-----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, W1alqA5QVYzezPK1Ik7NCU3RR6rQ4GrDem6L6maOxM25h2gnP3OOVcqe9IXq4DiR bgFJRSORsR7KY3iiLeegwQ== 0000950150-98-001758.txt : 19981113 0000950150-98-001758.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950150-98-001758 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98744906 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 FOR THE PERIOD ENDED SEPTEMBER 30, 1998 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 SEPTEMBER 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 November 9, 1998 COMMON STOCK, $.01 PAR VALUE 4,231,784 -1- 2 INTERNATIONAL AIRCRAFT INVESTORS INDEX
PART I. FINANCIAL INFORMATION Page No. Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets As of September 30, 1998 and December 31, 1997.............................. 3 Condensed Consolidated Statements of Income Three months ended September 30, 1998 and 1997.............................. 4 Condensed Consolidated Statements of Income Nine months ended September 30, 1998 and 1997............................... 5 Condensed Consolidated Statements of Cash Flows Nine months ended September 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 6. Exhibits and Reports on Form 8-K............................................ 13 Signatures.................................................................. 14
-2- 3 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1998 1997 --------------- ------------- (UNAUDITED) ASSETS Cash and cash equivalents ................................ $19,370,239 $23,838,306 Flight equipment, at cost less accumulated depreciation of $33,043,000 at September 30, 1998 and $25,402,000 at December 31, 1997 .................................. 209,974,257 172,506,257 Cash, restricted ......................................... 8,815,195 6,976,974 Other assets ............................................. 984,635 1,230,589 ------------- ------------- $239,144,326 $204,552,126 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Accrued interest and other accrued expenses .............. $1,348,198 $1,343,677 Notes payable ............................................ 183,132,787 154,719,546 Lease and other deposits on flight equipment ............. 15,375,299 11,236,113 Deferred rent ............................................ 2,499,988 3,334,000 Deferred taxes, net ...................................... 2,140,044 823,800 ------------- ------------- 204,496,316 171,457,136 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 4,407,584 shares at September 30, 1998 and 4,497,584 shares at December 31, 1997 .................. 44,076 44,976 Additional paid-in capital ............................... 32,629,269 33,272,435 Deferred compensation .................................... (562,500) (750,000) Retained earnings ........................................ 2,537,165 527,579 ------------- ------------- Net shareholders' equity ....................... 34,648,010 33,094,990 ------------- ------------- $239,144,326 $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 SEPTEMBER 30, -------------------------------- 1998 1997 ------------- ------------ (UNAUDITED) REVENUES: Rental of flight equipment ............................... $6,858,318 $4,048,850 Interest income .......................................... 449,252 102,334 ---------- ---------- Total revenues .................................... 7,307,570 4,151,184 EXPENSES: Interest ................................................. 3,078,618 2,034,430 Depreciation ............................................. 2,724,000 1,701,000 General and administrative ............................... 357,025 174,157 Stock compensation ....................................... 62,500 75,000 ---------- ---------- Total expenses ..................................... 6,222,143 3,984,587 ---------- ---------- Income before income taxes ................................. 1,085,427 166,597 Income tax expense ......................................... 434,000 66,600 ---------- ---------- Net income ......................................... $651,427 $99,997 ========== ========== Basic earnings per share ................................... $ .15 $ 1.23 ========== ========== Diluted earnings per share ................................. $ .14 $ .06 ========== ========== Weighted average common shares outstanding: Basic ............................................... 4,486,497 81,110 ========== ========== Assuming dilution ................................... 4,634,132 1,755,512 ========== ========== Pro forma effect assuming the change in accounting principle is applied retroactively: Net income ......................................... $651,427 $109,997 Earnings per share: Basic ....................................... $ .15 $ 1.36 Diluted ..................................... $ .14 $ .06
See accompanying notes to condensed consolidated financial statements -4- 5 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1998 1997 ------------- -------------- (UNAUDITED) REVENUES: Rental of flight equipment ................................... $19,118,937 $10,527,731 Consulting fees .............................................. -- 12,000 Interest income .............................................. 1,370,873 201,209 ----------- ----------- Total revenues ........................................ 20,489,810 10,740,940 EXPENSES: Interest ..................................................... 8,598,682 5,055,478 Depreciation ................................................. 7,632,000 4,461,000 General and administrative ................................... 1,066,842 463,678 Stock compensation ........................................... 187,500 175,000 ----------- ----------- Total expenses ......................................... 17,485,024 10,155,156 ----------- ----------- Income before income taxes and cumulative effect of accounting change ....................................................... 3,004,786 585,784 Income tax expense ............................................. 1,204,200 226,600 ----------- ----------- Net income before cumulative effect of accounting change ....... 1,800,586 359,184 Cumulative effect of change in accounting for ancillary payments under lease agreements, net of income tax expense of $139,000 ................................................... 209,000 -- ----------- ----------- Net income ............................................. $2,009,586 $359,184 =========== =========== Basic earnings share: Net income before cumulative effect of accounting change $ .40 $ 4.87 Cumulative effect of accounting change ................. .05 -- ----------- ----------- Net income ............................................. $ .45 $ 4.87 =========== =========== Diluted earnings per share: Net income before cumulative effect of accounting change $ .39 $ .20 Cumulative effect of accounting change ................. .04 -- ----------- ----------- Net income ............................................. $ .43 $ .20 =========== =========== Weighted average common shares outstanding: Basic ................................................... 4,493,848 73,703 =========== =========== Assuming dilution ....................................... 4,635,019 1,765,790 =========== =========== Pro forma effect assuming the change in accounting principle is applied retroactively: Net income ............................................. $1,800,586 $389,184 Earnings per share: Basic ........................................... $ .40 $ 5.28 Diluted ......................................... $ .39 $ .22
See accompanying notes to condensed consolidated financial statements -5- 6 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1998 1997 ------------- ------------- (UNAUDITED) Cash flows from operating activities: Net income ....................................... $ 2,009,586 $ 359,184 Adjustments to reconcile net income to cash provided by operating activities: Depreciation of flight equipment ............. 7,632,000 4,461,000 1,380,000 Cumulative effect of accounting change ....... (209,000) -- Amortization of deferred transaction fees .... 170,474 138,775 Deferred taxes, net .......................... 1,316,244 219,000 Stock compensation ........................... 187,500 175,000 (Increase) decrease in assets: Cash, restricted ............................. (1,838,221) (2,838,755) Other assets ................................. 89,730 (350,887) Increase (decrease) in liabilities: Accrued interest and other accrued liabilities 4,521 602,347 Lease and other deposits on flight equipment . 4,348,186 4,809,680 Deferred rent ................................ (834,012) 250,500 ------------ ------------ Net cash provided by operating activities .... 12,877,008 7,825,844 Cash flows from investing activities: Purchase of flight equipment ................. (45,100,000) (52,906,283) ------------ ------------ Net cash used in investing activities ........ (45,100,000) (52,906,283) Cash flows from financing activities: Repayment of notes payable ................... (6,038,104) (3,786,017) Repayment of notes payable to ILFC ........... (1,805,405) (323,712) Repayment of notes payable to GLH ............ (41,500) -- Proceeds from notes payable .................. -- 23,500,000 Proceeds from notes payable from ILFC ........ 36,284,000 24,433,000 Proceeds from notes payable from GLH ......... -- 200,000 Issuance of common stock ..................... -- 50,000 Repurchase of common stock ................... (644,066) -- ------------ ------------ Net cash provided by financing activities .... 27,754,925 44,073,271 ------------ ------------ Net decrease in cash and cash equivalents .... (4,468,067) (1,007,168) Cash and cash equivalents at beginning of period . 23,838,306 1,174,369 ------------ ------------ Cash and cash equivalents at end of period ....... $ 19,370,239 $ 167,201 ============ ============ Supplemental disclosure of cash flow information Cash paid for interest ....................... $ 8,565,405 $ 4,406,756 Cash paid for income taxes ................... $ 18,156 $ --
See accompanying notes to condensed consolidated financial statements -6- 7 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 September 30, 1998 and December 31, 1997 and the results of its operations for the three month and nine month periods ended September 30, 1998 and 1997 and its cash flows for the nine months ended September 30, 1998 and 1997. Operating results for the nine month period ended September 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 nine month periods ended September 30, 1998, respectively were increases of $164,000 ($.04 per basic and diluted share) and $478,000 ($.11 per basic and $.10 per 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 balloon payments. 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 ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Numerator: Net income before cumulative effect of accounting change .......................... $ 651,427 $ 99,997 $1,800,586 $ 359,184 Cumulative effect of change in accounting for ancilary payments under lease agreements ... -- -- 209,000 -- ---------- ---------- ---------- ---------- Net income ..................................... $ 651,427 $ 99,997 $2,009,586 $ 359,184 Denominator: Denominator for basic earnings per share- weighted average shares outstanding ........ 4,486,497 81,110 4,493,848 73,703 Effect of dilutive securities: Employee stock options ...................... 147,635 180,805 141,171 198,490 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 ............... 147,635 1,674,402 141,171 1,692,087 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share- adjusted weighted average shares and assumed conversions ................................ 4,634,132 1,755,512 4,635,019 1,765,790 Basic earnings per share: Net income before cumulative effect of accounting change .......................... $ .15 $ 1.23 $ .40 $ 4.87 Cumulative effect of accounting change ......... -- -- .05 -- ---------- ---------- ---------- ---------- Net income ..................................... $ .15 $ 1.23 $ .45 $ 4.87 ========== ========== ========== ========== Diluted earnings per share: Net income before cumulative effect of accounting change .......................... $ .14 $ .06 $ .39 $ .20 Cumulative effect of accounting change ...... -- -- .04 -- ---------- ---------- ---------- ---------- Net income .................................. $ .14 $ .06 $ .43 $ .20 ========== ========== ========== ==========
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) Options issued under the Eligible Directors Option Plan are excluded from the computation of diluted net income per common share because they were anti-dilutive. 5. FLIGHT EQUIPMENT During 1998, the Company purchased from ILFC a 1990 Boeing Model MD-83 on lease to March 2002 and a 1989 Boeing Model 737-400 on lease to January 2000 with an aggregate purchase price of $45,100,000. The Company financed these acquisitions through bridge loans and loans provided by ILFC. During the third quarter of 1998, the Company entered into an agreement to purchase a 1993 Airbus Model A320-200 on lease to October 2000. The completion of the purchase is dependant on the timing of certain bank financing. 6. NOTES PAYABLE The Company refinanced notes payable for $3,755,900 and $4,080,443 with banks to May 2003 and June 1999, respectively. The Company is in the process of negotiating with banks long-term financing to take out bridge loans currently with ILFC with an aggregate balance of $32,633,632 The Company's composite interest rate was 7.2% and 7.3% at September 30, 1998 and 1997, respectively. 7. SHAREHOLDERS' EQUITY During 1998, the Company granted options to purchase 25,000 shares of common stock at an exercise price of $10.25 under the 1997 Eligible Director Stock Option Plan. In September 1998, the Board of Directors authorized the repurchase of up to 449,758 shares of the Company's common stock of which 265,800 have been repurchased as of October 30, 1998. 8. 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 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. 9. SUBSEQUENT EVENTS In October 1998, the Company re-leased its 1989 Boeing Model MD-82 aircraft until Trans World Airlines to October 2004. In October 1998, the Company extended a bridge loan of $14,500,000 to November 1998. -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 nine month periods ended September 30, 1998, respectively were an increase of $164 and $478. 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 September 30, 1998 and 1997 Revenues from rental of flight equipment increased by 69%, or $2,809, to $6,858 in the three months ended September 30, 1998 compared to the same period in 1997 as a result of the acquisition of three aircraft on lease, as well as the impact of the change in accounting method discussed above. The Company's lease portfolio consisted of twelve aircraft on lease with a book value of $209,974 at September 30, 1998 and nine aircraft on lease with a book value of $138,330 at September 30, 1997. During the three months ended September 30, 1998, the Company purchased a 1990 Boeing Model MD-83 on lease until March 2002, a Boeing Model 737-400 on lease to January 2000 and extended the lease of a hushkitted 1980 Boeing Model 737-200ADV aircraft to March 2001. Interest income increased to $449 for the three months ended September 30, 1998 from $102 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 96% during the three months ended September 30, 1998 and 1997, respectively. This decrease in the percentage is due to the effect of a 76% increase in total revenue while -10- 11 expenses increased 56%. Interest expense increased to $3,079 for the three months ended September 30, 1998 from $2,034 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 7.2% and 7.3% at September 30, 1998 and 1997, respectively. Depreciation expense increased to $2,724 in the third quarter of 1998 from $1,701 in the third quarter of 1997 primarily as a result of the acquisition of three additional aircraft. General and administrative expenses increased to $357 in the three months ended September 30, 1998 from $174 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 an employee 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 September 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. Income before income taxes increased to $1,085 from $167 as a result of the increase in total revenues and reduction in total expenses as a percent of total revenues. The $367 increase in income tax expense primarily represents a provision for income taxes at an effective rate of 40%. The Company continues to generate substantial federal net operating loss carryforwards resulting primarily from accelerated depreciation. Net income increased to $651 for the three months ended September 30, 1998 from $100 for the same period in 1997 due to the factors described above. Nine Months Ended September 30, 1998 and 1997 Revenues from rental of flight equipment increased by 82%, or $8,591, to $19,119 in the nine months ended September 30, 1998 compared to the same period in 1997 as a result of the acquisition of three aircraft on lease, as well as the impact of the change in accounting method discussed above. The Company's lease portfolio consisted of twelve aircraft on lease with a book value of $209,974 at September 30, 1998 and nine aircraft on lease with a book value of $138,330 at September 30, 1997. During the nine months ended September 30, 1998, the Company purchased a 1990 Boeing Model MD-83 on lease until March 2002 and a Boeing Model 737-400 on lease to January 2000. In addition, the Company extended the lease of a 1979 Boeing Model 727-200 to April 2003 and a hushkitted 1980 Boeing Model 737- 200ADV aircraft to March 2001. 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 $1,371 for the nine months ended September 30, 1998 from $201 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 95% during the nine months ended September 30, 1998 and 1997, respectively. This decrease in the percentage is due to the effect of the 91% increase in total revenue while expenses increased 72%. Interest expense increased to $8,599 for the nine months ended September 30, 1998 from $5,055 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 $7,632 in 1998 from $4,461 in 1997 primarily as a result of the acquisition of three additional aircraft. General and administrative expenses increased to $1,067 in the nine months ended September 30, 1998 from $464 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 nine months ended September 30, 1998, the Company incurred $188 of non-cash stock compensation expense compared to $175 of non-cash stock compensation expense in the same period of 1997 related to the vesting of options granted to executives officers. -11- 12 Income before income taxes and cumulative effect of accounting change increased to $3,005 from $586 as a result of the increase in total revenues and reduction in total expenses as a percent of total revenues. The $978 increase in income tax expense primarily represents a provision for income taxes at an effective rate of 40%. The Company continues to generate substantial federal net operating loss carryforwards resulting primarily from accelerated depreciation. Net income increased to $2,010 for the nine months ended September 30, 1998 from $359 for the same period in 1997 due to the factors described above, as well as a $209 cumulative effect of accounting change. 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 nine months ended September 30, 1998, net cash provided from operating activities increased by $5,051 principally as a result of an increase of $1,650 in net income, increases in non-cash charges for depreciation and deferred taxes of $3,171 and 1,097, respectively, and a $1,001 decrease in restricted cash, partially offset by decreases in accrued interest and other liabilities, as well as lease and other deposits on flight equipment of $598 and $461, respectively. Net cash used in investing activities decreased to $45,100 in the nine months ended September 30, 1998 from $52,906 in the same period of 1997. The Company acquired two aircraft on lease in both periods. For the nine months ended September 30, 1998, net cash provided by financing activities was $27,755, including the proceeds from borrowings of $36,284 to finance the acquisition of aircraft on lease, offset by repayments of $7,885 on notes payable and $644 of common stock repurchases. For the nine months ended September 30, 1997, net cash provided by financing activities was $44,073, including borrowings of $48,133 to finance the acquisition of aircraft under lease, offset by repayments of $4,110 on notes payable and $50 received from the exercise of management stock options. In September 1998, the Board of Directors of the Company authorized the repurchase of up to 10%, or 449,758 shares, of the Company's outstanding common stock. As of October 30, 1998, the Company had repurchased 265,800 shares of common stock. Cash and cash equivalents vary from period to period principally as a result of the timing of the purchase and sale of aircraft, as well as internally generated cash. 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 successfully execute 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, extend 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 -12- 13 arrangements to date have been dependent in part upon International Lease Finance Corporation. IMPACT OF YEAR 2000 ISSUE The Year 2000 issue results from computer programs written using two digits to identify the year in the date field. These computer programs were designed and developed without consideration of the impact of the upcoming change in the century. If not corrected, these programs could create erroneous information by or at the year 2000. The Company has performed a review and assessment of its internal computer systems to determine the effect of the Year 2000 issue. Based on the results of this review, the Company believes that the internal effects of the Year 2000 issue will not materially affect future financial results or financial condition of the Company and the related cost for compliance will be insignificant. The Company has also initiated formal communications with lessees, manufacturers of its aircraft and business partners to determine the extent to which the Company and its aircraft are vulnerable to those third parties' failure to address their own Year 2000 issues. The Company expects to have its review of third party issues complete by December 31, 1998. Based on the responses from third parties received, the Company does not expect an material affect on the company's financial results or financial position. As such, no contingency plan has been developed. If the remaining responses indicate a material exposure as a result of third parties, the Company will develop a contingency plan. The Company will continue assessing its internal and external risk as the Company acquires additional information systems and enters into business relationships with additional lessees, manufacturers of aircraft and other business partners. PART II. OTHER INFORMATION 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 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 27.1 Financial Data Schedule for the three months ended September 30, 1998 27.2 Financial Data Schedule for the nine months ended September 30, 1998 27.3 Financial Data Schedule for the three months ended September 30, 1997 27.4 Financial Data Schedule for the nine months ended September 30, 1997
REPORTS ON FORM 8-K: During the quarter ended September 30, 1998, the Company did not file any reports on Form 8-K. -13- 14 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 November 10, 1998 /s/ MICHAEL P. GRELLA ----------------------------------------- Michael P. Grella President November 10, 1998 /s/ ALAN G. STANFORD, JR. ----------------------------------------- Alan G. Stanford, Jr. Vice President-Controller -14- EX-27.1 2 FINANCIAL DATA SCHEDULE FOR 3 MONTHS ENDED 9/30/98
5 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 19,370,239 0 0 0 0 0 243,008,257 33,034,000 239,144,326 0 183,132,787 0 0 44,076 34,603,934 239,144,326 0 7,307,570 0 3,143,525 0 0 3,078,618 1,085,427 434,000 0 0 0 0 651,427 .15 .14
EX-27.2 3 FINANCIAL DATA SCHEDULE FOR 9 MONTHS ENDED 9/30/98
5 3-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 167,201 0 0 0 0 0 161,643,257 23,313,000 143,120,069 0 126,745,064 49,410 0 811 5,617,504 143,120,069 0 4,151,184 0 1,950,157 0 0 2,034,430 166,597 66,600 0 0 0 0 99,997 1.23 .06
EX-27.3 4 FINANCIAL DATA SCHEDULE FOR 3 MONTHS ENDED 9/30/97
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 19,370,239 0 0 0 0 0 243,008,257 33,034,000 239,144,326 0 183,132,787 0 0 44,076 34,603,934 239,144,326 0 20,489,810 0 8,886,342 0 0 8,598,682 3,004,786 1,204,200 0 0 0 209,000 2,009,586 .45 .43
EX-27.4 5 FINANCIAL DATA SCHEDULE FOR 9 MONTHS ENDED 9/30/97
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 167,201 0 0 0 0 0 161,643,257 23,313,000 143,120,069 0 126,745,064 49,410 0 811 5,617,504 143,120,069 0 10,740,940 0 5,099,678 0 0 5,055,478 585,784 226,600 0 0 0 0 359,184 4.87 .20
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