<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1997
REGISTRATION NO. 333-19875
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERNATIONAL AIRCRAFT INVESTORS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA 7359 95-4176107
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER ID NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.)
</TABLE>
3655 TORRANCE BOULEVARD, SUITE 410
TORRANCE, CALIFORNIA 90503
(310) 316-3080
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
WILLIAM E. LINDSEY
INTERNATIONAL AIRCRAFT INVESTORS
3655 TORRANCE BOULEVARD, SUITE 410
TORRANCE, CALIFORNIA 90503
(310) 316-3080
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
RICHARD A. BOEHMER, ESQ. PAUL H. IRVING, ESQ.
PRISCILA CASTILLO LEMUS, ESQ. ALLEN Z. SUSSMAN, ESQ.
O'MELVENY & MYERS LLP MANATT, PHELPS & PHILLIPS, LLP
400 SOUTH HOPE STREET 11355 W. OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90064
(213) 669-6000 (310) 312-4000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
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 OCTOBER 17, 1997
PRELIMINARY PROSPECTUS
2,600,000 SHARES
[LOGO] INTERNATIONAL AIRCRAFT INVESTORS
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby are being sold by
International Aircraft Investors (the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $9.50 and
$10.50 per share. See "Underwriting" for information relating to the
determination of the initial public offering price.
Application has been made for the Common Stock of the Company to be
approved for quotation on the National Association of Securities Dealers
Automated Quotation National Market ("Nasdaq-NM") under the trading symbol
"IAIS."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
THESE SECURITIES HAVE NOT 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
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Per Share.......................... $ $ $
- -----------------------------------------------------------------------------------------------
Total(3)........................... $ $ $
===============================================================================================
</TABLE>
(1) Excludes the value of warrants to purchase up to 260,000 shares of Common
Stock at an exercise price per share equal to 120% of the initial public
offering price per share issuable upon exercise of warrants to be issued to
Sutro & Co. Incorporated upon the closing of this offering. The Company has
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $800,000.
(3) The Company has granted the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase a maximum of 390,000
additional shares of Common Stock from the Company solely to cover
overallotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part and to withdraw, cancel or modify this offering without
notice. It is expected that delivery of the certificates for the shares will be
made on or about , 1997.
SUTRO & CO. INCORPORATED CRUTTENDEN ROTH INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3
[FOUR AIRCRAFT IN FLIGHT. THREE B 737S, ONE WITH THE LOGO AND NAME OF SOUTHWEST,
ONE WITH THE LOGO AND NAME OF BRITISH MIDLAND AND ONE WITH THE LOGO AND NAME OF
SHANGHAI AIRLINES. THE FOURTH AIRCRAFT IS AN MD 82 WITH THE LOGO AND NAME OF
ALASKA.]
[MAP OF THE WORLD WITH THE OUTLINE OF TEN AIRCRAFT, EACH WITH A FLAG UNDERNEATH
AND A LINE INDICATING THE COUNTRY OF THE LESSEE OF THE AIRCRAFT. THE AIRCRAFT
REPRESENTING THE AIRCRAFT TO BE ACQUIRED, WHICH WILL BE ON LEASE TO AIR TRANSAT,
STATES UNDER THE OUTLINE OF THE AIRCRAFT THE WORDS "(DELIVERY 1997)." AT THE
BOTTOM OF THE MAP ARE THE WORDS "INTERNATIONAL AIRCRAFT INVESTORS WORLDWIDE
PORTFOLIO."]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus, including the information
appearing under "Risk Factors." Unless otherwise indicated, all financial
information and share and per share data in this Prospectus, other than the
Consolidated Financial Statements, (i) reflect a 1-for-4.5 reverse split of
Common Stock prior to the closing of the offering, (ii) assume no exercise of
the Underwriters' over-allotment option, (iii) assume the conversion of all the
outstanding shares of Convertible Preferred Stock (the "Preferred Stock") into
1,097,969 shares of Common Stock upon the closing of this offering, (iv) assume
the exercise of options to purchase 477,391 shares of Common Stock, and (v)
exclude up to 260,000 shares of Common Stock issuable upon exercise of a warrant
to be issued to Sutro & Co. Incorporated (the "Sutro Warrant") upon the closing
of this offering. See "Management -- Stock Option Plan," "Description of Capital
Stock" and "Underwriting." References in this Prospectus to the Company or IAI
shall be deemed to include International Aircraft Investors and its subsidiaries
unless otherwise stated.
THE COMPANY
International Aircraft Investors (the "Company" or "IAI") is primarily
engaged in the acquisition of used, single-aisle jet aircraft and engines for
lease and sale to domestic and foreign airlines and other customers. As of June
30, 1997, the Company's portfolio, appraised at approximately $121 million, had
eight aircraft on lease to eight customers. In September 1997, the Company
acquired from International Lease Finance Corporation ("ILFC") a Boeing
737-300QC (Quick Change) on lease to Air Belgium until September 2000 and agreed
to acquire from ILFC a Boeing 757-200ER (Extended Range) on lease to Air
Transat, a Canadian charter airline, until April 2003. The Company leases its
aircraft under "triple net" operating leases where the lessee is responsible for
all operating costs (i.e., crew, fuel, insurance, taxes, licenses, landing fees,
navigation charges, maintenance, repairs and associated expenses) and the
Company retains the potential benefit and assumes the risk of the residual value
of the aircraft, as distinct from finance leases where the full cost of the
aircraft is recovered over the term of the lease at usually lower monthly rates.
The profits of the global airline industry are on the rise and passenger
traffic is expected to grow through 2016, according to the 1997 Current Market
Outlook published by the Boeing Commercial Airplane Group ("Boeing") in March
1997 (the "Boeing Report"). Boeing projects that traffic will increase 4.9%
annually through 2016 and that 16,162 new commercial jet aircraft will be
required over the next approximately 20 years. Airlines will confront an
increasingly competitive environment with long-term profitability dependent on
successful cost reductions. Such reductions will include improvements in fleet
planning designed to more closely match aircraft capacity with passenger demand.
An important element of fleet planning for many airlines is the use of
operating leases which tend to maximize fleet flexibility due to their
short-term nature and relatively small capital outlay, while minimizing
financial risks. While most operating leases are made for new aircraft, emphasis
on cost containment has been increasing the attractiveness of leasing used
commercial jet aircraft.
The Boeing Report estimates that 16,162 new commercial jet aircraft will be
required over the next approximately 20 years, resulting in a projected
worldwide fleet of approximately 23,600 commercial jet aircraft in 2016, net of
4,069 retired aircraft. Single-aisle jet aircraft with seating capacity of 121
to 170 are projected by the Boeing Report to account for approximately 29.7% of
new commercial jet aircraft deliveries over the next approximately 20 years.
Due to the increasing cost of commercial jet aircraft, the anticipated
modernization of the worldwide aircraft fleet, and the emergence of new
niche-focused airlines which generally use leasing for capital asset
acquisitions, the Company believes that airlines will increasingly turn to
operating leases as an alternative method to finance their fleets. Although
Boeing estimated in its 1996 Current Market Outlook that the fleets of operating
lessors have grown from over 200 aircraft in 1986 to over 1,000 in 1995,
commercial jet aircraft under operating lease represented only approximately 10%
of total commercial jet aircraft in service at year-end 1995. Aviation Week &
Space Technology ("Aviation Week") reports that leasing will be the primary
means by which the global air transport industry acquires new aircraft between
now and 1999, and probably
3
<PAGE> 5
beyond. Aviation Week, based upon data provided by GE Capital Aviation Services,
states that in 1986, 41% of the world's airlines owned all of their equipment,
15% leased all of their equipment and 44% used a mix of the two (with 80% owned
and 20% leased). By contrast, in 1996, 16% owned all of their equipment, 42%
leased all of their equipment and 42% used a mix of the two (with 60% leased and
40% owned).
The larger operating lessors appear to be focused on the lease of new,
rather than used, commercial jet aircraft. The Company believes that the market
for the operating lease of used commercial jet aircraft, including for
single-aisle jet aircraft with seating capacity of 121 to 170, should grow due
to the factors discussed above as well as the emphasis on airline cost
reduction, the desire of airlines for fleet flexibility and the growth in air
travel.
The Company's strategy is to focus on operating leases of used,
single-aisle jet aircraft to a diversified base of customers worldwide, while
employing strict risk management criteria. Key elements of the Company's
business strategy include the following:
Focus on Operating Leases. The Company believes that airlines are becoming
increasingly aware of the benefits of financing their fleet equipment on an
operating lease basis, including preservation of cash flow and flexibility
regarding fleet size and composition. The Company believes the operating lease
of jet aircraft, especially used jet aircraft, offers the potential for a higher
rate of return to the Company than other methods of aircraft financing, such as
finance leases.
Focus on Used Commercial Jet Aircraft with a Broad Market Acceptance. The
Company leases used, single-aisle jet aircraft, particularly aircraft between
five and 15 years old at the time the aircraft is acquired by the Company. The
Company is currently focusing on the acquisition and lease of single-aisle jet
aircraft, primarily aircraft with a seating capacity of 121 to 170 passengers,
which, according to the Boeing Report, accounted for approximately 35.9% of the
world fleet at December 31, 1996. The Boeing Report estimates that the
commercial replacement cycle for this type of aircraft is 25 to 28 years from
manufacture date. This category of jet aircraft includes aircraft such as the
Boeing 737-300/-400, the Airbus A320 and the McDonnell Douglas MD80 series. The
Company is in the process of acquiring and leasing a Boeing 757-200ER aircraft.
The Boeing 757 is a single-aisle aircraft with a seating capacity of 171 to 240
passengers. The Company will continue to purchase aircraft which enjoy
significant manufacturer's support and fit the Company's criteria.
Optimize Relationship with ILFC. The Company has had a long and continuous
relationship with ILFC, a wholly owned subsidiary of American International
Group, Inc. ILFC was an initial investor in the Company and prior to the
offering owned approximately 4.1% of the Company's equity. ILFC is a major
owner-lessor of commercial jet aircraft having contacts with most airlines
worldwide, the aircraft and engine manufacturers and most of the significant
participants in the aircraft industry worldwide. Boeing and Airbus each recently
announced a multi-billion dollar order of aircraft by ILFC. The Company intends
to use its relationship with ILFC to seek to gain access, where appropriate, to
various airlines and other participants in the market to facilitate the
purchase, lease, re-lease and sale of aircraft. ILFC's primary focus is the
acquisition and leasing of new commercial jet aircraft. Thus, the Company
believes that its business complements rather than competes with ILFC. See
"Business -- Relationship With ILFC."
Leverage Management Experience. The successful purchase and leasing of used
commercial jet aircraft requires skilled management in order to evaluate the
condition and price of the aircraft to be purchased and the current and
anticipated market demand for that aircraft. The management of the Company and
the Board of Directors of the Company have significant global experience in the
aviation industry, with an average of more than 20 years of experience,
especially in the purchase, sale and financing of commercial jet aircraft, and
have extensive contacts with airlines worldwide. See "Management -- Directors
and Executive Officers."
Access a Diversified Global Customer Base. The Company's objective is to
diversify its customer base to avoid dependence on any one lessee, geographic
area or economic trend.
Employ Strict Risk Management Criteria. The Company will only purchase
aircraft that are currently under lease or are subject to a contractual
commitment for lease or purchase, will not purchase aircraft on speculation, and
will generally seek financing using a non-recourse loan structure. The Company
evaluates
4
<PAGE> 6
carefully the credit risk associated with each of its lessees and the lessee's
ability to operate and properly maintain the aircraft. The Company also
evaluates the return conditions in each lease since the condition of an aircraft
at the end of a lease can significantly impact the amount the Company will
receive on the re-lease or sale of an aircraft.
The Company was incorporated in California in 1988, its principal executive
offices are located at 3655 Torrance Boulevard, Suite 410, Torrance, California
90503, and its telephone and facsimile numbers are (310) 316-3080 and (310)
316-8145, respectively.
RECENT DEVELOPMENTS
In September 1997, the Company agreed to acquire two aircraft from ILFC.
The first aircraft, a Boeing 737-300QC manufactured in 1987, was purchased in
September 1997. This aircraft may be changed quickly by the lessee between
passenger and cargo configurations. The seats are palletized and can slide in
and out of the aircraft with minimal downtime, giving the operator increased
operational capability and utilization. This aircraft is on lease to Air Belgium
until September 2000 and was initially financed through ILFC. The second
aircraft will be delivered prior to the end of 1997 and is a Boeing 757-200ER
manufactured in 1990. This aircraft is on lease to Air Transat, a Canadian
charter airline, until April 2003. These acquisitions will increase the
Company's total assets by approximately $59 million. The annual rentals revenues
for these two aircraft will aggregate approximately $7 million over their
existing lease terms.
THE OFFERING
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Common Stock offered by the Company.. 2,600,000 shares
Common Stock to be outstanding after
the offering....................... 4,256,467 shares(1)
Use of proceeds...................... To repay a portion of the debt incurred to acquire two
aircraft, to finance the acquisition of additional
aircraft, and for working capital and other general
corporate purposes
Proposed Nasdaq-NM symbol............ IAIS
</TABLE>
- ---------------
(1) Excludes (i) 485,554 shares of Common Stock subject to options outstanding
on the date of this Prospectus with an exercise price of $4.50 per share;
(ii) 155,555 shares of Common Stock issuable upon conversion of a 5%
Subordinated Convertible Note due August 13, 1998 in the principal amount of
$700,000 (the "Convertible Note"); (iii) 260,000 shares of Common Stock
issuable upon exercise of the Sutro Warrant; and (iv) 100,000 shares of
Common Stock reserved for issuance under the Company's 1997 Employee Stock
Option and Award Plan (the "1997 Option Plan") and the Company's 1997
Eligible Directors Stock Option Plan (the "1997 Directors Plan").
RISK FACTORS
See "Risk Factors" beginning on page 8 for information that should be
considered by prospective investors. Such risk factors include the risks
associated with the ownership of aircraft; the effects of downturns or adverse
effects on the air transportation industry; the limited number of aircraft and
leases of the Company; the Company's reliance upon ILFC; the credit risks
associated with the Company's customers; international risks to the Company as a
result of leases to foreign customers; aircraft noise compliance; the Company's
dependence upon the availability of financing; interest rate risks to the
Company; substantial competition in the aircraft leasing industry; limitations
on stock ownership of the Company which may affect registration of the Company's
aircraft in the United States; uncertainty regarding limits on liability of
lessors of aircraft; the requirements and costs associated with the maintenance
and operation of aircraft; risks of changes in tax laws or accounting
principles; dependence on key management; quarterly fluctuations in operating
results; the absence of a prior public market for the Company's Common Stock and
the possible volatility of the stock price of the Company's Common Stock; broad
management discretion in the allocation of the use of the net proceeds of the
offering; the number of shares eligible for future sale; certain anti-takeover
provisions; and the immediate and substantial dilution of purchasers of the
Common Stock of the Company.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
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SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- -----------------
1992(1) 1993 1994 1995 1996 1996 1997
----------- ------ ------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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INCOME STATEMENT DATA
Revenues:
Rental of flight equipment...................... $ 6,166 $6,098 $8,108 $7,765 $12,681 $ 6,330 $ 6,479
Consulting fees................................. 68 742 213 491 461 183 12
Gain on sale of aircraft equipment.............. 841 -- -- -- 141 -- --
Interest income................................. 35 7 68 118 169 82 99
------ ------ ------ ------ ------- ------- -------
Total revenues.............................. 7,110 6,847 8,389 8,374 13,452 6,595 6,590
Expenses:
Interest........................................ 3,182 2,293 3,548 3,776 6,277 3,231 3,021
Depreciation.................................... 2,970 2,014 3,165 3,354 5,550 2,774 2,760
General and administrative...................... 690 447 548 526 553 266 290
Loss on sale of aircraft........................ 3,645(2) -- -- -- -- -- --
Other........................................... 185 -- -- -- -- -- 100
------ ------ ------ ------ ------- ------- -------
Total expenses.............................. 10,672 4,754 7,261 7,656 12,380 6,271 6,171
Equity in earnings of affiliates.................. -- -- -- 183 -- -- --
Income (loss) before income taxes and
extraordinary items............................. (3,562) 2,093 1,128 901 1,072 324 419
Income tax expense................................ 2 45 59 30 37 20 160
Income (loss) before extraordinary items.......... (3,564) 2,048 1,069 871 1,035 304 259
Extraordinary items -- gain from debt
forgiveness..................................... 4,326 -- -- -- -- -- --
------ ------ ------ ------ ------- ------- -------
Net income........................................ $ 762 $2,048 $1,069 $ 871 $ 1,035 $ 304 $ 259
====== ====== ====== ====== ======= ======= =======
Net income (loss) per common and common equivalent
share(3):
Income (loss) before extraordinary items........ $ (0.59) $ 0.24 $ 0.13 $ 0.11 $ 0.13 $ .04 $ .03
Extraordinary items............................. 0.72 -- -- -- -- -- --
------ ------ ------ ------ ------- ------- -------
Net income.................................... $ 0.13 $ 0.24 $ 0.13 $ 0.11 $ 0.13 $ .04 $ .03
====== ====== ====== ====== ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding(3)................ 6,062 9,857 8,218 8,218 8,263 8,263 8,263
Pro forma net income per common and common
equivalent share(4)............................. $ .46 $ 1.09 $ .61 $ .51 $ .59 $ .23 $ .21
Pro forma weighted average number of common and
common equivalent shares outstanding(4)......... 2,045 2,045 2,045 2,045 2,067 2,067 2,067
</TABLE>
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JUNE 30, 1997
------------------------
AS
ACTUAL ADJUSTED(5)
-------- -----------
(IN THOUSANDS)
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BALANCE SHEET DATA
Flight equipment under operating lease.................................................. $117,325 $ 117,325
Total assets............................................................................ 122,130 147,885
Debt financing.......................................................................... 107,010 107,010
Shareholders' equity.................................................................... 5,493 31,248
</TABLE>
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<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
--------- -------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
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OTHER DATA
EBITDA(6)........................................ $ 5,394 $ 6,400 $ 7,841 $ 8,031 $12,758 $ 6,329 $ 6,200
Cash Flow(7):
From operating activities...................... -- $ 4,499 $ 4,466 $ 3,939 $ 6,796 $ 3,675 $ 5,166
From investing activities...................... -- (28,665) (3,304) (40,967) 156 (199) (30,200)
From financing activities...................... -- 24,278 (1,006) 36,755 (5,812) (2,946) 24,350
Return on average assets(8)...................... 1.8% 5.8% 1.9% 1.5% 1.1% .6% .6%
Return on average equity(9)...................... -- -- 39.6% 24.6% 22.9% 14.3% 9.6%
Aircraft equipment owned at period end........... 4 5 5 8 7 7 8
</TABLE>
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(1) Included in the 1992 income statement data is the consolidation of a wholly
owned subsidiary which the Company disposed of during 1992. The subsidiary
had net liabilities of $3,552,000 and was sold to ILFC
(footnotes continue on next page)
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for no consideration as ILFC guaranteed the debt of the subsidiary.
Accordingly, the Company recognized an extraordinary gain from the disposal
of the subsidiary for relief of the net liabilities. During 1992, revenues,
expenses, gain on disposal, net loss and net loss per share related to this
subsidiary were $712,000, $1,144,000, $3,552,000, $(432,000) and $(0.07),
respectively.
(2) See "Risk Factors -- Customer Credit Risks."
(3) The treasury stock method was used to calculate net income (loss) per common
and common equivalent share information and weighted average number of
common and common equivalent shares outstanding. The treasury stock method
was modified as the number of common stock equivalents exceeded 20% of the
number of common shares outstanding at the end of each of the periods
presented in the accompanying consolidated financial statements.
Accordingly, the number of shares which could be repurchased with the
proceeds from such conversions was limited to 20% of the number of common
shares and the remaining balance was applied to reduce long-term debt. The
modified treasury stock method was applied only to 1993 as the effect on
1992, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997
was anti-dilutive. See Note 1 to Consolidated Financial Statements. Does not
give effect to the 1-for-4.5 reverse stock split of Common Stock, the
assumed conversion of outstanding shares of Preferred Stock into Common
Stock, or the assumed exercise of options to acquire shares of Common Stock.
(4) Pro forma information was calculated as if the 1-for-4.5 reverse stock
split, the conversion of all the outstanding shares of Preferred Stock into
1,097,969 shares of Common Stock and the exercise of options to acquire
477,391 shares of Common Stock had occurred at the beginning of the periods
indicated, with the proceeds from the exercise of the options used to reduce
long-term debt and related interest costs. For purposes of this calculation,
Preferred Stock and stock options at June 30, 1997 are assumed to be
outstanding for all periods presented and effected for the related
conversions and exercises.
(5) As adjusted to give effect to (i) the conversion of all the outstanding
shares of Preferred Stock into 1,097,969 shares of Common Stock; (ii)
exercise of options to purchase 477,391 shares of Common Stock at $4.50 per
share; (iii) the sale of the 2,600,000 shares of Common Stock offered by the
Company hereby at an assumed offering price to the public of $10.00 per
share, after deducting underwriting discounts and commissions and estimated
expenses of the offering; and (iv) the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
(6) EBITDA, defined as income before interest expense, income taxes,
depreciation, gain (loss) on sale of aircraft and extraordinary items, is
not intended to represent an alternative to net income (as determined in
accordance with generally accepted accounting principles) as a measure of
performance and is also not intended to represent an alternative to cash
flow from operating activities as a measure of liquidity. Rather, it is
included herein because management believes that it provides an important
additional perspective on the Company's operating results and the Company's
ability to fund its continuing operations.
(7) See Consolidated Statement of Cash Flows included in the Consolidated
Financial Statements. Cash flow information for 1992 is not available.
(8) Calculations are based on the average monthly balances. Percentages for
six-month periods are annualized.
(9) Calculations are based on average quarterly balances. Percentages for
six-month periods are annualized. Prior to 1994, results are not considered
meaningful.
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RISK FACTORS
An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to other information in this Prospectus, the
following risk factors should be considered carefully by potential purchasers in
evaluating an investment in the Common Stock offered hereby. This Prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include those discussed below, as well as those discussed elsewhere herein.
OWNERSHIP RISKS
The Company leases its portfolio of aircraft under operating leases rather
than finance leases. Under an operating lease, the Company retains title to the
aircraft and assumes the risk of not recovering its entire investment in the
aircraft through the re-leasing and remarketing process. Operating leases
require the Company to re-lease or sell aircraft in its portfolio in a timely
manner upon termination of the lease in order to minimize off-lease time and
recover its original investment in the aircraft. Numerous factors, many of which
are beyond the control of the Company, may have an impact on the Company's
ability to re-lease or sell an aircraft on a timely basis or to re-lease at a
satisfactory lease rate. Among the factors are the demand for various types of
aircraft, general market and economic conditions, regulatory changes
(particularly those imposing environmental, maintenance and other requirements
on the operation of aircraft), changes in the supply or cost of aircraft and
technological developments. In addition, the success of an operating lease
depends in significant part upon having the aircraft returned by the lessee in
marketable condition as required by the lease. Consequently, there can be no
assurance that the Company's estimated residual value for aircraft will be
realized. If the Company is unable to re-lease or resell aircraft on favorable
terms, its business, financial condition and results of operations would be
adversely affected.
INDUSTRY RISKS
The Company is in the business of providing leases of commercial jet
aircraft to international and domestic airlines. Consequently, the Company is
affected by downturns in the air transportation industry in general. Substantial
increases in fuel costs or interest rates, increasing fare competition, slower
growth in air traffic, or any significant downturn in the general economy could
adversely affect the air transportation industry and may therefore negatively
impact the Company's business, financial condition and results of operations. In
recent months, there has been an increase in spot jet fuel prices. In addition,
in recent years, a number of commercial airlines have experienced financial
difficulties, in some cases resulting in bankruptcy proceedings. While the
Company believes that its lease terms protect its aircraft and the Company's
investment in such aircraft, there can be no assurance that the financial
difficulties experienced by a number of airlines will not have an adverse effect
on the Company's business, financial condition and results of operations.
LIMITED NUMBER OF AIRCRAFT AND LESSEES
The Company currently owns and leases nine aircraft to nine lessees. The
loss of any one aircraft or the financial difficulty of or lease default by any
one lessee could have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE UPON ILFC
Seven of the Company's current nine aircraft and leases were acquired from
ILFC. See "Business -- Relationship With ILFC". In connection with all of the
Company's aircraft, ILFC has provided guarantees or other financial support
which have allowed the Company to finance the aircraft at more favorable
leverage rates than the Company could have obtained without the guarantees and
financial support of ILFC. In addition, ILFC has provided a portion of the
consulting fees reported by the Company. See "Management's
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<PAGE> 10
Discussion and Analysis of Financial Condition and Results of Operations." There
can be no assurance that the Company will be able to continue to acquire from
ILFC or from other entities aircraft and leases of the type and on terms as
favorable as or better than the aircraft and leases acquired from ILFC. If
aircraft and leases are acquired from ILFC or others, there can be no assurance
that guarantees or financial support will be given by the seller or whether the
Company will be able to receive as favorable leverage and interest rates from
its lenders. If the Company is unable to acquire aircraft and leases and to
finance the acquired aircraft at competitive rates, the Company's business,
financial condition and results of operations could be adversely affected. See
"Business -- Relationship With ILFC," "Certain Transactions" and Note 6 to
Consolidated Financial Statements.
CUSTOMER CREDIT RISKS
Certain of the Company's existing and prospective customers are smaller
domestic and foreign passenger airlines which, together with major passenger
airlines, may suffer from the factors which have historically affected the
airline industry. See "Industry Risks" above. A lessee may default in
performance of its lease obligations and the Company may be unable to enforce
its remedies under a lease. A number of airlines have experienced financial
difficulties, and certain airlines have filed for bankruptcy and a number of
such airlines have ceased operations. In most cases where a debtor seeks
protection under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"), creditors are stayed automatically from enforcing their
rights. In the case of United States certificated airlines, Section 1110 of the
Bankruptcy Code provides certain relief to lessors of aircraft. Specifically,
the airline has 60 days from the date the lessor makes its claim to agree to
perform its obligations and to cure any defaults before the lessor may repossess
the aircraft. The scope of Section 1110 has been the subject of significant
litigation and there can be no assurance that the provisions of Section 1110
will protect the Company's investment in an aircraft in the event of a lessee's
bankruptcy. In addition, Section 1110 does not apply to lessees located outside
of the United States and applicable foreign laws may not provide comparable
protection.
During the years ended December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1997, lease revenues from flight equipment generated from foreign
customers accounted for approximately 80%, 69%, 45% and 46%, respectively, of
total revenues. See "International Risks" below. The following customers
accounted for more than 10% of the Company's total revenues in one or more of
the three years ended December 31, 1996 or in the six months ended June 30,
1997: British Midland Airways Limited (36%, 36%, 23% and 19% for the years ended
December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997,
respectively), Alaska Airlines, Inc. (21% for the year ended December 31, 1996
and the six months ended June 30, 1997), Southwest Airlines Co. (15% for the
year ended December 31, 1996 and 16% for the six months ended June 30, 1997),
ILFC (6%, 16%, 10% and 10% for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1997, respectively), New Zealand International
Airlines Limited (42%, 26%, 10% and 10% for the years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1997, respectively) and Delta
Air Lines, Inc. (12%, 11%, 7% and 7% for the years ended December 31, 1994, 1995
and 1996 and the six months ended June 30, 1997, respectively).
In 1991, the Company had a DC-9 aircraft on lease to Midway Airlines
("Midway"). The aircraft was not acquired from ILFC and was financed under a
recourse loan to the Company. Due in part to expansion by Midway and an economic
downturn, Midway filed for protection under the Bankruptcy Code in March 1991.
At the time of the bankruptcy filing, the Company's DC-9 aircraft was undergoing
a scheduled major overhaul, which caused the aircraft to be in a condition that
it could not be flown.
After the filing under the Bankruptcy Code, the Company negotiated with
Midway and the Company's lender regarding the continued lease or other
disposition of the aircraft. Market conditions for the leasing of used
commercial jet aircraft deteriorated while these negotiations were underway.
Ultimately, the Company concluded that the aircraft should not remain on lease
to Midway. Management concluded that, because of the Company's then limited
capital resources and the significant capital investment required to return the
aircraft to a condition where it could be re-leased, the aircraft should be sold
and the Company's loan with respect to the aircraft should be renegotiated.
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<PAGE> 11
The aircraft, minus one engine which was at an overhaul shop, was then
recovered. The aircraft was sold, resulting in proceeds of $1.5 million. The
purchaser was required to complete the major overhaul work on the aircraft and
add an engine before the aircraft could be operated. In satisfaction of the
outstanding recourse loan of approximately $6.7 million (including accrued
interest), the lender agreed to accept $4.0 million, a $750,000 Note due August
1998 and the Convertible Note. The $4.0 million was obtained from ILFC. The
Company paid to ILFC the net proceeds from the sale of the aircraft, sold other
assets to ILFC and issued to ILFC a $1.7 million Note due in installments
through August 1999.
These transactions resulted in a net loss to the Company in 1992 of $2.9
million. The Company's inability to collect receivables under a lease or to
repossess aircraft in the event of a default by a lessee would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Aircraft Leasing."
INTERNATIONAL RISKS
During the years ended December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1997, approximately 80%, 69%, 45% and 46%, respectively, of the
Company's lease revenue was generated by leases to foreign customers. Such
leases may present greater risks to the Company because certain foreign laws,
regulations and judicial procedures may not be as protective of lessor rights as
those which apply in the United States. In addition, many foreign countries have
currency and exchange laws regulating the international transfer of currencies.
The Company attempts to minimize its currency and exchange risks by negotiating
all of its aircraft lease transactions in U.S. Dollars. See
"Business -- Aircraft Leasing." The Company is subject to the timing and access
to courts and the remedies local laws impose in order to collect its lease
payments and recover its assets. Political instability abroad and changes in
international policy also present risks associated with expropriation of the
Company's leased aircraft. Although the Company has experienced no problems to
date with its foreign lessees, there can be no assurance that the Company will
not experience problems in collecting accounts due under leases to foreign
customers or reacquiring aircraft from such customers in the future.
International collection problems and problems in recovering aircraft could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Many foreign countries have currency and exchange laws regulating the
international transfer of currencies. The Company attempts to minimize its
currency and exchange risks by negotiating all of its aircraft leasing in U.S.
Dollars. The Company requires, as a condition to any foreign transaction, that
the lessee in a foreign country first obtain, if required, written approval of
the appropriate government agency, finance ministry or central bank for the
remittance of all funds contractually owed to the Company in U.S. Dollars.
Although the Company has attempted to minimize the foreign currency risk, to the
extent that significant currency fluctuations result in materially higher rental
costs to a foreign lessee, the foreign lessee may be unable or unwilling to make
the required lease payments.
The Company's revenues and income may be affected by, among other matters,
political instability abroad, changes in national policy, competitive pressures
on certain air carriers, fuel shortages, labor stoppages, recessions and other
political or economic events adversely affecting world or regional trading
markets or impacting a particular customer.
The Company's aircraft can be subject to certain foreign taxes and airport
fees. Unexpected liens on an aircraft could be imposed in favor of a foreign
entity, such as Eurocontrol or the airports of the United Kingdom.
AIRCRAFT NOISE COMPLIANCE
The Airport Noise and Capacity Act of 1990 ("ANCA") requires the phaseout
of Stage 2 aircraft (defined as aircraft that comply with the Stage 2 noise
levels prescribed in Part 36 of the Federal Aviation Regulations) by December
31, 1999, subject to certain exceptions. The Federal Aviation Administration
("FAA") regulations which implement the ANCA require carriers to modify or
reduce the number of Stage 2 aircraft operated by 50% by the end of 1996, 75% by
the end of 1998 and 100% by the end of 1999. Alternatively, a carrier could
satisfy these compliance requirements by phasing in aircraft meeting the
stricter
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Stage 3 requirements (set forth in Part 36 of the Federal Aviation Regulations)
so that it has at least 65% Stage 3 aircraft by the end of 1996, 75% Stage 3
aircraft by the end of 1998 and 100% of Stage 3 aircraft by the end of 1999.
Similar rules exist in other countries, including the countries in Western
Europe, Australia, New Zealand and Japan, which either require compliance with
regulations substantially identical to Stage 3 or which forbid the operation of
additional non Stage 3 aircraft by carriers based in such jurisdictions, which
has the effect of limiting the Company's ability to place aircraft on lease in
such jurisdictions unless they have been modified to meet Stage 3 requirements.
Six of the Company's aircraft currently meet Stage 3 requirements. Two of
the Company's remaining three aircraft are currently leased in areas not
imposing Stage 3 requirements. The Company may be required to modify one or more
of its aircraft to meet Stage 3 requirements, which currently could cost in the
range of $1.7 million to $2.5 million per aircraft. See "Business -- Government
Regulation." The Company has no assurance that it will be able to obtain
financing for any such modifications. See "Dependence Upon Availability of
Financing" below.
The ANCA also recognizes the right of airport operators with special noise
problems to implement local noise abatement procedures as long as such
procedures do not interfere unreasonably with the interstate and foreign
commerce of the national air transportation system. ANCA generally requires FAA
approval of local noise restrictions on Stage 3 aircraft and establishes a
regulatory notice and review process for local restrictions on Stage 2 aircraft
first proposed after October 1990. As the result of litigation and pressure from
airport area residents, airport operators have taken local actions over the
years to reduce aircraft noise. These actions have included regulations
requiring aircraft to meet prescribed decibel limits by designated dates,
curfews during night time hours, restrictions on frequency of aircraft
operations and various operational procedures for noise abatement.
The imposition of and the cost of compliance by the Company with statutory
and regulatory requirements concerning noise restriction and abatement could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE UPON AVAILABILITY OF FINANCING
The operating lease business is a capital intensive business. The Company's
typical operating lease transaction requires a cash investment by the Company of
approximately 5% to 15% of the aircraft purchase price, commonly known as an
"equity investment." The Company's equity investments have historically been
financed from internally generated funds and other cash and seller financing
(primarily from ILFC), and in the future will include a substantial portion of
the net proceeds of the offering. The balance of the purchase price of an
aircraft is typically financed with the proceeds of non-recourse, secured
borrowings from banks or other financial institutions (to date with the support
of ILFC as the seller of the flight equipment). Accordingly, the Company's
ability to successfully execute its business strategy and to sustain its
operations is dependent, in part, on the availability of debt and equity
capital. In addition, the terms of the Company's loans generally require a
substantial balloon payment at the end of the noncancelable portion of the lease
of the related aircraft, at which time the Company will be required to re-lease
the aircraft and renegotiate the loan with its lender or obtain other financing.
Refinancing the balloon amount of the loan is dependent upon the Company
re-leasing the related aircraft. At June 30, 1997, approximately $16.9 million
of the Company's debt financing was due within one year, of which $10.2 million
represents balloon payments due at the end of the noncancellable portion of
leases and $6.7 million represents installment payments. Of these balloon
payments, $7.7 million relate to two noncancellable leases expiring May and June
1998 and $2.5 million due December 1997 (consisting of $2.1 million payable to
Great Lakes Holdings, a company owned by the Chief Executive Officer and
President of the Company, and $.4 million payable to ILFC) relate to
noncancellable leases expiring subsequent to June 30, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." There can be no assurance that
the necessary amount of such capital will continue to be available to the
Company on favorable terms, or at all. If the Company were unable to continue to
obtain any portion of required financing on favorable terms, the
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<PAGE> 13
Company's ability to add new leases to its lease portfolio, renew leases,
re-lease an aircraft, repair or recondition an aircraft if required or retain
ownership of an aircraft on which financing has expired would be limited, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company's financing
arrangements to date have been dependent in part upon ILFC. See "Reliance Upon
ILFC" above and "Business -- Relationship With ILFC," "Certain Transactions" and
Note 6 to Consolidated Financial Statements.
INTEREST RATE RISK
The Company's leases are generally structured at fixed rental rates for
specified terms. As of June 30, 1997, borrowings subject to interest rate risk,
after taking into account guarantees and interest rate swaps in place, totaled
$1.8 million or 2% of the Company's total borrowings. At June 30, 1997,
approximately $16.9 million of the Company's debt financing matures or comes due
within 12 months from such date, including approximately $10.2 million of
balloon payments. See "Business -- Lease Portfolio" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." There can be no assurance that the Company will be able to
finance or refinance its borrowings at fixed rates which result in acceptable
interest rate spreads to the applicable leases, or at fixed rates at all.
Increases in interest rates could narrow or eliminate the spread, or result in a
negative spread, between the rental revenue the Company realizes under its
leases and the interest rate that the Company pays under its loans. There can be
no assurance that the Company's business, financial condition and operating
results will not be adversely affected during any period of increases in
interest rates.
SUBSTANTIAL COMPETITION
The aircraft leasing industry is highly competitive, depending in part upon
the type of leased aircraft and prospective lessees. The Company believes that
only a few comparably sized companies on a worldwide basis focus primarily on
the same segment of the aircraft leasing market as the Company. In addition, a
number of aircraft manufacturers, airlines and other operators, distributors,
equipment managers, leasing companies (including ILFC), financial institutions
and other parties engaged in leasing, managing, marketing or remarketing
aircraft compete with the Company, although their primary focus is not on the
market segment on which the Company focuses. Many of these periodic competitors
have significantly greater financial resources than the Company. The Company's
competitors may lease aircraft at lower rates than the Company and provide
benefits, such as direct maintenance, crews, support services and trade-in
privileges, which the Company does not intend to provide. There can be no
assurance that the Company will continue to compete effectively against present
and future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
STOCK OWNERSHIP AFFECTING AIRCRAFT REGISTRATION
The Company intends to maintain United States registration of some of the
aircraft which it owns. Aircraft may not be registered in the United States
unless the registered owner is a citizen of the United States or other
permissible persons under the Federal Aviation Act. If a corporation is the
registered owner of an aircraft, the corporation must be organized under the
laws of the United States or any State, and the president and two-thirds or more
of the board of directors and at least 75% of the voting interest of the
corporation must be controlled by persons who are citizens of the United States.
Non-U.S. citizens may hold stock in a U.S. corporation through an appropriate
voting trust. Any successful challenge to registration of an aircraft by the FAA
may result in substantial penalties, including the forced sale of the aircraft,
the potential for uninsured casualties to the aircraft, the loss of the benefits
of the central recording system under federal law (thereby leaving the aircraft
exposed to liens or other interests not of record with the FAA), and a breach by
the Company of any leases or financing agreements with respect to the aircraft.
See "Principal Shareholders."
UNCERTAINTY REGARDING LIMITS ON LIABILITY OF LESSORS
Section 44112 of Title 49 of the United States Code provides that a lessor
of aircraft generally will not be liable for any personal injury or death, or
damage to or loss of property, provided that such lessor is not in
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<PAGE> 14
actual possession or control of the aircraft at the time of such injury, death
or damage. Under certain circumstances, however, courts have interpreted Section
44112 narrowly, limiting its protection to certain aircraft lessors and have
held that state common law remedies may apply, notwithstanding the limitations
on liability under Section 44112. Under common law, the owner of an aircraft may
be held liable for injuries or damage to passengers or property, and such damage
awards can be substantial. Because there is little case law interpreting Section
44112, there can be no assurance that the provisions of Section 44112 would
fully protect the Company from all liabilities in connection with any injury,
death, damage or loss that may be caused by any aircraft it owns. For example,
Section 44112 may not preempt state law with respect to liability for third
party injuries arising from a lessor's or owner's own negligence. It is
anticipated that each lessee under the terms of each lease to be entered into by
the Company will be obligated to indemnify the Company for, or insure the
Company against, virtually all claims by third parties; however, in the event
that Section 44112 were not applicable, no assurance can be given that the
lessees could fulfill their indemnity obligations under any such leases or that
any insurance obtained will be sufficient.
REQUIREMENTS AND COSTS ASSOCIATED WITH THE MAINTENANCE AND OPERATION OF AIRCRAFT
The maintenance and operation of aircraft are strictly regulated by the FAA
and foreign aviation authorities which oversee such matters as aircraft
certification, inspection, maintenance, certification of personnel, and
record-keeping. The cost of complying with such requirements are significant.
The Company will seek to lease its aircraft to lessees that agree to bear all or
a significant portion of the costs of complying with governmental regulations.
All of the Company's current leases require the lessee to bear all of the costs
of complying with governmental regulations. However, in the event a lessee fails
to maintain aircraft in accordance with the terms of a lease or a lease
terminates shortly before a major required overhaul, the Company may be required
to spend substantial sums to repair or recondition the aircraft and may be
required to borrow funds for the purpose. See "Customer Credit Risks" above. The
FAA issued several Airworthiness Directives ("ADs") in 1990 mandating changes to
the maintenance program for older aircraft. These ADs were issued to ensure that
the oldest portion of the nation's transport aircraft fleet remains airworthy.
The FAA is requiring that these aircraft undergo extensive structural
modifications. These modifications are required upon accumulation of 20 years'
time in service or prior to the accumulation of a designated number of
flight-cycles, whichever occurs later. Future regulatory changes may also
increase the cost of operating or maintaining the aircraft and may adversely
affect the residual value of the aircraft. The failure of a lessee to comply
with lease maintenance and operation obligations or the imposition of
governmental requirements involving substantial compliance costs could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISK OF CHANGES IN TAX LAWS OR ACCOUNTING PRINCIPLES
The Company's leasing activities generate significant depreciation
allowances that provide the Company with substantial tax benefits on an ongoing
basis. In addition, the Company's lessees currently enjoy favorable accounting
and tax treatment by entering into operating leases. Any change to current tax
laws or accounting principles that make operating lease financing less
attractive would adversely affect the Company's business, financial condition
and results of operations.
DEPENDENCE ON KEY MANAGEMENT
The Company's business operations are dependent in part upon the expertise
of certain key employees. Loss of the services of such employees, particularly
William E. Lindsey and Michael P. Grella, would have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company will have employment agreements with Mr. Lindsey and Mr. Grella. The
Company will maintain key man life insurance of $3.0 million on each of Mr.
Lindsey and Mr. Grella. See "Management."
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced fluctuations in its quarterly operating results
and anticipates that these fluctuations may continue. Such fluctuations may be
due to a number of factors, including the timing of
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<PAGE> 15
purchases or sales of aircraft, the timing and extent of consulting and
remarketing fees, unanticipated early lease terminations, termination of a lease
and the subsequent re-lease at a different lease rate or a default by a lessee.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations for preceding quarters are not
necessarily meaningful and that results for any one quarter should not be relied
upon as an indication of future performance. In the event the Company's revenues
or earnings for any quarter are less than the level expected by securities
analysts or the market in general, such shortfall could have an immediate and
significant adverse impact on the market price of the Company's Common Stock.
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market for the Common Stock
will develop or continue after the offering. The initial public offering price
of the Common Stock will be determined through negotiations between the Company
and Sutro & Co. Incorporated ("Sutro") and Cruttenden Roth Incorporated, as
representatives of the several Underwriters (the "Representatives"), and may not
be indicative of the market price. Additionally, the market price of the Common
Stock could be subject to significant fluctuations in response to operating
results of the Company, changes in general conditions in the economy, the
financial markets, the airline industry, changes in accounting principles or tax
laws applicable to the Company or its lessees, or other developments affecting
the Company, its customers or its competitors, some of which may be unrelated to
the Company's performance, and changes in earnings estimates or recommendations
by securities analysts. See "Underwriting."
BROAD MANAGEMENT DISCRETION IN ALLOCATION OF NET PROCEEDS
The Company expects to use the net proceeds of the offering to repay a
portion of the debt incurred to acquire two aircraft, to acquire additional
aircraft for lease and for working capital and other general purposes, but has
not yet entered into agreements to purchase any specific aircraft or otherwise
identified any other specific uses for such net proceeds. The Company's
management, subject to approval by the Company's Board of Directors, will retain
broad discretion as to the allocation of the proceeds of the offering. The
failure of management to apply such proceeds effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations.
SHARES ELIGIBLE FOR FUTURE SALE
After completion of the offering, the Company will have 4,256,467 shares of
Common Stock outstanding. Of those shares, the 2,600,000 shares of Common Stock
offered hereby (2,990,000 if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless purchased by "affiliates" of the Company, as that term is defined
in Rule 144 under the Securities Act ("Rule 144"). The remaining 1,656,467
shares were issued by the Company in private transactions prior to this offering
and are "restricted securities" as that term is defined in Rule 144 and are
tradeable subject to compliance with Rule 144. In addition, 485,554 shares are
subject to existing options and 100,000 shares are reserved for issuance under
the Company's 1997 Option Plan and the 1997 Directors Plan. The Company plans to
register the shares issuable upon exercise of these options under the Securities
Act.
The Company, its officers and directors, and certain of the shareholders of
the Company have agreed not to offer, sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable for shares of
Common Stock, subject to certain exceptions, for a period of 180 days from the
date of this Prospectus, without the prior written consent of Sutro.
Because there has been no public market for shares of Common Stock of the
Company, the Company is unable to predict the effect, if any, that future sales
of shares, or the availability of shares for future sale, will have on the
market price for the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect market prices for the
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Common Stock and could impair the Company's future ability to obtain capital
through an offering of equity securities. See "Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS
Certain provisions of law and the Company's Amended and Restated Articles
of Incorporation and Bylaws (as they will be amended prior to the offering)
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise, and the removal of incumbent officers and
directors. These provisions include authorization of the issuance of up to
15,000,000 shares of Preferred Stock, with such characteristics that may render
it more difficult or tend to discourage a merger, tender offer or proxy contest.
The Company's Amended and Restated Articles of Incorporation also provide that
shareholder action can be taken only at an annual or special meeting of
shareholders and may not be taken by written consent. The Company's Bylaws also
limit the ability of shareholders to raise matters at a meeting of shareholders
without giving advance notice. In addition, upon qualification of the Company as
a "listed corporation" as defined in Section 301.5(d) of the California
Corporations Code, cumulative voting will be eliminated. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids, and to encourage persons seeking to acquire control of
the Company to negotiate first with the Company. See "Description of Capital
Stock -- Certain Anti-Takeover Provisions."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the offering will experience immediate and
substantial dilution of approximately $2.66 per share in the net tangible book
value per share of Common Stock from the assumed initial public offering price
of $10.00 per share. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,600,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$23.38 million (or $27.01 million if the Underwriters' over-allotment option is
exercised in full), after deducting underwriting discounts and commissions and
estimated expenses of the offering, and assuming an initial public offering
price of $10.00 per share. The Company intends to use approximately $2.8 million
of the net proceeds to repay bridge loans with interest rates of 7% per annum
incurred after June 30, 1997 in the acquisition of a Boeing 737-300QC and
757-200ER. See "Business -- Lease Portfolio." The Company intends to use the
remaining net proceeds, together with debt financing, to acquire additional
aircraft for lease and for working capital and other general purposes. Except as
noted above, the Company has not yet entered into agreements to purchase any
specific aircraft or otherwise identified any other specific uses of such net
proceeds. See "Risk Factors -- Broad Management Discretion in Allocation of Net
Proceeds." Pending such uses, the Company will invest the net proceeds in
short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock. The
payment of cash dividends in the future will be made at the discretion of the
Board of Directors of the Company and will depend on a number of factors,
including future earnings, capital requirements, financial condition and future
prospects of the Company and such other factors as the Board of Directors may
deem relevant. Following consummation of the offering, the Company intends to
retain all available funds for use in its business. Accordingly, the Company
does not anticipate declaring or paying any dividends on the Common Stock in the
foreseeable future.
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CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1997 on an actual basis, which gives effect to a 1-for-4.5 reverse stock
split, and as adjusted to give effect to (i) the conversion of all the
outstanding shares of Preferred Stock into 1,097,969 shares of Common Stock;
(ii) the exercise of options to acquire 477,391 shares of Common Stock; (iii)
the sale of the 2,600,000 shares of Common Stock offered by the Company hereby
at an assumed offering price to the public of $10.00 per share, after deducting
underwriting discounts and commissions and estimated expenses of the offering;
and (iv) the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Debt financing........................................................ $107,010 $ 107,010
-------- --------
Shareholders' equity:
Convertible preferred stock, $.01 par value per share; 15,000,000
shares authorized; 4,941,000 shares issued and outstanding,
actual; none issued, as adjusted................................. 49 --
Common stock, $.01 par value per share; 20,000,000 shares
authorized; 81,107 shares outstanding, actual; and 4,256,467
shares outstanding, as adjusted(1)............................... 4 43
Additional paid-in capital............................................ 6,220 31,985
Deferred stock compensation........................................... (900) (900)
Retained earnings..................................................... 120 120
-------- --------
Total shareholders' equity.......................................... 5,493 31,248
-------- --------
Total capitalization........................................ $112,503 $ 138,258
======== ========
</TABLE>
- ---------------
(1) Excludes (i) 485,554 shares of Common Stock subject to options outstanding
on the date of this Prospectus with an exercise price of $4.50 per share;
(ii) 155,555 shares of Common Stock issuable upon conversion of the
Convertible Note; (iii) 260,000 shares of Common Stock issuable upon
exercise of the Sutro Warrant; and (iv) 100,000 shares of Common Stock
reserved for issuance under the 1997 Option Plan and the 1997 Directors
Plan. See "Management -- Director Compensation" and " -- Stock Option Plan"
and "Underwriting."
16
<PAGE> 18
DILUTION
At June 30, 1997, the net tangible book value of the Company was $5.5
million or $67.72 per share of Common Stock. Net tangible book value per share
represents the Company's total tangible assets, less total liabilities, divided
by the number of shares of Common Stock outstanding after giving effect to a
1-for-4.5 reverse stock split. After giving effect to (i) the conversion of all
the outstanding shares of Preferred Stock into 1,097,969 shares of Common Stock;
and (ii) the exercise of options to acquire 477,391 shares of Common Stock, the
net tangible book value of the Company at June 30, 1997 would have been $7.9
million, or $4.75 per share of common stock. After giving effect to these
conversions, the sale by the Company of the 2,600,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price to the
public of $10.00 per share, and after deducting underwriting discounts and
commissions and estimated offering expenses, the as adjusted net tangible book
value of the Company at June 30, 1997 would have been $31.2 million, or $7.34
per share. This represents an immediate increase in net tangible book value of
$2.59 per share to the existing shareholders and an immediate dilution in net
tangible book value to new investors of $2.66 per share. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price...................... $10.00
Net tangible book value per share at June 30, 1997....... $67.72
Decrease attributable to conversion of Preferred Stock
and exercise of stock options......................... 62.97
------
Adjusted net tangible book value per share before the
offering.............................................. 4.75
Increase attributable to new investors in the offering... 2.59
------
As adjusted, net tangible book value per common share after
the offering............................................. 7.34
------
Dilution per common share to new investors................. $ 2.66
======
</TABLE>
The following table summarizes, as of June 30, 1997, after giving effect to
a 1-for-4.5 reverse stock split, the conversion of all the outstanding shares of
Preferred Stock into 1,097,969 shares of Common Stock and the exercise of
options to acquire 477,391 shares of Common Stock, the difference between the
current shareholders and new investors with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid, assuming an initial public offering price to the
public of $10.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................. 1,656,467 38.9% $ 7,647,583 22.7% $ 4.62
New investors.......................... 2,600,000 61.1 26,000,000 77.3 10.00
--------- ----- ----------- -----
Total........................ 4,256,467 100.0% $33,647,583 100.0%
========= ===== =========== =====
</TABLE>
The foregoing excludes (i) 485,554 shares of Common Stock subject to
options outstanding on the date of this Prospectus with an exercise price of
$4.50 per share; (ii) 155,555 shares of Common Stock issuable upon conversion of
the Convertible Note; (iii) 260,000 shares of Common Stock issuable upon
exercise of the Sutro Warrant; and (iv) 100,000 shares of Common Stock reserved
for issuance under the 1997 Option Plan and the 1997 Directors Plan. See
"Management -- Director Compensation" and " -- Stock Option Plan" and
"Underwriting."
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
The following selected consolidated financial and operating data should be
read in conjunction with the accompanying Consolidated Financial Statements and
the related notes thereto included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected consolidated financial data set forth below as of and
for the fiscal years ended December 31, 1993, 1994, 1995 and 1996 have been
derived from the consolidated financial statements of the Company audited by
KPMG Peat Marwick LLP, independent certified public accountants. The selected
consolidated financial data set forth below as of and for the fiscal year ended
December 31, 1992 have been derived from the unaudited consolidated financial
statements of the Company. The selected consolidated financial data set forth
below as of June 30, 1996 and 1997 and for the six month periods then ended have
been derived from the unaudited interim consolidated financial statements of the
Company that, in the opinion of management, reflect all adjustments, which are
of a normal recurring nature, necessary to present fairly the information set
forth herein. Results for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for any other interim period or
the full year.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------------------------- ----------------------------
1992(1) 1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA
Revenues:
Rental of
flight
equipment.... $ 6,166 $ 6,098 $ 8,108 $ 7,765 $ 12,681 $ 6,330 $ 6,479
Consulting
fees......... 68 742 213 491 461 183 12
Gain on sale of
aircraft
equipment.... 841 -- -- -- 141 -- --
Interest
income....... 35 7 68 118 169 82 99
---------- ----------- ---------- ---------- ---------- ---------- ----------
Total
revenues... 7,110 6,847 8,389 8,374 13,452 6,595 6,590
Expenses:
Interest....... 3,182 2,293 3,548 3,776 6,277 3,231 3,021
Depreciation... 2,970 2,014 3,165 3,354 5,550 2,774 2,760
General and
administrative... 690 447 548 526 553 266 290
Loss on sale of
aircraft..... 3,645(2) -- -- -- -- -- --
Other.......... 185 -- -- -- -- -- 100
---------- ----------- ---------- ---------- ---------- ---------- ----------
Total
expenses... 10,672 4,754 7,261 7,656 12,380 6,271 6,171
Equity in
earnings of
affiliates..... -- -- -- 183 -- -- --
Income (loss)
before income
taxes and
extraordinary
items.......... (3,562) 2,093 1,128 901 1,072 324 419
Income tax
expense........ 2 45 59 30 37 20 160
Income (loss)
before
extraordinary
items.......... (3,564) 2,048 1,069 871 1,035 304 259
Extraordinary
items -- gain
from debt
forgiveness.... 4,326 -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- ---------- ----------
Net income....... $ 762 $ 2,048 $ 1,069 $ 871 $ 1,035 $ 304 $ 259
========== =========== ========== ========== ========== ========== ==========
Net income (loss)
per common and
common
equivalent
share(3):
Income (loss)
before
extraordinary
items........ $ (0.59) $ 0.24 $ 0.13 $ 0.11 $ 0.13 $ 0.04 $ 0.03
Extraordinary
items........ 0.72 -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- ---------- ----------
Net
income... $ 0.13 $ 0.24 $ 0.13 $ 0.11 $ 0.13 $ 0.04 $ 0.03
========== =========== ========== ========== ========== ========== ==========
Weighted average
number of
common and
common
equivalent
shares
outstanding(3)... 6,062 9,857 8,218 8,218 8,263 8,263 8,263
Pro forma net
income per
common and
common
equivalent
share(4)....... $ 0.46 $ 1.09 $ 0.61 $ 0.51 $ 0.59 $ 0.23 $ 0.21
Pro forma
weighted
average number
of common and
common
equivalent
shares
outstanding(4)... 2,045 2,045 2,045 2,045 2,067 2,067 2,067
</TABLE>
(footnotes on next page)
18
<PAGE> 20
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
1992(1) 1993 1994 1995 1996 1996 1997
---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Flight equipment
under operating
lease.......... $ 29,694 $ 56,346 $ 56,162 $ 95,450 $ 89,885 $ 92,875 $ 117,325
Total assets..... 30,180 57,036 57,131 96,779 92,620 94,647 122,130
Debt financing... 28,895 52,873 51,688 87,825 82,710 85,575 107,010
Shareholders'
equity
(deficit)...... (340) 2,008 3,078 4,048 5,084 4,353 5,493
OTHER DATA
EBITDA(5)........ $ 5,394,000 $ 6,400,000 $ 7,841,000 $ 8,031,000 $ 12,758,000 6,329,000 6,200,000
Cash Flows(6):
From operating
activities... -- 4,498,832 4,465,779 3,938,585 6,796,134 3,674,840 5,166,178
From investing
activities... -- (28,665,000) (3,303,555) (40,966,917) 156,026 (198,974) (30,200,000)
From financing
activities... -- 24,278,491 (1,005,942) 36,754,685 (5,811,689) (2,946,292) 24,350,143
Return on average
assets(7)...... 1.8% 5.8% 1.9% 1.5% 1.1% .6% .6%
Return on average
equity(8)...... -- -- 39.6% 24.6% 22.9% 14.3% 9.6%
Aircraft
equipment owned
at period
end............ 4 5 5 8 7 7 8
</TABLE>
- ---------------
(1) Included in the 1992 income statement data is the consolidation of a wholly
owned subsidiary which the Company disposed of during 1992. The subsidiary
had net liabilities of $3,552,000 and was sold to ILFC for no consideration
as ILFC guaranteed the debt of the subsidiary. Accordingly, the Company
recognized an extraordinary gain from the disposal of the subsidiary for
relief of the net liabilities. During 1992, revenues, expenses, gain on
disposal, net loss and net loss per share related to this subsidiary were
$712,000, $1,144,000, $3,552,000, $(432,000) and $(0.07), respectively.
(2) See "Risk Factors -- Customer Credit Risks."
(3) The treasury stock method was used to calculate net income (loss) per
common and common equivalent share information and weighted average number
of common and common equivalent shares outstanding. The treasury stock
method was modified as the number of common stock equivalents exceeded 20%
of the number of common shares outstanding at the end of each of the
periods presented in the accompanying consolidated financial statements.
Accordingly, the number of shares which could be repurchased with the
proceeds from such conversions was limited to 20% of the number of common
shares and the remaining balance was applied to reduce long-term debt. The
modified treasury stock method was applied only to 1993 as the effect on
1992, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997
was anti-dilutive. See Note 1 to Consolidated Financial Statements. Does
not give effect to the 1-for-4.5 reverse stock split of Common Stock, the
assumed conversion of outstanding shares of Preferred Stock into Common
Stock, or the assumed exercise of options to acquire shares of Common
Stock.
(4) Pro forma information was calculated as if the 1-for-4.5 reverse stock
split, the conversion of all the outstanding shares of Preferred Stock into
1,097,969 shares of Common Stock and the exercise of options to acquire
477,391 shares of Common Stock had occurred at the beginning of the periods
indicated, with the proceeds from the exercise of the options used to
reduce long-term debt and related interest costs. For purposes of this
calculation, Preferred Stock and stock options at June 30, 1997 are assumed
to be outstanding for all periods presented and effected for the related
conversions and exercises.
(5) EBITDA, defined as income before interest expense, income taxes,
depreciation, gain (loss) on sale of aircraft and extraordinary items, is
not intended to represent an alternative to net income (as determined in
accordance with generally accepted accounting principles) as a measure of
performance and is also not intended to represent an alternative to cash
flow from operating activities as a measure of liquidity. Rather, it is
included herein because management believes that it provides an important
additional perspective on the Company's operating results and the Company's
ability to fund its continuing operations.
(6) See Consolidated Statement of Cash Flows included in the Consolidated
Financial Statements. Cash flow information for 1992 is not available.
(7) Calculations are based on the average monthly balances. Percentages for
six-month periods are annualized.
(8) Calculations are based on average quarterly balances. Percentages for
six-month periods are annualized. Prior to 1994, results are not considered
meaningful.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
The following discussion of financial condition and results of operations
of the Company should be read in conjunction with the Consolidated Financial
Statements and the related Notes thereto included elsewhere in this Prospectus.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors."
The Company is primarily engaged in the acquisition of used, single-aisle
jet aircraft and engines for lease and sale to domestic and foreign airlines and
other customers. The Company leases aircraft under short- to medium-term
operating leases where the lessee is responsible for all operating costs and the
Company retains the potential benefit or risk of the residual value of the
aircraft, as distinct from finance leases where the full cost of the aircraft is
generally recovered over the term of the lease.
Rental amounts are accrued evenly over the lease term and are recognized as
revenue from the rental of flight equipment. The Company's cost of the leased
equipment is recorded on the balance sheet and is depreciated on a straight-line
basis over the estimated useful life to the Company's estimated salvage value.
Revenue, depreciation expense and resultant profit for operating leases are
recorded evenly over the life of the lease. Initial direct costs related to the
origination of leases are capitalized and amortized over the lease terms.
RESULTS OF OPERATIONS
Six months Ended June 30, 1996 and 1997
Revenues from rental of flight equipment increased by 2% from $6,330 for
the six months ended June 30, 1996 to $6,479 for the same period in 1997
principally as a result of the re-lease of one aircraft at a higher lease rate.
In addition to leasing operations, the Company provides consulting
services. During the six months ended June 30, 1996, consulting revenues
totalled $183, including $72 paid by Great Lakes Holding, a company owned 100%
by the Chief Executive Officer and the President of the Company ("Great Lakes"),
$76 paid by ILFC and $35 paid by an unrelated airline. During the six months
ended June 30, 1997, consulting fees totalled $12, all of which were paid by
Great Lakes. The decrease in the 1997 period was primarily the result of the
arrangement with Great Lakes which terminated in January 1997. No further
consulting fees are expected to be paid by Great Lakes.
Interest income increased from $82 for the six months ended June 30, 1996
to $99 for the same period in 1997 principally as a result of interest earned on
increased cash balances.
Expenses as a percent of total revenues were 95.1% and 93.6% during the six
months ended June 30, 1996 and 1997, respectively. Interest expense decreased
from $3,231 for the six months ended June 30, 1996 to $3,021 for the same period
in 1997 principally as a result of loan paydowns. Depreciation expense remained
relatively the same at $2,774 and $2,760 for the six months ended June 30, 1996
and 1997. General and administrative expenses also remained relatively constant
at $266 and $290 for the six months ended June 30, 1996 and 1997. The slight
increase in 1997 was principally the result of the addition of a Vice President,
Technical in April 1997. Other expenses of $100 during the six months ended June
30, 1997 represent non-cash compensation due to the vesting of options granted
to executive officers. See "Management -- Existing Stock Options" and Note 9 to
Consolidated Financial Statements.
Following the offering, the Company expects increased general and
administrative expenses as a result of adding a Vice President-Controller in
September 1997, additional requirements imposed due to maintaining the Company's
status as a public company and additional compensation expense as a result of
new employment agreements. See "Management -- Employment Agreements."
20
<PAGE> 22
The Company recognized income tax expense of $20 during the six months
ended June 30, 1996 and $160 for the same period in 1997. The increase in 1997
was primarily due to the reduction in 1996 of substantially all of the valuation
allowance for deferred tax assets related to federal net operating loss
carryforwards.
Net income decreased from $304 for the six months ended June 30, 1996 to
$259 for the same period in 1997 due to the factors described above.
Inflation during recent years has not impacted the Company's operations or
profitability.
The Company anticipates that it will incur non-cash compensation expense of
approximately $150 for the remainder of 1997 and approximately $250 for each of
the years 1998, 1999 and 2000 due to the vesting of stock options granted to
executive officers. See "Management -- Existing Stock Options."
Years Ended December 31, 1994, 1995 and 1996
Revenues from rental of flight equipment decreased by 4% from $8,108 in
1994 to $7,765 in 1995 principally as a result of the re-lease of one aircraft
in June 1995 at a lower lease rate. The increase of 63% to $12,681 in 1996 from
$7,765 in 1995 was principally due to the acquisition in December 1995 of two
aircraft and their related leases.
In 1994, consulting revenues totalled $213, including $144 paid by Great
Lakes and $69 paid by ILFC. In 1995, consulting revenues totalled $491,
including $144 paid by Great Lakes and $347 paid by ILFC. In 1996, consulting
revenues totalled $461, including $144 paid by Great Lakes, $78 paid by ILFC,
$49 paid by an unrelated airline and $190 paid by an unrelated leasing company.
In 1996, the Company realized a gain on sale of aircraft equipment of $141
for the sale of an auxiliary power unit previously on lease. The Company did not
realize any gains on the sale of aircraft equipment in 1994 and 1995.
Interest income increased from $68 in 1994 to $118 in 1995 principally as a
result of interest earned on increased maintenance reserves under certain
leases. The increase to $169 in 1996 resulted primarily from interest earned on
receivables from ILFC relating to an aircraft acquired from ILFC in December
1995. See Note 6 to the Consolidated Financial Statements.
Expenses as a percent of total revenues were 86.5% in 1994, 91.4% in 1995
and 92.0% in 1996. Interest expense increased from $3,548 in 1994 to $3,776 in
1995 and $6,277 in 1996. The increase from 1994 to 1995 was principally the
result of $2,430 of additional debt incurred during the third quarter of 1994 to
upgrade an aircraft to Stage 3. The increase in 1996 resulted from $39,288 of
additional debt to acquire two aircraft in December 1995.
Depreciation expense increased from $3,165 in 1994 to $3,354 in 1995 and
$5,550 in 1996, resulting from four aircraft acquisitions -- one in May 1993,
one in December 1993 and two in December 1995.
General and administrative expenses were $548 in 1994, $526 in 1995 and
$553 in 1996. Variations were due mainly to travel and marketing expenses. The
number of personnel remained constant and management salary levels were
unchanged. As a result of the revision of options held by certain executive
officers, the Company expects to incur additional compensation expense of
approximately $250 in each of 1997, 1998, 1999 and 2000. See
"Management -- Existing Stock Options."
Equity in earnings of affiliates in 1995 consisted of the Company's share
of income of $66 of International Engine Investors ("IEI"), a company formed
exclusively for the acquisition of one engine, and the Company's share of the
gain of $118 on the sale of the aircraft engine which constituted the sole asset
of IEI. See Note 3 to Consolidated Financial Statements, IEI was liquidated in
November 1995.
The Company recognized income tax expense of $59, $30 and $37 representing
effective income tax rates of 5%, 3% and 3% during 1994, 1995 and 1996,
respectively. The difference between the effective rates and the federal
statutory rate was primarily due to the recognition of deferred tax assets. See
Note 4 to Consolidated Financial Statements.
21
<PAGE> 23
Net income decreased from $1,069 in 1994 to $871 in 1995 and increased to
$1,035 in 1996 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal external sources of funds have been term loans from
banks and seller financing secured by aircraft. As a result, a substantial
amount of the Company's cash flow from rental of flight equipment is applied to
principal and interest payments on secured debt. The terms of the Company's
loans generally require a substantial balloon payment at the end of the
noncancellable portion of the lease of the related aircraft, at which time the
Company will be required to re-lease the aircraft and renegotiate the balloon
amount of the loan or obtain other financing. Refinancing of the balloon amount
is dependent upon the Company re-leasing the related aircraft. Accordingly, the
Company begins lease remarketing efforts well in advance of the lease
termination. See "Business -- Financing/Source of Funds." The principal use of
cash is for financing the acquisition of the Company's aircraft portfolio, which
are financed by loans secured by the applicable aircraft. As a result, the
Company does not currently maintain a line of credit.
At December 31, 1996 and June 30, 1997, the Company had cash and cash
equivalents of $1,174 and $491, respectively.
Net cash provided by operating activities increased from $3,675 for the six
months ended June 30, 1996 to $5,166 for the same period in 1997 principally as
a result of increased lease deposits and rentals from the re-lease of one
aircraft. Net cash provided by operating activities decreased from $4,466 in
1994 to $3,939 in 1995 and increased to $6,796 in 1996. The decrease in 1995 was
principally the result of the re-lease of one aircraft in June 1995 at a lower
lease rate. The increase in 1996 was principally the result of the cash flow
from the acquisition in December 1995 of two aircraft and their related leases.
For the six months ended June 30, 1996 and 1997, net cash used in investing
activities was $199 and $30,200, respectively. In 1997, the Company acquired an
additional aircraft and lease for $30,200. In 1994 and 1995, net cash used in
investing activities was $3,304 and $40,967, substantially all of which were
used to purchase aircraft. In 1996, $156 was provided by investing activities as
a result of the sale of aircraft equipment for $355, offset by flight equipment
purchases of $199.
For the six months ended June 30, 1996, net cash used in financing
activities was $2,946 compared to net cash provided by financing activities of
$24,350 during the six months ended June 30, 1997. In 1997, the Company borrowed
$26,933 to finance the acquisition of an aircraft and received $50 from the
exercise of management stock options. In 1997, the Company also made payments on
its outstanding borrowings of $2,633. In 1994, net cash used in financing
activities was $1,006, consisting of the repayment of notes of $3,616 offset by
proceeds of additional borrowings of $2,610. In 1995, net cash provided by
financing activities was $36,755, including the proceeds of borrowings of
$39,805 offset by repayments of notes of $3,150. In 1996, net cash used in
financing activities was $5,812, consisting of repayments of notes and other
payables of $6,544 offset by the proceeds of additional borrowings of $732.
Cash and cash equivalents vary from year to year principally as a result of
the timing of the purchase and sale of aircraft.
The Company uses interest swap arrangements to reduce the potential impact
of increases in interest rates on floating rate long-term debt and does not use
them for trading purposes. Premiums paid for purchased interest rate swaps
agreements are amortized to interest expense over the terms of the swap
agreements.
Notes payable due within one year totalled $16,918 at June 30, 1997, of
which $10,209 represents balloon payments and $6,709 represents installment
payments. Of these balloon payments, $7,670 relate to two leases which expire
May and June, 1998 and $2,539 due December 1997 ($2,100 payable to Great Lakes
and $439 payable to ILFC) relates to leases which expire subsequent to June 30,
1998. The Company plans to refinance the balloon payments in connection with the
re-leasing of the two aircraft in May and June 1998 and refinance the balloon
payments with Great Lakes and ILFC during December 1997. During the eight months
ended August 31, 1997, the Company refinanced $38,311 of balloon payments. See
"Risk Factors -- Dependence Upon Availability of Financing."
The Company's ability to execute successfully its business strategy and to
sustain its operations is dependent, in part, on its ability to obtain financing
and to raise equity capital. There can be no assurance that
22
<PAGE> 24
the necessary amount of such capital will continue to be available to the
Company on favorable terms or at all. If the Company were unable to continue to
obtain any portion of required financing on favorable terms, the Company's
ability to add new aircraft to its lease portfolio, renew leases, re-lease an
aircraft, repair or recondition an aircraft if required, or retain ownership of
an aircraft on which financing has expired would be impaired, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's financing arrangements to date
have been dependent in part upon ILFC. See "Risk Factors -- Reliance Upon ILFC"
and "-- Dependence Upon Availability of Financing."
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings
per Share," SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS No.
128 changes the computation, presentation and disclosure requirements for
earnings per share. See Note 1 to the Consolidated Financial Statements. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. SFAS No. 131 supersedes previous reporting requirements for
reporting on segments of a business enterprise. SFAS No. 128 is effective for
periods ending after December 15, 1997. Early adoption is not permitted. SFAS
No. 130 and SFAS No. 131 are effective for periods beginning after December 15,
1997. Accordingly, the Company plans to implement these two standards during
1998.
23
<PAGE> 25
BUSINESS
The Company is primarily engaged in the acquisition of used, single-aisle
jet aircraft and engines for lease and sale to domestic and foreign airlines and
other customers. As of June 30, 1997, the Company had eight aircraft on lease to
eight customers. In September 1997, the Company acquired from ILFC a Boeing 737-
300QC on lease to Air Belgium until September 2000 and agreed to acquire from
ILFC a Boeing 757-200ER on lease to Air Transat, a Canadian charter airline,
until April 2003. The Company leases its aircraft under "triple net" operating
leases where the lessee is responsible for all operating costs (i.e., crew,
fuel, insurance, taxes, licenses, landing fees, navigation charges, maintenance,
repairs and associated expenses) and the Company retains the potential benefit
and assumes the risk of the residual value of the aircraft, as distinct from
finance leases where the full cost of the aircraft is recovered over the term of
the lease at usually lower monthly rates.
COMPANY HISTORY
The Company was formed in August 1988 by Mr. William E. Lindsey, Mr.
Michael P. Grella and Mr. Richard O. Hammond to take advantage of their
significant experience in both the airline industry in general and the aircraft
marketing industry in particular, and to meet the growing demand of customers in
a segment of the aircraft leasing market, specifically those customers
interested in the operating lease of used, single-aisle jet aircraft. See
"Management -- Directors and Executive Officers." Management believes that
leasing of used commercial jet aircraft under operating leases represents an
investment that is secured by a moveable asset which is required to be
maintained to FAA standards and which should maintain a substantial residual
value for a number of years. They also believe that a well developed risk
management criteria can minimize risk by prudent selection of aircraft, an
appropriate mix of lease termination dates, a worldwide customer base and strict
monitoring of technical and regulatory changes. The initial investors in the
Company included ILFC, a major owner-lessor of commercial jet aircraft, and
Christer and Sven Salen, whose family interests hold significant investments in
airline operations in Sweden. See "Relationship with ILFC" below,
"Management -- Directors and Executive Officers" and "Principal Shareholders."
The initial equity investment in the Company was $2.8 million, which allowed the
Company to purchase from ILFC a Boeing 727-200 Advanced aircraft under lease to
Delta Air Lines.
INDUSTRY BACKGROUND
The profits of the global airline industry are on the rise and passenger
traffic is expected to grow through 2016, according to the Boeing Report. Boeing
projects that traffic will increase 4.9% annually through 2016 and that 16,162
new commercial jet aircraft will be delivered over the next approximately 20
years. Airlines will confront an increasingly competitive environment with
long-term profitability dependent on successful cost reductions. Such reductions
will include improvements in fleet planning designed to more closely match
aircraft capacity with passenger demand.
An important element of fleet planning for many airlines is the use of
operating leases which tend to maximize fleet flexibility due to their
short-term nature and relatively small capital outlay, while minimizing
financial risks. While most operating leases are made for new aircraft, emphasis
on cost containment has been increasing the attractiveness of leasing used
commercial jet aircraft.
The Boeing Report estimates that 16,162 new commercial jet aircraft will be
delivered over the next approximately 20 years, resulting in a projected
worldwide fleet of approximately 23,600 commercial jet aircraft in 2016, net of
4,069 retired aircraft. Single-aisle jet aircraft with seating capacity of 121
to 170 are projected by the Boeing Report to account for approximately 29.7% of
new commercial jet aircraft deliveries over the next approximately 20 years.
Due to the increasing cost of commercial jet aircraft, the anticipated
modernization of the worldwide aircraft fleet, and the emergence of new
niche-focused airlines which generally use leasing for capital asset
acquisitions, the Company believes that airlines will increasingly turn to
operating leases as an alternative method to finance their fleets. Although
Boeing estimated in its 1996 Current Market Outlook that the fleets of operating
lessors have grown from over 200 aircraft in 1986 to over 1,000 in 1995,
commercial jet aircraft
24
<PAGE> 26
under operating lease represented only approximately 10% of total commercial jet
aircraft in service at year-end 1995. Aviation Week reports that leasing will be
the primary means by which the global air transport industry acquires new
aircraft between now and 1999, and probably beyond. Aviation Week, based upon
data provided by GE Capital Aviation Services, states that in 1986, 41% of the
world's airlines owned all of their equipment, 15% leased all of their equipment
and 44% used a mix of the two (with 80% owned and 20% leased). By contrast, in
1996, 16% owned all of their equipment, 42% leased all of their equipment and
42% used a mix of the two (with 60% leased and 40% owned).
The larger operating lessors appear to be focused on the lease of new,
rather than used, commercial jet aircraft. The Company believes that the market
for the operating lease of used commercial jet aircraft, including for
single-aisle jet aircraft with seating capacity of 121 to 170, should grow due
to the factors discussed above as well as the emphasis on airline cost
reduction, the desire of airlines for fleet flexibility and the growth in air
travel.
STRATEGY
The Company's strategy is to focus on entering into operating leases of
used, single-aisle jet aircraft to a diversified base of customers worldwide,
while employing strict risk management criteria. Key elements of the Company's
business strategy include the following:
Focus on Operating Leases. The Company believes that airlines are becoming
increasingly aware of the benefits of financing their fleet equipment on an
operating lease basis, including preservation of cash flow and flexibility
regarding fleet size and composition. The Company believes the operating lease
of jet aircraft, especially used jet aircraft, offers the potential for a higher
rate of return to the Company than other methods of aircraft financing, such as
finance leases.
Focus on Used Commercial Jet Aircraft with a Broad Market Acceptance. The
Company leases used, single-aisle jet aircraft, particularly aircraft between
five and 15 years old at the time the aircraft is acquired by the Company. The
Company is currently focusing on the acquisition and lease of single-aisle jet
aircraft, primarily aircraft with a seating capacity of 121 to 170 passengers,
which, according to the Boeing Report, accounted for approximately 35.9% of the
world fleet at December 31, 1996. The Boeing Report estimates that the
commercial replacement cycle for this type of aircraft is 25 to 28 years from
manufacturer date. This category of jet aircraft includes aircraft such as the
Boeing 737-300/-400, the Airbus A320 and the McDonnell Douglas MD80 series. The
Company is in the process of acquiring and leasing a Boeing 757-200ER aircraft.
The Boeing 757 is a single-aisle aircraft with a seating capacity of 171 to 240
passengers. The Company will continue to purchase aircraft which enjoy
significant manufacturer's support and fit the Company's criteria.
Optimize Relationship with ILFC. The Company has had a long and continuous
relationship with ILFC. ILFC was an initial investor in the Company and prior to
the offering owned approximately 4.1% of the Company's equity. ILFC is a major
owner-lessor of commercial jet aircraft having contacts with most airlines
worldwide, the aircraft and engine manufacturers and most of the significant
participants in the aircraft industry worldwide. Boeing and Airbus each recently
announced a multi-billion dollar order of aircraft by ILFC. The Company intends
to use its relationship with ILFC to seek to gain access, where appropriate, to
various airlines and other participants in the market to facilitate the
purchase, lease, re-lease and sale of aircraft. ILFC's primary focus is the
acquisition and leasing of new commercial jet aircraft. Thus, the Company
believes that its business complements rather than competes with ILFC. See
"Relationship With ILFC" below.
Leverage Management Experience. The successful purchase and leasing of used
commercial jet aircraft requires skilled management in order to evaluate the
condition and price of the aircraft to be purchased and the current and
anticipated market demand for that aircraft. The management of the Company and
the Board of Directors of the Company have significant experience in the
aviation industry, with an average of more than 20 years of experience,
especially in the purchase, sale and financing of commercial jet aircraft, and
have extensive contacts with airlines worldwide. See "Management -- Directors
and Executive Officers."
25
<PAGE> 27
Access a Diversified Global Customer Base. The Company's objective is to
diversify its customer base to avoid dependence on any one lessee, geographic
area or economic trend.
Employ Strict Risk Management Criteria. The Company will only purchase
aircraft that are currently under lease or are subject to a contractual
commitment for lease or purchase, will not purchase aircraft on speculation, and
will seek financing using a non-recourse loan structure. The Company evaluates
carefully the credit risk associated with each of its lessees and the lessee's
ability to operate and properly maintain the aircraft. The Company also
evaluates the return conditions in each lease since the condition of an aircraft
at the end of a lease can significantly impact the amount the Company will
receive on the re-lease or sale of an aircraft.
AIRCRAFT LEASING
All of the Company's current leases are operating leases rather than
finance leases. Under an operating lease, the Company retains title to the
aircraft thereby retaining the potential benefits and assuming the risk of the
residual value of the aircraft. Operating leases allow airlines greater fleet
and financial flexibility due to their shorter-term nature, the relatively small
initial capital outlay necessary to obtain use of the aircraft and off-balance
sheet treatment. Operating lease rates are generally priced higher than finance
lease rates, in part because of the risks to the lessor associated with the
residual value. See "Risk Factors -- Ownership Risks."
Before committing to purchase specific aircraft, the Company takes into
consideration factors such as the condition and maintenance history of the
aircraft, the rental rate and other lease terms, the breadth of the customer
base for the aircraft, trends in global supply and demand for the aircraft type,
the technology included in the aircraft, the stage of the production cycle and
manufacturer's support for the aircraft, estimates of future values, remarketing
potential and anticipated obsolescence. Certain types and vintages of aircraft
do not fit the profile for inclusion in the Company's portfolio of aircraft.
The Company targets the medium-term operating lease market, which generally
consists of leases with three to eight year initial noncancelable terms. The
Company's leases are "triple net leases" whereby the lessee is responsible for
all operating costs (i.e., crew, fuel, insurance, taxes, licenses, landing fees,
navigation charges, maintenance, repairs and associated expenses). In addition,
the leases contain extensive provisions regarding the remedies and rights of the
Company in the event of a default thereunder by the lessee. The leases have
payment clauses whereby the lessee is required to continue to make the lease
payments regardless of circumstances, including whether or not the aircraft is
in service. Certain of the Company's leases limit the lessee's obligation to
make lease payments if the Company violates the covenant of quiet enjoyment
regarding the aircraft or if the Company enters bankruptcy and does not assume
the lease. During the term of the lease, the Company is required to be named as
an additional insured on the lessee's aviation liability insurance policies.
Also, the leases contain very specific criteria for the maintenance and
regulatory status of the asset as well as the return conditions for the
airframe, engines, landing gears, auxiliary power unit and associated
components.
Generally, the lessee provides the Company with an initial security deposit
that is returnable at the expiration of the lease if all lease return conditions
are met by the lessee and there is no default under the lease. Depending on the
creditworthiness of a lessee, in some instances the lessee will also pay into a
maintenance reserve account a certain amount monthly for each hour the aircraft
and/or engine has flown. These maintenance reserves may be drawn upon by the
lessee to be applied towards the cost of periodic scheduled overhaul and
maintenance checks. At the termination of the lease, the lessee is required to
return the asset to the Company in the same condition as it was received, normal
wear and tear excepted, so the asset is in a proper condition for re-lease or
sale. Normally, any remaining maintenance reserves are retained by the Company.
See "Risk Factors -- Ownership Risks."
The Company makes an analysis of the credit risk associated with each lease
before entering into a lease. The Company's credit analysis consists of
evaluating the prospective lessee's available financial statements and trade and
banking references, and working with the Company's lender to evaluate country
and political risk, insurance coverage, liability and expropriation risk. The
process for credit approval is a joint undertaking
26
<PAGE> 28
between the Company and the senior lender providing the debt financing for the
lease. The Company obtains extensive financial information regarding the lessee.
See "Risk Factors -- Customer Credit Risks."
Upon termination of a lease, the objective of the Company is to re-lease or
sell the aircraft. The Company's leases generally require that the lessee notify
the Company at least six to nine months prior to the termination of the lease as
to whether the lessee intends to exercise any option to extend the lease. This
allows the Company to commence its remarketing efforts well in advance of the
termination of a lease. Since January 1, 1995, four of the Company's aircraft
came off lease and were re-leased to new customers. One Boeing 737-200 ADVANCED
went from Britannia Airways (United Kingdom) to New Zealand International
Airlines Limited, a subsidiary of Air New Zealand Limited; one Boeing 737-200
ADVANCED went from New Zealand International Airlines Limited to TACA
International Airlines (El Salvador) and subsequently to its sister company,
Compania Panamena De Aviacion, S.A. ("COPA") (Panama); one Boeing 737-200
ADVANCED went from Air New Zealand Limited to COPA; and one Boeing 737-300 went
from British Midland Airways to Shanghai Airlines. The Company has entered into
an agreement with ILFC pursuant to which ILFC has agreed to assist the Company,
if requested by the Company, in the remarketing of its aircraft for a fee to be
negotiated for each transaction. See "Relationship With ILFC" below. If the
Company is unable to re-lease or sell an aircraft on favorable terms, its
business, financial condition and results of operations may be adversely
affected. See "Risk Factors -- Ownership Risks" and "-- Customer Credit Risks."
Many foreign countries have currency and exchange laws regulating the
international transfer of currencies. The Company attempts to minimize its
currency and exchange risks by negotiating all of its aircraft leasing in U.S.
dollars. The Company requires, as a condition to any foreign transaction, that
the lessee in a foreign country first obtain, if required, written approval of
the appropriate government agency, finance ministry or central bank for the
remittance of all funds contractually owed to the Company in U.S. dollars.
Although the Company has attempted to minimize the foreign currency risk, to the
extent that significant currency fluctuations result in materially higher rental
costs to a foreign lessee, the foreign lessee may be unable or unwilling to make
the required lease payments.
The Company's revenues and income may be affected by, among other matters,
political instability abroad, changes in national policy, competitive pressures
on certain air carriers, fuel shortages, labor stoppages, recessions and other
political or economic events adversely affecting world or regional trading
markets or impacting a particular customer. See "Risk Factors -- Industry
Risks."
During the years ended December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1997, lease revenues from flight equipment generated from foreign
customers accounted for approximately 80%, 69%, 45% and 46%, respectively, of
total revenues. See "Risk Factors -- International Risks." The following
customers accounted for more than 10% of the Company's total revenues in one or
more of the three years ended December 31, 1996 or in the six months ended June
30, 1997: British Midland Airways Limited (36%, 36%, 23%, and 19% for the years
ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997,
respectively), Alaska Airlines, Inc. (21% for the year ended December 31, 1996
and the six months ended June 30, 1997), Southwest Airlines Co. (15% for the
year ended December 31, 1996 and 16% for the six months ended June 30, 1997),
ILFC (6%, 16%, 10%, and 10% for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1997, respectively), New Zealand International
Airlines Limited (42%, 26%, 10%, and 10% for the years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1997), respectively, and Delta
Air Lines, Inc. (12%, 11%, 7%, and 7% for the years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1997, respectively).
27
<PAGE> 29
LEASE PORTFOLIO
The following table sets forth certain information concerning the status of
flight equipment leased by the Company to others as of June 30, 1997:
<TABLE>
<CAPTION>
MANUFACTURE NONCANCELABLE LEASE EXTENSION
AIRCRAFT YEAR LESSEE LEASE PERIOD OPTIONS
- ---------------------- ----------- ----------------------- -------------- -----------------------
<S> <C> <C> <C> <C>
B-727-200 ADVANCED(1) 1979 Delta Air Lines, Inc. April 1998(2) None
B-737-200 1978 ILFC/COPA (Panama) August 1999 None
ADVANCED(1)(3)
B-737-200 ADVANCED(1) 1980 COPA (Panama) June 1998 Two one-year options
B-737-200 ADVANCED(4) 1980 New Zealand September 1998 One six-month option
International Airlines
Limited
B-737-300(4) 1989 Shanghai Airlines April 2000 None
B-737-300(4) 1985 Southwest Airlines Co. December 2002 Four-one year options
B-737-400(4) 1992 British Airways Ltd. March 2001 None
MD-82(4) 1989 Alaska Airlines, Inc. October 1998 One one-year option
</TABLE>
- ---------------
(1) Stage 2 aircraft. See "Government Regulation" below.
(2) As of the date of this Prospectus, Delta Air Lines, Inc. has not informed
the Company whether it will re-lease the aircraft at the end of the current
lease. Management believes that if the aircraft is not re-leased to Delta
Air Lines, Inc., the Company can re-lease the aircraft to another party
without a material adverse effect on the Company's financial condition or
results of operations.
(3) This aircraft is leased to ILFC and subleased to COPA.
(4) Stage 3 aircraft. See "Government Regulation" below.
In September 1997, the Company agreed to acquire two aircraft from ILFC.
The first aircraft, a Boeing 737-300QC manufactured in 1987, was purchased in
September 1997. This aircraft may be changed quickly by the lessee between
passenger and cargo configurations. The seats are palletized and can slide in
and out of the aircraft with minimal downtime, giving the operator increased
operational capability and utilization. This aircraft is on lease to Air Belgium
until September 2000 and was initially financed through ILFC. The second
aircraft will be delivered prior to the end of 1997 and is a Boeing 757-200ER
manufactured in 1990. This aircraft is on lease to Air Transat, a Canadian
charter airline, until April 2003.
APPRAISAL OF LEASE PORTFOLIO
Simat, Helliesen & Eichner, Inc. ("SH&E"), a recognized appraiser of
aircraft, has performed an appraisal of the Company's aircraft and has
determined that the aggregate "Current Market Value" of this equipment as of
June 30, 1997 was approximately $121 million, which compares favorably to the
aggregate net book value of the Company's aircraft at June 30, 1997 of $117.3
million. "Current Market Value" is defined as SH&E's opinion of the most likely
trading price that may be generated for an aircraft under the market
circumstances that are perceived to exist at the time in question. Current
Market Value assumes that the aircraft is valued for its highest, best use, that
the parties to the hypothetical sale transaction are willing, able, prudent and
knowledgeable, and under no unusual pressure for a prompt sale, and that the
transaction would be negotiated in an open and unrestricted market on an
arm's-length basis, for cash or equivalent consideration, and given an adequate
amount of time for effective exposure to prospective buyers. See the appraisal
report of SH&E appearing at page A-1 of this Prospectus for a discussion of the
assumptions utilized and various factors considered by SH&E in performing its
appraisal.
Since appraisals are only estimates of resale values, there can be no
assurance that such appraised values will not materially change due to factors
beyond the Company's control including, but not limited to, obsolescence and/or
changing market conditions, or that upon expiration of the leases, due to the
absence of purchasers or re-lease demand for the Company's aircraft, the Company
will realize either the then book or appraised value through either sale or
re-leasing of the aircraft.
SH&E was paid $27,000, plus out-of-pocket expenses, for its services in
connection with its appraisal.
FINANCING/SOURCE OF FUNDS
The Company purchases used aircraft and aircraft engines on lease to
airlines directly from other leasing companies or from airlines for leasing back
to the airline. The typical purchase requires both secured debt and
28
<PAGE> 30
an equity investment by the Company. The Company generally makes an equity
investment of approximately 5% to 15% of the purchase price of aircraft and
engines from internally generated and other cash and seller financing (primarily
from ILFC). The balance of the purchase price is typically financed with the
proceeds of secured borrowings from banks or other financial institutions (to
date with the support of ILFC as the seller of the flight equipment). The
Company maintains banking relationships primarily with five commercial banks
providing long-term secured equipment financing to the Company at June 30, 1997
in an aggregate amount of $88.9 million. ILFC has provided certain guarantees
and other financial support with respect to the Company's borrowings which have
allowed the Company to finance its aircraft at more favorable leverage rates
than the Company could have obtained without ILFC's support. See Notes 5 and 6
to Consolidated Financial Statements and "Risk Factors -- Reliance Upon ILFC."
At June 30, 1997, $93.7 million (or 88%) of the Company's borrowings to
finance aircraft purchases were on a non-recourse basis. Non-recourse loans are
structured as loans to special purpose subsidiaries of the Company which only
own the assets which secure the loan. The Company, other than the relevant
special purpose subsidiary, is not liable for the repayment of the non-recourse
loan unless the Company breaches certain limited representations and warranties
under the applicable pledge agreement. The lender assumes the credit risk of
each lease, and its only recourse upon a default under the lease is against the
lessee, the leased equipment and the special purpose subsidiary of the Company.
Interest rates under this type of financing are negotiated on a
transaction-by-transaction basis and reflect the financial condition of the
lessee, the terms of the lease, any guarantees and the amount of the loan. The
remaining $13.3 million of the Company's borrowings are on a recourse basis.
ILFC has agreed to indemnify the Company for any payments under this recourse
loan not funded by lease or sale payments.
The term of all of the Company's current borrowings ends within 30 to 60
days after the minimum noncancelable period under the related lease. Thus, the
Company will be required to renegotiate the loan or obtain other financing if
the lessee has and exercises an option to extend the term of the lease. See
"Risk Factors -- Dependence Upon Availability of Financing."
At June 30, 1997, the Company's borrowings had interest rates ranging from
5.4% to 8.1% per annum, with a weighted average interest rate of 7.4% per annum.
At June 30, 1997, approximately 14% of the Company's borrowings accrued interest
on a floating rate basis. See "Risk Factors -- Reliance Upon ILFC."
The Company has previously provided for all of its financing needs through
internally generated funds and borrowings. There is no assurance that such
sources will provide the Company with additional capital resources. The
Company's future growth is dependent upon raising additional capital. See "Risk
Factors -- Dependence Upon Availability of Financing."
RELATIONSHIP WITH ILFC
ILFC was an initial investor in the Company, and prior to the offering
owned approximately 4.1% of the Company's Common Stock. See "Company History"
above. Seven of the Company's nine present aircraft were acquired from ILFC and
ILFC has provided certain guarantees and other financial support with respect to
the Company's borrowings. See "Financing/Source of Funds" above. ILFC has also
paid various fees to the Company for consulting and remarketing services. The
Company has entered into an agreement with ILFC pursuant to which ILFC has
agreed to assist the Company in the remarketing of its aircraft if requested by
the Company. See "Aircraft Leasing" above, "Risk Factors -- Reliance Upon ILFC,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations," "Certain Transactions" and Note 6 to
Consolidated Financial Statements.
ILFC is a wholly owned subsidiary of American International Group, Inc.
("AIG") and a major owner-lessor of commercial jet aircraft. At June 30, 1997,
ILFC owned 349 aircraft and managed an additional 21 aircraft. ILFC's flight
equipment under operating lease at June 30, 1997 had an aggregate net book value
of approximately $14.2 billion. For the six months ended June 30, 1997, ILFC had
total revenues of approximately $895.7 million and net income of approximately
$131.3 million. For the year ended December 31, 1996, ILFC had total revenues of
$1.6 billion and net income of $252 million. AIG is a holding company which,
through its subsidiaries, is primarily engaged in a broad range of insurance and
insurance-related activities in the United States and abroad. At June 30, 1997,
AIG reported total assets of approximately $156.2 billion. For the year ended
December 31, 1996 and the six months ended June 30, 1997,
29
<PAGE> 31
AIG reported net income of approximately $2.9 billion and $1.6 billion,
respectively. AIG's principal executive offices are located at 70 Pine Street,
New York, New York 10270. The Common Stock of AIG is listed on, among others,
the New York Stock Exchange. AIG does not guarantee the obligations of the
Company nor the obligations of ILFC to the Company.
COMPETITION
The aircraft leasing industry is highly competitive, depending in part upon
the type of leased aircraft and prospective lessees. Competition is primarily
based upon the availability of the aircraft required by the customer and the
lease rate. The Company believes that only a few comparably sized companies
focus primarily on the same segment of the aircraft leasing market as the
Company. In addition, a number of aircraft manufacturers, airlines and other
operators, distributors, equipment managers, leasing companies (including ILFC),
financial institutions and other parties engaged in leasing, managing, marketing
or remarketing aircraft compete with the Company, although their primary focus
is not on the same market segment on which the Company focuses. Many of these
periodic competitors have significantly greater financial resources than the
Company. The Company's competitors may lease aircraft at lower rates than the
Company and provide benefits, such as direct maintenance, crews, support
services and trade-in privileges, which the Company does not intend to provide.
The Company believes that it is able to compete in the leasing of used jet
aircraft due to its experience in the industry and its reputation and expertise
in acquiring and leasing aircraft. See "Risk Factors -- Competition."
GOVERNMENT REGULATION
The FAA, the Department of Transportation and the Department of State
exercise regulatory authority over the air transportation industry in the United
States. Most other countries have similar regulatory agencies. The FAA has
regulatory jurisdiction over registration and flight operations of aircraft
operating in the United States, including equipment use, ground facilities,
maintenance, communications and other matters.
The FAA regulates the repair and operation of all aircraft operated in the
United States. Its regulations are designed to insure that all aircraft and
aviation equipment are continuously maintained in proper condition to ensure
safe operation of the aircraft. Similar rules apply in most other countries. All
aircraft must be maintained under a continuous condition monitoring program and
must periodically undergo thorough inspection and maintenance. The inspection,
maintenance and repair procedures for the various types of aircraft equipment
are prescribed by regulatory authorities and can be performed only by certified
repair facilities utilizing certified technicians. The FAA can suspend or revoke
the authority of air carriers or their licensed personnel for failure to comply
with its regulations and can ground aircraft if their airworthiness is in
question.
The Department of State and the Department of Transportation, in general,
have jurisdiction over economic regulation of air transportation, but since the
Company does not operate its aircraft for public transportation of passengers
and property, it is not directly subject to their regulatory jurisdiction.
To export aircraft from the U.S. to a foreign destination, the Company is
required to obtain an export license from the United States Department of
Commerce. To date, the Company has not experienced any difficulty in obtaining
required certificates, licenses and approvals either from the FAA, the
Department of Commerce or any other regulatory agency or their foreign
counterparts.
Member countries of the United Nations are signatories to the International
Civil Aviation Organization (the "ICAO"). Each signatory has agreed to comply
with airworthiness directives of the country of manufacture of the aircraft. The
Company will not lease its aircraft to any carrier domiciled in a country which
is not a member of ICAO. The Company also requires its lessees to comply with
the most restrictive standards of either the FAA or its foreign equivalent. In
some instances, the Company may have to share in the cost of complying with
regulatory airworthiness directives. For older aircraft, a special group of
airworthiness directives require extensive inspections and repairs to bring such
aircraft into compliance, which are required to be paid by the lessee.
30
<PAGE> 32
The FAA and the civil aviation authorities of most countries and
international entities issue regulations limiting permitted noise and other
emissions from aircraft. In most instances, older non-complying aircraft may be
brought into compliance by modifying the engines. One of the Company's aircraft
had noise compliance work performed at a cost of $2.45 million (all of which was
paid by the Company and the lease rate on the aircraft was increased) and three
of the Company's aircraft will require this work to be performed over the next
three years unless the aircraft is leased to a lessee in an area that does not
require the modifications. Currently, these modifications range in cost from
$1.7 million to $2.5 million per aircraft. In some instances, it is necessary to
perform noise compliance work to lease the aircraft into a new jurisdiction. For
example, Western Europe and the United States have non-addition rules which
state that an aircraft which does not meet specified noise compliance
regulations cannot be operated by an airline licensed by one of these
governments. A non-complying aircraft can only be leased or sold into a market
that does not require compliance with the stricter standards. See "Risk
Factors -- Aircraft Noise Compliance."
INSURANCE
The Company requires its lessees to carry those types of insurance which
are customary in the air transportation industry, including comprehensive
liability insurance and aircraft hull insurance. The Company is named as an
additional insured on liability policies carried by the lessees. All policies
contain a breach of warranty endorsement so that the interests of the Company
are not prejudiced by any act or omission of the operator-lessee.
Insurance premiums are prepaid by the lessee on a periodic basis, with
payment acknowledged to the Company through an independent insurance broker. The
territorial coverage is, in each case, suitable for its lessee's area of
operations and the policies contain, among other provisions, a "no co-insurance"
clause and a provision prohibiting cancellation or material change without at
least 30 days advance written notice to the Company. Furthermore, the insurance
is primary and not contributory and all insurance carriers are required to waive
rights of subrogation against the Company.
The stipulated loss value schedule under aircraft hull insurance policies
is on an agreed value basis acceptable to the Company, which usually exceeds the
book value of the aircraft. Aircraft hull policies contain standard clauses
covering aircraft engines with deductibles required to be paid by the lessee.
Furthermore, the aircraft hull policies contain full war risk endorsements,
including, but not limited to, confiscation, seizure, hijacking and similar
forms of retention or terrorist acts, subject to certain specified exclusions.
All losses under such policies are payable in U.S. Dollars.
The comprehensive liability insurance policies include provisions for
bodily injury, property damage, passenger liability, cargo liability and such
other provisions reasonably necessary in commercial passenger and cargo airline
operations with minimal deductibles. Such policies generally have combined
comprehensive single liability limits of not less than $200 million and require
all losses to be paid in U.S. Dollars.
Insurance policies are generally placed or reinsured in the Lloyds of
London or U.S. markets. The insurance carrier under the insurance policies must
be approved by the Company.
EMPLOYEES
As of September 30, 1997, the Company had six employees. None of the
Company's employees is covered by a collective bargaining agreement and the
Company believes its employee relations are good.
FACILITIES
The Company's principal offices are located at 3655 Torrance Boulevard,
Suite 410, Torrance, California. The Company occupies space in Torrance under a
lease that covers approximately 1,845 square feet of office space and expires on
February 1, 1999. The Company believes that its current facilities are adequate
for its needs and does not anticipate any difficulty replacing such facilities
or locating additional facilities, if needed. See Note 8 to Consolidated
Financial Statements.
LEGAL PROCEEDINGS
The Company is not currently involved in any litigation.
31
<PAGE> 33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
SERVED AS
DIRECTOR
NAME POSITION WITH THE COMPANY AGE(1) SINCE
- ----------------------------- --------------------------------------- -------------------------------------- ---------
<S> <C> <C> <C>
William E. Lindsey Chairman of the Board, Chief Executive 59 1988
Officer and Director
Michael P. Grella President and Director 41 1988
Richard O. Hammond Vice President -- Finance and Treasurer 67
Christopher W. Vorderkunz Vice President -- Technical 47
Alan G. Stanford, Jr. Vice President -- Controller 35
Stuart M. Warren Secretary and Director 54 1988
Aaron Mendelsohn Director 45 1988
Christer Salen Director 55 1989
Kenneth Taylor Director 65 1994
Ralph O. Hellmold Director 56 1997
Magnus Gunnarsson Director 50 1997
</TABLE>
- ---------------
(1) As of August 31, 1997.
All members of the Board of Directors hold office until the next annual
meeting of shareholders or until their successors are duly elected and
qualified. Executive officers serve at the discretion of the Board of Directors.
MR. LINDSEY has served as Chairman of the Board of Directors, Chief
Executive Officer and a Director of the Company since 1988. He has over 30 years
of aviation experience as an aeronautical and astronautical engineer, attorney,
aircraft salesman, fleet and financial planner, and airline manufacturing
executive. Prior to joining the Company, he was Chairman of the Board of
Directors of Aircraft Finance Corporation ("AFC"), a privately held company
engaged in the acquisition, disposition and leasing of used commercial aircraft,
for approximately three years. In 1987, AFC was engaged by Sunworld Airlines to
manage its operations because Sunworld Airlines was in financial distress. As a
result of that engagement, Mr. Lindsey became Chairman of the Board of Sunworld
Airlines. In 1988, Sunworld Airlines entered bankruptcy proceedings and
discontinued operations the same year. Previously, Mr. Lindsey was employed by
Western Airlines for approximately 15 years as the Manager of Operations, as an
attorney in the corporate law department, and as the Director of Fleet Planning
with responsibility for the evaluation, negotiation and acquisition of aircraft.
From 1967 to 1972, in addition to his duties for Western Airlines, Mr. Lindsey
was qualified as a Designated Engineering Representative (DER) for the FAA,
which allowed him to approve all of Western Airlines' aircraft operational
parameters on behalf of the FAA. He holds a B.S. in aeronautical engineering
from Northrop University and a J.D. from Loyola University School of Law, Los
Angeles.
MR. GRELLA has served as President of the Company since 1988. Prior to
joining the Company, he was President of Aircraft Finance Corporation for
approximately three years. Previously, Mr. Grella served for seven years as
Director of Marketing for Aircraft Investment Corporation. In that capacity, he
was responsible for the marketing, negotiation and sale of commercial jet
aircraft on several continents, as well as for research, evaluation, pricing and
contract administration. Mr. Grella's experience also includes the evaluation,
inspection, selection and acquisition of aircraft on an international basis; and
the negotiation and management of a multiple aircraft modification program for a
major U.S. manufacturer. Mr. Grella holds a B.S. in business from Brockport
University.
MR. HAMMOND has served as the Vice President -- Finance and Treasurer of
the Company since 1988. Prior to joining the Company, he was the Chief Financial
Officer of Aircraft Finance Corporation for three years. For the past
approximately 35 years, Mr. Hammond has been actively engaged in the airline
industry and in aircraft financing, including Vice President and Treasurer of
Western Airlines from 1969 to 1982. His
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experience includes negotiating aircraft leases and equipment trusts, raising
corporate debt and equity capital, negotiating domestic and foreign bank lines
of credit, and arranging aircraft hull and liability insurance. Mr. Hammond also
has experience in insurance brokerage, specializing in aviation insurance. He
holds a B.S. with Honors in accounting from the University of California at Los
Angeles.
MR. VORDERKUNZ became Vice President -- Technical in April 1997. For the
five years prior to December 1996, Mr. Vorderkunz was the Vice President of
Airclaims, Inc., a commercial aviation loss adjustment and consultancy company,
responsible for investigating and adjusting hull, third party liability and
product claims primarily for London-based underwriters. He was also responsible
for performing airline risk, aircraft condition appraisals and technical record
audits on commercial aircraft. Prior to his employment with Airclaims, Inc., Mr.
Vorderkunz was the Vice President for the Company for three years. Mr.
Vorderkunz began his aviation career in the U.S. Army in 1968 and has been
active in international and domestic commercial airline maintenance and
engineering, leasing and aviation insurance positions since 1972. He also holds
a valid FAA airframe and powerplant license which was issued in 1972, and a
State of California aviation insurance adjuster license.
MR. STANFORD became Vice President -- Controller in September 1997. From
September 1992 to September 1997, Mr. Stanford was an accountant with Ernst &
Young LLP. He holds a B.S. in business administration from the University of
Denver and a Master of Business Administration from the University of Colorado
and is licensed as a certified public accountant in California.
MR. WARREN has served as Secretary and a Director of the Company since
1988. Mr. Warren is currently a principal in Warren & Sklar, a law corporation.
He has been a practicing attorney for the past 26 years, during the last 24 of
which he has been actively engaged in representing clients in the aviation
industry. Mr. Warren was engaged as an attorney for The Flying Tiger Line Inc.
for approximately 14 years and thereafter represented ILFC as well as other
leasing companies and airlines in connection with the purchase, finance and
lease of aircraft. He received his A.B. from Princeton University and his LL.B.
from the Harvard Law School and is a member of the State Bars of California and
New York.
MR. MENDELSOHN currently is a private investor and was an Associate
Director of Bear Stearns & Co. Inc. from 1988 to March 1997. Mr. Mendelsohn was
responsible for the public financing in 1984 of Wings West Airlines Inc, a
commuter airline that was sold to American Airlines in 1987. He currently serves
on the Board of Directors of Display Products, Inc (an electronics firm),
Advanced Bionics Corporation (a medical device technology company), and AMMI(a
company engaged in the design and manufacture of "smart cards"). He received his
B.A. from the University of California at Los Angeles, his J.D. from Loyola
University School of Law, Los Angeles and is a member of the State Bar of
California (inactive status).
MR. SALEN has been engaged in the shipping and aviation sectors of the
transport industry for his entire working life. He is a director of EXXTOR
Group, Ltd., a London-based holding company for ventures principally engaged in
surface transportation and airline operations out of the United Kingdom. Mr.
Salen was the founding partner of Cargolux Airlines International, S.A. and
currently is also Chairman of European Aircraft Investors (an aviation holding
company), Caledonian Steamship Company (a shipping holding company) and SCS
Management Limited (a management company).
MR. TAYLOR retired from ILFC in early 1994 where he served as Vice
President-Technical. Prior to joining ILFC in 1983, Mr. Taylor was an officer,
director and principal shareholder of Century International, Ltd., which was
engaged in the business of aircraft sales, leasing and financing from 1978 to
1983. Prior to 1978, Mr. Taylor was an executive of TigerAir, Inc. and he was
active in the airline industry with Douglas Aircraft Company, Fairchild Aircraft
Marketing Company and DeHavilland Aircraft of Canada.
MR. HELLMOLD is the founder and President of Hellmold Associates, Inc., an
investment banking boutique which specializes in mergers and acquisitions and
acts as general partner of a hedge fund. Mr. Hellmold is also a director of Core
Materials Corp. (a plastics manufacturer), AHL Shipping Company, The Gammon
Group (a circuit board manufacturer) and Q.C. Leasing, and he is an independent
trustee of Ridgewood Electric Power Trusts II and III, Delaware business trusts.
Prior to forming Hellmold Associates in 1990, Mr. Hellmold was a Managing
Director at Prudential-Bache Capital Funding, where he served as co-
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head of the Corporate Finance Group, co-head of the Investment Banking Committee
and head of the Financial Restructuring Group. From 1974 until 1987, Mr.
Hellmold was a partner at Lehman Brothers and its successors, where he worked in
Corporate Finance and co-founded the Financial Restructuring Group.
MR. GUNNARSSON is the founder and President of Capital Consulting, an
Iceland based airlines consulting firm specializing in the leasing of aircraft
worldwide for various airline operators and investors. Prior to forming Capital
Consulting, he was the Managing Director of the Union of Icelandic Fish
Producers and Chairman of the Board of the Icelandic Export Council from 1986 to
1994. He was Managing Director of the Confederation of Icelandic Employers from
1983 to 1986, Vice Chairman of Esso Oil Company in Iceland from 1981 to 1983 and
Managing Director of Eagle Air, an Icelandic charter airline, from 1976 to 1981.
He is a former professor of economics and management at the Icelandic Commercial
College and a graduate of the same institution.
DIRECTOR COMPENSATION
No director currently receives any compensation or other remuneration for
their services as members of the Board of Directors. The Company proposes to pay
outside directors after the closing of the offering an annual fee of $8,000 and
a fee of $1,000 for each board meeting attended in person and $500 for each
telephonic board meeting attended and $500 for each committee meeting attended.
All directors will be reimbursed for their reasonable out-of-pocket expenses
incurred to attend Board of Directors or committee meetings.
The Board of Directors and shareholders of the Company have adopted the
Company's 1997 Directors Plan. The purpose of the 1997 Directors Plan is to
promote the success of the Company by providing an additional means through the
grant of stock options to attract, motivate and retain experienced and
knowledgeable Eligible Directors (as defined below). The 1997 Directors Plan
provides that annually an Eligible Director will receive an option to purchase
5,000 shares of Common Stock at an exercise price equal to the market price of
the Common Stock on the date of grant. The Board of Directors has authorized
50,000 shares of Common Stock for issuance under the 1997 Directors Plan. Stock
options granted under the 1997 Directors Plan will expire five years after the
date of grant. If a person's service as a member of the Board of Directors
terminates, any unexercisable portion of the option shall terminate and the
option will terminate six months after the date of termination or the earlier
expiration of the option by its terms. Options generally vest over a three-year
period. Upon a Change in Control Event (as defined in the 1997 Directors Plan),
the options will become fully exercisable. "Eligible Director" means a member of
the Board of Directors of the Company who as of the applicable date of grant is
not (i) an officer or employee of the Company or any subsidiary, or (ii) a
person to whom equity securities of the Company or an affiliate have been
granted or awarded within the prior year under or pursuant to any other plan of
the Company or an affiliate that provides for the grant or award of equity
securities.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Amended and Restated Articles of Incorporation will contain provisions
that eliminate the personal liability of its directors for monetary damages
arising from a breach of their fiduciary duties in certain circumstances to the
fullest extent permitted by law. Such limitation of liability does not affect
the availability of equitable remedies such as injunctive relief or rescission.
Prior to the consummation of the offering, the Company will enter into
indemnity agreements with its officers and directors containing provisions which
are in some respects broader than the specific indemnification provisions
contained in the California Corporations Code. The indemnity agreements may
require the Company, among other things, to indemnify such officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers, to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified, and
to obtain directors' and officers' insurance if available on reasonable terms.
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At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that may result in a claim for such indemnification.
AUDIT COMMITTEE
An Audit Committee has been formed, the members of which are Aaron
Mendelsohn, Christer Salen and Kenneth Taylor. The Audit Committee's duties
include reviewing internal financial information, monitoring cash flow, budget
variances and credit arrangements, reviewing the audit program of the Company,
reviewing with the Company's independent auditors the results of all audits upon
their completion, annually selecting and recommending independent accountants,
overseeing the quarterly unaudited reporting process and taking such other
action as may be necessary to assure the adequacy and integrity of all financial
information distributed by the Company.
COMPENSATION COMMITTEE
After the offering, a Compensation Committee will be formed and consist of
at least three directors, a majority of whom will not be present or former
employees or officers of the Company. The Compensation Committee will recommend
compensation levels of senior management and work with senior management on
benefit and compensation programs for Company employees.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation earned, for services rendered in all capacities to the Company, by
the Company's Chief Executive Officer for the year ended December 31, 1996. No
other executive officer of the Company had total salary and bonus in excess of
$100,000 for the year ended December 31, 1996. Certain columns have been omitted
from this Summary Compensation Table because they are not applicable.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
-----------------
NAME AND PRINCIPAL POSITION SALARY BONUS
----------------------------------------------------------- -------- ------
<S> <C> <C>
William E. Lindsey
Chairman of the Board and Chief Executive Officer........ $120,000 $ --
</TABLE>
EXISTING STOCK OPTIONS
During the six months ended June 30, 1997, William E. Lindsey, the Chairman
of the Board and Chief Executive Officer of the Company, exercised options to
purchase 6,666 shares of Common Stock and Mr. Grella, the President of the
Company, exercised options to purchase 4,444 shares of Common Stock. As of the
date of the offering, executive officers will hold options to acquire 485,554
shares of Common Stock, including options to acquire 286,666 shares of Common
Stock granted to William E. Lindsey. These options have an exercise price of
$4.50 per share, will vest 25% in 1997 and 25% in each of the following three
years and will expire on March 31, 2007. If the executive is terminated for
whatever reason, the options vest in full.
EMPLOYMENT AGREEMENTS
Immediately prior to the offering, the Company will enter into employment
agreements with each of William E. Lindsey, the Chairman of the Board and Chief
Executive Officer of the Company, and Michael P. Grella, the President of the
Company. Each employment agreement will provide for a term of approximately
three years and will automatically extend annually one additional year unless
notice is given by the Company or the employee. Mr. Lindsey and Mr. Grella will
be entitled to a base salary of $160,000 and $140,000 per year, respectively,
and each will be entitled to a bonus based upon certain pretax income targets,
which could amount to bonuses of up to 125% of the employee's base salary.
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Under each employment agreement, in the event of a termination of the
employee's employment without cause, his total disability (as defined in the
agreements) or the employee resigns for "good reason" (as defined in the
agreements) within one year of a "change in control" (as defined below), the
employee is entitled to receive, in addition to salary and bonuses accrued to
the date of termination, all amounts payable under the agreement as though such
termination, total disability or resignation for good reason had not occurred. A
"change in control" occurs under the agreements upon (i) approval by the
shareholders of the Company of the dissolution or liquidation of the Company;
(ii) approval by the shareholders of the Company of an agreement to merge or
consolidate, or otherwise reorganize, with or into one or more entities not a
subsidiary of the Company, as a result of which less than 50% of the outstanding
voting securities of the surviving or resulting entity immediately after the
reorganization are, or will be owned, directly or indirectly, by shareholders of
the Company immediately before such reorganization (assuming for purposes of
such determination that there is no change in the record ownership of the
Company's securities from the record date for such approval until such
reorganization and that such record owners hold no securities of the other
parties to such reorganization, but including in such determination any
securities of the other parties to such reorganization held by affiliates of the
Company); (iii) approval by the shareholders of the Company of the sale, lease,
conveyance or other disposition of all or substantially all of the Company's
business and/or assets to a person or entity which is not a wholly owned
subsidiary of the Company; (iv) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), but
excluding any person described in and satisfying the conditions of Rule
13d-1(b)(1) thereunder), other than a person who is the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act) of more than 20% of the
outstanding shares of Common Stock of the Company at the time of the execution
of the employment agreements (or an affiliate, successor, heir, descendant or
related party of or to any such person), becomes the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing more than 25% of the combined voting
power of the Company's then outstanding securities entitled to then vote
generally in the election of directors of the Company; or (v) a majority of the
Board of Directors of the Company not being comprised of Continuing Directors.
For purposes of this definition, "Continuing Directors" are persons who were (A)
members of the Board of Directors of the Company on the date of the employment
agreements or (B) nominated for election or elected to the Board of Directors of
the Company with the affirmative vote of at least a majority of the directors
who were Continuing Directors at the time of such nomination or election.
STOCK OPTION PLAN
The Board of Directors and shareholders of the Company have adopted the
Company's 1997 Option Plan. The 1997 Option Plan provides a means to attract,
motivate, retain and reward key employees of the Company and its subsidiaries
and other selected persons and promote the success of the Company. A maximum of
50,000 shares of Common Stock (subject to certain anti-dilutive adjustments) may
be issued pursuant to grants and awards under the 1997 Option Plan. The maximum
number of shares that may be subject to all qualifying share-based awards,
either individually or in the aggregate, that during any calendar year are
granted under the 1997 Option Plan to any one participant will not exceed 20,000
(subject to certain anti-dilutive adjustments).
Administration and Eligibility. The 1997 Option Plan will be administered
by the Board of Directors or a committee appointed by the Board of Directors
(the "Administrator"). The 1997 Option Plan empowers the Administrator among
other things, to interpret the 1997 Option Plan, to make all determinations
deemed necessary or advisable for the administration of the 1997 Option Plan and
to award to officers and other key employees of Company and its subsidiaries and
certain other eligible persons ("Eligible Employees"), as selected by the
Administrator, options, including incentive stock options ("ISOs") as defined in
the Internal Revenue Code (the "Code"), stock appreciation rights ("SARs"),
shares of restricted stock, performance shares and other awards valued by
reference to Common Stock, based on the performance of the participant, the
performance of the Company or its Common Stock and/or such other factors as the
Administrator deems appropriate. The various types of awards under the 1997
Option Plan are collectively referred to as "Awards." It is expected that after
the consummation of the offering there will be approximately five officers and
other employees eligible to participate in the 1997 Option Plan.
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<PAGE> 38
Transferability. Generally speaking, Awards under the 1997 Option Plan are
not transferable other than by will or the laws of descent and distribution, are
exercisable only by the participant, and may be paid only to the participant or
the participant's beneficiary or representatives. However, the Administrator may
establish conditions and procedures under which exercise by and transfers and
payments to certain third parties are permitted, to the extent permitted by law.
Options. An option is the right to purchase shares of Common Stock at a
future date at a specified price. The option price is generally the closing
price for a share of Common Stock as reported on the Nasdaq-NM ("fair market
value") on the date of grant, but may be a lesser amount if authorized by the
Administrator. The 1997 Option Plan authorizes the Administrator to award
options to purchase Common Stock at an exercise price which may be less than
100% of the fair market value of such stock at the time the option is granted,
except in the case of ISOs.
An option may be granted as an incentive stock option, as defined in the
Code, or a nonqualified stock option. An ISO may not be granted to a person who,
at the time the ISO is granted, owns more than 10% of the total combined voting
power of all classes of stock of the Company and its subsidiaries unless the
exercise price is at least 110% of the fair market value of shares of Common
Stock subject to the option and such option by its terms is not exercisable
after the expiration of five years from the date such option is granted. The
aggregate fair market value of shares of Common Stock (determined at the time
the option is granted) for which ISOs may be first exercisable by an option
holder during any calendar year under the 1997 Option Plan or any other plan of
the Company or its subsidiaries may not exceed $100,000. A nonqualified stock
option is not subject to any of these limitations.
The 1997 Option Plan permits optionees, with certain exceptions, to pay the
exercise price of options in cash, Common Stock (valued at its fair market value
on the date of exercise), a promissory note, a combination thereof or, if an
option award so provides, by delivering irrevocable instructions to a
stockbroker to promptly deliver the exercise price to the Company upon exercise
(i.e., a so-called "cashless exercise"). Cash received by the Company upon
exercise will constitute general funds of the Company and shares of Common Stock
received by the Company upon exercise will return to the status of authorized
but unissued shares.
Consideration for Awards. Typically, the only consideration received by the
Company for the grant of an Award under the 1997 Option Plan will be the future
services by the optionee (as contemplated by the vesting schedule or required by
agreement), past services, or a combination thereof.
SARs. The 1997 Option Plan authorizes the Administrator to grant SARs
independent of any other Award or concurrently (and in tandem) with the grant of
options. An SAR granted in tandem with an option is only exercisable when and to
the extent that the related option is exercisable. An SAR entitles the holder to
receive upon exercise the excess of the fair market value of a specified number
of shares of Common Stock at the time of exercise over the option price. This
amount may be paid in Common Stock (valued at its fair market value on the date
of exercise), cash or a combination thereof, as the Administrator may determine.
Unless the Award agreement provides otherwise, the option granted concurrently
with the SAR must be cancelled to the extent that the appreciation right is
exercised and the SAR must be cancelled to the extent the option is exercised.
SARs limited to certain periods of time around a major event, such as a
reorganization or change in control, may also be granted under the 1997 Option
Plan.
Restricted Stock. The 1997 Option Plan authorizes the Administrator to
grant restricted stock to Eligible Employees on such conditions and with such
restricted periods as the Administrator may designate. During the restricted
period, stock certificates evidencing the restricted shares will be held by the
Company or a third party designated by the Administrator and the restricted
shares may not be sold, assigned, transferred, pledged or otherwise encumbered.
Performance Share Awards. The Administrator may, in its discretion, grant
Performance Share Awards to Eligible Employees based upon such factors as the
Administrator deems relevant in light of the specific type and terms of the
Award. The amount of cash or shares or other property that may be deliverable
pursuant to these Awards will be based upon the degree of attainment over a
specified period of not more than ten years (a
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"performance cycle") as may be established by the Administrator of such measures
of the performance of the Company (or any part thereof) or the participant as
may be established by the Administrator. The Administrator may provide for full
or partial credit, prior to completion of a performance cycle or the attainment
of the performance achievement specified in the Award, in the event of the
participant's death, retirement, or disability, a Change in Control Event (as
defined in the 1997 Option Plan) or in such other circumstances as the
Administrator may determine.
Special Performance-Based Share Awards. In addition to awards granted under
other provisions of the 1997 Option Plan, performance-based awards within the
meaning of Section 162(m) of the Code and based on revenues, net earnings, cash
flow, return on equity or on assets, or other business criteria ("Other
Performance-Based Awards") relative to preestablished performance goals, may be
granted under the 1997 Option Plan. The specific performance goals relative to
these business criteria must be approved by the Administrator in advance of
applicable deadlines under the Code and while the performance relating to the
goals remains substantially uncertain. The applicable performance measurement
period may not be less than one nor more than ten years. Performance goals may
be adjusted to mitigate the unbudgeted impact of material, unusual or
nonrecurring gains and losses, accounting changes or other extraordinary events
not foreseen at the time the goals were set.
The eligible class of persons for Other Performance-Based Awards is
executive officers of the Company. In no event may grants of this type of Award
in any fiscal year to any participant relate to more than 20,000 shares or
$600,000 if payable only in cash. Before any Other Performance-Based Award is
paid, the Administrator must certify that the material terms of the Other
Performance-Based Award were satisfied. The Administrator will have discretion
to determine the restrictions or other limitations of the individual Awards.
Stock Bonuses. The Administrator may grant a stock bonus to any Eligible
Employee to reward exceptional or special services, contributions or
achievements in the manner and on such terms and conditions (including any
restrictions on such shares) as determined from time to time by the
Administrator. The number of shares so awarded shall be determined by the
Administrator and may be granted independently or in lieu of a cash bonus.
Cash Awards. If Awards payable only in cash are not considered derivative
securities and are not intended to constitute a performance-based award under
the Code, such Awards will not reduce the number of shares available under the
1997 Option Plan. Some cash only awards, however, such as SARs, will reduce the
numbers of shares available under the 1997 Option Plan. Subject to the
provisions of the 1997 Option Plan, the Administrator has the sole and complete
authority to determine the employees to whom and the time or times at which such
awards will be made, the number of shares awarded and other conditions of the
awards.
Term and Exercise Period of Awards. The 1997 Option Plan provides that
awards may be granted for such terms as the Administrator may determine but not
greater than ten years after the date of the Award. The 1997 Option Plan does
not impose any minimum vesting period, post-termination exercise period or
pricing requirement, although in the ordinary course, customary restrictions
will likely be imposed. Options and SARs will generally be exercisable during
the holder's employment by the Company or by a related company and unearned
restricted stock and other Awards will generally be forfeited upon the
termination of the holder's employment prior to the end of the restricted or
performance period. Generally speaking, options which have become exercisable
prior to termination of employment will remain exercisable for three months
thereafter (12 months in the case of retirement, disability or death). Such
periods, however, cannot exceed the expiration dates of the Options. SARs have
the same post-termination provisions as the Options to which they relate. The
Administrator has the authority to accelerate the exercisability of Awards or
(within the maximum ten-year term) extend the exercisability periods.
Termination, Amendment and Adjustment. The Plan may be terminated by the
Board of Directors at any time. In addition, the Board may amend the 1997 Option
Plan from time to time, without the authorization or approval of the Company's
shareholders, unless the amendment (i) materially increases the benefits
accruing to participants under the 1997 Option Plan, (ii) materially increases
the aggregate number of securities that may be issued under the 1997 Option Plan
or (iii) materially modifies the requirements as to eligibility for
participation in the 1997 Option Plan, but in each case only to the extent then
required by the Code or applicable law, or deemed necessary or advisable by the
Board of Directors. No Award may be
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granted under the 1996 Option Plan after March 1, 2007, although Awards
previously granted may thereafter be amended consistent with the terms of the
1997 Option Plan.
Upon the occurrence of a Change in Control Event (as defined in the 1997
Option Plan), there will be an acceleration of vesting unless the Administrator
determines otherwise prior to the Change in Control Event. In addition, upon the
occurrence of an extraordinary dividend or distribution or any extraordinary
corporate transaction, an appropriate adjustment to the number and type of
shares or other securities or property subject to an Award and the price thereof
may be made in order to prevent dilution or enlargement of rights under Awards.
Individual awards may be amended by the Administrator in any manner
consistent with the 1997 Option Plan. Amendments that adversely affect the
holder of an Award, however, are subject to his or her consent.
The 1997 Option Plan is not exclusive and does not limit the authority of
the Board of Directors or the Administrator to grant other awards, in stock or
cash, or to authorize other compensation, under any other plan or authority.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a compensation committee for the fiscal year ended
December 31, 1996. For the year ended December 31, 1996, all decisions regarding
executive compensation were made by the Board of Directors of the Company.
William E. Lindsey and Michael P. Grella, directors and executive officers of
the Company, did not participate in deliberations by the Board of Directors of
the Company regarding executive compensation. None of the executive officers of
the Company currently serves on the compensation committee of another entity or
any other committee of the board of directors of another entity performing
similar functions.
CERTAIN TRANSACTIONS
ILFC is a shareholder of the Company. See "Business -- Relationship With
ILFC." During 1993, 1995 and the six months ended June 30, 1997, the Company
purchased aircraft from ILFC aggregating $30.2 million, $41.5 million and $30.2
million, respectively. None were purchased during 1994 or 1996. At December 31,
1996 and June 30, 1997, 79% and 83%, respectively, of the Company's gross fleet
cost was comprised of aircraft acquired from ILFC. The Company financed these
acquisitions through bank loans, partially guaranteed by ILFC, as well as loans
from ILFC. ILFC provides these guarantees to lenders through an asset value
guarantee ("AVG"). ILFC's financial support has allowed the Company to finance
aircraft purchases at more favorable leverage than the Company could otherwise
obtain. The Company's typical operating lease transaction with an AVG requires a
cash investment by the Company of approximately 5% to 15% of the aircraft
purchase price while the industry standard ranges from 20% to 30%. At December
31, 1996 and June 30, 1997, $34.2 million and $39.3 million, respectively, of
notes payable were covered by AVG and $10.2 million and $14.4 million,
respectively, were due to ILFC. During 1993, the Company sold an aircraft to an
unrelated party and received proceeds of $1.5 million, of which $800,000 was
from ILFC. ILFC had assured the Company that it would recover at least $1.5
million from the sale of this aircraft. See "Risk Factors -- Reliance Upon
ILFC."
At June 30, 1997, the Company had one aircraft on lease to ILFC which is
subleased to COPA. See "Business -- Lease Portfolio." The lease originated in
August 1994 and provides for monthly rents of $80,000 through August 1999. The
Company recognized rental income of $400,000, $960,000, $960,000 and $480,000
during the years ended 1994, 1995 and 1996 and the six months ended June 30,
1997, respectively, from this lease.
In 1997, the Company leased an aircraft to a third party for a three year
period for which ILFC guaranteed certain rental payments. See Note 7 to
Consolidated Financial Statements. In connection with that lease, ILFC also
guaranteed repayment of the related lease deposit of $1.6 million to the lessee.
The Company has an agreement with ILFC relating to the December 1995
purchase of an aircraft which provides for recovery of an operating loss, as
defined in the acquired lease. The Company estimates this loss will be incurred
through 1999. Accordingly, the Company reduced the purchase price of the related
aircraft and recognized a receivable for the present value of the estimated
recovery aggregating $579,000. The amount
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due from ILFC at December 31, 1996 and June 30, 1997 was $441,000 and $320,000,
respectively, which includes accrued interest of $87,000 and $24,500,
respectively. The loss stems from a stated lease rate which is less than the
market lease rate at the date of acquisition. Accordingly, the Company allocated
additional cost to the purchase price and recognized deferred rent aggregating
$1.7 million for the present value of the difference between the market and
stated rent. Deferred rent will be amortized on the straight line method over
the remaining lease term.
The Company realized consulting fee revenues of $69,000, $347,000 and
$78,000 during the years 1994, 1995 and 1996, respectively, for services to
ILFC. The consulting services provided to ILFC by the Company included assisting
in the marketing and remarketing of aircraft and related assets. No consulting
fees were recognized during the six months ended June 30, 1997.
The Company's Chief Executive Officer and President own Great Lakes, an
affiliated company. From time to time, these officers provide consulting
services to Great Lakes, consisting of portfolio management and technical
services. In consideration of these services, Great Lakes paid the Company
$144,000 for each of the years 1994, 1995 and 1996 and $12,000 for the six
months ended June 30, 1997.
In connection with the purchase of aircraft by the Company, the Company
borrowed from Great Lakes
an aggregate of $2.1 million, due in December 1997 and bearing interest at 5.4%.
See Note 5 of Consolidated Financial Statements.
During 1994, ILFC incurred $179,628 for certain improvements to an aircraft
which it leased from the Company. The Company accrued for such costs at December
31, 1994 and reimbursed ILFC in 1995. During 1995, ILFC advanced the Company
$696,000 to assist with the financing of an aircraft purchase which the Company
repaid during 1996. At December 31, 1994 and 1995, the Company had amounts due
to ILFC of $179,628 and $696,000, respectively. No amounts were due at December
31, 1996.
The Company intends to continue its relationship with ILFC, where
appropriate, to facilitate the purchase, lease, re-lease and sale of aircraft.
See "Risk Factors -- Reliance Upon ILFC" and "Business -- Strategy -- Optimize
Relationship with ILFC."
Management of the Company believes that the terms of the above described
transactions were as or more favorable to the Company than the Company could
have received from non-affiliated third parties.
40
<PAGE> 42
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997 as adjusted to
reflect to 1-for-4.5 reverse stock split, the conversion of all the outstanding
shares of Preferred Stock into 1,097,969 shares of Common Stock, the exercise of
options to acquire 477,391 shares of Common Stock and the sale of the shares of
Common Stock offered hereby for (i) each person known by the Company to be the
beneficial owner of more than five percent of the outstanding shares of the
Company's Common Stock, (ii) each director of the Company, (iii) the Chief
Executive Officer and (iv) all executive officers and directors of the Company
as a group.
<TABLE>
<CAPTION>
PERCENT OF CLASS
-----------------------
NUMBER OF BEFORE THE AFTER THE
NAME(1) SHARES OFFERING OFFERING
- ----------------------------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Christer Salen(2)................................................ 402,540 24.3% 9.5%
Sven Salen(3).................................................... 339,723 20.5 8.0
Gunnar Bjorg(4).................................................. 209,583 12.7 4.9
William E. Lindsey(5)............................................ 104,665 6.1 2.4
Michael P. Grella(6)............................................. 69,775 4.1 1.6
Aaron Mendelsohn(7).............................................. 70,273 4.2 1.7
Kenneth Taylor................................................... 10,296 * *
Stuart M. Warren(8).............................................. 58,887 3.6 1.4
Ralph O. Hellmold................................................ -- -- --
Magnus Gunnarsson................................................ -- -- --
All directors and executive officers as a group (11
persons)(9).................................................... 723,739 41.2 16.6
</TABLE>
- ---------------
* Less than one percent
(1) The address for each of named individuals is 3655 Torrance Boulevard, Suite
410, Torrance, California 90503.
(2) 222,222 of the shares are held by George Alexander, as Voting Trustee under
a Voting Trust for European Aircraft Investors Limited and 35,111 of the
shares are held by George Alexander, as Trustee for European Aircraft
Investors Limited. The address of Mr. Alexander is East 4511 Mockingbird
Lane, Paradise Valley, Arizona 85253. Christer Salen is a director of and
owns 9% of the outstanding stock of European Aircraft Investors Limited. The
remaining stock of European Aircraft Investors Limited is indirectly owned
by discretionary trusts of which Mr. Salen is not a beneficiary. Mr. Salen
disclaims beneficial ownership of the shares held by such trusts. Christer
Salen is the brother of Sven Salen and disclaims beneficial ownership of the
shares beneficially owned by Sven Salen.
(3) Shares are held by John T. McMahan, as Voting Trustee under a Voting Trust
for Salenia AB. The address for Mr. McMahan is 1980 Post Oak Boulevard,
Houston, Texas 77056. Salenia AB is beneficially owned by Sven Salen and his
family. Sven Salen is the brother of Christer Salen and disclaims beneficial
ownership of the shares beneficially owned by Christer Salen and European
Aircraft Investors.
(4) Shares are held by Menzane International Corp., P.O. Box 184, Lettstrasse
37, FC-9490 Vaduz, Liechtenstein. Gunnar Bjorg is the beneficial owner of
Menzane International Corp.
(5) Includes 59,333 shares subject to options exercisable within 60 days of
September 30, 1997.
(6) Includes 39,555 shares subject to options exercisable within 60 days of
September 30, 1997.
(7) Shares are owned by G-G Associates, a general partnership. Mr. Mendelsohn
shares voting and dispositive power.
(8) Does not include 13,333 shares held by C. H. Cleworth Pension Plan, as to
which Mr. Warren does not have voting or dispositive power. Mr. Warren and
his parents are the sole beneficiaries of the C. H. Cleworth Pension Plan.
(9) See footnotes (2), (7) and (8). Includes an aggregate of 100,636 shares
subject to options exercisable within 60 days of September 30, 1997.
41
<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, $.01 par value, and
15,000,000 shares of Preferred Stock, $.01 par value. After giving effect to the
offering, there will be 4,256,467 shares of Common Stock outstanding, assuming
the conversion of all the outstanding Preferred Stock into 1,097,969 shares of
Common Stock and the exercise of options to purchase 477,391 shares of Common
Stock.
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 any
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 shareholders. Holders of Common Stock have no 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 Common Stock. All outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby will be when issued, fully paid and nonassessable.
PREFERRED STOCK
As of June 30, 1997, the Company had outstanding 4,941,000 shares of
Convertible Preferred Stock with a liquidation preference of $1.00 per share.
Each share of Convertible Preferred Stock, after giving effect to the 1-for-4.5
reverse stock split, will be convertible into .222 of a share of Common Stock
subject to adjustment upon the occurrence of certain events, including the
issuance of Common Stock or rights, options or securities convertible into or
exchangeable for Common Stock at a price per share of Common Stock less than the
then effective conversion price of the Convertible Preferred Stock. The holders
of the Convertible Preferred Stock are entitled to receive dividends pro rata
with the holders of the Common Stock and vote together with the holders of the
Common Stock, voting as one class, on all matters except for certain amendments
to the terms of the Convertible Preferred Stock which require the approval of
the holders of 67% (and in some cases 90%) of the shares of Convertible
Preferred Stock, voting as a separate class. Upon consummation of the offering,
all of the shares of the Convertible Preferred Stock will be converted to Common
Stock.
The Company is authorized to issue 15,000,000 shares of Preferred Stock in
one or more series, and to designate the rights, preferences, limitations,
restrictions of and upon shares of each series, including voting, redemption and
conversion rights. The Board of Directors may also designate dividend rights and
preferences in liquidation. It is not possible to state the effect of the
authorization and issuance of any series of Preferred Stock upon the rights of
holders of Common Stock until the Board of Directors determines the specific
terms, rights and preferences of such a series of Preferred Stock. However, such
effects might include, among other things, restricting dividends on the Common
Stock, diluting the voting power of the Common Stock or impairing the
liquidation rights of such shares without further action by holders of Common
Stock. In addition, under certain circumstances, the issuance of Preferred Stock
may render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management, which could thereby depress
the market price of the Company's Common Stock. At present, the Company has no
plans to issue any additional shares of Preferred Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation and Bylaws (as they will be amended prior to the offering)
summarized in the following paragraphs may be deemed to have anti-takeover
effects and may delay, defer or prevent a tender offer or takeover attempt that
a shareholder
42
<PAGE> 44
might consider to be in such shareholder's best interest, including those
attempts that might result in a premium over the market price for the shares
held by shareholders.
The Company's Amended and Restated Articles of Incorporation will include
authorization of the issuance of up to 15,000,000 shares of Preferred Stock,
with such characteristics that may tend to discourage a merger, tender offer or
proxy contest, as described in "Preferred Stock" above. The Company's Amended
and Restated Articles of Incorporation will also provide that shareholder action
can be taken only at an annual or special meeting of shareholders and may not be
taken by written consent. The Company's Bylaws also will limit the ability of
shareholders to raise matters at a meeting of shareholders without giving
advance notice. In addition, upon qualification of the Company as a "listed
corporation" as defined in Section 301.5(d) of the California Corporations Code,
cumulative voting will be eliminated.
The Amended and Restated Articles of Incorporation and the Bylaws will
provide that the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of the Company then entitled to vote on the matter is
required to amend the Bylaws and certain provisions of the Amended and Restated
Articles of Incorporation, including those provisions relating to the number of
directors, the filling of vacancies on the Board of Directors, the prohibition
on shareholders action without a meeting, indemnification of directors, officers
and others, the limitation on liability of directors and the supermajority
voting requirements in the Amended and Restated Articles of Incorporation and
Bylaws. These voting requirements will have the effect of making more difficult
any amendment by stockholders, even if a majority of the Company's stockholders
believes that such amendment would be in its best interests.
The Company will also include in its Amended and Restated Articles of
Incorporation provisions to eliminate the personal liability of its directors
for monetary damages resulting from breaches of their fiduciary duty to the
extent permitted by the California General Corporation Law. See "Risk
Factors -- Anti-Takeover Provisions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Common Stock is American Stock
Transfer & Trust Company.
REPORTS TO SHAREHOLDERS
The Company will furnish its shareholders with annual reports containing
financial statements audited by independent accountants and quarterly reports
for the first three quarters of each year containing unaudited financial
statements.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding
4,256,467 shares of Common Stock. Of these shares, the 2,600,000 shares sold in
the offering plus any additional shares sold upon exercise of the Underwriters'
over-allotment option will be freely tradeable without restriction or further
registration under the Securities Act except for any of such shares held by
"affiliates" of the Company.
The remaining shares of Common Stock held by the existing shareholders are
"restricted securities" as that term is defined in Rule 144 of the Securities
Act. The Company, its directors, officers and certain holders of restricted
securities have agreed not to offer, sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable for shares of
Common Stock of the Company for a period of 180 days after the date of this
Prospectus without the prior written consent of Sutro except for: (i) the sale
of the shares hereunder, (ii) the issuance by the Company of Common Stock
pursuant to the exercise of options under the Company's stock plans disclosed in
this Prospectus; (iii) the granting by the Company of stock options after the
date of this Prospectus under the 1997 Option Plan or the 1997 Directors Plan;
or (iv) as a bona fide gift to a third party or as a distribution to the
partners or shareholders of a Company shareholder, provided that the
recipient(s) thereof agree in writing to be bound by the terms of the Lock-Up
Agreement to
43
<PAGE> 45
which such shareholder is bound. Upon expiration of these Lock-Up Agreements,
the restricted securities will be eligible for sale in the public market in
accordance with Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the consummation of the offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
as well as persons who may be deemed "affiliates" of the Company, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are also subject to certain other requirements relating to manner of sale,
notice and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the three months immediately
preceding the sale is entitled to sell restricted shares pursuant to Rule 144(k)
without regard to the limitations described above, provided that two years have
expired since the later of the date on which such restricted shares were first
acquired from the Company or from an affiliate of the Company.
Currently 485,554 authorized shares of Common Stock are subject to
outstanding options. Additionally, 100,000 shares of Common Stock of the Company
have been reserved for issuance pursuant to the 1997 Option Plan and the 1997
Directors Plan. Following the offering, the Company intends to file a
registration statement under the Securities Act to register the 100,000 shares
of Common Stock reserved for issuance upon the exercise of stock options
outstanding and to be granted under the 1997 Option Plan and the 1997 Directors
Plan. Shares granted or issued upon the exercise of stock options after the
effective date of such registration statement generally will be available for
sale in the open market as long as they are not held by affiliates.
Because there has been no public market for shares of Common Stock of the
Company, the Company is unable to predict the effect that sales made under Rule
144, pursuant to future registration statements or otherwise may have on any
then prevailing market price of shares of the Common Stock. Nevertheless, sales
of a substantial amount of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect market prices.
44
<PAGE> 46
UNDERWRITING
The Underwriters named below, acting through their representatives, Sutro
and Cruttenden Roth Incorporated, have severally agreed, subject to the terms
and conditions of the Underwriting Agreement with the Company, to purchase from
the Company the number of shares of Common Stock set forth opposite their
respective names. The Underwriters are committed to purchase and pay for all
such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Sutro & Co. Incorporated..........................................
Cruttenden Roth Incorporated......................................
---------
Total................................................... 2,600,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow selected
dealers a concession of not more than $ per share, and the Underwriters
may allow, and such dealers may reallow, a concession of not more than
$ per share to certain other dealers. After the initial public
offering, the price and concessions and reallowances to dealers may be changed
by the Representatives. The Common Stock is offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or part.
The Company has granted the Underwriters an option exercisable for 45 days
after the date of the Underwriting Agreement to purchase up to a maximum of
390,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the foregoing table.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
The Company, its directors, officers and certain shareholders have agreed
not to offer, sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock of the
Company for a period of 180 days after the date of this Prospectus without the
prior written consent of Sutro except for: (i) the sale of the shares hereunder,
(ii) the issuance by the Company of Common Stock pursuant to the exercise of
options under the Company's stock plans disclosed in the Prospectus; (iii) the
granting by the Company of stock options after the date of this Prospectus under
the 1997 Option Plan or the 1997 Directors Plan; or (iv) as a bona fide gift to
a third party or as a distribution to the partners or shareholders of a Company
shareholder, provided that the recipient(s) thereof agree in writing to be bound
by the terms of the Lock-Up Agreement to which such shareholder is bound.
If the Underwriters create a short position in the Common Stock in
connection with the offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives also may elect to reduce any short position by exercising
all or part of the over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases.
45
<PAGE> 47
The imposition of a penalty bid may have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of, or any effect that the
transactions described above may have on, the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or,
once commenced, will not be discontinued without notice.
The Company has agreed to sell to Sutro the Sutro Warrant to purchase from
the Company up to 260,000 shares of Common Stock at an exercise price per share
equal to 120% of the initial public offering price per share. The Sutro Warrant
may not be sold, transferred, assigned, pledged or hypothecated for a period of
twelve (12) months from the date of this Prospectus except to officers or
partners of Sutro and other members of the underwriting or selling group and
officers or partners thereof in compliance with the applicable provisions of the
Corporate Financing Rule of the National Association of Securities Dealers, Inc.
The Sutro Warrant will be exercisable for a three year period beginning one year
from the date of this Prospectus. In addition, the Company has granted certain
demand and piggyback registration rights to the holders of the Sutro Warrant
which enable them to register the Common Stock underlying the Sutro Warrant
under the Securities Act. Under the terms of the Sutro Warrant, Sutro will be
the underwriter of any demand registration requested to be in the form of an
underwritten offering.
Prior to this offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price for the Common Stock was
determined by negotiations between the Company and the Representatives. Among
the factors considered in such negotiations were the history of, and the
prospects for, the Company and the industry in which it competes, an assessment
of the Company's management, its past and present operations, its past and
present earnings and the trend of such earnings, the prospects for future
earnings, the present state of the Company's development, the general conditions
of the securities market at the time of the offering, and the market prices of
publicly traded common stocks of comparable companies in recent periods. The
Representatives have informed the Company that the Underwriters do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Melveny & Myers LLP, Los Angeles, California. Certain
legal matters will be passed upon for the Underwriters by Manatt, Phelps &
Phillips, LLP, Los Angeles, California.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1995 and December 31, 1996 and for each of the years in the three year period
ended December 31, 1996 included in this Prospectus have been so included in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, given on the authority of said firm as experts in accounting and
auditing.
The report of Simat, Helliesen & Eichner, Inc. is included herein in
reliance upon the authority of such firm as an expert with respect to the
matters contained in such report.
46
<PAGE> 48
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission, Washington, D.C. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement, exhibits and
schedules. Copies of the Registration Statement may be obtained from the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, upon the payment of certain fees
prescribed by the Commission or may be examined without charge at the offices of
the Commission, or accessed through the Commission's Internet address at
http://www.sec.gov.
47
<PAGE> 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996
and June 30, 1997 (Unaudited)....................................................... F-3
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (Unaudited)......................... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1997 (Unaudited).................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 1996 and 1997 (Unaudited).................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
The Board of Directors
International Aircraft Investors:
We have audited the accompanying consolidated balance sheets of
International Aircraft Investors and subsidiaries as of December 31, 1995 and
1996 and the related consolidated statements of income, shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 of 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Aircraft Investors and subsidiaries as of December 31, 1995 and
1996 and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 31, 1997, except
the third paragraph
of Note 9 which
is as of March 4, 1997
and Note 5 which is as of
March 26, 1997
F-2
<PAGE> 51
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1995 1996 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents.......................... $ 33,898 $ 1,174,369 $ 490,690
Accounts receivable from ILFC (note 6)............. 54,000 12,106 --
Due from officers (note 9)......................... -- -- 50,000
Due from ILFC (note 6)............................. 579,000 441,000 320,000
Flight equipment, at cost, net (notes 2, 5 and
6)............................................... 95,449,700 89,884,974 117,324,974
Deferred fees...................................... 366,515 268,776 568,684
Cash, restricted (note 1).......................... 177,008 210,827 2,655,136
Other assets....................................... 118,747 627,535 720,758
----------- ----------- ------------
$96,778,868 $92,619,587 $122,130,242
=========== =========== ============
LIABILITY AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses.............. $ 37,762 $ 195,193 $ 212,368
Accrued interest................................... 205,800 632,500 788,540
Notes payable (note 5)............................. 87,825,287 82,710,293 107,010,436
Lease deposits (note 6)............................ 835,000 835,000 2,734,000
Maintenance reserves (note 1)...................... 181,426 468,060 2,957,170
Advanced rentals................................... 795,850 798,000 1,009,000
Payable to affiliate (note 3)...................... 36,750 -- --
Payable to ILFC (note 6)........................... 696,695 -- --
Deferred rent (note 6)............................. 1,747,000 1,497,000 1,372,000
Deferred taxes, net (note 4)....................... 369,017 400,000 554,000
----------- ----------- ------------
92,730,587 87,536,046 116,637,514
----------- ----------- ------------
Commitments and contingencies (note 8)
Shareholders' equity (notes 9 and 10):
Convertible preferred stock, $.01 par value.
Authorized 15,000,000 shares; issued and
outstanding 4,941,000 shares; liquidation
value of $1 per share......................... 49,410 49,410 49,410
Common Stock, $.01 par value. Authorized
20,000,000 shares; issued and outstanding
315,000 shares at December 31, 1995 and 1996
and 365,000 shares at June 30, 1997........... 3,150 3,150 3,650
Additional paid-in capital....................... 5,170,098 5,170,098 6,219,598
Deferred stock compensation...................... -- -- (900,000)
Retained earnings (accumulated deficit).......... (1,174,377) (139,117) 120,070
----------- ----------- ------------
Net shareholders' equity................. 4,048,281 5,083,541 5,492,728
----------- ----------- ------------
$96,778,868 $92,619,587 $122,130,242
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 52
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- -------------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (note 6)
Rental of flight equipment..... $8,107,751 $7,764,763 $12,681,153 $6,330,108 $ 6,478,881
Consulting fees................ 213,500 491,045 460,950 182,750 12,000
Gain on sale of aircraft
equipment................... -- -- 141,000 -- --
Interest income (note 1)....... 67,997 117,961 169,023 81,872 98,875
---------- ---------- ---------- ----------- ----------
Total revenues......... 8,389,248 8,373,769 13,452,126 6,594,730 6,589,756
Expenses:
Interest....................... 3,547,600 3,776,165 6,277,388 3,230,755 3,021,048
Depreciation................... 3,164,800 3,354,400 5,549,700 2,773,700 2,760,000
General and administrative..... 548,494 526,021 552,778 265,982 289,521
Stock compensation (note 9).... -- -- -- -- 100,000
---------- ---------- ---------- ----------- ----------
Total expenses......... 7,260,894 7,656,586 12,379,866 6,270,437 6,170,569
---------- ---------- ---------- ----------- ----------
Operating income..... 1,128,354 717,183 1,072,260 324,293 419,187
---------- ---------- ---------- ----------- ----------
Equity in earnings of affiliate
(note 3):
Earnings from operations....... -- 66,028 -- -- --
Gain on sale of aircraft
engine...................... -- 117,500 -- -- --
---------- ---------- ---------- ----------- ----------
Total equity in
earnings............. -- 183,528 -- -- --
---------- ---------- ---------- ----------- ----------
Income before income taxes....... 1,128,354 900,711 1,072,260 324,293 419,187
---------- ---------- ---------- ----------- ----------
Income tax expense (note 4)...... 59,000 30,000 37,000 20,000 160,000
---------- ---------- ---------- ----------- ----------
Net income............. $1,069,354 $ 870,711 $ 1,035,260 $ 304,293 $ 259,187
========== ========== ========== =========== ==========
Net income per common and common
equivalent shares.............. $ .13 $ .11 $ .13 $ .04 $ .03
========== ========== ========== =========== ==========
Weighted average common and
common equivalent shares
outstanding.................... 8,218,436 8,218,436 8,263,481 8,263,481 8,263,481
========== ========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 53
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFERRED
CONVERTIBLE COMMON STOCK ADDITIONAL STOCK RETAINED EARNINGS
PREFERRED ---------------- PAID-IN COMPENSATION (ACCUMULATED
STOCK SHARES AMOUNT CAPITAL (NOTE 9) DEFICIT) NET
----------- -------- ------ ---------- ------------ ----------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993...................... $49,410 215,000 $2,150 $5,071,098 $ -- $(3,114,442) $2,008,216
Net income.................. -- -- -- -- -- 1,069,354 1,069,354
------- ------- ------ ---------- ----------- ----------- ----------
Balance at December 31,
1994...................... 49,410 215,000 2,150 5,071,098 -- (2,045,088) 3,077,570
Issuance of common stock
from exercise of stock
options................... -- 100,000 1,000 99,000 -- -- 100,000
Net income.................. -- -- -- -- -- 870,711 870,711
------- ------- ------ ---------- ----------- ----------- ----------
Balance at December 31,
1995...................... 49,410 315,000 3,150 5,170,098 -- (1,174,377) 4,048,281
Net income.................. -- -- -- -- -- 1,035,260 1,035,260
------- ------- ------ ---------- ----------- ----------- ----------
Balance at December 31,
1996...................... 49,410 315,000 3,150 5,170,098 -- (139,117) 5,083,541
Issuance of common stock
from exercise of stock
options................... -- 50,000 500 49,500 -- -- 50,000
Stock compensation (note
9)........................ -- -- -- 100,000 -- -- 100,000
Deferred stock
compensation.............. -- -- -- 900,000 (900,000) -- --
Net income.................. -- -- -- -- -- 259,187 259,187
------- ------- ------ ---------- ----------- ----------- ----------
Balance at June 30, 1997
(Unaudited)............... $49,410 365,000 $3,650 $6,219,598 $ (900,000) $ 120,070 $5,492,728
======= ======= ====== ========== =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 54
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net income.............................. $ 1,069,354 $ 870,711 $ 1,035,260 $ 304,293 $ 259,187
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation of flight equipment...... 3,164,800 3,354,400 5,549,700 2,773,700 2,760,000
Amortization of deferred transaction
fees................................ 171,348 101,082 158,410 104,520 76,567
Stock compensation.................... -- -- -- -- 100,000
Gain on sale of aircraft equipment.... -- -- (141,000) -- --
Equity in earnings of affiliate....... -- (183,528) -- -- --
(Increase) decrease in assets:
Accounts receivable from ILFC....... (20,570) (28,430) 41,894 42,148 12,106
Due from ILFC....................... -- -- 138,000 (43,400) 121,000
Deferred fees....................... (66,836) (225,811) (60,671) (29,000) (376,475)
Other assets........................ 117,593 (48,136) (508,788) 29,417 (143,223)
Cash, restricted.................... -- (177,006) (33,819) (16,750) (2,444,309)
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses.......................... (54,033) 61,587 120,681 (74,362) 17,175
Accrued interest.................... 39,023 413 426,700 496,061 156,040
Lease deposits...................... (500,000) 475,000 -- -- 1,899,000
Maintenance reserves................ -- 181,426 286,634 190,480 2,489,110
Advance rentals..................... 123,356 (103,396) 2,150 3,150 211,000
Deferred rent....................... -- -- (250,000) (125,400) (125,000)
Deferred taxes, net................. 58,622 23,395 30,983 19,983 154,000
Due to lessee....................... 363,122 (363,122) -- -- --
----------- ------------ ----------- ----------- ------------
Net cash provided by operating
activities........................ 4,465,779 3,938,585 6,796,134 3,674,840 5,166,178
----------- ------------ ----------- ----------- ------------
Cash flows from investing activities:
Purchase of flight equipment.......... (2,981,305) (41,472,695) (198,974) (198,974) (30,200,000)
Proceeds from sale of aircraft........ -- -- 355,000 -- --
Investment in (dividends and sale of
IEI)................................ (322,250) 505,778 -- -- --
----------- ------------ ----------- ----------- ------------
Net cash provided by (used in)
investing activities.............. (3,303,555) (40,966,917) 156,026 (198,974) (30,200,000)
----------- ------------ ----------- ----------- ------------
Cash flows from financing activities:
Repayment of notes payable............ (1,884,003) (2,749,082) (5,322,926) (2,684,206) (2,389,845)
Repayment of notes payable to ILFC.... (1,731,567) (400,800) (524,292) (274,615) (243,012)
Proceeds from notes payable........... 2,430,000 29,725,000 244,724 221,724 22,500,000
Proceeds from notes payable to ILFC... -- 7,950,000 -- -- 4,433,000
Proceeds from notes payable to GLH.... -- 1,612,500 487,500 487,500 --
Issuance of common stock.............. -- 100,000 -- -- 50,000
Payable to ILFC....................... 179,628 517,067 (696,695) (696,695) --
----------- ------------ ----------- ----------- ------------
Net cash provided by (used in)
financing activities.............. (1,005,942) 36,754,685 (5,811,689) (2,946,292) 24,350,143
----------- ------------ ----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents.................. 156,282 (273,647) 1,140,471 529,574 (683,679)
Cash and cash equivalents at beginning
of year............................... 151,263 307,545 33,898 33,898 1,174,369
----------- ------------ ----------- ----------- ------------
Cash and cash equivalents at end of
year.................................. $ 307,545 $ 33,898 1,174,369 563,472 490,690
=========== ============ =========== =========== ============
Supplemental disclosure of cash flow
information -- cash paid for
interest.............................. $ 3,339,156 $ 3,548,054 $ 5,722,256 $ 2,734,694 $ 2,865,008
=========== ============ =========== =========== ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During 1995, the Company earned $311,000 of consulting fees from ILFC which
were applied to amounts owed ILFC.
See accompanying notes to consolidated financial statements
F-6
<PAGE> 55
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
International Aircraft Investors (the Company) is primarily engaged in the
acquisition of used, single aisle jet aircraft and engines for lease and sale to
domestic and foreign airlines and other customers. The Company leases aircraft
under short- to medium-term operating leases where the lessee is responsible for
all operating costs and the Company retains the potential benefit or risk of the
residual value of the aircraft, as distinct from finance leases where the cost
of the aircraft is generally recovered over the term of the lease.
Six of the Company's eight aircraft at June 30, 1997 were acquired from
International Lease Finance Corporation (ILFC), a 5.7% shareholder of the
Company. In connection with certain of these aircraft acquisitions, ILFC has
provided loan guarantees or other financial support which have provided more
favorable borrowing arrangements than the Company could otherwise have obtained
(notes 5 and 6). Additionally, the Company has derived certain consulting fees
from ILFC for providing remarketing and other services.
The accompanying consolidated financial statements include the accounts of
the Company and wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Unaudited June 30, 1997 Interim Financial Information
The consolidated financial statements and related notes as of June 30, 1997
and for the six month periods ended June 30, 1996 and 1997 are unaudited. These
unaudited consolidated financial statements and related notes have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting. In the opinion of management, all adjustments (consisting
of normal and recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six month period ending June 30,
1997 are not necessarily indicative of the results that may be expected for the
full year.
Cash and Cash Equivalents
Cash and cash equivalents includes cash and highly liquid investments
purchased with an original maturity of less than 90 days. Cash and short-term
investments restricted for the repayment of a security deposit and maintenance
reserves pursuant to certain lease agreements were $210,827 and $2,655,136 at
December 31, 1996 and June 30, 1997, respectively. Such security deposit and
maintenance reserves mature through March 31, 2001.
Deferred Transaction Fees
The direct costs related to purchase and lease agreements are capitalized
and amortized to expense using the straight-line method , which approximates the
effective interest method, over the term of the related lease.
The costs related to asset value guarantees (AVGs - note 6) are capitalized
and amortized to expense using the straight-line method over the term of the
AVG, generally ten years. At December 31, 1996 and June 30, 1997, deferred
transaction fees related to AVGs were $207,500 and $244,700, respectively.
Rentals
The Company leases flight equipment under operating leases. Accordingly,
income is recognized over the life of noncancelable lease terms under the
straight-line method.
F-7
<PAGE> 56
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Flight Equipment and Depreciation
Flight equipment is stated at cost.
Depreciation of flight equipment is generally computed on a straight-line
method over the estimated remaining useful lives (25 year original life less
years in service at the date of acquisition) of the related assets. At December
31, 1996 and June 30, 1997 (includes the 1997 aircraft acquisition), the
Company's fleet, related useful lives and estimated salvage values were as
follows:
<TABLE>
<CAPTION>
USEFUL LIFE AT
YEAR OF ACQUISITION
DESCRIPTION OF ASSET ACQUISITION DATE SALVAGE VALUE
---------------------------------------- ----------- -------------- -------------
<S> <C> <C> <C>
1979 Boeing 727-200..................... 1988 16 years $ 2,500,000
1978 Boeing 737-219..................... 1990 13 2,500,000
1980 Boeing 737-219..................... 1991 14 2,500,000
1989 Boeing 737-300..................... 1993 21 3,000,000
1980 Boeing 737-204..................... 1993 12 3,000,000
1985 Boeing 737-300..................... 1995 15 3,000,000
1989 McDonnell MD-82.................... 1995 19 3,000,000
1992 Boeing 737-400..................... 1997 20 4,500,000
</TABLE>
Maintenance Reserves and Interest Income
Normal maintenance and repairs of flight equipment on lease are provided by
and paid for by the lessee. Maintenance reserves received under certain leases
amounted to $181,426, $268,581 and $2,489,110 during the years ended December
31, 1995, 1996 and the six months ended June 30, 1997, respectively.
Additionally, one of the Company's lessees holds a related maintenance reserve
with ILFC in accordance with an agreed-upon arrangement. The Company receives
interest earned on this reserve held with ILFC which amounted to $48,885,
$95,116, $62,100 and $38,528 during 1994, 1995 and 1996 and the six months ended
June 30, 1997, respectively. The lease and related arrangement expired April
1997.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," issued in March 1995 and effective for fiscal years beginning
after December 15, 1995, establishes accounting standards for the recognition
and measurement of impairment of long-lived assets, certain identifiable
intangibles and goodwill either to be held or disposed of. The Company adopted
SFAS No. 121 during 1996. The adoption of SFAS No. 121 did not have a material
impact on the Company's financial position or results of operations.
The Company evaluates the carrying value of its flight equipment on an
ongoing basis and when required will provide for any impairment of long-lived
assets.
Income Taxes
The Company accounts for income taxes under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences for differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years when such temporary differences are expected to be recovered
or settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income at the enactment date.
F-8
<PAGE> 57
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Earnings per Share
Net earnings per share has been computed using the weighted average number
of common and common equivalent shares outstanding for each of the periods
presented. Common stock equivalents represent the number of shares which would
be issued assuming the exercise of common stock options, conversion of preferred
stock and conversion of a note payable reduced by the number of shares which
could be purchased with the proceeds from such conversions using the treasury
stock method.
Fully diluted net income per common and common equivalent share is not
presented since the amounts do not differ significantly from the primary net
income per share presented.
In February 1997, the Financial Accounting Standards Board issued Statement
on Financial Accounting Standards No. 128 (SFAS No. 128) "Earnings per Share."
The statement changes the computation, presentation and disclosure requirements
for earnings per share in financial statements for periods ending after December
15, 1997. Early adoption is not permitted.
Basic earnings per share represents income available to common shareholders
divided by the weighted average number of common shares outstanding for the
period. Pro forma earnings per share for the six months ended June 30, 1996 and
1997 was $.97 and $.80, respectively. Diluted earnings per share is similar to
the current presentation of fully diluted earnings per share. Accordingly, pro
forma diluted earnings per share for the six months ended June 30, 1996 and 1997
did not differ from fully diluted earnings per share.
Stock Compensation
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation," issued in October 1995 and effective
for fiscal years beginning after December 15, 1995, encourages, but does not
require, a fair-value-based method of accounting for employee stock options or
similar equity instruments. SFAS No. 123 allows an entity to elect to continue
to measure compensation cost under Accounting Principles Board Opinion No. 25
(APBO No. 25), "Accounting for Stock Issued to Employees," but requires pro
forma disclosures of net earnings and earnings per share as if the fair-value-
based method of accounting had been applied. The Company elected to continue to
measure compensation cost under APBO No. 25. Had compensation cost been
determined using the fair value at the grant date for awards during the six
months ended June 30, 1997, consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amount as indicated below:
<TABLE>
<S> <C>
Net earnings as reported........................................ $ 259,187
Pro forma net earnings.......................................... 233,187
Net earnings per share, as reported............................. .03
Pro forma net earnings per share................................ $ .03
========
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants during the period ended June 30, 1997; dividend
yield of 0%; expected volatility of 32.3%; risk-free interest rate of 6.6% and
expected lives of five years.
The weighted average fair value of options granted during the period ended
June 30, 1997 is $.59.
No options were issued in 1996.
F-9
<PAGE> 58
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest Rate Swap Agreements
The Company uses interest rate swap arrangements to reduce the potential
impact of increases in interest rates on floating rate long-term debt and does
not use them for trading purposes. Premiums paid for purchased interest rate
swap agreements are amortized to interest expense over the terms of the swap
agreements.
All outstanding swap agreements are hedges and, therefore, are not marked
to market.
Fair Values of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and payable to ILFC approximate fair market
value because of the short-term nature of these items.
The fair values of the Company's interest rate swaps approximates
unamortized costs as the remaining amortization periods are short-term. The fair
value of the amount due from ILFC approximates the carrying value as it was
determined using the present value method with the Company's internal rate of
return. The fair values of the Company's debt instruments, including the related
AVGs, approximate the carrying values because (1) the rates currently offered to
the Company are similar to the rates for these items, or (2) the yields to
maturity approximate the rates for these items.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These affect the reported amounts of assets, liabilities, revenues
and expenses and the amount of any contingent assets or liabilities disclosed in
the financial statements. Actual results could differ from the estimates made.
The Company leases aircraft to various commercial airline fleets, on
short-to-medium-term operating leases, generally three to five years. The
related aircraft are generally financed by borrowings that become due at or near
the end of the lease term through a balloon payment. As a result, the Company's
operating results depend on management's ability to roll over debt facilities,
renegotiate favorable leases and realize estimated salvage values.
Significant Customers
The following customers individually accounted for 10% or more of revenues:
<TABLE>
<CAPTION>
NUMBER OF
SIGNIFICANT PERCENTAGE OF REVENUES BY
CUSTOMERS SIGNIFICANT CUSTOMERS
--------- ---------------------------
<S> <C> <C>
Year ended December 31:
1994............................... 3 12%, 42% and 36%
1995............................... 4 11%, 16%, 26% and 36%
1996............................... 5 10%, 10%, 15%, 21% and 23%
Six months ended June 30, 1997....... 4 10%, 16%, 19% and 21%
</TABLE>
F-10
<PAGE> 59
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) FLIGHT EQUIPMENT
The Company's investment in flight equipment (primarily purchased from
ILFC) as of December 31, 1995 and 1996 and June 30, 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- JUNE 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Flight equipment................. $108,788,000 $108,736,974 $138,936,974
Accumulated depreciation......... (13,338,300) (18,852,000) (21,612,000)
------------ ------------ ------------
Flight equipment, net............ $ 95,449,700 $ 89,884,974 $117,324,974
============ ============ ============
</TABLE>
(3) INVESTMENT IN JOINT VENTURE
During 1994, the Company purchased a 50% non-controlling interest in
International Engine Investors (IEI) for $322,250. IEI was formed in December
1994 between the Company and Partimande Holding Anstalt (wholly owned by a
shareholder of the Company) for the purpose of acquiring an aircraft engine. The
Company used the equity method to account for its investment. The Company's
share of IEI's income for 1995 was $66,028. On November 11, 1995, the engine was
sold by IEI, and IEI was liquidated. The Company's share of the gain on sale was
$117,500. At December 31, 1995, the Company had a payable to Partimande Holding
Anstalt of $36,750 related to the sale of the engine.
(4) INCOME TAXES
Provision for taxes on income consisted of the following:
<TABLE>
<CAPTION>
TOTAL CURRENT DEFERRED
------- ------- --------
<S> <C> <C> <C>
Year ended December 31:
1994:
Federal.................................. $ -- $ -- $ --
State.................................... 59,000 -- 59,000
------- ------- -------
$59,000 $ -- $ 59,000
======= ======= =======
1995:
Federal.................................. $ -- $ -- $ --
State.................................... 30,000 7,000 23,000
------- ------- -------
$30,000 $ 7,000 $ 23,000
======= ======= =======
1996:
Federal.................................. $ -- $ -- $ --
State.................................... 37,000 6,000 31,000
------- ------- -------
$37,000 $ 6,000 $ 31,000
======= ======= =======
</TABLE>
F-11
<PAGE> 60
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1996, the Company had net operating loss carryforwards
("NOL") for Federal and state income tax purposes of approximately $23,082,000
and $4,472,000 expiring from 2005 through 2011 and from 1996 through 2001,
respectively, as follows:
<TABLE>
<CAPTION>
EXPIRES FEDERAL NOL STATE NOL
--------------------------------------------------- ----------- ----------
<S> <C> <C>
1997............................................... -- $3,436,000
1998............................................... -- --
1999............................................... -- --
2000............................................... -- --
2001............................................... -- 660,000
2002-2006.......................................... $17,741,000 376,000
2007-2011.......................................... 3,136,000 --
2012............................................... 2,205,000 --
----------- ----------
$23,082,000 $4,472,000
=========== ==========
</TABLE>
Temporary differences which give rise to deferred tax liabilities result
primarily from timing differences for depreciation and net operating losses. The
deferred tax liabilities of $369,017 and $400,000 at December 31, 1995 and 1996,
respectively, are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforward................... $ 7,098,058 $ 7,847,880
Deferred and advanced rent........................ 1,048,186 691,832
Flight equipment, principally due to differences
in depreciation................................. (7,754,765) (8,542,840)
Other............................................. (116,641) (113,539)
----------- -----------
274,838 (116,667)
Valuation allowance............................... (643,855) (283,333)
----------- -----------
$ (369,017) $ (400,000)
=========== ===========
</TABLE>
Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets net of the valuation allowance.
A reconciliation of total income tax expense with the expected amount
computed by applying the Federal and state statutory tax rates to earnings
before income taxes follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" Federal tax expense......... $ 384,000 $ 306,000 $ 364,000
State taxes, net of Federal income tax
benefit....................................... 21,000 17,000 10,000
Change in valuation allowance................... (308,000) (284,000) (361,000)
Other........................................... (38,000) (9,000) 24,000
--------- --------- ---------
$ 59,000 $ 30,000 $ 37,000
========= ========= =========
</TABLE>
F-12
<PAGE> 61
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM DEBT
Long-term debt as of December 31, 1995 and 1996 and June 30, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Notes payable to bank, refinanced August 1997,
bearing interest at 7.50% on $7,000,000 and LIBOR
plus 1.125% (5.719% at June 30, 1997) on
$484,150, secured by flight equipment, 33 1/3%
guaranteed by ILFC, payable in monthly
installments of $77,000 including interest,
balloon payment of $6,639,000, due August 1999... $ 7,960,343 $ 7,649,079 $ 7,484,150
Note payable to bank bearing interest at 7.313% on
$3,500,000 and LIBOR plus 1.125% (5.719% at June
30, 1997) on $1,299,587, secured by flight
equipment, 33 1/3% guaranteed by ILFC, payable in
monthly installments of $87,000 including
interest, balloon payment of $4,099,960, due June
1998............................................. 5,595,152 5,141,600 4,799,587
Notes payable to bank, refinanced March 26, 1997,
bearing interest at 8.10% (Floating plus Swap),
secured by flight equipment, 65% guaranteed by
ILFC, balloon payment of $3,570,400, due May
1998............................................. 4,943,028 4,401,028 4,108,283
Notes payable to bank, refinanced April 24, 1997,
bearing interest at 7.60%, secured by flight
equipment, 50% guaranteed by ILFC, balloon
payment of $3,410,500, due April 1999............ 3,796,000 3,307,000 4,782,657
Note payable to bank, repaid April 24, 1997........ 2,045,600 1,804,300 --
Note payable to bank, refinanced May 12, 1997,
bearing interest at 7.96%, secured by flight
equipment, 53.4% guaranteed by ILFC, balloon
payment of $14,998,420, due May 2000............. 19,734,963 18,582,417 18,250,000
Note payable to bank, refinanced November 4, 1996,
bearing interest at LIBOR plus 1.2 (5.938% at
June 30, 1997), secured by flight equipment, 100%
guaranteed by ILFC, payable in quarterly
installments of $445,000 including interest,
balloon payment of $7,400,000, due January
2003............................................. 14,500,000 13,700,000 13,263,964
Note payable to bank, refinanced May 17, 1996,
bearing interest at 7.75%, secured by flight
equipment, guaranteed up to $2,175,000 by ILFC,
payable in quarterly installments of $510,000
including interest, balloon payment of
$9,514,719, due May 2001......................... 15,225,000 14,193,403 13,718,793
Note payable to bank with interest accrued at 6%,
payment is based on profit sharing agreements on
certain flight equipment, principal due August
1998............................................. 909,551 887,608 883,156
Note payable to bank bearing interest at 7.60%,
secured by flight equipment, guaranteed up to
$5,000,000 by ILFC, payable in quarterly
installments of $598,000, including interest,
balloon payment of $19,806,718, due May 2001..... -- -- 22,500,000
Convertible note payable to bank with interest
accrued at 5.0%, payable quarterly, principal due
August 1998...................................... 792,000 757,000 743,000
</TABLE>
F-13
<PAGE> 62
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Note payable to ILFC, refinanced July 22, 1997,
bearing interest at 5.9% through January 2, 1998
and 7.25% through January 3, 2003, payable in
quarterly installments including interest,
balloon payment of $3,320,000, due January
2003............................................. 3,600,000 3,572,000 3,556,000
Note payable to ILFC, refinanced March 11, 1997,
bearing interest at 6.0%, secured by flight
equipment, balloon payment of $439,200, due
December 1997.................................... 444,000 441,600 440,400
Note payable to ILFC, refinanced July 25, 1997,
bearing interest at 6.0%, secured by flight
equipment, payable in quarterly installments
including interest, balloon payment of $301,757,
due May 2000..................................... 1,160,305 982,330 901,757
Note payable to ILFC bearing interest at 6.0%,
payable in monthly installments of $15,000 plus
interest, balloon payment of $496,845, due August
1999............................................. 1,156,845 976,845 886,845
Note payable to ILFC bearing interest at 7.8%,
payable in quarterly installments of $110,000
including interest, balloon payment of
$3,718,293, due December 2000.................... 4,350,000 4,214,083 4,158,844
Note payable to ILFC bearing interest at 7.25%,
payable in quarterly installments of $126,500,
including interest, balloon payment of
$3,725,840, due May 2001......................... -- -- 4,433,000
Note payable to Great Lakes Holdings (affiliated
company), refinanced in 1996, bearing interest at
5.4%, due December 1997.......................... 612,500 700,000 700,000
Notes payable to Great Lakes Holdings (affiliated
company), refinanced July 31, 1997, bearing
interest at 5.4%, due December 1997.............. 1,000,000 1,400,000 1,400,000
----------- ----------- ------------
Total.................................... $87,825,287 $82,710,293 $107,010,436
=========== =========== ============
</TABLE>
The terms of the Company's loans generally require a substantial balloon
payment at the end of the noncancellable portions of the lease of the related
aircraft, at which time the Company will be required to re-lease the aircraft
and renegotiate the balloon amount of the loan on a long-term basis or obtain
other long-term financing. Refinancing of the balloon amount is dependent upon
the Company re-leasing the related aircraft; accordingly, the Company begins
lease remarketing efforts well in advance of the lease termination. At June 30,
1997, $10.2 million of balloon payments and $6.7 million of installment payments
were due within one year. Of these balloon payments, $7.7 million relate to two
leases which expire May and June 1998 and $2.5 million due December 1997 ($2.1
million payable to Great Lakes Holdings and $.4 million payable to ILFC) related
to leases which expire subsequent to June 30, 1998. The Company plans to
refinance these balloon payments in connection with the re-leasing of the two
aircraft in May and June 1998 and refinance the balloon payments with Great
Lakes Holdings and ILFC during December 1997.
At December 31, 1996 and June 30, 1997, $34,186,000, or 41%, and
$39,341,000, or 37%, of the Company's notes payable were guaranteed by ILFC and
$10,186,000, or 12%, and $14,377,000, or 13%, of the Company's notes payable
were due to ILFC, respectively.
F-14
<PAGE> 63
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The convertible note payable was entered into in August 1992 with an
original principal balance of $700,000. The note payable, or $1,000 multiples
thereof, is convertible into shares of preferred stock at $1 per share or up to
700,000 shares at any time prior to August 13, 1998.
Scheduled future repayments of notes payable at December 31, 1996 and June
30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
----------------------------------------
<S> <C>
1997............................... $38,428,219
1998............................... 15,595,095
1999............................... 2,870,808
2000............................... 6,140,780
2001............................... 10,976,391
Thereafter......................... 8,699,000
-----------
$82,710,293
===========
</TABLE>
<TABLE>
<CAPTION>
TWELVE-MONTH PERIOD ENDING JUNE 30:
---------------------------------------
<S> <C>
1998.............................. $ 16,918,370
1999.............................. 10,774,657
2000.............................. 26,842,375
2001.............................. 39,707,034
2002.............................. 1,204,000
Thereafter........................ 11,564,000
-----------
$107,010,436
===========
</TABLE>
Certain notes payable contain various financial covenants including
tangible net worth and delivery of audited financial statements. The Company was
in compliance with these covenants at December 31, 1996 and June 30, 1997.
The Company has entered into interest rate swaps with financial
institutions under terms that provide payment of interest on the notional amount
of the swap. In accordance with these arrangement, the Company pays interest at
a fixed rate and the financial institution pays interest at variable rates
pursuant to terms of the loans. The following table presents the Company's
interest rate swap agreements at December 31, 1995 and 1996 and June 30, 1997:
DECEMBER 31, 1995
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
TYPE NOTIONAL AMOUNT INTEREST RATE (%) MATURITY
--------------------------------- --------------- ----------------- ---------
<S> <C> <C> <C>
Fixed/variable................... $30,520,000 7.64/7.13 2/97-7/97
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
TYPE NOTIONAL AMOUNT INTEREST RATE (%) MATURITY
--------------------------------- --------------- ----------------- ---------
<S> <C> <C> <C>
Fixed/variable................... $28,094,000 7.65/6.66 2/97-7/97
</TABLE>
F-15
<PAGE> 64
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
TYPE NOTIONAL AMOUNT INTEREST RATE (%) MATURITY
--------------------------------- --------------- ----------------- ---------
<S> <C> <C> <C>
Fixed/variable................... $ 4,108,000 7.60/7.20 5/98
</TABLE>
The net effect of swaps was to record $372,000, $131,000, $265,000 and
$94,000 of additional interest expense during 1994, 1995 and 1996 and the six
months ended June 30, 1997, respectively.
(6) RELATED PARTY TRANSACTIONS
During 1997, the Company leased an aircraft to a third party for a
three-year period for which ILFC guaranteed certain rental revenue (note 7). In
connection with the lease, ILFC also guaranteed repayment of the related lease
deposit to the lessee of $1,632,000 included in the accompanying consolidated
balance sheet.
During December 1995 and June 1997, the Company purchased aircraft from
ILFC aggregating $41,473,000 and $30,200,000, respectively. None were purchased
during 1994 and 1996. At December 31, 1996 and June 30, 1997, 79% and 83%,
respectively, of the Company's gross fleet cost was comprised of aircraft
acquired from ILFC. The Company financed these acquisitions through bank loans,
partially guaranteed by ILFC, as well as loans from ILFC (note 5). ILFC provides
these guarantees to lenders through an asset value guarantee (AVG). ILFC's
financial support has allowed the Company to finance aircraft purchases at more
favorable leverage than the Company could otherwise obtain. The Company's
typical operating lease transaction with an AVG requires a cash investment by
the Company of approximately 5% to 15% of the aircraft purchase price while the
industry standard ranges from 20% to 30%. At December 31, 1996 and June 30,
1997, $34,186,000, or 41%, and $39,341,000, or 37%, of long-term debt was
covered by AVGs and $10,186,000, or 12%, and $14,377,000, or 13%, was due to
ILFC, respectively.
During December 1996, the Company sold certain aircraft equipment in
connection with an ILFC transaction to a third party. The Company recognized a
gain on sale of this equipment of $141,000.
The Company has one aircraft leased to ILFC at December 31, 1996 and June
30, 1997. The lease originated in August 1994 and provides for monthly rents of
$80,000 through August 1999. The Company recognized rental income of $400,000,
$960,000, $960,000 and $480,000 during the years ended 1994, 1995 and 1996 and
six months ended June 30, 1997, respectively, from this lease.
The Company has an agreement with ILFC related to the December 1995
purchase of an aircraft which provides for recovery of an operating loss, as
defined, in the acquired lease. The Company estimates this loss will be incurred
through 1999. Accordingly, the Company reduced the purchase price of the related
aircraft and recognized a receivable for the present value of the estimated
recovery aggregating $579,000. The amount due from ILFC at December 31, 1996 and
June 30, 1997 was $441,000 and $320,000, which includes accrued interest of
$87,000 and $24,500, respectively. The loss stems from a stated lease rate which
is less than the market lease rate at the date of acquisition. Accordingly, the
Company allocated additional cost to the purchase price and recognized deferred
rent aggregating $1,747,000 for the present value of the difference between the
market and stated rent. Deferred rent will be amortized on the straight-line
method over the remaining lease term.
The Company realized consulting fee revenues of $69,000, $347,000 and
$78,000 during the years 1994, 1995 and 1996, respectively, for services to
ILFC. No consulting fee revenues were recognized during the six months ended
June 30, 1997.
F-16
<PAGE> 65
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's Chairman and President collectively own Great Lakes Holdings
(GLH), an affiliated company. From time to time, these officers provide
consulting services to GLH. GLH paid the Company $144,000 for each of the years
1994, 1995 and 1996 and $12,000 during the six months ended June 30, 1997 for
these services. GLH does not plan to require these services from the Company in
the future. Additionally, the Company earned consulting fees of $239,000 during
1996 from unrelated parties, however, $190,000 of the amount was derived from a
transaction in which the Company provided services in connection with a sale by
ILFC of aircraft equipment to a third party.
During 1994, ILFC incurred $179,628 for certain improvements to an aircraft
which it leased from the Company. The Company accrued for such costs at December
31, 1994 and reimbursed ILFC in 1995. During 1995, ILFC advanced the Company
$696,000 to assist the financing of an aircraft purchase. The advance was repaid
during 1996. At December 31, 1995, $696,695 was due to ILFC.
(7) RENTAL INCOME
Minimum future rental income on noncancelable operating leases of flight
equipment at December 31, 1996 and June 30, 1997, adjusted for the lease
renewals below, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------------------------------
<S> <C>
1997.......................................... $10,421,000
1998.......................................... 6,483,000
1999.......................................... 2,926,000
2000.......................................... 2,326,000
2001.......................................... 2,076,000
Thereafter.................................... 2,076,000
-----------
$26,308,000
===========
</TABLE>
<TABLE>
<CAPTION>
TWELVE-MONTH PERIOD ENDING JUNE 30:
------------------------------------------------
<S> <C>
1998.......................................... $15,446,000
1999.......................................... 10,649,000
2000.......................................... 8,639,000
2001.......................................... 2,076,000
2002.......................................... 2,076,000
Thereafter.................................... 1,038,000
-----------
$39,924,000
===========
</TABLE>
During the six months ended June 30, 1997, the Company renewed two of its
leases extending the expiration dates to March 1998 and August 1999
respectively, and re-leased another aircraft through April 2000. The lease
expiring in April 2000 allows the lessee to terminate the lease in April 1999 at
its option, however, ILFC has guaranteed the Company will receive the related
rental revenue if the lessee exercises its option. Additionally, the Company
assumed the lease related to the aircraft purchased during June 1997 which
extends through March 2001.
Four of the Company's aircraft leases expire in 1998, one expires in 1999,
one expires in 2000, one expires in 2001 and one expires in 2002.
F-17
<PAGE> 66
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases offices from a third party under a noncancelable
operating lease. Future minimum lease payments are:
<TABLE>
<CAPTION>
TWELVE-MONTH PERIOD ENDING JUNE 30:
---------------------------------------------------
<S> <C>
1998............................................. $29,889
1999............................................. 17,435
-------
$47,324
=======
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1994, 1995 and 1996 and six months ended June 30, 1997 was $24,600, $20,665,
$20,460 and $13,548, respectively.
Government Regulations
The maintenance and operation of aircraft are regulated by the Federal
Aviation Administration (FAA) and foreign aviation authorities which oversee
such matters as aircraft certification, inspection, maintenance, certification
of personnel, and record-keeping. All current leases require the lessee to bear
the costs of complying with governmental regulations. However, in the event a
lessee fails to maintain aircraft in accordance with the terms of a lease, the
Company could be required to repair or recondition the aircraft. Failure of a
lessee to fulfill lease maintenance and operation obligations could have a
material adverse effect on the Company's financial condition and results of
operations.
The FAA and civil aviation authorities of most countries and international
entities issue regulations limiting permitted noise and other emissions from
aircraft. These older non-complying aircraft can be brought into compliance by
modifying the engines. One of the Company's aircraft had noise compliance work
performed at a cost of approximately $2.4 million during 1994 (all of which was
paid by the Company) and three aircraft will require this work to be performed
over the next three years unless the aircraft is leased and operated in an area
that does not require the modification.
(9) SHAREHOLDERS' EQUITY
The holders of convertible preferred stock are entitled to convert each
share to one share of common stock. In the event of liquidation, holders of
preferred stock are entitled to receive $1 per share plus accrued and unpaid
dividends, if any, before distributions to holders of common stock. The
convertible preferred stock do not bear dividends and contains certain defined
antidilution provisions.
Through March 1993, the Company granted options to purchase 2,913,735
shares of common stock at management's estimate of fair value, $1 per share;
100,000 options were exercised during December 1995. Through May 1991, the
Company also granted options to purchase 1,569,550 shares of convertible
preferred stock at management's estimate of fair value, primarily $1.15 per
share. These options are exercisable no later than the earlier of December 31,
1998 or a sale of the Company's shares under the Securities Act of 1933. At
December 31, 1996, 4,383,285 options were outstanding and all were exercisable.
During March, 1997, the Company extended the expiration date on 2,235,000
employee stock options to March 31, 2007, which will vest 25% in 1997 and 25% in
each of the following three years. Accordingly, the Company will recognize
aggregate compensation expense of approximately $1 million for the difference
between the value of the options on the extension date and the exercise price.
The Company recognized $100,000 in stock compensation during the six months
ended June 30, 1997 related to the amortization of such cost from March to June
1997. If the related employee is terminated, the respective stock options will
vest in full.
F-18
<PAGE> 67
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During June 1997, 50,000 options were exercised and financed through
amounts due from officers. Such amounts were collected in July 1997. At June 30,
1997, 4,333,285 options were outstanding and 2,321,785 were exercisable.
(10) PROPOSED INITIAL PUBLIC OFFERING AND REVERSE STOCK SPLIT
The Company is currently contemplating an initial public offering (IPO) of
its common stock. In connection with the IPO, the Company plans to effect a
1-for-4.5 reverse stock split of its common stock.
Concurrent with the IPO, the Company anticipates the conversion of all
issued and outstanding shares of preferred stock into 1,097,969 shares of common
stock, and the exercise of stock options to acquire 477,391 shares (post reverse
stock split) (note 9).
In September 1997, the Company agreed to acquire two aircraft from ILFC
with an aggregate purchase price of $59 million which will be initially financed
by ILFC. The acquisition of one of these aircraft was completed in September
1997 and the other is expected to be completed prior to December 31, 1997.
F-19
<PAGE> 68
Simat, Helliesen & Eichner, Inc. (212)682-8455 Fax: 212-986-1825
90 Park Avenue Telex: 4949296
New York, New York 10016 SITA: BOSSHCR
APPENDIX 1
[LOGO]
September 30, 1997
International Aircraft Investors
3655 Torrance Boulevard, Suite 410
Torrance, California 90503
Gentlemen:
Simat, Helliesen & Eichner, Inc. ("SH&E") has been retained to determine
the aggregate Current Market Value ("CMV") for one (1) Boeing 727-200ADV, three
(3) Boeing 737-200ADV, two (2) Boeing 737-300, one (1) Boeing 737-400 and one
(1) McDonnell Douglas MD-82 aircraft (the "Subject Aircraft"), all owned by
International Aircraft Investors ("IAI"). The Subject Aircraft are collectively
referred to herein as (the "Collateral") and are identified on Attachment A.
SH&E has determined the aggregate Current Market Value of the Collateral as
of June 30, 1997 was approximately $121 million.
VALUATION DETERMINATION
SH&E has studied many aircraft transactions over the past 30 years. This
list includes a wide variety of pure jet, fan-powered and turboprop powered two,
three and four-engined transports. Models studied have covered many types,
including Boeing 707, 727, 737, 757, 767 and 747 aircraft; Douglas DC-8, DC-9,
DC-10, MD80 and MD-11 models; Airbus A300, A310, A320, A330 and A340 models;
Lockheed L-1011; BAC 1-11; and various turboprop models, including most major
commuter aircraft.
The SH&E valuation approach starts by determining a half-life value. The
term "half-life" represents an aircraft whose major components (e.g. airframe,
engines, landing gear and APU) have used 50 percent of the time between
scheduled or expected overhauls. This initial appraisal can then be adjusted
(positive or negative) for each individual unit to reflect the airframe's
maintenance status relative to next overhaul. In most cases, the Base Value (as
defined below) of an aircraft assumes its physical condition is average for an
aircraft of its type and age, and its maintenance time status is at mid-life (or
benefitting from an above-average maintenance status if it is new or nearly new,
as the case may be).
In the case of new aircraft, the above half-life values are automatically
adjusted upwards to reflect the fact that the aircraft has the full span of
maintenance overhaul intervals available. Consequently, SH&E's initial
depreciation of new aircraft is considerably greater than for a used aircraft,
thereby accounting for both the change in its maintenance status and its
intrinsic depreciation.
SH&E half-life values are determined on a semi-annual basis by reviewing
recent past sales, aircraft availability trends, technological aspects,
environmental constraints and maintenance requirements.
The Base Value is the appraiser's opinion of the underlying economic value
of an aircraft in an open, unrestricted and stable market environment with a
reasonable balance of supply and demand, and also assumes full considerations of
its "highest and best use". An aircraft's Base Value is founded in the
historical trend of values and in the projection of value trends and presumes an
arm's-length, cash transaction between willing, able and knowledgeable parties,
acting prudently, with an absence of duress and with a reasonable period of time
available for marketing.
<PAGE> 69
Since Base Value pertains to a somewhat idealized aircraft and market
combination it may not necessarily reflect the actual value of the aircraft in
question, but is a nominal starting value to which adjustments may be applied to
determine an actual value.
The Base Value of each aircraft is derived from SH&E's aircraft valuation
models. The SH&E Base Value models provide trend lines derived from known
transactions, econometric factors affecting aircraft values, and aircraft
economic life estimates. Because it is related to long-term market trends, the
Base Value definition is normally applied to analyses of historical values and
projections of residual values.
The Current Market Value (CMV) is SH&E's opinion of the most likely trading
price that may be generated for an aircraft under the market circumstances that
are perceived to exist at the time in question. CMV assumes that the aircraft is
valued for its highest, best use, that the parties to the hypothetical sale
transaction are willing, able, prudent and knowledgeable, and under no unusual
pressure for a prompt sale, and that the transaction would be negotiated in an
open and unrestricted market on an arm's-length basis, for cash or equivalent
consideration, and given an adequate amount of time for effective exposure to
prospective buyers.
The CMV of a specific aircraft is derived from, and will tend to be
somewhat consistent with its Base Value in a stable market environment, but
where a reasonable equilibrium between supply and demand does not exist, trading
prices, and therefore CMVs, are likely to be at variance with the Base Value of
that aircraft. CMV may be based upon either the actual (or specified) physical
condition and maintenance time status of the aircraft, or alternatively upon an
assumed average physical condition and mid-life, mid-time maintenance time
status, depending on the nature of the appraisal assignment.
QUALIFICATIONS
SH&E has provided consulting services to the aviation industry since its
founding 30 years ago. The staff consists of more than 75 professionals with
many years of experience of air transportation management, planning, operations,
and economic research. SH&E has performed numerous world-wide assignments for
clients which include airlines, manufacturers, government agencies and financial
institutions.
An appraiser from SH&E is certified by the International Society of
Transport Aircraft Trading (ISTAT).
LIMITATIONS
SH&E used information supplied by IAI together with in-house data
accumulated through other recent studies of aircraft transactions.
SH&E's opinions are based upon historical relationships and expectations
that it believes are reasonable. Some of the underlying assumptions, including
those described above, may not materialize because of unanticipated events and
circumstances. SH&E's opinions could, and would, vary materially, should any of
the above assumptions prove to be inaccurate.
The opinions expressed herein are not given for, or as an inducement or
endorsement of, any financial transaction.
This report reflects SH&E's expert opinion and best judgment based upon the
information available to it at the time of its preparation. SH&E does not have,
and does not expect to have, any financial interest in the appraised property.
For SH&E:
/s/ CLIVE G. MEDLAND
--------------------------------------
Clive G. Medland Vice President
Certified Appraiser International
Society of Transport Aircraft Trading
A-2
<PAGE> 70
ATTACHMENT A
<TABLE>
<CAPTION>
MAXIMUM
AIRCRAFT SERIAL YEAR OF ENGINE TAKEOFF
TYPE NUMBER MANUFACTURE TYPE WEIGHT (LBS) CURRENT OPERATOR
- ---------- ------ ------------ --------- ------------ ---------------------
<S> <C> <C> <C> <C> <C>
727-200ADV 21826 1979 JT8D-15 190,500 Delta Air Lines
737-200ADV 21645 1978 JT8D-15 117,000 COPA
737-200ADV 22088 1980 JT8D-15 117,000 COPA
737-200ADV 22364 1980 JT8D-15A 121,500 Air New Zealand
737-300 24300 1989 CFM56-3B1 135,000 Shanghai Airlines
737-300 23254 1985 CFM56-3B1 135,000 Southwest Airlines
MD-82 49925 1989 JT8D-219 149,500 Alaska Airlines
737-400 25168 1992 CFM56-3C1 150,000 British Airways, Ltd.
</TABLE>
A-3
<PAGE> 71
[THREE AIRCRAFT IN FLIGHT. TWO B 737 AIRCRAFT, ONE WITH THE LOGO AND NAME OF
COPA AND ONE WITH THE LOGO AND NAME OF AIR NEW ZEALAND. THE THIRD AIRCRAFT IS A
B 727 WITH THE LOGO AND NAME OF DELTA.]
<PAGE> 72
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE COMMON STOCK
TO WHICH IT RELATES OR AN OFFER IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Consolidated Financial and
Operating Data...................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 24
Management............................ 32
Certain Transactions.................. 39
Principal Shareholders................ 41
Description of Capital Stock.......... 42
Shares Eligible for Future Sale....... 43
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Additional Information................ 47
Index to Consolidated Financial
Statements.......................... F-1
Simat, Helliesen & Eichner, Inc.
Appraisal........................... A-1
</TABLE>
------------------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
2,600,000 SHARES
[LOGO]
INTERNATIONAL AIRCRAFT INVESTORS
COMMON STOCK
--------------------
PROSPECTUS
--------------------
SUTRO & CO. INCORPORATED
CRUTTENDEN ROTH
INCORPORATED
, 1997
======================================================
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee.............................................. $ 9,514
NASD fee.......................................................... 3,954
Nasdaq-NMS listing fee............................................ 25,340
Printing and engraving expenses................................... 150,000
Legal fees and expenses........................................... 225,000
Accounting fees and expenses...................................... 255,000
Blue Sky qualification fees and expenses.......................... 10,000
Transfer Agent and Registrar fees................................. 5,000
Appraiser fee..................................................... 27,000
Miscellaneous fees and expenses................................... 89,192
---------
Total................................................... $ 800,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Articles of Incorporation of the Company will
contain a provision eliminating the personal liability of the directors to the
Company or its shareholders to the fullest extent permitted under the California
General Corporations Law. The Bylaws of the Company provide for indemnification
of directors, officers, employees and agents of the Company consistent with the
provisions of the California General Corporation Law. Reference is also made to
Section 10 of the Underwriting Agreement, contained in Exhibit 1 hereto,
indemnifying officers and directors of the Company against certain liabilities.
See also the form of Indemnity Agreement, included herein as Exhibit 10.3, to be
entered into with the directors and officers of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Upon the consummation of the offering, the outstanding shares of
Convertible Preferred Stock of the Company will be converted pursuant to their
terms into shares of the Common Stock of the Company. The issuance of shares of
Common Stock of the Company is exempt from registration under the Securities Act
of 1933 pursuant to Section 3(a)(9) or 4(2) of that Act.
Immediately prior to the consummation of the offering, options to purchase
477,391 shares of Common Stock of the Company will be exercised. The options
expire by their terms upon consummation of the offering. The issuance of shares
of Common Stock of the Company is exempt from registration under the Securities
Act of 1933 pursuant to Section 4(2) of that Act.
II-1
<PAGE> 74
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------- -------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement (including Common Stock Warrant and
Registration Rights Agreement)
*3.1 Articles of Incorporation of the Company
*3.2 Certificate of Amendment of Articles of Incorporation of the Company,
dated November 15, 1988
*3.3 Certificate of Amendment of Articles of Incorporation of the Company,
dated April 1, 1992
*3.4 Certificate of Determination with respect to Convertible Preferred Stock
*3.5 Bylaws of the Company
*3.6 Form of Amended and Restated Articles of Incorporation of the Company to
be effective upon consummation of the Offering
*3.7 Form of Bylaws of the Company to be effective upon consummation of the
Offering
*4.1 Specimen of Common Stock certificate
*4.2 Amended and Restated Aircraft Loan Agreement dated as of November 4, 1996
between SWA I Corporation and Wells Fargo Bank, N.A.
*4.3 Secured Promissory Note in the original principal amount of $13,700,000
made November 4, 1996 by SWA I Corporation in favor of Wells Fargo Bank,
N.A.
*4.4 Amended and Restated Guaranty Agreement dated as of November 4, 1996 made
by International Aircraft Investors in favor of Wells Fargo Bank, N.A.
*4.5 Senior Term Loan Agreement dated as of May 17, 1996 between IAI Alaska I
Corporation and City National Bank
*4.6 Aircraft Secured Promissory Note in the original principal amount of
$14,650,000 made May 17, 1996 by IAI Alaska I Corporation in favor of
City National Bank
*4.7 Secured Credit Agreement dated as of December 21, 1993 between IAI II,
Inc. and Continental Bank, N.A.
*4.8 Note in the original principal amount of $21,976,677 made by IAI II, Inc.
in favor of Continental Bank, N.A.
*4.9 Loan Agreement, dated as of September 26, 1997, between IAI IV, Inc. and
International Lease Finance Corporation.
*4.10 Senior Term Loan Agreement, dated June 23, 1997, between IAI III, Inc.
and City National Bank.
4.11 The Company hereby agrees to furnish to the Commission upon request a
copy of any instrument with respect to long-term debt where the total
amount of securities authorized thereunder does not exceed 10% of the
consolidated assets of the Company
5 Opinion of O'Melveny & Myers LLP regarding the legality of the securities
to be registered
*10.1 1997 Employee Stock Option and Award Plan
*10.2 Lease of principal offices
*10.3 Form of indemnity agreement
*10.4 Letter agreement, dated November 6, 1996, between the Company and ILFC
*10.5 Letter agreement, dated January 14, 1997, between the Company and ILFC
*10.6 Form of Employment Agreement with William E. Lindsey
</TABLE>
II-2
<PAGE> 75
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
-------------------------------------------------------------------------
<C> <S>
*10.7 Form of Employment Agreement with Michael P. Grella
*10.8 1997 Eligible Directors Stock Option Plan
*10.9 Form of Restated Stock Option Agreements
*10.10 Purchase Agreement, dated September 30, 1997, between the Company and
International Lease Finance Corporation regarding the purchase of a
Boeing 757 aircraft
*11 Statement regarding computation of earnings per share
21 The Company's subsidiaries are as follows: IAI Atlantic Leasing, Inc.,
IAI-I, Inc., IAI-II, Inc., IAI Pacific Leasing, Inc., IAI Alaska I
Corporation and SWA I Corporation
23.1 Consent of KPMG Peat Marwick LLP, independent certified public
accountants
23.2 Consent of O'Melveny & Myers LLP (included in Exhibit 5)
*23.3 Consent of Simat Helliesen & Eichner, Inc.
*24 Power of Attorney
*27.1 Financial Data Schedule for the year ended December 31, 1996
*27.2 Financial Data Schedule for the six months ended June 30, 1997
</TABLE>
- ---------------
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Commission are provided in the Notes to the Consolidated
Financial Statements included elsewhere in this Registration Statement or are
not required under the applicable instructions or are inapplicable and therefore
have been omitted.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described in
Item 14 or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel, the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE> 76
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
Rule 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE> 77
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Amendment No. 5 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on this 17th day of October, 1997.
INTERNATIONAL AIRCRAFT INVESTORS
By: /s/ MICHAEL P. GRELLA
------------------------------------
Michael P. Grella
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------- -------------------
<S> <C> <C>
/s/ WILLIAM E. LINDSEY* Chairman of the Board, October 17, 1997
- ----------------------------------------------- Chief Executive Officer
William E. Lindsey and Director (Principal
Executive Officer)
/s/ MICHAEL P. GRELLA President and Director October 17, 1997
- -----------------------------------------------
Michael P. Grella
/s/ RICHARD O. HAMMOND* Vice President -- Finance October 17, 1997
- ----------------------------------------------- and Treasurer (Principal
Richard O. Hammond Financial Officer)
/s/ ALAN G. STANFORD JR.* Vice President -- October 17, 1997
- ----------------------------------------------- Controller (Principal
Alan G. Stanford Jr. Accounting Officer)
/s/ STUART M. WARREN* Director October 17, 1997
- -----------------------------------------------
Stuart M. Warren
/s/ AARON MENDELSOHN* Director October 17, 1997
- -----------------------------------------------
Aaron Mendelsohn
/s/ CHRISTER SALEN* Director October 17, 1997
- -----------------------------------------------
Christer Salen
/s/ KENNETH TAYLOR* Director October 17, 1997
- -----------------------------------------------
Kenneth Taylor
/s/ RALPH HELLMOLD* Director October 17, 1997
- -----------------------------------------------
Ralph O. Hellmold
/s/ MAGNUS GUNNARSSON* Director October 17, 1997
- -----------------------------------------------
Magnus Gunnarsson
* /s/ MICHAEL P. GRELLA
- -----------------------------------------------
Michael P. Grella
Attorney-in-fact
</TABLE>
II-5
<PAGE> 1
EXHIBIT 1
2,600,000 Shares
(Subject to increase of up to 390,000 additional
shares in the event of an oversubscription)
INTERNATIONAL AIRCRAFT INVESTORS
(A CALIFORNIA CORPORATION)
Common Stock
(par value $0.01 per share)
UNDERWRITING AGREEMENT
_______________, 1997
Sutro & Co. Incorporated
Cruttenden Roth Incorporated
As Representatives of the several Underwriters
c/o Sutro & Co. Incorporated
11150 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025
Ladies and Gentlemen:
International Aircraft Investors, a California corporation (the
"Company") proposes, subject to the terms and conditions stated herein, to
issue and sell, or to sell, as the case may be, to the several Underwriters
named in Schedule A hereto (the "Underwriters"), for which you are acting as
representatives (the "Representatives"), an aggregate of 2,600,000 shares (the
"Firm Common Shares") of common stock, par value $0.01 per share (the "Common
Stock"), of the Company. In addition, the Company proposes to grant to the
Underwriters an option to purchase up to 390,000 additional shares of Common
Stock (the "Optional Common Shares"), as provided in Section 5 hereof, for the
purpose of covering over-allotments in connection with the sale of the Firm
Common Shares. The Firm Common Shares and, to the extent such option is
exercised, the Optional Common Shares are hereinafter collectively referred to
as the "Common Shares."
The Company understands that the Underwriters propose to make a public
offering of the Common Shares on the effective date of the registration
statement hereinafter referred to or as soon thereafter as in your judgment is
advisable. The Company hereby confirms that the Underwriters and any dealers
have been authorized to distribute or cause to be distributed each Preliminary
Prospectus (as defined below) and are authorized to distribute the Prospectus
(as
1
<PAGE> 2
defined below), as from time to time amended or supplemented, on the effective
date of the registration statement hereinafter referred to or as soon thereafter
as in your judgment is advisable.
The Company confirms its agreement with respect to the purchase of the
Common Shares by the Underwriters as follows:
SECTION 1. Representations and Warranties of
the Company. The Company hereby represents and warrants to, and agrees with,
each of the Underwriters that:
(a) A registration statement on Form S-1 (File No.
333-19875) with respect to the Common Shares has been prepared by the Company
in conformity in all material respects with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission. The Company has prepared
and has filed or proposes to file prior to the effective date of such
registration statement an amendment or amendments to such registration
statement, which amendment or amendments have been or will be similarly
prepared. There have been delivered to you two signed copies of such
registration statement and amendments, together with two copies of each exhibit
filed therewith. Conformed copies of such registration statement and
amendments thereto and related preliminary prospectuses have been delivered to
you in such reasonable quantities as you have requested. The Company will next
file with the Commission one of the following: (i) prior to effectiveness of
such registration statement, a further amendment thereto, including the form of
final prospectus, (ii) a final prospectus in accordance with Rules 430A and
424(b) of the Rules and Regulations or (iii) a term sheet (the "Term Sheet") as
described in and in accordance with Rules 434 and 424(b) of the Rules and
Regulations. As filed, the final prospectus, if one is used, or the Term Sheet
and the latest Preliminary Prospectus sent or given to purchasers of the Common
Shares by the Underwriters prior to or at the same time as the confirmation of
such sale, if a final prospectus is not used, shall include all Rule 430A
Information (as defined below) and, except to the extent that you shall agree
in writing to a modification, shall be in all substantive respects in the form
furnished to you prior to the date and time that this Agreement was executed
and delivered by the parties hereto, or, to the extent not completed at such
date and time, shall contain only such specific additional information and
other changes (beyond that contained in the latest Preliminary Prospectus) as
the Company shall have previously advised you in writing would be included or
made therein.
The term "Registration Statement" as used herein shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as defined below), shall also mean
such registration statement as so amended; provided, however, that such term
shall also include (i) all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes
effective as provided by Rule 430A of the Rules and Regulations and (ii) any
registration statement filed pursuant to Rule 462(b) of the
2
<PAGE> 3
Rules and Regulations relating to the Common Shares. The term "Preliminary
Prospectus" shall mean any preliminary prospectus relating to the Common Shares
and delivered to you as well as any preliminary prospectus included in the
Registration Statement at the time it becomes effective that omits Rule 430A
Information. The term "Prospectus" shall mean: (i) the prospectus relating to
the Common Shares in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations; (ii) if a Term Sheet is
not used and no filing pursuant to Rule 424(b) of the Rules and Regulations is
required, the form of final prospectus included in the Registration Statement
at the time it becomes effective; or (iii) if a Term Sheet is used, the Term
Sheet in the form in which it is first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations, together with the latest Preliminary
Prospectus sent or given to purchasers of the Common Shares by the Underwriters
prior to or at the same time as the confirmation of such sale. The term "Rule
430A Information" shall mean information with respect to the Common Shares and
the offering thereof permitted to be omitted from the Registration Statement
when it becomes effective pursuant to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects to the requirements of the
Act and the Rules and Regulations and, as of its date, has not included any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; at the time the Registration
Statement becomes effective, and at all times subsequent thereto up to and
including each Closing Date hereinafter mentioned, the Registration Statement
and the Prospectus, and any amendments or supplements thereto, will contain all
material statements and information required to be included therein by the Act
and the Rules and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, and the Registration
Statement will not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and neither the Prospectus, nor any
amendment or supplement thereto, will include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary, in light of the circumstances under which they were made, to make
the statements therein not misleading; provided, however, no representation or
warranty contained in this subsection 1(b) shall be applicable to information
contained in or omitted from any Preliminary Prospectus, the Registration
Statement, the Prospectus or any such amendment or supplement that is described
in clauses (i) and (ii) of Section 3 hereof.
(c) The subsidiaries of the Company are IAI Atlantic
Leasing, Inc., a Nevada corporation; IAI-I, Inc., a Nevada corporation; IAI-II,
Inc., a Nevada corporation; IAI Pacific Leasing, Inc., a Nevada corporation; IAI
Alaska I Corporation, a Nevada corporation; and SWA I Corporation, a Nevada
corporation (collectively, the "Subsidiaries" and individually, a "Subsidiary").
The Company does not own or control, directly or indirectly, any corporation,
association or other entity other than the Subsidiaries. The Company and each
of the Subsidiaries has been duly incorporated and is validly existing as a
corporation in good standing under the laws of their respective jurisdiction of
incorporation, with full power and authority (corporate and
3
<PAGE> 4
other) to own and lease its assets and properties and conduct its business as
now being conducted and as described in the Registration Statement. The
Company owns all of the outstanding capital stock of each of the Subsidiaries
free and clear of all claims, liens, charges and encumbrances, other than as
disclosed in the Registration Statement. The Company and each of the
Subsidiaries are duly qualified to do business and are in good standing as
foreign corporations in each jurisdiction in which the ownership or leasing of
their respective properties or the conduct of their respective businesses
requires such qualification, except for jurisdictions in which the failure to
so qualify would not have a material adverse effect upon the Company and the
Subsidiaries, taken as a whole; and to the Company's knowledge, no proceeding
has been instituted in any such jurisdiction revoking, limiting or curtailing,
or seeking to revoke, limit or curtail, such power and authority or
qualification.
(d) The Company and each of the Subsidiaries holds and is
operating in compliance with all licenses, approvals, certificates, permits,
authorizations, consents and orders from governmental and regulatory
authorities, foreign and domestic, which are necessary or required in the
conduct of their respective businesses.
(e) The Company has an authorized capitalization as set
forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of capital stock of the Company are duly authorized and
validly issued, are fully paid and nonassessable, have been issued in
compliance with all applicable federal and state securities laws, have not been
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and conform in all material respects to
the description thereof contained in the Prospectus. All issued and
outstanding shares of capital stock of each Subsidiary have been duly
authorized and validly issued and are fully paid and nonassessable. Except as
disclosed in or contemplated by the Prospectus and the financial statements of
the Company, and the related notes thereto, included in the Prospectus, none of
the Company or any Subsidiary has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of capital stock of the Company or any of the
Subsidiaries or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(f) The Common Shares have been duly authorized and, when
issued, delivered and paid for in the manner set forth in this Agreement, will
be validly issued, fully paid and nonassessable, and will conform in all
material respects to the description thereof contained in the Prospectus. No
preemptive rights or other rights to subscribe for or purchase exist with
respect to the issuance and sale of the Common Shares. No shareholder of the
Company has any right which has not been waived to require the Company to
register the sale of any shares owned by such shareholder under the Act in the
public offering contemplated by this Agreement. The shares of Common Stock
proposed to be issued upon exercise of the Sutro Warrant (as defined below)
4
<PAGE> 5
have been duly authorized and, when issued, delivered and paid for in the
manner set forth in the Warrant Agreement (as defined below), will be validly
issued, fully paid and nonassessable. No further approval or authorization of
the shareholders or the Board of Directors of the Company is required for the
issuance and sale of the Common Shares as contemplated herein or the shares of
Common Stock proposed to be issued upon exercise of the Sutro Warrant.
(g) The Company has full right, power and authority to
enter into this Agreement and the Warrant Agreement and perform the
transactions contemplated in such agreements. This Agreement has and, prior to
the First Closing Date (as defined below), the Warrant Agreement will have
been, duly authorized, executed and delivered by the Company, and they
constitute the valid and binding agreements of the Company enforceable against
it in accordance with their terms, except (A) as limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, (B) that the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding may be brought and (C)
to the extent that rights to indemnity or contribution under this Agreement or
the Warrant Agreement may be limited by federal, state or provincial securities
laws or the public policy underlying such laws. The execution and delivery of
this Agreement and the Warrant Agreement by the Company and the consummation of
the transactions contemplated in such agreements by the Company does not
violate any provisions of the certificate or articles of incorporation or
bylaws of the Company or any Subsidiary and will not conflict with, result in
the breach or violation of, or constitute, either by itself or upon notice or
the passage of time or both, a default under any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to
which the Company or any of the Subsidiaries is a party or by which the Company
or any of the Subsidiaries or any of their respective properties may be bound
or affected, any statute or any authorization, judgment, decree, order, rule or
regulation of any court or any regulatory body, administrative agency or other
governmental body applicable to the Company or any of the Subsidiaries or any
of their respective properties. No consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of this Agreement
or the Warrant Agreement or the consummation of the transactions contemplated
by such agreements, except for compliance with the Act, the Blue Sky laws
applicable to the public offering of the Common Shares by the several
Underwriters and the clearance of such offering with the National Association
of Securities Dealers, Inc. (the "NASD").
(h) KPMG Peat Marwick LLP, who have expressed their
opinion with respect to the financial statements filed with the Commission as a
part of the Registration Statement and included in the Prospectus, are
independent accountants as required by the Act and the Rules and Regulations.
(i) The consolidated financial statements of the Company
and its Subsidiaries, and the related notes thereto, included in the
Registration Statement and the Prospectus present fairly the consolidated
financial position of the Company and the Subsidiaries, as of the respective
5
<PAGE> 6
dates of such financial statements and schedules, and the consolidated results
of operations, cash flows and shareholders' equity and the other information
purported to be shown therein of the Company and its Subsidiaries for the
respective periods covered thereby. Such statements and related notes have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as noted therein) as certified by the
independent accountants named in subsection 1(h). The Registration Statement
includes all of the financial statements and schedules required under the Act
to be included therein. The selected financial data set forth in the
Prospectus under the captions "Prospectus Summary -- Summary Consolidated
Financial Data," "Capitalization" and "Selected Consolidated Financial and
Operating Data" present fairly the information set forth therein on the basis
stated in the Registration Statement.
(j) Except as disclosed in the Prospectus, and except as
to defaults which individually or in the aggregate would not be material to the
Company and the Subsidiaries, taken as a whole, (i) none of the Company or any
of the Subsidiaries is in violation or default of any provision of their
respective certificate or articles of incorporation or bylaws, or is in breach
of or default with respect to any provision of any agreement, judgment, decree,
order, mortgage, deed of trust, lease, franchise, license, indenture, permit or
other instrument to which it is a party or by which it or any of its properties
is bound; and (ii) there does not exist any state of facts which constitutes an
event of default (as defined in such documents) on the part of the Company or
any such Subsidiary or which, with notice or lapse of time or both, would
constitute such an event of default.
(k) There are no contracts or other documents required to
be described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which have
not been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof; and, except as
disclosed in the Prospectus and except as to defaults which individually or in
the aggregate would not be material to the Company and the Subsidiaries, taken
as a whole, neither the Company nor any of the Subsidiaries, nor to the best of
the Company's knowledge, any other party, is in breach of or in default under
any of such contracts.
(l) There are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge, threatened to
which the Company or any of the Subsidiaries is a party or of which property
owned or leased by the Company or any of the Subsidiaries is the subject,
including actions related to environmental or discrimination matters, which
actions, suits or proceedings (i) might reasonably be expected to, individually
or in the aggregate, prevent or materially and adversely affect the
transactions contemplated by this Agreement or result in a material adverse
change in the condition (financial or otherwise), properties, business, results
of operations or prospects of the Company and the Subsidiaries, taken as a
whole, or (ii) questions the validity of any of the securities of the Company,
this Agreement or the Warrant Agreement, or of any action taken or to be taken
by the Company pursuant to or in connection with this Agreement or the Warrant
Agreement; and no labor disturbance by the employees of the Company or any of
the Subsidiaries exists or is imminent which might
6
<PAGE> 7
reasonably be expected to affect materially and adversely such condition,
properties, business, results of operations or prospects or the Company's
business. None of Company or any of the Subsidiaries is a party or subject to
the provisions of any material injunction, judgment, decree or order of any
court, regulatory body, administrative agency or other governmental body.
(m) The Company and each Subsidiary has good and valid
title to all the properties and assets reflected as owned in the financial
statements hereinabove described or as described elsewhere in the Prospectus,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements or as described
elsewhere in the Prospectus and (ii) those which are not material in amount and
do not materially and adversely affect the use made and proposed to be made of
such property and assets by the Company and the Subsidiaries. The Company and
each Subsidiary holds its leased properties under valid and binding leases,
with such exceptions as are not materially significant in relation to the
business of the Company and the Subsidiaries. Except as disclosed in the
Prospectus, the Company and the Subsidiaries own or lease all such properties
as are necessary to their respective operations as now conducted.
(n) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as described
in or specifically contemplated by the Prospectus: (i) neither the Company nor
any of the Subsidiaries have incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or written
agreement or other transaction which is not in the ordinary course of business
or which could reasonably be expected to result in a material reduction in the
future earnings of the Company and each of the Subsidiaries, taken as a whole;
(ii) the Company and the Subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
earthquake, windstorm, accident or other calamity, whether or not covered by
insurance; (iii) the Company has not paid or declared any dividends or other
distributions with respect to its capital stock and the Company and each of the
Subsidiaries are not in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in the capital
stock (other than upon the sale of the Common Shares hereunder) or indebtedness
of the Company or any of the Subsidiaries that is material to the Company and
the Subsidiaries, taken as a whole (other than in the ordinary course of
business); and (v) there has not been any material adverse change in the
condition (financial or otherwise), business, properties, results of operations
or prospects of the Company and the Subsidiaries, taken as a whole.
(o) The Company and each of the Subsidiaries have
sufficient trademarks, trade names, service marks, patent rights, mask works,
copyrights, licenses, know-how and other similar rights and proprietary
knowledge (collectively, "Intangibles") to conduct their respective businesses
as now conducted, and the Company has no knowledge of any material infringement
by any of the Company or the Subsidiaries of any Intangible of others, and
there is no claim being made against the Company or the Subsidiaries regarding
any Intangible which could have a
7
<PAGE> 8
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company and the Subsidiaries, taken
as a whole.
(p) The Company has not been advised, and has no reason
to believe, that any of the Company or any Subsidiary is not conducting its
business in compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without
limitation, all applicable local, state and federal environmental laws and
regulations, except where failure to be in compliance therewith would not
materially and adversely affect the condition (financial or otherwise),
business, results of operations or prospects of the Company and the
Subsidiaries, taken as a whole.
(q) The Company and each of the Subsidiaries have filed,
or applied in good faith for extensions of, all necessary federal, state and
foreign tax returns and have paid all taxes shown as due thereon; and the
Company has no knowledge of any tax deficiency which has been or might be
asserted or threatened against the Company or the Subsidiaries which could
materially and adversely affect the business, operations or properties of the
Company and the Subsidiaries, taken as a whole.
(r) Neither the Company nor any of the Subsidiaries is,
and upon completion of the sale of Common Shares contemplated hereby will not
be, an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
(s) The Company has not distributed and will not
distribute prior to the First Closing Date any offering materials in connection
with the offering and sale of the Common Shares other than any Preliminary
Prospectus, the Prospectus, the Registration Statement and the other materials
permitted by the Act.
(t) The Company and each of the Subsidiaries maintains
insurance of the types and in the amounts generally deemed adequate for its
respective business, including, but not limited to, insurance covering
aircraft, aircraft parts and components and real and personal property owned or
leased by the Company or any Subsidiary, against loss, theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(u) Neither the Company nor any of the Subsidiaries has
at any time during the past five years (i) made any unlawful contribution to
any candidate for foreign office, or failed to disclose fully any contribution
in violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar public
or quasi-public duties, other than payments required or permitted by the laws
of the United States or any jurisdiction thereof.
(v) All material transactions between the Company or the
Subsidiaries and their respective officers and directors and their affiliates
have been accurately disclosed in the
8
<PAGE> 9
Prospectus; and the terms of such transactions are fair to the Company and/or
the Subsidiaries, as the case may be.
(w) Neither the Company nor any of the Subsidiaries has
taken and will not take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Common Shares.
Any certificate signed by any officer of the Company and delivered to
you or to your counsel shall be deemed a representation and warranty by the
Company to you as to the matters covered thereby. Any certificate delivered by
the Company to its counsel for purposes of enabling such counsel to render the
opinions referred to in Section 7(e) will also be furnished to the Underwriter
and its counsel and shall be deemed to be additional representations and
warranties by the Company to the Underwriter as to the matters covered thereby
and the Underwriter and its counsel are entitled to rely thereon.
SECTION 2. Reserved.
SECTION 3. Representations and Warranties of
the Underwriters. The Representatives, on behalf of the several Underwriters,
represent and warrant to the Company that the information set forth (i) on the
cover page of the Prospectus with respect to price, underwriting discounts and
commissions and terms of offering and (ii) under the caption "Underwriting" in
the Prospectus was furnished to the Company by and on behalf of the
Underwriters for use in connection with the preparation of the Registration
Statement and the Prospectus, and such information is correct in all material
respects. The Representatives represent and warrant that they have been
authorized by each of the other Underwriters as the Representatives to enter
into this Agreement on behalf of each such Underwriter and to act on behalf of
each such Underwriter in the manner herein provided.
SECTION 4. Purchase, Sale and Delivery of
Common Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter the number of Firm Common
Shares set forth herein or in Schedule A hereto, and each Underwriter agrees,
severally and not jointly, to purchase from the Company the number of Firm
Common Shares set forth opposite their respective names in Schedule A hereto.
The purchase price per share to be paid by the several Underwriters shall be
$_____ per share.
(b) Delivery of certificates for the Firm Common Shares to
be purchased by the Underwriters and payment therefor shall be made at the
offices of Sutro & Co. Incorporated, 11150 Santa Monica Boulevard, Suite 1500,
Los Angeles, California (or such other place as may be agreed upon by the
Company and the Representatives) at 7:00 a.m., local time, on ________, 1997
(or at such other time and date, not later than one week after such date, as may
be agreed
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<PAGE> 10
upon by the Company and the Underwriters) (the "First Closing Date"); provided,
however, that if the Prospectus is at any time prior to the First Closing Date
recirculated to the public, the First Closing Date shall occur upon the later of
the third full business day following the first date that any of the Common
Shares are released by you for sale to the public or the date that is 48 hours
after the date that the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares
shall be made by or on behalf of the Company to you, for the respective
accounts of the several Underwriters, against payment by you, for the accounts
of the several Underwriters, of the purchase price therefor by wire transfers
payable in same day funds to such account as the Company shall have designated
to the Representatives in writing at least two business days prior to the First
Closing Date. The certificates for the Firm Common Shares shall be registered
in such names and denominations as you shall have requested at least two
business days prior to the First Closing Date, and shall be made available for
checking and packaging on the business day preceding the First Closing Date at
such location in [New York, New York] as may be designated by you. Time shall
be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
(c) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of 273,000 Optional
Common Shares at the purchase price per share to be paid by the Underwriters
for the Firm Common Shares, for use solely in covering any over-allotments made
by the Underwriters for the account of the Underwriters in the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) within 45 days after the first
date that any of the Common Shares are released by you for sale to the public,
upon notice by you to the Company setting forth the aggregate number of
Optional Common Shares as to which the Underwriters are exercising the option,
the names and denominations in which the certificates for such Optional Common
Shares are to be registered and the time and place at which such certificates
are to be delivered. Such time of delivery (which may not be earlier than the
First Closing Date and being herein referred to as the "Second Closing Date")
shall be determined by you, but if at any time other than the First Closing
Date shall not be earlier than three nor later than five full business days
after delivery of such notice of exercise. The number of Optional Common
Shares to be purchased by each Underwriter shall be determined by multiplying
the number of Optional Common Shares to be sold by the Company pursuant to such
notice of exercise by a fraction, the numerator of which is the number of Firm
Common Shares to be purchased by such Underwriter as set forth opposite its
name in Schedule A and the denominator of which is 1,820,000 (subject to such
adjustments to eliminate any fractional share purchases as you in your
discretion may make). Certificates for the Optional Common Shares being
purchased will be made available for checking and packaging on the business day
preceding the Second Closing Date at such location in [New York, New York] as
may be designated by you. The manner of payment for and delivery of such
Optional Common Shares shall be the same as for the Firm Common Shares
purchased from the Company as specified in
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<PAGE> 11
the two preceding paragraphs. At any time before lapse of the option, you may
cancel such option by giving written notice of such cancellation to the
Company.
(d) You have advised the Company that each Underwriter
has authorized you to accept delivery of its Common Shares, to make payments
and receipt therefore. You, individually and not as the Representatives of the
Underwriters, may (but shall not be obligated to) make payments for any Common
Shares to be purchased by any Underwriter whose funds shall not have been
received by you by the First Closing Date or the Second Closing Date, as the
case may be, for the account of such Underwriter, but any such payment shall
not relieve such Underwriter from any of its obligations under this Agreement.
(e) Subject to the terms and conditions hereof, the
Underwriters propose to make a public offering of their respective portions of
the Common Shares as soon after the effective date of the Registration
Statement as in your judgment is advisable and at the public offering price per
share (the "Offering Price") set forth on the cover page of and on the terms
set forth in the final prospectus, if one is used, or on the first page of the
Term Sheet, if one is used.
(f) On the First Closing Date, the Company shall issue
and sell to Sutro & Co. Incorporated, at a purchase price of $0.01, a warrant
(the "Sutro Warrant") entitling the holder(s) thereof to purchase from the
Company an aggregate of 182,000 shares of the Common Stock. The Sutro Warrant
shall be exercisable for a period of three (3) years commencing one (1) year
from the effective date of the Registration Statement at a price per share
equal to one hundred twenty percent (120%) of the Offering Price. The Sutro
Warrant shall be substantially in the form of the Common Stock Purchase Warrant
attached hereto as Exhibit A (the "Warrant Agreement"), which the Company and
Sutro & Co. Incorporated shall enter into on the First Closing Date, along with
a related Registration Rights Agreement substantially in the form attached
hereto as Exhibit B.
SECTION 5. Covenants of the Company. The
Company hereby covenants and agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto,
to become effective. If the Registration Statement has become or becomes
effective pursuant to Rule 430A of the Rules and Regulations, or the filing of
the Prospectus is otherwise required under Rule 424(b) of the Rules and
Regulations, the Company will file the Prospectus, properly completed, pursuant
to the applicable paragraph of Rule 424(b) of the Rules and Regulations within
the time period prescribed and will provide evidence satisfactory to you of
such timely filing. The Company will promptly advise you in writing (i) of the
receipt of any comments of the Commission, (ii) of any request of the
Commission for amendment of or supplement to the Registration Statement (either
before or after it becomes effective), any Preliminary Prospectus or the
Prospectus or for additional information, (iii) when the Registration Statement
shall have become effective and (iv) of the issuance by the Commission
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<PAGE> 12
of any stop order suspending the effectiveness of the Registration Statement or
of the institution of any proceedings for that purpose. If the Commission
shall enter any such stop order at any time, the Company will use its
commercially reasonable best efforts to obtain the lifting of such order at the
earliest possible time. The Company will not file any amendment or supplement
to the Registration Statement (either before or after it becomes effective),
any Preliminary Prospectus or the Prospectus if you have not been furnished
with a copy a reasonable time prior to such filing, if you reasonably object to
the Company filing such document or if the document to be filed is not in
compliance with the Act and the Rules and Regulations.
(b) The Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to the
Registration Statement or the Prospectus which in your judgment may be
necessary or advisable to enable the Underwriters to continue the distribution
of the Common Shares and will use its best efforts to cause the same to become
effective as promptly as possible. The Company will fully and completely
comply with the provisions of Rule 430A of the Rules and Regulations with
respect to information omitted from the Registration Statement in reliance upon
such Rule.
(c) If at any time during which a prospectus relating to
the Common Shares is required to be delivered under the Act any event occurs,
as a result of which the Prospectus, including any amendments or supplements,
would include an untrue statement of a material fact, or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, or if it is necessary at any time to amend the
Prospectus, including any amendments or supplements, to comply with the Act or
the Rules and Regulations, the Company will promptly advise you thereof and
will promptly prepare and file with the Commission, at its own expense, an
amendment or supplement which will correct such statement or omission or an
amendment or supplement which will effect such compliance and will use its best
efforts to cause the same to become effective as soon as possible.
(d) During such period as a prospectus is required by law
to be delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, will furnish to you or mail to your order copies of
the Registration Statement, the Prospectus, the Preliminary Prospectus and all
amendments and supplements to any such documents in each case as soon as
available and in such quantities as you may reasonably request, for the
purposes contemplated in the Act.
(e) As soon as practicable, but not later than 50 days
after the end of the first quarter ending after the first anniversary of the
effective date of the Registration Statement (as defined in Rule 158(c) of the
Rules and Regulations), the Company will make generally available to its
security holders an earnings statement (which need not be audited) covering a
period of 12 consecutive months beginning after the effective date of the
Registration Statement which will satisfy the provisions of the last paragraph
of Section 11(a) of the Act.
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<PAGE> 13
(f) The Company shall cooperate with you and your counsel
in order to qualify or register the Common Shares for sale under (or obtain
exemptions from the application of) the Blue Sky laws of such jurisdictions as
you designate, will comply with such laws and will continue such
qualifications, registrations and exemptions in effect so long as reasonably
required for the distribution of the Common Shares. The Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any such jurisdiction where it is not presently qualified
or where it would be subject to taxation as a foreign corporation. The Company
will advise you promptly of the suspension of the qualification or registration
of (or any such exemption relating to) the Common Shares for offering, sale or
trading in any jurisdiction or any initiation or threat of any proceeding for
any such purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company, with your cooperation,
will use its best efforts to obtain the withdrawal thereof.
(g) For a period of five years from the First Closing
Date, the Company will furnish to the Representatives: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the consolidated balance sheet of the Company as of the
close of such fiscal year and consolidated statements of income, shareholders'
equity and cash flows for the year then ended and the opinion thereon of the
Company's independent public accountants; (ii) as soon as practicable after the
filing thereof, copies of each proxy statement and annual and other report
filed by the Company with the Commission, the NASD or any securities exchange;
and (iii) as soon as available, copies of any report or communication of the
Company mailed generally to holders of its Common Stock.
(h) During the period of 180 days after the effective
date of the Registration Statement, without the prior written consent of Sutro
& Co. Incorporated (which consent may be withheld at the sole discretion of
Sutro & Co. Incorporated), the Company will not issue, offer, sell or otherwise
dispose of any shares of Common Stock of the Company or any securities
convertible into or exchangable for shares of Common Stock of the Company,
other than (i) the sale of the Common Shares hereunder; (ii) the issuance of
Common Stock of the Company pursuant to the exercise of options under the
Company's stock plans disclosed in the Prospectus; or (iii) the granting of
stock options after the date of the Prospectus under the Company's stock plans
disclosed in the Prospectus.
(i) The Company will apply the net proceeds of the sale
of the Common Shares substantially in accordance with its statements under the
caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to designate
and maintain the Common Stock for quotation on the Nasdaq National Market.
(k) The Company will file with the Commission such
reports on Form SR as may be required by Rule 463 under the Act.
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<PAGE> 14
You, on behalf of the Underwriters, may, in your sole
discretion, waive in writing the performance by the Company of any one or more
of the foregoing covenants or extend the time for their performance.
SECTION 6. Payment of Expenses. Whether or not
the transactions contemplated hereunder are consummated or this Agreement
becomes effective or is terminated, the Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby,
including without limiting the generality of the foregoing: (i) all expenses
incident to the issuance and delivery of the Common Shares (including all
printing and engraving costs), (ii) all fees and expenses of the registrar and
transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other taxes in connection with the issuance and sale of the Common Shares to
the Underwriters, (iv) all fees and expenses of counsel and independent
accountants of the Company and the Subsidiaries, (v) all costs and expenses
incurred in connection with the printing, filing, shipping and distribution of
the Registration Statement, each Preliminary Prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments and
supplements provided for herein, this Agreement, the Agreement Among
Underwriters, the Selected Dealers Agreement, the Underwriters' Questionnaire,
the Underwriters' Power of Attorney, the Preliminary and the Final Blue Sky
Memoranda, (vi) all filing fees, attorneys' fees and expenses incurred by the
Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Common Shares for offer and sale under the U.S. state Blue Sky laws,
(vii) the NASD and any fees and expenses relating to the inclusion of the
Common Shares on the Nasdaq National Market, and (viii) all other fees, costs
and expenses referred to in Item 13 of the Registration Statement. Except as
provided in this Section 6, Section 8 and Section 10 hereof, the Underwriters
shall pay all of their own expenses, including the fees and disbursements of
their counsel (excluding those relating to qualification, registration or
exemption under the securities and Blue Sky laws and the Blue Sky Memoranda
referred to above).
SECTION 7. Conditions of the Obligations of the
Underwriters. The obligations of the several Underwriters to purchase and pay
for the Firm Common Shares on the First Closing Date and the Optional Common
Shares on the Second Closing Date shall be subject to the accuracy of the
representations and warranties on the part of the Company herein set forth as
of the date hereof and as of the First Closing Date or the Second Closing Date,
as the case may be, to the accuracy of the statements of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 5:00 P.M. (or in the case of a registration statement filed
pursuant to Rule 462(b) of the Rules and Regulations relating to the Common
Shares, not later than 10:00 P.M.), Washington, D.C. time, on the date of this
Agreement, or at such later time as shall have been consented to by you; if the
filing of the Prospectus, or any supplement thereto, is required pursuant to
Rule 424(b) of the
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<PAGE> 15
Rules and Regulations, the Prospectus shall have been filed in the manner and
within the time period required by Rule 424(b) of the Rules and Regulations; and
prior to such Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company or you, shall be contemplated by the Commission; and any request of
the Commission for inclusion of additional information in the Registration
Statement, or otherwise, shall have been complied with to your satisfaction.
(b) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, (i) except as set forth in
or contemplated by the Registration Statement or the Prospectus, there shall
not have been any change in the capital stock of the Company or any of the
Subsidiaries or any material change in the indebtedness (other than in the
ordinary course of business) of the Company or any of the Subsidiaries, (ii)
except as set forth in or contemplated by the Registration Statement or the
Prospectus, no material verbal or written agreement or other transaction shall
have been entered into by the Company or any of the Subsidiaries, which is not
in the ordinary course of business or which could reasonably be expected to
result in a material reduction in the future earnings of the Company and the
Subsidiaries, taken as a whole, (iii) no loss or damage (whether or not
insured) to the property of the Company, or any of the Subsidiaries shall have
been sustained which materially and adversely affects the condition (financial
or otherwise), business, properties, results of operations or prospects of the
Company and the Subsidiaries, taken as a whole, (iv) no legal or governmental
action, suit or proceeding affecting the Company or any of the Subsidiaries
which is material to the Company and the Subsidiaries, or which affects or may
affect the transactions contemplated by this Agreement shall have been
instituted or threatened and (v) there shall not have been any material adverse
change in the condition (financial or otherwise), business, properties, results
of operations or prospects of the Company and the Subsidiaries, taken as a
whole, which makes it impractical or inadvisable in your reasonable judgment to
proceed with the public offering or purchase the Common Shares as contemplated
hereby.
(c) There shall have been delivered to you the Firm
Common Shares and, if any Optional Common Shares are then being purchased, such
Optional Common Shares.
(d) The NASD, upon review of the terms of the public
offering of the Common Shares, shall not have objected to the fairness and
reasonableness of the underwriting terms and arrangements as proposed in this
Agreement.
(e) There shall have been furnished to you, as
Representatives of the Underwriters on each Closing Date, in form and substance
reasonably satisfactory to you, except as otherwise expressly provided below:
(i) An opinion of O'Melveny & Myers LLP, counsel
for the Company and each of the Subsidiaries, addressed to the
Underwriters and dated the
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<PAGE> 16
First Closing Date or the Second Closing Date, as the case may be, to
the effect that:
(1) Each of the Company and each of the
Subsidiaries has been duly organized and is validly existing
in good standing under the laws of its jurisdiction of
incorporation, with corporate power to own its properties and
assets, to carry on its business as described in the
Prospectus, and, as to the Company, to enter into this
Agreement and to perform its obligations under this Agreement.
(2) The authorized and outstanding
capital stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus; the outstanding shares of
the capital stock of the Company have been duly authorized by
all necessary corporate action on the part of the Company and
are validly issued, fully paid and non-assessable.
(3) The Common Shares being issued and
sold by the Company and the shares of Common Stock to be
issued by the Company upon exercise of the Sutro Warrant have
been duly authorized by all necessary corporate action on the
part of the Company and, upon payment for and delivery of such
shares in accordance with this Agreement and the Warrant
Agreement and the countersigning of the certificate or
certificates representing such shares by a duly authorized
signatory of the registrar for the Common Stock, such shares
will be validly issued, fully paid and non-assessable.
(4) The statements in the Prospectus
under the caption "Description of Capital Stock", insofar as
they summarize provisions of the Articles of Incorporation and
Bylaws of the Company, and the statements in the Prospectus
under the caption "Business -- Regulation", insofar as they
summarize matters of law, fairly present the information
required by Form S-1.
(5) The outstanding shares of the
capital stock of each Subsidiary have been duly authorized by
all necessary corporate action on the part of each such
corporation, are validly issued, fully paid and
non-assessable, and are owned of record by the Company.
(6) Holders of the capital stock of the
Company are not entitled to any preemptive right to subscribe
to any additional shares of the Company's capital stock under
the Company's Articles of Incorporation or Bylaws.
(7) The Registration Statement has
become effective under the Act and, to such counsel's
knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued or threatened by the
Commission.
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<PAGE> 17
(8) The Registration Statement and each
amendment thereto, on the date it was filed, appeared on its
face to comply in all material respects with the requirements
as to form for registration statements on Form S-1 under the
Act and the Rules and Regulations in effect at the date of
filing, except such counsel need express no opinion concerning
the financial statements and other financial information
contained therein.
(9) Such counsel does not know of any
contract or other document of a character required to be filed
as an exhibit to the Registration Statement which is not filed
as required.
(10) The execution, delivery and
performance of this Agreement and the Warrant Agreement have
been duly authorized by all necessary corporate action on the
part of the Company, and this Agreement and the Warrant
Agreement have been duly executed and delivered by the
Company.
(11) No order, consent, permit or
approval by any California or federal governmental authority
is required on the part of the Company for the execution and
delivery of this Agreement or the Warrant Agreement, or for
the issuance and sale of the Common Shares being sold by the
Company under this Agreement or the issuance of the shares of
Common Stock upon exercise of the Sutro Warrant, except as
have been obtained under the Act and as may be required under
applicable Blue Sky or state securities laws or by the NASD.
(12) The execution and delivery by the
Company of this Agreement and the Warrant Agreement, and the
performance of the Company's obligations on or prior to the
date of this opinion under this Agreement do not (i) violate
any California or federal statute, rule or regulation that
such counsel has, in the exercise of customary professional
diligence, recognized as applicable to the Company or to
transactions of the type contemplated by this Agreement,
except that such counsel need express no opinion regarding any
federal securities laws, the Blue Sky or state securities laws
or with respect to Section 10 of this Agreement, except as
otherwise expressly stated in such counsel's opinion; or (ii)
violate, breach or result in a default under the articles or
certificates of incorporation or bylaws of the Company or any
Subsidiary or under any of the agreements, instruments,
contracts, orders, injunctions or judgments identified to such
counsel in a certificate of officers of the Company as
agreements, instruments, contracts, orders, injunctions or
judgments binding on the Company or any of the Subsidiaries
which have provisions relating to the issuance by the Company
of capital stock, except such counsel need express no opinion
regarding the effect, if any, of the issuance of the Common
Shares upon the Company's or Subsidiary's compliance with any
of the financial covenants contained in any of said
agreements, instruments, contracts, orders, injunctions or
judgments.
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<PAGE> 18
(13) The Company is not an "investment
company" within the meaning of the Investment Company Act of
1940, as amended.
Except for such matters described in an attachment to
such counsel's opinion, such counsel shall state that it has not,
since January 1, 1995, given substantive attention on behalf of the
Company or any Subsidiary to, or represented the Company or any
Subsidiary in connection with, any actions, suits or proceedings
pending or threatened against the Company or any Subsidiary before any
court, arbitrator or governmental agency. Such counsel may call to
your attention the fact that its engagement is limited to specific
matters as to which it is consulted by the Company or any Subsidiary.
Such counsel shall state that in connection with such
counsel's participation in the preparation of the Registration
Statement and the Prospectus, such counsel has not independently
verified the accuracy, completeness or fairness of the statements
contained therein, and the limitations inherent in the examination
made by such counsel and the knowledge available to such counsel are
such that such counsel is unable to assume, and does not assume, any
responsibility for such accuracy, completeness or fairness (except as
otherwise specifically stated in paragraph 4 above), However, on the
basis of such counsel's review and participation in conferences in
connection with the preparation of the Registration Statement and the
Prospectus, and relying as to materiality to a large extent upon
opinions of officers and other representatives of the Company, such
counsel shall state that it does not believe that the Registration
Statement as of its effective date contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and counsel shall state that it does not believe that the
Prospectus as of its date and as of the date of such opinion,
contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading. However, such counsel need express no
opinion or belief as to the financial statements and other financial
information contained in the Registration Statement or the Prospectus.
In rendering such opinions, such counsel may rely (A)
as to matters involving the application of the laws of any
jurisdiction other than the federal laws of the United States of
America, the laws of the State of California and the General
Corporation Law of the State of Nevada, to the extent deemed proper
and specified in such opinion, upon the opinion of other counsel who
are satisfactory to counsel for the Underwriters and (B) as to matters
of fact, to the extent deemed proper, on certificates of responsible
officers of the Company and public officials.
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<PAGE> 19
(ii) Such opinion or opinions of Manatt, Phelps &
Phillips, LLP, counsel for the Underwriters, dated the First Closing
Date or the Second Closing Date, as the case may be, with respect to
the incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require,
and the Company shall have furnished to such counsel such documents
and shall have exhibited to them such papers and records as they may
reasonably request for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and
governmental officials.
(iii) A certificate of the Company executed by the
Chief Executive Officer and the Chief Financial Officer of the
Company, dated the First Closing Date or the Second Closing Date, as
the case may be, to the effect that:
(1) The representations and warranties
of the Company set forth in Section 1 of this Agreement were
true and correct as of the date of this Agreement and are true
and correct in all material respects as of the First Closing
Date or the Second Closing Date, as the case may be, and the
Company has complied in all material respects with all the
agreements and satisfied in all material respects all the
conditions on its part to be performed or satisfied on or
prior to such Closing Date.
(2) The Commission has not issued any
order preventing or suspending the use of the Prospectus or
any Preliminary Prospectus filed as a part of the Registration
Statement or any amendment or supplement thereto; no stop
order suspending the effectiveness of the Registration
Statement has been issued; and to the best of the knowledge of
the respective signers, no proceedings for that purpose have
been instituted or are pending or contemplated under the Act.
(3) Each of the respective signers of
the certificate has carefully examined the Registration
Statement and the Prospectus; in his opinion and to the best
of his knowledge, the Registration Statement and the
Prospectus and any amendments or supplements thereto contain
all statements required to be stated therein regarding the
Company; and neither the Registration Statement nor the
Prospectus nor any amendments or supplement thereto includes
any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading.
(4) Since the initial date on which the
Registration Statement was filed, no agreement, whether
written or oral, transaction or event has occurred which
should have been set forth in an amendment to the Registration
Statement
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<PAGE> 20
or in a supplement to or amendment of any prospectus which has
not been disclosed in such a supplement or amendment.
(5) Since the respective dates as of
which information is given in the Registration Statement and
the Prospectus, and except as disclosed in or contemplated by
the Prospectus, there has not been any material adverse change
or a development involving a material adverse change in the
condition (financial or otherwise), business, properties,
results of operations, management or prospects of the Company
and the Subsidiaries; and no legal or governmental action,
suit or proceeding is pending or threatened against the
Company or any Subsidiary which is material to the Company and
the Subsidiaries, whether or not arising from transactions in
the ordinary course of business, or which may adversely affect
the transactions contemplated by this Agreement; since such
dates and except as so disclosed, the Company and the
Subsidiaries have not entered into any verbal or written
agreement or other transaction which could result in a
material reduction in the future earnings of the Company and
the Subsidiaries or incurred any material liability or
obligation, direct, contingent or indirect, made any change in
its capital stock, made any material change in its short-term
debt or funded debt or repurchased or otherwise acquired any
of the Company's capital stock; and the Company has not
declared or paid any dividend, or made any other distribution,
upon its outstanding capital stock payable to shareholders of
record on a date prior to the First Closing Date or Second
Closing Date; and
(6) Since the respective dates as of
which information is given in the Registration Statement and
the Prospectus and except as disclosed in or contemplated by
the Prospectus, the Company and its Subsidiaries have not
sustained a material loss or damage by strike, fire, flood,
windstorm, accident or other calamity (whether or not
insured).
(iv) On the date before this Agreement is executed
and also on each Closing Date, a letter addressed to you, as
Representatives of the Underwriters, from KPMG Peat Marwick LLP,
independent accountants, the first one to be dated the date of this
Agreement, the second one to be dated the First Closing Date and the
third one (in the event of a second closing hereunder) to be dated the
Second Closing Date, in form and substance reasonably satisfactory to
you, to the effect that they are independent public accountants with
respect to the Company within the meaning of the Act and the related
Rules and Regulations, and containing statements and information of
the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus.
(v) On or before the First Closing Date, letters
from certain shareholders and each director and executive officer of
the Company, in form and substance reasonably
20
<PAGE> 21
satisfactory to you, (i) confirming that for a period of 180 days from
the date of the Prospectus, such person will not, directly or
indirectly, offer to sell, contract to sell or otherwise sell, dispose
of, loan, pledge or grant any rights or options with respect to (each,
a "Disposition") any shares of the Common Stock, any options or
warrants to purchase any shares of the Common Stock or any securities
convertible into or exercisable or exchangeable for shares of the
Common Stock, whether then owned or thereafter acquired by such person
or with respect to which such person has or thereafter acquires the
power of disposition, or transfer, in any manner, all or a portion of
the economic consequences associated with the ownership of such Common
Stock, any options or warrants to purchase any shares of the Common
Stock or any securities convertible into or exercisable or
exchangeable for shares of the Common Stock, otherwise than (i) as a
bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by the terms of such letter, (ii) as a
distribution to partners or shareholders of such person, provided that
the distributees thereof agree in writing to be bound by the terms of
such letter, or (iii) with the prior written consent of the
Representatives, which consent may be withheld in the sole discretion
of the Representatives.
(f) On or before the date any of the Common Shares are
released by the Representatives for sale to the public and on the First Closing
Date, the Common Shares shall be authorized for quotation on the Nasdaq
National Market.
(g) The Common Shares shall be qualified for sale in such
States and jurisdictions as the Representatives may reasonably request, each
such qualification shall be in effect and not subject to any stop order or
other proceeding on the First Closing Date and the Second Closing Date.
(h) On or before the Closing Date, the Company shall have
executed and delivered to Sutro & Co. Incorporated, the Warrant Agreement,
substantially in the form of Exhibit A hereto, and the Registration Rights
Agreement, substantially in the form of Exhibit B hereto.
All such opinions, certificates, letters and documents shall
be in compliance with the provisions hereof only if they are reasonably
satisfactory to you and to Manatt, Phelps & Phillips, LLP, counsel for the
Underwriters. The Company shall furnish you with such manually signed or
conformed copies of such opinions, certificates, letters and documents as you
request.
If any condition to the Underwriters' obligations hereunder to
be satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you to the
Company without liability on the part of you or any Underwriter or the Company
except for the expenses to be paid or reimbursed by the Company pursuant to
Sections 6 and 8 hereof and except to the extent provided in Section 10 hereof.
21
<PAGE> 22
SECTION 8. Reimbursement of Underwriters'
Expenses. Notwithstanding any other provisions hereof, if this Agreement shall
be terminated by you pursuant to Section 7 or Section 13b(iii) or (iv) hereof,
or if the sale to the Underwriters of the Firm Common Shares at the First
Closing Date is not consummated because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse you and the other
Underwriters upon demand for all out-of-pocket expenses that shall have been
reasonably incurred by them in connection with the proposed purchase and the
sale of the Firm Common Shares, including but not limited to reasonable fees
and disbursements of counsel, printing expenses, travel expenses, postage and
telephone charges relating directly to the offering contemplated by the
Prospectus. Any such termination shall be without liability of any party to
any other party except that the provisions of this Section and Section 6 and
Section 10 hereof shall at all times be effective and shall apply.
SECTION 9. Effectiveness of Registration
Statement. You and the Company will use your and its respective best efforts
to cause the Registration Statement to become effective, to prevent the
issuance of any stop order suspending the effectiveness of the Registration
Statement and, if such stop order be issued, to obtain as soon as possible the
lifting thereof.
SECTION 10. Indemnification and Contribution.
(a) The Company agrees to (i) indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act, against any losses, claims, damages, liabilities or
expenses, joint or several, to which such Underwriter or such controlling
person may become subject, under the Act, the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof as contemplated below) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state in any of them a material
fact required to be stated therein or necessary to make the statements in any
of them not misleading, or arise out of or are based in whole or in part on any
inaccuracy in the representations and warranties of the Company contained
herein or any failure of the Company to perform its obligations hereunder or
under law; and (ii) reimburse each Underwriter and each such controlling person
for any legal and other expenses as such expenses are reasonably incurred by
such Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made (i) in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance
22
<PAGE> 23
upon and in conformity with the information furnished to the Company pursuant
to Section 3 hereof; or (ii) in any Preliminary Prospectus if a copy of the
Prospectus (or the Prospectus as then amended or supplemented) was not sent or
given by or on behalf of the Underwriters to such person at or prior to the
written confirmation of the sale of such Common Shares to such person in any
case where such delivery is required by the Act, such untrue statement
contained in or omission from such Preliminary Prospectus was corrected in the
Prospectus (or the Prospectus as so amended or supplemented) and the Company
had previously furnished copies of such corrected Prospectus to the
Underwriters.
In addition to its other obligations under this
Section 10(a), the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any untrue statement or omission, or any alleged
untrue statement or omission, or any inaccuracy in the representations and
warranties of the Company or any failure to perform its obligations hereunder,
all as described in this Section 10(a), the Company will reimburse each
Underwriter (and to the extent applicable each controlling person) on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse each Underwriter (and to the extent applicable each
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to have
been improper, each Underwriter (and to the extent applicable each controlling
person) shall promptly return it to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by [BANK OF AMERICA NT&SA, SAN FRANCISCO], California (the
"Prime Rate"). Any such interim reimbursement payments which are not made to
an Underwriter within 30 days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have.
(b) Each Underwriter agrees to severally indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages,
liabilities or expenses to which the Company or any such director, officer or
controlling person may become subject, under the Act, the Exchange Act or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of such Underwriter), insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof as contemplated
below) arise out of or are based upon any untrue or alleged untrue statement of
any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
in any of them not misleading, in each case to the extent, but only to the
extent, that
23
<PAGE> 24
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 3
hereof; and will reimburse the Company and each such director, officer or
controlling person for any legal and other expenses, as such expenses are
reasonably incurred by the Company or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. In addition
to its other obligations under this Section 10(b), each Underwriter severally
agrees that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
untrue statement or omission, or any alleged untrue statement or omission,
described in this Section 10(b) which relates to information furnished to the
Company pursuant to Section 3 hereof; it will reimburse the Company and each
such officer, director or controlling person on a quarterly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company and
each such officer, director or controlling person for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company and each
such officer, director or controlling person shall promptly return it to the
Underwriters, together with interest, compounded daily, determined on the basis
of the Prime Rate. Any such interim reimbursement payments which are not made
to the appropriate person within 30 days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which the Underwriters may
otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party under this Section, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under the indemnity agreement contained in this Section or to
the extent it is not prejudiced as a proximate result of such failure. In case
any such action is brought against any indemnified party and such indemnified
party seeks or intends to seek indemnity from an indemnifying party, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with all other indemnifying parties similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise
24
<PAGE> 25
participate in the defense of such action on behalf of such indemnified party
or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of its election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed such
counsel in connection with the assumption of legal defenses in accordance with
the proviso to the next preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel, approved by the Underwriters in the case of paragraph (a) of
this Section 10, representing the indemnified parties who are parties to such
action) or (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action, in
each of which cases the reasonable fees and expenses of counsel shall be at the
expense of the indemnifying party. An indemnifying party shall not be liable
for any settlement of any action, suit, proceeding or claim effected without
its written consent, which will not be unreasonably withheld.
(d) If the indemnification provided for in this Section
10 is required by its terms but is for any reason held to be unavailable to
hold harmless an indemnified party under subsections (a), (b) or (c) of this
Section 10 in respect of any losses, claims, damages, liabilities or expenses
referred to herein, then each applicable indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of any losses,
claims, damages, liabilities or expenses referred to herein in such proportion
as is appropriate to reflect the relative benefits received by the Company and
the Underwriters from the offering of the Common Shares and the relative fault
of the Company and the Underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The
respective relative benefits received by the Company and the Underwriters shall
be deemed to be in the same proportion, in the case of the Company, as the
total price paid to the Company for the Common Shares sold by it to the
Underwriters (net of underwriting commissions but before deducting expenses),
and, in the case of the Underwriters, as the underwriting commissions received
by them, bears to the total of such amounts paid to the Company and the amounts
received by the Underwriters as underwriting commissions. The relative fault
of the Company and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
subsection (c) of this Section 10, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim.
25
<PAGE> 26
The provisions set forth in subsection (c) of this Section 10
with respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this subsection (d); provided, however, that
no additional notice shall be required with respect to any action for which
notice has been given under subsection (c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this Section 10 were determined solely by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 10, no Underwriter
shall be required to contribute any amount in excess of the amount of the total
underwriting commissions received by such Underwriter in connection with the
Common Shares underwritten by it. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
this Section 10 are several in proportion to their respective underwriting
commitments and not joint.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections 10(a)
and 10(b) hereof, including the amounts of any requested reimbursement payments
and the method of determining such amounts, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or written notice of intention to
arbitrate, therein selecting the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 10(a) and 10(b)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 10(a) and 10(b) hereof.
SECTION 11. Default of Underwriters. It shall be a
condition to this Agreement and the obligations of the Company to sell and
deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner as described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase and pay for
all the Common Shares agreed to be purchased by such Underwriter hereunder upon
tender to the Underwriters of such shares in accordance with the terms hereof.
If applicable, if any Underwriter or Underwriters default in their obligations
to purchase Common Shares hereunder on either the First or Second Closing Date,
and the aggregate number of Common Shares which such defaulting entity agreed
but failed to purchase on such Closing Date does not exceed 10% of the total
number of Common Shares which the Underwriters are obligated to purchase on
such Closing Date, the nondefaulting entities shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Common
Shares which such defaulting entities agreed but failed to purchase on such
Closing Date. If any Underwriter or Underwriters so
26
<PAGE> 27
default and the aggregate number of Common Shares with respect to which such
default occurs is more than the above percentage, and arrangements satisfactory
to you and the Company for the purchase of such Common Shares by other persons
are not made within two full business days after such default, this Agreement
will terminate without liability on the part of any nondefaulting Underwriter
or the Company, except for the expenses to be paid by the Company pursuant to
Section 6 hereof and except to the extent provided in Section 10 hereof.
If applicable, in the event that Common Shares to which a
default relates are to be purchased by a nondefaulting Underwriter or by
another person or persons, the Representatives shall have the right to postpone
the First or Second Closing Date, as the case may be, for not more than five
business days in order that the necessary changes in the Registration
Statement, Prospectus, this Agreement and any other documents, as well as any
other arrangements, may be effected. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability
for its default.
SECTION 12. Effective Date. This Agreement shall become
effective immediately as to Sections 6, 8, 10, 13 and 14 hereof and, as to all
other provisions, (i) if at the time of execution of this Agreement the
Registration Statement has not become effective, at 6:30 a.m., California time,
on the first full business day following the effectiveness of the Registration
Statement, or (ii) if at the time of execution of this Agreement the
Registration Statement has been declared effective, at 6:30 a.m., California
time, on the first full business day following the date of execution of this
Agreement; but this Agreement shall nevertheless become effective at such
earlier time after the Registration Statement becomes effective as you may
determine on and by notice to the Company or by release of any of the Common
Shares for sale to the public. For the purposes of this Section 12, the Common
Shares shall be deemed to have been so released upon the release for
publication of any newspaper advertisement relating to the Common Shares or
upon the release by you of notices (i) advising Underwriters that the Common
Shares are released for public offering, or (ii) offering the Common Shares for
sale to securities dealers, whichever may occur first.
SECTION 13. Termination. Without limiting the right to
terminate this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company or by
you by notice to the other parties hereto at any time prior to the time this
Agreement shall become effective as to all its provisions, and any such
termination shall be without liability on the part of the Company to you or any
Underwriter (except for the expenses to be paid by the Company pursuant to
Section 6 hereof and except to the extent provided in Section 10 hereof) or of
you or any Underwriter to the Company (except to the extent provided in Section
10 hereof).
(b) This Agreement may also be terminated by you prior to
the First Closing Date by notice to the Company (i) if material governmental
restrictions, not in force and effect
27
<PAGE> 28
on the date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally established on
the New York Stock Exchange or on the American Stock Exchange or in the over
the counter market by the NASD, or trading in securities generally shall have
been suspended on either such Exchange or in the over the counter market by the
NASD, or a general banking moratorium shall have been established by federal,
New York or California authorities, (ii) if an outbreak of major hostilities or
other national or international calamity or any substantial change in
political, financial or economic conditions shall have occurred or shall have
accelerated or escalated to such an extent, as, in the reasonable judgment of
the Representatives, to affect materially and adversely the marketability of
the Common Shares, (iii) if any adverse event shall have occurred or shall
exist which makes untrue or incorrect in any material respect any statement or
information contained in the Registration Statement or the Prospectus or which
is not reflected in the Registration Statement or the Prospectus but should be
reflected therein in order to make the statements or information contained
therein not misleading in any material respect or (iv) if there shall be any
action, suit or proceeding pending or threatened, or there shall have been any
development or prospective development involving particularly the business or
properties or securities of the Company or any of the Subsidiaries or the
transactions contemplated by this Agreement, which, in the reasonable judgment
of the Representatives, may materially and adversely affect the Company's
business or earnings and makes it impracticable or inadvisable to offer or sell
the Common Shares. Any termination pursuant to this Section 13(b) shall be
without liability on the part of any Underwriter to the Company or on the part
of the Company to you or any Underwriter (except for expenses to be paid or
reimbursed by the Company pursuant to Sections 6 and 8 hereof and except to the
extent provided in Section 10 hereof).
SECTION 14. Representations and Indemnities to Survive
Delivery. The respective indemnities, agreements, representations, warranties
and other statements of the Company, its officers and the several Underwriters
set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company, or any of its or their partners, officers or directors or any
controlling persons, as the case may be, and will survive delivery of and
payment for the Common Shares sold hereunder.
SECTION 15. Notices. All communications hereunder shall
be in writing and, if sent to the Underwriters, shall be mailed, delivered or
telecopied and confirmed to you at 1150 Santa Monica Boulevard, Suite 1500, Los
Angeles, California 90025, with a copy to Manatt, Phelps & Phillips, LLP,
11355 W. Olympic Blvd., Los Angeles, California 90064, Attention: Paul H.
Irving, Esq., FAX: (310) 312-4224; if sent to the Company, shall be mailed,
delivered or telecopied and confirmed to the Company at 3655 Torrance
Boulevard, Suite 410, Torrance, California 90503, Attention: William E.
Lindsey, FAX: (310) 316-8145, with a copy to O'Melveny & Myers LLP, 400 South
Hope Street, Los Angeles, California 90071, Attention: Richard A. Boehmer,
Esq., FAX: (213) 669-6407. The Company or you may change the address for
receipt of communications hereunder by giving notice to the others.
28
<PAGE> 29
SECTION 16. Successors. This Agreement will inure to the
benefit of and be binding upon the parties hereto, including any substitute
Underwriters pursuant to Section 11 hereof, and to the benefit of the officers
and directors and controlling persons referred to in Section 10 hereof, and in
each case their respective successors, personal representatives and assigns,
and no other person will have any right or obligation hereunder. No such
assignment shall relieve any party of its obligations hereunder. The term
"successors" shall not include any purchaser of the Common Shares as such from
any of the Underwriters merely by reason of such purchase.
SECTION 17. Representation of Underwriters. You will act
as Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you,
as Representatives, will be binding upon all the Underwriters.
SECTION 18. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 19. Applicable Law. This Agreement shall be
governed by and construed in accordance with the internal laws (and not the
laws pertaining to conflicts of laws) of the State of California.
SECTION 20. General. This Agreement constitutes the
entire agreement of the parties to this Agreement and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may be
executed in several counterparts, each one of which shall be an original, and
all of which shall constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders
and the singular and the plural include one another. The Section headings in
this Agreement are for the convenience of the parties only and will not affect
the construction or interpretation of this Agreement. This Agreement may be
amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company and you.
29
<PAGE> 30
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement between the Company and you, all
in accordance with its terms.
Very truly yours,
INTERNATIONAL AIRCRAFT INVESTORS
By:______________________________
William E. Lindsey,
Chief Executive Officer
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in Los Angeles, California as of
the date first above written.
SUTRO & CO. INCORPORATED
CRUTTENDEN ROTH INCORPORATED
As Representatives of the several Underwriters
By Sutro & Co. Incorporated
By: _____________________________
Its:_____________________________
30
<PAGE> 31
SCHEDULE A
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
<S> <C>
Sutro & Co. Incorporated . . . . . . . . . . . . . . . . . .
Cruttenden Roth Incorporated. . . . . . . . . . . . . . . . .
[NAMES OF OTHER UNDERWRITERS]. . . . . . . . . . . . . . . .
---------
Total. . . . . . . . . . . . . . . . . . . . . . . . 2,600,000
=========
</TABLE>
<PAGE> 32
EXHIBIT A
WARRANT AGREEMENT
<PAGE> 33
EXHIBIT A
THE SECURITIES REPRESENTED BY THIS DOCUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR REGISTERED OR
QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS IN RELIANCE UPON EXEMPTIONS
THEREFROM. THE HOLDER MAY NOT OFFER, SELL, TRANSFER, ASSIGN, PLEDGE,
HYPOTHECATE, OR OTHERWISE DISPOSE OF OR ENCUMBER THE SECURITIES REPRESENTED BY
THIS DOCUMENT EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS, OR UPON RECEIPT BY THE ISSUER
OF AN OPINION OF LEGAL COUNSEL FOR THE HOLDER REASONABLY SATISFACTORY TO THE
ISSUER AND ITS LEGAL COUNSEL THAT SUCH OFFER, SALE, TRANSFER, ASSIGNMENT,
PLEDGE, HYPOTHECATION, OR OTHER DISPOSITION OR ENCUMBRANCE IS EXEMPT FROM THE
REGISTRATION PROVISIONS OF THE SECURITIES ACT AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER AND THE REGISTRATION AND/OR QUALIFICATION PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS.
Warrant to Purchase up to 260,000 Shares of Common Stock (subject to
adjustment)
INTERNATIONAL AIRCRAFT INVESTORS
COMMON STOCK PURCHASE WARRANT
Void after ___, 2001
This certifies that, for value received, Sutro & Co. Incorporated, a
Delaware corporation, or its transferee(s) as provided herein (in any event,
the "Holder") is entitled, subject to the terms set forth below, to purchase
from International Aircraft Investors, a California corporation (the
"Company"), two hundred sixty thousand (260,000) shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"), as
constituted on the date hereof, upon surrender hereof with the Notice of
Exercise attached hereto (the "Notice of Exercise") duly executed, and
simultaneous payment therefor in lawful money of the United States or otherwise
as hereinafter provided, at the exercise price as set forth in Section 2
hereof. The number, character, and exercise price of such shares of Common
Stock are subject to adjustment as provided below.
1. TERM OF WARRANT. Subject to the terms and conditions set
forth herein, this Warrant shall become exercisable on ____, 1998, and
shall remain exercisable until 5:00 p.m. Pacific time on ___, 2001, and
shall be void thereafter.
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2. EXERCISE AND ADJUSTMENTS.
2.1 Exercise Price. The exercise price at which this
Warrant may be exercised is ________________________ ($_____) per share of
Common Stock, subject to adjustment as set forth herein (as adjusted, the
"Exercise Price").
2.2 Adjustment for Stock Splits and Combinations. If the
Company should, at any time or from time to time after the date hereof, fix a
record date for a split, subdivision, or combination of the outstanding shares
of Common Stock, then as of such record date (or the date of such stock split,
subdivision, or combination if no record date is fixed) the number of shares of
Common Stock that this Warrant is exercisable to purchase as of such time shall
be adjusted to be the same number of shares of Common Stock that the Holder
would have if this Warrant had been exercised immediately prior to such split,
subdivision, or combination. The Exercise Price shall be adjusted to be the
then Exercise Price multiplied by a fraction, the numerator of which is the
number of shares of Common Stock purchasable under this Warrant immediately
prior to such stock split, subdivision, or combination, and the denominator of
which is the number of shares of Common Stock purchasable by this Warrant
immediately after such event.
2.3 Adjustment for Dividends in Stock or Other Securities
or Property. If the Company should, at any time or from time to time after the
date hereof, fix a record date for the determination of eligible stockholders
to receive, without payment therefor, other or additional stock or other
securities or property (other than cash) of the Company by way of dividend,
then and in each case, this Warrant shall represent the right to acquire, in
addition to the number of shares of the Common Stock receivable upon exercise
of this Warrant, and without payment of any additional consideration therefor
upon such exercise, the amount of such other or additional stock or other
securities or property (other than cash) of the Company receivable upon payment
of such dividend as a holder of the number of shares of Common Stock for which
this Warrant would have been exercisable immediately prior to such record date
would have had been entitled to receive, and had such holder thereafter, during
the period from the date of payment of such dividend to and including the date
of exercise of this Warrant, retained such shares and/or all other additional
stock payable in such dividend or dividends during such period, giving effect
to all adjustments called for during such period by the provisions of this
Section 2.
2.4 Adjustment for Reclassification, Exchange, or
Substitution. If the Common Stock issuable upon the exercise of this Warrant
shall be changed into the same or different number of shares of any class or
classes of stock, whether by reclassification, exchange, substitution, or
otherwise (other than a stock split, combination or dividend provided for in
Sections 2.2 or 2.3 hereof, or a reorganization, merger, consolidation, or sale
of assets provided for in Section 2.5 hereof), then and in such event the
Holder shall have the right thereafter to receive upon exercise of this
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such reclassification, exchange, substitution, or
other change as a holder of the number of shares of Common Stock for which this
Warrant would have been exercisable immediately prior to such reclassification,
exchange, substitution, or other change would have had.
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<PAGE> 35
2.5 Reorganization, Merger, Consolidation, or Sale of
Assets. If at any time or from time to time, there shall be a capital
reorganization of the Common Stock (other than a subdivision, combination,
reclassification, or exchange of shares provided for elsewhere in this Section
2) or a merger or consolidation of the Company with or into another entity
where the Company is not the surviving entity, or the sale of all or
substantially all of the Company's assets to any other person, then as a part
of such reorganization, merger, consolidation, or sale, effective provision
shall be made so that the Holder shall thereafter be entitled to receive upon
exercise of this Warrant the number of shares of stock or other securities,
instruments or property of the Company or of the successor entity resulting
from such merger, consolidation, or sale to which a holder of the Common Stock
issuable upon exercise of this Warrant would have been entitled upon such
capital reorganization, merger, consolidation, or sale. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 2.5 with respect to the rights of the Holder after such
reorganization, merger, consolidation, or sale to the end that the provisions
of this Section 2 (including adjustment of the exercise price then in effect)
shall be applicable after that event as nearly equivalent as may be
practicable. The provisions of this Section 2.5 shall similarly apply to
successive reorganizations, mergers, consolidations or sale of assets, and to
the stock, securities or instruments of any other entity which are at the time
receivable upon the exercise of this Warrant.
2.6 Limits on Adjustments. No adjustment in the Exercise
Price shall be required unless such an adjustment would require an increase or
decrease of at least five cents ($0.05) in such price; provided, however, that
any adjustments which by reason of this Section 2.6 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 2 shall be made to the nearest cent or to
the nearest 1/100th of a share, as the case may be. Notwithstanding anything
in this Section 2 to the contrary, the Exercise Price shall not be reduced to
less than the then existing par value of the Common Stock as a result of any
adjustment made hereunder.
2.7 No Impairment. The Company will not, by any
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Company, but will at
all times in good faith assist in the carrying out of all the provisions of
this Section 2.
2.8 Notice.
(a) Whenever an adjustment is to be made pursuant
to Sections 2.2, 2.3, 2.4 or 2.5 hereof, the Company shall issue and promptly
provide to the Holder a certificate signed by the Company's Secretary setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated and the
exercise price and number of shares or amount of property purchasable
hereunder, after giving effect to such adjustment.
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<PAGE> 36
(b) In case (i) the Company shall take a record
of the holders of its Common Stock (or other stock or securities at the time
receivable upon the exercise of this Warrant) for the purpose of entitling them
to receive any dividend or other distribution, or any right to subscribe for or
purchase any shares of stock of any class or any other securities, or to
receive any other right, (ii) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another entity, or any sale, lease or
conveyance of all or substantially all of the assets of the Company to another
person, or (iii) of any voluntary dissolution, liquidation or winding-up of the
Company, then, and in each such case, the Company will promptly provide to the
Holder a notice specifying, as the case may be, (A) the date on which a record
is to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, or
(B) the date on which such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding-up is to take place,
and the time, if any is to be fixed, as of which the holders of record of
Common Stock (or such stock or securities at the time receivable upon the
exercise of this Warrant) shall be entitled to exchange their shares of Common
Stock (or such other stock or securities) for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding-up. The Company shall provide
such notice at least ten (10) days prior to the date therein specified.
3. EXERCISE OF WARRANT.
3.1 Manner of Exercise. The purchase rights represented
by this Warrant are exercisable by the Holder in whole or in part, but not for
less than one hundred (100) shares at a time (or such lesser number of shares
which may then constitute the maximum number purchasable; such number being
subject to adjustment as provided in Section 2 hereof), at any time or from
time to time during the term hereof as described in Section 1 hereof, by the
surrender of this Warrant and the Notice of Exercise annexed hereto duly
completed and executed on behalf of the Holder, at the office of the Company
(or such other office or agency of the Company as it may designate by notice in
writing to the Holder at the address of the Holder appearing on the books of
the Company), upon payment (i) in cash or other immediately available funds
acceptable to the Company, (ii) by cancellation by the Holder of indebtedness
of the Company to the Holder, or (iii) by a combination of (i) and (ii), of the
purchase price of the shares of Common Stock to be purchased.
3.2 Effect of Exercise. This Warrant shall be deemed to
have been exercised immediately prior to the close of business on the date of
its surrender for exercise as provided in Section 3.1 hereof and the persons
entitled to receive the shares of Common Stock issuable upon such exercise
shall be treated for all purposes as the holders of record of such shares as of
the close of business of such date. As promptly as practicable on or after
such date, the Company at its expense shall issue and deliver to the person or
persons entitled to receive the same a certificate or certificates for the
number of shares of Common Stock issuable upon such exercise. In the event
that this Warrant is exercised in part, the Company shall execute and deliver a
new Warrant of like tenor exercisable for the number of shares for which this
Warrant may then be exercised.
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<PAGE> 37
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional shares to which the Holder would otherwise
be entitled, the Company shall make a cash payment equal to the then exercise
price multiplied by such fraction.
5. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of loss, theft, or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and substance to the
Company, or in the case of mutilation, on surrender and cancellation of the
remainder of this Warrant, the Company at its expense shall execute and
deliver, in lieu of this Warrant, a new warrant of like tenor and amount.
6. NO RIGHTS AS STOCKHOLDER. Nothing contained herein shall be
construed as conferring upon the Holder or any other person the right to vote
or to consent or to receive notice as a stockholder in respect of meetings of
stockholders for the election of directors of the Company or any other matter
or any right as a stockholder of the Company, and no dividends shall be payable
or accrued in respect of this Warrant or the interest represented hereby or the
shares of Common Stock obtainable hereunder until, and only to the extent that,
this Warrant shall have been exercised as set forth herein.
7. TRANSFERS OF THE WARRANT.
7.1 Company Records. The Holder may change its address
as shown on the Company records by written notice to the Company requesting
such change. Any notice or written communication required or permitted to be
given to the Holder may be delivered or given by mail to the Holder at the
address shown on the Company records. Until this Warrant is transferred on the
Company records, the Company may treat the Holder as shown on the Company
records as the absolute owner of this Warrant for all purposes, notwithstanding
any notice to the contrary.
7.2 Warrant Agent. The Company may, by written notice to
the Holder, appoint an agent for the purpose of maintaining the Company records
referred to in Section 7.1 hereof, issuing the Common Stock or other securities
then issuable upon the exercise of this Warrant, exchanging or replacing this
Warrant, or any or all of the foregoing. Thereafter, any such registration,
issuance, exchange, or replacement, as the case may be, shall be made at the
office of such agent.
7.3 Transfer of Warrant. The Holder may not transfer or
assign this Warrant in whole or in part without compliance with all applicable
federal and state securities laws and the rules and regulations thereunder (the
"Securities Laws") by the Holder and the transferee (including the delivery of
investment representation letters and legal opinions reasonably satisfactory to
the Company, if such are requested by the Company). In addition, this Warrant
may not be sold, transferred, assigned, pledged or hypothecated for a period of
twelve (12) months from the date hereof, except (i) to officers or partners of
Sutro & Co. Incorporated, (ii) to other members of the
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<PAGE> 38
underwriting or selling group for the Company's initial public offering to
which this Warrant relates, (iii) to the officers or partners of such other
members, or (iv) otherwise without compliance with the Corporate Financing Rule
of the National Association of Securities Dealers, Inc. Subject to the
foregoing, title to this Warrant may be transferred by endorsement (by the
Holder executing the Assignment Form annexed hereto) and delivery in the same
manner as a negotiable instrument transferable by endorsement and delivery.
7.4 Exchange of Warrant Upon a Transfer. On surrender of
this Warrant, properly endorsed on the Assignment Form, for exchange, and
subject to compliance with the Securities Laws and the limitations on
assignment and transfer contained in this Section 7, the Company at its expense
shall issue to or to the order of the Holder a new warrant or warrants of like
tenor, in the name of the Holder or as the Holder may direct for the number of
shares issuable upon exercise hereof.
8. COMPLIANCE WITH SECURITIES LAWS
8.1 The Holder of this Warrant, by acceptance hereof,
acknowledges that the shares of Common Stock to be issued upon exercise hereof
are being acquired solely for the Holder's own account and not as a nominee for
any other party, and for investment, and that the Holder will not offer, sell
or otherwise dispose of any shares of Common Stock to be issued upon exercise
hereof, except under circumstances that will not result in a violation of the
Securities Laws. Upon exercise of this Warrant, the Holder shall, if requested
by the Company, and subject to the applicability of the Registration Rights
Agreement between the Company and the Holder of even date herewith (the
"Registration Rights Agreement"), confirm in writing, in a form satisfactory to
the Company, that the shares of Common Stock so purchased are being acquired
solely for the Holder's own account and not as a nominee for any other party,
for investment, and not with a view toward distribution or resale.
8.2 Legend. Subject to the applicability of the
Registration Rights Agreement, all shares of Common Stock issued upon exercise
hereof may be stamped or imprinted with a legend in substantially the following
form (in addition to any legend required by state securities laws):
THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION OR QUALIFICATION IS NOT REQUIRED.
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<PAGE> 39
9. RESERVATION OF COMMON STOCK. The Company covenants that
during the term that this Warrant is exercisable, the Company will reserve from
its authorized and unissued shares of Common Stock a sufficient number of
shares to provide for the issuance of Common Stock upon the exercise of this
Warrant, and from time to time will take all steps necessary to provide
sufficient reserves of shares of Common Stock issuable upon exercise of the
Warrant, including, if necessary, amending its Articles of Incorporation. The
Company further covenants that all shares that may be issued upon the exercise
of rights represented by this Warrant, upon exercise of the rights represented
by this Warrant and payment of the exercise price, all as set forth herein,
will be free from all taxes, liens and charges in respect of the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously or
otherwise specified herein). The Company agrees that its issuance of this
Warrant shall constitute full authority to its officers who are charged with
the duty of executing stock certificates to execute and issue the necessary
certificates for shares of Common Stock upon the exercise of this Warrant.
10. INFORMATION. During the term of this Warrant, the Company
shall provide the Holder with the same financial information, annual reports,
notices of stockholder meetings, and other information as and to the same
extent that the Company provides the same to its stockholders from time to
time.
11. GENERAL PROVISIONS.
11.1 Amendment. Any amendment or modification of this
Warrant shall be in writing and shall be signed by all of the parties hereto.
11.2 Waiver. Any waiver of any right, power, or privilege
hereunder must be in writing and signed by the party being charged with the
waiver. No delay on the part of any party hereto in exercising any right,
power, or privilege hereunder shall operate as a waiver of any other right,
power, or privilege hereunder, nor shall any single or partial exercise of any
right, power, or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power, or privilege.
11.3 Notices. All notices or other communications
required or permitted to be given pursuant to this Warrant shall be in writing
and shall be delivered personally or sent by overnight courier or by
first-class United States mail. Notices delivered personally or sent by
overnight courier shall be effective on the date received, while notices sent
by first-class mail shall be deemed to have been received and to be effective
three (3) business days after deposit into the United States mails. Notices
shall be given to the parties at the following respective addresses, or to such
other addresses as any party shall designate in writing:
If to the Company: International Aircraft Investors
3655 Torrance Blvd., Suite 410
Torrance, California 90503
Attn: Chief Executive Officer
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<PAGE> 40
If to the Holder: Sutro & Co. Incorporated
11150 Santa Monica Blvd., 15th Floor
Santa Monica, California 90025
Attn: Scott E. Wendelin, Managing Director
11.4 Law Governing. This Warrant has been negotiated,
executed, and delivered and shall be performed in the State of California and
shall be governed by and construed and enforced in accordance with the laws of
the State of California, without regard for its conflict of laws principles.
11.5 Counterparts. This Warrant may be executed in two or
more counterparts, including by facsimile transmission, all of which together
shall constitute a single instrument.
11.6 Construction. The headings in the Sections of this
Warrant are for convenience only and shall not constitute a part hereof.
Whenever the context so requires, the masculine shall include the feminine and
the neuter, the singular shall include the plural, and conversely. The terms
and all parts of this Warrant shall in all cases be interpreted simply and
according to their plain meaning and neither for nor against any party hereto.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Warrant as of this ____ day of __________, 1997.
International Aircraft Investors Sutro & Co. Incorporated
By: ____________________________ By:__________________________
Name: __________________________ Name:________________________
Its: ___________________________ Its:_________________________
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<PAGE> 41
NOTICE OF EXERCISE
To: International Aircraft Investors
1. The undersigned hereby elects to purchase ___________________
shares of the common stock (the "Common Stock") of International Aircraft
Investors pursuant to the terms of the attached Common Stock Purchase Warrant
(the "Warrant"), and tenders herewith payment of the purchase price for such
shares in full.
2. In exercising this Warrant, the undersigned hereby confirms
and acknowledges that the shares of Common Stock being purchased hereby are
being acquired solely for the account of the undersigned and not as a nominee
for any other party, for investment purposes only, and that the undersigned
will not offer, sell, or otherwise dispose of any such shares of Common Stock
except under circumstances that will not result in a violation of the
Securities Act of 1933, as amended, or any applicable state securities laws.
3. Please issue a certificate or certificates representing such
shares of Common Stock in the name of the undersigned or in such other name as
specified below:
______________________________________
4. Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned or in such other name as is
specified below:
______________________________________
Date: _________________________ Sutro & Co. Incorporated
By: __________________________________
Name: (Print) ________________________
Its: _________________________________
<PAGE> 42
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned registered owner of the attached
Common Stock Purchase Warrant (the "Warrant") hereby sells, assigns, and
transfers unto the Assignee named below all of the rights of the undersigned
under the Warrant with respect to the number of shares of the common stock (the
"Common Stock") of International Aircraft Investors (the "Company") set forth
below:
Name of Assignee Address Number of Shares
and does hereby irrevocably constitute and appoint ___________________________,
attorney-in-fact, to make such transfer on the books and records of the Company
maintained for this purpose, with full power of substitution and
resubstitution.
The undersigned also represents that, by assignment hereof, the
Assignee acknowledges that this Warrant and the shares of Common Stock issuable
on exercise hereof are being acquired for investment and not with a view toward
distribution or resale, and that the Assignee will not offer, sell, or
otherwise dispose of this Warrant or any shares of Common Stock issuable on
exercise hereof except under circumstances that will not result in a violation
of the Securities Act of 1933, as amended, or any applicable state securities
laws. Further, in compliance with Section 7.3 of the Warrant, the Assignee
shall, if requested by the Company, confirm in writing in a form satisfactory
to the Company that this Warrant or any shares of Common Stock issuable on
exercise hereof are being acquired for investment and not with a view toward
distribution or resale.
Date: __________________________ ___________________________________
___________________________________
___________________________________
<PAGE> 43
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
<PAGE> 44
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and
entered into as of _________, 1997, by and among International Aircraft
Investors, a California corporation (the "Company") and Sutro & Co.
Incorporated, a Delaware corporation.
RECITAL
The Company is issuing to the Holder (as defined below) that certain
Common Stock Purchase Warrant (the "Warrant"), of even date herewith, granting
to the Holder the right to purchase up to _______ Shares of the Company's
Common Stock, subject to adjustment, for $_______ per share. The Company
desires to grant certain demand and incidental registration rights to the
Holder in connection with the shares purchasable on exercise of the Warrant.
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
and covenants contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are here-by acknowledged, the parties hereby
agree as follows:
AGREEMENT
1. DEFINITIONS. Unless the context requires otherwise, the
following underlined terms shall have the following respective meanings:
1.1 Agreement. This Registration Rights Agreement.
1.2 Common Stock. The Company's common stock, par value
$0.01 per share.
1.3 Company. International Aircraft Investors, a
California corporation.
1.4 Exchange Act. The Securities Exchange Act of 1934,
as amended.
1.5 Holder or Holders. Sutro & Co. Incorporated and its
permitted assigns.
1.6 Registrable Securities. The shares of Common Stock
issued upon exercise of the Warrant.
1.7 Registration Expenses. All expenses of registration,
including but not limited to registration and filing fees, including filing
fees for Nasdaq and all stock exchanges on which the Common Stock is traded,
fees and expenses of complying with the Securities Laws, printing expenses,
transfer agent fees, and the fees and expenses of the Company's independent
certified
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<PAGE> 45
public accountants, the Company's investment banker and underwriter and the
Company's legal counsel, but excluding the Holder's brokerage fees,
underwriting fees and discounts, transfer taxes, if any, and the fees and
expenses of any Selling Shareholder's legal counsel.
1.8 SEC. The United States Securities and Exchange
Commission.
1.9 Securities. The Warrant and the shares of Common
Stock issuable on exercise thereof of the Warrant.
1.10 Securities Act. The Securities Act of 1933, as
amended.
1.11 Securities Laws. The Securities Act, the Exchange
Act and all applicable state securities laws, and all rules and regulations
promulgated thereunder.
1.12 Selling Shareholder. With respect to any
registration statement, any Holder whose Registrable Securities are included
therein.
1.13 Sutro. Sutro & Co. Incorporated or its successors.
1.14 Warrant. The Company's Common Stock Purchase Warrant
dated ___________, 1997, issued to the Holder and exercisable to purchase up to
[ ] shares of Common Stock at $_______ per share.
2. REGISTRATION RIGHTS.
2.1 Incidental Registration Rights.
(a) Notice of Registration; Registration.
Whenever the Company proposes to file a registration statement under the
Securities Act to offer publicly shares of the Common Stock (other than in
connection with any merger, acquisition, exchange offer, dividend reinvestment
plan, employee benefit plan, or stock option plan), the Company shall give each
Holder written notice of such intention at least twenty (20) days prior to the
anticipated initial filing date of such registration statement. The Company
shall include in such registration statement all Registrable Securities
requested to be so included by a Holder upon written notice to the Company
within ten (10) days of the Company's notice. If the registration statement is
for an underwritten offering, the Selling Shareholder shall sell its
Registrable Securities in such offering on the same terms and conditions as all
other shares of Common Stock being offered in such registration statement.
(b) Holdback. If the notice of registration
under this Section 2.1 is for an underwritten public offering and the Company
is advised in writing by the managing underwriter of such offering that in its
reasonable judgment the number of Registrable Securities for which incidental
registration is requested pursuant to this Agreement cannot be sold without
impairing the ability to complete the preestablished plan for distribution of
the Common Stock (the grounds for
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<PAGE> 46
which shall be confidentially disclosed to any Selling Shareholder who so
requests and who agrees to maintain the confidentiality of such disclosure)
then the number of Registrable Securities to be sold by the Selling Shareholder
shall be reduced. The Company shall so advise all Holders proposing to
distribute their securities through such underwriting and the number of shares
of securities that may be included in the registration and underwriting (other
than on behalf of the Company) shall be allocated among all Holders and such
other holders, if any, with contractual rights to participate in such
registration which are not subordinate to the Holders, in proportion, as nearly
as practicable, to the respective amounts of Registrable Securities or other
securities requested to be included in such registration by such Holders and
such other holders. If the number of Registrable Securities of the Selling
Shareholder is reduced, the Selling Shareholder may withdraw all or part of the
Registrable Securities from registration without affecting such Selling
Shareholder's registration rights hereunder for the Registrable Securities so
withdrawn or reduced.
(c) Underwriting Agreement. As a condition for
the inclusion of any Registrable Securities in any registration statement, at
the request of the Company, the Selling Shareholder shall enter into an
underwriting agreement with the Company and the underwriter(s) with respect to
the registration of its Registrable Securities, in such customary form that is
reasonably acceptable to the Company, the Selling Shareholder and such
underwriter(s), consistent with the provisions of this Agreement.
(d) Withdrawal by the Company. The Company shall
retain the absolute right to withdraw any registration statement prior to the
effective date thereof, even if the Company shall have given notice to the
Holder pursuant to Section 2.1(a) hereof and the Selling Shareholder has
requested inclusion of its Registrable Securities therein.
(e) Expenses. The Company shall pay all
Registration Expenses for registrations under this Section 2.1. The Selling
Shareholder shall pay all brokerage fees, underwriting fees and discounts,
transfer taxes, if any, and the fees and expenses of the Selling Shareholder's
legal counsel in connection with the registration and sale of its Registrable
Securities.
(f) Term. The incidental registration rights
granted pursuant to this Section 2.1 shall terminate on the earliest of the
sale of all Registrable Securities by the Holder or the receipt by the Holder
of the written opinion of legal counsel for the Company that all of the
Registrable Securities may be publicly sold without the need for compliance
with the registration provisions of the Securities Laws.
2.2 Demand Registration.
(a) Notice of Demand. If, any time after ______,
1998, the Company shall receive a written notice from a Holder demanding
that the Company register its Registrable Securities, then the Company shall
promptly give written notice of such demand to all other Holders of Registrable
Securities, if any, and will, subject to the other provisions of this
Agreement, include in a registration statement all Registrable Securities
requested to be so included by Holders upon
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written notice to the Company within twenty (20) days after the date of the
notice by the Company to the Holders, as long as the total of all Registrable
Securities for which registration is demanded represents a majority of the
outstanding Registrable Securities. The Holders as a group shall be entitled
to one (1) demand registration under this Section 2.2.
(b) Registration. Promptly after receipt of a
demand for registration as set forth in Section 2.2(a) hereof, the Company
shall prepare and file with the SEC a registration statement, on the applicable
form deemed appropriate by the Company, for all the Registrable Securities for
which registration is demanded, and the Company shall use reasonable efforts to
cause such registration statement to become effective as soon as practicable
and any necessary or appropriate qualification or compliance (including,
without limitation, appropriate qualification under applicable blue sky or
other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Laws and any other governmental
requirements or regulations). Notwithstanding the foregoing, the Company shall
have the right to delay the filing of the registration statement once for up to
one hundred twenty (120) days if the Company shall furnish to the Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors it would be materially detrimental to
the Company or its shareholders for a registration statement to be filed or
become effective during such period.
(c) Expenses. The Company shall pay all
Registration Expenses for registrations under this Section 2.2. The Selling
Shareholder shall pay all brokerage fees, underwriting fees and discounts,
transfer taxes, if any, and the fees and expenses of the Selling Shareholder's
legal counsel in connection with the registration and sale of its Registrable
Securities.
(d) Term. The demand registration rights granted
pursuant to this Section 2.2 shall terminate on the earliest of the sale of all
Registrable Securities by the Holder or the receipt by the Holder of the
written opinion of legal counsel for the Company that the Registrable
Securities may be publicly sold without the need for compliance with the
registration provisions of the Securities Laws.
(e) Underwriting by Sutro. If a registration
under this Section 2.2 is requested by one or more Selling Shareholders to be
in the form of an underwritten offering, then the Company and the Selling
Shareholder(s) shall retain and cooperate with Sutro as the managing
underwriter of such offering, subject to the execution of an underwriting
agreement in such customary form that is reasonably acceptable to the Company,
the Selling Shareholder(s) and Sutro and consistent with the provisions of this
Agreement; provided that Sutro maintains, at the time of such offering, all
federal and state governmental and other licenses and permits necessary to act
as an underwriter of securities.
2.3 Registration Procedures.
(a) Selling Shareholder Information. Each
Selling Shareholder shall provide the Company with such information about the
Selling Shareholder and its intended manner
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of distribution of the Registrable Securities, and shall otherwise cooperate
with the Company and the underwriters, if any, as may be needed or helpful to
complete any obligation of the Company hereunder.
(b) Consultation. The Company shall supply
drafts of any registration statement to the Selling Shareholder prior to filing
the registration statement with the SEC, and shall reasonably consult with the
Selling Shareholder and its legal counsel with respect to the form and content
of such filing. The Company will amend such registration statement to include
such revisions as the Selling Shareholder or its legal counsel shall reasonably
request. If material revisions reasonably requested by the Selling Shareholder
or its legal counsel are not effected by the Company, the Selling Shareholder
may withdraw all or part of the Registrable Securities from registration
without affecting such Selling Shareholder's registration rights hereunder for
the Registrable Securities so withdrawn or reduced.
(c) Provision for Prospectuses. The Company
shall furnish the Selling Shareholder with the number of copies of a summary
prospectus or other prospectus, including a preliminary prospectus in
conformity with the requirements of the Securities Act, and such other
documents as the Selling Shareholder may reasonably request, in order to
facilitate the public sale or other disposition of the Registrable Securities.
(d) State Securities Law Compliance. The Company
shall use reasonable efforts to register or qualify the Registrable Securities
covered by the registration statement under the Securities Laws of such states
as the Selling Shareholder may reasonably request in light of the costs of such
registration or qualification for the Company (provided, however, that the
Company shall not be required to consent to the general service of process for
all purposes in any jurisdiction where it is not then qualified to do business
or to qualify to do business) and do any and all other acts or things that may
be reasonably necessary or advisable to enable the Selling Shareholder to
consummate the public sale or other disposition of their Registrable Securities
in such states.
(e) Amendments. In the case of a demand
registration pursuant to Section 2.2, the Company shall use reasonable efforts
to prepare and file promptly with the SEC such amendments and supplements to
the registration statement filed with the SEC in connection with such
registration and the prospectus used in connection therewith as may be
necessary to keep such registration statement continuously effective and in
compliance with the Securities Act for up to six (6) months, or until all
Registrable Securities registered in such registration statement have been
sold, whichever is earlier.
(f) Prospectus Delivery. At any time when a sale
or other public disposition of Common Stock pursuant to a registration
statement is subject to a prospectus delivery requirement, the Company shall
immediately notify the Selling Shareholder of the occurrence of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then
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existing. Upon receipt of such a notice, the Selling Shareholder shall
immediately discontinue sales or other dispositions of Registrable Securities
pursuant to such registration statement. The Selling Shareholder may resume
sales only upon receipt of an amended prospectus or after the Selling
Shareholder has been advised by the Company that use of the previous prospectus
may be legally resumed.
(g) Opinions. At the request of the Selling
Shareholder, the Company shall use reasonable efforts to furnish on the date
that the Registrable Securities are delivered to the underwriter for sale in
connection with an underwritten offering registration pursuant to this
Agreement (i) a letter from the legal counsel representing the Company for the
purposes of such registration giving the Selling Shareholder the right to rely
upon the opinion of such legal counsel delivered to the underwriter(s) acting
on behalf of the Company in connection with such registration insofar as such
opinion relates to the Selling Shareholder, and (ii) a letter from the
independent certified public accountants of the Company substantially the same
as the letter of such accountants delivered to the underwriter(s) acting on
behalf of the Company in connection with such registration, provided that the
Selling Shareholder provides to such accountants the opinion or representation
letter required by Statement of Auditing Standards No. 72.
(h) Stop Orders. The Company shall immediately
notify the Selling Shareholder of the issuance by the SEC of any stop order or
order suspending the effectiveness of any registration statement, the issuance
by any state regulatory authority of any order suspending the registration or
qualification of the Registrable Securities for sale in such jurisdiction, or
the initiation of any proceeding for such purposes. The Company, with the
reasonable cooperation of the Selling Shareholder, shall make every reasonable
effort to contest any such proceeding or to obtain the withdrawal of any such
order at the earliest possible date.
(i) Review of Records. The Company shall make
available all financial and other records, pertinent corporate documents, and
properties of the Company for inspection by the Selling Shareholder or its
underwriter, legal counsel, or accountants, and shall cause the Company's
officers, directors, and employees to supply all information reasonably
requested by any such person in connection with any registration statement
filed or to be filed hereunder, so long as such person agrees to keep
confidential any records, information, or documents designated by the Company
in writing as confidential.
(j) Compliance with Securities Laws. In all
actions taken under this Agreement, the Company and the Selling Shareholder
shall use their best efforts to comply with all provisions of the Securities
Laws.
(k) Market Stand-Off. If requested by the
Company, the Holder may not sell or otherwise transfer any Registrable
Securities held by the Holder, other than those Registrable Securities included
in a registration statement, during the one hundred eighty (180) day period
following the effective date of a registration statement filed by the Company
under the Securities Act with respect to any underwritten offering. The
Company may impose stop-transfer instructions
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with respect to the Registrable Securities subject to the foregoing
restrictions until the end of such one hundred eighty day period.
2.5 Sales under Rule 144. With the view to making the
benefits of Rule 144 under the Securities Act available to the Holder, the
Company shall use reasonable efforts to (a) ensure that there is adequate
current public information (as set forth in Rule 144(c)) available with respect
to the Company; (b) timely file with the SEC all reports and other documents
required to be filed by the Company under the Securities Act, the Exchange Act,
and the rules and regulations promulgated thereunder; and (c) promptly furnish
to the Holder upon request a written statement by the Company as to the
Company's compliance with these covenants and the provisions of Rule 144.
2.6 Indemnification.
(a) The Company's Indemnification. The Company
shall indemnify, defend, save, and hold the Selling Shareholder (and any person
who controls the Selling Shareholder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act), with respect to which a
registration or qualification has been effected pursuant to this Agreement,
harmless from and against any and all liabilities, claims, damages, demands,
expenses, and losses, including but not limited to interest, penalties, court
costs, attorneys' fees, and settlements approved by the Company, which consent
shall not be unreasonably withheld, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement or prospectus, or any amendment or supplement thereto,
incident to any such registration or qualification, or based on any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation by the
Company of the Securities Act applicable to the Company in connection with any
such registration or qualification, and the Company will reimburse each such
Holder, each of its officers and directors, and each person controlling such
Holder for any legal and any other expenses reasonably incurred in connection
with investigating, preparing or defending any such claim, loss, damage,
liability or action, provided that the Company will not be liable to any such
person in any case to the extent that any such claim, loss, damage, liability
or expense arises out of or is based on any untrue statement or omission (or
alleged untrue statement or omission), made in reliance upon and in conformity
with written information furnished to the Company by such Holder or controlling
person and stated to be specifically for use therein or the preparation
thereby.
(b) The Selling Shareholder's Indemnification.
Each Selling Shareholder with Registrable Securities included in a registration
statement under this Agreement shall indemnify, defend, save, and hold (i) the
Company and its directors, officers, and controlling persons (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act),
(ii) the underwriter(s), if any, and their controlling persons, and (iii) all
other selling shareholders participating in such offering (and their respective
officers, directors, underwriters, and controlling persons) harmless from and
against any and all liabilities, claims, damages, demand, expenses, and losses,
including but not limited to interest, penalties, court costs, attorneys' fees,
and settlements
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approved by the Selling Shareholder, which consent shall not be unreasonably
withheld, arising out of (i) any untrue statement (or alleged untrue statement)
of a material fact contained in any such registration statement or a related
prospectus, or any amendment or supplement thereto, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) or any violation
by such Selling Shareholder of the Securities Act in connection with such
registration or qualification, and will reimburse the Company, such Holders,
such directors, officers, persons, underwriters or control persons for any
legal or any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action, in the case of clause (i) above to the extent, but only to the
extent that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement or in a related
prospectus in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use
therein or the preparation thereby. Notwithstanding the foregoing, the
liability of each Holder under this subsection (b) shall be limited to the
gross proceeds from the offering received by such Holder.
(c) Contribution. If the indemnification
provided for in this Section 2.6 from an indemnifying party is unavailable to
an indemnified party hereunder in respect to any liability, claim, damage,
demand, expense, or loss referred to herein, then the indemnifying party in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such liability, claim,
damage, demand, expense, or loss in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and the indemnified party
in connection with the statements or omissions that resulted in such liability,
claim, damage, demand, expense, or loss, as well as any other relevant
equitable consideration. The relative fault of such indemnifying party and
indemnified party shall be determined by reference to, among other things,
whether the untrue statement of a material fact or the omission to state a
material fact relates to information supplied by such indemnifying party or
indemnified party and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by a party as a result of the
liabilities, claims, damages, demands, expenses, and losses referred to above
shall be deemed to include any court costs, attorneys' fees, and other expenses
reasonably incurred by such party in connection with investigating or defending
any action, suit, or proceeding. The parties hereto agree that it would not be
just and equitable if contribution pursuant to this Section 2.6(c) were
determined by pro rata allocation or by any other method of allocation that
does not take into account the equitable considerations referred to in this
Section 2.6(c). No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who is not also guilty of such fraudulent
misrepresentation.
3. GENERAL PROVISIONS.
3.1 Amendment. All amendments or modifications of this
Agreement shall be in writing and shall be signed by all of the parties hereto.
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3.2 Waiver. Any waiver of any right, power, or privilege
hereunder must be in writing and signed by the party being charged with the
waiver. No delay on the part of any party hereto in exercising any right,
power, or privilege hereunder shall operate as a waiver of any other right,
power, or privilege hereunder, nor shall any single or partial exercise of any
right power, or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power, or privilege.
3.3 Notices. All notices or other communications
required or permitted to be given pursuant to this Agreement shall be in
writing and shall be delivered personally or sent by overnight courier, by
telecopy with confirmation by first-class mail, or by certified mail, return
receipt requested. Notices delivered personally or sent by overnight courier
or by telecopy with confirmation by first-class mail shall be effective on the
date first received, while notices sent by certified mail, return receipt
requested, shall be deemed to have been received and to be effective three (3)
business days after deposit into the mails. Notices shall be given to the
parties at the following respective addresses, or to such other addresses as
any party shall designate in writing:
If to the Company: International Aircraft Investors
3655 Torrance Blvd., Suite 410
Torrance, California 90503
Attn: Chief Executive Officer
If to the Holder: Sutro & Co. Incorporated
11150 Santa Monica Blvd., 15th Floor
Santa Monica, California 90025
c/o Scott E. Wendelin, Managing Director
3.4 Successors and Assigns This Agreement and each of
its provisions shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, executors, administrators
successors, and assigns. The Holder may assign this Agreement and its rights
hereunder only in connection with a transfer or assignment of all or part of
the Warrant or the Registrable Securities.
3.5 Law Governing. This Agreement has been negotiated,
executed and delivered and shall be performed in the State of California and
shall be governed by and construed and enforced in accordance with the laws of
the State of California, without regard for its conflict of laws rules.
3.6 Attorneys' Fee. In any suit to interpret or enforce
the terms and provisions of this Agreement, the prevailing party shall be
entitled to recover court costs and attorneys' fees, in addition to any other
remedy or recovery to which such party may be entitled.
3.7 Counterparts. This Agreement may be executed in two
or more counterparts, including by facsimile transmission, all of which
together shall constitute a single instrument.
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3.8 Severability of Provisions. In the event any one or
more of the provisions of this Agreement shall for any reason be held to be
invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability shall not affect any other provision hereof,
and this Agreement shall be construed as if such invalid, illegal, or
unenforceable provision had never been contained herein.
3.9 Construction. The headings in the sections and
paragraphs of this Agreement are for convenience only and shall not constitute
a part hereof. Whenever the context so requires, the masculine shall include
the feminine and the neuter, the singular shall include the plural, and
conversely. The terms and all parts of this Agreement shall in all cases be
interpreted simply and according to their plain meaning and neither for nor
against any party hereto.
IN WITNESS WHEREOF, the parties have duty executed and
delivered this Agreement as of the date first written above.
International Aircraft Investors Sutro & Co. Incorporated
By: _______________________________ By: _____________________________
William E. Lindsey
Chief Executive Office Name (Printed): _________________
Title: __________________________
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<PAGE> 1
EXHIBIT 5
[O'MELVENY & MYERS LLP LETTERHEAD]
October
16th
1 9 9 7
(213) 669-6643 411,967-001
LA1-737946.V1
International Aircraft Investors
3655 Torrance Boulevard
Suite 410
Torrance, California 90503
Re: Registration of Shares of Common Stock
of International Aircraft Investors
Ladies and Gentlemen:
At your request, we have examined Amendment No. 5 to the
Registration Statement (the "Registration Statement") on Form S-1 (File No.
333-19875) of International Aircraft Investors, a California corporation (the
"Company"), in connection with the registration under the Securities Act of
1933, as amended, of 2,990,000 shares of Common Stock, par value $.01 per share,
of the Company (the "Shares"). We are familiar with the proceedings taken by the
Company in connection with the authorization, issuance and sale of the Shares.
Subject to the completion, approval, execution and delivery of
the Underwriting Agreement substantially in the form included in the
Registration Statement and the completion, execution and filing with the
Secretary of State of California of the Amended and Restated Articles of
Incorporation of the Company substantially in the form included in the
Registration Statement, we are of the opinion that the Shares will be duly
authorized by all necessary corporate action on the part of the Company and,
upon payment for and delivery of the Shares as contemplated by the Registration
Statement and the countersigning of the certificates representing the Shares by
a duly authorized signatory of the registrar for the Company's
<PAGE> 2
Page 2 - International Aircraft Investors - October 16, 1997
Common Stock, the Shares will be validly issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus constituting part of the Registration
Statement.
Respectfully submitted,
O'MELVENY & MYERS LLP
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
International Aircraft Investors
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Consolidated Financial and Operating Data"
and "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Los Angeles, California
October 17, 1997
