ITEM 1. BUSINESS
GENERAL
International Lease Finance Corporation (the "Company") is primarily engaged in the acquisition of new and used commercial jet aircraft and the leasing and sale of such aircraft to domestic and foreign airlines. The Company, in terms of the number and value of transactions concluded, is a major owner-lessor of commercial jet aircraft. In addition, the Company is engaged in the remarketing of commercial jets for its own account, for airlines and for financial institutions. As well, the Company provides fleet management services for third party operating lessors.
As of December 31, 1997, the Company owned 299 aircraft and managed an additional 62 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, 1997, 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, 1997, the average age of the Company's flight equipment was 3.86 years.
\The following table shows the scheduled lease terminations (for the minimum noncancelable period) by aircraft type for the Company's lease portfolio at December 31, 1997 as adjusted for aircraft sold through March 9, 1998:
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This schedule does not include three Boeing 737-300, two 737-400, one 757-200, one A310-200 and one A310-300 aircraft sold through March 9, 1998. In addition, the schedule does not include two A310-200 committed for sale in 1998. This schedule includes 20 aircraft leased by the Company and subleased to others.
COMMITMENTS
At December 31, 1997, the Company had committed to purchase the following aircraft at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $17.7 billion for delivery as shown:
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(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.
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.
All of the purchase commitments set forth above are based upon master arrangements with each of The Boeing Company ("Boeing") and AVSA, S.A.R.L., the sales subsidiary of Airbus Industrie ("Airbus").
The aircraft listed above are being purchased pursuant to agreements executed by the Company and either 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, 1997, 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 $553,749,000 and $359,873,000 with Boeing and Airbus, respectively.
As of March 9, 1998, the Company had entered into contracts for the lease of all of the 60 aircraft to be delivered in 1998, 46 of the 52 aircraft to be delivered in 1999, 17 of the 43 aircraft to be delivered in 2000, 9 of the 38 aircraft to be delivered in 2001 and 12 of the 135 aircraft to be delivered subsequent to 2001. The Company will need to find customers for aircraft presently on order and any new aircraft ordered and 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 or sales contracts, and has obtained adequate financing in the past, there can be no assurance as to the future continued availability of lessees or purchasers, 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 2000. The leases cover approximately 30,000 square feet of office space, provide for annual rentals of approximately $1,627,000, and the rental payments thereunder are subject to certain indexed escalation provisions.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material 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, 1995, 1996 and 1997, the Company paid cash dividends to its parent company of $21,150,000, $20,600,000 and $19,700,000, 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, 1997 in the amount of $438,335,000 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
GENERAL
INDUSTRY CONDITION
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. No aircraft were repossessed in 1997. See "Item 1. Business -- Customers."
FINANCIAL CONDITION
The Company borrows funds to purchase flight equipment, including funds for progress payments during the construction phase, principally on an unsecured basis from various sources. At December 31, 1997, 1996 and 1995, the Company's debt financing and capital lease obligations were comprised of the following:
The interest on substantially all the public debt (exclusive of the commercial paper) is fixed for the term of the note. As of December 31, 1997, the Company had committed credit agreements with 48 commercial banks aggregating $2.65 billion and uncommitted lines of credit with three banks for varying amounts. Bank debt principally provides for interest rates that vary according to the pricing option in effect at the time of borrowing and range from prime to .20% over LIBOR at the Company's option. Bank financings are subject to facility fees of up to .08% of amounts available. Bank financing is used primarily as backup for the Company's Commercial Paper program.
On January 16, 1998, the Company replaced $1.25 billion of the committed revolving loans and lines of credit with a new, expanded facility for $1.35 billion. The facility is a 364 day tranche with a 5.5 basis point annual facility fee. The pricing options range from prime to .20% over LIBOR.
As of December 31, 1997, the Company had an effective registration statement with respect to $2.09 billion of debt securities, under which $700 million of notes were sold through 1997. Additionally, a $990 million Medium-Term Note program was implemented under the shelf registration statement, under which $780 million was sold through 1997. Through February 1998, the Company sold an additional $300 million of notes and $80 million of Medium-Term Notes.
In March 1998, a new registration statement of the Company with respect to $2.13 billion of debt securities was declared effective.
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 varies between 6.18% and 6.89%. The remaining 15% of the original financing available provides for LIBOR based pricing.
In 1995, 1996 and 1997, the Company, through unrestricted 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 for one year operating leases, each with six one year extension options for a total of seven years for each aircraft. 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 December 31, 1997, the Company had repurchased one aircraft which was sold to a third party in January, 1998.
In each of February and November 1995, the Company sold $100 million of Market Auction Preferred Stock.
The Company believes that the combination of internally generated funds and debt financing currently available to the Company will allow the Company to meet its capital requirements for at least the next 12 months.
In the normal course of business, the Company employs a variety of off-balance sheet financial instruments and other 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 not to speculate on interest rates. These derivative products include interest rate swap agreements, interest rate spreadlocks, interest rate swaptions and interest rate floors.
The counterparties to the Company's derivative instruments are all recognized U.S. derivative dealers. The counterparties to the majority of the notional amounts of the Company's derivative instruments are "AAA" rated and all have at least an "A" credit rating. 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. Any failure of the instruments or counterparties to perform under the derivative contracts would have an immaterial impact on the Company's earnings.
RESULTS OF OPERATIONS
The increase in revenues from rentals of flight equipment from $1,254.0 million in 1995 to $1,444.4 million in 1996 to $1,732.7 million in 1997 is due to the increase in the volume of flight equipment available for operating lease from 282 in 1995 to 308 in 1996 and 319 in 1997. The increase is also attributable to the increase in the relative cost of the fleet, from $12.0 billion in 1995 to $13.7 billion in 1996 and $14.4 billion in 1997 exclusive of aircraft subject to sale-leaseback transactions from which rental income is earned.
In addition to its leasing operations, the Company engages in the marketing of flight equipment on a principal and commission basis as well as the disposition of flight equipment at the end of, or during, the lease term. Revenue from such flight equipment marketing increased from $119.1 million in 1995 to $136.1 million in 1996 to $176.0 million in 1997 as a result of the type and the number of the flight equipment marketed in each period which fluctuated from 41 aircraft in 1995 to 36 aircraft in 1996 and 57 aircraft in 1997.
In addition, the Company sold 11 engines (1997), seven engines (1996) and 19 engines (1995).
Expenses as a percentage of total revenues were 76.2% for 1995, 75.8% for 1996 and 73.1% for 1997. Interest expense increased from $541.4 million in 1995 to $573.6 million in 1996 to $642.3 million in 1997, primarily as a result of an increase in debt outstanding, excluding the effect of debt discount, from $8.908 billion in 1995 to $9.817 billion in 1996 to $9.963 billion in 1997, to finance aircraft acquisitions, as
affected by changes in interest rates during the periods. These interest rate changes caused the Company's composite borrowing rate to fluctuate as follows:
Depreciation of flight equipment increased from $431.9 million in 1995 to $485.1 million in 1996 to $546.2 million in 1997 due to the addition of aircraft. Provisions for overhauls also increased from $71.1 million in 1995 to $85.1 million in 1996 to $99.5 million in 1997 due to an increase in the number of aircraft on which the Company collects overhaul reserves resulting in an increase in the aggregate number of hours flown for which overhaul reserves are provided.
Rent expense increased from $51.8 million in 1996 to $103.9 million in 1997 due to the increase in the number of sale-leaseback transactions from 14 aircraft in 1996 to 20 in 1997.
The effective tax rate decreased from 41.9% in 1995 to 36.2% in 1996 and 35.7% in 1997. The higher percentage in 1995 was due principally to the impact of losses of subsidiaries for which the Company did not receive a current or future tax benefit. During the fourth quarter of 1995, two of these corporations were restructured.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. This could result in a system failure or miscalculations in the year 2000 causing disruptions of operations of the Company, its lessees, manufacturers or business partners.
The Company has already reviewed and identified its computer systems that are subject to Year 2000 risk. Accordingly, the Company has commenced the remediation of all systems not Year 2000 compliant. Remediation and testing of such systems will be completed in advance of Year 2000. The costs of such remediation are expensed as incurred and are not material to the Company's consolidated financial position or consolidated results of operations.
The Company has also initiated formal communication with lessees, manufacturers and business partners to determine the extent to which the Company is vulnerable to those third parties' failures to remediate their own Year 2000 issues. The Company has not yet completed its review of responses from its lessees, manufacturers and business partners. As a result, the Company can not determine at this time the extent, if any, to which the Company may be exposed to financial risk from the inability of the Company's lessees, manufacturers and business partners to remediate their own Year 2000 issues.
NEW ACCOUNTING PRONOUNCEMENTS, ISSUED BUT NOT YET EFFECTIVE
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The Company does not expect this pronouncement to materially impact the Company's results of operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. The new standard becomes effective for the Company for the year ending December 31, 1998, and requires that comparative information from earlier years be restated to conform to the requirements of this standard. The Company does not expect this pronouncement to materially change the Company's current reporting and disclosures.
In February 1997, the Securities and Exchange Commission (SEC) issued Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments" (FRR No. 48). These disclosures will be effective with the Company's reporting during 1998.
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
The Registrant changed its independent auditors from Ernst & Young LLP on April 17, 1997 due to the desire to have the accounts of the Registrant and its ultimate parent corporation, American International Group, Inc., and its consolidated subsidiaries audited by the same independent auditors, Coopers & Lybrand L.L.P. On April 17, 1997, the Registrant engaged Coopers & Lybrand L.L.P. as the Registrant's independent auditors.
Neither of the reports of Ernst & Young LLP for the years ended December 31, 1996 or 1995 contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles.
The decision to change independent auditors was approved by the Board of Directors of Registrant.
Since January 1, 1995, there were no disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, and none of the events set forth in paragraphs (a)(2)(v)(A) through (D) of Item 304 of Regulation S-K occurred.
From January 1, 1995 through April 17, 1997, neither the Registrant nor anyone acting on its behalf has consulted Coopers & Lybrand L.L.P. regarding (i) either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Registrant's financial statements, and either a written report was provided to the Registrant or oral advice was provided that Coopers & Lybrand L.L.P. concluded was an important factor considered by the Registrant in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to that Item) or a reportable event (as described in Item 304(a)(1)(iv) of Regulation S-K).
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 14.
(a)(3) and (c): Exhibits: The response to this portion of Item 14 is submitted as a separate section on this report beginning on page 13.
(b) Reports on Form 8-K: None.
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 AUDITORS
Shareholders and Board of Directors International Lease Finance Corporation Los Angeles, California
We have audited the accompanying consolidated balance sheet of International Lease Finance Corporation and subsidiaries as of December 31, 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for the year ended December 31, 1997 and the related financial statement schedule. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Lease Finance Corporation and subsidiaries at December 31, 1997, and the consolidated results of their operations and their cash flows for the year ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California February 3, 1998
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors International Lease Finance Corporation Los Angeles, California
We have audited the accompanying consolidated balance sheet of International Lease Finance Corporation and subsidiaries as of December 31, 1996 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Lease Finance Corporation and subsidiaries at December 31, 1996, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Century City, Los Angeles, California February 19, 1997
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: The Company is primarily engaged in the acquisition of new and used commercial jet aircraft and the leasing and sale of such aircraft to charter and scheduled airlines throughout the world. In addition, the Company is engaged in the remarketing of commercial jets for its own account, for airlines and for financial institutions.
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 and financial services 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 $4,526 (1997), $5,595 (1996) and $6,439 (1995).
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.
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 most leases, for certain airframe and engine overhauls, the lessee is reimbursed for costs incurred up to but not exceeding related contingent 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 expected during the life of the lease, which amount is included in overhaul reserves.
Generally, all 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.
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: The Company has granted certain parties the right but not the obligation to effectively convert certain of the Company's fixed rate obligations to floating rate obligations based on an established notional amount. The proceeds of such option agreements are initially recorded as a liability. INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) When swap agreements are effective in modifying the terms of actual debt agreements, such swaps are accounted for by the accrual method. Periodic payments as well as the amortization (by a level yield method) of the initial value are treated as adjustments to interest expense of the related debt.
Income Taxes: The Company and its U.S. subsidiaries are included in the consolidated federal income tax return of AIG. The Company and its subsidiaries are included in 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.
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 1996 and 1995 financial statements to conform to the Company's 1997 presentation.
NOTE B -- NOTES RECEIVABLE
Notes receivable are primarily from the sale of flight equipment and are summarized as follows:
Included above, the Company had notes receivable of $4,374 (1997) and $10,694 (1996) representing restructured lease payments.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE B -- NOTES RECEIVABLE (CONTINUED) At December 31, 1997, the minimum future notes receivable payments to be received are as follows:
The Company sold notes receivable with certain limited recourse provisions to a related party of the Company. The notes were sold at face value including accrued interest and aggregated $116,235 in 1996 and $56,413 in 1995. The Company continues to collect payments from the notes and transfers to the related party the amounts received less a servicing fee. The Company recorded no gain or loss on the sale. The Company recorded servicing fee income of $112 (1997) and $16 (1996) related to the notes sold. The Company's maximum exposure under recourse provisions was $0 at December 31, 1997 and $23,205 at December 31, 1996. During 1997 the Company repurchased one note sold in 1996 and during 1996, the Company repurchased one note sold in 1995. Neither of the notes were repurchased under the recourse provisions.
NOTE C -- NET INVESTMENT IN FINANCE AND SALES-TYPE LEASES
The following lists the components of the net investment in finance and sales-type leases:
Minimum future lease payments to be received for flight equipment on finance and sales-type leases at December 31, 1997 are as follows:
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE D -- INVESTMENTS
Investments consist of the following:
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(A) During 1997, Air Liberte was acquired by British Airways. As a result of the acquisition, ILFC's percentage ownership will be reduced. Until the acquisition is complete, ILFC's percentage ownership is not determinable.
(B) During 1997, International Aircraft Investors ("IAI") consummated an initial public offering which raised $23,380 in equity. As a result, the Company's investment has been diluted to 1.5%.
At December 31, 1997, the Company had one aircraft on lease to Air Liberte. This lease is similar in terms to those of unaffiliated customers.
The Company has sold used aircraft and engines to IAI on terms similar to those of unaffiliated customers. In exchange for these sales the Company has received notes aggregating $36,675 (1997) and $8,763 (1996), which are included in Notes Receivable in the accompanying consolidated balance sheets (see Note B). In addition, the Company has guaranteed certain obligations of IAI related to such sales (see Note K).
The Company has a 50% interest in Pacific Ocean Leasing Ltd. ("POL"), a Bermuda corporation. POL presently owns one Boeing 767-200 aircraft and one spare engine, both of which are on lease to an airline. POL also owns an inventory of spare parts. Additionally, the Company has guaranteed the bank loan to POL (see Note K).
The Company has a 25% interest in Pacific Asia Leasing Ltd. ("PAL"), a Bermuda corporation. PAL presently owns one Boeing 767-300ER aircraft on lease to an airline. The Company has a demand note, which bears interest at Libor+1 5/8%, with PAL of $26,751.
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:
Bank Financing:
As of December 31, 1997, the Company had committed credit agreements with 48 commercial banks aggregating $2,650,000 and uncommitted lines of credit with three banks for varying amounts. Bank debt principally provides for interest rates that vary according to the pricing option in effect at the time of borrowing and range from prime to .20% over LIBOR at the option of the Company. Bank financings are subject to facility fees of up to .08% of amounts available. Bank financing is used primarily as backup for the Company's Commercial Paper program.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE E -- DEBT FINANCING AND CAPITAL LEASE OBLIGATIONS (CONTINUED) Term Notes:
The Company has issued the following Notes which provide for a single principal payment at maturity and cannot be redeemed prior to maturity:
- --------------- See Note L -- Financial Instruments. (1) Floating rate swap expired April 1, 1997.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE E -- DEBT FINANCING AND CAPITAL LEASE OBLIGATIONS (CONTINUED) Medium-Term Notes:
The Company's Medium-Term Notes have an average notional amount of $11 million, bear interest at rates varying between 5.05% and 9.88%, inclusive, with maturities from 1998 through 2005. The Medium-Term Notes provide for a single principal payment at the maturity of the respective note. They cannot be redeemed by the Company prior to maturity.
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%. The final 15% of the original debt is at a floating LIBOR based rate. The 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 $1,147,514 (1997) and $1,174,845 (1996).
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, 1997:
Maturities of debt financing and capital lease obligations (excluding commercial paper and deferred debt discount) at December 31, 1997 are as follows:
Under the most restrictive provisions of the related borrowings, consolidated retained earnings at December 31, 1997, in the amount of $438,335, are unrestricted as to payment of dividends based on consolidated tangible net worth requirements.
NOTE F -- SHAREHOLDERS' EQUITY
Preferred Stock:
In February and November 1995, 500 shares each of Series E and F and G and H, respectively, of Market Auction Preferred Stock ("MAPS") were issued in connection with public offerings at $100 per
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE F -- SHAREHOLDERS' EQUITY (CONTINUED) share. Proceeds, net of issuance costs, to the Company were $197,144. In addition, issuance costs of $130 for Series G and H were incurred in 1996. The MAPS have a liquidation value of $100 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. At December 31, 1997, the dividend rates for Series A through H ranged from 4.125% to 4.50%.
Stock Appreciation Rights:
Stock Appreciation Rights ("SARs") were granted to certain employees of the Company during 1990. The SARs granted generally vest over a nine year period from the effective date and are exercisable immediately upon vesting. SARs initially have no value but can gain a cash value based upon the difference between a Benchmark Price and a Formula Price (based on adjusted pre-tax cash flow of the Company), but not in excess of an aggregate of $150,000, to be accrued and paid over the period of the plan. The SAR plan became effective on January 1, 1991. No value has been earned or accrued under the SAR plan as of December 31, 1997.
NOTE G -- RENTAL INCOME
Minimum future rentals on noncancelable operating leases and subleases of flight equipment which have been delivered at December 31, 1997 are as follows:
Additional rentals earned by the Company based on the lessees' usage aggregated $219,380 (1997), $194,741 (1996) and $168,121 (1995). Flight equipment is leased, under operating leases, with remaining terms ranging from one to 10 years.
NOTE H -- RENTAL EXPENSE
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, maturing on December 22, 1998, September 20, 1998 and September 11, 1998, respectively. During 1997 one aircraft was repurchased. The lease rates equate to fixed principal amortization and floating interest payments based on LIBOR or commercial paper pricing.
Minimum future rental expense for 1998 is $44,227 at December 31, 1997.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE I -- INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
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(1) Including U.S. tax on foreign income
The provision for deferred income taxes is comprised of the following temporary differences:
The deferred tax liability consists of the following:
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE I -- INCOME TAXES (CONTINUED) A reconciliation of computed expected total provision for income taxes to the amount recorded is as follows:
NOTE J -- OTHER INFORMATION
Concentration of Credit Risk
The Company leases and sells aircraft to airlines. All of the lease receivables and the majority of notes receivable are from airlines 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 $1,472,075 (1997), $1,202,651 (1996) and $1,002,251 (1995).
The following table sets forth the dollar amount and percentage of total rental revenues attributable to the indicated geographic areas for the years indicated:
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).
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE J -- OTHER INFORMATION (CONTINUED) 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, 1997 by $39,569.
NOTE K -- COMMITMENTS AND CONTINGENCIES
Aircraft orders
At December 31, 1997, the Company had committed to purchase 328 aircraft deliverable from 1998 through 2006 at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $17.7 billion.
Most of these purchase commitments and options are based upon master arrangements 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 A319, A320, A321, A330 and A340) 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, 1997, 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 $553,749 and $359,873 with Boeing and Airbus, respectively.
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.
Asset Value Guarantees
The Company has guaranteed a portion of the residual value of 28 aircraft to financial institutions expiring at various dates through 2006. The guarantees 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, 1997, the maximum exposure if the Company were to pay under such guarantees was $145,733.
Other Guarantees
In connection with the sale of aircraft, the Company has guaranteed certain obligations for entities in which it has an investment. At December 31, 1997, the Company guaranteed nine loans secured by aircraft aggregating $62,256.
The Company guaranteed three loans, collateralized by flight equipment, of customers which, at December 31, 1997, aggregated $12,850.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. This could result in a system failure or miscalculations in the year 2000 causing disruptions of operations of the Company, its lessees, manufacturers or business partners.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE K -- COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company has already reviewed and identified its computer systems that are subject to Year 2000 risk. Accordingly, the Company has commenced the remediation of all systems not Year 2000 compliant. Remediation and testing of such systems will be completed in advance of Year 2000. The costs of such remediation are expensed as incurred and are not material to the Company's consolidated financial position or consolidated results of operations.
The Company has also initiated formal communication with lessees, manufacturers and business partners to determine the extent to which the Company is vulnerable to those third parties' failures to remediate their own Year 2000 issues. The Company has not yet completed its review of responses from its lessees, manufacturers and business partners. As a result, the Company can not determine at this time the extent, if any, to which the Company may be exposed to financial risk from the inability of the Company's lessees, manufacturers and business partners to remediate their own Year 2000 issues.
NOTE L -- FINANCIAL INSTRUMENTS
In the normal course of business, the Company employs a variety of off-balance sheet derivative transactions with the objective to lower its overall borrowing cost and to maintain its optimal mix of variable and fixed rate interest obligations. These derivative products include interest rate swap agreements, swaptions and interest rate floors (off-balance sheet derivative transactions).
The Company accounts for its off-balance sheet derivative transactions on an accrual basis. As such, accrued future payments or receipts are reflected in operating income in the period incurred or earned. Credit risk exposure arises from the potential that the counterparty may not perform under these agreements with respect to the off-balance sheet derivative transactions. The Company minimizes such exposure through transacting with recognized U.S. derivative dealers assigned at least an "A" rating by a recognized statistical rating organization. The counterparties to the majority of the off-balance sheet derivative transactions are assigned an "AAA" rating. One of the counterparties is a related party of the Company. The Company monitors each counterparty's assigned credit rating throughout the life of the off-balance sheet derivative transaction. The Company currently does not require, nor is it required by, its counterparties to provide security for its positions with the Company although it can in certain circumstances.
The following table provides the notional amounts of the Company's off-balance sheet derivative transactions at December 31, 1997. The notional amounts used to express the extent of the Company's involvement in swap transactions represent a standard measurement of the volume of the Company's swap transactions. Notional amount is not a quantification of market risk or credit risk and is not recorded on the balance sheet. Notional amounts represent those amounts used to calculate contractual cash flows to be exchanged and are not paid or received. The timing and the amount of cash flows relating to swaption and other interest rate option contracts are determined by each of the respective contractual agreements.
It is management's belief that any failure of a counterparty to perform under the agreement with respect to these off-balance sheet transactions would have an immaterial effect on the Company's results of operations, financial condition and liquidity.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE L -- FINANCIAL INSTRUMENTS (CONTINUED) The following table presents the notional amounts of the Company's interest rate swap agreements, swaptions and interest rate floors by maturity at December 31, 1997.
- --------------- (1) Swaptions obligate the Company to convert certain fixed rate obligations to floating rate obligations if the option purchaser chooses to exercise. These amounts do not represent credit exposure.
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.
Investments: It was not practicable to estimate 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 estimate fair value without incurring excessive costs due to their short maturities. The carrying amount of these investments at December 31, 1997 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, 1997, the Company used such quoted market price in estimating 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.
Off-balance-sheet instruments: Fair values for the Company's off-balance-sheet instruments are based on pricing models or formulas using current assumptions (swaps, swaptions and interest rate floors) and the amount of the guarantee which would not be covered by the fair value of the underlying collateral (loan guarantees and asset value guarantees).
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE L -- FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
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(1) Reimbursements to lessees for overhauls performed and amounts transferred to buyers for aircraft sold.
(2) Payments received from lessees in lieu of compliance with return conditions.
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 9, 1998
INTERNATIONAL LEASE FINANCE CORPORATION
By /s/ LESLIE L. GONDA ------------------------------------ Leslie L. Gonda Chairman of the Board
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 for the year ended December 31, 1997 or proxy statement, form of proxy or other proxy soliciting materials have been sent to securities holders since January 1, 1990.