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, 1999 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 October 29, 1999 COMMON STOCK, $.01 PAR VALUE 4,209,204 -1- 2 INTERNATIONAL AIRCRAFT INVESTORS INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statement Condensed Consolidated Balance Sheets As of September 30, 1999 and December 31, 1998............................. 3 Condensed Consolidated Statements of Income Three months ended September 30, 1999 and 1998............................. 4 Condensed Consolidated Statements of Income Nine months ended September 30, 1999 and 1998.............................. 5 Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 1999 and 1998.............................. 6 Notes to Condensed Consolidated Financial Statements....................... 7 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations.................................................. 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K........................................... 14 Signatures................................................................. 15 -2- 3 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- -------------- (UNAUDITED) ASSETS Cash and cash equivalents ............................................ $ 16,050,437 $ 15,923,982 Flight equipment, at cost less accumulated depreciation of $46,843,871 at September 30, 1999 and $36,099,484 at December 31, 1998 .............................................. 288,297,773 236,908,773 Cash, restricted ..................................................... 14,004,328 13,387,878 Other assets ......................................................... 1,563,804 1,670,383 ------------ ------------ $319,916,342 $267,891,016 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Accrued interest and other accrued expenses .......................... $ 1,786,577 $ 1,000,291 Notes payable ........................................................ 250,461,369 208,001,908 Lease and other deposits on flight equipment ......................... 24,568,370 18,629,524 Deferred rent ........................................................ 1,413,007 3,030,812 Deferred taxes, net .................................................. 4,108,504 2,477,876 ------------ ------------ 282,337,827 233,140,411 Commitments and contingencies Shareholders' equity Preferred stock, $.01 par value. Authorized 15,000,000 shares; none issued and outstanding ................................ -- -- Common stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,209,284 shares at September 30, 1999 and 4,216,284 shares at December 31, 1998 .............................. 42,093 42,163 Additional paid-in capital ........................................... 31,248,794 31,292,324 Deferred compensation ................................................ (312,500) (500,000) Retained earnings .................................................... 6,600,128 3,916,118 ------------ ------------ Net shareholders' equity ................................... 37,578,515 34,750,605 ------------ ------------ $319,916,342 $267,891,016 ============ ============ 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, --------------------------------- 1999 1998 ------------- -------------- (UNAUDITED) REVENUES: Rental of flight equipment ................ $10,194,403 $ 6,858,318 Interest income ........................... 403,544 449,252 ----------- ----------- Total revenues ..................... 10,597,947 7,307,570 EXPENSES: Interest .................................. 4,267,127 3,078,618 Depreciation .............................. 4,024,387 2,724,000 General and administrative ................ 567,760 357,025 Stock compensation ........................ 62,500 62,500 ----------- ----------- Total expenses ...................... 8,921,774 6,222,143 ----------- ----------- Income before income taxes .................. 1,676,173 1,085,427 Income tax expense .......................... 636,946 434,000 ----------- ----------- Net income .......................... $ 1,039,227 $ 651,427 =========== =========== Basic earnings per share .................... $ .25 $ .15 ====== ====== Diluted earnings per share .................. $ .24 $ .14 ====== ====== Weighted average common shares outstanding: Basic .............................. 4,211,040 4,486,497 =========== =========== Assuming dilution .................. 4,340,606 4,634,132 =========== =========== 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, --------------------------------- 1999 1998 -------------- ------------ (UNAUDITED) REVENUES: Rental of flight equipment ................................................... $ 27,441,289 $ 19,118,937 Consulting fees .............................................................. 200,000 -- Interest income .............................................................. 1,142,965 1,370,873 ------------ ------------ Total revenues ........................................................ 28,784,254 20,489,810 EXPENSES: Interest ..................................................................... 11,762,873 8,598,682 Depreciation ................................................................. 10,744,387 7,632,000 General and administrative ................................................... 1,414,871 1,066,842 Stock compensation ........................................................... 187,500 187,500 ------------ ------------ Total expenses ......................................................... 24,109,631 17,485,024 ------------ ------------ Income before income taxes and cumulative effect of accounting change and extraordinary loss ................................................ 4,674,623 3,004,786 Income tax expense ............................................................. 1,776,350 1,204,200 ------------ ------------ Income before cumulative effect of accounting change and extraordinary loss ........................................................ 2,898,273 1,800,586 Cumulative effect of change in accounting for ancillary payments under lease agreements, net of income tax expense of $139,000 .................................................................. -- 209,000 Extraordinary loss on debt extinguishment, net of income tax benefit of $131,322 ...................................................... 214,263 -- ------------ ------------ Net income ............................................................. $ 2,684,010 $ 2,009,586 ============ ============ Basic earnings share: Income before cumulative effect of accounting change ................... $ .69 $ .40 Cumulative effect of accounting change ................................. -- .05 Extraordinary loss .................................................... (.05) -- ------------ ------------ Net income ............................................................. $ .64 $ .45 ============ ============ Diluted earnings per share: Income before cumulative effect of accounting change ................... $ .67 $ .39 Cumulative effect of accounting change ................................. -- .04 Extraordinary loss .................................................... (.05) -- ------------ ------------ Net income ............................................................. $ .62 $ .43 ============ ============ Weighted average common shares outstanding: Basic ................................................................. 4,211,928 4,493,848 ============ ============ Assuming dilution ..................................................... 4,327,265 4,635,019 ============ ============ Pro forma effect assuming the change in accounting principle is applied retroactively: Net income ............................................................. $ 2,684,010 $ 1,800,586 Earnings per share: Basic ................................................................. $ .64 $ .40 Diluted ............................................................... $ .62 $ .39 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, -------------------------------- 1999 1998 ------------- ------------ (UNAUDITED) Cash flows from operating activities: Net income .................................................................. $ 2,684,010 $ 2,009,586 Adjustments to reconcile net income to cash provided by operating activities: Depreciation of flight equipment ................................... 10,744,387 7,632,000 Cumulative effect of accounting change ............................. -- (209,000) Amortization of deferred transaction fees .......................... 334,471 170,474 Deferred taxes, net ................................................ 1,630,628 1,316,244 Stock compensation ................................................. 187,500 187,500 (Increase) decrease in assets: Cash, restricted ................................................... (616,450) (1,838,221) Other assets ....................................................... (227,892) 89,730 Increase (decrease) in liabilities: Accrued interest and other accrued liabilities ..................... 786,286 4,521 Lease and other deposits on flight equipment ....................... 5,938,846 4,348,186 Deferred rent ...................................................... (1,617,805) (834,012) ------------ ------------ Net cash provided by operating activities .......................... 19,843,981 12,877,008 Cash flows from investing activities: Purchase of flight equipment ....................................... (62,133,387) (45,100,000) ------------ ------------ Net cash used in investing activities .............................. (62,133,387) (45,100,000) Cash flows from financing activities: Repayment of notes payable ......................................... (23,048,090) (6,038,104) Repayment of notes payable to ILFC ................................. (3,837,922) (1,805,405) Repayment of notes payable to GLH .................................. -- (41,500) Proceeds from notes payable ........................................ -- -- Proceeds from notes payable to ILFC ................................ 69,345,473 36,284,000 Repurchase of common stock ......................................... (43,600) (644,066) ------------ ------------ Net cash provided by financing activities .......................... 42,415,861 27,754,925 ------------ ------------ Net decrease in cash and cash equivalents .......................... 126,455 (4,468,067) Cash and cash equivalents at beginning of period ............................ 15,923,982 23,838,306 ------------ ------------ Cash and cash equivalents at end of period .................................. $ 16,050,437 $ 19,370,239 ============ ============ Supplemental disclosure of cash flow information Cash paid for interest ............................................. $ 10,988,192 $ 8,565,405 Cash paid for income taxes ......................................... $ 12,000 $ 18,156 See accompanying notes to condensed consolidated financial statements -6- 7 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (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, 1999 and the results of its operations for the three month and nine month periods ended September 30, 1999 and 1998 and its cash flows for the nine months ended September 30, 1999 and 1998. Operating results for the nine month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. 2. EXTRAORDINARY ITEM In May 1999, the Company repaid a note with a principal amount of $15,745,473 prior to maturity. The note was due May 2000 with a rate of 7.96%. The repayment resulted in an extraordinary charge of $214,263, net of a $131,322 income tax benefit. 3. ACCOUNTING CHANGE Effective January 1, 1998, the Company changed its method of accounting for income recognition of ancillary payments under lease agreements to a full accrual method from recognition upon lease termination. This new method, which was accounted for as a change in accounting method, was made to better reflect the earnings process under lease agreements. The effect of this change on net earnings and earnings per share, before cumulative effect of accounting change, for the three month periods ended September 30, 1999 and 1998, respectively were increases of $358,000 ($.09 per basic share and $.08 per diluted share) and $164,000 ($.04 per basic and diluted share) and the nine month periods ended September 30, 1999 and 1998, respectively were $1,267,000 ($.30 per basic share and $.29 per diluted share) and $478,000 ($.11 per basic and $.10 per diluted share). The cumulative effect on retained earnings at January 1, 1998 of the accounting change was an increase of approximately $209,000 ($.05 per basic and diluted share), net of related income taxes of $139,000. The pro forma amounts shown on the condensed consolidated statements of income have been adjusted for the effect of retroactive application. 4. 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 -7- 8 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) on management's ability to roll over debt facilities, renegotiate favorable leases and realize estimated residual values. 5. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Numerator: Income before cumulative effect of accounting change and extraordinary loss .... $ 1,039,227 $ 651,427 $ 2,898,273 $ 1,800,586 Cumulative effect of change in accounting for ancillary payments under lease agreements -- -- -- 209,000 Extraordinary loss on debt extinguishment ... -- -- 214,263 -- ----------- ----------- ----------- ----------- Net income .................................... $ 1,039,227 $ 651,427 $ 2,684,010 $ 2,009,586 Denominator: Denominator for basic earnings per share- weighted average shares outstanding ......... 4,211,040 4,486,497 4,211,928 4,493,848 Effect of dilutive securities: Employee stock options ...................... 126,436 147,635 113,779 141,171 Non-employee stock options .................. 3,130 -- 1,558 -- ----------- ----------- ----------- ----------- Dilutive potential common shares .............. 129,566 147,635 115,337 141,171 ----------- ----------- ----------- ----------- Denominator for diluted earnings per share- adjusted weighted average shares and assumed conversions ................................. 4,340,606 4,634,132 4,327,265 4,635,019 Basic earnings per share: Income before cumulative effect of accounting change and extraordinary loss ... $ .25 $ .15 $ .69 $ .40 Cumulative effect of accounting change ..... -- -- -- .05 Extraordinary loss ................... -- -- (.05) -- ----------- ----------- ----------- ----------- Net income .................................... $ .25 $ .15 $ .64 $ .45 =========== =========== =========== =========== Diluted earnings per share: Income before cumulative effect of accounting change and extraordinary loss .... $ .24 $ .14 $ .67 $ .39 Cumulative effect of accounting change ...... -- -- -- .04 Extraordinary loss .......................... -- -- (.05) -- ----------- ----------- ----------- ----------- Net income .................................. $ .24 $ .14 $ .62 $ .43 =========== =========== =========== =========== 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 -8- 9 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) per common share because they were anti-dilutive. The warrants are exercisable through November 10, 2001. 6. FLIGHT EQUIPMENT The Company entered into an agreement to purchase four aircraft from International Lease Finance Corporation (ILFC). Through September 1999, the Company completed the purchase of two of the aircraft under that agreement. 7. NOTES PAYABLE The Company extended notes due July 1999 with balances totaling $2,017,000 to December 1999. The Company extended a note due October 1999 with a balance totaling $17,034,888 to December 1999. Related to the acquisition of an aircraft purchased in July 1999, the Company obtained bridge financing of $30,000,000 due November 1999 from ILFC and a subordinated note of $4,000,000 due August 2004 to ILFC. It is the Company's intent to refinance bridge financings with term notes. At September 30, 1999 the Company's weighted average composite interest rate was 7%. 8. 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. -9- 10 MANAGEMENTS 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 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, 1998 ("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. EXTRAORDINARY ITEM In May 1999, we repaid a note with a principal amount of $15,745 prior to maturity. The note was due May 2000 with a rate of 7.96%. The repayment resulted in an extraordinary charge of $214, net of a $131 income tax benefit. ACCOUNTING CHANGE Effective January 1, 1998, we changed our method of accounting for income recognition of ancillary payments under lease agreements to a full accrual method from recognition upon lease termination. This new method, which was accounted for as a change in accounting method, was made to better reflect the earnings process under lease agreements. The effect of this change on net earnings, before cumulative effect of accounting change, for the three month periods ended September 30, 1999 and 1998, respectively were increases of $358 and $164 and the nine month periods ended September 30, 1999 and 1998, respectively were increases of $1,267 and $478. The cumulative effect on retained earnings at January 1, 1998 of the accounting change was an increase of approximately $209, net of related income taxes of $139. RESULTS OF OPERATIONS Three Months Ended September 30, 1999 and 1998 Revenues from rental of flight equipment increased by 49%, or $3,336, to $10,194 in the three months ended September 30, 1999 compared to the same period in 1998 as a result of the acquisition of three aircraft on lease, an acceleration of revenues on ancillary payments resulting from lease terminations as well as the impact of the change in accounting method discussed above. Our lease portfolio consisted of fifteen aircraft on lease with a book value of $288,298 at September 30, 1999 and twelve aircraft on lease with a book value of $209,974 at September 30, 1998. Interest income decreased to $404 for the three months ended September 30, 1999 from $449 for the same period in 1998 principally as a result a decrease in average interest rates from 1998 to 1999. -10- 11 Expenses as a percent of total revenues were 84% and 85% during the three months ended September 30, 1999 and 1998, respectively. This decrease in the percentage is due to the effect of the 45% increase in total revenue while expenses increased 43%. Interest expense increased to $4,267 for the three months ended September 30, 1999 from $3,079 for the same period in 1998 principally as a result of interest on financing related to the acquisition of three additional aircraft, offset by the effect of loan paydowns. Our composite interest rate was 7% and 7.2% at September 30, 1999 and 1998, respectively. Depreciation expense increased to $4,024 in the third quarter of 1999 from $2,724 in the third quarter of 1998 primarily as a result of the acquisition of three additional aircraft. General and administrative expenses increased to $568 in the three months ended September 30, 1999 from $357 in the same period of 1998 primarily as a result of increased compensation expense. During the three months ended September 30, 1999 and 1998, we incurred $62 of non-cash stock compensation related to the vesting of options granted to executive officers. Income tax expense increased to $637 from $434 as a result of the increase in revenues and reduction in total expenses as a percent of total revenues. The $203 increase in income tax expense represents a non-cash provision for deferred income taxes at an effective rate of 38%. We continue to generate substantial federal net operating loss carryforwards primarily resulting from accelerated tax depreciation. Net income increased to $1,039 for the three months ended September 30, 1999 from $651 for the same period in 1998 due to the factors described above. Nine Months Ended September 30, 1999 and 1998 Revenues from rental of flight equipment increased by 44%, or $8,322, to $27,441 in the nine months ended September 30, 1999 compared to the same period in 1998 as a result of the acquisition of three aircraft on lease, an acceleration of revenues from ancillary payments resulting from lease terminations as well as the impact of the change in accounting method discussed above. In the nine months ended September 30, 1999, we earned $200 of consulting fees. No consulting fees were earned in the nine month period ended September 30, 1998. Interest income decreased to $1,143 for the nine months ended September 30, 1999 from $1,371 for the same period in 1998 principally as a result of a decrease in average interest rates from 1998 to 1999. Expenses as a percent of total revenues were 84% and 85% during the nine months ended September 30, 1999 and 1998, respectively. This decrease in the percentage is due to the effect of the 40% increase in total revenue while expenses increased 38%. Interest expense increased to $11,763 for the nine months ended September 30, 1999 from $8,599 for the same period in 1998 principally as a result of interest on financing related to the acquisition of three additional aircraft, offset by the effect of loan paydowns. Depreciation expense increased to $10,744 in 1999 from $7,632 in 1998 primarily as a result of the acquisition of three additional aircraft. General and administrative expenses increased to $1,415 in the nine months ended September 30, 1999 from $1,067 in the same period of 1998. The increase in general and administrative expense was primarily the result of additional compensation expense. During the nine months ended September 30, 1999 and 1998, we incurred $187 of non-cash stock compensation related to the vesting of options granted to executive officers. The $572 increase in income tax expense represents a non-cash provision for deferred income taxes at an effective rate of 38%. The Company paid no federal income taxes during the nine months ended September 30, 1999 due to substantial net operating loss carryforwards resulting primarily from accelerated tax depreciation. Net income increased to $2,684 for the nine months ended September 30, 1999 from $2,010 for the same period in 1998 due to the factors described above and the effects of the extraordinary item and the change in accounting method. LIQUIDITY AND CAPITAL RESOURCES Our principal external sources of funds have been term loans from banks and seller financing secured by flight equipment and the net proceeds from our initial public offering. A substantial amount of our cash flow from rental -11- 12 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. Accordingly, we begin lease remarketing efforts well in advance of the lease termination. 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. As a result, we do not currently maintain a line of credit. For the nine months ended September 30, 1999, net cash provided from operating activities increased by $6,967 principally as a result of an increase of $674 in net income, an increase in a non-cash expense for depreciation of $3,112 and a decrease in restricted cash of $1,222 and an increase in lease and other deposits of $1,591. The $62,133 used in investing activities during the nine months ended September 30, 1999 resulted primarily from the purchase of two aircraft. The $45,100 used in investing activities during the nine months ended September 30, 1998 resulted primarily from the purchase of two aircraft. The $17,033 increase in cash used in investing activities resulted from the difference in the age and the type of aircraft purchased. For the nine months ended September 30, 1999, net cash provided in financing activities was $42,416 compared to net cash provided by financing activities of $27,755 during the nine months ended September 30, 1998. Proceeds from financing activities resulted primarily from $69,345 of bridge financing and other financing from ILFC related to the purchase of an aircraft. Proceeds from financing activities were partially offset in 1999 by loan paydowns and stock repurchases of $26,930. For the nine months ended September 30, 1998, net cash provided by financing activities was $27,755, including the proceeds from borrowings of $36,284 to finance the acquisition of aircraft on lease, offset by repayments of $7,885 on notes payable and $644 of common stock repurchases. 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 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 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. IMPACT OF YEAR 2000 The Year 2000 issue results from computer programs written using two digits to identify the year in the date field. These computer programs were designed and developed without consideration of the impact of the upcoming change in the century. If not corrected, these programs could create erroneous information by or at the Year 2000. We have performed a review and assessment of our internal computer systems to determine the effect of the Year 2000 issue. Based on the results of this review, we believe that the internal effects of the Year 2000 issue will not materially affect our future financial results or financial condition. Failure by our lessees, manufacturers of our aircraft and business partners to properly comply with Year 2000 issues could result in lost revenues and increased expenses. We have initiated formal communications with lessees, manufacturers of our aircraft and business partners to determine the extent to which we and our aircraft are vulnerable -12- 13 to those third parties' failure to address their own Year 2000 issues. Based on the responses from third parties we have received, we do not expect a material affect on our financial results or our financial position. As such, no contingency plan has been developed. If future responses indicate a material exposure as a result of third parties, we will develop a contingency plan. We expect to be Year 2000 compliant by December 31, 1999. We have incurred no additional costs associated with the Year 2000 issue and estimate that no additional costs will be incurred. We will continue assessing our internal and external risk as we acquire additional information systems and enter into business relationships with additional lessees, manufacturers of aircraft and other business partners. A possible scenario is that one or more of our lessees would be unable to operate and generate revenues and as a result be unable to make lease payments. At this time, we are unable to estimate the likelihood or the magnitude of the resulting lost revenue. -13- 14 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 27.1 Financial Data Schedule for the three months ended September 30, 1999 27.2 Financial Data Schedule for the nine months ended September 30, 1999 REPORTS ON FORM 8-K: During the quarter ended September 30, 1999, 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 11, 1999 /s/ Michael P. Grella ------------------------------------ Michael P. Grella President And Chief Operating Officer November 11, 1999 /s/ Alan G. Stanford, Jr. ------------------------------------ Alan G. Stanford, Jr. Vice President--Controller And Chief Accounting Officer -15-