<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-22249
INTERNATIONAL AIRCRAFT INVESTORS
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4176107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3655 TORRANCE BOULEVARD, SUITE 410 TORRANCE, CALIFORNIA 90503
(Address of principal executive offices) (Zip Code)
(310) 316-3080
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 30, 1999
----- ----------------------------
COMMON STOCK, $.01 PAR VALUE 4,212,284
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<PAGE> 2
INTERNATIONAL AIRCRAFT INVESTORS
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
As of June 30, 1999 and December 31, 1998........................... 3
Condensed Consolidated Statements of Income
Three months ended June 30, 1999 and 1998........................... 4
Condensed Consolidated Statements of Income
Six months ended June 30, 1999 and 1998............................. 5
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998............................. 6
Notes to Condensed Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations........................................... 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters for Vote of Securities Holders................ 14
Item 6. Exhibits and Reports on Form 8-K.................................... 15
Signatures.......................................................... 16
</TABLE>
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<PAGE> 3
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents ..................................... $ 15,324,540 $ 15,923,982
Flight equipment, at cost less accumulated depreciation of
$42,819,484 at June 30, 1999 and $36,099,484
at December 31, 1998 ....................................... 252,917,285 236,908,773
Cash, restricted .............................................. 13,280,199 13,387,878
Other assets .................................................. 2,158,569 1,670,383
------------- -------------
$ 283,680,593 $ 267,891,016
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued interest and other accrued expenses ................... $ 1,220,939 $ 1,000,291
Notes payable ................................................. 220,766,866 208,001,908
Lease and other deposits on flight equipment .................. 20,133,005 18,629,524
Deferred rent ................................................. 1,588,015 3,030,812
Deferred taxes, net ........................................... 3,474,758 2,477,876
------------- -------------
247,183,583 233,140,411
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value. Authorized 15,000,000
shares; none issued and outstanding ......................... -- --
Common stock, $.01 par value. Authorized
20,000,000 shares; issued and outstanding
4,212,284 shares at June 30, 1999 and
4,216,284 shares at December 31, 1998 ....................... 42,123 42,163
Additional paid-in capital .................................... 31,268,986 31,292,324
Deferred compensation ......................................... (375,000) (500,000)
Retained earnings ............................................. 5,560,901 3,916,118
------------- -------------
Net shareholders' equity ............................ 36,497,010 34,750,605
------------- -------------
$ 283,680,593 $ 267,891,016
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE> 4
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------
1999 1998
----------- ----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Rental of flight equipment ................................ $ 8,373,229 $6,120,193
Consulting fees ........................................... 200,000 --
Interest income ........................................... 368,453 490,079
----------- ----------
Total revenues ..................................... 8,941,682 6,610,272
EXPENSES:
Interest .................................................. 3,688,032 2,731,887
Depreciation .............................................. 3,360,000 2,454,000
General and administrative ................................ 365,316 372,693
Stock compensation ........................................ 62,500 62,500
----------- ----------
Total expenses ...................................... 7,475,848 5,621,080
----------- ----------
Income before income taxes and extraordinary loss ........... 1,465,834 989,192
Income tax expense .......................................... 557,015 397,200
----------- ----------
Income before extraordinary loss ............................ 908,819 591,992
Extraordinary loss on debt extinguishment, net of income
tax benefit of $131,322 ................................... 214,263 --
----------- ----------
Net income .......................................... $ 694,556 $ 591,992
=========== ==========
Basic earnings share:
Income before extraordinary loss .................... $ .21 $ .13
Extraordinary loss .................................. (.05) --
----------- ----------
Net income .......................................... $ .16 $ .13
=========== ==========
Diluted earnings per share:
Income before extraordinary loss .................... $ .21 $ .13
Extraordinary loss .................................. (.05) --
----------- ----------
Net income .......................................... $ .16 $ .13
=========== ==========
Weighted average common shares outstanding:
Basic ................................................. 4,212,284 4,497,584
=========== ==========
Assuming dilution ..................................... 4,329,024 4,679,055
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE> 5
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Rental of flight equipment ...................................... $ 17,246,886 $12,260,619
Consulting fees ................................................. 200,000 --
Interest income ................................................. 739,421 921,621
------------ -----------
Total revenues ........................................... 18,186,307 13,182,240
EXPENSES:
Interest ........................................................ 7,495,746 5,520,064
Depreciation .................................................... 6,720,000 4,908,000
General and administrative ...................................... 847,111 709,817
Stock compensation .............................................. 125,000 125,000
------------ -----------
Total expenses ............................................ 15,187,857 11,262,881
------------ -----------
Income before income taxes and cumulative effect of accounting
change and extraordinary loss ................................... 2,998,450 1,919,359
Income tax expense ................................................ 1,139,404 770,200
------------ -----------
Income before cumulative effect of accounting change
and extraordinary loss .......................................... 1,859,046 1,149,159
Cumulative effect of change in accounting for ancillary
payments under lease agreements, net of income tax expense
of $139,000 ..................................................... -- 209,000
Extraordinary loss on debt extinguishment, net of income
tax benefit of $131,322 ......................................... 214,263 --
------------ -----------
Net income ................................................ $ 1,644,783 $ 1,358,159
============ ===========
Basic earnings share:
Income before cumulative effect of accounting change ...... $ .44 $ .25
Cumulative effect of accounting change .................... -- .05
Extraordinary loss ........................................ (.05) --
------------ -----------
Net income ................................................ $ .39 $ .30
============ ===========
Diluted earnings per share:
Income before cumulative effect of accounting change ...... $ .43 $ .25
Cumulative effect of accounting change .................... -- .04
Extraordinary loss ........................................ (.05) --
------------ -----------
Net income ................................................ $ .38 $ .29
============ ===========
Weighted average common shares outstanding:
Basic ..................................................... 4,212,462 4,497,584
============ ===========
Assuming dilution ......................................... 4,325,181 4,661,662
============ ===========
Pro forma effect assuming the change in accounting principle
is applied retroactively:
Net income ................................................ $ 1,644,783 $ 1,149,159
Earnings per share:
Basic ................................................ $ .39 $ .25
Diluted .............................................. $ .38 $ .25
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE> 6
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 1,644,783 $ 1,358,159
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation of flight equipment ....................... 6,720,000 4,908,000
Cumulative effect of accounting change ................. -- (209,000)
Amortization of deferred transaction fees .............. 210,327 103,105
Deferred taxes, net .................................... 996,882 900,400
Stock compensation ..................................... 125,000 125,000
(Increase) decrease in assets:
Cash, restricted ....................................... 107,679 (1,167,253)
Other assets ........................................... (698,513) (4,864,460)
Increase (decrease) in liabilities:
Accrued interest and other accrued liabilities ......... 220,648 38,620
Lease and other deposits on flight equipment ........... 1,503,481 2,430,074
Deferred rent .......................................... (1,442,797) (993,400)
------------ ------------
Net cash provided by operating activities .............. 9,387,490 2,629,245
Cash flows from investing activities:
Purchase of flight equipment ........................... (22,728,512) --
------------ ------------
Net cash used in investing activities .................. (22,728,512) --
Cash flows from financing activities:
Repayment of notes payable ............................. (20,684,159) (4,195,319)
Repayment of notes payable to ILFC ..................... (1,896,356) (1,000,601)
Repayment of notes payable to GLH ...................... -- (41,500)
Proceeds from notes payable from ILFC .................. 35,345,473 --
Repurchase of common stock ............................. (23,378) --
------------ ------------
Net cash provided by (used in) financing activities .... 12,741,580 (5,237,420)
------------ ------------
Net decrease in cash and cash equivalents .............. (599,442) (2,608,175)
Cash and cash equivalents at beginning of period ........... 15,923,982 23,838,306
------------ ------------
Cash and cash equivalents at end of period ................. $ 15,324,540 $ 21,230,131
============ ============
Supplemental disclosure of cash flow information
Cash paid for interest ................................. $ 7,089,771 $ 5,378,339
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE> 7
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The accompanying unaudited interim condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-K.
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of normal and recurring accruals)
necessary for a fair presentation of the financial position of the Company as of
June 30, 1999 and December 31, 1998 and the results of its operations for the
three month and six month periods ended June 30, 1999 and 1998 and its cash
flows for the six months ended June 30, 1999 and 1998. Operating results for the
six month period ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999.
2. EXTRAORDINARY ITEM
In May 1999, the Company repaid a note with a principal amount of $15,745,473
prior to maturity. The note was due May 2000 with a rate of 7.96%. The repayment
resulted in an extraordinary charge of $214,263, net of a $131,322 income tax
benefit.
3. ACCOUNTING CHANGE
Effective January 1, 1998, the Company changed its method of accounting for
income recognition of ancillary payments under lease agreements to a full
accrual method from recognition upon lease termination. This new method, which
was accounted for as a change in accounting method, was made to better reflect
the earnings process under lease agreements. The effect of this change on net
earnings and earnings per share, before cumulative effect of accounting change,
for the three month periods ended June 30, 1999 and 1998, respectively were
increases of $428,000 ($.10 per basic share and diluted share) and $157,000
($.03 per basic and diluted share) and the six month periods ended June 30, 1999
and 1998, respectively were $908,000 ($.22 per basic share and $.21 per diluted
share) and $314,000 ($.07 per basic and diluted share). The cumulative effect on
retained earnings at January 1, 1998 of the accounting change was an increase of
approximately $209,000 ($.05 per basic and diluted share), net of related income
taxes of $139,000. The pro forma amounts shown on the condensed consolidated
statements of income have been adjusted for the effect of retroactive
application.
4. MANAGEMENT ESTIMATES
The preparation of condensed consolidated 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 condensed consolidated financial statements. Actual
results could differ from estimates made.
The Company leases flight equipment to various commercial airline fleets on
short-term to medium-term operating leases, generally three to five years. The
related flight equipment is 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
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<PAGE> 8
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on management's ability to roll over debt facilities, renegotiate favorable
leases and realize estimated residual values.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator:
Income before cumulative effect of
accounting change and extraordinary loss ......... $ 908,819 $ 591,992 $ 1,859,046 $1,149,159
Cumulative effect of change in accounting for
ancillary payments under lease agreements ........ -- -- -- 209,000
Extraordinary loss on debt extinguishment .......... 214,263 -- 214,263 --
----------- ---------- ----------- ----------
Net income ........................................... $ 694,556 $ 591,992 $ 1,644,783 $1,358,159
Denominator:
Denominator for basic earnings per share-
weighted average shares outstanding .............. 4,212,284 4,497,584 4,212,462 4,497,584
Effect of dilutive securities:
Employee stock options ............................. 115,795 181,471 112,147 164,078
Non-employee stock options ......................... 945 -- 572 --
----------- ---------- ----------- ----------
Dilutive potential common shares ..................... 116,740 181,471 112,719 164,078
----------- ---------- ----------- ----------
Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversions ...................................... 4,329,024 4,679,055 4,325,181 4,661,662
Basic earnings per share:
Income before cumulative effect of
accounting change and extraordinary loss ......... $ .21 $ .13 $ .44 $ .25
Cumulative effect of accounting change ............. -- -- -- .05
Extraordinary loss ................................. (.05) -- (.05) --
----------- ---------- ----------- ----------
Net income ........................................... $ .16 $ .13 $ .39 $ .30
=========== ========== =========== ==========
Diluted earnings per share:
Income before cumulative effect of
accounting change and extraordinary loss ......... $ .21 $ .13 $ .43 $ .25
Cumulative effect of accounting change ............. -- -- -- .04
Extraordinary loss ................................. (.05) -- (.05) --
----------- ---------- ----------- ----------
Net income ......................................... $ .16 $ .13 $ .38 $ .29
=========== ========== =========== ==========
</TABLE>
The Company issued its underwriters warrants to purchase 260,000 shares of its
common stock at $12 per share in connection with its initial public offering.
These warrants were excluded from the computation of diluted net income
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<PAGE> 9
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
per common share because they were anti-dilutive. The warrants are exercisable
through November 5, 2000.
6. FLIGHT EQUIPMENT
The Company entered into an agreement to purchase four aircraft from
International Lease Finance Corporation (ILFC). In June 1999, the Company
completed the purchase of the first aircraft under that agreement.
7. NOTES PAYABLE
The Company extended notes due May 1999 with balances totaling $2,017,000 to
July 1999. The Company extended a note due July 1999 with a balance totaling
$17,350,422 to October 1999. Related to the acquisition of an aircraft purchased
in June 1999, the Company obtained bridge financing of $14,700,000 due November
2000 from ILFC and a subordinated note of $4,900,000 due July 2004 from ILFC.
During May 1999, the Company repaid a note with a bank with a principal balance
of $15,745,473 prior to maturity. The Company repaid the note with bridge
financing obtained from ILFC. It is the Company's intent to refinance bridge
financings with term notes.
At June 30, 1999 the Company's weighted average composite interest rate was 7%.
8. SHAREHOLDERS' EQUITY
The Company granted options to purchase 60,000 shares of the Company's common
stock at an exercise price of $6.38 under the 1997 Eligible Directors Option
Plan and the 1997 Employee Stock Option and Award Plan.
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<PAGE> 10
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
OVERVIEW
We are primarily engaged in the acquisition of used, single-aisle jet aircraft
for lease and sale to domestic and foreign airlines and other customers. We
lease aircraft under short-term to medium-term operating leases where the lessee
is responsible for all operating costs, including major overhauls and we retain
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. Our flight equipment is recorded on
the balance sheet at cost and is depreciated on a straight-line basis over the
estimated useful life to our 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.
This Report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are intended to be covered by
the safe harbors created thereby. Reference is made to the cautionary statements
made in our Report on Form 10-K for the year ended December 31, 1998 ("Form
10-K") which should be read as being applicable to all related forward-looking
statements wherever they appear in this Report on Form 10-Q. Our 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 in the Form 10-K.
EXTRAORDINARY ITEM
In May 1999, we repaid a note with a principal amount of $15,745 prior to
maturity. The note was due May 2000 with a rate of 7.96%. The repayment resulted
in an extraordinary charge of $214, net of a $131 income tax benefit.
ACCOUNTING CHANGE
Effective January 1, 1998, we changed our method of accounting for income
recognition of ancillary payments under lease agreements to a full accrual
method from recognition upon lease termination. This new method, which was
accounted for as a change in accounting method, was made to better reflect the
earnings process under lease agreements. The effect of this change on net
earnings, before cumulative effect of accounting change, for the three month
periods ended June 30, 1999 and 1998, respectively were increases of $428 and
$157 and the six month periods ended June 30, 1999 and 1998, respectively were
increases of $908 and $314. The cumulative effect on retained earnings at
January 1, 1998 of the accounting change was an increase of approximately $209,
net of related income taxes of $139.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998
Revenues from rental of flight equipment increased by 37%, or $2,253, to $8,373
in the three months ended June 30, 1999 compared to the same period in 1998 as a
result of the acquisition of three aircraft on lease, an acceleration of
revenues on ancillary payments resulting from lease terminations as well as the
impact of the change in accounting method discussed above. The one additional
aircraft purchased in June 1999 had an insignificant impact on our income
statement in the three month period ended June 30, 1999. Our lease portfolio
consisted of fourteen aircraft on lease with a book value of $252,917 at June
30, 1999 and ten aircraft on lease with a book value of $167,598 at June 30,
1998.
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<PAGE> 11
In the three months ended June 30, 1999, we earned $200 of consulting fees. No
consulting fees were earned in the three month period ended June 30, 1998.
Interest income decreased to $368 for the three months ended June 30, 1999 from
$490 for the same period in 1998 principally as a result a decrease in interest
rates from 1998 to 1999 and a decrease in cash and restricted cash balances.
Expenses as a percent of total revenues were 84% and 85% during the three months
ended June 30, 1999 and 1998, respectively. This decrease in the percentage is
due to the effect of the 35% increase in total revenue while expenses increased
33%. Interest expense increased to $3,688 for the three months ended June 30,
1999 from $2,732 for the same period in 1998 principally as a result of interest
on financing related to the acquisition of three additional aircraft, offset by
the effect of loan paydowns. Our composite interest rate was 7% and 7.3% at June
30, 1999 and 1998, respectively. Depreciation expense increased to $3,360 in the
second quarter of 1999 from $2,454 in the second quarter of 1998 primarily as a
result of the acquisition of three additional aircraft. General and
administrative expenses decreased to $365 in the three months ended June 30,
1999 from $373 in the same period of 1998. Increases in compensation expense
were offset by decreases in insurance and professional fees. During the three
months ended June 30, 1999 and 1998, we incurred $62 of non-cash stock
compensation related to the vesting of options granted to executive officers.
Income tax expense increased to $557 from $397 as a result of the increase in
revenues and reduction in total expenses as a percent of total revenues. The
$160 increase in income tax expense represents a non-cash provision for deferred
income taxes at an effective rate of 38%. We continue to generate substantial
federal net operating loss carryforwards primarily resulting from accelerated
tax depreciation.
Net income increased to $695 for the three months ended June 30, 1999 from $592
for the same period in 1998 due to the factors described above and the effect of
the extraordinary item.
Six Months Ended June 30, 1999 and 1998
Revenues from rental of flight equipment increased by 41%, or $4,987, to $17,247
in the six months ended June 30, 1999 compared to the same period in 1998 as a
result of the acquisition of three aircraft on lease, an acceleration of
revenues from ancillary payments resulting from lease terminations as well as
the impact of the change in accounting method discussed above. The one
additional aircraft purchased in June 1999 had an insignificant impact on our
income statement in the three month period ended June 30, 1999.
In the six months ended June 30, 1999, we earned $200 of consulting fees. No
consulting fees were earned in the six month period ended June 30, 1998.
Interest income decreased to $739 for the six months ended June 30, 1999 from
$922 for the same period in 1998 principally as a result a decrease in interest
rates from 1998 to 1999 and a decrease in cash and restricted cash balances.
Expenses as a percent of total revenues were 84% and 85% during the six months
ended June 30, 1999 and 1998, respectively. This decrease in the percentage is
due to the effect of the 38% increase in total revenue while expenses increased
35%. Interest expense increased to $7,496 for the six months ended June 30, 1999
from $5,520 for the same period in 1998 principally as a result of interest on
financing related to the acquisition of three additional aircraft, offset by the
effect of loan paydowns. Depreciation expense increased to $6,720 in 1999 from
$4,908 in 1998 primarily as a result of the acquisition of three additional
aircraft. General and administrative expenses increased to $847 in the six
months ended June 30, 1999 from $710 in the same period of 1998. The increase in
general and administrative expense was primarily the result of additional
compensation expense. During the six months ended June 30, 1999 and 1998, we
incurred $125 of non-cash stock compensation related to the vesting of options
granted to executive officers.
The $369 increase in income tax expense represents a non-cash provision for
deferred income taxes at an effective rate of 38%. The Company paid no federal
income taxes during the six months ended June 30, 1999 due to substantial net
operating loss carryforwards resulting primarily from accelerated tax
depreciation.
Net income increased to $1,645 for the six months ended June 30, 1999 from
$1,358 for the same period in 1998 due
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<PAGE> 12
to the factors described above and the effects of the extraordinary item and the
change in accounting method.
LIQUIDITY AND CAPITAL RESOURCES
Our principal external sources of funds have been term loans from banks and
seller financing secured by flight equipment and the net proceeds from our
initial public offering. A substantial amount of our cash flow from rental of
flight equipment is applied to principal and interest payments on secured debt.
The terms of our loans generally require a substantial balloon payment at the
end of the noncancellable portion of the lease of the related flight equipment,
at which time we will be required to re-lease the flight equipment and
renegotiate the balloon amount of the loan or obtain other financing.
Refinancing of the balloon amount is dependent upon our re-leasing the related
flight equipment. Accordingly, we begin lease remarketing efforts well in
advance of the lease termination. The principal use of cash is for financing the
acquisition of our flight equipment portfolio, which is financed by loans
secured by the applicable flight equipment. As a result, we do not currently
maintain a line of credit.
For the six months ended June 30, 1999, net cash provided from operating
activities increased by $6,758 principally as a result of an increase of $287 in
net income, an increase in a non-cash expense for depreciation of $1,812 and
decreases in restricted cash and other assets of $1,275 and $4,166,
respectively, partially offset by a decrease in lease and other deposits of $927
and decrease in deferred rent.
The increase of $22,729 in cash used in investing activities resulted primarily
from the purchase of an aircraft during the three months ended June 30, 1999. No
aircraft were purchased during the six months ended June 30, 1998.
For the six months ended June 30, 1999, net cash provided in financing
activities was $12,742 compared to net cash used in financing activities of
$5,237 during the six months ended June 30, 1998. Proceeds from financing
activities resulted primarily from $15,745 of bridge financing from ILFC and
$19,600 of financing from ILFC related to the purchase of an aircraft. Proceeds
from financing activities were partially offset in 1999 by loan paydowns and
stock repurchases of $22,604. In 1998, proceeds used in financing activities was
$5,237 as a result of loan paydowns.
Cash and cash equivalents vary from period to period principally as a result of
the timing of the purchase and sale of aircraft.
We use 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 swap agreements are
amortized to interest expense over the terms of the swap agreements.
Our ability to successfully execute our business strategy and to sustain our
operations is dependent, in part, on our ability to obtain financing and to
raise equity capital. There can be no assurance that the necessary amount of
such capital will continue to be available to us on favorable terms or at all.
If we were unable to continue to obtain any portion of required financing on
favorable terms, our ability to add new aircraft to its lease portfolio, extend
leases, release 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 our business, financial
condition and results of operations. In addition, our financing arrangements to
date have been dependent in part upon International Lease Finance Corporation.
IMPACT OF YEAR 2000
The Year 2000 issue results from computer programs written using two digits to
identify the year in the date field. These computer programs were designed and
developed without consideration of the impact of the upcoming change in the
century. If not corrected, these programs could create erroneous information by
or at the Year 2000.
We have performed a review and assessment of our internal computer systems to
determine the effect of the Year 2000
-12-
<PAGE> 13
issue. Based on the results of this review, we believe that the internal effects
of the Year 2000 issue will not materially affect our future financial results
or financial condition.
Failure by our lessees, manufacturers of our aircraft and business partners to
properly comply with Year 2000 issues could result in lost revenues and
increased expenses. We have initiated formal communications with lessees,
manufacturers of our aircraft and business partners to determine the extent to
which we and our aircraft are vulnerable to those third parties' failure to
address their own Year 2000 issues. Based on the responses from third parties we
have received, we do not expect a material affect on our financial results or
our financial position. As such, no contingency plan has been developed. If
future responses indicate a material exposure as a result of third parties, we
will develop a contingency plan.
We expect to be Year 2000 compliant by December 31, 1999. We have incurred no
additional costs associated with the Year 2000 issue and estimate that no
additional costs will be incurred.
We will continue assessing our internal and external risk as we acquire
additional information systems and enter into business relationships with
additional lessees, manufacturers of aircraft and other business partners.
A possible scenario is that one or more of our lessees would be unable to
operate and generate revenues and as a result be unable to make lease payments.
At this time, we are unable to estimate the likelihood or the magnitude of the
resulting lost revenue.
-13-
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders, at which the proposals described
below were submitted to stockholders, was held June 3, 1999.
Proposal No. 1 Election of Directors. The following individuals, who received
the votes indicated, were elected as directors:
<TABLE>
<CAPTION>
Name FOR WITHHELD
---- --------- --------
<S> <C> <C>
William E. Lindsey 2,932,698 46,611
Michael P. Grella 2,932,698 46,611
Magnus Gunnarsson 2,932,698 46,611
Ralph O. Hellmold 2,932,698 46,611
Aaron Mendelsohn 2,932,698 46,611
Christer Salen 2,932,698 46,611
Kenneth Taylor 2,932,698 46,611
Stuart M. Warren 2,932,698 46,611
</TABLE>
Proposal No. 2 The proposal to amend the Company's 1997 Stock Option and Award
Plan. The results of the voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
1,664,342 176,395 10,400
</TABLE>
Proposal No. 3 The proposal to amend the Company's 1997 Eligible Directors Stock
Option Plan. The results of the voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
1,768,387 72,195 10,555
</TABLE>
Proposal No. 4 The proposal to ratify the selection of KPMG LLP as independent
public accountants for the Company for the fiscal year ending
December 31, 1999. The results of the voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
2,968,587 5,500 3,000
</TABLE>
-14-
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company.
Filed as Exhibit 3.1 to Form 10-Q for the quarterly period ended
September 30, 1997, and incorporated herein by reference
3.2 Amended and Restated Bylaws of the Company. Filed as Exhibit 3.2
to Form 10-Q for the quarterly period ended September 30, 1997,
and incorporated herein by reference
4.1 Senior Term Loan Agreement, dated December 10, 1997, between IAI
V, Inc. and City National Bank. Filed as Exhibit 4.11 to Form
10-Q for the quarterly period ended September 30, 1997, and
incorporated herein by reference
4.2 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
18 Preferability letter regarding change in accounting principle.
Filed as Exhibit 18 to Form 10-Q for the quarterly period ended
March 31, 1998, and incorporated herein by reference
27.1 Financial Data Schedule for the three months ended June 30, 1999
27.2 Financial Data Schedule for the six months ended June 30, 1999
</TABLE>
REPORTS ON FORM 8-K:
During the quarter ended June 30, 1999, the Company did not file any reports on
Form 8-K.
-15-
<PAGE> 16
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL AIRCRAFT INVESTORS
August 5, 1999
/s/ MICHAEL P. GRELLA
----------------------------------------
Michael P. Grella
President
And Chief Operating Officer
August 5, 1999
/s/ RICK O. HAMMOND
----------------------------------------
Rick O. Hammond
Vice President-Finance
And Treasurer
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 15,324,540
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 295,736,769
<DEPRECIATION> 42,819,484
<TOTAL-ASSETS> 283,680,593
<CURRENT-LIABILITIES> 0
<BONDS> 220,766,866
0
0
<COMMON> 42,123
<OTHER-SE> 36,454,887
<TOTAL-LIABILITY-AND-EQUITY> 283,680,593
<SALES> 0
<TOTAL-REVENUES> 8,941,682
<CGS> 0
<TOTAL-COSTS> 3,787,816
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,688,032
<INCOME-PRETAX> 1,465,834
<INCOME-TAX> 557,015
<INCOME-CONTINUING> 908,819
<DISCONTINUED> 0
<EXTRAORDINARY> 214,263
<CHANGES> 0
<NET-INCOME> 694,556
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 15,324,540
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 295,736,769
<DEPRECIATION> 42,819,484
<TOTAL-ASSETS> 283,680,593
<CURRENT-LIABILITIES> 0
<BONDS> 220,766,866
0
0
<COMMON> 42,123
<OTHER-SE> 36,454,887
<TOTAL-LIABILITY-AND-EQUITY> 283,680,593
<SALES> 0
<TOTAL-REVENUES> 18,186,307
<CGS> 0
<TOTAL-COSTS> 7,692,111
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,495,746
<INCOME-PRETAX> 2,998,450
<INCOME-TAX> 1,139,404
<INCOME-CONTINUING> 1,859,046
<DISCONTINUED> 0
<EXTRAORDINARY> 214,263
<CHANGES> 0
<NET-INCOME> 1,644,783
<EPS-BASIC> .39
<EPS-DILUTED> .38
</TABLE>
