10-Q 1 doc1.txt IASG 2ND QUARTER 10Q NOVEMBER 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended November 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________________ to __________________. Commission file number 0-18352 ------- INTERNATIONAL AIRLINE SUPPORT GROUP, INC. --------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 59-2223025 -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1954 Airport Road, Suite 200, Atlanta, GA 30341 ----------------------------------------------- ------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (770) 455-7575 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days . YES X NO APPLICABLE ONLY TO CORPORATE --- --- ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The number of shares of the Company's common stock outstanding as of January 6, 2003 was 2,150,497. FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY INDEX Page No. --------- Part I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of May 31, 2002 and November 30, 2002 3 Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended November 30, 2001 and 2002 4 Condensed Consolidated Statements of Cash Flows for the Six months Ended November 30, 2001 and 2002 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 Item 4. Controls and Procedures 16 Part II OTHER INFORMATION Item 1. Legal Proceedings 17 Item 3. Defaults with respect to Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17 FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS

*Condensed from audited Financial Statements The accompanying notes are an integral part of these condensed financial statements - 3 - FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FORM 10-Q INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

5 INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain adjustments (consisting only of normal and recurring adjustments) necessary to present fairly International Airline Support Group, Inc. and Subsidiaries' condensed consolidated balance sheets as of May 31, 2002 and November 30, 2002, the condensed consolidated statements of operations for the three and six months ended November 30, 2001 and November 30, 2002, and the condensed consolidated statements of cash flows for the six months ended November 30, 2001 and November 30, 2002. The accounting policies followed by the Company are described in the notes to the May 31, 2002 consolidated financial statements. The results of operations for the three and six months ended November 30, 2002 are not necessarily indicative of the results to be expected for the remaining quarters or the full year. 2. Inventories consisted of the following: May 31,2002 November 30,2002 ------------ ----------------- Aircraft parts $ 6,110,083 $ 5,327,077 Aircraft and Engines available for sale 1,726,481 1,666,555 ------------ ----------- $ 7,836,564 $ 6,993,632 ============ =========== 3. Loss Per Share: The Company's basic loss per share is calculated by dividing net loss by the weighted average shares outstanding during the period. Common stock equivalents have been excluded from the diluted per share calculation for the three and six months ended November 30, 2001 and 2002, as the Company incurred net losses and their inclusion would have been anti-dilutive. Potential common stock equivalents at November 30, 2001 and 2002 were outstanding stock options to purchase 468,774 and 668,796 shares, respectively, of the Company's common stock with exercise prices ranging from $0.55 to $3.31 per share. 4. Reclassifications: Certain prior year amounts have been reclassified to conform with the current year presentation. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Credit Facility: The Company obtains working capital and long-term financing for inventory and aircraft acquisitions pursuant to the Credit Facility. The Credit Facility includes a revolving credit facility that permits the Company to borrow up to $14 million. It also includes two term loans that totaled approximately $7.8 million as of November 30, 2002. The Credit Facility matures in December 2005. The Company is required to make monthly repayments of the principal of the term loans. The interest rate that the Company pays on borrowings pursuant to the Credit Facility is subject to fluctuation and may change based upon certain financial covenants. As of November 30, 2002, the effective interest rate under the Credit Facility was the lender's base rate plus 1.75% (6.10%), which is based on the default rate specified in the Credit Facility. The Credit Facility is secured by substantially all of the assets of the Company and availability of amounts for borrowing is subject to certain limitations and restrictions. As of the date hereof, the Company is not in compliance with certain covenants included in the Credit Facility and has defaulted on the payment of certain installments of principal on the term loans. The Company ceased to be in compliance with the covenants during the second quarter of fiscal 2002 when it recorded a non-cash impairment charge to eliminate the Company's investment in Air 41 LLC. The Company has also failed to make monthly repayments of the principal on the term loans, in the amount of approximately $1,080,000, since the first quarter of fiscal 2003. As a result of these defaults, the entire principal amount of the indebtedness outstanding under the Credit Facility has been classified as current in the accompanying balance sheet at November 30, 2002. On September 20, 2002, the Company and its lender entered into a forbearance letter, pursuant to which the lender has agreed that it will not exercise the remedies available to it under the Credit Facility and that it will continue to advance funds to the Company in accordance with the terms of the Credit Facility. The lender's agreement terminates if the Company defaults on the performance of the terms of the Credit Facility other than the default of making monthly principal payments. The Company is required, pursuant to the forbearance letter, to provide weekly cash flow budgets to the lender, to cooperate with a consultant hired by the lender to evaluate the Company's prospects and to pay the lender's fees and expenses in connection with its evaluation of the Company. The original forbearance letter has since been amended and the amended forbearance letter will expire on January 15, 2003 if the Company and the lender have not entered into a formal forbearance agreement. The Company believes that the lender will extend the forbearance letter. In addition, the Company has entered into discussion with the lender about selling certain amount of assets over a certain period of time, of which the terms have been negotiated. Upon the expiration or earlier termination of the forbearance letter, the Company's lender could accelerate the Company's obligation to repay the amount of all borrowings outstanding under the Credit Facility, could refuse to extend additional credit to the Company and could foreclose on its lien on the Company's assets. The Company would be unable to continue operations if the lender took such actions. The report of the independent certified public accountants on the financial statements that accompany the Company's Annual Report on Form 10-K, for the year ended May 31, 2002, includes a paragraph that indicates the uncertainty about the Company's ability to continue as a going concern. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Credit Facility (cont.): The Company's lender is continuing to extend credit under the Credit Facility, although the Company has had no availability under the Credit Facility since September 15, 2002. As of January 7, 2003, the Company's lender had over advanced the Company approximately $325,000 pursuant to the revolving Credit Facility. The Company has no assurances, however, that the lender will continue to do so. The Company is continuing its negotiations with its lender but has no assurances that it will be able to consummate a revised credit facility with the lender. Accordingly, the Company is pursuing other alternatives. Such alternatives include discussions with other potential sources of financing and with companies that might pursue a business combination transaction with the Company. The Company has no assurance that any of such alternatives will materialize. 6. Supplemental Cash Flow Disclosures: Cash payments for interest were $768,000 and $593,000 for the six months ended November 30, 2001 and 2002, respectively. Cash and cash equivalents include $29,000 and $71,000 of restricted cash at May 31, 2002 and November 30, 2002, respectively. Restricted cash includes customer receipts deposited into the Company's lockbox account, which are applied the next business day against the outstanding amount of the Credit Facility, and customer deposits on aircraft and engines leases. 7. Related Party Transactions: The Company had notes receivables from an affiliate in the principal amount of $200,000 and $300,000, net of reserves, as of November 30, 2002 and May 31, 2002, respectively, relating to loans provided to North-South Airways, which are secured by aircraft operated by the airline. The notes, outstanding at November 30, 2002, bear interest at an annual rate of 9.50% and have monthly principal payments extending through August 2004. During the second quarter of fiscal 2003, the Company took the leased EMB-120 aircraft back from North-South Airways due to North-South Airways' default on the lease payments. There was no lease revenue from North-South Airways for the three months ended November 30, 2002 compared to $285,000 for the three months ended November 30, 2001. For the six months ended November 30, 2002, the total lease revenue from North-South Airways was approximately $119,000 compared to $510,000 for the six months ended November 30, 2001. North-South Airways has ceased its operations. The Company does not believe it will recover any amount owed to it by North-South Airways other than net amounts recorded as notes receivable. The Company has fully reserved all advances and trade accounts receivable due from North-South. During the second quarter of fiscal 2003, the Company paid Mesa Air Group a deposit in the amount of $150,000 in exchange for receiving additional surplus spare parts under the existing inventory agreement. A board member of the Company is a executive and a member of the Board of Directors of Mesa Air Group. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. Unconsolidated Subsidiaries: During the first quarter of fiscal 2003, the Company's joint venture, Air 41 LLC, reached an agreement with its lender to transfer its aircraft to the lender in exchange for the cancellation of the joint venture's indebtedness. The lender and the Company executed mutual releases in connection with the agreement between the lender and the joint venture. During the first quarter of fiscal 2003, the Company received a payment of $185,000 from the lender upon the consummation of the agreement between the lender and the joint venture. In exchange for this payment, the Company released any and all claims it may have had against the lender and the joint venture. Equity in net loss of unconsolidated joint ventures related to North-South was approximately $283,000 and $259,000 for the six months ended November 30, 2002 and 2001, respectively. The Company is in negotiations with certain third parties who have expressed an interest in providing equity capital to North-South. There can be no assurances that such parties will provide any equity capital. The Company has fully reserved all advances and trade accounts receivable due from North-South. 9. Recent Events: On September 30, 2002, the Company received a notice of default and demand for payment under the Term Loan Agreement dated December 20, 2000, between the Company and Bombardier Capital. The loan, the principal amount of which is approximately $1,560,000, is secured by one of the Company's EMB-120 aircraft. The Company has not been able to make the monthly installments of principal and interest, approximately $22,000 per month, with respect to this loan since August 2002. The lender has demanded payment in full of the amounts in default within 30 days from the date of the notice. The lender has stated that it may pursue and enforce all rights and remedies to which it is entitled under the loan agreement, including the repossession and sale of the aircraft if the amounts due are not repaid within such period. The Company does not have sufficient funds to repay the amount due and cannot obtain them by means of an advance under the Credit Facility. Accordingly, the Company expects that Bombardier Capital will repossess the aircraft and sell it for the best price obtainable. The Company will be liable to Bombardier Capital for any amount of the loan remaining unpaid after the aircraft is sold. As of January 7, 2003, the Company has not received further notice from Bombardier Capital regarding the action the lender is going to take. As a result of this default under the Term Loan Agreement, the Company recorded an impairment charge of $611,186 related to the aircraft collateralizing the indebtedness owed to Bombardier Capital during the first quarter of fiscal 2003 in order to write down the value of the aircraft to its estimated fair value. As of November 30, 2002, the value of this aircraft is classified as aircraft held for lease. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 10. New Accounting Pronouncements: In July 2002, the FASB issued Statement 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 nullifies EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The statement provides guidance on the accounting and disclosure requirements for companies that incur costs to exit an activity. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Early application is encouraged. Restatement of previously issued financial statements is prohibited. Management believes that this standard will not have a material impact on its current operations. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following is management's discussion and analysis of certain significant factors which have affected the Company's operating results and financial position during the periods included in the accompanying condensed consolidated financial statements. RESULTS OF OPERATIONS: ------------------------ Revenues -------- Total revenue for the three and six months ended November 30, 2002 was $1.9 million and $4 million, respectively, compared to $4.2 million and $8.9 million, respectively, during the three and six months ended November 30, 2001. Net sales for the three and six months ended November 30, 2002 were $1.6 million and $3.3 million, respectively, compared to $3.7 million and $7.6 million, respectively, during the three and six months ended November 30, 2001. The decrease in total revenue is primarily due to the decrease in parts sales, engine sales and lease revenue. The decline in parts sales is attributable to the weaker economy, decreased demand due to the overall slowdown in the aviation industry as a whole, pricing pressure from our competition and the fact that the Company has had no availability under the Credit Facility to purchase additional inventory. Engine sales are unpredictable transactions and may fluctuate significantly from year to year, dependent, in part, upon the Company's ability to purchase an engine at an attractive price and resell it within a relatively brief period of time, as well as the overall market for used engines. For the three months ended November 30, 2002, lease and service revenue slightly decreased to $255,000 for the three months ended November 30, 2002 from $260,000 for the three months ended November 30, 2001, lease and service revenue decreased to $510,000 for the six months ended November 30, 2002 from $764,000 for the six months ended November 30, 2001, primarily due to fewer assets under lease during the first three and six months of fiscal 2003. During the second quarter of fiscal 2003, the Company took the leased EMB-120 aircraft back from North-South Airways due to North-South Airways' default on the lease payments. There was no lease revenue from North-South Airways for the three months ended November 30, 2002 compared to $285,000 for the three months ended November 30, 2001. For the six months ended November 30, 2002, lease revenue from North-South Airways decreased to $119,000 from $510,000 for the six months ended November 30, 2001. Cost of Sales --------------- Cost of sales decreased 57% from $2.8 million during the three months ended November 30, 2001 to $1.2 million during the three months ended November 30, 2002. Cost of sales decreased 54% from $5.7 million during the six months ended November 30, 2001 to $2.6 million during the six months ended November 30, 2002. The decreases were primarily due to the corresponding decreases in sales during the periods. As a percentage of total revenues, cost of sales for the three months ended November 30, 2002 was 63% compared to 66% during the three months ended November 30, 2001. The decrease was due to the engine sales, which typically carry a lower margin than part sales, during the three months period in 2001 compared to no engine sales in the corresponding period in 2002. Cost of sales as a percentage of total revenues for the six months ended November 30, 2002 was 66% compared to 64% during the six months ended November 30, 2001. The increase was due primarily to a write off of a prepayment under an inventory agreement during the first quarter of fiscal 2003. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES Selling, General and Administrative Expenses ------------------------------------------------ Selling, general and administrative expenses decreased 9% from approximately $1.1 million during the three months ended November 30, 2001 to approximately $1.0 million during the three months ended November 30, 2002. Selling, general and administrative expenses decreased 9% from approximately $2.3 million during the six months ended November 30, 2001 to approximately $2.1 million during the six months ended November 30, 2002. The decrease in selling, general and administrative expenses for fiscal 2003 was primarily due to decreases in salaries and wages, commissions, insurances expenses and owned aircraft expenses, partially offset by higher bank charges and legal fees. Depreciation and Amortization ------------------------------- Depreciation and amortization for the three and six months ended November 30, 2002 totaled $306,000 and $625,000, respectively, compared to $248,000 and $485,000, respectively, for the three and six months ended November 30, 2001, respectively. This increase was due to having more aircraft under depreciation in the periods of fiscal 2003. Equity in Net Earnings (Loss) of Unconsolidated Joint Ventures ---------------------------------------------------------------------- Equity in net loss of unconsolidated joint ventures for the three and six months ended November 30, 2002 was $0 and $(283,000) respectively, compared to net earnings of $185,000 and $341,000 respectively for the three and six months ended November 30, 2001. The equity in net loss of $(283,000) for the six months ended November 30, 2002 was the Company's share of net loss from North-South. The equity in net earnings of $185,000 for the three months ended November 30, 2001 consisted of earnings of $270,000 from Air 41 LLC and a loss of $(85,000) from North-South. The equity in net earnings of $341,000 for the six months ended November 30, 2001 consisted of earnings of $600,000 from Air 41 LLC and a loss of $(259,000) from North-South. During the first quarter of fiscal 2003, Air 41 LLC reached an agreement, dated as of August 9, 2002, with its lender to transfer its aircraft to the lender in exchange for the cancellation of its indebtedness. Air 41 LLC currently has no operations or assets (see Note 8). During the second quarter of fiscal 2003, the Company did not book any earnings or loss from North-South because its equity investment in North-South had been completely written off and its receivables and advances had been fully reserved. Impairment of Aircraft ------------------------ The Company recorded an impairment charge of $611,186 related to the aircraft collateralizing the indebtedness owed to Bombardier Capital during the first quarter of fiscal 2003 in order to write down the value of the aircraft to its estimated selling price upon foreclosure, see Note 9. Interest Expense ----------------- Interest expense for the three and six months ended November 30, 2002 was $329,000 and $593,000, respectively, compared to $351,000 and $768,000 for the three and six months ended November 30, 2001, respectively. The decrease was due to a decrease in the prime rate, partially offset by an increase in the interest rate margin of two basis points under the Credit Facility as a result of the default on this debt. In addition, the decrease was due to the amortization of certain deferred loan costs during the three and six months ended November 30, 2001. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES Net Losses ----------- Loss per share for the second quarter of fiscal 2002 were $(1.69), based on 2,181,497 weighted average shares outstanding, compared to loss per share for the second quarter of fiscal 2003 of $(0.43), based on 2,154,541 weighted average shares outstanding. Loss per share for the first six months of fiscal 2002 were $(1.75) per share, based on 2,101,060 weighted average shares outstanding, compared to loss per share for the first six months of fiscal 2003 of $(1.30) per share, based on 2,151,033 weighted average shares outstanding. Liquidity and Capital Resources ---------------------------------- The Company obtains working capital and long-term financing for inventory and aircraft acquisitions pursuant to the Credit Facility. The Credit Facility includes a revolving credit facility that permits the Company to borrow up to $14 million. It also includes two term loans that totaled approximately $7.8 million as of November 30, 2002. The Credit Facility matures in December 2005. The Company is required to make monthly repayments of the principal of the term loans. The interest rate that the Company pays on borrowings pursuant to the Credit Facility is subject to fluctuation and may change based upon certain financial covenants. As of November 30, 2002, the effective interest rate under the Credit Facility was the lender's base rate plus 1.75% (6.10%), which is based on the default rate specified in the Credit Facility. The Credit Facility is secured by substantially all of the assets of the Company and availability of amounts for borrowing is subject to certain limitations and restrictions. As of the date hereof, the Company is not in compliance with certain covenants included in the Credit Facility and has defaulted on the payment of certain installments of principal of the term loans. The Company ceased to be in compliance with the covenants during the second quarter of fiscal 2002 when it recorded a non-cash impairment charge to eliminate the Company's investment in Air 41 LLC. The Company has also failed to make monthly repayments of the principal of the term loans, in the amount of approximately $1,080,000, since the first quarter of fiscal 2003. As a result of these defaults, the entire principal amount of the indebtedness outstanding under the Credit Facility has been classified as current in the accompanying balance sheet at November 30, 2002. On September 20, 2002, the Company and its lender entered into a forbearance letter, pursuant to which the lender has agreed that it will not exercise the remedies available to it under the Credit Facility and that it will continue to advance funds to the Company in accordance with the terms of the Credit Facility. The lender's agreements terminate if the Company defaults on the performance of the terms of the Credit Facility other than the default of making monthly principal payments. The Company is required, pursuant to the forbearance letter, to provide weekly cash flow budgets to the lender, to cooperate with a consultant hired by the lender to evaluate the Company's prospects and to pay the lender's fees and expenses in connection with its evaluation of the Company. The original forbearance letter has since been amended and the amended forbearance letter will expire on January 15, 2003 if the Company and the lender have not entered into a formal forbearance agreement. The Company believes that the lender will extend the forbearance letter. In addition, the Company has entered into discussions with the lender about selling certain amount of assets over a certain period of time, of which the terms have been negotiated. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES Liquidity and Capital Resources (cont.) ------------------------------------------- Upon the expiration or earlier termination of the forbearance letter, the Company's lender could accelerate the Company's obligation to repay the amount of all borrowings outstanding under the Credit Facility, could refuse to extend additional credit to the Company and could foreclose on its lien on the Company's assets. The Company would be unable to continue operations if the lender took such actions. The report of the independent certified public accountants on the financial statements that accompany the Company's Annual Report on Form 10-K, for the year ended May 31, 2002, includes a paragraph that indicates the uncertainty about the Company's ability to continue as a going concern. The Company's lender is continuing to extend credit under the Credit Facility, although the Company has had no availability under the Credit Facility since September 15, 2002. As of January 7, 2003, the Company's lender had over advanced the Company approximately $325,000 pursuant to the revolving Credit Facility. The Company has no assurances, however, that the lender will continue to do so. The Company is continuing its negotiations with its lender but has no assurances that it will be able to consummate a revised credit facility with the lender. Accordingly, the Company is pursuing other alternatives. Such alternatives include discussions with other potential sources of financing and with companies that might pursue a business combination transaction with the Company. The Company has no assurance that any of such alternatives will materialize. Net cash (used in) provided by operating activities for the six months ended November 30, 2002 and November 30, 2001 was $(547,000) and $74,000, respectively. The cash used in operating activities for six months ended November 30, 2002 was due primarily to the decrease in the accounts payables and increase in other assets. The cash provided by operating activities for the six months ended November 30, 2001 was due primarily to the net earnings for the period before the non-cash charge for the impairment of investment. Net cash used in investing activities for the six months ended November 30, 2002 amounted to $7,000 compared to $283,000 for the six months ended November 30, 2001. The net cash used in investing activities for the six months ended November 30, 2002 was primarily the result of the addition of equipment. The net cash used for investing activities for the six months ended November 30, 2001 was the result of the capitalized expenses incurred for the aircraft purchased. Net cash provided by financing activities for the six months ended November 30, 2002 amounted to $635,000 compared to $299,000 for the six months ended November 30, 2001. The net cash provided by financing activities for the six months ended November 30, 2001 and 2002 was primarily the result of the increase of the revolving loan balance to fund operating losses. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES Recent Events -------------- On September 30, 2002, the Company received a notice of default and demand for payment under the Term Loan Agreement dated December 20, 2000, between the Company and Bombardier Capital. The loan, the principal amount of which is approximately $1,560,000, is secured by one of the Company's EMB-120 aircraft. The Company has not been able to make the monthly installments of principal and interest, approximately $22,000 per month, with respect to this loan since August 2002. The lender has demanded payment in full of the amounts in default within 30 days from the date of the notice. The lender has stated that it may pursue and enforce all rights and remedies to which it is entitled under the loan agreement, including the repossession and sale of the aircraft if the amounts due are not repaid within such period. The Company does not have sufficient funds to repay the amount due and cannot obtain them by means of an advance under the Credit Facility. Accordingly, the Company expects that Bombardier Capital will repossess the aircraft and sell it for the best price obtainable. The Company will be liable to Bombardier Capital for any amount of the loan remaining unpaid after the aircraft is sold. As of January 7, 2003, the Company has not received further notice from Bombardier Capital regarding the action the lender is going to take. As a result of this default under the Term Loan Agreement, the Company recorded an impairment charge of $611,186 related to the aircraft collateralizing the indebtedness owed to Bombardier Capital during the first quarter of fiscal 2003 in order to write down the value of the aircraft to its estimated fair value. New Accounting Pronouncements ------------------------------- In July 2002, the FASB issued Statement 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 nullifies EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The statement provides guidance on the accounting and disclosure requirements for companies that incur costs to exit an activity. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Early application is encouraged. Restatement of previously issued financial statements is prohibited. Management believes that this standard will not have a material impact on its current operations. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks that may impact the Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows due to changing interest rates. The Company does not currently participate in any hedging activities. However, interest rate fluctuations expose the Company's variable-rate debt to changes in interest expense and cash flows. The Company's variable-rate debt, primarily short-term secured borrowings, amounted to approximately $20.3 million at November 30, 2002. Based on outstanding borrowings at quarter-end, a 10% adverse change in market interest rates at November 30, 2002 would result in additional after-tax interest expense of approximately $31,000 and $62,000 for the three and six months ended November 30, 2002, respectively. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures The Chief Executive Officer and the Vice President - Finance, who serves as the chief financial officer, of the Company have concluded, based on their evaluation of the Company's disclosure controls and procedures within 90 days of the date of the filing of this Quarterly Report on Form 10-Q, that the Company's disclosure controls and procedures were effective and designed to ensure that material information relating to the Company, including its consolidated subsidiary, would be made known to them by others within the Company during the period in which this Quarterly Report on Form 10-Q was being prepared. (b) Changes in internal controls N/A Forward Looking Statements ---------------------------- This Form 10-Q may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 and within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information currently available to the Company, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, including: the impact of the events of September 11, 2001 on the economy, the aviation/aerospace industry and the Company; general economic conditions; ability to acquire inventory at favorable prices; marketplace competition; economic and aviation/aerospace market stability and Company profitability. Should one or more of these risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. These events and uncertainties are difficult or impossible to predict accurately and many are beyond the Company's control. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements reflecting changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. The Company assumes no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is from time to time subject to legal proceedings and claims that arise in the ordinary course of its business. On the date hereof, no such proceedings are pending and no such claims have been asserted. Item 3. DEFAULTS UPON SENIOR SECURITIES The Company is in default in the payment of principal and in the performance of certain covenants with respect to its senior secured credit facility. As of January 7, 2003, the Company was in default in the payment of $1,082,000 of principal. The Company is in default in the payment of principal and interest with respect to the Term Loan Agreement, dated December 20, 2000, between the Company and Bombardier Capital, Inc. As of January 7, 2003, the Company was in default in the payment of $111,000 of principal, interest and late fees. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company conducted an annual meeting for its stockholders on October 15, 2002. The Company solicited proxies pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to management's solicitation and all persons nominated by the Company for election to its Board of Directors at the annual meeting were so elected. The following sets forth information regarding the number of votes cast for and withheld with respect to each person nominated by the Company for election to its Board of Directors as a Class II Director for a term expiring at the annual stockholders' meeting in 2005. Director Votes For Abstentions F. Dixon McElwee, Jr. 1,552,894 511,083 Ronald R. Fogelman 1,552,894 511,083 E. James Mueller 1,552,746 511,231 There were no other matters submitted to a vote of the Company's stockholders at the annual meeting. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -------- Exhibit Number Description Page Number or Method of Filing ------ ----------- ------------------------------------ 3.1 Amended and Restated Certificate of Incorporation of the --- --------------------------------------------------------------- Registrant. Incorporated by reference to Exhibit 3.1 to the Company's Annual --- - ---------------------------------------------------------------- Report on Form 10-K for the fiscal year ended May 31, 1996 (the "1996 Form -------------------------------------------------------------------------------- 10-K"). ------- 3.2 Restated and Amended Bylaws of the Registrant. Incorporated by --- ----------------------------------------------- --------------- reference to Exhibit 3.2 to the 1996 Form 10-K. ------------------------------------------------------- 4.1 Specimen Common Stock Certificate. Incorporated by reference to --- ---------------------------------- ---------------------------- Exhibit 4.1 to the 1996 Form 10-K. ---------------------------------------- 10.1.1 Second Amended and Restated Employment Agreement, dated July 25, ------ ---------------------------------------------------------------- 2001, between the Registrant and Alexius A. Dyer III. Incorporated by ------------------------------------------------------------ --------------- reference to Exhibit 10.1.1 to the Company's Annual Report on Form 10-K for the -------------------------------------------------------------------------------- fiscal year ended May 31, 2001. ------------------------------------ 10.2.1 1996 Long-Term Incentive and Share Award Plan. Incorporated ------ ----------------------------------------------- ------------ by reference to Appendix B to the Proxy Statement/Prospectus included in the -------------------------------------------------------------------------------- Company's Registration Statement on Form S-4 (File No. 333-08065), filed on July -------------------------------------------------------------------------------- 12, 1996. ---------- 10.2.2 401(k) Plan. Incorporated by reference to Exhibit 10-H to ------ ------------- ---------------------------------------------- the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1992 ------------------------------------------------------------------------------ (the "1992 Form 10-K"). -------------------------- 10.2.3 Bonus Plan. Incorporated by reference to Exhibit 10.2.4 to ------ ------------ ----------------------------------------------- the 1992 Form 10-K. --------------------- 10.2.4 Cafeteria Plan. Incorporated by reference to Exhibit 10.2.5 ------ ---------------- ------------------------------------------- of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, -------------------------------------------------------------------------------- 1993. ----- 10.2.5 Form of Option Certificate (Employee Non-Qualified Stock ------ -------------------------------------------------------------- Option). Incorporated by reference to Exhibit 10.2.5 to the 1996 Form 10-K. --- ------------------------------------------------------------------- 10.2.6 Form of Option Certificate (Director Non-Qualified Stock ------ -------------------------------------------------------------- Option). Incorporated by reference to Exhibit 10.2.6 to the 1996 Form 10-K. --- ------------------------------------------------------------------- 10.2.7 Form of Option Certificate (Incentive Stock Option). ------ ---------------------------------------------------------- Incorporated by reference to Exhibit 10.2.7 to the 1996 Form 10-K. ----------------------------------------------------------------------- 10.14 Commission Agreement dated December 1, 1995 between the ----- -------------------------------------------------------------- Registrant and J.M. Associates, Inc. Incorporated by reference to Exhibit ---------------------------------- ------------------------------------ 10.14 to the 1996 Form 10-K. ------------------------------- 10.15 Office Lease Agreement dated January 31, 1997 between the ----- ----------------------------------------------------------------- Registrant and Globe Corporate Center, as amended. Incorporated by reference --------------------------------------------- ------------------------- to Exhibit 10.17 to the 1997 Form 10-K. ---------------------------------------------- Incorporated by reference to Exhibit 10.18 to the 1997 Form 10-K. 10.16 Lease Agreement dated March 31, 1997 between the Registrant and ----- ----------------------------------------------------------------- Port 95-4, Ltd. ---------------- Incorporated by reference to Exhibit 10.20 to the Company's Quarterly Report for the quarter ending November 30, 2000. 10.17 Securities Purchase Agreement, dated September 18, 2000, among ----- ----------------------------------------------------------------- Diamond Aviation, Inc., the Registrant and the purchasers named therein. ------------------------------------------------------------------------------ Stockholders Agreement, dated September 18, 2000, among Diamond Aviation, Inc., the Registrant and the purchasers named therein. Incorporated by reference to Exhibit 10.19 to the Company's Quarterly Report for the quarter ending November 30, 2000. 10.18 ----- 10.19 Lease Extension and Modification Agreement dated December 10, ----- ----------------------------------------------------------------- 2001 between the Registrant and Port 95-4, Ltd. Incorporated by reference to -------------------------------------------- ---------------------------- Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year -------------------------------------------------------------------------------- ended May 31, 2002. ---------------------- 10.20 Term Loan Agreement dated December 20, 2000 between the ----- --------------------------------------------------------------- Registrant and Bombardier Capital Inc. Incorporated by reference to Exhibit ---------------------------------- ------------------------------------ 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended May -------------------------------------------------------------------------------- 31, 2002. ---------- Letter dated October 15, 2002 from GMAC Commercial Finance to the Company establishing the terms on which GMAC Commercial Finance will refrain from exercising remedies. 10.21 Incorporated by reference to Exhibit 10.21 to the Company's ----- ------------------------------------------------------------ Quarterly Report on Form 10-Q for the quarter ended August 31, 2002 ------------------------------------------------------------------------------ 10.22 Letter dated September 20, 2002 from Bombardier Capital Inc. to ----- ----------------------------------------------------------------- the Company declaring an Event of Default under Term Loan Agreement ---------------------------------------------------------------------------- Incorporated by reference to Exhibit 10.22 to the Company's Quarterly Report on ------------------------------------------------------------------------------- Form 10-Q for the quarter ended August 31, 2002 ------------------------------------------------------- Settlement Agreement, dated as of August 9, 2002, by and between Finova Capital Corporation, Air 41, LLC, Aircorp, Inc. and the Company. Incorporated by reference to Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 2002 10.23 ----- Incorporated by reference to Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 2002 10.24 Letter dated October 15, 2002 from GMAC Commercial Finance to the ----- ----------------------------------------------------------------- Company extending the expiration of the September 20, 2002 forbearance letter. -------------------------------------------------------------------------------- Letter dated November 30, 2002 from GMAC Commercial Finance to the Company extending the expiration of the September 20, 2002 forbearance letter. 10.25 Filed herewith ----- --------------- Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (the "Act") and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Act. 99.1 Filed herewith. ---- ---------------- 99.2 Certification of the Principal Financial Officer pursuant to ---- ------------------------------------------------------------------ Section 302 of the Sarbanes-Oxley Act of 2002 (the "Act") and pursuant to 18 --------------------------------------------------------------------------- U.S.C. Section 1350, as adopted pursuant to Section 906 of the Act. Filed ------------------------------------------------------------------- ----- herewith. ------- (b) Reports on Form 8-K ---------------------- None INTERNATIONAL AIRLINE SUPPORT GROUP, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL AIRLINE SUPPORT GROUP, INC. -------------------------------------------- (Registrant) /s/Alexius A. Dyer III January 14, 2003 ------------------------- ------------------ Alexius A. Dyer III Date Chairman, President and Chief Executive Officer /s/Qiang Wang January 14, 2003 -------------- ------------------ Qiang Wang Date VP Finance and Chief Accounting Officer CERTIFICATIONS I, Alexius A. Dyer III, certify that 1. I have reviewed this Quarterly Report on Form 10-Q of International Airline Support Group, Inc. 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and (c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 14, 2003 /s/ Alexius A. Dyer III _____ --------------------------- Name: Alexius A. Dyer III Title: Chairman, President and Chief Executive Officer ====== I, John Wang, certify that 1. I have reviewed this Quarterly Report on Form 10-Q of International Airline Support Group, Inc. 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and (c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 14, 2003 /s/ Qiang Wang ---------------- Name: Qiang Wang Title: Vice President - Finance

INTERNATIONAL AIRLINE SUPPORT GROUP INC 10-Q