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 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, 2000, the Company's lease portfolio consisted of 401 aircraft under operating lease and three aircraft under finance lease. Additionally, the Company provided fleet management services for 89 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, 2000, 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, 2000, the average age of the Company's aircraft was 4.32 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, 2000:
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This schedule includes 19 aircraft leased by the Company and subleased to others and excludes one aircraft which was not subject to lease at December 31, 2000, but was subsequently leased.
COMMITMENTS
At December 31, 2000, the Company had committed to purchase the following aircraft at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $27.2 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.
At December 31, 2000, 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.
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, 2000, 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 $583,370,000 and $372,360,000 with Boeing and Airbus, respectively.
As of March 15, 2000, the Company had entered into contracts for the lease of all of the 67 aircraft to be delivered in 2001, 62 of the 66 aircraft to be delivered in 2002, 25 of the 68 aircraft to be delivered in 2003, 5 of
the 67 aircraft to be delivered in 2004 and 4 of the 220 aircraft to be delivered subsequent to 2004. The Company will need to find customers for aircraft presently on order 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, 2000, the Company occupied approximately 44,000 square feet of office space with a signed agreement to obtain an additional 9,700 square feet during 2001. 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 annual average 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, 2000, 1999 and 1998, the Company paid cash dividends to its parent company of $206,000,000, $69,500,000 and $25,200,000, 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, 2000 in the amount of $741,437,000 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
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. See "Item 1. Business -- Customers."
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. At December 31, 2000, 1999 and 1998, 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. As of December 31, 2000, the Company had an effective shelf registration statement with respect to $2.0 billion of debt securities, under which $925 million of notes were sold through December 31, 2000. Additionally, a $1,075 million Medium-Term Note program was implemented under the shelf registration statement, under which $1.0 billion was sold through December 31, 2000 and $1,075 million was sold through March 16, 2001. The Company's new shelf registration statement in the amount of $2.0 billion became effective on January 5, 2001, under which $800 million of notes have been sold as of March 16, 2001. In addition, a $750 million Medium-Term Note program was implemented on January 19, 2001 under which $200 million have been sold as of March 16, 2001. The Company has a Euro Medium Term Note Program for $2.0 billion, under which $771 million (E750 million) in notes were sold through December 31, 2000. The Company has hedged the foreign currency risk of the notes through operating lease payments or through swaps.
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.
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 has the right, but is 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 first 75 aircraft depending on the delivery date of the aircraft. Through March 9, 2001, the Company borrowed $2.2 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. The weighted average interest rate of the Company's Commercial Paper Program was 6.63%, 5.87% and 5.30% at December 31, 2000, 1999 and 1998 respectively.
Bank Commitments
As of December 31, 2000, the Company had committed revolving loans and lines of credit with 48 commercial banks aggregating $3.2 billion and an uncommitted line of credit with one bank for $30.0 million. 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. In November 2000, the Company replaced $1.5 billion of the committed revolving loans with a new 364 day facility for $1.8 billion at reduced pricing.
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 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, 2000, the Company had repurchased two aircraft which were sold to third parties.
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 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 American International Group Financial Products ("AIGFP"), a related party with a "AAA" rating, 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.
RESULTS OF OPERATIONS
The increase in revenues from rentals of flight equipment from $1,854.0 million in 1998 to $2,080.6 million in 1999 to $2,301.4 million in 2000 is due to the increase in the number of aircraft available for operating lease from 349 in 1998, to 357 in 1999 to 402 in 2000. The increase is also attributable to the increase in the cost of the leased fleet, which includes aircraft subject to sale-leaseback transactions from which rental income is earned, from $18.3 billion in 1998 and $19.7 billion in 1999 to $22.0 billion in 2000. Additionally, the percentage of the number of widebodies, for which higher lease payments are typically received, has increased from 30% to 33% to 35% of the fleet in 1998, 1999 and 2000, respectively.
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 increased from $118.2 million in 1998 to $147.2 million in 1999 and decreased to $99.7 million in 2000 as a result of the type and the number of the flight equipment marketed in each period which fluctuated from 31 aircraft in 1998 to 51 aircraft in 1999 and to 20 in 2000. In addition, the Company sold 15 engines (1998), 13 engines (1999) and 7 engines (2000).
Interest expense fluctuated from $640.0 million in 1998, to $686.8 million in 1999 to $773.5 in 2000, as a result of an increase in debt outstanding, excluding the effect of debt discount, from $11.2 billion in 1998 to $11.9 billion in 1999 to $13.5 billion in 2000, to finance aircraft acquisitions, offset in part by lower composite borrowing rates during 1999 and increased by higher composite borrowing rates in 2000. The Company's composite borrowing rate fluctuated as follows:
Depreciation of flight equipment increased from $556.1 million in 1998 to $637.3 million in 1999 to $705.7 million in 2000 due to the increased cost of the fleet. The cost of flight equipment during the same periods increased from $16.9 billion at December 31, 1998 to $18.2 billion at December 31, 1999 to $20.5 billion in 2000.
Provisions for overhauls decreased from $102.5 million in 1998 to $94.5 million in 1999 and increased to $104.5 million in 2000 due to changes in the number of aircraft on which the Company collects overhaul revenue. A decrease or increase in the number of aircraft may result in a corresponding decrease or increase in the aggregate number of hours flown, for which overhaul reserves are provided.
Rent expense decreased from $138.4 million in 1998 to $130.0 million in 1999, due to a decrease in the number of sale-leaseback transactions, and increased to $141.0 million in 2000 due to an increase in the lease rates resulting from an increase in interest rates affecting the floating rate component of the lease rates, partially offset by amortization. The Company, through subsidiaries, has entered into sale-leaseback transactions relating to 21 aircraft. As of December, 2000, the Company had repurchased two of the aircraft, previously subject to Sale-lease back transactions, which were sold to third parties.
The effective tax rate increased from 34.3% in 1998 to 35.5% in 1999 and decreased to 33.6% in 2000.
NEW ACCOUNTING PRONOUNCEMENTS, ISSUED BUT NOT YET EFFECTIVE
On September 25, 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 138, Accounting for Derivative Instruments and Hedging Activities -- An
Amendment of FASB Statement No. 133. (SFAS 138). SFAS 138 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. In connection with the adoption of SFAS No. 133 on January 1, 2001, the Company recorded in its transition adjustment an increase in Net Income of approximately $15 million (net of taxes of approximately $8 million) and decreased Accumulated Other Comprehensive Income by approximately $20 million (net of taxes of approximately $11 million).
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, 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 and 2000 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, 1999 and December 31, 2000, the VaR for the Company with respect to its fair value was $50 million and $11 million, respectively.
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 November 1, 2000 (Item 7)
Form 8-K, event date January 10, 2001 (Item 7)
Form 8-K, event date January 19, 2001 (Item 7)
Form 8-K, event date January 19, 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 Shareholder 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 15 present fairly, in all material respects, the financial position of International Lease Finance Corporation and its subsidiaries (the "Company") at December 31, 2000 and December 31, 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP Los Angeles, California February 16, 2001
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 new and used 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 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 $1,213 (2000), $2,896 (1999) and $3,828 (1998).
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, 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.
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: 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.
Other Comprehensive Income: The Company reports comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income." Liabilities denominated in a foreign currency and not hedged are translated into US dollars using the current exchange rate and reported in shareholders' equity as Accumulated Other Comprehensive Income.
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.
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 1998 and 1999 financial statements to conform to the Company's 2000 presentation.
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 $57,615 (2000) and $12,585 (1999) representing restructured lease payments.
At December 31, 2000, 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 $25 (2000) $50 (1999), and $1 (1998) related to the notes sold. The Company has no exposure under recourse provisions at December 31, 2000. During 2000 the Company repurchased one note and during 1999 the Company repurchased two notes sold in 1998. The notes were 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, 2000 are as follows:
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. ILFC's percentage ownership is not yet determinable. The Company has reserved a portion of the investment balance awaiting final determination.
In 2000, the Company invested $7,286 in common stock of Air New Zealand and $30,000 in American Trans Air ("ATA") non-voting preferred stock.
The Company has a 50% interest in Pacific Ocean Leasing Ltd. ("POL"), a Bermuda corporation. POL owned one Boeing 767-200 aircraft and one spare engine, both of which were on lease to an airline. The aircraft and spare engine were sold in January 1999. POL owns an inventory of spare parts. The Company received a dividend of $5,000 in 1999.
The Company has a 25% interest in Pacific Asia Leasing Ltd. ("PAL"), a Bermuda corporation. PAL owned one Boeing 767-300ER aircraft on lease to an airline and has been sold. As a result, as of December 31, 2000 PAL has entered into liquidation processings. The Company had received a partial liquidating dividend in the amount of $440 as of December 31, 2000.
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 bank loan 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 6.63% and 5.87% at December 31, 2000 and 1999 respectively.
Bank Commitments
As of December 31, 2000, the Company had committed revolving loans and lines of credit with 48 commercial banks aggregating $3.2 billion and an uncommitted line of credit with one bank for $30.0 million. 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. In November 2000, the Company replaced $1.5 billion of the committed revolving loans with a new 364 day facility for $1.8 billion at reduced pricing. The Company had not drawn any funds under its committed revolving loans and lines of credit at December 31, 2000 and 1999, respectively.
Public Debt
As of December 31, 2000 the Company had an effective shelf registration statement with respect to $2.0 billion in debt securities, under which $925 million of notes were sold through December 31, 2000. Additionally, a $1,075 million Medium-Term Note program was implemented under the shelf registration statement, under which $1.0 billion was sold through December 31, 2000.
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 (E750 million) in Notes were sold through December 31, 2000. The Company has hedged the notes through operating lease payments or through swaps to transfer the currency exposure to third parties.
Public Medium-Term Notes
At December 31, 2000 the Company's Medium-Term Notes bear interest at rates varying between 5.20% and 8.55%, with maturities from 2001 through 2005. 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.
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 has the right,
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE E -- DEBT FINANCING AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
but is 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. Through December 31, 2000 the Company had borrowed $2.1 billion 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 $1,006,271 (2000) and $1,049,447 (1999).
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, 2000:
Maturities of debt financing and capital lease obligations (excluding commercial paper, deferred debt discount and foreign currency translation adjustment in the amount of $14,655) at December 31, 2000 are as follows:
Under the most restrictive provisions of the related borrowings, consolidated retained earnings at December 31, 2000, in the amount of $741,437, are unrestricted as to payment of dividends based on consolidated tangible net worth requirements.
The Company has entered into various debt and derivative transactions with AIGFP, a related party broker-dealer (See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations."). The Company executed $1,418,200 and $775,480 notional amount of derivative instruments with the related party during 2000 and 1999, respectively.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE F -- SHAREHOLDERS' EQUITY
Preferred Stock
The Market Auction Preferred Stock (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, 2000, the dividend rates for Series A through H ranged from 4.98% to 5.25%.
Other Comprehensive Income
The Other Comprehensive Income consists of foreign currency translation of liabilities denominated in a foreign currency and not hedged. The debt was translated into US dollars using the current exchange rate.
Stock Appreciation Rights
Stock Appreciation Rights ("SARs") were granted to certain employees of the Company during 1990. The SARs granted generally vest over a ten 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 had been earned or accrued under the SAR plan as of January 1, 2001 when the plan expired.
NOTE G -- RENTAL INCOME
Minimum future rentals on noncancelable operating leases and subleases of flight equipment which have been delivered at December 31, 2000 are as follows:
Additional rentals earned by the Company based on the lessees' usage aggregated $222,579 (2000), $202,976 (1999), and $202,425 (1998). Flight equipment is leased, under operating leases, with remaining terms ranging from one to 14 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. The existing one year leases mature on December 22, 2001, September 20, 2001 and September 12, 2001, respectively. One aircraft was repurchased in each of 1997 and 1999. The lease rates equate to fixed principal amortization and floating interest payments based on LIBOR or commercial paper pricing.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE H -- RENTAL EXPENSE (CONTINUED)
Minimum future rental expense for 2001 is $102,052 at December 31, 2000.
NOTE I -- INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
- --------------- (a) 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:
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(a) Includes Canadian tax credit of $6,650 and related valuation allowance of $6,650. 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:
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, 2000, $50,400 was held in trust, under control of the Company, for such exchanges.
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 $2,026,017 (2000), $1,842,126 (1999) and $1,623,891 (1998).
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:
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE J -- OTHER INFORMATION (CONTINUED)
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.
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, 2000 by $146,098.
NOTE K -- COMMITMENTS AND CONTINGENCIES
Aircraft orders
At December 31, 2000, the Company had committed to purchase 488 aircraft deliverable from 2001 through 2009 at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $27.2 billion.
The Company also had options to purchase an additional 51 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, 757, 767 and 777), and the Airbus aircraft (models A318, 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, 2000, the Company had made non-refundable deposits (exclusive of capitalized interest) on the aircraft which the Company has committed to purchase of approximately $583,370 and $372,360 with Boeing and Airbus, respectively.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE K -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Aircraft orders (continued)
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 42 aircraft to financial institutions expiring at various dates through 2009. 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, 2000 and 1999, the maximum exposure if the Company were to pay under such guarantees was $706,200 (of which $684,139 represents the total purchase option price of 34 aircraft) and $136,669 (of which $63,000 represents the total purchase option price of 2 aircraft), respectively.
Other Guarantees
The Company has guaranteed certain obligations for entities in which it has an investment. At December 31, 2000 and 1999, the Company guaranteed ten loans collateralized by aircraft aggregating $87,913 and $30,824, respectively.
Leases
The Company has operating leases for office space extending through 2005. Commitments for minimum rentals under the noncancellable leases at the end of 2000 as follows:
NOTE L -- FINANCIAL INSTRUMENTS
In the normal course of business, the Company employs a variety of off-balance sheet 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 (off-balance sheet derivative transactions). 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 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 off-balance sheet derivative transactions. The Company's counterparty for all of its off-balance sheet derivatives is AIGFP, a related party with a "AAA" counterparty rating (see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations"). The Company currently does not require, nor is it required
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE L -- FINANCIAL INSTRUMENTS (CONTINUED)
by, its counterparty to provide collateral 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, 2000. 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.
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, 2000 and 1999.
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(a) Certain contracts were reclassified to comply with SFAS 133 definitions. The Company has adopted SFAS 133 as of January 1, 2001.
The Company has entered into various derivative transactions with AIGFP, a related party broker-dealer. The Company has executed $1,418,200 and $775,480 notional amount of derivative instruments with the related party during 2000 and 1999, respectively.
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 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, 2000 represents the original cost or original cost plus the Company's share of earnings of the investment. For investments held by the
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE L -- FINANCIAL INSTRUMENTS (CONTINUED)
Company that had a quoted market price at December 31, 2000, 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.
Off-balance-sheet instruments: Fair values for the Company's off-balance-sheet instruments are the amounts at which they could be settled and are estimated by obtaining quotes from the broker.
Guarantees: It is not practical to determine the fair value of the Company's guarantees and the value is not significant to the Company.
The carrying amounts and fair values of the Company's financial instruments at December 31, 2000 and 1999 are as follows:
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(a) Certain contracts were reclassified to comply with SFAS No. 133 definitions. The Company has adopted SFAS No. 133 as of January 1, 2001.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
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(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 19, 2001
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 or proxy statement, form of proxy or other proxy soliciting materials have been sent to security holders since January 1, 1990.