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.
Since 1973, the Company has engaged in over 700 transactions involving the lease or sale of commercial aircraft to more than 140 airlines. As of December 31, 1994, the Company owned 270 aircraft including aircraft owned in joint ventures. 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, 1994, 93% of the aircraft, which represent 99% of the net book value of the aircraft, were Stage III, which are aircraft that 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, 1994, the average age of the Company's flight equipment was 4.99 years and the average age of the Stage III fleet was 4.03 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, 1994:
- ------------ (a) As of March 1, 1995, of the 18 737-200 aircraft, six are committed for sale in 1995. In addition, two of the 737-400 aircraft are committed for sale, one in 1995 and one in 1996.
In addition, at December 31, 1994, one BAC1-11, one A320 and one 757-200 were not on lease. Subsequent to December 31, 1994, and prior to March 1, 1995, all aircraft were committed for lease or sale.
COMMITMENTS
At December 31, 1994 the Company had committed to purchase the following aircraft at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $13.4 billion for delivery as shown:
- -------- * The Company has the right to designate which model of 737 (737-300, 737- 400 or 737-500) will be delivered at specified dates prior to contractual delivery. For 1995, the Company has designated for delivery eleven 737- 300, four 737-400 and five 737-500.
At December 31, 1994, the Company had options to purchase the following aircraft at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $2.8 billion for delivery as shown:
- -------- * The Company has the right to designate which model of 737 (737-300, 737- 400 or 737-500) will be delivered at specified dates prior to contractual delivery.
If all 287 aircraft were to be acquired, the estimated aggregate purchase price (including adjustment for anticipated inflation) would be approximately $16.2 billion. 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.
Most of the purchase commitments and options set forth above are based upon master arrangements with each of The Boeing Company ("Boeing"), AVSA, S.A.R.L., the sales subsidiary of Airbus Industrie ("Airbus"), Fokker Aircraft USA Inc. ("Fokker") and McDonnell Douglas Corporation ("McDonnell Douglas").
The Boeing aircraft (models 737, 747, 757, 767 and 777), the Airbus aircraft (models A300, A310, A319, A320, A321, A330 and A340), the Fokker aircraft (model) and the McDonnell Douglas aircraft (model MD-11) listed above are either being purchased, or the options to purchase have been granted, pursuant to purchase agreements executed by the Company and Boeing, Airbus, Fokker or McDonnell Douglas, respectively. 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, 1994, 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 $430,080,000, $330,595,000, $2,000,000 and $39,181,000 with Boeing, Airbus, Fokker and McDonnell Douglas, respectively.
As of March 15, 1995, the Company had entered into contracts for 63 of the 68 aircraft to be delivered in 1995, 37 of the 52 aircraft to be delivered in 1996, 12 of the 47 aircraft to be delivered in 1997, 2 of the 35 aircraft to be delivered in 1998 and 3 of the 34 aircraft to be delivered subsequent to 1998. 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 $1,513,000, 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 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, 1992, 1993 and 1994, the Company paid cash dividends to AIG of $10,330,000, $11,359,000 and $13,462,000, respectively. It is the intent of the Company to pay AIG an annual dividend of 7% of net income. Under the most restrictive provisions of the Company's borrowing arrangements, consolidated retained earnings at December 31, 1994 in the amount of $82,000,000 were unrestricted as to the payment of dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data and operating information of the Company. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
- ------------ (1) Includes an extraordinary loss of $7,035,000 in 1990. (2) See Exhibit 12. (3) See "Item 2. Properties--Flight Equipment".
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
INDUSTRY CONDITION
In recent years, many airlines have experienced economic difficulties and some have filed for bankruptcy or similar proceedings or have requested that their leases be restructured. The Company has restructured leases with both foreign and domestic lessees. Such restructurings have involved the voluntary termination of leases prior to lease expiration, the replacement of leased aircraft with smaller, less expensive leased aircraft, the arrangement of subleases from the primary lessee to another airline and the rescheduling of lease payments. In eight instances between January 1989 and December 31, 1993, the Company has been required to repossess aircraft. Recently, however, the Company has seen some stabilization and a small reversal in this trend which resulted in only four lessees requesting lease restructurings and no repossessions in 1994. In January 1995, the Company repossessed one A320 aircraft from an airline. As of February 8, 1995, the aircraft had been re- leased.
FINANCIAL CONDITION
The Company borrows funds for the purchases of flight equipment, including the making of progress payments during the construction phase, principally on an unsecured basis from various sources. At December 31, 1994, 1993 and 1992, the Company's debt financing was 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, 1994, the Company had committed revolving loans and lines of credit with 29 banks aggregating $1.226 billion and uncommitted lines of credit with two banks aggregating $125 million. Bank debt principally provides for interest rates that vary according to the pricing option then in effect and range from prime, .25% to 3/8% over LIBOR or .375% to .425% over CD rates, at the Company's option. Bank financings are subject to facility fees of up to .1875% of amounts available.
On February 2, 1995, the Company replaced $1.121 billion of the committed revolving loans and lines of credit with a new, expanded facility for $1.8 billion. The new facility is subject to a facility fee of up to .10% which is lower than that for the original facility.
The Company has an effective shelf registration with respect to $2.449 billion of debt securities, under which $300 million of notes were sold through 1994. Additionally, a $1 billion Medium-Term Note program has been implemented under the shelf registration, under which $535.6 million has been sold through December 31, 1994.
As of December 31, 1994, the Company had entered into an Export Credit Lease facility in the amount of $555 million for the acquisition of up to 10 Airbus aircraft originally scheduled to be delivered in 1994. As of December 31, 1994, the Company had cancelled the options to finance four of the aircraft aggregating $131 million. An additional $315 million was used to finance four of the aircraft in 1994. The remaining $109 million will be used for aircraft to be delivered in 1995. In addition, as of December 31, 1994, the Company entered into a second Export Credit Lease facility in the amount of $1,375 million which is available for the acquisition of up to 21 Airbus aircraft to be delivered in 1995. Both Export Credit Lease facilities provide ten year, amortizing loans. The interest rate on 62.5% of the total financing available is 6.55%, the interest rate on 22.5% of the financing available varies between 6.18% and 6.89%. The remaining 15% of the financing available provides for LIBOR based pricing.
Since AIG's acquisition of the Company in 1990, through December 31, 1994, AIG has contributed $250 million of additional capital to the Company.
In each of 1992, 1993 and February 1995, the Company sold $100 million of Market Auction Preferred Stock.
The Company believes that it has sufficient financing sources available to meet its capital requirements through fiscal 1995.
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. These derivative products include interest rate swap agreements, interest rate spreadlocks and interest rate swap options ("swaptions").
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 Company currently does not, although it can in certain circumstances, require its counterparties to provide security for its positions with the Company. 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 $628.6 million in 1992 to $795.4 million in 1993 to $993.6 million in 1994 is due to the increase in both the size and relative cost of the fleet of leased flight equipment subject to operating lease from 167 in 1992 to 223 in 1993 to 262 in 1994.
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 the lease term. Revenue from such flight equipment marketing increased from $46.8 million in 1992 to $53.7 million in 1993 to $76.2 million in 1994 as a result of the following number of aircraft transactions in each period:
In addition, in 1994 the Company sold eight engines.
Interest and other income increased from $55.1 million in 1992 to $62.5 million in 1993 and decreased to $40.3 million in 1994. The increase in 1993 was due to an increase in notes receivable from $171.3 million (1992) to $337.9 million (1993). Additionally, the Company had dividend income of $6.4 million (1992) and $2.4 million (1993) from its investment in Alaska Air Group and realized $8.6 million (1992) and $16.3 million (1993) in deposit forfeitures and fees principally on repossessed aircraft and early lease terminations. The decrease in 1994 was due to the decline in dividend income due to the disposition of the Alaska Air Group Stock in 1993. In addition, due to the stabilization in the airline industry, the Company only realized $1.4 million (1994) in deposit forfeitures and fees on early lease terminations.
Expenses as a percentage of total revenues were 66.3% for 1992 compared to 70.0% for 1993 and 71.9% for 1994. Interest expense increased from $243.5 million in 1992 to $301.2 million in 1993 to $376.6 million in 1994, primarily as a result of an increase in debt outstanding, excluding the effect of debt discount, from $4,249.3 million in 1992 to $5,829.7 million in 1993 to $7,602.0 million in 1994 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:
The balance of the increase in expenses is primarily attributable to increases in depreciation of flight equipment from $192.2 million in 1992 to $268.2 million in 1993 to $334.6 million in 1994 due to the addition of aircraft.
Provision for overhauls increased from $28.1 million in 1992 to $39.9 million in 1993 to$57.6 million in 1994 due to an increase in the number of aircraft on which the Company collects overhaul reserves and therefore an increase in the number of hours flown for which an overhaul reserve is provided, partially offset by the reversal of reserves on aircraft which either changed lessees or were sold during the year.
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
During the two fiscal periods prior to the date of the Company's most recent financial statements, the Company has not reported a change in accountants nor have there been any disagreements reported on any matter of accounting principles or practices or financial statement disclosure.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2): Financial Statements and Financial Schedule: The response to this portion of Item 14 is submitted as a separate section of this report beginning on page 18.
(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 14.
(b) Reports on Form 8-K: Current Reports on Form 8-K, event dates October 12, 1994 andDecember 6, 1994.
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):
- ------------ *Denotes management contract.
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors International Lease Finance Corporation Los Angeles, California
We have audited the accompanying consolidated balance sheets of International Lease Finance Corporation as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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 at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, 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 21, 1995
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
See accompanying notes.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
(Table continued on next page)
(Table continued from previous page)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Flight equipment with a net book value of $222,873 was transferred from finance and sales-type leases to operating leases. Flight equipment was received in exchange for notes receivable in the amount of $69,317. Notes and finance and sales-type leases in the amount of $177,857 were received as partial payments in exchange for flight equipment sold with a book value of $124,230. Flight equipment with a net book value of $60,478 was transferred from operating leases to finance and sales-type leases. Flight equipment was received in exchange for notes receivable in the amount of $41,987. Notes in the amount of $228,645 were received as partial payments in exchange for flight equipment sold with a book value of $204,185. Notes in the amount of $26,600 were received in exchange for investments in preferred stock with a book value of $26,153. Notes in the amount of $60,595 were received as partial payments in ex- change for flight equipment sold with a book value of $47,622.
See accompanying notes.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Parent Company: International Lease Finance Corporation (the "Company") is a wholly owned subsidiary of American International Group, Inc. ("AIG"). AIG is a holding company which through its subsidiaries is primarily engaged in a broad range of insurance and insurance-related activities in the United States and abroad.
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 affiliates are carried at cost. Investments of between 20% and 50% in other affiliates are carried under the equity method. All significant intercompany balances and transactions have been eliminated in consolidation.
Intercompany Allocations: AIG allocates certain costs to its subsidiaries. The charges amounted to $2,506 (1994), $2,312 (1993) and $225 (1992).
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 amounts 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, commissions and net gains on disposition of leased flight equipment.
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 contingent rentals paid the Company by the lessee. The Company provides a charge to operations for such reimbursements based primarily upon the hours utilized during the period and the expected reimbursement during the life of the lease.
Generally, all aircraft are depreciated using the straight-line method over a 25 year life from the date of manufacture to a 15% residual value. Boeing 737-200 aircraft are depreciated to a residual value of 15% at December 31, 1996.
At the time assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the related accounts and the difference, net of proceeds, is recorded as a gain or loss.
Capitalized Interest: The Company borrows certain funds to finance progress payments for flight equipment being constructed to order. 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 being amortized over the life of the debt using the interest rate method.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial Instruments: As a result of the Company having specific aircraft purchase agreements, it has been able to obtain financing options for fixed rate debt. The financing is available upon the purchase of specific aircraft. However, the Company is not required to use the financing options to purchase the specific aircraft and may choose to use other financing methods. Acquired financing options that are expected to be designated as hedges of anticipated financing arrangements are carried at cost based on their allocated fair values. Such costs are amortized over the lives of the acquired financing options.
The Company has granted certain parties the right but not the obligation to effectively convert certain of the Company's fixed note obligations to floating rate obligations based on an established notional amount. The proceeds of such option agreements are initially recorded as a liability. Subsequently, the value of such options agreements, as well as the cost allocated to undesignated aircraft financing options, are adjusted to fair value with changes in value recorded in income.
When swap agreements resulting from this activity are effective in modifying the terms of actual debt agreements from a fixed rate basis to a floating rate basis, such swaps are treated 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 from 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").
Reclassifications: Certain amounts have been reclassified in the 1993 and 1992 financial statements to conform to the Company's 1994 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 flight equipment and are summarized as follows:
The Company restructured approximately $36,558 (1994) and $16,428 (1993) of lease payments, of which $18,010 was outstanding at December 31, 1994 and is included above.
At December 31, 1994, the minimum future notes receivable payments to be received are as follows:
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:
The decrease in 1994 primarily resulted from the conversion of three aircraft from finance leases to operating leases.
Minimum future lease payments to be received for flight equipment on finance and sales-type leases at December 31, 1994 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:
In addition, the Company has notes receivable of $10,538 (1994) and $31,984 (1993) from companies in which it has investments.
At December 31, 1994, the Company had seven aircraft on lease to Air Liberte and nine on lease to Southwest Airlines. These leases are similar in terms to those of unaffiliated customers.
The Company has sold used aircraft and engines to International Aircraft Investors ("IAI") on terms similar to those of unaffiliated customers (see Note J). In exchange for these sales the Company has received notes which are included in Notes Receivable in the accompanying consolidated balance sheets (see Note B).
The Company has a 50% interest in Pacific Ocean Leasing Ltd. ("POL"), a Bermuda corporation. POL presently owns one Boeing 767-200 aircraft, one spare engine and various spare parts on lease to an airline. Additionally, the Company has guaranteed the bank loan to POL (see Note J) and has a subordinated loan to POL, which is included in Notes Receivable on the accompanying consolidated balance sheets (see Note B).
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 guaranteed a bridge loan in connection with such purchase (see Note J).
In 1993, the Company invested $1,601 for a 50% interest in Hoeri Corporation ("Hoeri"), a British Virgin Islands corporation. In 1994, the subordinated loan was paid off and the investment in the company was sold (see Note B).
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
NOTE E--DEBT FINANCING
Debt financing is comprised of the following:
Bank Financing:
As of December 31, 1994, the Company had committed credit agreements with 29 commercial banks aggregating $1,226,000 and uncommitted lines of credit with two commercial banks in the amount of $125,000. Bank debt principally provides for interest rates that vary according to the pricing option then in effect and range from prime, .25% to 3/8% over LIBOR or .375% to .425% over CD rates, at the option of the Company. The interest rates on the uncommitted bank lines are fixed for a period of up to one year at rates determined by the banks. Bank debt is subject to facility fees of up to .1875% of amounts available. Bank financing is used primarily as backup for the Company's Commercial Paper program.
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:
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE E--DEBT FINANCING (CONTINUED)
Term Notes (continued):
Medium-Term Notes:
The Company's Medium-Term Notes bear interest at rates varying between 3.75% and 9.88%, inclusive, with maturities from 1995 through 2004. 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:
At December 31, 1994, the Company had guaranteed funding facilities with committed fixed rate funding for 1995 borrowings in the amount of $1,484,000. The facilities provide for funding the purchase of up to 23 Airbus aircraft during 1995. The Company has the right but not the obligation to utilize these facilities and will make this decision based on the cost of the facilities versus alternate funding opportunities existing on the exercise dates of the facilities.
The Company's guaranteed funding facilities provide 10 year, fully amortizing debt in three interest rate tranches. The first 62.5% of the debt is at a fixed rate of 6.55%. The second 22.5% of the debt is at fixed rates varying between 6.18% and 6.89%. The final 15% of the debt is at a floating LIBOR based rate.
Maturities of debt financing (excluding commercial paper) at December 31, 1994 are as follows:
Under the most restrictive provisions of the related borrowings, consolidated retained earnings at December 31, 1994, in the amount of $82,000 are unrestricted as to payment of dividends.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE F--SHAREHOLDERS' EQUITY
Preferred Stock:
In November 1993 and December 1992, 500 shares each of Series C and D and 500 shares each of Series A and B, respectively, of Market Auction Preferred Stock ("MAPS") were issued in connection with public offerings at $100,000 per share. Proceeds, net of issuance costs, to the Company were $98,472 (1993) and $98,568 (1992). The MAPS have a liquidation value of $100,000 per share and are not convertible. The dividend rate, other than the initial rate, for each dividend period for each series will be reset approximately every 7 weeks (49 days) on the basis of orders placed in an auction. At December 31, 1994, the dividend rates for Series A, B, C and D were 4.88%, 5.125%, 4.53% and 4.60%, respectively.
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, 1994.
NOTE G--RENTAL INCOME
Minimum future rentals on noncancelable operating leases of flight equipment which have been delivered at December 31, 1994 are as follows:
Additional rentals earned by the Company based on the lessees' usage aggregated $122,321 (1994), $101,761 (1993) and $72,589 (1992). Flight equipment is leased, under operating leases, with remaining terms ranging from one to 11 years.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE H--INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
The provision for deferred income taxes is comprised of the following temporary differences:
The deferred tax liability at December 31, 1994 consists of the following:
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE H--INCOME TAXES (CONTINUED)
A reconciliation of computed expected total provision for income taxes to the amount recorded is as follows:
NOTE I--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 marketing of flight equipment through leasing and sales.
Revenues include rentals of flight equipment to foreign airlines of $798,619 (1994), $655,773 (1993) and $546,452 (1992).
Miscellaneous
Interest and other revenue includes dividend income from its investment in Alaska Air Group $2,431 (1993) and $6,400 (1992) and security deposit forfeitures and early lease termination fees of $1,400 (1994), $16,329 (1993) and $8,565 (1992).
Employee Benefit Plans
The Company's employees participate in various benefit plans sponsored by AIG, including a noncontributory qualified defined benefit retirement plan 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, 1994 by $21,375.
Gain on Disposition of Assets
During 1992, proceeds from the sale and leaseback of aircraft were $26,000. The gain of $7,069 was deferred and is being credited to rent expense over the term of the applicable lease agreement.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE J--COMMITMENTS AND CONTINGENCIES
Aircraft orders and options
At December 31, 1994, the Company had committed to purchase 236 aircraft deliverable from 1995 through 2000 at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $13,379,200.
At December 31, 1994, the Company had options to purchase 51 aircraft deliverable from 1996 through 2001 at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $2,766,800.
Most of these purchase commitments and options are based upon master arrangements with each of The Boeing Company ("Boeing"), AVSA, S.A.R.L., the sales subsidiary of Airbus Industrie ("Airbus"), Fokker Aircraft USA Inc. ("Fokker") and McDonnell Douglas Corporation ("McDonnell Douglas").
The Boeing aircraft (models 737, 747, 757, 767 and 777), the Airbus aircraft (models A300, A310, A319, A320, A321, A330 and A340), the Fokker aircraft (model) and the McDonnell Douglas aircraft (model MD-11) described above are either being purchased, or the options to purchase have been granted, pursuant to purchase agreements executed by the Company and Boeing, Airbus, Fokker or McDonnell Douglas, respectively. 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, 1994, 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 $430,080, $330,595, $2,000 and $39,181 with Boeing, Airbus, Fokker and McDonnell Douglas, respectively.
If all 287 aircraft were to be acquired, the estimated aggregate purchase price (including adjustment for anticipated inflation) would be approximately $16,146,000. 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 guaranteed a portion of the residual value of one aircraft for a fee paid in 1990, four aircraft for fees paid in 1991 and five aircraft for fees paid in 1994. The aggregate guarantees at December 31, 1994, are $131,313 and, if called upon, are payable in the amounts of $2,000 (1995), $6,213 (1997), $3,100 (1999), $21,000 (2000), $63,000 (2003) and $36,000 (2006).
Other Guarantees
In connection with the acquisition of six aircraft by affiliates, the Company guaranteed the loans, which at December 31, 1994 aggregated $65,493.
In connection with the acquisition of one aircraft by an unrelated company, the Company guaranteed an aggregate of $1,440 of lease payments through 1996.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE K--FINANCIAL INSTRUMENTS
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. These derivative products include interest rate swap agreements, interest rate spreadlocks and interest rate swap options ("swaptions").
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. One of the counterparties is a related party of the Company. All derivative contracts between the Company and the related party are at arms length. The Company currently does not, although it can in certain circumstances, require its counterparties to provide security for its positions with the Company. Any failure of the instruments or counterparties to perform under the derivative contracts would have an immaterial impact on the Company's earnings.
At December 31, 1994 and 1993, the Company had interest rate swap agreements with aggregate notional amounts of $294,761 and $125,000, respectively, which effectively converted certain fixed rate obligations with a weighted average interest rate of 6.46% (1994) and 5.56% (1993) to variable rate obligations equal to the six month LIBOR rate. In addition, at December 31, 1994 and 1993, the Company had an interest rate swap agreement with a notional amount of $100,000 which effectively converted a floating rate obligation equal to the one month commercial paper rate to a fixed rate obligation with a weighted average interest rate of 5.82%. Also, at December 31, 1994 the Company had an interest rate swap agreement with a notional amount of $50,000 which converted a floating rate obligation equal to two year U.S. Treasuries minus 0.25% to a floating rate obligation equal to three month LIBOR plus 0.25%. The interest rate swap agreements expire in 1996 ($25,000 notional value), 1997 ($100,000 notional value), 1998 ($100,000 notional value), 1999 ($50,000 notional value) and 2004 ($169,761 notional value).
At December 31, 1994, the Company had committed swaption contracts with an aggregate notional amount of $1,116,280 substantially expiring through 1996. The swaptions grant to the option holder the right but not the obligation to effectively convert certain of the Company's fixed rate financing options with a weighted average interest rate of 6.78% to floating rates equal to the six month LIBOR rate. The swaptions were entered into with the objective to lower the Company's borrowing costs and to obtain its optimal mix of variable and fixed rate obligations.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying value reported in the balance sheet for cash and cash equivalents approximates its fair value.
Notes receivable: The fair values for notes receivable are estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE K--FINANCIAL INSTRUMENTS (CONTINUED)
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. The carrying amount of these investments at December 31, 1994 represents the original cost or original cost plus the Company's share of earnings of the investment, which management believes is not impaired. For investments held by the Company that had a quoted market price at December 31, 1994, 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 Treasuries 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 the guaranteed loan facility) 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).
The carrying amounts and fair values of the Company's financial instruments at December 31, 1994 are as follows:
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
- -------- (1)Reimbursements to lessees for overhauls performed. (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 20, 1995
INTERNATIONAL LEASE FINANCE CORPORATION
By LESLIE L. GONDA ---------------------------------------- Leslie L. Gonda Chairman of the Board
Pursuant to 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 a wholly owned subsidiary of AIG, no annual report to security holders for the year ended December 31, 1994 or proxy statement, form of proxy or other proxy soliciting materials have been sent to securities holders since January 1, 1990.