-----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, AXw4BmJeVvs5WJOPmkKepuPQwe1cWfiTYUeeXONgE7W9Zh0vE973JOSosvobPWkb /DX546kE7w56hqTmOhu20Q== 0000950150-98-001309.txt : 19980805 0000950150-98-001309.hdr.sgml : 19980805 ACCESSION NUMBER: 0000950150-98-001309 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980804 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-13451 FILM NUMBER: 98676846 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 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from................to................ Commission file number 000-22249 INTERNATIONAL AIRCRAFT INVESTORS (Exact name of registrant as specified in its charter) CALIFORNIA 95-4176107 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3655 TORRANCE BOULEVARD, SUITE 410 TORRANCE, CALIFORNIA 90503 (Address of principal executive offices) (Zip Code) (310) 316-3080 (Registrant's telephone number, including area code) ........................................N/A.................................... (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 30, 1998 ----- ---------------------------- COMMON STOCK, $.01 PAR VALUE 4,497,584 -1- 2 INTERNATIONAL AIRCRAFT INVESTORS INDEX
PART I. FINANCIAL INFORMATION Page No. Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets As of June 30, 1998 and December 31, 1997.......................... 3 Condensed Consolidated Statements of Income Three months ended June 30, 1998 and 1997.......................... 4 Condensed Consolidated Statements of Income Six months ended June 30, 1998 and 1997............................ 5 Condensed Consolidated Statements of Cash Flows Six months ended June 30, 1998 and 1997............................ 6 Notes to Condensed Consolidated Financial Statements............... 7 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations.......................................... 10 PART II. OTHER INFORMATION Item 5. Other Information.................................................. 13 Item 6. Exhibits and Reports on Form 8-K................................... 13 Signatures......................................................... 15
-2- 3 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1998 1997 ------------- ------------- (UNAUDITED) ASSETS Cash and cash equivalents ................................ $ 21,230,131 $ 23,838,306 Flight equipment, at cost less accumulated depreciation of $30,310,000 at March 31, 1998 and $25,402,000 at December 31, 1997 .................................. 167,598,257 172,506,257 Cash, restricted ......................................... 8,144,227 6,976,974 Other assets ............................................. 6,006,194 1,230,589 ------------- ------------- $ 202,978,809 $ 204,552,126 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Accrued interest and other accrued expenses .............. $ 1,382,297 $ 1,343,677 Notes payable ............................................ 149,496,376 154,719,546 Lease and other deposits on flight equipment ............. 13,457,187 11,236,113 Deferred rent ............................................ 2,340,600 3,334,000 Deferred taxes, net ...................................... 1,724,200 823,800 ------------- ------------- 168,400,660 171,457,136 Commitments and contingencies Shareholders' equity Preferred stock, $.01 par value. Authorized 15,000,000 shares; none issued and outstanding .................... -- -- Common stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,497,584 shares ....................................... 44,976 44,976 Additional paid-in capital ............................... 33,272,435 33,272,435 Deferred compensation .................................... (625,000) (750,000) Retained earnings ........................................ 1,885,738 527,579 ------------- ------------- Net shareholders' equity ....................... 34,578,149 33,094,990 ------------- ------------- $ 202,978,809 $ 204,552,126 ============= =============
See accompanying notes to condensed consolidated financial statements -3- 4 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, ---------------------------- 1998 1997 ---------- ---------- (UNAUDITED) REVENUES: Rental of flight equipment ............................... $6,120,193 $3,317,732 Interest income .......................................... 490,079 55,450 ---------- ---------- Total revenues .................................... 6,610,272 3,373,182 EXPENSES: Interest ................................................. 2,731,887 1,538,012 Depreciation ............................................. 2,454,000 1,380,000 General and administrative ............................... 372,693 159,141 Stock compensation ....................................... 62,500 75,000 ---------- ---------- Total expenses ..................................... 5,621,080 3,152,153 ---------- ---------- Income before income taxes ................................. 989,192 221,029 Income tax expense ......................................... 397,200 88,000 ---------- ---------- Net income ......................................... $ 591,992 $ 133,029 ========== ========== Basic earnings per share ................................... $ .13 $ 1.90 ========== ========== Diluted earnings per share ................................. $ .13 $ .08 ========== ========== Weighted average common shares outstanding: Basic ................................................. 4,497,584 70,000 ========== ========== Assuming dilution ..................................... 4,679,055 1,720,470 ========== ========== Pro forma effect assuming the change in accounting principle is applied retroactively: Net income ......................................... $ 591,992 $ 143,029 Earnings per share: Basic ............................................. $ .13 $ 2.04 Diluted ........................................... $ .13 $ .08
See accompanying notes to condensed consolidated financial statements -4- 5 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, ------------------------------ 1998 1997 ----------- ----------- (UNAUDITED) REVENUES: Rental of flight equipment ................................... $12,260,619 $ 6,478,881 Consulting fees .............................................. -- 12,000 Interest income .............................................. 921,621 98,875 ----------- ----------- Total revenues ........................................ 13,182,240 6,589,756 EXPENSES: Interest ..................................................... 5,520,064 3,021,048 Depreciation ................................................. 4,908,000 2,760,000 General and administrative ................................... 709,817 289,521 Stock compensation ........................................... 125,000 100,000 ----------- ----------- Total expenses ......................................... 11,262,881 6,170,569 ----------- ----------- Income before income taxes and cumulative effect of accounting change ....................................................... 1,919,359 419,187 Income tax expense ............................................. 770,200 160,000 ----------- ----------- Net income before cumulative effect of accounting change ....... 1,149,159 259,187 Cumulative effect of change in accounting for ancillary payments under lease agreements, net of income tax expense of $139,000 ................................................... 209,000 -- ----------- ----------- Net income ............................................. $ 1,358,159 $ 259,187 =========== =========== Basic earnings share: Net income before cumulative effect of accounting change $ .25 $ 3.70 Cumulative effect of accounting change ................. .05 -- ----------- ----------- Net income ............................................. $ .30 $ 3.70 =========== =========== Diluted earnings per share: Net income before cumulative effect of accounting change $ .25 $ .15 Cumulative effect of accounting change ................. .04 -- ----------- ----------- Net income ............................................. $ .29 $ .15 =========== =========== Weighted average common shares outstanding: Basic ..................................................... 4,497,584 70,000 =========== =========== Assuming dilution ......................................... 4,661,662 1,750,470 =========== =========== Pro forma effect assuming the change in accounting principle is applied retroactively: Net income ............................................. $ 1,149,159 $ 279,187 Earnings per share: Basic ................................................. $ .25 $ 3.99 Diluted ............................................... $ .25 $ .16
See accompanying notes to condensed consolidated financial statements -5- 6 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, --------------------------------- 1998 1997 ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net income ............................................. $ 1,358,159 $ 259,187 Adjustments to reconcile net income to cash provided by operating activities: Depreciation of flight equipment .................... 4,908,000 2,760,000 Cumulative effect of accounting change .............. (209,000) -- Amortization of deferred transaction fees ........... 103,105 76,567 Deferred taxes, net ................................. 900,400 154,000 Stock compensation .................................. 125,000 100,000 (Increase) decrease in assets: Cash, restricted .................................... (1,167,253) (2,444,309) Other assets ........................................ (4,864,460) (386,592) Increase (decrease) in liabilities: Accrued interest and other accrued liabilities ...... 38,620 173,215 Lease and other deposits on flight equipment ........ 2,430,074 4,388,110 Deferred rent ....................................... (993,400) 86,000 ------------ ------------ Net cash provided by operating activities ........... 2,629,245 5,166,178 Cash flows from investing activities: Purchase of flight equipment ........................ -- (30,200,000) ------------ ------------ Net cash used in investing activities ............... -- (30,200,000) Cash flows from financing activities: Repayment of notes payable .......................... (4,195,319) (2,389,845) Repayment of notes payable to ILFC .................. (1,000,601) (243,012) Repayment of notes payable to GLH ................... (41,500) -- Proceeds from notes payable ......................... -- 22,500,000 Proceeds from notes payable from ILFC ............... -- 4,433,000 Issuance of common stock ............................ -- 50,000 ------------ ------------ Net cash (used in) provided by financing activities . (5,237,420) 24,350,143 ------------ ------------ Net decrease in cash and cash equivalents ........... (2,608,175) (683,679) Cash and cash equivalents at beginning of period ....... 23,838,306 1,174,369 ------------ ------------ Cash and cash equivalents at end of period ............. $ 21,230,131 $ 490,690 ============ ============ Supplemental disclosure of cash flow information Cash paid for interest .............................. $ 5,378,339 $ 2,865,008
See accompanying notes to condensed consolidated financial statements -6- 7 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal and recurring accruals) necessary for a fair presentation of the financial position of the Company as of June 30, 1998 and December 31, 1997 and the results of its operations for the three month and six month periods ended June 30, 1998 and 1997 and its cash flows for the three and six months ended June 30, 1998 and 1997. Operating results for the six month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. 2. ACCOUNTING CHANGE Effective January 1, 1998, the Company changed its method of accounting for income recognition of ancillary payments under lease agreements to a full accrual method from recognition upon lease termination. This new method, which was accounted for as a change in accounting method, was made to better reflect the earnings process under lease agreements. The effect of this change on net earnings and earnings per share, before cumulative effect of accounting change, for the three month and six month periods ended June 30, 1998, respectively were increases of $157,000 ($.03 per basic and diluted share) and $314,000 ($.07 per basic and diluted share). The cumulative effect on retained earnings at January 1, 1998 of the accounting change was an increase of approximately $209,000 ($.05 per basic and diluted share), net of related income taxes of $139,000. The pro forma amounts shown on the condensed consolidated statements of income have been adjusted for the effect of retroactive application. 3. MANAGEMENT ESTIMATES The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These affect the reported amounts of assets, liabilities, revenues and expenses and the amount of any contingent assets or liabilities disclosed in the condensed consolidated financial statements. Actual results could differ from estimates made. The Company leases flight equipment to various commercial airline fleets on short-term to medium-term operating leases, generally three to five years. The related flight equipment is generally financed by borrowings that become due at or near the end of the lease term through a balloon payment. As a result, the Company's operating results depend on management's ability to roll over debt facilities, renegotiate favorable leases and realize estimated residual values. 4. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (SFAS No. 128) "Earnings per Share." SFAS No. 128 replaced the calculation of primary and diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings -7- 8 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to SFAS No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------------- -------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Numerator: Net income before cumulative effect of accounting change .......................... $ 591,992 $ 133,029 $1,149,159 $ 259,187 Cumulative effect of change in accounting for ancillary payments under lease agreements ... -- -- 209,000 -- ---------- ---------- ---------- ---------- Net income .................................... $ 591,992 $ 133,029 $1,358,159 $ 259,187 Denominator: Denominator for basic earnings per share- weighted average shares outstanding ........ 4,497,584 70,000 4,497,584 70,000 Effect of dilutive securities: Employee stock options ...................... 181,471 156,873 164,078 186,873 Non-employee stock options .................. -- 240,069 -- 240,069 Convertible preferred stock ................. -- 1,097,973 -- 1,097,973 Convertible note payable .................... -- 155,555 -- 155,555 ---------- ---------- ---------- ---------- Dilutive potential common shares .............. 181,471 1,650,470 164,078 1,680,470 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share- adjusted weighted average shares and assumed conversions ................................ 4,679,055 1,720,470 4,661,662 1,750,470 Basic earnings per share: Net income before cumulative effect of accounting change .......................... $ .13 $ 1.90 $ .25 $ 3.70 Cumulative effect of accounting change ........ -- -- .05 -- ---------- ---------- ---------- ---------- Net income .................................... $ .13 $ 1.90 $ .30 $ 3.70 ========== ========== ========== ========== Diluted earnings per share: Net income before cumulative effect of accounting change .......................... $ .13 $ .08 $ .25 $ .15 Cumulative effect of accounting change ...... -- -- .04 -- ---------- ---------- ---------- ---------- Net income .................................. $ .13 $ .08 $ .29 $ .15 ========== ========== ========== ==========
The Company issued its underwriters warrants to purchase 260,000 shares of its common stock at $12 per share in connection with its initial public offering. These warrants were excluded from the computation of diluted net income per common share because they were anti-dilutive. The warrants are exercisable through November 5, 2000. -8- 9 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. NOTES PAYABLE In April 1998, the Company refinanced a note payable for $3,755,900 with a bank to August 1998. The Company is in the process of extending the note to April 2003. In April 1998, the Company repaid a note payable with a balance of $886,000. The Company's composite interest rate was 7.3% and 7.4% at June 30, 1998 and 1997, respectively. 6. NEW ACCOUNTING STANDARDS The FASB has issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." 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. 130 and SFAS No. 131 are effective for periods beginning after December 15, 1997. SFAS No. 130, "Comprehensive Income" is the same as income as reported on the accompanying condensed consolidated financial statements. The Company plans to implement SAFS No. 131 in connection with its 1998 reporting on Form 10-K. As SFAS No. 131 only requires additional disclosures, the Company expects there will be no material impact on its financial condition or results of operations from its implementation. 7. SUBSEQUENT EVENTS During July 1998, the Company completed the purchase of a Boeing Model MD-83 on lease to Air Liberte through April 2002. Air Liberte, a French regional carrier, is 74% owned by British Airways. The acquisition from International Lease Finance Corporation was financed through a combination of equity investment and seller financing. The Company is in the process of refinancing with a bank a portion of the seller financing. In July 1998, the Company entered into an agreement to purchase two additional twin engine jet aircraft--a 1989 Boeing Model 737-400 and a 1993 Airbus Model A320-200. The 737-400 is on lease to Asiana, a Korean airline through January 2000 and the A320-200 is on lease to TransAer, an Irish charter airline through October 2001. In July 1998, the Company extended the lease of a Boeing Model 737-200 advance to Air New Zealand to March 2001. -9- 10 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) OVERVIEW The Company is primarily engaged in the acquisition of used, single-aisle jet aircraft for lease and sale to domestic and foreign airlines and other customers. The Company leases aircraft under short-term to medium-term operating leases where the lessee is responsible for all operating costs, including major overhauls 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 flight equipment is recorded on the balance sheet at cost 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. This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbors created thereby. Reference is made to the cautionary statements made in the Company's Report on Form 10-K for the year ended December 31, 1997 ("Form 10-K") which should be read as being applicable to all related forward-looking statements wherever they appear in this Report on Form 10-Q. 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 in the Form 10-K. ACCOUNTING CHANGE Effective January 1, 1998, the Company changed its method of accounting for income recognition of ancillary payments under lease agreements to a full accrual method from recognition upon lease termination. This new method, which was accounted for as a change in accounting method, was made to better reflect the earnings process under lease agreements. The effect of this change on net earnings, before cumulative effect of accounting change, for the three and six month periods ended June 30, 1998, respectively were an increase of $157 and $314. The cumulative effect on retained earnings at January 1, 1998 of the accounting change was an increase of approximately $209, net of related income taxes of $139. RESULTS OF OPERATIONS Three Months Ended June 30, 1998 and 1997 Revenues from rental of flight equipment increased by 84%, or $2,802, to $6,120 in the three months ended June 30, 1998 compared to the same period in 1997 as a result of the Company having ten aircraft under lease in the three months ended June 30, 1998 compared to seven aircraft under lease in the same period of 1997, as well as the impact of the change in accounting method discussed above. Interest income increased to $490 for the three months ended June 30, 1998 from $55 for the same period in 1997 principally as a result of interest on increased cash balances, primarily from the Company's initial public offering in November 1997 and restricted cash balances. Expenses as a percent of total revenues were 85% and 93% during the three months ended June 30, 1998 and 1997, respectively. This decrease in the percentage is due to the effect of the 96% increase in total revenue while expenses increased 78%. Interest expense increased to $2,732 for the three months ended June 30, 1998 from $1,538 for the same period in 1997 principally as a result of interest on financing related to the acquisition of three additional aircraft, offset by the effect of loan paydowns. The Company's composite interest rate was 7.3% and 7.4% at June 30, 1998 -10- 11 and 1997, respectively. Depreciation expense increased to $2,454 in the second quarter of 1998 from $1,380 in the second quarter of 1997 primarily as a result of the acquisition of three additional aircraft. General and administrative expenses increased to $373 in the three months ended June 30, 1998 from $159 in the same period of 1997. The increase in general and administrative expense was primarily the result of additional compensation resulting from the addition of two employees and new employment agreements with the Company's Chief Executive Officer and President, as well as the additional costs incurred due to maintaining the Company's status as a public company. During the three months ended June 30, 1998, the Company incurred $63 of non-cash stock compensation expense compared to $75 of non-cash stock compensation expense in the same period of 1997 related to the vesting of options granted to executive officers. The $309 increase in income tax expense represents a non-cash provision for deferred income taxes at an effective rate of 40%. The Company paid no federal income taxes during the three months ended June 30, 1998 due to substantial net operating loss carryforwards (NOL) resulting from accelerated tax depreciation. At December 31, 1997, the Company had $23,577 of federal NOLs. Net income increased to $592 for the three months ended June 30, 1998 from $133 for the same period in 1997 due to the factors described above. Six Months Ended June 30, 1998 and 1997 Revenues from rental of flight equipment increased by 89%, or $5,782, to $12,261 in the six months ended June 30, 1998 compared to the same period in 1997 as a result of the Company having ten aircraft under lease in the six months ended June 30, 1998 compared to seven aircraft under lease in the same period of 1997, as well as the impact of the change in accounting method discussed above. The decrease in consulting fees of $12 is primarily the result of the termination in January 1997 of an arrangement with Great Lakes Holdings ("Great Lakes"), a company owned 100% by the Chief Executive Officer and the President of the Company. No further consulting fees are expected to be received from Great Lakes. Interest income increased to $922 for the six months ended June 30, 1998 from $99 for the same period in 1997 principally as a result of interest on increased cash balances, primarily from the Company's initial public offering in November 1997 and restricted cash balances. Expenses as a percent of total revenues were 85% and 94% during the six months ended June 30, 1998 and 1997, respectively. This decrease in the percentage is due to the effect of the 100% increase in total revenue while expenses increased 83%. Interest expense increased to $5,520 for the six months ended June 30, 1998 from $3,021 for the same period in 1997 principally as a result of interest on financing related to the acquisition of three additional aircraft, offset by the effect of loan paydowns. Depreciation expense increased to $4,908 in 1998 from $2,760 in 1997 primarily as a result of the acquisition of three additional aircraft. General and administrative expenses increased to $710 in the six months ended June 30, 1998 from $290 in the same period of 1997. The increase in general and administrative expense was primarily the result of additional compensation resulting from the addition of two employees and new employment agreements with the Company's Chief Executive Officer and President, as well as the additional costs incurred due to maintaining the Company's status as a public company. During the six months ended June 30, 1998, the Company incurred $125 of non-cash stock compensation expense compared to $100 of non-cash stock compensation expense in the same period of 1997 related to the vesting of options granted to executives officers. The $610 increase in income tax expense represents a non-cash provision for deferred income taxes at an effective rate of 40%. The Company paid no federal income taxes during the three months ended June 30, 1998 due to substantial net operating loss carryforwards (NOL) resulting from accelerated tax depreciation. At December 31, 1997, the Company had $23,577 of federal NOLs. Net income increased to $1,358 for the six months ended June 30, 1998 from $259 for the same period in 1997 due to the factors described above, as well as a $209 cumulative effect of accounting change. -11- 12 LIQUIDITY AND CAPITAL RESOURCES The Company's principal external sources of funds have been term loans from banks and seller financing secured by flight equipment and the net proceeds from the Company's initial public offering. A substantial amount of the Company's cash flows 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 flight equipment, at which time the Company will be required to re-lease the flight equipment and renegotiate the balloon amount of the loan or obtain other financing. Refinancing of the balloon amount is dependent upon the Company re-leasing the related flight equipment. Accordingly, the Company begins lease remarketing efforts well in advance of the lease termination. The principal use of cash is for financing the acquisition of the Company's flight equipment portfolio, which is financed by loans secured by the applicable flight equipment. As a result, the Company does not currently maintain a line of credit. For the six months ended June 30, 1998, net cash provided from operating activities decreased by $2,537 principally as a result of decreases in other assets, deferred rent and lease and other deposits on flight equipment of $4,478, $1,079 and $1,958, respectively, partially offset by an increase of $1,099 in net income, increases in noncash charges for depreciation and deferred taxes of $2,148 and $746, respectively, as well as a $1,277 increase in restricted cash. During the six months ended June 30, 1997, the Company acquired aircraft on lease for $30,200. No aircraft were purchased during the six months ended June 30, 1998. For the six months ended June 30, 1998, net cash used in financing activities was $5,237 compared to net cash provided by financing activities of $24,350 during the six months ended June 30, 1997. The Company made loan paydowns of $5,237 compared to $2,633 in 1997. In 1997, the Company borrowed $26,933 to finance the acquisition of aircraft and received $50 from the exercise of management stock options. Cash and cash equivalents vary from period to period 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 swap agreements are amortized to interest expense over the terms of the swap agreements. 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 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 International Lease Finance Corporation. IMPACT OF YEAR 2000 No change has occurred in the Company's Year 2000 status as previously disclosed in its December 31, 1997 report on Form 10-K. -12- 13 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION The Bylaws of the Company provide that for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Company, not less than 60 days prior nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure made. Since the last annual meeting was held on May 21, 1998, a shareholder's notice for the 1999 annual meeting must be received by the Company on or after February 20, 1999 and on or prior to March 22, 1999, unless the 1999 annual meeting is called for a date not within 30 days before or after May 21, 1999. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Company's books, of the shareholder proposing such business, (c) the class and number of shares of the Company which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS
NUMBER DESCRIPTION ------ ----------- 3.1 Amended and Restated Articles of Incorporation of the Company. Filed as Exhibit 3.1 to Form 10-Q for the quarterly period ended September 30, 1997, and incorporated herein by reference 3.2 Amended and Restated Bylaws of the Company. Filed as Exhibit 3.2 to Form 10-Q for the quarterly period ended September 30, 1997, and incorporated herein by reference 4.1 Specimen of Common Stock certificate. Filed as Exhibit 4.1 to Registration Statement No. 333-19875, and incorporated herein by reference 4.2 Amended and Restated Aircraft Loan Agreement dated November 4, 1996 between SWA I Corporation and Wells Fargo Bank, N.A.. Filed as Exhibit 4.2 to Registration Statement No. 333-19875, and incorporated herein by reference 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.. Filed as Exhibit 4.3 to Registration Statement No. 333-19875, and incorporated herein by reference 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.. Filed as Exhibit 4.4 to Registration Statement No. 333-19875, and incorporated herein by reference 4.5 Senior Term Loan Agreement dated as of May 17, 1996 between IAI Alaska I Corporation and City National Bank. Filed as Exhibit 4.5 to Registration Statement No. 333-19875, and incorporated herein by reference 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. Filed as Exhibit 4.6 to Registration Statement No. 333-19875, and incorporated herein by reference
-13- 14
NUMBER DESCRIPTION ------ ----------- 4.7 Secured Credit Agreement dated as of December 21, 1993 between IAI II, Inc. and Continental Bank, N.A. Filed as Exhibit 4.7 to Registration Statement No. 333-19875, and incorporated herein by reference 4.8 Note in the original principal amount of $21,976,677 made by IAI II, Inc. in favor of Continental Bank, N.A. Filed as Exhibit 4.8 to Registration Statement No. 333-19875, and incorporated herein by reference 4.9 Loan Agreement, dated as of September 26, 1997, between IAI IV, Inc. and International Lease Finance Corporation. Filed as Exhibit 4.9 to Registration Statement No. 333-19875, and incorporated herein by reference 4.10 Senior Term Loan Agreement, dated June 23, 1997, between IAI III, Inc. and City National Bank. Filed as Exhibit 4.10 to Registration Statement No. 333-19875, and incorporated herein by reference 4.11 Senior Term Loan Agreement, dated December 10, 1997, between IAI V, Inc. and City National Bank. Filed as Exhibit 4.11 to Form 10-Q for the quarterly period ended September 30, 1997, and incorporated herein by reference 4.12 Senior Term Loan Agreement, dated December 10, 1997, between IAI V, Inc. and International Lease Finance Corporation. Filed as Exhibit 4.12 to Form 10-Q for the quarterly period ended September 30, 1997, and incorporated herein by reference 4.13 The Company hereby agrees to furnish to the Commission upon request a copy of any instrument with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the consolidated assets of the Company 18 Preferability letter regarding change in accounting principle. Filed as Exhibit 18 to Form 10-Q for the quarterly period ended March 31, 1998 and incorporated herein by reference. 27.1 Financial Data Schedule for the three months ended June 30, 1998 27.2 Financial Data Schedule for the six months ended June 30, 1998 27.3 Financial Data Schedule for the three months ended June 30, 1997 27.4 Financial Data Schedule for the six months ended June 30, 1997
REPORTS ON FORM 8-K: During the quarter ended June 30, 1998, the Company did not file any reports on Form 8-K. -14- 15 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL AIRCRAFT INVESTORS August 3, 1998 by: /S/ Michael P. Grella ------------------------------- Michael P. Grella President August 3, 1998 by: /S/ Rick O. Hammond ------------------------------- Rick O. Hammond Vice President-Finance And Treasurer -15- EX-27.1 2 FINANCIAL DATA SCHEDULE FOR 3 MONTHS ENDED 6/30/98
5 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 21,230,131 0 0 0 0 0 197,908,257 30,310,000 202,978,809 0 0 0 0 44,976 34,533,173 202,978,809 0 6,610,272 0 2,889,193 0 0 2,731,887 989,192 397,200 0 0 0 0 591,992 $.13 $.13
EX-27.2 3 FINANCIAL DATA SCHEDULE FOR 6 MONTHS ENDED 6/30/98
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 21,230,131 0 0 0 0 0 197,908,257 30,310,000 202,978,809 0 0 0 0 44,976 34,533,173 202,978,809 0 13,182,240 0 5,742,817 0 0 5,520,064 1,919,359 770,200 0 0 0 209,000 1,358,159 $.30 $.29
EX-27.3 4 FINANCIAL DATA SCHEDULE FOR 3 MONTHS ENDED 6/30/97
5 3-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 490,690 0 0 0 0 0 138,936,974 21,612,000 122,130,242 0 0 49,410 0 700 5,442,618 0 0 3,373,182 0 1,614,141 0 0 1,538,012 221,029 88,000 0 0 0 0 133,029 $1.90 $.08
EX-27.4 5 FINANCIAL DATA SCHEDULE FOR 6 MONTHS ENDED 6/30/97
5 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 490,690 0 0 0 0 0 138,936,974 21,612,000 122,130,242 0 0 49,410 0 700 5,442,618 0 0 6,589,756 0 3,149,521 0 0 3,021,048 419,187 160,000 0 0 0 0 259,187 $3.70 $.15
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