parts because a hushed DC-8 is among the lowest cost aircraft to operate per ton mile. I-6 Accordingly, the Company believes that the DC-8s will continue to be used by freight carriers and other operators and that the sale of DC-8 parts will continue to be a source of revenues in the foreseeable future. However, it is expected that sales of DC-8 parts will continue to decline in correspondence with the decrease of DC-8s in operation. Because of the limited number of DC-8s in operation, the Company began expanding its inventory to include parts for Stage 2 aircraft, such as the DC-9 aircraft. Currently, the Company specializes in replacement parts for DC-9 aircraft. The noise abatement regulations issued by the FAA require aircraft operators to phase out their noisier Stage 2 jets by the year 2000 unless they are retrofitted with hush kits to bring them into compliance with the Stage 3 noise requirements. The Company believes that retrofitting with hush kits as well as the extended life maintenance programs instituted by many aircraft operators will increase the useful life of the DC-9s. In addition to the Company's inventory of McDonnell Douglas DC-8 and DC-9 parts, the Company's inventory also includes spare parts for the Boeing 727, 737, and 747 aircraft, the McDonnell Douglas MD-80 aircraft and the Lockheed L1011 and L100/C130 aircraft and for the Pratt & Whitney JT-8D engine series. MARKETING. The Company has developed a sales and marketing infrastructure which includes well-trained and knowledgeable sales personnel, computerized inventory management and listing of parts in electronic industry data bank catalogues. Key to the successful marketing of the Company's inventory is IASG's ability to make timely delivery of spare parts in reliable condition. The Company believes aircraft operators are more sensitive to reliability and timeliness than price. Rather than purchase new parts, the Company believes aircraft operators will purchase less expensive overhauled parts from a trusted vendor. The Company's account executives are experienced and knowledgeable about the market segment in which the Company participates. Account executives understand maintenance requirements, parts for the aircraft type utilized in their markets, as well as list prices and fair values of most items sold. Furthermore, they are familiar with alternative sources for parts not inventoried by the Company. Market forces establish the price for used aircraft parts. No pricing service or catalogue exists for used components. Used aircraft parts prices are determined by referencing new parts catalogues with consideration given to existing supply and demand conditions. Often, aircraft operators will opt for quality used parts even when new parts are still in production. Used aircraft parts that meet the same FAA standards as new parts cost less than the same new parts and are often available in shorter lead times. In addition to directly marketing its inventory, IASG lists its inventory in the Air Transport Association's computerized data bank ("AIRS") and with the Inventory Locator Service ("ILS"), a proprietary computerized data bank. Both of these data bases are 24 hour electronic "marketplaces" where aircraft parts transactions take place. CUSTOMERS GENERAL. The Company's parts customers operate in a segment of the airline industry that is very volatile. A number of carriers that use the types of aircraft for which the Company stocks parts fail each year. Consequently, the identity of the Company's major customers frequently changes. The loss of a major parts customer could have an adverse impact on the Company's sales of parts for a given period. However, the Company believes that the overall level of its parts sales is determined more by the number of aircraft of the types for which it stocks parts that are in service than by the identity of the operators of such aircraft. In addition to selling parts, the Company also sells entire aircraft from time to time. In a given period, a substantial portion of the Company's revenues may be attributable to the sale of aircraft. Such sales are unpredictable transactions, dependent, in part, upon the Company's ability to purchase an aircraft and resell it within a relatively brief period of time. The revenues from the sale of aircraft during a given period may result in the purchaser of the aircraft being considered a major customer of the Company for that period. The Company does not expect to make repeat aircraft sales to a given customer; therefore, changes in the identity of major customers are frequently due to the occurrence of aircraft sales. I-7 CUSTOMER PROFILE. IASG's customer base includes aircraft operators, overhaul facilities and other parts suppliers who may in turn resell to end users. The Company's customers range from major passenger and cargo operators to smaller aircraft operators and FAA-certified repair facilities. Certain aircraft operators often buy through competitors instead of directly through IASG because of the operator's existing relationship with the competitor or the competitor's ability to overhaul the part sought. MAJOR CUSTOMERS. Transafrik Corp., a cargo carrier operating in Africa, accounted for a significant amount of the Company's revenue prior to fiscal 1994. In fiscal 1994, sales to Transafrik declined significantly. Transafrik accounted for less than one percent of the Company's total revenue in fiscal 1995, compared to 9%, 18% and 25% of total revenue in fiscal 1994, 1993 and 1992, respectively. During fiscal 1994, Transafrik underwent a change in ownership and made other significant management and operational changes, including a downsizing of its fleet and changes in fleet mix. To reduce the Company's future vulnerability to a decrease in sales to any single customer, the Company's marketing focus is on the identification and solicitation of new customers. As a result, the Company obtained approximately 80 new parts customers during fiscal 1995. The following table lists the Company's customers which, based upon net revenues, accounted for more than 10% of net revenues for the fiscal years ended May 31, 1995 and 1994:
Percentage of Customer Net Revenues (000'S) Total Net Revenues -------- -------------------- ------------------ 1995: ---- Aeroservicios Carabobo C.A. $2,716 10.9 Ajax Leasing Ltd. $5,625 22.5 1994: ---- ADC Airlines $3,182 16.0
Prior to fiscal 1993, no customer accounted for more than 10% of the Company's net revenues, other than Transafrik. During fiscal 1993, 1994 and 1995, 60%, 52% and 28%, respectively, of the Company's net revenues were made to customers in foreign countries. ADDITIONAL SERVICES AIRCRAFT AND ENGINE SALES AND LEASING. The Company has determined that its spare parts sales opportunities are enhanced by providing its existing and new customers with whole aircraft and engines through sale transactions. Such transactions allow the Company to expand its customer base for spare parts and to reduce the cost basis in its aircraft. The Company currently owns five aircraft. As of May 31, 1995, two of the aircraft were subject to leases. One was on a month-to-month lease and the lease of the other expires in October 1995. In order to reduce debt and return to its core operations, the Company intends to sell its aircraft as soon as practicable, with the exception of one of such aircraft which the Company may part out. The Company expects to continue to broker sales of aircraft and engines when opportunities to do so arise. EXCHANGE TRANSACTIONS. An "exchange transaction" generally involves a high value/high turnover rotable part which an operator frequently replaces when performing aircraft maintenance. In an exchange transaction, a customer pays an exchange fee and returns a "core" unit to IASG within 14 days. A "core" unit is the same part which is being delivered to the customer by IASG, but in need of overhaul. IASG has the customer's core unit overhauled and bills the customer for the overhaul charges and retains the overhauled core unit in its inventory. The Company continues to emphasize exchange transactions because they are profitable and ensure that scarce parts remain in stock for future sales. I-8 BROKERED TRANSACTIONS. In a "brokered transaction" the Company fills a customer order for a part not held in the Company's inventory. The Company locates the part for the customer from another vendor and then resells the part to the customer. During fiscal 1995, brokered transactions accounted for 19% of total revenues, as compared to 13% of total revenues during fiscal 1994. REGULATION The United States aviation industry is regulated by the FAA. The FAA requires aircraft parts to be repaired by FAA-certified repair stations prior to installation. Because of concerns regarding maintenance procedures, it is possible that the FAA will promulgate new and more stringent regulations relating to the ability to trace the repair history of individual parts. If this were to occur, it could have a material adverse impact upon the Company's business; however, the Company has attempted to anticipate the focus of such new regulations and has added resources and implemented procedures to address these potential requirements. On July 14, 1995, the FAA issued a proposal regarding a voluntary accreditation program for dealers of civil aircraft parts. Pursuant to the proposal, a dealer of civil aircraft parts, such as the Company, could obtain accreditation of its quality control systems. The Company is evaluating this proposal. PRODUCT LIABILITY Claims paid by aircraft and aircraft parts manufacturers have risen dramatically in the past 10 years; however, no lawsuit has ever been filed against the Company based upon a products liability theory. The Company is not aware of a corresponding increase in claims against businesses similar to the Company which sell but do not manufacture new and used aircraft parts. The Company maintains liability insurance in the amount of $10 million. In addition, the Company's policy is to require lessees of its aircraft to maintain liability insurance covering the Company as an additional insured. Nevertheless, there can be no assurances that such insurance will be adequate to protect the Company in the event a claim is brought against the Company. COMPETITION The Company competes with several other companies, none of which accounts for a significant amount of the spare parts market for narrow-bodied aircraft. Customers in need of aircraft parts have access, through computer-generated inventory catalogues, to a broad array of suppliers including major aircraft manufacturers, airlines and aircraft services companies, many of which have greater financial resources and some of which have larger inventories and more established reputations than the Company. The Company has established relationships with many domestic and foreign aircraft operators and maintains such relationships by having the necessary parts available and by delivering such parts in a timely manner. The dominant companies in the aircraft parts aftermarket are AAR Corp., Aviation Sales and Banner Aerospace. The companies are larger than IASG and have more substantial financial resources. EMPLOYEES As of May 31, 1995, IASG had approximately 24 employees. Of these, one is an executive officer, six are sales personnel, ten are accounting, finance, data processing, and administrative personnel, one is a quality assurance specialist and the remainder are inventory and warehouse operations personnel. The Company is not a party to any collective bargaining agreement. The Company believes its relations with its employees are good. ITEM 2. PROPERTIES. The Company's principal executive offices are located at 8095 N.W. 64th Street, Miami, Florida. The Company purchased its 15,000 square foot office and warehouse building in September 1992, for approximately $750,000, partially funded with mortgage financing of $520,000. The mortgage note bears interest at 1.0% above the prime rate and requires monthly principal payments of $2,180 together with outstanding interest until I-9 September 18, 1997, at which time the remaining outstanding principal and all accrued interest is due and payable in full. As of May 31, 1995, the balance due on this mortgage note was $455,420. The Company is a party to one five-year lease agreement with a five-year renewal option, for certain property located in Grayson County, Texas (the "Texas Property"). If the renewal option is not exercised, such lease will expire in June, 1996. The aggregate fixed annual rental is approximately $49,000. The facility consists of approximately 23,450 square feet of warehouse, ramp and apron space. The Texas Property is used to store the Company's part-out aircraft and for warehousing certain parts. Management believes that its properties are adequate for its present and current foreseeable operations. All of the properties owned or leased by the Company, as well as substantially all the other assets of the Company, are subject to the lien of holders of the Senior Notes. In addition, the Company's headquarters are also subject to the lien of its mortgage lender. ITEM 3. LEGAL PROCEEDINGS. In July 1993, Viglass Aviation ("Viglass") filed a complaint against the Company in the Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida (Case No. 93-14256CA20), claiming that Viglass was entitled to payment of $681,750 under a commission agreement with the Company relating to the sale of certain aircraft to one of the Company's significant customers. The Company disputes this claim, maintaining that the sale occurred outside the provisions of the commission agreement. The Company filed a motion to hold the plaintiffs in contempt for failure to comply with discovery demands. This motion remains in abeyance pending settlement negotiations between the parties. On February 28, 1994, a complaint entitled Ullman et al. v. International Airline Support Group, Inc., et al. (Case No. 94-0379), was filed in the United States District Court for the Southern District of Florida. The complaint alleged actionable misrepresentations and non-disclosures by the Company and certain directors under the federal securities laws, as well as claims for common law fraud and breach of fiduciary duty. The plaintiffs brought the action on behalf of a class of similarly situated purchasers of ISAG stock. During the first quarter of fiscal 1996, the Company settled the individual claims of the named plaintiffs and the case was dismissed. In the opinion of management, the amount paid in settlement of this claim will not have a material adverse effect on the Company's financial position or results of operations. The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and which have not been finally adjudicated. The actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse affect upon the financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. I-10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock has been publicly traded since April 2, 1990. From April 2, 1990 through July 22, 1994, the Common Stock was listed and traded on the Nasdaq/National Market System under the symbol ISAG. Effective July 22, 1994, the Nasdaq Qualifications Committee delisted the Company's Common Stock from quotation on the Nasdaq/National Market System. Since that time, the Common Stock has been traded through the National Quotation Bureau's National Daily Quotation Price Sheets (the "Pink Sheets"). The following table sets forth the high and low closing prices of the Common Stock for the fiscal periods indicated below as reported by Nasdaq/National Market System, prior to July 22, 1994, and the high and low bid quotations as reported by the National Quotation Bureau thereafter. 1994 Fiscal Year High Low ---------------- ---- --- First Quarter $ 5-1/2 $ 2-7/8 Second Quarter 4-1/8 2-3/4 Third Quarter 3-1/4 1-3/8 Fourth Quarter 1-3/4 15/16 1995 FISCAL YEAR ---------------- First Quarter (through July 22) 15/16 5/16 First Quarter (from July 22) 3/8 1/4 Second Quarter 3/8 1/16 Third Quarter 13/32 1/32 Fourth Quarter 1/2 5/32 At May 31, 1995, there were 124 holders of record of the Company's Common Stock and no holders of the Company's Preferred Stock. The Company has not paid dividends on the Common Stock. The Company's financial condition and the existence of defaults pursuant to the Senior Notes and the Subordinated Debentures make it unlikely that the Company will be able to pay dividends on the Common Stock in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial data presented below for, and as of the end of, each of the fiscal years in the five year period ended May 31, 1995 have been derived from the Company's consolidated financial statements. The consolidated financial statements of the Company for the fiscal years ended May 31, 1995, 1994, 1993 and 1992 were audited by Grant Thornton L.L.P., independent certified public accountants. The consolidated financial statements of the Company for the fiscal year ended May 31, 1991 were audited by Wachsman, Rappaport and Fink, P.A., independent certified public accountants. The consolidated financial statements of the Company as of May 31, 1995 and 1994 and for the three-year period ended May 31, 1995 and the accountant's reports thereon are included in Item 8 of this Form 10-K. II-1
Fiscal Year Ended May 31, (In thousands, except per share data) ------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- EARNINGS STATEMENT DATA: Revenues - -------- Net sales $21,999 $16,747 $32,031 $26,526 $21,521 Lease revenue 2,984 1,986 1,473 -- -- ----- ----- ----- -- -- Total revenues 24,983 18,733 33,504 26,526 21,521 Cost of sales 17,713 22,104 21,493 16,310 14,920 Selling, general and administrative expenses 4,358 6,943 6,469 5,281 3,230 Provision (recovery) for doubtful accounts (335) 1,488 493 374 517 Interest expense 2,272 2,563 2,163 871 513 Depreciation and amortization 1,693 2,866 1,406 201 164 Interest and other income (603) (88) (66) (94) (55) Unusual and non-recurring items (177) -- -- -- -- Losses of service center subsidiary 676 1,922 -- -- -- Earnings (loss) before income taxes, equity in earnings (loss) of joint venture and extraordinary item (614) (19,065) 1,546 3,583 2,232 Provision for income taxes (benefit) -- (2,475) 510 1,370 941 Equity in earnings (loss) of joint venture -- (423) (59) (229) 121 Extraordinary loss on extinguishment of debt -- (363) -- -- -- ----- ----- --- --- --- Net earnings (loss) $(614) $(17,376) $ 977 $1,984 $1,412 ----- -------- ---- ----- ----- Earnings (loss) per common share before extraordinary items (.15) (4.21) .24 .52 .37 Extraordinary item -- (.09) -- -- -- --- ----- --- --- --- EarningS (loss) per common share $(.15) $(4.30) $0.24 $0.52 $0.37 ----- ------ ---- ---- ---- Weighted average number of common shares outstanding 4,042 4,042 3,997 3,850 3,825
II-2
At May 31 --------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Working capital (deficit) $(13,295) $(18,312) $17,087 $2,938 $1,748 Total assets 14,511 25,553 35,709 20,303 14,319 Short-term debt 3,279 3,531 4,905 7,296 4,863 Long-term debt in technical default classified as current 16,617 22,157 -- -- -- Long-term debt 440 485 18,579 309 57 Stockholders' equity (deficit) (9,702) (9,088) 8,173 7,081 4,529
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW INTRODUCTION. As of May 31, 1994, the Company operated an FAA-certified repair facility located adjacent to the Company's warehouse facilities in Sherman, Texas. The principal business of this facility, which was opened by the Company during fiscal 1994, was to perform FAA-required maintenance checks on certain narrow body aircraft. At May 31, 1994, this facility employed approximately 60 people. During fiscal 1994, the wholly owned subsidiary that operated the facility incurred costs and expenses of $2.4 million while generating revenues of only $525,000. During fiscal 1995, the Company disposed of the repair facility (after incurring losses on the repair facility during fiscal 1995 of $675,000) and sold a subsidiary that was engaged in air cargo transport. As a result of these actions, in fiscal 1995, the Company returned to its core business, the sale of aircraft parts. During fiscal 1995, the Company also implemented further cost reduction measures with respect to its core business. Although the Company experienced significant improvement in its core business during fiscal 1995, the Company is in default in the payment of principal and interest on the Senior Notes and Subordinated Debentures, as noted below, under "Liquidity and Capital Resources." As a result of such defaults, the Company is unable to secure the financing necessary to replenish its parts inventory. Unless the Company obtains funds for significant additional inventory purchases, it will be unable to sustain operation of its core business at present levels. The Company is attempting to sell aircraft to obtain cash with which to make certain principal payments on the Senior Notes. However, the Company does not expect that it will be able to resume making payments on the Subordinated Debentures. The Company intends to present a restructuring proposal to the holders of the Senior Notes and the Subordinated Debentures during the second quarter of fiscal 1996. Unless the Company's capitalization is restructured, management does not believe that the Company will be able to continue as a going concern in its present form. There can be no assurance that the Company will be able to consummate a restructuring of its indebtedness. As a result of the matters described above, the Company's independent public accountants included in their report on the Company's consolidated financial statements for fiscal 1995 an explanatory paragraph that describes the uncertainty about the Company's ability to continue as a going concern in its present form. INVENTORY ACCOUNTING. Inventories are valued at the lower of cost or market. The cost of aircraft spare parts purchased in lots, as opposed to whole aircraft purchases, is determined on a specific identification basis. As of May 31, 1995, such parts represented approximately 42% of the inventory cost value. The cost of parts acquired through whole aircraft purchases is assigned to the pool of parts (the aircraft) based on the purchase price of the aircraft. As parts are sold from the pool, the amount of cost amortized is based upon the relationship of the cost basis of the pool to the estimated sales value of the pool. As parts sales II-3 take place, the costs are charged to cost of sales based on the estimated cost of sales percentage. As of May 31, 1995, such parts represented approximately 20% of the inventory cost value. Certain aircraft held for sale, which were previously leased, are accounted for as inventory. As of May 31, 1995, such aircraft represented approximately 38% of the inventory cost value. The revenue estimates for the pool of parts (the aircraft) is determined by management based upon the individual sales values of all the parts in the pool. The revenue estimates are then projected by quarter over a five-year period beginning with the date on which management determines the aircraft is to be parted out. Management monitors its initial estimates and may make adjustments if warranted by market conditions. If the actual revenue exceeds the quarterly estimates, no amortization adjustment is required. The amortization schedule is established to write the pool of parts to zero over a five-year period even though there may be parts in the pool remaining for future sale after such period. GENERAL FINANCIAL INFORMATION. The following table sets forth percentage relationships of expense items to total revenues for the periods indicated:
Percentage of Total Revenues Years ended May 31, ------------------- 1995 1994 1993 ---- ---- ---- Total revenues 100.0% 100.0% 100.0% ----- ------- ------- Cost of goods sold 70.9 118.0 64.2 Selling, general and administrative expenses 17.4 37.1 19.3 Provision for bad debts (1.3) 7.9 1.5 Interest expense 9.1 13.7 6.4 Depreciation and amortization expense 6.8 15.2 4.2 Interest and other income (2.4) ( .5) ( .2) Unusual and nonrecurring items ( .7) -- -- Loss on discontinued subsidiary 2.7 10.3 -- ----- ------ ----- Operating earnings (2.5) (101.8) 4.6 Income tax expense (benefit) -- (13.2) 1.5 Joint venture (loss) income -- (2.3) (0.2) Extraordinary loss -- (1.9) -- ----- ------- ------- Net earnings (2.5)% (92.8)% 2.9% ----- ------- ------- ----- ------- -------
RESULTS OF OPERATIONS FISCAL 1995 COMPARED WITH FISCAL 1994. Total revenues for the fiscal year ended May 31, 1995 ("fiscal 1995") increased 33.4% from total revenues for the fiscal year ended May 31, 1994 ("fiscal 1994"), to $25.0 million from $18.7 million. The increase in total revenues is primarily attributable to an increase in aircraft sales, from $4.1 million in fiscal 1994 to $8.2 million in fiscal 1995. During fiscal 1995, the Company sold three DC-9 aircraft to a leasing company for $5.6 million pursuant to a contract entered into during fiscal 1994. Aircraft sales are unpredictable transactions and may fluctuate significantly from year to year, dependant, in part, upon the Company's ability to purchase an aircraft and resell it within a relatively brief period of time. Lease revenue increased to $3.0 million in fiscal 1995 from $2.0 million in fiscal 1994. Cost of sales decreased 19.9% from $22.1 million in fiscal 1994 to $17.7 million in fiscal 1995, while cost of sales as a percentage of revenues decreased from 118.0% in fiscal 1994 to 70.9% in fiscal 1995. During fiscal 1994, the Company recorded charges to cost of sales totalling $9.5 million for writedowns and valuation II-4 adjustments to certain parts inventory and aircraft (see Results of Operations - Fiscal 1994 Compared With Fiscal 1993), thus making a comparison of cost of sale percentages between fiscal 1994 and fiscal 1995 not meaningful. During fiscal 1995, the Company realized no profit on the $5.6 million sale of three DC-9 aircraft to a leasing company because the carrying value of such aircraft equalled the sales price. Excluding the $5.6 million from sales and cost of sales during fiscal 1995, the Company's cost of sales as a percentage of fiscal 1995 revenues was 60% compared to 64.0% and 61.2% in fiscal 1993 and 1992, respectively. Selling, general and administrative expenses ("SG&A") for fiscal 1995 decreased 37.2% to $4.4 million in fiscal 1995 compared to $6.9 million in fiscal 1994. As a percentage of revenues, SG&A expense was 17.4% in fiscal 1995 compared to 37.1% in fiscal 1994. The reduction in SG&A expense of $2.6 million from fiscal 1994 to fiscal 1995 was due to several factors, including reductions in the number of management personnel and ongoing efforts to reduce operating costs. Payroll and commissions costs were $1.3 million in fiscal 1995 compared to $2.2 million in fiscal 1994. Travel and entertainment costs were $261,000 in fiscal 1995 compared to $610,000 in fiscal 1994. Additionally, in the fourth quarter of fiscal 1994 the Company accrued a charge of $825,000 in connection with an unfavorable judgment arising from a lawsuit relating to commissions owed on the sale of an aircraft in 1989. Provision (recovery) for doubtful accounts was $(335,000) in fiscal 1995 compared to $1.5 million in fiscal 1994. During fiscal 1995, the Company, primarily through litigation, recovered approximately $700,000 of accounts receivable which had been written off or reserved during fiscal 1994. The recoveries were offset during fiscal 1995 by a provision for doubtful accounts of $350,000. During fiscal 1994, the Company wrote off approximately $900,000 of accounts receivable which were determined to be uncollectible, and reserved additional funds for accounts that may not be collectible. Interest expense for fiscal 1995 was $2.3 million compared to $2.6 million in fiscal 1994. The decrease in interest expense is due to a net reduction in total debt outstanding, from $26.2 million at May 31, 1994 to $20.3 million at May 31, 1995. During fiscal 1995, the Company repaid $4.7 million of the principal due on the Senior Notes. Depreciation and amortization was $1.7 million in fiscal 1995 compared to $2.9 million in fiscal 1994. The net reduction of $1.2 million from 1994 to 1995 was due primarily to a decrease in depreciation of aircraft held for lease, as several of the Company's aircraft that were being depreciated in fiscal 1994 were sold either during the latter part of fiscal 1994 or during fiscal 1995. Interest and other income was $603,000 for fiscal 1995 compared to $88,000 for fiscal 1994. Included in interest and other income during fiscal 1995 is approximately $340,000 interest income collected on notes receivable, a $66,000 gain on the sale of certain land located in Kentucky, and approximately $120,000 received in connection with consulting and other services provided to an insurance company. Included in unusual and non-recurring items is an expense of $180,000 incurred in connection with the transactions between the Company and Richard R. Wellman and Lynda Wellman and an affiliate of the Wellmans and a gain of $375,000 relating to settlement of litigation which had previously been accrued in an amount in excess of the settlement amount. Loss of service center subsidiary was approximately $675,000 in fiscal 1995 compared to a loss of $1.9 million in fiscal 1994. The net loss for fiscal 1995 was $614,000, or $(.15) per share, compared to a net loss of $17.4 million or $(4.30) per share for fiscal 1994. FISCAL 1994 COMPARED WITH FISCAL 1993. Total revenues for fiscal 1994 decreased 43.9% from total revenues for fiscal 1993, to $18.8 million from $33.5 million. The decrease in total revenues was primarily attributable to a 72% decrease in aircraft sales, from II-5 $14.9 million in fiscal 1993 to $4.1 million in fiscal 1994. The reduction in aircraft sales from fiscal 1993 to fiscal 1994 was based on several factors, including the Company's weak cash position, which decreased the Company's ability to purchase aircraft and inventory for resale, and overall weakness in the market for used aircraft and parts. The decrease in total revenues was also attributable to a reduction in parts and engine sales to Transafrik, a cargo carrier operating in Africa. Parts and engine sales to Transafrik decreased 75% from $6.0 million in fiscal 1993 to $1.5 million in fiscal 1994. During fiscal 1994 Transafrik underwent a change in ownership and made other significant management and operational changes, including a down sizing of its fleet and certain changes in fleet mix. Transafrik is headquartered in Angola. The Company experienced difficulty in obtaining current information regarding Transafrik due to conditions prevailing in Angola, namely the on-again, off- again civil war and the existence of a Marxist government. In addition, the Company experienced a number of changes in senior management during the first half of calendar 1994. The Company's Chief Financial Officer resigned in early February, 1994. The Company's President, who was the Company's primary contact with Transafrik, was terminated not long thereafter. Due to such management changes, it is difficult to say with certainty when the Company became aware of the circumstances that the Company believes resulted in a loss of business from Transafrik. The Company believes that it disclosed the circumstances as soon as practicable following the Company's current senior management becoming aware of them. The Company's decrease in total revenues was in small part offset by an increase in lease revenue of $500,000 from $1.5 million in fiscal 1993 to $2.0 million in fiscal 1994. Cost of sales increased 2.8% from $21.5 million in fiscal 1993 to $22.1 million in fiscal 1994, while cost of sales as a percentage of total revenues increased to 117.4% in fiscal 1994 from 64% in fiscal 1993. The increase in cost of sales from fiscal 1993 to fiscal 1994 is a result of several factors, including lower profits realized on aircraft sales due to weak market conditions, and charges of $3.1 million and $2.0 million for decreasing the carrying value of certain inventory due to continuing poor market conditions and changes in sales estimates and related inventory values. These write-downs included parts costed under both the specific identification method and the pooling method. The write-downs were due to a change in emphasis of sales from certain older product lines, including DC-8 and other parts, and a close examination of the realizability of asset values in light of weak market conditions. In connection with the write-downs of inventory, the amount of cost being amortized upon the sale of inventory accounted for under the pooling method has been increased based on management's evaluation of the adjusted cost basis of the pool to the estimated sales value of the pool. As a result of weak demand in the marketplace and the Company's need to increase its liquidity to meet its obligations as they become due, the Company recorded a $2.1 million charge to cost of sales for losses from the sale or loss of aircraft. This charge related primarily to one B-727 sold in April 1994 to its lessee at an amount substantially below cost to raise cash, and another B-727 that was written off entirely because the Nigerian lessee defaulted under the lease and it was doubtful that the Company could recover possession of the aircraft. The Company did recover the aircraft in June 1995. In addition, during the fourth quarter, the Company accrued to cost of sales a charge of $2.4 million for three DC-9-15F aircraft to reflect net realizability of the aircraft. The unanticipated cost of overhauling these aircraft for delivery eliminated the economic benefit that the Company had negotiated under their sales contract. One of these aircraft was sold in June 1994, another was sold in early October 1994, and the third aircraft was sold in November 1994. SG&A expense for fiscal 1994 increased 7.3% to $6.9 million from $6.5 million for fiscal 1993. As a percentage of revenues, SG&A expense increased from 19.3% during fiscal 1993 to 36.9% during fiscal 1994. The increase in SG&A's expense as a percentage of revenues was due primarily to a 42% decrease in revenues without a corresponding decrease in SG&A expense. The Company incurred substantial expenses related to settlement of litigation (including a charge of $825,000 in connection with an unfavorable judgment arising from a lawsuit relating to commissions owed on the sale of an aircraft in 1989), severance payments and other charges. Provisions for doubtful accounts for fiscal 1994 increased 202% to $1.4 million for fiscal 1994, from $500,000 in fiscal 1993. During the third quarter, the Company wrote off $900,000 of amounts receivable which II-6 were determined to be uncollectible, and reserved additional funds for accounts that may not be collectible. The Company has legal and collection proceedings against some of these accounts. Interest expense for fiscal 1994 totaled $2.6 million compared with $2.2 million for fiscal 1993. The increase in interest expense was the result of the issuance of the Senior Notes and the Subordinated Debentures. Depreciation and amortization expense for fiscal 1994 increased from $1.4 million in fiscal 1993 to $2.9 million in fiscal 1994. The increase in depreciation expense for fiscal 1994 of $1.5 million over fiscal 1993 was primarily attributable to the depreciation costs associated with the higher volume of aircraft leased by the Company to third parties and an acceleration of depreciation of overhaul costs of aircraft to more closely match the estimated service life of the overhaul. In addition, depreciation of property and equipment increased by approximately $300,000 in connection with the operation of the maintenance facility in Texas. Losses of service center subsidiary were approximately $1.9 million in fiscal 1994. Equity in loss of joint venture was $423,000 in fiscal 1994 compared to $59,000 in fiscal 1993. The 1994 amount includes the Company's share of the joint venture operating losses of $280,000 and a loss of $143,000 upon dissolution of the venture. The fiscal 1993 amount consisted of the Company's share of that joint venture's operating losses. Extraordinary loss on the extinguishment of debt of $363,000 in fiscal 1994 is net of tax and consists of a 6% prepayment penalty and write-off of deferred debt issuance costs in connection with the early retirement of a portion of the Senior Notes. In August 1993, the Company entered into a management agreement with a domestic corporation in Mojave, California for a period of four months from September 1, 1993 to December 31, 1993. Pursuant to this agreement, the Company engaged in selling the parts of part-out consignment aircraft from various parties. During the contract period, the Company incurred a net loss of $47,906 related to these services, which was included in SG&A expense for fiscal 1994. The domestic corporation with which the Company entered the management arrangement was not affiliated with Company. Pursuant to the management arrangement, the Company received commissions based on sales of consigned parts. The Company's expenses of providing the management services, consisting principally of personnel costs, exceeded the Company's revenue from the contract. Therefore, the Company elected not to renew the management arrangement after the expiration of the initial four-month term. The net loss for fiscal 1994 was $17.4 million, or $(4.30) per share, representing a decrease from net earnings of $1.0 million or $.24 per share for fiscal 1993. For fiscal 1994, IASC incurred losses of $1.9 million or $(.48) per share of the Company's Common Stock. LIQUIDITY AND CAPITAL RESOURCES At May 31, 1995, the Company's total long-term debt amounted to $20.3 million, consisting of $9.9 million principal amount of the Senior Notes, $10.0 million principal amount of the Subordinated Debentures and $400,000 principal amount of a mortgage loan secured by its corporate headquarters. The entire principal amount of the Senior Notes and the Subordinated Debentures are classified as current at May 31, 1995, because of the existence of defaults under the governing documents. The Senior Notes, which were issued during fiscal 1994, bear interest at the fixed rate of 12% per annum, payable quarterly. The Senior Notes mature in 1997. The Subordinated Debentures, which were issued during fiscal 1994, bear interest at the fixed rate of 8% per annum, payable quarterly and are convertible into shares of the Company's Common Stock at $4.00 per share. The Subordinated Debentures mature in 2003. On May 26, 1995, the Company received a notice of payment blockage from the holder (the "Majority Noteholder") of a majority of the outstanding principal amount of the Senior Notes. Citing a continuing Event of Default under the agreement governing the Senior Notes as a result of the Company's noncompliance with II-7 certain financial covenants, the Majority Noteholder demanded that the scheduled interest payment which would otherwise have been payable on May 31, 1995 to holders of the Subordinated Debentures not be paid. As a result of the Company's receipt of the notice of payment blockage, the Company did not make its scheduled May 31, 1995 interest payment to the holders of the Subordinated Debentures and is prohibited from making any other payments with respect to the Subordinated Debentures until the earlier of (i) the expiration of a 180-day period commencing upon the date of the Company's receipt of such notice (the "Payment Blockage Period") or (ii) the receipt by the Company of written notice from the Majority Noteholder terminating such Payment Blockage Period. The aggregate interest payment due on May 31, 1995 was $200,000. The Company did not make its scheduled July 17, 1995 principal payment to the holders of the Senior Notes. The aggregate principal payment due on July 17, 1995 was approximately $1.8 million. The failure to make the May 31, 1995 interest payment to the holders of the Subordinated Debentures and the July 17, 1995 principal payment to the holders of the Senior Notes constitutes an Event of Default under the agreements governing the Senior Notes and Subordinated Debentures. If the Company remains in default under the terms of the Senior Notes and Subordinated Debentures, the holders of such instruments could accelerate the debt, resulting in principal of approximately $20 million becoming immediately due and payable. The Company would have no ability to repay such indebtedness if it were to be accelerated. The foregoing circumstances could require the Company to cease operations or to seek protection from its creditors through judicial reorganization proceedings. At May 31, 1995, the Company had a working capital deficit of $13.3 million and a current ratio of .44 to 1.0, compared to a working capital deficit of $18.3 million and a current ratio of .46 to 1.0 at May 31, 1994. The $5.0 million reduction in the working capital deficit was the result of proceeds from the sale of certain aircraft (that were previously leased), being used to pay down current liabilities. This is reflected in the Company's cash flows which show cash flow provided by operating activities of approximately $5.8 million, but cash flows from financing activities using approximately $4.9 million. In fiscal 1996, the Company expects to continue to sell aircraft held for lease when the leases expire and to use the proceeds for debt repayment. The Company does not have any bank lines of credit or other sources of liquidity beyond cash flows from operating activities due to profitable operations, if any, or further asset sales. However, the Company does not currently have any significant commitments for capital outlays. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information with respect to this Item is contained in the Company's consolidated financial statements and financial statement schedules indicated in the Index on Page F-1 of this Annual Report on Form 10-K and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None II-8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth the names, ages and positions of the executive officers and directors of the Company as of May 31, 1995. A summary of the background and experience of each of these individuals is set forth following the table.
Name Age Position Held Director Since ---- --- ------------- -------------- Alexius A. Dyer III(1) 39 Chairman of the Board, President 1992 and Chief Executive Officer Kyle R. Kirkland (2)(3) 33 Director 1992 E. James Mueller(1)(2)(3) 49 Director 1991 - ------------ (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation Committee
ALEXIUS A. DYER III has been the Chief Executive Officer of the Company and Chairman of the Company's Board of Directors since February 1995. Mr. Dyer has been a director of the Company since 1992. Mr. Dyer served as President of the Company from February 1994 to February 1995. From February 1991 to February 1994, Mr. Dyer served as Executive Vice President of Capital Markets of the Company. Additionally, during 1991, he served as the President and director of the Company's subsidiary, Barnstorm Leasing, Inc., which was merged into the Company in July 1992. From January 1990 to February 1991, Mr. Dyer served as the Vice President of Meridian Aviation Capital, a Georgia-based aircraft leasing company offering products and services to the global airline industry. KYLE R. KIRKLAND has been a director of the Company since July 1992. Mr. Kirkland was appointed to the Board in connection with the Company's issuance of the Senior Notes. Mr. Kirkland has served as the President of Kirkland Messina, Inc., an investment banking firm, since March 1994. Mr. Kirkland was employed as Senior Vice President of Dabney/Resnick, Inc. ("Dabney") from June 1991 until February 1994. Dabney acted as the placement agent for the Senior Notes and the Subordinated Debentures. Mr. Kirkland was employed as an investment banker with Canyon Partners, Inc. and with Drexel Burnham Lambert, Inc. from March 1990 through June 1991 and from July 1988 through March 1990, respectively. Mr. Kirkland is also a director of Image Entertainment, Inc. and Selmer Company. E. JAMES MUELLER has been a director of the Company since 1991. Mr. Mueller has been a principal with J.M. Associates, Inc., a business development consulting firm, since January 1992. From June 1978 through December 1991, Mr. Mueller was the Vice President of Sales/Marketing of Air Cargo Associates, Inc., a Connecticut airline charter brokerage/sales corporation. J.M. Associates, Inc. provides the Company with consulting services. See "Certain Relationships and Related Transactions." COMMITTEES OF THE BOARD The Compensation Committee of the Board of Directors reviews all aspects of compensation of executive officers of the Company and makes recommendations on such matters to the full Board of Directors. The Compensation Committee was created by action of the Board of Directors after the end of the 1992 fiscal year. During the fiscal year ended May 31, 1995, the Compensation Committee met two times. III-1 The Audit Committee makes recommendations to the Board concerning the selection of outside auditors, reviews the financial statements of the Company and considers such other matters in relation to the internal and external audit of the financial affairs of the Company as may be necessary or appropriate in order to facilitate accurate and timely financial reporting. The Audit Committee also reviews proposals for major transactions. During the fiscal year ended May 31, 1995, the Audit Committee met one time. The Board of Directors also created an Executive Committee after the end of the Company's 1992 fiscal year. During the fiscal year ended May 31, 1995, the Executive Committee did not meet. The Company does not maintain a standing nominating committee or other committee performing similar functions. During the fiscal year ended May 31, 1995, the Board of Directors of the Company met on ten occasions. Each of the directors attended in excess of 75% of the meetings of the Board of Directors and 75% of all meetings held by all committees of the Board on which he served. FAILURE TO FILE REPORTS During fiscal year 1995, Mr. Robert K. Norris, the Vice President - Finance of the Company, failed to file one report required by Section 16(a) of the Securities Exchange Act of 1934, as amended, on a timely basis. The report not filed on a timely basis was Mr. Norris' Form 3, his initial statement of beneficial ownership of the Company's Common Stock. No transactions were reported late because of Mr. Norris' failure to file his Form 3 on a timely basis. ITEM 11. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION The following sets forth certain information regarding the aggregate cash compensation paid to or earned by the Company's Chief Executive Officer and Mr. Richard R. Wellman, who served as the Company's Chief Executive Officer for a portion of fiscal 1995, during the periods indicated: III-2 SUMMARY COMPENSATION TABLE
Long Term Annual Compensation Compensation Awards ------------ ------------- Name and All Other Principal Position Year Salary ($) Bonus ($)(1) Options/SARS(#) Compensation ($) ------------------- ---- ---------- ------------ -------------- ------------------- Alexius A. Dyer III 1995 $133,108 0 107,000 0 President and Chief 1994 108,865 20,000 0 0 Executive Officer 1993 109,615 15,750 5,000 0 Richard R. Wellman(2) 1995 $38,523 0 0 0 1994 75,800 0 0 0 1993 20,800 2,080 10,000 0 - ------------------------- (1) All officers are eligible to participate in the Company's bonus plan. Awards are based upon certain performance criteria relating to the Company's net sales. (2) Mr. Wellman was Chief Executive Officer of the Company until January 31, 1995, when he resigned from his position as such. Effective upon his resignation, Mr. Wellman's employment agreement with the Company was terminated by mutual consent.
III-3 OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS Percent Number of of Total Potential Realizable Securities Option/SARs Value at Assumed Underlying Granted to Exercise or Annual Rates of Stock Option/SARs Employees in Base Price Expiration Price Appreciation for Name Granted (#) Fiscal Year ($/sh) Date Option Term (5 years)* ---- ----------- ------------ ----------- ----------- ------------------------ 5%($) 10%($) ----- ------ Alexius A. Dyer III, 107,000 40% $0.19 12/27/99 $5,616.75 $12,411.68 President and Chief Executive Officer
- ------------------------ * The gains under these columns result from calculations assuming 5% and 10% growth rates as set by the Securities and Exchange Commission and are not intended to forecast future price appreciation of the Common Stock of the Company. The gains reflect a future value based upon growth at the prescribed rates. The Company did not use an alternate formula for a grant-date valuation, an approach which would state gains at present, and therefore lower value. The Company is not aware of any formula that will determine with reasonable accuracy a present value based on future unknown or volatile factors. III-4 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUE Shown below is information with respect to all unexercised options to purchase the Company's Common Stock granted to the Named Officers through the end of the last fiscal year under the Company's option plans. No options were exercised during fiscal year 1995.
Shares Value of Unexercised Acquired Number of Unexercised In-the-Money Options at by Value Options at FY-End FY-End ($) Name Exercise Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable(1) ---- -------- ------------ ------------------------- --------------------------- Alexius A. Dyer III 0 0 140,334/66,666(2) $39,875.00 (1) Represents the market value of the underlying Common Stock at fiscal year end minus the exercise price. (2) Includes 33,334 shares of Common Stock that may be acquired pursuant to the vested portion of a Stock Purchase Warrant granted to Mr. Dyer on October 15, 1993. The exercise price is $3.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee, Kyle R. Kirkland and E. James Mueller, have never been employees of the Company. No interlocks existed and no insiders participated in the Compensation Committee's deliberations or decisions regarding fiscal year 1995 salaries. COMPENSATION OF DIRECTORS The non-employee members of the Company's Board of Directors received a $25,000 fee for their service on the Board during the 1995 fiscal year pursuant to a Director's Compensation Plan, which was adopted during the 1995 fiscal year. During the 1994 fiscal year, non-employee members of the Board of Directors received options to purchase 15,000 shares of Common Stock upon their appointment or election to the Board. Such grants vest in increments of 5,000 shares per year. Additional grants of 15,000 shares are made upon election to the Board after all previous grants have vested. These additional grants also vest in 5,000 share increments. The exercise price of all grants is the fair market value of the Common Stock at the date of grant. Directors are also reimbursed for expenses incurred in connection with the attendance of Board meetings. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. PRINCIPAL STOCKHOLDERS AND STOCKHOLDINGS OF MANAGEMENT The following table sets forth certain information regarding each person known to the Company who may be considered a beneficial owner of more than 5% of the outstanding shares of the Company's Common Stock as of May 31, 1995: III-5
Shares Percentage of Name of Beneficial Owner Beneficially Owned Outstanding Shares ------------------------- ------------------ ------------------- LYNDA WELLMAN(1) 1,999,700 49.48 RICHARD R. WELLMAN(1) 7540 Loch Ness Drive Miami Lakes, Florida 33014 SUN LIFE INSURANCE COMPANY OF AMERICA(2) 514,865 12.74 11601 Wilshire Boulevard, 12th Floor Los Angeles, California 90025-1748 - --------------------------- (1) For purposes of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), Mr. and Mrs. Wellman are deemed to be the beneficial owners of the Common Stock owned by the other. Mr. and Mrs. Wellman executed an irrevocable proxy, in connection with their resignation of their positions with the Company on January 31, 1995, authorizing the Board Of Directors of the Company to vote 1,980,000 shares of the Company's Common Stock owned by the Wellmans. Mr. and Mrs. Wellman have notified the Company that they consider the proxy terminated as a result of the Company's failure to make timely payments of certain amounts due Ms. Wellman as severance payments. The Company disputes the Wellmans' assertion that the proxy has been terminated. (2) Sun Life Insurance Company of America ("Sun Life"), a subsidiary of SunAmerica Corporation ("SunAmerica"), is the registered owner of exercisable warrants to purchase 514,865 shares of the Company's Common Stock at an exercise price of $5.3875. Sun Life acquired the warrants in connection with its purchase of Senior Notes. Under the Exchange Act, SunAmerica may be deemed the beneficial owner of the shares described herein.
The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of May 31, 1995 by the Company's Chief Executive Officer, who is the only officer of the Company whose salary exceeds $100,000, and each of the Company's directors and by all directors and executive officers as a group: III-6
Shares Percentage of Name of Beneficial Owner or Identity of Group (1) Beneficially Owned Outstanding Shares ------------------------------------------------- ------------------ ------------------- Alexius A. Dyer, III 141,334(2) 3.50 E. James Mueller 15,000(3) * Kyle R. Kirkland 107,237(4) 2.65 All Directors and Executive Officers as a Group (3 persons) 257,385 6.37 - ------------------ * Less than one percent of the shares of Common Stock outstanding. (1) The address for each person listed in this table is c/o International Airline Support Group, Inc., 8095 N.W. 64th Street, Miami, Florida 33166. (2) Includes 107,000 shares of Common Stock that may be obtained by Mr. Dyer upon exercise by him of options granted to him pursuant to the Employee Stock Option Plan and 33,334 shares of Common Stock that may be acquired pursuant to the vested portion of a Stock Purchase Warrant granted to Mr. Dyer on October 15, 1993. The exercise prices for the options and warrants are $.19 and $3.00 per share, respectively. (3) Represents shares that may be obtained by Mr. Mueller upon exercise by him of options granted to him pursuant to the Non-Employee Directors Stock Option Plan. The exercise price is $4.625 per share. (4) Represents shares that may be obtained by Mr. Kirkland upon exercise of options granted to him pursuant to the Non-Employee Directors Stock Option Plan and upon the exercise of warrants granted to him as an officer of the placement agent for the Senior Notes. The exercise prices for the options and warrants are $5.125 and $5.3875 per share, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On January 31, 1995, IASG entered into a Purchase Agreement with Richard R. Wellman and Lynda Wellman (the "Wellmans") and an entity affiliated with the Wellmans, Custom Air Holdings, Inc., a Nevada corporation ("Custom Air"), pursuant to which IASG transferred to Custom Air (i) all of the outstanding shares of common stock of Brent Aviation, Inc., which was a wholly-owned subsidiary of IASG ("Brent"), (ii) certain spare parts, components, inventory and equipment for Boeing 727 series aircraft, and (iii) A McDonnell Douglas DC-4 aircraft. In consideration for the foregoing, Custom Air paid IASG $230,000 and agreed to lease a Boeing B-727-100 freighter airplane on a month-to-month basis. In addition, the Wellmans resigned from all positions as officers or directors held by them with IASG and its subsidiaries, granted a proxy to IASG enabling IASG's directors to vote 1,980,000 shares of common stock of IASG held by the Wellmans for a period of two years, and agreed not to compete or interfere with any of the businesses of IASG and its remaining subsidiaries for a period of two years. IASG agreed to pay Lynda Wellman severance equivalent to her current salary for a period of one year. IASG further agreed to terminate its leasehold interest in a facility located at the Grayson County, Texas Airport, allowing Brent to lease such facility for its operations. III-7 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS. PAGE OR METHOD OF FILING (1) Index to Consolidated Financial Statements Page F-1 (2) Report of Grant Thornton L.L.P. Page F-2 (3) Consolidated Financial Statements and Notes to Page F-3 Consolidated Financial Statements of the Company, including Consolidated Balance Sheets as of May 31, 1995 and 1994 and related Consolidated Statements of Operations, Consolidated Cash Flows and Consolidated Stockholders' Equity (Deficiency) for each of the years in the three-year period ended May 31, 1995 (b) FINANCIAL STATEMENTS SCHEDULES PAGE OR METHOD OF FILING (1) Report of Grant Thornton L.L.P. as to Included in the report Consolidated Financial Statement Schedules for listed in (a)(ii) above fiscal years ended May 31, 1995, 1994 and 1993 (2) Schedule II. Valuation and Qualifying Page S-1 Accounts
Schedules not listed above and columns within certain Schedules have been omitted because of the absence of conditions under which they are required or because the required material information is included in the Consolidated Financial Statements or Notes to the Consolidated Financial Statements included herein. IV-1 (c) EXHIBITS
Page Number or Exhibit Number Description Method of Filing - -------------- ----------- ---------------- 3.1 Articles of Incorporation of the Incorporated by reference to Company, as amended Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (the "1993 Form 10-K") 3.2 Amended and Restated Bylaws of the Incorporated by reference to Company Exhibit 3.2 of the 1993 Form 10-K 4.1 Form of Certificate for Common Stock Incorporated by reference to Exhibit 4.1 of the 1993 Form 10-K 4.2 Form of Warrant issued to holders of Incorporated by reference to Senior Notes Exhibit 4-A to the Company's Form 8-K dated July 17, 1992 (the "July 1992 Form 8-K") 4.3 Form of 8% Convertible Subordinated Incorporated by reference to Debentures due August 31, 2003 Exhibit 4.3 of the 1993 Form 10-K 10.1.1 Lease Agreement dated June 14, 1991 Incorporated by reference to between The County of Grayson, Texas Exhibit 10.1.1 of the 1993 Form 10-K and International Airline Support Group, Inc. 10.2.1 Employee Stock Option Plan Incorporated by reference to Exhibit 10.2.1 of the 1993 Form 10-K 10.2.2 Non-Employee Director Stock Option Plan Incorporated by reference to Exhibit 10.2.2 of the 1993 Form 10-K 10.2.3 401(k) Plan Incorporated by reference to Exhibit 10-H of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1992 (the "1992 Form 10-K") 10.2.4 Bonus Plan Incorporated by reference to Exhibit 10.2.4 of the 1993 Form 10-K IV-2 10.2.5 Cafeteria Plan Incorporated by reference to Exhibit 10.2.5 of the 1993 Form 10-K 10.3.1 Form of Securities Purchase Incorporated by reference to Agreement dated as of July 17, 1992 Exhibit 10-A to the Company's among the Company and the Purchasers July 1992 Form 8-K listed therein, as amended 10.3.2 Consent, Amendment and Waiver dated Incorporated by reference to as of September 8, 1993 among the Exhibit 10.9.2 of the 1993 Form 10-K Company and the parties listed therein 10.3.3 Letter Agreement dated March 23, Incorporated by reference to Exhibit 1992, between Dabney/Resnick and 10.4.3 of the Company's amended Wagner, Inc. and International Annual Report on Form 10-K for the Airline Support Group, Inc., fiscal year ended May 31, 1994 (the relating to placement of the "1994 Form 10-K/A") Company's 12% Senior Secured Notes 10.4 Representative Indemnity Agreement Incorporated by reference to between the Company and its Exhibit 10.12 of the 1993 Form 10-K Directors and Executive Officers 10.5.1 Securities Purchase Agreement dated Incorporated by reference to as of September 8, 1993 among the Exhibit 10.13 of the 1993 Form 10-K Company and the Purchasers listed therein 10.5.2 Letter Agreement dated March 25, Incorporated by reference to 1993, between Dabney/Resnick and Exhibit 10.6.2 of the 1994 Form 10- Wagner, Inc. and International K/A Airline Support Group, Inc., relating to placement of the Company's 8% Convertible Subordinated Debentures 10.6 Form of Registration Rights Incorporated by reference to Agreement dated as of September 8, Exhibit 10.14 of the 1993 Form 10-K 1993, among the Company and the Purchasers listed therein 10.7.1 Joint Venture Agreement dated Incorporated by reference to August 20, 1992 between the Company Exhibit 10.7 of the 1993 Form 10-K and R.T. Leasing, Inc. IV-3 10.7.2 Settlement Agreement, dated Incorporated by reference to February 10, 1994, between Aircraft Exhibit 10.9 of the 1994 Partners, Ltd., International Airline Form 10-K/A Support Leases, Inc., R.T. Leasing, Inc., A.P. Number 1, Inc. and Richard R. Wellman Group, Inc., International Air 10.7.3 Settlement Stipulation, dated January 31, Filed herewith 1995, among Admark International Ltd., Plaintiff and Norville Trading Company Ltd., International Airline Support Group, Inc. and Richard R. Wellman, Defendants 10.8 Aircraft Purchase Agreement, dated Incorporated by reference to December 30, 1993, between Dana Messina and Exhibit 10.9 of the 1994 Form International Airline Support Group, Inc. 10-K/A 10.9.1 Purchase Agreement, dated January 1995, among Incorporated by reference to International Airline Support Group, Inc., Exhibit 10.1 to the Company's Form Richard R. Wellman, Lynda Wellman and Custom 10-Q/A for the quarter ended Air Holdings, Inc., including as an exhibit August 31, 1994 the "General Proxy" executed by Richard R. Wellman and Lynda Wellman 10.10 Assignment and Assumption Agreement, dated Incorporated by reference to January 31, 1995, between International Exhibit 10.2 to the Company's Form Airline Service Center, Inc. and Express One 10-Q/A for the quarter ended International, Inc. August 31, 1994 10.11 Notice of Payment Blockage, dated May 25, 1995 Filed herewith 21 Subsidiaries of Registrant Filed herewith 23 Consent of Grant Thornton L.L.P. Filed herewith 27 Financial Data Schedule Filed herewith
(d) REPORTS ON FORM 8-K. A Report on Form 8-K dated May 26, 1995 was filed by the Company relating to the Company's nonpayment of its scheduled May 31, 1995 interest payment to the holders of the Debentures as a result of the Company's receipt of a notice of payment blockage from the holder of a majority of the outstanding principal amount of the Company's Senior Notes. IV-4 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized this 28th day of August, 1995 International Airline Support Group, Inc., a Delaware Corporation By: /S/ ALEXIUS A. DYER III _______________________________________ Alexius A. Dyer III President Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Title Date /S/ ALEXIUS A. DYER III _______________________ President and Director August 28, 1995 Alexius A. Dyer III (Principal Executive Officer) /S/ ROBERT K. NORRIS ________________________ Vice President-Finance (Principal August 28, 1995 Robert K. Norris Financial and Accounting Officer) /S/ KYLE R. KIRKLAND ________________________ Director August 28, 1995 Kyle R. Kirkland /S/ E. JAMES MUELLER _________________________ Director August 28, 1995 E. James Mueller
IV-5 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Page Report of independent certified public accountants . . . . . . . . . . F-2 Consolidated balance sheets as of May 31, 1995 and 1994. . . . . . . . F-3 Consolidated statements of operations for the years ended May 31, 1995, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated statements of stockholders' equity (deficit) for the years ended May 31, 1995, 1994 and 1993. . . . . . . . . . . . . . F-5 Consolidated statements of cash flows for the years ended May 31, 1995, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . F-6 Notes to consolidated financial statements . . . . . . . . . . . . . . F-7 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders International Airline Support Group, Inc. We have audited the accompanying consolidated balance sheets of International Airline Support Group, Inc. and Subsidiaries as of May 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended May 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of International Airline Support Group, Inc. and Subsidiaries as of May 31, 1995 and 1994 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended May 31, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B, the Company has incurred significant operating losses and the Company is in default under its debt agreements which could result in the lenders demanding payment under the Company's long-term debt agreements, raising substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We have also audited Schedule II of International Airline Support Group, Inc. and Subsidiaries for each of the three years in the period ended May 31, 1995. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. Miami, Florida July 21, 1995 F-2 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MAY 31, 1995 AND 1994 ASSETS
1995 1994 ---- ---- Current assets Cash $ 848,331 $ 95,790 Accounts receivable, net of allowance for doubtful accounts of $ 619,000 in 1995 and $940,000 in 1994 2,592,463 3,817,023 Notes receivable (Note A) 313,490 1,120,000 Income tax refund receivable - 1,930,000 Inventories (Notes A, C and D) 6,497,270 8,719,774 Deferred tax benefit - current, net of valuation allowance of $1,146,000 in 1995 and $2,190,000 in 1994 (Note F) - - Other current assets 31,480 162,055 ------------ ------------ Total current assets 10,283,034 15,844,642 Property and equipment (Notes A and E) Land 330,457 330,457 Aircraft held for lease 3,289,613 7,227,835 Building and leasehold improvements 715,772 789,340 Machinery and equipment 940,948 2,191,999 ------------ ------------ 5,276,790 10,539,631 Less accumulated depreciation 1,980,927 2,233,680 ------------ ------------ 3,295,863 8,305,951 ------------ ------------ Other assets Deferred debt costs, net (Note A) 931,932 1,224,401 Deferred tax benefit, net of valuation allowance of $3,894,000 in 1995 and $3,095,000 in 1994 (Note F) - - Deposits and other assets - 178,322 ------------ ------------ 931,932 1,402,723 ------------ ------------ $ 14,510,829 $ 25,553,316 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities Current maturities of long-term obligations (Note D) $ 1,812,040 $ 3,531,228 Long-term obligations in default classified as current (Notes B and D) 18,083,334 22,156,720 Bank overdrafts - 410,570 Accounts payable 1,650,078 4,086,998 Accrued expenses (Note P) 2,226,900 3,970,840 ------------ ------------ Total current liabilities 23,772,352 34,156,356 Long-term obligations, less current maturities (Notes B and D) 440,377 485,020 Commitments and contingencies (Notes E, M, N and Q) - - Stockholders' equity (deficit) (Notes G and H) Preferred Stock - $.001 par value, authorized 500,000 shares; 0 shares outstanding in 1995 and 1994. - - Common stock - $.001 par value; authorized 20,000,000 shares; issued and outstanding 4,041,779 shares in 1995 and 1994. 4,042 4,042 Additional paid-in capital 2,654,332 2,654,332 Accumulated deficit (12,360,274) (11,746,434) ------------ ------------ Total stockholders' deficit (9,701,900) (9,088,060) ------------ ------------ $ 14,510,829 $ 25,553,316 ============ ============
The accompanying notes are an integral part of these statements. F-3 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MAY 31, 1995, 1994 AND 1993 1995 1994 1993 ---- ---- ---- Revenues Net sales $21,998,869 $16,746,932 $32,031,596 Lease revenue 2,984,218 1,986,450 1,473,038 ----------- ------------ ----------- Total revenues 24,983,087 18,733,382 33,504,634 Cost of sales (Note O) 17,712,427 22,104,131 21,493,792 Selling, general and administrative expenses (Notes O and P) 4,358,119 6,943,147 6,469,160 Provision (recovery) for doubtful accounts (334,571) 1,487,969 493,234 Interest expense 2,271,849 2,562,681 2,162,994 Depreciation and amortization 1,693,301 2,865,610 1,405,720 Interest and other income (602,943) (87,600) (65,828) Unusual and nonrecurring items (Note Q) (177,115) - - Losses of service center subsidiary (Note R) 675,860 1,922,086 - ----------- ------------ ----------- 25,596,927 37,798,024 31,959,072 ----------- ------------ ----------- Earnings (loss) before income taxes, equity in loss of joint venture, and extraordinary item (613,840) (19,064,642) 1,545,562 Provision for income taxes (benefit) (Note F) - (2,475,185) 510,000 ----------- ------------ ----------- Earnings (loss) before equity in loss of joint venture and extraordinary item, (613,840) (16,589,457) 1,035,562 Equity in loss of joint venture (Note J) - (423,224) (58,543) ----------- ------------ ----------- Earnings (loss) before extraordinary item (613,840) (17,012,681) 977,019 Extraordinary loss on the extinguishment of debt (Note D) - (363,022) - ----------- ------------ ----------- Net (loss) earnings $ (613,840) $(17,375,703) $ 977,019 =========== ============ =========== Per share data (Note A): Weighted average shares outstanding 4,041,779 4,041,779 3,997,458 =========== ============ =========== Earnings (loss) per common share and common equivalent shares Earnings (loss) before extraordinary item $ (.15) $ (4.21) $ .24 Extraordinary item - (.09) - ------ ------- ----- Net (loss) earnings $ (.15) $ (4.30) $ .24 ====== ======= =====
The accompanying notes are an integral part of these statements. F-4 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED MAY 31, 1995, 1994 AND 1993
COMMON STOCK ----------------- Additional Retained Number of Par Paid-In Earnings Shares Value Capital (Deficit) Total ------ ----- ------- --------- ----- Balance at June 1, 1992 3,974,112 $3,974 $2,424,579 $4,652,250 $7,080,803 Issuance of common stock 35,000 35 115,451 - 115,486 Net earnings - - - 977,019 977,019 --------- ------ ---------- ------------ ---------- Balance at May 31, 1993 4,009,112 4,009 2,540,030 5,629,269 8,173,308 Issuance of common stock 32,667 33 114,302 - 114,335 Net loss - - - (17,375,703) (17,375,703) --------- ------ ---------- ------------- ---------- Balance at May 31, 1994 4,041,779 4,042 2,654,332 (11,746,434) (9,088,060) Net loss - - - (613,840) (613,840) --------- ------ ---------- ------------ ----------- Balance at May 31, 1995 4,041,779 $4,042 $2,654,332 $(12,360,274) $(9,701,900) ========= ====== ========== ============ ===========
The accompanying notes are an integral part of these statements. F-5 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MAY 31, 1995, 1994 AND 1993
1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net earnings (loss) $ (613,840) $(17,375,703) $ 977,019 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,693,301 3,150,062 1,405,720 Depreciation - service center 196,322 - - Gain on Express One transaction (Note R) (70,631) - - Loss on Wellman transaction 33,575 - - (Increase) decrease in deferred tax benefit (23,696) 69,000 (332,000) Equity in loss of joint venture - 423,224 58,543 Decrease (increase) in accounts receivable 1,224,560 (83,108) 281,738 Decrease (increase) in notes receivable 806,510 800,000 (1,920,000) Decrease (increase) in income tax refund 1,930,000 (1,930,000) - Decrease (increase) in inventories 4,910,834 8,243,147 (8,631,990) Decrease (increase) in other current assets 154,271 981,557 (1,098,118) (Increase) in deferred debt costs - (341,326) (1,237,980) Decrease (increase) in other assets 178,322 (112,999) (9,026) (Decrease) increase in accounts payable and accrued expenses (4,591,430) 5,012,896 134,576 (Decrease) increase in income taxes payable - (211,666) (1,788,676) $(0,000,000) $(00,000,000) $(00,000,000) ----------- ------------ ------------ Total adjustments 6,441,938 16,000,787 (13,137,213) ----------- ------------ ------------ Net cash provided by (used in) operating activities 5,828,098 (1,374,916) (12,160,194) Cash flows from investing activities: Proceeds from maturity of restricted certificates of deposit - 356,115 1,350,000 Purchase of restricted certificate of deposit - - (350,000) Capital expenditures (135,936) (3,635,919) (1,960,700) Proceeds from sale of aircraft held for lease - 1,000,000 - Investments in joint ventures - - (5,000) Decrease (increase) in due from affiliates - - 25,445 ----------- ------------ ------------ Net cash used in investing activities (135,936) (2,279,804) (940,255) Cash flows from financing activities: Net payments under line of credit - (1,000,000) (2,918,463) Proceeds from issuance of common stock - - 115,486 Borrowings under notes and leases - 10,000,000 19,515,783 Repayments of debt obligations (4,939,621) (5,760,432) (3,312,238) ----------- ------------ ------------ Net cash (used in) provided by financing activities (4,939,621) 3,239,568 13,400,568 ----------- ------------ ------------ Net increase (decrease) in cash 752,541 (415,152) 300,119 Cash at beginning of period 95,790 510,942 210,823 ----------- ------------ ------------ Cash at end of period $ 848,331 $ 95,790 $ 510,942 =========== ============ ============ Supplemental disclosures of cash flow information (Note K): Cash paid during the year for: Interest $ 2,167,279 $ 2,736,233 $ 1,843,630 =========== ============ ============ Income Taxes $ - $ - $ 2,633,626 =========== ============ ============
The accompanying notes are an integral part of these statements. F-6 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES International Airline Support Group, Inc. and Subsidiaries (the "Company") is primarily engaged in the sale of aircraft, aircraft parts, leasing of aircraft and related services. The Company previously was engaged in other activities through the Company's wholly-owned subsidiary, International Airline Service, Inc. Center ("Service Center"), which was an FAA certified repair facility engaged in the performance of maintenance checks required by the FAA on narrow body aircraft (see Note R). The Company's other wholly-owned subsidiary, Brent Aviation, Inc. d/b/a Custom Air Transport was previously engaged in the flight operation of cargo aircraft (see Note Q). a) CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Investments in nonconsolidated entities are reported on the equity method. b) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. c) INVENTORIES Inventories are stated at the lower of cost or market. The cost of aircraft parts is determined on a specific identification basis for those parts purchased individually or in lots where specific identification is practical. For parts acquired through whole aircraft purchases, the costs are assigned to pools which are then amortized as part sales take place. The amortization is then based upon the actual sales, except in any periods where sales are lower than expected, the estimated sales per the initial sales projection are used (which has a maximum life of 5 years). The amount of cost amortized is based upon the gross profit percentage as calculated from the estimated sales value of the parts. The sales value estimates are monitored by management, and adjusted periodically as necessary. Certain aircraft, which were previously leased have been classified as held for sale and are included in inventory. At May 31, 1995 and 1994, approximately 80% and 72%, respectively, of the ending inventory (including aircraft held for sale) was costed under the specific identification method, and the remaining 20% and 28%, respectively, was costed under the pooling method. d) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated life utilizing straight-line and accelerated methods. The estimated lives of the depreciable assets range from 5 to 31.5 years. Overhaul costs on aircraft held for lease are capitalized and depreciated over the estimated service life of the overhaul. For income tax purposes, accelerated methods of depreciation are generally used. Deferred income taxes are provided for the difference between depreciation expense for tax and financial reporting purposes. F-7 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued e) NOTES RECEIVABLE In fiscal 1993, the Company sold certain aircraft to an African airline in exchange for notes receivable totalling $2,590,000. In December 1994, the remaining balance due on one of the notes was paid. A new note was executed for $937,466 representing the current principal balance on the remaining note plus balances due on trade accounts receivable. In addition, the note provides for an additional $250,000 of future part sales, none of which were delivered as of May 31, 1995. The new note bears interest at a rate of 12%, and requires monthly payments of $70,000 until paid. Due to certain economic conditions in Nigeria, the Company is deferring the recognition of interest income on this note until the collection of such interest. The note is collateralized by the aircraft sold. In May 1993, the Financial Accounting Standards Board issued SFAS No. 114, which relates to "Accounting for Creditors For Impairment of a Loan". This Statement, which is effective for fiscal years beginning after December 15, 1994, requires that impaired loans or notes receivable be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or fair value of the collateral. Management does not anticipate that the adoption of SFAS No. 114 will have a significant effect on the overall financial condition or operations of the Company. The Company intends to adopt SFAS No. 114 on June 1, 1995, as required. f) DEFERRED DEBT COSTS Deferred debt costs principally relate to the costs associated with obtaining the Company's Senior Secured Notes and Convertible Subordinated Debentures. These costs are being amortized using the interest method over the life of the respective debt issue. Accumulated amortization at May 31, 1995 and 1994, was approximately $1,094,000 and $802,000, respectively. g) EARNINGS PER SHARE Earnings per share is computed by dividing the net earnings (loss) by the weighted average number of common shares outstanding and common stock equivalents. Stock options and warrants are considered common stock equivalents unless their inclusion would be anti-dilutive. The Company's Convertible Subordinated Debentures are not considered common stock equivalents as their inclusion would be anti-dilutive and the effective yield on the securities exceeded 66-2/3% of the average Aa corporate bond rate at the time of issuance. h) REVENUE RECOGNITION Revenue from the sale of parts is recognized when products are shipped to the customer. Revenue from the sale of aircraft is recognized when all consideration has been received and the buyer has taken delivery and acceptance of the aircraft. Lease revenue is recognized on an accrual basis, unless collectibility is uncertain. i) EMPLOYEE BENEFIT PLAN The Company established in fiscal 1992 a contributory 401(K) plan. The plan is a defined contribution plan covering all eligible employees of the Company, to which the Company makes certain discretionary matching contributions based upon the level of its employees' contributions. The amount charged to earnings in fiscal 1995, 1994 and 1993 were insignificant. The Company does not provide any health or other benefits to retirees. F-8 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE A - DESCRIPTION OF COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued j) RECLASSIFICATIONS Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. k) UNINSURED CASH BALANCES Cash balances in financial institution accounts are secured by the Federal Deposit Insurance Corporation (FDIC) for amounts up to $100,000, per customer. At May 31, 1995, the Companys uninsured cash balances approximated $803,000. l) INCOME TAXES Income taxes are provided based on earnings reported for tax return purposes in addition to a provision for deferred income taxes. Deferred income taxes are provided in order to reflect the tax consequences in future years of differences between the financial statement and tax basis on assets and liabilities at each year end. NOTE B - GOING CONCERN Primarily as a result of the net losses experienced in fiscal 1995 and 1994, and the classification of most indebtedness as current, the Company has a significant deficit in working capital and stockholders' equity. Currently, the Company is in noncompliance with certain financial and other covenants under the loan agreements relating to the 12% Senior Secured Notes ("Notes"), issued July 1992, and the 8% Convertible Subordinated Debentures ("Debentures"), issued September 1993 (see Long-Term Obligations Note D). The Notes are secured by substantially all of the assets of the Company and the Debentures are unsecured and are subordinated in right of payment to the Notes. Excluding amounts scheduled to be repaid in fiscal 1996 under the terms of the agreements, $18,083,334 is subject to accelerated maturity and, as such, has been classified as a current liability in the Consolidated Balance Sheets at May 31, 1995. The Company intends to present a restructuring proposal to the holders of the Notes and the Debentures during the second quarter of fiscal 1996. There can be no assurance that the Company will be able to consummate a restructuring of its indebtedness. If the lenders were to accelerate maturity, the Company would not have sufficient funds to repay the debt obligations. As a result of the factors, there exists substantial doubt about the Company's ability to continue in existence. However, in 1995, the Company took a number of cost-cutting steps to reduce its operating losses including ceasing the operations of its Service Center (see Note R), personnel reductions and the elimination of other costs. NOTE C - INVENTORY Inventories at May 31, 1995 and 1994 consisted of the following:
1995 1994 ---- ---- Aircraft parts $4,063,352 $5,624,922 Aircraft available for sale 2,433,918 3,094,852 ---------- ---------- $6,497,270 $8,719,774 ========== ==========
F-9 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS - CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE D - LONG-TERM OBLIGATIONS Long-term obligations at May 31, 1995 and 1994 consisted of the following:
1995 1994 ---- ---- 12% Senior Secured Notes $ 9,850,000 $14,550,000 8% Convertible Subordinated Debentures 10,000,000 10,000,000 Mortgage note payable to bank 455,420 481,580 Notes payable due in equal monthly installments through October 1997, bearing interest at 9.5% to 11.5% collateralized by equipment 16,363 31,823 Capitalized lease obligations (Note E) 13,968 1,109,565 ----------- ----------- 20,335,751 26,172,968 Less: Current maturities and long-term obligations in default classified as current 19,895,374 25,687,948 ----------- ----------- $ 440,377 $ 485,020 =========== ===========
In July 1992, the Company issued $18.0 million of five (5) year 12% Senior Secured Notes ("Notes") due July 1997. In September of 1993, the note agreement was amended, to require a payment of $3,450,000 with the proceeds from the issuance of the Convertible Subordinated Debentures ("Debentures") and subsequent sinking fund payments of $3,233,333 in July 1994 and 1995 and $4,041,667 in July 1996 and 1997. In connection with this extinguishment, the Company recorded as an extraordinary item the loss on retirement of debt. Such costs included a 6% prepayment penalty as well as that portion of the deferred debt issuance costs associated with the Notes retired. During fiscal 1995 the Company prepaid, without penalty, $1,466,333 of the amount due in July 1995. The notes are secured by substantially all the assets of the Company. Warrants to purchase 1,093,528 shares of common stock were issued to the Noteholders at an exercise price of $5.375. The warrants have a five year term and carry restrictions regarding exercise and registration of the underlying shares. The security purchase agreement contains restrictive covenants requiring the Company to maintain a minimum net worth as well as certain financial ratios, restricts dividends and limits capital expenditures, indebtedness, liens, certain business activities and inventory purchases. The Company is in default of the loan agreement. In September 1993, the Company issued $10.0 million in Convertible Subordinated Debentures ("Debentures"), due August 2003, through a private placement offering. The Debentures may be redeemed in whole or in part after August 1996, upon 30 days notice by the Company. The Debentures are convertible to the Company's common stock at a price of $4.00 per share (2,500,000 shares). The Debentures conversion options carry restrictions regarding conversion and registration of the underlying shares. The Debenture holders have certain demand and piggy-back registration rights on the underlying shares. The Debentures have a fixed annual interest rate of 8%, with such interest payable quarterly. The securities purchase agreement contains restrictive covenants requiring the Company to maintain a certain level of consolidated net worth and certain financial ratios related to interest expense coverage. The Company is in default of the loan agreement. In May 1995, the Company received a notice of payment blockage from the holder of a majority of the Notes. The payment blockage has prevented the Company from making the scheduled interest payment on the Debentures, which was due May 31, 1995. The Company also did not make its scheduled July 1995 principal payment to the holders of the Notes. F-10 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE D - LONG-TERM OBLIGATIONS - Continued In September 1992, the Company entered into a promissory note and mortgage and security agreement with a bank. The promissory note is payable in equal monthly installments of $2,180 plus interest through September 1997 when the remaining balance is due. The note has an interest rate of 1% above the bank's prime rate. The note is secured by a first mortgage on the land and building in Miami, Florida. The land and building has a total cost of approximately $1,009,000. This property also has a junior mortgage filed by the Senior Secured Noteholders. The maturities of long-term obligations in each of the next five years subsequent to May 31, 1995 are as follows: 1996 - $1,812,040, 1997 - $4,084,204, 1998 - $4,439,507, 1999 - $0, 2000 - $0, and thereafter $10,000,000. However, the Company is in default under the terms of the securities purchase agreement for the 12% Senior Secured Notes, and the 8% Convertible Subordinated Debentures. If the holders were to demand repayment, $18,083,334, which is scheduled to be paid subsequent to May 31, 1996, would be due in fiscal 1996. NOTE E - LEASES The Company conducts a portion of its operations utilizing leased equipment which has been capitalized. Substantially all of the fixed assets of the Service Center were acquired through a leasing arrangement which was classified as a capitalized lease. In January 1995, the Company was released from all obligations under this lease in connection with the transfer of assets from the Service Center, as discussed in Note R. Following is a schedule of future minimum rental payments under capital leases together with the present value of future minimum rentals as of May 31, 1995. Year ended May 31, 1995 $18,770 Amount representing interest 4,802 ------- Present value of future minimum lease payments 13,968 Current maturities 3,606 ------- Long term obligations under capital leases $10,362 =======
Capitalized equipment leases are accounted for and amortized as company-owned equipment. The following is a schedule of leased equipment under capital leases:
1995 1994 ---- ---- Equipment $298,279 $1,412,904 Less: Accumulated amortization 279,863 482,051 -------- ---------- $ 18,416 $ 930,853 ======== ==========
The Company leases warehouse and hangar facilities as well as certain equipment under long-term operating lease agreements which expire at varying times over the next five years. Rental expense under these leases for the years ended May 31, 1995, 1994 and 1993 was approximately $220,000, $242,000 and $203,000, respectively. At May 31, 1995, future minimum payments on non-cancellable operating leases are $47,900 in fiscal 1996. F-11 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE E - LEASES - Continued The Company leases aircraft to customers under various operating leases one of which is month to month and the other expires in October 1995. In addition to minimum base rentals, the lease agreements require additional rent based upon aircraft usage. Future minimum rentals at May 31, 1995, on non-cancellable operating leases will be $180,000 in fiscal year 1996. The net investment in aircraft held for or leased to customers was $2,210,202 and $6,126,138 at May 31, 1995 and 1994, respectively. NOTE F - INCOME TAXES The provision for income taxes for the years ended May 31, 1995, 1994 and 1993:
1995 1994 1993 ---- ---- ---- Current provision: Federal $ - $ (2,544,185) $ 732,000 State - - 110,000 ----------- ------------ --------- - (2,544,185) 842,000 Deferred provision (benefit) - 69,000 (332,000) ----------- ------------ --------- $ - $ (2,475,185) $ 510,000 =========== ============ =========
The tax effect of the Company's temporary differences and carryforwards are as follows:
1995 1994 ---- ---- Deferred tax liabilities (benefits) -- current: Reserve for overhaul costs $ (545,000) $ (316,000) Bad debt reserve (233,000) (354,000) Inventory capitalization (188,000) (256,000) Inventory writedown - (912,000) Accrued payroll (37,000) (29,000) Accrued legal settlement costs (116,000) (310,000) Accrued vacation (16,000) (13,000) Accrued - other (11,000) - ----------- ----------- $(1,146,000) $(2,190,000) 1995 1994 ---- ---- Deferred tax liabilities (benefits) - non-current: Inventory capitalization $ - $ (10,000) Depreciation 226,000 23,000 Aircraft - capitalized maintenance 36,000 36,000 Restructuring charges (702,000) (1,279,000) Accrued interest income (106,000) (106,000) Net operating loss carryforward - federal (2,941,000) (1,315,000) Net operating loss carryforward - state (277,000) (315,000) Minimum tax credit - federal (122,000) (122,000) Other, net (8,000) (7,000) ----------- ----------- $(3,894,000) $(3,095,000)
The Company has recorded valuation allowances equal to the amount of the deferred tax benefits at May 31, 1995 and 1994. F-12 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE F - INCOME TAXES - Continued The following table summarizes the differences between the Company's effective tax rate and the statutory federal rate as follows:
1995 1994 1993 Statutory federal rate (34.0)% (34.0)% 34.0% Operating losses with no current tax benefit 34.0 19.6 - Increase in taxes resulting from State income tax less federal income tax benefit - - 3.6 Foreign Sales Corporation (FSC) - - (6.0) Penalties and other non-deductible items - - 1.4 ----- ----- ---- - (14.4)% 33.0% ===== ====== ====
The Company has net operating loss carryforwards for federal and state purposes of approximately $8.7 and $7.6 million, respectively. The net operating losses will expire in the year 2010. The Company has a federal minimum tax credit carryover of approximately $122,000 which may be utilized in future years to the extent that regular tax liability exceeds the alternative minimum tax. Certain provisions of the tax law may limit the net operating loss and credit carryforwards available for use in any given year in the event of a significant change in ownership interest. NOTE G - COMMON AND PREFERRED STOCK In July 1993, the Company amended the Articles of Incorporation to authorize the issuance of up to 500,000 shares of preferred stock. No such stock has been issued. In June of 1993, the Company issued 32,667 shares of common stock to an individual in exchange for certain aircraft parts included in the Company's inventory. NOTE H - STOCK OPTIONS AND WARRANTS The Stockholders in October 1989 approved a Stock Option Plan pursuant to which 350,000 shares of the Company's common stock were reserved for the grant of options to employees and directors of the Company or its subsidiaries. The issuance of the options and the form of the options shall be at the discretion of the Company's Compensation Committee. Information with respect to stock options under the plan is as follows:
Number of Shares -------------------------------------- Reserved Outstanding Available -------- ----------- --------- Balance June 1, 1993 315,000 221,500 93,500 Expired - (71,000) 71,000 -------- --------- ------- Balance May 31, 1994 315,000 150,500 164,500 Granted - 265,000 (265,000) Expired - (54,000) 54,000 Canceled - (66,500) 66,500 -------- --------- ------- Balance May 31, 1995 315,000 295,000 20,000 ======== ========= =======
F-13 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE H - STOCK OPTIONS AND WARRANTS - Continued Effective in December 1994, the outstanding employee stock options were canceled and new options were issued through an Incentive Stock Option Agreement. Options were granted to purchase 265,000 shares at an exercise price of $.19, which equalled the fair market value of the Company's stock on the effective date of the grant. All options granted were fully vested at May 31, 1995, and expire in December 1999. Included in the above table are options granted to directors to purchase 30,000 shares at exercise prices ranging from $4.625 to $5.125 per share. At May 31, 1995, options to purchase 24,000 shares were vested. In April 1992, the Company granted a lender options to purchase 100,000 and 50,000 shares with exercise prices of $4.875 and $4.625, respectively. The options expire in October 1996. In connection with the settlement of a legal dispute arising from a loan to the Company, in April 1992, the Company issued an option to the lender to purchase 200,000 shares at $3.25 per share. The option price approximated the market price on the date of the grant. NOTE I - SALES TO MAJOR CUSTOMERS/FOREIGN AND DOMESTIC The Company sells aircraft and aircraft parts, and leases aircraft to foreign and domestic customers. Most of the Company's sales take place on an unsecured basis, and a majority of the sales are to aircraft operators. The information with respect to sales and lease revenue, by geographic area, is presented in the table below for the years ended May 31, 1995, 1994 and 1993.
(In Thousands) 1995 1994 1993 ---- ---- ---- United States $18,048 $10,978 $13,245 Africa and Middle East 1,204 5,249 14,354 Europe 1,350 374 4,514 Latin America 4,347 2,178 1,102 Canada 34 558 307 Asia - 9 48 ------- ------- ------- $24,983 $19,346 $33,570 ======= ======= =======
The Company had sales to a Venezuelan customer which accounted for approximately 11% of net sales in fiscal 1995 and less than 10% in fiscal years 1994 and 1993. Additionally, the Company sold 3 aircraft to a United States customer which represented 23% of net sales in fiscal 1995. The Company did not have any sales to this customer in previous fiscal years. The Company had sales to one African customer which accounted for less than 1%, 10% and 18% of net sales during the years ended May 31, 1995, 1994, and 1993, respectively. The Company also had sales to another African customer which accounted for 6% and 16% of net sales for fiscal 1995 and 1994, respectively. In 1993, the Company had sales to a Czechoslovakian customer and a United States customer each of which accounted for 11%, of 1993 net sales. F-14 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE J - INVESTMENT IN UNCONSOLIDATED JOINT VENTURE The Company had a 50% interest in A.P. Number 1, Inc., a joint venture corporation created to purchase, sell and lease aircraft and engines. In fiscal 1993, the Company advanced $5,000 and executed as co-maker, together with the Company's Joint Venture partner, a promissory note for $2,900,000 due October 31, 1993. The promissory note was also signed as co-maker by the Chairman of the Company personally. The proceeds of the loan were advanced to the joint venture without any specific terms regarding repayment of principal or payment of interest, and the funds were used to purchase three aircraft. The joint venture's operations were not successful, and the joint venture was not able to make the required payments under the terms of the note. The Company was in default under the terms of the note due to nonpayment of principal and interest and in February 1994, the Company agreed upon a settlement with the lender, whereby the lender received title to the three (3) aircraft and $500,000 from the Company. All remaining liabilities have been satisfied and the joint venture has been dissolved. The Company's loss relating to the joint venture, as shown in the statement of operations for fiscal 1994, includes its share of the joint venture operating losses ($280,000) and its loss upon dissolution ($143,224). Summarized financial information for the joint venture for the year ended May 31, 1993 was as follows:
1993 ---- Total assets $2,721,329 Total liabilities $2,894,416 Net loss $ 183,057
NOTE K - SUPPLEMENTAL CASH FLOW DISCLOSURE During fiscal 1994, the Company acquired approximately $1,140,000 in equipment under a leasing arrangement which was classified as a capital lease obligation at May 31, 1994. The net change in inventory in fiscal 1995 and 1994, as derived from the change in balance sheet amounts, has been adjusted for the following items:
1995 1994 ---- ---- Net decrease in inventory $(2,222,504) $(9,901,144) Transfer of aircraft from inventory to held for lease - 4,070,430 Transfer of aircraft from held for lease to inventory (2,688,330) (250,000) Write-down of inventory through restructuring charge - (2,449,458) Reduction in carrying value of aircraft leased and depreciated in fiscal 1994 and classified as inventory at May 31, 1994 - 287,025 ----------- ----------- Cash flow impact from change in inventory $(4,910,834) $(8,243,147)
In fiscal 1994, the Company issued 32,667 shares of common stock in exchange for certain inventory. During the year ended May 31, 1993, the Company sold three aircraft to several customers for $3,700,000 of which the Company received $1,100,000 in cash, $125,000 in receivables and $2,475,000 in aircraft, which were classified in inventory and aircraft held for lease. F-15 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE L - RELATED PARTY TRANSACTIONS During the year ended May 31, 1994, the Company sold an aircraft for $400,000 to a business partner of an outside director of the Company based upon management's best estimate of the aircraft's fair market value. The Company recorded a loss of approximately $106,000 on this transaction. During the year ended May 31, 1993, the Company paid an outside director of the Company a total of $203,000, including interest of $23,000, to repay a short-term unsecured loan made to the Company during the same year. In fiscal 1994 and 1995, the Company paid approximately $54,000 and $33,000, respectively, to a director for certain consulting services. This consulting agreement, which originated in fiscal 1993, was terminated in 1994, and a commission agreement was entered into. Under the commission agreement, the director is entitled to 3-4% of revenues generated from sales to customers brought in by the director. No amounts have been earned by the director under this new agreement. In connection with the issuance of the Senior Secured Notes, the Company's placement agent received a $720,000 placement fee, together with a warrant to purchase 273,382 shares of common stock at $5.3875 per share. In connection with the issuance of the Convertible Subordinated Debentures, this same placement agent received a $600,000 placement fee. A director of the Company was an employee of the placement agent. The Company previously rented an aircraft used in corporate travel from an entity controlled by a former officer/director of the Company. The total rent paid in fiscal 1993 was approximately $81,000. The Company also rented a condominium unit from an entity controlled by this officer/director. Total rent paid in fiscal 1994 and 1993 was approximately $9,000 and $18,000, respectively. NOTE M - COMMITMENTS AND CONTINGENCIES On February 28, 1994, a complaint titled Ullman et al v. International Airline Support Group, Inc. et al. was filed in the United States District Court for the Southern District of Florida (Case No. 94-0379), alleging certain actionable misrepresentations and non-disclosures by the Company and certain directors under the federal securities laws, as well as claims for common law fraud and breach of fiduciary duty. The plaintiffs allege damages due to declines in the market price of the Company's common stock and seek to have the action certified as a class-action complaint. The complaint seeks unspecified damages. The plaintiffs' original complaint was dismissed by the Court with leave to re-plead such complaint. In August 1994, an amended complaint was filed. On June 1, 1995, the plaintiffs and the Company reached an agreement in principle to settle the litigation. The Company is also a defendant in various lawsuits which arise in the ordinary course of business. In the opinion of management, based on advice of legal counsel, the ultimate resolution of the remaining lawsuits will not have a material effect on the financial statements. NOTE N - FOURTH QUARTER ADJUSTMENTS The Company recorded a fourth quarter adjustment in 1994 in the amount of approximately $2,476,000 which related to reducing certain estimated tax benefits recorded in the third quarter, for which a 100% valuation allowance was established at year-end. Also, an adjustment was made for $110,000 reversing an inventory part included erroneously twice in inventory in the first, second, and third quarters. Also in the fourth quarter, certain charges recorded initially as restructuring charges in the third quarter were re-classified to cost of goods sold. F-16 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE N - FOURTH QUARTER ADJUSTMENTS - Continued In the fourth quarter of fiscal 1993, the Company recorded an accrual of approximately $200,000 at May 31, 1993 relating to the settlement of certain litigation. The Company also increased its allowance for doubtful accounts by $215,000 in the fourth quarter of fiscal 1993 due to concerns about the collectibility of receivable balances from various customers. NOTE O - COST OF SALES In the third quarter of fiscal 1994, the Company adopted a restructuring program designed to reduce costs, improve liquidity, and increase stockholder value. The restructuring program included the termination of the Company's President, other reductions in personnel, the sale of certain fixed assets and an intensive review of the Company's product lines and inventories. Cost of sales for fiscal 1994 includes charges aggregating $9.6 million relating to the following: 1. Reductions of approximately $2.0 million in the carrying amount of the Company's inventory part pools resulting from changes in sales estimates and related inventory values, reflecting the deteriorating economic conditions in the industry. 2. In March 1994, the Company entered into an agreement to sell three aircraft upon completion of certain repairs and maintenance that was expected to be completed in fiscal 1995. The Company recorded a provision of approximately $2.4 million at May 31, 1994, for the estimated excess of the final cost of the repairs and maintenance over the sales price, after overhauling the aircraft to meet the customer's contract specifications. 3. Writedowns approximating $3.1 million relating to weak current market conditions and the review of realizability of Company assets performed during the Company's restructuring program. 4. Losses totaling approximately $2.1 million relating to the sale of a leased aircraft and the write-off of another aircraft due to a default by the lessee under the terms of the lease. In June 1995, the Company recovered this aircraft. NOTE P - ACCRUED LIABILITIES Accrued liabilities consist of the following items:
1995 1994 ---- ---- Customer deposits $ 426,453 $ 558,900 Accrued repair costs 224,406 585,510 Accrued legal costs 60,000 825,000 Accrued interest 399,030 294,460 Accrued payroll 282,834 329,255 Accrued commissions 159,536 - Advance payment on customer account - 600,000 Reserve for repair of leased aircraft 570,940 579,450 Other 103,701 198,265 ---------- ---------- $2,226,900 $3,970,840 ========== ==========
F-17 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MAY 31, 1995, 1994 AND 1993 NOTE P - ACCRUED LIABILITIES - Continued In November 1994, the Company received an unfavorable judgment arising from a lawsuit relating to commissions owed on the sale of an aircraft in 1989. Accordingly, the Company recorded an accrual of $825,000 at May 31, 1994 relating to this settlement, as reflected in the above table. In January 1995, a settlement on the judgment was reached whereby the Company agreed to pay $520,000 over three years. The present value of the settlement amount was $467,997. The difference between this amount and the prior year accrual of $825,000 is included in unusual and nonrecurring items in the Consolidated Statements of Operations. The remaining balance of this payable of $308,875 is included in accounts payable at May 31, 1995. NOTE Q - WELLMAN TRANSACTION In January of 1995, the Company entered into an agreement with the former President and former Secretary of the Company whereby the Company transferred all of the outstanding stock of Brent Aviation, a wholly-owned subsidiary, to an affiliate of the former employees. In addition, the Company also transferred certain spare parts, components, inventory and equipment for B-727 series aircraft, and a McDonnell Douglas DC-4 aircraft. In consideration, the Company received $230,000 and agreed to lease a B-727 to the affiliate on a month-to-month basis. In addition, the employees resigned from all positions as officers or directors, granted a proxy to the Company enabling the Company's directors to vote 1.98 million shares of common stock held by the employees for a period of two years, and agreed not to compete or interfere with any of the businesses of the Company and its remaining subsidiaries for a period of two years. The Company further agreed to pay the former secretary one year's salary as severance. As of May 31, 1995, $95,000 of the accrued severance was unpaid and is recorded in accrued liabilities. The Company also agreed to terminate its leasehold interest in a facility located at Grayson County, Texas Airport, allowing Brent Aviation to lease such facility for its operations. In June 1995, the counsel of the employees notified the Company that the employees were alleging that the Company was in default to such parties in the performance of certain of its obligations to them pursuant to the Purchase Agreement. Counsel for employees has not threatened to institute litigation against the Company. The Company responded by raising defenses to the alleged breaches and alleging breaches by the employees of their obligations to the Company. As of the current date, a settlement had not been reached. NOTE R - DISPOSAL OF SERVICE CENTER OPERATIONS In June 1994, the Company's Board of Directors unanimously voted to cease operations and to sell or otherwise dispose of the Company's wholly-owned subsidiary, International Airline Service Center ("IASC"), which was an FAA certified repair facility for the performance of maintenance check required by the FAA on narrow body aircraft, following the sale of certain of the Company's aircraft being serviced under contract by IASC. During the third quarter of 1995, IASC fulfilled its obligations to service the aircraft and ceased operations. On January 31, 1995, IASC entered into an agreement with a third party, pursuant to which IASC assigned its interest in a certain equipment lease with a net book value of $826,965 at May 31, 1995, to the third party, and the third party assumed IASC's interests and obligations under such lease. IASC interest in the lease as of May 31, 1995 was $897,596. Thus a gain of $70,631 was recognized as a result of the transaction. Pursuant to the transaction, IASC disposed of substantially all of its operating assets. As of May 31, 1995, IASC had an insignificant amount of assets and liabilities recorded on its books. F-18 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MAY 31, 1995, 1994 AND 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- ADDITIONS ---------------------- BALANCE AT CHARGED TO CHARGED BALANCE AT BEGINNING COSTS AND TO OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- --------- ---------- -------- ---------- ---------- YEAR ENDED MAY 31, 1995 Reserves deducted from assets to which they apply: Allowance for possible losses on accounts receivable $940,214 $ 406,147 $ - $727,176(a) $619,185 ======== ========== ======= ======== ======== YEAR ENDED MAY 31, 1994 Reserves deducted from assets to which they apply: Allowance for possible losses on accounts receivable $450,000 $1,337,969 $28,850 $876,605(a) $940,214 ======== ========== ======= ======== ======== YEAR ENDED MAY 31, 1993 Reserves deducted from assets to which they apply: Allowance for possible losses on accounts receivable $ 87,427 $ 586,843 $18,728 $242,998(a) $450,000 ======== ========== ======= ======== ========
(a) Write-off of accounts receivable against the reserve. S-1 EX-10. 2 EX-10.7.3 EXHIBIT 10.7.3 ADMARK SETTLEMENT AGREEMENT IN THE CIRCUIT COURT OF THE 11TH JUDICIAL CIRCUIT IN AND FOR DADE COUNTY, FLORIDA GENERAL JURISDICTION DIVISION ADMARK INTERNATIONAL, LTD., : a Bangladeshi Corp., : Plaintiff, vs. : CASE NO. 91-08435 (10) NORVALLE TRADING COMPANY, LTD., : an Isle of Man Corporation INTERNATIONAL AIRLINE SUPPORT : GROUP, INC., a Florida Corporation, and RICHARD R. WELLMAN, : Defendants. : - ---------------------------------------- SETTLEMENT STIPULATION Plaintiff, Admark International Ltd., and Defendant, International Airline Support Group, Inc., ("IASG") hereby stipulate and agree to compromise and settle the above styled case in accordance to the following terms and conditions: 1. IASG agrees to pay to Plaintiff and Plaintiff agrees to accept from IASG the sum of $520,000 in full and final settlement of the judgment entered herein on November 16, 1994, subject to the terms of this agreement. 2.(A) IASG shall pay the aforesaid sum of $520,000 as follows: (1) $135,000 to be paid on or before January 31, 1995. (2) $35,000 to be paid on or before April 1, 1995. (3) $35,000 to be paid on or before July 1, 1995. (4) $35,000 to be paid on or before October 1, 1995. (5) $35,000 to be paid on or before January 1, 1996. (6) $35,000 to be paid on or before April 1, 1996. (7) $35,000 to be paid on or before July 1, 1996. (8) $35,000 to be paid on or before October 1, 1996. (9) $35,000 to be paid on or before January 1, 1997. (10) $35,000 to be paid on or before April 1, 1997. (11) $35,000 to be paid on or before July 1, 1997. (12) $35,000 to be paid on or before October 1, 1997. (B) IASG shall submit each of the foregoing payments to Hoffman & Hertzig, P.A., Trust Account, c/o Carl H. Hoffman, Hoffman & Hertzig, P.A., 241 Sevilla Avenue, Suite 900, Coral Gables, Florida 33134. 3. Plaintiff agrees that it will not execute or levy on the property of IASG, or otherwise attempt to enforce the judgment, so long as IASG is in compliance with the terms of this agreement. 4. As soon as the total sum of $520,000 has been paid in full, in accordance with the terms of this agreement, Plaintiff shall deliver to IASG a Satisfaction of Judgment in recordable form. 5. If, for any reason, IASG fails to make any payment due under the terms of this agreement on the date agreed, the entire amount of the judgment, less all amounts paid hereunder, together with accrued interest thereon, shall become immediately due and payable and Plaintiff may execute and levy upon IASG's property or take other appropriate legal action to satisfy the full unpaid balance; PROVIDED, HOWEVER, that before undertaking any action to execute or levy on IASG's property or otherwise collect on the judgment, Plaintiff shall serve a Notice of Non-Payment upon IASG's counsel, either by fax and U.S. Mail, or by hand-delivery, at the address specified in paragraph 6 below. IASG shall have ten (10) days after receipt of such Notice of Non-Payment to hand-deliver either (1) proof of timely payment or (2) the past due payment together with a penalty of $500, to Plaintiff's counsel at the address specified in paragraph 2(B) above. It is agreed that IASG shall be liable for the costs and attorney's fees incurred by Plaintiff by reason of execution and levy or other appropriate legal action. 6. All notices required to be submitted to IASG's counsel may be mailed or delivered to Jarvis & Roffino, 550 Biltmore Way, Suite 830, Coral Gables, Florida 33134, or submitted by fax to 305-445-4545. 7. The parties agree and stipulate to the entry forthwith of an order denying IASG's Motion For Judgment In Accordance With Motion For Directed Verdict, Or For A New Trial, Or For Remittitur. 8. The court herein shall retain jurisdiction to enforce the settlement stipulation and the judgment relating thereto. Dated this 31st day of January, 1995. Hoffman & Hertzig, P.A. Jarvis & Roffino 241 Sevilla Avenue, Ste 900 550 Biltmore Way, Ste 830 Coral Gables, Florida 33134 Coral Gables, Florida 33134 Telephone: (305) 445-3100 Telephone: (305) 448-4848 By: By: ________________________ ___________________________ Carl H. Hoffman James W. Jarvis EX-10. 3 EX-10.11 EXHIBIT 10.11 PAYMENT BLOCKAGE NOTICE May 25, 1995 By FAX AND FED EX Mr. Alexius Dyer President International Airline Support Group 8095 N.W. 64th Street Miami, Florida 33166 Dear Mr. Dyer: As we have discussed, International Airline Support Group, Inc. ("IASG") is currently in violation of, without limitation, sections 7.3 (Interest Coverage Ratio,) 7.10 (Maintenance of Consolidated Net Worth and Net Income,) and 7.21 (Indebtedness to Cash Flow Ratio) of the Securities Purchase Agreement (the "Agreement") dated July 17, 1992 governing IASG's 12% Senior Secured Notes due July 17, 1997 (the "Notes.") Noncompliance with these covenants constitutes an Event of Default under Section 9 of the Agreement which would permit the Majority Noteholders, as defined in the Agreement, to declare an acceleration of the Notes. Sun Life Insurance Company of America ("Sun") is the holder of $6,972,852 of the Notes, which is in excess of half the Notes outstanding, thereby rendering it a Majority Noteholder. Sun hereby declares that an Event of Default is continuing and demands that the scheduled coupon payment which would otherwise be payable to holders of IASG's 8% Convertible Subordinated Debentures (the "Debentures") on May 31, 1995 not be paid. This is a notice of payment blockage as contemplated by Section 8.3 of the Securities Purchase Agreement dated September 8, 1993 governing the Debentures, and is delivered to IASG in both its capacity as obligor and Paying Agent. At this time, Sun is not pursuing other remedies, including acceleration, but reserves the right to do so at any time permitted under the Agreement. Yours truly, Robert E. Sydow Senior Vice President, Sun America Investments EX-21 4 EX-21 EXHIBIT 21 SCHEDULE OF SUBSIDIARIES International Airline Service Center, Inc., a Nevada corporation Professional Aviation Technical Services, Inc., a Nevada corporation EX-23 5 CONSENT OF IND. CPA EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated July 21, 1995, accompanying the consolidated financial statements and schedules included in the Annual Report of International Airline Support Group, Inc. on Form 10-K for the year ended May 31, 1995. We hereby consent to the incorporation by reference of the aforementioned report in the Registration Statements of International Airline Support Group, Inc. on Form S-8, (File No. 33-55302, effective November 25, 1992) and Form S-8 (File 33-55298, effective November 25, 1992). Miami, Florida August 25, 1995 EX-27 6 FINANCIAL DATA SCHEDULE
5 12-MOS MAY-31-1995 JUN-01-1994 MAY-31-1995 848,331 0 3,524,953 619,000 6,497,270 10,283,034 5,276,790 1,980,727 14,510,829 23,772,352 440,337 4,042 0 0 (9,705,942) 14,510,829 21,998,869 24,983,087 17,712,427 17,712,427 2,369,161 (334,571) 2,271,849 (613,840) 0 (613,840) 0 0 0 (613,840) (.15) (.15)
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