-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q66jqhH00lc7pIlJI2IcPqHiTPjnw3glOufrefQ8O84su/i3C6PhffpB/HabmheU qD+pP69b4g3kyWR+D3XsRQ== 0000950150-97-001450.txt : 19971020 0000950150-97-001450.hdr.sgml : 19971020 ACCESSION NUMBER: 0000950150-97-001450 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19971017 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL AIRCRAFT INVESTORS CENTRAL INDEX KEY: 0001029688 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 954176107 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-19875 FILM NUMBER: 97697492 BUSINESS ADDRESS: STREET 1: 3655 TORRANCE BLVD STREET 2: SUITE 410 CITY: TORRANCE STATE: CA ZIP: 90503 BUSINESS PHONE: 3103163080 MAIL ADDRESS: STREET 1: 3655 TORRANCE BLVD STREET 2: SUITE 410 CITY: TORRANCE STATE: CA ZIP: 90503 S-1/A 1 FORM S-1, AMENDMENT NO. 5 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) CALIFORNIA 7359 95-4176107 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER ID NO.) INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.)
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: 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
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. ================================================================================ 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.
- ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ----------------------------------------------------------------------------------------------- Per Share.......................... $ $ $ - ----------------------------------------------------------------------------------------------- Total(3)........................... $ $ $ ===============================================================================================
(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 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 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 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 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 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
- --------------- (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 7 SUMMARY CONSOLIDATED FINANCIAL DATA
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ----------------- 1992(1) 1993 1994 1995 1996 1996 1997 ----------- ------ ------ ------ ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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
JUNE 30, 1997 ------------------------ AS ACTUAL ADJUSTED(5) -------- ----------- (IN THOUSANDS) 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
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997 --------- -------- ------- -------- ------- ------- ------- (DOLLARS IN THOUSANDS) 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
- --------------- (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) 6 8 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. 7 9 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 8 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. 9 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 10 12 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 11 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 12 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 13 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 14 16 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. 15 17 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."
JUNE 30, 1997 ------------------------ ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) 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 ======== ========
- --------------- (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 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: 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 ======
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.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ----------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE --------- ------- ----------- ------- --------- 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% ========= ===== =========== =====
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 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.
FOR THE SIX MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------------------------------------------------- ---------------------------- 1992(1) 1993 1994 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ ------------ ------------ 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
(footnotes on next page) 18 20
FOR THE SIX MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30, 1992(1) 1993 1994 1995 1996 1996 1997 ---------- ----------- ---------- ---------- ---------- ---------- ---------- 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
- --------------- (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 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 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 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 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 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 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 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 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 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:
MANUFACTURE NONCANCELABLE LEASE EXTENSION AIRCRAFT YEAR LESSEE LEASE PERIOD OPTIONS - ---------------------- ----------- ----------------------- -------------- ----------------------- 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
- --------------- (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 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 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 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 33 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Directors and executive officers of the Company are as follows:
SERVED AS DIRECTOR NAME POSITION WITH THE COMPANY AGE(1) SINCE - ----------------------------- --------------------------------------- -------------------------------------- --------- 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
- --------------- (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 32 34 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- 33 35 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. 34 36 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
ANNUAL COMPENSATION ----------------- NAME AND PRINCIPAL POSITION SALARY BONUS ----------------------------------------------------------- -------- ------ William E. Lindsey Chairman of the Board and Chief Executive Officer........ $120,000 $ --
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. 35 37 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. 36 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 37 39 "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 38 40 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 39 41 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 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.
PERCENT OF CLASS ----------------------- NUMBER OF BEFORE THE AFTER THE NAME(1) SHARES OFFERING OFFERING - ----------------------------------------------------------------- --------- ---------- ---------- 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
- --------------- * 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 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 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 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 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.
NUMBER OF SHARES --------- Sutro & Co. Incorporated.......................................... Cruttenden Roth Incorporated...................................... --------- Total................................................... 2,600,000 =========
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 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 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 49 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- 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
F-1 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 51 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, --------------------------- JUNE 30, 1995 1996 1997 ----------- ----------- ------------ (UNAUDITED) 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 =========== =========== ============
See accompanying notes to consolidated financial statements F-3 52 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------- ------------------------- 1994 1995 1996 1996 1997 ---------- ---------- ----------- ---------- ----------- (UNAUDITED) 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 ========== ========== ========== =========== ==========
See accompanying notes to consolidated financial statements F-4 53 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DEFERRED CONVERTIBLE COMMON STOCK ADDITIONAL STOCK RETAINED EARNINGS PREFERRED ---------------- PAID-IN COMPENSATION (ACCUMULATED STOCK SHARES AMOUNT CAPITAL (NOTE 9) DEFICIT) NET ----------- -------- ------ ---------- ------------ ----------------- ---------- 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 ======= ======= ====== ========== =========== =========== ==========
See accompanying notes to consolidated financial statements F-5 54 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ----------- ------------ ----------- ----------- ------------ (UNAUDITED) 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 =========== ============ =========== =========== ============
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 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 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:
USEFUL LIFE AT YEAR OF ACQUISITION DESCRIPTION OF ASSET ACQUISITION DATE SALVAGE VALUE ---------------------------------------- ----------- -------------- ------------- 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
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 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: 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 ========
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 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:
NUMBER OF SIGNIFICANT PERCENTAGE OF REVENUES BY CUSTOMERS SIGNIFICANT CUSTOMERS --------- --------------------------- 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%
F-10 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:
DECEMBER 31, ----------------------------- JUNE 30, 1995 1996 1997 ------------ ------------ ------------ 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 ============ ============ ============
(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:
TOTAL CURRENT DEFERRED ------- ------- -------- 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 ======= ======= =======
F-11 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:
EXPIRES FEDERAL NOL STATE NOL --------------------------------------------------- ----------- ---------- 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 =========== ==========
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:
DECEMBER 31, ----------------------------- 1995 1996 ------------ ------------ 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) =========== ===========
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:
YEAR ENDED DECEMBER 31, ------------------------------------- 1994 1995 1996 --------- --------- --------- 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 ========= ========= =========
F-12 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:
DECEMBER 31, --------------------------- JUNE 30, 1995 1996 1997 ----------- ----------- ------------ 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
F-13 62 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, JUNE 30, 1995 1996 1997 ----------- ----------- ------------ 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 =========== =========== ============
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 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:
YEAR ENDING DECEMBER 31: ---------------------------------------- 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 ===========
TWELVE-MONTH PERIOD ENDING JUNE 30: --------------------------------------- 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 ===========
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
WEIGHTED AVERAGE TYPE NOTIONAL AMOUNT INTEREST RATE (%) MATURITY --------------------------------- --------------- ----------------- --------- Fixed/variable................... $30,520,000 7.64/7.13 2/97-7/97
DECEMBER 31, 1996
WEIGHTED AVERAGE TYPE NOTIONAL AMOUNT INTEREST RATE (%) MATURITY --------------------------------- --------------- ----------------- --------- Fixed/variable................... $28,094,000 7.65/6.66 2/97-7/97
F-15 64 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997
WEIGHTED AVERAGE TYPE NOTIONAL AMOUNT INTEREST RATE (%) MATURITY --------------------------------- --------------- ----------------- --------- Fixed/variable................... $ 4,108,000 7.60/7.20 5/98
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 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:
YEAR ENDING DECEMBER 31: ------------------------------------------------ 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 ===========
TWELVE-MONTH PERIOD ENDING JUNE 30: ------------------------------------------------ 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 ===========
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 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:
TWELVE-MONTH PERIOD ENDING JUNE 30: --------------------------------------------------- 1998............................................. $29,889 1999............................................. 17,435 ------- $47,324 =======
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 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 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. 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 70 ATTACHMENT A
MAXIMUM AIRCRAFT SERIAL YEAR OF ENGINE TAKEOFF TYPE NUMBER MANUFACTURE TYPE WEIGHT (LBS) CURRENT OPERATOR - ---------- ------ ------------ --------- ------------ --------------------- 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.
A-3 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.] 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
PAGE ---- 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
------------------------ 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 ====================================================== 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.
AMOUNT TO BE PAID --------- 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 =========
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 74 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
NUMBER DESCRIPTION ------- ------------------------------------------------------------------------- 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
II-2 75
NUMBER DESCRIPTION ------------------------------------------------------------------------- *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
- --------------- * 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 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 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.
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------- ------------------- /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
II-5 EX-1 2 FORM OF UNDERWRITING AGREEMENT 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 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 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 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 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 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 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 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 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 9 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 10 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 11 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. 12 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. 13 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 14 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 15 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. 16 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. 17 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. 18 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 19 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 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 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 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 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 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 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 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 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 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 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 31 SCHEDULE A SCHEDULE OF UNDERWRITERS
Number of Firm Common Shares Name of Underwriter to be Purchased - ------------------- --------------- Sutro & Co. Incorporated . . . . . . . . . . . . . . . . . . Cruttenden Roth Incorporated. . . . . . . . . . . . . . . . . [NAMES OF OTHER UNDERWRITERS]. . . . . . . . . . . . . . . . --------- Total. . . . . . . . . . . . . . . . . . . . . . . . 2,600,000 =========
32 EXHIBIT A WARRANT AGREEMENT 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 $0.01 per share (the "Common Stock"), as constituted on the date hereof, upon surrender hereof with the Notice of Exercise attached hereto (the "Notice of Exercise") duly executed, and simultaneous payment therefor in lawful money of the United States or otherwise as hereinafter provided, at the exercise price as set forth in Section 2 hereof. The number, character, and exercise price of such shares of Common Stock are subject to adjustment as provided below. 1. TERM OF WARRANT. Subject to the terms and conditions set forth herein, this Warrant shall become exercisable on ____, 1998, and shall remain exercisable until 5:00 p.m. Pacific time on ___, 2001, and shall be void thereafter. 1 34 2. EXERCISE AND ADJUSTMENTS. 2.1 Exercise Price. The exercise price at which this Warrant may be exercised is ________________________ ($_____) 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. 2 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. 3 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. 4 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 5 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. 6 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 7 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:_________________________ 8 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: _________________________________ 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: __________________________ ___________________________________ ___________________________________ ___________________________________ 43 EXHIBIT B REGISTRATION RIGHTS AGREEMENT 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 1 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 2 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 3 47 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 4 48 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 5 49 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 6 50 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 7 51 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. 8 52 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. 9 53 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: __________________________ 10 EX-5 3 OPINION OF O'MELVENY & MYERS 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 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 EX-23.1 4 CONSENT OF KPMG PEAT MARWICK, LLP 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 -----END PRIVACY-ENHANCED MESSAGE-----