1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
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 August 6, 2001
----- -----------------------------
COMMON STOCK, $.01 PAR VALUE 3,581,773
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INTERNATIONAL AIRCRAFT INVESTORS
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
As of June 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income
Three months ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Income
Six months ended June 30, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
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INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 10,307,381 $ 11,164,227
Short-term investments -- 1,393,450
Net investment in direct financing lease 16,346,977 --
Flight equipment, at cost less accumulated depreciation of
$75,241,351 at June 30, 2001 and $71,488,351
at December 31, 2000 269,789,436 295,292,436
Cash, restricted 10,852,459 11,479,649
Other assets 2,122,814 1,026,667
------------ ------------
$309,419,067 $320,356,429
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued interest and other accrued expenses $ 1,836,377 $ 2,121,279
Notes payable 244,169,909 253,700,338
Lease and other deposits on flight equipment 19,607,281 20,011,609
Deferred rent 2,971,455 3,884,090
Deferred taxes, net 4,879,686 4,777,053
------------ ------------
273,464,708 284,494,369
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
3,681,773 shares at June 30, 2001 and
3,696,573 shares at December 31, 2000 36,818 36,966
Additional paid-in capital 28,152,603 28,234,506
Retained earnings 7,764,938 7,590,588
------------ ------------
Net shareholders' equity 35,954,359 35,862,060
------------ ------------
$309,419,067 $320,356,429
============ ============
See accompanying notes to condensed consolidated financial statements
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INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30,
---------------------------
2001 2000
------ ------
(UNAUDITED)
REVENUES:
Rental of flight equipment $ 9,227,964 $10,402,373
Consulting and other fees 138,751 --
Interest income 467,082 382,168
----------- -----------
Total revenues 9,833,797 10,784,541
EXPENSES:
Interest 4,246,286 4,663,936
Depreciation 4,404,410 4,659,865
Repossession and maintenance 519,779 631,257
General and administrative 558,235 559,396
Stock compensation -- 62,500
----------- -----------
Total expenses 9,728,710 10,576,954
----------- -----------
Income before income taxes 105,087 207,587
Income tax expense 42,035 77,845
----------- -----------
Net income $ 63,052 $ 129,742
=========== ===========
Basic earnings share $ .02 $ .03
=========== ===========
Diluted earnings per share $ .02 $ .03
=========== ===========
Weighted average common shares outstanding:
Basic 3,681,773 3,987,757
=========== ===========
Assuming dilution 3,681,773 4,066,541
=========== ===========
See accompanying notes to condensed consolidated financial statements
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INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30,
----------------------------
2001 2000
----------- -----------
(UNAUDITED)
REVENUES:
Rental of flight equipment $18,701,032 $21,003,271
Consulting and other fees 145,000 --
Interest income 891,905 834,754
----------- -----------
Total revenues 19,737,937 21,838,025
EXPENSES:
Interest 8,666,096 9,497,366
Depreciation 9,000,040 9,319,045
Repossession and maintenance 658,627 837,676
General and administrative 1,122,591 1,102,903
Stock compensation -- 125,000
----------- -----------
Total expenses 19,447,354 20,881,990
----------- -----------
Income before income taxes 290,583 956,035
Income tax expense 116,233 358,513
----------- -----------
Net income $ 174,350 $ 597,522
=========== ===========
Basic earnings share $ .05 $ .15
=========== ===========
Diluted earnings per share $ .05 $ .14
=========== ===========
Weighted average common shares outstanding:
Basic 3,682,101 4,076,274
=========== ===========
Assuming dilution 3,682,448 4,170,709
=========== ===========
See accompanying notes to condensed consolidated financial statements
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INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
---- ----
(UNAUDITED)
Cash flows from operating activities:
Net income $ 174,350 $ 597,522
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation of flight equipment 8,884,800 9,180,000
Amortization of deferred transaction fees 144,674 200,020
Deferred taxes, net 102,633 344,913
Stock compensation -- 125,000
(Increase) decrease in assets:
Short-term investments 1,393,450 --
Cash, restricted 627,190 2,262,445
Other assets (1,240,821) 99,940
Increase (decrease) in liabilities:
Accrued interest and other accrued liabilities (284,902) 104,543
Lease and other deposits on flight equipment (404,328) (2,082,469)
Deferred rent (912,635) 54,782
------------ ------------
Net cash provided by operating activities 8,484,411 10,886,696
Cash flows from investing activities:
Collections from direct financing lease 271,223 --
Purchase of flight equipment -- (169,143)
------------ ------------
Net cash provided by (used in) investing activities 271,223 (169,143)
Cash flows from financing activities:
Repayment of notes payable (4,290,959) (4,565,503)
Repayment of notes payable to International Lease (4,579,470) (4,372,713)
Finance Corp.
Repayment of notes payable to Great Lakes Holdings (660,000) (79,500)
Repurchase of common stock (82,051) (1,687,722)
------------ ------------
Net cash used in financing activities (9,612,480) (10,705,438)
------------ ------------
Net increase in cash and cash equivalents 856,846 12,115
Cash and cash equivalents at beginning of period 11,164,227 13,045,392
------------ ------------
Cash and cash equivalents at end of period $ 10,307,381 $ 13,057,507
============ ============
Supplemental disclosure of cash flow information
Cash paid for interest $ 8,832,359 $ 9,546,865
Cash paid for income taxes $ 13,600 $ 13,600
Supplemental disclosure of noncash investing and financing activities:
In March 2001, the Company entered into a $16,618,200 investment in a direct
financing lease on an aircraft which had formerly been under operating lease.
See accompanying notes to condensed consolidated financial statements
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INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The accompanying unaudited interim condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-K.
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of normal and recurring accruals)
necessary for a fair presentation of the financial position of the Company as of
June 30, 2001 and December 31, 2000 and the results of its operations for the
three month and six month periods ended June 30, 2001 and 2000 and its cash
flows for the six months ended June 30, 2001 and 2000. Operating results for the
six month period ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001.
2. MANAGEMENT ESTIMATES
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
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 is primarily engaged in the acquisition of used, single-aisle jet
aircraft for lease and sale to domestic and foreign airlines and other
customers. While the Company enters into both operating and direct financing
leases, the Company is primarily engaged in leasing 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 direct financing leases where the cost
of the aircraft is generally recovered over the term of the lease. 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. REPOSSESSION OF AIRCRAFT
In 2001, the Company recorded $658,627 of repossession and maintenance expense
related to two aircraft repossessed in 2000. In June 2001, the Company leased
the repossessed Airbus A320-200 to Mexicana, one of Mexico's premier airlines to
June 2006. In July 2001, the Company also leased the repossessed Boeing Model
737-300 for three years to Panair, an Italian airline operating out of Sicily.
The Company has a 1990 MD-83 on lease to Air Liberte, a French airline to April
2002. On June 19, 2001, Air Liberte filed for bankruptcy under French law. The
airline is allowed to continue its operations for 90 days. On July 27, 2001, the
French courts adopted a plan by which the airline will be purchased by an
outside investor group. The details of the plan are in the process of being
finalized with the administrator and the terms and conditions under which the
aircraft will remain leased to the airline are in negotiations. It is currently
too early to determine whether or not the terms and conditions under which the
aircraft will be leased would be acceptable to the Company.
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4. 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
Basic weighted average shares outstanding 3,681,773 3,987,757 3,682,101 4,076,274
Effect of dilutive securities:
Employee stock options -- 78,107 -- 94,313
Non-employee stock options -- 677 347 122
--------- --------- --------- ---------
Dilutive potential common shares -- 78,784 347 94,435
--------- --------- --------- ---------
Diluted weighted average shares and
assumed conversions 3,681,773 4,066,541 3,682,448 4,170,709
========= ========= ========= =========
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 its employees to purchase 641,554 shares of
the Company's common stock at prices ranging from $4.50 to $7.25 per share and
exercisable from March 2004 to March 2007. The dilutive effect of these options
is dependant on the weighted average price of the Company's common stock during
the reporting period.
The Company has issued options to its eligible directors to purchase 210,000
shares of the Company's common stock at prices ranging from $4.00 to $10.25 per
share and exercisable from May 2003 to May 2006. The dilutive effect of these
options is dependant on the weighted average price of the Company's common stock
during the reporting period.
5. NET INVESTMENT IN DIRECT FINANCING LEASE
In March 2001, American Airlines agreed to lease the Company's MD-82 formerly on
lease to TWA. As the lease was extended to December 2014, the lease was recorded
as a direct financing lease. Under a direct financing lease, the Company
recognizes interest income rather than rental revenue and depreciation expense.
The following table lists the components of net investment in direct financing
lease:
JUNE 30, 2001
-------------
Total minimum lease payments $ 22,731,210
------------
Estimated residual value of leased flight equipment 3,050,000
------------
Unearned income (9,434,233)
------------
Net investment in direct financing lease $ 16,346,977
============
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6. NOTES PAYABLE
The Company extended a note due June 2001 with a balance totaling $3,244,681 to
August 2001, notes due June 2001 with balances totaling $1,277,500 to September
2001 and notes due May 2001 with balances totaling $23,247,712 to May 2003.
At June 30, 2001, the Company's weighted average composite interest rate was
6.95%.
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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. While
we enter into both operating and direct financing leases, we are primarily
engaged in leasing 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 direct financing 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 its
estimated useful life to our estimated salvage value. Initial direct costs
related to the origination of leases are capitalized and amortized evenly over
the lease terms.
Net investment in direct financing leases is recorded on the balance sheet as
the sum of future minimum lease payments, initial direct costs and estimated
residual value less unearned income. Under direct financing leases, interest
income is recognized rather than rental revenues and depreciation expense.
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, 2000 ("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 in the Form 10-K.
REPOSSESSION
In 2001, the Company recorded $659 of repossession and maintenance expense
related to two aircraft repossessed in 2000. In June 2001, the Company leased
the repossessed Airbus A320-200 to Mexicana, one of Mexico's premier airlines to
June 2006. In July 2001, the Company also leased the repossessed Boeing Model
737-300 for three years to Panair, an Italian airline operating out of Sicily.
We have a 1990 MD-83 on lease to Air Liberte, a French airline to April 2002. On
June 19, 2001, Air Liberte filed for bankruptcy under French law. The airline is
allowed to continue its operations for 90 days. On July 27, 2001, the French
courts adopted a plan by which the airline will be purchased by an outside
investor group. The details of the plan are in the process of being finalized
with the administrator and the terms and conditions under which the aircraft
will remain leased to the airline are in negotiations. It is currently too early
to determine whether or not the terms and conditions under which the aircraft
will be leased would be acceptable to us.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 and 2000
Revenues from rental of flight equipment decreased by 11%, or $1,174, to $9,228
in the three months ended June 30, 2001 compared to the same period in 2000 as a
result of lost rent on two repossessed aircraft and recording in March 2001 of
our MD-82 as a direct financing lease. Our lease portfolio consisted of fifteen
aircraft with a book value of $269,790 and one aircraft under a direct financing
lease with a value of $16,347 at June 30, 2001 compared to sixteen aircraft with
a book value of $306,472 at June 30, 2000.
During the second quarter of 2001, we earned $139 of consulting and other fees
primarily related to our assisting International Lease Finance Corporation
(ILFC) with the purchase of three aircraft. Quarter to quarter comparisons
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are impacted by the timing and amount of consulting fees which are earned from
time to time.
Interest income increased to $467 for the three months ended June 30, 2001 from
$382 for the same period in 2000 principally as a result of interest income from
recording of our MD-82 as a direct financing lease in March 2001, partially
offset by lower interest rates and cash balances in 2001.
Interest expense decreased to $4,246 for the three months ended June 30, 2001
from $4,664 for the same period in 2000 as result of the effect of continued
loan paydowns. Our composite interest rate was 6.95% at June 30, 2001 and 7.1%
at June 30, 2000.
Depreciation expense decreased to $4,404 in the second quarter of 2001 from
$4,660 in the second quarter of 2000 primarily as a result of recording of our
MD-82 as a direct financing lease in March 2001. We incurred $520 of
repossession expense in the second quarter of 2001 compared to $631 in the same
period of 2000.
General and administrative expenses were $558 in the three months ended June 30,
2001 and $559 in the same period of 2000. During the three months ended June 30,
2001, no stock compensation was incurred compared to $63 of non-cash stock
compensation incurred in the same period of 2000 related to the vesting of
options granted to executive officers.
Income tax expense decreased to $42 from $78 as a result of reduction in income
before taxes of $103. Income tax expense represents a non-cash provision for
deferred income taxes at an effective rate of 40% in 2001 compared to 37.5% in
2000.
Net income decreased to $63 for the three months ended June 30, 2001 from $130
for the same period in 2000.
Six Months Ended June 30, 2001 and 2000
Revenues from rental of flight equipment decreased by 10%, or $2,302, to $18,701
in the six months ended June 30, 2001 compared to the same period in 2000 as a
result of lost rent on two repossessed aircraft and recording in March 2001 of
our MD-82 as a direct financing lease. Our lease portfolio consisted of fifteen
aircraft with a book value of $269,790 and one aircraft under a direct financing
lease with a value of $16,347 at June 30, 2001 compared to sixteen aircraft with
a book value of $306,472 at June 30, 2000.
During the six months ended June 30, 2001, we earned $145 of consulting and
other fees primarily related to our assisting ILFC with the purchase of three
aircraft. Quarter to quarter comparisons are impacted by the timing and amount
of consulting fees which are earned from time to time.
Interest income increased to $892 for the six months ended June 30, 2001 from
$835 for the same period in 2000 principally as a result of interest income from
recording of an MD-82 as a direct financing lease in March 2001, partially
offset by lower interest rates and cash balances in 2001.
Interest expense decreased to $8,666 for the six months ended June 30, 2001 from
$9,497 for the same period in 2000 as result of the effect of continued loan
paydowns. Our composite interest rate was 6.95% at June 30, 2001 and 7.1% at
June 30, 2000.
Depreciation expense decreased to $9,000 in the six months ended June 30, 2001
from $9,319 in the six months ended June 30, 2000 primarily as a result of
recording of our MD-82 as a direct financing lease in March 2001. We incurred
$659 of repossession expense in 2001 compared to $838 in 2000.
General and administrative expenses were $1,123 in the six months ended June 30,
2001 and $1,103 in the same period of 2000. During the six months ended June 30,
2001, no stock compensation was incurred compared to $125 of non-cash stock
compensation incurred in the same period of 2000 related to the vesting of
options granted to executive officers.
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Income tax expense decreased to $116 from $359 as a result of reduction in
income before taxes of $665. Income tax expense represents a non-cash provision
for deferred income taxes at an effective rate of 40% in 2001 compared to 37.5%
in 2000.
Net income decreased to $174 for the six months ended June 30, 2001 from $598
for the same period in 2000.
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. Seller financing is generally short-term and requires a substantial
balloon payment at loan maturity. 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. The principal use of cash is
for debt payments, repossession and maintenance costs and the acquisition of our
aircraft portfolio, which are financed by loans secured by the applicable
aircraft. We maintain a $5,000 line of credit with a bank which bears interest
at LIBOR plus 2.5%. The line of credit was extended during the second quarter of
2001 to October 31, 2001. No borrowings have been made against the line of
credit.
At June 30, 2001 and 2000, we had cash and cash equivalents of $10,307 and
$13,058, respectively.
Net cash provided by operating activities was $8,484 in the six months ended
June 30, 2001. The movement in short-term investments in 2001 related to the
sale of investments in commercial paper with maturities greater than 90 days and
the movement in other assets related to receivables from ILFC related to the
lease of two engines off of the repossessed A320-200. The engines were replaced
on the aircraft before it was leased to Mexicana. Net cash provided by operating
activities was $10,887 in the six months ended June 30, 2000. The movements in
restricted cash and lease deposits in 2000 were due to lease deposit
reimbursements to several lessees in 2000. The timing and amount of these
reimbursements vary as a result of the type and usage of the aircraft on lease.
In March 2001, American Airlines agreed to lease our MD-82 formerly on lease to
TWA. As we extended the lease to December 2014, the lease was recorded as a
direct financing lease. In the six months ended June 30, 2001, cash flows from
investing activities of $271 related to collections under the financing lease.
In the six months ended June 30, 2001, net cash used in financing activities was
$9,612, including repayments of $9,530 and $82 of common stock repurchases. In
the six months ended June 30, 2000, net cash used in financing activities was
$10,705,including repayments of $9,018 and $1,687 of common stock repurchases.
Notes payable within one year totaled $128,496 at June 30, 2001, of which
$110,399 represents balloon payments and $18,097 represents installment
payments. We intend to refinance all balloon payments due within one year. We
extended loans with balloons totaling $135,805 during the six months ended 2001.
Cash and cash equivalents vary from year to year principally as a result of the
timing of the purchase and sale of aircraft, the timing of rental receipts and
debt payments, and repossession, maintenance and financing costs on repossessed
aircraft.
From time to time, we use interest rate swap arrangements to reduce the
potential impact of increases in interest rates on floating rate long-term debt.
We do not enter into 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. At June 30, 2001, we had no 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
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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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
(DOLLARS IN THOUSANDS)
Lease Portfolio
While we enter into both operating and direct financing leases, we primarily
engage in leasing aircraft under short-term and medium-term operating 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. A hypothetical 10% decrease in lease
rates of those leases which terminate within a one-year period would reduce our
lease revenue by $903 annually.
Financial Instruments
The following analysis presents the hypothetical loss in earnings, cash flows or
fair value of the financial instruments which we held at June 30, 2001 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 this 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 June 30, 2001.
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 June 30, 2001
resulting from a hypothetical 10% increase in our weighted average borrowing
rate at June 30, 2001 or $1,697.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders, at which the proposals described
below were submitted to stockholders, was held May 31, 2001.
Proposal No. 1 Election of Directors. The following individuals, who received
the votes indicated, were elected as directors:
Name FOR WITHHELD
------------ --------- ---------
William E. Lindsey 3,206,880 235,600
Michael P. Grella 3,206,880 235,600
Magnus Gunnarsson 3,206,880 235,600
Ralph O. Hellmold 3,206,880 235,600
Alex R. Lieblong 3,176,880 265,600
Aaron Mendelsohn 3,206,880 235,600
Christer Salen 3,206,880 235,600
Kenneth Taylor 3,206,880 235,600
Stuart M. Warren 3,206,880 235,600
Proposal No. 2 The proposal to amend the Company's 1997 Stock Option and Award
Plan. The results of the voting were as follows:
FOR AGAINST ABSTAIN
--------- ------- -------
2,069,187 815,121 16,211
Proposal No. 3 The proposal to amend the Company's 1997 Eligible Directors Stock
Option Plan. The results of the voting were as follows:
FOR AGAINST ABSTAIN
--------- ------- -------
1,894,481 273,367 732,311
Proposal No. 4 The proposal to ratify the selection of KPMG LLP as independent
public accountants for the Company for the fiscal year ending
December 31, 2001. The results of the voting were as follows:
FOR AGAINST ABSTAIN
--------- ------- -------
3,307,303 102,066 33,111
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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
REPORTS ON FORM 8-K:
During the quarter ended June 30, 2001, the Company did not file any reports on
Form 8-K.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL AIRCRAFT INVESTORS
August 14, 2001 /s/ Michael P. Grella
--------------------------
Michael P. Grella
President
And Chief Operating Officer
August 14, 2001 /s/ Alan G. Stanford, Jr.
--------------------------
Alan G. Stanford, Jr.
Vice President, Finance--Treasurer
And Chief Accounting Officer
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