Table of Contents
UNITED STATES
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
For the fiscal year ended December 31, 2002
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
For the transition period from _______________
to
INTERNATIONAL LEASE FINANCE CORPORATION
|
California
|
22-3059110 | |
|
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
|
| 1999 Avenue of the Stars, Los Angeles, California | 90067 | |
|
(Address of principal executive
offices)
|
(Zip Code) | |
Registrant’s telephone number, including
area code: (310) 788-1999
Securities registered pursuant to Section
12(b) of the Act:
Title of each class
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
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 that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES o NO x
As of June 28, 2002 and March 12, 2003, there were 35,818,122 and 42,198,119 shares of Common Stock, no par value, respectively, outstanding, all of which were held by affiliates.
Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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| PART I | ||||||
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Item 1.
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Business
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1 | ||||
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Item 2.
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Properties
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8 | ||||
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Item 3.
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Legal Proceedings
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10 | ||||
| PART II | ||||||
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Item 5.
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Market for Registrant’s Common Equity and
Related Stockholder Matters
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10 | ||||
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Item 6.
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Selected Financial Data
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11 | ||||
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Item 7.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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12 | ||||
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Item 7A.
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Quantitative and Qualitative Disclosures About
Market Risk
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21 | ||||
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Item 8.
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Financial Statements and Supplementary Data
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22 | ||||
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Item 9.
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Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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22 | ||||
| PART III | ||||||
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Item 14.
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Controls and Procedures
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22 | ||||
| PART IV | ||||||
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Item 15.
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Exhibits, Financial Statement Schedules and
Reports on Form 8-K
|
22 | ||||
Table of Contents
PART I
General
International Lease Finance Corporation (the “Company”) is primarily engaged in the acquisition of new commercial jet aircraft and the leasing of those aircraft to airlines throughout the world. In addition to its leasing activity, the Company regularly sells aircraft from its leased aircraft fleet and aircraft owned by others to third party lessors and airlines and in some cases provides fleet management services to these buyers. The Company, in terms of the number and value of transactions concluded, is a major owner-lessor of commercial jet aircraft.
As of December 31, 2002, the Company’s lease portfolio consisted of 543 owned aircraft, 13 leased by the Company and subleased to others, and five aircraft classified as finance leases. Additionally, the Company provided fleet management services for 33 aircraft. See “Item 2. Properties — Flight Equipment.” At December 31, 2002, the Company had committed to purchase 523 aircraft deliverable through 2010 at an estimated aggregate purchase price of $29.8 billion, of which the Company currently anticipates taking delivery of 90 aircraft in 2003 with an estimated aggregate purchase price of $4.4 billion. It also had options to purchase an additional 18 aircraft deliverable through 2008 at an estimated aggregate purchase price of $1.3 billion. See “Item 2. Properties — Commitments.”
The Company maintains the mix of flight equipment to meet its customers’ needs and to minimize the time that its aircraft are not leased to customers by purchasing those models of new and used aircraft which it believes will have the greatest airline demand and operational longevity.
The Company purchases, and finances the purchase of, aircraft on terms intended to permit the Company to lease or sell such aircraft at a profit. The Company typically finances the purchase of aircraft with borrowed funds and internally generated cash flow. The Company accesses the capital markets for such funds at times and on terms and conditions it considers appropriate. The Company may, but does not usually, engage in financing transactions for specific aircraft. The Company relies significantly on short- and medium-term financing, and thereby attempts to manage interest rate exposure. To date, the Company has been able to purchase aircraft on terms which have permitted it to lease the aircraft at a profit and has been able to obtain the necessary funding from the capital markets.
The Company’s aircraft are usually leased on terms under which the Company does not fully recover the acquisition cost of such aircraft. Thus, at the termination of a lease, the Company bears the risk of selling or re-leasing the aircraft on terms which will cover its remaining cost.
The airline industry is cyclical, economically sensitive and highly competitive. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company’s revenue and income may be affected by political or economic instability, terrorist activities, changes in national policy, competitive pressures on certain air carriers, fuel shortages, labor stoppages, recessions, competition from other leasing companies and other political or economic events adversely affecting world or regional trading markets or impacting a particular customer. The Company’s continued success is partly dependent on management’s ability in the future to develop customer relationships for leasing, sales, remarketing and management services with those airlines and other customers best able to maintain their economic viability and survive in the competitive environment in which they operate.
The Company is incorporated in the State of California and its principal executive offices are located at 1999 Avenue of the Stars, Los Angeles, California 90067. The Company’s telephone, telecopier number and website address are (310) 788-1999, (310) 788-1990, and www.ilfc.com, respectively. The Company makes available its SEC EDGAR filings, free of charge, on its website.
The Company is an indirect wholly owned subsidiary of American International Group, Inc. (“AIG”). AIG is a holding company which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities in the United States and abroad. AIG’s primary activities include both general and
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Aircraft Leasing
The initial term of the Company’s current leases range in length from one year to 15 years. See “Item 2. Properties — Flight Equipment” for information regarding scheduled lease terminations. Most of the Company’s leases are operating leases under which the Company does not fully recover its aircraft cost and retains the benefit and assumes the risk of the residual value of the aircraft. The Company on occasion also enters into finance and sales-type leases where the full cost of the aircraft is substantially recovered over the term of the lease. At December 31, 2002, five of the Company’s leases were accounted for as finance leases. The aircraft under operating leases are included as Flight equipment on the Company’s balance sheet and depreciation is charged to income over the estimated useful lives of the aircraft. In accordance with generally accepted accounting principles, rentals are reported ratably as revenue over the lease term as they are earned. The Company attempts to maintain a mix of short- and medium-term leases to balance the benefits and risks associated with different lease terms and changing market conditions. Varying lease terms mitigate the effects of changes in prevailing market conditions at the time aircraft become eligible for re-lease or sale and the uncertainty associated with the estimated residual value of the aircraft at the end of the lease term.
All leases are on a “net” basis with the lessee responsible for all operating expenses, which customarily include fuel, crews, airport and navigation charges, taxes, licenses, registration and insurance. In addition, normal maintenance and repairs, airframe and engine overhauls, and compliance with return conditions of flight equipment on lease are provided by and paid for by the lessee. The Company may, in connection with the lease of an aircraft, agree to contribute to the cost of certain major overhauls depending on the condition of the aircraft at delivery. Under the provisions of some leases, for certain airframe and engine overhauls, the lessee is reimbursed by the Company for costs incurred up to but not exceeding related hourly rentals paid to the Company by the lessee. Such rentals are included in the caption Rental of flight equipment on the Company’s Consolidated Statement of Income. The Company provides a charge to operations for such reimbursements based on the estimated reimbursements during the life of the lease, which amount is included in Provision for overhauls on the Company’s Consolidated Statement of Income. The lessee is responsible for compliance with all applicable laws and regulations with respect to the aircraft. The Company requires its lessees to comply with the standards of either the Federal Aviation Administration (the “FAA”) or its foreign equivalent. The Company makes periodic inspections of the condition of its leased aircraft. Generally, the Company requires a deposit which is security for the condition of the aircraft upon return to the Company, the rental payments by the lessee and the performance of other obligations by the lessee under the lease. In addition, the leases contain extensive provisions regarding the remedies and rights of the Company in the event of a default by the lessee and specific provisions regarding the condition of the aircraft upon return of the aircraft to the Company. The lessee is required to continue to make lease payments under all circumstances, including periods during which the aircraft is not in operation due to maintenance or grounding.
The Company obtains and reviews relevant business materials from all prospective lessees and purchasers before entering into a lease or extending credit. Under certain circumstances, the Company may require the lessee to obtain guarantees or other financial support from an acceptable financial institution or other third party.
Flight Equipment Marketing
The Company also may dispose of its leased aircraft at or before the expiration of their leases. The buyers include the aircraft’s lessee, another aircraft operator or a third party lessor. Any gain or loss on disposition of leased aircraft is included in the caption Flight equipment marketing.
From time to time, the Company also engages in transactions to buy aircraft for resale. In other cases, the Company assists its customers in acquiring or disposing of aircraft through consulting services and procurement of financing from third parties.
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In addition to its leasing and sales operations, the Company is engaged, from time to time, as an agent for airlines and various financial institutions in the disposition of their surplus aircraft. The Company generally acts as an agent under an exclusive remarketing contract whereby it agrees to sell aircraft on a “best efforts” basis within a fixed time period. These activities generally augment the Company’s primary activities and also serve to promote relationships with prospective sellers and buyers of aircraft. The Company may, from time to time, participate with banks, airlines and other financial institutions to assist in financing aircraft by providing asset guarantees, put options, or loan guarantees collateralized by aircraft.
The Company plans to continue its remarketing services on a selective basis involving specific situations where these activities will not conflict or compete with, but rather will be complementary to, its leasing and selling activities.
Fleet Management Services
The Company provides fleet management services to third party operating lessors who are unable or unwilling to perform this service as part of their own operation. The Company typically provides the same services that it performs for its own fleet. Specifically, the Company provides leasing, re-leasing and sales services on behalf of the lessor for which the Company receives a fee.
Financing/Source of Funds
The Company purchases new aircraft directly from manufacturers and used aircraft from airlines and other owners. The Company finances the purchase price of flight equipment from internally generated funds, secured and unsecured commercial bank financings and the issuance of commercial paper, public and private debt and preferred stock. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Customers
At December 31, 2002, the Company had contracts to lease aircraft, and manage aircraft leased, to the following airlines: (domestic) Alaska Airlines, American Airlines, American Trans Air, America West, Continental Airlines, Frontier Airlines, Hawaiian Airlines, Jet Blue Airways, MN Airlines, North American Airlines, Omni Air, Southwest Airlines, USA 3000 and World Airways; (foreign) Aer Lingus, Aeris, Aero Continente, Aeroflot, Aero Lloyd, Aeromexico, Aerosvit, Air 2000, Air Anatolia, Air Asia, Air Astana, Air Atlanta Icelandic, Air Austral, Air Canada, Air China, Air Europa, Air Europe SpA, Air France, Air Holland, Air India, Air Jamaica, Air Luxor, Air Macau, Air Madagascar, Air Malta, Air Mauritanie, Air Mauritius, Air Mediterranee, Air New Zealand, Air Polonia, Air One, Air Plus Comet, Air Seychelles, Air Tahiti NUI, Air Transat, Air Vanuatu, Alitalia, Asiana Airlines, Austrian Airlines, Avianca, Belair, Braathens S.A.F.E., Britannia Airways, British Midland Airways, Blue Panorama, Blue Wings, BWIA, Cathay Pacific, China Airlines, China Eastern Airlines, China Hainan Airlines, China Northwest, China Southern Airlines, China Xinjiang, Cyprus Airways, Eagle Aviation, Easy Jet, Emirates, Estonian Air, Euroatlantic Airways, Eurocypria, Eurofly, Excel Airways, Finnair, Flash Airlines, Garuda Indonesia, GOL Transportes Aeros, S.A., Hapag-Lloyd Flug, Hong Kong Dragon Airlines (Dragonair), Iberia, Iberworld, Icelandair, Islandflug Icebird Airlines, Israir, JMC Airlines, Jugoslovenski Aerotransport (JAT), KLM Royal Dutch Airlines, KLM U.K. (“BUZZ”), Lauda Air Italy, Lithuanian, Lloyd Aero Boliviano (LAB), Línea Aérea Nacional Chile, Lotus Air, LTU Luftransport-Unternehmen, Lufthansa, Malaysia Airlines, Malev, Mandarin Airlines, Mekong Airlines, Meridiana, Mexicana, Middle East Airlines, MNG Airlines, Norwegian, Olympic, Oman Air, Onur Air, Pegasus, Polynesian Airlines, QANTAS, Region Air, Rio Sul, Royal Jordanian, Sahara India Airlines, Shanghai, Shenzhen, Siberia Airlines, Sichuan Airlines, Sky Airlines, Skymark, Skyservice Airlines, South African, Southern Winds, Spanair, Star Airlines, Sterling European, Swiss, TACV Cabo Verde, TAP Air Portugal, Turk Hava Yollari (THY), Transaero, Transavia, Varig, Vietnam Airlines, Virgin Atlantic Airways, Virgin Blue, Volare, Wuhan Airlines, Xiamen Airlines and Yemenia. No single customer accounted for more than 10% of total revenues in any of the last three years.
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Revenues include rentals of flight equipment to foreign airlines of $2,317,619,000 (2002), $2,173,778,000 (2001) and $2,026,017,000 (2000) comprising 86.5%, 87.9% and 88.0%, respectively, of total rentals of flight equipment. See Note J of Notes to Consolidated Financial Statements.
The following table sets forth the dollar amount
and percentage of total rental revenues attributable to the
indicated geographic areas based on each airline’s
principal place of business for the years indicated:
2002
2001
2000
Amount
%
Amount
%
Amount
%
(Dollars in thousands)
$
1,236,123
46.2
%
$
1,160,793
47.0
%
$
1,054,783
45.8
%
601,775
22.5
523,630
21.2
462,426
20.1
481,507
18.0
455,680
18.4
437,745
19.0
202,688
7.5
199,026
8.0
229,438
10.0
155,783
5.8
134,655
5.4
117,048
5.1
$
2,677,876
100
%
$
2,473,784
100.0
%
$
2,301,440
100.0
%
The following table sets forth revenue
attributable to individual countries representing at least 10%
of total revenue based on each airline’s principal place of
business for the years indicated:
2002
2001
2000
Amount
%
Amount
%
Amount
%
(Dollars in thousands)
$
360,257
13.5
$
300,006
12.1
%
$
275,423
12.0
%
276,185
10.3
283,090
11.4
276,340
12.0
282,776
10.6
265,871
10.8
251,372
10.9
Many foreign countries have currency and exchange laws regulating the international transfer of currencies. The Company attempts to minimize its currency and exchange risks by negotiating most of its aircraft leases and all of its sales transactions in U.S. Dollars, and all guarantees obtained to support various lease agreements are denominated for payment in the same currency as the lease. The Company requires, as a condition to any foreign transaction, that the lessee or purchaser in a foreign country obtain the necessary approvals of the appropriate government agency, finance ministry or central bank for the remittance of all funds contractually owed to the Company in U.S. Dollars. Some of the Company’s leases are negotiated in Euros to meet the needs of a growing number of airlines. As the Euro to U.S. Dollar exchange rate fluctuates, airlines’ interest in entering into Euro denominated lease agreements will change. Once an airline and the Company agree to the rental payment currency, it remains for the term of the lease. The Company currently has sufficient Euro inflows from leases and currency swaps to meet its Euro denominated debt obligations. Therefore foreign currency risk has, to date, been immaterial to the Company.
The Company has restructured leases with both foreign and domestic lessees. Such restructurings have involved the voluntary termination of leases prior to lease expiration, the replacement of leased aircraft with smaller, less expensive leased aircraft, the arrangement of subleases from the primary lessee to another airline and the rescheduling of lease payments. In some situations where the Company repossesses an aircraft, it may decide to export the aircraft from the lessee’s jurisdiction. In the majority of these situations, the Company obtains the lessee’s cooperation and the return and export of the aircraft is immediate. In some situations, however, the lessees have not cooperated in returning aircraft, in which case the Company has had to take legal action in the appropriate jurisdictions which has delayed the ultimate return and export of the aircraft. In addition, in connection with the repossession of an aircraft, the Company may be required to pay outstanding mechanic’s, airport and other operating liens on the repossessed aircraft, which could include charges relating to other aircraft operated by the lessee.
The Company’s revenues and income may be affected by political or economic instability, terrorist activities, changes in national policy, competitive pressures on certain air carriers, fuel shortages, labor stoppages, recessions, competition from other leasing companies and other political or economic events adversely affecting world or regional trading markets or impacting a particular customer.
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As a result of the September 11, 2001 terrorist attacks on the United States, the general slowdown of the worldwide economy, both before and after the attacks, and world political unrest, many United States and international commercial air carriers have reduced capacity, idled aircraft, furloughed employees and initiated cost reduction programs and some have filed for bankruptcy protection and/or ceased operations. Many airlines still face significant economic challenges. Air carriers are experiencing increased competition from low cost carriers, a reduction in passenger traffic and an actual or potential increase in costs, including insurance premiums, fuel cost and security costs. These factors combined with the potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war have created many economic and political uncertainties, which could adversely affect the Company’s business and revenues in the short and long-term in ways that cannot presently be predicted.
Competition
The leasing, remarketing and sale of jet aircraft is highly competitive. The Company faces competition from aircraft manufacturers, banks, financial institutions, other leasing companies, aircraft brokers and airlines. Competition for a leasing transaction is based on a number of factors including delivery dates, lease rates, term of lease, extension options, termination options, purchase options, aircraft condition and the availability of the types of aircraft to meet the needs of the customer. The Company believes it is a strong competitor in all of these areas. However, overcapacity in the current market place has increased competition from other entities leasing aircraft and will cause continued downward pressure on lease rates and lease revenue and, possibly, aircraft values.
Government Regulation
The FAA and the U.S. Departments of Transportation and State exercise regulatory authority over air transportation in the United States.
The U.S. Departments of Transportation and State, in general, have jurisdiction over the economic regulation of air transportation, including the negotiation with foreign governments of the rights of U.S. carriers to fly to other countries and the rights of foreign carriers to fly to and within the United States.
The FAA has regulatory jurisdiction over the maintenance and operation of U.S. air carriers, the operation of aircraft in the United States by foreign carriers and the registration of aircraft in the United States. The FAA can suspend or revoke the authority of U.S. air carriers or their licensed personnel and can similarly revoke the authority of foreign air carriers to operate within the United States for failure to comply with FAA regulations. The FAA can also ground aircraft if their airworthiness is in question.
In every foreign country, similar government agencies regulate the country’s air carriers, the operations of foreign airlines in the country and the registration of aircraft. Like the FAA, the civil aviation authority in a foreign country can suspend or revoke the operating authority of an airline and ground aircraft for safety reasons.
Since the Company does not itself operate its aircraft for public transportation of passengers and property, the Company is not directly subject to the regulatory jurisdiction of the U.S. Departments of Transportation and State or their counterpart organizations in foreign countries.
The Company’s relationship with the FAA consists of the registration with the FAA of those aircraft which are leased by the Company to U.S. carriers and to a number of foreign carriers where, by agreement, the aircraft are to be registered in the United States. In limited circumstances, the Company also obtains from the FAA, or its designated representatives, a U.S. Certificate of Airworthiness for a particular aircraft or a ferry flight permit.
The Company’s involvement with the civil aviation authorities of foreign jurisdictions consists largely of requests to register and deregister the Company’s aircraft on lease to carriers in those countries.
The Company also works with U.S. Customs with respect to the import and export of the Company’s aircraft into and from the United States for maintenance or lease.
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Employees
The Company is in a capital intensive rather than a labor intensive business. As of December 31, 2002, the Company had 124 full-time employees, which it considered adequate for its business operations. The Company will expand its management and administrative personnel, as necessary, to meet future growth. None of the Company’s employees is covered by a collective bargaining agreement and the Company believes that it has maintained excellent employee relations. The Company provides certain employee benefits under plans established by its parent, AIG, including retirement, health, life, disability and accident insurance plans.
Insurance
The Company requires its lessees to carry those types of insurance which are customary in the air transportation industry, including comprehensive liability insurance and aircraft hull insurance. In general, the Company is an additional insured on liability policies carried by the lessees. The Company obtains certificates of insurance from the lessee’s insurance brokers. All certificates of insurance contain a breach of warranty endorsement so that the interests of the Company are not prejudiced by any act or omission of the operator-lessee.
Insurance premiums are paid by the lessee, with coverage acknowledged by the broker or carrier. The territorial coverage is, in each case, suitable for the lessee’s area of operations and the certificates of insurance contain, among other provisions, a “no co-insurance” clause and a provision prohibiting cancellation or material change without at least 30 days advance written notice to the insurance broker, who is obligated to give prompt notice to the Company. Hull/war insurance policies customarily provide 7 days advance written notice and may be subject to lesser notice under certain market conditions. Furthermore, the insurance is primary and not contributory and all insurance carriers are required to waive rights of subrogation against the Company.
The stipulated loss value schedule under aircraft hull insurance policies is on an agreed value basis acceptable to the Company, which usually exceeds the book value of the aircraft. In cases where the Company believes that the agreed value stated in the lease is not sufficient, the Company purchases additional Total Loss Only coverage for the deficiency. Aircraft hull policies contain standard clauses covering aircraft engines. All deductibles are required to be paid by the lessee. Furthermore, the aircraft hull policies contain full war risk endorsements, including, but not limited to, confiscation (where available), seizure, hijacking and similar forms of retention or terrorist acts. Lease agreements generally require liability limits to be in U.S. Dollars, which are shown on the certificate of insurance.
The comprehensive liability insurance listed on certificates of insurance include provisions for bodily injury, property damage, passenger liability, cargo liability and such other provisions reasonably necessary in commercial passenger and cargo airline operations. Such certificates of insurance list combined comprehensive single liability limits of not less than $250 million. As a result of the terrorist attacks on September 11, 2001, the insurance market unilaterally imposed a sublimit on each operator’s policy for third party war risk liability in the amount of $50 million. The Company requires each lessee to purchase higher limits of third party war risk liability or obtain an indemnity from their government. Additionally, all aircraft in the Company’s fleet are covered by contingent liability insurance and contingent hull insurance.
The Company also maintains other insurance covering the specific needs of its business operations. Insurance policies are generally placed or reinsured through AIG subsidiaries, with costs allocated back to the Company. The Company believes that its insurance is adequate both as to coverage and amount.
Forward-Looking Statements
This annual report on Form 10-K contains or incorporates statements that constitute forward-looking statements. Those statements appear in a number of places in this Form 10-K and include statements regarding, among other matters, the state of the airline industry, the Company’s access to the capital markets, the Company’s ability to restructure leases and repossess aircraft, the structure of the Company’s leases, regulatory matters pertaining to compliance with governmental regulations and other factors affecting the
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Item 2. Properties
Flight Equipment
The Company’s management frequently reviews opportunities to acquire suitable commercial jet aircraft based not only on market demand and customer airline requirements, but also on the Company’s fleet portfolio mix criteria and planning strategies for leasing. Before committing to purchase specific aircraft, the Company takes into consideration factors such as estimates of future values, potential for remarketing, trends in supply and demand for the particular type, make and model of aircraft and engines, and anticipated obsolescence. As a result, certain types and vintages of aircraft do not necessarily fit the profile for inclusion in the Company’s portfolio of aircraft owned and used in its leasing operations.
At December 31, 2002, all of the Company’s fleet was Stage III compliant, meaning that the aircraft hold or are capable of holding a noise certificate issued under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago Convention or have been shown to comply with the Stage III noise levels set out in Section 36.5 of Appendix C of Part 36 of the Federal Aviation Regulations of the United States. At December 31, 2002, the average age of the Company’s aircraft was 4.92 years.
The following table shows the scheduled lease
terminations (for the minimum noncancelable period) by aircraft
type for the Company’s operating lease portfolio at
December 31, 2002:
Aircraft Type
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
5
13
20
15
11
7
3
4
78
1
5
7
13
7
5
9
11
10
1
6
6
81
1
6
16
8
19
8
2
60
3
1
4
5
7
12
8
7
8
4
1
52
4
2
3
2
2
2
3
3
21
1
1
3
5
2
2
4
1
4
4
13
1
1
2
2
3
3
6
2
1
2
1
6
2
2
1
2
7
8
7
1
3
4
3
7
2
1
36
12
9
8
15
3
1
9
1
11
5
74
6
9
3
6
8
4
6
42
4
5
15
2
8
2
36
1
2
5
2
1
1
12
2
3
2
4
3
1
2
17
34
61
92
80
73
56
54
16
19
44
10
3
1
6
6
555
This schedule includes 13 aircraft leased by the Company and subleased to others and excludes one aircraft which was not subject to lease at December 31, 2002 but was subsequently leased. As of March 20, 2003, 24 of the 34 aircraft with lease expiration dates during 2003 had been extended or leased to other customers.
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Commitments
At December 31, 2002, the Company had
committed to purchase the following new and used aircraft at an
estimated aggregate purchase price (including adjustment for
anticipated inflation) of approximately $29.8 billion for
delivery as shown:
Aircraft Type
2003
2004
2005
2006
2007
2008
2009
2010
Total
31
25
22
23
23
124
1
1
3
5
5
5
3
2
3
26
3
4
1
1
9
2
2
4
2
2
4
4
3
5
5
13
14
18
20
16
13
14
6
101
12
15
17
18
19
22
10
113
6
9
10
9
9
11
5
59
7
5
8
8
7
9
44
1
1
4
4
2
2
3
2
9
1
1
2
3
2
9
90
86
90
88
80
60
27
2
523
| (a) | The Company has the right to designate the size of the aircraft within the specific model type at specific dates prior to contractual delivery. |
| (b) | Commitment is to acquire used aircraft. |
| (c) | Subsequent to December 31, 2002, the Company cancelled one B737-700 for delivery in 2004, one A330-200 for delivery in 2008 and two A340-600 for delivery in 2005. The Company also deferred one A319, one A320 and one A321 deliveries from 2004 to 2006 and one A380 delivery from 2006 to 2008. |
| (d) | Under the terms of the contract with Airbus, the Company intends to exercise its right to redesignate these aircraft to other aircraft types. |
At December 31, 2002, the Company had
options to purchase the following aircraft at an estimated
aggregate purchase price (including adjustment for anticipated
inflation) of approximately $1.3 billion for delivery as
shown:
Aircraft Type
2003
2004
2005
2006
2007
2008
2009
2010
Total
1
1
2
3
7
1
1
3
1
6
1
1
2
1
1
1
1
1
1
0
1
4
5
7
1
0
0
18
Management anticipates that a significant portion of such aggregate purchase price will be funded by incurring additional debt. The exact amount of the indebtedness to be incurred will depend upon the actual purchase price of the aircraft, which can vary due to a number of factors, including inflation, and the percentage of the purchase price of the aircraft which must be financed. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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The aircraft listed above are being purchased pursuant to master agreements with each of The Boeing Company (“Boeing”) and AVSA, S.A.R.L., the sales subsidiary of Airbus Industrie (“Airbus”). These agreements establish the pricing formulas (which include certain price adjustments based upon inflation and other factors) and various other terms with respect to the purchase of aircraft. Under certain circumstances, the Company has the right to alter the mix of aircraft type ultimately acquired. As of December 31, 2002, the Company had made non-refundable deposits (exclusive of capitalized interest) with respect to the aircraft which the Company has committed to purchase of approximately $610 million and $407 million with Boeing and Airbus, respectively.
As of March 20, 2003, after taking into consideration deferrals and cancellations, the Company had entered into contracts for the lease of 86 of the 90 aircraft to be delivered in 2003, 51 of the 82 aircraft to be delivered in 2004, 16 of the 88 aircraft to be delivered in 2005, 6 of the 90 aircraft to be delivered in 2006 and 5 of the 169 aircraft to be delivered subsequent to 2006. The Company will need to find customers for aircraft presently on order and not subject to contract and any new aircraft ordered and will need to arrange financing for portions of the purchase price of such equipment. Although the Company has been successful to date in placing its new aircraft on lease and has been able to obtain adequate financing in the past, there can be no assurance as to the future continued availability of lessees or of sufficient amounts of financing on terms acceptable to the Company.
Facilities
The Company’s principal offices are located at 1999 Avenue of the Stars, Los Angeles, California. The Company occupies space under leases which expire in 2005. As of December 31, 2002, the Company occupied approximately 54,000 square feet of office space. The leases provide for annual rentals of approximately $3,000,000, and the rental payments thereunder are subject to certain indexed escalation provisions. The Company signed a lease for approximately 127,000 square feet of office space at 10250 Constellation Avenue, Los Angeles, California starting in the fourth quarter, 2003. The lease provides for average annual rent of approximately $9,000,000 beginning in 2004. The Company is actively seeking subleases for its currently leased office space.
Item 3. Legal Proceedings
The Company is not a party to any significant legal proceedings.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
The Company is indirectly wholly owned by AIG and the Company’s common stock is not listed on any national exchange or traded in any established market. During the years ended December 31, 2002, 2001 and 2000, the Company paid cash dividends to its parent company of $26,000,000, $83,500,000, and $206,000,000, respectively. It is the intent of the Company to pay its parent company an annual dividend of at least 7% of net income subject to the dividend preference of any preferred stock outstanding. Under the most restrictive provisions of the Company’s borrowing arrangements, consolidated retained earnings at December 31, 2002 in the amount of $1,238,697,000 were unrestricted as to the payment of dividends. In 2002 the Company cancelled 40 shares of Series A Preferred Stock in the amount of $400 million owned by AIG and issued 3,951,398 shares of common stock for the value of the cancelled Series A Preferred Stock and 2,428,599 shares for $250 million.
10
Table of Contents
Item 6. Selected Financial Data
The following table summarizes selected
consolidated financial data and certain operating information of
the Company. The selected consolidated financial data should be
read in conjunction with the Consolidated Financial Statements
and notes thereto and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this Form 10-K.
Years Ended December 31,
2002
2001
2000
1999
1998
(Dollar amounts in thousands)
$
2,677,876
$
2,473,784
$
2,301,440
$
2,080,555
$
1,853,983
66,315
62,883
99,716
147,216
118,183
104,718
80,046
77,589
72,317
73,500
2,848,909
2,616,713
2,478,745
2,300,088
2,045,666
2,055,606
1,862,994
1,772,552
1,596,683
1,483,392
793,303
753,719
706,193
703,405
562,274
531,123
507,866
468,901
453,447
369,352
23.24%
24.69%
22.98%
23.26%
19.99%
27.85%
28.80%
28.49%
30.58%
27.49%
1.74x
1.75x
1.68x
1.75x
1.60x
$
25,287,747
$
20,983,197
$
17,878,389
$
16,096,053
$
14,872,430
150,611
142,013
114,062
56,555
89,904
27,490,613
23,167,290
19,701,478
17,507,124
16,379,632
18,977,267
15,826,296
13,436,181
11,861,796
11,184,010
4,561,162
3,963,675
3,463,779
3,210,192
2,844,375
543
453
383
338
329
13
18
19
19
20
5
4
3
2
3
8
7
20
51
31
| (a) | Rentals of flight equipment less Expenses, divided by Rentals of flight equipment. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” |
| (b) | Income before income taxes and cumulative effect of accounting change divided by Total revenues. |
(c) See Exhibit 12.
(d) See “Item 2. Properties — Flight Equipment.”
11
Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Industry Condition
The Company receives its revenue principally from airlines and companies associated with the airline industry. The airline industry is cyclical, economically sensitive and highly competitive. Airlines and related companies may be affected by political or economic instability, terrorist activities, changes in national policy, competitive pressures on certain air carriers, fuel shortages, labor stoppages, insurance cost, recessions, and other political or economic events adversely affecting world or regional trading markets. As such, the Company’s revenues and income will be affected by its customers’ ability to react to and cope with the volatile competitive environment in which they operate as well as the Company’s own competitive environment.
From time to time, certain of the Company’s customers have experienced economic difficulties resulting in the Company’s participation in customer restructurings. Such restructurings have involved the voluntary early termination of leases, the replacement of leased aircraft with smaller, less expensive leased aircraft, the arrangement of subleases from the primary lessee to another airline and the rescheduling of payments. In addition, in certain circumstances, the Company has repossessed aircraft.
As a result of the September 11, 2001 terrorist attacks on the United States, the general slowdown of the worldwide economy, both before and after the attacks, and world political unrest, many United States and international commercial air carriers have reduced capacity, idled aircraft, furloughed employees and initiated cost reduction programs and some have filed for bankruptcy protection and/or ceased operations. As a result, many airlines still face significant economic challenges. Air carriers are experiencing increased competition from low cost carriers, a reduction in passenger traffic and an actual or potential increase in costs, including insurance premiums, fuel cost and security costs. These factors combined with the potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war have created many economic and political uncertainties, which could adversely affect the Company’s business and revenues in the short and long-term in ways that cannot presently be predicted.
The effects of the worsening economic conditions, participation in customer restructurings and requirements to re-lease aircraft from airlines which have ceased operations during 2001 and 2002 had a negative impact on the Company’s results of operations in 2002. During 2002, one of the Company’s customers, Sun Country (5 aircraft), filed for protection under Chapter 11 of the United States Bankruptcy Code and two of the Company’s customers, Delsey Airlines (3 aircraft) and National Airlines (2 aircraft), ceased operation. The Company subsequently placed all of the aircraft previously leased to those airlines with other airlines. On March 21, 2003, two of the Company’s customers, Avianca (1 aircraft) and Hawaiian Airlines (4 aircraft) filed for protection under Chapter 11 of the United States Bankruptcy Code. Lease Margin (Rentals of flight equipment less total expense, divided by Rentals of flight equipment (as a percentage)) is a measure by which the Company evaluates the overall profitability of its leasing operations. The Company experienced a decrease in its Lease Margin during 2002 due to the factors mentioned above. Management believes that this trend will likely continue until economic conditions and the global political environment stabilize and improve.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue, depreciation, overhaul reserves, and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.
12
Table of Contents
The Company believes the following are the Company’s critical accounting policies, some of which require significant judgments and estimates, used in the preparation of the consolidated financial statements.
Lease Revenue : The Company, as lessor, leases flight equipment principally under operating leases and reports income over the life of the lease as rentals become receivable under the provisions of the lease to the extent of amounts received or deposits held. When the lease has varying payments, revenue is recorded under the straight-line method over the noncancelable term of the lease.
Flight Equipment Marketing : The Company markets flight equipment and recognizes this revenue when the equipment is sold and the risk of ownership of the equipment is passed to the new owner.
Flight Equipment : Flight equipment is stated at cost. Purchases, major additions, capitalized interest and modifications are capitalized. Normal maintenance and repairs, airframe and engine overhauls and compliance with return conditions of flight equipment returned from lease are provided for and paid for by the lessee. Generally, aircraft are depreciated using the straight-line method over a 25 year life from the date of manufacture to a 15% residual value. At the time assets are retired or sold, the cost and accumulated depreciation are removed from the related accounts and the difference, net of proceeds, is recorded as a gain or loss. ILFC management is very active in the airline industry and reviews quarterly issues affecting the Company’s fleet, including events and circumstances that may affect impairment of aircraft values (e.g. residual value, useful life and current and future revenue generating capacity). Management evaluates aircraft in the fleet, as necessary, based on these events and circumstances in accordance with Statement of Financial Accounting Standard No. 144. (“SFAS 144”).
Capitalized Interest : The Company borrows funds to finance progress payments for the construction of flight equipment ordered. The Company estimates the interest incurred on such borrowings. This amount is capitalized and included in the cost of the equipment.
Provision for Overhauls : Under the provisions of some leases, the Company receives overhaul rentals based on the usage of the aircraft. For certain airframe and engine overhauls, the lessee is reimbursed by the Company for costs incurred up to, but not exceeding, related overhaul rentals paid to the Company by the lessee for usage of the aircraft.
Overhaul rentals are included under the caption Rental of flight equipment. The Company provides a charge to operations for reimbursements at the time the overhaul rentals are paid by the lessee, based on overhaul rentals received and the estimated reimbursements during the life of the lease. The Company periodically evaluates its reserve for these reimbursements and its reimbursement rate, and then adjusts the provision for overhauls accordingly.
Financial Condition
The Company borrows funds to purchase new and used flight equipment (see “Item 2. Properties — Commitments”), including funds for progress payments during the construction phase, and to pay off existing debt obligations as they mature. These funds are borrowed principally on an unsecured basis from various sources. During 2002, the Company borrowed $5.7 billion (excluding commercial paper) and $1.8 billion was provided by operating activities to meet those needs. As of December 31, 2002, the Company had committed to purchase 523 aircraft from Boeing and Airbus at an estimated aggregate purchase price of approximately $29.8 billion for delivery through 2010, of which the Company currently anticipates taking delivery of 90 aircraft in 2003 with an estimated aggregate purchase price of $4.4 billion. It also had options to purchase 18 additional aircraft deliverable through 2008 at an estimated aggregate purchase price of approximately $1.3 billion. Subsequent to year end, the Company cancelled four of the aircraft it had committed to purchase. The Company currently expects to fund expenditures for capital requirements as well as liquidity needs from a combination of available cash balances, internally generated funds and financing arrangements. At Decem-
13
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| 2002 | 2001 | 2000 | |||||||||||
|
|
|
|
|||||||||||
| (Dollars in thousands) | |||||||||||||
|
Public term debt with single maturities
|
$ | 7,475,775 | $ | 4,796,330 | $ | 3,471,330 | |||||||
|
Public medium-term notes with varying maturities
|
4,969,500 | 4,809,000 | 3,175,000 | ||||||||||
|
Capital lease obligations
|
260,623 | 365,289 | 463,362 | ||||||||||
|
Bank term debt
|
2,084,793 | 2,368,969 | 2,072,562 | ||||||||||
|
|
|
|
|||||||||||
|
Total term debt, bank debt and
capital lease obligations |
14,790,691 | 12,339,588 | 9,182,254 | ||||||||||
|
Commercial paper
|
4,218,504 | 3,501,865 | 4,288,681 | ||||||||||
|
Less: Deferred debt discount
|
(31,928 | ) | (15,157 | ) | (34,754 | ) | |||||||
|
|
|
|
|||||||||||
|
Debt financing and capital lease obligations
|
$ | 18,977,267 | $ | 15,826,296 | $ | 13,436,181 | |||||||
|
|
|
|
|||||||||||
|
Composite interest rate
|
4.73% | 5.07% | 6.37% | ||||||||||
|
Percentage of total debt at fixed rate
|
76.67% | 78.81% | 68.65% | ||||||||||
|
Composite interest rate on fixed debt
|
5.69% | 5.78% | 6.20% | ||||||||||
|
Bank prime rate
|
4.25% | 4.75% | 9.50% | ||||||||||
The above amounts represent the Company’s
anticipated settlement of its currently outstanding debt
obligations. Certain adjustments required to present currently
outstanding debt obligations have been recorded and presented
separately on the face of the balance sheet, including
adjustments related to foreign currency and interest rate
hedging activities. Composite interest rates and percentage of
total debt at fixed rate reflect the effect of derivative
instruments.
Public Debt
The interest on substantially all of the public
debt (exclusive of the commercial paper) is fixed for the term
of the note.
The Company has the ability to borrow under
various public debt financing arrangements as follows:
Maximum
Sold
Sold
Offering
December 31, 2002
March 20, 2003
(Dollars in millions)
$
6,080
(a)
$
—
$
2,326
4,000
(b)
2,314
(c)
2,314
(c)
| (a) | Includes $1.08 billion, which was incorporated into the registration statement from a prior registration statement, increasing the maximum offering from $5.0 billion to $6.08 billion. The Company increased the Medium-Term Note program to $2 billion in the first quarter of 2003. |
| (b) | The Company increased its Euro Medium-Term Note Programme during the second quarter of 2002 from $2.0 billion to $4.0 billion, under which an additional € 1.25 billion and £300 million in notes were sold as of December 31, 2002. |
| (c) | The Company has hedged the foreign currency risk of the notes through operating lease payments or derivatives. |
14
Table of Contents
Capital Lease Obligations
The Company has Export Credit Lease financings which provide ten year, amortizing loans in the form of capital lease obligations. The interest rate on 62.5% of the original financed amount is 6.55% and the interest rate on 22.5% of the original financed amount is fixed at rates varying between 6.18% and 6.89%. These two tranches are guaranteed by various European Export Credit Agencies.
Bank Term Debt
In January 1999, the Company entered into an Export Credit Facility, up to a maximum of $4.3 billion, for approximately 75 aircraft to be delivered through 2001. The Company had the right, but was not required, to use the facility to fund 85% of each aircraft’s purchase price. This facility is guaranteed by various European Export Credit Agencies. The Company financed 62 aircraft with $2.8 billion under this facility over ten years with interest rates from 5.753% to 5.898%. The debt is collateralized by a pledge of the shares of a subsidiary of the Company which holds title to the aircraft financed under the facility.
Commercial Paper
The Company currently has a $4.8 billion Commercial Paper Program. Under this program, the Company may borrow in minimum increments of $100,000 for a period from one day to 270 days. Notwithstanding the program’s size, it is the Company’s intention to sell commercial paper not to exceed one and a half times the aggregate amount of the backup facilities available (see Bank Commitments). The weighted average interest rate of the Company’s Commercial Paper Program was 1.46%, 4.10%, and 6.41% at December 31, 2002, 2001, and 2000, respectively.
Bank Commitments
As of December 31, 2002, the Company had committed revolving loans and lines of credit with 20 commercial banks aggregating $3.15 billion. These revolving loans and lines of credit principally provide for interest rates that vary according to the pricing option in effect at the time of borrowing. Pricing options include prime, a range from .25% over LIBOR to .35% over LIBOR based upon utilization, or a rate determined by a competitive bid process with the banks. The revolving loans and lines of credit are subject to facility fees of up to .10% of amounts available. In addition, the facilities are subject to facility fees of up to .10% of amounts available. This financing is used primarily as backup for the Company’s Commercial Paper program.
Off Balance Sheet Arrangements
In 1995, 1996 and 1997, the Company, through subsidiaries, entered into sale-leaseback transactions providing proceeds to the Company in the amounts of $413.0 million, $507.6 million and $601.9 million, respectively, each relating to seven aircraft. The transactions resulted in the sale and leaseback of these aircraft under one year operating leases, each with six one year extension options for a total of seven years for each aircraft. The Company has not recorded any gains related to the transactions. The Company has the option to either buy back the aircraft or redeliver the aircraft for a fee to the lessor at the end of any lease period. The lease rates equate to fixed principal amortization and floating interest payments based on LIBOR or commercial paper pricing. The Company had repurchased three aircraft before the lease termination, which were sold to third parties, and five aircraft when the 1995 sale-leaseback transactions expired in December 2002. If the Company does not negotiate extensions of the one year operating lease terms as they expire in September 2003 and 2004, it will be required to borrow additional funds to terminate the transactions and reacquire the assets. The estimated remaining minimum lease payments (exclusive of the interest component of rent) and buy-back amounts, assuming the contractual end of the transactions are $390,810,000 (2003) and $462,391,000 (2004). As discussed under New Accounting Pronouncements, FASB Interpretation No. 46 may result in the consolidation of these entities, starting in the third quarter of 2003. If the Company is required to consolidate these entities, it expects to record assets and liabilities of approximately $810 million and will cease to record rent expense for the operating leases. The Company does not have any other
15
Table of Contents
Derivatives
In the normal course of business, the Company employs a variety of derivative products to manage its exposure to interest rates and the resulting impact of changes in interest rates on earnings, with the objective to lower its overall borrowing cost and to maintain its optimal mix of variable and fixed rate interest obligations. The Company only enters into derivative transactions to hedge interest rate risk and currency risk and not to speculate on interest rates or currency fluctuations. These derivative products include interest rate swap agreements, currency swap agreements, and interest rate floors.
The counterparty to the Company’s derivative instruments is AIG Financial Products Corp. (“AIGFP”), a related party with the highest ratings available from the credit rating agencies, who enters into identical transactions with independent third parties. The derivatives are subject to a bilateral security agreement which, in certain circumstances, may allow one party to the agreement to require the second party to the agreement to provide collateral. Failure of the instruments or counterparty to perform under the derivative contracts could have a material impact on the Company’s results of operations.
Common and Preferred Stock
The Company received $400.0 million from AIG for the issuance of Series A Preferred Stock and repurchased $250.0 million at its Market Auction Preferred Stock during the year ended December 31, 2001.
During the year ended December 31, 2002, the Company repurchased $50.0 million of its Market Auction Preferred Stock, cancelled $400.0 million of its Series A Preferred Stock and issued 3,951,398 shares of its common stock for the value of the cancelled Series A Preferred Stock and 2,428,599 shares of its common stock for $250 million. AIG has no obligation to contribute additional equity to the Company.
Market Liquidity Risks
The Company is in compliance with all covenants or other requirements set forth in its credit agreements. Further, the Company does not have any rating downgrade triggers that would accelerate the maturity dates of its debt. However, a downgrade in the Company’s credit rating could adversely affect the Company’s ability to borrow on, renew existing, or obtain access to new financing arrangements and would increase the cost of such financing arrangements. For example, a downgrade in credit rating could preclude the Company from issuing commercial paper under its current program.
Turmoil in the airline industry and continued political unrest in the Middle East have led to increased uncertainty in the debt markets in which the Company borrows funds. While the Company has been able to borrow the funds necessary to finance operations in the current market environment, additional turmoil in the airline industry or political environment could limit the Company’s ability to borrow funds from its current funding sources. Should this occur the Company would seek alternative sources of funding, including securitizations, manufacturer’s financings, drawings upon its revolving loans and lines of credit facilities or additional short term borrowings. If the Company was unable to obtain sufficient funding, it would negotiate with manufacturers to defer deliveries of aircraft.
16
Table of Contents
The following summarizes the Company’s
contractual obligations at December 31, 2002, and the
possible effect of such obligations on the Company’s
liquidity and cash flows in future periods.
Existing Commitments (Exclusive of
Interest)
Contingent Commitments
Commitments Due by Year
Total
2003
2004
2005
2006
2007
Thereafter
(Dollars in thousands)
$
14,530,068
$
3,680,673
$
3,200,624
$
1,960,549
$
1,234,174
$
2,608,424
$
1,845,624
260,623
111,746
105,194
43,683
—
—
—
4,218,504
4,218,504
—
—
—
—
—
128,045
5,411
11,336
11,485
8,575
8,918
82,320
853,201
390,810
462,391
—
—
—
—
29,816,400
4,430,700
4,824,700
4,982,100
5,021,800
4,332,100
6,225,000
$
49,806,841
$
12,837,844
$
8,604,245
$
6,997,817
$
6,264,549
$
6,949,442
$
8,152,944
Contingency Expiration by Year
Total
2003
2004
2005
2006
2007
Thereafter
(Dollars in thousands)
$
1,287,200
$
—
$
36,600
$
295,100
$
248,400
$
567,100
$
140,000
821,384
231,614
117,800
256,658
—
—
215,312
264,850
198,161
4,726
11,041
8,178
—
42,744
40,139
25,815
493
3,000
6,000
—
4,831
20,000
20,000
—
—
—
—
—
$
2,433,573
$
475,590
$
159,619
$
565,799
$
262,578
$
567,100
$
402,887
| (a) | Includes the repurchase of six aircraft in 2003 and seven aircraft in 2004. |
| (b) | From time to time the Company participates with banks, airlines and other financial institutions to assist in financing aircraft by providing asset guarantees, put options, or loan guarantees collateralized by aircraft. As a result, should the Company be called upon to fulfill its obligations, the Company would have recourse to the value of the underlying aircraft. |
Results of Operations
Revenues from the rentals of flight equipment increased 8.25% to $2,677.9 million in 2002 compared to $2,473.8 million in 2001 and $2,301.4 million in 2000 due to an increase in the number of aircraft available for operating lease, partially offset by an increase in the number of aircraft being reconfigured and redelivered and therefore not earning revenues for some part of the year. Revenues were also negatively impacted by lower lease rates and restructured rents, as a result of the slowdown in the airline industry that was exacerbated after the September 11, 2001 terrorist attacks. At December 31, 2002 the Company’s fleet, on which it earns rental revenue, consisted of 556 aircraft compared to 471 at December 31, 2001 and 402 at December 31, 2000. The cost of the leased fleet, which includes aircraft subject to sale-leaseback transactions from which rental income is earned, increased to $30.6 billion in 2002 from $25.8 billion in 2001 and $22.0 billion in 2000.
The Company’s Lease Margin (lease revenue less total expenses divided by lease revenue (as a percentage)) decreased 1.5% to 23.2% in 2002 compared to 24.7% in 2001. In 2001, the Lease Margin had
17
Table of Contents
The Company’s Lease Margin has been
favorably impacted by the downward trend in interest rates
during 2002 and 2001. The benefit of these interest rate
reductions has been offset by decreasing lease rates on returned
and redelivered aircraft at lower lease rates than previously
earned. Idle and excess aircraft in the market place has
increased competition for the lease of aircraft. The Company
expects that this downward pressure on lease rates will continue
to impact Lease Margin as the effects of restructurings,
repossessions and releases are realized in lease rates and until
the market for aircraft stabilizes. Further, as interest rates
are at historically low levels, the Company expects that the
Lease Margin will experience further downward pressure as
current interest rates climb. The Company experienced low Lease
Margins in the mid-nineties, which resulted from the lingering
impacts on lease rates from leases negotiated around the time of
the Gulf War, compounded by a high interest environment and
higher leverage. Due to the varying terms of the Company’s
leases and borrowings, the effects of events and circumstances
which cause changes in lease rates and interest rates in the
current market place, may not fully materialize in the
Company’s results of operations for three to five years.
ILFC Historical Lease Margin
Historical Lease Margin
22.96
20.30
19.68
13.55
14.32
17.36
19.99
23.26
22.98
24.69
23.24
In addition to its leasing operations, the Company engages in the marketing of flight equipment throughout the lease term, as well as the sales of flight equipment on a principal and commission basis. Revenue from flight equipment marketing was $66.3 million in 2002, $62.9 million in 2001 and $99.7 million in 2000. The fluctuations are due to the different types and the number of the flight equipment marketed in each period and a downturn in the market for flight equipment. The Company sold 8 aircraft during 2002 compared to 7 in 2001 and 20 in 2000. In addition, the Company sold 7 engines during 2002, compared to 5 engines during 2001 and 7 engines during 2000.
Interest expense increased to $846.4 million in 2002 from $792.6 million in 2001 and $773.5 million in 2000, as a result of an increase in debt outstanding, to finance aircraft acquisitions, to $19.0 billion in 2002, to $15.8 billion in 2001 and $13.4 billion in 2000 (excluding the effect of debt discount and foreign exchange
18
Table of Contents
ILFC Composite Interest Rates and Prime Rate
| Composite-All Debt | Composite-Fixed-Rate Debt | Prime Rate | ||||||||||
|
|
|
|
||||||||||
|
Dec-99
|
6.14 | 6.06 | 8.5 | |||||||||
|
Mar-00
|
6.12 | 6 | 9 | |||||||||
|
Jun-00
|
6.33 | 6.13 | 9.5 | |||||||||
|
Sep-00
|
6.38 | 6.15 | 9.5 | |||||||||
|
Dec-00
|
6.37 | 6.2 | 9.5 | |||||||||
|
Mar-01
|
5.92 | 6.13 | 8 | |||||||||
|
Jun-01
|
5.49 | 5.93 | 6.75 | |||||||||
|
Sep-01
|
5.21 | 5.88 | 6 | |||||||||
|
Dec-01
|
5.07 | 5.78 | 4.75 | |||||||||
|
Mar-02
|
4.93 | 5.77 | 4.75 | |||||||||
|
Jun-02
|
5.03 | 5.76 | 4.75 | |||||||||
|
Sep-02
|
4.95 | 5.74 | 4.75 | |||||||||
|
Dec-02
|
4.73 | 5.69 | 4.25 | |||||||||
The Company adopted SFAS 133 on January 1, 2001 (see notes to the consolidated financial statements). The transition adjustment in the amount of $15.2 million is accounted for as the cumulative effect of an accounting change. Interest expense for the year ended December 31, 2002 and 2001 include a benefit of $4.8 million and $0.6 million, respectively, related to hedging activities.
Depreciation of flight equipment increased to $954.2 million in 2002 from $802.8 million in 2001 and $705.7 million in 2000 due to an increase in the depreciable base of the fleet. The depreciable base of flight equipment (which excludes aircraft subject to sale-leaseback) during the same periods increased to $29.6 billion at December 31, 2002 from $24.4 billion in 2001 and $20.5 billion in 2000.
Provisions for overhauls decreased to $90.7 million in 2002 from $94.4 million in 2001 and $104.5 million in 2000 due to the cumulative effect of favorable payout factors realized. Further, the Company experienced lower overhaul revenue collections as a result of an increase in restructured overhaul payments, a slowdown in the economy, and in some cases lower aircraft utilization.
Flight equipment rent decreased to $75.4 million in 2002, from $108.0 million in 2001 and $141.0 million in 2000 due to a change in the lease rates resulting from changes in interest rates, affecting the floating rate component of the lease rates, and the repurchase of three aircraft. One facility including five aircraft matured in December 2002 and the Company repurchased the related five aircraft. The Company, through subsidiaries, has sale-leaseback transactions relating to 13 aircraft as of December 31, 2002.
Selling, general and administrative expenses increased to $88.9 million in 2002 compared to $65.2 million in 2001 and $47.9 million in 2000 primarily due to an increase in costs related to the reconfiguration and re-delivery of aircraft from one lessee to another.
The effective tax rate was 33.1% in 2002, 34.6% in 2001 and 33.6% in 2000. The Company’s effective tax rate fluctuates as a result of the effect of state taxes, foreign taxes and benefits related to the Company’s foreign
19
Table of Contents
The Company performed an impairment review of all aircraft in its fleet as of December 31, 2002, in accordance with SFAS 144. No impairments have been recognized related to aircraft, as the existing service potential of the aircraft in the Company’s portfolio has not been diminished. Further, the Company has been able to re-lease the aircraft without diminution in lease rates to an extent that would warrant an impairment write down.
Accumulated other comprehensive income changed $(87,991) to $(138,620) in 2002 compared to $(50,629) in 2001 primarily due to a change in the Euro exchange rate to the U.S. Dollar. See Note L — Financial Instruments.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”), “Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” In addition to amending or rescinding other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions, SFAS 145 precludes companies from recording gains and losses from the extinguishment of debt as an extraordinary item. SFAS 145 is effective for financial statements issued after May 15, 2002.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“SFAS 146”) which addresses financial accounting and reporting for costs associated with exit or disposal activities. Under SFAS 146, such costs will be recognized when the liability is incurred, rather than at the date of commitment to an exit plan. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application permitted.
In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147, “Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9,” (“SFAS 147”) which addresses accounting for purchases of certain financial institutions. SFAS 147 is effective October 1, 2002, with early application permitted.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123,” (SFAS 148) which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of FASB Statement No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
The above mentioned statements are not applicable to the Company’s activities as of December 31, 2002 and have no impact on its results of operations, financial conditions or cash flows.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others,” an interpretation of FASB Statements No. 5, 57 and 107 and Recission of FASB interpretation No. 34. FIN 45 elaborates on existing disclosures of guarantees and clarifies when a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statements of interim or annual periods that end after December 15, 2002. The Company adopted FIN 45 as of December 31, 2002 and it had no impact on its financial position.
On January 15, 2003, the FASB issued Interpretation No. 46 (“FIN 46”) “Consolidation of Variable Interest Entities”. FIN 46 requires a company to consolidate a Variable Interest Entity if the company is
20
Table of Contents
The Emerging Issues Task Force (“EITF”) issued release 02-16 “Accounting by a customer (including a reseller) for certain consideration received from a Vendor” (“EITF 02-16”) which clarifies issues arising from EITF Issue No. 01-9 “Accounting by a Vendor for consideration given to a customer (including a reseller of the Vendor’s Products).” EITF 02-16 should be applied to new arrangements, entered into after December 31, 2002. The Company does not expect EITF 02-16 will have a significant impact on its financial position, its results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Measuring potential losses in fair values has recently become the focus of risk management efforts by many companies. Such measurements are performed through the application of various statistical techniques. One such technique is Value at Risk (VaR), a summary statistical measure that uses historical interest rates and foreign currency exchange rates which estimates the volatility and correlation of these rates and prices to calculate the maximum loss that could occur over a defined period of time given a certain probability.
The Company believes that statistical models alone do not provide a reliable method of monitoring and controlling market risk. While VaR models are relatively sophisticated, the quantitative market risk information generated is limited by the assumptions and parameters established in creating the related models. Therefore, such models are tools and do not substitute for the experience or judgment of senior management.
The Company is exposed to market risk and the risk of loss of fair value and possible liquidity strain resulting from adverse fluctuations in interest rates and foreign exchange prices. The Company statistically measures the loss of fair value through the application of a VaR model on a quarterly basis. In this analysis the net fair value of the Company is determined using the financial instrument assets and other assets. This includes tax adjusted future flight equipment lease revenues and financial instrument liabilities, which includes future servicing of current debt. The impact of current derivative positions is also taken into account.
The Company calculates the VaR with respect to the net fair value by using historical scenarios. This methodology entails re-pricing all assets and liabilities under explicit changes in market rates within a specific historical time period. In this case, the most recent two and three years of historical information for interest rates and foreign exchange rates were used to construct the historical scenarios at December 31, 2002 and 2001 respectively. For each scenario, each financial instrument is re-priced. Scenario values for the Company are then calculated by netting the values of all the underlying assets and liabilities. The final VaR number represents the maximum adverse deviation in fair market value incurred by these scenarios with 95% confidence (i.e. only 5% of historical scenarios show losses greater than the VaR figure). A one month holding
21
Table of Contents
ILFC Market Risk
| December 31, 2002 | December 31, 2001 | |||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Average | High | Low | Average | High | Low | |||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Combined
|
$ | 20.1 | $ | 42.8 | $ | 7.8 | $ | 9.8 | $ | 13.3 | $ | 6.8 | ||||||||||||
|
Interest Rate
|
20.0 | 42.8 | 7.8 | 9.8 | 13.3 | 6.8 | ||||||||||||||||||
|
Currency
|
0.5 | 1.2 | 0.0 | 0.0 | 0.1 | 0.0 | ||||||||||||||||||
Item 8. Financial Statements and Supplementary Data
The response to this Item is submitted as a separate section of this report.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
PART III
Item 14.
Controls and
Procedures
During the 90 day period before the filing
of this report, the Chairman of the Board and Chief Executive
Officer and the Vice Chairman, Chief Financial Officer and Chief
Accounting Officer of the Company (collectively, the
“Certifying Officers”) have evaluated the
effectiveness of the Company’s disclosure controls and
procedures. These disclosure controls and procedures are those
controls and procedures which are designed to insure that all of
the information required to be disclosed by the Company in its
periodic reports filed with the Securities and Exchange
Commission (the “Commission”) is recorded, processed,
summarized and reported within the time periods specified by the
Commission rules and forms, and that the information is
communicated to the Certifying Officers on a timely basis.
The Certifying Officers concluded, based on their
evaluation, that the Company’s disclosure controls and
procedures are effective for the Company, taking into
consideration the size and nature of the Company’s business
and operations. No significant deficiencies or material
weaknesses in the controls or procedures were detected,
therefore no corrective actions were needed to be taken.
Subsequent to the date when the disclosure controls and
procedures were evaluated, there have not been any significant
changes in the Company’s internal controls or in other
factors that could significantly affect such controls.
PART IV
(a)(1) and (2): Financial Statements and Financial Statement Schedule: The response to this portion of Item 14 is submitted as a separate section of this report beginning on page 15.
(a)(3) and (c): Exhibits: The response to this portion of Item 14 is submitted as a separate section of this report beginning on page 15.
| (b) | Reports on Form 8-K: Current Report on Form 8-K: |
Form 8-K, event date November 15, 2002 (Item 7)
22
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
FORM 10-K
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
The following consolidated financial statements of the Company and its subsidiaries required to be included in Item 8 are listed below:
| Page | |||||
|
|
|||||
|
Report of Independent Accountants
|
25 | ||||
|
Consolidated Financial Statements:
|
|||||
|
Balance Sheets at December 31, 2002 and 2001
|
26 | ||||
|
Statements of Income for the years ended
December 31, 2002, 2001 and 2000
|
27 | ||||
|
Statements of Shareholders’ Equity for the
years ended December 31, 2002, 2001 and 2000
|
28 | ||||
|
Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
|
29 | ||||
|
Notes to Consolidated Financial Statements
|
31 | ||||
The following financial statement schedule of the
Company and its subsidiaries is included in Item 14(a)(2):
Schedule Number
Description
Page
II
Valuation and Qualifying Accounts
49
All other financial statements and schedules not listed have been omitted since the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
The following exhibits of the Company and its
subsidiaries are included in Item 14(c):
Exhibit
Number
Description
3.1
Restated Articles of Incorporation of the
Company, as amended through December 9, 1992, filed
November 3, 1993 (filed as an exhibit to Registration
Statement No. 33-50913 and incorporated herein by
reference).
3.2
Certificate of Determination of Preferences of
Series A Market Auction Preferred Stock (filed
December 9, 1992 as an exhibit to Registration Statement
No. 33-54294 and incorporated herein by reference).
3.3
Certificate of Determination of Preferences of
Series B Market Auction Preferred Stock (filed
December 9, 1992 as an exhibit to Registration Statement
33-54294 and incorporated herein by reference).
3.4
Certificate of Determination of Preferences of
Series C Market Auction Preferred Stock (filed as an
exhibit to Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
3.5
Certificate of Determination of Preferences of
Series D Market Auction Preferred Stock (filed as an
exhibit to Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
3.6
Certificate of Determination of Preferences of
Series E Market Auction Preferred Stock (filed as an
exhibit to Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
3.7
Certificate of Determination of Preferences of
Series F Market Auction Preferred Stock (filed as an
exhibit to Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
3.8
Certificate of Determination of Preferences of
Series G Market Auction Preferred Stock (filed as an
exhibit to Form 10-K for the year ended December 31,
1995 and incorporated herein by reference).
3.9
Certificate of Determination of Preferences of
Series H Market Auction Preferred Stock (filed as an
exhibit to Form 10-K for the year ended December 31,
1995 and incorporated herein by reference).
3.10
Certificate of Determination of Preferences of
Preferred Stock of the Company (filed as an exhibit to
Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference).
3.11
By-Laws of the Company, including amendment
thereto dated August 31, 1990 (filed as an exhibit to
Registration Statement No. 33-37600 and incorporated herein
by reference).
23
Table of Contents
Exhibit
Number
Description
4.1
Indenture dated as of November 1, 1991, between
the Company and U.S. Bank Trust National Association (successor
to Continental Bank, National Association), as Trustee (filed as
an exhibit to Registration Statement No. 33-43698 and
incorporated herein by reference).
4.2
First supplemental indenture, dated as of
November 1, 2000, to the Indenture between the Company and
U.S. Bank Trust National Association. (filed as an exhibit to
Form 10K for the year ended December 31, 2000 and
incorporated herein by reference).
4.3
Second supplemental indenture, dated as of
February 28, 2001, to the Indenture between the Company and
U.S. Bank Trust National Association. (filed as an exhibit
to Form 10Q for the quarter ended March 31, 2001 and
incorporated herein by reference).
4.4
Third supplemental indenture, dated as of
September 26, 2001, to the Indenture between the Company
and U.S. Bank Trust National Association. (filed as an
exhibit to Form 10Q for the quarter ended
September 30, 2000 and incorporated herein by reference).
4.5
Indenture dated as of November 1, 2000,
between the Company and the Bank of New York, as Trustee (filed
as an exhibit to Registration No. 33-49566 and incorporated
herein by reference).
4.6
The Company agrees to furnish to the Commission
upon request a copy of each instrument with respect to issues of
long-term debt of the Company and its subsidiaries, the
authorized principal amount of which does not exceed 10% of the
consolidated assets of the Company and its subsidiaries.
4.7
First supplemental indenture, dated as of
August 16, 2002 to the indenture between the Company and
the Bank of New York (filed as Exhibit 4.2 to Registration
Statement No. 333-100340 and incorporated herein by
reference).
4.8
Fourth supplemental indenture, dated as of
November 6, 2002, to the indenture between the Company and
U.S. Bank National Association.
4.9
Fifth supplemental indenture, dated as of
December 27, 2002, to the indenture between the Company and
U.S. Bank National Association.
10.1
Amendment to Revolving Credit Agreement, dated as
of January 17, 2002 among the Company, Citicorp USA, Inc.,
and the other banks listed therein providing up to
$1,000,000,000 (three year facility).
10.2
Revolving Credit Agreement, dated as of November
17, 1999 among the Company, Citicorp USA, Inc. and other banks
listed therein (364 day facility) (filed as an exhibit to Form
10-K for the year ended December 31, 1999 and incorporated
herein by reference).
10.3
Amendment to Revolving Credit Agreement, dated as
of November 15, 2000, among the Company, Citicorp USA,
Inc., and the other banks listed therein providing up to
$1,800,000,000 (364 day facility). (filed as an exhibit to
Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).
10.4
Second amendment to Revolving Credit Agreement,
dated as of January 17, 2002, among the Company, Citicorp
USA Inc., and the other banks listed therein providing up to
$1,500,000,000 (364 day facility).
10.5
Aircraft Facility Agreement, dated as of
January 19, 1999, among the Company, Halifax PLC and the
other banks listed therein providing up to $4,327,260,000 for
the financing of approximately seventy-five Airbus aircraft
(filed as an exhibit to Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).
10.6
Boeing Purchase Agreement No. 2241 and
related letter agreements, all dated July 30, 1999, between
the Company and the Boeing Company (filed as an exhibit to
Form 10-Q for the quarter ended September 30, 1999)
(confidential treatment granted).
10.7
Supplemental Agreement #5, dated
December 29, 2000, to the Boeing Purchase Agreement
No. 2241 between the Company and the Boeing Company (filed
as an exhibit to Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference).
(confidential treatment granted).
12
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends.
23
Consent of PricewaterhouseCoopers LLP, dated
March 20, 2003.
24
Table of Contents
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Directors
In our opinion, the consolidated financial
statements listed in the accompanying index appearing under
Items 15(a)(1) and (2) on page 23 present fairly, in
all material respects, the financial position of International
Lease Finance Corporation and its subsidiaries (the
“Company”) at December 31, 2002 and
December 31, 2001, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and the financial statement schedule are the
responsibility of the Company’s management; our
responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our
audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
25
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2002
2001
ASSETS
$65,693 (2002) and $78,295 (2001)
$
66,049
$
79,383
193,526
173,280
221,966
252,264
150,611
142,013
29,631,150
24,400,217
4,343,403
3,417,020
25,287,747
20,983,197
1,157,864
1,321,699
142,817
109,672
170,395
20,799
64,067
56,236
$68,516 (2002) and $59,056 (2001)
35,571
28,747
$
27,490,613
$
23,167,290
LIABILITIES AND SHAREHOLDERS’ EQUITY
$
235,827
$
265,107
$31,928 (2002) and $15,157 (2001)
18,716,644
15,461,007
264,880
(92,129
)
135,853
185,858
260,623
365,289
864,053
966,213
129,244
114,874
2,322,327
1,937,396
—
400,000
100,000
150,000
653,582
3,582
579,955
579,955
(138,620
)
(50,629
)
3,366,245
2,880,767
4,561,162
3,963,675
$
27,490,613
$
23,167,290
See accompanying notes.
26
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2002
2001
2000
$
2,677,876
$
2,473,784
$
2,301,440
66,315
62,883
99,716
104,718
80,046
77,589
2,848,909
2,616,713
2,478,745
846,353
792,611
773,539
954,246
802,850
705,715
90,763
94,383
104,486
75,372
107,992
140,956
88,872
65,158
47,856
2,055,606
1,862,994
1,772,552
793,303
753,719
706,193
262,180
261,044
237,292
531,123
492,675
468,901
—
15,191
—
$
531,123
$
507,866
$
468,901
See accompanying notes.
27
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
Market Auction
Preferred Stock
Preferred Stock
Common Stock
Accumulated
Other
Number of
Number of
Number of
Paid-in
Comprehensive
Retained
Shares
Amount
Shares
Amount
Shares
Amount
Capital
Income (Loss)
Earnings
Total
4,000
$
400,000
35,818,122
$
3,582
$
579,955
$
2,226,655
$
3,210,192
(206,000
)
(206,000
)
(18,570
)
(18,570
)
468,901
468,901
$
9,256
9,256
478,157
4,000
400,000
35,818,122
3,582
579,955
9,256
2,470,986
3,463,779
(2,500
)
(250,000
)
(250,000
)
40
$
400,000
400,000
(83,500
)
(83,500
)
(14,624
)
(14,624
)
39
39
507,866
507,866
7,706
7,706
(47,118
)
(47,118
)
(20,473
)
(20,473
)
447,981
1,500
150,000
40
400,000
35,818,122
3,582
579,955
(50,629
)
2,880,767
3,963,675
(500
)
(50,000
)
(50,000
)
(40
)
(400,000
)
(400,000
)
6,379,997
650,000
650,000
(26,000
)
(26,000
)
(19,645
)
(19,645
)
531,123
531,123
(182,530
)
(182,530
)
94,539
94,539
443,132
1,000
$
100,000
—
$
—
42,198,119
$
653,582
$
579,955
$
(138,620
)
$
3,366,245
$
4,561,162
See accompanying notes.
28
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years Ended December 31,
2002
2001
2000
$
531,123
$
507,866
$
468,901
954,246
802,850
705,715
432,311
437,629
298,944
357,009
(76,193
)
—
(361,447
)
91,201
—
15,709
13,497
9,762
(56,706
)
(37,286
)
(76,237
)
465
(702
)
2,827
(23,020
)
4,543
(6,753
)
(33,146
)
(35,921
)
(15,894
)
2,001
15,929
(36,025
)
(20,246
)
(114,290
)
(73,360
)
14,370
(14,278
)
18,717
1,812,669
1,594,845
1,296,597
(5,420,761
)
(4,109,812
)
(2,990,287
)
(12,886
)
(39,207
)
(81,770
)
163,835
(263,517
)
(209,452
)
173,152
208,917
543,665
—
—
(20,702
)
57,547
66,441
52,884
8,540
7,764
5,533
(262
)
298
(42,286
)
1,178
626
440
(5,029,657
)
(4,128,490
)
(2,741,975
)
250,000
—
—
—
400,000
—
(50,000
)
(250,000
)
—
716,639
(786,816
)
1,310,328
5,736,325
5,352,532
2,565,843
(3,285,221
)
(2,195,199
)
(2,295,033
)
(16,284
)
(4,856
)
(3,747
)
(45,645
)
(98,085
)
(224,570
)
(102,160
)
60,799
104,101
3,203,654
2,478,375
1,456,922
(13,334
)
(55,270
)
11,544
79,383
134,653
123,109
$
66,049
$
79,383
$
134,653
29
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
See accompanying notes.
30
INTERNATIONAL LEASE FINANCE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note A — Summary of Significant
Accounting Policies
Organization:
International
Lease Finance Corporation (the “Company”) is primarily
engaged in the acquisition of new commercial jet aircraft and
the leasing of those aircraft to airlines throughout the world.
In addition to its leasing activity, the Company regularly sells
aircraft from its leased aircraft fleet and aircraft owned by
others to third party lessors and airlines and in some cases
provides fleet management services to these buyers. The Company,
in terms of the number and value of transactions concluded, is a
major owner-lessor of commercial jet aircraft.
Parent
Company:
International Lease
Finance Corporation is an indirect wholly owned subsidiary of
American International Group, Inc. (“AIG”). AIG is a
holding company which through its subsidiaries is primarily
engaged in a broad range of insurance and insurance-related
activities in the United States and abroad. AIG’s primary
activities include both general and life insurance operations.
Other significant activities include financial services and
retirement savings and assets management.
Principles of
Consolidation:
The accompanying
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Investments of less
than 20% in other entities are carried at cost. Investments of
between 20% and 50% in other entities are carried under the
equity method. All significant intercompany balances and
transactions have been eliminated in consolidation.
Intercompany
Allocations:
The Company is party
to cost sharing agreements with AIG. Generally, these agreements
provide for the allocation of costs based upon either a specific
identification basis or a proportional cost allocation basis.
The charges aggregated $1,198 (2002), $1,001 (2001) and $1,213
(2000). The Company also pays AIG a fee related to management
services provided for certain foreign subsidiaries. The fees
aggregated $388 (2002), $759 (2001) and $249 (2000).
Rentals:
The
Company, as lessor, leases flight equipment principally under
operating leases and reports income over the life of the lease
as rentals become receivable under the provisions of the lease
to the extent of amounts received and deposits held or, when the
lease has varying payments, revenue is recorded under the
straight-line method over the noncancelable term of the lease.
In certain cases, leases provide for additional rentals based on
usage.
Flight Equipment
Marketing:
The Company is a
marketer of flight equipment. Marketing revenues include all
revenues from such operations consisting of net gains on sales
of flight equipment and commissions. The Company recognizes
marketing revenue when flight equipment is sold and the risk of
ownership of the equipment is passed to the new owner.
Provision for
Overhauls:
Under the provisions
of some leases, the Company receives overhaul rentals based on
the usage of the aircraft. For certain airframe and engine
overhauls, the lessee is reimbursed by the Company for costs
incurred up to, but not exceeding, related overhaul rentals paid
to the Company by the lessee for usage of the aircraft.
Overhaul rentals are included under the caption
Rental of Flight Equipment. The Company provides a charge to
operations for reimbursements at the time the overhaul rentals
are paid by the lessee, based on overhaul rentals received and
the estimated reimbursements during the life of the lease. The
Company periodically evaluates its reserve for these
reimbursements and its reimbursement rate, and then adjusts the
provision for overhauls accordingly.
Cash:
Cash
includes cash on hand, time deposits and cash held in trust for
Internal Revenue Code Section 1031 exchanges.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Flight
Equipment:
Flight equipment is
stated at cost. Purchases, major additions and modifications and
capitalized interest are capitalized. Normal maintenance and
repairs, airframe and engine overhauls, and compliance with
return conditions of flight equipment on lease are provided by
and paid for by the lessee.
Generally, aircraft, including aircraft acquired
under capital leases, are depreciated using the straight-line
method over a 25 year life from the date of manufacture to a 15%
residual value.
At the time the Company disposes of assets, the
cost and accumulated depreciation are removed from the related
accounts and the difference, net of proceeds, is recorded as a
gain or loss.
Quarterly, management reviews issues affecting
the Company’s fleet, including events and circumstances
that may affect impairment of aircraft values (e.g. residual
values, useful life, current and future revenue generating
capacity). Management evaluates aircraft in the fleet, as
necessary, based on these events and circumstances in accordance
with Statement of Financial Accounting Standards No. 144
“Accounting for the Impairment or Disposal of Long-Lived
Assets.”
Capitalized
Interest:
The Company borrows
certain funds to finance progress payments for the construction
of flight equipment ordered. The interest incurred on such
borrowings is capitalized and included in the cost of the
equipment.
Deferred Debt Issue
Costs:
Deferred debt issue costs
incurred in connection with debt financing are amortized over
the life of the debt using the interest method and are charged
to interest expense.
Financial
Instruments:
In the normal course
of business, the Company utilizes derivative financial
instruments to manage its exposure to interest rate risks and
foreign currency risks. All derivatives are recognized on the
balance sheet at their fair value. On the date that the Company
enters into a derivative contract, it designates the derivative
as (1) a hedge of (a) the fair value of a recognized
asset or liability or (b) an unrecognized firm commitment
(a “fair value” hedge); (2) a hedge of (a) a
forecasted transaction or (b) the variability of cash flows
that are to be received or paid in connection with a recognized
asset or liability (a “cash flow” hedge); or
(3) a foreign-currency fair value or cash flow hedge (a
“foreign currency” hedge). Changes in the fair value
of a derivative, that is highly effective and that is designated
and qualifies as a fair-value hedge, along with changes in the
fair value of the hedged asset or liability that are
attributable to the hedged risk, are recorded in current-period
earnings. Changes in the fair value of a derivative that is
highly effective and that is designated and qualifies as a cash
flow hedge, to the extent that the hedge is effective, are
recorded in accumulated other comprehensive income, until
earnings are affected by the variability of cash flows of the
hedged transaction (e.g. until periodic settlements of the
variable-rate asset or liability are recorded in earnings). Any
hedge ineffectiveness (which represents the amount by which the
changes in the fair value of the derivative exceed the
variability in the cash flows of the forecasted transaction) is
recorded in current-period earnings. Changes in the fair value
of a derivative that is highly effective and that is designated
and qualifies as a foreign currency hedge are recorded in either
current-period earnings or other accumulated comprehensive
income, depending on whether the hedging relationship satisfies
the criteria for a fair value or cash flow hedge. Changes in the
fair value of derivative financial instruments that did not
qualify for hedge treatment under SFAS 133 are reported in
current-period earnings.
The Company formally documents all relationships
between hedging instruments and hedged items, as well as risk
management objectives and strategies for undertaking various
hedge transactions. This includes linking all derivatives that
are designated as fair value, cash flow, or foreign currency
hedges to (1) specific assets or liabilities on the balance
sheet or (2) specific firm commitments or forecasted
transactions. The Company also assesses (both at the
hedge’s inception and on an ongoing basis) whether the
derivatives that are used in hedging transactions have been
highly effective in offsetting changes in the fair value or cash
flow
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
of hedged items and whether those derivatives may
be expected to remain highly effective in future periods. When
it is determined that a derivative is not (or has ceased to be)
highly effective as a hedge, the Company will discontinue hedge
accounting prospectively, as discussed below.
The Company will discontinue hedge accounting
prospectively when (1) it determines that the derivative is
no longer effective in offsetting changes in the fair value or
cash flows of a hedged item; (2) the derivative expires or
is sold, terminated, or exercised; (3) it is no longer
probable that the forecasted transaction will occur; (4) a
hedged firm commitment no longer meets the definition of a firm
commitment; or (5) management determines that designating
the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued due to the
Company’s determination that the derivative no longer
qualifies as an effective fair value hedge, the Company will
continue to carry the derivative on the balance sheet at its
fair value, but cease to adjust the hedged liability for changes
in fair value. When the Company discontinues hedge accounting
because it is no longer probable that the forecasted transaction
will occur in the originally expected period, the gain or loss
on the derivative remains in accumulated other comprehensive
income and is reclassified into earnings when the forecasted
transaction affects earnings. However, if it is probable that a
forecasted transaction will not occur by the end of the
originally specified time period or within an additional
two-month period of time thereafter, the gains and losses that
were accumulated in accumulated other comprehensive income will
be recognized immediately in earnings. In all situations in
which hedge accounting is discontinued and the derivative
remains outstanding, the Company will carry the derivative at
its fair value on the balance sheet, recognizing changes in the
fair value in current-period earnings.
Other Comprehensive Income (Loss):
The Company reports comprehensive
income or loss in accordance with SFAS No. 130,
“Reporting Comprehensive Income.” The Company’s
other comprehensive loss reported in shareholders’ equity
as Accumulated Other Comprehensive Income (Loss) consists of
foreign currency adjustments of debt denominated in a foreign
currency, translated into US dollars using the current exchange
rates and the gains and losses associated with changes in fair
value of derivatives designated as cash flow hedges in
accordance with SFAS 133.
Income
Taxes:
The Company and its U.S.
subsidiaries are included in the consolidated federal income tax
return of AIG. The provision for income taxes is calculated on a
separate return basis. Income tax payments are made pursuant to
a tax payment allocation agreement whereby AIG credits or
charges the Company for the corresponding increase or decrease
(not to exceed the separate return basis calculation) in
AIG’s current taxes resulting from the inclusion of the
Company in AIG’s consolidated tax return. Intercompany
payments are made when such taxes are due or tax benefits are
realized by AIG. Current income taxes on the Consolidated
Balance Sheet represent amounts receivable from AIG under the
agreement.
The Company and its U.S. subsidiaries are
included in the combined state unitary tax returns of AIG,
including California. The Company also files separate returns in
certain other states, as required. The provision for state
income taxes is calculated on a separate return basis. Current
income tax expense is adjusted to reflect credits and charges
allocated to ILFC by AIG, based upon the combined filings and
the resultant current tax payable.
The deferred tax liability is determined based on
the difference between the financial statement and tax basis of
assets and liabilities and is measured at the enacted tax rates
that will be in effect when these differences reverse. Deferred
tax expense is determined by the change in the liability for
deferred taxes (“Liability Method”).
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Use of
Estimates:
The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.
Reclassifications:
Certain
amounts have been reclassified in the 2001 and 2000 financial
statements to conform to the Company’s 2002 presentation.
New Accounting
Pronouncements:
The Company
adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 45 (“FIN 45”)
Guarantor’s Accounting and Disclosure requirements for
Guarantees, including Indirect Guarantees of Indebtedness of
Others” in December 2002. FIN 45 requires a guarantor
to recognize a liability for the fair value of the obligation
undertaken in issuing the guarantee. The adoption of FIN 45
had no impact on the Company’s results of operations,
financial position, or cash flows as of December 31, 2002.
The Company will adopt SFAS 145,
“Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections”, SFAS 146 “Accounting for Costs
Associated with Exit or Disposal Activities” SFAS 147,
“Acquisitions of Certain Financial Institutions, an
amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9”, and SFAS 148
“Accounting for Stock-Based Compensation —
Transition and Disclosure — an amendment of FASB
Statement No. 123” for the fiscal year ended
December 31, 2003.
SFAS No. 145 precludes companies from
recording gains and losses from the extinguishment of debt as an
extraordinary item. SFAS No. 146 requires that a liability
be recognized for exit and disposal costs only when the
liability has been incurred and when it can be measured at fair
value. SFAS No. 147 addresses a change in classification
and treatment of recorded goodwill. SFAS No. 148 permits
two additional transition methods for companies that elect to
adopt the fair-value-based method of accounting for stock-based
employee compensation. These statements are not applicable to
the operations of the Company as of December 31, 2002, and
it does not expect any impact from adopting these statements on
its results of operations, financial position, or cash flows.
The Company will adopt FASB Interpretation
No. 46 (“FIN 46”) “Consolidation of Variable
Interest Entities” in the third quarter of 2003.
FIN 46 requires a company to consolidate a Variable
Interest Entity if the company is determined to be the primary
beneficiary. The Company is currently investigating the impact
FIN 46 will have on its financial position. The Company is
reviewing entities that may be considered Variable Interest
Entities and in which the Company may have a Variable Interest
as defined by FIN 46. The Company has not yet determined
the possible impact of the consolidation of these entities due
to the analysis and data collections effort required to apply
the requirements of FIN 46. The Company believes that the
potential liabilities that may need to be recorded as a result
of the Company’s Variable Interest in accordance with
FIN 46 are currently disclosed in Note D and
Note K.
The Company will adopt EITF issue 02-16
which provides guidance on accounting for cash considerations
received by a customer from a vendor as either a reduction of
cost of sales, as revenue, or as reduction of cost incurred by
the customer to sell the vendor’s product. The Company does
not expect EITF 02-16 to have a significant impact on its
financial position.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note B — Notes Receivable
Notes receivable are primarily from the sale of
and collaterized by flight equipment and are summarized as
follows:
Included above are notes receivable of $53,032
(2002) and $59,230 (2001) representing restructured lease
payments.
At December 31, 2002, the minimum future payments
on notes receivable are as follows:
Note C — Net Investment in Finance
Leases
The following lists the components of the net
investment in finance leases:
At December 31, 2002, minimum future lease
payments on finance leases are as follows:
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note D — Investments
Investments consist of the following:
Note E — Debt Financing and Capital
Lease Obligations
Debt financing and capital lease obligations are
comprised of the following:
The above amounts represent the Company’s
anticipated settlement of its currently outstanding debt
obligations. Certain adjustments required to present currently
outstanding debt obligations have been recorded and presented
separately on the face of the balance sheet, including
adjustments related to foreign currency and interest rate
hedging activities.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Commercial
Paper
The Company has a $4.8 billion Commercial
Paper Program. Under this program, the Company may borrow in
minimum increments of $100 for a period from one day to 270
days. The weighted average interest rate of the Company’s
Commercial Paper Program was 1.46%, 4.10% and 6.41% at
December 31, 2002, 2001 and 2000 respectively.
Bank
Commitments
As of December 31, 2002, the Company had
committed revolving loans and lines of credit with
20 commercial banks aggregating $3.15 billion. These
revolving loans and lines of credit principally provide for
interest rates that vary according to the pricing option in
effect at the time of borrowing. Pricing options include prime,
a range from .25% over LIBOR to .35% over LIBOR based upon
utilization, or a rate determined by a competitive bid process
with the banks. The revolving loans and lines of credit are
subject to facility fees of up to .10% of amounts available.
Such financing is used primarily as backup for the
Company’s Commercial Paper program. The Company had not
drawn any funds under its committed revolving loans and lines of
credit at December 31, 2002 and 2001, respectively.
Public
Debt
The interest on substantially all of the public
debt (exclusive of the commercial paper) is fixed for the term
of the note. As of December 31, 2002 the Company had an
effective shelf registration statement with respect to
$6.08 billion in debt securities including a
$1.0 billion Medium-Term Note program, under which no notes
were sold through December 31, 2002.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Public
Term Debt
The Company has issued the following Notes which
provide for a single principal payment at maturity and cannot be
redeemed prior to maturity:
The Company has a Euro Medium-Term Note Program
for $4.0 billion, under which $2,106 million
(
€
1,800 million
and £300 million) in notes were outstanding at
December 31, 2002. The Company has eliminated the currency
exposure arising from the notes by either hedging the notes
through swaps or through the offset provided by operating lease
payments. The Company translates the debt into US dollars
using current exchange rates. The foreign exchange adjustment
for the euro denominated note was $264,880 (2002) and $(92,129)
(2001).
Public
Medium-Term Notes
At December 31, 2002 the Company’s
Medium-Term Notes bear interest at rates varying between 1.595%
and 8.35%, with maturities from 2003 through 2007. The
Medium-Term Notes provide for a single
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
principal payment at the maturity of the
respective note and cannot be redeemed by the Company prior to
maturity.
Bank
Term Debt
In January 1999, the Company entered into an
Export Credit Facility for up to a maximum of $4.3 billion,
for up to 75 aircraft to be delivered from 1999 through 2001.
The Company had the right, but was not required, to use the
facility to fund 85% of each aircraft’s purchase price.
This facility is guaranteed by various European Export Credit
Agencies. The interest rate varies from 5.753% to 5.898%
depending on the delivery date of the aircraft. At
December 31, 2002 the Company had financed 62 aircraft
and had $2.1 billion outstanding debt under this facility.
The debt is collateralized by a pledge of the shares of a
subsidiary of the company which holds title to the aircraft
financed under the facility. The flight equipment associated
with the obligations, included in flight equipment under
operating leases in the balance sheet, had a net book value of
$3.1 billion (2002) and $3.2 billion (2001).
Capital
Lease Obligations
The Company’s capital lease obligations
provide 10 year, fully amortizing debt in two interest rate
tranches. The first 62.5% of the original debt is at a fixed
rate of 6.55%. The second 22.5% of the original debt is at fixed
rates varying between 6.18% and 6.89%. These two tranches are
guaranteed by various European Export Credit Agencies. The
remaining debt matures through 2005. The flight equipment
associated with the obligations, and included in flight
equipment under operating leases in the balance sheet, had a net
book value of $892,404 (2002) and $931,296 (2001).
The following is a schedule by years of future
minimum lease payments under capitalized leases together with
the present value of the net minimum lease payments as of
December 31, 2002:
Maturities of debt financing and capital lease
obligations (excluding commercial paper and deferred debt
discount) at December 31, 2002 are as follows:
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Other
Under the most restrictive provisions of the
related borrowings, consolidated retained earnings at
December 31, 2002, in the amount of $1,238,697, are
unrestricted as to payment of dividends based on consolidated
tangible net worth requirements.
See Note L — Financial Instruments.
The Company has entered into various debt and
derivative transactions with AIGFP, a related party. The Company
executed $1,690,454 and $1,456,000 notional amount of derivative
instruments with the related party during 2002 and 2001,
respectively.
Note F — Shareholders’
Equity
Preferred
Stock
The Board of Directors is authorized to issue up
to 20,000,000 shares of preferred stock that may be issued
in one or more series and with such stated value and terms as
may be determined by the Board of Directors.
Series
A Preferred Stock
In December 2001, the Company issued
40 shares of Series A preferred shares with a
liquidation value of $10 million per share. AIG, as holder
of the Series A Preferred Stock, was entitled to quarterly
dividends at a rate of 5% per annum. The Series A Preferred
Stock was nonconvertible, and was redeemable at the
Company’s option. In September 2002, pursuant to an
agreement with the holder, the Company cancelled the outstanding
shares of Series A preferred shares. The Company issued
3,951,398 shares of Common Stock for the value of the cancelled
Series A preferred shares.
Market
Auction Preferred Stock
The Market Auction Preferred Stock (MAPS) have a
liquidation value of $100 thousand per share and are not
convertible. The dividend rate, other than the initial rate, for
each dividend period for each series is reset approximately
every 7 weeks (49 days) on the basis of orders placed
in an auction. The Company repurchased Series C, D, F, G
and H in the fourth quarter of 2001 and Series E in the
first six months of 2002 for the liquidation values and no gain
or loss was recognized. During 2001 the Company extended the
Series A to 5 years at a dividend rate of 5.90%. At
December 31, 2002, the dividend rate for Series B was
2.15%.
Common
Stock
On September 24, 2002, the Company issued
3,951,398 shares of Common Stock to AIG in exchange for the
value of the cancelled Series A preferred shares. On
December 4, 2002, the Company issued and sold 2,428,599
shares of Common Stock to AIG for proceeds of $250,000.
Other
Comprehensive Income
The Other Comprehensive Income consists of fair
value adjustments of cash flow derivative instruments and
foreign currency adjustment of liabilities denominated in a
foreign currency. The debt was translated into US dollars using
the current exchange rate. The cash flow derivatives were
adjusted using market values obtained from a related party
broker-dealer.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note G — Rental Income
Minimum future rentals on non-cancelable
operating leases and subleases of flight equipment which have
been delivered at December 31, 2002 are as follows:
Additional rentals earned by the Company based on
the lessees’ usage aggregated $249,503 (2002), $235,099
(2001), and $222,579 (2000). Flight equipment is leased, under
operating leases, with remaining terms ranging from one to
15 years.
Note H — Flight Equipment Rent and
Off Balance Sheet Arrangements
During 1995, 1996 and 1997, the Company entered
into sale-leaseback transactions providing proceeds to the
Company in the amounts of $412,626, $507,600 and $601,860,
respectively, relating to seven aircraft for each transaction.
The transactions resulted in the sale and leaseback of these
aircraft under one-year operating leases, each with six one-year
extension options. The existing one-year leases mature on
September 20, 2003 and September 12, 2003,
respectively. One aircraft was repurchased in each of 1997, 1999
and 2001 and sold to third parties and five aircraft were
repurchased in the fourth quarter of 2002 when the 1995
transaction matured and the operating leases of these aircraft
expired. The lease rates equate to fixed principal amortization
and floating interest payments based on LIBOR or commercial
paper pricing.
Minimum future rental expense for 2003 is $36,155
at December 31, 2002.
Note I — Income Taxes
The provision (benefit) for income taxes is
comprised of the following:
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The provision for deferred income taxes is
comprised of the following temporary differences:
The deferred tax liability consists of the
following deferred tax liabilities (assets):
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A reconciliation of computed expected total
provision for income taxes to the amount recorded is as follows:
During 2002, the Company settled an open audit
issue with the Internal Revenue Service which required the
Company to capitalize for tax purposes certain overhaul
reimbursements made between 1991 and 2001. The adjustment had no
impact on the total provision but required the Company to
establish a current tax liability and a corresponding deferred
tax asset of $27,130 in 2002. Such amount is reflected in the
Company’s 2002 current and deferred provision.
During 2002, the Company revalued its state
deferred taxes based on a reduction in the Company’s
standalone California apportionment factor, as determined by
AIG. The revaluation reduced the total state provision by
$21,634 and the total provision including the Federal income tax
effect of the revaluation by $14,062.
Federal tax benefits provided by the
Extraterritorial Income Exclusion (“ETI”) and the
Foreign Sales Corporation (“FSC”) may not be available
in 2003. The World Trade Organization has ruled that these are
unfair export subsidies, and the European Union has threatened
trade sanctions if these subsidies are not repealed by the
United States. To avoid these sanctions, the United States may
repeal the legislation that provides for ETI and FSC export
benefits.
Note J — Other Information
Concentration
of Credit Risk
The Company leases and sells aircraft to airlines
and others throughout the world. The lease receivables and notes
receivable are from entities located throughout the world. The
Company generally obtains deposits on leases and obtains
collateral in flight equipment on notes receivable. The Company
has no single customer which accounts for 10% or more of
revenues.
Segment
Information
The Company operates within one industry: the
leasing, sales and management of flight equipment.
Revenues include rentals of flight equipment to
foreign airlines of $2,317,619 (2002), $2,173,778 (2001), and
$2,026,017 (2000).
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table sets forth the dollar amount
and percentage of total rental revenues attributable to the
indicated geographic areas based on each airline’s
principal place of business for the years indicated:
The following table sets forth revenue
attributable to individual countries representing at least 10%
of total revenue based on each airline’s principal place of
business for the years indicated:
Currency
Risk
The Company attempts to minimize its currency and
exchange risks by negotiating most of its aircraft leases in US
dollars. Some of the Company’s leases, however, are
negotiated in Euros to meet the needs of a growing number of
airlines. These Euro denominated leases are primarily used as a
hedge against Euro denominated debt obligations of the Company.
Therefore, the Company’s foreign currency gain (loss) has
not been material to the Company’s consolidated financial
statements to date.
Employee
Benefit Plans
The Company’s employees participate in
various benefit plans sponsored by AIG, including a
noncontributory qualified defined benefit retirement plan,
various stock option and purchase plans and a voluntary savings
plan (401(k) plan).
AIG’s U.S. plans do not separately identify
projected benefit obligations and plan assets attributable to
employees of participating affiliates. AIG’s projected
benefit obligations exceeded the plan assets at
December 31, 2002 by $428,500.
Note K — Commitments and
Contingencies
Aircraft
Orders
At December 31, 2002, the Company had committed
to purchase 523 aircraft deliverable from 2003 through 2010
at an estimated aggregate purchase price (including adjustment
for anticipated inflation) of approximately $29.8 billion.
The Company also had options to purchase an
additional 18 aircraft deliverable through 2008 at an
estimated aggregate purchase price of $1.3 billion.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Most of these purchase commitments and options
are based upon master agreements with each of The Boeing Company
(“Boeing”) and AVSA, S.A.R.L., the sales subsidiary of
Airbus Industrie (“Airbus”).
The Boeing aircraft (models 737, 747 and 777),
and the Airbus aircraft (models A319, A320, A321, A330, A340 and
A380) are being purchased pursuant to agreements executed by the
Company and Boeing or Airbus. These agreements establish the
pricing formulas (which include certain price adjustments based
upon inflation and other factors) and various other terms with
respect to the purchase of aircraft. Under certain
circumstances, the Company has the right to alter the mix of
aircraft type ultimately acquired. As of December 31, 2002, the
Company had made non-refundable deposits (exclusive of
capitalized interest) on the aircraft which the Company has
committed to purchase of approximately $610,000 and $407,000
with Boeing and Airbus, respectively.
Management anticipates that a significant portion
of the aggregate purchase price will be funded by incurring
additional debt. The exact amount of the indebtedness to be
incurred will depend upon the actual purchase price of the
aircraft, which can vary due to a number of factors, including
inflation, and the percentage of the purchase price of the
aircraft which must be financed.
Asset
Value Guarantees
The Company has guaranteed a portion of the
residual value of 52 aircraft to financial institutions.
These guarantees expire at various dates through 2013 and
generally provide for the Company to pay the difference between
the fair market value of the aircraft and the guaranteed value
up to certain specified amounts, or, at the option of the
Company, purchase the aircraft for the guaranteed value. At
December 31, 2002, the maximum exposure if the Company were
to pay under such guarantees was $264,850. In addition, the
Company has written put options for 28 aircraft in the
amount of $821,384.
Other
Guarantees
The Company has guaranteed certain obligations
for entities in which it has an investment. The Company
guaranteed eight loans at December 31, 2002, all
collateralized by aircraft, aggregating $40,139.
Leases
The Company has operating leases for office space
extending through 2015. In 2001, the Company signed a lease for
additional office space with rents commencing in 2003. Rent
expense was $3,475, $3,221, and $1,967 for the years ended 2003,
2001 and 2000 respectively. Commitments for minimum rentals
under the noncancelable leases at the end of 2002 are as follows:
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note L — Financial Instruments
In the normal course of business, the Company
employs a variety of derivative transactions with the objective
of lowering its overall borrowing cost and maintaining its
optimal mix of variable and fixed rate interest obligations.
These derivative products include interest rate swap agreements,
currency swap agreements, and interest rate floors. The Company
enters into derivative transactions only to hedge interest rate
and currency risk and not to speculate on interest rates or
currency fluctuation.
All derivatives are recognized on the balance
sheet at their fair value and the change in fair value is
recorded in operating income or other comprehensive income
depending on the designation of the hedging instrument. (See
Note A — Summary of Significant Accounting
Policies, Financial instruments).
Credit risk exposure arises from the potential
that the counterparty may not perform under these derivative
transactions. The Company’s counterparty for all of its
derivatives is AIGFP, a related party with the highest ratings
available from the credit rating agencies, who enters into
identical transactions with independent third parties. The
Company has executed $1,690,454 and $1,456,000 notional amount
of derivative instruments with the related party during 2002 and
2001, respectively. The Company currently does not require, nor
is it required by its counterparty, to provide collateral for
its positions with the Company although it can in certain
circumstances.
Failure of a counterparty to perform under the
agreement with respect to these transactions could have an
material effect on the Company’s results of operations.
The following methods and assumptions were used
by the Company in estimating its fair value disclosures for
financial instruments:
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Derivatives
The Company uses derivatives to manage exposures
to interest rate and foreign currency risks. The Company
recorded hedge ineffectiveness in interest expense related to
cross currency fair value hedges in the amount of
$(1.0) million (2002) and $1.0 million (2001). Hedge
ineffectiveness related to cash flow hedges for the period was
immaterial to the Company for years 2002 and 2001. In accordance
with the transition provision of SFAS 133, the Company
recorded the following cumulative effect adjustments in earnings
as of January 1, 2001, net of taxes:
In addition, the Company recorded the following
net-of-tax cumulative effect adjustments in other comprehensive
income as of January 1, 2001:
During the twelve months ended December 31,
2002 and 2001, the Company recorded the following in earnings in
accordance with SFAS 133:
Years Ended December 31,
2002
2001
2000
$
827,280
$
747,006
$
720,966
(149,885
)
(54,115
)
11,709
Preferred stock was received in exchange for
notes receivable in the amount of $14,019.
Notes in the amount of $28,775 were received as
partial payment in exchange for flight equipment sold with a net
book value of $46,242.
One aircraft was received in exchange for notes
receivable in the amount of $10,968.
Pursuant to an agreement with the holder, the
Company cancelled the outstanding shares of Series A
Preferred Stock and issued 3,951,398 shares of common stock.
One aircraft was received in exchange for notes
receivable in the amount of $18,136.
One aircraft with net book value of $11,372 was
contributed to a joint venture.
Two aircraft were received in exchange for notes
receivable and other assets in the amount of $41,429.
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2002
2001
$
37,111
$
43,870
133,858
139,299
50,700
53,509
297
4,618
10,968
$
221,966
$
252,264
$
39,894
26,245
19,796
17,063
18,694
100,274
$
221,966
2002
2001
$
212,037
$
205,011
49,045
49,045
(110,471
)
(112,043
)
$
150,611
$
142,013
$
19,630
18,178
18,178
18,178
18,178
119,695
$
212,037
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2002
2001
Percent
Percent
Owned
Amount
Owned
Amount
.9
%
$
2,180
.9
%
$
6,986
30,000
30,000
14,019
1,537
1,832
99
%
9,859
99
%
10,782
50
%
6,342
50
%
6,517
130
119
$
64,067
$
56,236
(a)
In 2000, the Company invested $6,986 in common
stock of Air New Zealand and $30,000 in American Trans Air
(“ATA”) non-voting preferred stock. In 2002, the
investment in Air New Zealand was adjusted ($4,806) to lower of
cost or market value.
(b)
In 2001, the Company contributed an aircraft with
a net book value of $11,372 for a 99% interest in 21937, LLC, a
joint venture that leases the aircraft to a third party. This
investment is not consolidated due to the Company’s lack of
effective control in the joint venture.
(c)
In 2000, the Company invested $5,000 for a 50%
interest in ILTU Ireland (“ILTU”), an Irish
corporation. ILTU presently owns one Boeing 767-300 on lease to
an airline. The Company has guaranteed a loan from a related
party to ILTU (see Note K).
(d)
In 2002, the Company received International
Aircraft Investors non-voting preferred stock as a partial
settlement of notes receivables in the amount of $14,019.
2002
2001
$
4,218,504
$
3,501,865
7,475,775
4,796,330
4,969,500
4,809,000
2,084,793
2,368,969
260,623
365,289
(31,928
)
(15,157
)
$
18,977,267
$
15,826,296
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Initial
Term
2002
2001
5 years
$
100,000
4 years
100,000
3 years
100,000
3 years
175,000
4 years
100,000
2 years
250,000
5 years
100,000
2 years
150,000
5 years
$
100,000
100,000
2 years
250,000
250,000
2 years
250,000
250,000
5 years
100,000
100,000
3 years
250,000
250,000
3 years
300,000
300,000
3 years
250,000
250,000
3 years
200,000
200,000
3 years
300,000
300,000
3 years
150,000
150,000
10 years
100,000
100,000
3 years
160,000
5 years
700,000
700,000
5 years
500,000
5 years
900,000
5 years
110,000
7 years
750,000
3 years
207,880
5 years
563,450
563,450
3 years
666,375
5 years
444,250
7 years
431,700
$
7,475,775
$
4,796,330
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$
127,256
113,179
45,136
285,571
24,948
$
260,623
$
3,792,419
3,305,818
2,004,232
1,234,174
2,608,424
1,845,624
$
14,790,691
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Year Ended
$
2,305,548
2,080,984
1,789,967
1,450,978
1,145,359
2,913,316
$
11,686,152
2002
2001
2000
$
(169,073
)
$
(154,680
)
$
(49,989
)
(2,202
)
(13,683
)
(10,871
)
1,145
(43
)
(791
)
(170,130
)
(168,406
)
(61,651
)
427,797
400,320
278,614
4,513
29,130
20,329
432,310
429,450
298,943
$
262,180
$
261,044
$
237,292
(a)
Including U.S. tax on foreign income
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(b)
Deferred taxes were also provided (charged) to
other comprehensive income of $47,380 (2002), $(32,661) (2001)
and $5,399 (2000), respectively, and for cumulative effect of
accounting change of $8,180 (2001).
(c)
Includes benefit realized from change in
California state apportionment of $21,634 (2002).
2002
2001
2000
$
496,050
$
423,846
$
294,334
for Federal income tax purposes
(961
)
(5,164
)
(3,045
)
(28,580
)
11,745
22,416
8,294
4,594
(6,871
)
(30,863
)
—
—
(6,316
)
4,503
(5,186
)
1,517
(5,675
)
—
10,139
(1,227
)
(459
)
(21,634
)
—
—
4,664
(3,172
)
(2,246
)
$
432,310
$
429,450
$
298,943
2002
2001
$
2,403,134
$
1,927,970
for Federal income tax purposes
(40,813
)
(39,852
)
131,325
161,688
(44,164
)
(53,145
)
(30,863
)
—
(53,647
)
(47,939
)
27,784
17,871
3,990
2,505
(74,642
)
(27,262
)
223
(4,440
)
$
2,322,327
$
1,937,396
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2002
2001
2000
$
277,656
$
263,802
$
247,168
1,502
10,041
6,148
(18,517
)
(6,590
)
(13,499
)
2,564
(6,080
)
(3,997
)
(1,025
)
(129
)
1,472
$
262,180
$
261,044
$
237,292
(a)
Includes realized Canadian tax credit in 2001 for
taxes paid in prior years.
(b)
Includes benefit realized from change in
California state apportionment factor of $14,062 (2002).
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2002
2001
2000
Amount
%
Amount
%
Amount
%
$
1,236,123
46.2
%
$
1,160,793
47.0
%
$
1,054,783
45.8
%
601,775
22.5
523,630
21.2
462,426
20.1
481,507
18.0
455,680
18.4
437,745
19.0
202,688
7.5
199,026
8.0
229,438
10.0
155,783
5.8
134,655
5.4
117,048
5.1
$
2,677,876
100.0
%
$
2,473,784
100.0
%
$
2,301,440
100.0
%
2002
2001
2000
Amount
%
Amount
%
Amount
%
$
360,257
13.5
%
$
300,006
12.1
%
$
275,423
12.0
%
276,185
10.3
283,090
11.4
276,340
12.0
282,776
10.6
265,871
10.8
251,372
10.9
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$
5,411
11,336
11,485
8,575
8,918
82,320
$
128,045
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Cash and cash
equivalents:
The carrying value
reported in the balance sheet for cash and cash equivalents
approximates its fair value.
Notes receivable:
The fair values for notes receivable are estimated using
discounted cash flow analyses, using interest rates currently
being offered for similar loans to borrowers with similar credit
ratings.
Investments:
It was
not practicable to determine the fair value of most of the
Company’s investments in the common and preferred stocks of
other companies because of the lack of a quoted market price and
the inability to determine fair value without incurring
excessive costs due to their short maturities. The carrying
amount of these investments at December 31, 2002 represents
the original cost or original cost plus the Company’s share
of earnings of the investment. For investments held by the
Company that had a quoted market price at December 31,
2002, the Company used such quoted market price in determining
the fair value of such investments.
Debt financing:
The
carrying value of the Company’s commercial paper and term
debt maturing within one year approximates its fair value. The
fair value of the Company’s long-term debt is estimated
using discounted cash flow analyses, based on the Company’s
spread to U.S. Treasury bonds for similar debt at year-end.
Guarantees:
As of
December 31, 2002, the Company’s maximum commitment
under the guarantees was $264,850. It is not practical to
determine the fair value of the Company’s guarantees at
this time. The Company regularly reviews the underlying values
of the collateral aircraft, to determine its exposure under
these guarantees. The Company will adopt Financial Accounting
Standards Board Interpretation No. 45
“Guarantor’s Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of
Others” for guarantees entered into after December 31,
2002.
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The carrying amounts and fair values of the
Company’s financial instruments at December 31, 2002
and 2001 are as follows:
2002
2001
Carrying
Carrying
Amount of
Fair Value of
Amount of
Fair Value of
Asset (Liability)
Asset (Liability)
Asset (Liability)
Asset (Liability)
$
66,049
$
66,049
$
79,383
$
79,383
221,966
219,914
252,264
264,791
64,067
63,631
56,236
49,654
(19,242,508
)
(19,507,647
)
(15,734,166
)
(15,800,028
)
2002
2001
$
3,678
$
1,943
(18,133
)
(6,366
)
19,093
5,406
$
4,638
$
983
47
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2002 and 2001, the Company’s
accumulated other comprehensive income (loss) consisted of the
following:
2002
2001
$
(172,172
)
$
42,416
33,552
(93,045
)
$
(138,620
)
$
(50,629
)
During the twelve months ended December 31, 2002, $83,868 (net) was reclassified from accumulated other comprehensive income to interest expense when interest was paid or received on the Company’s cash flow hedges. The Company estimates that within the next twelve months it will amortize into earnings $90,000 of the pre-tax balance in accumulated other comprehensive income under cash flow hedge accounting in connection with the Company’s program to convert debt from floating to fixed rates.
48
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INTERNATIONAL LEASE FINANCE CORPORATION AND
SUBSIDIARIES
SCHEDULE II — VALUATION AND
QUALIFYING ACCOUNTS
COL. A
COL. B
COL. C
COL. D
COL. E
ADDITIONS
Charged to
Balance at
Charged to
Other
Beginning of
Costs and
Accounts —
Deductions —
Balance at
Description
Period
Expenses
Describe
Describe(a)
End of Period
(Dollars in thousands)
$
142,715
$
90,763
$
115,234
$
118,244
$
154,865
$
94,383
$
106,533
$
142,715
$
136,451
$
104,486
$
86,072
$
154,865
| (a) | Reimbursements to lessees for overhauls performed and amounts transferred to buyers for aircraft sold. |
49
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 27, 2003
| INTERNATIONAL LEASE FINANCE CORPORATION |
| By | /s/ STEVEN F. UDVAR-HAZY |
|
|
|
| Steven F. Udvar-Hazy | |
| Chairman of the Board and | |
| Chief Executive Officer |
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the date indicated.
Signature
Title
Date
Leslie L. Gonda
/s/ STEVEN F. UDVAR-HAZY
Steven F. Udvar-Hazy
/s/ JOHN L. PLUEGER
John L. Plueger
Louis L. Gonda
/s/ M. R. GREENBERG
M. R. Greenberg
/s/ EDWARD E. MATTHEWS
Edward E. Matthews
/s/ WILLIAM N. DOOLEY
William N. Dooley
/s/ HOWARD I. SMITH
Howard I. Smith
/s/ ALAN H. LUND
Alan H. Lund
50
Table of Contents
CERTIFICATIONS
I, Steven F. Udvar-Hazy, certify that:
1. I have reviewed this annual report on
Form 10-K of International Lease Finance Corporation;
2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;
4. The registrant’s other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
5. The registrant’s other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons
performing the equivalent function):
6. The registrant’s other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: March 27, 2003
51
a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b) evaluated the effectiveness of the
registrant’s disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the “Evaluation Date”); and
c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
a) all significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the
registrant’s auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrant’s internal controls; and
/s/ STEVEN F. UDVAR-HAZY
Steven F. Udvar-Hazy
Chairman of the Board and Chief Executive
Officer
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CERTIFICATIONS
I, Alan H. Lund, certify that:
1. I have reviewed this annual report on
Form 10-K of International Lease Finance Corporation;
2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;
4. The registrant’s other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
5. The registrant’s other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons
performing the equivalent function):
6. The registrant’s other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: March 27, 2003
52
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY
REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
Since the Registrant is an indirect wholly owned
subsidiary of AIG, no annual report to security holders or proxy
statement, form of proxy or other proxy soliciting materials
have been sent to security holders since January 1, 1990.
a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b) evaluated the effectiveness of the
registrant’s disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the “Evaluation Date”); and
c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
a) all significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the
registrant’s auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrant’s internal controls; and
/s/ ALAN H. LUND
Alan H. Lund
Vice Chairman, Chief Financial Officer and
Chief Accounting Officer
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53