10-Q 1 a72521e10-q.txt FORM 10-Q QUARTER ENDED MARCH 31, 2001 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 MARCH 31, 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 May 1, 2001 ----- -------------------------- COMMON STOCK, $.01 PAR VALUE 3,681,773 -1- 2 INTERNATIONAL AIRCRAFT INVESTORS INDEX

-2- 3 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements -3- 4 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to condensed consolidated financial statements -4- 5 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Supplemental disclosure of noncash investing and financing activities: During the three months ended March 31, 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 -5- 6 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 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 March 31, 2001 and the results of its operations for the three months ended March 31, 2001 and 2000 and its cash flows for the three months ended March 31, 2001 and 2000. Operating results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. 2. MANAGEMENT ESTIMATES The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These affect the reported amounts of assets, liabilities, revenues and expenses and the amount of any contingent assets or liabilities disclosed in the condensed consolidated financial statements. Actual results could differ from estimates made. The Company 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 the first quarter of 2001, the Company recorded $138,848 repossession and maintenance expense related to two aircraft repossessed in 2000. The Company has entered into a letter of intent to lease the repossessed Airbus A320-200 to a Canadian charter airline operating out of Ontario to November 2003. Related to the aircraft, the Company has a note payable due to a bank of $14,924,562 bearing interest at 7.1% due November 2001 and a note payable to International Lease Finance Corporation ("ILFC") of $8,848,300 bearing interest of 6.15% due December 2003. The Company also signed a letter of intent to lease the repossessed Boeing Model 737-300 for three years to an Italian airline operating out of Sicily. The Company has two notes payable to ILFC related to the aircraft of $13,121,330 bearing interest at 7.96% due October 2001 and $151,757 bearing interest at 6% due February 2002. Both aircraft are due to deliver June 2001. -6- 7 INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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:

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. 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 reclassified from an operating lease to 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:

6. NOTES PAYABLE The Company extended notes due March 2001 with balances totaling $1,607,500 to June 2001, a note due April 2001 with a balance of $1,557,246 to February 2002, notes due April 2001 with balances totaling $69,950,040 to October 2001, and a note due May 2001 with a balance of $21,884,993 to November 2001. At March 31, 2001, the Company's weighted average composite interest rate was 7.1%. -7- 8 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 the 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 the first quarter of 2001, we recorded $139 repossession and maintenance expense related to two aircraft repossessed in 2000. We have entered into a letter of intent to lease the repossessed Airbus A320-200 to a Canadian charter airline operating out of Ontario to November 2003. Related to the aircraft, we have a note payable due to a bank of $14,925 bearing interest at 7.1% due November 2001 and a note payable to ILFC of $8,848 bearing interest of 6.15% due December 2003. We also signed a letter of intent to lease the repossessed Boeing Model 737-300 for three years to an Italian airline operating out of Sicily. We have two notes payable to ILFC related to the aircraft of $13,121 bearing interest at 7.96% due October 2001 and $152 bearing interest at 6% due February 2002. Both aircraft are due to deliver June 2001. RESULTS OF OPERATIONS Three Months Ended March 31, 2001 and 2000 Revenues from rental of flight equipment decreased by 11%, or $1,128, to $9,473 in the three months ended March 31, 2001 compared to the same period in 2000 as a result of no rent received on the two repossessed aircraft and the reclassification in March 2001 of our MD-82 on lease to American Airlines to a direct financing lease. Our lease portfolio consisted of fifteen aircraft with a book value of $274,133 and one aircraft under a direct financing lease with a value of $16,478 at March 31, 2001 compared to sixteen aircraft with a book value of $310,893 at March 31, 2000. Quarter to quarter comparisons are impacted by the timing and amount of consulting fees which are earned from time to time. During the first quarter of 2001, we earned $6 of consulting and other fees related to a two year contract. -8- 9 Interest income decreased to $425 for the three months ended March 31, 2001 from $452 for the same period in 2000 principally as a result of lower average cash balances in 2001, partially offset by interest income in the first quarter of 2001 from the reclassification of our MD-82 to a financing lease in March 2001. Interest expense decreased to $4,420 for the three months ended March 31, 2001 from $4,833 for the same period in 2000 as result of the effect of continued loan paydowns. Our composite interest rate was 7.1% at March 31, 2001 and 2000. Depreciation expense decreased to $4,596 in the first quarter of 2001 from $4,659 in the first quarter of 2000 primarily as a result of the reclassification of our MD-82 to a financing lease in March 2001. We incurred $139 of repossession expense in the first quarter of 2001 compared to $206 in the same period of 2000. General and administrative expenses increased to $564 in the three months ended March 31, 2000 from $544 in the same period of 2000 primarily as a result of increased accounting and consulting expenses. During the three months ended March 31, 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 $74 from $281 as a result of reduction in income before taxes of $563. 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 $111 for the three months ended March 31, 2001 from $468 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 financing 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% and expires June 30, 2001. No borrowings have been made against the line of credit. At March 31, 2001 and 2000, we had cash and cash equivalents of $12,081 and $14,150, respectively. Net cash provided by operating activities was $5,750 in the three months ended March 31, 2001. The movement in short-term investments in 2001 related to the sale of investments in commercial paper with maturities greater than 90 days. Net cash provided by operating activities was $5,775 in the three months ended March 31, 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 reclassified from an operating lease to a direct financing lease. In the three months ended March 31, 2001, cash flows from investing activities of $140 related to collections under the financing lease. In the three months ended March 31, 2001, net cash used in financing activities was $4,973, including repayments of $4,891 and $82 of common stock repurchases. In the three months ended March 31, 2000, net cash used in financing activities was $4,671,including repayments of $4,338 and $332 of common stock repurchases. Notes payable within one year totaled $149,692 at March 31, 2001, of which $139,870 represents balloon payments and $9,822 represents installment payments. We intend to refinance all balloon payments due in within one year. We -9- 10 extended loans with balloons totaling $109,028 during the first quarter of 2001. Cash and cash equivalents vary from year to year principally as a result of the timing of the purchase and sale of aircraft 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 March 31, 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 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 $609 annually. Financial Instruments This analysis presents the hypothetical loss in earnings, cash flows or fair value of the financial instruments which we held at March 31, 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 the following analysis. From time to time, we enter into interest rate swaps with financial institutions under terms that provide payment of interest on the notional amount of the swap. In accordance with these arrangements, we pay interest at a fixed rate and the financial institution pays interest at variable rates pursuant to terms of the related loans. We had no swap agreements at March 31, 2001. The carrying amounts of cash and cash equivalents approximate fair market value because of the short-term nature of -10- 11 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 March 31, 2001 resulting from a hypothetical 10% increase in our weighted average borrowing rate at March 31, 2001 or $1,757. -11- 12 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS

REPORTS ON FORM 8-K: During the quarter ended March 31, 2001, the Company did not file any reports on Form 8-K. -12- 13 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 May 11, 2001 /s/ Michael P. Grella ------------------------------------- Michael P. Grella President and Chief Operating Officer May 11, 2001 /s/ Alan G. Stanford, Jr. ------------------------------------- Alan G. Stanford, Jr. Vice President--Controller and Chief Accounting Officer -13-

INTERNATIONAL AIRCRAFT INVESTORS 10-Q