-----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, QYcDvj8wofNkBxgfeY+NS95cdWAoN/NBhgUvDrXGJ3eXxyCFgVV8OidchbDPjJ0A 9G6XwsC1tH9TcpTJP+NtiQ== 0000950150-00-000228.txt : 20000329 0000950150-00-000228.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950150-00-000228 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 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-K405 SEC ACT: SEC FILE NUMBER: 001-13451 FILM NUMBER: 580218 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-K405 1 FORM 10-K405 YEAR ENDED DECEMBER 31, 1999 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K --------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ___________________ 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 ID No.) incorporation or organization) 3655 TORRANCE BOULEVARD, 90503 SUITE 410, TORRANCE, CALIFORNIA (Zip Code) (Address of registrant's principal executive offices) Registrant's telephone number, including area code: (310) 316-3080 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to Form 10-K. [X] The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant at March 16, 2000 was approximately $20,987,070 (based on the closing price on Nasdaq National Market as reported by the Wall Street Journal on such date). At March 16, 2000, the registrant had issued and outstanding an aggregate of 4,166,784 shares of its common stock. Documents Incorporated by Reference Certain information included in the registrant's definitive proxy statement ("Proxy Statement") to be filed with the Securities and Exchange Commission for the Annual Meeting of Stockholders of the registrant is incorporated by reference into Part III hereof. ================================================================================ 2 INTERNATIONAL AIRCRAFT INVESTORS ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 TABLE OF CONTENTS
ITEM PART I PAGE ---- ---- 1 Business 3 2 Properties 14 3 Legal Proceedings 14 4 Submission of Matters to a Vote of Securities Holders 14 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters 15 6 Selected Financial Data 16 7 Management's Discussion and Analysis of Financial Condition and Results of Operation 18 7A Quantitative and Qualitative Disclosures About Market Risk 21 8 Financial Statements and Supplementary Data 21 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 PART III 10 Directors and Executive Officers of the Registrant 22 11 Executive Compensation 22 12 Security Ownership of Certain Beneficial Owners and Management 22 13 Certain Relationships and Related Transactions 22 PART IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
2 3 PART I ITEM 1. BUSINESS. GENERAL We are primarily engaged in the acquisition of used, single-aisle jet aircraft for lease and sale to domestic and foreign airlines and other customers. As of December 31, 1999, we had sixteen aircraft on lease to fifteen airlines worldwide. We lease 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 we retain the potential benefit and 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 generally lower lease rates. The Company was incorporated in California in 1988. Our principal executive offices are located at 3655 Torrance Boulevard, Suite 410, Torrance, California 90503 and our telephone and facsimile numbers are (310) 316-3080 and (310) 316-8145, respectively. STRATEGY Our 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 our business strategy include the following: Focus on Operating Leases. We believe that airlines are 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. We believe the operating lease of jet aircraft, especially used jet aircraft, offers the potential for a higher rate of return to us than other methods of aircraft financing, such as finance leases. Focus on Used Commercial Jet Aircraft with a Broad Market Acceptance. We lease used, single-aisle jet aircraft which generally range between five and 15 years old at the time the aircraft is acquired by us. We currently focus on the acquisition and lease of single-aisle jet aircraft, primarily aircraft with a seating capacity of 121 to 240 passengers. According to the 1999 Current Market Outlook published by the Boeing Commercial Airplane Group in 1999, that type of aircraft accounted for approximately 40% of the world fleet at December 31, 1998. 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 the Boeing 737-300/-400, the Boeing Model 757-200, the McDonnell Douglas MD80 series and the Airbus A320. Optimize Relationship with ILFC. We have had a long and continuous relationship with International Lease Finance Corporation. ILFC was an initial investor in us and currently owns approximately 1.6% of our common stock. ILFC is a major owner-lessor of commercial jet aircraft and has contacts with most airlines worldwide, the aircraft and engine manufacturers and most of the significant participants in the aircraft industry worldwide. We intend to use our relationship with ILFC 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, rather than used, commercial jet aircraft. Thus, we believe that our 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. Our management and our Board of Directors 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. Access a Diversified Global Customer Base. Our objective is to diversify our customer base to avoid dependence on any one lessee, geographic area or economic trend. 3 4 Employ Strict Risk Management Criteria. We will only purchase aircraft that are currently under lease or are subject to a contractual commitment for lease or purchase. We currently seek to finance our aircraft using a non-recourse loan structure. We will not purchase aircraft on speculation. We evaluate carefully the credit risk associated with each of our lessees and the lessee's ability to operate and properly maintain the aircraft. We also evaluate the return conditions in each lease since the condition of an aircraft at the end of a lease can significantly impact the amount we will receive on the re-lease or sale of an aircraft. AIRCRAFT LEASING All of our current leases are operating leases rather than finance leases. Under an operating lease, we retain 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 "Cautionary Statements." We target the medium-term operating lease market, which generally consists of three to eight year initial noncancelable lease terms. Our 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, our leases contain extensive provisions regarding our remedies and rights in the event of a default by the lessee. The leases have payment clauses that require the lessee to continue to make the lease payments regardless of circumstances, including whether or not the aircraft is in service. Certain of our leases limit the lessee's obligation to make lease payments if we violate the covenant of quiet enjoyment regarding the aircraft or if we enter bankruptcy and do not assume the lease. During the term of the lease, we are required to be named as an additional insured on the lessee's aviation hull and liability insurance policies. Also, the leases contain very specific criteria for the maintenance and regulatory status of the aircraft, as well as the return conditions for the airframe, engines, landing gears, auxiliary power unit and associated components. Generally, the lessee provides us 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. The lessee may draw upon these maintenance reserves to reimburse the cost of periodic scheduled overhaul and maintenance checks. At the termination of the lease, the lessee is required to return the aircraft to us in the same condition as it was received, normal wear and tear excepted, so the aircraft is in a proper condition for re-lease or sale. See "Cautionary Statements." We make an analysis of the credit risk associated with each lease before entering into a lease. We obtain extensive financial information regarding the lessee. We evaluate the prospective lessee's available financial statements and trade and banking references, and working with our lender evaluate country and political risk, insurance coverage, liability and expropriation risk. The process for credit approval is a joint undertaking between us and the senior lender providing the debt financing for the leased aircraft. See "Cautionary Statements." Upon termination of a lease, our objective is to re-lease or sell the aircraft. Our leases generally require that the lessee notify us 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 us to commence our remarketing efforts well in advance of the termination of a lease. We generally negotiate lease extensions with our lessees. However, since January 1, 1997, aircraft which came off lease were re-leased to four new customers. 4 5 CUSTOMERS At December 31, 1999, our lessees included: Domestic Customers: Foreign Customers: - Delta Air Lines, Inc. - Air Liberte S.A. - ILFC (subleased to Copmania - Air Transat A.T. Inc. Panamenia de Aviacon, S.A. (COPA)) - Southwest Airlines Co. - Asiana Airlines, Inc. - Trans World Airlines, Inc. - British Airways Plc - Canada 3000 Airlines Limited - COPA - Flying Colours Airlines Limited - GB Airways Limited - Islandsflug, HF - New Zealand International Airlines Ltd. - TransAer International Airlines Limited - Transportes Aereos Ejecutivos, S.A. de C.V. (TAESA) During the years ended December 31, 1997, 1998 and 1999, lease revenues from flight equipment generated from foreign customers accounted for approximately 61%, 68% and 76%, respectively, of total revenues. Many foreign countries have currency and exchange laws regulating the international transfer of currencies. We attempt to minimize our currency and exchange risks by negotiating all of our aircraft leases in U.S. Dollars. We require, 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 us in U.S. Dollars. Although we have 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 following customers accounted for more than 10% of our total revenues in one or more of the three years ended December 31, 1999: Air Belgium International N.V. British Airways Plc. 1998-10% 1998-12% 1997-11% Air Transat A.T. Inc. Shanghai Airlines 1999-11% 1998-11% 1998-15% 1997-13% Alaska Airlines, Inc. Southwest Airlines Co. 1997-17% 1997-13% We lease aircraft to British Airways and two of its affiliates (Air Liberte and GB Airways). Revenues from British Airways and its affiliates accounted for 11%, 16% and 19% in 1997, 1998 and 1999, respectively. 5 6 FINANCING/SOURCE OF FUNDS We purchase used aircraft and aircraft engines on lease to airlines directly from other leasing companies or from airlines for leasing back to the airlines. Our typical purchase requires both secured debt and an equity investment by us. We generally make 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). We typically finance the balance of the purchase price with the proceeds of borrowings from banks or other financial institutions secured by the aircraft being financed (to date with the support of ILFC as the seller of the flight equipment). We maintain banking relationships primarily with four commercial banks providing long-term secured equipment financing to us in an aggregate amount of $127.9 million at December 31, 1999. ILFC has provided certain guarantees and other financial support with respect to our borrowings which have allowed us to finance our aircraft at more favorable leverage than we could have obtained without ILFC's support. See Notes 5 and 6 to Consolidated Financial Statements. At December 31, 1999, $262.9 million (or 96.7%) of our borrowings to finance aircraft purchases were on a non-recourse basis. Non-recourse loans are structured as loans to special purpose subsidiaries which only own the assets which secure the loan. Only the relevant special purpose subsidiary is liable for the repayment of the non-recourse loan. We are only liable if we breach certain limited representations and warranties under the applicable loan documentation. 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. 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 $9.1 million of our borrowings are on a recourse basis. ILFC has agreed to indemnify us for any payments under this recourse loan not funded by lease or sale payments. The terms of all of our current non-ILFC bridge borrowings end within 30 to 60 days after the minimum noncancelable period under the related lease, after which we will be required to renegotiate the loan or obtain other financing in connection with the re-lease of the aircraft. See "Cautionary Statements." Notes payable due within one year totaled $102.4 million at December 31, 1999, of which $101.3 million represents balloon payments and $1.1 million represents installment payments. We intend to refinance all of the balloon payments due in 2000. During 1997, 1998 and 1999, we refinanced $40.4 million, $29.7 million and $46 million of balloon payments, respectively. At December 31, 1999, our borrowings had interest rates ranging from 6.0% to 7.96% per annum, with a weighted average interest rate of 7% per annum. At December 31, 1999, approximately 10% of our borrowings accrued interest on a floating rate basis. We have previously provided for all of our financing needs through internally generated funds, borrowings and equity capital. There is no assurance that those sources will provide us with additional capital resources. Our future growth is dependent upon raising additional capital. See "Cautionary Statements." RELATIONSHIP WITH ILFC ILFC was an initial investor in the Company, and owns approximately 1.6% of our common stock. Fourteen of our sixteen present aircraft were acquired from ILFC and ILFC has provided certain guarantees and other financial support with respect to our borrowings. See "Financing/Source of Funds" above. ILFC has also paid various fees to us for consulting and remarketing services. We have entered into an agreement with ILFC pursuant to which ILFC has agreed to assist us in the remarketing of our aircraft if requested by us. See "Aircraft Leasing" above, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations," and Note 5 to Consolidated Financial Statements. ILFC is a wholly owned subsidiary of American International Group, Inc. and is a major owner-lessor of commercial jet aircraft. 6 7 COMPETITION The aircraft leasing industry is highly competitive. The level of competition depends in part upon the type of aircraft being leased and prospective lessees for the aircraft. Competition is primarily based upon the availability of the aircraft required by the customer and the lease rate. We believe that only a few comparably sized companies focus primarily on the same segment of the aircraft leasing market as we do. 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 us, although their primary focus is not on the same market segment on which we focus. Many of these periodic competitors have significantly greater financial resources than we have. Our competitors may lease aircraft at lower rates than we do and provide benefits, such as direct maintenance, crews, support services and trade-in privileges, which we do not intend to provide. We believe that we are able to compete in the leasing of used jet aircraft due to our experience in the industry and our reputation and expertise in acquiring and leasing aircraft. See "Cautionary Statements." GOVERNMENT REGULATION The Federal Aviation Administration ("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 operation and maintenance of all aircraft operated in the United States. Its regulations are designed to ensure 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 we do not operate our aircraft for public transportation of passengers and property, we are not directly subject to their regulatory jurisdiction. To export aircraft from the U.S. to a foreign destination, we are required to obtain an export license from the United States Department of Commerce. To date, we have not experienced any difficulty in obtaining the 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. Each signatory has agreed to comply with airworthiness directives of the country of manufacture of the aircraft. We will not lease our aircraft to any carrier domiciled in a country which is not a member of ICAO. We also require our lessees to comply with the most restrictive standards of either the FAA or its foreign equivalent. For older aircraft, a special group of airworthiness directives require extensive inspections and repairs to bring the aircraft into compliance, which are required to be paid by the lessee. In some instances, we may have to share in the cost of complying with regulatory airworthiness directives. 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. Fourteen of our aircraft currently comply with these regulations. Our remaining two aircraft, currently on lease to 2001, are leased in areas not requiring modification. These two aircraft may require modification if moved to a jurisdiction requiring compliance. Currently, these modifications range in cost from $1.2 million to $2 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 brought into the region and operated by an 7 8 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 "Cautionary Statements." INSURANCE We require our lessees to carry those types of insurance which are customary in the air transportation industry, including comprehensive third party liability insurance and aircraft hull insurance. We are named as an additional insured on both the liability and hull policies carried by our lessees. All policies contain a breach of warranty endorsement so that our interests 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 us through an independent insurance broker. The territorial coverage is, in each case, suitable for our 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 us. Furthermore, the insurance is primary and not contributory and all insurance carriers are required to waive rights of subrogation against us. The stipulated loss value schedule under aircraft hull insurance policies is on an agreed value basis, 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. These 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 us. EMPLOYEES As of December 31, 1999, we had seven employees. None of our employees is covered by a collective bargaining agreement and we believe our employee relations are good. CAUTIONARY STATEMENTS This Report on Form 10-K 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. The cautionary statements made in this Report on Form 10-K should be read as being applicable to all related forward-looking statements wherever they appear in this Report on Form 10-K. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Report. 8 9 We retain the residual value risk and the risk of the re-lease or sale of the aircraft. We lease our portfolio of aircraft under operating leases rather than finance leases. Under an operating lease, we retain title to the aircraft and assume the risk of not recovering our entire investment in the aircraft through the re-leasing and remarketing process. Operating leases require us to re-lease or sell aircraft in our portfolio in a timely manner upon termination of the lease in order to minimize off-lease time and recover our original investment in the aircraft. Numerous factors, many of which are beyond our control, may have an impact on our 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, including those imposing environmental, maintenance or operational requirements - changes in supply or cost of aircraft - 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, we cannot assure you that our estimated residual value for aircraft will be realized. If we are unable to re-lease or resell aircraft on favorable terms, our business, financial condition and results of operations could be adversely affected. We depend on the airline industry. We are in the business of providing leases of commercial jet aircraft to international and domestic airlines. Consequently, we are affected by downturns in the air transportation industry in general. We could be negatively impacted by any of the following factors affecting the air transportation industry: - substantial increases in fuel costs or interest rates - fare competition - slower growth in traffic - the number and quality of available aircraft - significant downturn in the general economy In recent years, a number of commercial airlines have experienced financial difficulties, in some cases resulting in bankruptcy proceedings. While we believe that our lease terms protect our aircraft and our investment in our aircraft, we cannot assure you that the financial difficulties experienced by airlines will not have an adverse effect on our business, financial condition and results of operations. We have a limited number of aircraft and lessees. We currently own and lease sixteen aircraft to fifteen 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 our business, financial condition and results of operations. We depend upon ILFC. Fourteen of our current sixteen aircraft were acquired from ILFC. See "Relationship With ILFC". In connection with all of our aircraft, ILFC has provided guarantees or other financial support which have allowed us to finance the aircraft at more favorable leverage than we could have obtained without the guarantees and financial support of ILFC. In addition, ILFC has provided a portion of the consulting fees reported by us. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." We cannot assure you that we 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, we cannot assure you that guarantees or financial support will be given by the seller or whether we will be able to receive as favorable leverage and interest rates from its lenders. If we are unable to acquire aircraft and leases and to finance the acquired aircraft at competitive rates, our business, financial condition and results of operations could be adversely affected. See "Relationship With ILFC," and Note 5 to Consolidated Financial Statements. 9 10 We are exposed to our lessees' credit risk. Certain of our 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 "We depend on the airline industry" above. A lessee may default in performance of its lease obligations and we may be unable to enforce our remedies under a lease. A number of airlines have experienced financial difficulties, and certain airlines have filed for bankruptcy. A number of these airlines have ceased operations. In most cases where a debtor seeks protection under Chapter 11 of the United States 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 we cannot assure you that the provisions of Section 1110 will protect our 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. We face special risks because of the number of foreign customers. Leases to foreign customers may present greater risks to us because certain foreign laws, regulations and judicial procedures may not be as protective of lessor rights as those which apply in the United States. We are subject to the timing and access to courts and the remedies local laws impose in order to collect our lease payments and recover our assets. Political instability abroad and changes in international policy also present risks associated with expropriation of our leased aircraft. We cannot assure you that we will not experience problems in collecting amounts due under leases to foreign customers or reacquiring aircraft from customers in the future. International collection problems and problems in recovering aircraft could have a material adverse effect on our business, financial condition and results of operations. Many foreign countries have currency and exchange laws regulating the international transfer of currencies. We attempt to minimize currency and exchange risks by negotiating all of our aircraft leases in U.S. Dollars. We require, 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 in U.S. Dollars of all funds contractually owed to us. Although we have 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. Our revenues and income may be affected by political instability abroad, changes in national policy and other political or economic events adversely affecting world or regional trading markets or impacting a particular customer. Our 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. We may need to comply with certain aircraft noise requirements for some of our aircraft. The Airport Noise and Capacity Act of 1990 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. 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 those jurisdictions. This has the effect of limiting our ability to place our Stage 2 aircraft on lease in those jurisdictions until they have been modified to meet Stage 3 requirements. Fourteen of our aircraft currently meet Stage 3 requirements. Our remaining two aircraft are currently leased in areas not imposing Stage 3 requirements. These two aircraft may require modification if moved to a jurisdiction requiring Stage 3 compliance. Currently, these modification costs range from $1.2 million to $2 million per aircraft. See "Government Regulation." We cannot assure you that we will be able to obtain financing for any of these modifications. The ANCA also recognizes the right of airport operators with special noise problems to implement local noise abatement procedures as long as these procedures do not interfere unreasonably with the interstate and foreign commerce 10 11 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 us with statutory and regulatory requirements concerning noise restriction and abatement could have a material adverse effect on our business, financial condition and results of operations. We depend on our ability to obtain financing. The operating lease business is a capital intensive business. Our typical operating lease transaction requires a cash investment by us of approximately 5% to 15% of the aircraft purchase price, commonly known as an "equity investment." Our equity investments have historically been financed from internally generated funds and other cash, seller financing (primarily from ILFC) and proceeds from our initial public 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, our ability to successfully execute our business strategy and to sustain our operations is dependent, in part, on the availability of debt and equity capital. In addition, the terms of our loans generally require a substantial balloon payment at the end of the noncancelable portion of the lease of the related aircraft, at which time we will be required to re-lease the aircraft and renegotiate the loan with the lender or obtain other financing. Refinancing the balloon amount of the loan is dependent upon our re-leasing the related aircraft. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." We cannot assure you that the necessary amount of capital will continue to be available to us on favorable terms, or at all. If we are unable to continue to obtain any portion of required financing on favorable terms, our ability to add new leases to our 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 could be limited, which could have a material adverse effect on our business, financial condition and results of operations. In addition, our financing arrangements to date have been dependent in part upon ILFC. See "Reliance Upon ILFC" above and "Relationship With ILFC," and Note 5 to Consolidated Financial Statements. We face risks of changes in interest rates. Our leases are generally structured at fixed rental rates for specified terms. See "Lease Portfolio" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." We cannot assure you that we will be able to finance or refinance our 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 lease rates we realize under our leases and the interest rate that we pay under our loans. Our business, financial condition and operating results could be adversely affected during any period of increases in interest rates. We face actual and potential competition from many sources. The aircraft leasing industry is highly competitive. The level of competition depends in part upon the type of aircraft being leased and prospective lessees for the aircraft. We believe that only a few comparably sized companies on a worldwide basis focus primarily on the same segment of the aircraft leasing market as we do. 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 us, although their primary focus is not on the market segment on which we focus. Many of these periodic competitors have significantly greater financial resources than we have. Our competitors may lease aircraft at lower rates than we do and provide benefits, such as direct maintenance, crews, support services and trade-in privileges, which we do not intend to provide. We cannot assure you that we will continue to compete effectively against present and future competitors or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations. 11 12 Foreign ownership of companies owning U.S. registered aircraft is limited. We intend to maintain United States registration of some of the aircraft which we own. 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 failure to meet the registration requirements of 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 us of any leases or financing agreements with respect to the aircraft. The limits on liability of lessors are uncertain. 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 the lessor is not in 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 damage awards can be substantial. Because there is little case law interpreting Section 44112, we cannot assure you that the provisions of Section 44112 would fully protect us from all liabilities in connection with any injury, death, damage or loss that may be caused by any aircraft we own. 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 us will be obligated to indemnify us for, or insure us against, virtually all claims by third parties; however, in the event that Section 44112 were not applicable, we cannot assure you that the lessees could fulfill their indemnity obligations under any such leases or that any insurance obtained will be sufficient. We could be subject to substantial costs if lessees do not properly maintain their leased aircraft. The maintenance and operation of aircraft are strictly regulated by the FAA and foreign aviation authorities. The cost of complying with these requirements is significant. We will seek to lease our aircraft to lessees that agree to bear all or a significant portion of the costs of complying with governmental regulations. All of our 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, we may be required to spend substantial sums to repair or recondition the aircraft and may be required to borrow funds for the purpose. The FAA issued several Airworthiness Directives in 1990 mandating changes to the maintenance programs for older aircraft. These ADs were issued to ensure that the oldest portion of the United States' 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 our business, financial condition and results of operations. Changes in tax laws or accounting principles could adversely affect us. Our leasing activities generate significant depreciation allowances that provide us with substantial tax benefits on an ongoing basis. In addition, some of our 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 could adversely affect our business, financial condition and results of operations. 12 13 We are dependent on key management Our business operations are dependent in part upon the expertise of certain key employees. The loss of the services of those employees, particularly William E. Lindsey and Michael P. Grella, would have a material adverse effect on our business, financial condition and results of operations. Our quarterly operating results fluctuate. We have experienced fluctuations in our quarterly operating results and anticipate that these fluctuations may continue. The factors causing fluctuations include: - the timing of 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 of an aircraft at a different lease rate - default by a lessee Given the possibility of fluctuations, we believe that comparisons of the results of our 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 our revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, the shortfall could have an immediate and significant adverse impact on the market price of our common stock. 13 14 ITEM 2. PROPERTIES FLIGHT EQUIPMENT We review opportunities to acquire suitable jet aircraft that meet our portfolio strategy based on market demand and customer airline requirements, as well as our portfolio mix and planning strategies. Before committing to purchase an aircraft, we take into consideration factors such as estimates of future values, potential for remarketing, trends in supply and demand for the particular type, make and model of aircraft and engines and anticipated obsolescence. As a result, certain types and vintages of aircraft do not meet the profile for inclusion in our portfolio of aircraft. At December 31, 1998 and 1999, the average age of our flight equipment was 12.5 and 12.6 years, respectively. As of December 31, 1998 and 1999, our portfolio contained ten and fourteen aircraft, respectively that were Stage 3 compliant. See "Item 1. Business--Cautionary Statements." The following table shows the scheduled lease terminations (for the minimum noncancellable period) by aircraft type for our lease portfolio at December 31, 1999:
AIRCRAFT TYPE 2000 2001 2002 2003 2004 2005 TOTAL - ------------- ---- ---- ---- ---- ---- ---- ----- A320-200 ........... 1 -- -- 1 -- -- 2 727-200 ............ -- -- -- 1 -- -- 1 737-200 ............ -- 3 -- -- -- -- 3 737-300 ............ -- -- 3 -- -- -- 3 737-400 ............ -- 2 -- 1 -- -- 3 757-200 ............ -- -- 1 1 -- -- 2 MD-82 .............. -- -- -- -- 1 -- 1 MD-83 .............. -- 1 -- -- -- -- 1 --- --- --- --- --- --- --- Total ........ 1 6 4 4 1 -- 16 === === === === === === ===
We are in the process of terminating a lease with TAESA, a Mexican airline. The airline recently had an accident on one of its DC-9 aircraft and the Mexican government subsequently grounded its entire fleet. As a result, TAESA defaulted on its lease of a Boeing Model 737-300, and we are currently in the process of repossessing the aircraft. The lease was due to terminate June 2002. FACILITIES Our principal offices are located at 3655 Torrance Boulevard, Suite 410, Torrance, California. We occupy space in Torrance under a lease that covers approximately 3,254 square feet of office space and expires on May 31, 2004. We believe that our current facilities are adequate for our needs and do not anticipate any difficulty replacing those facilities or locating additional facilities, if needed. See Note 7 to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS. We are not currently involved in any litigation. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None. 14 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS. Our common stock is listed on the National Association of Securities Dealers Automated Quotation National Market (Nasdaq National Market) under the trading symbol "IAIS." The high and low sale prices, as reported by The Nasdaq Stock Market, Inc., for the years ended December 31, 1998 and 1999 were as follows: 1998 1999 --------------------- ------------------- HIGH LOW HIGH LOW -------- ------ ------ ------- First Quarter $10 7/8 $9 1/8 $8 1/4 $6 1/8 Second Quarter $10 5/8 $8 5/8 $7 1/8 $6 3/16 Third Quarter $9 13/16 $6 3/4 $7 3/4 $6 7/16 Fourth Quarter $7 $5 3/8 $7 1/4 $5 11/16
On March 16, 2000, the number of holders of record of our common stock was 57. We have not paid any cash dividends on our capital stock. The payment of cash dividends in the future will be made at the discretion of the Board of Directors and will depend on a number of factors, including future earnings, capital requirements, our financial condition and future prospects and such other factors as the Board of Directors may deem relevant. We intend to retain all available funds for use in our business. Accordingly, we do not anticipate declaring or paying any dividends on our common stock in the foreseeable future. 15 16 ITEM 6. SELECTED FINANCIAL 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 and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
AT AND FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 1995 1996 1997 1998 1999 --------- --------- --------- --------- --------- STATEMENT OF INCOME DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND OTHER DATA) Revenues: Rental of flight equipment.................... $ 7,765 $ 12,681 $ 15,433 $ 26,985 $ 38,088 Consulting fees............................... 491 461 212 605 200 Gain on sale of aircraft equipment............ -- 141 -- -- -- Interest income............................... 118 169 483 1,727 1,454 --------- --------- --------- --------- --------- Total revenues........................... 8,374 13,452 16,128 29,317 39,742 Expenses........................................ 7,656 12,380 15,028 24,596 33,686 Equity in earnings of affiliates................ 183 -- -- -- -- --------- --------- --------- --------- --------- Income before income taxes and cumulative effect of accounting change and extraordinary loss...................... 901 1,072 1,100 4,721 6,056 Income tax expense.............................. 30 37 433 1,542 2,263 --------- --------- --------- --------- --------- Net income before cumulative effect of accounting change and extraordinary loss........................................ 871 1,035 667 3,179 3,793 Cumulative effect of accounting change.......... -- -- -- 209 -- Extraordinary loss on debt extinguishment....... -- -- -- -- (214) --------- --------- --------- --------- --------- Net income...................................... $ 871 $ 1,035 $ 667 $ 3,388 $ 3,579 ========= ========= ========= ========= ========= Basic earnings per share(1): Net income before cumulative effect of accounting change and extraordinary loss....................... $ 17.77 $ 14.79 $ .88 $ .72 $ .90 Cumulative effect of accounting change........ -- -- -- .04 -- Extraordinary loss on debt extinguishment..... -- -- -- -- (.05) --------- --------- --------- --------- --------- Net income.................................... $ 17.77 $ 14.79 $ .88 $ .76 $ .85 ========= ========= ========= ========= ========= Diluted earnings per share(1): Net income before cumulative effect of accounting change and extraordinary loss....................... $ .48 $ .56 $ .30 $ .70 $ .88 Cumulative effect of accounting change........ -- -- -- .05 -- Extraordinary loss on debt extinguishment..... -- -- -- -- (.05) --------- --------- --------- --------- --------- Net income.................................... $ .48 $ .56 $ .30 $ .75 $ .83 ========= ========= ========= ========= ========= Weighted average number of common shares outstanding.......................... 49 70 754 4,430 4,212 Weighted average number of common shares outstanding-assuming dilution........ 1,826 1,837 2,207 4,545 4,323 BALANCE SHEET DATA Flight equipment under operating lease.......... $ 95,450 $ 89,885 $ 172,506 $ 236,909 $ 314,083 Total assets.................................... 96,779 92,620 204,552 267,891 342,497 Debt financing.................................. 87,825 82,710 154,720 208,002 271,971 Shareholders' equity............................ 4,048 5,084 33,095 34,751 38,296 OTHER DATA Aircraft equipment owned at period end(2)....... 8 7 10 13 16
16 17 - -------------- (1) The earnings per share amounts have been restated as required to comply with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." For further discussion of earnings per share and the impact of SFAS No. 128, see Note 1 to Consolidated Financial Statements. (2) Aircraft equipment owned at December 31, 1995 includes one auxiliary power unit which was purchased in 1995 and sold for a gain of $141 in December 1996. 17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. (DOLLARS IN THOUSANDS) We are primarily engaged in the acquisition of used, single-aisle jet aircraft for lease and sale to domestic and foreign airlines and other customers. We lease aircraft under short-term to medium-term operating leases where the lessee is responsible for all operating costs and we retain the potential benefit or risk of the residual value of the aircraft. This is distinct from finance leases where the full cost of the aircraft is generally recovered over the term of the lease. Rental amounts are accrued evenly over the lease term and are recognized as revenue from the rental of flight equipment. Our flight equipment is recorded on the balance sheet at cost and is depreciated on a straight-line basis over the estimated useful life to our estimated salvage value. Revenue, depreciation expense and resultant profit for operating leases are recorded evenly over the life of the lease. Initial direct costs related to the origination of leases are capitalized and amortized over the lease terms. EXTRAORDINARY ITEM In May 1999, we repaid a note with a principal amount of $15,745 prior to maturity. The note was due May 2000 with a rate of 7.96%. The repayment resulted in an extraordinary charge of $214, net of a $131 income tax benefit. ACCOUNTING CHANGE Effective January 1, 1998, we changed our method of accounting for income recognition for 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 years ended December 31, 1998 and 1999, were increases of $983 and $2,055, respectively. 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 Years Ended December 31, 1997, 1998 and 1999 Revenues from rental of flight equipment increased by 74.8% to $26,985 in 1998 from $15,433 in 1997 primarily as a result of the acquisition of three aircraft under lease in 1998, as well as the change in accounting method discussed above. Our lease portfolio increased from ten aircraft with a book value of $172,506 at December 31, 1997 to thirteen aircraft with a book value of $236,909 at December 31, 1998. The 41% increase in rental revenues in 1999 to $38,088 from $26,985 in 1998 was primarily the result of the acquisition of three aircraft under lease in 1999. Our lease portfolio increased from thirteen aircraft with a book value of $236,909 at December 31, 1998 to sixteen aircraft with a book value of $314,083 at December 31, 1999. We are in the process of terminating a lease with TAESA, a Mexican airline. The airline recently had an accident on one of its DC-9 aircraft and the Mexican government subsequently grounded its entire fleet. As a result, TAESA defaulted on its lease of a Boeing Model 737-300, and we are currently in the process of repossessing the aircraft. The lease was due to terminate June 2002. We are aggressively marketing the aircraft to several airlines. Because of the current softness in the leasing market, any new lease will likely be at a reduced rate. In addition, we will not recognize rental revenue on this aircraft for at least the first three months of 2000. We will incur additional charges related to the repossession. We have two notes payable to ILFC related to the aircraft of $14,996 bearing interest at 7.96% due April 2000 and $402 bearing interest at 6.0% due May 2000. We intend to refinance the notes payable as they come due. In 1997, consulting revenues totaled $212, including $12 paid by Great Lakes Holdings (which is owned by our Chief Executive Officer and our President), $25 from ILFC and $175 from unrelated parties. No further consulting fees are expected to be received from Great Lakes. In 1998 and 1999, consulting fee revenues totaled $605 and $200, respectively paid from unrelated parties. Interest income increased to $1,727 in 1998 from $483 in 1997 principally as a result of a full year of interest earned on increased cash from our initial public offering and on increased restricted cash balances. Interest income decreased from $1,727 in 1998 to $1,454 in 1999 primarily as a result of lower average interest rates. 18 19 Expenses as a percent of total revenues were 93.2%, 83.9% and 84.7% in 1997, 1998 and 1999, respectively. The decrease in the percent of total revenues from 1997 to 1998 was due to the effect of an 82% increase in total revenues and only a 64% increase in total expenses. The increase in the percent of total revenues from 1998 to 1999 was due to the effect of a 36% increase in total revenues and a 37% increase in total expenses. Interest expense increased from $7,480 in 1997 to $12,120 in 1998 and $16,525 in 1999. Interest expense increased in 1998 as a result of interest on financing related to the acquisition of three additional aircraft, offset by loan paydowns and lower interest rates on new financings. Interest expense increased in 1999 as a result of interest on financing related to the acquisition of three additional aircraft and a charge related to the early termination of a lease, offset by loan paydowns. Our weighted average interest rate was 7.1% and 7% at December 31, 1998 and 1999, respectively. Depreciation expense increased from $6,550 in 1997 to $10,697 in 1998 and $15,029 in 1999. The increase of $4,147 in 1998 from 1997 resulted from the acquisition of three additional aircraft in 1998. The increase of $4,332 in 1999 from 1998 resulted from the acquisition of three additional aircraft in 1999. General and administrative expenses were $747, $1,529 and $1,882 in 1997, 1998 and 1999, respectively. The increase from 1997 to 1998 was primarily the result of additional compensation expense as the result of new employment agreements with our Chief Executive Officer and with our President, as well as the additional costs associated with maintaining our status as a public company. The increase from 1998 to 1999 was primarily the result of additional compensation. In 1997, 1998 and 1999, we incurred $250 of non-cash compensation expense related to the vesting of options. We expect to incur $250 of non-cash compensation expense related to the vesting of these options in 2000. See Note 8 to Consolidated Financial Statements. We recognized income tax expense of $433, $1,542 and $2,263, representing effective income tax rates of 40% and 33% and 37%, during 1997, 1998 and 1999, respectively. The $1,109 increase in income tax expense in 1998 primarily represents a non-cash provision for deferred income taxes. Our effective tax rate decreased to 33% as a result of an increasing number of foreign aircraft in our portfolio and tax planning associated with our federal net operating loss carryforwards. The $721 increase in income tax expense in 1999 primarily represents a non-cash provision for deferred income taxes as our effective tax rate increased to 37%. During 1999, we continued to generate substantial federal net operating loss carryforwards. At December 31, 1999, we had $21,608 of federal net operating loss carryforwards. See Note 3 to Consolidated Financial Statements. Net income increased from $667 in 1997 to $3,388 in 1998 and $3,579 in 1999 due to the factors described above and the effects of the extraordinary item and the change in accounting method. LIQUIDITY AND CAPITAL RESOURCES Our principal external sources of funds have been term loans from banks and seller financing secured by aircraft. As a result, a substantial amount of our cash flow from the rental of flight equipment is applied to principal and interest payments on secured debt. The terms of our loans generally require a substantial balloon payment at the end of the noncancellable portion of the lease of the related aircraft, at which time we 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 re-leasing the related aircraft. Accordingly, we begin lease remarketing efforts well in advance of the lease termination. See "Item 1. Business -- Financing/Source of Funds." The principal use of cash is for financing the acquisition of our aircraft portfolio, which are financed by loans secured by the applicable aircraft. We entered into a $5,000 line of credit with a bank in February 2000. The line of credit bears interest at LIBOR plus 2.5% and expires June 30, 2001. No borrowings have been made against the line of credit. At December 31, 1998 and 1999, we had cash and cash equivalents of $15,924 and $13,045, respectively. Net cash provided by operating activities increased from $12,776 in 1997 to $15,900 in 1998 and to $25,639 in 1999. The increase of $3,124 in 1998 was primarily the result of the acquisition of three aircraft and their related leases. The increase of $9,739 in 1999 was primarily the result of the acquisition of three additional aircraft and their related leases. In 1997, the $89,171 of net cash used in investing activities was primarily used to purchase three aircraft. In 1998, cash of $75,100 was used in investing activities to purchase three additional aircraft. In 1999, cash of $92,203 was used primarily in investing activities to purchase three additional aircraft. 19 20 In 1997, net cash provided by financing activities was $99,059 including the proceeds of borrowings of $80,463 primarily to finance the acquisition of three aircraft, offset by repayments of notes of $7,768, as well as $26,365 from both the issuance of 2,680,000 shares in our initial public offering and the issuance of 488,501 shares upon the exercise of stock options. In 1998, net cash provided by financing activities was $51,285, including proceeds from borrowings of $64,384 to finance the purchase of three aircraft, offset by repayments of $11,116 and $1,983 of common stock repurchases. In 1999, net cash provided by financing activities was $63,686, including proceeds from borrowings of $110,127 to finance the purchase of three aircraft and refinance existing borrowings, offset by repayments of $46,159 and $283 of common stock repurchases. Cash and cash equivalents vary from year to year principally as a result of the timing of the purchase and sale of aircraft. We use interest rate swap arrangements to reduce the potential impact of increases in interest rates on floating rate long-term debt and do not use swap arrangements for trading purposes. Premiums paid for purchased interest rate swap agreements are amortized to interest expense over the terms of the swap agreements. Our ability to execute our business strategy successfully and to sustain our operations is dependent, in part, on our ability to obtain financing and to raise equity capital. We cannot assure you that the necessary amount of capital will continue to be available to us on favorable terms or at all. If we are unable to continue to obtain any portion of required financing on favorable terms, our ability to add new aircraft to our lease portfolio, renew leases, re-lease aircraft, repair or recondition aircraft if required, or retain ownership of aircraft on which financing has expired would be impaired, which could have a material adverse effect on our business, financial condition and results of operations. In addition, our financing arrangements to date have been dependent in part upon ILFC. See "Item 1. Business--Cautionary Statements." 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 change in the century. If not corrected, these programs could create erroneous information. The effects of the Year 2000 issue did not materially affect our financial results or financial condition. We have incurred no additional costs associated with the Year 2000 issue and estimate that no additional costs will be incurred. Failure by our lessees, manufacturers of our aircraft and business partners to properly comply with Year 2000 issues could result in lost revenues and increased expenses. We have not experienced, nor do we expect to experience a material effect on our financial results or our financial position. We will continue assessing our internal and external risk as we acquire additional information systems and enter into business relationships with additional lessees, manufacturers of aircraft and other business partners. MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT This analysis presents the hypothetical loss in earnings, cash flows or fair value of the financial instruments which we held at December 31, 1999 and are sensitive to changes in interest rates. In the normal course of business, we also face risks that are either nonfinancial or non-quantifiable. These risks principally include country risk, credit risk and legal risk and are not included in the following analysis. See "Item 1. Business--Cautionary Statements." From time to time, we enter 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 arrangements, we pay interest at a fixed rate and the financial institution pays interest at variable rates pursuant to terms of the loans. We had no swap agreements at December 31, 1999. The carrying amounts of cash and cash equivalents approximate fair market value because of the short-term nature of these items. Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 10% increase in interest rates for our cash equivalents and was not materially different from the year-end carrying value. 20 21 The fair values of the our debt instruments, including the related AVGs, approximate the carrying values because (1) the rates currently offered to us are similar to the rates for these items, or (2) the yields to maturity approximate the rates for these items. Market risk associated with our debt instruments primarily results from our ability to refinance balloon payments at comparable or lower interest rates. Market risk was estimated as the potential increase in interest expense in 2000 resulting from a hypothetical 10% increase in our weighted average borrowing rate at December 31, 1999 or $1,904. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Market-- Sensitive Instruments and Risk Management. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. During the two fiscal periods prior to the date of our most recent financial statements, we have not reported a change in accountants nor have there been any disagreements reported on any matter of accounting principles or practices or financial statement disclosure. 21 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The section entitled "Election of Directors" in the Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The section entitled "Executive Compensation" in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The section entitled "Beneficial Ownership of Shares" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The section entitled "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS: See Index to Consolidated Financial Statements on page 24 of this report. FINANCIAL STATEMENT SCHEDULES: None. 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 Senior Term Loan Agreement, dated December 10, 1997, between IAI V, Inc. and City National Bank. Filed as Exhibit 4.11 to Form 10-Q for the quarterly period ended September 30, 1997, and incorporated herein by reference 4.2 The Company hereby agrees to furnish to the Commission upon request a copy of any instrument with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the consolidated assets of the Company
22 23 NUMBER DESCRIPTION ------ ----------- * 10.1 Employment Agreement with William E. Lindsey. Filed as Exhibit 10.1 to Form 10-Q for the quarterly period ended September 30, 1997, and is incorporated herein by reference * 10.2 Employment Agreement with Michael P. Grella. Filed as Exhibit 10.2 to Form 10-Q for the quarterly period ended September 30, 1997, and is incorporated herein by reference * 10.3 1997 Stock Option and Award Plan. Filed as Exhibit 6 to Registration Statement No. 333-46411, and incorporated herein by reference * 10.4 1997 Eligible Director Stock Option Plan. Filed as Exhibit 6 to Registration Statement No. 333-46413, and incorporated herein by reference * 10.5 Form of Indemnity Agreement. Filed as Exhibit 10.3 to Registration Statement No. 333-19875, and incorporated herein by reference 23.1 Consent of KPMG LLP, independent certified public accountants 27 Financial Data Schedule for the year ended December 31, 1999
- -------------- * Management contracts. REPORTS ON FORM 8-K: During the quarter ended December 31, 1999, we did not file any reports on Form 8-K. 23 24 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Independent Auditors' Report................................................ 25 Consolidated Balance Sheets as of December 31, 1999 and 1998................ 26 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997......................................................... 27 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1998 and 1999............................................ 29 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 30 1997...................................................... 30 Notes to Consolidated Financial Statements.................................. 31
24 25 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, 1999 and 1998 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, 1999. 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. As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for income recognition for ancillary payments under lease agreements effective January 1, 1998. 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, 1999 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California January 21, 2000, Except for Note 9 which is as of March 21, 2000 25 26 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31, --------------------------------- 1999 1998 ------------- ------------- Cash and cash equivalents ...................... $ 13,045,392 $ 15,923,982 Flight equipment, at cost, net ................. 314,083,293 236,908,773 Deferred fees .................................. 1,061,924 1,180,681 Cash, restricted ............................... 13,908,097 13,387,878 Other assets ................................... 398,294 489,702 ------------- ------------- $ 342,497,000 $ 267,891,016 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Accrued interest and other accrued expenses .... $ 1,727,635 $ 1,000,291 Notes payable .................................. 271,970,620 208,001,908 Lease and other deposits ....................... 23,282,834 18,629,524 Deferred rent .................................. 2,624,534 3,030,812 Deferred taxes, net ............................ 4,594,927 2,477,876 ------------- ------------- 304,200,550 233,140,411 Commitments and contingencies Shareholders' equity : Preferred stock, $.01 par value Authorized 15,000,000 shares; none issued and outstanding ..................... -- -- Common stock, $.01 par value Authorized 20,000,000 shares; issued and outstanding 4,173,784 shares at December 31, 1999 and 4,216,284 shares at December 31, 1998 ....................... 41,738 42,163 Additional paid-in capital ................... 31,009,749 31,292,324 Deferred stock compensation .................. (250,000) (500,000) Retained earnings ............................ 7,494,963 3,916,118 ------------- ------------- Net shareholders' equity ................. 38,296,450 34,750,605 ------------- ------------- $ 342,497,000 $ 267,891,016 ============= =============
See accompanying notes to consolidated financial statements 26 27 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ------------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Revenues: Rental of flight equipment ................................... $ 38,088,180 $ 26,985,395 $ 15,432,631 Consulting fees............................................... 200,000 605,000 212,000 Interest income............................................... 1,453,726 1,727,480 482,842 ------------ ------------ ------------ Total revenues ............................................. 39,741,906 29,317,875 16,127,473 Expenses: Interest ..................................................... 16,525,291 12,119,746 7,480,490 Depreciation ................................................. 15,028,867 10,697,484 6,550,000 General and administrative.................................... 1,881,867 1,529,200 747,287 Stock compensation ........................................... 250,000 250,000 250,000 ------------ ------------ ------------ Total expenses ............................................. 33,686,025 24,596,430 15,027,777 Income before income taxes and cumulative effect of accounting change and extraordinary loss ..................... 6,055,881 4,721,445 1,099,696 Income tax expense ............................................. 2,262,773 1,541,906 433,000 ------------ ------------ ------------ Net income before cumulative effect of accounting change and extraordinary loss ....................................... 3,793,108 3,179,539 666,696 Cumulative effect of accounting change, net of income tax of $139,000 .................................................. -- 209,000 -- Extraordinary loss on debt extinguishment, net of income tax benefit of $131,322 .......................................... (214,263) -- -- ------------ ------------ ------------ Net income ..................................................... $ 3,578,845 $ 3,388,539 $ 666,696 ============ ============ ========== Basic earnings per share: Net income before cumulative effect of accounting change and extraordinary loss .................................. $ .90 $ .72 $ .88 Cumulative effect of accounting change ....................... -- .04 -- Extraordinary loss on debt extinguishment .................... (.05) -- -- ------------ ------------ ------------ Net income ................................................... $ .85 $ .76 $ .88 ============ ============ ========== Diluted earnings per share: Net income before cumulative effect of accounting change and extraordinary loss .................................. $ .88 $ .70 $ .30 Cumulative effect of accounting change ....................... -- .05 -- Extraordinary loss on debt extinguishment .................... (.05) -- -- ------------ ------------ ------------ Net income .................................................... $ .83 $ .75 $ .30 ============ ============ ============ Weighted average common shares outstanding ...................... 4,211,534 4,430,183 754,131 ============ ============ ============ Weighted average common shares -- assuming dilution ............. 4,322,711 4,545,191 2,206,863 ============ ============ ============
27 28 Pro forma effect assuming the change in accounting principle is retroactively applied: Net income ................................................. $ 3,578,845 $ 3,179,539 $ 706,696 Earnings per share: Basic ................................................... $ .85 $ .72 $ .94 Diluted ................................................. $ .83 $ .70 $ .32
See accompanying notes to consolidated financial statements 28 29 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained Convertible Common Stock Additional Deferred Earnings Preferred --------------------- Paid-in Stock (Accumulated Stock Shares Amount Capital Compensation Deficit) Net --------- ------- --------- ------------ ------------ ------------ ------------ Balance at December 31, 1996 ... $ 49,410 315,000 $ 3,150 $ 5,170,098 $ -- $ (139,117) $ 5,083,541 Reverse stock split ............ -- (245,000) (2,450) 2,450 -- -- -- --------- ------- --------- ------------ ------------ ------------ ------------ Adjusted Balance at December 31, 1996 ..................... 49,410 70,000 700 5,172,548 -- (139,117) 5,083,541 Issuance of common stock from exercise of stock options ................... -- 488,501 4,885 2,418,374 -- -- 2,423,259 Issuance of common stock from conversion of convertible preferred stock (49,410) 1,103,528 11,035 38,375 -- -- -- Issuance of common stock from conversion of convertible note payable.. -- 155,555 1,556 727,844 -- -- 729,400 Issuance of common stock, net of stock issuance costs ... -- 2,680,000 26,800 23,915,294 -- -- 23,942,094 Deferred stock compensation .. -- -- -- 1,000,000 (1,000,000) -- -- Stock compensation ........... -- -- -- -- 250,000 -- 250,000 Net income ................... -- -- -- -- -- 666,696 666,696 --------- ------- --------- ------------ ------------ ------------ ------------ Balance at December 31, 1997 ... -- 4,497,584 44,976 33,272,435 (750,000) 527,579 33,094,990 Repurchase of common stock ... -- (281,300) (2,813) (1,980,111) -- -- (1,982,924) Stock compensation ........... -- -- -- -- 250,000 -- 250,000 Net income ................... -- -- -- -- -- 3,388,539 3,388,539 --------- ------- --------- ------------ ------------ ------------ ------------ Balance at December 31, 1998 ... -- 4,216,284 42,163 31,292,324 (500,000) 3,916,118 34,750,605 Repurchase of common stock ... -- (42,500) (425) (282,575) -- -- (283,000) Stock compensation ........... -- -- -- -- 250,000 -- 250,000 Net income ................... -- -- -- -- -- 3,578,845 3,578,845 --------- ------- --------- ------------ ------------ ------------ ------------ Balance at December 31, 1999 ... $ -- 4,173,784 $ 41,738 $ 31,009,749 $ (250,000) $ 7,494,963 $ 38,296,450 ========= ========= ========= ============ ============ ============ ============
See accompanying notes to consolidated financial statements 29 30 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Cash flow from operating activities: Net income .............................................. $ 3,578,845 $ 3,388,539 $ 666,696 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change ................ -- 209,000 -- Depreciation of flight equipment ...................... 15,028,867 10,697,484 6,550,000 Amortization of deferred fees ......................... 624,511 257,647 235,653 Deferred taxes, net of effect of accounting change .... 2,117,051 1,654,076 423,800 Stock compensation .................................... 250,000 250,000 250,000 Increase in assets: Cash, restricted ................................... (520,219) (6,410,904) (6,766,147) Other assets ....................................... (414,346) (683,191) (72,277) Increase (decrease) in liabilities: Accrued interest and other accrued expenses ........ 727,344 (343,386) 515,984 Lease deposits and other deposits .................. 4,653,310 7,184,411 9,933,053 Deferred rent ...................................... (406,278) (303,188) 1,039,000 ------------ ------------ ------------ Net cash provided by operating activities ........ 25,639,085 15,900,488 12,775,762 Cash flows from investing activities: Purchase of flight equipment .......................... (92,203,387) (75,100,000) (89,171,283) ------------ ------------ ------------ Net cash used in investing activities .............. (92,203,387) (75,100,000) (89,171,283) Cash flows from financing activities: Repayment of notes payable ............................ (25,254,014) (8,152,498) (6,293,592) Repayment of notes payable to ILFC .................... (20,904,747) (2,880,390) (1,274,803) Repayment of notes payable to GLH ..................... -- (83,000) (200,000) Proceeds from notes payable ........................... 14,600,000 31,250,000 52,500,000 Proceeds from notes payable to ILFC ................... 95,527,473 33,134,000 27,762,500 Proceeds from notes payable to GLH .................... -- -- 200,000 Issuance of common stock .............................. -- -- 26,365,353 Repurchase of common stock ............................ (283,000) (1,982,924) -- ------------ ------------ ------------ Net cash provided by (used in) financing activities 63,685,712 51,285,188 99,059,458 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (2,878,590) (7,914,324) 22,663,937 Cash and cash equivalents at beginning of year .......... 15,923,982 23,838,306 1,174,369 ------------ ------------ ------------ Cash and cash equivalents at end of year ................ $ 13,045,392 $ 15,923,982 $ 23,838,306 ============ ============ ============ Supplemental disclosure of cash flow information -- Cash paid for interest ............................. $ 15,298,845 $ 12,205,485 $ 6,772,358 ============ ============ ============ Cash paid for taxes ................................ $ 12,800 $ 26,830 -- ============ ============ ============
Supplemental disclosure of noncash investing and financing activities: During 1997, a 5% convertible note with a balance of $729,400 was converted to common stock. See accompanying notes to consolidated financial statements 30 31 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 (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 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 and the Company retains the potential benefit and 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. Fourteen of the Company's sixteen aircraft at December 31, 1999 were acquired from International Lease Finance Corporation (ILFC), a 1.6% 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. 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 its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform to current year presentation. Extraordinary Item In May 1999, the Company repaid a note with a principal amount of $15,745,473 prior to maturity. The note was due May 2000 with a rate of 7.96%. The repayment resulted in an extraordinary charge of $214,263, net of a $131,322 income tax benefit. Accounting Change Effective January 1, 1998, the Company changed its method of accounting for income recognition for 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 years ended December 31, 1999 and 1998, were increases of $2,055,000 ($.30 per basic and diluted share) and $983,000 ($.22 per basic and diluted share), respectively. The cumulative effect on retained earnings at January 1, 1998 of the accounting change was an increase of approximately $209,000 ($.04 per basic share and $.05 per diluted share), net of related income taxes of $139,000. The pro forma amounts shown on the consolidated statements of income have been adjusted for the effect of retroactive application. Cash and Cash Equivalents Cash and cash equivalents includes cash and highly liquid investments purchased with an original maturity of less than 90 days. Certain cash and short-term investments for the repayment of a security deposit and maintenance reserves are restricted pursuant to certain loan agreements. Such security deposit and maintenance reserves mature through November 2004. 31 32 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred 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) are capitalized and amortized to expense using the straight-line method over the term of the AVG, generally ten years. At December 31, 1999 and 1998, deferred fees related to AVGs were $247,890 and $255,106, 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. Flight Equipment and Depreciation Flight equipment is stated at cost. Major additions and modifications are capitalized. 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) assuming a 15% estimated residual value. 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 $13,197,538, $5,959,306 and $7,672,043 during the years ended December 31, 1999, 1998 and 1997, respectively. Additionally, one of the Company's lessees held a related maintenance reserve with ILFC in accordance with an agreed-upon arrangement. The Company received interest earned on this reserve held with ILFC which amounted to $40,699 during 1997. 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 using undiscounted operating cash flows and when required will provide for any permanent impairment of long-lived assets. Interest Rate Swap Agreements The Company uses interest rate swap arrangements to reduce the potential impact of increases in interest rates on certain 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. 32 33 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Fair Values of Financial Instruments The carrying amounts of cash and cash equivalents and accrued interest and other accrued expenses approximate fair market value because of the short-term nature of these items. The fair values of the Company's interest rate swaps approximate unamortized costs as the remaining amortization periods are short-term. The fair value of the amount due from ILFC approximates the carrying value as the fair value 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 airlines, on short-term 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. 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 1998 and 1997, consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share for 1999 would have been reduced to the pro forma amount as indicated below. Net earnings as reported .............. $3,578,845 Pro forma net earnings ................ 3,251,167 Net earnings per share, as reported: Basic ............................ .85 Diluted .......................... .83 Pro forma net earnings per share: Basic ............................ .77 Diluted .......................... $ .75 ==========
33 34 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 December 31, 1999; dividend yield of 0%; expected volatility of 46%; risk-free interest rate of between 4.57% and 4.62% and expected lives of five years. The weighted average fair value per share of options granted during the periods ended December 31, 1999 is $3.12. 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. Comprehensive Income In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" which established standards for reporting and display of comprehensive income and its components. The Company has no items of comprehensive income and as a result SFAS. No. 130 has no impact on the Company's financial reporting. Earnings per Share In February 1997, the Financial Accounting Standards Board issued 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 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. 34 35 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth the computation of the weighted average number of shares used to calculate basic and diluted earnings per share: YEARS ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 --------- --------- --------- Basic earnings per share-weighted average shares outstanding ........................... 4,211,534 4,430,183 754,131 Effect of dilutive securities: Employee stock options ....................... 109,842 115,008 187,267 Non-employee stock options ................... 1,335 -- 202,580 Convertible preferred stock .................. -- -- 931,196 Convertible note payable ..................... -- -- 131,689 --------- --------- --------- Dilutive potential common shares ............... 111,177 115,008 1,452,732 Diluted earnings per share-adjusted average shares and assumed conversions ....... 4,322,711 4,545,191 2,206,863 ========= ========= =========
The Company issued to 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 compensation computation of diluted net income per common share because they were anti-dilutive. The warrants are exercisable through November 10, 2001. In 1998, the Company issued options to purchase 25,000 shares of common stock at $10.25 per share under its Eligible Directors Option Plan. These options were excluded from the compensation computation of diluted net income per common share because they were anti-dilutive. The options are exercisable through May 21, 2003. Significant Customers The Company currently owns and leases sixteen aircraft to fifteen 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 its business, financial condition and results of operations. The Company is in the process of terminating a lease with TAESA, a Mexican airline. The airline recently had an accident on one of its DC-9 aircraft and the Mexican government subsequently grounded its entire fleet. As a result, TAESA defaulted on its lease of a Boeing Model 737-300, and the Company is currently in the process of repossessing the aircraft. The lease was due to terminate June 2002. The Company is aggressively marketing the aircraft to several airlines. Because of the current softness in the leasing market, any new lease will likely be at a reduced rate. In addition, the Company will not recognize rental revenue on this aircraft for at least the first three months of 2000 and the Company will incur additional charges related to the repossession. The Company has two notes payable to ILFC related to the aircraft of $14,995,794 bearing interest at 7.96% due April 2000 and $401,757 bearing interest at 6.0% due May 2000. The Company intends to refinance the notes payable as they come due. The following customers individually accounted for 10% or more of revenues: NUMBER OF PERCENTAGE OF SIGNIFICANT REVENUES BY CUSTOMERS SIGNIFICANT CUSTOMERS ----------- --------------------- Year ended December 31: 1999...................... 1 11% 1998...................... 4 10%, 11%, 12% and 15% 1997...................... 4 11%, 13%, 13% and 17%
35 36 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Segment Information In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes previous reporting requirements for reporting on segments of a business enterprise. The Company's operations are generally limited to the aircraft leasing industry. These operations included the acquisition of used single-aisle jet aircraft and engines for lease and sale to domestic and foreign airlines and other customers. Revenues include rentals of flight equipment to foreign airlines of $30,306,055, $19,824,984 and $9,407,081 in 1999, 1998 and 1997, respectively. The following table sets forth the dollar amount and percentage of rentals of flight equipment attributable to the indicated geographic areas for the years indicated: 1999 1998 1997 ----------- ----------- ----------- United States and Canada .... $14,075,897 $11,624,832 $ 6,167,050 Europe ...................... 14,322,696 7,797,163 3,668,181 Central America and Mexico .. 3,636,187 2,112,000 2,112,000 Asia and the Pacific ........ 6,053,400 5,451,400 3,485,400 ----------- ----------- ----------- $38,088,180 $26,985,395 $15,432,631 =========== =========== ===========
(2) FLIGHT EQUIPMENT The Company's investment in flight equipment (primarily purchased from ILFC) as of December 31, 1999 and 1998 is as follows: DECEMBER 31, ------------------------------- 1999 1998 ------------- ------------- Flight equipment, at cost .. $ 365,211,644 $ 273,008,257 Accumulated depreciation ... (51,128,351) (36,099,484) ------------- ------------- Flight equipment, net ...... $ 314,083,293 $ 236,908,773 ============= =============
(3) INCOME TAXES Provision for taxes on income consisted of the following: TOTAL CURRENT DEFERRED ---------- ---------- ---------- Year ended December 31: 1999: Federal ................. $1,941,500 $ -- $1,941,500 State ................... 189,951 12,800 177,151 ---------- ---------- ---------- $2,131,451 $ 12,800 $2,118,651 ========== ========== ========== 1998: Federal ................. $1,184,560 $ 16,430 $1,168,130 State ................... 357,346 10,400 346,946 ---------- ---------- ---------- $1,515,076 $ 26,830 $1,515,076 ========== ========== ========== 1997: Federal ................. $ 423,800 $ -- $ 423,800 State ................... 9,200 9,200 -- ---------- ---------- ---------- $ 433,000 $ 9,200 $ 423,800 ========== ========== ==========
36 37 As of December 31, 1999, the Company had net operating loss carryforwards ("NOL") for Federal and state income tax purposes as follows: EXPIRES FEDERAL NOL STATE NOL ----------- ---------- 2000 .................. -- $ 136,000 2001 .................. -- 435,000 2002 .................. -- 167,000 2003 .................. -- 445,000 2004 .................. -- 613,000 2005-2009 ............. $11,052,000 -- 2010-2014 ............. 1,124,000 -- 2015-2019 ............. 9,432,000 -- ----------- ---------- $21,608,000 $1,796,000 =========== ==========
Temporary differences which give rise to net deferred tax liabilities result primarily from timing differences for depreciation and net operating losses. The net deferred tax liabilities are comprised of the following: DECEMBER 31, ------------------------------- 1999 1998 ------------ ------------ Net operating loss carryforward ... $ 8,076,666 $ 6,453,075 Deferred and advanced rent ........ $ 1,203,507 $ 1,085,933 Flight equipment, principally due to differences in depreciation .. (14,006,504) (10,103,117) Other ............................. 339,108 291,401 ------------ ------------ (4,387,223) (2,272,708) Valuation allowance ............... (207,704) (205,168) ------------ ------------ $ (4,594,927) $ (2,477,876) ============ ============
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 and cumulative effect of accounting change follows: YEAR ENDED DECEMBER 31, ------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Computed "expected" Federal tax expense .............. $ 1,931,544 $ 1,605,291 $ 375,000 State taxes, net of Federal income tax benefit ....... 198,835 86,391 64,000 Expiration of state net operating loss carryforwards ............ 31,587 7,407 207,000 Change in valuation allowance (2,536) (47,726) (126,000) Other ....................... (27,979) (109,457) (87,000) ----------- ----------- ----------- $ 2,131,451 $ 1,541,906 $ 433,000 =========== =========== ===========
37 38 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) LONG-TERM DEBT Long-term debt as of December 31, 1999 and 1998 is summarized as follows:
DECEMBER 31, ---------------------------- 1999 1998 ------------ ------------ Note payable to bank bearing interest at 7% on $4,500,000 and LIBOR plus 1.125% (6.46% at December 31, 1999) on $1,195,976, secured by flight equipment, 33 1/3% guaranteed by ILFC, payable in monthly installments of $130,000 including interest, balloon payment of $3,907,919, due August 2001 ......................................... $ 5,695,976 $ 6,900,431 Note payable to bank bearing interest at 7.125% on $3,000,000 and LIBOR plus 1.125% (6.56% at December 31, 1999) on $411,060, secured by flight equipment, 33 1/3% guaranteed by ILFC, payable in monthly installments of $30,000 including interest, balloon payment of $3,235,813, due June 2001 ........................................... 3,411,061 3,695,297 Notes payable to bank bearing interest at 7.1% secured by flight equipment, payable in monthly installments of $40,000 including interest, balloon payment of $1,740,120, due May 2003 ............... 2,795,392 3,470,668 Notes payable to bank bearing interest at 7%, secured by flight equipment, 50% guaranteed by ILFC, payable in quarterly installments of $276,000 including interest, balloon payment of $1,557,246, due April 2001 .......................................... 2,738,256 3,612,093 Note payable to bank bearing interest at 7.96%, repaid June 1999 ....... -- 16,414,944 Note payable to bank, bearing interest at LIBOR plus 1.2 (6% at December 31, 1999), secured by flight equipment, 100% guaranteed by ILFC, payable in quarterly installments of $445,000 including interest, balloon payment of $7,354,276, due January 2003 ........... 10,908,835 11,940,979 Note payable to bank, bearing interest at 7.75% to May 18, 2001, then 8.375%, secured by flight equipment, guaranteed up to $2,600,000 by ILFC, payable in monthly installments of $160,000 including interest, balloon payment of $4,904,929, due November 2004 .......... 10,970,234 12,181,112 Note payable to bank bearing interest at 7.6%, 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 ................................ 20,854,601 21,437,596 Note payable to bank bearing interest at 7.3%, secured by flight equipment, guaranteed up to $6,000,000 by ILFC, payable in monthly installments including interest of $259,000 through April 2000, $263,000 through April 2001, $266,000 through April 2002, and $270,000 thereafter, balloon payment of $22,536,481, due May 2003 ... 27,078,538 28,154,495 Note payable to bank bearing interest at 6.7%, secured by flight equipment, payable in monthly installments of $180,000 including interest, balloon payment of $10,026,502, due April 2002 ............ 12,992,149 14,227,700 Note payable to bank bearing interest at 7.1%, secured by flight equipment, payable in monthly installments of $152,000 including interest, balloon payment of $14,470,694, due November 2001 ......... 15,836,259 16,500,000 Note payable to bank bearing interest at LIBOR plus 1.5%% (6.125% at December 31, 1999), secured by flight equipment, guaranteed up to $3,000,000 by ILFC, payable in monthly installments of $50,000 plus interest, balloon payment of $13,800,000, due May 2001 .............. 14,600,000 -- Note payable to ILFC bearing interest at 7.25%, secured by flight equipment, payable in quarterly installments of $10,000 through October 2000, $12,000 through October 2001 and $13,000 through October 2002 plus interest, balloon payment of $3,320,000, due January 2003 ........................................................ 3,464,000 3,504,000 Note payable to ILFC bearing interest at 6.0%, secured by flight equipment, payable in quarterly installments of $50,000 plus interest, balloon payment of $301,757, due May 2000 ................. 401,757 601,757 Note payable to ILFC bearing interest at 6.0% repaid in August 1999 .... -- 616,845
38 39 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, ---------------------------- 1999 1998 ------------ ------------ Note payable to ILFC bearing interest at 7.8%, to December 2000, then 8% payable, secured by flight equipment, in monthly installments of $35,000 including interest, balloon payment of $3,188,123, due November 2004 ......................................................... 3,845,733 3,985,164 Note payable to ILFC bearing interest at 7%, secured by flight equipment, payable in monthly installments of $180,000, including interest, balloon payment of $15,370,978, due September 2000 .................... 15,617,687 16,734,673 Note payable to ILFC bearing interest at an effective rate of 6.9%, secured by flight equipment, payable in monthly installments of $20,000, including interest, balloon payment of $1,394,891, due September 2002 ........................................................ 1,732,557 1,856,839 Note payable to ILFC bearing interest at an effective rate of 6.93%, secured by flight equipment, payable in monthly installments of $32,000, including interest, balloon payment of $2,361,994, due May 2003 .................................................................. 3,003,157 3,177,146 Note payable to ILFC bearing interest at 7.25%, secured by flight equipment, payable in quarterly installments of $126,500, including interest, balloon payment of $3,725,840, due May 2001 ................. 3,999,383 4,153,373 Note payable to ILFC bearing interest at 6.5%, secured by flight equipment, payable in monthly installments of $30,000, including interest, balloon payment of $1,750,025, due May 2002 ................. 2,277,813 2,479,536 Note payable to ILFC bearing interest at 7%, secured by flight equipment, payable in monthly installments of $181,200, including interest, balloon payment of $16,391,671, due June 30 ........................... 16,710,403 17,971,526 Note payable to ILFC bearing interest at 6%, secured by flight equipment, payable in monthly installments of $30,000, including interest, balloon payment of $122,362, due February 2007 .............. 2,146,696 2,368,734 Note payable to ILFC bearing interest at 6.15%, secured by flight equipment, payable in monthly installments of $92,000, including interest, balloon payment of $7,253,151, due December 2003 ............ 9,510,954 10,000,000 Note payable to ILFC bearing interest at 7.96%, secured by flight equipment, payable in monthly installments of $220,000, including interest, balloon payment of $14,732,199, due April 2000 .............. 14,995,794 -- Note payable to ILFC bearing interest at 6.25%, secured by flight equipment, payable in monthly installments of $47,489, including interest, balloon payment of $3,416,505, due July 2004 ................ 4,795,926 -- Note payable to ILFC bearing interest at 6.5%, secured by flight equipment, payable in monthly installments of $325,450, including interest, balloon payment of $28,969,076, due April 2000 .............. 29,463,901 -- Note payable to ILFC bearing interest at 6.25%, secured by flight equipment, payable in monthly installments of $40,308, including interest, balloon payment of $2,663,073, due August 2004 .............. 3,924,558 -- Note payable to ILFC bearing interest at 6.5%, secured by flight equipment, payable in monthly installments of $224,228, including interest, balloon payment of $23,062,523, due August 2000 ............. 23,182,000 -- Note payable to ILFC bearing interest at 6.25%, secured by flight equipment, payable in monthly installments of $29,000, including interest, balloon payment of $2,088,634, due December 2004 ............ 3,000,000 -- Note payable to Great Lakes Holdings (affiliated company) bearing interest at 6.5%, due June 2000 ....................................... 672,000 672,000 Notes payable to Great Lakes Holdings (affiliated company) bearing interest at 6.5%, due June 2000 ....................................... 1,345,000 1,345,000 ------------ ------------ Total .......................................................... $271,970,620 $208,001,908 ============ ============
The terms of the Company's aircraft financing 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 39 40 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Notes payable due within one year totaled $102,388,582 at December 31, 1999, of which $101,304,379 represents balloon payments and $1,084,203 represents installment payments due within one year. The Company intends to refinance all of the balloon payments due in 2000. During 1999, 1998 and 1997, the Company refinanced $45,979,203, $29,725,000 and $40,382,963 of balloon payments, respectively. Scheduled future repayments of notes payable subsequent to December 31, 1999 are as follows: YEAR ENDING DECEMBER 31: 2000..................................... $113,988,878 2001..................................... 70,153,991 2002..................................... 19,808,437 2003..................................... 48,748,509 2004..................................... 18,460,218 Thereafter .............................. 810,587 ------------ $271,970,620 ============
Certain notes payable contain various financial covenants including maintaining specified minimum tangible net worth and delivery of audited financial statements. The Company was in compliance with these covenants at December 31, 1999. From time to time, the Company enters 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 Company had no swap agreements at December 31, 1999. (5) RELATED PARTY TRANSACTIONS During 1999, 1998 and 1997, the Company purchased aircraft from ILFC aggregating $91,700,000, $75,100,000 and $89,090,000, respectively. At December 31, 1999 and 1998, 94% and 91%, 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 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, 1999 and 1998, $31,913,643 or 12% and $39,219,482 or 19%, of long-term debt was covered by AVGs and $142,072,319, or 52%, and $67,450,465, or 32%, was due to ILFC, respectively. The Company had one aircraft leased to ILFC which is subleased to an airline at December 31, 1999 and 1998. The Company recognized rental income of $942,500, $960,000 and $960,000 from this lease in each of the years ended 1999, 1998 and 1997, respectively. The lease expires in August 2001. During 1999 and 1998, the Company leased an aircraft to a third party for a three-year period for which ILFC guaranteed certain rental revenue. 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 1998, the Company purchased an aircraft from ILFC for which ILFC guaranteed certain rental revenue. 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 40 41 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) present value of the estimated recovery aggregating $579,000. The balance was paid at December 31, 1999. The amount due from ILFC at December 31, 1998 was $61,600. The loss stems from a stated lease rate which was 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. At December 31, 1999 and 1998, deferred rent from the lease was $747,000 and $1,008,000, respectively. The Company realized consulting fee revenues of $25,000 during 1997, for services to ILFC. 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 $12,000 during 1997 from Great Lakes. (6) RENTAL INCOME Minimum future rental income on noncancelable operating leases of flight equipment at December 31, 1999 is as follows: YEAR ENDING DECEMBER 31: 2000................................... $39,115,776 2001................................... 32,107,614 2002................................... 20,714,097 2003................................... 5,503,334 2004................................... 2,507,000 Thereafter............................. -- ----------- $99,947,821 ===========
The Company's aircraft are leased under short-term to medium-term leases with remaining terms expiring within one to four years. (7) COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases offices from a third party under a noncancelable operating lease. Future minimum lease payments are: YEAR ENDING DECEMBER 31: 2000 .................................. $ 59,083 2001 .................................. 59,966 2002 .................................. 62,688 2003 .................................. 64,928 2004 .................................. 27,220 Thereafter ............................ -- -------- $273,885 ========
Total rent expense under operating leases for the years ended December 31, 1999, 1998 and 1997 was $40,559, $33,107 and $27,285, respectively. 41 42 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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). One of the Company's aircraft will be modified to meet noise compliance regulations as a condition of an existing lease at the lessee's expense. At December 31, 1999, two of the Company's aircraft were on lease to airlines which operate in jurisdictions which do not require these modifications. These two aircraft may require this work to be performed after their leases expire unless the aircraft are re-leased and operated in an area that does not require the modification. (8) SHAREHOLDERS' EQUITY In September 1998, the Company's Board of Directors authorized the repurchase of up to 449,758 shares of the Company's common stock. During 1999 and 1998, the Company repurchased 42,500 and 281,300 shares, respectively of its common stock. In November 1997, the Company issued 2.6 million shares of common stock in an initial public offering (IPO) at $10.00 per share. In connection with the IPO, the Company effected a 1-for-4.5 reverse stock split of its common stock which has been applied retroactively in the accompanying consolidated financial statements. In accordance with the underwriting agreement, the Company granted the underwiters warrants to purchase 260,000 shares of common stock at $12 per share exercisable through November 10, 2001 and an overallotment option exercisable through December 20, 1997 to purchase 390,000 additional shares of common stock of which 80,000 shares were exercised. After underwriting discount and other offering costs, net proceeds to the Company were $23,942,094 for these issuances. Concurrent with the Company's IPO, all of the outstanding convertible preferred stock was converted to 1,103,528 shares of common stock. Through March 1993, the Company granted options to purchase 647,493 shares of common stock at management's estimated fair value, $4.50 per share. During 1997, 139,717 options were exercised. Through May 1991, the Company also granted options to purchase 348,784 shares of convertible preferred stock at management's estimate of fair value, primarily $5.18 per share. Concurrent with the Company's IPO, all of these options were exercised and converted to common stock. During March 1997, the Company extended the expiration date on 496,664 employee stock options described in the preceding paragraph to March 31, 2007, which 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 $250,000 in stock compensation during the years ended December 31, 1999, 1998 and 1997 related to the amortization of such cost. If the related employee is terminated, the respective stock options will vest in full. At December 31, 1999, 485,554 options with an exercise price of $4.50 per share were outstanding and 364,165 were exercisable. During 1997, the Company adopted the 1997 Employee Stock Option and Award Plan (the Employee Plan). The Employee Plan was amended in 1999. A maximum of 325,000 shares of common stock (subject to certain anti-dilutive adjustments) may be issued pursuant to grants and awards under the Employee Plan. The maximum number of shares that may be subject to qualifying share-based awards, either individually or in aggregate, that can be granted under the Employee Plan to any one participant during any calendar year will not exceed 150,000 (subject to certain anti-dilutive adjustments). During 1999 and 1998, options to purchase 55,000 and 5,000 shares, respectively of the Company's common stock at $7.25 42 43 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and $5.875 per share, respectively have been granted under the Employee Plan. The options are fully vested at December 31, 1999 and expire from 2003 to 2004. During 1997, the Company adopted the 1997 Eligible Directors Stock Option Plan (the Directors Plan). The Directors Plan was amended in 1999. The Directors Plan provides that annually an Eligible Director will receive an option to purchase 10,000 shares of common stock at an exercise price equal to the market price of common stock on the date of grant. Under the Directors Plan 125,000 shares of common stock are authorized for issuance. During 1999 and 1998, options to purchase 50,000 and 25,000 shares, respectively of the Company's common stock at $6.38 and $10.25 per share, respectively had been granted under the Directors Plan. The options vest through June 2002 and expire from 2003 to 2004. Changes in outstanding options under the Company's stock option plans during the three years ended December 31, 1999 and options exercisable at December 31 1999 are as follows: Outstanding at December 31, 1996 ..... 974,055 Granted at $4.50 .................. 496,664 Exercised at $4.50 to $5.175 ...... (488,501) Canceled or expired ............... (496,664) -------- Outstanding at December 31, 1997 ..... 485,554 Granted at $5.875 to $10.25 ....... 30,000 Exercised ......................... -- Canceled or expired ............... -- -------- Outstanding at December 31, 1998 ..... 515,554 Granted at $6.375 to $7.25 ........ 105,000 Exercised ......................... -- Canceled or expired ............... -- -------- Outstanding at December 31, 1999 ..... 620,554 ========
In November 1997, a convertible note payable was converted to 155,555 shares of common stock. (9) SUBSEQUENT EVENTS In January 2000, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's common stock. The Company entered into a $5,000,000 line of credit with a bank in February 2000. The line of credit bears interest at LIBOR plus 2.5% and expires June 30, 2001. No borrowings have been made against the line of credit. The Company is in the process of terminating a lease with TAESA, a Mexican airline. The airline recently had an accident on one of its DC-9 aircraft and the Mexican government subsequently grounded its entire fleet. As a result, TAESA defaulted on its lease of a Boeing Model 737-300, and the Company is currently in the process of repossessing the aircraft. The lease was due to terminate June 2002. The Company is aggressively marketing the aircraft to several airlines. Because of the current softness in the leasing market, any new lease will likely be at a reduced rate. In addition, the Company will not recognize rental revenue on this aircraft for at least the first three months of 2000 and the Company will incur additional charges related to the repossession. The Company has two notes payable to ILFC related to the aircraft of $14,995,794 bearing interest at 7.96% due April 2000 and $401,757 bearing interest at 6.0% due May 2000. The Company intends to refinance the notes payable as they come due. 43 44 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED --------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ----------- ----------- ------------ ----------- 1999: Revenues ................................ $ 9,244,625 $ 8,941,682 $10,597,947 $10,957,652 Expenses ................................ 7,712,009 7,475,848 8,921,774 9,576,394 ----------- ----------- ----------- ----------- Income before income taxes and extraordinary loss .................... 1,532,616 1,465,834 1,676,173 1,381,258 Income taxes ............................ 582,389 557,015 636,946 486,423 ----------- ----------- ----------- ----------- Income before extraordinary loss ........ 950,227 908,819 1,039,227 894,835 Extraordinary loss on debt extinguishment -- (214,263) -- -- ----------- ----------- ----------- ----------- Net income .............................. $ 950,227 $ 694,556 $ 1,039,227 $ 894,835 =========== =========== =========== =========== Basic earnings per share:* Income before extraordinary loss ...... $ .23 $ .21 $ .25 $ .21 Extraordinary loss on debt extinguishment ...................... -- (.05) -- -- ----------- ----------- ----------- ----------- Net income ............................ $ .23 $ .16 $ .25 $ .21 =========== =========== =========== =========== Diluted earnings per share* Income before extraordinary loss ...... $ .22 $ .21 $ .24 $ .21 Extraordinary loss on debt extinguishment ...................... -- (.05) -- -- ----------- ----------- ----------- ----------- Net income ............................ $ .22 $ .16 $ .24 $ .21 =========== =========== =========== =========== Weighted average number of common shares outstanding ............. 4,212,462 4,212,284 4,211,040 4,196,959 Weighted average number of common shares outstanding- assuming dilution ..................... 4,326,277 4,329,024 4,340,606 4,318,915
44 45 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- ---------- ------------ ----------- 1998: Revenues .................................... $6,571,968 $6,610,272 $7,307,570 $8,828,065 Expenses .................................... 5,641,801 5,621,080 6,222,143 7,111,406 ---------- ---------- ---------- ---------- Income before income taxes and cumulative effect of accounting change ......................... 930,167 989,192 1,085,427 1,716,659 Income taxes ................................ 373,000 397,200 434,000 337,706 ---------- ---------- ---------- ---------- Income before cumulative effect of accounting change ......................... 557,167 591,992 651,427 1,378,953 Cumulative effect of accounting change ...... 209,000 -- -- -- ---------- ---------- ---------- ---------- Net income .................................. $ 766,167 $ 591,992 $ 651,427 $1,378,953 ========== ========== ========== ========== Basic earnings per share:* Income before cumulative effect of accounting change ...................... $ .12 $ .13 $ .15 $ .33 Cumulative effect of accounting change .... .05 -- -- -- ---------- ---------- ---------- ---------- Net income ................................ $ .17 $ .13 $ .15 $ .33 ========== ========== ========== ========== Diluted earnings per share* Income before cumulative effect of accounting change ...................... $ .12 $ .13 $ .14 $ .32 Cumulative effect of accounting change .... .05 -- -- -- ---------- ---------- ---------- ---------- Net income ................................ $ .17 $ .13 $ .14 $ .32 ========== ========== ========== ========== Weighted average number of common shares outstanding ............................... 4,497,584 4,497,584 4,486,497 4,241,266 Weighted average number of common shares outstanding-assuming dilution ............. 4,627,244 4,679,055 4,634,132 4,287,125
*Per share data may not always add up to the total for the year since each figure is independently calculated. 45 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Date: March 27, 2000 By: /s/ MICHAEL P. GRELLA ---------------------------------- Michael P. Grella President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM E. LINDSEY Chairman of the Board, March 27, 2000 - ------------------------- Chief Executive Officer and William E. Lindsey Director (Principal Executive Officer) /s/ MICHAEL P. GRELLA President, March 27, 2000 - ------------------------- Chief Operating Officer and Michael P. Grella Director (Principal Operating Officer) /s/ RICK O. HAMMOND Vice President--Finance, March 27, 2000 - ------------------------- Chief Financial Officer Rick O. Hammond (Principal Financial Officer) /s/ ALAN G. STANFORD, JR. Vice President--Controller March 27, 2000 - ------------------------- (Principal Accounting Alan G. Stanford, Jr. Officer) /s/ MAGNUS GUNNARSSON Director March 27, 2000 - ------------------------- Magnus Gunnarsson /s/ RALPH O. HELLMOLD Director March 27, 2000 - ------------------------- Ralph O. Hellmold /s/ AARON MENDELSOHN Director March 27, 2000 - ------------------------- Aaron Mendelsohn /s/ CHRISTER SALEN Director March 27, 2000 - ------------------------- Christer Salen /s/ KENNETH TAYLOR Director March 27, 2000 - ------------------------- Kenneth Taylor /s/ STUART M. WARREN Director March 27, 2000 - ------------------------- Stuart M. Warren
46 EX-23.1 2 CONSENT OF EXPERTS AND COUNSEL 1 EXHIBIT 23.1 ACCOUNTANTS' CONSENT Board of Directors International Aircraft Investors: We consent to incorporation by reference in the registration statements (No. 333-46411 and 333-46413) on Form S-8 of International Aircraft Investors and subsidiaries of our report dated January 21, 2000 relating to the consolidated balance sheets of International Aircraft Investors and subsidiaries as of December 31, 1999 and 1998 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, 1999, which report appears in the 1999 report on Form 10-K of International Aircraft Investors and subsidiaries. KPMG LLP Los Angeles, California March 27, 2000 47 EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 13,045,392 0 0 0 0 0 365,211,644 51,128,351 342,497,000 0 342,497,000 0 0 41,738 38,254,712 342,497,000 0 39,741,906 0 17,160,734 0 0 16,525,291 6,055,881 2,262,773 3,793,108 0 (214,263) 0 3,578,845 .85 .83
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