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, 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 November 10, 2001
----- --------------------------------
COMMON STOCK, $.01 PAR VALUE 3,581,773
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INTERNATIONAL AIRCRAFT INVESTORS
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
As of September 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income
Three months ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Income
Nine months ended September 30, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents ............................................ $ 8,889,994 $ 11,164,227
Short-term investments ............................................... -- 1,393,450
Net investment in direct financing lease ............................. 16,194,492 --
Flight equipment, at cost less accumulated depreciation of
$79,585,351 at September 30, 2001 and $71,488,351
at December 31, 2000 .............................................. 265,445,436 295,292,436
Cash, restricted ..................................................... 10,360,976 11,479,649
Other assets ......................................................... 1,981,537 1,026,667
------------ ------------
$302,872,435 $320,356,429
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued interest and other accrued expenses .......................... $ 1,431,249 $ 2,121,279
Notes payable ........................................................ 239,923,238 253,700,338
Lease and other deposits on flight equipment ......................... 19,111,264 20,011,609
Deferred rent ........................................................ 1,020,086 3,884,090
Deferred taxes, net .................................................. 5,267,108 4,777,053
------------ ------------
266,752,945 284,494,369
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
3,581,773 shares at September 30, 2001 and
3,696,573 shares at December 31, 2000 .............................. 35,818 36,966
Additional paid-in capital ........................................... 27,737,600 28,234,506
Retained earnings .................................................... 8,346,072 7,590,588
------------ ------------
Net shareholders' equity ................................... 36,119,490 35,862,060
------------ ------------
$302,872,435 $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 SEPTEMBER 30,
-------------------------------
2001 2000
----------- -----------
(UNAUDITED)
REVENUES:
Rental of flight equipment ..................... $ 9,973,858 $10,482,925
Consulting and other fees ...................... 6,250 200,000
Interest income ................................ 422,687 352,757
----------- -----------
Total revenues .......................... 10,402,795 11,035,682
EXPENSES:
Interest ....................................... 4,238,611 4,745,293
Depreciation ................................... 4,458,008 4,660,999
Repossession, maintenance and lease cancellation 218,906 207,419
General and administrative ..................... 518,714 522,663
Stock compensation ............................. -- 62,500
----------- -----------
Total expenses ........................... 9,434,239 10,198,874
----------- -----------
Income before income taxes ....................... 968,556 836,808
Income tax expense ............................... 387,422 313,803
----------- -----------
Net income ............................... $ 581,134 $ 523,005
=========== ===========
Basic earnings share ............................. $ .16 $ .13
=========== ===========
Diluted earnings per share ....................... $ .16 $ .13
=========== ===========
Weighted average common shares outstanding:
Basic .................................... 3,620,903 3,876,231
=========== ===========
Assuming dilution ........................ 3,625,712 3,960,267
=========== ===========
See accompanying notes to condensed consolidated financial statements
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INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
----------- -----------
(UNAUDITED)
REVENUES:
Rental of flight equipment ..................... $28,674,890 $31,486,196
Consulting and other fees ...................... 151,250 200,000
Interest income ................................ 1,314,592 1,187,511
----------- -----------
Total revenues .......................... 30,140,732 32,873,707
EXPENSES:
Interest ....................................... 12,904,707 14,242,659
Depreciation ................................... 13,458,048 13,980,044
Repossession, maintenance and lease cancellation 877,533 1,045,095
General and administrative ..................... 1,641,305 1,625,566
Stock compensation ............................. -- 187,500
----------- -----------
Total expenses ........................... 28,881,593 31,080,864
----------- -----------
Income before income taxes ....................... 1,259,139 1,792,843
Income tax expense ............................... 503,655 672,316
----------- -----------
Net income ............................... $ 755,484 $ 1,120,527
=========== ===========
Basic earnings share ............................. $ .21 $ .28
=========== ===========
Diluted earnings per share ....................... $ .21 $ .27
=========== ===========
Weighted average common shares outstanding:
Basic .................................... 3,661,478 4,009,115
=========== ===========
Assuming dilution ........................ 3,662,449 4,108,543
=========== ===========
See accompanying notes to condensed consolidated financial statements
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INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2001 2000
------------ ------------
(UNAUDITED)
Cash flows from operating activities:
Net income ............................................... $ 755,484 $ 1,120,527
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation of flight equipment ................. 13,228,800 13,770,000
Lease cancellation ............................... -- 207,419
Amortization of deferred transaction fees ........ 276,128 309,076
Deferred taxes, net .............................. 490,055 658,716
Stock compensation ............................... -- 187,500
(Increase) decrease in assets:
Short-term investments ........................... 1,393,450 --
Cash, restricted ................................. 1,118,673 1,462,093
Other assets ..................................... (1,230,998) (110,759)
Increase (decrease) in liabilities:
Accrued interest and other accrued liabilities ... (690,030) 50,873
Lease and other deposits on flight equipment ..... (900,345) (1,387,910)
Deferred rent .................................... (2,864,004) (87,783)
------------ ------------
Net cash provided by operating activities ........ 11,577,213 16,179,752
Cash flows from investing activities:
Collections from direct financing lease .......... 423,708 --
Purchase of flight equipment ..................... -- (169,143)
------------ ------------
Net cash provided by (used in) investing
activities ..................................... 423,708 (169,143)
Cash flows from financing activities:
Repayment of notes payable ....................... (6,356,427) (6,878,631)
Repayment of notes payable to International Lease (10,411,414) (6,652,675)
Finance Corp. ..................................
Repayment of notes payable to Great Lakes Holdings (802,500) (79,500)
Proceeds from notes payable ...................... 3,793,241 --
Repurchase of common stock ....................... (498,054) (1,884,743)
------------ ------------
Net cash used in financing activities ............ (14,275,154) (15,495,549)
------------ ------------
Net increase in cash and cash equivalents ........ (2,274,233) 515,060
Cash and cash equivalents at beginning of period ......... 11,164,227 13,045,392
------------ ------------
Cash and cash equivalents at end of period ............... $ 8,889,994 $ 13,560,452
============ ============
Supplemental disclosure of cash flow information
Cash paid for interest ........................... $ 13,115,091 $ 14,211,610
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
-6-
INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 and
its subsidiaries as of September 30, 2001 and December 31, 2000 and the results
of their operations for the three month and nine month periods ended September
30, 2001 and 2000 and their cash flows for the nine months ended September 30,
2001 and 2000. Operating results for the nine month period ended September 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 $877,533 of repossession and maintenance expense
related to two aircraft repossessed in 2000. In June 2001, the Company leased a
repossessed Airbus A320-200 to Mexicana, one of Mexico's premier airlines to
June 2006. In July 2001, the Company also leased a 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. On
July 27, 2001, the French courts adopted a plan by which the airline will be
purchased by an outside investor group. The Company is currently in negotiations
to restructure and extend the lease of this aircraft to the airline. The results
of the negotiations will result in a reduction in monthly rental revenue.
-7-
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Basic weighted average shares outstanding ............. 3,620,903 3,876,231 3,661,478 4,009,115
Effect of dilutive securities:
Employee stock options ........................ -- 84,036 -- 97,486
Non-employee stock options .................... 4,809 -- 971 1,942
--------- --------- --------- ---------
Dilutive potential common shares ...................... 4,809 84,036 971 99,428
--------- --------- --------- ---------
Diluted weighted average shares and assumed
conversions ................................. 3,625,712 3,960,267 3,662,449 4,108,543
========= ========= ========= =========
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. Options to purchase 641,554 shares of common stock under
this plan were excluded from the computation of diluted net income per common
share during the three and nine month periods ended September 30, 2001 because
they were anti-dilutive.
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. Options to purchase 150,000 shares of common stock
under this plan were excluded from the computation of diluted net income per
common share during the three and nine month periods ended September 30, 2001
because they were anti-dilutive.
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:
SEPTEMBER 30,
2001
------------
Total minimum lease payments ............................... $ 22,311,210
Estimated residual value of leased flight equipment ........ 3,050,000
Unearned income ............................................ (9,166,718)
------------
Net investment in direct financing lease ................... $ 16,194,492
============
-8-
6. NOTES PAYABLE
Scheduled future repayments of notes payable subsequent to September 2001 are as
follows:
YEAR ENDING DECEMBER 31:
2001 ................................... $114,758,517
2002 ................................... 22,516,248
2003 ................................... 70,059,441
2004 ................................... 21,047,445
2005 ................................... 1,074,298
Thereafter ............................. 10,467,289
------------
$239,923,238
============
The Company refinanced a note due November 2004 to November 2014 and increased
the borrowing from $9,087,755 to $12,880,996. The Company used part of the
proceeds from the borrowing to payoff a note with a balance $3,645,761. The
Company extended notes totaling $7,744,681 due October 2001 to November 2001.
At September 30, 2001, the Company's weighted average composite interest rate
was 6.88%.
7. SUBSEQUENT EVENTS
The Company refinanced a note due November 2001 to July 2006 and increased the
borrowing from $14,536,686 to $20,166,868. The Company used part of the proceeds
from the borrowing to payoff $5,000,000 of a note with a balance $8,570,803. The
Company refinanced a note with a balance of $21,258,699 due November 2001 to May
2003. The Company extended a note with a balance of $13,747,402 due October 2001
to April 2002.
The Company maintains a $5,000,000 line of credit with a bank which bears
interest at LIBOR plus 2.5%. The line of credit was extended to February 28,
2002. No borrowings have been made against the line of credit.
The Company has a 1992 Boeing Model 757-200ER on lease to Canada 3000 to May
2002. On November 8, 2001, Canada 3000 was granted protection from its creditors
under the Companies' Creditors Arrangement Act. The Company is in the process of
repossessing the aircraft. It is too early to determine the effect on the
Company as a result of the repossession.
-9-
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.
EFFECT OF TERRORIST ATTACKS
Following the terrorist attacks on September 11, the world's airlines have
entered into the worst financial crisis in the history of the industry. While
governments around the world have agreed to provide assistance to varying
degrees, the fate of the individual carriers and the industry is uncertain. Our
lessees have been adversely affected by these events. However, it is too soon to
accurately evaluate the extent of the impact on us.
We face many risks in the current climate. These risks include, but are not
limited to, lease rate reductions, collection of rents, airline bankruptcies,
refinancing risk and reductions in the value of aircraft. In order to minimize
these risks, we require most of our lessees to pay rents in advance, pay lease
deposits, and make payments to be applied to scheduled aircraft maintenance. In
addition, we are beginning to reap the benefits of lower interest rates in the
refinancing of our debt.
REPOSSESSION
In 2001, we recorded $878 of repossession and maintenance expense related to two
aircraft repossessed in 2000. In June 2001, we leased a repossessed Airbus
A320-200 to Mexicana, one of Mexico's premier airlines to June 2006. In July
2001, we also leased a 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. On July 27,
2001, the French courts adopted a plan by which the airline was purchased by an
outside investor group. We are currently in negotiations to restructure and
extend the lease of this aircraft to the airline. The results of the
negotiations will result in a reduction in monthly rental revenue.
We have a 1992 Boeing Model 757-200ER on lease to Canada 3000 to May 2002. On
November 8, 2001, Canada 3000 was granted protection from its creditors under
the Companies' Creditors Arrangement Act. We are in the process of repossessing
the aircraft. It is too early to determine the effect on the Company as a result
of the
-10-
repossession.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 and 2000
Revenues from rental of flight equipment decreased by 5%, or $509 to $9,974 in
the three months ended September 30, 2001 compared to the same period in 2000 as
a result of recording an MD-82 on lease to American Airlines as a direct
financing lease in March 2001 and the reduction of rent on the MD-83 lease to
Air Liberte, partially offset by two months rent on the Boeing 737-300 on lease
to Panair which was off lease during the same period of 2000. The Company's
lease portfolio consisted of fifteen aircraft with a book value of $265,445 and
one aircraft under a financing lease with a net investment of $16,194 at
September 30, 2001 compared to sixteen aircraft with a book value of $301,882 at
September 30, 2000.
During the third quarter of 2001, the Company earned $6 of consulting and other
fees compared to $200 earned in the third quarter of 2000. 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 $423 for the three months ended September 30, 2001
from $353 for the same period in 2000 principally as a result of interest income
from the 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 $4,239 for the three months ended September 30,
2001 from $4,745 for the same period in 2000 as a result of the effect of
continued loan paydowns and reduced interest rates. The Company's composite
interest rate was 6.88% at September 30, 2001 and 7.1% at September 30, 2000.
Depreciation expense decreased to $4,458 in the third quarter of 2001 from
$4,661 in the third quarter of 2000 primarily as a result of the recording of an
MD-82 as a direct financing lease in March 2001. The Company incurred $219 of
repossession expense in the third quarter of 2001 as a result of a settlement
with a repair facility compared to $207 in the same period of 2000. The aircraft
for which these costs were incurred has now been leased.
General and administrative expenses were $519 in the three months ended
September 30, 2001 and $523 in the same period of 2000. During the three months
ended September 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 increased to $387 in the three months ended September 30,
2001 from $314 in the same period of 2000 as a result of an increase in income
before taxes of $132 and an increase in the effective tax rate. 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 increased to $581 for the three months ended September 30, 2001 from
$523 for the same period in 2000.
Nine Months Ended September 30, 2001 and 2000
Revenues from rental of flight equipment decreased by 9%, or $2,811, to $28,675
in the nine months ended September 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 $265,445 and one aircraft under a direct
financing lease with a value of $16,194 at September 30, 2001 compared to
sixteen aircraft with a book value of $301,882 at September 30, 2000.
During the nine months ended September 30, 2001, we earned $151 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 are impacted by the timing and amount of consulting fees which are
earned from time to time.
-11-
Interest income increased to $1,315 for the nine months ended September 30, 2001
from $1,188 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 $12,905 for the nine months ended September 30,
2001 from $14,243 for the same period in 2000 as result of the effect of
continued loan paydowns and reduced interest rates. Our composite interest rate
was 6.88% at September 30, 2001 and 7.1% at September 30, 2000.
Depreciation expense decreased to $13,458 in the nine months ended September 30,
2001 from $13,980 in the nine months ended September 30, 2000 primarily as a
result of recording of our MD-82 as a direct financing lease in March 2001. We
incurred $878 of repossession expense in 2001 compared to $1,045 in 2000.
General and administrative expenses were $1,641 in the nine months ended
September 30, 2001 and $1,626 in the same period of 2000. During the nine months
ended September 30, 2001, no stock compensation was incurred compared to $188 of
non-cash stock compensation incurred in the same period of 2000 related to the
vesting of options granted to executive officers.
Despite an increase in the effective tax rate, income tax expense decreased to
$504 from $672 as a result of reduction in income before taxes of $534. 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 $755 for the nine months ended September 30, 2001 from
$1,121 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. The impact of the terrorist attacks on the
ability to re-lease aircraft in the future is not presently known. 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 to
February 28, 2002. No borrowings have been made against the line of credit.
At September 30, 2001 and 2000, we had cash and cash equivalents of $8,890 and
$13,560, respectively.
Net cash provided by operating activities was $11,577 in the nine months ended
September 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. The movement in deferred rent
related to the timing of the receipt of rental payments. Net cash provided by
operating activities was $16,180 in the nine months ended September 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 on lease
aircraft.
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 nine months ended September 30, 2001, cash flows
from investing activities of $424 related to collections under the financing
lease. 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.
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In the nine months ended September 30, 2001, net cash used in financing
activities was $14,275, including repayments of notes payable of $17,570 and
$498 of common stock repurchases, partially offset by $3,793 of borrowings. 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.
Notes payable within one year totaled $127,496 at September 30, 2001, of which
$126,230 represents balloon payments and $1,266 represents installment payments.
We intend to refinance $125,095 of balloon payments due within one year.
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.
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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
(DOLLARS IN THOUSANDS)
EFFECT OF TERRORIST ATTACKS
Following the terrorist attacks on September 11, the world's airlines have
entered into the worst financial crisis in the history of the industry. While
governments around the world have agreed to provide assistance to varying
degrees, the fate of the individual carriers and the industry is uncertain. Our
lessees have been adversely affected by these events. However, it is too soon to
accurately evaluate the extent of the impact on us.
We face many risks in the current climate. These risks include, but are not
limited to, lease rate reductions, collection of rents, airline bankruptcies,
refinancing risk and reductions in the value of aircraft. In order to minimize
these risks, we require most of our lessees to pay rents in advance, pay lease
deposits, and make payments to be applied to scheduled aircraft maintenance. In
addition, we are beginning to reap the benefits of lower interest rates in the
refinancing of our debt.
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 (which may be affected by the
terrorist attacks)
- - 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
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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 $1,178 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 September 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.
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,
2001 resulting from a hypothetical 10% increase in our weighted average
borrowing rate at September 30, 2001 or $1,651.
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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
REPORTS ON FORM 8-K:
During the quarter ended September 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
November 14, 2001 /s/ Michael P. Grella
------------------------------------
Michael P. Grella
President
And Chief Operating Officer
November 14, 2001 /s/ Alan G. Stanford, Jr.
------------------------------------
Alan G. Stanford, Jr.
Vice President, Finance--Treasurer
And Chief Accounting Officer
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