10-Q 1 a67039e10-q.txt FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________to_____________ Commission file number 000-22249 INTERNATIONAL AIRCRAFT INVESTORS (Exact name of registrant as specified in its charter) CALIFORNIA 95-4176107 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3655 TORRANCE BOULEVARD, SUITE 410 TORRANCE, CALIFORNIA 90503 (Address of principal executive offices) (Zip Code) (310) 316-3080 (Registrant's telephone number, including area code) N/A ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at November 7, 2000 ----- ------------------------------- COMMON STOCK, $.01 PAR VALUE 3,839,673
-1- 2 INTERNATIONAL AIRCRAFT INVESTORS INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets As of September 30, 2000 and December 31, 1999........................ 3 Condensed Consolidated Statements of Income Three months ended September 30, 2000 and 1999........................ 4 Condensed Consolidated Statements of Income Nine months ended September 30, 2000 and 1999......................... 5 Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2000 and 1999......................... 6 Notes to Condensed Consolidated Financial Statements.................. 7 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations............................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...................................... 14 Signatures............................................................ 15
-2- 3 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------- (UNAUDITED) ASSETS Cash and cash equivalents $ 13,560,452 $ 13,045,392 Flight equipment, at cost less accumulated depreciation of $64,898,351 at September 30, 2000 and $51,128,351 at December 31, 1999 301,882,436 314,083,293 Cash, restricted 12,446,004 13,908,097 Other assets 1,054,482 1,460,218 ------------- ------------- $ 328,943,374 $ 342,497,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Accrued interest and other accrued expenses $ 1,778,508 $ 1,727,635 Notes payable 258,359,814 271,970,620 Lease and other deposits on flight equipment 21,894,924 23,282,834 Deferred rent 3,936,751 2,624,534 Deferred taxes, net 5,253,643 4,594,927 ------------- ------------- 291,223,640 304,200,550 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 3,853,784 shares at September 30, 2000 and 4,173,784 shares at December 31, 1999 38,538 41,738 Additional paid-in capital 29,128,206 31,009,749 Deferred compensation (62,500) (250,000) Retained earnings 8,615,490 7,494,963 ------------- ------------- Net shareholders' equity 37,719,734 38,296,450 ------------- ------------- $ 328,943,374 $ 342,497,000 ============= =============
See accompanying notes to condensed consolidated financial statements -3- 4 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2000 1999 ----------- ----------- (UNAUDITED) REVENUES: Rental of flight equipment $10,482,925 $10,194,403 Consulting and other fees 200,000 -- Interest income 352,757 403,544 ----------- ----------- Total revenues 11,035,682 10,597,947 EXPENSES: Interest 4,816,292 4,267,127 Depreciation 4,590,000 4,024,387 Lease cancellation 207,419 -- General and administrative 522,663 567,760 Stock compensation 62,500 62,500 ----------- ----------- Total expenses 10,198,874 8,921,774 ----------- ----------- Income before income taxes 836,808 1,676,173 Income tax expense 313,803 636,946 ----------- ----------- Net income $ 523,005 $ 1,039,227 =========== =========== Basic earnings per share $ .13 $ .25 =========== =========== Diluted earnings per share $ .13 $ .24 =========== =========== Weighted average common shares outstanding: Basic 3,876,231 4,211,040 =========== =========== Assuming dilution 3,960,267 4,340,606 =========== ===========
See accompanying notes to condensed consolidated financial statements -4- 5 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 2000 1999 ------------ ------------ (UNAUDITED) REVENUES: Rental of flight equipment $ 31,486,196 $ 27,441,289 Consulting and other fees 200,000 200,000 Interest income 1,187,511 1,142,965 ------------ ------------ Total revenues 32,873,707 28,784,254 EXPENSES: Interest 14,452,703 11,762,873 Depreciation 13,770,000 10,744,387 Repossession, maintenance and lease cancellation 1,045,095 -- General and administrative 1,625,566 1,414,871 Stock compensation 187,500 187,500 ------------ ------------ Total expenses 31,080,864 24,109,631 ------------ ------------ Income before income taxes and extraordinary loss 1,792,843 4,674,623 Income tax expense 672,316 1,776,350 ------------ ------------ Income before extraordinary loss 1,120,527 2,898,273 Extraordinary loss on debt extinguishment, net of income tax benefit of $131,322 -- 214,263 ------------ ------------ Net income $ 1,120,527 $ 2,684,010 ============ ============ Basic earnings per share: Income before extraordinary loss $ .28 $ .69 Extraordinary loss -- (.05) ------------ ------------ Net income $ .28 $ .64 ============ ============ Diluted earnings per share: Income before extraordinary loss $ .27 $ .67 Extraordinary loss -- (.05) ------------ ------------ Net income $ .27 $ .62 ============ ============ Weighted average common shares outstanding: Basic 4,009,115 4,211,928 ============ ============ Assuming dilution 4,108,543 4,327,265 ============ ============
See accompanying notes to condensed consolidated financial statements -5- 6 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 2000 1999 ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net income $ 1,120,527 $ 2,684,010 Adjustments to reconcile net income to cash provided by operating activities: Depreciation of flight equipment 13,770,000 10,744,387 Lease cancellation 207,419 -- Amortization of deferred transaction fees 309,076 334,471 Deferred taxes, net 658,716 1,630,628 Stock compensation 187,500 187,500 (Increase) decrease in assets: Cash, restricted 1,462,093 (616,450) Other assets (110,759) (227,892) Increase (decrease) in liabilities: Accrued interest and other accrued liabilities 50,873 786,286 Lease and other deposits on flight equipment (1,387,910) 5,938,846 Deferred rent (87,783) (1,617,805) ------------ ------------ Net cash provided by operating activities 16,179,752 19,843,981 Cash flows from investing activities: Purchase of flight equipment (169,143) (62,133,387) ------------ ------------ Net cash used in investing activities (169,143) (62,133,387) Cash flows from financing activities: Repayment of notes payable (6,878,631) (23,048,090) Repayment of notes payable to ILFC (6,652,675) (3,837,922) Repayment of notes payable to GLH (79,500) -- Proceeds from notes payable to ILFC -- 69,345,473 Repurchase of common stock (1,884,743) (43,600) ------------ ------------ Net cash provided by (used in) financing activities (15,495,549) 42,415,861 ------------ ------------ Net increase in cash and cash equivalents 515,060 126,455 Cash and cash equivalents at beginning of period 13,045,392 15,923,982 ------------ ------------ Cash and cash equivalents at end of period $ 13,560,452 $ 16,050,437 ============ ============ Supplemental disclosure of cash flow information Cash paid for interest $ 14,211,610 $ 10,988,192 Cash paid for income taxes $ 13,600 $ 12,000
See accompanying notes to condensed consolidated financial statements -6- 7 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal and recurring accruals) necessary for a fair presentation of the financial position of the Company as of September 30, 2000 and December 31, 1999 and the results of its operations for the three month and nine month periods ended September 30, 2000 and 1999 and its cash flows for the nine months ended September 30, 2000 and 1999. Operating results for the nine month period ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. 2. MANAGEMENT ESTIMATES The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These affect the reported amounts of assets, liabilities, revenues and expenses and the amount of any contingent assets or liabilities disclosed in the condensed consolidated financial statements. Actual results could differ from estimates made. The Company leases flight equipment to various commercial airline fleets on short-term to medium-term operating leases, generally three to five years. The related flight equipment is generally financed by borrowings that become due at or near the end of the lease term through a balloon payment. As a result, the Company's operating results depend on management's ability to roll over debt facilities, renegotiate favorable leases and realize estimated residual values. 3. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Transactions" and SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 133 requires that all derivative financial instruments, such as interest rate swap contracts and foreign exchange contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or shareholders' equity (as a component of comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. SFAS No. 137 defers the implementation date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company has not completed the process of determining the effect of SFAS No. 133 and SFAS No. 137 on its financial statements. 4. REPOSSESSION OF AIRCRAFT In the first quarter of 2000, the Company repossessed one of its Boeing Model 737-300 aircraft from a Mexican airline. In the second quarter of 2000, the Company entered into an agreement to lease the aircraft to a foreign airline. The Company has subsequently canceled the lease and has written off $207,419 of lease initiation costs. The Company has -7- 8 also incurred repossession, maintenance and legal expenses of $837,676 for the nine month period ended September 30, 2000. The Company has entered into an agreement to sell the aircraft to a third party and has obtained a $200,000 non-refundable deposit from the purchaser. The deposit required the Company to hold the aircraft available to the purchaser for a specific price. The time period that the Company was required to hold the plane available was completed in the third quarter of 2000. The Company recorded the deposit as fee revenue. The Company has two notes payable to ILFC related to the aircraft of $13,894,896 bearing interest at 7.96% due January 2001 and $251,757 bearing interest at 6% due February 2002. 5. EARNINGS PER SHARE The following table sets forth the computation of the weighted average number of shares used to calculate basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Basic weighted average shares outstanding 3,876,231 4,211,040 4,009,115 4,211,928 Effect of dilutive securities: Employee stock options 84,036 126,436 97,486 113,779 Non-employee stock options -- 3,130 1,942 1,558 --------- --------- --------- --------- Dilutive potential common shares 84,036 129,566 99,428 115,337 --------- --------- --------- --------- Diluted weighted average shares and assumed conversions 3,960,267 4,340,606 4,108,543 4,327,265 ========= ========= ========= =========
The Company issued its underwriters warrants to purchase 260,000 shares of its common stock at $12 per share in connection with its initial public offering. These warrants were excluded from the computation of diluted net income per common share because they were anti-dilutive. The warrants are exercisable through November 10, 2001. The Company has issued options to purchase 125,000 shares of common stock at prices ranging from $5.88 to $10.25 per share under its Eligible Directors Option Plan. These options were excluded from the computation of diluted net income per common share because they were anti-dilutive. The options are exercisable through the periods ranging from May 10, 2003 to May 23, 2005. The Company has issued options to purchase 60,000 shares of common stock at prices ranging from $5.88 to $7.25 per share under its Eligible Employees Stock Option and Award Plan. These options were excluded from the computation of diluted net income per common share because they were anti-dilutive. The options are exercisable through the periods ranging from February 28, 2003 to December 31, 2007. 6. NOTES PAYABLE The Company extended a note due October 2000 with a balance totaling $13,894,896 to January 2001, notes due September 2000 with balances totaling $1,937,500 to December 2000, a note due September 2000 with a balance totaling $15,955,308 to December 2000, a note due October 2000 with a balance totaling $28,011,328 to January 2001 and a note due December 2000 with a balance totaling $22,502,487 to February 2001. At September 30, 2000, the Company's weighted average composite interest rate was 7.1%. -8- 9 7. SUBSEQUENT EVENTS The Company has taken possession of a 1993 Airbus A320-200 from TransAer, an Irish carrier, two weeks prior to its lease termination of October 31, 2000. The Company is in discussions with several airlines about leasing the aircraft. The repossession had no effect on the Company's third quarter financial results. -9- 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) OVERVIEW We are primarily engaged in the acquisition of used, single-aisle jet aircraft for lease and sale to domestic and foreign airlines and other customers. We lease aircraft under short-term to medium-term operating leases where the lessee is responsible for all operating costs, including major overhauls and we retain the potential benefit or risk of the residual value of the aircraft, as distinct from finance leases where the full cost of the aircraft is generally recovered over the term of the lease. Rental amounts are accrued evenly over the lease term and are recognized as revenue from the rental of flight equipment. Our flight equipment is recorded on the balance sheet at cost and is depreciated on a straight-line basis over the estimated useful life to our estimated salvage value. Revenue, depreciation expense and resultant profit for operating leases are recorded evenly over the life of the lease. Initial direct costs related to the origination of leases are capitalized and amortized evenly over the lease terms. This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbors created thereby. Reference is made to the cautionary statements made in our Report on Form 10-K for the year ended December 31, 1999 ("Form 10-K") which should be read as being applicable to all related forward-looking statements wherever they appear in this Report on Form 10-Q. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in the Form 10-K. REPOSSESSION In the first quarter of 2000, we repossessed one of our Boeing Model 737-300 aircraft from a Mexican airline. In the second quarter of 2000, we entered into an agreement to lease the aircraft to a foreign airline. We have subsequently canceled the lease and have written off $207 of lease initiation costs. We have also incurred repossession, maintenance and legal expenses of $838 for the nine month period ended September 30, 2000. We have entered into an agreement to sell the aircraft to a third party and have obtained a $200 non-refundable deposit from the purchaser. The deposit required us to hold the plane available to the purchaser for a specific time period. The time period that we were required to hold the plane available was completed in the third quarter of 2000. We recorded the deposit as fee revenue. We have two notes payable to ILFC related to the aircraft of $13,895 bearing interest at 7.96% due January 2001 and $252 bearing interest at 6% due February 2002. We repossessed one of our Airbus A320-200 aircraft from an Irish carrier two weeks prior to its lease termination of October 31, 2000. We are in discussion with several airlines about leasing the aircraft. The effect on future financial results depends on the timing, terms and conditions of a future lease. RESULTS OF OPERATIONS Three Months Ended September 30, 2000 and 1999 Revenues from rental of flight equipment increased by 3%, or $289, to $10,483 in the three months ended September 30, 2000 compared to the same period in 1999 as a result of a full quarter effect of two aircraft acquired in July and December 1999, partially offset by the impact of no rent on the repossessed 737-300 discussed above. Our lease portfolio consisted of sixteen aircraft with a book value of $301,882 at September 30, 2000 and fifteen aircraft on lease with a book value of $288,298 at September 30, 1999. Quarter to quarter comparisons are impacted by the timing and amount of consulting and other fees which are earned from time to time. We earned $200 from the non-refundable deposit on an agreement to sell a 737-300 as discussed -10- 11 above. No fees were earned in the third quarter of 1999. Interest income decreased to $353 for the three months ended September 30, 2000 from $403 for the same period in 1999 as a result of lower average cash and restricted cash balances as a result of the purchase of aircraft in 1999 and maintenance reserve reimbursements paid in 2000, partially offset by higher average interest rates. Interest expense increased to $4,816 for the three months ended September 30, 2000 from $4,267 for the same period in 1999 principally as a result of a full quarter effect of interest on financings related to the acquisition of two aircraft acquired in 1999, offset by the effect of loan paydowns. Our composite interest rate was 7.1% and 7% at September 30, 2000 and 1999, respectively. Depreciation expense increased to $4,590 in the third quarter of 2000 from $4,024 in the third quarter of 1999 primarily as a result of a full quarter effect of two aircraft acquired in 1999. We wrote off $207 of lease initiation costs as a result of the cancellation of a lease agreement on a 737-300 as discussed above. General and administrative expenses decreased to $523 in the three months ended September 30, 2000 from $568 in the same period of 1999 primarily as a result of decreased compensation expense. During the three months ended September 30, 2000 and 1999, we incurred $63 of non-cash stock compensation related to the vesting of options granted to executive officers. Income tax expense decreased to $314 from $637 as a result of an $839 reduction in income before income taxes. Income tax expense represents a non-cash provision for deferred income taxes at an effective rate of 37.5%. We continue to generate substantial federal net operating loss carryforwards primarily resulting from accelerated tax depreciation. At December 31, 1999, we had $21.6 million of federal net operating tax loss carryforwards. Nine Months Ended September 30, 2000 and 1999 Revenues from rental of flight equipment increased by 15%, or $4,045, to $31,486 in the nine months ended September 30, 2000 compared to the same period in 1999 as a result of the effect of three aircraft on lease purchased from July 1999 to December 1999, partially offset by the impact of no rent on the repossessed aircraft discussed above. Our lease portfolio consisted of sixteen aircraft with a book value of $301,882 at September 30, 2000 and fifteen aircraft on lease with a book value of $288,298 at September 30, 1999. Period to period comparisons are impacted by the timing and amount of consulting fees which are earned from time to time. We earned $200 from a non-refundable deposit on an agreement to sell a 737-300 as discussed above. In 1999, we earned $200 of consulting fees. Interest income increased to $1,188 for the nine months ended September 30, 2000 from $1,143 for the same period in 1999 as a result of higher average interest rates partially offset by lower average cash and restricted cash balances. Interest expense increased to $14,453 for the nine months ended September 30, 2000 from $11,763 for the same period in 1999 principally as a result of interest on financing the purchase of three aircraft purchased from July 1999 to December 1999, offset by the effect of loan paydowns. Our composite interest rate was 7.1% and 7% at September 30, 2000 and 1999, respectively. Depreciation expense increased to $13,770 in the nine months ended September 30, 2000 from $10,744 in the same period of 1999 primarily as a result of the effect of three aircraft purchased from July 1999 through December 1999. We have incurred $1,045 of expense related to the repossessed 737-300. Of the $1,045, we wrote off $207 of lease initiation costs as discussed above and incurred $838 of repossession and maintenance expense. General and administrative expenses increased to $1,626 in the nine months ended September 30, 2000 from $1,415 in the same period of 1999 primarily as a result of increased compensation expense. During the nine months ended September 30, 2000 and 1999, we incurred $188 of non-cash stock compensation related to the vesting of options granted to executive officers. -11- 12 Income tax expense decreased to $672 from $1,776 as a result of a $2,882 reduction in income before income taxes and an extraordinary item. Income tax expense represents a non-cash provision for deferred income taxes at an effective rate of 37.5%. We continue to generate substantial federal net operating loss carryforwards primarily resulting from accelerated tax depreciation. At December 31, 1999, we had $21.6 million of federal net operating tax loss carryforwards. In the second quarter of 1999, we repaid a note prior to maturity, resulting in an extraordinary loss on debt extinguishment of $214, net of $131 income tax benefit. Net income decreased to $1,121 for the nine months ended September 30, 2000 from $2,684 for the same period in 1999 due to the factors described above. LIQUIDITY AND CAPITAL RESOURCES Our principal external sources of funds have been term loans from banks and seller financing secured by flight equipment and the net proceeds from our initial public offering. A substantial amount of our cash flow from rental of flight equipment is applied to principal and interest payments on secured debt. The terms of our loans generally require a substantial balloon payment at the end of the noncancellable portion of the lease of the related flight equipment, at which time we will be required to re-lease the flight equipment and renegotiate the balloon amount of the loan or obtain other financing. Refinancing of the balloon amount is dependent upon our re-leasing the related flight equipment. The principal use of cash is for financing the acquisition of our flight equipment portfolio, which is financed by loans secured by the applicable flight equipment. We maintain a $5,000 line of credit with a bank. 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. For the nine months ended September 30, 2000, net cash provided from operating activities decreased by $3,664. The decrease is a result of a decrease in net income of $1,563 primarily due to the loss of rent and repossession, maintenance and lease cancellation expense on the repossessed 737-300, a $7,327 decrease in the change in lease and other deposits, partially offset by a $2,078 increase in the change in restricted cash and non-cash expense for depreciation of $3,026 and a decrease in deferred taxes of $972. Net cash used in investing activities was $169 in the nine months ended September 30, 2000 as the result of equipment installed on the repossessed aircraft. Net cash used in investing activities was $62,133 in the nine months ended September 30, 1999 resulting primarily from the purchase of two aircraft in June and July of 1999. Net cash used in financing activities was $15,496 in the nine months ended September 30, 2000. Cash used was principally due to loan paydowns of $13,611 as well as repurchasing $1,885 of our common stock. For the nine months ended September 30, 1999, net cash provided in financing activities was $42,416. Proceeds from financing activities resulted primarily from $69,345 of bridge financing and other financing from International Lease Finance Corporation related to the purchase of aircraft. Proceeds from financing activities were partially offset in 1999 by loan paydowns of $26,886 and stock repurchases of $44. Cash and cash equivalents vary from period to period principally as a result of the timing of the purchase and sale of aircraft. We use interest rate swap arrangements to reduce the potential impact of increases in interest rates on floating rate long-term debt and do not use them for trading purposes. Premiums paid for purchased interest rate swap agreements are amortized to interest expense over the terms of the swap agreements. Our ability to successfully execute our business strategy and to sustain our operations is dependent, in part, on our ability to obtain financing and to raise equity capital. There can be no assurance that the necessary amount of such capital will continue to be available to us on favorable terms or at all. If we were unable to continue to obtain any portion of required financing on favorable terms, our ability to add new aircraft to our lease portfolio, extend leases, re-lease an aircraft, repair or recondition an aircraft if required, or retain ownership of an aircraft on which financing -12- 13 has expired would be impaired, which would have a material adverse effect on our business, financial condition and results of operations. In addition, our financing arrangements to date have been dependent in part upon International Lease Finance Corporation. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. (DOLLARS IN THOUSANDS) Lease Portfolio 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: o the demand for various types of aircraft o general market and economic conditions o regulatory changes, including those imposing environmental, maintenance or operational requirements o changes in supply or cost of aircraft o 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. A hypothetical 10% decrease in lease rates of those leases which expire within a one-year period would reduce our lease revenue by $1,117 annually. Financial Instruments This analysis presents the hypothetical loss in earnings, cash flows or fair value of the financial instruments which we held at September 30, 2000 and which 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. 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 related loans. We had no swap agreements at September 30, 2000. 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 period-end carrying value. The fair values of our debt instruments, including the related asset value guarantees, 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 for a one year period from September 30, 2000 resulting from a hypothetical 10% increase in our weighted average borrowing rate at September 30, 2000 or $1,842. -13- 14 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS
NUMBER DESCRIPTION ------ ----------- 3.1 Amended and Restated Articles of Incorporation of the Company. Filed as Exhibit 3.1 to Form 10-Q for the quarterly period ended September 30, 1997, and incorporated herein by reference 3.2 Amended and Restated Bylaws of the Company. Filed as Exhibit 3.2 to Form 10-Q for the quarterly period ended September 30, 1997, and incorporated herein by reference 4.1 The Company hereby agrees to furnish to the Commission upon request a copy of any instrument with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the consolidated assets of the Company 27 Financial Data Schedule for the three months ended September 30, 2000
REPORTS ON FORM 8-K: During the quarter ended September 30, 2000, the Company did not file any reports on Form 8-K. -14- 15 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL AIRCRAFT INVESTORS November 10, 2000 /s/ Michael P. Grella --------------------------------- Michael P. Grella President And Chief Operating Officer November 10, 2000 /s/ Alan G. Stanford, Jr. --------------------------------- Alan G. Stanford, Jr. Vice President--Controller And Chief Accounting Officer -15-