Item 1. Business
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, 2001, the Company’s lease portfolio consisted of 461 aircraft under operating lease and four aircraft under finance lease. Additionally, the Company had 10 aircraft available for lease and provided fleet management services for 33 aircraft. See “Item 2.
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, 2001, 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, 2001, the average age of the Company’s aircraft was 4.59 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, 2001:
This schedule includes 18 aircraft leased by the Company and subleased to others and excludes ten aircraft which were not subject to lease at December 31, 2001, seven of which were leased at March 20, 2002.
Commitments
At December 31, 2001, the Company had committed to purchase the following aircraft at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $32.1 billion for delivery as shown:
(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. 	
At December 31, 2001, the Company had options to purchase the following aircraft at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $3.0 billion for delivery as shown:
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.”
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, 2001, 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 $724,000,000 and $468,000,000 with Boeing and Airbus, respectively.
As of March 20, 2002, the Company had entered into contracts for the lease of all of the 84 aircraft to be delivered in 2002, 65 of the 75 aircraft to be delivered in 2003, 20 of the 76 aircraft to be delivered in 2004, 7 of the 84 aircraft to be delivered in 2005 and 0 of the 232 aircraft to be delivered subsequent to 2005. 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 obtained 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, 2001, 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 10270 Constellation Avenue, Los Angeles, California starting in 2004. The lease provides for average annual rent of approximately $9,000,000.
Item 3.
Item 3. Legal Proceedings
The Company is not a party to any significant legal proceedings.
PART II
Item 5.
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, 2001, 2000 and 1999, the Company paid cash dividends to its parent company of $83,500,000, $206,000,000, and $69,500,000, 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, 2001 in the amount of $989,898,000 were unrestricted as to the payment of dividends.
Item 6.
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.
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 abroad, 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 competitive environment in which they operate. While worsening economic conditions have not materially affected the Company’s earnings to date, revenues and earnings could deteriorate in the future as a result of continuing weak global economic conditions.
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 and the rescheduling of payments. In addition, in certain circumstances, the Company has been required to repossess aircraft.
As a result of the September 11, 2001 terrorist attacks on the United States and the general slowdown of the United States economy both before and after the attacks, many United States and international commercial air carriers have announced reductions in their long-term schedules and have initiated cost reduction programs. On January 10, 2001, one of the Company’s customers, TWA, filed for protection under Chapter 11 of the United States Bankruptcy Code. American Airlines acquired substantially all of the assets and leases of TWA, including the leases of 16 aircraft owned by the Company. Three of the Company’s customers, Canada 3000, Swissair and Sabena, became insolvent in the fourth quarter of 2001 and have ceased operations or will cease operations. As of March 20, 2002, the Company had placed 30 of the 32 aircraft leased to these customers. In the first quarter of 2002, one of the Company’s customers, Sun Country, filed for protection under Chapter 11 of the United States Bankruptcy Code. As of March 20, 2002, the Company had placed all of the 5 aircraft previously leased to Sun Country. Further, the Company has experienced an increase in its number of customer restructurings. Load factors (% of seats filled, distance weighted) are approaching prior year levels, but ticket pricing remains weak. As a result, airlines still face significant economic challenges. The long-term effects of the September 11, 2001 attacks on the Company’s business and revenues are unknown. 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.
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.
The Company believes the following critical accounting policies affect 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, except
when the lease has varying payments in which case the 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 and airframe and engine overhauls are 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. The Company regularly reviews the carrying value, residual value and useful life of its flight equipment based on current and future revenue generating capacity. At such times, the Company may reduce the carrying value, residual value or useful life of specific aircraft.
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 many leases, for certain airframe and engine overhauls, the lessee is reimbursed for costs incurred up to, but not exceeding, related hourly rentals paid to the Company by the lessee. The Company maintains reserves for the estimated reimbursements during the life of the lease. The reserve is adjusted based on hourly rentals received and historical and projected reimbursement rates.
Financial Condition
The Company borrows funds to purchase flight equipment (see “Item 2. Properties - Commitments”), including funds for progress payments during the construction phase, principally on an unsecured basis from various sources. As of December 31, 2001, the Company had committed to purchase 551 aircraft from Boeing and Airbus at an estimated aggregate purchase price of approximately $32.1 billion for delivery through 2010 and options to purchase 49 additional aircraft at an estimated aggregate purchase price of approximately $3.0 billion. 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 December 31, 2001, 2000 and 1999, the Company’s debt financing and capital lease obligations were comprised of the following:
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:
(a)
Includes amounts outstanding under Medium-Term 	Note programs implemented under each of the registration 	statements. 	
(b)
The Company has hedged the foreign currency risk 	of the notes through operating lease payments or derivatives. 	
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 financing available is 6.55% and the interest rate on 22.5% of the original financing available is fixed at rates varying between 6.18% and 6.89%. These two tranches are guaranteed by various European Export Credit Agencies. The remaining 15% of the original financing available provides for LIBOR based pricing. This 15% tranche was prepaid in 2000. The remaining debt matures through 2005.
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 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% on the 75 aircraft depending on the delivery date of the aircraft. The Company financed 62 aircraft with $2.8 billion under this 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. 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. The weighted average interest rate of the Company’s Commercial Paper Program was 4.10%, 6.41% and 5.32% at December 31, 2001, 2000 and 1999, respectively. At December 31, the composite commercial paper interest rate was 2.24% (2001), 6.63% (2000) and 5.87% (1999).
Bank Commitments
As of December 31, 2001, the Company had committed revolving loans and lines of credit with 46 commercial banks aggregating $3.2 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 .20% 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 .08% of amounts available. In January 2002, the Company replaced $3.05 billion of committed loans and lines of credits with new facilities from a total of 18 banks, totaling $2.55 billion. The revolving loans and lines of credit now total $2.7 billion and provide for pricing options including prime and a spread from .25% to .35% over LIBOR, based upon utilization. In addition, the facilities 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 is in negotiations to expand its backup facilities.
Other
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. As of March 15, 2002, the Company had repurchased three aircraft which were sold to third parties. If the Company decides not to negotiate extensions of the one year operating lease options as they terminate in December 2002 and 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 $303,974 (2002), $390,810 (2003) and $462,391 (2004). The Company did not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. The Company may, however, from time to time enter into joint ventures or other partnership arrangements with the limited purpose to lease aircraft.
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, who enters into identical transactions with independent third parties on an arm’s length basis. 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 establish a cash collateral account. It is management’s belief that any failure of the instruments or counterparty to perform under the derivative contracts would have an immaterial impact on the Company’s financial condition and results of operations.
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. Should this occur the Company would seek alternative sources of funding, including issuance of bonds under its existing shelf registration. In addition, the Company has the ability, at its option, to draw upon its revolving loans and lines of credit facilities.
The Company received $400.0 million from AIG for the issuance of Series A Preferred Stock and repurchased $250.0 million of its Market Auction Preferred Stock during the year ended December 31, 2001. AIG has no obligation to contribute additional equity to the Company.
The following summarizes the Company’s contractual obligations at December 31, 2001, 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
(1)
As a complement to the Company’s leasing 	operation, it participates with banks, airlines and other 	financial institutions in assisting 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
The increase in revenues from rentals of flight equipment from $2,080.6 million in 1999 to $2,301.4 million in 2000 and $2,473.8 million in 2001 is due to the increase in the number of aircraft available for operating lease from 357 in 1999 to 402 in 2000 to 471 in 2001. The increase is also attributable to the increase in the cost of the fleet, which includes aircraft subject to sale-leaseback transactions from which rental income is earned, from $19.7 billion in 1999 and $22.0 billion in 2000 to $25.8 billion in 2001.
In addition to its leasing operations, the Company engages in the marketing of flight equipment at the end of, or during, the lease term, as well as the sales of flight equipment on a principal and commission basis. Revenue from such flight equipment marketing decreased from $147.2 million in 1999 to $99.7 million in 2000 and $62.9 million in 2001 as a result of the type and the number of the flight equipment marketed in each
period which decreased from 51 aircraft in 1999 to 20 in 2000 and 7 in 2001. In addition, the Company sold 13 engines (1999), 7 engines (2000) and 5 engines (2001).
Interest expense increased from $686.8 million in 1999 to $773.5 million in 2000 and $792.6 million in 2001, as a result of an increase in debt outstanding, to finance aircraft acquisitions, excluding the effect of debt discount of $11.9 billion in 1999, $13.5 billion in 2000 and $15.9 billion in 2001, offset in part by lower composite borrowing rates during 1999 and 2001. The Company’s composite borrowing rate fluctuated as follows:
ILFC Composite Interest Rates and Prime Rate
(INTERNATIONAL LEASE GRAPH)
The Company adopted SFAS 133 on January 1, 2001 (see notes to the financial statements). The transition adjustment in the amount of $15.2 million is accounted for as the cumulative affect of an accounting change. Interest expense for the year ended December 31, 2001 includes a $0.6 million credit related to the application of SFAS 133.
Depreciation of flight equipment increased from $637.3 million in 1999 to $705.7 million in 2000 and $802.8 million in 2001 due to the increased cost of the fleet. The cost of flight equipment (which excludes aircraft subject to sale-leaseback) during the same periods increased from $18.2 billion at December 31, 1999 to $20.5 billion in 2000 to $24.4 billion in 2001.
Provisions for overhauls increased from $94.5 million in 1999 to $104.5 million in 2000 due to an increase in the number of aircraft and aggregate number of hours flown on which the Company collects overhaul revenue and decreased to $94.4 million in 2001 due to the effect of favorable payout factors realized. A decrease or increase in the number of aircraft may result in a corresponding change in the aggregate number of hours flown, for which overhaul reserves are provided.
Flight equipment rent increased from $130.0 million in 1999, to $141.0 million in 2000 and decreased to $108.0 million in 2001 due to a change in the lease rates resulting from changes in interest rates, affecting the floating rate component of the lease rates. The interest effect is partially offset or enhanced by annual principal amortization. The Company, through subsidiaries, has entered into sale-leaseback transactions relating to
21 aircraft. As of March 15, 2002, the Company had repurchased three of the aircraft, previously subject to sale-lease back transactions, which were then sold to third parties.
Selling, general and administrative expenses remained relatively constant from 1999 to 2000, but increased from $47.9 million in 2000 to $65.2 million in 2001 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 fluctuated from 35.5% in 1999 to 33.6% in 2000, to 34.6% in 2001 as a result of the effect of state taxes, foreign taxes and benefits related to the Company’s foreign sales corporation.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards No. 142, “Goodwill and Other Intangible Assets”, (SFAS 142) which addresses the accounting for goodwill and other intangible assets after an acquisition. This statement requires that goodwill and intangible assets with indefinite lives no longer be amortized, but must be reviewed for impairment at least annually. The statement is effective for financial years beginning after December 15, 2001 (January, 2002 for the Company).
In June 2001, the FASB issued Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143) which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for asset retirement obligations be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002 (January 1, 2003 for the Company).
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the Disposal of a Segment of a Business.” SFAS 144 is effective for all fiscal quarters of all fiscal years beginning after December 15, 2001 and interim periods within those fiscal years (January 1, 2002 for the Company).
The Company does not expect a significant impact from adopting SFAS 142, SFAS 143 and SFAS 144 on its results of operations, financial conditions or cash flows.
Item 7A.
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, foreign currency exchange rates and equity prices to estimate 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 resulting from adverse fluctuations in interest rates and foreign exchange prices. As of December 31, 2001, 2000 and 1999, the Company statistically measured the loss of fair value through the application of a VaR model. In this analysis the net fair value of the Company was determined using financial instrument assets. This included tax adjusted future flight equipment lease revenues, aircraft residual values at maturity of the lease contracts and financial
instrument liabilities, which included future servicing of current debt. The impact of current derivative positions was also taken into account.
The Company calculated 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, 1999, 2000 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 period is assumed in computing the VaR figure. As December 31, the VaR for the Company with respect to its fair value was $50 million (1999), $11 million (2000) and $10 million (2001).
Item 8.
Item 8. Financial Statements and Supplementary Data
The response to this Item is submitted as a separate section of this report.
Item 9.
Item 9.
Changes in and Disagreements with 	Accountants on Accounting and Financial Disclosure
None.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(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 October 2, 2001 (Item 7)
Form 8-K, event date October 3, 2001 (Item 7)
Form 8-K, event date October 12, 2001 (Item 7)
Form 8-K, event date November 14, 2001 (Item 7)
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
FORM 10-K
Items 8, 14(a), and 14(c)
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:
The following financial statement schedule of the Company and its subsidiaries is included in Item 14(a)(2):
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):
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Directors
International Lease Finance Corporation
Los Angeles, California
In our opinion, the consolidated financial statements listed in the accompanying index appearing under Items 14(a)(1) and (2) on page 19 present fairly, in all material respects, the financial position of International Lease Finance Corporation and its subsidiaries (the “Company”) at December 31, 2001 and December 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 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.
As discussed in Note L to the consolidated financial statements, on January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 “Accounting for Certain Derivative Instruments and Certain Hedging Activities”.
PricewaterhouseCoopers LLP
Los Angeles, California
February 15, 2002
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
ASSETS
See accompanying notes.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
See accompanying notes.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except share amounts)
See accompanying notes.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
See accompanying notes.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note A - Summary of Significant Accounting Policies
Organization: International Lease Finance Corporation (the “Company”) is primarily engaged in the acquisition of commercial jet aircraft and the leasing of those aircraft to airlines throughout the world. In addition to its leasing activities, 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 (the “Company”) 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, financial services, retirement savings and assets management in the United States and abroad.
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 upon either a specific identification basis or a proportional cost allocation basis. The charges aggregated $1,001 (2001) $1,213 (2000) and $2,896 (1999).
Rentals: The Company, as lessor, leases flight equipment principally under operating leases. Accordingly, income is reported over the life of the lease as rentals become receivable under the provisions of the lease or, in the case of leases with varying payments, 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.
Cash: Cash includes cash on hand, time deposits and cash held in trust for Internal Revenue Code Section 1031 exchanges.
Flight Equipment: Flight equipment is stated at cost. Major additions and modifications 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. Under the provisions of many leases, for certain airframe and engine overhauls, the lessee is reimbursed 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. 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 overhaul reserves.
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 assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the related accounts and the difference, net of proceeds, is recorded as a gain or loss.
The Company regularly reviews its flight equipment to determine that its carrying value is not impaired.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note A - Summary of Significant Accounting Policies (Continued)
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 rate 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 as 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 as 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 as 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 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
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note A - Summary of Significant Accounting Policies (Continued)
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 in accordance with SFAS No. 130, “Reporting Comprehensive Income.” The Company’s other comprehensive income reported in shareholders’ equity as Accumulated Other Comprehensive Income (Loss) consists of assets and liabilities denominated in a foreign currency, translated into US dollars using the current exchange rate 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 and the combined California unitary 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 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”).
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 1999 and 2000 financial statements to conform to the Company’s 2001 presentation.
New Accounting Pronouncements: The Company will adopt Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143), and Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) for the fiscal year ended December 31, 2002. SFAS 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized but must be reviewed for impairment at least annually. SFAS 143 requires the fair value of a liability for asset retirement obligations be recognized in the period incurred if a reasonable estimate of fair value can be made. SFAS 144 provides guidance for accounting for impairment or disposal of long-lived assets. The Company does not expect a significant impact from adopting these statements on its results of operations, financial position, or cash flows.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note B - Notes Receivable
Notes receivable are primarily from the sale of and collaterized by flight equipment and are summarized as follows:
Included above, the Company had notes receivable of $59,230 (2001) and $57,615 (2000) representing restructured lease payments.
At December 31, 2001, the minimum future notes receivable payments to be received are as follows:
In 1998 and prior years, the Company sold notes receivable with certain limited recourse provisions to a related party of the Company. The notes sold in 1998 aggregated $68,694 and were sold at face value including accrued interest. The Company continues to collect payments on the notes, transfers the payments to the related party and receives a servicing fee. The Company recorded no gain or loss on the sale. The Company recorded servicing fee income of $0 (2001), $25 (2000) and $50 (1999) related to the notes sold. The notes had matured at December 31, 2001. During 2000, the Company repurchased one note sold in 1998. The note was not repurchased under the recourse provisions.
Note C - Net Investment in Finance Leases
The following lists the components of the net investment in finance leases:
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note C - Net Investment in Finance Leases (Continued)
Minimum future lease payments to be received on finance leases at December 31, 2001 are as follows:
Note D - Investments
Investments consist of the following:
(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. 	
(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). 	
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note E - Debt Financing and Capital Lease Obligations
Debt financing and capital lease obligations are comprised of the following:
The interest on substantially all of the public debt (exclusive of the commercial paper) is fixed for the term of the note.
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 4.10% and 6.41% at December 31, 2001 and 2000 respectively. At December 31, 2001 and 2000 the composite commercial paper rate was 2.24% and 6.63% respectively.
Bank Commitments
As of December 31, 2001, the Company had committed revolving loans and lines of credit with 46 commercial banks aggregating $3.2 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 .20% 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 .08% 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, 2001 and 2000, respectively.
Public Debt
As of December 31, 2001 the Company had an effective shelf registration statement with respect to $4.0 billion in debt securities, under which $1.2 billion of notes were sold through December 31, 2001. Additionally, a $2.0 billion Medium-Term Note program was implemented under the shelf registration statement, under which $1.9 billion was sold through December 31, 2001.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note E - Debt Financing and Capital Lease Obligations (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 $2.0 billion, under which $771 million (750 million) in Notes were sold through December 31, 2001. The Company has hedged the notes through operating lease payments or through swaps to transfer the currency exposure to third parties. The Company translates the debt into US dollars using current exchange rates.
Public Medium-Term Notes
At December 31, 2001 the Company’s Medium-Term Notes bear interest at rates varying between 4.40% and 8.35%, with maturities from 2002 through 2007. The Medium-Term Notes provide for a single principal payment at the maturity of the respective note and cannot be redeemed by the Company prior to maturity.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note E - Debt Financing and Capital Lease Obligations (Continued)
Bank Term Debt
In January 1999, the Company entered into an Export Credit Facility for up to a maximum of $4.3 billion, for approximately 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, 2001 the Company had financed 62 aircraft and had $2.4 billion outstanding debt under this facility.
See Note L - Financial Instruments.
Capital Lease Obligations
The Company’s capital lease obligations provide 10 year, fully amortizing debt in three 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 15% of the original debt is at a floating LIBOR based rate. The LIBOR based tranche was prepaid in 2000. 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 $931,296 (2001) and $1,006,271 (2000).
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, 2001:
Maturities of debt financing and capital lease obligations (excluding commercial paper, derivatives, deferred debt discount and foreign currency translation adjustment in the amount of $92,129) at December 31, 2001 are as follows:
Under the most restrictive provisions of the related borrowings, consolidated retained earnings at December 31, 2001, in the amount of $989,898, are unrestricted as to payment of dividends based on consolidated tangible net worth requirements.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note E - Debt Financing and Capital Lease Obligations (Continued)
The Company has entered into various debt and derivative transactions with AIGFP, a related party. The Company executed $1,456,000 and $1,418,200 notional amount of derivative instruments with the related party during 2001 and 2000, 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 Series A Preferred Stock, is entitled to quarterly dividends at a rate of 5% per annum. Series A Preferred Stock is nonconvertible, and is redeemable at the Company’s option.
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 for the liquidation value in the fourth quarter of 2001, no gain or loss was recognized. During the year the Company extended the Series A to 5 years at a dividend rate of 5.90%. At December 31, 2001, the dividend rates for Series B and E ranged from 3.20% to 3.25%.
Other Comprehensive Income
The Other Comprehensive Income consists of fair market value adjustments of cash flow derivative instruments and foreign currency translation 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.
Note G - Rental Income
Minimum future rentals on non-cancelable operating leases and subleases of flight equipment which have been delivered at December 31, 2001 are as follows:
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note G - Rental Income (Continued)
Additional rentals earned by the Company based on the lessees’ usage aggregated $235,099 (2001), $222,579 (2000), and $202,976 (1999). Flight equipment is leased, under operating leases, with remaining terms ranging from one to 14 years.
Note H - Flight Equipment Rent
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 December 22, 2002, September 20, 2002 and September 12, 2002, respectively. One aircraft was repurchased in each of 1997, 1999 and 2001 and sold to third parties. The lease rates equate to fixed principal amortization and floating interest payments based on LIBOR or commercial paper pricing.
Minimum future rental expense for 2002 is $58,982 at December 31, 2001.
Note I - Income Taxes
The provision (benefit) for income taxes is comprised of the following:
(a)
Including U.S. tax on foreign income 	
(b)
Deferred taxes were also provided (charged) to 	other comprehensive income of $(32,661) (2001) and $5,399 	(2000), respectively, and for cumulative effect of accounting 	change of $8,180 (2001). 	
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note I - Income Taxes (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):
A reconciliation of computed expected total provision for income taxes to the amount recorded is as follows:
(a)
Includes realized Canadian tax credit in 2001 for 	taxes paid in prior years. 	
The Company entered into flight equipment sales transactions designated to meet the requirement for a like kind exchange of assets under Section 1031 of the Internal Revenue Code. At December 31, $0 (2001) and $50,400 (2000) was held in trust, under control of the Company, for such exchanges.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note J - Other Information
Concentration of Credit Risk
The Company leases and sells aircraft to airlines and others throughout the world. All of the lease receivables and the majority of 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 $2,173,778 (2001), $2,026,017 (2000) and $1,842,126 (1999).
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. The Company’s foreign currency gain (loss) has not been material to the Company’s consolidated financial statements to date.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note J - Other Information (Continued)
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, 2001 by $159,276.
Note K - Commitments and Contingencies
Aircraft Orders
At December 31, 2001, the Company had committed to purchase 551 aircraft deliverable from 2002 through 2010 at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $32.1 billion.
The Company also had options to purchase an additional 49 aircraft deliverable through 2008 at an estimated aggregate purchase price of $3.0 billion.
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, 757, 767 and 777), and the Airbus aircraft (models A318, 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, 2001, the Company had made non-refundable deposits (exclusive of capitalized interest) on the aircraft which the Company has committed to purchase of approximately $724,012 and $468,178 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 50 aircraft to financial institutions. These guarantees expire at various dates through 2014 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, 2001 and 2000, the maximum exposure if the Company were to pay under such guarantees was $772,292 (of which $567,394 represents the total purchase option price of 19 aircraft) and $706,200 (of which $684,139 represents the total purchase option price of 20 aircraft), respectively.
Other Guarantees
The Company has guaranteed certain obligations for entities in which it has an investment. At December 31, 2001 and 2000, the Company guaranteed ten loans collateralized by aircraft aggregating $58,836 and $87,913, respectively.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note K - Commitments and Contingencies (Continued)
Leases
The Company has operating leases for office space extending through 2014. In 2001, the Company signed a lease for additional office space with rents commencing in 2004. Rent expense was $3,221, $1,967, and $1,603 for the years ended 2001, 2000 and 1999 respectively. Commitments for minimum rentals under the noncancelable leases at the end of 2001 are as follows:
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, swaptions and interest rate floors. The Company only enters into derivative transactions to hedge interest rate and currency risk and not to speculate on interest rates or currency fluctuation.
The Company adopted Statement of Financial Accounting Standards No. 133 - Accounting for Certain Derivative Instruments and Certain Hedging Activities, as amended by Statement of Financial Accounting Standards No. 138 and related implementation guidance (“SFAS 133”) on January 1, 2001. 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, who has swapped the transactions with independent third parties. The Company has executed $1,456,000 and $1,418,200 notional amount of derivative instruments with the related party during 2001 and 2000, 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.
It is management’s belief that any failure of a counterparty to perform under the agreement with respect to these transactions would have an immaterial effect on the Company’s results of operations, financial condition and liquidity.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
	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. 	
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note L - Financial Instruments (Continued)
	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, 2001 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, 	2001, 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: It is 	not practical to determine the fair value of the Company’s 	guarantees. The Company regularly reviews the underlying values 	of the collateral aircraft, to determine its exposure under 	these guarantees. As of December 31, 2001, the 	Company’s exposure was not material. 	
The carrying amounts and fair values of the Company’s financial instruments at December 31, 2001 and 2000 are as follows:
Derivatives
The Company adopted Statement of Financial Accounting Standards No. 133 - Accounting for Certain Derivative Instruments and Certain Hedging Activities, as amended by Statement of Financial Accounting Standards No. 138 and related implementation guidance (“SFAS 133”) on January 1, 2001. The Company uses derivatives to manage exposures to interest rate and foreign currency risks. The Company recorded $1.0 million of hedge ineffectiveness in interest expense related to cross currency fair value hedges, for the year ended December 31, 2001. Hedge ineffectiveness related to cash flow hedges for the period was immaterial to the Company. 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:
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
Note L - Financial Instruments (Continued)
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, 2001, the Company recorded the following in earnings in accordance with SFAS 133:
At December 31, 2001, the Company’s accumulated other comprehensive income (loss) consisted of the following:
During the twelve months ended December 31, 2001, $33,230 (net) was reclassified from accumulated other comprehensive income to interest expense under cash flow hedge accounting in connection with the Company’s program to convert debt from floating to fixed rates. The Company expects that within the next twelve months it will reclassify as earnings $88,783 of the balance recorded plus quarterly cash flow hedge adjustments to accumulated other comprehensive income.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(a)
Reimbursements to lessees for overhauls performed 	and amounts transferred to buyers for aircraft sold. 	
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 26, 2002
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.
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.