-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CyPWVXi9WpEbcoGDB0hjx6BXZnyw5pTsV7K0V4qAfPtWUbShxLZ0GvIlx/IVeXLP 6/+BO2xc0FdQmwf8stnzGg== 0000912057-96-014525.txt : 19960715 0000912057-96-014525.hdr.sgml : 19960715 ACCESSION NUMBER: 0000912057-96-014525 CONFORMED SUBMISSION TYPE: SC 13E4 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960712 SROS: NONE SUBJECT COMPANY: 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: SC 13E4 SEC ACT: 1934 Act SEC FILE NUMBER: 005-42216 FILM NUMBER: 96594326 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 FILED BY: 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: SC 13E4 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 SC 13E4 1 SC 13E4 SCHEDULE 13E-4 Tender Offer Statement Pursuant to Section 13(e)(l) of the Securities Exchange Act of 1934 and Rule 13e-4 Thereunder SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Issuer Tender Offer Statement (Pursuant to Section 13(e)(l) of the Securities Exchange Act of 1934) (Amendment No. ________) International Airline Support Group, Inc. ----------------------------------------------------------------- (Name of Issuer) International Airline Support Group, Inc. ----------------------------------------------------------------- (Name of Person(s) Filing Statement) 8% Convertible Subordinated Debentures Due August 31, 2003 ----------------------------------------------------------------- (Title of Class of Securities) NONE ----------------------------------------------------------------- CUSIP (Number of Class of Securities) Alexius A. Dyer III Chairman, Chief Executive Officer and President 8095 N.W. 64th Street Miami, FL 33166 (305) 593-2658 ----------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Person(s) filing Statement) As soon as practicable following the effective date of the related Registration Statement on Form S-4 ----------------------------------------------------------------- (Date Tender Offer First Published, Sent or Given to Security-Holders) Calculation of Filing Fee TRANSACTION VALUATION* AMOUNT OF FILING FEE $3,333,333.33 $666.67 * Calculated pursuant to Rule 0-11(b)(2) based upon one-third of the principal amount of the Convertible Debentures as of July 11, 1996, the latest practicable date prior to the date of filing. /X/ Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: $1,149.43 Form or Registration No.: Registration Statement on Form S-4 Filing Party: International Airline Support Group, Inc. Date Filed: July 12, 1996 ITEM 1. SECURITY AND ISSUER. (a) The issuer is International Airline Support Group, Inc. (the "Company") and the address of its principal executive offices is 8095 N.W. 64th Street, Miami, Florida 33166. (b) As of the date hereof, $10,000,000 aggregate principal amount of 8% Convertible Subordinated Debentures due August 31, 2003 ("Convertible Debentures") are outstanding. The Company is seeking to acquire all of the Convertible Debentures. Upon the terms and subject to the conditions set forth in the Company's Proxy Statement/Prospectus dated July 12, 1996 (the "Proxy Statement/Prospectus") and in the related Consent and Letter of Transmittal, copies of which are attached hereto as exhibits (a) and (b), the Company is offering (the "Exchange Offer") to issue 224.54 shares of its Common Stock, par value $.001 per share ("Common Stock") for each $1,000 of principal amount of Convertible Debentures. No officer, director or affiliate of the Company owns of record or beneficially any Convertible Debentures. (c) The information set forth in "Market Prices of and Dividends Paid on Common Stock and Market Prices of Convertible Debentures -- Convertible Debentures" in the Proxy Statement/Prospectus is incorporated by reference herein. (d) This Issuer Tender Offer Statement on Schedule 13E-4 is being filed by the Company, as issuer. ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a) Assuming that all $10,000,000 of principal amount of Convertible Debentures are tendered to and accepted by the Company, the Company will issue an aggregate of 2,245,400 shares of its Common Stock in exchange therefor (after giving effect to the proposed one-for-27 reverse stock split described in the Proxy Statement/Prospectus). (b) No part of the consideration is expected to be borrowed, directly or indirectly, for purposes of the Exchange Offer. ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE. The purpose of the Exchange Offer is to assist the Company in achieving changes in its financial structure that it believes are necessary to help alleviate the problems caused by the Company's current debt service levels and debt repayment obligations, to help assure its long-term viability and to permit it to implement its operating strategy. The Company intends to retire all Convertible Debenture tendered to and accepted by the Company in the Exchange Offer.The Exchange Offer, if consummated, will materially change the Company's level of indebtedness and capital structure, as reflected in the table under "Historical and Pro Forma Capitalization" in the Proxy Statement/Prospectus, which table is incorporated by reference herein. As described in the Proxy Statement/Prospectus, the Exchange Offer is one component of the Company's proposed financial restructuring (the "Restructuring"). The consummation of the Restructuring would also result in, among other things: (i) the issuance of options to acquire up to 598,782 shares of Common Stock pursuant to a new stock option plan (the "Option Issuance"); (ii) certain changes to the present board of directors of the Company, including changes in the number of directors (the "Board Amendments") and (iii) certain changes to the Company's Certificate of Incorporation and Bylaws, including the Board Amendments (the "Charter Amendments"). The Option Issuance, Board Amendments and Charter Amendments are described in "Stockholders' Meeting, Voting Rights and Proxies -- The Stock Option Plan," "Stockholders' Meeting, Voting Rights and Proxies -- Proposed Amendment to the Company's Certificate of Incorporation; Classification of Board of Directors" and various sections under "Stockholders' Meeting, Voting Rights and Proxies", respectively, in the Proxy Statement/Prospectus, and such discussions are incorporated by reference herein. 2 ITEM 4. INTEREST IN SECURITIES OF THE ISSUER. None. ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDING OR RELATIONSHIPS WITH RESPECT TO THE ISSUER'S SECURITIES. There is no contract, arrangement, understanding or relationship relating, directly or indirectly, to the Exchange Offer between the Company (including its executive officers and directors) and any person with respect to any securities of the Company, except that the Company expects to enter into an agreement with First Union National Bank, Charlotte, North Carolina, as described in "The Exchange Offer -- Acceptance of Convertible Debentures and Delivery of Common Stock" and except for the arrangements described in "The Exchange Offer -- Fees and Expenses" in the Proxy Statement/Prospectus, which discussions are incorporated by reference herein. ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. None. ITEM 7. FINANCIAL INFORMATION. (a) Audited and unaudited financial information concerning the Company is set forth at "Summary -- Summary Consolidated Historical Financial Data", "Selected Historical Financial Data" and pages F-1 through F-24 of the Proxy Statement/Prospectus. (b) Certain pro forma data disclosing the effect of the consummation of the Exchange Offer is set forth at "Summary -- Summary Pro Forma Financial Data", "Historical and Pro Forma Capitalization" and "Pro Forma Financial Information" in the Proxy Statement/Prospectus. ITEM 8. ADDITIONAL INFORMATION. Except as would not be material to a decision by a holder of the Convertible Debentures as to whether or not to tender them in the Exchange Offer, there are no: (a) Present or proposed contracts, arrangements, understandings or relationships between the Company and its executive officers, directors or affiliates; (b) Applicable regulatory requirements which must be complied with or approvals which must be obtained in connection with the Exchange Offer; (c) Applications of the margin requirements of Section 7 of the Exchange Act and the regulations thereunder; (d) Material pending legal proceedings relating to the Exchange Offer; or (e) Additional information necessary to make the required statements herein, in light of the circumstances under which they are made, not materially misleading. 3 ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. (a) Proxy Statement/Prospectus filed as part of the Company's Registration Statement on Form S-4 (No. 333- _____) (the "Registration Statement"). (b) Consent and Letter of Transmittal, filed as Exhibit 99.1 to the Registration Statement is hereby incorporated by reference herein. (c) Form of agreement by and among the Company and First Union National Bank, Charlotte, North Carolina, as Depositary.* (d) Tax opinion of King & Spalding, filed as Exhibit 8.1 to the Registration Statement is hereby incorporated by reference herein. _____________________ * To be filed by amendment. 4 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: July 12, 1996 /s/ GEORGE MURNANE III -------------------------------------------- George Murnane III Executive Vice President and Chief Financial Officer 5 EXHIBIT INDEX EXHIBIT DESCRIPTION (a) Proxy Statement/Prospectus filed as part of the Company's Registration Statement on Form S-4 (No. 333- _____) (the "Registration Statement"). (b) Consent and Letter of Transmittal, filed as Exhibit 99.1 to the Registration Statement is hereby incorporated by reference herein. (c) Form of agreement by and among the Company and First Union National Bank, Charlotte, North Carolina, as Depositary.* (d) Tax opinion of King & Spalding, filed as Exhibit 8.1 to the Registration Statement is hereby incorporated by reference herein. _____________________ * To be filed by amendment. 6 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED JULY 12, 1996 PROXY STATEMENT/PROSPECTUS INTERNATIONAL AIRLINE SUPPORT GROUP, INC. --------------- OFFER TO EXCHANGE TO AND SOLICITATION OF CONSENTS FROM HOLDERS OF 8% CONVERTIBLE SUBORDINATED DEBENTURES DUE AUGUST 31, 2003 ($10 MILLION PRINCIPAL AMOUNT OUTSTANDING) This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") describes the proposed financial restructuring (the "Restructuring") of International Airline Support Group, Inc. (the "Company"). Pursuant to the Restructuring, the Company hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Proxy Statement/Prospectus and in the accompanying Consent and Letter of Transmittal (the "Letter of Transmittal"), to issue 224.54 shares of its Common Stock, par value $.001 per share (the "Common Stock"), after giving effect to the proposed reverse stock split described below, for each $1,000 of principal amount of its outstanding 8% Convertible Subordinated Debentures due August 31, 2003 (the "Convertible Debentures"). Holders of Convertible Debentures whose securities are accepted in the Exchange Offer will not be entitled to receive any consideration other than the shares of Common Stock for any interest accrued subsequent to February 28, 1995. The last trade of the Convertible Debentures known to the Company occurred in October, 1995, when the largest single holder of the Convertible Debentures sold all the Convertible Debentures held by it for a cash price of $150 per $1,000 principal amount of the Convertible Debentures, to one or more other substantial holders of the Convertible Debentures. This Proxy Statement/Prospectus also constitutes a consent solicitation statement in connection with the solicitation (the "Solicitation") of consents (the "Consents") to certain amendments (the "Amendments") to the several Securities Purchase Agreements, each dated as of September 8, 1993 (collectively, the "Purchase Agreements"), pursuant to which the Convertible Debentures were issued. HOLDERS OF CONVERTIBLE DEBENTURES WHO TENDER THEIR CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER WILL BE REQUIRED TO CONSENT TO THE AMENDMENTS. The Exchange Offer and the Solicitation will expire at 12:00 Midnight, New York City time on , 1996, unless extended (the "Expiration Date"). Tenders of the Convertible Debentures may be withdrawn, in accordance with the withdrawal provisions described herein, at any time prior to the Expiration Date. A Consent may be revoked, in accordance with the revocation provisions described herein, prior to the date the Amendments become effective. --------------- SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON , 1996 RELATING TO THE APPROVAL OF CERTAIN AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION --------------- THE COMMON STOCK OFFERED HEREBY IS SUBJECT TO CERTAIN MATERIAL RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 18 OF THIS PROXY STATEMENT/PROSPECTUS FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE RESTRUCTURING. THE RESTRUCTURING DESCRIBED HEREIN WILL RESULT IN SUBSTANTIAL DILUTION TO HOLDERS OF THE COMPANY'S COMMON STOCK. NEITHER THE TRANSACTIONS DESCRIBED HEREIN NOR THE SECURITIES OFFERED HEREBY HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTIONS OR UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE --------------- THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS _________, 1996 (COVER PAGE CONTINUED ON FOLLOWING PAGE) --------------- (COVER PAGE CONTINUED) This Proxy Statement/Prospectus is also being furnished to the stockholders of the Company as a proxy statement in connection with the solicitation of proxies for a special meeting of stockholders (the "Meeting") at which proposals relating to the Restructuring and certain other matters are to be voted on by the stockholders. The items to be voted on include (a) a proposal to combine each 27 shares of the Common Stock outstanding after the closing of the Exchange Offer into one share of Common Stock (the "Reverse Stock Split"); (b) a proposal to fix the number of directors comprising the Company's Board of Directors at seven and to provide that the number of Directors constituting the Board shall not be changed without the affirmative vote of the holders of at least 75% of the issued and outstanding shares of the Common Stock (collectively, the "Board Amendments"); (c) a proposal to increase to 2,000,000 the number of authorized shares of Preferred Stock and to provide that these shares may be issued without further consent of the stockholders with such terms as may be designated by the Board of Directors (the "Preferred Stock Authorization"); (d) a proposal to amend and restate the Company's Certificate of Incorporation to (i) amend provisions regarding corporate governance to require supermajority voting with respect to certain matters of corporate governance and (ii) require supermajority stockholder approval and board approval of certain transactions in accordance with Delaware law (the "Charter Amendments") and (e) the approval of a stock option plan for the Company's directors, officers and employees (the "Stock Option Plan"). Consummation of the Restructuring is conditioned upon, among other things, the following: (i) the holders of at least 95% of the outstanding principal amount of the Convertible Debentures (the "Minimum Debt Tenders") shall have validly tendered and shall not have withdrawn their Convertible Debentures prior to the Expiration Date; (ii) the Company shall have received Consents from the holders of at least a majority of the principal amount of the Convertible Debentures (disregarding the principal amount of any Convertible Debentures held by the Company or its affiliates); (iii) the Company's stockholders shall have approved the Reverse Stock Split, the Board Amendments, the Preferred Stock Authorization, the Charter Amendments and the Stock Option Plan; (iv) the Credit Agreement to be negotiated and executed by and between the Company and the bank named therein (the "Credit Agreement") shall have been negotiated and executed, the conditions to the effectiveness thereof shall have been satisfied or waived and the Company shall have the ability to borrow at least $2.5 million pursuant to the Credit Agreement immediately following the consummation of Restructuring; and (v) the Company shall have received consents from the holders of at least a majority of the Stock Units represented by the Warrants, dated July 17, 1992 (the "Old Warrants"), to the amendment of the expiration date of the Old Warrants (the "Old Warrant Amendment"). If the foregoing conditions are satisfied, the Restructuring will be consummated at a closing (the "Closing") to be held promptly following the Meeting. At the Closing, (a) the Reverse Stock Split, the Board Classification, the Preferred Stock Authorization, the Charter Amendments, the Stock Option Plan and the Credit Agreement would become effective; (b) the Company would accept all valid tenders of Convertible Debentures and would issue shares of Common Stock in exchange therefor; (c) the Amendments would become effective; (d) the Company's 12% Senior Notes due July 17, 1997 (the "Senior Notes") would be redeemed using advances under the Credit Agreement; (e) the Company would issue options to purchase shares of Common Stock to the Company's directors, officers and employees pursuant to the Stock Option Plan in settlement of options and/or warrants previously awarded to them or in connection with employment agreements to be entered into by them; and (f) the Old Warrant Amendment would become effective. None of the foregoing will become effective unless all are consummated at the Closing. Only holders of record of Common Stock at the close of business on the Record Date for the Meeting are entitled to receive notice of and to vote at the Meeting and any adjournments or postponements thereof. The Meeting may be adjourned from time to time without notice other than by announcement. A list of stockholders entitled to vote at the Meeting will be available for inspection by any stockholder for any purpose germane to the Meeting during ordinary business hours, during the ten days prior to the Meeting, at the Company's headquarters at the address set forth herein. -ii- (COVER PAGE CONTINUED) THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING OF STOCKHOLDERS ARE OF GREAT IMPORTANCE TO THE COMPANY'S STOCKHOLDERS, ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS. Your vote is important. Whether or not you intend to be present at the Special Meeting, please complete, sign, date and return the accompanying proxy in the enclosed envelope, which requires no postage if mailed in the United States. If you choose to attend the Meeting, you may of course revoke your proxy and personally cast your votes. THIS PROXY STATEMENT/PROSPECTUS IS FIRST BEING MAILED TO HOLDERS OF THE CONVERTIBLE DEBENTURES AND THE COMMON STOCK ON , 1996. -iii- AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-4 (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended ("the Securities Act"), with respect to the securities offered hereby. As permitted by the rules and regulations of the Commission, this Proxy Statement/Prospectus omits certain information, exhibits and undertakings contained in the Registration Statement. Such additional information, exhibits and undertakings can be inspected at and obtained from the Commission in the manner set forth below. For further information with respect to the securities offered hereby and the Company, reference is made to the Registration Statement and the financial schedules and exhibits filed as a part thereof. Statements contained in this Proxy Statement/Prospectus as to the terms of any contract or other document are not necessarily complete, and, in each case, reference is made to the copy of each such contract or other document that has been filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files periodic reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed with the Commission, as well as the Registration Statement, can be inspected and copied at the public reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of such material can also be obtained by mail from the Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web site at http:\\www.sec.gov. which contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. Copies of such reports, proxy statements and other information may also be obtained from the Company upon request to the Company at its principal executive offices. ------------------------------- No person has been authorized to give any information or make any representation not contained in this Proxy Statement/Prospectus and, if given or made, such information or representation must not be relied upon. This Proxy Statement/Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than those to which it relates, or an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Proxy Statement/Prospectus nor the distribution of any securities hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company or in the information contained herein since the date hereof. -iv- TABLE OF CONTENTS PAGE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . Background and Purpose of the Restructuring . . . . . . . . . . . . . . Conditions to the Restructuring . . . . . . . . . . . . . . . . . . . . Certain Significant Effects of the Restructuring. . . . . . . . . . . . Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest of Certain Persons in the Restructuring. . . . . . . . . . . . The Exchange Offer. . . . . . . . . . . . . . . . . . . . . . . . . . . The Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proposed Amendments to the Company's Certificate of Incorporation . . . Exchange of Stock Certificates; Fractional Shares . . . . . . . . . . . The Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . . Financial Forecast . . . . . . . . . . . . . . . . . . . . . . . . . . Summary Consolidated Historical Financial Data. . . . . . . . . . . . . Summary Pro Forma Financial Data. . . . . . . . . . . . . . . . . . . . Market Prices of and Dividends Paid on Common Stock and Market Prices of Convertible Debentures. . . . . . . . . . . . . . . . . . . . . . . Market and Trading Information. . . . . . . . . . . . . . . . . . . . . RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors Relating to Failure of the Restructuring to Occur. . . . . Risk Factors Associated with Ownership of the Common Stock. . . . . . . THE RESTRUCTURING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . Negotiations with Debentureholders. . . . . . . . . . . . . . . . . . . Overview of the Restructuring . . . . . . . . . . . . . . . . . . . . . Certain Significant Effects of the Restructuring. . . . . . . . . . . . Conditions to the Restructuring . . . . . . . . . . . . . . . . . . . . Forecast of Certain Financial Data. . . . . . . . . . . . . . . . . . . Interests of Certain Persons in the Restructuring . . . . . . . . . . . THE EXCHANGE OFFER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acceptance of Convertible Debentures and Delivery of Common Stock . . . Expiration Date; Extensions; Amendments . . . . . . . . . . . . . . . . How to Tender and Consent in the Exchange Offer . . . . . . . . . . . . Tenders and Consents -- General . . . . . . . . . . . . . . . . . . . . Guaranteed Delivery Procedures. . . . . . . . . . . . . . . . . . . . . Withdrawal of Tenders and Revocation of Consents. . . . . . . . . . . . Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depositary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . -v- STOCKHOLDERS' MEETING, VOTING RIGHTS AND PROXIES. . . . . . . . . . . . . . Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . Voting of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . Proposed Amendment to the Company's Certificate of Incorporation: Reverse Stock Split Amendment. . . . . . . . . . . . . . . . . . . . . Proposed Amendment to the Company; Certificate of Incorporation: Preferred Stock Authorization . . . . . . . . . . . . . . . . . . . . Proposed Amendment to the Company's Certificate of Incorporation: Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . Proposed Amendments to the Company Certificate of Incorporation: Provisions Affecting Corporate Governance. . . . . . . . . . . . . . . The Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchange of Stock Certificates; Fractional Shares . . . . . . . . . . . Other Matters to be Considered. . . . . . . . . . . . . . . . . . . . . CERTAIN FEDERAL INCOME TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Consequences to the Company . . . . . . . . . . . . . . . . . . . . Tax Consequences to the Holders of the Convertible Debentures . . . . . ACCOUNTING TREATMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . HISTORICAL AND PRO FORMA CAPITALIZATION . . . . . . . . . . . . . . . . . . SELECTED HISTORICAL FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . PRO FORMA FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . Operations of the Company . . . . . . . . . . . . . . . . . . . . . . . Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Services . . . . . . . . . . . . . . . . . . . . . . . . . . Government Regulation and Traceability. . . . . . . . . . . . . . . . . Product Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Composition of the Board. . . . . . . . . . . . . . . . . . . . . . . . Committees of the Board . . . . . . . . . . . . . . . . . . . . . . . . -vi- Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Committee Interlocks and Insider Participation . . . . . . . Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . The Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . Employment Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . DESCRIPTION OF THE AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . DESCRIPTION OF THE CREDIT AGREEMENT . . . . . . . . . . . . . . . . . . . . . DESCRIPTION OF THE CONVERTIBLE DEBENTURES . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conversion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordination of Convertible Debentures . . . . . . . . . . . . . . . . . Purchase Convertible Debentures Upon a Change of Control. . . . . . . . . Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . Modifications of the terms of the Convertible Debentures or the rights of the Holders of the Convertible Debentures. . . . . . . . . . . . . . . . DESCRIPTION OF CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Effects of Authorized but Unissued Stock. . . . . . . . . . . . . Directors' Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . Anti-takeover Effects of Certain Provisions of the Company's Restated Certificate of Incorporation and Bylaws. . . . . . . . . . . . . . . . . LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . STOCKHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . APPENDIX A -- PROPOSED RESTATED CERTIFICATE OF INCORPORATION. . . . . . . . . APPENDIX B -- PROPOSED STOCK OPTION PLAN. . . . . . . . . . . . . . . . . . . -vii- SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. CERTAIN TERMS USED IN THE FOLLOWING SUMMARY ARE DEFINED ON THE COVER PAGE OF THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY STATEMENT/PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH STATEMENTS APPEAR THROUGHOUT THIS PROXY STATEMENT/PROSPECTUS, INCLUDING WITHOUT LIMITATION UNDER THE HEADING "THE RESTRUCTURING -- PROJECTIONS OF CERTAIN FINANCIAL DATA," AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR EXPECTATIONS OF THE COMPANY, ITS DIRECTORS OR ITS OFFICERS WITH RESPECT TO, AMONG OTHER THINGS: (I) FUTURE OPERATING RESULTS; (II) POTENTIAL ACQUISITIONS; (III) THE COMPANY'S FINANCING PLANS; (IV) TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS; AND (V) THE COMPANY'S GROWTH AND OPERATING STRATEGY. RECIPIENTS OF THIS PROXY STATEMENT/PROSPECTUS ARE CAUTIONED THAT ANY SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, INCLUDING WITHOUT LIMITATION THE INFORMATION SET FORTH UNDER THE HEADINGS "THE RESTRUCTURING -- PROJECTIONS OF CERTAIN FINANCIAL DATA," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS," IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES. GENERAL This Proxy Statement/Prospectus describes the Restructuring of the Company. In such regard, it sets forth the terms and conditions of the Exchange Offer, which is part of the Restructuring. This Proxy Statement/Prospectus also constitutes a consent solicitation statement in connection with the Solicitation of Consents to the Amendments. Holders of Convertible Debentures who wish to accept the Exchange Offer as set forth herein must tender their Convertible Debentures in accordance with the procedures set forth herein and in the accompanying Letter of Transmittal. HOLDERS OF CONVERTIBLE DEBENTURES WHO WISH TO ACCEPT THE EXCHANGE OFFER WILL BE REQUIRED TO CONSENT TO THE AMENDMENTS. HOLDERS OF CONVERTIBLE DEBENTURES MAY CONSENT TO THE AMENDMENTS WITHOUT TENDERING THEIR CONVERTIBLE DEBENTURES. The Exchange Offer will expire at 12:00 Midnight, New York City time, on ______________, 1996, unless extended by the Company, in its sole discretion, to permit the satisfaction of all conditions for such Exchange Offer (such date or such later date and time to which such offer has been extended, the "Expiration Date"). For a discussion of the conditions required to be satisfied to enable the Company to consummate the Exchange Offer, see "The Exchange Offer -- Conditions." At the Closing, to be held promptly after the Expiration Date, the Company will acquire, to the extent validly tendered, all of the Convertible Debentures, subject to the continuing satisfaction of such conditions. This Proxy Statement/Prospectus is also furnished in connection with the solicitation by the Board of Directors of the Company of proxies to be voted at the Special Meeting of the Company's stockholders (the "Meeting") to be held at the offices of King & Spalding, 50th Floor, 191 Peachtree Street, Atlanta, Georgia, 30303, on ____________, 1996 at __ a.m., Atlanta time. Stockholders who wish to vote at the Meeting must execute and return a proxy in accordance with the procedures set forth herein and in the accompanying proxy or attend the Meeting. THE COMPANY The Company is a worldwide supplier of aircraft spare parts to the aviation redistribution market. The Company sells spare parts to major commercial passenger airlines, air cargo carriers, maintenance and repair facilities and other redistributors. The parts sold by the Company include avionics, rotable and expendable airframe and engine components for commercial aircraft, including Boeing and McDonnell Douglas aircraft and Pratt & Whitney jet engines. During the fiscal year ended May 31, 1996 ("fiscal 1996"), the Company supplied parts to over 771 customers worldwide. Currently, the Company specializes in replacement parts for McDonnell Douglas DC-9 aircraft. Management believes that the Company has one of the most extensive inventories of aftermarket DC-9 parts in the industry. For the twelve-month period ended on -1- February 29, 1996, the Company's operating revenues were approximately $22.1 million, its gross profit was approximately $9.9 million and its pretax income was approximately $2.3 million. The Company believes that the annual worldwide market for aircraft spare parts is approximately $10 billion, of which approximately $1.3 billion represents sales of aircraft spare parts to the redistribution market. The redistribution market is highly fragmented, with a limited number of large, well capitalized companies selling a broad range of aircraft spare parts, and numerous smaller competitors serving distinct market niches. The Company believes that significant trends affecting the redistribution market will continue to increase its overall size while reducing the number of competitors. Factors causing the expansion of the redistribution market include the increasing size and age of the world-wide airline fleet and the increasing pressures on airlines and maintenance and repair facilities to control their costs. Although the Company's current financial condition is weak, the Company has been successful over the last two years in positioning itself as one of the premier redistributors of aircraft spare parts. Upon the successful implementation of the Restructuring, the Company believes that it will have the financial viability to implement its operating strategy to become one of the select number of redistributors well positioned to fully service the aircraft spare parts requirements of its customers. The Company's principal executive offices are located at 8095 N.W. 64th Street, Miami, Florida. Its telephone number is (305) 593-2658. OPERATING STRATEGY The Company is, therefore, undertaking the Restructuring to improve its financial flexibility and allow it to more fully implement its operating strategy. The Company's operating strategy has two components. First, the Company intends to increase its revenues and operating income through continued customer penetration in its existing markets and expansion into new markets. The Company intends to achieve this by continuing to increase its share of the market for spare parts for certain widely operated aircraft models, including, in particular, the DC-9 (which is no longer in production) and the MD-80. Although the MD-80 is still in production, many of the DC-9's parts are interchangeable with the MD-80, which, given the Company's experience and knowledge with the DC-9, gives it a competitive advantage. The Company intends to capitalize on the limited availability of spare parts for such aircraft models, which are either out of production or have a high degree of parts interchangeability with other model aircraft, by acquiring (i) pools of inventory from airlines that cease to operate such aircraft or that desire to reduce their levels of parts inventory and (ii) aircraft for parting out when the purchase price justifies doing so. The Company believes that its knowledge of the fleets of DC-9 and MD-80 aircraft currently in operation and its worldwide contacts in the commercial aviation industry will permit it to acquire inventory pools and aircraft for parting out on favorable terms in the future. The second component of the Company's operating strategy is to achieve revenue and earnings growth by acquiring other companies engaged in the sale of aircraft parts as well as companies with product lines that would complement the Company's existing redistribution business. The Company competes in a fragmented market in which numerous small companies serve distinct market niches. The Company believes that small aircraft parts redistributors, many of which are family owned and capital constrained, are unable to provide the extensive inventory and quality control necessary to comply with applicable regulatory and customer requirements and will provide acquisition opportunities for the Company. The Company believes that such acquisitions will permit it to expand its customer base by selling aircraft parts to airlines and others that are not now customers, to expand its product line with respect to aircraft in which the Company currently specializes, to strengthen its relationships with existing customers and to expand the types of aircraft in which the Company specializes. BACKGROUND AND PURPOSE OF THE RESTRUCTURING The Company issued the Convertible Debentures during fiscal 1994 on September 8, 1993. The proceeds of the Convertible Debentures were used for the following purposes: (i) to repurchase a portion of the Senior Notes ($3.4 million); (ii) to repay certain other indebtedness ($1.9 million); (iii) to pay fees and expenses of the offering ($1.1 million); and (iv) to purchase four DC-9 aircraft for parting out ($3.6 million). Also during fiscal 1994, the Company, in an attempt to more vertically integrate its business, invested approximately $3 million to establish a repair facility certified by the Federal -2- Aviation Administration ("FAA"). The principal business of the repair facility, which commenced operations in fiscal 1994, was to perform FAA-required maintenance checks on certain narrow body aircraft. The facility was operated by a wholly-owned subsidiary of the Company, International Airline Service Center, Inc. ("IASC"). However, during fiscal 1994, while the Company was undertaking its diversification and expansion program, its financial performance was adversely affected by several factors. First, sales to Transafrik Corp., a cargo carrier operating in Africa, declined significantly, from approximately $6.0 million in fiscal 1993 to approximately $1.5 million in fiscal 1994. Transafrik had accounted for a significant portion of the Company's revenue prior to fiscal 1994. 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. Second, the Company was unable to operate the repair facility profitably, losing approximately $1.9 million on its operations of the facility during fiscal 1994. Principally as the result of the establishment of the repair facility, the number of persons employed by the Company grew from approximately 80 in fiscal 1993 to approximately 160 in fiscal 1994, and sales, general and administrative expense increased to approximately 37.1% of total revenue in fiscal 1994 from approximately 19.3% of total revenue in fiscal 1993. Third, the overall market for used aircraft and parts weakened and this, combined with a diminished cash position, reduced the Company's ability to purchase additional aircraft and inventory for resale and led to a 43.9% decline in total revenues for fiscal 1994, from $33.5 million in fiscal 1993 to $18.7 million. As a result of the weak demand in the marketplace and the Company's need to increase its liquidity to meet its obligations as they became due, it became necessary for the Company to sell an aircraft at an inopportune time and price, resulting in a $2.1 million loss. This loss related primarily to the aircraft being sold to raise cash at an amount substantially below cost, as well as the write-off of an aircraft because its Nigerian lessee defaulted under the lease and the Company did not believe it could recover possession of the aircraft. In addition, during the fourth quarter of fiscal 1994, the Company accrued to cost of sales a charge of $2.4 million for the partial writedown of three aircraft to reflect net realizability of the aircraft. The unanticipated cost of overhauling these aircraft at IASC for delivery eliminated the economic benefit that the Company had negotiated under their sales contract. In February 1994, the Company's President and Chief Financial Officer left the Company and in January 1995, the Company's Chief Executive Officer was replaced by the current Chief Executive Officer. In an effort to address the Company's financial problems, current senior management made the strategic decision to refocus the Company on its core business--parts sales. The costs of implementing this strategy were largely recognized in fiscal 1994. Accordingly, the Company recorded a net loss of $17.4 million in fiscal 1994, substantially all of which was related to non-core businesses and, to the extent related to the core business, was nonrecurring. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." As part of its strategic decision to refocus on its core business, in late fiscal 1994 and early fiscal 1995, the Company sought aggressively to reduce its expenses. As a result, the total number of persons employed by the Company was reduced by approximately 85%, to 24 by the end of fiscal 1995, and operations at the service center were terminated. Further, the Company sold a subsidiary that was engaged in air cargo transport. In addition, during fiscal 1995, the Company sought to reduce its vulnerability to a decrease in sales to any single customer by focusing its marketing on the identification and solicitation of new customers. The Company obtained approximately 80 new parts customers during fiscal 1995. Also in fiscal 1995, the Company instituted new compensation policies for its parts sales force. Pursuant to the new policies, all salesman are paid strictly on commission, sales to new customers are encouraged and commissions are not paid until accounts are collected. Furthermore, the Company has continued to decrease its exposure to more volatile international markets. Its domestic parts sales as a percentage of total sales has increased in each of the last four fiscal years, to approximately 79% for the nine months ended February 29, 1996 from 72% in fiscal 1995, 57% in fiscal 1994, and 39% in fiscal 1993. On May 26, 1995, the Company received a notice of payment blockage from the majority holder (the "Majority Noteholder") 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 certain financial covenants, the Majority Noteholder demanded that the scheduled interest payment that would otherwise have been payable on May 31, 1995 to holders of the Convertible Debentures not be paid. As a result of the Company's receipt of the notice of payment blockage, the Company did not make the interest payments due to holders of the Convertible Debentures on May 31 and August 31, 1995, totaling $.4 million. -3- Pursuant to terms of the Senior Notes, the Company was prohibited from making any other payments with respect to the Convertible Debentures prior to the expiration of the payment blockage period on November 22, 1995. Notwithstanding the expiration of the payment blockage period, the Company did not make the November 30, 1995 and the February 29 and May 31, 1996 interest payments on the Convertible Debentures. The Company does not intend to resume making payments of interest on the Convertible Debentures. The Company did not make its scheduled July 17, 1995 principal payment on the Senior Notes in the approximate amount of $1.8 million. The Company cured the default in part by making a principal payment of $1.45 million on December 12, 1995. The Company made an additional principal payment of $.7 million on May 13, 1996, which cured such principal payment default and prepaid approximately $.35 million of the $4.1 million principal payment due on the Senior Notes on July 17, 1996. The Company will not make its July 17, 1996 payment, pending redemption of the Senior Notes in connection with the Restructuring. If the Restructuring is not consummated, the Company will be unable to make such principal payment. The failure to make the interest payments to the holders of the Convertible Debentures referred to above constituted an Event of Default under the agreements governing the Senior Notes and Convertible Debentures. Further, the Company is in default in the observance of certain financial covenants applicable to the Senior Notes and the Convertible Debentures and, following July 17, 1996, will be in default with respect to the payment of principal on the Senior Notes. If the Company remains in default under the terms of the Senior Notes and Convertible Debentures, the holders of such instruments could accelerate the debt, resulting in principal of approximately $17.7 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 most likely would require the Company to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. In addition, if the holders of any of the Senior Notes or Convertible Debentures demand repayment or if the holders of the Senior Notes seek to realize upon the collateral securing the Senior Notes, there is a substantial likelihood that the Company will be forced to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. The terms of the Restructuring result from an analysis of the Company's financial condition and operations conducted by the Company. The Company is proposing the Restructuring to achieve changes in its financial structure that it believes are necessary to help alleviate the problems caused by the Company's current debt service levels and debt repayment obligations, to help assure its long-term viability and to permit it to implement its operating strategies. If the Restructuring is not consummated, the financial condition of the Company will necessitate the development of alternative actions. In view of the Company's limited financial resources and the existence of unwaived defaults with respect to the Senior Notes and the Convertible Debentures, there can be no assurance that the Company would succeed in formulating and consummating an alternative financial restructuring. In such case, the Company most likely would be forced to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. See "Risk Factors --Risk Factors Relating to Failure of the Restructuring to Occur." CONDITIONS TO THE RESTRUCTURING Consummation of the Restructuring is conditioned upon, among other things, the following: (i) the Minimum Tenders shall have been validly tendered and not withdrawn by the holders of the Convertible Debentures prior to the Expiration Date; (ii) the requisite Consents shall have been received and such Consents shall not have been revoked and the Amendments shall have become effective; (iii) the Company's stockholders shall have approved the amendments to the Company's Certificate of Incorporation to effect the Reverse Stock Split, the Board Amendments, the Preferred Stock Authorization and the Charter Amendments and shall have approved the Stock Option Plan; (iv) the Company and the Bank (as defined herein) shall have negotiated and executed the Credit Agreement, the conditions to the effectiveness thereof shall have been satisfied or waived and the Company shall have the ability to borrow at least $2.5 million pursuant to the Credit Agreement immediately following the consummation of the Restructuring; and (v) the Old Warrant Amendment shall have become effective. See "The Restructuring -- Conditions to the Restructuring." The Company reserves the right to amend the terms of the Restructuring (including changes in the consideration being offered in the Exchange Offer to holders of the Convertible Debentures), if and to the extent that the Company determines -4- that such amendments are necessary or desirable to complete the Restructuring. The Company will give holders of the Common Stock and the Convertible Debentures notice of such amendments as may be required by applicable law. Holders of the Convertible Debentures may withdraw their tenders of the Convertible Debentures at any time prior to the Expiration Date of the Exchange Offer, including during any period of time the Exchange Offer is extended because of amendments to the terms of the Restructuring. CERTAIN SIGNIFICANT EFFECTS OF THE RESTRUCTURING Implementation of the Restructuring would have significant effects on the financial obligations of the Company and on the current holders of the Common Stock, the Senior Notes and the Convertible Debentures. The Restructuring would result in significant changes in the Company's financial obligations, including (a) the elimination of future interest and principal payment obligations with respect to at least 95% of the aggregate principal amount of the Convertible Debentures, (b) the repayment of the Senior Notes, (c) the incurrence of approximately $7.9 million of indebtedness under the Credit Agreement, (d) the increased sensitivity of the Company to prevailing interest rates because indebtedness under the Credit Agreement will bear interest at a floating rate, and (e) the deferral of principal payments on the Company's long-term indebtedness because the final maturity of the Credit Agreement is later than the maturity date of the Senior Notes. The Restructuring would also result in the modification of certain restrictive covenants now applicable to the Company pursuant to the instruments creating the Convertible Debentures and the elimination of the restrictive covenants now applicable to the Company pursuant to the instruments creating the Senior Notes. On a pro forma basis, the Restructuring would have reduced the amount of the Company's outstanding indebtedness, at May 31, 1995, from $20.3 million to $10.3 million and at February 29, 1996, from $18.9 million to $8.9 million, based on the assumptions that the Restructuring occurred on such dates and that all the Convertible Debentures were accepted for exchange. Total interest expense, on a pro forma basis, would have been reduced from $2.3 million to $1.3 million during fiscal 1995 and from $1.5 million to $.8 million during the nine months ended February 29, 1996, based on the assumptions that the Restructuring occurred on the first day of the respective periods presented, that all the Convertible Debentures were accepted for exchange and that amounts outstanding pursuant to the Credit Agreement bore interest at 10.25% throughout the periods. If the Restructuring were implemented, approximately 2.2 million shares of Common Stock (after giving effect to the Reverse Stock Split) would be issued in the Exchange Offer, assuming that all of the Convertible Debentures are accepted for exchange. Issuance of such numbers of shares of Common Stock would dilute substantially the ownership percentage of the existing holders of the Common Stock. The percentage ownership of the Company on an actual and on a fully-diluted basis and the effect of the issuance of such numbers of shares of Common Stock on the percentage ownership of the common equity of the Company is shown in the following table: -5-
PRE- RESTRUCTURING RESTRUCTURING RESTRUCTURING(1) NO DILUTION(2) FULL DILUTION(3) ---------------- -------------- --------------- NUMBER NUMBER NUMBER OF SHARES PERCENT OF SHARES PERCENT OF SHARES PERCENT Convertible Debentures -- -- 2,245,400 93.8 2,245,400 75.0 Common Stock 4,041,779 100.0 149,704 6.2 149,704 5.0 Warrant and Option Holders -- -- -- -- 598,782 20.0 -------- ----- --------- ----- --------- ----- 4,041,779 100.0 2,395,104 100.0 2,993,886 100.0
- ------------------------------ (1) Assumes no (i) conversion of the Convertible Debentures; (ii) exercise of the Old Warrants; and (iii) exercise of certain outstanding stock options and warrants, prior to giving effect to the Reverse Stock Split. The Old Warrant Amendment will provide for the expiration of the Old Warrants at the Closing and the options outstanding pursuant to the Company's existing stock option plan will be canceled as part of the Restructuring. (2) Assumes that 2,245,400 shares of Common Stock are issued to the Holders of the Convertible Debentures, after giving effect to the Reverse Stock Split. (3) Incorporates the assumptions set forth in (2) and further assumes the exercise of certain outstanding warrants, other than the Old Warrants, and the issuance of all options to be granted under the Stock Option Plan. RISK FACTORS The Common Stock offered hereby pursuant to the Exchange Offer is subject to certain material risks. In addition, in the event the Restructuring is not consummated, there are additional risks to the ownership of Common Stock and Convertible Debentures primarily as a result of the Company's financial condition. Before deciding whether or not to tender any Convertible Debentures pursuant to the Exchange Offer, or to vote in favor of the matters to be brought before the Meeting, each stockholder and each holder of the Convertible Debentures should consider carefully all of the information contained in this Proxy Statement/Prospectus. See "Risk Factors." INTERESTS OF CERTAIN PERSONS IN THE RESTRUCTURING In considering the Restructuring, holders of Common Stock and the Convertible Debentures should be aware that the executive officers and directors of the Company have certain interests that may present them with potential conflicts of interests with respect to the Restructuring. See "The Restructuring--Interests of Certain Persons in the Restructuring." The conflicts result from the following factors: (i) the employment agreement between Mr. Alexius A. Dyer III, the Chairman of the Board, President and Chief Executive Officer of the Company, will be extended for an additional five-year term effective upon consummation of the Restructuring and Mr. George Murnane III, the Executive Vice President and Chief Financial Officer of the Company, will enter into a five-year employment agreement with the Company having terms, other than salary and bonus, substantially similar to those of Mr. Dyer's employment agreement (see "Management--Employment Agreement"); (ii) Mr. Dyer's annual compensation will increase from $135,000 to $175,000 upon consummation of the Restructuring; (iii) Messrs. Dyer and Murnane will be granted restricted stock and/or options representing 7.5% and 3.5%, respectively, of the shares of Common Stock to be outstanding following the Restructuring (see "Management--The Stock Option Plan"); (iv) Messrs. Kyle R. Kirkland and E. James Mueller, who are non-employee directors of the Company, will be granted restricted stock and/or options, which, together with shares reserved for issuance to non-employee directors pursuant to the Stock Option Plan, will represent up to 2.5% of the shares of Common Stock to be outstanding following the Restructuring (see "Management--The Stock Option Plan"); and (v) Kirkland Messina, Inc., an investment banking firm of which Mr. Kirkland is a principal, will receive a placement agent's fee in connection with the origination of the Credit Agreement (see "Management--Certain Transactions"). -6- THE EXCHANGE OFFER In exchange for the Convertible Debentures, the Company will issue 224.54 shares of Common Stock, after giving effect to the Reverse Stock Split, for each $1,000 of principal amount of its outstanding Convertible Debentures. As of the date of this Proxy Statement/Prospectus, there were outstanding $10 million aggregate principal amount of Convertible Debentures. The Company has not made an interest payment on the Convertible Debentures since February 28, 1995. The Company does not intend to make any subsequent payment of accrued interest with respect to any Convertible Debentures accepted for exchange in the Exchange Offer. Holders of Convertible Debentures whose Convertible Debentures are accepted in the Exchange Offer will not be entitled to receive any consideration other than shares of Common Stock for any interest accrued subsequent to February 28, 1995, on such Convertible Debentures. See "The Exchange Offer -- General." In connection with the Exchange Offer, the Company is also soliciting the Requisite Consents from the "Holders" (as defined below) of the Convertible Debentures in the Solicitation. HOLDERS OF CONVERTIBLE DEBENTURES WHO TENDER THEIR CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER WILL BE REQUIRED TO CONSENT TO THE AMENDMENTS. Holders of Convertible Debentures may consent to the Amendments without tendering their Convertible Debentures in the Exchange Offer. The Company will make no separate payment for Consents. The Amendments will not become effective unless and until the Restructuring is consummated. The term "Holder," when used with respect to a Convertible Debenture, means the registered owner of such Convertible Debenture on ___________________, 1996 (the "Debt Record Date") or any person who has obtained a properly completed bond power and proxy from the registered owner on the Debt Record Date. See "The Exchange Offer -- General." The Exchange Offer will expire at 12:00 Midnight, New York City time, on ______________, 1996, unless the Exchange Offer is extended by the Company, in its sole discretion, to permit the satisfaction of all conditions to the Exchange Offer, in which case the term "Expiration Date" shall mean the last date and time to which the Exchange Offer is extended. See "The Exchange Offer - -- Expiration Date; Extensions; Amendments." A Holder electing to tender Convertible Debentures in the Exchange Offer and to consent to the Amendments should either (i) complete and sign the Letter of Transmittal, have the signatures thereon guaranteed if required by Instruction 6 thereof, and mail or deliver such Letter of Transmittal together with a properly completed and duly executed Notice of Guaranteed Delivery or the Convertible Debentures and any other required documents to the Depository at one of its addresses set forth on the back cover page of this Proxy Statement/Prospectus, or effect the tender of Convertible Debentures pursuant to the procedures for book-entry transfer as set forth under "The Exchange Offer -- How to Tender and Consent in the Exchange Offer" or (ii) request his broker, dealer, commercial bank, trust company or other nominee to effect the transaction for him. Holders will not be obligated to pay any brokerage commissions or solicitation fees in connection with the Exchange Offer. HOLDERS OF CONVERTIBLE DEBENTURES WHO TENDER THEIR CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER WILL BE REQUIRED TO CONSENT TO THE AMENDMENTS. Holders of Convertible Debentures may consent to the Amendments without tendering their Debentures in the Exchange Offer. Tenders of any Convertible Debentures may be withdrawn, in accordance with the withdrawal provisions described herein, at any time prior to the Expiration Date for the Exchange Offer. In addition, tenders of Convertible Debentures may be withdrawn after the expiration of 40 business days from the commencement of the Exchange Offer, if not yet accepted by the Company. A Consent may be revoked only by the Holder of the Convertible Debenture with respect to which the Consent was given and only if the Company receives written notice of revocation from the Holder prior to the date the Amendment becomes effective. However, the revocation of a Consent will, unless waived by the Company, render the tender of the related Convertible Debenture defective. See "The Exchange Offer -- Withdrawal of Tenders and Revocation of Consents." No fractional shares of Common Stock will be issued upon consummation of the Exchange Offer. The Company expects to enter into an agreement with the Depositary whereby the Depositary will aggregate and sell in the open market all fractional shares of Common Stock otherwise issuable in the Exchange Offer. The proceeds of such sales would be distributed by the Depositary to the persons who would otherwise have received such fractional amounts. There can be no -7- assurance as to the price at which such sales will be affected. See "The Exchange Offer -- Acceptance of Convertible Debentures and Delivery of Common Stock." If the Restructuring is consummated, at least 95% of the outstanding Convertible Debentures will be exchanged for shares of Common Stock. Holders of Convertible Debentures who do not exchange may experience a significant reduction in their ability to sell their Convertible Debentures and will not have the benefit of certain restrictive covenants now contained in the Purchase Agreements. However, the Company's reduced leverage as a result of the Restructuring should increase the likelihood that the Company will be able to pay the principal of and interest on the outstanding Convertible Debentures. Requests for additional copies of this Proxy Statement/Prospectus or the Letter of Transmittal should be directed to the Company at the address set forth on the back of this Proxy Statement/Prospectus or to the telephone number set forth above. First Union National Bank, Charlotte, North Carolina has been appointed as Depositary for the Exchange Offer. Questions and requests for assistance may be directed to the Depositary at _____________. For further information regarding any of the foregoing, contact George Murnane III, Chief Financial Officer of the Company, at (305) 593-2658. THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF CONVERTIBLE DEBENTURES TENDER THEIR SECURITIES IN THE EXCHANGE OFFER AND CONSENT TO THE AMENDMENTS. THE MEETING At the Meeting, the Company's stockholders will be asked to approve amendments to the Company's Certificate of Incorporation to effect the Reverse Stock Split, the Preferred Stock Authorization and the Charter Amendments and to approve the Stock Option Plan. The Company will restate its Certificate of Incorporation (the "Restated Certificate") in connection with these amendments. See "Appendix A" for the proposed Restated Certificate. Adoption of the proposed amendments to the Company's Certificate of Incorporation is a condition to the Exchange Offer and an essential part of the Restructuring. THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF THE COMMON STOCK VOTE IN FAVOR OF THE PROPOSED AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION AND APPROVE THE STOCK OPTION PLAN. Only stockholders of record at the close of business on ___________, 1996 will be entitled to notice of and to vote at the Meeting. As of the date of this Proxy Statement/Prospectus, there were 4,041,779 shares of Common Stock outstanding, of which there were 105 holders of record. There are no shares of Preferred Stock outstanding. Stockholders have no appraisal or dissenters' rights with respect to the proposals to amend the Company's Certificate of Incorporation. Each share of Common Stock is entitled to one vote with respect to the proposed amendments to effect the Reverse Stock Split and the Board Classification and with respect to the approval of the Stock Option Plan. Stockholders have no appraisal or dissenters' rights with respect to any of the proposed amendments to the Company's Certificate of Incorporation or the approval of the Stock Option Plan. See "Stockholders' Meeting, Voting Rights and Proxies." As of the date of this Proxy Statement/Prospectus, without giving effect to the Reverse Stock Split, Alexius A. Dyer III, the Chairman of the Board, President and Chief Executive Officer of the Company, owned of record or beneficially approximately 1,000 shares of the Company's Common Stock (disregarding any shares of Common Stock beneficially owned by him by reason of his ownership of stock options or warrants), which represents approximately .025% of the aggregate number of shares of Common Stock outstanding. At such date, without giving effect to the Reverse Stock Split, Mr. and Mrs. Richard R. Wellman, formerly the Chairman of the Board and Secretary, respectively, of the Company owned of record or beneficially approximately 1,999,700 shares of Common Stock, or 49.48% of the shares of Common Stock outstanding. 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 (representing approximately 48.99% of the shares of Common Stock outstanding) owned by the -8- Wellmans. The irrevocable proxy was affirmed by the Wellmans in October 1995. Accordingly, the executive officers and directors of the Company possess the power to vote approximately 49.02% of the outstanding shares of Common Stock with respect to the Reverse Stock Split, the Board Classification, the Preferred Stock Authorization, the Charter Amendments and approval of the Stock Option Plan. Messrs. Dyer, Mueller and Kirkland have informed the Company that they intend to vote in favor of the proposed amendments to the Company's Certificate of Incorporation and for approval of the Stock Option Plan. Stockholders are encouraged to mark, sign and date the appropriate proxy card and mail it promptly in the enclosed return envelope. A stockholder who has executed and returned a proxy may revoke it at any time before it is voted by executing and returning a proxy bearing a later date, by giving notice of revocation to the Secretary of the Company or by attending the Meeting and voting in person. See "Stockholders' Meeting, Voting Rights and Proxies -- Solicitation of Proxies," "-- Voting of Proxies," "-- Record Date," "-- Voting Rights" and "-- Revocation of Proxies." PROPOSED AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS REVERSE STOCK SPLIT The Board of Directors has approved an amendment to the Company's Certificate of Incorporation to effect the Reverse Stock Split (the "Reverse Stock Split Amendment"). Pursuant to the Reverse Stock Split Amendment, each 27 outstanding shares of Common Stock will be combined into one share of Common Stock. If adopted, the Reverse Stock Split Amendment will not become effective unless and until the Closing occurs. The authorized capitalization of the Company will not be affected by the Reverse Stock Split. Adoption of the Reverse Stock Split Amendment requires the affirmative vote of the holders of a majority of the shares of Common Stock outstanding. See "Stockholders' Meeting, Voting Rights and Proxies -- Proposed Amendment to the Company's Certificate of Incorporation: Reverse Stock Split Amendment." BOARD OF DIRECTORS The Board of Directors has approved the Board Amendments, pursuant to which (i) the number of directors of the Company shall be fixed at seven members and (ii) the number of directors constituting the Board shall not be changed without the affirmative vote of at least 75% of the issued and outstanding shares of Common Stock. If the Board Amendment is adopted, three members of the Company's initial Board of Directors will be members of the Company's management (each, a "Management Director"). The remaining four directors will be persons nominated by certain representatives of holders of the Convertible Debentures after consultation with the Company's Board of Directors (each, an "Independent Director"). The Management Directors will be Alexius A. Dyer III; George Murnane III; and E. James Mueller. The Independent Directors will be Kyle R. Kirkland, ______________ and ______________. If adopted, the Board Amendment will not become effective unless and until the Closing occurs. Adoption of the Board Amendment requires the affirmative vote of the holders of a majority of the shares of Common Stock outstanding. See "Stockholders' Meeting, Voting Rights and Proxies -- Proposed Amendment to the Company's Certificate of Incorporation: Annual Election of Board of Directors," "Management" and Description of Capital Stock." PREFERRED STOCK AUTHORIZATION The Board of Directors has approved an amendment to the Company's Certificate of Incorporation (i) to increase the number of authorized shares of Preferred Stock $.001 par value (the "Preferred Stock") to 2,000,000, (ii) to provide that such shares may be issued from time to time by the Board of Directors without further stockholder approval and (iii) to provide that a series of Preferred Stock may be issued with such designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms and conditions of redemption as are determined by the Board of Directors (the "Preferred Stock Authorization"). If adopted, the Preferred Stock Authorization will not become effective unless and until the Closing occurs. Adoption of the Preferred Stock Authorization requires the affirmative vote of the holders of a majority of the shares of Common Stock outstanding. See "Stockholders' Meeting, Voting Rights and -9- Proxies--Proposed Amendments to the Company's Certificate of Incorporation: Preferred Stock Authorization" and "Description of Capital Stock." CHARTER AMENDMENTS The Board of Directors has approved amendments to the Company's Certificate of Incorporation and Bylaws to add certain provisions with respect to stockholder action (the "Charter Amendments "). Certain of those provisions may make an acquisition of the Company more difficult for an acquiror. SECTION 203 OF THE DELAWARE LAW. Pursuant to the Charter Amendments, the Company's Certificate of Incorporation would be amended to make the provisions of Section 203 of the Delaware General Corporation Law (the "DGCL") inapplicable to the Company. In general, Section 203 of the DGCL prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date such stockholder became an "interested stockholder," unless (a) prior to such date the board of directors of the corporation approved either the "business combination" or the transaction which resulted in the stockholder becoming an "interested stockholder," or (b) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the "interested stockholder" owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (i) persons who are directors and also officers and (ii) by employee stock plans, in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or (c) on or subsequent to such date the "business combination" is approved by the board of directors and authorized at the annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the "interested stockholder." A "business combination" includes certain mergers, stock or asset sales and other transactions resulting in a financial benefit to the "interested stockholder." An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. Under the terms of Section 203, this amendment will not be effective until 12 months after adoption by the stockholders and shall not apply to any "business combination" between the Company and any person who becomes an "interested stockholder" on or prior to such adoption. STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate of Incorporation will be amended to provide that no action required or permitted to be taken at any annual or special meeting of the stockholders of the Company may be taken without a meeting, and the power of stockholders of the Company to consent in writing, without a meeting, to the taking of any action is specifically denied. This provision of the Certificate of Incorporation may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. The Bylaws will be amended to provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or special meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received no later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. The Bylaws also specify certain requirements for a stockholder's notice to be in proper written form. These provision may preclude some stockholders from bringing matters before the stockholders at an annual or special meeting or from making nominations for directors at an annual or special meeting. As set forth below, this provision of the Bylaws may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. ADJOURNMENT OF MEETINGS OF STOCKHOLDERS. The Bylaws will be amended to provide that when a meeting of stockholders of the Company is convened, the presiding officer, if directed by the Board of Directors, may adjourn the meeting if no quorum is present for the transaction of business or if the Board of Directors determines that adjournment is -10- necessary or appropriate to enable the stockholders to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to stockholders or to otherwise effectively exercise their voting rights. This provision will, under certain circumstances, make more difficult or delay actions by the stockholders opposed by the Board of Directors. The effect of such provision could be to delay the timing of a stockholders' meeting, including in cases where stockholders have brought proposals before the stockholders which are in opposition to those brought by the Board of Directors and therefore may provide the Board of Directors with additional flexibility in responding to such stockholder proposals. As set forth below, the Bylaw provisions regarding holding of meetings of stockholders may not be amended or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. AMENDMENT OF THE BYLAWS. The Certificate of Incorporation will be amended to provide that no provision of the Bylaws may be amended, modified or repealed by the stockholders of the Company, nor any provision of the Bylaws inconsistent with such provision be adopted by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. This provision will make it more difficult for stockholders to make changes to the Bylaws that are opposed by the Board of Directors. This provision of the Certificate of Incorporation may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. If adopted, the Charter Amendments will not become effective unless and until the Closing occurs. Adoption of the Charter Amendments requires the affirmative vote of the holders of a majority of the shares of Common Stock outstanding. See "Stockholders' Meeting, Voting Rights and Proxies -- Proposed Amendment to the Company's Certificate of Incorporation: Provisions Affecting Corporate Governance" and "Description of Capital Stock." THE STOCK OPTION PLAN The Board of Directors has approved the adoption of the Stock Option Plan for the Company's directors, officers and employees. The Stock Option Plan is intended to provide a means to attract, retain and motivate selected employees of the Company and non-employee directors of the Company. The Stock Option Plan provides for the grant to eligible employees of incentive stock options, non-qualified stock options, stock appreciation rights, restricted shares, performance share and performance units, dividend equivalents and other share based awards. All employees and directors are eligible to participate in the Stock Option Plan. The portion of the Stock Option Plan applicable to employees will be administered by the Compensation Committee of the Company's Board of Directors. The Compensation Committee will have the full and final authority to select employees to whom awards may be granted, to determine the type of awards to be granted to such employees and to make all administrative determinations required by the Stock Option Plan. The Compensation Committee also will have authority to waive conditions relating to an award or accelerate vesting of awards. The Stock Option Plan provides for certain grants of nonqualified stock options to non-employee directors, and, in the case of such grants, is intended to operate automatically and not require administration. An aggregate of 598,782 shares of Common Stock have been reserved for issuance under the Stock Option Plan, subject to anti-dilution adjustments in the event of certain changes in the Company's capital structure. In connection with the Restructuring, the Company intends to grant restricted stock and/or options to purchase the following numbers of shares of Common Stock to the following persons or groups: Alexius Dyer, 224,543 shares, representing 7.5% of the Common Stock to be outstanding following the Restructuring; George Murnane, 104,787 shares, representing 3.5% of the outstanding Common Stock; and the non-executive employees of the Company, 119,756 shares, representing 4.0% of the outstanding Common Stock. Forty percent of such options or shares will vest immediately with 15% vesting annually, over the four years following the date of grant. In addition, shares representing 2.5% of the outstanding Common Stock will be reserved for future issuance pursuant to the Stock Option Plan, each grant to vest equally, over three years after being awarded. The Company also intends to grant options representing up to 2.5% of the outstanding Common Stock to non-employee directors. The number of options to be granted to the non-employee directors will be determined by the Company prior to the consummation of the Restructuring. The Company intends to reserve for future issuance to the non-employee directors any shares not granted as restricted stock and not covered by options issued upon consummation of the Restructuring. See "Management - The Stock Option Plan." -11- EXCHANGE OF STOCK CERTIFICATES; FRACTIONAL SHARES As soon as practicable after the Closing, the Company's stockholders will be notified and requested to surrender their present Common Stock certificates for replacement certificates representing the number of shares of Common Stock into which their shares of Common Stock were combined pursuant to the Reverse Stock Split. Until so surrendered, each existing certificate for 27 shares of Common Stock prior to the Closing will be deemed to represent a certificate for one share of Common Stock. No certificates or scrip representing fractional shares of Common Stock will be issued in connection with the Restructuring. The Company expects to enter into an agreement with the Depositary whereby the Depositary will aggregate and sell in the open market all fractional shares of Common Stock otherwise issuable in connection with the Restructuring. There can be no assurance as to the price at which such sales will be effected. Market conditions or other factors could cause the fractional shares to be sold at depressed prices, including prices substantially below fair market value. The proceeds of such sales will be distributed by the Depositary to the persons who would otherwise have received such fractional amount. See "Certain Risk Factors - -- Market for Common Stock" and "Stockholders' Meeting, Voting Rights and Proxies -- Exchange of Stock Certificates; Fractional Shares." FEDERAL INCOME TAX CONSIDERATIONS The Restructuring is expected to result in the recognition by the Company of a certain amount of cancellation of debt ("COD") income. As a result of such income, the Company's available federal net operating loss carryforwards ("NOLs") will be reduced accordingly. Following the Restructuring, the Company's ability to use its remaining NOLs will be significantly limited by Section 382 of the Tax Code, except to the extent the Company recognizes certain built-in gains in its assets during the five-year period following the Restructuring. The exchange of the Convertible Debentures for Common Stock should constitute a tax-free recapitalization for federal income tax purposes. Accordingly, except to the extent that the consideration received by the holder of Convertible Debentures is attributable to accrued interest, a holder of Convertible Debentures should not recognize any gain or loss as a result of the Restructuring. Under the terms of the Exchange Offer, a holder of Convertible Debentures will be deemed to have been paid, and thus will be required to include in income the amount of unpaid interest that has accrued with respect to such Convertible Debentures as of the date of the Restructuring which has not previously been included in such holder's income. See "Certain Federal Income Tax Considerations." FINANCIAL FORECAST For information with respect to the Company's projected financial performance, see "The Restructuring -- Forecast of Certain Financial Data." SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA The following table sets forth selected historical financial information of the Company for the five years ended May 31, 1995 and the nine-month periods ended February 28, 1995 and February 29, 1996. The historical operating data and historical balance sheet data for the five years ended May 31, 1995 presented below have been derived from, and should be read in conjunction with, the Company's audited consolidated financial statements and the related notes thereto. The selected unaudited historical financial information for the nine- month periods indicated has been derived from unaudited consolidated financial statements prepared by the Company, which reflect all adjustments, consisting of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation. Results of operations for the nine-month periods are not necessarily indicative of results for the full year. The following financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company included elsewhere in this Proxy Statement/Prospectus. See "Selected Historical Financial Data." -12-
NINE MONTHS ENDED YEAR ENDED MAY 31, FEBRUARY 28 OR 29 -------------------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- ---- OPERATING DATA: (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA) Total revenues $21,521 $26,527 $33,504 $18,733 $24,983 $20,438 $17,524 Gross profit 6,601 9,537 12,011 (3,371) 7,270 5,527 7,763 Income from operations 2,690 4,360 3,643 (14,668) 1,554 798 3,785 Interest and other income, net 458 777 2,097 2,475 1,669 1,164 1,507 Other (55) (94) (66) 1,922 499 524 306 ------- ------- ------- ------- ------- ------- ------- Earnings (loss) before income taxes, equity in earnings (loss) of joint venture and extraordinary item 2,232 3,583 1,546 (19,065) (614) (890) 1,972 Provision for income taxes (benefit) 941 1,370 510 (2,475) -- -- -- Equity in earnings (loss) of joint venture 121 (229) (59) (423) -- -- -- Extraordinary loss on extinguishment of debt -- -- -- (363) -- -- -- ------- ------- ------- ------- ------- ------- ------- Net earnings (loss) $ 1,412 $ 1,984 $ 977 $(17,376) $ (614) $ (890) $ 1,972 Earnings (loss) per common share $0.37 $0.52 $0.24 $(4.30) $(0.15) $(0.22) $0.49 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Weighted average number of common shares outstanding 3,825 3,850 3,997 4,042 4,042 4,042 4,042 Ratio of earnings to fixed charges (1) 5.24 5.00 1.68 -- -- -- 2.50 AT MAY 31, AT FEBRUARY 28 OR 29, -------------------------------------------------------- --------------------- 1991 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- ---- BALANCE SHEET DATA: Working capital (deficit) $1,748 $2,938 $17,087 $(18,312) $(13,489) $(17,070) $(11,167) Total assets 14,319 20,615 35,709 25,553 14,511 16,020 15,769 Total debt 4,920 7,605 23,484 26,173 20,336 20,829 18,854 Stockholder's equity (deficit) 4,529 7,081 8,173 (9,088) (9,702) (9,979) (7,729) Book value per share $1.18 $1.78 $2.04 $(2.25) $(2.40) $(2.47) $(1.91)
- ------------------------------ (1) For purposes of this item, "fixed charges" represent interest expense and "earnings" represent income (loss) from operations. Earnings were insufficient to cover fixed charges by $17.2 million, $.7 million and $1.0 million for the years ended May 31, 1994 and 1995 and the nine months ended February 28, 1995, respectively. -13- SUMMARY PRO FORMA FINANCIAL DATA The summary pro forma results of operations and financial position of the Company set forth below have been derived from the Pro Forma Financial Information appearing elsewhere in this Proxy Statement/Prospectus. The pro forma operating data have been prepared assuming that the Restructuring occurred on the first day of the respective period presented and the pro forma balance sheet data have been prepared assuming that the Restructuring occurred on the respective balance sheet dates. For purposes of presenting pro forma results, the Company's historical consolidated financial statements have been adjusted to give effect to the Restructuring, assuming that all of the Convertible Debentures are accepted for exchange, that the Senior Notes are redeemed on the Closing Date with the proceeds of an advance pursuant to the Credit Agreement, that amounts outstanding pursuant to the Credit Agreement bear interest at the rate applicable to the Credit Agreement (2% above the lender's prime rate) throughout the periods and that the Restructuring was accounted for as a restructuring of troubled debt pursuant to Statement of Financial Accounting Standards 15 ("SFAS 15"). See "Accounting Treatment." The pro forma financial information does not purport to be indicative of the results that would actually have been obtained had such transactions been consummated as of the date and for the periods presented or that may be obtained in the future. The information set forth below should be read in conjunction with the Company's consolidated historical financial statements and the notes thereto included elsewhere in this Proxy Statement/Prospectus. See "Financial Statements." For an explanation of the adjustments and assumptions made to prepare the pro forma financial data, see "Pro Forma Financial Information." -14- YEAR ENDED NINE MONTHS ENDED MAY 31, 1995 FEBRUARY 29, 1996 ------------ ----------------- (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA) OPERATING DATA: Total revenue $24,983 $17,524 Gross profit (1) 7,270 7,763 Income from operations (2) 1,217 3,595 Interest and other income, net 645 820 Other (3) 499 306 ------- ------- Earnings before income taxes and extraordinary items 73 2,473 Provision for income taxes (benefits) (4) -- -- ------- ------- Earnings before extraordinary items 73 2,473 Extraordinary gain on troubled debt restructuring 1,300 456 ------- ------- Net earnings $ 1,373 $ 2,929 ------- ------- ------- ------- Ratio of earnings to fixed charges (5) -- 4.38 PER SHARE DATA: Weighted average number of common shares outstanding 2,395 2,395 Earnings before extraordinary items $ 0.03 $ 1.03 Extraordinary items 0.54 0.19 ------- ------- Net earnings $ .57 $ 1.22 - ------------------------------- (1) Gross profit is defined as total revenues less cost of sales. (2) Income from operations is defined as gross profit less SG&A expenses, provision for doubtful accounts, depreciation and amortization. (3) Other is defined as losses of service center subsidiary and unusual and nonrecurring items. (4) As of February 29, 1996 after giving effect to the Restructuring, the Company had net operating losses carryforwards of approximately $7.5 million available to offset income. (5) For purposes of this item "fixed charges" represent interest expense and "earnings" represent income from operations. Pro forma earnings would be insufficient to cover fixed charges by $31,000 for the year ended May 31, 1995. -15- AT FEBRUARY 29, 1996 ----------------- BALANCE SHEET DATA: Working Capital $ 6,460 Total assets 15,472 Total debt 8,854 Stockholders' equity 1,601 Book value per share $ 0.67 MARKET PRICES OF AND DIVIDENDS PAID ON COMMON STOCK AND MARKET PRICES OF CONVERTIBLE DEBENTURES COMMON STOCK 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 IASG. 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. Fiscal 1995 High Low ----------- ------ ----- 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 Fiscal 1996 High Low ----------- ------ ----- First Quarter.......................................... $ 7/16 $9/32 Second Quarter......................................... 9/32 5/32 Third Quarter.......................................... 3/16 1/8 Fourth Quarter......................................... 7/32 1/8 Fiscal 1997 High Low ----------- ------ ----- First Quarter (through July 11, 1996).................. $ 1/4 $3/16 At May 31, 1996, there were 105 holders of record of the Company's Common Stock and no holders of the Company's Preferred Stock. -16- 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 Convertible Debentures make it unlikely that the Company will be able to pay dividends on the Common Stock in the foreseeable future in the event the Restructuring is not consummated. If the Restructuring is consummated, covenants to be contained in the Credit Agreement will prohibit the Company from paying dividends on the Common Stock as long as indebtedness issued pursuant to the Credit Agreement remain outstanding. The last sale of the Common Stock prior to the announcement of the Restructuring known to the Company occurred on July 9, 1996 at a price of $.1875 per share. CONVERTIBLE DEBENTURES No active trading market for the Convertible Debentures exists. The Convertible Debentures were not registered pursuant to the Securities Act prior to issuance and are not listed on any exchange. The Convertible Debentures are traded over the counter by certain dealers who from time to time are willing to effect transactions in the Convertible Debentures. Holders of the Convertible Debentures also from time to time effect transactions in the Convertible Debentures with one another. Trading in the Convertible Debentures is, however, extremely limited and sporadic. The last trade of the Convertible Debentures known to the Company occurred in October, 1995, when the largest single holder of the Convertible Debentures sold all the Convertible Debentures held by it for a cash price equal to $150 per $1,000 principal amount of the Convertible Debentures, to one or more other substantial holders of the Convertible Debentures. MARKET AND TRADING INFORMATION The Company intends to apply for inclusion of the Common Stock in The Nasdaq Stock Market under the symbol "IFLY" upon consummation of the Restructuring. The Company will use its best efforts to have the Common Stock included in The Nasdaq Stock Market. However, there can be no assurance that such application will be granted or that an active trading market for the Common Stock will develop and no assurance can be given as to the price at which the Common Stock might trade. See "Certain Risk Factors - -- Market for Common Stock." -17- RISK FACTORS The Common Stock offered hereby pursuant to the Exchange Offer is subject to certain material risks. In addition, in the event the Restructuring is not consummated, there are additional risks to the ownership of Common Stock and Convertible Debentures primarily as a result of the Company's financial condition. Before deciding whether or not to tender any Convertible Debentures pursuant to the Exchange Offer, or to vote in favor of the matters to be brought before the Meeting, each stockholder and each holder of the Convertible Debentures should consider carefully all of the information contained in this Proxy Statement/Prospectus. RISK FACTORS RELATING TO FAILURE OF THE RESTRUCTURING TO OCCUR FINANCIAL CONDITION OF THE COMPANY. The Company faces significant liquidity problems caused by its substantial debt burden. The Company had outstanding indebtedness of approximately $18.1 million at May 31, 1996, consisting primarily of $7.7 million principal amount of the Senior Notes, $10 million principal amount of the Convertible Debentures and $.4 million principal amount of a mortgage loan secured by its corporate headquarters. The Company has scheduled debt service obligations (principal and interest) of approximately $5.05 million during fiscal 1997. Cash flow from operations and cash on hand will not be sufficient to cover the Company's scheduled cash debt service obligations during fiscal 1997. See "The Restructuring -- Forecast of Certain Financial Data." The Company has not made any interest payments on the Convertible Debentures since February 28, 1995 and there is currently an interest arrearage of approximately $1 million on the Convertible Debentures. On July 17, 1995 the Company did not make its scheduled principal payment totaling approximately $1.8 million to the holders of the Senior Notes. The Company made a principal payment of $1.45 million on the Senior Notes on December 12, 1995 and a subsequent payment of $.7 million on May 13, 1996, which cured such principal payment default and prepaid approximately $.35 million of the $4.1 million principal payment due on the Senior Notes on July 17, 1996. The Company will not make its July 17, 1996 payment, pending redemption of the Senior Notes in connection with the Restructuring. If the Restructuring is not consummated, the Company will be unable to make such principal payment. If the Restructuring is not consummated, the financial condition of the Company will necessitate the development of alternative actions. In view of the Company's limited financial resources and the existence of unwaived defaults with respect to the Senior Notes and the Convertible Debentures, there can be no assurance that the Company would succeed in formulating and consummating an alternative financial restructuring. In such case, the Company most likely would be forced to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. The Company projects that it will have insufficient funds to make all of its scheduled principal and interest payments with respect to the Senior Notes and Convertible Debentures during fiscal 1997 through 2002, as set forth in the table below: FISCAL YEAR 1997 1998 1999 2000 2001 2002 ----- ----- ---- ---- ---- ---- (DOLLARS IN MILLIONS) Scheduled principal payments under the Senior Notes........................... $3.70 $4.00 -- -- -- -- Scheduled interest payments under the Senior Notes........................... .50 .10 -- -- -- -- Scheduled interest payments on the Convertible Debentures (1)............. .80 .80 .80 .80 .80 .80 ----- ----- ---- ---- ---- ---- Totals............................... $5.00 $4.90 $.80 $.80 $.80 $.80 ----- ----- ---- ---- ---- ---- ----- ----- ---- ---- ---- ---- - ----------------------------- (1) No principal repayments with respect to the Convertible Debentures are due until August 31, 2003. CERTAIN DEFAULTS. On May 26, 1995, the Company received a notice of payment blockage from the Majority Noteholder. 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 -18- payment which would otherwise have been payable on May 31, 1995 to holders of the Convertible Debentures not be paid. As a result of the Company's receipt of the notice of payment blockage, the Company did not make the interest payments due to holders of Convertible Debentures on May 31, 1995 and August 31, 1995, totaling $.4 million. Pursuant to terms of the Senior Notes, the Company was prohibited from making any other payments with respect to the Convertible Debentures prior to the expiration of the payment blockage period on November 22, 1995. Notwithstanding the expiration of the payment blockage period, the Company did not pay the November 30, 1995 and the February 29 and May 31, 1996 interest payments on the Convertible Debentures. The Company does not intend to resume making payments of interest on the Convertible Debentures. The Company did not make its scheduled July 17, 1995 principal payment on the Senior Notes in the approximate amount of $1.8 million. The Company cured the default in part by making a principal payment of $1.45 million on December 12, 1995. The Company made an additional principal payment of $.7 million on May 13, 1996, which cured such principal payment default and prepaid approximately $.35 million of the $4.1 million principal payment due on the Senior Notes on July 17, 1996. The Company will not make its July 17, 1996 payment, pending redemption of the Senior Notes in connection with the Restructuring. If the Restructuring is not consummated, the Company will be unable to make such principal payment. The failure to make the interest payments to the holders of the Convertible Debentures referred to above constituted an Event of Default under the agreements governing the Senior Notes and Convertible Debentures. Further, the Company is in default in the observance of certain financial covenants applicable to the Senior Notes and the Convertible Debentures and, following July 17, 1996, will be in default with respect to the payment of principal on the Senior Notes. If the Company remains in default under the terms of the Senior Notes and Convertible Debentures, the holders of such instruments could accelerate the debt, resulting in principal of $17.7 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 most likely would require the Company to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. In addition, if the holders of any of the Senior Notes or Convertible Debentures demand repayment or if the holders of the Senior Notes seek to realize upon the collateral securing the Senior Notes, there is a substantial likelihood that the Company will be forced to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. CONSEQUENCES OF FAILURE TO CONSUMMATE THE RESTRUCTURING. If the Restructuring is not consummated, the Company's highly leveraged financial position will result in the continuation of the defaults described above with respect to the Senior Notes and the Convertible Debentures and may result in a number of other serious financial and operational problems, including the following: (i) the Company will experience a severe liquidity crisis; (ii) the Company will be unable to invest adequate capital in its business or maintain its current capital assets; (iii) the Company will have little, if any, ability to access capital markets; (iv) the Company's senior management will be required to spend an excessive amount of time and effort dealing with the Company's financial problems, instead of focusing on the operation of its business; (v) the Company may be unable to retain top managers and other key personnel and build the value of its business; (vi) the Company may lose business if customers become concerned about the Company's ability to supply quality replacement parts in a timely manner or to comply with applicable regulatory requirements; and (vii) suppliers to the Company may stop providing supplies or may provide supplies only on shortened payment or cash terms. If these problems occur, the Company believes that the value of its business will deteriorate. Accordingly, if the Restructuring is not consummated, the Company will have little choice but to devise alternative actions. Considering the Company's limited financial resources and the existence of unwaived defaults with respect to the Senior Notes and the Convertible Debentures, there can be no assurance that the Company would succeed in formulating and consummating an acceptable alternative financial restructuring. In such case, the Company most likely would be forced to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. In addition, because payment defaults currently exist under the Senior Notes and Convertible Debentures (see "-- Certain Defaults"), it is possible that creditors of the Company could file an involuntary petition seeking to place the Company in bankruptcy. There can be no assurance that a bankruptcy proceeding would result in a reorganization of the Company rather than a liquidation, or that any reorganization would be on terms as favorable to the holders of the Convertible Debentures, Senior Notes and Common Stock as the terms of the Restructuring. If a liquidation or a protracted reorganization were to occur, there is a risk that there -19- would be no cash or property available for distribution to holders of the Convertible Debentures and the Common Stock and that the holders of Senior Notes would incur a significant discount on their claims. CONDITIONS TO THE RESTRUCTURING. The Restructuring will not be consummated unless the following things, among others, occur: (i) the Minimum Tenders shall have been validly tendered and not withdrawn by the holders of the Convertible Debentures prior to the Expiration Date; (ii) the requisite Consents shall have been received and such Consents shall not have been revoked and the Amendments shall have become effective; (iii) the Company's stockholders shall have approved the amendments to the Company's Certificate of Incorporation to effect the Reverse Stock Split, the Board Amendments, the Preferred Stock Authorization and the Charter Amendments and shall have approved the Stock Option Plan; (iv) the Company and the Bank shall have negotiated and executed the Credit Agreement, the conditions to the effectiveness thereof shall have been satisfied or waived and the Company shall have the ability to borrow at least $2.5 million pursuant to the Credit Agreement immediately following the Restructuring; and (v) the Old Warrant Amendment shall have become effective. See "The Restructuring -- Conditions to the Restructuring." There can be no assurance that the foregoing conditions will be satisfied. RISK FACTORS ASSOCIATED WITH OWNERSHIP OF THE COMMON STOCK EFFECTS OF THE ECONOMY ON THE OPERATIONS OF THE COMPANY. Since the Company's customers consist of airlines, maintenance and repair facilities that service airlines and other aircraft spare parts redistributors, the Company's business can be impacted by the economic factors that affect the airline industry. When such factors adversely affect the airline industry, they tend to cause downward pressure on the pricing for aircraft spare parts and increase the credit risk associated with doing business with airlines. Additionally, factors such as the price of fuel affect the aircraft spare parts market for older aircraft, since older aircraft become less competitive with newer model aircraft as the price of fuel increases. There can be no assurance that economic and other factors which might affect the airline industry will not have an adverse impact on the Company's results of operations. RISKS REGARDING THE COMPANY'S INVENTORY. The Company's inventory consists principally of new, overhauled, serviceable and repairable aircraft parts that are purchased from many sources. Before parts may be installed in an aircraft, they must meet certain standards of condition established by the Federal Aviation Administration ("FAA") and/or the equivalent regulatory agencies in other countries. Specific regulations vary from country to country, although regulatory requirements in other countries generally coincide with FAA requirements. Parts must also be traceable to sources deemed acceptable by such agencies. Parts owned or acquired by the Company may not meet applicable standards or standards may change in the future, causing parts which are already contained in the Company's inventory to be scrapped or modified. Aircraft manufacturers may also develop new parts to be used in lieu of parts already contained in the Company's inventory. In all such cases, to the extent that the Company has such parts in its inventory, their value may be reduced. FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results are affected by many factors, including the timing of orders from large customers, the timing of expenditures to purchase inventory in anticipation of future sales, the timing of bulk inventory purchases, and the mix of available aircraft spare parts contained, at any time, in the Company's inventory. Since the Company typically does not obtain long-term purchase orders or commitments from its customers, it must anticipate the future volume of orders based upon the historic purchasing patterns of its customers and upon its discussions with its customers as to their future requirements. Cancellations, reductions or delays in orders by a customer or group of customers could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION. The aviation industry is highly regulated in the United States by the FAA and in other countries by similar agencies. While the Company's business is not regulated, the aircraft spare parts which it sells to its customers must be accompanied by documentation that enables the customer to comply with applicable regulatory requirements. There can be no assurance that new and more stringent government regulations will not be adopted in the future or that any such new regulations, if enacted, would not have an adverse impact on the Company. See "Business--Government Regulation." -20- CONCENTRATION OF SALES. During a given fiscal year, one or more customers may account for a significant portion of the Company's parts sales. The Company's parts customers operate in a segment of the airline industry that is volatile and it is not unusual for a carrier that uses the types of aircraft for which the Company stocks parts to fail. In addition, in the past the Company's sales have been concentrated with a small number of customers. For example, in fiscal 1994 ADC Airlines and Transafrik accounted for approximately 25% of the Company's total revenue and in fiscal 1995, Aeroservicios Carabobo C.A. and Ajax Leasing Ltd., accounted for more than 34% of the Company's total revenue. During fiscal 1996, other than ValuJet Airlines, Inc., no customer represented more than 4% of the Company's total revenue. For the twelve months ended May 31, 1996, the Company's parts sales to ValuJet represented approximately 21% of the Company's total revenue. ValuJet has been the subject of intense scrutiny by the FAA since the crash of one of its aircraft in early May 1996. On June 17, 1996, ValuJet entered into a consent decree with the FAA. Pursuant to the consent decree, ValuJet agreed to ground all of its aircraft until it demonstrates compliance with specified safety and maintenance procedures. Although ValuJet officials have publicly stated their intentions to resume operations within 30 to 60 days, there can be no assurance that ValuJet will be able to do so. Further, the consent decree provides that ValuJet may operate no more than 15 aircraft when it initially resumes operations, which is less than half of its fleet. The failure of ValuJet to resume operations or eventually to resume operations to substantially the level conducted prior to the grounding could have a material adverse effect on the Company by reducing the Company's sales and earnings from ValuJet. Furthermore, to the extent that a number of ValuJet's aircraft are not returned to service with ValuJet and become available for sale and/or lease, short-term disruptions may occur in the DC-9 market, temporarily diminishing the value of the Company's inventory and aircraft. The Company believes that any aircraft previously operated by ValuJet and not placed back in service will eventually be acquired by other carriers who will need spare parts, but there can be no assurance in this regard. To reduce the Company's future vulnerability to a decrease in sales to any single customer, the Company focused its marketing efforts on the identification and solicitation of new customers. As a result, the Company obtained approximately 240 new parts customers during fiscal 1995 and approximately 300 during fiscal 1996. PRODUCT LIABILITY. The Company's business exposes it to possible claims for personal injury or death which may result from the failure of an aircraft spare part sold by it. In this regard, the Company maintains liability insurance in the amount of $10 million. While the Company maintains what it believes to be adequate liability insurance to protect it from such claims, and while no lawsuit has ever been filed against the Company based upon a products liability theory, no assurance can be given that claims will not arise in the future or that such insurance coverage will be adequate. Additionally, there can be no assurance that insurance coverages can be maintained in the future at an acceptable cost. Any such liability not covered by insurance could have a material adverse effect on the financial condition of the Company. GROWTH STRATEGY AND RISKS RELATING TO FUTURE ACQUISITIONS. A key element of the Company's strategy involves growth through the acquisition of additional inventories of aircraft spare parts and the acquisition of other companies, assets or product lines that would complement or expand the Company's existing aircraft spare parts business. The Company's ability to grow by acquisition is dependent upon, and may be limited by, the availability of suitable aircraft parts inventories, acquisition candidates, capital, and by restrictions contained in the Credit Agreement. In addition, acquisitions involve risks that could adversely affect the Company's operating results, including the assimilation of the operations and personnel of acquired companies, the potential amortization of acquired intangible assets and the potential loss of key employees of acquired companies. There can be no assurance that the Company will be able to consummate acquisitions on satisfactory terms. RELIANCE ON EXECUTIVE OFFICERS AND KEY EMPLOYEES. The continued success of the Company is dependent to a significant degree upon the services of its executive officers and upon the Company's ability to attract and retain qualified personnel experienced in the various phases of the Company's business. The Company has or will, upon consummation of the Restructuring, have, employment agreements with all of its executive officers. The ability of the Company to operate successfully could be jeopardized if one or more of its executive officers were unavailable and capable successors were not found. The employment agreements between the Company and its executive officers will be individually terminable by each executive officer upon a change of control of the Company. -21- COMPETITION. There are numerous suppliers of aircraft spare parts in the aviation market worldwide and, through inventory listing services, customers have access to a broad array of suppliers. These include major aircraft manufacturers, airline and aircraft service companies and aircraft spare parts redistributors. None of the Company's competitors, however, accounts for a significant amount of the spare parts market for narrow-bodied aircraft. Certain of the Company's competitors have substantially greater financial and other resources than the Company. There can be no assurance that competitive pressures will not materially and adversely affect the Company's business, financial condition or results of operations. DILUTION. The issuance of a significant number of shares of Common Stock in connection with the Restructuring will result in a significant dilution of the equity interests of the existing holders of Common Stock. Immediately following the consummation of the Restructuring, the equity interests of the holders of Common Stock will be diluted to approximately 5% of the total number of shares outstanding, assuming that all of the Convertible Debentures are accepted for exchange, and that all options to purchase shares of Common Stock to be issued to the Company's management are exercised. MARKET FOR COMMON STOCK. The Company intends to apply for inclusion of the Common Stock in The Nasdaq Stock Market upon consummation of the Restructuring. The Company will use its best efforts to have the Common Stock included in The Nasdaq Stock Market. However, there can be no assurance that such application will be granted or that an active trading market for the Common Stock will develop and no assurance can be given that a holder of Common Stock will be able to sell such Common Stock in the future or as to the price at which the Common Stock might trade. The Company expects to enter into an agreement with the Depositary whereby the Depositary will aggregate and sell in the open market all fractional shares of Common Stock otherwise issuable in the Exchange Offer. The Company can give no assurance that the price at which such sales will be made will not be at a substantial discount from the fair value of the securities sold. NO DIVIDENDS. The Company does not anticipate that it will pay any dividends on the Common Stock in the foreseeable future. The Credit Agreement will contain provisions prohibiting the Company from paying dividends without the consent of the lender. See "Description of the Credit Agreement." CERTAIN BANKRUPTCY AND INSOLVENCY CONSIDERATIONS. Consummation of the Restructuring will have significant consequences in the event of a subsequent bankruptcy for exchanging holders of Convertible Debentures. To the extent exchanging holders of the Convertible Debentures receive Common Stock, such holders will have only an equity interest in the Company, which will rank below all debt claims in a subsequent bankruptcy, including the claims of non-exchanging holders of Convertible Debentures. Further, the Convertible Debentures are subordinated to the Senior Notes and to all of the Company's other secured and unsecured debt. Following the Restructuring, any Convertible Debentures that have not been exchanged will be subordinated to the Company's obligations under the Credit Agreement and all of the Company's other secured and unsecured debt. -22- The relative rankings of the Company's debt claims and equity interests both before and after the Restructuring are summarized in the following table. PRE-RESTRUCTURING POST-RESTRUCTURING ----------------- ------------------ 1. Secured Debt(a) 1. Secured Debt(a) Senior Notes Credit Agreement Other Secured Debt Other Secured Debt 2. Unsecured Debt(b) 2. Unsecured Debt(b) Trade Debt Trade Debt Convertible Debentures Convertible Debentures 3. Equity(c) 3. Equity(c) Common Stock Common Stock - ----------------------------- (a) All "Secured Debt" ranks ahead of all "Equity" and, to the extent of the value of the security interests securing any such "Secured Debt," all "Unsecured Debt." In addition, the debt under the Senior Notes has, and the debt under the Credit Agreement will have, a contractual priority over all "Unsecured Debt." To the extent any amount of the "Secured Debt" is under secured or becomes unsecured, any such amount will have the relative priority of "Unsecured Debt," except that debt under the Credit Agreement and Convertible Debentures would retain its contractual priority over all "Unsecured Debt." (b) All "Unsecured Debt" ranks ahead of all "Equity." The Convertible Debentures rank below all indebtedness of the Company other than "Trade Debt" and indebtedness that by its express terms is not superior to the Convertible Debentures. (c) The Common Stock would constitute all the outstanding "Equity" of the Company. In the event of a liquidation of the Company, all Secured and Unsecured Debt of the Company, as well as Preferred Stock, if any, would be paid or provided for and any amounts remaining would be available for the "Equity." THE RESTRUCTURING The following sections of this Proxy Statement/Prospectus set forth certain information regarding the events leading to the Restructuring, the terms of the Restructuring, and the effects of the Restructuring on the Company and the holders of its securities. BACKGROUND The Company issued the Convertible Debentures during fiscal 1994 on September 8, 1993. The proceeds of the Convertible Debentures were used for the following purposes: (i) to repurchase a portion of the Senior Notes ($3.4 million); (ii) to repay certain other indebtedness ($1.9 million); (iii) to pay fees and expenses of the offering ($1.1 million); and (iv) to purchase four DC-9 aircraft for parting out ($3.6 million). Also during fiscal 1994, the Company, in an attempt to more vertically integrate its business, invested approximately $3 million to establish a repair facility certified by the FAA. The principal business of the repair facility, which commenced operations in fiscal 1994, was to perform FAA-required maintenance checks on certain narrow body aircraft. The facility was operated by IASC. However, during fiscal 1994, while the Company was undertaking its diversification and expansion program, its financial performance was adversely affected by several factors. First, sales to Transafrik Corp., a cargo carrier operating in Africa, declined significantly, from approximately $6.0 million in fiscal 1993 to approximately $1.5 million in fiscal 1994. Transafrik had accounted for a significant portion of the Company's revenue prior to fiscal 1994. 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. Second, the Company was unable to operate the repair facility profitably, losing approximately $1.9 million on its operations of the facility during fiscal 1994. Principally as the result of the establishment of the repair facility, the number of persons employed by the Company grew from approximately 80 in fiscal -23- 1993 to approximately 160 in fiscal 1994, and sales, general and administrative expense increased to approximately 37.1% of total revenue in fiscal 1994 from approximately 19.3% of total revenue in fiscal 1993. Third, the overall market for used aircraft and parts weakened and this, combined with a diminished cash position, reduced the Company's ability to purchase additional aircraft and inventory for resale and lead to a 43.9% decline in total revenues in fiscal 1994, from $33.5 million in fiscal 1993 to $18.7 million. As a result of the weak demand in the marketplace and the Company's need to increase its liquidity to meet its obligations as they became due, it became necessary for the Company to sell an aircraft at an inopportune time and price, resulting in a $2.1 million loss. This loss related primarily to the aircraft being sold to raise cash at an amount substantially below cost, as well as the write-off of an aircraft because its Nigerian lessee defaulted under the lease and the Company did not believe it could recover possession of the aircraft. In addition, during the fourth quarter of fiscal 1994, the Company accrued to cost of sales a charge of $2.4 million for the partial write-down of three aircraft to reflect net realizability of the aircraft. The unanticipated cost of overhauling these aircraft at IASC eliminated the economic benefit that the Company had negotiated under their sales contract. In February 1994, the Company's President and Chief Financial Officer left the Company and in January 1995, the Company's Chief Executive Officer was replaced by the current Chief Executive Officer. In an effort to address the Company's financial problems, current senior management made the strategic decision to refocus the Company on its core business--parts sales. The costs of implementing this strategy were largely recognized in fiscal 1994. Accordingly, the Company recorded a net loss of $17.4 million in fiscal 1994, substantially all of which was related to non-core businesses and, to the extent related to the core business, was nonrecurring. See "Management's Discussion and Analysis of Results of Operations and Financial Conditions." As part of its strategic decisions to refocus on its core business, in late fiscal 1994 and early fiscal 1995, the Company sought aggressively to reduce its expenses. As a result, the total number of persons employed by the Company was reduced by approximately 85%, to 24 by the end of fiscal 1995, and operations at the service center were terminated. Further, the Company sold a subsidiary that was engaged in air cargo transport. In addition, during fiscal 1995, the Company sought to reduce its vulnerability to a decrease in sales to any single customer by focusing its marketing on the identification and solicitation of new customers. The Company obtained approximately 240 new parts customers during fiscal 1995. Also in fiscal 1995, the Company instituted new compensation policies for its parts sales force. Pursuant to the new policies all salesman are paid strictly on commission, sales to new customers are encouraged and commissions are not paid until accounts are collected. Furthermore, the Company has continued to decrease its exposure to more volatile international markets. Its domestic parts sales as a percentage of total sales has increased in each of the last four fiscal years, to approximately 79% for the nine months ended February 29, 1996 from 72% in fiscal 1995, 57% in fiscal 1994, and 39% in fiscal 1993. CERTAIN DEFAULTS On May 26, 1995, the Company received a notice of payment blockage from the Majority Noteholder. 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 Convertible Debentures not be paid. As a result of the Company's receipt of the notice of payment blockage, the Company did not make the interest payments on the Convertible Debentures due on May 31 and August 31, 1995, totaling $.4 million. Pursuant to terms of the Senior Notes, the Company was prohibited from making any other payments with respect to the Convertible Debentures prior to the expiration of the payment blockage period on November 22, 1995. Notwithstanding the expiration of the payment blockage period, the Company did not pay the November 30, 1995 and the February 29 and May 31, 1996 interest payments on the Convertible Debentures. The Company does not intend to resume making payments of interest on the Convertible Debentures. The Company did not make its scheduled July 17, 1995 principal payment on the Senior Notes in the approximate amount of $1.8 million. The Company cured the default in part by making a principal payment of $1.45 million on December 12, 1995. The Company made an additional principal payment of $.7 million on May 13, 1996, which cured such principal payment default and prepaid approximately $.35 million of the $4.1 million principal amount due on the Senior Notes on July 17, 1996. The Company will not make its July 17, 1996 payment, pending redemption of the Senior Notes -24- in connection with the Restructuring. If the Restructuring is not consummated, the Company will be unable to make such principal payment. The failure to make the interest payments to holders of the Convertible Debentures referred to above constituted an Event of Default under the agreements governing the Senior Notes and Convertible Debentures. Further, the Company is in default in the observance of certain financial covenants applicable to the Senior Notes and the Convertible Debentures and, following July 17, 1996, will be in default with respect to the payment of principal on the Senior Notes. If the Company remains in default under the terms of the Senior Notes and Convertible Debentures, the holders of such instruments could accelerate the debt, resulting in principal of approximately $17.7 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 most likely would require the Company to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. In addition, if the holders of any of the Senior Notes or Convertible Debentures demands repayment or if the holders of the Senior Notes seek to realize upon the collateral securing the Senior Notes, there is a substantial likelihood that the Company will be forced to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. NEGOTIATIONS WITH DEBENTUREHOLDERS In late fiscal 1995, the Company conducted preliminary meetings with certain holders of the Senior Notes and Convertible Debentures and representatives of Dabney/Resnick, Incorporated ("D/R"), which served as the Company's placement agent for the offering of the Convertible Debentures and whose clients include several holders of the Convertible Debentures, regarding a restructuring of the Company's debt. In July 1995, the Company formulated a restructuring proposal that contemplated (among other things) (i) the issuance of shares of Common Stock representing approximately 63.55% of the total shares of Common Stock to be outstanding on a fully diluted basis following implementation of the proposal to the holders of the Convertible Debentures in exchange for their debt claims against the Company; (ii) a deferral of the repayment of approximately $1 million of the principal of the Senior Notes for one year; and (iii) the sale of up to $2 million of new subordinated debt securities and shares of Common Stock representing up to 12.5% of the Common Stock outstanding on a fully diluted basis following the implementation of the proposal to certain holders of the Convertible Debentures for cash. Pursuant to such restructuring proposal, the Company's management would have received options representing 8.95% of the total shares of Common Stock to be outstanding on a fully diluted basis following implementation of the proposal and options equal to 2% of such Common Stock with respect to each year during the five fiscal years following implementation of the proposal that the Company achieved certain earnings projections. Following the implementation of such proposal, the outstanding shares of Common Stock would have represented approximately 5% of the total outstanding on a fully diluted basis. The restructuring proposal was presented to certain major holders of the Convertible Debentures and D/R in July, 1995. The Company understands that, after the presentation of the restructuring proposal, the largest holder of the Convertible Debentures sold all of the Convertible Debentures then held by it, for a cash price equal to $150 per $1,000 principal amount of the Convertible Debentures, to one or more substantial holders of Convertible Debentures that had also been participating in the restructuring discussions. In November 1995, a major Convertible Debenture holder and D/R held discussions with the Company regarding a possible counterproposal to the Company's restructuring proposal. Pursuant to the counterproposal, the holders of the Convertible Debentures would have exchanged their debt claims against the Company for $4.85 million aggregate principal amount of new debt instruments and shares of Common Stock representing 60% of the Common Stock outstanding on a fully diluted basis following implementation of the counterproposal. The new debt instrument would have been non-interest bearing through fiscal 2000 and thereafter would have borne interest at the rate of 15% per annum until maturity in fiscal 2003. The counterproposal also contemplated that management would receive Common Stock, or options to acquire shares of Common Stock, representing 10% of the Common Stock outstanding on a fully diluted basis following the implementation of the counterproposal. Shares of Common Stock representing 20% of the total outstanding on a fully diluted basis were to be issued to the holders of a new series of debt instruments contemplated by the counterproposal. The new debt instruments were to be issued for $1.5 million cash. Finally, under the counterproposal, the outstanding shares of Common Stock would have represented approximately 5% of the total outstanding on a fully diluted basis. The Company rejected the counterproposal and it was retracted. -25- The Convertible Debenture holder then engaged, at the Company's expense, an aviation consulting firm and an investment banking firm to review the Company's restructuring proposal. These experts completed their review and issued a report dated December 12, 1995. The report concluded (i) that the value of the Company's aircraft and parts inventory exceeded the then outstanding principal amount of the Senior Notes; (ii) that the Company's gross margins were likely to decline from current levels and that, therefore, the Company should consider selling its aircraft to obtain working capital; and (iii) that the recovery that the Convertible Debenture holders could expect by retaining an equity interest in the Company should significantly exceed the recovery from a quick sale of assets or the current sale of the Company's business to a third party. On February 1, 1996, the Company again met with the major holder of the Convertible Debentures and D/R. At this meeting, the Company, the Convertible Debenture holder and D/R discussed the Company's proposal that the Convertible Debentures be converted into shares of the Company's common stock. The Convertible Debenture holder and D/R requested that the Company update certain information included in its original restructuring proposal and provide a revised restructuring proposal. The Company presented the updated financial information to the Convertible Debenture holder and D/R on June 10, 1996. At the June 10 meeting, the Convertible Debenture holder agreed to exchange the Convertible Debentures held by it for shares of Common Stock representing 75% of the shares of Common Stock to be outstanding following the Restructuring, on a fully-diluted basis, and D/R agreed to recommend to its clients that they do so, subject to the following conditions: (i) that, following the consummation of the Restructuring, the Company would be permitted to borrow at least $2.5 million pursuant to the Credit Agreement; (ii) that the Company agree to use its best efforts to have the Common Stock included in The Nasdaq Stock Market following the consummation of the Restructuring; (iii) that the Company, such Debenture holder and D/R negotiate final terms regarding the composition of the Board of Directors of the Company and the terms and distribution of the restricted shares of Common Stock and options to be issued to management upon consummation of the Restructuring; and (iv) that the amount of the expenses of consummating the Restructuring be reduced. On June 26, 1996, the Company again met with D/R. At that meeting, the D/R representative indicated that D/R would be supportive of a restructuring plan that satisfied each of the conditions discussed at the June 10 meeting. Also on June 26, 1996, the Company met with the Majority Noteholder. At the meeting, the Majority Noteholder agreed to accept prepayment of its Senior Notes upon consummation of the Restructuring without receipt of prepayment penalty or penalty interest on overdue interest and to consent to the Old Warrant Amendment. The Company proposed to the Majority Noteholder that it enter into a standstill agreement with the Company and provided a draft of such an agreement to the Majority Noteholder. The Restructuring is the Company's revised restructuring proposal provided in response to its negotiations with the Majority Noteholder, such Convertible Debenture holder and D/R representatives. The terms of the Restructuring were approved by the Directors of the Company at a meeting held on __________, 1996. THE STANDSTILL AGREEMENT As a result of the negotiations described above, the Company entered into a Standstill Agreement with the Majority Noteholder on July 11, 1996. Pursuant to the Standstill Agreement, the Majority Noteholder has agreed to refrain (to the extent provided therein) from exercising any rights or remedies it may have with respect to the Event of Default with respect to the Senior Notes that will occur upon the Company's failure to pay the installment of principal due on the Senior Notes on July 17, 1996. The obligations of the Majority Noteholder pursuant to the Standstill Agreement terminate on the earlier of (i) the 120th day following the date of the Standstill Agreement; (ii) the consummation of the Restructuring; and (iii) the Termination Date (as defined below). Such agreement, however, does not constitute a waiver of the Event of Default. In the event that the Termination Date occurs, the Majority Noteholder will be entitled to exercise any and all of its rights and remedies with respect to such Event of Default. The Company has agreed, pursuant to the Standstill Agreement, to continue to pay non-default rate interest with respect to the Senior Notes in accordance with their terms prior to the consummation of the Restructuring. For purposes of the Standstill Agreement, the "Termination Date" is defined as the first to occur of the following: (i) the occurrence of any "Standstill Event of Default" (as defined below); (ii) the exercise by any creditor of the Company of any remedies against the Company with respect to the Company's obligations to such creditor; and (iii) the first date on which, in the reasonable determination of the Majority Noteholder, any one of the conditions precedent to the Restructuring (see "--Conditions to the Restructuring") is no longer capable of being satisfied. The Standstill Agreement provides that the -26- Company shall promptly give notice to the Majority Noteholder of the occurrence of any event or circumstance of which it is aware that would constitute grounds for the Majority Noteholder to declare that the Termination Date has occurred and that if the Termination Date shall occur, the holders of a majority of the principal amount of the Notes shall give the Company notice of the occurrence. The "Standstill Events of Default" are the following: (i) the Company, pursuant to or within the meaning of any bankruptcy law, commences a voluntary case or proceeding, consents to the entry of an order for relief against it in an involuntary case or proceeding, consents to the entry of an order for relief against it in an involuntary case or proceeding, consents to the appointment of a custodian of it or for all or substantially all of its property, makes a general assignment for the benefit of its creditors or admits in writing its inability to pay its debts as they come due; (ii) pursuant to or within the meaning of any bankruptcy law, an involuntary case or proceeding is commenced with respect to the Company, and an order against the debtor is entered in such case or proceeding or the court in such case or proceeding appoints a custodian for or orders the liquidation of the debtor or any substantial part of its assets and such order or appointment remains unstayed an in effect for 60 days; or (iii) the Company defaults in its obligation to make interest payment with respect to the Senior Notes. The Majority Noteholder has also agreed that, prior to the Termination Date, it will not voluntarily transfer Senior Notes or Old Warrants unless the transferee agrees to be bound by the terms and conditions set forth in the Standstill Agreement. The Majority Noteholder has also agreed to refrain, prior to the Termination Date, from collecting from the Company, and from asserting any right to collect, payment of penalty interest on overdue payments of principal and interest on the Notes. Further, the Majority Noteholder has agreed that the provisions of the Senior Notes Purchase Agreement that require the payment by the Company of a prepayment premium upon the optional prepayment of the Senior Notes shall be waived in connection with the prepayment of the Notes upon consummation of the Restructuring. Pursuant to the Standstill Agreement, the provisions of the Senior Notes that provide for the payment of interest and interest on overdue installments of interest will again be in full force and effect upon the occurrence of the Termination Date (other than a Termination Date that results from the consummation of the Restructuring). OVERVIEW OF THE RESTRUCTURING GENERAL. The Company is proposing the Restructuring to achieve changes in its financial structure that it believes are necessary to help alleviate the problems caused by the Company's excessive debt service levels and debt repayment obligations, to help assure its long-term viability and to permit it to implement its operating strategy. If the Restructuring is consummated, the Company expects that it will have the financial flexibility and liquidity it requires to implement its operating strategy. However, consummation of the Restructuring is subject to a number of conditions and the Company has no assurance that such conditions will be satisfied. See "-- Conditions to the Restructuring." In the absence of the Restructuring, the Company will be unable to make the scheduled principal payments on the Senior Notes and the Convertible Debentures. In addition, in the absence of the Restructuring, although the Company expects to be able to make scheduled interest payments on the Senior Notes, it would be unable to make scheduled interest payments on the Convertible Debentures. If the holders of any of the Company's Senior Notes or Convertible Debentures demand repayment or if the holders of the Senior Notes seek to realize upon the collateral securing the Senior Notes, the Company most likely would be forced to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. Upon consummation of the Restructuring, (a) the Reverse Stock Split, the Board Classification, the Preferred Stock Authorization, the Charter Amendments, the Stock Option Plan and the Credit Agreement would become effective; (b) the Company would accept all valid tenders of Convertible Debentures and would issue shares of Common Stock in exchange therefor; (c) the Amendments would become effective; (d) the Senior Notes would be redeemed using advances under the Credit Agreement; (e) the Company would issue options to purchase shares of Common Stock to the Company's directors, officers and employees pursuant to the Stock Option Plan in settlement of options and/or warrants previously awarded to them or in connection with employment agreements to be entered into by them; and (f) the Old Warrant Amendment would become effective. None of the foregoing will become effective unless all are consummated. The consummation of the Restructuring is conditioned upon the occurrence of certain events. See "-- Conditions to the Restructuring." On a pro forma basis, the Restructuring would have reduced the amount of the Company's outstanding indebtedness, at May 31, 1995, from $20.3 million to $10.3 million and at February 29, 1996, from $18.9 million to $8.9 million, based -27- on the assumptions that the Restructuring occurred on such dates and that all Convertible Debentures were accepted for exchange. Total interest expense, on a pro forma basis, would have been reduced from $2.3 million to $1.3 million during fiscal 1995 and from $1.5 million to $.8 million during the nine months ended February 29, 1996, based on the assumptions that the Restructuring occurred on the first day of the respective periods presented, that all Convertible Debentures were accepted for exchange and that amounts outstanding on the Credit Agreement bore interest at 10.25% throughout the periods. If the Restructuring does not receive the required approvals, the highly leveraged financial condition of the Company will necessitate the development of alternative actions. In view of the Company's limited financial resources and the existence of unwaived defaults under the Senior Notes and the Convertible Debentures, there can be no assurance that the Company would succeed in formulating and consummating an alternative financial restructuring. In such case, the Company would most likely be forced to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. See "Risk Factors --Consequences of Failure to Consummate the Restructuring." THE CREDIT AGREEMENT. The Restructuring is conditioned upon the execution of the Credit Agreement with the Bank and the Company's ability to borrow at least $2.5 million pursuant to the Credit Agreement immediately following the consummation of the Restructuring. See "Description of The Credit Agreement." RETIREMENT OF THE SENIOR NOTES; AMENDMENT OF OLD WARRANTS. The Senior Notes will be redeemed upon consummation of the Restructuring. It is a condition to the Restructuring that the holders of the Old Warrants agree to amend the expiration date of the Old Warrants upon consummation of the Restructuring. EQUITY RESTRUCTURING. The amendment to the Company's Certificate of Incorporation authorizing the Reverse Stock Split must be adopted by the stockholders prior to the consummation of the Restructuring. Pursuant to the Reverse Stock Split Amendment, the Reverse Stock Split will cause each 27 shares of Common Stock outstanding to be combined into one share of Common Stock. Adoption of the Reverse Stock Split requires the affirmative vote of the holders of a majority of the shares of Common Stock outstanding. See "Stockholders' Meeting, Voting Rights and Proxies -- Exchange of Stock Certificates; Fractional Shares" for a discussion of the treatment of fractional shares of Common Stock. CERTAIN SIGNIFICANT EFFECTS OF THE RESTRUCTURING Implementation of the Restructuring would have significant effects on the financial obligations of the Company and on the current holders of the Common Stock, the Senior Notes and the Convertible Debentures. Certain of the anticipated effects are described below. SIGNIFICANT CHANGES IN FINANCIAL OBLIGATIONS. The Restructuring would result in significant changes in the Company's financial obligations, including (a) the elimination of future interest and principal payment obligations with respect to at least 95% of the aggregate principal amount of the Convertible Debentures, (b) the repayment of the Senior Notes, (c) the incurrence of approximately $7.9 million of indebtedness under the Credit Agreement, (d) the increased sensitivity of the Company to prevailing interest rates because indebtedness under the Credit Agreement will bear interest at a floating rate, and (e) the deferral of principal payments on the Company's long-term indebtedness because the final maturity of the Credit Agreement is later than the maturity date of the Senior Notes. The Restructuring would also result in the modification of certain restrictive covenants now applicable to the Company pursuant to the instruments creating the Convertible Debentures and the elimination of the restrictive covenants now applicable to the Company pursuant to the instruments creating the Senior Notes. Certain effects of the Restructuring, assuming, in the case of outstanding indebtedness, that the Restructuring was consummated on May 31, 1996, and, in the case of interest expense, that the Restructuring was consummated on June 1, 1995, are set forth in the tables below. In addition, the information set forth in the tables below has been prepared based on the assumption that all of the Convertible Debentures are accepted for exchange. The information set forth in the tables below and the assumptions upon which such information is based are more fully described in the section entitled "Pro Forma Financial Information." The discussion herein is qualified in its entirety by the information set forth in such section. -28- OUTSTANDING INDEBTEDNESS ------------------------ AT MAY 31, 1996 -------------------------- PRO FORMA HISTORICAL RESTRUCTURING ---------- ------------- (IN THOUSANDS) PRINCIPAL PRINCIPAL Senior Notes..................................... $ 7,700 $ -- Convertible Debentures........................... 10,000 -- Credit Agreement................................. -- 7,700 Other Debt....................................... 400 400 --------- --------- Total........................................ $18,100 $ 8,100 --------- --------- --------- --------- INTEREST REQUIREMENTS FOR THE YEAR ENDED MAY 31, 1996 -------------------------- (IN THOUSANDS) PRO FORMA HISTORICAL RESTRUCTURING ---------- ------------- Senior Notes..................................... $ 1,100 $ -- Convertible Debentures........................... 800 -- Credit Agreement................................. -- 900 Other Debt....................................... 100 100 --------- ---------- Total........................................ $ 2,000 $1,000 --------- ---------- --------- ---------- The Company's scheduled obligations to pay interest and principal under the instruments creating the Senior Notes and the Convertible Debentures during fiscal years 1997 through 2001 in the absence of the Restructuring are set forth in the following table. In the absence of the Restructuring, the Company will be unable to make the scheduled principal payments on the Senior Notes and the Convertible Debentures. In addition, in the absence of the Restructuring, although the Company expects to be able to make scheduled interest payments on the Senior Notes, it would be unable to make scheduled interest payments on the Convertible Debentures. -29- NO RESTRUCTURING FISCAL YEAR ------------------------------ (IN MILLIONS) 1997 1998 1999 2000 2001 ----- ----- ---- ---- ---- Scheduled principal and interest payments on the Senior Notes........................ $4.25 $4.10 $-- $-- $-- Scheduled principal and interest payments on the Convertible Debentures.............. $ .80 $ .80 $.80 $.80 $.80 ----- ----- ---- ---- ---- Totals................................. $5.05 $4.90 $.80 $.80 $.80 ----- ----- ---- ---- ---- ----- ----- ---- ---- ---- If the Restructuring does not occur, no interest or other payments will be due under the Credit Agreement because it is a condition precedent to the effectiveness of the Credit Agreement that the Restructuring occur. The Credit Agreement will establish a revolving line of credit facility and a term loan facility in the Company's favor. The Company may borrow up to the lesser of $11.0 million and an amount based on the level of the Company's eligible receivables and inventory pursuant to the revolving line of credit facility. All borrowings pursuant to the revolving line of credit facility must be repaid by the Company on or before the fifth anniversary of the effectiveness of the Credit Agreement. The Company may borrow up to the lesser of $3.0 million and an amount based on a percentage of the liquidation value of its aircraft pursuant to the term loan facility. To the extent that the entire $3 million is borrowed pursuant to the term loan facility, such amount must be repaid in monthly installments of $33,333 during the first fiscal year the term loan is outstanding, $41,666 during the second year, $50,000 during the third year, $58,333 during the fourth year and $66,666 during the fifth year. See "Description of the Credit Agreement" and "-- Forecast of Certain Financial Data" for a discussion of the Company's estimates regarding borrowings pursuant to the Credit Agreement. SIGNIFICANT DILUTION OF EQUITY INTERESTS. If the Restructuring were implemented, approximately 2.2 million shares of Common Stock (after giving effect to the Reverse Stock Split) would be issued in the Exchange Offer, assuming that all of the Convertible Debentures are accepted for exchange. Issuance of such number of shares of Common Stock would dilute substantially the equity ownership percentage of the existing holders of the Common Stock. The percentage ownership of the Company on an actual and on a fully diluted basis and the effect of the issuance of such number of shares of Common Stock on the percentage ownership of the equity of the Company is shown in the following table: -30-
PRE- RESTRUCTURING RESTRUCTURING RESTRUCTURING(1) NO DILUTION(2) FULL DILUTION(3) -------------------- -------------------- -------------------- NUMBER OF NUMBER NUMBER OF SHARES PERCENT OF SHARES PERCENT SHARES PERCENT --------- ------- --------- ------- --------- ------- Convertible Debentures -- -- 2,245,400 93.8 2,245,400 75.0 Common Stock 4,041,779 100.0 149,704 6.2 149,704 5.0 Warrant and Option Holders -- -- -- -- 598,782 20.0 ---------- ----- ---------- ------ ---------- ------ 4,041,779 100.0 2,395,104 100.0 2,993,886 100.0
- ----------------------- (1) Assumes no (i) conversion of the Convertible Debentures; (ii) exercise of the Old Warrants; and (iii) exercise of certain outstanding stock options and warrants, prior to giving effect to the Revenue Stock Split. The Old Warrant Amendment will provide for the expiration of the Old Warrants at the Closing and the options outstanding pursuant to the Company's existing stock option plan will be cancelled as part of the Restructuring. (2) Assumes that 2,245,400 shares of Common Stock are issued to the Holders of the Convertible Debentures, after giving effect to the Reverse Stock Split. (3) Incorporates the assumptions set forth in (2) and further assumes the exercise of certain outstanding warrants, other than the Old Warrants, and the issuance of all options to be granted under the Stock Option Plan. CONDITIONS TO THE RESTRUCTURING Consummation of the Restructuring is conditioned upon, among other things, the following: (i) the Minimum Tenders shall have been validly tendered and not withdrawn by the holders of the Convertible Debentures prior to the Expiration Date; (ii) the requisite Consents shall have been received and such Consents shall not have been revoked and the Amendments shall have become effective; (iii) the Company's stockholders shall have approved the amendments to the Company's Certificate of Incorporation to effect the Reverse Stock Split, the Board Amendments, the Preferred Stock Authorization and the Charter Amendments and shall have approved the Stock Option Plan; (iv) the Company and the Bank shall have negotiated and executed the Credit Agreement, the conditions to the effectiveness thereof shall have been satisfied or waived and the Company shall have the ability to borrow at least $2.5 million pursuant to the Credit Agreement immediately following the consummation of the Restructuring; and (v) the Old Warrant Amendment shall have become effective. The Company reserves the right to amend the terms of the Restructuring (including changes in the consideration being offered in the Exchange Offer to Holders of the Convertible Debentures), if and to the extent that the Company determines that such amendments are necessary or desirable to complete the Restructuring. The Company will give holders of Convertible Debentures and Common Stock notice of such amendments as may be required by applicable law. Holders of the Convertible Debentures may withdraw their tenders of the Convertible Debentures at any time prior to the Expiration Date of the Exchange Offer, including during any period of time the Exchange Offer is extended because of amendments to the terms of the Restructuring. -31- FORECAST OF CERTAIN FINANCIAL DATA The forecasted data contained herein were prepared by the management of the Company and are qualified by, and are subject to, the assumptions set forth below and the other information contained in this Proxy Statement/Prospectus. The following forecast was not prepared with a view toward compliance with published guidelines of the Commission or the American Institute of Certified Public Accountants regarding forecasts or generally accepted accounting principles. Grant Thornton LLP, the independent auditors of the Company, have neither examined, reviewed nor compiled the forecast and, consequently, do not express an opinion or any other form of assurance with respect thereto. The Company believes, however, that the forecast is presented on a basis consistent with generally accepted accounting principles as applied to the Company's historical financial statements. The forecast is forward-looking financial information within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. In preparing the forecast, the Company made numerous assumptions with respect to industry performance, general business and economic conditions, taxes and other matters, many of which are beyond the Company's control. All the material assumptions made in the forecast are set forth below or are referenced in the notes that accompany the forecast. The Company believes that all such assumptions are reasonable; however, such forecast and assumptions are not necessarily indicative of current values or future performance, which may be significantly less favorable or more favorable than as set forth below. Although the forecast represents the best estimate of the Company, for which the Company believes it had a reasonable basis as of the time of the preparation thereof, of the results of operations and financial position of the Company after giving effect to the Restructuring, it is only an estimate, and actual results may vary considerably from the forecast. The forecast also reflects assumptions as to certain business decisions that are subject to change. The Company's future results of operations and the other forward looking statements contained in the forecast, in particular the forecasts of parts sales and aircraft sale and lease information, gross margin and selling, general and administrative expenses, involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are business conditions and the general economy, competitive factors such as the demand for older aircraft, the Company's ability to maintain inventory that meets applicable regulatory standards and client demand, the availability of new parts and general risks of inventory obsolescence, the ongoing trend for customers to use fewer suppliers causing a loss of customers, and the loss of a principal customer in a given period if the Company is unable to replace sales to such customers. See "Risk Factors." The forecast was materially completed in June 1996. The Company is not aware of any events subsequent to such date that would materially impact the forecast. The Company does not intend to update or otherwise revise the forecast to reflect circumstances existing after the date hereof or to reflect the occurrence of unanticipated events, even in the event that the assumptions underlying the forecast are shown to be in error, except as required by applicable law, prior to the consummation of the Restructuring. Furthermore, the Company does not intend to update or revise the forecast to reflect changes in general economic or industry conditions. The forecast should not be relied on for any purpose other than in consideration of the Restructuring. The forecast should be read together with the information contained in "Pro Forma Unaudited Financial Information," "Business" and the Consolidated Financial Statements of the Company and the related notes included elsewhere in this Proxy Statement/Prospectus. The Company's regular quarterly and annual financial statements are included in the Company's Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K, which are filed with the Commission. Information contained in such financial statements shall be deemed to supersede the forecast. See "Available Information." The inclusion of the forecast herein should not be regarded as a representation by the Company, and there can be no assurance that the results reflected in the forecast will be realized. The forecast and actual results will vary, and those variations may be material. Neither the Company nor any of its agents or representatives assume responsibility for the accuracy or adequacy of the forecasts contained herein. HOLDERS OF COMMON STOCK AND CONVERTIBLE DEBENTURES ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORECAST. -32- GENERAL ASSUMPTIONS The forecast is based upon assumptions which the Company's management believes provide a reasonable basis for presenting the effects of the Restructuring. The general assumptions used to prepare the forecast include the following: 1. The projections give effect to the Restructuring, assuming that all the Convertible Debentures are accepted for exchange, that the Restructuring was consummated on May 31, 1996, that all conditions to the Restructuring have been satisfied and that the Restructuring was accounted for as a restructuring of troubled indebtedness pursuant to SFAS 15. 2. The Restructuring generates $.7 million in earnings. 3. The interest expense on the Credit Agreement is based on the lender's prime rate plus 2% and is assumed to equal 10.25% throughout the forecast period. 4. The Senior Notes are redeemed without the payment of a prepayment penalty or penalty interest on overdue principal or interest. 5. The Company will pay an additional $.4 million of fees and expenses associated with the Restructuring at or prior to the Closing in addition to $.3 million of costs incurred to date relating to the Restructuring. The accounting for the fees and expenses will be as provided under "Accounting Treatment." 6. Following the Restructuring, the Company will have net operating loss carryforwards of $5.2 million. As a result of built-in gains in the Company's inventory, the Company expects (outside of the annual Section 382 limitation), to be able to use net operating loss carryforwards of $4.2 million in respect to 50% of its pretax income. Deferred income taxes have not been provided because the differences between book and taxable incomes are not expected to be significant. 7. The Company will make no acquisitions during the periods presented. OPERATING ASSUMPTIONS The Company expects to sell one aircraft during fiscal 1997 for approximately $550,000 (at a cost of $450,000) and that at any given time two of the three remaining aircraft will be leased for total monthly lease rentals of $80,000. The Company does not expect to sell any other aircraft during the forecast period. Parts sales are forecasted in fiscal 1997 to be the same as in fiscal 1996 (primarily as a result of an expected reduction in sales to ValuJet from fiscal 1996 levels); thereafter, parts sales are expected to increase 7.5% per annum. The forecasted growth in parts sales is principally attributed to the Company's improved financial flexibility, its ability to implement its operating strategy, primarily through the use of advances obtained pursuant to the Credit Agreement to acquire new inventory and management's estimate of the effect of such additional inventory on the level of parts sales, as well as general increased demand for aircraft spare parts. The gross margin for parts is forecasted to remain at approximately 35% in fiscal 1997 and to remain constant thereafter. Selling, general and administrative costs are expected to increase in fiscal 1997 to approximately 21% of total revenues, principally due to the reduction in aircraft sales and lease revenue. Thereafter, selling, general and administrative costs are expected to remain at approximately 22% of total revenues. -33- PROJECTED INCOME STATEMENT DATA
FISCAL YEAR ENDING MAY 31, ---------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (in thousands) Revenue: Aircraft sales $ 550 $ -- $ -- $ -- $ -- Parts sales 18,885 20,301 21,824 23,461 25,220 Lease revenue 960 960 960 960 960 ------ ------ ------ ------ ------ Total revenue 20,395 21,261 22,784 24,421 26,180 Cost of Goods Sold: Parts 12,300 13,196 14,186 15,250 16,393 Aircraft 450 -- -- -- -- ------ ------ ------ ------ ------ Total Cost of Goods Sold 12,725 13,196 14,186 15,250 16,393 ------ ------ ------ ------ ------ Gross Profit 7,670 8,065 8,598 9,171 9,787 Credit Agreement Commitment Fee 90 90 90 90 90 S, G &A expenses 4,306 4,629 4,976 5,349 5,750 ------ ------ ------ ------ ------ EBITDA (1) 3,274 3,346 3,532 3,732 3,947 Depreciation and amortization 733 725 717 496 204 ------ ------ ------ ------ ------ EBIT (2) 2,541 2,621 2,815 3,236 3,743 Interest expense, net 852 937 887 817 729 ------ ------ ------ ------ ------ Earnings before taxes 1,689 1,684 1,928 2,419 3,014 Provision for income taxes 295 294 340 432 603 ------ ------ ------ ------ ------ Net earnings $1,394 $1,390 $1,588 $1,987 $2,411 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Earnings per common share $0.58 $0.58 $0.66 $0.83 $1.01
NOTES TO PROJECTED INCOME STATEMENT DATA 1. EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. 2. EBIT is defined as earnings before interest and income taxes. - 34 - PROJECTED CASH FLOW DATA
FISCAL YEAR ENDING MAY 31, -------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: (IN THOUSANDS) Net earnings $1,394 $1,391 $1,588 $1,988 $2,411 Adjustments to reconcile Net Income to Net cash provided by operating activities Depreciation 617 609 601 380 88 Amortization of fees and expenses 116 116 116 116 116 Increase in working capital (1) (2,913) (1,531) (1,514) (1,515) (1,516) ------- ------- ------- ------- ------- Total adjustments (2,180) (806) (797) (1,019) (1,312) ------- ------- ------- ------- ------- Net cash provided by (used in) operating activities: $ (786) $ 585 $ 791 $ 969 $1,099 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (96) (99) (102) (106) (108) CASH FLOWS FROM FINANCING ACTIVITIES: Term loan (400) (500) (600) (700) (800) Revolving Credit Facility 1,246 41 (64) (137) (165) Other (2) (39) (26) (26) (26) (26) ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities 807 (485) (690) (863) (991) Net increase (decrease) in cash ($166) $ 0 $ 0 $ 0 $ 0 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NOTES TO PROJECTED CASH FLOW DATA (1) Represents changes in accounts receivables plus inventories and other current assets less accounts payable and accrued and other liabilities. Inventory purchases are projected to be $1 million in fiscal 1997 and $1.5 million annually thereafter. (2) Represents principal repayments under the Company's mortgage note, equipment notes and capitalized lease obligations. - 35 - PROJECTED CAPITALIZATION DATA
FISCAL YEAR ENDING MAY 31, -------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (IN THOUSANDS) Revolving Credit Facility $6,176 $6,218 $6,154 $6,017 $5,852 Long-term liabilities: Term Loan 2,600 2,100 1,500 800 0 Mortgage payable 403 377 351 325 299 Notes payable 1 0 0 0 0 ----- ----- ----- ----- --- Total long-term debt 3,004 2,477 1,851 1,125 299 Stockholders' equity: Common stock 2 2 2 2 2 Additional paid-in capital 11,563 11,563 11,563 11,563 11,563 Retained earnings (accumulated deficit) (7,749) (6,358) (4,770) (1,782) (371) ------ ------ ------ ------ ----- Total stockholders' equity 3,816 5,207 6,795 9,783 11,194 ------ ------ ------ ------ ------ Total capitalization $12,996 $13,902 $14,800 $16,925 $17,345 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- 36 - PROJECTED BALANCE SHEET DATA
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------------- ASSETS: 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (IN THOUSANDS) Current Assets: Cash $ 0 $ 0 $ 0 $ 0 $ 0 Accounts receivable 3,353 3,495 3,745 4,014 4,304 Aircraft inventory 1,654 1,654 1,654 1,654 1,654 Parts inventory 8,250 9,750 11,250 12,750 14,250 Other current costs 102 106 114 122 130 ------- ------- ------- ------- ------- Total current assets 13,359 15,005 16,763 18,540 20,338 Net property, plant & equipment 1,982 1,472 973 699 719 Land 330 330 330 330 330 Capitalized fees & expenses 464 348 232 116 --- ------- ------- ------- ------- ------- Total assets $16,135 $17,156 $18,298 $19,685 $21,387 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- LIABILITIES: Total current liabilities $3,138 $3,254 $3,498 $3,760 $4,042 Revolving Credit Facility 6,177 6,218 6,154 6,017 5,852 Long-term debt: Term Loan 2,600 2,100 1,500 800 0 Mortgage payable 403 377 351 325 299 Notes payable 1 0 0 0 0 ------- ------- ------- ------- ------- Total long-term debt 3,004 2,477 1,851 1,125 299 STOCKHOLDERS' EQUITY: Common stock 2 2 2 2 2 Additional paid-in capital 11,563 11,563 11,563 11,563 11,563 Retained earnings (accumulated deficit) (7,749) (6,358) (4,770) (2,782) (371) ------- ------- ------- ------- ------- Total stockholders' equity 3,816 5,207 6,795 8,783 11,194 ------- ------- ------- ------- ------- Total liabilities & stockholders' equity $16,135 $17,156 $18,298 $19,685 $21,387 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- 37 - INTERESTS OF CERTAIN PERSONS IN THE RESTRUCTURING In considering the Restructuring, holders of Common Stock and the Convertible Debentures should be aware that the executive officers and directors of the Company have certain interests that may present them with potential conflicts of interests with respect to the Restructuring. The conflicts result from the following factors: (1) the employment agreement between Mr. Alexius A. Dyer III, the Chairman of the Board, President and Chief Executive Officer of the Company, will be extended for an additional five-year term effective upon consummation of the Restructuring and Mr. George Murnane III, the Executive Vice President and Chief Financial Officer of the Company, will enter into a five- year employment agreement with the Company having terms, other than salary and bonus, substantially similar to those of Mr. Dyer's employment agreement (see "Management--Employment Agreement"); (ii) Mr. Dyer's annual compensation will increase from $135,000 to $175,000 upon consummation of the Restructuring; (iii) Messrs. Dyer and Murnane will be granted restricted stock and/or options which, together with shares reserved for issuance to non-employee directors pursuant to the Stock Option Plan, will represent 7.5% and 3.5%, respectively, of the shares of Common Stock to be outstanding following the Restructuring (see "Management--The Stock Option Plan"); (iv) Messrs. Kyle R. Kirkland and E. James Mueller, who are non-employee directors of the Company, will be granted restricted stock and/or options representing up to 2.5% of the shares of Common Stock to be outstanding following the Restructuring (see "Management--The Stock Option Plan"); and (v) Kirkland Messina, Inc., an investment banking firm of which Mr. Kirkland is a principal, will receive a placement agent's fee in connection with the origination of the Credit Agreement (See "Management-- Certain Transactions"). THE EXCHANGE OFFER GENERAL Upon the terms and subject to the conditions set forth in this Proxy Statement/Prospectus and in the accompanying Letter of Transmittal, the Company is offering in the Exchange Offer to issue 224.54 shares of the Company's Common Stock, after giving effect to the Reverse Stock Split, for each $1,000 principal amount of its outstanding Convertible Debentures. Convertible Debentures not accepted by the Company in the Exchange Offer will be returned. As of the date of this Proxy Statement/Prospectus, there were outstanding $10 million aggregate principal amount of Convertible Debentures. No executive officer, director or affiliate of the Company owned or owns of record or beneficially any Convertible Debentures. The Company has not made an interest payment on the Convertible Debentures since December 28, 1995. The Company does not intend to make any subsequent payment of accrued interest with respect to any Convertible Debentures accepted for exchange in the Exchange Offer. Holders of Convertible Debentures whose Convertible Debentures are accepted in the Exchange Offer will not be entitled to receive any consideration other than shares of Common Stock for any interest accrued subsequent to February 28, 1995 on such Convertible Debentures. Under the terms of the Exchange Offer, the fair market value of the Common Stock exchanged for Convertible Debentures will be allocated first to accrued interest and then to the principal amount of such Convertible Debentures. See "Certain Federal Income Tax Considerations -- Exchange of Convertible Debentures." In connection with the Exchange Offer, the Company is also soliciting the Requisite Consents to the applicable Amendments. HOLDERS OF CONVERTIBLE DEBENTURES WHO TENDER THEIR CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER WILL BE REQUIRED TO CONSENT TO THE AMENDMENTS. Holders of Convertible Debentures may consent to the Amendments without tendering their Convertible Debentures in the Exchange Offer. The Company will make no separate payment for Consents. The purpose of the Amendments is to amend or eliminate from the Purchase Agreement covenants and other provisions. The Amendments will reduce the covenant protection available to holders thereof. The Purchase Agreement with respect to the Convertible Debentures will be amended, upon consummation of the Restructuring, by deleting covenants requiring the Company to (i) maintain a specified interest coverage ratio, (ii) maintain a specified consolidated net worth, (iii) provide demand registration rights with respect to the Common Stock issuable upon conversion and the covenant that limits the ability of the Company to engage in certain lines of business. - 38 - If the Exchange Offer is consummated, Holders of Convertible Debentures who do not tender pursuant to the Exchange Offer will hold the Convertible Debentures under the Purchase Agreement as amended by the Amendments. The Amendments will not affect the Company's obligation to pay the principal of the Convertible Debentures at maturity and interest on the Convertible Debentures when due; and, in connection with the Closing, the Holders of the Convertible Debentures remaining outstanding will be paid amounts sufficient to cure all interest payment defaults with respect to such Convertible Debentures. Further, the Company's reduced leverage as a result of the Restructuring should increase the likelihood that the Company will be able to pay the principal of and interest on the outstanding Convertible Debentures. See "Description of Convertible Debentures -- Certain Covenants" and "Description of the Amendments." Holders of Convertible Debentures who do not exchange may also experience a significant reduction in their ability to sell their Convertible Debentures because, if the Exchange Offer is consummated, at least 95% of the outstanding Convertible Debentures will be exchanged for shares of Common Stock. Holders of Convertible Debentures who tender in the Exchange Offer will not be required to pay brokerage commissions or solicitation fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of securities pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than certain applicable taxes, in connection with the Exchange Offer. See "--Fees and Expenses." All references herein to the Exchange Offer shall be deemed to include the Solicitation, unless otherwise specified. Subject to limitations imposed by applicable law and the Company's debt instruments, the Company may, in the future, seek to acquire any outstanding Convertible Debentures in open market purchases, optional redemptions, subsequent exchange offers or otherwise. The Company does not have any current plans to make any such acquisitions and the Credit Agreement will preclude such acquisition, absent the consent of the Bank. ACCEPTANCE OF CONVERTIBLE DEBENTURES AND DELIVERY OF COMMON STOCK Subject to the satisfaction of all conditions to the Exchange Offer, the Company will accept, promptly after the Expiration Date, all Convertible Debentures that were validly tendered and not withdrawn on or prior to the applicable Expiration Date. The shares of Common Stock will be delivered in exchange for the applicable Convertible Debentures accepted in the Exchange Offer promptly after the Expiration Date. The Company shall be deemed to have accepted validly tendered Convertible Debentures in the Exchange Offer and validly delivered Consents in the Solicitation when, as and if the Company has given oral or written notice thereof to the Depositary. The Depositary will act as agent for the tendering Holders of Convertible Debentures for the purposes of receiving the Common Stock from the Company. The Common Stock will be delivered in exchange for Convertible Debentures accepted in the Exchange Offer promptly after the Expiration Date. The Company's obligation to accept Convertible Debentures for exchange and to accept delivered Consents is subject to the satisfaction of the conditions set forth below under "-- Conditions." No fractional shares of Common Stock will be issued upon consummation of the Exchange Offer. The Company expects to enter into an agreement with the Depositary whereby the Depositary will aggregate all fractional shares of Common Stock otherwise issuable in the Exchange Offer and sell them in the open market. Each person otherwise entitled to a fractional share of Common Stock will receive a payment in cash in lieu of such fractional share equal to such person's proportionate interest in the proceeds of sales of all such fractional shares in the open market, net of the costs of the Depositary in effecting such sales. The Company intends to cause such payments to be made promptly after the Expiration Date, but in any event not later than five business days after the Expiration Date. The Company can give no assurance that the price at which such sales will be made will not be at a substantial discount from the fair value of the securities sold. See "Risk Factors--Risk Factors Associated with Ownership of the Common Stock--Market for Common Stock." - 39 - EXPIRATION DATE; EXTENSIONS; AMENDMENTS The Exchange Offer will expire at 12:00 Midnight, New York time on ___________, 1996, unless extended by the Company, in its sole discretion, to permit the satisfaction of all conditions to the Exchange Offer, in which case the term "Expiration Date" shall mean the last date and time to which the Exchange Offer is extended. In order to extend the Expiration Date, the Company will notify the Depositary of any extension by oral or written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York time, on the next business day after the previously scheduled Expiration Date. Such announcement may state that the Company is extending the Exchange Offer for a specified period or on a daily basis. The Company expressly reserves the right to (i) delay accepting any Consents or Convertible Debentures, to extend the Exchange Offer or to terminate the Exchange Offer and not accept Consents or Convertible Debentures not previously accepted if any of the conditions set forth herein under "-- Conditions" shall not have been satisfied, by giving oral or written notice of such delay, extension or termination to the Depositary, or (ii) amend at any time, or from time to time, the terms of the Exchange Offer in any respect. If the Company exercises any such right, the Company will give written or oral notice to the Depositary and make a public announcement thereof. Without limiting the manner in which the Company may choose to make such a public announcement, the Company shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by making a release to the Dow Jones News Service. The Commission has taken the position that the minimum period during which an exchange offer must remain open following material changes in the terms of such exchange offer or in the information concerning such exchange offer (other than a change in price or a change in percentage of securities sought) will depend upon the facts and circumstances of such change, including the relative materiality of the terms or information changes. With respect to any change in price or percentage of securities sought, a minimum ten business day period is required to allow for adequate dissemination of such change. Except for the press release described above and except as required by the Exchange Act and the rules and regulations thereunder, the Company does not intend to give written notification of any such changes to Holders of Convertible Debentures. HOW TO TENDER AND CONSENT IN THE EXCHANGE OFFER A Holder electing to tender Convertible Debenture in the Exchange Offer and to consent to the Amendments should either (i) complete and sign the Letter of Transmittal or a facsimile thereof, have the signatures thereon guaranteed if required by Instruction 6 thereof, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with a properly completed and duly executed Notice of Guaranteed Delivery or the Convertible Debentures and any other required documents to the Depositary at one of its addresses set forth on the back cover page of this Proxy Statement/Prospectus, or effect the tender of Convertible Debentures pursuant to the procedure for book-entry transfer as set forth below or (ii) request his broker, dealer, commercial bank, trust company or other nominee to effect the transaction for him. Pursuant to the terms of the Letter of Transmittal, the completion, execution and delivery thereof will constitute consent to the Amendments. However, as set forth in the Letter of Transmittal, a defective tender may, under circumstances where the Holder has otherwise properly completed, executed and delivered the Letter of Transmittal, constitute a valid Consent and will be counted for purposes of determining whether requisite approval of the Amendments has been obtained even if the accompanying Convertible Debentures are not accepted for exchange by reason of such defect. In addition, if a Letter of Transmittal is properly executed, delivered and dated prior to the Expiration Date, but no box with respect to the Amendments on the Letter of Transmittal is marked, the Holder of Convertible Debentures who executed such Letter of Transmittal shall be deemed to have consented to the Amendments. Holders of Convertible Debentures who do not tender their Convertible Debentures but wish to consent to the Amendments should complete the Letter of Transmittal in accordance with the instructions thereto and return it promptly to the Depositary. In order for a tender of Convertible Debentures to constitute a valid tender, Holders should complete the Letter of Transmittal in accordance with the instructions set forth therein and deliver such Letter of Transmittal to the Depositary on or prior to 12:00 midnight, New York time, on the Expiration Date. The term "Holder," when used with respect to a - 40 - Convertible Debenture means the registered owner of such a Convertible Debenture on the Debt Record Date or any person who has obtained a properly completed bond power and proxy from the registered holder. Pursuant to the Purchase Agreement, only the registered owner of a Convertible Debenture on the Debt Record Date (or his duly designated proxy) shall be entitled to consent to an Amendment or to revoke any Consent, whether or not such person continues to be the registered owner of such Convertible Debenture after the Debt Record Date. TENDERS AND CONSENTS - GENERAL The tender or Consent by a Holder pursuant to one of the procedures set forth herein will constitute an agreement between such Holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. THE METHOD OF DELIVERY OF CONVERTIBLE DEBENTURES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE DEPOSITARY IS AT THE ELECTION AND RISK OF EACH HOLDER. Except as otherwise provided herein, such delivery will be deemed made only when actually received by the Depositary. Instead of effecting delivery by mail, it is recommended that Holders use an overnight or hand delivery service. If Convertible Debentures are sent by mail, registered mail, with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to assure timely delivery. No documents should be sent to the Company. The Depositary will make a request promptly after the date of this Proxy Statement/Prospectus to establish accounts with respect to the Convertible Debentures at the ___________________________________ (the "Book Entry Transfer Facilities(y)") for the purpose of facilitating the Exchange Offer. Any financial institution that is a participant in any of the Book Entry Transfer Facilities'(y'S) systems may make book-entry delivery of the Convertible Debentures by causing such Book Entry Transfer Facility to transfer such Convertible Debentures into the Depositary's account in accordance with such Book Entry Transfer Facility's procedure for such transfer. Although delivery of Convertible Debentures may be effected through book entry transfer in the Depositary's account at___________________________________ , the Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received or confirmed by the Depositary at one of its addresses set forth on the back cover of this Proxy Statement/Prospectus prior to 12:00 midnight, New York time, on the Expiration Date. DELIVERY OF DOCUMENTS TO A BOOK ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Any beneficial holder of Convertible Debentures whose Convertible Debentures are registered or held of record in the name of his broker, dealer, commercial bank, trust company or other nominee and who wishes to tender his Convertible Debentures should contact such registered holder or record holder promptly and instruct such holder to tender on his behalf. If such beneficial holder wishes to tender Convertible Debentures and consent to the Amendments on his own behalf, such beneficial holder must, prior to completing and executing the Letter of Transmittal and delivering his Convertible Debentures, make appropriate arrangements to obtain a properly completed bond power and proxy from the registered holder. Signatures on each Letter of Transmittal must be guaranteed unless the Convertible Debentures delivered pursuant thereto are delivered (i) by a registered holder of Convertible Debentures who has not completed the boxes on the Letter of Transmittal entitled "Special Issuance Instructions" or "Special Delivery Instructions;" (ii) for the account of an Eligible Institution (as defined below); or (iii) a Consent is being given by the registered holder of Convertible Debentures that are not being tendered in the Exchange Offer. In the event that signatures are required to be guaranteed, such guarantees must be by a firm that is a participant in the Medallion Signature Guarantee Program (an "Eligible Institution"). If the Letter of Transmittal with respect to any Convertible Debenture is signed by a person other than the registered holder of any certificate(s) listed therein, such certificate(s) must be endorsed or accompanied by appropriate bond powers and proxies, signed exactly as the name or names of the registered holder or holders appear on the certificate(s). If the Letter of Transmittal or any certificates, bond powers, proxies or other instruments of transfer are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, - 41 - such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. All questions as to the validity, form, eligibility (including time of receipt), acceptance, withdrawal and revocation of tendered Convertible Debentures and delivered Consents will be resolved by the Company, whose determination will be final and binding. The Company reserves the absolute right to reject any or all tenders and withdrawals of Convertible Debentures and deliveries and revocation of Consents that are not in proper form or the acceptance of which would, in the opinion of the Company or counsel for the Company, be unlawful. The Company also reserves the right to waive any irregularities or conditions of tenders or Consents as to particular Convertible Debentures. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letters of Transmittal) will be final and binding. Unless waived, any irregularities in connection with tenders and withdrawals of Convertible Debentures and deliveries and revocations of Consents must be cured within such time as the Company shall determine. Neither the Company nor the Depositary shall be under any duty to give notification of defects in such tenders, withdrawals, deliveries or revocations or shall incur any liability for failure to give such notification. Tenders and withdrawals of Convertible Debentures and deliveries and revocation of Consents will not be deemed to have been made until such irregularities have been cured or waived. Any Convertible Debentures received by the Depositary that are not properly tendered or delivered and as to which the irregularities have not been cured or waived will be returned by the Depositary to the tendering Holders of Convertible Debentures unless otherwise provided in the Letter of Transmittal as soon as practicable following the Expiration Date. GUARANTEED DELIVERY PROCEDURES If a Holder of Convertible Debentures desires to tender such Convertible Debentures and the certificate(s) representing such Convertible Debentures are not immediately available, or time will not permit such Holder's certificate(s) or other required documents to reach the Depositary before 12:00 midnight, New York time, on the Expiration Date or such Holder cannot complete the procedure for book-entry transfer on a timely basis, a tender may be effected if: (a) the tender is made through an Eligible Institution; (b) prior to 12:00 midnight, New York time on the Expiration Date, the Depositary receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of Convertible Debentures, and the principal amount of Convertible Debentures to be delivered, as the case may be, stating that the delivery is being made thereby and guaranteeing that within five New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery, the duly executed Letter of Transmittal (or facsimile thereof) and the certificate(s) representing the Convertible Debentures, and any other documents required thereby will be deposited by the Eligible Institution with the Depositary; and (c) the certificate(s) for all tendered Convertible Debentures, or a confirmation of a book entry transfer of such Convertible Debentures into the Depositary's applicable account at a Book-Entry Transfer Facility as described above, the Letter of Transmittal (or facsimile thereof), and all other documents required thereby are received by the Depositary within five New York Stock Exchange trading days after the date of execution of such Notice of Guaranteed Delivery. Failure to complete the guaranteed delivery procedures outlined above will not, of itself, affect the validity of, or effect a revocation of, any Consent properly executed by a Holder of Convertible Debentures who attempted to use the guaranteed delivery procedures. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS Tenders of Convertible Debentures may be withdrawn at any time prior to the Expiration Date for the Exchange Offer. In addition, tenders of Convertible Debentures may be withdrawn after the expiration of 40 business days from the commencement of the Exchange Offer, if not yet accepted by the Company. Any Holder of Convertible Debentures who - 42 - has tendered Convertible Debentures may withdraw such Convertible Debentures by delivery of a written notice of withdrawal to the Depositary. To be effective, a written or facsimile transmission notice of withdrawal must (i) be timely received by the Depositary at one of its addresses specified on the back cover of this Proxy Statement/Prospectus before the expiration of the Exchange Offer, (ii) specify the name of the registered holder of the Convertible Debentures to be withdrawn, (iii) contain a description of the Convertible Debentures to be withdrawn, the certificate numbers shown on the particular certificates evidencing such Convertible Debentures and the aggregate principal amount represented by such Convertible Debentures, and (iv) be signed by the registered holder of such Convertible Debentures in the same manner as the original signature on the Letter of Transmittal (including any required signature guarantees), or be accompanied by documents of transfer sufficient to have the transfer of such Convertible Debenture registered pursuant to the Purchase Agreement. The signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution unless such Convertible Debentures have been tendered (i) by a registered holder of Convertible Debentures who has not completed the boxes on the Letter of Transmittal entitled "Special Issuance Instructions" or "Special Delivery Instructions" or (ii) for the account of an Eligible Institution. If the Convertible Debentures to be withdrawn have been delivered or otherwise identified to the Depositary, a signed notice of withdrawal is effective immediately upon receipt of written or facsimile transmission notice of withdrawal even if physical release is not yet effected. Any Convertible Debentures which have been tendered for exchange but which are not exchanged will be returned to the Holder thereof without cost to such Holder promptly following the Expiration Date. Properly withdrawn Convertible Debentures may be retendered at any time prior to 12:00 midnight, New York time, on the Expiration Date by following one of the procedures described under "-- How to Tender and Consent in the Exchange Offer." All questions as to the validity (including time of receipt) of notices of withdrawal will be determined by the Company, whose determination will be final and binding. None of the Company, the Depositary or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or revocation or incur any liability for failure to give any such notification. A Consent may be revoked only by the Holder of the Convertible Debentures with respect to which the Consent was given and only if the Company receives written notice of revocation from the Holder, prior to the date the Amendment becomes effective. However, if a Holder who has tendered Convertible Debentures subsequently effects a valid revocation of a Consent, such action will render the prior tender of the Convertible Debentures with respect to which the Consent was given defective. The Company reserves the right to waive any such defect. In order to withdraw a Consent, the Holder of the Convertible Debentures with respect to which the Consent was given must provide the Company written notice of revocation, at the applicable address as provided below, prior to the date the Consent becomes effective. The Purchase Agreement provides that any notice or communication sent to the Company shall be sufficiently given if in writing and delivered in person, telecopied or mailed by first-class mail addressed to the President of the Company at the address set forth above. Notices to the Company are deemed given only when received by the Company. Holders of Convertible Debentures who wish to revoke their Consents should allow sufficient time for the notice of revocation to reach the Company. CONDITIONS The obligation of the Company to accept for exchange any Convertible Debentures validly tendered pursuant to the Exchange Offer is subject to the satisfaction of the following conditions: (a) the Minimum Tenders shall have been validly tendered by the Holders of Convertible Debentures pursuant to the Exchange Offer and not withdrawn prior to the Expiration Date; (b) the Company shall have received Consents from the holders of at least a majority of the principal amount of the Convertible Debentures (disregarding the principal amount of any Convertible Debenture held by the Company or its affiliates); - 43 - (c) the Company's stockholders shall have approved the Reverse Stock Split, the Board Amendments, the Preferred Stock Authorization, the Charter Amendments and the Stock Option Plan; (d) the Company and the Bank shall have negotiated and executed the Credit Agreement, the conditions to the effectiveness thereof shall have been satisfied or waived and the Company shall have the ability to borrow at least $2.5 million pursuant to the Credit Agreement immediately following the consummation of the Restructuring; and (e) the Company shall have received Consents from the holders of at least a majority of the Stock Units represented by the Old Warrants to the Old Warrant Amendment. If any of the conditions listed above is not satisfied, the Company may (i) refuse to accept any Convertible Debentures or Consents and return all tendered Convertible Debentures to tendering Holders, (ii) extend the Exchange Offer and retain all Convertible Debentures tendered and Consents delivered prior to the expiration of the Exchange Offer, or (iii) modify any of such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Convertible Debentures or properly delivered Consents. There can be no assurance that the foregoing conditions will be satisfied. In the event that the foregoing conditions are not satisfied or waived, the Restructuring will not occur, the Company will not accept for exchange any of the Convertible Debentures and the Amendments will not become effective. If a modification constitutes a material change to the Exchange Offer, the Company will promptly disclose such modification in a manner reasonably calculated to inform Holders of Convertible Debentures of such modification, and the Company will extend the Exchange Offer for a period which the Company in its discretion deems appropriate, subject to any applicable laws, depending on the significance of the modification and the manner of disclosure to Holders of Convertible Debentures. The Commission has taken the position that the minimum period during which an exchange offer must remain open following material changes in the terms of such exchange offer or in the information concerning such exchange offer (other than a change in price or a change in percentage of securities sought) will depend upon the facts and circumstances of such change, including the relative materiality of the terms or information changes. With respect to any change in price or percentage of securities sought, a minimum ten business day period is required to allow for adequate determination of such change. IN THE EVENT THE COMPANY MODIFIES ANY OF SUCH CONDITIONS, THE COMPANY AND/OR HOLDERS OF CONVERTIBLE DEBENTURES MAY BE EXPOSED TO ADDITIONAL RISKS WHICH CANNOT PRESENTLY BE PREDICTED OR EVALUATED. In addition to the foregoing, the Company will not be required to accept for exchange any Convertible Debentures not theretofore accepted for exchange or exchanged, and may terminate, extend or amend the Exchange Offer as provided herein, if, at any time prior to the time of acceptance for exchange of any Convertible Debentures pursuant to the Exchange Offer, the Company shall have been advised, or shall otherwise have reason to believe, that any necessary consent or approval will be denied or substantially delayed, or will not be given other than upon terms or conditions which would, in the opinion of the Company, make it impractical to proceed with the Exchange Offer. Furthermore, notwithstanding any other term of the Exchange Offer, the Company will not be required to accept for exchange any Convertible Debentures not theretofore accepted for exchange or exchanged, and may terminate, extend or amend the Exchange Offer as provided herein, before the acceptance of such Convertible Debentures for exchange, if any of the following conditions exist: (a) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the sole judgment of the Company, may materially impair the contemplated benefits of the Exchange Offer to the Company; (b) there shall have occurred (i) any general suspension of, or limitation on prices for, trading in securities traded on the New York Stock Exchange; (ii) a declaration of a banking moratorium by United States, New York, Delaware, Florida or Georgia authorities; or (iii) commencement or escalation of a war or armed hostilities or other international or national emergency that, in the sole judgment of the Company, would or might have a material adverse effect on the market prices of the Company's securities; - 44 - (c) there shall have occurred any change or development involving a prospective change in the general economic, financial or market conditions in the United States or abroad that, in the sole judgment of the Company, would or might have a material adverse effect upon the market prices of the Company's securities; (d) there shall have occurred any change or development involving a prospective change in or affecting the business, condition (financial or otherwise) or prospects of the Company which in the sole judgment of the Company, would or might prohibit, restrict or delay consummation of the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; (e) there exists, in the sole judgment of the Company, any actual or threatened legal impediment (including a default under a material agreement, indenture or other instrument or obligation to which the Company is a party or by which it is bound) to the acquisition of the Convertible Debentures or the issuance of the Common Stock; or (f) (i) any person shall publicly disclose an acquisition proposal with respect to the Company or any of its securities or assets; or (ii) a tender or exchange offer for Convertible Debentures and/or Common Stock shall have been commenced by any person, if such tender or exchange offer could result in such other person and its affiliates beneficially owning directly or indirectly more than 15% of the then outstanding shares of Common Stock that would be outstanding upon consummation of the Restructuring; or (iii) it shall have been publicly disclosed or the Company shall have learned that any person or "group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) shall have acquired, or proposed to acquire, beneficial ownership of more than 15% of the outstanding shares of Common Stock and/or Convertible Debentures which would constitute more than 15% of the shares of Common Stock that would be outstanding upon consummation of the Restructuring; which event, in the sole judgment of the Company in any case, and regardless of the circumstances (including any action or inaction by the Company) giving rise to any such condition, makes it inadvisable to consummate the Exchange Offer or to proceed with such acceptance for exchange. The foregoing conditions set forth in clauses (a) through (f) above are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances giving rise to such conditions or may be waived by the Company in whole or in part at any time, and from time to time, in its sole discretion. Any determination by the Company concerning such conditions described above will be final and binding upon all parties. DEPOSITARY First Union National Bank, Charlotte, North Carolina has been appointed as Depositary for the Exchange Offer. Questions and requests for assistance may be directed to the Depositary at one of its addresses and telephone numbers set forth on the back cover of this Proxy Statement/Prospectus. FEES AND EXPENSES The expenses of soliciting tenders of Convertible Debentures and of obtaining Consents will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of the Company and its affiliates, who will not receive additional compensation. Such officers may solicit tenders of Convertible Debentures and seek to obtain Consents. Arrangements may also be made with brokerage houses and other custodians, nominees and fiduciaries to forward the material regarding the Exchange Offer to the beneficial owners of Convertible Debentures. The Company will reimburse such forwarding agents for reasonable out-of-pocket expenses incurred by them but no compensation will be paid for their services. The total cash expenditures to be incurred by the Company in connection with the Exchange Offer, including printing, accounting and legal fees and the fees and expenses of the Depositary, are estimated to be approximately $.4 million. - 45 - STOCKHOLDERS' MEETING, VOTING RIGHTS AND PROXIES SOLICITATION OF PROXIES This Proxy Statement/Prospectus is furnished in connection with the solicitation by the Board of Directors of the Company of proxies to be voted at the Meeting, which will be held at the offices of King & Spalding, 50th Floor, 191 Peachtree Street, Atlanta, Georgia 30303, on ______________, 1996 at __________a.m., Atlanta time, to consider the proposals set forth in this Proxy Statement/Prospectus to approve the Reverse Stock Split, the Board Amendments, the Preferred Stock Authorization, the Charter Amendments and the Stock Option Plan. WHETHER OR NOT YOU ARE TO ATTEND THE MEETING, YOUR VOTE BY PROXY IS VERY IMPORTANT. STOCKHOLDERS ARE ENCOURAGED TO MARK, SIGN AND DATE THE APPROPRIATE PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE. The expenses of soliciting proxies will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of the Company and its affiliates, who will not receive additional compensation. Arrangements may also be made with brokerage houses and other custodians, nominees and fiduciaries to forward the material regarding the Meeting to the beneficial owners of Common Stock. The Company will reimburse such forwarding agents for reasonable out-of-pocket expenses incurred by them, but no compensation will be paid for their services. VOTING OF PROXIES All shares represented by a properly executed proxy will be voted at the Meeting in accordance with the directions on such proxy. If no direction is indicated on a properly signed proxy, the shares covered thereby will be voted in favor of the Reverse Stock Split, the Board Amendments, the Preferred Stock Authorization, the Charter Amendment and to approve the Stock Option Plan. Abstentions and "broker non-votes" are counted for purposes of determining the presence or absence of a quorum for the transaction of business, and will therefore have the effect of a "no" vote on all proposals brought before the Meeting. The Board of Directors recommends that you vote, according to your voting rights, "FOR" such proposals by checking the appropriate box on the accompanying proxy. In the event that sufficient votes in favor of any of the proposals set forth in the Notice of Special Meeting of Stockholders are not received by the time scheduled for the Meeting, or if any of the other conditions to the Restructuring are not satisfied, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of proxies with respect to any such proposal or to permit the satisfaction of any such condition. Any such adjournment will require the affirmative vote of a majority of the voting power present or represented at the Meeting. The persons named as proxies will vote in favor of such adjournment, if proposed, those proxies which they are entitled to vote in favor of the Reverse Stock Split, the Board Amendments, the Preferred Stock Authorization, the Charter Amendment, and to approve the Stock Option Plan and persons named as proxies will vote against such adjournment those proxies required to be voted against such proposals. RECORD DATE Only stockholders of record at the close of business on _______________, 1996 will be entitled to notice of and to vote at the Meeting. As of the date of this Proxy Statement/Prospectus, there were 4,041,779 shares of Common Stock outstanding, of which there were 105 holders of record. There are no shares of Preferred Stock outstanding. As of the date of this Proxy Statement/Prospectus, without giving effect to the Reverse Stock Split, Alexius A. Dyer III, the Chairman of the Board, President and Chief Executive Officer of the Company, owned of record or beneficially approximately 1,000 shares of the Company's Common Stock (disregarding any shares of Common Stock beneficially owned by him by reason of his ownership of stock options or warrants), which represents approximately .025% of the aggregate number of shares of Common Stock outstanding. At such date, without giving effect to the Reverse Stock Split, Mr. and Mrs. Richard R. Wellman, formerly the Chairman of the Board and Secretary, respectively, of the Company, owned of record or - 46 - beneficially approximately 1,999,700 shares of Common Stock, or 49.48% of the shares of Common Stock outstanding. 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 (representing approximately 48.99% of the shares of Common Stock outstanding) owned by the Wellmans. The irrevocable proxy was affirmed by the Wellmans in October 1995. Accordingly, the executive officers and directors of the Company possess the power to vote approximately 49.02% of the outstanding shares of Common Stock with respect to the Reverse Stock Split, the Board Amendments, the Charter Amendments, the Preferred Stock Authorization and approval of the Stock Option Plan. Messrs. Dyer, Mueller and Kirkland have informed the Company that they intend to vote in favor of the proposed amendments to the Company's Certificate of Incorporation and for approval of the Stock Option Plan. VOTING RIGHTS Each share of Common Stock is entitled to one vote with respect to the Reverse Stock Split Amendment, the Board Amendments, the Preferred Stock Authorization, the Charter Amendments and the Stock Option Plan. Stockholders have no appraisal or dissenters' rights with respect to the proposals to amend the Company's Certificate of Incorporation. REVOCATION OF PROXIES A stockholder who has executed and returned a proxy may revoke it at any time before it is voted by executing and returning a proxy bearing a later date, by giving written notice of revocation to the Secretary of the Company or by attending the Meeting and voting in person. PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION: REVERSE STOCK SPLIT AMENDMENT The Board of Directors has approved the Reverse Stock Split Amendment whereby each 27 outstanding shares of Common Stock will be combined into one share of Common Stock. See "Description of Capital Stock" and Appendix A. If adopted, the Reverse Stock Split Amendment will not become effective unless and until the Closing occurs. The authorized capitalization of the Company will not be affected by the Reverse Stock Split. Adoption of the Reverse Stock Split Amendment requires the affirmative vote of the holders of a majority of the shares of Common Stock outstanding. PROPOSED AMENDMENT TO THE COMPANY; CERTIFICATE OF INCORPORATION: PREFERRED STOCK AUTHORIZATION The Board of Directors has approved the Preferred Stock Authorization. The Preferred Stock Authorization would increase the number of authorized shares of Preferred Stock to 2,000,000 from 500,000 and would allow the Board of Directors to fix the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms and conditions of redemption for a particular series of Preferred Stock. The Board of Directors does not currently intend to issue a series of Preferred Stock. If adopted, the Preferred Stock Authorization will not become effective unless and until the Closing occurs. Adoption of the Preferred Stock Authorization requires the affirmative vote of the holders of a majority of the shares of Common Stock outstanding. PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION: BOARD OF DIRECTORS The Board of Directors has approved the Board Amendment, pursuant to which (i) the number of directors of the Company shall be fixed at seven members and (ii) the number of directors constituting the Board shall not be changed without the affirmative vote of at least 75% of the issued and outstanding shares of Common Stock. If adopted, the Board Amendments will not become effective unless and until the Closing occurs. Adoption of the Board Amendments requires the affirmative vote of the holders of a majority of the shares of Common Stock outstanding. - 47 - PROPOSED AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION: PROVISIONS AFFECTING CORPORATE GOVERNANCE The Board of Directors has approved the Charter amendments to add certain provisions to the Company's Certificate of Incorporation and Bylaws with respect to stockholder action. Certain of those provisions may make an acquisition of the Company more difficult for an acquiror. SECTION 203 OF THE DELAWARE LAW. Pursuant to the Charter Amendments, the Company's Certificate of Incorporation would be amended to make the provisions of Section 203 of the DGCL inapplicable to the Company. In general, Section 203 of the DGCL prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date such stockholder became an "interested stockholder," unless (a) prior to such date the board of directors of the corporation approved either the "business combination" or the transaction which resulted in the stockholder becoming an "interested stockholder," or (b) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the "interested stockholder" owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (i) by persons who are directors and also officers and (ii) by an employee stock plan in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or (c) on or subsequent to such date the "business combination" is approved by the board of directors and authorized at the annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the "interested stockholder." A "business combination" includes certain mergers, stock or asset sales and other transactions resulting in a financial benefit to the "interested stockholder." An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. Under the terms of Section 203, this amendment will not be effective until 12 months after its adoption by the stockholders and shall not apply to any "business combination" between the Company and any person who becomes an "interested stockholder" on or prior to such adoption. STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate of Incorporation will be amended to provide that no action required or permitted to be taken at any annual or special meeting of the stockholders of the Company may be taken without a meeting, and the power of stockholders of the Company to consent in writing, without a meeting, to the taking of any action is specifically denied. This provision of the Certificate of Incorporation may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. The Bylaws will be amended to provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or special meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received no later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. The Bylaws also specify certain requirements for a stockholder's notice to be in proper written form. These provision may preclude some stockholders from bringing matters before the stockholders at an annual or special meeting or from making nominations for directors at an annual or special meeting. This provision of the Bylaws may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three- fourths of the Company's outstanding Common Stock. ADJOURNMENT OF MEETINGS OF STOCKHOLDERS. The Bylaws will be amended to provide that when a meeting of stockholders of the Company is convened, the presiding officer, if directed by the Board of Directors, may adjourn the meeting if no quorum is present for the transaction of business or if the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to stockholders or to otherwise effectively exercise their voting rights. This provision will, under certain circumstances, make more difficult or delay actions by the stockholders opposed by the - 48 - Board of Directors. The effect of such provision could be to delay the timing of a stockholders' meeting, including in cases where stockholders have brought proposals before the stockholders which are in opposition to those brought by the Board of Directors and therefore may provide the Board of Directors with additional flexibility in responding to such stockholder proposals. As set forth below, this provision of the Bylaws may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. AMENDMENT OF THE BYLAWS. The Certificate of Incorporation will be amended to provide that no provision of the Bylaws may be amended, modified or repealed by the stockholders of the Company, nor may any provision of the Bylaws inconsistent with such provision be adopted by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. This provision will make it more difficult for stockholders to make changes to the Bylaws that are opposed by the Board of Directors. This provision of the Certificate of Incorporation may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. If adopted, the Charter Amendments will not become effective unless and until the Closing occurs. Adoption of the Charter Amendments requires the affirmative vote of the holders of a majority of the shares of Common Stock outstanding. THE STOCK OPTION PLAN The Board of Directors has approved the adoption of the Stock Option Plan for the Company's directors, officers and employees. The Stock Option Plan is intended to provide a means to attract, retain and motivate selected employees of the Company and non-employee directors of the Company. The Stock Option Plan provides for the grant to eligible employees of incentive stock options, non- qualified stock options, stock appreciation rights, restricted shares, performance share and performance units, dividend equivalents and other share based awards. All employees and directors are eligible to participate in the Stock Option Plan. The portion of the Stock Option Plan applicable to employees will be administered by the Compensation Committee of the Company's Board of Directors. The Compensation Committee will have the full and final authority to select employees to whom awards may be granted, to determine the type of awards to be granted to such employees and to make all administrative determinations required by the Stock Option Plan. The Compensation Committee also will have authority to waive conditions relating to an award or accelerate vesting of awards. The Stock Option Plan provides for certain grants of nonqualified stock options to non-employee directors, and, in the case of such grants, is intended to operate automatically and not require administration. An aggregate of 598,782 shares of Common Stock have been reserved for issuance under the Stock Option Plan, subject to anti-dilution adjustments in the event of certain changes in the Company's capital structure. In connection with the Restructuring, after the adoption of the Stock Option Plan, the Company intends to grant restricted stock and/or options to purchase the following numbers of shares of Common Stock to the following persons or groups: Alexius Dyer, 224,543 shares, representing 7.5% of the Common Stock to be outstanding following the Restructuring; George Murnane, 104,787 shares, representing 3.5% of the outstanding Common Stock; and the non- executive employees of the Company, 119,756 shares, representing 4.0% of the outstanding Common Stock. Forty percent of such options will vest immediately with 15% vesting annually, over the four years following the date of grant. In addition, shares representing 2.5% of the outstanding Common Stock will be reserved for future issuance pursuant to the Stock Option Plan, each grant to vest equally, over three years after being awarded. The Company also intends to grant options representing up to 2.5% of the outstanding Common Stock to non-employee directors. The number of options to be granted to the non-employee directors will be determined by the Company prior to the consummation of the Restructuring. The Company intends to reserve for future issuance to the non-employee directors any shares not granted as restricted stock and not covered by options issued upon consummation of the Restructuring. For a complete description of the Stock Option Plan, see "Management - The Stock Option Plan." - 49 - DILUTION The Restructuring will result in significant dilution of the equity interests of the existing holders of Common Stock. See "Risk Factors -- Dilution" and "The Restructuring -- Certain Significant Effects of the Restructuring -- Significant Dilution of Equity Interests." EXCHANGE OF STOCK CERTIFICATES; FRACTIONAL SHARES As soon as practicable after the Closing, the Company's stockholders will be notified and requested to surrender their Common Stock certificates for replacement certificates representing the number of shares of Common Stock into which their shares of Common Stock were combined pursuant to the Reverse Stock Split. Until so surrendered, each existing certificate for 27 shares of Common Stock prior to the Closing will be deemed to represent a certificate for one share of Common Stock. No certificates or scrip representing fractional shares of Common Stock will be issued in connection with the Restructuring. The Company expects to enter into an agreement with the Depositary whereby the Depositary will aggregate and sell all fractional shares of Common Stock otherwise issuable in connection with the Restructuring. There can be no assurance as to the price at which sales will be effected. Market conditions or other factors could cause the fractional shares or holdings to be sold at depressed prices, including prices substantially below fair market value. The proceeds of such sales will be distributed by the Depositary to the persons who would otherwise have received such fractional amount. See "The Exchange Offer -- Acceptance of Convertible Debentures and Delivery of Common Stock" and "Risk Factors -- Market for Common Stock." OTHER MATTERS TO BE CONSIDERED It is not anticipated that any matter other than the approval of the Stock Option Plan, the Reverse Stock Split, the Board Amendments, the Preferred Stock Authorization and the Charter Amendments will be brought before the Meeting. If other matters are properly presented, proxies will be voted in accordance with the best judgment of the proxy holders. - 50 - CERTAIN FEDERAL INCOME TAX CONSIDERATIONS GENERAL The Company has received an opinion from its counsel, King & Spalding ("Counsel"), that the material federal income tax consequences of the Restructuring to the Company and to the holders of Convertible Debentures are as described herein. Such opinion is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Tax Code"), final, temporary and proposed Treasury regulations thereunder, and administrative and judicial interpretations thereof, all as in effect as of the date hereof, and all of which are subject to change (perhaps retroactively) by legislation, administrative action or judicial decision. There can be no assurance that the Internal Revenue Service (the "Service") will not challenge one or more of the tax consequences of the Restructuring described herein, and no ruling from the Service has been or will be requested as to any of such tax consequences. The following discussion does not include all matters that may be relevant to any particular holder in light of such holder's particular facts and circumstances. Certain holders, including financial institutions, broker- dealers, tax-exempt entities, insurance companies and foreign persons may be subject to special treatment not described below. THE FEDERAL INCOME TAX CONSEQUENCES OF THE RESTRUCTURING ARE COMPLEX. ALL HOLDERS OF CONVERTIBLE DEBENTURES SHOULD CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE RESTRUCTURING AND THE OWNERSHIP AND DISPOSITION OF THE COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL AND FOREIGN TAX LAWS. TAX CONSEQUENCES TO THE COMPANY CANCELLATION OF INDEBTEDNESS. If a taxpayer satisfies its outstanding debt obligation for less than its principal amount, such taxpayer generally realizes cancellation of debt ("COD") income for federal income tax purposes. In the case of an exchange such as that contemplated by the Restructuring, where outstanding indebtedness is canceled in exchange for Common Stock, the amount of such COD income is, in general, equal to the excess of the adjusted issue price (including accrued but unpaid interest) of the indebtedness satisfied over the fair market value of such Common Stock. Such COD income is recognized and included in the taxpayer's taxable income except to the extent that Section 108 of the Tax Code applies. Section 108 of the Tax Code provides an exception to the recognition of COD income for taxpayers who are insolvent (but only to the extent of their insolvency) or where the discharge occurs in a Chapter 11 or similar case under the Bankruptcy Code. Section 108(b) of the Tax Code provides that certain tax attributes of the taxpayer must be reduced by the amount of the taxpayer's COD income that is excluded under Section 108(a) of the Tax Code. In general, net operating loss carryovers, tax credit and capital loss carryforwards are reduced first, and then the tax basis of the Company's property is reduced (but not below the remaining amount of its liabilities). In lieu of the generally required order of attribute reduction, the taxpayer may elect instead to reduce first, its tax basis in its depreciable property, and then its remaining tax attributes. Such attribute reductions are made after the determination of the Company's tax liability for the taxable year in which the Restructuring occurs. If the cancellation of indebtedness does not occur pursuant to a federal bankruptcy case, the exclusion from income provided by Section 108 of the Tax Code applies only to the extent that the taxpayer is insolvent for purposes of that section. To the extent that the COD income exceeds the amount by which the taxpayer is insolvent prior to the debt discharge, such excess is included in the taxpayer's taxable income. A taxpayer is insolvent to the extent of the excess of (i) the aggregate amount of all the taxpayer's liabilities over (ii) the fair market value of all of the taxpayer's assets immediately prior to the debt cancellation transaction. - 51 - The Company may recognize COD income in the Restructuring depending on the value of the Company's Common Stock following the Restructuring. Any such COD income will be excluded from the Company's taxable income to the extent of its pre-Restructuring insolvency (with correlative reduction of its tax attributes under Section 108(b) of the Tax Code), and the remainder will be included in the Company's taxable income. However, there can be no assurance that the IRS or a court will agree with the Company's determination of its insolvency or the value of the Common Stock after the Restructuring is effected. As a result, it is possible that the Company could be required to recognize a significant amount of taxable income in connection with the Restructuring. LIMITATION ON UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS. Section 382 of the Tax Code generally limits a corporation's use of its net operating loss carryforwards ("NOLs") and certain built-in losses if the corporation undergoes an "ownership change." An ownership change generally occurs when a percentage of the corporation's stock by value held by certain persons (identified in Tax Code Section 382 as "5% shareholders") increases in the aggregate by more than 50 percentage points over the lowest level held by such persons during a three-year testing period. If an ownership change occurs, the corporation's annual utilization of its NOLs is limited to the product of the corporation's equity value immediately before the ownership change multiplied by the applicable long-term federal tax-exempt rate. The Company believes that the Restructuring will result in an ownership change of the Company for purposes of Section 382 of the Tax Code. However, under a special rule, the Company will be entitled to use its NOL carryforwards to fully offset, without any limitation, any "built-in gains" that are recognized during the five-year period following the Restructuring. In order to take advantage of the recognized built-in gain rule, the Company must have an aggregate net unrealized built-in gain in its assets (i.e., excess of aggregate fair market value over aggregate tax basis) on the date of the Restructuring which exceeds the lesser of $10 million or 15% of the total gross fair market value of its assets (excluding cash and cash items). The Company is permitted to increase its annual Section 382 limitation by the amount of "recognized built-in gains" attributable to the disposition of assets held on the date of the Restructuring within the five-year period following the Restructuring. The Company presently believes it will have a net unrealized built-in gain in assets in excess of the statutory threshold. The Company presently estimates that it will have NOL carryforwards following the Restructuring of approximately $5.2 million, although there can be no assurance that the IRS will concur in the reporting positions on which the Company's NOL calculations are based. The application of Section 382 of the Tax Code could severely limit the Company's ability to use such carryforwards. Except to the extent that the Company has a net unrealized built-in gain and recognizes such gains during such five-year period, the Company's annual limitation under Section 382 may be small. TAX CONSEQUENCES TO THE HOLDERS OF THE CONVERTIBLE DEBENTURES The exchange of the Convertible Debentures for Common Stock pursuant to the Exchange Offer will constitute a recapitalization under Section 368(a)(1)(E) of the Tax Code, and therefore, no gain or loss will be recognized by the holders except to the extent provided in Section 354(c)(2)(B) with respect to accrued interest that is treated as paid by Common Stock. The terms of the Exchange Offer provide that the fair market value of the Common Stock exchanged for Convertible Debentures will be allocated first to accrued interest and then to the principal amount of such Convertible Debentures. The Company will report interest in its information filings to holders and to the Service in a manner consistent with the above allocations. If the Company's allocations are accepted by the Service or ultimately sustained by the courts, then a holder of Convertible Debentures should recognize ordinary interest income equal to the fair market value of the Common Stock that is allocated to interest which accrued during the holder's holding period for such Convertible Debentures to the extent that such interest has not previously been included in the holder's income. In general, a holder's tax basis in such Common Stock received pursuant to the Restructuring (and not allocable to accrued and unpaid interest) would equal the holder's adjusted tax basis in the Convertible Debentures surrendered, and such holder's holding period in the Common Stock received (and not allocable to accrued and unpaid interest) would include its holding period for the Convertible Debentures surrendered. The holder's tax basis in that portion of the Common Stock allocable to accrued and unpaid interest would be equal to the amount of interest deemed received, and the holder's holding - 52 - period in such portion of the Common Stock allocable to accrued and unpaid interest would begin on the day after the exchange. This discussion assumes that holders hold their Convertible Debentures as capital assets within the meaning of Section 1221 of the Tax Code and will hold the Common Stock received in the exchange therefor as capital assets. Based on this assumption and except as specifically noted herein, any gain or loss recognized by a holder on the disposition of any such securities would be capital gain or loss. Such gain or loss would be long-term capital gain or loss if the holding period with respect to such security exceeds one year, and otherwise would be short-term capital gain or loss. The use of capital losses to offset other income is subject to significant limitations. Moreover, gain on the disposition of Common Stock acquired by a holder in exchange for Convertible Debentures will generally be treated as ordinary income to the extent that the holder was allowed an ordinary loss on such exchange. BACKUP WITHHOLDING. A holder of Common Stock may, under certain circumstances, be subject to "backup withholding" at the rate of 31% with respect to dividends paid on Common Stock or the proceeds of a sale, exchange or redemption of such Common Stock unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding provisions. A holder who does not provide a correct taxpayer identification number may be subject to penalties imposed by the Service. Any amount withheld under these rules will be creditable against the holder's federal income tax liability. ACCOUNTING TREATMENT The Company proposes to account for the Restructuring using the principles of SFAS 15, entitled "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Pursuant to such principles, a debtor, such as the Company, that issues an equity interest to a creditor in discharge of the creditor's debt claim is required to account for the equity interest at its fair value and to recognize as a gain the difference between the fair value of the equity interest and the carrying amount of the debt discharged. - 53 - HISTORICAL AND PRO FORMA CAPITALIZATION The following unaudited tables set forth the consolidated capitalization of the Company at February 29, 1996 and the consolidated pro forma capitalization of the Company as of such date as adjusted to give effect to the Restructuring as if it became effective on such date. The pro forma information presented below assumes that all of the Convertible Debentures are accepted for exchange. The information presented below should be read in conjunction with the Consolidated Financial Statements and the unaudited Pro Forma Financial Information and related notes appearing elsewhere herein. See "Financial Statements" and "Pro Forma Financial Information."
FEBRUARY 29, 1996 ----------------------------- ACTUAL PRO FORMA ------ --------- IN THOUSANDS Short-term debt $ 38 $ 438 Long-term debt 18,816 8,416 Stockholders' equity: Preferred stock, $.001 par value, 500,000 shares authorized; 2,000,000 shares authorized pro forma; no shares issued and outstanding, actual or pro forma -- -- Common stock, $.001 par value; 20,000,000 shares authorized; 4,041,779 shares issued and outstanding; 2,993,880 shares issued and outstanding pro forma (1) 4 2 Additional paid-in capital 2,654 11,031 Retained earnings (accumulated deficit) (10,387) (9,433) -------- --------- Total stockholders' equity (deficit) (7,729) 1,600 -------- --------- Total capitalization $ 11,125 $ 10,454 -------- --------- -------- ---------
- ---------------------------- (1) Represents shares issued after the Restructuring and Reverse Stock Split but does not include ____ shares of Common Stock issuable under certain outstanding warrants and options pursuant to the existing stock option plan and the Old Warrants, actual, and ____ shares of Common Stock subject to options under the Stock Option Plan, pro forma. See "Management -- Stock Option Plan." - 54 - SELECTED HISTORICAL FINANCIAL DATA The following table sets forth selected historical financial information of the Company for the five years ended May 31, 1995 and the nine-month periods ended February 28, 1995 and February 29, 1996. The historical operating data and historical balance sheet data for the five years ended May 31, 1995 presented below have been derived from, and should be read in conjunction with, the Company's audited consolidated financial statements and the related notes thereto. The selected unaudited historical financial information for the nine-month periods indicated has been derived from unaudited consolidated financial statements prepared by the Company, which reflect all adjustments, consisting of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation. Results of operations for the nine-month periods are not necessarily indicative of results for the full year. The following financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company included elsewhere in this Proxy Statement/Prospectus. - 55 -
Nine Months Ended YEAR ENDED MAY 31, FEBRUARY 28 OR 29, -------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- ---- OPERATING DATA: (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA) Net sales $21,521 $26,527 $32,031 $16,747 $21,999 $18,248 $16,247 Lease revenue -- -- 1,473 1,986 2,984 2,190 1,277 ------- ------- ------- ------- ------- ------- ------- Total revenues $21,521 $26,527 $33,504 $18,733 $24,983 $20,438 $17,524 Cost of sales 14,920 16,940 21,493 22,104 17,713 14,911 9,761 ------- ------- ------- ------- ------- ------- ------- Gross profit 6,601 9,587 12,011 (3,371) 7,270 5,527 7,763 Selling, general and administrative expenses 3,230 4,652 6,469 6,943 4,358 3,322 3,046 Provision (recovery) for doubtful accounts 517 374 493 1,488 (335) (292) 317 Depreciation and amortization 164 201 1,406 2,866 1,693 1,699 614 Financial Restructuring costs -- -- -- -- -- -- 306 ------- ------- ------- ------- ------- ------- ------- Total operating expenses 3,911 5,227 8,368 11,297 5,716 4,729 4,283 Income from operations 2,690 4,360 3,643 (14,668) 1,554 798 3,785 Interest and other income, net 458 777 2,097 2,475 1,669 1,164 1,507 Unusual and nonrecurring items -- -- -- -- (177) (177) 306 Losses of service center subsidiary -- -- -- 1,922 676 701 -- ------- ------- ------- ------- ------- ------- ------- Earnings (loss) before income taxes, equity in earnings (loss) of joint venture and extraordinary item 2,232 3,583 1,546 (19,065) (614) (890) 1,972 Provision for income taxes (benefit) 941 1,370 510 (2,475) -- -- -- Equity in earnings (loss) of joint venture 121 (229) (59) (423) -- -- -- Extraordinary loss on extinguishment of debt -- -- -- (363) -- -- -- ------- ------- ------- ------- ------- ------- ------- Net earnings (loss) $1,412 $1,984 $977 $(17,376) $(614) $(890) $1,972 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Earnings (loss) per common share before extraordinary items .37 .52 .24 (4.21) (.15) (.22) .49 Extraordinary item -- -- -- (.09) -- -- -- ------- ------- ------- ------- ------- ------- ------- Earnings (loss) per common share $0.37 $0.52 $0.24 $(4.30) $(0.15) $(0.22) $0.49 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Weighted average number of common shares outstanding 3,825 3,850 3,997 4,042 4,042 4,042 4,042 Ratio of earnings to fixed charges (1) 5.24 5.00 1.68 -- -- -- 2.50
(1) For purposes of this item, "fixed charges" represent interest expense and "earnings" represent income (loss) from operations. Earnings were insufficient to cover fixed charges by $17.2 million, $.7 million and $1.0 million for the years ended May 31, 1994 and 1995 and the nine months ended February 28, 1995, respectively. - 56 -
AT MAY 31, AT FEBRUARY 28 OR 29, -------------------------------------------------- --------------------- 1991 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- ---- BALANCE SHEET DATA: Working capital (deficit) $1,748 $2,938 $17,087 $(18,312) $(13,489) $(17,070) $(11,167) Total assets 14,319 20,615 35,709 25,553 14,511 16,020 15,769 Short-term debt 4,863 7,296 4,905 3,531 1,812 527 38 Long-term debt in technical default classified as current -- -- -- 22,157 18,083 19,850 18,400 Long-term debt 57 309 18,579 485 440 452 416 Stockholder's equity (deficit) 4,529 7,081 8,173 (9,088) (9,702) (9,979) (7,729) Book value per share $1.15 $1.78 $2.04 $(2.25) $(2.40) $(2.47) $(1.91)
- 57 - PRO FORMA FINANCIAL INFORMATION The unaudited Pro Forma Condensed Consolidated Balance Sheet as of February 29, 1996 and the unaudited Pro Forma Condensed Consolidated Statements of Operations for the fiscal year ended May 31, 1995 and the nine months ended February 29, 1996 set forth below, have been prepared using the principles of SFAS 15, entitled "Accounting by Debtors and Creditors for Troubled Debt Restructurings" and are based on the historical consolidated financial statements of the Company, adjusted to give effect to the Restructuring, assuming all of the Convertible Debentures are accepted for exchange, that the Senior Notes are redeemed on the Closing Date with the proceeds of an advance pursuant to the Credit Agreement and that the amounts outstanding pursuant to the Credit Agreement bear interest at the rate applicable to the Credit Agreement (2% above the lender's prime rate) throughout the periods. The Pro Forma Condensed Consolidated Balance Sheet reflects adjustments as if the Restructuring had occurred as of the date of such balance sheet. The Pro Forma Condensed Consolidated Statements of Operations reflect adjustments as if the Restructuring had occurred on the first day of the applicable period. The pro forma financial information should be read in conjunction with the historical financial statements, including the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations, all of which are included in this Proxy Statement/Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Index to Financial Statements." The pro forma financial information does not purport to be indicative of the results which would actually have been obtained had such transactions been completed as of the date and for the periods presented or which may be obtained in the future. - 58 -
HISTORICAL PRO FORMA YEAR ENDED PRO FORMA YEAR ENDED OPERATING DATA: MAY 31, 1995 ADJUSTMENTS MAY 31, 1995 ------------ ----------- ------------ Revenues - -------- (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA) Net sales $21,999 $21,999 Lease revenue 2,984 2,984 ------- ------- Total revenue 24,983 24,983 Cost of sales 17,713 17,713 ------- ------- Gross profit $7,270 $7,270 Operating expenses: - ------------------- SG&A expenses 4,023 4,023 Depreciation and amortization 1,693 231 (1) 2,030 50 (3) ------ --------- ------ Total operating expenses 5,716 337 (7) 6,053 Income from operations 1,554 (337) 1,217 Interest and other income, net 1,669 (224)(4) 1,645 (800)(5) Other 499 499 ------ --------- ------ Earnings before income taxes and extraordinary items (614) 687 73 ------ --------- ------ Provision for income taxes (benefits) -- (11) -- (11) --(11) Earnings (loss) before extraordinary items (614) 687 73 Extraordinary (gain) loss gain on trouble debt retructuring 701 (2) (1,301) (10,000)(6) 8,001 (8) (2)(6) ------ --------- ------ Net earnings (loss) $(614) $ 1,987 $1,373 ------ --------- ------ ------ --------- ------ Ratio of earnings to fixed charges (14) -- -- PER SHARE DATA: Earnings (loss) before extraordinary items $(0.15) $0.03 Extraordinary items -- .54 ------ ------ Net earnings (loss) per common share $(0.15) $0.57 ------ ------ ------ ------ Weighted average number of common shares outstanding 4,042 2,395
- 59 -
HISTORICAL PRO FORMA NINE MONTHS ENDED PRO FORMA NINE MONTHS ENDED OPERATING DATA: FEBRUARY 29, 1995 ADJUSTMENTS FEBRUARY 29, 1995 ----------------- ----------- ----------------- Revenues - -------- (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA) Net sales $16,247 $16,247 Lease revenue 1,277 1,277 ------- ------ Total revenue 17,524 17,524 Cost of sales 9,761 9,761 ------- ------ Gross profit $7,763 $7,763 Operating expenses: - ------------------- SG&A expenses 3,363 3,363 Depreciation and amortization 614 113 (1) 807 38 (3) 42 (7) ------- -------- ------ Total operating expenses 3,977 193 4,170 Income from operations 3,786 (193) 3,593 Interest and other income, net 1,507 (92)(4) 815 (600)(5) Other 306 306 ------- --------- ------ Earnings before income taxes and extraordinary 1,973 499 2,472 Provisions for income taxes (benefits) --(11) --(11) --(11) ------- --------- ------ Earnings (loss) before extraordinary items 1,973 499 2,472 Extraordinary (gain) loss gain on debt retirement 634 (2) (456) (10,000)(6) (200)(5) 9,112 (8) (2)(8) ------- --------- ------ Net earnings (loss) $1,973 $1,048 $2,928 ------- --------- ------ ------- --------- ------ Ratio of earnings to fixed charges (14) -- 4.38 PER SHARE DATA: Earnings before extraordinary items $.49 $1.03 Extraordinary items -- .19 ------ ------ Net earnings per common share $0.49 $1.22 ------ ------ ------ ------ Weighted average number of common shares outstanding 4,042 2,395
- 60 -
HISTORICAL PRO FORMA NINE MONTHS ENDED PRO FORMA NINE MONTHS ENDED BALANCE SHEET DATA: FEBRUARY 29, 1996 ADJUSTMENTS FEBRUARY 29, 1996 ----------------- ----------- ----------------- Working Capital (deficit) ($11,167) 250 (3) $6,460 (92)(4) (800)(5) 735 (12) 280 (7) 400 (13) (8,400)(9) (10,000)(6) Total assets 15,769 (113)(1) 15,472 (634)(2) 212 (3) 238 (7) Total debt 18,854 (10,000)(6) 8,854 (8,400)(9) 8,400 (7) Stockholders' equity (deficit) (7,729) (2)(8) 1,600 9,112 (8) (735)(7) 935 (10) Book value per share $(1.91) $0.67
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following notes set forth an explanation of the assumptions used in preparing the unaudited pro forma condensed financial statements. The pro forma adjustments are based on the best estimates of the Company's management using information currently available. (1) Reflects the amortization of remaining balance of the deferred debt costs attributable to the Senior Notes. (2) Reflects the amortization of remaining balance of the deferred debt costs attributable to the Convertible Debentures. (3) The Company will pay a fee of $250,000 to a placement agent in connection with the origination of the Credit Agreement. The Company intends to amortize the fee over a five-year period. Reflects amortization of the placement agent's fee for the periods presented. (4) Reflects the assumed differential between the stated interest rate on the Senior Notes (12%) and the assumed interest rate on the amounts borrowed pursuant to the Credit Agreement. (5) Reflects elimination of Interest on Convertible Debentures. (6) Reflects the conversion of $10 million principal amount on the Convertible Debentures to equity. (7) Reflects fees incurred in connection with the Credit Agreement less amortization of such fees for the periods presented. (8) Reflects the assumed value of the Common Stock issued to holders of the Convertible Debentures. (9) Reflects the prepayment of the Senior Notes with the proceeds of a concurrent advance pursuant to the Credit Agreement. - 61 - (10) Net Pro Forma earnings adjustments. (11) The Company has net operating loss carryforwards sufficient to offset income. (12) Reflects estimated costs to be incurred in connection with the Restructuring. (13) Reflects the current portion of amounts advanced pursuant to the Credit Agreement. (14) Earnings were insufficient to cover fixed charges by $1.0 million and $.7 million for the nine months ended February 28, 1996 and year ended May 31, 1995, respectively, and, on a pro forma basis would have been insufficient to cover fixed charges by $31,000 for the year ended May 31, 1995. - 62 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES THE RESTRUCTURING. On July __, 1996, the Company announced that it had entered into Standstill Agreements with holders of approximately ____% of the outstanding principal amount of the Senior Notes and that it had reached an agreement in principle with the single largest holder of the Convertible Debentures and D/R providing for the Restructuring. See "The Restructuring--Background" and "Negotiations with Debentureholders." The Company expects that consummation of the Restructuring will result in the following: - A reduction of its indebtedness from approximately $18.4 million to approximately $8.4 million and reclassification of long-term debt from a current to a long-term obligation. - A capital structure that will permit the Company to implement its operating strategy. - Reduced debt service obligations and adequate cash flow to fund such obligations and operations. - An improved operating income to fixed charge ratio. See "The Restructuring--Certain Significant Effects of the Restructuring" and "The Restructuring--Forecast of Certain Financial Data." If the Restructuring is not consummated, the Company's highly leveraged financial position will result in the continuation of the defaults with respect to the Senior Notes and the Convertible Debentures and may result in a number of other serious financial and operational problems, including the following:(i) the Company will experience a severe liquidity crisis; (ii) the Company will be unable to invest adequate capital in its business or maintain its current capital assets; (iii) the Company will have little, if any, ability to access capital markets; (iv) the Company's senior management will be required to spend an excessive amount of time and effort dealing with the Company's financial problems, instead of focusing on the operation of its business; (v) the Company may be unable to retain top managers and other key personnel and build the value of its business; (vi) the Company may lose business if customers become concerned about the Company's ability to supply quality replacement parts in a timely manner or to comply with applicable regulatory requirements; and (vii) suppliers to the Company may stop providing supplies or may provide supplies only on shortened payment or cash terms. If these problems occur, the Company believes that the value of its business will deteriorate. Accordingly, if the Restructuring is not consummated, the Company will have little choice but to devise alternative actions. Considering the Company's limited financial resources and the existence of unwaived defaults with respect to the Senior Notes and the Convertible Debentures, there can be no assurance that the Company would succeed in formulating and consummating an acceptable alternative financial restructuring. In such case, the Company most likely would be forced to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. In addition, because payment defaults currently exist under the Senior Notes and Convertible Debentures (see "Risk Factors--Risk Factors Relating to Failure of the Restructuring to Occur--Certain Defaults"), it is possible that creditors of the Company could file an involuntary petition seeking to place the Company in bankruptcy. There can be no assurance that a bankruptcy proceeding would result in a reorganization of the Company rather than a liquidation, or that any reorganization would be on terms as favorable to the holders of the Convertible Debentures, Senior Notes and Common Stock as the terms of the Restructuring. If a liquidation or a protracted reorganization were to occur, there is a risk that there would be no cash or property available for distribution to holders of the Convertible Debentures and the Common Stock and that the holders of Senior Notes would incur a significant discount on their claims. THE COMPANY'S CURRENT FINANCIAL CONDITION. 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 Convertible Debentures and $.4 million principal amount of a mortgage loan secured by its corporate headquarters. The entire principal amount of the Senior Notes and the Convertible Debentures was classified as current at May 31, 1995, because of the existence -63- of defaults under the governing documents. The Senior Notes, which were issued during fiscal 1993, bear interest at the fixed rate of 12% per annum, payable quarterly. The Senior Notes mature in 1997. The Convertible 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 Convertible Debentures mature in 2003. On May 26, 1995, the Company received a notice of payment blockage from the Majority Noteholder. 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 Convertible 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 and August 31, 1995 interest payments due to holders of the Convertible Debentures, totaling $400,000. Pursuant to terms of the Senior Notes, the Company was prohibited from making any other payments with respect to the Convertible Debentures prior to the expiration of the payment blockage period on November 22, 1995. Notwithstanding the expiration of the payment blockage period, the Company did not pay the November 30, 1995 and the February 29 and May 31, 1996 interest payments on the Convertible Debentures. The Company does not intend to resume making payments of interest on the Convertible Debentures. The Company did not make its scheduled July 17, 1995 principal payment on the Senior Notes in the approximate amount of $1.8 million. The Company cured the default in part by making a principal payment of $1.45 million on the Senior Notes on December 12, 1995. The Company made an additional principal payment of $.7 million, on May 13, 1996 which cured such principal payment default and prepaid approximately $.35 million of the $4.1 million principal payment due on the Senior Notes on July 17, 1996. The Company will not make its July 17, 1996 payment, pending redemption of the Senior Notes in connection with the Restructuring. If the Restructuring is not consummated, the Company will be unable to make such principal payment. The failure to make the interest payments to the holders of the Convertible Debentures and the principal payment to the holders of the Senior Notes due on July 17, 1996 referred to above constitutes an Event of Default under the agreements governing the Senior Notes and Convertible Debentures. Further, the Company is in default in the observance of certain financial covenants applicable to the Senior Notes and the Convertible Debentures. If the Company remains in default under the terms of the Senior Notes and Convertible Debentures, the holders of such instruments could accelerate the debt, resulting in principal of $17.7 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 most likely would require the Company to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. In addition, if the holders of any of the Company's Senior Notes or Convertible Debentures demand repayment or if the holders of the Senior Notes seek to realize upon the collateral securing the Senior Notes, there is a substantial likelihood that the Company will be forced to cease operations or to file for protection under Chapter 11 of the Bankruptcy Code. 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. 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. -64- RESULTS OF OPERATIONS OVERVIEW. 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, ----------------------------- 1993 1994 1995 ---- ---- ----- Total revenues 100.0% 100.0% 100.0% ----- ----- ----- Cost of goods sold 64.2 118.0 70.9 Selling, general and administrative expenses 19.3 37.1 17.4 Provision (recovery) for doubtful accounts 1.5 7.9 (1.3) Interest expense 6.4 13.7 9.1 Depreciation and amortization expense 4.2 15.2 6.8 Interest and other income (.2) (.5) (2.4) Unusual and nonrecurring items -- -- (.7) Loss on discontinued subsidiary -- 10.3 2.7 ----- ------ ----- Operating earnings (loss) 4.6 (101.7) (2.5) Income tax expense (benefit) 1.5 (13.2) -- Joint venture (loss) income (0.2) (2.3) -- Extraordinary loss -- (1.9) -- ---- ----- --- Net earnings (loss) 2.9% (92.7)% (2.5)% ---- ----- --- ---- ----- --- 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 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. 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. 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. FISCAL 1995 COMPARED WITH FISCAL 1994. Total revenues for fiscal 1995 increased 33.4% from total revenues for 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 -65- 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 totaling $9.5 million for writedowns and valuation adjustments to certain parts inventory and aircraft (see "-- 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 equaled 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 commission 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. -66- 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 $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. -67- Provision 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 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 Convertible 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. -68- THREE AND NINE MONTHS ENDED FEBRUARY 29, 1996 COMPARED WITH THREE AND NINE MONTHS ENDED FEBRUARY 28, 1995. Total revenues of the three months and nine months ended February 29, 1996 increased 89% and decreased 14% respectively, to $7.8 million and $17.5 million, from $4.2 million and $20.4 million, respectively, for the three months and nine months ended February 28, 1995. Aircraft sales were $1,450,000 and $1,775,000 during the three and nine months ended February 29, 1996, compared to $0 and $8.2 million, respectively, during the three and nine months ended February 28, 1995. Aircraft sales are unpredictable transactions and may fluctuate significantly from year to year, dependent, in part, upon the Company's ability to purchase an aircraft and resell it within a relatively brief period of time. Included in aircraft sales during the nine months ended February 28, 1995 are the sale of three DC-9 aircraft sold to a leasing company of $5.6 million pursuant to a contract entered into during the fiscal year ended 1994. Parts sales for the three and nine months ended February 29, 1996 were $5.9 million and $14.4 million, respectively, compared to $3.4 million and $10.1 million, respectively, during the three and nine months ended February 28, 1995. During the nine months ended February 29, 1996, the Company has continued to increase its domestic customer base and decrease its number of foreign customers in order to lessen the Company's credit risks. Lease revenue for the three and nine months ended February 29, 1996 decreased to $529,000 and $1.3 million, respectively, compared to $774,000 and $2.2 million, respectively, during the three and nine months ended February 28, 1995, as certain leases that were in existence during the prior year have terminated. During the fiscal year ending May 31,1995, the Company accepted lease payments from a foreign customer in the customer's local currency because conversion restrictions precluded the customer from obtaining and paying U.S. dollars. Due to uncertainties regarding when and at what rate the local currency could be converted to U.S. dollars, the Company valued the local currency at an estimated value of $200,000 as of May 31, 1995 (included in cash), such amount being less than the then current U.S. equivalent amount at the official exchange rate. The Company subsequently was able to convert the funds to U.S. dollars in the amount of $339,000, resulting in a gain of $139,000, which is included in lease revenues during the nine months ended February 29, 1996. The Company recorded a gain during the nine months ended February 29, 1996 relating to the settlement of certain disputes with a customer. Pursuant to the settlement, the customer paid the Company $660,000 and the Company canceled a note receivable from the customer. The Company also released all claims it had against the customer, which included among other things, claims for the purchase price of parts purchased by the customer on open account or pursuant to a consignment arrangement. The customer released certain claims it had against the Company as part of the settlement. The transaction resulted in a net gain to the Company of approximately $345,000, consisting of the excess of cash received over the net carrying value of the note receivable and cost of the inventory. The Company recorded as net sales the cost of the inventory plus the amount of the net gain. During the three months and nine months ended February 29, 1996, the Company's parts sales to ValuJet represented approximately 25.0% and 18.0% repsective of the Company's revenues. On June 17, 1996, ValuJet entered into a consent decree with the FAA, pursuant to which ValuJet agreed to ground all of its aircraft until it demonstrates compliance with specified safety and maintenance procedures. The failure of ValuJet to resume operations or eventually to resume operations to substantially the level conducted prior to the grounding could have a material adverse effect on the Company. Cost of sales as a percentage of total revenues for the three and nine months ended February 29, 1996 was 56%, compared to 49% and 73%, respectively, during the three and nine months ended February 28, 1995. Cost of sales on aircraft sales was 28% and 30% for the three and nine months ended February 29, 1996, compared to 99% during the nine months ended February 28, 1995 (there were no aircraft sales during the three months ended February 28, 1995). The higher percentage of cost of sales on aircraft sales during the nine months ended February 28, 1995 as compared to the three and nine months ended February 29, 1996 was the result of zero margins realized on the sale of three DC-9 aircraft sold during the nine months ended February 28, 1995 to a leasing company for $5.6 million pursuant to a contract entered into during the fiscal year ended 1994. Excluding aircraft sales and cost of aircraft sales, cost of sales as a percentage of total revenues during the three and nine months ended February 29, 1996 was 62% and 59%, respectively, compared to 49% and 56% during the three and nine months ended February 28, 1995. The higher cost of sales percentage (excluding aircraft sales and cost of aircraft sales) during the three and nine months ended February 29, 1996 compared to the three and nine months ended February 28, 1995 is primarily attributable to the larger volume of parts sales during the three months ended February 29, 1996, some of which were brokered transactions (the Company fills a customer order for a part not held in inventory, whereby the Company locates the part of the customer from another vendor and then resells the part to the customer, which typically have lower margins, and sales from inventory of certain large dollar items at slightly lower margins. Additionally, the decrease in lease revenue in fiscal 1996 from fiscal 1995 results in lower overall margins due to the lower amount of cost of sales incurred in generating such lease revenue. -69- Selling, general and administrative expenses for the three and nine months ended February 29, 1996 were $1.1 million and $3.0 million, respectively, compared to $1.0 million and $3.3 million, respectively, during the three and nine months ended February 28, 1995. Provision (recovery) for doubtful accounts was $317,000 during the three and nine months ended February 29, 1996, compared to ($194,000) and ($292,000) during the three and nine months ended February 28, 1995. The provision recorded during the three and nine months ended February 29, 1996 resulted from a general provision for doubtful accounts. During the three and nine months ended February 28, 1995, the Company, primarily through litigation, recovered approximately $540,000 and $640,000, respectively, of accounts receivable which had been written off or reserved during the fiscal year ended May 31, 1994. The recoveries were offset by a general provision of doubtful accounts of $350,000. During the three and nine months ended February 29, 1996 the Company incurred approximately $113,000 and $6,000, respectively, of legal, accounting and other consulting fees in connection with its debt restructuring activities. Interest expense for the three and nine months ended February 29, 1996 was $475,000 and $1.5 million, respectively, compared to $516,000 and $1.8 million during the three and nine months ended February 29, 1995, reflecting the overall reduction in debt. Depreciation and amortization for the three and nine months ended February 29 1996 was $183,000 and $614,000, respectively, compared to $564,000 and $1.7 million, respectively, during the three and nine months ended February 28, 1995. The decrease in depreciation and amortization was due primarily to a reduction in depreciable aircraft held for lease, such aircraft held for lease amounting to a gross value of $2.9 million at February 29, 1996 compared to $7.8 million at February 28, 1995. The reduction in aircraft held for lease is due to the Company selling during fiscal 1995 certain aircraft previously leased or transferring certain aircraft to inventory held for sale. In fiscal 1994 the Company began operations of IASC, an FAA-certified repair facility. During the fiscal year 1995, IASC ceased operations and the majority of its assets were sold. As a result, there were no operating results of IASC during the three and nine months ended February 29, 1996. The results of IASC during the three and nine months ended February 28, 1995, amounting to approximately ($286,000) and $701,000, respectively, are shown as (income) losses of service center subsidiary. No income tax provision or benefits were recorded during the three and nine months ended February 29, 1996, or during the three and nine months ended February 28, 1995, respectively, as the Company has net operating loss carryforwards sufficient to offset income. The Company has fully exhausted its carryback benefits and recorded a one hundred percent (100%) valuation allowance against the deferred tax asset for net operating loss carryforwards. -70- BUSINESS GENERAL The Company is a worldwide supplier of aircraft spare parts to the aviation redistribution market. The Company sells spare parts to major commercial passenger airlines, air cargo carriers, maintenance and repair facilities and other redistributors. The parts sold by the Company include avionics, rotable and expendable airframe and engine components for commercial aircraft, including Boeing and McDonnell-Douglas aircraft and Pratt & Whitney jet engines. During fiscal 1996, the Company supplied parts to over 771 customers worldwide. Currently, the Company specializes in replacement parts for McDonnell Douglas DC-9 aircraft. Management believes that the Company has one of the most extensive inventories of aftermarket DC-9 parts in the industry. For the twelve-month period ended on February 29, 1996, the Company's operating revenues were approximately $22.1 million, its gross profit was approximately $9.9 million and its pretax income was approximately $2.3 million. The Company believes that the annual worldwide market for aircraft spare parts is approximately $10 billion, of which approximately $1.3 billion represents sales of aircraft spare parts to the redistribution market and that the Company's sales represented approximately 2% of such market during fiscal 1995. The redistribution market is highly fragmented, with a limited number of large, well capitalized companies selling a broad range of aircraft spare parts, and numerous smaller competitors serving distinct market niches. The Company believes that significant trends affecting the redistribution market will continue to increase its overall size while reducing the number of competitors. Factors causing the expansion of the redistribution market include the increasing size and age of the world-wide airline fleet and the increasing pressures on airlines and maintenance and repair facilities to control their costs. Although the Company's current financial condition is weak, the Company has been successful over the last two years in positioning itself as one of the premier redistributors of aircraft spare parts. Upon the successful implementation of the Restructuring, the Company believes that it will have the financial viability to implement its operating strategy and to become one of the select number of redistributors well positioned to fully service the aircraft spare parts requirements of its customers. OPERATING STRATEGY The Company is, therefore, undertaking the Restructuring to improve its financial flexibility and allow it to implement its operating strategy. The Company's operating strategy has two components. First, the Company intends to increase its revenues and operating income through continued customer penetration in its existing markets and expansion into new markets. The Company intends to achieve this by continuing to increase its share of the market for spare parts for certain widely operated aircraft models, including, in particular, the DC-9 (which is no longer in production) and the MD-80. Although the MD-80 is still in production, many of the DC-9's parts are interchangeable with the MD-80, which, given the Company's experience and knowledge with the DC-9, gives it a competitive advantage. The Company intends to capitalize on the limited availability of spare parts for such aircraft models by acquiring (i) pools of inventory from airlines that cease to operate such aircraft or that desire to reduce their levels of parts inventory and (ii) aircraft for parting out when the purchase price justifies doing so. In this regard, the Company purchased an inventory of DC-9 and MD-80 parts from Pt. Garuda Indonesia, an Indonesian airline, in May 1996 for total consideration of approximately $2.6 million. This inventory, which has an appraised fair market value in excess of $7.5 million, became available following Garuda's decision to discontinue operating DC-9 aircraft. The Company believes that its knowledge of the fleets of DC-9 and MD-80 aircraft currently in operation and its worldwide contacts in the commercial aviation industry will permit it to acquire other inventory pools and aircraft for parting out on favorable terms in the future. The second component of the Company's operating strategy is to achieve revenue and earnings growth by acquiring other companies engaged in the sale of aircraft parts as well as companies with product lines that would complement the Company's existing redistribution business. The Company competes in a fragmented market in which numerous small companies serve distinct market niches. The Company believes that small aircraft parts redistributors, many of which are family owned and capital constrained, are unable to provide the extensive inventory and quality control necessary to comply with applicable -71- regulatory and customer requirements and will provide acquisition opportunities for the Company. The Company believes that such acquisitions will permit it to expand its customer base by selling aircraft parts to airlines and others that are not now customers, to expand its product line with respect to aircraft in which the Company currently specializes, to strengthen its relationships with existing customers and to expand the types of aircraft in which the Company specializes. The Company, however, has not entered into an agreement to acquire any such company and there can be no assurance that the Company will be able to do so. Further, the Company will be unable to make acquisitions if the Restructuring is not consummated. HISTORY The Company became a supplier of aircraft parts in the early 1980s 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 have exceeded the manufacturer's original estimates. Beginning in 1992, the Company began purchasing and parting out Boeing 727 aircraft. The Company 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 sell parts to 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, 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 appropriate prices are increasingly difficult to locate because of, among other things, the continued trend of start-up, low-cost airlines to 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, such airlines need to maintain a minimum supply of spare parts or establish relationships with spare parts suppliers. Because of the Company'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 parts supplier for such airlines. In addition to its DC-9 spare parts, the Company maintains inventories of spare parts for the Boeing 727, 737 and 747 aircraft, the McDonnell Douglas DC-8 and 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 quality spare parts are the primary factors considered by customers when making a spare parts purchase decision. INDUSTRY OVERVIEW GENERAL. The Company believes that the world-wide aircraft fleet is both growing and getting older. According to the World Jet Airplane Inventory for calendar 1995, the combined aircraft fleets of aircraft operators throughout the world at December 31, 1995 consisted of approximately 12,452 jet aircraft, the average age of which was approximately 13.1 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 redistributors, such as the Company, 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-capitalized and financed companies with proven infrastructures to exploit niche markets in certain types of aircraft, such as the DC-9 and MD-80. -72- 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 which use DC-9s and MD-80s, 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 these high-traffic, short-haul routes. In addition to the growth in the number of older aircraft in service, cost and availability considerations are causing airlines to reduce the size of their spare parts inventories and, therefore, to utilize aircraft spare parts sold by redistributors to provide parts that are no longer in production. As airlines adopt just-in-time inventory procurement processes, inventory storage and handling devolves to suppliers such as the Company, thus increasing the percentage of parts sold by redistributors relative to those sold by parts manufacturers. Furthermore, in order to reduce purchasing costs, airlines have been reducing the number of "approved" suppliers. As a result of these supplier reductions, there has been and the Company believes there will continue to be a consolidation in the redistribution market even as the redistribution market is expected to grow. The Company believes that only those redistributors with extensive inventories, adequate capital and the ability to comply with applicable regulatory and customer requirements regarding part quality and traceability will be able to capitalize on these trends. The Company currently maintains an inventory of over 50,500 line items consisting of more than 565,000 parts, which the Company believes will enhance its ability to respond well to such market trends. 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 that was not the original purchaser of the aircraft. As OEMs cease manufacturing replacement parts, and as other sources of new parts become increasingly scarce, aircraft operators must locate alternative sources for quality aftermarket parts to maintain the reliable operation of their aircraft. Often, aircraft operators will opt for quality aftermarket parts even when new parts are still in production. Aftermarket aircraft parts must meet the same FAA standards as new parts but generally cost less than new parts, and are often more readily available. 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 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. -73- 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 often 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 repeatedly 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 rotable 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 aftermarket parts that have not been inspected and certified. PRODUCT LINES. Historically, the Company maintained a large inventory of aftermarket 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 class 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 declined. 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 and an additional hush kit was approved for other JT3 engines in 1987. The effect of these changes was to create new demand for DC-8 parts because a DC-8 equipped with a hush kit is among the lowest cost aircraft to operate per ton mile. 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 -74- increase the useful life of 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. Many of the parts on the MD-80, which is still in production, are interchangeable with similar parts for the DC-9. MARKETING. The Company has developed a sales and marketing infrastructure which includes well-trained and knowledgeable sales personnel, computerized inventory management, listing of parts in electronic industry data bank catalogues and a home page on the Internet. Crucial to the successful marketing of the Company's inventory is the Company's ability to make timely delivery of spare parts in reliable condition. The Company believes aircraft operators are more sensitive to reliability and timeliness than price. 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 aftermarket aircraft parts. No pricing service or catalogue exists for aftermarket components. Aftermarket aircraft parts prices are determined by referencing new parts catalogues with consideration given to existing supply and demand conditions. Often, aircraft operators will opt for quality aftermarket parts even when new parts are still in production. Aftermarket aircraft parts that meet the same FAA standards as new parts cost less than the same new parts and are often more readily available. In addition to directly marketing its inventory, the Company 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 customer base includes major passenger and cargo operators, smaller aircraft operators, overhaul facilities, FAA-certified repair facilities and other redistributors who may in turn resell to end users. Certain aircraft operators often buy through competitors instead of directly through the Company because of the operator's existing relationship with the competitor or the competitor's ability to overhaul the part sought. 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. 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 and the nine months ended February 29, 1996, compared with 9%, 18% and 25% of total revenue in fiscal 1994, 1993 and 1992, respectively. During fiscal 1995, the Company sought to reduce its vulnerability to a decrease in sales to any single customer by focusing its marketing on the identification and solicitation of new customers. The Company obtained approximately 240 new parts customers during fiscal 1995. Also in fiscal 1995, the Company instituted new compensation policies for its parts sales force. Pursuant to the new policies, all salesman are paid strictly on commission, sales to new customers are encouraged and commissions are not paid until accounts are collected. In addition, the Company has continued to decrease its exposure to more volatile international markets. Its domestic parts sales as a percentage of total sales has increased in each of the last four fiscal years, to approximately 79% for the nine months ended February 29, 1996 from 72% in fiscal 1995, 57% in fiscal 1994, and 39% in fiscal 1993. -75- During fiscal 1996, the Company's parts sales to ValuJet represented approximately 21% of the Company's total revenues. On June 17, 1996, ValuJet entered into a consent decree with the FAA, pursuant to which ValuJet agreed to ground all its aircraft until it demonstrates compliance with specified safety and maintenance procedures. 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, 1996 and 1995:
Customer Net Revenues (000's) Percentage of Total Net Revenues - -------- -------------------- -------------------------------- 1996: - ----- ValuJet Airlines, Inc. $4,771 20.6% 1995: - ----- Aeroservices Carabobo C.A. $2,716 10.9 Ajax Leasing Ltd. 5,625 22.5
Prior to fiscal 1993, no customer accounted for more than 10% of the Company's net revenues, other than Transafrik. 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 four aircraft. As of May 31, 1996, one of the aircraft was subject to a lease. 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 the Company within 14 days. A "core" unit is the same part which is being delivered to the customer by the Company, but in need of overhaul. The Company 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. 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 1996, brokered transactions accounted for approximately 13% of total revenues, as compared to approximately 19% of total revenues during fiscal 1995. GOVERNMENT REGULATION The aviation industry is highly regulated in the United States by the FAA and in other countries by similar agencies. While the Company's business is not regulated, the aircraft spare parts which it sells to its customers must be accompanied by documentation that enables the customer to comply with applicable regulatory requirements. There can be no assurance that new and more stringent government regulations will not be adopted in the future or that any such new regulations, if enacted, would not have an adverse impact on the Company. PRODUCT LIABILITY The Company's business exposes it to possible claims for personal injury or death which may result from the failure of an aircraft spare part sold by it. In this regard, the Company maintains liability insurance in the amount of $10 million. While -76- the Company maintains what it believes to be adequate liability insurance to protect it from such claims, and while no lawsuit has ever been filed against the Company based upon a products liability theory, no assurance can be given that claims will not arise in the future or that such insurance coverage will be adequate. Additionally, there can be no assurance that insurance coverages can be maintained in the future at an acceptable cost. Any such liability not covered by insurance could have a material adverse effect on the financial condition of the Company. 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 Company and Banner Aerospace. The companies are larger than the Company and have greater financial resources. EMPLOYEES As of June 30, 1996, the Company had approximately 25 employees. Of these, two are executive officers, six are sales personnel, seven 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. LEGAL PROCEEDINGS The Company is not now a party to any litigation or other legal proceeding. The Company may become a defendant in legal proceedings in the ordinary course of business. -77- MANAGEMENT The following table sets forth the names, ages and positions of the executive officers and directors of the Company as of the date of the Proxy Statement/Prospectus. 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) 40 Chairman of the Board, 1992 President and Chief Executive Officer George Murnane III(2) 38 Executive Vice President N/A and Chief Financial Officer Kyle R. Kirkland(3)(4) 34 Director 1992 E. James Mueller(1)(3)(4) 50 Director 1991 - ------------------------------ (1) Member of Executive Committee (2) Mr. Murnane is a nominee to the Board of Directors (3) Member of Audit Committee (4) 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. GEORGE MURNANE III has been Executive Vice President and Chief Financial Officer of the Company since June 1996. From March 1996 through June 1996, Mr. Murnane served as a consultant for the aviation industry. From October 1995 through February 1996 he served as Executive Vice President and Chief Operating Officer of Atlas Air, Inc., an air cargo company. From 1986 to 1995 he was affiliated with the New York investment banking firm of Merrill Lynch & Co., most recently as Director in the firm's Transportation Group. 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. ("D/R") from June 1991 until February 1994. D/R 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 1998 through March 1990, respectively. Mr. Kirkland is also a director of Steinway Musical Instruments, Inc. 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. From time to time, J.M. Associates, Inc. provides the Company with consulting services. See "Certain Relationships and Related Transactions." -78- COMPOSITION OF THE BOARD Pursuant to the Board Amendment, (i) the number of directors of the Company shall be fixed at seven members; and (ii) the number of directors constituting the Board shall not be changed without the affirmative vote of at least 75% of the issued and outstanding shares of Common Stock. 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 fiscal 1992. 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. The Board of Directors also created an Executive Committee after the end of fiscal 1992. The Company does not maintain a standing nominating committee or other committee performing similar functions. EXECUTIVE COMPENSATION The following sets forth certain information regarding the aggregate cash compensation paid to or earned by the Company's Chief Executive Officer during fiscal 1994, 1995 and 1996. Mr. Murnane became Chief Financial Officer of the Company on June 17, 1996.
LONG TERM ANNUAL COMPENSATION COMPENSATION AWARDS Name and -------------------- ----------------------------- All Other Principal Position Year Salary($) Bonus($)(1) Options/SARs(#) Compensations($) - ------------------ ---- --------- ----------- --------------- ---------------- Alexius A. Dyer III 1996 $135,000 80,000 -- -- President and Chief 1995 133,108 -- 107,000 -- Executive Officer 1994 108,865 20,000 -- --
- ---------------------------------------------- (1) All officers are eligible to participate in the Company's bonus plan. Awards are based upon certain performances criteria relating to the Company's net sales. -79- AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUE Shown below is information with respect to all unexercised options to purchase the Company's Common Stock granted to the Named Officers through the end of fiscal 1995 under the Company's option plans. No options were exercised during fiscal year 1996.
Value of Unexercised Shares Number of Unexercised In-the-Money Options Acquired Value Options at FY-End at FY-End($) Name by Exercise Realized($) Exercisable/Unexercisable Exercisable/Unexercisable(1) - ---- ----------- ----------- ------------------------- ---------------------------- Alexius A. Dyer III(2) 0 0 173,667/33,333(3) $ --
- --------------------------- (1) Represents the market value of the underlying Common Stock at fiscal year end minus the exercise price. With respect to all such options, the exercise price exceeded the market value of the underlying Common Stock at fiscal year end. (2) All options granted under the prior stock option plan will be canceled in connection with the Restructuring. (3) Includes 66,667 shares of Common Sock 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 shares. 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 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 fiscal 1996 pursuant to a Director's Compensation Plan, which was adopted during fiscal 1995. During fiscal 1994, 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 expense incurred in connection with the attendance of Board meetings. -80- THE STOCK OPTION PLAN The following information regarding the Stock Option Plan is being provided to the stockholders of the Company in connection with the solicitation of proxies for approval of the Stock Option Plan. The following description of the Stock Option Plan is a summary only and does not purport to be complete. This summary is qualified in its entirety by reference to the Stock Option Plan, which is attached hereto as Appendix B. Stockholders are urged to read the Stock Option Plan. PLAN DESCRIPTION The Stock Option Plan is intended to provide a means to attract, retain and motivate selected employees and non-employee directors of the Company. The Stock Option Plan provides for the grant to eligible employees of incentive stock options, non-qualified stock options, share appreciation rights, restricted shares, restricted share units, performance shares and performance units, dividend equivalents and other share-based awards (collectively "awards"). All employees (approximately 25 persons) and directors (seven persons) are eligible to participate in the Stock Option Plan. The portion of the Stock Option Plan applicable to employees will be administered by the Compensation Committee, which will consist of disinterested persons within the meaning of Rule 16b-3 under the Exchange Act. The Compensation Committee will have the full and final authority to select employees to whom awards may be granted, to determine the type of awards to be granted to such employees and to make all administrative determinations required by the Stock Option Plan. The Compensation Committee also will have authority to waive conditions relating to an award or accelerate vesting of awards. The Stock Option Plan provides for certain grants of nonqualified stock options to non-employee directors, and, in the case of such grants, is intended to operate automatically and not require administration, so as to qualify as a formula plan meeting the requirements of Rule 16b-3 under the Exchange Act. An aggregate of 598,782 shares of Common Stock have been reserved for issuance under the Stock Option Plan, subject to anti-dilution adjustments in the event of certain changes in the Company's capital structure. In connection with the Restructuring, after the adoption of the Stock Option Plan, the Company intends to grant shares of restricted stock and/or options to purchase the following numbers of shares of Common Stock to the following persons or groups:
Number of Stock Options and/or Name Shares of Restricted Stock to be Granted - ---- ---------------------------------------- Alexius A. Dyer III 224,543 All executive officers as a group (2 persons) 329,330 All other employees as a group 119,756
Forty percent of such options will vest immediately with 15% vesting annually over the next four years. The Company also intends to grant options representing up to 2.5% of the outstanding Common Stock to non-employee directors. The number of options to be granted to non-employee directors will be determined by the Company prior to the consummation of the Restructuring. The Company intends to reserve for future issuance to non-employee directors any shares not granted as restricted stock and not covered by options issued upon consummation of the Restructuring. STOCK OPTIONS. The Stock Option Plan authorizes the granting of both incentive stock options and non-qualified stock options. At the discretion of the Compensation Committee, awards of options to employees under the Stock Option Plan may be granted in tandem with other types of awards. Incentive stock options granted to employees under the Stock Option Plan, and any accompanying share appreciation rights, must generally expire within 10 years after the date of grant. The exercise prices of incentive stock options must be equal to at least 100% of the fair market value of the Common Stock on the date of grant. The exercise prices of non-qualified stock options may be more or less than the fair market value of the Common Stock on the date of grant. Awards under the Stock Option Plan to employees, except for vested shares, are not transferable by the holder other than by will or applicable laws of descent or distribution, except pursuant to a designation filed by an employee with the Company as to who shall receive the benefits specified under the Stock Option Plan upon the death of such employee. -81- RESTRICTED STOCK. The Stock Option Plan authorizes the Compensation Committee to grant shares of restricted stock to employees, subject to the terms and conditions imposed by the Compensation Committee. These terms may include a restriction period during which the shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered and during which such shares may be subject to forfeiture if one or more conditions established by the Compensation Committee are not satisfied. Except for such restrictions on transfer and such other restrictions as the Compensation Committee may impose, the recipient of restricted stock will have all the rights of a holder of Common Stock as to such restricted stock including the right to vote the shares and the right to receive dividends. Except as provided by the Compensation Committee at the time of grant or otherwise, upon a termination of employment for any reason during the restriction period, all shares still subject to restriction will be forfeited by the employee. The Stock Option Plan also authorizes the Compensation Committee to grant restricted share units to an employee, under which shares of Common Stock or cash will be delivered to the employee after the expiration of the restriction period. SHARE APPRECIATION RIGHTS. The Stock Option Plan authorizes the Compensation Committee to grant share appreciation rights to employees, subject to the terms and conditions imposed by the Compensation Committee. Share appreciation rights give an employee the right to receive the excess of the fair market value of shares of Common Stock at a particular time over the exercise price of the share appreciation rights, as set by the Compensation Committee. Terms within the discretion of the Compensation Committee may include the time of exercise, the form of consideration payable at exercise, and the method by which shares of Common Stock will be delivered or deemed to be delivered to an employee. PERFORMANCE SHARES AND PERFORMANCE UNITS. The Stock Option Plan also authorizes the Compensation Committee to grant performance shares or performance units to employees, subject to the terms and conditions imposed by the Compensation Committee. These awards provide shares of Common Stock or cash to an employee upon the satisfaction of certain performance objectives, as determined by the Compensation Committee. Awards may be fixed or may vary in accordance with the level of such performance. The Compensation Committee may revise the performance objectives to reflect the occurrence of significant events which it expects to have a substantial effect on the performance objectives. Except as provided by the Compensation Committee at the time of grant or otherwise, upon a termination of employment during the performance period, all shares and units relating to such performance period will be forfeited by the employee. DIVIDEND EQUIVALENTS. The Stock Option Plan also authorizes the Compensation Committee to grant dividend equivalents to employees. These awards relate to other awards of shares, rights or units and generally give an employee the right to receive cash or other property equal to any dividends paid on the shares of Common Stock underlying such other awards. Such dividend equivalents may either be paid when accrued or deemed to have been reinvested in additional shares of Common Stock. Dividend equivalents will be subject to all conditions and restrictions of the underlying awards to which they relate. In addition to the foregoing types of awards, the Stock Option Plan also authorizes the Compensation Committee, subject to limitations under applicable law, to grant employees any other awards based on shares of Common Stock, including the award of unrestricted shares purely as a bonus and not subject to any conditions. Cash awards, as an element of or supplement to any other award, are also authorized under the Stock Option Plan. In all cases, the Compensation Committee shall determine the terms and conditions of such awards. The Stock Option Plan may be amended, altered, suspended, discontinued or terminated from time to time by the Board of Directors, except that stockholder approval is required, in accordance with Section 422 of the Code, for any amendment (a) to increase the number of shares of Common Stock reserved for issuance under the Stock Option Plan or (b) to change the class of employees eligible to participate in the Stock Option Plan; provided, however, that no such amendment may impair the rights of any participant without his consent. The Stock Option Plan further provides that stockholder approval is required, in accordance with Rule 16b-3 under the Exchange Act, for any amendment (a) to increase materially the benefits accruing to an individual under the Stock Option Plan, (b) to increase materially the number of securities which may be issued under the Stock Option Plan to insiders or (c) otherwise to modify materially the requirements as to eligibility for participation in the Stock Option Plan. No provision of the Stock Option Plan may be amended more than once every six months if such amendment would result in the loss of an exemption under Rule 16b-3 under the Exchange Act, and provisions which apply specifically to non-qualified stock options for non-employee directors may not be amended more than once every six months other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. - 82 - The Stock Option Plan provides that, if the Compensation Committee determines that a stock dividend, recapitalization, stock split, reorganization, merger, consolidation, spin-off, combination, or similar corporate transaction affects the Common Stock such that an adjustment is appropriate to prevent dilution or enlargement of rights of employees participating in the Stock Option Plan, the Compensation Committee has discretion to adjust the number and kind of shares to be issued under the Stock Option Plan and the terms of any award. The Stock Option Plan provides that such adjustments with respect to non-employee director's options shall be made automatically. In addition, the Compensation Committee is authorized to make adjustments in the terms of awards in recognition of certain unusual or non-recurring events affecting the Company and its financial statements. FEDERAL INCOME TAX CONSEQUENCES OF OPTION GRANTS The following discussion outlines generally the federal income tax consequences of option awards under the Stock Option Plan. Individual circumstances may vary these results. The federal income tax law and regulations are frequently amended, and each participant should rely on his own tax counsel for advice regarding federal income tax treatment under the Stock Option Plan. NON-QUALIFIED STOCK OPTIONS. The recipient of a non-qualified stock option under the Stock Option Plan is not subject to any federal income tax upon the grant of such option nor does the grant of the option result in an income tax deduction for the Company. As a result of the exercise of an option, the recipient will recognize ordinary income in an amount equal to the excess, if any, of the fair market value of the shares transferred to the recipient upon exercise over the exercise price. Such fair market value generally will be determined on the date the shares of Common Stock are transferred pursuant to the exercise. However, if the recipient is subject to Section 16(b) of the Exchange Act, the date on which the fair market value of the shares transferred will be determined is delayed until the earlier of the last day of the six-month period beginning on the date the "property" is "purchased" or the first day on which a sale of the "property purchased" will not subject the recipient to suit under Section 16(b) of the Exchange Act. Alternatively, if the recipient is subject to Section 16(b) of the Exchange Act and makes a timely election under Section 83(b) of the Code, such fair market value will be determined on the date the shares are transferred pursuant to the exercise without regard to the effect of Section 16(b) of the Exchange Act. The recipient will recognize ordinary income in the year in which the fair market value of the shares transferred is determined. The Company generally will be entitled to a federal income tax deduction equal to the amount of ordinary income recognized by the recipient when such ordinary income is recognized by the recipient, provided the Company satisfies applicable federal income tax reporting requirements. The Company's deduction, however, is subject to a $1,000,000 limitation on the deduction of certain employee renumeration under Section 162(m) of the Code, unless an exception for performance-based compensation under such section applies. Depending on the period the shares of Common Stock are held after exercise, the sale or other taxable disposition of shares acquired through the exercise of a non-qualified stock option generally will result in a short- or a long-term capital gain or loss equal to the difference between the amount realized on such disposition and the fair market value of such shares when the non-qualified stock option was exercised. Special rules apply to a recipient who exercises a non-qualified stock option by paying the exercise price, in whole or in part, by the transfer of shares of Common Stock to the Company. INCENTIVE STOCK OPTIONS. An employee is not subject to any federal income tax upon the grant of an incentive stock option pursuant to the Stock Option Plan, nor does the grant of an incentive stock option result in an income tax deduction for the Company. Further, an employee will not recognize income for federal income tax purposes and the Company normally will not be entitled to any federal income tax deduction as a result of the exercise of an incentive stock option and the related transfer of shares of Common Stock to the employee. However, the excess of the fair market value of the shares transferred upon the exercise of the incentive stock option over the exercise price for such shares generally will constitute an item of alternative minimum tax adjustment to the employee for the year in which the option is exercised. Thus, certain employees may increase their federal income tax liability as a result of the exercise of an incentive stock option under the alternative minimum tax rules of the Code. If the shares of Common Stock transferred pursuant to the exercise of an incentive stock option are disposed of within two years from the date the option is granted or within one year from the date the option is exercised, the employee generally will recognize ordinary income equal to the lesser of (1) the gain recognized (i.e., the excess of the amount realized on the disposition over the exercise price) or (2) the excess of the fair market value of the shares transferred upon exercise over the -83- exercise price for such shares. If the employee is subject to Section 16(b) of the Exchange Act, special rules may apply to determine the amount of ordinary income recognized upon the disposition. The balance, if any, of the employee's gain over the amount treated as ordinary income on disposition generally will be treated as long- or short-term capital gain depending upon whether the holding period applicable to long-term capital assets is satisfied. The Company generally would be entitled to a federal income tax deduction equal to any ordinary income recognized by the employee, provided the Company satisfies applicable federal income tax reporting requirements and subject to the limitation on the deduction of certain employee renumeration as mandated by Section 162(m) of the Code, absent an exception for the performance-based compensation under such section. If the shares of Common Stock transferred upon the exercise of an incentive stock option are disposed of after the holding periods have been satisfied, such disposition generally will result in a long-term capital gain or loss treatment with respect to the difference between the amount realized on the disposition and the exercise price. The Company will not be entitled to a federal income tax deduction as a result of a disposition of such shares after these holding periods have been satisfied. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors of the Company has unanimously approved the Stock Option Plan and has determined that the Stock Option Plan is in the best interest of the Company and its stockholders. Accordingly, the Board of Directors unanimously recommends that the stockholders of the Company vote to approve the Stock Option Plan. EMPLOYMENT AGREEMENT As of December 1, 1995, the Company entered into a two-year employment agreement with Mr. Alexius A. Dyer III, the President, Chief Executive Officer and Chairman of the Company. The employment agreement provides for payment of a base salary of $135,000 per annum for each year during the stated term; provided that the base salary shall automatically increase to $150,000 per annum effective upon consummation of the Restructuring. Further, pursuant to the employment agreement, the Company paid Mr. Dyer a bonus of $80,000 upon his execution of the employment agreement as an inducement for entering into the agreement. The employment agreement provides that Mr. Dyer is entitled to an annual bonus during the stated term in an amount equal to 5% of the Company's net income before extraordinary and non-recurring items and income taxes, subject to two adjustments. First, in computing net income, the Company is required to exclude any item of revenue (including COD income) or expense attributable to the Restructuring or to any litigation commenced by or against the Company. Second, items of revenue and expense attributable to the sale of aircraft are not considered extraordinary or non-recurring items. Pursuant to the employment agreement, if Mr. Dyer is terminated without cause prior to the end of the term of the employment agreement, the Company is required to pay to Mr. Dyer the base salary for the remaining term of the agreement plus an amount equal to a pro rata portion (based on months employed during the current fiscal year) of the bonus paid to him during the previous fiscal year. If Mr. Dyer terminates the employment agreement following the occurrence of a "Change of Control" (as defined) or the consummation of the Restructuring, the Company is obligated to pay to him an amount equal to the average annual compensation paid to him during the two most recent fiscal years of the Company. CERTAIN TRANSACTIONS The Company has engaged Kirkland Messina, Inc., an investment banking firm, to act as the exclusive financial advisor and agent to the Company in connection with the origination of the Credit Agreement. Mr. Kyle R. Kirkland, a director of the Company, is an executive officer of Kirkland Messina, Inc. Kirkland Messina, Inc. will receive customary compensation for its services pursuant to such engagement. -84- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding (i) 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 and (ii) 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 as of May 31, 1996:
SHARES PERCENTAGE OF BENEFICIALLY OWNED OUTSTANDING SHARES Alexius A. Dyer, III (1) 174,667(2) 4.00 E. James Mueller (1) 15,000(3) * Kyle R. Kirkland (1) 107,237(4) 2.65 All Directors and Executive Officers as a Group (3 persons) 296,904 6.87 Lynda Wellman (1)(5) 1,999,700 49.48 Richard R. Wellman (1)(5) 1,999,700 49.48 Sun Life Insurance Company of America(6) 514,865 12.74 11601 Wilshire Boulevard, 12th Floor Los Angeles, California 90025-1748
__________________ * Less than one percent of the shares of Common Stock outstanding. (1) The address for Messrs. Dyer, Mueller and Kirkland is c/o International Airline Support Group, Inc., 8095 N.W. 64th Street, Miami, Florida 33166. The address for Mr. and Mrs. Wellman is 7540 Lochness Drive, Miami Lakes, Florida 33014. (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 66,667 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. The options will be canceled as part of the Restructuring and new options will be granted as part of the Restructuring. See "Management -- The Stock Option Plan." (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. These options will be cancelled as part of the Restructuring and new options will be granted as part of the Restructuring. See "Management -- The Stock Option Plan." (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. These options will be canceled pursuant to the Restructuring and new options will be granted as part of the Restructuring. See "Management -- The Stock Option Plan." -85- (5) 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. The Wellmans affirmed the proxy in October 1995. (6) 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. These warrants will expire on the date of the Closing pursuant to the Old Warrant Amendment. DESCRIPTION OF THE AMENDMENTS This Proxy Statement/Prospectus constitutes a consent solicitation for consents to the Amendments to the Purchase Agreements. The Amendments will delete certain financial covenants contained in the Purchase Agreements. The Amendments will delete the covenants requiring the Company to (i) maintain a specified interest coverage ratio, (ii) maintain a specified consolidated net worth, (iii) provide demand registration rights with respect to the Common Stock issuable upon conversion and the covenant that limits the ability of the Company to engage in certain lines of business. For a description of such covenants, see "Description of the Convertible Debentures--Certain Covenants--Interest Coverage Ratio; -- Maintenance of Consolidated Net Worth; --Demand Registration Rights; and --Limitation on Activities." DESCRIPTION OF THE CREDIT AGREEMENT The Company has received a commitment from a major money-center bank (the "Bank") for a secured credit facility (the "Credit Agreement") consisting of (i) a revolving line of credit in amount equal to the lesser of (a) $11.0 million and (b) an amount based on the sum of eligible receivables plus eligible inventory (the "Revolving Facility") and (ii) a term loan in an amount equal to the lesser of (a) $3.0 million and (b) an amount based on a percentage of the liquidation value of aircraft approved by the Bank owned by the Company (the "Term Loan"). Amounts outstanding under either the Term Loan or the Revolving Facility bear interest at a rate equal to the greater at (i) the Bank's prime rate or (ii) the federal funds rate, plus 0.5%, plus 2.0%. The Credit Agreement has a maturity of five years. The Term Loan provides for monthly principal payments of $33,333 in the first year; $41,666 in the second year; $50,000 in the third year; $58,333 in the fourth year; and $66,666 in the fifth year; provided that upon the sale of aircraft, if no aircraft is substituted, the Company must repay a pro rata portion of the Term Loan. The Credit Agreement will require the Company to maintain a minimum tangible net worth, minimum working capital and minimum fixed charge coverages, as well as contain prohibitions on incurring additional indebtedness, prohibitions on asset rules, limitations on dividends and other forms of cash distributions and prohibitions on mergers, consolidations or acquisitions, in each case without the consent of the Bank. The events of default under the Credit Agreement will include nonpayment, misrepresentations, breach of covenants, bankruptcy, defaults in the Company's obligations under the Employee Retirement Income Security Act of 1974, as amended, bankruptcy and cross- defaults to other agreements and judgments against the Company. The execution of a definitive Credit Agreement is subject to numerous conditions precedent customary for transactions of this type, most notably consummation of the Restructuring and negotiation of definitive documentation. There can be no assurances that the Company will be able to negotiate and execute the Credit Agreement or that it will be able to satisfy all the conditions precedent. -86- DESCRIPTION OF THE CONVERTIBLE DEBENTURES The Convertible Debentures were issued by the Company pursuant to the several Security Purchase Agreement each dated as of September 8, 1993 (each, a "Purchase Agreement" and collectively, the "Purchase Agreements"). The following statements are subject to the detailed provisions of the Purchase Agreements and are qualified in their entirety by reference to the Purchase Agreements, a form of which is filed as an exhibit to the Registration Statement of which this Proxy Statement/Prospectus is a part and is also available for inspection at the offices of the Company. GENERAL The Convertible Debentures represent unsecured general obligations of the Company subordinate in right of payment to certain other obligations of the Company as described under "--Subordination of Convertible Debentures," and convertible into Common Stock as described under "--Conversion." At May 31, 1996, $10,000,000 principal amount of Convertible Debentures were outstanding. The Convertible Debentures mature on August 31, 2003, unless earlier redeemed at the option of the Company or at the option of a Holder upon a Change of Control (as defined below). See "--Redemption" and "Purchase of Convertible Debentures Upon a Change of Control." The Convertible Debentures are not subject to a sinking fund. The Convertible Debentures are issued in fully registered form only in denominations of $1,000 or any integral multiple thereof. No established trading market exists for the Convertible Debentures. See "--Market Information." Interest at the annual rate of 8.0% is payable quarterly in arrears on each February 28, May 31, August 31 and November 30. The Company has not paid interest since February 28, 1995. As of May 31, 1996, the amount of interest arrearages on the Convertible Debentures was approximately $1 million. REDEMPTION MANDATORY. The Company is required to redeem on August 31, 2003, the aggregate amount of outstanding Convertible Debentures at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. OPTIONAL. The Convertible Debentures may be redeemed upon 30 days notice, in whole or in part, on any interest payment date after August 31, 1996 (three year non-call) at the following prices (expressed as a percentage of par) if redeemed during the twelve month period beginning August 31 of the year indicated below, plus accrued interest: Year Redemption Price ---- ---------------- 1996 106.00% 1997 105.15% 1998 104.30% 1999 103.45% 2000 102.60% 2001 101.75% 2002 100.85% 2003 and thereafter 100.00% The Company is required to give written notice of redemption of the Convertible Debentures pursuant to the Purchase Agreements to each Holder of any outstanding Convertible Debentures not less than 30 nor more than 60 days prior to the date fixed for such redemption in such notice, which notice shall specify the principal amount to be redeemed, together with the premium to be paid thereon and the date fixed for such redemption. Upon the giving of notice of any redemption as provided in related Purchase Agreement, the Company will redeem on the date therein fixed for redemption the applicable redemption price of the Convertible Debentures so to be redeemed as specified in such notice, together with interest accrued thereon to such date fixed for redemption. -87- CONVERSION The Convertible Debentures may be converted at their principal amount or any portion thereof which is an integral multiple of $1,000 at any time prior to the close of business on August 31, 2003 subject to prior redemption or purchase at the option of the Holder of Convertible Debentures into shares of the Company's Common Stock par value $.001 per share (calculated as to each conversion to the nearest 1/100th of a share), at the conversion price of $4.00 per share (the "Conversion Price"), subject to adjustment as described below. The conversion price per share for any Convertible Debenture not tendered pursuant to the Exchange Offer will be $____, subject to adjustment as described below. The Company will not be required to issue fractional shares of Common Stock but will pay a cash adjustment in lieu thereof. In the case of any Convertible Debenture or portion thereof called for redemption, conversion rights will expire at the close of business on the business day immediately preceding the date fixed for redemption. A Convertible Debenture for which a Holder of Convertible Debentures has delivered notice exercising the option of such Holder of Convertible Debentures to require the Company to purchase such Convertible Debenture may be converted only if such notice is withdrawn by a written notice of withdrawal delivered by the Holder of Convertible Debentures prior to the close of business on the purchase date in accordance with the Securities Purchase Agreement. Convertible Debentures surrendered for conversion during the period from the close of business on any record date next preceding any date specified in the related Purchase Agreement as the fixed date on which an installment of interest thereon is due and payable (the "Interest Payment Date") to the opening of business on such Interest Payment Date (except Convertible Debentures called for redemption) must be accompanied by payment of an amount equal to the interest thereon which the Holder of Convertible Debentures is to receive. In the case of any Convertible Debenture which has been converted after any record date but on or before the next Interest Payment Date (except Convertible Debentures called for redemption within such period), the interest payable on such Interest Payment Date shall be paid notwithstanding such conversion, and such interest shall be paid to the Holder of such Convertible Debenture on such record date. Except as described above, no interest on converted Convertible Debentures will be payable by the Company on any Interest Payment Date subsequent to the date of conversion. No other payment or adjustment for interest or dividends is to be made upon conversion. The Conversion Price is subject to adjustment as set forth in the Securities Purchase Agreement in certain events, including (i) the subdivision, combination or reclassification of the outstanding Common Stock of the Company; (ii) the issuance of Common Stock as a dividend or distribution on Common Stock; (iii) the issuance of rights, warrants or options (expiring within 45 days after the record date in respect of such rights, warrants or options) to an affiliate and/or all holders of Common Stock entitling them to acquire shares of Common Stock (or securities convertible into or exchangeable for Common Stock) at less than the current market price (as defined in the Purchase Agreements) of the Common Stock; (iv) the distribution to all holders of Common Stock or shares of any class of capital stock other than Common Stock, of cash or assets (including securities, but excluding any regular or quarterly cash dividends or distributions paid out of consolidated current or retained earnings), any rights, options warrants to purchase securities of the Company, and the issuance of any class of capital stock as a dividend or distribution on Common Stock; or (v) certain mergers, consolidations or sales of assets. There will be no upward adjustment in the Conversion Price except in the event of a reverse stock split. The Company is not required to make any adjustment in the Conversion Price of less than $0.05, but the same will be carried forward and taken into account in the computation of any subsequent adjustment. Conversion Price adjustments or omissions in making such adjustments may, under certain circumstances, be deemed to be distributions that could be taxable as dividends under the Internal Revenue Code to Holders of Convertible Debentures or to holders of Common Stock. In case of any reclassification (excluding those referred to above), merger, consolidation or sale of substantially all the assets of the Company as an entirety, the Holder of each outstanding Convertible Debenture shall have the right to convert such Convertible Debenture only into the kind and amount of securities, cash and other property receivable by a holder of the number of shares of Common Stock into which such Convertible Debentures might have been converted immediately prior to the effective date of the transaction. The Company shall at all times reserve and keep available, free from preemptive rights, out of authorized but unissued Common Stock, the full number of shares of Common Stock then issuable upon the conversion of all outstanding Convertible -88- Debentures. All outstanding shares of Common Stock are, and the shares of Common Stock issuable upon conversion of the Convertible Debentures will be, upon issuance, validly issued, fully paid and nonassessable. SUBORDINATION OF CONVERTIBLE DEBENTURES The payment of the principal of, premium, if any, interest on and all other amounts with respect to the Convertible Debentures is subordinated in right of payment, to the extent set forth in the Purchase Agreements, to the prior payment in full of all Senior Indebtedness (as defined below) of the Company. By reason of such subordination of the Company, whether in bankruptcy, insolvency, reorganization, marshaling of assets and liabilities of the Company or similar events, certain general creditors of Company may recover more, ratably, than the Holders of the Convertible Debentures. There are no restrictions in the Purchase Agreements on the amount of Senior Indebtedness or any other indebtedness that may be incurred by the Company or any of its subsidiaries, and the Convertible Debentures will be subordinate to substantially all future indebtedness of the Company and its subsidiaries. No payment on account of principal of, premium, if any, interest on, or any other amounts with respect to the Convertible Debentures may be made unless all amounts then due for principal of, premium, if any, and sinking fund requirements and interest on, and any other amounts with respect to any Senior Indebtedness have been paid; and no payment on account of principal of, premium, if any, interest on, or any other amounts with respect to the Convertible Debentures may be made unless there shall not have existed at the time of payment or immediately after giving effect thereto any default in the payment of any amounts with respect to Senior Indebtedness or any event of default with respect to any Senior Indebtedness permitting acceleration of maturity of such Senior Indebtedness. Upon any distribution of the assets of the Company or upon any dissolution, winding up, liquidation, or reorganization of the Company, the holders of Senior Indebtedness will be entitled to receive payment in full before the Holders of the Convertible Debentures are entitled to receive any payment. Senior Indebtedness is defined in the Purchase Agreement as the principal of or premium, if any, unpaid interest on and any other amounts with respect to (i) indebtedness for borrowed money for the payment of which the Company is responsible or liable or the payment of which the Company has guaranteed, whether such indebtedness is outstanding as of the date of the Securities Purchase Agreement or thereafter created, incurred, assumed or guaranteed by the Company, unless in the instrument creating or evidencing the same or pursuant to which the same is outstanding it is specifically provided that such indebtedness is not superior in right of payment to the Convertible Debentures; (ii) capital lease obligations determined in accordance with generally accepted accounting principals; (iii) any reimbursement and cash collateralization obligations under letters of credit; (iv) obligations under bankers' acceptances and interest rate hedge or currency hedge agreements; (v) all interest on such amounts accruing after the commencement of any bankruptcy or similar proceeding of which the Company or any of its subsidiaries is the subject, whether or not a claim for post-petition interest is allowed as a claim in any such proceeding, and including all fees, expenses and other amounts payable in connection therewith; and (vi) renewals, extensions, modifications and refundings of any such indebtedness or obligations. The Convertible Debentures will be effectively subordinated to all indebtedness and other liabilities and commitments (including trade payables and lease obligations) of the Company's subsidiaries. Any right of the Company to receive assets of any such subsidiary upon the latter's liquidation or reorganization (and the consequent right of the Holders of the Convertible Debentures to participate in those assets) will be effectively subordinated to the claims of that subsidiary's creditors, except to the extent that the Company is itself recognized as a creditor of such subsidiary, in which case the claims of the Company would still be subordinated to any obligations secured by the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by the Company. At May 31, 1996, the aggregate amount of Senior Indebtedness of the Company and indebtedness of its consolidated subsidiaries was approximately $18.4 million. PURCHASE OF CONVERTIBLE DEBENTURES UPON A CHANGE OF CONTROL In the event of any Change in Control (as defined below) of the Company occurring prior to maturity, each Holder of Convertible Debentures will have the right, at the Holder's option, subject to the terms and conditions of the Purchase Agreements, to require the Company to purchase all or any part (provided that the remaining principal amount thereof is $1,000 or an integral multiple thereof), of the Holder's Convertible Debentures on the date that is no later than 30 business -89- days after the occurrence of such Change in Control (the "Change in Control Purchase Date") at a cash price equal to 100% of the principal amount thereof plus accrued interest to and including the Change in Control Purchase Date (the "Change in Control Purchase Price"). Within 15 business days after the Change in Control, the Company is obligated to mail to the registered agent for the Holders of the Convertible Debentures (the "Agent") and to all Holders of Convertible Debentures at their addresses shown in the register of the registrar (and to beneficial owners as required by applicable law) a notice regarding the Change in Control, which notice shall state, among other things: (i) the last date on which the purchase right may be exercised; (ii) the Change in Control Purchase Price; (iii) the Change in Control Purchase Date; (iv) the name and address of the Agent (if other than the Company) and of any other office or agency maintained for the purpose of surrender of the Convertible Debentures for purchase; and (v) the procedures that Holders of Convertible Debentures must follow to exercise these rights. The Company will cause a copy of such notice to be published in a daily newspaper of national circulation. To exercise this right, the Holder of Convertible Debentures must deliver written notice (a "Change in Control Purchase Notice") to the Agent or to any other office or agency maintained for such purpose, of the exercise of such right prior to the close of business on the Change in Control Purchase Date. The Change in Control Purchase Notice must state: (i) the certificate numbers on the Convertible Debentures to be delivered by the Holder of Convertible Debentures thereof for purchase by the Company; (ii) the portion of the principal amount of the Convertible Debentures to be purchased, which portion must be $1,000 or an integral multiple thereof; and (iii) that such Convertible Debentures are to be purchased by the Company on the Change in Control Purchase Date pursuant to the applicable provisions of the Convertible Debentures. Any Change in Control Purchase Notice may be withdrawn by the Holder of Convertible Debentures by a written notice of withdrawal delivered to the Agent or to any other office or agency maintained for such purpose on or prior to the close of business on the Change in Control Purchase Date. The notice of withdrawal shall state the principal amount and the certificate numbers of the Convertible Debentures as to which the withdrawal notice relates and the principal amount, if any, which remains subject to the original Change in Control Purchase Notice. Under the Securities Purchase Agreement, a "Change in Control" of the Company is deemed to have occurred at such time as (x) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which the Company's Voting Stock (as defined below) would be converted into cash, securities or other property, other than, in either case, a merger of the Company in which the holders of Voting Stock of the Company immediately prior to the merger have directly or indirectly, at least a majority of Voting Stock of the surviving corporation immediately after the merger or (y) any person, including its Affiliates, other than Lynda Wellman, Richard Wellman or the Company, its subsidiaries or their employee benefit plans, files a Schedule 13D or 14D-1 (or any successor schedule, form or report under the Exchange Act) disclosing that such person has become the beneficial owner of 50% or more of the voting power of the Company's Voting Stock. "Voting Stock" means, with respect to any person, capital stock of such person having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such person (irrespective of whether or not at the time capital stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). Notwithstanding the foregoing, a Change in Control as described above shall not be deemed to have occurred if (i) the Closing Price per share of the Common Stock for any five trading days within the period of ten consecutive trading days ending immediately before the Change in Control (in the case of a Change in Control described in clause (x) above) or, in the case of a Change in Control described in clause (y) above, within such period or within the period of ten consecutive trading days commencing on the date immediately after the later of the Change in Control or the public announcement of the Change in Control, is at least equal to 105% of the conversion price in effect on the date immediately preceding the date of such Change in Control or public announcement, as the case may be, (ii) the average Closing Price per share of the Common Stock for the ten consecutive trading days ending immediately before the Change in Control (in the case of a Change in Control described in clause (x) above) or, in case of a Change in Control described in clause (y) above, for such period or for the ten consecutive trading days commencing on the date immediately after the later of the Change in Control or the public announcement of the Change in Control, is greater than 100% of the conversion price in effect on the date immediately preceding the date of such Change in Control or public announcement, as the case may be, (iii) all of the consideration to the holders of Common Stock in the transaction giving rise to such Change in Control consists of cash, securities that are, -90- or immediately upon issuance will be, listed on the national securities exchange or quoted on The Nasdaq National Market System, or a combination of cash and such securities, and the aggregate fair market value of such consideration (which, in the case of such securities, shall be equal to the average of the daily closing prices of such securities during the ten consecutive trading days commencing with the sixth trading day following consummation of such transaction) allocable to each share of Common Stock is greater than 100% of the conversion price in effect on the date immediately preceding the closing date of such transaction or (iv) at least 90% of the consideration in any consolidation, merger, recapitalization or business combination, however effected, accounted for as a pooling of interests, consists of common stock which is (or will, upon consummation of such transaction or event, be) listed on a national securities exchange or approved for quotation on The Nasdaq National Market System. CERTAIN COVENANTS PAYMENT OF CONVERTIBLE DEBENTURES. The Company shall pay the principal of and interest on the Convertible Debentures on the dates and in a manner provided in the Convertible Debentures. Principal and interest shall be considered paid on the date due if the Paying Agent (other than the Company or a Subsidiary thereof) holds on the date money designated for and sufficient to pay all principal of and interest on the Convertible Debentures then due. To the extent lawful, the Company shall pay interest on (I) overdue principal, at 10.0% per annum, compounded quarterly and (ii) installments of overdue interest at 10.0% per annum. Interest is payable on overdue principal and interest regardless of the applicable grace period. DEMAND REGISTRATION RIGHTS. Holders of at least 51.0% principal amount of the Convertible Debentures acting jointly, and as one class, may demand that the Company have a Registration Statement under the Securities Act of 1933, as amended (the "1933 Act"), with respect to the Common Stock issuable upon conversion of the Convertible Debentures, filed within six months and declared effective within nine months following the date of such demand (the "Demand Date"), which Registration Statement would permit public trading of such Common Stock, and to keep such registration effective for three years thereafter. This covenant will be deleted pursuant to the Amendments. PIGGYBACK REGISTRATION RIGHTS. Whenever the Company proposes to register any of its securities under the 1933 Act and the registration form to be used may be used for the registration of Registerable Securities (a "Piggyback Registration"), the Company will give prompt notice to all holders of Registerable Securities of its intention to effect such registration and, subject to underwriter cutbacks, will include in such registration all Registerable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company's notice. For purposes of the Convertible Debentures, "Registerable Securities" means any shares of Common Stock into which the Convertible Debentures have been converted. FINANCIAL INFORMATION. The Company will deliver to the Holders of Convertible Debentures copies of the annual and quarterly reports and other information, documents, and other reports which the Company is required to file with the SEC pursuant to any provision of the Securities and Exchange Act of 1934, and of any other reports or information which the Company delivers or makes available to any of its security holders, within five (5) days of filing such reports with the SEC or of delivery to the Company's security holders, as the case may be. So long as any of the Convertible Debentures remain outstanding, the Company shall cause quarterly reports for the first three quarters of each fiscal year and annual reports which it would be required to file under any provision of the Exchange Act if it had a class of securities listed on a national securities exchange, together with copies of a consolidating balance sheet of the Company and its subsidiaries as of the end of each such accounting period and of the related consolidating statements of income and cash flow for the portion of the year then ended, to be mailed to the Holders of Convertible Debentures at their address appearing in the register within five (5) days of when such report would have been required to be filed under Section 13 of the Exchange Act. -91- The Company shall also make such reports available promptly to prospective purchasers of the Convertible Debentures, beneficial Holders of the Convertible Debentures, securities analysts and broker-dealers upon their reasonable request. INSPECTION RIGHTS. Holders of at least $1 million in aggregate principal amount of the Convertible Debentures (at issuance), at such Holders' expense (unless a Default or an Event of Default has occurred and is continuing, in which case at the Company's expense), shall have the right to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the books of account and records of the Company and its Subsidiaries, to be provided with copies and extracts therefrom, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with, and to be advised as to the same by, its and their officers and employees and their independent public accountants (and the Company authorizes such independent public accountants to discuss the Company's and its Subsidiaries financial matters with such Holder of Convertible Debentures or its representatives, regardless of whether any representative of the Company or any of its Subsidiaries is present, but provided that an officer of the Company will be afforded a reasonable opportunity to be present at any such discussion), all at such reasonable times and intervals during normal business hours and upon reasonable prior notice. The Company will likewise afford such Holders the opportunity to obtain any information, to the extent the Company or any of its Subsidiaries possesses such information or can acquire it without unreasonable effort or expense, necessary to verify the accuracy or any of the representations and warranties made by the Company under the Securities Purchase Agreement. Each Holder of Convertible Debentures agrees to keep all information received pursuant to the "DISCLOSURE" section of the Securities Purchase Agreement confidential, except that disclosure can be made: (I) to any governmental body (including for this purpose the National Association of Insurance Commissioners) having jurisdiction over the holder of the Convertible Debentures in the law or ordinary course of business; (ii) to any other person pursuant to subpoena or other process, whether legal, administrative or other; (iii) to the Holder of the Convertible Debentures' officers, directors, trustees, employees, legal counsel, financial advisors, auditors or accountants who need access to such information in connection with their duties, provided that such party agrees to keep such information confidential in accordance with this paragraph; (iv) to any transferee or prospective institutional purchaser of a Debenture who agrees to be bound by this paragraph; or (v) to the extent necessary in the enforcement of such Holder of Convertible Debentures' rights under the Securities Purchase Agreement and under the Convertible Debentures during the continuance of a Default or Event of Default. INTEREST COVERAGE RATIO. The Company shall not permit the Interest Coverage Ratio (defined as the ratio of Consolidated Cash Flow to Total Net Interest Expense) of the Company for the immediately preceding four fiscal quarters as determined as of the last day of each fiscal quarter beginning May 31, 1994 to be less than 2.0 to 1.0. This covenant will be deleted pursuant to the Amendments. MAINTENANCE OF CONSOLIDATED NET WORTH. The Company shall furnish to the Holders of Convertible Debentures an Officer's Certificate within 60 days after the end of the first three fiscal quarters of the Company's Fiscal Year and 90 days after the end of its Fiscal Year, setting forth the Consolidated Net Worth (defined as common equity) of the Company as of the end of such fiscal quarter or Fiscal Year. For each four fiscal quarter period ending on the dates set forth below, the Consolidated Net Worth of the Company at the end of at least one of the four fiscal quarters ending during such period shall be equal to or greater than the amount set forth across from such dates for such fiscal quarters: One Quarter with a Consolidated Net Worth Date of at least: ---- ---------------------- November 30, 1993 $ 6,000,000 February 28, 1994 6,000,000 May 31, 1994 6,000,000 August 31, 1994 8,000,000 November 30, 1994 8,000,000 February 28, 1995 8,000,000 May 31, 1995 8,000,000 -92- August 31, 1995 10,000,000 November 30, 1995 10,000,000 February 29, 1996 10,000,000 May 31, 1996 10,000,000 August 31, 1996 11,000,000 November 30, 1996 11,000,000 February 28, 1997 11,000,000 May 31, 1997 11,000,000 August 31, 1997 12,000,000 November 30, 1997 12,000,000 February 28, 1998 12,000,000 May 31,1998 12,000,000 August 31, 1998 13,000,000 November 30, 1998 13,000,000 February 28, 1999 13,000,000 May 31, 1999 13,000,000 August 31, 2000 14,000,000 November 30, 2000 14,000,000 February 29, 2000 14,000,000 May 31, 2000 14,000,000 August 31, 2000 and thereafter 15,000,000 This covenant will be deleted pursuant to the Amendments. COMPLIANCE CERTIFICATE. The Company shall deliver to the Holders of Convertible Debentures, within 45 days after the end of each of the first three fiscal quarters of each Fiscal Year and within 90 days after the end of each Fiscal Year, an Officers' Certificate stating that a review of the activities of the Company during the preceding Fiscal Year, as the case may be, has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under the Securities Purchase Agreement, and further stating that, to the best knowledge of each such Officer signing such certificate, the Company has kept, observed, performed and fulfilled each and every covenant contained in the Securities Purchase Agreement, and is not in default in the performance or observance of any of the terms, provisions and conditions hereof, and to the best of such Officer's knowledge, no event has occurred and is continuing which is, or after notice or lapse of time or both would become, a Default or an Event of Default, or if such an event has occurred and is continuing, specifying each such event known to such Officer and the nature and status thereof. The Company, so long as any of the Convertible Debentures are outstanding, shall deliver to the Holders of Convertible Debentures, forthwith upon becoming aware of any Default, Event of Default or default in the performance of any covenant, agreement or condition contained in the Convertible Debentures, the Securities Purchase Agreement or any of the Collateral Documents, an Officer's Certificate specifying such Default, Event of Default and the nature and status thereof. STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law which would prohibit or forgive the Company from paying all or a portion of the principal of or interest on the Convertible Debentures as contemplated herein, wherever enacted, now or at any time hereinafter in force, or which may materially affect the covenants or the performance of the Securities Purchase Agreement in a manner inconsistent with the provisions of the Securities Purchase Agreement. The Company expressly waives all benefit or advantage of any such law, and will covenant that it will not hinder, delay or impede the execution of any power granted to -93- the Holders of Convertible Debentures, but will suffer and permit the execution of every such power as though no such law had been enacted. If a court of competent jurisdiction proscribes that the Company may not waive its rights to take the benefit or advantage of any stay or extension law or any usury law or other law in accordance with the prior sentence, then the obligation to pay interest on the Convertible Debentures shall be reduced to the maximum legal limit under applicable law governing the interest payable in connection with the Convertible Debentures. LIMITATION ON ACTIVITIES. The Company shall not be permitted to engage in any business or investment activities other than those necessary for, incident to, connected with, or arising out of its principal activities in the aircraft parts industry or a directly related industry. This covenant will be deleted pursuant to the Amendments. SALE OF ASSETS. The Company shall not sell, lease, transfer or dispose of any of its interest in its respective properties or assets, whether real, personal or mixed, or tangible or intangible, other than in the ordinary course of business consistent with prudent business practice. ACCOUNTING CHANGES. The Company will use one of the following accounting firms, or their respective successors: Arthur Andersen, Coopers & Lybrand, Deloitte & Touche, Ernst & Young, KPMG Peat Marwick, Price Waterhouse, or Grant Thornton. INVESTMENT COMPANY ACT. The Company shall not become an investment act company subject to registration under the Investment Company Act of 1940, as amended. LIMITATION ON MERGER CONSOLIDATION OR SALE. Except for certain limited circumstances, the Company shall not without the consent of a majority of the Holders of Convertible Debentures consolidate or merge with or into, or sell, transfer, lease or convey all or substantially all of its assets to, any person, provided HOWEVER, that the Company will be permitted to consolidate or merge a wholly-owned subsidiary into the Company or another wholly-owned subsidiary of the Company. Such action, in certain instances, will result in a redemption of the Convertible Debentures at the option of the Holders of Convertible Debentures subject to the redemption provisions contained in the Change of Control covenant herein. EXISTENCE. The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence in accordance with the organizational documents of the Company and the rights (charter and statutory), licenses and franchises of the Company; PROVIDED, HOWEVER, that the Company shall not be required to preserve any such right, license or franchise if the Board of Directors of the Company shall determine in good faith in accordance with the Company's charter documents that the preservation thereof is no longer desirable in the conduct of the business of the Company taken as a whole and that the loss thereof is not adverse in any material respect to the Holders of Convertible Debentures. MAINTENANCE OF PROPERTIES. The Company shall maintain, preserve, protect and keep its properties in good repair, working order and condition (ordinary wear and tear excepted), and make necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times consistent with past practices of International Airline Support Group, Inc. MAINTENANCE OF INSURANCE. The Company shall, and shall cause each of its Subsidiaries to, maintain insurance in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company and its subsidiaries operate. All insurance shall be maintained with insurance carriers having an A.M. Best & Co. rating of "A-" or better. BOOKS AND RECORDS. The Company shall keep books and records which accurately reflect all of its business affairs and transactions and permit any Holder of Convertible Debentures or any of its representatives, at reasonable times and intervals during normal business hours, and upon reasonable prior notice, to visit the Company offices, to discuss financial matters with representatives of senior management and independent public accountants (and the Company shall authorize such independent public accountants to discuss the Company's financial matters with any Holder of Convertible Debentures or its representative whether or not any representative of the Company is available to be present but provided that an officer -94- of the Company shall be afforded a reasonable opportunity to be present at any such discussion) and to examine (and, at the expense of the Company, photocopy extracts from) any of its books or other corporate records. COMPLIANCE WITH ERISA. The Company shall not permit any ERISA Affiliate to (i) terminate, any Welfare Plan so as to result in any liability of the Company or ERISA Affiliate to the PBGC; (ii) permit to exist any other event or condition that presents a material risk of such termination by the PBGC of any Welfare Plan, including, but not limited to, the occurrence of any Reportable Event; (iii) withdraw, or permit any ERISA Affiliate to incur any withdrawal liability with respect to any Multi employer Plan; or (iv) permit a Reportable Event to occur with respect to any Welfare Plan which would present a material risk to the Company of incurring a liability on account of such Welfare Plan. TRANSFER OF THE CONVERTIBLE DEBENTURES. The Convertible Debentures may not be transferred except in compliance with the Securities Act of 1933, as amended, and no other Holder of the Convertible Debentures may transfer any Convertible Debentures in an aggregate principal amount less than the lessor of (i) all of the Convertible Debentures held by such Holder of Convertible Debentures or (ii) $500,000. MODIFICATION OF CERTAIN AGREEMENTS. With the consent of the Holders of at least a majority in aggregate principal amount of the outstanding Convertible Debentures, the Agent and the Company may execute a supplemental agreement to add provisions to, or change in any manner or eliminate any provisions of, the Securities Purchase Agreement or modify in any manner the rights of the Holders of Convertible Debentures; provided however, that, without the consent of the Holder of each outstanding Convertible Debenture, no such supplemental agreement shall (i) extend the stated maturity of any Convertible Debenture, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or reduce the premium payable upon the redemption thereof or the amount payable thereon in the event of acceleration or the amount thereof payable in bankruptcy; (ii) reduce the aforesaid percentage of Holders of Convertible Debentures which are required to consent to any such supplemental agreement; or (iii) make any change that adversely affects the right to convert or the conversion price for any Convertible Debenture; provided further that no such supplemental agreement shall modify or eliminate the provisions of the Securities Purchase Agreement relating to the subordination of the Convertible Debentures in any manner that might terminate or impair the subordination of the Convertible Debentures to Senior Indebtedness without the prior written consent of all the holders of the Senior Indebtedness. EVENTS OF DEFAULT An "Event of Default" occurs under the Purchase Agreements if: (i) there is a default in the payment of the principal of or premium, if any, on any Convertible Debenture when and as the same shall become due and payable, whether at stated maturity, by acceleration, by notice of prepayment or otherwise; or (ii) default shall be made in the payment of any interest on any Convertible Debenture when and as such interest shall become due and payable, and such default shall have continued for a period of 10 days; or (iii) default shall be made in the performance or observance of any covenant, agreement or condition continued in the "INTEREST COVERAGE RATIO," "CHANGE IN CONTROL," or "MAINTENANCE OF CONSOLIDATED NET WORTH" sections of the Purchase Agreements; or (iv) default shall be made in the performance or observance of any other covenant, agreement or condition contained in the Purchase Agreements or the related registration rights agreement, and such default shall have continued for a period of 30 days after such default shall first have become known to the Company; or (v) any event shall occur or any condition shall exist in respect of any Indebtedness of the Company (other than the Convertible Debentures) in any aggregate principal amount of $500,000 or more, or under any agreement securing or relating to any of such Indebtedness, the effect of which is to cause the acceleration of the maturity of such -95- Indebtedness, or any such Indebtedness shall not have been paid at the final maturity date thereof and any applicable grace period shall have expired; or (vi) the Company shall (a) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (b) be generally unable to pay its debts as such debts become due, (c) make a general assignment for the benefit of its creditors, (d) commence a voluntary case under Title 11, United States Code or any similar federal or state law for the relief of debtors (the "Bankruptcy Laws") (as now or hereafter in effect), (e) file a petition seeking to take advantage of any other law providing for the relief of debtors, (f) fail to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under such Bankruptcy Laws, (g) take any action under the laws of its jurisdiction of incorporation analogous to any of the foregoing, or (h) take any corporate action for the purpose of effecting any of the foregoing; or (vii) a proceeding or case shall be commenced, without the application or consent of the Company in any court of competent jurisdiction, seeking (1) the liquidation, reorganization, dissolution, winding up, or composition or readjustment of its debts, (2) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets, or (3) similar relief in respect of it, under any law providing for the relief of debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 30 days; or an order for relief shall be entered in an involuntary case under such Bankruptcy Laws, against the Company; or action under the laws of the jurisdiction of incorporation of the Company analogous to any of the foregoing shall be taken with respect to the Company and shall continue unstayed and in effect for any period of 30 days; or (viii) final judgment for the payment of money shall be rendered by a court of competent jurisdiction against the Company and the Company shall not discharge the same or provide for its discharge in accordance with its terms, or procure a stay of execution thereof within 60 days from the date of entry thereof and within said period of 60 days, or such longer period during which execution of such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal, and such judgment together with all other such judgments shall exceed in the aggregate $500,000; (ix) any representation or warranty made by the Company in the Securities Purchase Agreement or in any certificate or other instrument delivered hereunder or thereunder or pursuant hereto or thereto or in connection with any provision hereof of thereof shall be false or incorrect; or (x) either the Company or any of its ERISA Affiliates as employers under any multi-employer plan, within the meaning of Section 4001(a)(3) of ERISA, shall have incurred, in connection with a complete or partial withdrawal from such multi-employer plan, withdrawal liability that is reasonably likely to have a material adverse effect on the business, business prospects, operations, properties or financial condition of the Company, or of the Company and its Subsidiaries; then (A) upon the occurrence of any Event of Default described in subsection (vi) or (vii) above, the unpaid principal amount of all Convertible Debentures, together with the interest accrued thereon and all other amounts payable by the Company hereunder and, to the extent permitted by applicable law, an amount equal to the premium that would be payable if the Company were redeeming the Convertible Debentures at such time pursuant to Purchase Agreements (or if such time is prior to August 31, 1996, then on September 1, 1996), shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by the Company or (B) upon the occurrence of any other Event of Default, the Holders of at least a majority in principal amount of the then outstanding Convertible Debentures, provided that Convertible Debentures owned by the Company or any affiliate of the Company shall be disregarded and not deemed outstanding for this purpose (the "Majority Holders"), may, by written notice to the Company, declare the unpaid principal amount of all Convertible Debentures to be, and the same shall forthwith become, due and payable, together with the interest accrued thereon and all other amounts payable by the Company hereunder and, to the extent permitted by applicable law, an amount equal to the premium that would be payable if the Company were redeeming the Debentures at such time pursuant to the Purchase Agreements (or if such time is prior to August 31, 1996, then on September 1, 1996), provided that, during the existence of an Event of Default described in clauses -96- (i) or (ii) above with respect to any Convertible Debenture, the Holder of such Convertible Debentures may, by written notice to the Company declare such Convertible Debenture to be, and the same shall forthwith become, due and payable, together with the interest accrued thereon and all other amounts payable by the Company hereunder and, to the extent permitted by applicable law, an amount equal to the premium that would be payable if the Company were redeeming the Convertible Debentures at the time pursuant to the Purchase Agreements (of if such time is prior to August 31, 1996, then on September 1, 1996). If any Holder of any Convertible Debenture shall exercise the option specified in the proviso to the preceding sentence, the Company will forthwith give written notice thereof to the Holders of all other outstanding Convertible Debentures and each such Holder of Convertible Debentures may (whether or not such notice is given or received), by written notice to the Company, declare the principal of all Convertible Debentures held by it to be, and the same shall forthwith become, due and payable, together with the interest accrued thereon and all other amounts payable by the Company hereunder and, to the extent permitted by applicable law, an amount equal to the premium that would be payable if the Company were redeeming the Debentures at the time pursuant to the Purchase Agreements (or if such time is prior to August 31, 1996, then on September 1, 1996). However, if at any time after any Convertible Debenture shall have so become due and payable, the Company shall pay all arrears of interest on the Convertible Debentures and all payments on account of the principal of and premium (if any) on the Convertible Debentures which shall have become due otherwise than by acceleration (with interest on such principal, premium (if any) and, to the extent permitted by law, on overdue payments of interest, at the rate specified in the Convertible Debentures) and all Events of Default (other than nonpayment of principal of and accrued interest on Convertible Debentures, and amounts equal to premium as aforesaid, due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to the Purchase Agreements, then, and in every such case, the Majority Holders, by written notice to the Company, may rescind and annul any such acceleration and its consequences; but no such action shall affect any subsequent Default or Event of Default or impair any right consequent thereon. Within forty-five days after the end of the first three fiscal quarters of the Company's fiscal year and within ninety days after the end of its fiscal year, an Officer's Certificate of Compliance with the Agreement must be delivered to the Holders of Convertible Debentures. A written statement regarding any Events of Default discovered by the Company's independent certified public accountants must be delivered to the Holders of Convertible Debentures within ninety days of the end of the fiscal year. Immediately upon becoming aware of any default, event of default, or default in the performance of any covenant, agreement or condition contained in the Convertible Debentures or the Purchase Agreements, written specifying such default, event of default, or default in performance and the nature and status thereof must be delivered to the Holders of the Convertible Debentures. Such notice must be in writing and delivered, telecopied or mailed, first class postage prepaid to the Holders of the Convertible Debentures at their addresses as set forth in the Purchase Agreements or at such other address as has been designated by a Holder of Convertible Debentures by written notice to the Company. MARKET INFORMATION No established public trading market for the Convertible Debentures exists. The Convertible Debentures are traded over the counter by certain dealers who from time to time are willing to effect transactions in the Convertible Debentures. Holders of the Convertible Debentures also from time to time effect transactions in the Convertible Debentures with one another. Trading in the Convertible Debentures is, however, extremely limited and sporadic. The last trade of the Convertible Debentures known to the Company occurred in October, 1995, when the largest single holder of the Convertible Debentures sold all of the Convertible Debentures held by it for a cash price equal to $150 per $1,000 principal amount of the Convertible Debentures, to one or more other substantial Holders of the Convertible Debentures. Convertible Debentures not tendered in the Exchange Offer may experience a significant decrease in liquidity. MODIFICATIONS OF THE TERMS OF THE CONVERTIBLE DEBENTURES OR THE RIGHTS OF THE HOLDERS OF THE CONVERTIBLE DEBENTURES The Purchase Agreements permit the Company to amend or waive compliance with any term, covenant, agreement or condition of the Purchase Agreements by one or more substantially concurrent written instruments signed by the Majority Holders; provided, however, that (i) no such amendment or waiver shall: (a) reduce the principal of, or reduce the rate of or change the time for payment of interest on or any premium payable upon redemption or the amount payable in bankruptcy -97- with respect to, any Convertible Debenture, or extend the maturity of any Convertible Debenture, without the consent of the Holder of each Convertible Debenture so affected; or (b) modify any of the provisions of the Securities Purchase Agreement or of the Convertible Debentures with respect to the payment or prepayment thereof, or reduce the percentage of the Holders of Convertible Debentures required to approve any such amendment or effectuate any such waiver, without the consent of the Holders of all of the Convertible Debentures at the time outstanding; or (c) make any change that adversely affects the right to convert or the conversion price of any Convertible Debenture, without the consent of the Holders of all of the Convertible Debentures at the time outstanding; or (d) modify or eliminate the provisions of the Securities Purchase Agreement relating to the subordination of the Convertible Debentures in any manner that might terminate or impair the subordination of the Convertible Debentures to Senior Indebtedness, without the prior written consent of the holders of Senior Indebtedness, and (ii) no such waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. Any amendment or waiver to the Convertible Debentures or the Purchase Agreements shall apply equally to all the Holders of the Convertible Debentures and shall be binding upon them, upon each future Holder of any Convertible Debenture and upon the Company, in each case whether or not a notation thereof shall have been placed on any Convertible Debenture. So long as any outstanding Convertible Debentures are owned by any institutional Holder, the Company will not solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of the Purchase Agreements or the Convertible Debentures unless each Holder of Convertible Debentures (irrespective of the amount of Convertible Debentures then owned by it) shall be informed thereof by the Company and shall be afforded the opportunity of considering the same and shall be supplied by the Company with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any amendment or waiver effected pursuant to the provisions of the Purchase Agreements shall be delivered by the Company to each Holder of Convertible Debentures forthwith following the date on which the same shall have been executed and delivered as set forth herein. Neither the Company nor any of its subsidiaries will, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any Holder of Convertible Debentures as consideration for or as an inducement to the entering into by any Holder of Convertible Debentures or any amendment or waiver of any of the terms and provisions of the Purchase Agreements unless such remuneration is concurrently paid, on the same terms, ratably to the Holders of all of the Convertible Debentures outstanding at the time such offer is made, and who consented to such amendment or waiver. -98- DESCRIPTION OF CAPITAL STOCK GENERAL After the Restructuring, the authorized capital stock of the Company will consist of 20,000,000 shares of Common Stock, par value $.001 per share and 2,000,000 shares of Preferred Stock par value $.001 per share. As of May 31, 1996, there were 4,041,779 shares of Common Stock outstanding which were held of record by 105 stockholders and no shares of Preferred Stock outstanding. Immediately following completion of the Restructuring, there will be 2,395,105 shares of Common Stock outstanding and no shares of Preferred Stock outstanding. COMMON STOCK Subject to the rights of the holders of any Preferred Stock which may be outstanding, each holder of Common Stock on the applicable record date is entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor, and, in the event of liquidation to share pro rata in any distribution of the Company's assets after payment or providing for the payment of liabilities and the liquidation preference of an outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote for each share held of record on the applicable record date on all matters presented to a vote of stockholders, including the election of directors. Holders of Common Stock have no cumulative voting rights or preemptive rights to purchase or subscribe for any stock or other securities and there are no conversion rights or redemption or sinking fund provisions with respect to such stock. All outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be when issued, fully paid and nonassessable. The transfer agent for the Common Stock is The First Union National Bank of North Carolina. PREFERRED STOCK Pursuant to the Preferred Stock Authorization, the Company's Board of Directors will have the authority to issue shares of Preferred Stock in one or more series and to fix, by resolution, the voting powers, full or limited or no voting powers, and such designations, preferences and relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, if any, including the number of shares in such series (which the Board may increase or decrease as permitted by Delaware law), liquidation preferences, dividend rates, conversion rights and redemption provisions of the shares constituting any series, without any further vote or action by the stockholders. Any share of Preferred Stock so issued would have priority over the Common Stock with respect to dividend or liquidation rights or both. CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK The authorized but unissued shares of Common Stock and Preferred Stock are available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved Common Stock and Preferred Stock may enable the Board of Directors to issue shares to persons friendly to current management which could render more difficult or discourage an attempt to obtain control of the Company by means of a proxy consent, tender offer, merger, or otherwise, and thereby protect the continuity of the Company's management. DIRECTORS' LIABILITY The Company has included in its Restated Certificate provisions to eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty (provided that such provision does not eliminate liability for breaches of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, violations under Section 174 of the DGCL or for any transaction from which the director derived an improper personal benefit) and in its Bylaws provisions to indemnify its directors and officers to the fullest extent permitted -99- by Section 145 of the DGCL, including circumstances in which indemnification is otherwise discretionary. The Company believes that these provisions are necessary to attract and retain qualified persons as directors and officers. ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate of Incorporation will be amended to provide that no action required or permitted to be taken at any annual or special meeting of the stockholders of the Company may be taken without a meeting, and the power of stockholders of the Company to consent in writing, without a meeting, to the taking of any action is specifically denied. This provision of the Certificate of Incorporation may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. The Bylaws will be amended to provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or special meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received no later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. The Bylaws also specify certain requirements for a stockholder's notice to be in proper written form. These provision may preclude some stockholders from bringing matters before the stockholders at an annual or special meeting or from making nominations for directors at an annual or special meeting. As set forth below, this provision of the Bylaws may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. ADJOURNMENT OF MEETINGS OF STOCKHOLDERS. The Bylaws will be amended to provide that when a meeting of stockholders of the Company is convened, the presiding officer, if directed by the Board of Directors, may adjourn the meeting if no quorum is present for the transaction of business or if the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to stockholders or to otherwise effectively exercise their voting rights. This provision will, under certain circumstances, make more difficult or delay actions by the stockholders opposed by the Board of Directors. The effect of such provision could be to delay the timing of a stockholders' meeting, including in cases where stockholders have brought proposals before the stockholders which are in opposition to those brought by the Board of Directors and therefore may provide the Board of Directors with additional flexibility in responding to such stockholder proposals. As set forth below, this provision of the Bylaws may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. AMENDMENT OF THE BYLAWS. The Certificate of Incorporation will be amended to provide that no provision of the Bylaw may be amended, altered, changed or repealed by the stockholders of the Company, nor may any provision of the Bylaws inconsistent with such provision be adopted by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. This provision will make it more difficult for stockholders to make changes to the Bylaws that are opposed by the Board of Directors. This provision of the Certificate of Incorporation may not be amended, modified or repealed by the stockholders of the Company, except with the consent of holders of three-fourths of the Company's outstanding Common Stock. If adopted, the Charter Amendments will not become effective unless and until the Closing occurs. Adoption of the Charter Amendments requires the affirmative vote of the holders of a majority at the shares of Common Stock outstanding. See "Stockholders' Meeting, Voting Rights and Proxies -- Proposed Amendment to the Company's Certificate of Incorporation: Provisions Affecting Corporate Governance" and "Description of Capital Stock." -100- LEGAL MATTERS Certain legal matters in connection with the Restructuring, including the validity of the shares of Common Stock to be issued pursuant to the Exchange Offer, will be passed upon for the Company by King & Spalding. EXPERTS The audited financial statements and schedules of the Company for the three years ended May 31, 1995 are included in this Proxy Statement/Prospectus in reliance upon the report of Grant Thornton LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. STOCKHOLDER PROPOSALS Any holder of Common Stock and any person who will become a holder of Common Stock who wishes to present a proposal for inclusion in the Company's proxy statement for the next annual meeting of stockholders must comply with the rules and regulations of the Commission then in effect. Such proposal must be received by the Secretary of the Company at 8095 N.W. 64th Street, Miami, Florida 33166, no later than _________, 1997, in order to be considered for inclusion in the Company's next annual meeting proxy statement. -101- INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS PAGE ---- Audited Consolidated Financial Statements Report of independent certified public accountants . . . . . . . F- Consolidated balance sheets as of May 31, 1994 and 1995. . . . . F- Consolidated statements of operations for the years ended May 31, 1993, 1994 and 1995. . . . . . . . . . . . . . . . . . . F- Consolidated statements of stockholders' equity (deficit) for the years ended May 31, 1993, 1994 and 1995. . . . . . . . . . . F- Consolidated statements of cash flows for the years ended May 31, 1993, 1994 and 1995. . . . . . . . . . . . . . . . . . . F- Notes to consolidated financial statements . . . . . . . . . . . F- Unaudited Condensed Consolidated Financial Statements Condensed consolidated balance sheets as of February 28 and 29, 1995 and 1996. . . . . . . . . . . . . . . . . . . . . . F- Condensed consolidated statements of operations for the three months and the nine months ended February 28 and 29, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F- Condensed consolidated statements of cash flows for the nine months ended February 28 and 29, 1995 and 1996. . . . . . . F- Notes to condensed consolidated financial statements . . . . . . F- 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, 1994 and 1995, 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, 1994 and 1995 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, 1994 AND 1995 ASSETS
1994 1995 ------------ ------------ Current assets Cash $ 95,790 $ 848,331 Accounts receivable, net of allowance for doubtful accounts of $940,000 in 1994 and $ 619,000 in 1995 3,817,023 2,592,463 Notes receivable (Note A) 1,120,000 313,490 Income tax refund receivable 1,930,000 - Inventories (Notes A, C and D) 8,719,774 6,497,270 Deferred tax benefit - current, net of valuation allowance of $2,190,000 in 1994 and $1,146,000 in 1995 (Note F) - - Other current assets 162,055 31,480 ------------ ------------ Total current assets 15,844,642 10,283,034 Property and equipment (Notes A and E) Land 330,457 330,457 Aircraft held for lease 7,227,835 3,289,613 Building and leasehold improvements 789,340 715,772 Machinery and equipment 2,191,999 940,948 ------------ ------------ 10,539,631 5,276,790 Less accumulated depreciation 2,233,680 1,980,927 ------------ ------------ 8,305,951 3,295,863 ------------ ------------ Other assets Deferred debt costs, net (Note A) 1,224,401 931,932 Deferred tax benefit, net of valuation allowance of $3,095,000 in 1994 and $3,894,000 in 1995 (Note F) - - Deposits and other assets 178,322 - ------------ ------------ 1,402,723 931,932 ------------ ------------ $ 25,553,316 $ 14,510,829 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities Current maturities of long-term obligations (Note D) $ 3,531,228 $ 1,812,040 Long-term obligations in default classified as current (Notes B and D) 22,156,720 18,083,334 Bank overdrafts 410,570 - Accounts payable 4,086,998 1,650,078 Accrued expenses (Note P) 3,970,840 2,226,900 ------------ ------------ Total current liabilities 34,156,356 23,772,352 Long-term obligations, less current maturities (Notes B and D) 485,020 440,377 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 1994 and 1995. - - Common stock - $.001 par value; authorized 20,000,000 shares; issued and outstanding 4,041,779 shares in 1994 and 1995. 4,042 4,042 Additional paid-in capital 2,654,332 2,654,332 Accumulated deficit (11,746,434) (12,360,274) ------------ ------------ Total stockholders' deficit (9,088,060) (9,701,900) ------------ ------------ $ 25,553,316 $ 14,510,829 ------------ ------------ ------------ ------------
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, 1993, 1994 AND 1995
1993 1994 1995 ------------ ------------ ------------ Revenues Net sales $ 32,031,596 $ 16,746,932 $ 21,998,869 Lease revenue 1,473,038 1,986,450 2,984,218 ------------ ------------ ------------ Total revenues 33,504,634 18,733,382 24,983,087 Cost of sales (Note O) 21,493,792 22,104,131 17,712,427 Selling, general and administrative expenses (Notes O and P) 6,469,160 6,943,147 4,358,119 Provision (recovery) for doubtful accounts 493,234 1,487,969 (334,571) Interest expense 2,162,994 2,562,681 2,271,849 Depreciation and amortization 1,405,720 2,865,610 1,693,301 Interest and other income (65,828) (87,600) (602,943) Unusual and nonrecurring items (Note Q) - - (177,115) Losses of service center subsidiary (Note R) - 1,922,086 675,860 ------------ ------------ ------------ 31,959,072 37,798,024 25,596,927 ------------ ------------ ------------ Earnings (loss) before income taxes, equity in loss of joint venture, and extraordinary item 1,545,562 (19,064,642) (613,840) Provision for income taxes (benefit) (Note F) 510,000 (2,475,185) - ------------ ------------ ------------ Earnings (loss) before equity in loss of joint venture and extraordinary item, 1,035,562 (16,589,457) (613,840) Equity in loss of joint venture (Note J) (58,543) (423,224) - ------------ ------------ ------------ Earnings (loss) before extraordinary item 977,019 (17,012,681) (613,840) Extraordinary loss on the extinguishment of debt (Note D) - (363,022) - ------------ ------------ ------------ Net (loss) earnings $ 977,019 $(17,375,703) $ (613,840) ------------ ------------ ------------ ------------ ------------ ------------ Per share data (Note A): Weighted average shares outstanding 3,997,458 4,041,779 4,041,779 ------------ ------------ ------------ ------------ ------------ ------------ Earnings (loss) per common share and common equivalent shares Earnings (loss) before extraordinary item $ .24 $ (4.21) $ (.15) Extraordinary item - (.09) - ------- ------- ------- Net (loss) earnings $ .24 $ (4.30) $ (.15) ------- ------- ------- ------- ------- -------
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)
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, 1993, 1994 AND 1995
1993 1994 1995 ------------ ------------ ------------ Cash flows from operating activities: Net earnings (loss) $ 977,019 $(17,375,703) $ (613,840) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,405,720 3,150,062 1,693,301 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 (332,000) 69,000 (23,696) Equity in loss of joint venture 58,543 423,224 - Decrease (increase) in accounts receivable 281,738 (83,108) 1,224,560 Decrease (increase) in notes receivable (1,920,000) 800,000 806,510 Decrease (increase) in income tax refund - (1,930,000) 1,930,000 Decrease (increase) in inventories (8,631,990) 8,243,147 (4,910,834) Decrease (increase) in other current assets (1,098,118) 981,557 154,271 (Increase) in deferred debt costs (1,237,980) (341,326) - Decrease (increase) in other assets (9,026) (112,999) 178,322 (Decrease) increase in accounts payable and accrued expenses 134,576 5,012,896 (4,591,430) (Decrease) increase in income taxes payable (1,788,676) (211,666) - ------------ ------------ ------------ Total adjustments (13,137,213) 16,000,787 6,441,938 ------------ ------------ ------------ Net cash provided by (used in) operating activities (12,160,194) (1,374,916) 5,828,098 Cash flows from investing activities: Proceeds from maturity of restricted certificates of deposit 1,350,000 356,115 - Purchase of restricted certificate of deposit (350,000) - - Capital expenditures (1,960,700) (3,635,919) (135,936) 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 (940,255) (2,279,804) (135,936) Cash flows from financing activities: Net payments under line of credit (2,918,463) (1,000,000) - Proceeds from issuance of common stock 115,486 - - Borrowings under notes and leases 19,515,783 10,000,000 - Repayments of debt obligations (3,312,238) (5,760,432) (4,939,621) ------------ ------------ ------------ Net cash (used in) provided by financing activities 13,400,568 3,239,568 (4,939,621) ------------ ------------ ------------ Net increase (decrease) in cash 300,119 (415,152) 752,541 Cash at beginning of period 210,823 510,942 95,790 ------------ ------------ ------------ Cash at end of period $ 510,942 $ 95,790 $ 848,331 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosures of cash flow information (Note K): Cash paid during the year for: Interest $ 1,843,630 $ 2,736,233 $ 2,167,279 ------------ ------------ ------------ ------------ ------------ ------------ 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, 1993, 1994 AND 1995 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, 1994 and 1995, approximately 72% and 80%, respectively, of the ending inventory (including aircraft held for sale) was costed under the specific identification method, and the remaining 28% and 20%, 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, 1993, 1994 AND 1995 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, 1994 and 1995, was approximately $802,000 and $1,094,000, 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 1993, 1994 and 1995 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, 1993, 1994 AND 1995 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 Company's 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 1994 and 1995, 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, 1994 and 1995 consisted of the following: 1994 1995 ---------- ---------- Aircraft parts $5,624,922 $4,063,352 Aircraft available for sale 3,094,852 2,433,918 ---------- ---------- 8,719,774 $6,497,270 ---------- ---------- ---------- ---------- F-9 International Airline Support Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MAY 31, 1993, 1994 AND 1995 NOTE D - LONG-TERM OBLIGATIONS Long-term obligations at May 31, 1994 and 1995 consisted of the following:
1994 1995 ------------ ------------ 12% Senior Secured Notes $ 14,550,000 $ 9,850,000 8% Convertible Subordinated Debentures 10,000,000 10,000,000 Mortgage note payable to bank 481,580 455,420 Notes payable due in equal monthly installments through October 1997, bearing interest at 9.5% to 11.5% collateralized by equipment 31,823 16,363 Capitalized lease obligations (Note E) 1,109,565 13,968 ------------ ------------ 26,172,968 20,335,751 Less: Current maturities and long-term obligations in default classified as current 25,687,948 19,895,374 ------------ ------------ $ 485,020 $ 440,377 ------------ ------------ ------------ ------------
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, 1993, 1994 AND 1995 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: 1994 1995 ---------- --------- Equipment $1,412,904 $ 298,279 Less: Accumulated amortization 482,051 279,863 ---------- --------- $ 930,853 $ 18,416 ---------- --------- ---------- --------- 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, 1993, 1994 and 1995 was approximately $203,000, $242,000 and $220,000, 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, 1993, 1994 AND 1995 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 $6,126,138 and $2,210,202 at May 31, 1994 and 1995, respectively. NOTE F - INCOME TAXES The provision for income taxes for the years ended May 31, 1993, 1994 and 1995:
1993 1994 1995 ------------ ------------ ------------ Current provision: Federal $ 732,000 $ (2,544,185) $ - State 110,000 - - ------------ ------------ ------------ 842,000 (2,544,185) - Deferred provision (benefit) (332,000) 69,000 - ------------ ------------ ------------ $ 510,000 $ (2,475,185) $ - ------------ ------------ ------------ ------------ ------------ ------------ The tax effect of the Company's temporary differences and carryforwards are as follows: 1994 1995 ------------ ------------ Deferred tax liabilities (benefits) - current: Reserve for overhaul costs $ (316,000) $ (545,000) Bad debt reserve (354,000) (233,000) Inventory capitalization (256,000) (188,000) Inventory writedown (912,000) - Accrued payroll (29,000) (37,000) Accrued legal settlement costs (310,000) (116,000) Accrued vacation (13,000) (16,000) Accrued - other - (11,000) ------------ ------------ $ (2,190,000) $ (1,146,000) ------------ ------------ ------------ ------------ 1994 1995 ------------ ------------ Deferred tax liabilities (benefits) - non-current: Inventory capitalization $ (10,000) $ - Depreciation 23,000 226,000 Aircraft - capitalized maintenance 36,000 36,000 Restructuring charges (1,279,000) (702,000) Accrued interest income (106,000) (106,000) Net operating loss carryforward - federal (1,315,000) (2,941,000) Net operating loss carryforward - state (315,000) (277,000) Minimum tax credit - federal (122,000) (122,000) Other, net (7,000) (8,000) ------------ ------------ $ (3,095,000) $ (3,894,000) ------------ ------------ ------------ ------------
The Company has recorded valuation allowances equal to the amount of the deferred tax benefits at May 31, 1994 and 1995. F-12 International Airline Support Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MAY 31, 1993, 1994 AND 1995 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:
1993 1994 1995 ----- ----- ----- Statutory federal rate 34.0% (34.0)% (34.0)% Operating losses with no current tax benefit - 19.6 34.0 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 - - ----- ----- ----- 33.0% (14.4)% -% ----- ----- ----- ----- ----- -----
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, 1993, 1994 AND 1995 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, 1993, 1994 and 1995.
(IN THOUSANDS) 1993 1994 1995 --------- --------- --------- United States $ 13,245 $ 10,978 $ 18,048 Africa and Middle East 14,354 5,249 1,204 Europe 4,514 374 1,350 Latin America 1,102 2,178 4,347 Canada 307 558 34 Asia 48 9 - --------- --------- --------- $ 33,570 $ 19,346 $ 24,983 --------- --------- --------- --------- --------- ---------
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 1993 and 1994. 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 18%, 10% and 1% of net sales during the years ended May 31, 1993, 1994, and 1995, respectively. The Company also had sales to another African customer which accounted for 16% and 6% of net sales for fiscal 1994 and 1995, 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, 1993, 1994 AND 1995 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 1994 and 1995, as derived from the change in balance sheet amounts, has been adjusted for the following items:
1994 1995 ------------ ------------ Net decrease in inventory $ (9,901,144) $ (2,222,504) Transfer of aircraft from inventory to held for lease 4,070,430 - Transfer of aircraft from held for lease to inventory (250,000) (2,688,330) 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 $ (8,243,147) $ (4,910,834) ------------ ------------ ------------ ------------
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, 1993, 1994 AND 1995 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 1993 and 1994 was approximately $18,000 and $9,000, 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 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, 1993, 1994 AND 1995 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:
1994 1995 ----------- ----------- Customer deposits $ 558,900 $ 426,453 Accrued repair costs 585,510 224,406 Accrued legal costs 825,000 60,000 Accrued interest 294,460 399,030 Accrued payroll 329,255 282,834 Accrued commissions - 159,536 Advance payment on customer account 600,000 - Reserve for repair of leased aircraft 579,450 570,940 Other 198,265 103,701 ----------- ----------- $ 3,970,840 $ 2,226,900 ----------- ----------- ----------- -----------
F-17 International Airline Support Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MAY 31, 1993, 1994 AND 1995 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 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS
MAY 31, 1995 FEBRUARY 29, 1996 (NOTE)* (UNAUDITED) ------------ ----------------- Current assets: Cash $ 848,331 $ 230,713 Accounts receivable, net of allowance for doubtful accounts of $588,000 at February 29, 1996 and $619,000 at May 31, 1995, respectively 2,592,463 4,104,296 Notes receivable 313,490 -- Inventories 6,497,270 7,432,857 Other current assets 31,480 147,496 ------------ ------------ Total current assets 10,283,034 11,915,335 Property and equipment: Land 330,457 330,457 Aircraft held for lease 3,289,613 2,904,760 Building and leasehold improvements 715,772 715,772 Machinery and Equipment 940,948 989,596 ------------ ------------ Less accumulated depreciation 5,276,790 4,940,585 1,980,927 1,832,932 ------------ ------------ 3,295,863 3,107,653 ------------ ------------ ------------ ------------ Other assets: Deferred debt costs, net 931,932 746,446 ------------ ------------ $ 14,510,829 $ 15,769,434 ------------ ------------ ------------ ------------
* Condensed from audited financial statements. The accompanying notes are an integral part of these condensed financial statements. F-19 International Airline Support Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
MAY 31, 1995 FEBRUARY 29, 1996 (NOTE)* (UNAUDITED) ------------ ----------------- Current assets: Current maturities of long-term obligations $ 45,354 $ 38,149 Long-term obligations in default classified as current 19,850,000 18,400,000 Accounts payable and accrued expenses 3,876,978 4,644,882 ------------ ------------ Total current liabilities 23,772,352 23,083,031 Long-term obligations, less current maturities 440,377 415,799 Commitments and contingencies -- -- Stockholders' equity (deficit): Common stock 4,042 4,042 Additional paid-in capital 2,654,332 2,654,332 Retained earnings (deficit) (12,360,274) (10,387,770) Total stockholders' equity (deficit) (9,701,900) (7,729,396) ------------ ------------ $ 14,510,829 $ 15,769,434 ------------ ------------ ------------ ------------
* Condensed from audited financial statements. The accompanying notes are an integral part of these condensed financial statements. F-20 International Airline Support Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, 1995 1996 1995 1996 ---- ---- ---- ---- Revenues Net sales $ 3,380,806 $ 7,318,730 $18,248,074 $16,247,134 Lease revenue 774,278 529,133 2,189,778 1,277,169 ----------- ----------- ----------- ----------- Total revenues 4,155,084 7,847,863 20,437,852 17,524,303 Cost of sales 2,044,978 4,369,628 14,910,941 9,761,700 Selling, general, and administrative expenses 1,005,113 1,141,055 3,322,197 3,046,450 Provision (recovery)for doubtful account (194,095) 317,084 (291,602) 317,084 Financial restructuring -- 112,776 -- 305,685 costs Interest expense 516,274 475,306 1,754,892 1,511,700 Depreciation and amortization 563,793 183,232 1,699,085 613,737 Interest and other income (352,462) (578) (590,628) (4,557) Unusual and non-recurring items (177,115) -- (177,115) -- (Income) losses of service center subsidiary (285,552) -- 701,317 -- 3,120,934 6,598,503 21,329,087 15,551,799 ----------- ----------- ----------- ----------- Earnings (loss) before income 1,034,150 1,249,360 (891,235) 1,972,504 taxes Provision for income taxes -- -- -- -- Net earnings (loss) $ 1,034,150 $ 1,249,360 $ (891,235) $ 1,972,504 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Per share date: Weighted average shares 4,041,779 4,041,779 4,041,779 4,041,779 Net earnings (loss) per common share and common equivalent shares Net earnings (loss) $ 0.26 $ 0.31 $ (0.48) $ 0.49
The accompanying notes are an integral part of these condensed financial statements. F-21 International Airline Support Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED FEBRUARY 18, 1995 FEBRUARY 29, 1996 Cash flows from operating activities: Net income (loss) $ (891,235) $ 1,972,504 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,889,145 613,737 Provision for doubtful accounts 350,000 335,413 Gain on disposal of discontinued subsidiary (70,628) -- Changes in assets and liabilities 4,522,827 (1,817,425) ---------- ---------- Total adjustments 6,691,344 (868,275) Net cash provided by operating activities 5,800,109 1,104,229 Cash flows from investing activities Capital expenditures (706,482) (240,044) ---------- ---------- Net cash (used in) investing activities (706,482) (240,044) Cash flows from financing activities: Repayments of notes payable and debt obligations (4,913,128) (1,481,803) ---------- ---------- Net cash (used in) financing activities (4,913,128) (1,481,803) Net (decrease) increase in cash 180,499 (617,618) Cash at beginning of period 95,790 848,331 ---------- ---------- Cash at end of period $ 276,289 $ 230,713 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these condensed financial statements F-22 International Airline Support Group, Inc. and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain adjustments (consisting only of normal and recurring adjustments) necessary to present fairly International Airline Support Group, Inc.'s condensed consolidated balance sheets as of May 31, 1995 and February 29, 1996, the condensed consolidated statements of operations for the three months and nine months ended February 28, 1995 and the three months and nine months ended February 29, 1996, and the condensed consolidated statements of cash flows for the nine month periods then ended. The accounting policies followed by the Company are described in the May 31, 1995 financial statements. The results of operations for the nine months ended February 29, 1996 are not necessarily indicative of the results to be expected for the full year. For interim reporting purposes, certain expenses are based on estimates rather than expenses actually incurred. 2. Inventories consisted of the following: May 31, 1995 February 29, 1996 ------------ ----------------- Aircraft parts $ 4,063,352 $ 5,120,988 Aircraft available for sale 2,433,918 2,104,354 ------------ ------------ $ 6,497,270 $ 7,432,857 ------------ ------------ ------------ ------------ 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 parts sales take place. The amortization is 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. At February 29, 1996, approximately 94% of the ending inventory (including aircraft held for sale) was costed under the specific identification method, and the remaining 6% was costed under the pooling method. 3. Primarily as a result of 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 default in the payment of principal on the 12% Senior Secured Notes ("Notes"), issued July 1992, and is in default in payment of interest on the 8% Convertible Subordinated Debentures ("Debentures"), issued September 1993. The Notes are secured by substantially all of the assets of the Company. The Debentures are unsecured and are subordinated in right of payment to the Notes and to the claims of the Company's general unsecured creditors. The entire balance of the Notes and the Debentures, amounting to $8,400,000 and $10,000,000, respectively, are subject to accelerated maturity and, as such, have been classified as a current liability in the Consolidated Balance Sheets at February 29, 1996. After conducting preliminary meetings with certain holders of the Notes and Debentures, the Company formulated a restructuring proposal that contemplates (among other things) a deferral of the time of payment of a portion of the principal of the Notes and a conversion of all of the outstanding Debentures into the Company's Common Stock. The restructuring proposal was subsequently presented to certain major holders of the Debentures. The Company understands that, after the presentation of the restructuring proposal, the largest holder of the Debentures sold all of the Debentures then held by it, for a cash price equal to $150 per $1,000 principal amount of the Debentures, to one or more substantial holders of Debentures that have also been participating in the restructuring discussions. In November 1995, these Debenture holders presented to the Company a preliminary counterproposal to the Company's restructuring proposal, but the counterproposal was subsequently F-23 International Airline Support Group, Inc. and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) retracted. On February 1, 1996, the Company again met with representatives of certain major holders of the Debentures. At this meeting, the Company and the representatives of the Debentureholders discussed the Company's proposal that the Debentures be converted into shares of the Company's common stock. The representatives requested that the Company update certain information included in its original restructuring proposal and provide a revised restructuring proposal. The Company is preparing a revised restructuring proposal based on the assumption that the Debentureholders will agree to convert their instruments into shares of the Company's Common Stock. Although the Company intends to continue these restructuring discussions, there can be no assurance that the Company will be able to consummate a restructuring of its indebtedness. If the lenders were to accelerate the maturity of the Notes or Debentures, or both, the Company would not have sufficient funds to repay the debt obligations. As a result of these factors, there exists substantial doubt about the Company's ability to continue in existence. During the nine months ended February 29, 1996, the Company incurred approximately $306,000 of legal, accounting and other consulting fees in connection with its debt restructuring activities. 4. During the fiscal year ending May 31, 1995, the Company accepted lease payments from a foreign customer in the customer's local currency because conversion restrictions precluded the customer from obtaining and paying U.S. dollars. Due to uncertainties regarding when and at what rate the local currency could be converted to U.S. dollars, the Company valued the local currency at an estimated value of $200,000 as of May 31, 1995 (included in cash), such amount being less than the then current U.S. equivalent amount at the official exchange rate. The Company subsequently was able to convert the funds to U.S. dollars in the amount of $339,000, resulting in a gain of $139,000, which is included in lease revenues during the nine months ended February 29, 1996. 5. The Company recorded a gain during the nine months ended February 29, 1996 relating to the settlement of certain disputes with a customer. Pursuant to the settlement, the customer paid the Company $660,000 and the Company canceled a note receivable from the customer. The Company also released all claims it had against the customer, which included among other things, claims for the purchase price of parts purchased by the customer on open account or pursuant to a consignment arrangement. The customer released certain claims it had against the Company as part of the settlement. The transaction resulted in a net gain to the Company of approximately $345,000, consisting of the excess of cash received over the net carrying value of the note receivable and cost of the inventory. The Company recorded as net sales the cost of the inventory plus the amount of the net gain. 6. 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. In all periods presented, stock options and warrants are anti-dilutive because their exercise price exceeded the market price. The Company's convertible subordinated debentures are not considered common stock equivalents as the effective yield on the securities exceeded 66-2/3% of the average Aa corporate bond rate at the time of issuance. 7. Supplemental cash flow disclosures: Cash payments for interest were $940,700 and $1,695,200 for the nine month periods ended February 29, 1996 and February 28, 1995, respectively. F-24 APPENDIX A -- PROPOSED RESTATED CERTIFICATE OF INCORPORATION RESTATED AND AMENDED CERTIFICATE OF INCORPORATION OF INTERNATIONAL AIRLINE SUPPORT GROUP, INC. International Airline Support Group, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is International Airline Support Group, Inc. (the "Corporation"). The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on October 20, 1989. 2. Pursuant to Sections 242 and 245 of the Delaware General Corporation Law, this Restated and Amended Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of the Corporation. 3. This Restated and Amended Certificate of Incorporation was duly adopted in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law. 4. Upon the filing in the Office of the Secretary of State of the State of Delaware of this Restated and Amended Certificate of Incorporation, the shares of common stock, par value $.001 per share, of the Corporation (the "Common Stock") issued and outstanding immediately prior to such filing of this Restated and Amended Certificate of Incorporation are hereby automatically reclassified and changed without any action on the part of the stockholders of the Corporation so that each twenty-seven (27) shares of Common Stock become one (1) share of common stock, par value $.001 per share, of the Corporation, neither increasing nor decreasing the Corporation's stated capital thereby. 5. The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: ARTICLE I The name of the Corporation is International Airline Support Group, Inc. A-1 ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, New Castle County, Wilmington, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV The Corporation shall have authority to issue 20,000,000 shares of common stock, par value $.001 per share ("Common Stock"), and 2,000,000 shares of preferred stock, par value $.001 per share ("Preferred Stock"). ARTICLE V The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware to establish from time to time the number of shares to be included in each such series and to fix the designations, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate on the shares of that series, if any, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (h) Any other relative rights, preferences and limitations of that series. A-2 ARTICLE VI Upon the filing of this Restated and Amended Certificate of Incorporation, the new Board of Directors of the Corporation shall consist of seven (7) members, but the number may be increased or decreased in the manner provided in the Bylaws of the Corporation; provided, however, that the number of directors constituting the full Board of Directors shall not be changed without the affirmative vote of at least seventy-five percent (75%) of the issued and outstanding shares of Common Stock. The names and mailing addresses of the persons who are to serve as the new directors of the Corporation upon the filing of this Restated and Amended Certificate of Incorporation are: Alexius A. Dyer III International Airline Support Group, Inc. 8095 N.W. 64th Street Miami, Florida 33166 George Murnane III International Airline Support Group, Inc. 8095 N.W. 64th Street Miami, Florida 33166 E. James Mueller International Airline Support Group, Inc. 8095 N.W. 64th Street Miami, Florida 33166 Kyle R. Kirkland International Airline Support Group, Inc. 8095 N.W. 64th Street Miami, Florida 33166 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- ARTICLE VII SECTION 1. The Board of Directors shall have the power to adopt, amend or repeal any provision of the Bylaws of the Corporation. Notwithstanding any other provision of this Restated and Amended Certificate of Incorporation or the Bylaws of the Corporation (and notwithstanding that some lesser percentage may be specified by law), no provision of the Bylaws of the Corporation shall be amended, modified or repealed by the stockholders of the Corporation, nor shall any provision of the Bylaws of the Corporation inconsistent with any such provision be adopted by the stockholders of the A-3 Corporation, unless approved by the affirmative vote of at least seventy-five percent (75%) of the issued and outstanding shares of Common Stock. SECTION 2. Notwithstanding any other provision of this Restated Certificate of Incorporation or the Bylaws of the Corporation (and notwithstanding that some lesser percentage may be specified by law), no provision of Articles IV, V, VI, VII, VIII, or X of this Restated and Amended Certificate of Incorporation shall be amended, modified or repealed, nor shall any provision of this Restated and Amended Certificate of Incorporation inconsistent with any such provision be adopted, by the stockholders of the Corporation, unless approved by the affirmative vote of at least seventy-five percent (75%) of the issued and outstanding shares of Common Stock. ARTICLE VIII A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of this Article by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of or prior to such repeal or modification. ARTICLE IX The provisions of Section 203 of the Delaware General Corporation Law, as in effect on the date hereof and as amended hereafter, shall not be applicable to the Corporation. ARTICLE X Notwithstanding any other provision of this Restated and Amended Certificate of Incorporation or the Bylaws of the Corporation, and notwithstanding anything to the contrary specified by law, no action required or permitted to be taken at any annual or special meeting of the stockholders of the Corporation may be taken without such a meeting, and the power of stockholders of the Corporation to consent in writing to the taking of such action without a meeting, as contemplated by Section 228 of the Delaware General Corporation Law, is hereby specifically denied. ARTICLE XI Elections of directors need not be by written ballot except and to the extent provided in the Bylaws of the Corporation. IN WITNESS WHEREOF, this Restated and Amended Certificate of Incorporation has been signed as of this ___ day of _______________, 1996. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. By: ------------------------------------------- Title: ---------------------------------------- A-4 Attest: By: ------------------------------------------ Title: --------------------------------------- A-5 APPENDIX B -- PROPOSED STOCK OPTION PLAN INTERNATIONAL AIRLINE SUPPORT GROUP, INC. ------------------------------------------------------------- 1996 LONG TERM INCENTIVE AND SHARE AWARD PLAN ------------------------------------------------------------- Section Page - ------- ---- I. Purposes..........................................................B-3 II. Definitions.......................................................B-3 III. Administration....................................................B-5 (A) Authority of the Committee...................................B-5 (B) Manner of Exercise of Committee Authority....................B-6 (C) Limitation of Liability......................................B-7 IV. Shares Subject to the Plan........................................B-7 V. Specific Terms of Awards..........................................B-8 (A) General......................................................B-8 (B) Options......................................................B-8 (C) SARs.........................................................B-9 (D) Restricted Shares............................................B-10 (E) Restricted Share Units.......................................B-11 (F) Performance Shares and Performance Units.....................B-11 (G) Dividend Equivalents.........................................B-12 (H) Other Share-Based Awards.....................................B-13 VI. Certain Provisions Applicable to Awards...........................B-13 (A) Stand-Alone, Additional, Tandem and Substitute Awards........B-13 (B) Terms of Awards..............................................B-14 (C) Form of Payment Under Award..................................B-14 (D) Nontransferability...........................................B-14 VII. Director's Options................................................B-14 (A) Annual Grant.................................................B-14 B-1 (B) Market Value.................................................B-14 (C) Termination of Service.......................................B-15 (D) Time and Method of Exercise..................................B-15 (E) Nontransferability...........................................B-15 (F) Adjustments..................................................B-15 (G) Administration...............................................B-15 VIII. General Provisions................................................B-16 (A) Compliance with Legal and Trading Requirements...............B-16 (B) No Right to Continued Employment or Service..................B-16 (C) Taxes........................................................B-16 (D) Changes to the Plan and Awards...............................B-16 (E) No Rights to Awards; No Stockholder Rights...................B-17 (F) Unfunded Status of Awards....................................B-17 (G) Nonexclusivity of the Plan...................................B-17 (H) Not Compensation for Benefit Plans...........................B-18 (I) No Fractional Shares.........................................B-18 (J) Governing Law................................................B-18 (K) Effective Date; Plan Termination.............................B-18 (L) Titles and Headings..........................................B-18 B-2 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. ------------------------------------------------------------- 1996 LONG TERM INCENTIVE AND SHARE AWARD PLAN ------------------------------------------------------------- I. PURPOSES. The purposes of the 1996 Long Term Incentive and Share Award Plan are to advance the interests of International Airline Support Group, Inc. and its stockholders by providing a means to attract, retain, and motivate selected employees and non-employee directors of the Company, upon whose judgment, initiative and efforts the continued success, growth and development of the Company is dependent. II. DEFINITIONS. For purposes of the Plan, the following terms shall be defined as set forth below: A. "Affiliate" means any entity other than the Company and its Subsidiaries that is designated by the Board or the Committee as a participating employer under the Plan, provided that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity. B. "Award" means any Option, SAR, Restricted Share, Restricted Share Unit, Performance Share, Performance Unit, Dividend Equivalent, or Other Share-Based Award granted to an Eligible Employee under the Plan. C. "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award. D. "Beneficiary" means the person, persons, trust or trusts which have been designated by such Eligible Employee in his most recent written beneficiary designation filed with the Company to receive the benefits specified under this Plan upon the death of the Eligible Employee, or, if there is no designated Beneficiary or surviving designated Beneficiary, then the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits. E. "Board" means the Board of Directors of the Company. F. "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to any provision of the Code shall be deemed to include successor provisions thereto and regulations thereunder. G. "Committee" means the Compensation Committee of the Board, or such other Board committee as may be designated by the Board to administer the Plan; PROVIDED, HOWEVER, that the Committee shall consist of two or more directors of the Company, each of whom is a "disinterested person" within the meaning of Rule 16b-3 under the Exchange Act, to the extent applicable. B-3 H. "Company" means International Airline Support Group, Inc., a corporation organized under the laws of Delaware, or any successor corporation. I. "Director" means a non-employee member of the Board. J. "Director's Option" means a NQSO granted to a Director under Section VII. K. "Dividend Equivalent" means a right, granted under Section V.G., to receive cash, Shares, or other property equal in value to dividends paid with respect to a specified number of Shares. Dividend Equivalents may be awarded on a free-standing basis or in connection with another Award, and may be paid currently or on a deferred basis. L. "Eligible Employee" means any employee of the Company or its Subsidiaries and Affiliates, including any director who is an employee. M. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. References to any provision of the Exchange Act shall be deemed to include successor provisions thereto and regulations thereunder. N. "Fair Market Value" means, with respect to Shares or other property, the fair market value of such Shares or other property determined by such methods or procedures as shall be established from time to time by the Committee. If a public market for the Company's Shares shall exist, unless otherwise determined by the Committee in good faith, the Fair Market Value of Shares shall mean the mean between the high and low selling prices per Share on the immediate preceding date (or, if the Shares were not traded on that day, the next preceding day that the Shares were traded) on the principal exchange or market on which the Shares are traded, as such prices are officially quoted on such exchange or market. O. "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code. P. "NQSO" means any Option that is not an ISO. Q. "Option" means a right, granted under Section V.B. or Section VII, to purchase Shares. R. "Other Share-Based Award" means a right, granted under Section V.H., that relates to or is valued by reference to Shares. S. "Participant" means an Eligible Employee or Director who has been granted an Award or Director's Option under the Plan. T. "Performance Share" means a performance share granted under Section V.F. B-4 U. "Performance Unit" means a performance unit granted under Section V.F. V. "Plan" means this 1996 Long Term Incentive and Share Award Plan. W. "Restricted Shares" means an Award of Shares under Section V.D. that may be subject to certain restrictions and to a risk of forfeiture. X. "Restricted Share Unit" means a right, granted under Section V.E., to receive Shares or cash at the end of a specified deferral period. Y. "Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. Z. "SAR" or "Share Appreciation Right" means the right, granted under Section V.C., to be paid an amount measured by the difference between the exercise price of the right and the Fair Market Value of Shares on the date of exercise of the right, with payment to be made in cash, Shares, or property as specified in the Award or determined by the Committee. AA. "Shares" means shares of common stock, $.001 par value per share, of the Company. BB. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns shares possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. III. ADMINISTRATION. A. AUTHORITY OF THE COMMITTEE. Except as provided in Section VII, the Plan shall be administered by the Committee, and the Committee shall have full and final authority to take the following actions, in each case subject to and consistent with the provisions of the Plan: 1. to select Eligible Employees to whom Awards may be granted; 2. to designate Affiliates; 3. to determine the type or types of Awards to be granted to each Eligible Employee; 4. to determine the type and number of Awards to be granted, the number of Shares to which an Award may relate, the terms and conditions of any Award granted under the Plan (including, but not limited to, any exercise price, grant price, or purchase price, and any bases for adjusting such exercise, grant or purchase price, any restriction or condition, any schedule for lapse of restrictions or conditions relating to transferability or forfeiture, exercisability, or settlement of an B-5 Award, and waiver or accelerations thereof, and waivers of performance conditions relating to an Award, based in each case on such considerations as the Committee shall determine), and all other matters to be determined in connection with an Award; 5. to determine whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Shares, other Awards, or other property, or an Award may be canceled, forfeited, exchanged, or surrendered; 6. to determine whether, to what extent, and under what circumstances cash, Shares, other Awards, or other property payable with respect to an Award will be deferred either automatically, at the election of the Committee, or at the election of the Eligible Employee; 7. to prescribe the form of each Award Agreement, which need not be identical for each Eligible Employee; 8. to adopt, amend, suspend, waive, and rescind such rules and regulations and appoint such agents as the Committee may deem necessary or advisable to administer the Plan; 9. to correct any defect or supply any omission or reconcile any inconsistency in the Plan and to construe and interpret the Plan and any Award, rules and regulations, Award Agreement, or other instrument hereunder; 10. to accelerate the exercisability or vesting of all or any portion of any Award or to extend the period during which an Award is exercisable; and 11. to make all other decisions and determinations as may be required under the terms of the Plan or as the Committee may deem necessary or advisable for the administration of the Plan. B. MANNER OF EXERCISE OF COMMITTEE AUTHORITY. The Committee shall have sole discretion in exercising its authority under the Plan. Any action of the Committee with respect to the Plan shall be final, conclusive, and binding on all persons, including the Company, Subsidiaries, Affiliates, Eligible Employees, any person claiming any rights under the Plan from or through any Eligible Employee, and stockholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. B-6 C. LIMITATION OF LIABILITY. Each member of the Committee shall be entitled to, in good faith, rely or act upon any report or other information furnished to him by any officer or other employee of the Company or any Subsidiary or Affiliate, the Company's independent certified public accountants, or other professional retained by the Company to assist in the administration of the Plan. No member of the Committee, nor any officer or employee of the Company acting on behalf of the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Committee and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination, or interpretation. IV. SHARES SUBJECT TO THE PLAN. A. Subject to adjustment as provided in Section IV.C. hereof, the total number of Shares reserved for issuance in connection with Awards and Director's Options under the Plan shall be 598,782. No Award or Director's Option may be granted if the number of Shares to which such Award or Director's Option relates, when added to the number of Shares previously issued under the Plan, exceeds the number of Shares reserved under the preceding sentence. If any Awards or Director's Options are forfeited, canceled, terminated, exchanged or surrendered or such Award or Director's Option is settled in cash or otherwise terminates without a distribution of Shares to the Participant, any Shares counted against the number of Shares reserved and available under the Plan with respect to such Award or Director's Option shall, to the extent of any such forfeiture, settlement, termination, cancellation, exchange or surrender, again be available for Awards or Director's Options under the Plan; PROVIDED, HOWEVER, that in the case of forfeiture, cancellation, exchange or surrender of Restricted Shares or Restricted Share Units with respect to which dividends or Dividend Equivalents were accrued but unpaid, such dividends and Dividend Equivalents are also forfeited, canceled, exchange or surrendered. Upon the exercise of any Award granted in tandem with any other Awards, such related Awards shall be canceled to the extent of the number of Shares as to which the Award is exercised. B. Any Shares distributed pursuant to an Award or Director's Option may consist, in whole or in part, of authorized and unissued Shares or treasury Shares, including Shares acquired by purchase in the open market or in private transactions. B-7 C. In the event that the Committee shall determine that any dividend in Shares, recapitalization, Share split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Shares such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Eligible Employees under the Plan, then the Committee shall make such equitable changes or adjustments as to deems appropriate and, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares which may thereafter be issued under the Plan, (ii) the number and kind of shares, other securities or other consideration issued or issuable in respect of outstanding Awards, and (iii) the exercise price, grant price, or purchase price relating to any Award; PROVIDED, HOWEVER, in each case that, with respect to ISOs, such adjustment shall be made in accordance with Section 424(h) of the Code, unless the Committee determines otherwise. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria and performance objectives included in, Awards in recognition of unusual or non-recurring events (including, without limitation, events described in the preceding sentence) affecting the Company or any Subsidiary or Affiliate or the financial statements of the Company or any Subsidiary or Affiliate, or in response to changes in applicable laws, regulations, or accounting principles; provided, however, that, if an Award Agreement specifically so provides, the Committee shall not have discretion to increase the amount of compensation payable under the Award to the extent such an increase would cause the Award to lose its qualification as performance-based compensation for purposes of Section 162(m)(4)(C) of the Code and the regulations thereunder. V. SPECIFIC TERMS OF AWARDS. A. GENERAL. Awards may be granted on the terms and conditions set forth in this Section V. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section VIII.D.), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms regarding forfeiture of Awards or continued exercisability of Awards in the event of termination of employment by the Eligible Employee. B. OPTIONS. The Committee is authorized to grant Options, which may be NQSOs or ISOs, to Eligible Employees on the following terms and conditions: B-8 1. EXERCISE PRICE. The exercise price per Share purchasable under an Option shall be determined by the Committee, and the Committee may, without limitation, set an exercise price that is based upon achievement of performance criteria if deemed appropriate by the Committee. 2. TIME AND METHOD OF EXERCISE. The Committee shall determine at the date of grant or thereafter the time or times at which an Option may be exercised in whole or in part (including, without limitation, upon achievement of performance criteria if deemed appropriate by the Committee), the methods by which such exercise price may be paid or deemed to be paid (including, without limitation, broker-assisted exercise arrangements), the form of such payment (including, without limitation, cash, Shares, notes or other property), and the methods by which Shares will be delivered or deemed to be delivered to Eligible Employees. 3. ISOs. The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, including but not limited to the requirement that no ISO shall be granted more than ten years after the earlier of the date of adoption or stockholder approval of the Plan. C. SARs. The Committee is authorized to grant SARs (Share Appreciation Rights) to Eligible Employees on the following terms and conditions: 1. RIGHT TO PAYMENT. An SAR shall confer on the Eligible Employee to whom it is granted a right to receive with respect to each Share subject thereto, upon exercise thereof, the excess of (a) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine in the case of any such right, the Fair Market Value of one Share at any time during a specified period before or after the date of exercise) over (b) the exercise price of the SAR as determined by the Committee as of the date of grant of the SAR (which, in the case of an SAR granted in tandem with an Option, shall be equal to the exercise price of the underlying Option). 2. OTHER TERMS. The Committee shall determine, at the time of grant or thereafter, the time or times at which an SAR may be exercised in whole or in part, the method of exercise, method of settlement, form of consideration payable in settlement, method by which Shares will be delivered or deemed to be delivered to Eligible Employees, whether or not an SAR shall be in tandem with any other Award, and any other terms and conditions of any SAR. Unless the Committee determines otherwise, an SAR (a) granted in tandem with an NQSO may be granted at the time of grant of the B-9 related NQSO or at any time thereafter or (b) granted in tandem with an ISO may only be granted at the time of grant of the related ISO. D. RESTRICTED SHARES. The Committee is authorized to grant Restricted Shares to Eligible Employees on the following terms and conditions: 1. ISSUANCE AND RESTRICTIONS. Restricted Shares shall be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose at the date of grant or thereafter, which restrictions may lapse separately or in combination at such times, under such circumstances (including, without limitation, upon achievement of performance criteria if deemed appropriate by the Committee), in such installments, or otherwise, as the Committee may determine. Except to the extent restricted under the Award Agreement relating to the Restricted Shares, an Eligible Employee granted Restricted Shares shall have all of the rights of a stockholder including, without limitation, the right to vote Restricted Shares and the right to receive dividends thereon. 2. FORFEITURE. Except as otherwise determined by the Committee, at the date of grant or thereafter, upon termination of employment during the applicable restriction period, Restricted Shares and any accrued but unpaid dividends or Dividend Equivalents that are at that time subject to restrictions shall be forfeited; PROVIDED, HOWEVER, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Shares will be waived in whole or in part in the event of termination resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Shares. 3. CERTIFICATES FOR SHARES. Restricted Shares granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Shares are registered in the name of the Eligible Employee, such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Shares, and the Company shall retain physical possession of the certificate. 4. DIVIDENDS. Dividends paid on Restricted Shares shall be either paid at the dividend payment date, or deferred for payment to such date as determined by the Committee, in cash or in unrestricted Shares having a Fair Market Value equal to the amount of such dividends. Shares distributed in connection with a Share split or dividend in Shares, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Shares with respect to which such Shares or other property has been distributed. B-10 E. RESTRICTED SHARE UNITS. The Committee is authorized to grant Restricted Share Units to Eligible Employees, subject to the following terms and conditions: 1. AWARD AND RESTRICTIONS. Delivery of Shares or cash, as the case may be, will occur upon expiration of the deferral period specified for Restricted Share Units by the Committee (or, if permitted by the Committee, as elected by the Eligible Employee). In addition, Restricted Share Units shall be subject to such restrictions as the Committee may impose, if any (including, without limitation, the achievement of performance criteria if deemed appropriate by the Committee), at the date of grant or thereafter, which restrictions may lapse at the expiration of the deferral period or at earlier or later specified times, separately or in combination, in installments or otherwise, as the Committee may determine. 2. FORFEITURE. Except as otherwise determined by the Committee at date of grant or thereafter, upon termination of employment (as determined under criteria established by the Committee) during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award Agreement evidencing the Restricted Share Units), or upon failure to satisfy any other conditions precedent to the delivery of Shares or cash to which such Restricted Share Units relate, all Restricted Share Units that are at that time subject to deferral or restriction shall be forfeited; PROVIDED, HOWEVER, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Share Units will be waived in whole or in part in the event of termination resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Share Units. F. PERFORMANCE SHARES AND PERFORMANCE UNITS. The Committee is authorized to grant Performance Shares or Performance Units or both to Eligible Employees on the following terms and conditions: 1. PERFORMANCE PERIOD. The Committee shall determine a performance period (the "Performance Period") of one or more years and shall determine the performance objectives for grants of Performance Shares and Performance Units. Performance objectives may vary from Eligible Employee to Eligible Employee and shall be based upon such performance criteria as the Committee may deem appropriate. Performance Periods may overlap and Eligible Employees may participate simultaneously with respect to Performance Shares and Performance Units for which different Performance Periods are prescribed. B-11 2. AWARD VALUE. At the beginning of a Performance Period, the Committee shall determine for each Eligible Employee or group of Eligible Employees with respect to that Performance Period the range of number of Shares, if any, in the case of Performance Shares, and the range of dollar values, if any, in the case of Performance Units, which may be fixed or may vary in accordance with such performance or other criteria specified by the Committee, which shall be paid to an Eligible Employee as an Award if the relevant measure of Company performance for the Performance Period is met. 3. SIGNIFICANT EVENTS. If during the course of a Performance Period there shall occur significant events as determined by the Committee which the Committee expects to have a substantial effect on a performance objective during such period, the Committee may revise such objective; PROVIDED, HOWEVER, that, if an Award Agreement so provides, the Committee shall not have discretion to increase the amount of compensation payable under the Award to the extent such an increase would cause the Award to lose its qualification as performance-based compensation for purposes of Section 162(m)(4)(C) of the Code and the regulations thereunder. 4. FORFEITURE. Except as otherwise determined by the Committee, at the date of grant or thereafter, upon termination of employment during the applicable Performance Period, Performance Shares and Performance Units for which the Performance Period was prescribed shall be forfeited; PROVIDED, HOWEVER, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in an individual case, that restrictions or forfeiture conditions related to Performance Shares and Performance Units will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Performance Shares and Performance Units. 5. PAYMENT. Each Performance Share or Performance Unit may be paid in whole Shares, or cash, or a combination of Shares and cash either as a lump sum payment or in installments, all as the Committee shall determine, at the time of grant of the Performance Share or Performance Unit or otherwise, commencing as soon as practicable after the end of the relevant Performance Period. G. DIVIDEND EQUIVALENTS. The Committee is authorized to grant Dividend Equivalents to Eligible Employees. The Committee may provide, at the date of grant or thereafter, that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Shares, or other investment vehicles as the Committee may B-12 specify, provided that Dividend Equivalents (other than freestanding Dividend Equivalents) shall be subject to all conditions and restrictions of the underlying Awards to which they relate. H. OTHER SHARE-BASED AWARDS. The Committee is authorized, subject to limitations under applicable law, to grant to Eligible Employees such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Shares, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, unrestricted shares awarded purely as a "bonus" and not subject to any restrictions or conditions, other rights convertible or exchangeable into Shares, purchase rights for Shares, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the performance of specified Subsidiaries or Affiliates. The Committee shall determine the terms and conditions of such Awards at date of grant or thereafter. Shares delivered pursuant to an Award in the nature of a purchase right granted under this Section V.H. shall be purchased for such consideration, paid for in such times, by such methods, and in such forms, including, without limitation, cash, Shares, notes or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, shall also be authorized pursuant to this Section 5(h). VI. CERTAIN PROVISIONS APPLICABLE TO AWARDS. A. STAND-ALONE, ADDITIONAL, TANDEM AND SUBSTITUTE AWARDS. Awards granted under the Plan may, in the discretion of the Committee, be granted to Eligible Employees either alone or in addition to, in tandem with, or in exchange or substitution for, any other Award granted under the Plan or any award granted under any other plan or agreement of the Company, any Subsidiary or Affiliate, or any business entity to be acquired by the Company or a Subsidiary or Affiliate, or any other right of an Eligible Employee to receive payment from the Company or any Subsidiary or Affiliate. Awards may be granted in addition to or in tandem with such other Awards or awards, and may be granted either as of the same time as or a different time from the grant of such other Awards or awards. The per Share exercise price of any Option, grant price of any SAR, or purchase price of any other Award conferring a right to purchase Shares which is granted, in connection with the substitution of awards granted under any other plan or agreement of the Company or any Subsidiary or Affiliate or any business entity to be acquired by the Company or any Subsidiary or Affiliate, shall be determined by the Committee, in its discretion. B-13 B. TERMS OF AWARDS. The term of each Award granted to an Eligible Employee shall be for such period as may be determined by the Committee; PROVIDED, HOWEVER, that in no event shall the term of any ISO or an SAR granted in tandem therewith exceed a period of ten years from the date of its grant (or such shorter period as may be applicable under Section 422 of the Code). C. FORM OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan and any applicable Award Agreement, payments to be made by the Company or a Subsidiary or Affiliate upon the grant, maturation, or exercise of an Award may be made in such forms as the Committee shall determine at the date of grant or thereafter, including, without limitation, cash, Shares, or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The Committee may make rules relating to installment or deferred payments with respect to Awards, including the rate of interest to be credited with respect to such payments. D. NONTRANSFERABILITY. Awards (except for vested Shares) shall not be transferable by an Eligible Employee except by will or the laws of descent and distribution (except pursuant to a Beneficiary designation) and shall be exercisable during the lifetime of an Eligible Employee only by such Eligible Employee or his guardian or legal representative. An Eligible Employee's rights under the Plan may not be pledged, mortgaged, hypothecated, or otherwise encumbered, and shall not be subject to claims of the Eligible Employee's creditors. VII. DIRECTOR'S OPTIONS. A. ANNUAL GRANT. On the Effective Date, each Director in office on such date shall automatically be granted a NQSO to purchase [ ] Shares with an exercise price per Share of $_________. In addition, on each anniversary such date, beginning with the anniversary occurring in 1997, each Director in office on such date shall automatically be granted a NQSO to purchase [ ] Shares with an exercise price per Share equal to 100 percent of the Market Value of one Share on the date of grant; provided, however, that such price shall be at least equal to the par value of a Share. Each Option granted to a Director under this paragraph (1) shall become fully exercisable on the date of grant, and shall expire (unless terminated earlier under paragraph (2) below) on the tenth anniversary of the date of grant. B. MARKET VALUE. For purposes of this Section VII, Market Value shall mean the mean between the high and low selling prices per Share on the immediately preceding date (or, if the Shares were not traded on that day, the next preceding day that the Shares were traded) on the principal exchange or market on which the Shares are traded, as such prices are B-14 officially quoted on such exchange or market. If no public trading market for the Shares shall exist, Market Value shall mean $_________ per share. C. TERMINATION OF SERVICE. If a person ceases to be a Director, (i) due to retirement after attainment of age 65, or (ii) due to death or disability, all of his outstanding Options may be exercised at any time prior to the expiration dates of such Options. If the Director's service terminates for any other reason, all of his outstanding Options may be exercised at any time within six months after the date of such termination, but no later than the expiration date of the Options. D. TIME AND METHOD OF EXERCISE. The exercise price of a Director's Option shall be paid to the Company at the time of exercise either in cash or in Shares already owned by the optionee and having a total Market Value equal to the exercise price, or in a combination of cash and such Shares. E. NONTRANSFERABILITY. No Director's Option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the optionee, a Director's Option shall be exercisable only by him or by his guardian or legal representative. F. ADJUSTMENTS. In the event that subsequent to the Effective Date any dividend in Shares, recapitalization, Share split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other such change, affects the Shares such that they are increased or decreased or changed into or exchanged for a different number or kind of shares, other securities of the Company or of another corporation or other consideration, then in order to maintain the proportionate interest of the Director and preserve the value of the Director's Option, (1) there shall automatically be substituted for each Share subject to an unexercised Director's Option and each Share to be issued under Section VII.A. subsequent to such event the number and kind of shares, other securities or other consideration into which each outstanding Share shall be changed or for which each such Share shall be exchanged, and (2) the exercise price shall be increased or decreased proportionately so that the aggregate purchase price for the Shares subject to any unexercised Director's Option shall remain the same as immediately prior to such event. G. ADMINISTRATION. To the extent the Plan relates to Director's Options, it is intended to operate automatically and not require administration. However, to the extent that administration is necessary with respect to such grants, the Plan shall be administered by the Secretary of the Company. Since the Director's Options are awarded automatically, this function will be limited to ministerial matters. The plan administrator will have no discretion with respect to the selection of Director B-15 optionees, the determination of the exercise price of Director's Options, the timing of such grants or number of Shares covered by the Director's Options. VIII. GENERAL PROVISIONS. A. COMPLIANCE WITH LEGAL AND TRADING REQUIREMENTS. The Plan, the granting and exercising of Awards or Director's Options thereunder, and the other obligations of the Company under the Plan and any Award Agreement, shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Shares under any Award or Director's Option until completion of such stock exchange or market system listing or registration or qualification of such Shares or other required action under any state or federal law, rule or regulation as the Company may consider appropriate, and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Shares in compliance with applicable laws, rules and regulations. No provisions of the Plan shall be interpreted or construed to obligate the Company to register any Shares under federal or state law. B. NO RIGHT TO CONTINUED EMPLOYMENT OR SERVICE. Neither the Plan or any action taken thereunder shall be construed as giving any employee or director the right to be retained in the employ or service of the Company or any of its Subsidiaries or Affiliates, nor shall it interfere in any way with the right of the Company or any of its Subsidiaries or Affiliates to terminate any employee's or director's employment or service at any time. C. TAXES. The Company or any Subsidiary or Affiliate is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Shares, or any payroll or other payment to an Eligible Employee, amounts of withholding and other taxes due in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Eligible Employees to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of an Eligible Employee's tax obligations. D. CHANGES TO THE PLAN AND AWARDS. The Board may amend, alter, suspend, discontinue, or terminate the Plan or the Committee's authority to grant awards under the Plan without the consent of stockholders of the Company or Participants, B-16 except that any such amendment, alteration, suspension, discontinuation, or termination shall be subject to the approval of the Company's stockholders to the extent such stockholders' approval is required (i) in order to insure that Awards granted under the Plan are exempt under Rule 16b-3 or (ii) under Section 422 of the Code; provided, however, that, without the consent of an affected Participant, no amendment, alteration, suspension, discontinuation, or termination of the Plan may impair the rights or, in any other manner, adversely affect the rights of such Participant under any Award or Director's Option theretofore granted to him. Notwithstanding the other provisions of this paragraph, (i) no provision of this Plan may be amended more than once every six months if such amendment would result in the loss of an exemption under Rule 16b-3 and (ii) Section VII and the other provisions of this Plan applicable to Director's Options may not be amended more than once every six months other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. E. NO RIGHTS TO AWARDS; NO STOCKHOLDER RIGHTS. No Eligible Employee or employee shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Employees and employees. No award shall confer on any Eligible Employee any of the rights of a stockholder of the Company unless and until Shares are duly issued or transferred to the Eligible Employee in accordance with the terms of the Award. F. UNFUNDED STATUS OF AWARDS. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award or Director's Option, nothing contained in the Plan or any Award or Director's Option shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided, however, that the Committee may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan to deliver cash, Shares, other Awards, or other property pursuant to any Award, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. G. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor its submission to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of options and other awards otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. B-17 H. NOT COMPENSATION FOR BENEFIT PLANS. No Award payable under this Plan shall be deemed salary or compensation for the purpose of computing benefits under any benefit plan or other arrangement of the Company for the benefit of its employees or directors unless the Company shall determine otherwise. I. NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award or Director's Option. In the case of Awards to Eligible Employees, the Committee shall determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated. In the case of Director's Options, cash shall be paid in lieu of such fractional shares. J. GOVERNING LAW. The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan, and any Award Agreement shall be determined in accordance with the laws of Delaware without giving effect to principles of conflict of laws. K. EFFECTIVE DATE; PLAN TERMINATION. The Plan shall become effective as of ___________ (the "Effective Date") upon approval by the affirmative votes of the holders of a majority of voting securities of the Company. The Plan shall terminate as to future awards on the date which is ten (10) years after the Effective Date. L. TITLES AND HEADINGS. The titles and headings of the sections in the Plan are for convenience of reference only. In the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. B-18 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. IMPORTANT Any holder of Convertible Debentures who wishes to accept the Exchange Offer should either (a) complete the Consent and Letter of Transmittal with any required signature guarantees and forward it with such Convertible Debentures and any other required documents to the Depositary or (b) request a broker or bank to effect the transaction for such holder. Holders of Convertible Debentures that are registered in the name of a broker, dealer, commercial bank, trust company or nominee should contact such institution to tender their Convertible Debentures. See "The Exchange Offer--How to Tender and Consent in the Exchange Offers." THE DEPOSITARY: ADDITIONAL COPIES Requests for additional copies of this Proxy Statement/Prospectus and the forms of Letter of Transmittal should be directed to the Company. You may also contact your local broker, dealer, commercial bank or trust company for assistance concerning the Exchange Offer. -----END PRIVACY-ENHANCED MESSAGE-----