As filed with the Securities and Exchange Commission on October 1 , 2004
Registration No. 333-5650
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 20-F
_________________
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-5650
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
(Exact name of Registrant as specified in its charter)
JERSEY, CHANNEL ISLANDS
(Jurisdiction of incorporation or organization)
22 Grenville Street
St. Helier, Jersey
JE4 8PX Channel Islands
(Address of principal executive offices)
_________________
Securities registered or to be registered pursuant to Section 12(b) of the
Act: None
Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.
(Title of Class)
ALPS 96-1 Pass Through Trust $245,673,000 Class A Pass Through Certificates,
Series A
ALPS 96-1 Pass Through Trust $56,868,750 Class B Pass Through Certificates,
Series A
ALPS 96-1 Pass Through Trust $50,044,500 Class C Pass Through Certificates,
Series A
ALPS 96-1 Pass Through Trust $40,945,500 Class D Pass Through Certificates,
Series A
Indicate the number of outstanding shares of each of the issuer's classes of
capital or Ordinary Shares as of the close of the period covered by the
annual report.
Shares, $1 par value........................................ 10
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 ___ Item 18 X
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TABLE OF CONTENTS
Page
Introduction
Definitions and Technical Terms....................... 1
Forward-Looking Statements............................ 1
Certain Information................................... 1
Part I Item 1. Identity of Directors, Senior
Management and Advisors............................ 1
A. Directors and Senior Management...........Not applicable
B. Advisors..................................Not applicable
C. Auditors..................................Not applicable
Item 2. Offer Statistics and Expected Timetable...... 2
A. Offer Statistics..........................Not applicable
B. Method and Expected Timetable.............Not applicable
Item 3. Key Information.............................. 2
A. Selected Financial Data................... 2
B. Capitalization and Indebtedness...........Not applicable
C. Reasons for the Offer and Use of Proceeds.Not applicable
D. Risk Factors.............................. 3
Item 4. Information on the Company................... 27
A. History and Development of the Company.... 27
B. Business Overview......................... 29
C. Organizational Structure.................. 39
D. Property, Plants and Equipment............ 39
Item 5. Operating and Financial Review and Prospects. 40
A. Operating Results......................... 40
B. Liquidity and Capital Resources........... 48
C. Research and Development, Patents
and Licenses............................ Not applicable
D. Trend Information......................... 52
E. Off-Balance Sheet Arrangements............ 54
F. Tabular Disclosure of Contractual
Obligations............................. 54
Item 6. Directors, Senior Management and Employees... 55
A. Directors and Senior Management........... 55
B. Compensation.............................. 60
C. Board Practices........................... 60
D. Employees................................. 61
E. Share Ownership........................... 61
Item 7. Major Shareholders and Related Party
Transactions....................................... 61
A. Major Shareholders........................ 61
B. Related Party Transactions................ 62
C. Interests of Experts and Counsel..........Not applicable
Item 8. Financial Information........................ 62
A. Consolidated Statements and Other
Financial Information................... 62
B. Significant Changes....................... 62
Item 9. The Listing.................................. 62
A. Offer and Listing Details................. 62
B. Plan of Distribution......................Not applicable
C. Markets................................... 62
D. Selling Shareholders......................Not applicable
E. Dilution..................................Not applicable
F. Expenses of the Issue.....................Not applicable
Item 10. Additional Information.................... 63
A. Share Capital.............................Not applicable
B. Memorandum and Articles of Association.... 63
C. Material Contracts........................ 67
D. Exchange Controls......................... 67
E. Taxation.................................. 67
F. Dividends and Paying Agents...............Not applicable
G. Statement by Experts......................Not applicable
H. Documents on Display...................... 69
I. Subsidiary Information....................Not applicable
Item 11. Quantitative and Qualitative Disclosures about
Market Risk........................... 69
Item 12. Description of Securities other than Equity
Securities............................. Not applicable
Part II Item 13. Defaults, Dividend Arrearages and
Delinquencies........................... 70
Item 14. Material Modifications to the rights of
Security Holders and use of Proceeds.... 72
Item 15. Controls and Procedures................... 72
Item 16. Reserved.................................. 72
Item 16A Audit Committee Financial Expert.......... 72
Item 16B Code of Ethics............................ 73
Item 16C Principal Accountant Fees and Services.... 73
Item 16D Exemption From the Listing Standards
for Audit Committee.................... Not applicable
Item 16E Purchases of Equity Securities by
the Issuer and
Affiliated Purchasers........................ 74
Part III Item 17. .............................................Not applicable
Item 18. Consolidated Financial Statements......... 74
Item 19. Exhibits.................................. 74
Certain Definitions and Technical Terms............... 75
1
INTRODUCTION
Definitions and Technical Terms
This annual report on Form 20-F uses defined terms and technical
terms. Definitions for these terms can be found on pages 75 to 82 of this
annual report.
Forward-Looking Statements
This annual report contains forward-looking statements that involve
risks and uncertainties. In most cases, you can identify forward-looking
statements by terminology such as "may," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of such terms or similar terminology. Such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and actual results may differ materially from those in the
forward-looking statements. In evaluating these statements, you should
specifically consider various factors, including, without limitation, the
information contained in this annual report under "Item 3 - Key Information
- - Risk Factors," "Item 4 - Information on the Company" and "Item 5 -
Operating and Financial Review and Prospects."
Certain Information
Aircraft Lease Portfolio Securitisation 92-1 Limited was incorporated
in Jersey on May 13, 1992 (registered number 52674) as a private limited
company under the laws of Jersey and became a public limited company
pursuant to a special resolution passed on June 15, 1992. As used in this
annual report on Form 20-F, "we," "us," "our" and the "Company" refer to
Aircraft Lease Portfolio Securitisation 92-1 Limited and its subsidiaries,
except where it is clear that such terms mean only Aircraft Lease Portfolio
Securitisation 92-1 Limited, and "you" and "your" refer to the holders of
Notes.
In this annual report, references to "United States" are to the United
States of America and references to "U.S. dollars," "dollars," "$" or "U.S.
$" are to United States dollars.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
A. Directors and Senior Management
Not applicable.
B. Advisors
Not applicable.
C. Auditors
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
A. Offer Statistics
Not applicable.
B. Method and Expected Timetable
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following table summarizes selected consolidated financial data
and operating information of the Company drawn from our audited financial
statements. The financial statements for each of the fiscal years ended
June 30, 2000 through 2004 have been prepared in accordance with U.S. GAAP
and audited by KPMG, independent chartered accountants. The selected
consolidated financial data should be read in conjunction with "Item 18 -
Consolidated Financial Statements" and the notes thereto and "Item 5 -
Operating and Financial Review and Prospects - Operating Results."
Selected Consolidated Financial Data and Operations Information
FISCAL YEAR ENDED (1)
June 30 June 30 June 30 June 30 June 30
2004 2003 2002 2001 2000
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STATEMENT OF OPERATIONS DATA:
Lease Revenue - Aircraft Leasing $15,175 $19,758 $32,605 $37,948 $43,087
Gain/(Loss) on sale of Aircraft - (1,152) - - 284
-------- --------- --------- --------- --------
Net Revenue 15,175 18,606 32,605 37,948 43,371
Net Expenses (51,325) (49,266) (63,370) (90,984) (52,680)
Loss before taxes (35,939) (30,660) (30,765) (53,036) (9,309)
Taxes (7) (225) (24) (20) (20)
Dividend - - - - -
--------- -------- -------- -------- -------
Net Loss $(35,946) $(30,885) $(30,789) $(53,056)$(9,329)
--------- -------- -------- -------- -------
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BALANCE SHEET DATA:
Total assets $166,136 $192,284 $254,987 $291,244 $340,876
Total liabilities $366,253 $356,455 $388,273 $393,741 $390,317
Shareholders' deficit $(200,117) $(164,171)$(133,286)$(102,497) $(49,441)
OTHER DATA
Aircraft owned at period end 9 9 11 11 11
________________
(1) All dollar amounts are listed in thousands.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
The following summarizes certain risks which may materially affect our
ability to pay interest, principal and premium, if any, on the Notes in full
at or before their final maturity date.
The risks and uncertainties described below are not the only ones
facing our company. Additional risks and liabilities that we are not aware
of at present, or that we believe today are immaterial, may also impair our
business operations. Our business, financial condition and results of
operations could be materially adversely affected by any of these risks. If
any of the following risks actually occur, we may not be able to make the
required payments on the Notes.
Recent Developments
Negative trends caused by the depression in the aviation industry have
adversely affected our lessees and our ability to sell and lease aircraft
and thereby have adversely affected our revenue.
The pre-existing slowdown in the global economy and its negative
effect on the commercial aviation industry was exacerbated by the economic
and political fallout from the terrorist attacks in the United States on
September 11, 2001, the military action of the U.S. and its allies in
Afghanistan, the war in Iraq, ongoing terrorist attacks in various parts of
the world and the outbreak of SARS.
In recent years, a number of initially small low cost airlines have
emerged with radically reduced fares and the attempt by the older
traditional "legacy" carriers to compete by matching the fares of these low
cost airlines has contributed to many of these larger airlines experiencing
significant financial losses due to their inability to adequately reduce
their greater costs of operation. A number of these larger airlines have
recently emerged from, filed for or are indicating that they are close to
filing for bankruptcy. Air Canada, our largest lessee, as measured by our
annual lease revenue and the ninth largest airline in the world as measured
by fleet size, filed for bankruptcy in April 2003 and emerged from
bankruptcy on September 30, 2004. United Airlines and U.S. Airways, the
second and sixth largest airlines in the world, respectively, as measured by
fleet size, are currently subject to Chapter 11 bankruptcy protection (U.S.
Airways for the second time in two years). Delta Airlines, the third
largest airline in the world as measured by fleet size, is indicating that
absent significant financial concessions from its employees it will be
forced to declare bankruptcy. Although many of these bankruptcies and
threatened bankruptcies of the largest airlines in the world are essentially
restructurings to reduce the airline's cost base they do often result in
fleet reductions and in some cases have the potential to lead to
liquidations. When these large airlines reduce the size of their fleets,
supply of used aircraft in the market increases and negatively affects the
lease rates and sale proceeds we can obtain for our aircraft. Further, if
any of these airlines or any other large airlines were to liquidate, the
addition of their aircraft portfolios into the marketplace would likely
cause significant volatility to lease rates and sale prices for used
aircraft. In addition to increasing the supply of aircraft for sale or
lease, further bankruptcies and consolidation would also further reduce the
number of potential lessees and operators of particular models of aircraft,
which would result in further decreased aircraft values for any such models
and lease rates in general. Certain of our lessees have suffered large
losses or face severe financial difficulties. Indeed, Skynet, one of our
lessees from January 2003 to May 2004, has ceased operations and returned
the aircraft we had leased to them ten months prior to the scheduled
expiration of their lease.
Significant increases in the cost of fuel in 2004 have further
strained the financial viability of many airlines. At the beginning of
2004, the IATA forecasted a $3 billion profit for the global airline
industry for calendar year 2004. This projection was based on among other
things, a positive trend that began in the last twelve months of an increase
in the number of airline passengers. RPK has increased in every region in
the first seven months of 2004 as compared to the same period in 2003. This
increase was particularly significant in Asia as the airlines in Asia
continued to rebound from SARS related issues. The IATA projection was also
predicated on a number of assumptions including the assumption that the
average price of oil in 2004 would be $30 per barrel. Assuming all other
assumptions remained unchanged, but that the average oil price were instead
$33 per barrel the IATA industry forecast changed to project that the
industry would break even, and if the average price were assumed to be $36
per barrel, the forecast varied further to project a $3 billion loss for the
industry. As at January 31, 2004, June 30, 2004, August 31, 2004 and
September 30, 2004 the price of oil was approximately $32, $36, $41 and $50
per barrel, respectively.
The depressed aircraft market that has existed for the last four years
has meant it has not been possible for the Company to sell aircraft at
prices consistent with the Business Objectives set out in the Deed of
Charge. Lease rates also suffered from the increase after September 2001 in
availability of aircraft, although in the past twelve months the overall
number of used aircraft available for lease and sale has begun to decrease
and lease rates have now begun to increase. However, the resulting positive
impact has been less significant for older aircraft such as ours. Further,
the potential for volatility as a result of airline restructurings or
liquidation, or the occurrence of other adverse world events remains. We
have experienced a significant decline in lease rates upon re-leasing or
extending leases as compared to lease rates prior to September 2001 and we
have received requests from certain lessees to restructure their leases.
Although the situation is now improving, our business has been adversely
affected by these negative developments in the industry during this period,
particularly in respect of new aircraft leases and the increased negotiating
power by lessees to, among other things, require that certain aircraft
maintenance, modification and overhaul expenses and the expenses of
complying with ADs be paid by the Company. As a result of the loss of
investor appetite and the difficulty in obtaining financing for the purchase
of the types of older aircraft in our portfolio, there are few potential
buyers of these aircraft on operating lease, and the resulting illiquidity
in the market has caused sale prices of these aircraft to further decline.
There have been few sale transactions of older aircraft such as the aircraft
in our portfolio that we are aware of in the past twelve months and the
difficulty in selling these types of older aircraft in the current market
has had an adverse effect on sales prices generally. The sales prices we
received for the aircraft we sold in fiscal year 2003, in our efforts to
comply with the Trust Note Sales Goals, reflected the industry wide decline
in sales prices for older aircraft.
In fiscal year 2000, we determined that projected lease and sale
proceeds combined with lease and sale proceeds received indicated that
proceeds expected through to the final maturity dates of the Notes would not
be sufficient to repay the Class E Notes in full and may not be sufficient
to repay the Class D Notes in full. Recognizing this projected shortfall
and the potential for further deterioration in lease rates and sale values
for older aircraft, we considered the limited alternatives available to us,
given the restrictions imposed by the Deed of Charge on the Company's
operations, to maximize the proceeds available to pay noteholders the
amounts owing to them at the time such amounts become due. With the
assistance of the Servicer, we solicited bids for a sale of our aircraft
portfolio.
By September 11, 2001, we were in advanced negotiations for a sale of
the Company to a prospective purchaser that would have, if consummated,
resulted in payment of all amounts owing to the Class A, Class B and Class C
noteholders and all amounts owing to the Class D noteholders except
make-whole premium. As a result of the terrorist attacks of September 11,
2001 and the resulting disruption to the economy generally and the airline
industry specifically, the prospective purchaser initially put these
negotiations on hold and ultimately informed us that they were no longer
interested in purchasing the portfolio. Assuming we were able to find
another prospective purchaser, the terms we negotiated prior to September
11, 2001 would not be achievable at this time given the current condition of
the airline industry. Further, because the sale values of older aircraft
have declined so significantly and with respect to certain aircraft models
there is currently no sales market, the Company was unable to comply with
the Trust Note Sales Goal for June 2003 or for June 2004.
This difficult business environment has already had serious adverse
implications for our revenue, and consequently for our ability to pay
noteholders certain amounts due. During fiscal year 2004, certain target
principal payments scheduled to be paid to holders of Class A, Class C and
Class D Notes, certain interest payments due to holders of Class A, Class B
and Class C Notes and all interest payments due to holders of Class D and
Class E Notes were in arrears. As at the end of fiscal year 2004, these
arrears consisted of $70.810 million of Class A Note Target Amount, $0.942
million of Class A Note step-up interest, $0.407 million of Class B Note
step-up interest, $4.304 million of Class C Note Target Amount, $0.390
million of Class C Note step-up interest, $5.177 million of Class D Note
Target Amount, $0.665 million of Class D Note step-up interest, $1.042
million of Class D Note default interest, $7.130 million of Class D Note
regular interest and $52.705 million of Class E Note interest. As of
September 15, 2004, unpaid amounts of target principal payments and interest
consisted of $77.472 million of Class A Note Target Amount, $1.042 million
of Class A Note step-up interest, $0.458 million of Class B Note step-up
interest, $4.304 million of Class C Note Target Amount, $0.441 million of
Class C Note step-up interest, $5.177 million of Class D Note Target Amount,
$1.127 million of Class D Note default interest, $0.750 million of Class D
Note step-up interest, $8.215 million of Class D Note regular interest and
$54.779 million of Class E Note interest.
As a result of the continued decline in lease rental rates and market
values, our revenue has decreased significantly. In addition, several of
our leases are "power-by-the-hour" leases, where our receipts are dependent
on the lessees' use of the aircraft. These factors have had an adverse
impact on our cashflow.
The rental amounts and sales proceeds received to date combined with
projected rental amounts and sale proceeds through the final maturity date
of the Notes indicate that there will not be sufficient funds to pay any
further interest on or repay the principal of the Class E Notes, pay any
further interest on or repay any further principal of the Class D Notes,
repay any further principal of the Class C Notes, repay some or all of the
outstanding principal of the Class B Notes or pay any further step-up
interest on the Class A, B, C or D Notes.
A significant proportion of our limited cash resources are being
applied and are expected to continue to be applied to pay required
maintenance, modification and overhaul expenses and the expenses of
complying with ADs that have come due in the last twelve months and that are
expected to continue to come due in the future. As a result, we have paid
only limited Class A Note principal in fiscal year 2004 and we expect to
only be able to pay a limited amount, if any, of Class A Note principal
prior to the sale of any of our aircraft.
ADs (and together with maintenance, modification and overhaul
expenses, "Maintenance Expenses") applicable to our aircraft have been
increasing due to various factors including the ageing of our aircraft, the
increased negotiating power of lessees to require us, as lessor, to
contribute towards Maintenance Expenses, and the increase in ADs issued that
relate to our aircraft. At the same time, our lease revenues have been
decreasing as we have sold aircraft to comply with the requirements of the
Deed of Charge and as lessees have negotiated for more favourable terms
given the weak industry environment and the age of our aircraft. These
Maintenance Expenses (as well as our other operational expenses) are
required to be paid prior to any principal payments to our Noteholders. As
a result of the increased percentage of our lease revenue being used to pay
Maintenance Expenses, as well as the continuation of a number of negative
industry factors as discussed in this Annual Report, in fiscal year 2004 we
have paid only $7.9 million of principal to Class A Noteholders (with only
$1.4 million of this principal being paid in the last six months of fiscal
year 2004) and have been unable to pay any principal to any other
Noteholders. Although in many cases it is not possible to predict with any
degree of certainty the amount of future Maintenance Expenses or when they
will come due, our projections based on information currently available to
the Servicer suggest that, in the absence of sales of our aircraft, our
future Maintenance Expenses combined with the other pre-existing negative
industry factors are likely to cause us to have only limited cash flow, if
any, available to pay any further principal to Class A Noteholders and
insufficient cash flow available to pay any further principal to other
Noteholders. Further, the combined effect of the Class A Note Target Amount
increasing as a result of the amortization schedule and of our inability to
pay Class A principal due to insufficient funds has caused the Class A Note
Target Amount arrears to increase significantly each month. As of September
15, 2004, the Class A Note Target Amount arrears are $77.472 million (being
the entire outstanding principal balance of the Class A Notes). The
inability of the Company to pay principal of the Notes on any day prior to
the final maturity date because funds are not available in accordance with
the priority of payments set out in the Deed of Charge does not constitute
an Event of Default.
We were unable to repay any of the Notes by their expected final
payment date and current projections indicate that we will not have
sufficient funds to pay any further step-up interest on any of the Notes,
pay any further interest on or repay the principal of the Class E Notes, pay
any further interest on or repay any further principal of the Class D Notes,
repay any further principal of the Class C Notes or to repay some or all of
the outstanding principal of the Class B Notes.
The pre-existing slowdown in the global economy and its negative
effect on the commercial aviation industry was exacerbated by the economic
and political fallout from the terrorist attacks in the United States on
September 11, 2001, the military action of the U.S. and its allies in
Afghanistan, the war in Iraq, ongoing terrorist attacks in various parts of
the world and the outbreak of SARS. These events combined with the
pre-existing downturn in the airline industry prior to September 11, 2001
have negatively affected projected rental amounts and sale proceeds through
to the final maturity date of the Notes. Our current projections indicate
that we will not have sufficient funds to pay any further step-up interest
on any of the Notes, pay any further interest on or repay the principal of
the Class E Notes, pay any further interest on or repay any further
principal of the Class D Notes, repay any further principal of the Class C
Notes or to repay some or all of the outstanding principal of the Class B
Notes.
The Company did not have sufficient funds to repay the Class A Notes
on their expected final payment date of May 15, 2002 or to repay the Class
B, Class C or Class D Notes on their expected final payment date of July 15,
2002. Failure to repay in full the principal of those Notes by such dates
is not an Event of Default; however, the Deed of Charge requires, to the
extent the Company does not repay in full the principal of those Notes by
such dates, that the Company pay to the Class A, Class B and Class C
Noteholders additional step-up interest of 0.50% per annum and to the Class
D Noteholders additional step-up interest of 1.00% per annum for each month
until the earlier of the date such Notes are repaid in full and their final
maturity date of June 15, 2006. These additional interest costs will only
be paid to the extent there are available collections in accordance with the
priority of payments set forth in the Deed of Charge. The Company paid some
step-up interest in fiscal year 2002, but our current projections indicate
that we will not have sufficient funds to pay any further step-up interest.
We were unable to comply with the Trust Note Sales Goals for June 2003
and for June 2004 and as a result we may be required by the Deed of Charge
to sell aircraft at the Class A Note Target Price.
The Deed of Charge sets out the following Trust Note Sales Goals which
required us to approve sales of our aircraft on an ongoing basis:
Aircraft to be Sold
(measured by Initial Appraised Date by which Sales Goals
Value as of June 3, 1996) were to be Satisfied
$65,000,000 June 27, 2001
$130,000,000 June 27, 2002
$200,000,000 June 27, 2003
$454,950,000 June 27, 2004
We were in compliance with and had exceeded the Trust Note Sales Goals
as of June 27, 2001 and were required to sell a further $54,330,000 (as
measured by Initial Appraised Value) worth of aircraft to be in compliance
with the Trust Note Sales Goals as of June 27, 2002.
As discussed above, since September 11, 2001, the market for sale of
older used aircraft such as our aircraft has been extremely poor.
Nevertheless, in order to meet the June 2002 Trust Note Sales Goal,
following an extensive marketing effort by the Servicer, the Company had
entered into non-binding agreements to sell a B737-300 and an A320-200
aircraft to two separate purchasers by June 27, 2002. However, as a result
of difficulties and delays outside the Company's control the sale of the
B737-300 aircraft was not completed until October 1, 2002 and the sale of
the A320-200 aircraft (which was ultimately sold to a different purchaser
following the withdrawal of the original prospective purchaser on November
5, 2002) was not completed until December 20, 2002. As a result, the
Company was not in compliance with the Trust Note Sales Goals from November
5, 2002 until the A320-200 aircraft was sold to such other purchaser on
December 20, 2002.
In the period from June 1996 to date, we have sold five aircraft
totaling $133,190,000 (measured by Initial Appraised Value). We needed to
sell an additional $66,810,000 (measured by Initial Appraised Value) worth
of aircraft to comply with the June 2003 Trust Note Sales Goal and needed to
sell all of our aircraft to comply with the June 2004 Trust Note Sales
Goal. At our direction, the Servicer has periodically been marketing each
of our aircraft for sale in order to meet the ongoing Trust Note Sales Goals
in a manner consistent with the requirements of the Deed of Charge.
However, the current market for sale of older used aircraft such as our
aircraft is extremely poor and it is not likely the market for our aircraft
will improve prior to the final maturity date of the Notes.
In fiscal year 2003, the marketing efforts of the Servicer resulted in
two offers to purchase the B757-200 aircraft, but both offers were at prices
significantly below the Class C Note Target Price. After careful
consideration of these offers, the Company's obligations under the Deed of
Charge (notably, the Business Objectives contained therein) and the then
current and possible future market conditions for aircraft sales and
leasing, we concluded that it would not be consistent with the terms of the
Deed of Charge for the Company to accept either such offer.
We did not comply with the Trust Note Sales Goals for June 27, 2003 or
for June 27, 2004 as we were unable, given the then current aircraft
industry market conditions, to sell sufficient aircraft at the sale prices
required by our then current Business Objectives.
Failure to comply with the Trust Note Sales Goals may, under certain
circumstances, constitute an Event of Default under the Deed of Charge if
such failure continues for 30 days or more after written notice thereof has
been given to the Company or the Security Trustee by holders of at least 25%
of the aggregate Outstanding Principal Balance of the Notes of any class
which has been materially adversely affected by such failure.
The Deed of Charge further provides that if an Event of Default were
to occur and be continuing an Enforcement Notice may only be served by
662/3% or more of the aggregate Outstanding Principal Balance of the
directing class, which will be Class A so long as any Class A Notes are
outstanding.
The Deed of Charge provides that the failure to comply with the June
2004 Trust Note Sales Goal gives the Noteholders the right to replace the
Servicer at the direction of Noteholders representing at least 66 2/3% of
the Outstanding Principal Balance of the Class A, Class B, Class C and Class
D Notes. The Deed of Charge also provides that, subject to the pre-emption
rights of the Class D and Class E Noteholders, to the extent the Trust Note
Sales Goals are not complied with prior to December 27, 2004, the Company is
required to accept any Sale Offer for the sale of an aircraft if the
proposed sale price is at least equal to the Class C Note Target Price.
During the time that the Company has not been in compliance with the Trust
Note Sales Goals, the Company has been unable, with the exception of the
sale of the A320-200 aircraft in December 2002, to sell aircraft at prices
at or above the Class C Note Target Price. However, to the extent the
Company has not complied with the Trust Note Sales Goals, on or after
December 27, 2004, the Company will be required, subject to the pre-emption
rights of the Class D and Class E Noteholders, to accept any Sale Offer for
the sale of an aircraft if the proposed sale price is at least equal to the
Class A Note Target Price (the "Required Sale Provision"). The Class A Note
Target Price, were all of the aircraft to be sold at the same time, is
defined in the Deed of Charge to be the Outstanding Principal Balance of the
Class A Notes (currently $77.472 million) plus accrued and unpaid Class A
Note regular interest at the time of sale and certain then outstanding
expenses of the Company.
Our Business Objectives changed on June 27, 2004 in a way that may
adversely affect Class B and Class C Noteholders.
With respect to the re-leasing, marketing and sale of aircraft, the
Deed of Charge provides that our Business Objectives (as described in "Item
4 - Information on the Company - B. Business Overview - Business
Objectives") change after certain dates. Accordingly, (i) prior to June 27,
2001 our Business Objectives were to (x) re-lease aircraft to maximize
rental payments so as to be able to make required payments of interest and
principal on the scheduled payment dates with respect to each class of Notes
and (y) market and sell aircraft so as to repay the Outstanding Principal
Balance of all Notes, (ii) from June 27, 2001 through June 26, 2004 our
Business Objectives were to (x) re-lease aircraft to maximize rental
payments so as to be able to make required payments of interest and
principal on the scheduled payment dates with respect to the Senior Trust
Notes and (y) market and sell aircraft so as to repay the Outstanding
Principal Balance of the Senior Trust Notes, and (iii) from June 27, 2004
through June 15, 2006 our Business Objectives are to (x) re-lease aircraft
to maximize rental payments so as to be able to make required payments of
interest and principal on the scheduled payment dates with respect to the
senior most class of Notes (namely the Class A Notes) and (y) market and
sell aircraft so as to repay the Outstanding Principal Balance of the senior
most class of Notes.
Consistent with these requirements of the Deed of Charge, from June
27, 2001 and continuing through June 26, 2004 we had analyzed each potential
sale or lease of aircraft with a view toward maximizing cashflow to the
holders of the Senior Trust Notes. However, since June 27, 2004 we have
been required to analyze such options with a view toward maximizing cashflow
to only the holders of Class A Notes. Although we are always cognizant of
acting in the interest of all the Company's noteholders, compliance with
this requirement may in certain circumstances dictate that aircraft be sold
or leased in a manner that may not be in the best interest of holders of
Notes junior to Class A. See "We were unable to comply with the Trust Note
Sales Goals for June 2003 and for June 2004 and as a result we may be
required by the Deed of Charge to sell aircraft at the Class A Note Target
Price."
As a result of incorrect LIBOR calculations by the Reference Agent,
holders of Class A, Class B and Class C Notes were overpaid on certain
payment dates and holders of Class D and Class E Notes were underpaid by
equivalent amounts on such dates.
The Reference Agency Agreement requires that the Reference Agent
determine LIBOR as the per annum rate for deposits in United States dollars
for a period of one month that appears on Telerate Page 3750 as of 11:00
a.m. (London time), rounded to the nearest 1/16 of one percentage point.
The Reference Agency Agreement further provides that based on this
determination, the Reference Agent shall determine the interest rate for
each class of the Company's floating rate notes.
The Reference Agent informed us in 2003 that since the Closing Date
there have been a number of instances where LIBOR was not rounded to the
nearest 1/16 of one percentage point. As a result on a number of Payment
Dates since the Closing Date, holders of Class A, Class B and Class C Notes
received more interest than they were entitled to, and holders of Class D
and Class E Notes received proportionately less interest than they were
entitled to. The Trustee has calculated that the cumulative effect of these
incorrect interest payments resulted in aggregate overpayments of
approximately $172,000, $70,000 and $61,000 to the holders of Class A, Class
B and Class C Notes, respectively, and underpayments of approximately
$215,000 and $88,000 to holders of Class D and Class E Notes, respectively.
The Trustee has sent notices to DTC for DTC to forward on to the
current holders of Class A, Class B and Class C Notes to attempt to identify
the holders of these Notes at the relevant times when the incorrect
overpayments were made and to request that the incorrect overpayments be
returned so that the Trustee can properly allocate such funds to the holders
of Class D and Class E Notes at the relevant times. The Trustee has also
sent notices to DTC for DTC to forward on to the current holders of Class D
Notes to attempt to identify the holders of the Class D Notes at the
relevant times when the incorrect underpayments were made, and the Trustee
has sent a notice to the holder of the Class E Notes. The Reference Agent
has advised the Company that it will compensate the relevant Class D and
Class E Noteholders to the extent of the incorrect underpayments and to the
extent these holders' identities are established. The Reference Agent has
further advised the Company that in response to these notices some
Noteholders who were underpaid have identified themselves and the Reference
Agent has compensated them to the extent of their respective underpayments.
Re-evaluation of our Notes by the rating agencies has resulted in
downgrades to our Class A, Class B, Class C and Class D Notes and could
result in some or all of these Notes being further downgraded by one or both
of the rating agencies.
In fiscal year 2004, Standard & Poor's announced on April 6, 2004 that
it was placing each class of the Notes on credit watch with negative
implications and on May 13, 2004 Standard & Poor's announced that it was
lowering its ratings on the Class A and Class B Notes and removing them from
credit watch.
In fiscal year 2004, Moody's announced on October 1, 2003 that it was
lowering its ratings on the Class A and Class B Notes. On May 11, 2004,
Moody's announced it was placing each class of the Notes rated by Moody's
under review for possible downgrade and on June 25, 2004, Moody's announced
it was downgrading each such class of Notes.
The current ratings on each class of the Notes are as follows:
Moody's Standard & Poor's
Class A Baa3 BB
Class B Caa1 B-
Class C Ca CCC/Outlook negative
Class D Not rated CCC-/Outlook negative
Copies of the announcements of these downgrades by Standard & Poor's
and Moody's may be viewed at their respective web sites.
A rating is not a recommendation to buy, sell or hold Notes because
ratings do not comment as to market price or suitability for a particular
investor. A rating may be subject to revision, suspension or withdrawal at
any time by the assigning rating agency. Given the continuing difficulties
in the aircraft industry and their impact on the factors which determine our
revenues, there can be no assurance that the rating agencies will not take
any further action in respect of our Notes.
Risks Relating to Payments on the Notes
Our assets are limited. Our current projections indicate that our
proceeds from leasing and selling aircraft will not be enough to pay any
further step-up interest on the Notes, pay any further interest on or repay
the principal of the Class E Notes, pay any further interest on or repay any
further principal of the Class D Notes, repay any further principal of the
Class C Notes or to repay some or all of the outstanding principal of the
Class B Notes.
We do not have, nor are we permitted or expected to have, any
significant assets other than our specific portfolio of aircraft and our
rights as lessor under the leases for these aircraft, including our rights
to the payments thereunder. Our ability to pay interest on and repay the
principal of the Notes is primarily dependent upon the receipt of rental
payments under the leases and of sales and other disposition proceeds in
respect of the aircraft, which depends upon a number of factors, including
(i) the timing of the receipt of payments under the leases and the ability
of our lessees to make such payments; (ii) the sale price we are able to
obtain for the sale of our aircraft and the timing of our receipt of the
proceeds of any such aircraft sales; (iii) our ability to re-lease any
aircraft upon termination of the existing lease with respect thereto,
whether upon the scheduled expiration date thereof or as a result of a
lessee default thereunder or otherwise, and the lease rates we are able to
obtain; (iv) the exercise by a lessee of an extension, early termination or
purchase option under the related lease; and (v) the occurrence of an event
of loss under a lease with respect to any aircraft and timing of our receipt
of casualty insurance or other proceeds, if any, in respect thereof. Many
of these factors have been adversely affected by the global economic
downturn existing prior to September 2001 and the events since September
2001 which are discussed throughout these Risk Factors. The rental amounts
and sale proceeds received to date combined with projected rental amounts
and sale proceeds through the final maturity date of the Notes indicate that
there will not be sufficient proceeds to pay any further step-up interest on
the Notes, pay any further interest on or repay the principal of the Class E
Notes, pay any further interest on or repay any further principal of the
Class D Notes, repay any further principal of the Class C Notes or to repay
some or all of the outstanding principal of the Class B Notes. See "Item 4
- - Information on the Company - History and Development of the Company," "Item
5 - Operating and Financial Review and Prospects - Liquidity and Capital
Resources - The Company's Cash Needs" and "Item 13 - Defaults, Dividend
Arrearages and Delinquencies."
To the extent we sell some of our aircraft to satisfy the Deed of
Charge requirement that the Company sell all of its aircraft, this will
reduce our ability to generate dependable funds to pay noteholders amounts
due, particularly as many of our expenses which are required to be paid
prior to payments to noteholders are fixed and do not necessarily decrease
proportionately with the decrease of our revenue generating assets.
To the extent we sell some of the aircraft in order to satisfy the
Deed of Charge requirement to sell all of our aircraft, we will reduce the
diversification of our portfolio and increase the Company's dependence upon
each remaining aircraft's lease revenues as a percentage of total lease
revenue. A number of our current leases are "power-by-the-hour" leases and
our revenue from these leases is primarily based on the number of hours
these aircraft are in use and this revenue is therefore a less dependable
source of rental income than our revenue from fixed leases. Further, many
of our expenses are fixed and are not reduced as aircraft are sold. Our
lessees and future potential lessees also have had, during this time of
oversupply of and reduced demand for aircraft, and continue to have greater
bargaining power with regard to having us, as lessor, agree to contribute
towards Maintenance Expenses which in earlier years had typically been
fully covered by lessees. Further, even if lessees are obligated to pay
such costs pursuant to their leases, their weak financial condition may
leave them unable to do so in which case we may have to cover such costs in
order to keep the aircraft in use. To the extent the size of our fleet
decreases, lease revenue will decrease proportionately. Maintenance
Expenses have increased as a percentage of our monthly revenue and, because
they are required to be paid in advance of principal and interest on the
Notes in accordance with the Deed of Charge, these expenses have had and are
expected to continue to have a significant adverse effect on the funds
available to pay principal and interest on the Notes. At present and, we
believe, until such time as we sell aircraft, these expenses are and will
continue to prevent us from making any further principal payments to the
Class A Noteholders. To the extent any remaining aircraft is off-lease or
re-leased at reduced rates it will also have a more significant impact on
our funds available to pay noteholders amounts due. This situation could be
further exacerbated if we sell aircraft as a result of the Required Sale
Provision but are unable to sell the entire portfolio, particularly if such
sales were of the aircraft that attract better lease rates and which have
longer lease terms outstanding.
Our original assumptions about revenue and operating costs have not
matched actual experience and as a result we have been unable to make all
Note payments at the times and in the amounts that our assumptions
indicated. We expect that actual experience will continue to be more
negative than our original assumptions.
On the Closing Date, the expected final payment dates for the Notes
were determined based on assumptions about our future revenue and interest
and operating costs and possible future economic conditions. The purpose of
these assumptions was to illustrate the payment provisions of the Notes.
Many of these assumptions related to future political, economic and market
conditions that were outside our control and difficult or impossible to
predict. Market interest rates are an example of such an assumption. Other
assumptions made at that time related to future events that depend on the
actions and future financial condition of lessees or others with whom we
deal. Insurance recoveries and maintenance payments are examples of such
assumptions. Further, our assumptions at that time clearly did not
anticipate events similar to the terrorist attacks of September 11, 2001 or
the outbreak of SARS. For the reasons discussed above, our actual
experience has not been consistent with the assumptions we made.
The Company did not have sufficient funds to repay the Class A Notes
on their expected final payment date of May 15, 2002 or to repay the Class
B, Class C or Class D Notes on their expected final payment date of July 15,
2002. Failure to repay in full the principal of those Notes by such dates
is not an Event of Default; however, the Deed of Charge requires, to the
extent the Company does not repay in full principal of these Notes by such
dates, that the Company pay to the Class A, Class B and Class C Noteholders
additional step-up interest of 0.50% per annum and to the Class D
Noteholders additional step-up interest of 1.00% per annum for each month
until the earlier of the date such Notes are repaid in full and their final
maturity date of June 15, 2006. These additional interest costs would only
be paid to the extent there are available collections in accordance with the
priority of payments set forth in the Deed of Charge. We paid some step-up
interest in fiscal year 2002, but our current projections indicate that we
will not have sufficient funds to pay any further step-up interest.
The pre-existing slowdown in the global economy and its negative
effect on the commercial aviation industry was exacerbated by the economic
and political fallout from the terrorist attacks in the United States on
September 11, 2001, the military action of the U.S. and its allies in
Afghanistan, the war in Iraq, ongoing terrorist attacks in various parts of
the world and the outbreak of SARS. These events combined with the
pre-existing downturn in the airline industry prior to September 11, 2001
have negatively affected projected rental amounts and sale proceeds through
to the final maturity date of the Notes. Current projections indicate that
there will not be sufficient funds to pay any further step-up interest on
the Notes, pay any further interest on or repay the principal of the Class E
Notes, pay any further interest on or principal of the Class D Notes, repay
any further principal of the Class C Notes or to repay some or all of the
outstanding principal of the Class B Notes.
Your right to receive payments ranks junior to our operational fees
and expenses, certain other payments we may make and any more senior classes
of Notes.
Our operational fees (including fees of the Servicer, Administrative
Agent, Cash Manager, Financial Consultant and Trustee and legal and audit
fees) and expenses (including expenses payable under the terms of our
leases, such as payments in respect of Maintenance Expenses discussed above
and other corporate expenses such as premiums for directors and officers
liability insurance) and certain other payments that we must make rank
senior to the Notes and are payable out of our funds before any payments are
made on the Notes. Depending on the amount of these more senior payments,
and the amount of our lease revenue (which has decreased for many reasons
including the required reduction of our portfolio and the reduction in
market lease rates for our aircraft - all as discussed herein) our ability
to make the required payments on the Notes is likely to be further reduced.
In addition, your right to receive payments of interest, principal and
any premium will rank junior to payments on more senior classes of Notes.
Upon the occurrence of an Event of Default, the holders of a class of Notes
may not exercise remedies under the Deed of Charge until all amounts we owe
on more senior classes of Notes and our other more senior obligations (such
as payments in respect of Maintenance Expenses and other fixed costs
discussed herein) have been paid. In that case, holders of the most senior
class of Notes will control the exercise of these remedies. For example,
see "Item 13 - Defaults, Dividend Arrearages and Delinquencies."
We rely on lease payments and aircraft sales proceeds to make
principal payments on the Notes. To date, these lease payments and aircraft
sales proceeds have not met expectations and based on our current
projections, future lease payments and aircraft sales proceeds will not be
sufficient to repay the principal of the Class E Notes, repay any further
principal on the Class D or Class C Notes, or to repay some or all of the
outstanding principal of the Class B Notes.
The pre-existing downturn in the world economic climate and its
negative effect on the commercial aviation industry was exacerbated by the
terrorist attacks of September 11, 2001, as well as the military action of
the U.S. and its allies in Afghanistan, the war in Iraq, the terrorist
attacks in various parts of the world and the outbreak of SARS. Although
passenger demand has begun to increase in 2004, the drop in passenger demand
from September 2001 until 2004 had resulted in a reduction in flight
schedules and a consequent oversupply of aircraft (including aircraft
available for lease) as compared to pre-September 2001 levels. We have
experienced declines in lease rates and a fall in the realizable value for
aircraft in open market sales as compared to lease rates and sale values
prior to September 11, 2001. Although the industry is beginning to
experience improvement in these areas, the positive impact to older aircraft
such as ours is more limited and is not expected to return the lease or sale
value of our aircraft to their pre-September 2001 levels. In addition,
during this period, many airlines including some of our lessees received
reduced rentals in exchange for extended lease terms. Air Canada, our
largest lessee, as measured by our annual lease revenue and the ninth
largest airline in the world as measured by fleet size, filed for bankruptcy
in April 2003 and emerged from bankruptcy on September 30, 2004. United
Airlines and U.S. Airways, the second and sixth largest airlines in the
world, respectively, as measured by fleet size, are currently subject to
Chapter 11 bankruptcy protection (U.S. Airways for the second time in two
years). Delta Airlines, the third largest airline in the world, as measured
by fleet size, is indicating that absent significant financial concessions
from its employees it will be forced to declare bankruptcy. Although many
of these bankruptcies and threatened bankruptcies of the largest airlines in
the world are essentially restructurings to reduce the airline's cost base
they do often result in fleet reductions and in some cases have the
potential to lead to liquidations. When these large airlines reduce the
size of their fleets, supply of used aircraft in the market increases and
negatively affects the lease rates and sale proceeds we can obtain for our
aircraft. Further, if any of these airlines or any other large airlines
were to liquidate, the addition of their aircraft portfolios into the
marketplace would likely cause significant volatility to lease rates and
sale prices for used aircraft. In addition to increasing the supply of
aircraft for sale or lease, further bankruptcies and consolidation would
also further reduce the number of potential lessees and operators of
particular models of aircraft, which would result in further decreased
aircraft values for any such models and lease rates in general.
The rental amounts and sales proceeds received to date combined with
projected rental amounts and sale proceeds through the final maturity date
of the Notes indicate that there will not be sufficient funds to repay the
principal of the Class E Notes, repay any further principal of the Class D
Notes, repay any further principal of the Class C Notes or repay some or all
of the outstanding principal of the Class B Notes. The failure of the
Company to pay principal of the Class A, Class B, Class C or Class D Notes
on any day prior to the final maturity date because funds of the Company are
not available in accordance with the priority of payments set forth in the
Deed of Charge, will not constitute an Event of Default with respect to such
class of Notes.
We rely on lease payments to make interest payments on the Notes. To
date, these lease payments have not met expectations and based on our
current projections we do not expect to have sufficient funds to pay any
further step-up interest on the Notes or any further interest on the Class D
and Class E Notes.
Our ability to make payments of interest on the Notes when and in the
amounts due depends primarily upon our receipt of payments under the leases
and the re-lease of each of the aircraft and the timing and amount of
proceeds from such leases. The financial condition of certain of our
lessees and many of the airlines which utilize operating leases is generally
weak, and as a result certain of our lessees are often in arrears, sometimes
significantly. Further, as a result of the decline in air travel
experienced since the end of 2001 and the competitive pressures caused by
the emergence of smaller low cost and low fare airlines, many airlines are
flying fewer aircraft than they were prior to September 2001. In addition, a
number of airlines have declared bankruptcy (including Air Canada, our
largest lessee as measured by our annual lease revenue, which emerged from
bankruptcy on September 30, 2004) and a number of airlines have ceased
operations since September 11, 2001 and it is expected that the industry
will experience further consolidation as well as additional bankruptcies in
the near future. All of this may significantly impact our ability to
re-lease our aircraft on a timely basis and at favorable rates. Further,
the reduced revenue and increased expenses (including recent significant
increases in the cost of fuel) that many airlines are encountering since the
September 2001 terrorist attacks are likely to continue to negatively impact
the already weak financial condition of these airlines, including our
lessees. This may result in an increase in delayed, missed or reduced
rental payments as has been the case for our largest lessee (as measured by
our annual lease revenue), Air Canada (see "Item 4 - Information on the
Company - Aircraft Leasing"). In the event that one or more of the lessees
does not make the required payments under the leases or one or more of the
aircraft are not re-leased on or promptly after the applicable scheduled
lease expiration date, payments of interest on the Notes will not be made
unless we are able to satisfy our obligation to make such payments from
payments on other leases that are current or that are entered into following
a repossession of the relevant aircraft or out of collateral provided under
the defaulted lease or out of available collections distributed on any
payment date in accordance with the priority of payments established for the
Notes. No assurance can be given, however, that amounts will be available
from such other sources to satisfy our obligations to pay interest on the
Notes or that such other sources will exist. This situation will also become
more difficult assuming we are able to sell aircraft and thereby become more
dependent on the lease revenue from each aircraft remaining in our portfolio
as a percentage of total lease revenue. Our reliance on declining lease
revenues is further exacerbated by the increased requirements for us to
contribute towards Maintenance Expenses (which are required to be paid in
advance of principal and interest on the Notes) that we are experiencing and
expect to continue to experience as discussed elsewhere in these Risk
Factors. Based on current projections, we expect our lease payments will
not be sufficient to pay any further interest due on the Class D or Class E
Notes. An Event of Default occurs if we do not pay interest (excluding
additional interest, default interest or step-up interest) on any Note
within five days of its due date. This Event of Default occurred on several
occasions prior to fiscal year 2003 when we had insufficient funds to pay
such interest in full to Class D Noteholders and has now been ongoing since
December 16, 2002. We expect this Event of Default to continue as the
Company does not expect to have sufficient funds to pay any further Class D
Note interest. See "Item 13 - Defaults, Dividend Arrearages and
Delinquencies" for a discussion of the limited remedies available upon the
occurrence of an Event of Default under these circumstances. Further, based
on our current projections we do not expect to have sufficient funds to pay
any step-up interest due to any noteholders.
Our leases are all interest-rate-fixed leases (some leases are based
on "power-by-the-hour" fixed hourly rates and others on fixed monthly rates)
and our interest obligations on the Notes are fixed and floating rate
obligations. If LIBOR materially increases it may adversely affect our
ability to make interest payments when due.
Our lease collections are invested based upon recommendations of the
Cash Manager. Based on these recommendations, we currently do not believe
it is necessary to invest our lease collections in swaps, options or other
hedging alternatives to protect against materially adverse movements in
interest rates. We may, however, invest in such instruments at any time if
we and our advisors determine it is appropriate. There can be no assurance
that the strategy adopted to invest or to not invest in such instruments at
any time will be effective in protecting your payments of interest in an
environment of material increases to LIBOR.
The Notes have a limited trading market. As a result you may be
unable to sell your Notes or the price of the Notes may suffer.
The Notes have a limited trading market, which may adversely affect
your ability to sell the Notes or the price at which you sell them. The
Notes are listed only on the Luxembourg Stock Exchange. No one has an
obligation to make a market in the Notes. We do not intend to seek approval
for quotation through any automated quotation system. Future trading prices
for the Notes will depend on many factors, including general economic
conditions and our financial condition, performance and prospects.
Risks Relating to Sales of Aircraft
Overview. Our ability to make payments of principal on the Class A
and Class B Notes on their final maturity date will be dependent principally
upon our ability to keep all of the aircraft on lease at current rates or
better through the final maturity date and upon our ability to sell the
aircraft at the Class A Note Target Price or better. Lease rates and sale
prices for our aircraft have been and will continue to be affected by
factors such as the demand for commercial jet aircraft in general, demand
for our aircraft in particular, the cost of comparable new aircraft, the
future value of our aircraft and the timing of the sale of our aircraft.
Each of these factors has been adversely affected by the terrorist attacks
of September 11, 2001 as well as the military action of the U.S. and its
allies in Afghanistan, the war in Iraq, the terrorist attacks in various
parts of the world and the outbreak of SARS all of which followed a
pre-existing global economic downturn.
The commercial aircraft market is cyclical. In addition, decreased
demand and excess supply of aircraft has decreased our revenue.
The market for commercial jet aircraft is cyclical and can produce
sharp increases and decreases in aircraft values and lease rates. Prior to
September 11, 2001, the aircraft leasing market was already experiencing a
reduction in demand, particularly for older widebody aircraft (which
accounted for two of our nine aircraft as at June 30, 2004). Decreases in
aircraft values and lease rates have caused and are likely to continue to
cause a decrease in our revenue.
Aircraft values and lease rates depend on various factors (many of
which have been adversely impacted by the depression in the airline
industry) that are outside our control, including:
o general economic conditions affecting lessee operations;
o used aircraft supply and demand;
o interest rates, currency exchange rates and credit availability;
o fuel and other operating costs;
o manufacturer production levels and prices for new aircraft;
o passenger demand;
o competitive pressures on various airlines;
o retirement and obsolescence of aircraft models;
o re-introduction into service of aircraft previously in storage;
o governmental regulations; and
o lack of capacity in the air traffic control system.
In addition to values for aircraft generally, the value of specific
aircraft may increase or decrease sharply depending on factors that are not
within our control, including:
o manufacturers merging or leaving the aircraft industry, such as the
merger between Boeing and McDonnell Douglas and the bankruptcy of
Fokker N.V., which led to the termination of production of
McDonnell Douglas and Fokker aircraft and a resulting decrease in
the values and lease rates of our MD aircraft;
o the maintenance and operating history of the aircraft;
o the number of operators using a particular type of aircraft (which may
be reduced by bankruptcy or industry consolidation) and the supply
of that type of aircraft;
o legal or regulatory requirements that prevent us from re-leasing or
selling an aircraft in the condition that it is in; and
o the discovery of manufacturing defects in an aircraft model. See
"Item 4 - Information on the Company - Business Overview -
Compliance with Governmental and Technical Regulation."
An increasing number of airlines are retiring older aircraft. This,
combined with other adverse industry conditions as discussed elsewhere in
these Risk Factors, has had a negative impact on the proceeds received to
date from the sale of our aircraft and the revenue we have received from our
leases. Although trends are now improving in some areas of the industry,
the benefits of these trends with respect to our aircraft may be limited.
Therefore, there can be no assurance that we will be able to repay the
holders of the Class A Notes the full amount of principal owed to them when
due. Further, based on our current projections, we expect to have
insufficient funds to repay some or all of the outstanding Class B Note
principal and any further Class C, Class D and Class E Note principal.
The pool of potential purchasers for our aircraft is likely to be a
limited group. Various factors outside our control may further reduce their
interest in purchasing our aircraft which may reduce our funds available for
payments on the Notes.
Although operators of aircraft may purchase one or more of the
aircraft in our portfolio, we expect that most of the aircraft will be sold
with leases in place, which makes it unlikely that aircraft operators will
be purchasers of our aircraft. Our aircraft are marketed principally as
financial assets for purchase by corporate, institutional and other
investors who seek returns based on a combination of the underlying rentals
and the residual value of an aircraft and, in certain cases, tax benefits.
There can be no assurance that, at the time the aircraft are marketed for
sale, historical purchasers of assets such as the aircraft, or other
institutional and corporate investors, will desire to purchase assets such
as the aircraft, or that particular developments in financial markets,
regulatory requirements or tax regimes will not make the purchase of the
aircraft an unattractive investment. Further, the effect of the Trust Note
Sales Goals contained in the Deed of Charge and ultimately the final
maturity of all Notes in June 2006 is to require us to sell all of our
remaining aircraft in a relatively short time frame. Given the adverse
impact of the terrorist attacks of September 11, 2001 and other subsequent
adverse events on the airline industry and, in particular, on aircraft
values, this obligates us to sell aircraft at a time when aircraft values
are significantly lower than they might otherwise be, which adversely
affects our ability to repay principal of the Notes.
We are competing with other aircraft sellers who have various
advantages in their ability to sell aircraft. This may adversely affect our
ability to sell our aircraft and the amount of proceeds we receive upon such
sale.
We have encountered and expect to continue to encounter competition
from sellers of other aircraft at the time we offer the aircraft for sale.
There are numerous other entities which own and sell aircraft that will
compete with us in the sale of our aircraft. These entities include, but
are not limited to, distributors, aircraft manufacturers, airlines, aircraft
leasing companies, financial institutions, public and private limited
partnerships and funds with investment objectives similar to ours and
special purpose vehicles similar to ours (such as Airplanes Group and AerCo
Limited) formed for the purpose of acquiring, leasing, re-leasing and
selling aircraft. In addition, because the Servicer performs lease
management services with respect to our aircraft as well as with respect to
aircraft owned by third parties, our aircraft may be offered for sale in
competition with other aircraft for which the Servicer performs management
services. Some of these other entities with aircraft available for sale
have, or have access to, financial resources substantially greater than ours
and may be able to offer financing, management, remarketing and other
services, inducements or concessions that we are not able to provide.
We believe the appraised base value of our aircraft is significantly
higher than the actual value we would receive upon a sale of such aircraft.
To the extent the sale price of an aircraft is below the aircraft's
appraised base value, our ability to make payments on the Notes will be
adversely affected.
Aircraft appraised base values do not necessarily reflect the market
value for an aircraft at a specific time. The scheduled principal payments
on the Notes were determined based on the assumptions set forth in the
Prospectus with respect to the appraised base value of the aircraft. If we
sell an aircraft to generate cash to make payments on the Notes, the
proceeds of the sale are likely to be significantly less than its appraised
base value. We expect therefore that we will have insufficient cash to make
any further principal payments on the Class C, Class D and Class E Notes,
and may have insufficient cash to repay some or all of the outstanding
principal of the Class B Notes.
We have obtained three desktop appraisals (without physical
inspection) of the appraised base value of each aircraft as of June 2004
from Avitas, AISI and BK. Based on such desktop appraisals, the nine
aircraft had an aggregate appraised base value of $137,680,000, $185,000,000
and $207,170,000, respectively, or an average aggregate appraised base value
of approximately $176,620,000.
The appraised base values were determined assuming an arm's-length,
cash transaction between willing and knowledgeable parties, with a
reasonable period of time available for marketing, assuming, among other
things, sales of the aircraft in an open, unrestricted stable market
environment with a reasonable balance of supply and demand, and assuming the
maintenance status of each aircraft with regard to such things as airframe,
engines and landing gear to be at its half-life condition (i.e., its
condition at midpoint between service intervals), adjusted to account for
certain aspects of the actual maintenance status of each aircraft, as
provided to the Independent Appraisers.
As discussed in the Statement of Accounting Policies in the
Consolidated Financial Statements contained in Item 18, the Directors
undertake a review to determine whether an impairment charge is required in
respect of both aircraft held for use and any aircraft held for sale. The
Directors, in applying Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-lived Assets ("SFAS 144"),
have determined that the carrying value for eight of the Company's aircraft,
all of which are classified as held for use, is greater than the estimated
undiscounted future net cashflows in respect of such aircraft and have
recorded an impairment charge for these aircraft equal to the difference
between their carrying value and fair value.
In applying SFAS 144 the Directors have determined that the most
appropriate estimate of the fair value of the Company's aircraft is the
average Appraised Current Market Value, which was in aggregate $138,300,000
as at June 30, 2004 for the nine aircraft. The Independent Appraisers'
assessment of Appraised Current Market Value reflects the underlying
economic value of aircraft and engines in normal market conditions. The
Independent Appraisers assume that the aircraft are valued for their
highest, best use, that the parties to the hypothetical sale are willing,
able, prudent and knowledgeable, and under no unusual pressure for a prompt
sale, and that the transaction would be negotiated in an open and
unrestricted market on an arm's length basis.
Appraised Current Market Values have been estimated by the Independent
Appraisers based on value curves from the last downturn in the aircraft
market. An appraisal is an estimate of value and should not be relied upon
as a measure of current sales value. In the current environment, there is a
lack of hard data available on which to base aircraft valuations for older
aircraft of the type in our portfolio and therefore the appraisal process is
more difficult.
The Directors believe that current market conditions (in particular,
the absence of liquidity and of willing buyers and sellers for the types of
aircraft owned by the Company) do not reflect the normal market conditions
which the Independent Appraisers have had to assume. Consequently, the
sales value that could be achieved for the aircraft in the event that they
were disposed of in the current market may be less than the average
Appraised Current Market Value and carrying value as at June 30, 2004.
Also, if the Company is required to sell the aircraft due to the Required
Sale Provision the proceeds from such sale may be even less than that which
could be achieved in the current market.
The application of the accounting policies in the fiscal year ended
June 30, 2004 has led to an impairment charge of $13.053 million. Previous
charges were made at June 30, 2003, June 30, 2002 and June 30, 2001 for
$14.378 million, $20.321 million and $30.259 million, respectively.
New and/or more technologically advanced aircraft may impair our
ability to re-lease or sell our aircraft. If we are unable to re-lease or
sell our aircraft on favorable terms, this will adversely affect our funds
available for payments on the Notes.
The availability of newer and/or more technologically advanced
aircraft or the introduction of increasingly stringent noise or emissions
regulations may make it more difficult for us to re-lease or sell aircraft.
We expect that our ability to manage these technological risks through
modifications to the aircraft and sale of aircraft will be limited.
Our maintenance expenses are increasing as our lease revenues are
declining. This will reduce the rental and sale proceeds available to make
payments on the Notes.
The standards of maintenance observed by our lessees and the condition
of the aircraft at the time of sale or re-lease may affect the future values
of and rental rates for the aircraft. Under each lease, it is the
responsibility of the relevant lessee to maintain the aircraft and to comply
with all governmental requirements applicable to the lessee or the aircraft,
including, without limitation, operational, maintenance and registration
requirements and, in most cases, manufacturer recommendations, although in
certain cases the Company, as lessor, has agreed to share the cost of
certain required modifications to the aircraft and certain overhaul costs.
If a lessee does not perform such obligations or if the aircraft is
off-lease, we will be responsible for maintenance obligations and for the
cost, in whole or in part, of complying with governmental requirements or
manufacturer recommendations. Failure to perform such required or
recommended maintenance with respect to an aircraft (a) could result in a
grounding of such aircraft, (b) is likely to adversely affect the value of
that aircraft upon the sale thereof and (c) in the event of a re-lease of
such aircraft, is likely to require us to incur costs, which could be
substantial, in restoring such aircraft to an acceptable maintenance
condition prior to re-leasing. Because our Maintenance Expenses are
expenses that rank senior to payments on the Notes, our ability to make
payments on the Notes is further reduced by these Maintenance Expenses. In
some cases, we may have an obligation to reimburse the lessee or pay some or
all of the cost of aircraft maintenance. Our cash resources may not be
sufficient both to fund maintenance requirements and make payments on the
Notes, especially as the aircraft continue to age (see also "Recent
Developments-A significant proportion of our limited cash resources are
being applied and are expected to continue to be applied to pay required
maintenance, modification and overhaul expenses and the expenses of
complying with airworthiness directives that have come due in the last
twelve months and that are expected to continue to come due in the future.
As a result, we have paid only limited Class A Note principal in fiscal year
2004 and we expect to only be able to pay a limited amount, if any, of Class
A Note principal prior to the sale of any of our aircraft.")
Risks Relating to Leasing of Aircraft
Our funds available to make payments on the Notes will be reduced if
we are unable to re-lease aircraft quickly or on favorable terms.
We may not be able to re-lease the aircraft upon expiration of the
leases or if the lease is for any reason terminated prior to its scheduled
expiration date without incurring significant downtime prior to commencement
of a new lease. If we cannot re-lease the aircraft, this will reduce our
funds available to make payments on the Notes. Even if we can re-lease the
aircraft, we may be unable to receive favorable rental rates, especially if
there is reduced demand for aircraft on operating lease. The decline in the
aircraft industry at the end of 2001 and the subsequent depression and
airline bankruptcies significantly reduced demand for and increased supply
of aircraft generally, including aircraft available for operating lease.
Although there have been some positive trends in 2004 any positive impact
with respect to our aircraft is expected to be limited. Our cashflows have
suffered and are expected to continue to suffer from an oversupply of
aircraft for lease, aircraft downtime and an overall decline in lease rates
of older aircraft as compared to lease rates prior to September 2001. Our
ability to re-lease aircraft and obtain acceptable lease payments and terms
may also suffer because of:
o economic conditions affecting the airline industry;
o the supply of competing aircraft and demand for particular types;
o lessor competition;
o competitive pressure on airlines to reduce costs;
o restrictions on our re-leasing flexibility under our operative
documents;
o increased bargaining power for lessees as they join airline global
alliances; and
o a reduction in the number of potential lessees due to airline
bankruptcies, liquidation or consolidation.
Aircraft re-leased during fiscal year 2004 were leased at rates
significantly below historic rates achieved on these aircraft. We currently
have no aircraft off-lease and we have no aircraft leases scheduled to
expire before April 2005, however there can be no assurance that aircraft
will not come off-lease before expiration of their lease terms. In the
current circumstances, re-leasing our aircraft in a timely fashion at
reasonable rates represents a significant challenge to the Company. Any
lack of success in meeting this challenge may have a significant effect on
our funds available to make payments on the Notes. Based on current
projections, we expect our cashflows will not be sufficient to pay any
further interest due on the Class D and Class E Notes. An Event of Default
occurs if we do not pay interest (excluding additional interest, default
interest or step-up interest) on any Note within five days of its due date.
This Event of Default has occurred and is continuing as we have had
insufficient funds to pay such interest in full to Class D Noteholders, and
we now expect this Event of Default to continue for the remaining term of
the Notes. See "Item 13 - Defaults, Dividend Arrearages and Delinquencies"
for a discussion of the limited remedies available upon the occurrence of an
Event of Default under these circumstances.
Lessees in weak financial condition could fail to make lease payments
and may require the restructuring of their leases to avoid default. This
would reduce the revenue available to make payments on the Notes.
There is a significant risk that lessees in weak financial condition
may default on their obligations under the leases. If lessees do not make
rent and maintenance payments or are significantly in arrears, it will
impair our ability to make payments on the Notes. The ability of each
lessee to perform its obligations under its lease will depend primarily on
its financial condition. A lessee's financial condition may be affected by
various factors beyond its control, including competition, fare levels,
passenger demand, operating costs (including the cost of fuel), the cost and
availability of finance, and environmental and other governmental regulation
of the air transportation business. The economic conditions of the regions
where our lessees operate will also affect their ability to meet their lease
obligations. Some of our lessees are based or operate in regions such as
Asia that from time to time experience severe economic crises. You should
refer to "Item 4 - Information on the Company - Business Overview - Regional
Concentrations" for a discussion of the regional concentrations of our
lessees and the economic trends of the regions that may impact the lessees'
financial conditions.
In addition, the events of September 11, 2001 as well as the military
action of the U.S. and its allies in Afghanistan, the war in Iraq, the
terrorist attacks in various parts of the world and the outbreak of SARS
have resulted in airlines worldwide experiencing financial difficulties.
Many large airlines are experiencing additional financial difficulty as they
are reducing fares in order to be competitive, but are unable to reduce
costs to the extent necessary to achieve profitability. The significant
increase in fiscal year 2004 in the price of fuel is further exacerbating
these difficulties. Some of our lessees are in a weak financial position,
including one of our fiscal year 2004 lessees that ceased operations in the
middle of 2004, and another that has just emerged from bankruptcy.
Investors should continue to expect that any number of our future lessees
will be financially weak. As a result, a large proportion of lessees may
consistently be significantly in arrears in their rental payments or
maintenance payments. Also, as a result of the many aircraft industry
factors discussed herein, the financial position of many airlines, including
our lessees, is likely to remain weak which in turn may cause an increase in
delayed, missed or reduced payments. Further, in order to keep aircraft on
lease and generating rental proceeds in this difficult economic environment,
many aircraft lessors, including the Company, have agreed to rental
holidays, rental restructurings, the early return of aircraft and similar
measures for some lessees. We expect this may continue to occur with our
lessees. We can also give no assurance that defaults, amounts in arrears
and the frequency of lease restructurings will not increase as the market
for our aircraft on operating lease experiences a continued decline.
Our ability to re-lease aircraft and generate cash to make payments on
the Notes will be impaired if we cannot terminate leases and repossess
aircraft when a lessee defaults.
We have the contractual right to terminate a lease and repossess the
aircraft if there is an event of default under a lease. However, due to
circumstances outside our control, we may be prevented from terminating a
particular lease. Further, we may incur substantial costs if we terminate a
lease and repossess the aircraft. If we cannot repossess the aircraft, it
will not be available for re-lease or sale. In that event, or if we incur
substantial costs in terminating a lease and repossessing an aircraft, our
revenue available to make payments on the Notes will be reduced.
Our ability to terminate a lease and repossess the aircraft may be
limited by a number of factors, including the following:
o a lessee contesting our right to terminate the lease and repossess the
aircraft;
o our inability to export, deregister and redeploy the aircraft;
o legal restrictions on our ability to terminate or repossess the
aircraft; and
o the appointment of a trustee in bankruptcy or similar officer in the
case of a bankrupt or insolvent lessee.
Even if we are able to terminate the lease and repossess the aircraft,
we may incur substantial costs, including:
o the direct costs associated with the termination of the lease or
repossession of an aircraft, including technical and legal costs;
o the cost of returning the aircraft to the appropriate jurisdiction;
o the payment of debts and taxes secured by liens on the aircraft that
were not paid by the lessee;
o the costs of retrieving or recreating aircraft records that are
required for re-registering the aircraft;
o the costs of putting the aircraft back in a condition suitable for
leasing or sale; and
o costs of obtaining a certificate of airworthiness for the aircraft.
Our revenue available to make payments on the Notes will be reduced if
aircraft insurance is not adequate to cover any losses or liabilities we
incur.
Our lessees have obligations under the leases to maintain property and
liability insurance covering their operation of the aircraft. We can give
no assurance that this insurance will be adequate to cover any losses or
liabilities that we may incur in our business. For example, the loss or
liability from an aviation accident or other catastrophic event may exceed
the coverage limits in the policy. Other losses may not be covered by
insurance. There is also a risk that our lessees will not perform their
insurance obligations under the lease, which may mean that insurance will
not be available to us. In either case, we may be unable to make payments
on the Notes if insurance proceeds do not cover losses or liabilities we may
incur.
As a consequence of the terrorist attacks of September 11, 2001,
airlines worldwide continue to experience difficulties in maintaining war
insurance cover and some other types of insurance cover in the amounts
required under their leases with us and other lessors. Until recently, our
lessees have relied on government guarantees or indemnities to provide
coverage for third party liability (other than to passengers) arising from
war and terrorism risks, above a greatly reduced ceiling of cover provided
by the aviation insurance market as a reaction to the events of September
11, 2001. Although most governments have now terminated their guarantee or
indemnity support, currently two of our eight lessees continue to rely on
such government support for this coverage. However, there can be no
assurance that if and when such government support is removed our lessees
will be able to replace that support by insurance coverage. If such
insurance coverage were not purchased or otherwise available from government
support, it may be necessary for the relevant aircraft to be grounded. Such
consequences would have a material adverse impact on the financial condition
of our lessees and their ability to perform under their leases. These
effects could cause a reduction in our revenue available to make payments on
the Notes.
If we cannot obtain the required licenses, consents and approvals to
re-lease or sell aircraft, our revenue available to make payments on the
Notes may be reduced.
If we or, where applicable, the lessee cannot obtain required
government licenses, consents and approvals, we may be unable to re-lease or
sell aircraft. Several leases require specific licenses, consents or
approvals. These include licenses, consents or approvals from governmental
or regulatory authorities to certain lease payments and to the import,
re-export or deregistration of the aircraft. There is a risk that
subsequent legal and administrative changes will increase such requirements
or that a license, consent or approval, once given, will be withdrawn. We
may be unable to receive licenses, consents or approvals needed in
connection with future re-leasing or sale of an aircraft. In any such case,
our revenue available to make payments on the Notes may be reduced.
If withholding taxes are imposed on lease rentals, these taxes would
reduce our revenue available to make payments on the Notes.
We have attempted to structure our leases in such a way that either no
withholding taxes will be applicable to payments by the lessees under the
leases or, if withholding taxes are applicable, the lessees would be
required to pay corresponding additional amounts. If such taxes must be
paid and we cannot recover these additional amounts from the lessee, that
amount will be unavailable for Note payments.
United States federal income withholding taxes at a rate of 30% are
applicable to lease payments relating to an aircraft that was re-delivered
in October 2002 and was immediately placed on lease to Allegiant Air, a
United States airline, and that lease makes no provision for recovery of
such taxes from the lessee. The lease to Allegiant Air has a lease
expiration date as of the date of completion of the next "C Check" for this
aircraft, which date is estimated to be in March 2006 (Allegiant Air having
exercised an extension option on July 28, 2004). There can also be no
assurance that any subsequent lease will avoid United States or other
withholding taxes.
If lessees do not comply with their obligations under their operating
leases it may increase our costs and reduce our revenue available to make
payments on the Notes.
The leases are all fixed term operating leases, under which we retain
substantially all of the risks and rewards associated with ownership of the
aircraft, including the aircraft's residual value. The leases are "net"
leases pursuant to which the lessees are obligated to make periodic rental
payments and generally assume responsibility for, inter alia, (i)
maintaining the aircraft, (ii) ensuring proper operation of the aircraft,
(iii) providing indemnification against and insurance for losses resulting
from operation of the aircraft, (iv) paying all costs of operating the
aircraft and keeping the aircraft free of liens (as defined in the relevant
lease) (other than permitted liens under the relevant lease) resulting from
such operation and (v) complying with all applicable governmental licensing,
registration and other requirements, including ADs (although in certain
cases, the terms of the relevant lease require the lessor to share the cost
thereof). Failure of a lessee to comply with such obligations could result
in increased costs to us and reduce our revenue available to make payments
on the Notes.
Other Risks Related to the Sale and Leasing of the Aircraft
Restrictions in our operative and governing corporate documents may
impair our ability to compete effectively in the aircraft leasing market.
Our operative and governing corporate documents impose restrictions on
how we operate our business. These restrictions limit our ability to
compete effectively in the aircraft leasing market. For example, we cannot
grant privileged rental rates to airlines in return for equity investments
in such airlines. There are also restrictions on persons to whom we may
lease aircraft and limits on leasing to lessees in specific geographical
regions. Most competing aircraft lessors do not operate under similar
restrictions.
If lessees do not discharge liens that attach to the aircraft, we may
be unable to repossess, re-lease or sell the aircraft.
Liens may attach to the aircraft in the course of their operation.
These liens may impair our ability to repossess, re-lease or sell the
aircraft. Liens that secure the payment of airport taxes, customs duties,
air navigation charges, landing charges, crew wages, repairer's charges or
salvage charges attach to the aircraft in the normal course of operation.
The amounts that the liens secure may be substantial and may exceed the
value of the aircraft against which the lien is asserted. In some
jurisdictions, a holder of aircraft liens may have the right to detain, sell
or cause the forfeiture of the aircraft. The lessees may fail to comply
with their obligations under the leases to discharge liens arising during
the terms of the leases. Prior to terminating our lease with Istanbul,
Istanbul incurred a debt to Eurocontrol. Istanbul failed to comply with
their obligation under the lease to pay this debt and cause the related lien
to be discharged. As owner of the aircraft, the Company was forced to
settle this debt of approximately $1.8 million with Eurocontrol (which was
accrued for in the fiscal years ended June 30, 2001 and 2002). The
settlement of this debt, in fiscal year 2003, reduced our funds available to
make payments on the Notes, and any other similar debt we may be required to
settle in the future in order to have liens discharged would also reduce our
revenue available to make payments on the Notes. On May 17, 2004, Skynet
returned its leased aircraft ten months prior to the scheduled expiration of
its lease. At the time of such return, Skynet had incurred substantial
payment arrears (for both the Company's aircraft and for Skynet's other
aircraft) to Eurocontrol and two other creditors. Skynet has informally
agreed with the Servicer that Skynet will discharge such arrears by monthly
installments over several months (see "Item 4. Information on the Company -
B. Business Overview - Aircraft Leasing" for further details). However, if
Skynet does not pay all such installments there is a risk that Eurocontrol
or one of the other creditors might assert a lien or right of detention over
the aircraft (unless the Company chooses to pay the outstanding amounts in
order to obviate this risk).
Lessees may fail to maintain valid registration of the aircraft. The
impact of the loss of aircraft registration or the inability of the aircraft
to generate rental income for us could adversely affect our funds available
to make payments on the Notes.
All of the aircraft that are or will be operated must be registered
with an appropriate aviation authority. If an aircraft is operated without
a valid registration or other required licenses, certificates and approvals,
the lessee operator or, in some cases, the owner or lessor, may be subject
to penalties which may result in a lien being placed on the aircraft. Loss
of registration could have other adverse effects, including grounding of the
aircraft and loss of insurance, which may have an adverse effect on our
funds available to make payments on the Notes.
Increased regulation of the aircraft industry may impair our ability
to re-lease or sell aircraft and the cost of compliance may reduce funds
available for payments on the Notes.
The aircraft industry is heavily regulated and aviation authorities
may adopt additional regulations in jurisdictions where our aircraft are
registered or operated. For example, as a result of the terrorist attacks
in the United States on September 11, 2001, installation of enhanced Ground
Proximity Warning Systems in all aircraft by 2005 has been mandated by the
U.S. Federal Aviation Administration ("FAA") and the European Joint
Airworthiness Authorities ("JAA"). The FAA and the JAA already require the
installation of reinforced cockpit doors. In addition, the International
Civil Aviation Organization ("ICAO") requires contracting states to mandate
the incorporation of cockpit doorway surveillance systems. Further new
security directives are also under consideration by a number of aviation
authorities. To the extent the cost of complying with such regulations is
required to be borne by the Company rather than the lessees, we could incur
significant cash expenditures in order to comply with such regulations.
Further, additional regulations relating to security and aircraft noise and
emissions, may cause us to incur significant costs, depress the value of the
aircraft and impair our ability to re-lease or sell aircraft.
Reliance on Third Parties and Conflicts of Interest
We rely on third parties to manage our business. Our operations may
suffer and we may be unable to make payments on the Notes if our service
providers do not perform their obligations to us or if we have to replace
them.
We have no employees or executive management resources of our own. We
therefore rely on several service providers for the leasing, re-leasing and
sale of the aircraft and all other executive and administrative
responsibilities. If these service providers do not perform their
contractual obligations to us, our operations may suffer and our revenue
available to repay the Notes may be reduced. We can give no assurance that
we will continue our arrangements with these service providers or that the
service providers will continue their relationship with us until the final
maturity date of the Notes. If a service provider resigns or we terminate
its appointment, we may be unable to find suitable replacement service
providers that we can engage on suitable terms. Additionally, our
appointment of replacement service providers may cause a lowering or
withdrawal of the ratings on the Notes. You should refer to "Item 6 -
Directors, Senior Management and Employees - Directors and Senior
Management" for detailed information on the responsibilities delegated to
service providers.
Babcock & Brown, as servicer will have conflicts of interest from
their other aircraft management activities. We may be unable to re-lease or
sell aircraft if they cannot resolve these conflicts.
Babcock & Brown own and manage other aircraft and may face conflicts
of interest in managing and marketing our aircraft for re-lease or sale.
Our Directors may have conflicts of interest.
From time to time our Directors may have conflicts of interest that
arise as a result of their other relationships in the aviation industry.
See "Item 6 - Directors, Senior Management and Employees - Directors and
Senior Management."
Bankruptcy Risks
If the Company were to be consolidated with another entity upon such
entity's bankruptcy our assets may be unavailable to repay the Notes and our
other obligations.
We have taken steps, described below, to ensure that our assets and
liabilities will not be consolidated with those of any other entity,
including WFC, in the event that such entity voluntarily or involuntarily
becomes the subject of an application for relief under applicable bankruptcy
or insolvency laws. At the time the Notes were issued, we received an
opinion of U.S. counsel concluding that neither our activities nor the
activities of WFC would result in a court holding that our assets and
liabilities should be consolidated with those of WFC in a proceeding under
the applicable insolvency laws in the United States. However, there can be
no assurance that the circumstances upon which such counsel based its
opinion will not change, that a court of competent jurisdiction would not
find differently, that such opinion will prove to be correct or that the law
of another jurisdiction would not apply.
In addition, WFC warranted to us, among other things, that upon
delivery of the WFC Aircraft to us we would be the owner of the WFC
Aircraft, that the sale of the WFC Aircraft by it to us was a "true sale" of
the WFC Aircraft to us and that the conveyance was effective to transfer
title to us. WFC and the Company have treated the conveyance of the WFC
Aircraft as a sale of the WFC Aircraft and transfer of the related lease to
us, and we have taken all actions that are required to perfect our ownership
interest in the WFC Aircraft and the related lease. However, if WFC were to
become a debtor in a bankruptcy case under the U.S. Bankruptcy Code and a
creditor or trustee-in-bankruptcy of WFC or WFC itself were to take the
position that the sale of WFC Aircraft to us should be recharacterized as a
pledge of the WFC Aircraft and the related lease to secure a borrowing of
WFC, then delays in payments of lease rentals to us on the WFC Aircraft
could occur. A court ruling in favor of any such creditor, trustee or WFC
could result in reductions in the amount of such payments and/or forfeiture
or subordination of our rights in the WFC Aircraft and the related lease.
Such delays or reductions and/or forfeiture also could result in delays or
reductions in our ability to make payments on the Notes. If the transfer of
the WFC Aircraft and the related lease to us is recharacterized as a pledge
or a lien on the property of WFC, our position with respect to WFC would be
that of a secured creditor of WFC with a claim in an amount equal to the
purchase price of the WFC Aircraft secured by such pledge or lien. On the
other hand, if the conveyance of the WFC Aircraft is treated as a sale, the
WFC Aircraft and rental payments under the related lease would not be part
of WFC's bankruptcy estate and would not be available to WFC's creditors.
On the Closing Date, we received an opinion of United States counsel
concluding that, under applicable state law, the sale of the WFC Aircraft
and the related lease would constitute a true sale from WFC to us and should
not be characterized as a pledge of these assets to secure a loan from us to
WFC. However, there can be no assurance that the circumstances upon which
such counsel has based its opinion will not change, that a court of
competent jurisdiction would not find differently, that such opinion would
prove to be correct or that the law of another jurisdiction would not apply.
Certain Income Tax Risks
If payments of principal or interest on the Notes become subject to
withholding tax, we will not make additional payments to you.
We will not make any additional payments to noteholders for any
withholding or deduction that is required under applicable law on payments
on the Notes. If we are required to make a withholding or deduction,
whether because of the implementation of the EU Savings Tax Directive or for
any other reason, we will use reasonable efforts to avoid the application of
withholding taxes. If we cannot avoid the withholding taxes, we have the
right to redeem the Notes. If withholding taxes are imposed on interest
payments on the Notes, we will reduce the amount of interest that you will
receive by the amount of the withholding taxes.
Ownership of the Notes entails certain risks regarding the application
of the tax laws of Ireland, the United States, Jersey and the jurisdictions
in which the Company, its subsidiaries and the lessees are organized, reside
or operate. You should refer to "Item 10 - Additional Information -
Taxation" for a more detailed discussion of some of the possible tax
consequences of owning the Notes.
Our operations may become subject to income taxes, which would reduce
the revenue available to make payments on the Notes.
Our operations may be subject to the income tax laws of Ireland, the
United Kingdom, the United States, Jersey, France and other jurisdictions.
There is also a risk that the Servicer's future management of the aircraft
might expose the Company and its subsidiaries to tax liabilities outside
Ireland and the United Kingdom. If our income is subject to taxation, the
revenue available to make payments on the Notes would be reduced.
If our Irish subsidiary were to lose its Irish tax benefits our funds
available to make payments on the Notes will be reduced.
Our Irish tax-resident subsidiary is entitled to certain corporate tax
benefits for International Financial Services Center certified companies,
including a preferential corporation tax rate of 10% in respect of
prescribed leasing operations through December 31, 2005. The loss of these
tax benefits would reduce our funds available to make payments on the Notes.
Upon the scheduled termination of the Irish preferential 10%
corporation tax rate on December 31, 2005, the Company's Irish tax-resident
subsidiary will become subject to Irish corporation tax on its net trading
income, which would include leasing income, at a 12.5% rate as provided for
in the Irish Finance Act of 1999. This legislation provides for non-trading
income (for example, deposit interest) to be taxed at 25%. There can be no
assurance that these tax rates will not be changed in the future.
The activities of our service providers or loss of treaty benefits
could expose us to United States federal net income taxation, which would
reduce our funds available to make payments on the Notes.
The Company and its subsidiaries do not expect to have any material
United States federal net income tax liability. However, this conclusion
may depend, in part, on:
o the nature of such companies' income and operations, and
o in the case of the Company's Irish-resident subsidiary, qualification
for the benefits of the income tax treaty between the United States
and Ireland.
There can be no assurance that the activities of the Servicer, the
Administrative Agent and other service providers will not expose the Company
and its subsidiaries to United States federal net income tax on part or all
of their income, which would reduce our funds available to make payments on
the Notes.
United States withholding taxes currently apply to one lease, may
continue to do so, and may apply to other leases in the future.
United States federal income withholding taxes at a rate of 30% are
applicable to lease payments relating to an aircraft that was re-delivered
in October 2002 and was immediately placed on lease to Allegiant Air, a
United States airline, and that lease makes no provision for recovery of
such taxes from the lessee. The lease to Allegiant Air has a lease
expiration date as of the date of completion of the next "C Check" for this
aircraft, which date is estimated to be in March 2006 (Allegiant Air having
exercised an extension option on July 28, 2004). There can be no assurance,
however, that any subsequent lease will avoid United States withholding
taxes. Likewise, there can be no assurance that other leases will not
become subject to United States federal income tax withholding.
The Company has incurred tax liabilities in 2003 and may have incurred
additional tax liabilities in prior years, in respect of unpaid United
States withholding taxes relating to the investment of certain collections
by the Cash Manager.
The Cash Manager informed the Company in 2003 that in past periods
certain Company collections had been invested in United States money market
funds, and that the Cash Manager apparently should have withheld United
States withholding taxes from such collections but failed to do so. Upon
being informed of these investments, the Company immediately directed the
Cash Manager to cease investing in such funds as the Deed of Charge provides
that collections may not be invested in investments that are subject to U.S.
withholding tax. The Cash Manager indicated that withholding taxes of
$9,991 were due and owing to the United States government for investments
relating to 2003, and the Cash Manager paid such amount from collections
otherwise available for distribution to Noteholders. The Cash Manager
further indicated that it was reviewing its withholding tax obligations in
respect of the years prior to 2003, and provided preliminary estimates of
$104,165, $74,319 and $24,871 that may be owed for 2000, 2001 and 2002,
respectively. Although the estimates for 2000, 2001 and 2002 are
preliminary they suggest that if withholding taxes are owed for these three
years, the amounts owed for each of these three years will be greater than
the tax paid for 2003. Further, the Cash Manager has not yet determined
whether withholding taxes may be owed for years prior to 2000, whether there
may be additional liabilities for penalties and interest owing for any years
or provided even preliminary calculations of potential withholding taxes
owed for years prior to 2000 or penalties and interest for any year. The
Company has requested that the Cash Manager provide, on an expedited basis,
its analysis of whether such amounts are owing and its calculations as to
what such amounts are. The Company further understands that, whatever
course of action the Cash Manager ultimately determines to take, the Company
may be liable for any withholding tax amounts not remitted by the Cash
Manager to the United States government. Although the investment of
collections in investments subject to withholding appears to have been
inconsistent with the terms of the Deed of Charge, the Company has not yet
determined the remedies, if any, that may be available in respect of
withholding liabilities it may ultimately bear. Accordingly, the United
States withholding tax liabilities associated with the investment of Company
collections in United States money market funds may be borne in full by the
Company and ultimately the Noteholders without the benefit of any
contribution from the Cash Manager.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
The Company was incorporated in Jersey (registered number 52674) as a
private, limited liability company under the Companies (Jersey) Law 1991 on
May 13, 1992, for an unlimited duration, and became a public company
pursuant to a special resolution passed on June 15, 1992. The registered
office of the Company is at 22 Grenville Street, St. Helier, Jersey, JE4
8PX, Channel Islands and its telephone number is 011-44-1534-609000. The
Company has an authorized share capital of 15,000 ordinary shares, $1 par
value per share, 10 of which have been issued. All of the issued ordinary
shares are held by the Nominees for the benefit of the trustee of the ALPS
Trust, a charitable trust established in Jersey.
The Company has three direct wholly owned subsidiaries, one in each of
Ireland, England and France. The subsidiaries directly or indirectly lease
aircraft from the Company and sublease them to operators where commercial or
other reasons make it desirable to do so.
The Company was formed for the purpose of acquiring a portfolio of 14
commercial jet aircraft all of which were subject to operating leases. The
Company agreed to purchase such aircraft from GPA and received delivery and
legal title from GPA of the aircraft over the four month period from June
23, 1992 to October 30, 1992. One aircraft was sold on March 15, 1996,
reducing the fleet size to 13. The WFC Aircraft was purchased on November
27, 1996 from WFC, and on July 24, 1997 the B747-283B aircraft was sold to
WFC. Four further aircraft were sold on July 2, 1999, June 27, 2000,
October 1, 2002 and December 20, 2002, respectively.
In June 1996, the Company elected to refinance the Prior Debt through
the issuance of the Notes rather than remarketing and selling all 13
aircraft during the one-year period prior to the originally scheduled
maturity of the Prior Debt in June 1997. The decision to refinance the
Prior Debt was primarily due to the uncertainty as to the ability of the
Company to make payment in full on the Old Class B Notes and Old Class M
Notes under the then current schedule for sale of the aircraft. In
connection with the refinancing of the Prior Debt, the Old Class A Notes and
the Old Class M Notes were redeemed and the Old Class B Notes were exchanged
for the Class E Notes. The Company believed that the revised schedule for
sale of the Company's then current aircraft portfolio would allow it to
realize better returns on such aircraft, because the Company expected at
that time to sell such aircraft over a period of five to seven years from
the Closing Date (compared to fifteen months under the terms of the Prior
Debt).
The Class A, Class B, Class C and Class D Notes were issued on the
Closing Date with an aggregate face amount of approximately $394 million.
The proceeds together with cash balances previously held in reserve accounts
were utilized to repay the outstanding interest on the Old Notes, the $367
million of outstanding principal on the Old Class A Notes and the Old Class
M Notes, the refinancing expenses of $13 million, the premium paid to the
holders of certain of the Old Notes of $4 million and to create an aircraft
purchase reserve account for the purchase of the WFC Aircraft. In addition,
in connection with such refinancing (i) the Old Class B Notes were exchanged
for the Class E Notes, and (ii) the Old SM Loan of $78 million was repaid.
The Company is obligated to pay interest on the Notes and a portion of
the principal of the Class A Notes from the revenue generated by the
Company's leasing operations. The Company was required to sell one or more
further aircraft having an aggregate Initial Appraised Value of at least
$66,810,000 by June 27, 2003 in order to comply with the June 2003 Trust
Note Sales Goal. Further, to comply with the Trust Note Sales Goal for June
27, 2004, the Company was required to sell all of its remaining aircraft by
that date. As discussed herein, due to market conditions in the aircraft
industry it was not possible to meet the Trust Note Sales Goals for June 27,
2003 or for June 27, 2004 and remain in compliance with other requirements
of the Deed of Charge. Proceeds from the sale of aircraft are required to
be used to pay principal of the Notes in the priority set forth in the Deed
of Charge. The Servicer has an ongoing instruction from us to market each
and every aircraft for sale in a manner consistent with our Business
Objectives and the other requirements of the Deed of Charge. However,
selling any of the aircraft in the current industry environment at prices
consistent with compliance with our current Business Objectives is extremely
difficult and there can be no assurance that we will be able to repay the
holders of the Class A Notes the full amount owed to them when due.
Further, based on current projections, we expect to have insufficient funds
to repay some or all of the outstanding Class B Note principal and any
further Class C, Class D and Class E Note principal, and we expect to have
insufficient funds to pay any further step-up interest due on the Class A,
Class B, Class C or Class D Notes or any further interest due on the Class D
and Class E Notes. An Event of Default occurs if we do not pay interest
(excluding additional interest, default interest or step-up interest) on any
Note within five days of its due date. This Event of Default occurred on
several occasions prior to fiscal year 2003 when we had insufficient funds
to pay such interest in full to Class D Noteholders and has now been ongoing
since December 16, 2002. The Company does not expect to have sufficient
funds to pay any further Class D Note interest. See "Item 3 - Key
Information - Risk Factors," and "Item 5 - Operating and Financial Review
and Prospects - Liquidity and Capital Resources" and see "Item 13 -
Defaults, Dividend Arrearages and Delinquencies" for a discussion of the
limited remedies available upon the occurrence of an Event of Default under
these circumstances.
The Company did not have sufficient funds to repay the Class A Notes
on their expected final payment date of May 15, 2002 or to repay the Class
B, Class C or Class D Notes on their expected final payment date of July 15,
2002. The Deed of Charge requires, to the extent the Company does not repay
in full principal of those Notes by such dates, that the Company pay to the
Class A, Class B and Class C Noteholders additional step-up interest of
0.50% per annum and to the Class D Noteholders additional step-up interest
of 1.00% per annum for each month until the earlier of the date such Notes
are repaid in full and their final maturity date of June 15, 2006. These
additional interest costs would only be paid to the extent there are
available collections in accordance with the priority of payments set forth
in the Deed of Charge. The Company paid some step-up interest in fiscal
year 2002, but our current projections indicate that we will not have
sufficient funds to pay any further step-up interest.
During fiscal year 2004, certain target principal payments scheduled
to be paid to holders of Class A, Class C and Class D Notes, certain
interest payments due to holders of Class A, Class B and Class C Notes, and
all interest payments due to holders of Class D and Class E Notes were in
arrears. As at the end of fiscal year 2004, these arrears consisted of
$70.810 million of Class A Note Target Amount, $0.942 million of Class A
Note step-up interest, $0.407 million of Class B Note step-up interest,
$4.304 million of Class C Note Target Amount, $0.390 million of Class C Note
step-up interest, $5.177 million of Class D Note Target Amount, $0.665
million of Class D Note step-up interest, $1.042 million of Class D Note
default interest, $7.130 million of Class D Note regular interest, and
$52.705 million of Class E Note interest.
B. Business Overview
Business Objectives
Our business objectives pursuant to the Deed of Charge (the "Business
Objectives") changed on June 27, 2004 and are now (a) to re-lease certain of
the aircraft promptly after the scheduled expiration date of the applicable
original lease and to manage the aircraft with a view towards receiving
rental payments under the existing leases, and, in the case of any renewed
or replacement lease relating to any aircraft, to maximize the amount of any
rental payments thereunder so as to be able to make the required payments of
interest and principal on the scheduled payment dates with respect to the
senior most class of Notes (namely the Class A Notes), (b) to market and
sell the aircraft at such times and for such amounts to realize, on an
aggregate basis, an amount sufficient to repay in full the Outstanding
Principal Balance of the senior most class of Notes (namely the Class A
Notes) and (c) to the extent consistent with the objective described in
clause (b) above, upon the sale of the aircraft, to realize the value of the
aircraft on an aggregate basis so as to provide the maximum return to the
Company on its investment therein, in all cases taking into account the
present and anticipated market conditions affecting the sale of used
aircraft and the commercial aviation industry generally. With respect to
the re-leasing, marketing and sale of aircraft described in clauses (a) and
(b) above, the Deed of Charge provides that our Business Objectives change
after certain dates. Accordingly, (i) prior to June 27, 2001 our Business
Objectives were to (x) re-lease aircraft to maximize rental payments so as
to be able to make required payments of interest and principal on the
scheduled payment dates with respect to each class of Notes and (y) market
and sell aircraft so as to repay the Outstanding Principal Balance of all
Notes and (ii) from June 27, 2001 through June 26, 2004 our Business
Objectives were to (x) re-lease aircraft to maximize rental payments so as
to be able to make required payments of interest and principal on the
scheduled payment dates with respect to the Senior Trust Notes and (y)
market and sell aircraft so as to repay the Outstanding Principal Balance of
the Senior Trust Notes.
The management and administration of the leases and the aircraft is
conducted principally by Babcock & Brown, as servicer.
Aircraft Leasing
As of June 30, 2004, our fleet of aircraft was comprised of nine
aircraft, eight of which were on lease to seven lessees in seven countries
and one of which was off-lease. As of June 30, 2004, the remaining terms of
the leases ranged from approximately seven months to five years and one
month. The following table shows the scheduled terminations by aircraft
type and lessee for the leases relating to our aircraft as of June 30, 2004
(except as noted with respect to the aircraft currently leased to Transaero):
Aircraft Type Lessee Month and Year of Expiration
B737 - 400 Batavia March 2007
B737 - 400 Travel Service March 2007
B737 - 400 AOG(1) -
B737 - 500 China Southern March 2006
B757 - 200 First Choice Airways(2) April 2005
B767 - 300ER Air Canada March 2007
B767 - 300ER Air Canada May 2007
MD83 Meridiana March 2006
MD83 Allegiant Air(3) January 2005
______________________
(1) This aircraft was formerly leased to Skynet with a lease expiration of
March 2005. At the request of Skynet, the Company agreed to the early
return of this aircraft which occurred on May 17, 2004. On July 28, 2004
the aircraft was re-leased to Transaero for a five year term ending on July
27, 2009.
(2) First Choice Airways has an option to extend the lease to April 30, 2006
if it provides notice by December 1, 2004 that it will exercise such option.
(3) Allegiant Air, by a notice dated July 28, 2004, exercised its option to
extend this lease until the next C check for this aircraft (estimated to
occur in March 2006).
All of the leases relating to our aircraft are operating leases under
which we (i) will not recover fully the cost of each aircraft and (ii)
retain the benefit and assume the risk of the residual value of the
aircraft. The aircraft are included as assets on our balance sheet and
depreciation is charged to income over the estimated useful lives of the
aircraft. See "Item 18 - Consolidated Financial Statements -Statement of
Accounting Policies - Aircraft." Minimum lease rentals in respect of the
aircraft are reported as revenue over the term of the lease on a straight
line basis. Contingent rents are recorded as the contingency is resolved.
All leases are on a "net" basis, under which the lessee is responsible
for all operating expenses, generally including, without limitation, fuel,
crews, airport and navigation charges, taxes, licenses, registration,
insurance and certain maintenance costs. However, in some of the more
recently executed leases, the Company has agreed to cover certain aircraft
maintenance and overhaul costs. Under the provisions of the leases, the
lessee may also be obligated to pay an agreed-upon charge based on the use
of the aircraft as a provision for certain future maintenance costs.
Normally, such amounts could be reclaimed by the lessee once the relevant
maintenance has been completed by the lessee. The leases contain specific
provisions regarding maintenance standards during the terms thereof and
regarding the condition of the aircraft upon redelivery to us. The lessee
is responsible for compliance with all applicable laws and regulations with
respect to the aircraft. We require our lessees to maintain the aircraft in
accordance with an approved maintenance program designed to ensure that the
aircraft meets applicable regulatory requirements in the jurisdictions where
the lessee operates.
Babcock & Brown, on our behalf, is required to inspect or arrange for
the inspection of the condition of each aircraft at least once every 18
months. Generally, we require a security deposit and/or a letter of credit
from the lessee as security for the performance of the lessee's obligations
under the lease although this has not been the case for all of the leases.
In addition, the leases contain extensive provisions regarding our rights
and remedies in the event of a default thereunder by the lessee.
Notwithstanding the foregoing, no assurance can be given that all lessees
will comply with the terms of their related leases or that all of the lease
provisions discussed herein will be enforceable against each lessee. As of
August 31, 2004, the aggregate arrears for all lessees was $145,000.
On April 1, 2003, Air Canada filed for bankruptcy protection under
Canada's Companies Creditors Arrangement Act. Under the terms of the
court's order, Air Canada's lessors, who wanted to continue leasing their
aircraft to Air Canada, agreed to a 60 day moratorium on lease rentals. Air
Canada subsequently extended this moratorium. Following execution of a
Memorandum of Understanding by Air Canada, which became effective on October
20, 2003, all rental arrears for the two aircraft leased by Air Canada in
the amount of $1,548,350 were offset against the Company's required
contribution of $1,447,300 towards the S4C check on one of the two
aircraft. Air Canada paid the remaining arrears of $101,050 on October 23,
2003. On November 17, 2003 the Company submitted a claim for approximately
$4.0 million in respect of the loss of the contracted lease rentals on both
of the Company's aircraft from the date that Air Canada entered bankruptcy
protection to the original lease expiry dates. Legal fees incurred by the
Company as a result of the Air Canada restructuring were also included in
the claim. We are advised that this claim has been approved by the
bankruptcy monitor. The latest indications are that creditors will receive
between five and seven U.S. cents for each U.S. dollar of claims and that
this will be settled by an issuance of shares (in ACE Aviation Holdings,
Inc., the new Air Canada holding company) to creditors. Air Canada emerged
from bankruptcy on September 30, 2004 and it is currently expected that such
shares will be issued over a period of months beginning in October 2004.
On May 10, 2004 Skynet advised the Servicer that it wished to
terminate the leasing of MSN 24519 due to its inability to generate
sufficient revenues to support its operations and lease payments. On May
17, 2004 the Company agreed to the early return of the aircraft and a notice
of termination was served on Skynet. Following the termination of the
lease, the Skynet cash security deposit of $296,000 was applied to the
outstanding May and June 2004 rentals. As a result of this application, on
June 1, 2004 the Skynet arrears were $365,902 comprising of maintenance
payment arrears of $363,215 and default interest due of $2,687. The
Servicer subsequently informally agreed with Skynet that the lessor would
release Skynet from its obligations under the lease in respect of such
maintenance payment arrears and default interest provided that Skynet
cleared all of its payment obligations to three entities: (i) Shannon
Aerospace (in respect of a "C Check" performed on the aircraft) (ii) Aer
Rianta (in respect of arrears of landing charges, catering charges and fuel)
and (iii) Eurocontrol (in respect of arrears of air navigation charges). As
of September 8, 2004 Skynet had continued to make all of their installment
payment obligations to these three entities and the balance outstanding was
in the aggregate approximately $0.703 million.
Aircraft Fleet
As of June 30, 2004, our fleet was comprised of nine aircraft. Our
aircraft consist of widebody and narrowbody Stage 3 Aircraft. As of June
30, 2004, two of the aircraft were classified as widebody aircraft, being
two Boeing 767-300ERs. The remaining seven aircraft were classified as
narrowbody aircraft.
As of June 30, 2004, our aircraft, divided by manufacturer, were as
follows:
COMPANY FLEET
Net Book Value
(in thousands of
Manufacturer Aircraft Type Number dollars)(1)
Boeing B737 - 400 3 $35,045
B737 - 500 1 10,590
B757 - 200 1 18,910
B767 - 300ER 2 60,530
McDonnell Douglas MD83 2 14,390
- ------
Total 9 $139,465
= =======
______________
(1) Net book value in respect of each of the nine aircraft is stated as of
June 30, 2004.
Aircraft Value
We have obtained three desktop appraisals (without physical
inspection) of the appraised base value of each aircraft as of June 2004
from Avitas, AISI and BK. Based on such desktop appraisals, the aircraft had
an aggregate appraised base value of $137,680,000, $185,000,000 and
$207,170,000, respectively, or an average aggregate appraised base value of
approximately $176,620,000.
We obtained desktop appraisals (without physical inspections) of the
appraised base value of the nine aircraft as of June 2003 from Avitas, AISI,
and BK. Based on such desktop appraisals, the aircraft had an average
aggregate appraised base value of approximately $205,820,000, calculated as
the average of the appraised base values as determined by the Independent
Appraisers.
For the purpose of the valuations, appraised base value is defined by
the International Society of Transport Aircraft Trading as the value of the
aircraft assuming an arm's-length, cash transaction between willing and
knowledgeable parties, with a reasonable period of time available for
marketing, assuming, among other things, sales of the aircraft in an open,
unrestricted, stable market environment with a reasonable balance of supply
and demand, and assuming the maintenance status of each aircraft with regard
to such things as airframe, engines and landing gear to be at its half-life
condition (i.e., its condition at midpoint between service intervals),
adjusted to account for certain aspects of the actual maintenance status of
each aircraft, as provided to the Independent Appraisers. Appraised base
values, as so determined, are only estimates of resale values in a
hypothetical market environment.
We believe that the reduction in the average appraised base value of
the nine aircraft from $205,820,000 as of June 2003 to $176,620,000 as of
June 2004 representing a reduction of 14.19% of the average appraised base
value from the prior year, is due primarily to the ageing of the aircraft
and, with respect to certain aircraft, those market conditions which have
had a negative effect on aircraft values.
As discussed in the Statement of Accounting Policies in the
Consolidated Financial Statements contained in Item 18, the Directors
undertake a review to determine whether an impairment charge is required in
respect of both aircraft held for use and any aircraft held for sale. The
Directors, in applying SFAS 144, have determined that the carrying value for
eight of the Company's aircraft, all of which are classified as held for
use, is greater than the estimated undiscounted future net cashflows in
respect of such aircraft and have recorded an impairment charge for these
aircraft equal to the difference between their carrying value and fair value.
In applying SFAS 144 the Directors have determined that the most
appropriate estimate of the fair value of the Company's aircraft is the
average Appraised Current Market Value, which was in aggregate $138,300,000
as at June 30, 2004 for the nine aircraft. The Independent Appraisers'
assessment of Appraised Current Market Value reflects the underlying
economic value of aircraft and engines in normal market conditions. The
Independent Appraisers assume that the aircraft are valued for their
highest, best use, that the parties to the hypothetical sale are willing,
able, prudent and knowledgeable, and under no unusual pressure for a prompt
sale, and that the transaction would be negotiated in an open and
unrestricted market on an arm's length basis.
Appraised Current Market Values have been estimated by the Independent
Appraisers based on value curves from the last downturn in the aircraft
market. An appraisal is an estimate of value and should not be relied upon
as a measure of current sales value. In the current environment, there is a
lack of hard data available on which to base aircraft valuations for older
aircraft of the type in our portfolio and therefore the appraisal process is
more difficult.
The Directors believe that current market conditions (in particular,
the absence of liquidity and of willing buyers and sellers for the types of
aircraft owned by the Company) do not reflect the normal market conditions
which the Independent Appraisers have had to assume. Consequently, the
sales value that could be achieved for the aircraft in the event that they
were disposed of in the current market may be less than the average
Appraised Current Market Value and carrying value as at June 30, 2004.
Also, if the Company is required to sell the aircraft due to the Required
Sale Provision the proceeds from such sale may be even less than that which
could be achieved in the current market.
The application of the accounting policies in the fiscal year ended
June 30, 2004 has led to an impairment charge of $13.053 million. Previous
charges were made at June 30, 2003, June 30, 2002 and June 30, 2001 for
$14,378,000, $20,321,000 and $30,259,000, respectively.
Following the terrorist attacks of September 11, 2001 and the other
world events and industry factors discussed herein that contributed to a
significant downturn in the airline industry, many airlines have been flying
fewer aircraft and downsizing or reducing planned growth of their fleets
during this period. In addition, since September 11, 2001 a number of
airlines have declared bankruptcy (including Air Canada, our largest lessee
as measured by our annual lease revenue, which emerged from bankruptcy on
September 30, 2004) some of which have ceased operations. Although there
have been some positive trends in 2004 for the aircraft industry it is still
expected that the industry will experience some further consolidation as
well as additional bankruptcies in the near future. As a result, some
aircraft owned by or leased to these airlines have been put on the market
for sale or lease. Due to the loss of investor appetite and the difficulty
in obtaining financing for the purchase of the types of older aircraft in
our portfolio, there are fewer potential buyers of these aircraft on
operating lease, and the resulting illiquidity in the market has caused sale
prices of these aircraft to further decline. As discussed above, Appraised
Current Market Values have been estimated by the Independent Appraisers
based on value curves from the last downturn in the aircraft market. An
appraisal is an estimate of value and should not be relied upon as a measure
of current sales value. In the current environment, there is a lack of hard
data available on which to base aircraft valuations for older aircraft of
the type in our portfolio and therefore the appraisal process is more
difficult. The Directors believe that current market conditions (in
particular, the absence of liquidity and of willing buyers and sellers for
the types of aircraft owned by the Company) do not reflect the normal market
conditions which the Independent Appraisers have had to assume.
Consequently, the sales value that could be achieved for the aircraft in the
event that they were disposed of in the current market may be less than the
average Appraised Current Market Value and carrying value as at June 30,
2004. Also, if the Company is required to sell the aircraft due to the
Required Sale Provision the proceeds from such sale may be even less than
that which could be achieved in the current market. Although it was not
possible, given the then current market conditions in the aircraft industry,
to comply with the Trust Note Sales Goals and achieve sale prices consistent
with our then current Business Objectives, there can be no assurance that we
will not be forced to sell one or more aircraft as a result of the Required
Sale Provision. See "Item 3 - Key Information - Risk Factors - We were
unable to comply with the Trust Note Sales Goals for June 2003 and for June
2004 and as a result we may be required to sell aircraft at the Class A Note
Target Price."
The foregoing indications of appraised base value provided by the
Independent Appraisers do not reflect the value of the leases, maintenance
reserves, security deposits or other related collateral, if any. All dollar
amounts listed under this subsection are rounded to the nearest $0.1 million.
Fleet Age Analysis
The weighted average age of our aircraft by net book value was 13.87
years as of June 30, 2004.
Lessees
The lessees of our aircraft as of June 30, 2004 (except as noted with
respect to the aircraft currently leased to Transaero), such lessees' home
country and the respective aircraft type and date of manufacture are as set
forth below:
Lessee Country Aircraft Type Date of Manufacture
Air Canada Canada B767 - 300ER March 1991
B767 - 300ER August 1991
Allegiant Air U.S.A. MD83 August 1989
Batavia Indonesia B737 - 400 November 1988
China Southern People's Republic of B737 - 500 July 1991
China
First Choice United Kingdom B757 - 200 March 1991
Airways
Meridiana Italy MD83 July 1989
Transaero(1) Russia B737 - 400 October 1989
Travel Service Czech Republic B737 - 400 March 1989
_______________
(1) This aircraft was formerly leased to Skynet, an Irish company, with a
lease expiration of March 2005. At the request of Skynet, the Company
agreed to the early return of this aircraft which occurred on May 17,
2004. On July 28, 2004 the aircraft was re-leased to Transaero.
In fiscal year 2004, four lessees accounted for more than 10% of our
leasing revenue (Air Canada 27.87%, Travel Service 14.94%, China Southern
14.17% and Skynet 11.70%). There are no leases with respect to which the
present value of the lease payments due from the lessee (utilizing a
discount rate equal to the average coupon on the Notes) exceeds 10% of the
original aggregate principal balance of the Notes.
Distribution of Revenue by Geographic Area
The following table sets forth the dollar amount and percentage of
total lease revenue attributable to the indicated geographic areas for the
period from July 1, 2003 to and including June 30, 2004:
Amount Percentage
--------------------- ----------------------
(in thousands of
dollars)
Europe $6,118 40.32
Americas $4,822 31.77
Asia/Pacific $4,235 27.91
$15,175 100.00%
======= ======
Many foreign countries have currency and exchange laws regulating the
international transfer of currencies. We attempt to minimize our currency
and exchange risks by negotiating our aircraft leasing transactions in U.S.
dollars and all letters of credit and any other forms of credit enhancement
obtained to support various leases are denominated for payment in U.S.
dollars.
- ------------------------------------------------------------------------------
Our revenue and income may be affected by political instability,
changes in national policy in the countries where our aircraft operate,
competitive pressures and other financial difficulties experienced by
certain air carriers, fuel shortages, labor stoppages, recessions and other
political or economic events adversely affecting world or regional trading
markets or impacting a particular customer. Many of these factors have been
adversely impacted by the terrorist attacks in the United States on
September 11, 2001, the military action of the U.S. and its allies in
Afghanistan, the terrorist attacks in Bali, Saudi Arabia, Spain and
elsewhere, the war in Iraq, the outbreak of SARS and the subsequent decline
in the aircraft industry.
Regional Concentrations.
Asia Concentration - At June 30, 2004, 15.4% of our aircraft by
appraised base value at June 30, 2004 were leased by operators in Asia.
The Asia region has recovered from the outbreak of SARS in 2003.
According to IATA statistics recently released, revenue passenger kilometres
RPK in Asia increased by 29.4% for the first seven months in 2004 compared
to the same period in 2003.
European Concentration - At June 30, 2004, 27.6% of our aircraft by
appraised base value at June 30, 2004 were leased by operators based in
"developed" Europe.
The commercial aviation industry in Europe is very sensitive to
general economic conditions. Since air travel is largely discretionary, the
industry tends to suffer severe financial difficulties during slow economic
periods. As a result, the financial prospects for European lessees will
depend on the level of economic activity in Europe and in the specific
countries where they operate. A recession or other worsening of economic
conditions in one or more of those countries, particularly if combined with
high fuel prices and/or a weak Euro, may adversely affect the European
lessees' ability to meet their financial and other obligations. Competitive
pressures from continuing deregulation of the airline industry by the EU may
also adversely affect European lessees' operations and their ability to meet
their obligations under the leases.
RPK in Europe increased by 12.6% for the first seven months of 2004
compared to the same period in 2003.
North America Concentration - At June 30, 2004, 48.5% of our aircraft
by appraised base value at June 30, 2004 were leased by two airlines in
North America. As in Europe, the commercial aviation industry in North
America is highly sensitive to general economic conditions. Since air
travel is largely discretionary, the industry has suffered severe financial
difficulties during economic downturns. Over the last several years, nearly
half of the major North American passenger airlines have filed for Chapter
11 bankruptcy protection (including Air Canada, our largest lessee as
measured by our annual lease revenue, which emerged from bankruptcy on
September 30, 2004), United Airlines, the second largest airline in the
world, and U.S. Airways, the sixth largest airline in the world by fleet
size) and several major United States airlines have ceased operations. In
addition, Delta Airlines (the third largest airline in the world as measured
by fleet size) has indicated that absent significant financial concessions
from its employees, it will also be forced to file for Chapter 11 bankruptcy
protection. Although RPK in North America have increased by 18.7% for the
first seven months of 2004 compared to the same period in 2003, the decline
in the airline industry following the terrorist attacks of September 11,
2001 continues to be a significant factor in the United States and
additional bankruptcies of other United States airlines remain likely.
Off lease aircraft - As at June 30, 2004, one of our aircraft,
representing 8.5% of our aircraft by appraised base value at June 30, 2004,
was off-lease having come off lease on May 17, 2004 in an early
termination. It was re-leased to another lessee based in Russia on July 28,
2004.
Payment History
As of June 30, 2004, there were no outstanding rental arrears
(following the application of the Skynet cash security deposit towards
outstanding May and June 2004 rentals (see "Aircraft Leasing")).
As of June 30, 2004 there were arrears of $365,902 owed by Skynet,
comprising of maintenance payments arrears of $363,215 and default interest
of $2,687. The Servicer subsequently informally agreed to release Skynet
from liability under the lease in respect of these arrears (and certain
other obligations) if Skynet cleared all its payment obligations to certain
third parties with respect to the leased aircraft (see "Aircraft Leasing").
Competition
Our principal business is the provision of aircraft through leasing
transactions to aircraft operators. We focus on the leasing of
widebody/narrowbody Stage 3 Aircraft. A number of other parties provide
aircraft on operating leases similar to those provided by us, including
International Lease Finance Corporation, debis AirFinance B.V., Airbus
Financial Services, Boeing Capital Corporation, Pembroke Capital Limited,
Ansett Worldwide Aviation Services, GE Capital Aviation Services, Limited,
GATX Corporation, AerCo Limited, Airplanes Limited, Airplanes U.S. Trust and
others. In addition, there are a number of specialist operators who
concentrate on particular regions or types of customers and on specific
aircraft types. Furthermore, we face competition from airlines, aircraft
manufacturers, aircraft brokers, banks and other financial institutions who
may provide aircraft for lease. Many of these parties have access to
financial resources substantially greater than those at our disposal, which
adversely affects our competitive position. Many entities sell used
aircraft so the competition for the sale of used aircraft is intense,
particularly under current market conditions.
Compliance with Governmental and Technical Regulation
Our customers are generally subject to a high degree of regulation in
the various jurisdictions in which they operate. Such regulation also
indirectly affects our business operations. The nature of such regulation
ranges from compliance with technical, environmental and airworthiness
standards to economic regulation of the market for air travel. Some
organizations and jurisdictions have already begun to discuss the further
tightening of noise and emissions certification requirements for newly
manufactured aircraft. Changes in regulation which are adverse to our
interests or our customers could have a significant effect upon our results
from operations or the value of our aircraft.
In addition to general requirements regarding maintenance of aircraft,
aviation authorities issue ADs requiring the operators of aircraft to take
particular maintenance actions or make particular modifications to a number
of aircraft of designated types. ADs normally specify a period in which to
carry out the required action or modification and generally enough time is
allowed to permit the implementation of the AD in connection with scheduled
maintenance of the aircraft or engines. The lessees usually bear the cost
of compliance with ADs issued by applicable aviation authorities and
relevant manufacturers' recommendations. We may be required to contribute a
portion of such costs over a specified threshold. However, if a lessee
fails to perform ADs required on an aircraft or if an aircraft is off-lease,
we would bear the cost of compliance necessary for the aircraft to maintain
its certificate of airworthiness. In such circumstances, funds in the
collection account will be available to mitigate the costs of compliance,
although such use would reduce the availability of such amounts to cover the
cost of scheduled maintenance. There can be no assurance that such funds
will be available at the time needed or that any funds available will be
sufficient for such purposes.
Other governmental regulations may apply to our aircraft, including
requirements relating to noise and emissions levels. Such regulations may
be imposed not only by the jurisdictions in which the aircraft are
registered, but also in jurisdictions where the aircraft operate. Chapter 3
of the Chicago Convention establishes two progressively restrictive noise
level standards that correspond to the requirements for Stage 3 Aircraft. A
number of jurisdictions have adopted, or are in the process of adopting,
noise regulations which will require all aircraft to comply with the most
restrictive of these standards. In addition, local municipalities may have
more stringent noise regulations than those applicable to Stage 3 Aircraft.
Volume 2 of Annex 16 of the Chicago Convention also contains standards
and recommendations regarding limitations on vented fuel and smoke and
gaseous emissions for aircraft. While a number of countries have adopted
regulations implementing these recommendations, such regulations generally
have been prospective in nature, requiring only that newly manufactured
engines meet particular standards after a particular date. To the extent
that these regulations require modifications to the engines owned by us,
they would be treated similarly to ADs under the leases.
Aviation authorities in Europe and North America have recently adopted
regulations requiring the installation of enhanced ground proximity warning
systems and certain other systems by 2005 such as Mode S Elementary and
Enhanced Surveillance Systems which will shortly become a requirement in
Europe in order to accommodate increased growth in air traffic. Depending
on whether the costs of complying with these regulations are borne by us or
the lessees, installation of these systems could result in significant cash
capital expenditures of approximately $500,000 per aircraft (operated in
Europe or North America) by us in 2004 through 2005.
As a result of the terrorist attacks of September 11, 2001, new
security directives have been adopted by aviation authorities such as the
installation of reinforced cockpit doors at a cost of approximately $50,000
per aircraft. In addition, the ICAO requires contracting states to mandate
the incorporation of cockpit doorway surveillance systems. Depending on
whether the cost of complying with such directives are borne by us or our
lessees, such directives could result in significant cash expenditures by us
in the future.
The FAA has previously announced an AD that requires operators of
MD-11, MD-80 and DC-10 aircraft to replace certain insulation blankets in
order to reduce the risk of fire. The estimated cost to implement this
modification is $665,000 per aircraft. We have two MD-80 series aircraft
representing 12% of our portfolio by appraised base value at June 30, 2004.
This modification has been implemented for one of our MD-80 series aircraft
and the modification of our other MD-80 series aircraft is expected to be
completed in January 2005. The significant costs incurred and to be
incurred in causing these two MD-80 series aircraft to comply with these
standards, are adversely impacting our results of operations.
The FAA has issued an AD mandating the replacement of main landing
gear shock strut pistons on MD-80 and MD-90 aircraft prior to the
accumulation of 30,000 cycles on the existing main landing gear shock strut
pistons. The cost for such replacement is approximately $265,000 per
aircraft. Depending on warranty credit provided by the manufacturer, the
majority of this cost may be claimed from the manufacturer. We have two
MD-80 series aircraft representing 12% of our portfolio by appraised base
value at June 30, 2004. Based on the current cycles completed to date by our
MD-80 aircraft, one of our aircraft may require this modification within the
next twelve to eighteen months. In the event that warranty credit is not
available from the manufacturer for any aircraft, we could incur significant
costs in ensuring our MD-80 aircraft comply with these standards, which will
impact adversely on our results of operations.
The FAA has issued a number of ADs mandating the modification of
affected lapjoints on Boeing 737 aircraft when the aircraft has completed
45,000 cycles. The estimated cost to implement such modifications is
approximately $1,000,000 per aircraft. We have four Boeing 737 aircraft in
our portfolio, representing 32% of the portfolio by appraised base value at
June 30, 2004. Based on the current cycles completed to date by our Boeing
737 aircraft, one of our Boeing 737 aircraft is likely to require an
inspection in connection with these ADs in 2004 and may then require these
modifications to be implemented . We could incur significant costs in
ensuring that our Boeing 737 aircraft comply with these standards, which
could impact adversely on our results of operations.
In 2003, the FAA issued an AD mandating a re-design of the rudder
systems of Boeing 737 aircraft prior to November 2008. The average cost per
aircraft of such modifications is approximately $182,000. We have four
Boeing 737 aircraft in the portfolio, representing 32% of the portfolio by
appraised base value at June 30, 2004. It is expected that we will incur
the full cost of this modification, which will impact adversely on our
results of operations.
In 2003, the FAA issued an AD that requires operators of Pratt &
Whitney PW4000 powered Airbus Industrie A300, Airbus Industrie A310, Boeing
747, Boeing 767 and McDonnell Douglas MD-11 aircraft to replace the engine
compressor case on each engine installed on these aircraft before December
31, 2007. The estimated cost to comply with this AD is approximately
$430,000 per aircraft. We have two PW4000 powered Boeing B767 aircraft
representing 42% of our portfolio by appraised base value at June 30, 2004.
The series of engine modifications required by this AD for these two
aircraft are scheduled to be completed between July 2005 and May 2007. We
will incur significant costs in ensuring that our two B767 aircraft comply
with these new standards. This will impact adversely on our results of
operations.
Employees
We have no employees or executive management of our own. We therefore
rely on the Servicer, the Administrative Agent, the Financial Consultant,
the Cash Manager, the Insurance Advisor and the Company Secretary for the
leasing, releasing and sale of our aircraft and all other executive and
administrative functions.
Insurance
Pursuant to each lease, we require our lessees to carry the types of
insurance which are customary in the air transportation industry, including
comprehensive liability insurance and aircraft hull insurance. We further
require that we be named as an additional insured on hull and liability
policies carried by the lessees. All policies are to contain a breach of
warranty endorsement or severability of interest clause so that we continue
to be protected even if the operator/lessee violates one or more of the
warranties or conditions of the insurance policy. The coverage usually is
worldwide, subject to limitations consistent with comparable operators
operating similar aircraft on similar routes. The comprehensive liability
insurance policies are generally arranged on a combined single limit basis
for comprehensive liabilities with an amount not less than $500 million for
each widebody aircraft and an amount of not less than $350 million per
narrowbody aircraft.
As a consequence of the terrorist attacks of September 11, 2001,
airlines worldwide continue to experience difficulties in maintaining war
insurance cover in the amounts required under their leases with us and other
lessors. Until recently, our lessees have relied on government guarantees
or indemnities to provide coverage for third party liability (other than to
passengers) arising from war and terrorism risks, above a greatly reduced
ceiling of cover provided by the aviation insurance market as a reaction to
the events of September 11, 2001. Although most governments have now
terminated their guarantee or indemnity support, presently two of our eight
lessees continue to rely on such government support for this coverage.
There can be no assurance that if and when such government support is
removed our lessees will be able to replace that support by insurance
coverage. If such insurance were not purchased or otherwise available from
government support, it may be necessary for the relevant aircraft to be
grounded. Such consequences would have a material adverse impact on the
financial condition of our lessees and their ability to perform under their
leases. These effects could cause a reduction in our revenue which would
adversely affect our funds available to make payments on the Notes.
Following insurance market developments in the aftermath of the
terrorist attacks of September 11, 2001, the insurance market, on January 1,
2002, ceased offering cover for Confiscation by the State of Registration
(as required under the majority of leases). Such cover became available
again from about mid 2003 albeit at increased cost, with additional imposed
conditions and only for certain jurisdictions. As of September 2004, all of
our lessees had cover for Confiscation by the State of Registration with the
exception of our lessees in China and the United States, as this cover is
not available in those jurisdictions.
Babcock & Brown, as Servicer, monitors the compliance by the lessees
with the foregoing requirements relating to insurance to be maintained in
respect of the aircraft and, to the extent of any insufficiencies or other
problems with respect to the required insurance coverage, negotiates and
arranges for appropriate additional insurance coverage.
C. Organizational Structure
The Company has three wholly-owned subsidiaries. They are ALPS 92-1
UK Limited incorporated in England, Carotene Limited incorporated in Ireland
and ALPS 92-1 France SARL which was incorporated in France on December 15,
2003.
D. Property, Plants and Equipment
We have no ownership or leasehold interest in any real property. Our
registered and principal office is located at 22 Grenville Street, St.
Helier, Jersey JE4 8PX, Channel Islands. For a description of our interest
in other property, see "Item 4 - Information on the Company - Business
Overview."
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following discussion is based on our financial statements which
were prepared under U.S. GAAP. We present our statements in U.S. dollars.
Except where otherwise indicated, all dollar amounts listed in this Item 5
are rounded to the nearest $0.1 million.
We believe that our revenue and expenses were not materially affected
by inflation during the period from incorporation to and including June 30,
2004.
Overview
We commenced operations in 1992 to acquire and own a portfolio of 14
commercial passenger jet aircraft, re-lease the aircraft as necessary and
sell the aircraft in order to provide funds to pay the principal amount of
the Company's debt securities at maturity. Substantially all of our
business consists of aircraft operating lease activities and aircraft sales
as required to satisfy our Trust Note Sales Goals. We conduct some of our
leasing operations through our wholly owned subsidiaries Carotene Limited,
ALPS 92-1 UK Limited and ALPS 92-1 France SARL, which were established for
the sole purpose of assisting us in accomplishing our Business Objectives by
leasing aircraft from us either directly or indirectly and re-leasing them
to operators where tax considerations or other business factors make it
desirable to do so. We sold one of our aircraft to GPA in March 1996,
bought the WFC Aircraft in November 1996, and sold a B747-283B aircraft to
WFC in July 1997. On July 2, 1999, we sold a Fokker 100 aircraft to
Besleasing, on June 27, 2000, we sold an A300B4-200 aircraft to Cebi
Aviation S.A., on October 1, 2002 we sold a B737-300 aircraft to JFM
Aviation One LLC, and on December 20, 2002 we sold an A320-200 aircraft to
Transamerica Aviation, LLC.
Our net income consists principally of lease revenue and interest
income, reduced by interest expense, general and administrative expenses,
depreciation and, in some years, a provision for impairment in aircraft
values.
Our results of operations have been and will continue to be determined
by significant factors such as (i) conditions in the civil aviation industry
for both leased and owned aircraft, (ii) the mix, relative age and
popularity of the various aircraft types in our portfolio of aircraft and
(iii) our financial resources and liquidity position relative to our
competitors, most of whom possess substantially greater financial
resources. We have operated in a difficult financial market environment for
many of the years since our formation in 1992. Although there had been
signs of recovery in the civil aviation industry, conditions remained
difficult through September 11, 2001 and deteriorated significantly as a
result of the terrorist attacks on that date, the military action of the
U.S. and its allies in Afghanistan, the war in Iraq, the terrorist attacks
in various parts of the world, the outbreak of SARS, and more recently the
significant increase in the price of oil.
Recent Developments
The pre-existing slowdown in the global economy and its negative
effect on the commercial aviation industry was exacerbated by the economic
and political fallout from the terrorist attacks in the United States on
September 11, 2001, the military action of the U.S. and its allies in
Afghanistan, the war in Iraq, ongoing terrorist attacks in various parts of
the world and the outbreak of SARS. More recently, in 2004, the significant
increase in the price of oil has further adversely affected the commercial
aviation industry.
Despite some positive trends in 2004 in the commercial aviation
industry, many of the factors discussed herein as having adversely affected
the industry since September 2001, continue to adversely affect the
financial condition of our lessees and their ability to perform under the
leases. This has also resulted in reduced demand for our aircraft, which
impacts our ability to re-lease aircraft on a timely basis and at favorable
rates, and a reduction in the value of our aircraft. These effects have
caused a reduction in our cashflow available to make payments on the Notes.
The vulnerability of the Notes has been reflected in actions taken by
the rating agencies which re-evaluated several structured aircraft
financings in the wake of the terrorist attacks in the United States on
September 11, 2001 and several times since then.
The current ratings on each class of the Notes are as follows:
Moody's Standard & Poor's
Class A Baa3 BB
Class B Caa1 B-
Class C Ca CCC/Outlook negative
Class D Not rated CCC-/Outlook negative
A rating is not a recommendation to buy, sell or hold Notes because
ratings do not comment as to market price or suitability for a particular
investor. A rating may be subject to revision, suspension or withdrawal at
any time by the assigning rating agency. Given the continuing difficulties
in the aircraft industry and their impact on the factors which determine our
revenues, there can be no assurance that the rating agencies will not take
any further action in respect of our Notes.
Lease Revenue
Revenue decreased in fiscal year 2000 due to the sale of the Fokker
100 aircraft and the A300B4-200 aircraft in July 1999 and June 2000,
respectively. Revenue decreased in fiscal year 2001 due to the re-leasing
of various aircraft at reduced rates and the downtime of one of our B737-400
aircraft which was subsequently leased to a lessee in India. Revenue
decreased in fiscal year 2002 due to downtime of the same B737-400 for
approximately three months, reduced revenue from the B757-200 which was on a
"power-by-the-hour" lease but was not utilized by the lessee for eight
months, and new "power-by-the-hour" leases and lease extensions negotiated
with a number of lessees which generally result in reduced and less
dependable rental income. Revenue decreased further in fiscal year 2003 due
to the sale of our B737-300 aircraft on October 1, 2002 and the sale of our
A320-200 aircraft on December 20, 2002 as well as the re-leasing or
extension of leases of various aircraft at reduced rates, the failure of a
lessee to make certain rental payments and downtime on one of our aircraft.
Revenue decreased further in fiscal year 2004 for three principal reasons.
First, Air Canada, the lessee of our two B767-300ER aircraft, filed for
bankruptcy protection on April 1, 2003 and immediately ceased making rental
payments. In October 2003, following execution of a memorandum of
understanding with the Company involving a restructuring of lease terms, Air
Canada resumed payment of rentals. However these have been at a
significantly lower level than the rentals received in the prior fiscal year
due to the terms of the restructured leases (which are "power- by-the-hour"
leases) and the fact that the utilisation of the aircraft up to April 2004
was relatively low. Secondly, the lease of one of our B737-400 aircraft
expired during fiscal year 2004 and this aircraft was subsequently re-leased
at a significantly lower monthly lease rate. Thirdly, the lease of another
of our B737-400 aircraft was terminated during fiscal year 2004 and no lease
rentals were received by the Company for the aircraft for the months of May
and June 2004. Further, three of our leases are "power-by-the-hour"
leases. "Power-by-the-hour" leases generally result in reduced and less
dependable lease income.
Our ability to make payments of interest will depend in part on the
successful re-leasing of our one aircraft with a lease which expires in 2005
(assuming the existing lessee of such aircraft does not exercise its option
to extend the lease). See "Item 3 - Key Information - Risk Factors - Risks
Relating to Leasing of Aircraft." A new lease of such aircraft may bear
fixed or floating rate payments. The rental rate achieved upon such
re-leasing will be affected by a number of factors including the age,
condition and jurisdiction of registration of the aircraft, the perceived
credit risk of the lessee, demand for the particular aircraft type, the
availability and price of competing new and used aircraft, the market into
which the aircraft is leased, the terms of the lease and general economic
factors such as interest rates, inflation and the general availability of
credit. Uncertainty with respect to short to medium term future prospects
of the aircraft industry has resulted in a number of aircraft lessees
requiring restructuring of leases. A number of new leases and
restructurings have also shifted certain aircraft maintenance and overhaul
costs to the Company, as lessor. Generally, our lease restructurings have
resulted in reduced rates, deferred payments or early returns of aircraft.
These conditions, particularly should they continue, are likely to affect
our lessees' ability to make rent and other lease payments, are likely to
impair our ability to re-lease aircraft on a timely basis and at favorable
rates and are likely to reduce the value of the aircraft for possible sale.
These factors have caused and are expected to continue to cause a reduction
in our funds available to make payments on the Notes. See "Item 3 - Key
Information - Risk Factors - Risks Relating to Payments on the Notes."
Lease revenue attributable to lessees based in Europe has decreased
over the nine year period since fiscal year 1995, decreasing from $22.7
million for fiscal year 1995 to $6.1 million for fiscal year 2004. Lease
revenue attributable to lessees based in Asia has also decreased from $13.6
million to $4.2 million over the same period. Lease revenue attributable to
lessees based in North America has decreased from $11.4 million to $4.8
million and lease revenue attributable to lessees based in South/Central
America has decreased from $6.6 million to zero over the same period. The
decrease in lease revenue attributable to lessees based in Europe, Asia and
North America is primarily the result of the portfolio being reduced from
fourteen to nine aircraft during the period and also a result of all
aircraft being re-leased at lower rates. The decrease in lease revenue
attributable to lessees based in South/Central America is the result of our
leasing the aircraft to lessees in other regions upon expiration of the
leases to airlines in South/Central America. The most significant decreases
in lease rates have been in respect of the aircraft with "power-by-the-hour"
leases and in the reduced lease rates for the two B767-300ER aircraft. In
connection with the re-lease or sub-lease of an aircraft, we are required to
satisfy certain criteria regarding geographic concentrations and the credit
ratings of the countries of domicile of new lessees or sublessees unless we
receive confirmation from each applicable rating agency that not doing so
will not result in the withdrawal or lowering of such rating agency's
then-current rating of certificates representing interests in any class of
the Notes. All our current leases provide for rental payments based on
fixed rates (some lessees are based on "power-by-the-hour" fixed hourly
rates and others on fixed monthly rates) whereas the interest obligations on
the Notes are based on fixed and floating rates. A material increase in
LIBOR may adversely impact our cashflow in respect of expenses. See "Item 3
- - Key Information - Risk Factors - Risks Relating to Payments on the Notes."
Sales Revenue
The Deed of Charge sets out the following Trust Note Sales Goals which
required us to approve sales of our aircraft on an ongoing basis:
Aircraft to be Sold
(measured by Initial Appraised Date by which Sales Goals
Value as of June 3, 1996) were to be Satisfied
$65,000,000 June 27, 2001
$130,000,000 June 27, 2002
$200,000,000 June 27, 2003
$454,950,000 June 27, 2004
We were in compliance with and had exceeded the Trust Note Sales Goals
as of June 27, 2001 and were required to sell a further $54,330,000 (as
measured by Initial Appraised Value) worth of aircraft to be in compliance
with the Trust Note Sales Goals as of June 27, 2002.
As discussed above, since September 11, 2001, the market for sale of
older used aircraft such as our aircraft has been extremely poor.
Nevertheless, in order to meet the June 2002 Trust Note Sales Goal,
following an extensive marketing effort by the Servicer, the Company had
entered into non-binding agreements to sell a B737-300 and an A320-200
aircraft to two separate purchasers by June 27, 2002. However, as a result
of difficulties and delays outside the Company's control the sale of the
B737-300 aircraft was not completed until October 1, 2002 and the sale of
the A320-200 aircraft (which was ultimately sold to a different purchaser
following the withdrawal of the original prospective purchaser on November
5, 2002) was not completed until December 20, 2002. As a result, the
Company was not in compliance with the Trust Note Sales Goals from November
5, 2002 until the A320-200 aircraft was sold to such other purchaser on
December 20, 2002.
In the period from June 1996 to date, we have sold five aircraft
totaling $133,190,000 (measured by Initial Appraised Value). We needed to
sell an additional $66,810,000 (measured by Initial Appraised Value) worth
of aircraft to comply with the June 2003 Trust Note Sales Goal and needed to
sell all of our aircraft to comply with the June 2004 Trust Note Sales
Goal. At our direction, the Servicer has periodically been marketing each
of our aircraft for sale in order to meet the ongoing Trust Note Sales Goals
in a manner consistent with the requirements of the Deed of Charge.
However, the current market for sale of older used aircraft such as our
aircraft is extremely poor and it is not likely the market for our aircraft
will improve prior to the final maturity date of the Notes.
In fiscal year 2003, the marketing efforts of the Servicer resulted in
two offers to purchase the B757-200 aircraft, but both offers were at prices
significantly below the Class C Note Target Price. After careful
consideration of these offers, the Company's obligations under the Deed of
Charge (notably the Business Objectives contained therein) and the then
current and possible future market conditions for aircraft sales and
leasing, we concluded that it would not be consistent with the terms of the
Deed of Charge for the Company to accept either such offer.
We did not comply with the Trust Note Sales Goal for June 27, 2003 or
for June 27, 2004 as we were unable, given the then current aircraft
industry market conditions, to sell sufficient aircraft at the sale prices
required by our then current Business Objectives. To the extent the Company
has not complied with the Trust Note Sales Goals, on or after December 27,
2004, the Company will be required, subject to the pre-emption rights of the
Class D and Class E Noteholders, to accept any Sale Offer for the sale of an
aircraft if the proposed sale price is at least equal to the Class A Note
Target Price. The Class A Note Target Price, were all of the aircraft to be
sold at the same time, is defined in the Deed of Charge to be the
Outstanding Principal Balance of the Class A Notes (currently $77.472
million) plus accrued and unpaid Class A Note regular interest at the time
of sale and certain then outstanding expenses of the Company.
Impairment
In accordance with SFAS 144, the Directors undertook a review to
determine whether an impairment charge is required in respect of the nine
aircraft, all of which were classified as held for use as at June 30, 2004.
This review has determined that the carrying value for eight of the
aircraft is greater than the estimated undiscounted future net cashflows in
respect of such aircraft and the Directors have recorded an impairment
charge for these aircraft equal to the difference between their carrying
value and fair value. For the purpose of measuring impairment losses for
long-lived assets, the Directors have determined that the most appropriate
estimate of the fair value of the Company's aircraft is the average
Appraised Current Market Value as calculated by the Independent Appraisers.
The average Appraised Current Market Value was in the aggregate $138,300,000
as at June 30, 2004 for the nine aircraft. The Independent Appraisers'
assessment of Appraised Current Market Value reflects the underlying
economic value of aircraft and engines in normal market conditions. The
Independent Appraisers assume that the aircraft are valued for their
highest, best use, that the parties to the hypothetical sale are willing,
able, prudent and knowledgeable, and under no unusual pressure for a prompt
sale, and that the transaction would be negotiated in an open and
unrestricted market on an arm's length basis.
Appraised Current Market Values have been estimated by the Independent
Appraisers based on value curves from the last downturn in the aircraft
market. An appraisal is an estimate of value and should not be relied upon
as a measure of current sales value. In the current environment, there is a
lack of hard data available on which to base aircraft valuations for older
aircraft of the type in our portfolio and therefore the appraisal process is
more difficult.
The Directors believe that current market conditions (in particular,
the absence of liquidity and of willing buyers and sellers for the types of
aircraft owned by the Company) do not reflect the normal market conditions
which the Independent Appraisers have had to assume. Consequently, the
sales value that could be achieved for the aircraft in the event that they
were disposed of in the current market may be less than the average
Appraised Current Market Value and carrying value as at June 30, 2004.
Also, if the Company is required to sell the aircraft due to the Required
Sale Provision the proceeds from such sale may be even less than that which
could be achieved in the current market.
The application of the accounting policies in the fiscal year ended
June 30, 2004 has led to an impairment charge of $13.053 million. Previous
charges were made at June 30, 2003, June 30, 2002 and at June 30, 2001 for
$14.378 million, $20.321 million and $30.259 million, respectively.
Critical Accounting Policies
We have determined the critical policies by considering those that
involve the most subjective decisions or assessments. The most critical
accounting policies are those related to adequacy of maintenance reserves,
impairment of aircraft values and depreciation methods since these policies
involve elements which require us to make assumptions as to matters that are
highly uncertain at the time the estimates were made. We also consider the
going concern assumption to be a critical element in our financial reporting.
Maintenance Reserves
In many of the lease contracts the lessee makes a payment into a fund
held by the Company, from which the costs of future maintenance checks are
reimbursed. The receipts from lessees are held in the maintenance reserve
fund, except where the Directors believe that a surplus exists, in which
case such a surplus, to the extent retainable by the Company is taken to
income as a reduction of expenses. Conversely, the Company also provides
for additional maintenance costs which are not expected to be paid out of
the maintenance reserves, and such costs are charged to expenses. The
determination of the adequacy of the maintenance reserves is based on an
analysis of the lease portfolio and reflects and takes into account the
judgment of the Directors.
Impairment
The Directors have reviewed the Company's fleet for impairment in
accordance with SFAS 144. Under SFAS 144, the Company's policy is to
evaluate for impairment when an asset's carrying value is greater than its
estimated undiscounted future net cashflows. The amount of the impairment
charge is the difference between the asset's carrying value and its fair
value. The Directors have concluded that the estimated undiscounted future
net cashflows to be generated by eight of the Company's aircraft will be
less than their carrying value. Consequently eight of the Company's
aircraft have been written down to their fair value.
In determining fair value, the Directors use external valuations. For
the purposes of measuring impairment losses for aircraft held for use, the
Directors have determined that the most appropriate estimate of the fair
value of the Company's aircraft is the average Appraised Current Market
Value, as calculated by the Independent Appraisers. An appraisal is an
estimate of value and therefore should not be relied upon as a measure of
current sales value. In the current environment, there is a lack of hard
data available on which to base aircraft valuations for older aircraft of
the type in our portfolio and therefore the appraisal process is more
difficult. The Directors believe that current market conditions (in
particular, the absence of liquidity and of willing buyers and sellers for
the types of aircraft owned by the Company) do not reflect the normal market
conditions which the Independent Appraisers have had to assume.
Consequently, the sales value that could be achieved for the aircraft in the
event that they were disposed of in the current market may be less than the
average Appraised Current Market Value and carrying value as at June 30,
2004. Also, if the Company is required to sell the aircraft due to the
Required Sale Provision the proceeds from such sale may be even less than
that which could be achieved in the current market.
Depreciation
Aircraft are recorded at cost and are depreciated at a rate calculated
to write off the cost of the assets to their estimated residual value on a
straight line basis over their estimated useful economic lives. The
determinations of useful life and residual value are critical to the
calculation of depreciation. The current estimates of residual value and
useful economic lives are 10% of cost, and 25 years from the date of
manufacture.
Going Concern
The Consolidated Financial Statements have been prepared assuming that
the Company will continue in operational existence, for a reasonable period
of time, up to one year beyond the date of the Consolidated Financial
Statements. Note 4 to the Consolidated Financial Statements sets out
certain matters that have had a significant adverse effect on the ability of
the Company's lessees to make rent and other payments and consequently on
the Company's ability to make interest and principal payments on the Notes
on a timely basis and in full. Note 1 to the Consolidated Financial
Statements describes the effect of these matters on the Company's payment
obligations, those provisions of the Deed of Charge concerning Events of
Default and the Required Sale Provision of the Deed of Charge which could
require the Company to dispose of some or all of its fleet and accordingly
discontinue or substantially curtail operations. These matters give rise to
substantial doubt about the Company's ability to continue as a going concern.
For the reasons given in note 1 to the Consolidated Financial
Statements the Directors consider that it is appropriate to prepare the
Consolidated Financial Statements on a going concern basis at this time. The
Consolidated Financial Statements do not include any adjustments that would
arise in the event that the Company was unable to continue as a going
concern.
Results of Operations - Fiscal Year Ended June 30, 2004 compared with the
Fiscal Year Ended June 30, 2003
Aircraft Leasing
Lease revenue, which constitutes substantially all of our revenue, was
$15.2 million for the fiscal year ended June 30, 2004, a decrease of 23.2%
from the corresponding figure of $19.8 million for the fiscal year ended
June 30, 2003. This decrease was due primarily to reduced revenue from the
Company's two B767-300ER aircraft which were on "power-by-the-hour" leases,
downtime of one of our B737-400 aircraft following its early return from
Skynet, re-leasing of one of our B737-400 aircraft at a lower rate, and by
reduced rental rates negotiated by a number of lessees.
General and Administrative Expenses
General and administrative expenses consist principally of lease
management fees, cash management fees, directors' and officers' insurance
and legal and professional fees. General and administrative expenses have
decreased from $5.9 million for the fiscal year ended June 30, 2003 to $3.2
million for the fiscal year ended June 30, 2004, a decrease of 45.4%. Lease
management fees decreased by 38.5% from $1.3 million in the fiscal year
ended June 30, 2003 to $0.8 million in the fiscal year ended June 30, 2004
as a result of lower lease revenue income. Aircraft costs of $0.1 million
were incurred in the fiscal year ended June 30, 2004 (compared to $1.9
million in the prior fiscal year) in connection with the redelivery of an
aircraft, the lease in respect of which expired during the fiscal year. Our
D&O insurance premium increased from $480,000 in the fiscal year ended June
30, 2003 to $936,000 in the fiscal year ended June 30, 2004 due to a general
increase in D&O insurance premiums across all industries and an increase in
the level of insurance cover compared to that obtained in the previous
fiscal year.
Depreciation
Depreciation of $10.8 million was charged for the fiscal year ended
June 30, 2004 and $12.0 million for the fiscal year ended June 30, 2003.
Impairment in Aircraft Values
In accordance with SFAS 144, the Directors of the Company reviewed the
carrying value of the aircraft against the sum of the estimated undiscounted
future net cashflows of the aircraft and determined that shortfalls existed
for eight of the aircraft, all of which are classified as held for use, as
their carrying value was more than the sum of the estimated undiscounted
future net cash flows of these aircraft. The Directors therefore made an
impairment charge for each of these aircraft equal to the difference between
their carrying value and their fair value. A charge for impairment of the
book value of aircraft of $13.053 million was made for the fiscal year ended
June 30, 2004. See "Overview - Impairment" above.
The decline in the fair value of the aircraft is due primarily to the
ageing of the aircraft, and with respect to certain aircraft, those market
conditions which have had a negative effect on aircraft values. These
conditions have continued to result in a reduction in lease rates.
Maintenance Reserves
The Company has provided for future expected lessor contributions to
AD, modification and overhaul costs of $10.263 million in respect of seven
aircraft.
Bad Debts
A provision of $0.366 million has been made as at June 30, 2004 with
respect to amounts outstanding from Skynet, the former lessee of one
B737-400 aircraft whose lease was terminated during the fiscal year. During
the fiscal year ended June 30, 2004, $0.172 million was recovered in respect
of amounts outstanding from Air Canada against which provision had been made
in the fiscal year ended June 30, 2003. The net bad debt position for the
fiscal year ended June 30, 2004 is therefore a provision of $0.194 million.
Results of Operations - Fiscal Year Ended June 30, 2003 compared with the
Fiscal Year Ended June 30, 2002
Aircraft Leasing
Lease revenue, which constitutes substantially all of our revenue, was
$19.8 million for the fiscal year ended June 30, 2003, a decrease of 39%
from the corresponding figure of $32.6 million for the fiscal year ended
June 30, 2002. This decrease was due primarily to the sale of two of our
aircraft during fiscal year 2003, downtime of one of our aircraft between
leases, the failure by a lessee to make certain rental payments, reduced
activity on "power-by-the-hour" leases and by reduced rental rates
negotiated by a number of lessees.
General and Administrative Expenses
General and administrative expenses consist principally of aircraft
costs borne by the Company, lease management fees, cash management fees,
directors' and officers' insurance, and legal and professional fees.
General and administrative expenses have increased from $3.6 million for the
fiscal year ended June 30, 2002 to $5.9 million for the fiscal year ended
June 30, 2003, an increase of 64%. Lease management fees increased by 8%
from $1.2 million in the fiscal year ended June 30, 2002 to $1.3 million in
the fiscal year ended June 30, 2003 as a result of aircraft sales. Aircraft
costs of $1.9 million were incurred in the fiscal year ended June 30, 2003
(compared to $0.8 million in the prior fiscal year) as a result of
redelivery conditions on an aircraft, the lease in respect of which expired
during the fiscal year. Our D&O insurance premium increased from $275,000
in the fiscal year ended June 30, 2002 to $480,000 in the fiscal year ended
June 30, 2003 due to a general increase in D&O insurance premiums across all
industries. Legal and professional expenses have increased from $0.8
million for the fiscal year ended June 30, 2002 to $1.4 million in the
fiscal year ended June 30, 2003, an increase of 75%. This increase was due
primarily to higher aircraft sales activity.
Depreciation
Depreciation of $12.0 million was charged for the fiscal year ended
June 30, 2003 and $16.4 million for fiscal year ended June 30, 2002.
Impairment in Aircraft Values
In accordance with SFAS 144, the Directors of the Company reviewed the
carrying value of the aircraft against the sum of the estimated undiscounted
future net cashflows of the aircraft and determined that shortfalls existed
for each of the aircraft, all of which are classified as held for use, as
their carrying value was more than the sum of the estimated undiscounted
future net cashflows of these aircraft. The Directors therefore made an
impairment charge for each of these aircraft equal to the difference between
their carrying value and their fair value. A charge for impairment of the
book value of aircraft of $14.378 million was made for the fiscal year ended
June 30, 2003. See "Overview - Impairment" above.
The decline in the fair value of the aircraft is due primarily to the
ageing of the aircraft, and with respect to certain aircraft, those market
conditions which have had a negative effect on aircraft values. These
conditions have continued to result in a reduction in lease rates.
Maintenance Reserves
The Company has provided for future expected lessor contributions to
AD, modification and overhaul costs of $3.565 million in respect of five
aircraft.
Bad Debts
A provision of $0.8 million has been made as at June 30, 2003 with
respect to amounts outstanding from Air Canada which filed for bankruptcy
protection during the fiscal year.
B. Liquidity and Capital Resources
Cash position
We acquired the original 14 aircraft with a portion of the proceeds we
received from the issuance of the Prior Debt. On June 27, 1996, we
refinanced the Prior Debt with the issuance of the Notes, the aggregate
principal amount of which was $435,110,000 as of June 30, 1997. Operating
expenses and payments of interest on and certain payments of principal of
the Notes have been satisfied from rental income received by us in respect
of the leases as well as sale proceeds.
Our cash resources were reduced during fiscal year 2004. At June 30,
2004, cash resources equaled $24.9 million compared to $26.5 million at June
30, 2003. This reduction was due primarily to a reduction in the overall
level of the Liquidity Reserve Amount required to be maintained by the
Company as well as the fact that as at June 30, 2004 the actual amount of
cash held by the Company representing the Liquidity Reserve Amount was
$715,000 below such required level.
Cash from Operating Activities
Net cash provided by operating activities amounted to $6.3 million in
fiscal year 2004, $1.0 million in fiscal year 2003 and $16.1 million in
fiscal year 2002. This reflects cash received in respect of lease rentals
of $16.1 million in fiscal year 2004, $17.7 million in fiscal year 2003 and
$31.1 million in fiscal year 2002. Cash paid in respect of interest was $3.1
million in fiscal year 2004 as compared to $6.2 million in fiscal year
2003. Cash paid in respect of interest is paid under the Deed of Charge and
is limited to the net cash provided by operating activities. The decrease
in net cash provided by operating activities is primarily due to the
reduction in lease rental income and interest and principal payments made
during the fiscal year ended June 30, 2004. During the fiscal year ended
June 30, 2003, there were maintenance payments of $1.8 million primarily in
respect of two B737-400, one B757-200 and one MD83 aircraft. During the
fiscal year ended June 30, 2004 there were maintenance payments of $4.5
million primarily in respect of one B757-200, two B737-400 and two MD83
aircraft.
Cash from Investing and Financing Activities
In fiscal year 1993, we issued the Prior Debt and received cash of
$521.0 million. In addition, we received an escrow payment of $15.5 million
from GPA and the Old SM Loan of $78.1 million. These proceeds were used to
finance the acquisition of the original 14 aircraft for $521.0 million and
the remaining cash balances were invested in bank deposits and commercial
paper.
In March 1996, we sold one aircraft to GPA for $25.0 million. On June
27, 1996, we refinanced the Prior Debt with the issuance of the Notes.
Proceeds of $380.6 million were received from the issuance of the Class A,
Class B, Class C and Class D Notes, net of expenses. The proceeds together
with cash balances previously held in reserve accounts were used to redeem
the Old Class A Notes and Old Class M Notes, which were discharged in full
pursuant to written instruments entered into by the parties, with the
balance of the proceeds of such Notes being held in bank deposits. The Old
Class B Notes which were owned by WFC were exchanged by WFC for the Class E
Notes, and the Old SM Loan was repaid.
From 1996 through June 30, 2004, approximately $207.2 million of
principal and $145.4 million of interest has been paid to the Noteholders.
The Company's Cash Needs
During fiscal year 2004, certain target principal payments scheduled
to be paid to holders of Class A, Class C and Class D Notes, certain
interest payments due to holders of Class A, Class B and Class C Notes and
all interest payments due to holders of Class D and Class E Notes were in
arrears. As at the end of fiscal year 2004, these arrears consisted of
$70.810 million of Class A Note Target Amount, $0.942 million of Class A
Note step-up interest, $0.407 million of Class B Note step-up interest,
$4.304 million of Class C Note Target Amount, $0.390 million of Class C Note
step-up interest, $5.177 million of Class D Note Target Amount, $0.665
million of Class D Note step-up interest, $1.042 million of Class D Note
default interest, $7.130 million of Class D Note interest and $52.705
million of Class E Note interest. Our current projections for the remainder
of fiscal year 2005 and thereafter indicate that we will not be able to pay
any further interest on the Class D and Class E Notes or any further step-up
interest on the Class A, Class B, Class C and Class D Notes.
The Company did not have sufficient funds to repay the Class A Notes
on their expected final payment date of May 15, 2002 or to repay the Class
B, Class C or Class D Notes on their expected final payment date of July 15,
2002. Failure to repay in full the principal of those Notes by such dates
is not an Event of Default; however, the Deed of Charge requires, to the
extent the Company does not repay in full principal of those Notes by such
dates, that the Company pay to the Class A, Class B and Class C Noteholders
additional step-up interest of 0.50% per annum and to the Class D
Noteholders additional step-up interest of 1.00% per annum for each month
until the earlier of the date such Notes are repaid in full and their final
maturity date of June 15, 2006. These additional interest costs will only
be paid to the extent there are available collections in accordance with the
priority of payments set forth in the Deed of Charge. The Company paid some
step-up interest in fiscal year 2002, but our current projections indicate
that we will not have sufficient funds to pay any further step-up interest.
The timing and amount of principal payments on the Notes will be
primarily a function of the Target Balances (as such term is defined in the
Prospectus) for the respective classes of Notes. Such Target Balances were
determined based on certain assumptions, including among other things,
assumptions regarding the timing of receipt and amount of proceeds of
aircraft sales and lease payments. Our actual experience in selling and
leasing aircraft has resulted in proceeds received by us being significantly
less than that provided in these assumptions. For the reasons discussed
under "Item 3 - Key Information - Risk Factors" and "Item 5 - Operating and
Financial Review and Prospectus - Operating Results" we expect that the
difference between these assumptions and actual experience will increase as
the industry experiences a period of prolonged decline. The Servicer, at
the Company's direction, has periodically been marketing each of the
aircraft for sale; however, the sales market for our used aircraft is
extremely weak at this time. The Company is continuing to review all
alternatives in order to maximize the amount available to pay outstanding
principal and interest to the noteholders while attempting to comply with
the Business Objectives and the other requirements of the Deed of Charge.
However, there can be no assurance that we will be able to repay the holders
of the Class A Notes the full amount owed to them when due. Further, based
on our current projections, we expect to have insufficient funds to repay
some or all of the outstanding Class B Note principal and any further Class
C, Class D and Class E Note principal. Our operative documents restrict our
ability to consider many traditional forms of financing and thereby
circumscribe the options available to us. We cannot offer any assurance
that viable alternative arrangements will be available to us or that any
alternative arrangement selected will be successful. See "Item 3 - Key
Information - Risk Factors," "Item 4 - Information on the Company - History
and Development of the Company" and "Item 13 - Defaults, Dividend Arrearages
and Delinquencies."
The Deed of Charge sets out the following Trust Note Sales Goals which
required us to approve sales of our aircraft on an ongoing basis:
Aircraft to be Sold
(measured by Initial Appraised Date by which Sales Goals
Value as of June 3, 1996) were to be Satisfied
$65,000,000 June 27, 2001
$130,000,000 June 27, 2002
$200,000,000 June 27, 2003
$454,950,000 June 27, 2004
We were in compliance with and had exceeded the Trust Note Sales Goals
as of June 27, 2001 and were required to sell a further $54,330,000 (as
measured by Initial Appraised Value) worth of aircraft to be in compliance
with the Trust Note Sales Goals as of June 27, 2002.
As discussed above, since September 11, 2001, the market for sale of
older used aircraft such as our aircraft has been extremely poor.
Nevertheless, in order to meet the June 2002 Trust Note Sales Goal,
following an extensive marketing effort by the Servicer, the Company had
entered into non-binding agreements to sell a B737-300 and an A320-200
aircraft to two separate purchasers by June 27, 2002. However, as a result
of difficulties and delays outside the Company's control the sale of the
B737-300 aircraft was not completed until October 1, 2002 and the sale of
the A320-200 aircraft (which was ultimately sold to a different purchaser
following the withdrawal of the original prospective purchaser on November
5, 2002) was not completed until December 20, 2002. As a result, the
Company was not in compliance with the Trust Note Sales Goals from November
5, 2002 until the A320-200 aircraft was sold to such other purchaser on
December 20, 2002.
In the period from June 1996 to date, we have sold five aircraft
totaling $133,190,000 (measured by Initial Appraised Value). We needed to
sell an additional $66,810,000 (measured by Initial Appraised Value) worth
of aircraft to comply with the June 2003 Trust Note Sales Goal and needed to
sell all of our aircraft to comply with the June 2004 Trust Note Sales
Goal. At our direction, the Servicer has periodically been marketing each
of our aircraft for sale in order to meet the ongoing Trust Note Sales Goals
in a manner consistent with the requirements of the Deed of Charge.
However, the current market for sale of older used aircraft such as our
aircraft is extremely poor and it is not likely the market for our aircraft
will improve prior to the final maturity date of the Notes.
In fiscal year 2003, the marketing efforts of the Servicer resulted in
two offers to purchase the B757-200 aircraft, but both offers were at prices
significantly below the Class C Note Target Price. After careful
consideration of these offers, the Company's obligations under the Deed of
Charge (notably the Business Objectives contained therein) and the then
current and possible future market conditions for aircraft sales and
leasing, we concluded that it would not be consistent with the terms of the
Deed of Charge for the Company to accept either such offer.
We did not comply with the Trust Note Sales Goals for June 27, 2003 or
for June 27, 2004 as we were unable, given the then current aircraft
industry market conditions, to sell sufficient aircraft at the sale prices
required by our then current Business Objectives.
Failure to comply with the Trust Note Sales Goals may, under certain
circumstances, constitute an Event of Default under the Deed of Charge if
such failure continues for 30 days or more after written notice thereof has
been given to the Company or the Security Trustee by holders of at least 25%
of the aggregate Outstanding Principal Balance of the Notes of any class
which has been materially adversely affected by such failure.
The Deed of Charge further provides that if an Event of Default were
to occur and be continuing an Enforcement Notice may only be served by
662/3% or more of the aggregate Outstanding Principal Balance of the
directing class, which will be Class A so long as any Class A Notes are
outstanding.
The Deed of Charge provides that the failure to comply with the June
2004 Trust Note Sales Goal gives the Noteholders the right to replace the
Servicer at the direction of Noteholders representing at least 66 2/3% of
the Outstanding Principal Balance of the Class A, Class B, Class C and Class
D Notes. The Deed of Charge also provides that, subject to the pre-emption
rights of the Class D and Class E Noteholders, to the extent the Trust Note
Sales Goals are not complied with prior to December 27, 2004, the Company is
required to accept any Sale Offer for the sale of an aircraft if the
proposed sale price is at least equal to the Class C Note Target Price.
During the time that the Company has not been in compliance with the Trust
Note Sales Goals, the Company has been unable, with the exception of the
sale of the A320-200 aircraft in December 2002, to sell aircraft at prices
at or above the Class C Note Target Price. However, to the extent the
Company has not complied with the Trust Note Sales Goals, on or after
December 27, 2004, the Company may be required to sell aircraft in
accordance with the Required Sale Provision.
Except as noted below, the Company's collection account is required to
be maintained at a balance equal to $22,191,000 (the "Liquidity Reserve
Amount"). In May 2004, the level of the Liquidity Reserve Amount was
reduced from $22,691,000 with the approval of the rating agencies. Part of
the Liquidity Reserve Amount consists of maintenance reserves and security
deposits received in cash from certain lessees under the terms of their
leases. The Liquidity Reserve Amount may be used to pay for maintenance
performed on aircraft, certain contingencies in respect of the aircraft,
repayment of cash security deposits and other Company expenses and
liabilities, including, among other things, interest due on the Class A,
Class B and Class C Notes and costs incurred in removing any lien imposed by
Eurocontrol, in performing ADs on the aircraft or in re-possessing or
re-leasing any aircraft, to the extent that available collections are not
sufficient therefor, in accordance with the priority of payments set out in
the Deed of Charge. The Company must augment the Liquidity Reserve Amount
on a monthly basis out of available collections to the extent it is used to
pay such interest, costs, expenses or liabilities. In accordance with the
Deed of Charge, the Company may in certain circumstances reduce the
Liquidity Reserve Amount. The balance of funds in the collection account
may fall below the Liquidity Reserve Amount at any time and the Company may
continue to make payments required on the Class A, Class B and Class C Notes
provided that the balance of funds in the collection account does not fall
below the "Maintenance Reserve Amount" (currently $10 million). The Company
believes its maintenance funding arrangements to be sufficient, based on
anticipated future maintenance expenses, to provide the Company with
sufficient liquidity to meet its ongoing maintenance liabilities. As at
June 30, 2004, the actual amount of cash held by the Company representing
the Liquidity Reserve Amount was $715,000 below the required level of
$22,191,000, and as at September 30, 2004 the actual amount of cash held in
this account was $857,000 below such required level.
C. Research and Development, Patents and Licenses
Not applicable.
D. Trend Information
The pre-existing slowdown in the global economy and its negative
effect on the commercial aviation industry was exacerbated by the economic
and political fallout from the terrorist attacks in the United States on
September 11, 2001, the military action of the U.S. and its allies in
Afghanistan, the war in Iraq, ongoing terrorist attacks in various parts of
the world and the outbreak of SARS.
In recent years, a number of initially small low cost airlines have
emerged with radically reduced fares, and the attempt by the older
traditional "legacy" carriers to compete by matching the fares of these low
cost airlines has contributed to many of these larger airlines experiencing
significant financial losses due to their inability to adequately reduce
their greater costs of operation. A number of these larger airlines have
recently emerged from, filed for or are indicating that they are close to
filing for bankruptcy. Air Canada, our largest lessee, as measured by our
annual lease revenue and the ninth largest airline in the world as measured
by fleet size, filed for bankruptcy in April 2003 and emerged from
bankruptcy on September 30, 2004. United Airlines and U.S. Airways, the
second and sixth largest airlines in the world, respectively, as measured by
fleet size, are currently subject to Chapter 11 bankruptcy protection (U.S.
Airways for the second time in two years). Delta Airlines, the third
largest airline in the world as measured by fleet size, is indicating that
absent significant financial concessions from its employees it will be
forced to declare bankruptcy. Although many of these bankruptcies and
threatened bankruptcies of the largest airlines in the world are essentially
restructurings to reduce the airline's cost base they do often result in
fleet reductions and in some cases have the potential to lead to
liquidations. When these large airlines reduce the size of their fleets,
supply of used aircraft in the market increases and negatively affects the
lease rates and sale proceeds we can obtain for our aircraft. Further, if
any of these airlines or any other large airlines were to liquidate, the
addition of their aircraft portfolios into the marketplace would likely
cause significant volatility to lease rates and sale prices for used
aircraft. In addition, other airlines, including certain of our lessees,
have suffered large losses or face severe financial difficulties. Indeed,
Skynet, one of our lessees from January 2003 to May 2004, has ceased
operations and returned the aircraft we had leased to them ten months prior
to the scheduled expiration of their lease.
Significant increases in the cost of fuel in 2004 have further
strained the financial viability of many airlines. At the beginning of
2004, the IATA forecasted a $3 billion profit for the global airline
industry for calendar year 2004. This projection was based on among other
things, a positive trend that began in the last twelve months of an increase
in the number of airline passengers. RPK has increased in every region in
the first seven months of 2004 as compared to the same period in 2003. This
increase was particularly significant in Asia as the airlines in Asia
continued to rebound from SARS related issues. The IATA projection was also
predicated on a number of assumptions including the assumption that the
average price of oil in 2004 would be $30 per barrel. Assuming all other
assumptions remained unchanged, but that the average oil price were instead
$33 per barrel the IATA industry forecast changed to project that the
industry would break even, and if the average price were assumed to be $36
per barrel, the forecast varied further to project a $3 billion loss for the
industry. As at January 31, 2004, June 30, 2004, August 31, 2004 and
September 30, 2004 the price of oil was approximately $32, $36, $41 and $50
per barrel, respectively.
The depressed aircraft market that has existed for the last four years
has meant it has not been possible for the Company to sell aircraft at
prices consistent with the Business Objectives set out in the Deed of
Charge. Lease rates also suffered from the increase after September 2001 in
availability of aircraft, although in the past twelve months the overall
number of used aircraft available for lease and sale has begun to decrease
and lease rates have now begun to increase. However, the resulting positive
impact has been less significant for older aircraft such as ours. Further,
the potential for volatility as a result of airline restructurings or
liquidation, or the occurrence of other adverse world events remains. We
have experienced a significant decline in lease rates upon re-leasing or
extending leases as compared to lease rates prior to September 2001 and we
have received requests from certain lessees to restructure their leases.
Although the situation is now improving, our business has been adversely
affected by these negative developments in the industry during this period,
particularly in respect of new aircraft leases and the increased negotiating
power by lessees to, among other things, require that certain aircraft
maintenance, modification and overhaul expenses and the expenses of
complying with ADs be paid by the Company. As a result of the loss of
investor appetite and the difficulty in obtaining financing for the purchase
of the types of older aircraft in our portfolio, there are few potential
buyers of these aircraft on operating lease, and the resulting illiquidity
in the market has caused sale prices of these aircraft to further decline.
There have been few sale transactions of older aircraft such as the aircraft
in our portfolio that we are aware of in the past twelve months and the
difficulty in selling these types of older aircraft in the current market
has had an adverse effect on sales prices generally. The sales prices we
received for the aircraft we sold in fiscal year 2003, in our efforts to
comply with the Trust Note Sales Goals, reflected the industry wide decline
in sales prices for older aircraft.
There has been a decline of 14.19% in the average appraised base value
of our fleet of nine aircraft from June 30, 2003 to June 30, 2004. The
appraised base values are based upon the value of the aircraft at normal
utilization rates in an open, unrestricted and stable market, and take into
account long-term trends, including current expectations of particular
models becoming obsolete more rapidly than previous predictions. As a
theoretical value, the appraised base value is not indicative of market
value and it is not likely that we would obtain the appraised base value
upon sale of any aircraft, since we might sell at a low point in the
business cycle, and since appraised base values are forward-looking.
Further, it is likely that certain of our aircraft, particularly the MD-80s
and 737-400/500s, are permanently impaired, which would negatively impact
the future appraised base values of these models.
Current interest rates are low by historic standards which has
generally been beneficial for our lessees. Any future increases in interest
rates may adversely affect the ability of our lessees to perform their
obligations under the leases.
See "Item 3 - Key Information - Risk Factors" and "Item 5 - Operating
and Financial Review and Prospects - Operating Results" for a discussion of
additional trends affecting our operations.
E. Off-Balance Sheet Arrangements
None.
F. Tabular Disclosure of Contractual Obligations
Payments due by period as at June 30, 2004
--------------------------------------------------------------
$million
--------------------------------------------------------------
Total less than 1-3 years 3-5 years more than
1 year 5 years
--------------------------------------------------------------
Contractual Obligations
(i) Long-Term Debt $274.319 - $274.319 - -
Obligations - Notes
(ii) Purchase $0.9436 $0.4718 $0.4718 - -
Obligations -
Servicer and Cash
Manager Fees
------------ ---------- ----------- ---------- -----------
Total $275.2626 $0.4718 $274.7908 - -
============ ========== =========== ========== ===========
(i) The Company is obligated to pay interest on the Notes and a portion of
the principal of the Class A Notes from the revenue generated by the
Company's leasing operations. Proceeds from the sale of aircraft are
required to be used to pay principal of the Notes in the priority set
forth in the Deed of Charge.
The matters described in "Item 3 - Key Information - Risk Factors -
Risks Relating to Payments on Notes" have had a significant adverse
effect on the Company's revenue and on the Company's ability to make
payments on the Notes on a timely basis and in full. Current
projections indicate that there will not be sufficient funds to pay
any further interest on or repay any principal of the Class E Notes,
pay any further interest on or repay any further principal of the
Class D Notes, repay any further principal of the Class C Notes, repay
some or all of the outstanding principal of the Class B Notes or pay
any further step-up interest on the Class A, B, C or D Notes.
Upon the final maturity date of the Notes (June 15, 2006) the cash
available will be applied to pay principal and interest on the Notes
in the order of priorities set forth in the Deed of Charge. The Class
E Notes will not receive any principal or interest payments until the
outstanding principal amount of each of the Class A, Class B, Class C
and the Class D Notes is reduced to zero and all interest due on these
Notes is paid in full.
The failure of the Company to pay principal of the Class A, Class B,
Class C or Class D Notes on any day prior to their final maturity date
due to insufficient cash collections will not constitute an Event of
Default with respect to such class of Notes. The limited recourse
nature of the Notes means that no amounts will be payable in excess of
the available collections.
(ii) The annual commitment to the Servicer is $454,800 plus 1% of the basic
rent amount received and 1% of the basic rent amount due. The annual
commitment to the Cash Manager is $17,000.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEEDS
A. Directors and Senior Management
Board of Directors
Our Directors and their ages, business addresses and principal
activities are as follows:
Name Age Business Address Principal Activities
- ------------------------ --- --------------------- ---------------------
Mr. Frederick W. Bradley, 77 764 Norgate, Westfield Retired - Senior Vice
Jr. New Jersey, United President, Citibank,
States 07090 N.A., Citicorp
Mr. G. Adrian Robinson 54 Timbers, Dean Street Aerospace Consultant
East Farleigh,
Maidstone
Kent ME15 OHS, England
Mr. Brian L. Chamness 44 1403 W. Lusher Ave. Consultant, Whirlpool
Elkhart, Indiana, Financial Corporation
United States 46517
The present principal occupation and other affiliations of our
Directors are as follows:
Frederick W. Bradley, Jr. - Mr. Bradley has served as a Director of
the Company and as Chairman of the Board since June 15, 1992. From 1969
until 1992, Mr. Bradley was a Senior Vice President of Citibank N.A., in
charge of the bank's global airline and aerospace business having joined
Citibank in 1958. Mr. Bradley served as the Chairman of the Board of ALPS
94-1 Limited from June 2, 1994 to October 18, 2001 and as Chairman of the
Board of AerCo Limited from June 23, 1998 to October 18, 2001. Mr. Bradley
is also a Director of First Citicorp Life Insurance Co., and the Institute
of Air Transport Paris, France and is president of the International Air
Transport Association's (IATA) International Airline Training Fund of the
United States. Mr. Bradley retired as a Director of America West Airlines,
Inc. in 1999 after serving seven years on its Board.
G. Adrian Robinson - Mr. Robinson has served as a Director of the
Company since June 27, 1996. Mr. Robinson has been an aerospace consultant
since 1992. From 1990 to 1992, Mr. Robinson was a Deputy General Manager of
The Nippon Credit Bank. Until 1989, he was a Managing Director, Special
Finance Group, of Chemical Bank, which he joined in 1986. Mr. Robinson has
served as a Director of ALPS 94-1 Limited since June 2, 1994, as a Director
of AerCo Limited since June 23, 1998 and as the Chairman of the Boards of
ALPS 94-1 Limited and AerCo Limited since October 18, 2001. Mr. Robinson
also provides consulting services from time to time to First Choice Airways,
one of the lessees.
Brian L. Chamness - Mr. Chamness served as a Director of the Company
from January 28, 1998 to June 30, 2000 and was re-appointed as a Director on
June 12, 2002. Mr. Chamness was a Vice President of WFC from January 1998
to June 2000 and was a member of the Board of Directors of WFC from April
1999 to June 2000. Mr. Chamness currently serves as a consultant to WFC.
Mr. Bradley and Mr. Robinson both serve for two year terms as
Directors, but there is no limit to the number of terms they may serve. Mr.
Chamness serves for a term of unlimited duration until removed or replaced
by WFC. Mr. Bradley's term expired in the second calendar quarter of 2003,
when he was re-appointed to the Board. Mr. Robinson's term expired in the
second calendar quarter of 2004, when he was re-appointed to the Board. Mr.
Bradley's term expires again in the second calendar quarter of 2005. Mr.
Robinson is the Chairman of the Board and a Director of AerCo Limited, a
competitor of the Company in the aircraft leasing industry.
Our Directors are non-executive and we do not and will not have any
employees or executive officers. Accordingly, the Board of Directors relies
upon the Servicer, the Administrative Agent, the Cash Manager and the other
service providers for all asset servicing, executive and administrative
functions under the service provider agreements. Certain individuals other
than the Directors listed above serve as Directors of various subsidiaries
of the Company.
In accordance with our Memorandum and Articles of Association, the
holder of the Class E Notes, currently WFC, is entitled to appoint one
member of the Board of Directors. Since June 12, 2002, Mr. Chamness has
been the Director appointed to the Board by WFC.
Audit Committee
The Audit Committee of the Company, established in September 2002,
consists of the two Independent Directors. The duties of the Audit
Committee include the following:
o to consider the appointment of the external auditors, the audit
engagement terms and audit fee, and any questions of
resignation or dismissal of the external auditors;
o to discuss and agree with the external auditors before the audit
commences the nature and scope of the audit;
o to pre-approve all permissible non-audit services performed by the
external auditors. (Audit services include the statutory
audit of group and subsidiary companies, the review of annual
reports and other related work). Pre-approval is delegated
to any member to cater for matters arising between meetings,
however, the full committee shall approve at the next
scheduled meeting;
o to review from time to time the cost effectiveness of the audit and
the independence and objectivity of the external auditors;
o to review the submission to the Board in relation to any audited
accounts, focusing particularly on:
o critical accounting policies and practices and any changes in
accounting policies and practice;
o all alternative treatments of financial information presented under
U.S. GAAP that have been or are to be discussed with the
Board and the treatment preferred by the auditors;
o major judgmental areas;
o significant adjustments resulting from the audit;
o any unadjusted audit differences;
o the going concern assumption;
o compliance with accounting standards (and in particular accounting
standards adopted in the financial year for the first
time);
o compliance with legal requirements;
o to discuss problems and reservations arising from the audit, and any
matters the external auditors may wish to discuss;
o to review the external auditors' management letter and management's
response;
o to review, on behalf of the Board, the Company's system of internal
and disclosure controls and procedures (including financial,
operational compliance and risk management) and make
recommendations to the board;
o to review adequacy of financial and non-financial information provided
to the Board by the third party service providers;
o to consider the major findings of internal investigations and
management's response;
o to review the Company's operating, financial and accounting policies
and practices;
o to consider other matters as defined by the Board; and
o to report on all of the above matters to the Board.
Corporate Management
Servicer
The Servicer, Babcock & Brown, provides a wide range of services
including:
o lease marketing and negotiation of lease agreements;
o aircraft sales;
o aircraft lease management including:
- - calculation, invoicing and collection of cash due under leases;
- - monitoring each lessee's performance of its aircraft maintenance
obligations;
- - arranging for aircraft inspections;
- - accepting delivery and redelivery of aircraft;
- - monitoring lessee insurance compliance and arranging for alternative
insurance where appropriate and to the extent commercially
available;
- - monitoring of cash and lease security provisions;
- - monitoring lessee compliance under the leases;
- - enforcement of our rights under the leases;
o preparation of budgets;
o preparation of Board agendas and reports;
o arranging valuations, and monitoring and advising us on regulatory
developments;
o periodic reporting of operational, financial and other information on
our aircraft and leases; and
o providing us with data and information relating to our aircraft and
the commercial aviation industry.
The Servicer is paid an annual asset based servicing fee of $454,800.
The asset based servicing fee is payable monthly in arrears in equal
installments.
The Servicer is paid lease incentive fees which are the aggregate of
(i) 1% of the basic rent amount received; (ii) 1% of the basic rent amount
due; and (iii) an amount equal to 10% of the amount by which the basic rent
is exceeded for each aircraft which is placed on a new lease. The lease
incentive fees are payable monthly in arrears.
The Servicer is also paid a sales incentive fee in respect of the sale
of aircraft calculated as follows:
(i) 1.25% of the net sale proceeds up to 87% of the depreciated value of
such aircraft; plus
(ii) 15% of the amount by which the net sale proceeds exceed 87% of the
depreciated value of such aircraft.
In certain circumstances, we or the Servicer may terminate the
Servicing Agreement.
Administrative Agent and Company Secretary
Our Administrative Agent and Company Secretary, Mourant & Co. Limited
and Mourant & Co. Secretaries Limited, respectively, provide administrative
and accounting services to the Board of Directors including:
o maintaining the corporate books and records, including our minute book
and share register and the register of Notes;
o making available to us telephone, telecopy and post office facilities,
and maintaining our registered office in Jersey, at which it
will accept service of process in Jersey and other notices
sent to us;
o providing other general administrative services;
o providing administrative services to us in connection with the
closings of the sale and re-lease of our aircraft;
o providing various types of accounting assistance;
o coordinating with the Financial Consultant with respect to various
financial matters;
o assisting us in connection with any hedging strategy;
o assisting with the preparation, filing and distributions of all
reports which need to be prepared, filed and/or distributed
by us (including reports required to be filed under the
securities laws of the United States but excluding reports
relating to the aircraft and the Luxembourg Stock Exchange);
o coordinating any amendments to the transaction documents (other than
the leases), subject to the terms of such agreements and
approval by the Board of Directors; and
o authorizing payment of certain bills and expenses, subject to
approvals by the Board of Directors.
The Administrative Agent may resign on 30 days' written notice, as
long as we have engaged another person or entity to perform the services
that were being provided by the Administrative Agent. We may remove the
Administrative Agent at any time on account of a material breach of its
obligations.
The Administrative Agent also may be asked by the Board of Directors
to provide other administrative services, including such other actions as
may be appropriate to facilitate the transactions contemplated by the
Prospectus and our operative documents and to assist the Board of Directors
in carrying out its duties.
The fee for the Administrative Agent's services to the Company is
based on the number of hours worked by each employee of the Administrative
Agent on affairs of the Company multiplied by the hourly rates of each such
employee. Mourant & Co. Limited provides administrative and secretarial
services to other corporate entities including other securitization
vehicles, and is affiliated with Mourant du Feu & Jeune, the law firm that
acts as Jersey legal counsel for the Company.
Cash Manager
The Cash Manager, Deutsche Bank Trust Company Americas (f/k/a Bankers
Trust Company), provides cash management and related services to us. In the
ordinary course of our business, the Cash Manager will inform the Servicer
of the aggregate deposits in the collection account on a daily basis and
with respect to each payment period, provide such other information as shall
be required in connection with our accounts and make disbursements in
accordance with the Deed of Charge. The Cash Manager is authorized to
invest the funds held by us in the collection account and the lessee funded
account in prescribed investments and on permitted terms at our direction.
In addition, the Cash Manager receives the data provided by the
Servicer and the Financial Consultant with respect to the aircraft, leases
and other matters and calculates certain monthly payments and makes all
other calculations as required under the Cash Management Agreement. The
Cash Manager will also provide the Trustee with such information as is
required by the Trustee to provide its report to the noteholders.
The Cash Manager may resign on 30 days' written notice, as long as we
have engaged another person or entity to perform the services that were
being provided by the Cash Manager. We may remove the Cash Manager at any
time on account of a material breach of its obligations.
The Cash Manager receives a fee of $17,000 per year for its services
to the Company.
Financial Consultant
The Financial Consultant, Deutsche Bank Trust Company Americas (f/k/a
Bankers Trust Company), develops financial models, revenue projections and
forecasts and provides computational services to assist the Board of
Directors in making lease, sale and hedging decisions, and in analyzing the
budget. The Financial Consultant may resign on 30 days' written notice, as
long as we have engaged another person or entity to perform the services
that were being provided by the Financial Consultant. We may remove the
Financial Consultant at any time on account of a material breach of its
obligations.
The Financial Consultant receives a fee of $32,000 per year for its
services to the Company.
Auditors
Since September 11, 2003, the Company's auditors have been KPMG
Ireland. Prior to that date the Company's auditors had been KPMG Channel
Islands. KPMG Channel Islands had informed us that it did not intend to
register with the U.S. Public Company Accounting Oversight Board (the
"PCAOB") in accordance with a new requirement of the PCAOB that any
independent auditor of a company subject to the U.S. Securities and Exchange
Commission's periodic reporting requirements register with the PCAOB.
Therefore, KPMG Channel Islands would no longer be in a position to continue
as independent auditor to the Company. It also informed us that KPMG
Ireland, which had intended to so register with the PCAOB, had expressed its
willingness to accept appointment as independent auditor to the Company.
There were no disagreements between KPMG Channel Islands and the
Company or any other reportable events that caused us to replace KPMG
Channel Islands with KPMG Ireland. This replacement was approved by both
the Audit Committee and the Board of Directors of the Company.
B. Compensation
All Directors are compensated for travel and other expenses incurred
by them in performing their duties as Directors. The Company currently pays
each Independent Director a fee of $58,600 per annum, which fee may be
increased only in accordance with Articles of Association of the Company and
the Deed of Charge, for his services. Each Independent Director is also
entitled to an additional fee of $1,000 for each day, or portion thereof, on
which he is required to travel (excluding the quarterly Board meetings in
Jersey) on account of Company business. Non-Independent Directors receive
no remuneration for their services.
Additionally, Mr. Robinson is paid fees of approximately Euro 6,400
per annum, fees of up to £3,000 per annum and fees of Euro 4,000 per annum
as compensation for acting as a Director of the Company's wholly owned
Irish, English and French subsidiaries, respectively.
The Company has no other officers.
C. Board Practices
None of the Directors have service contracts and none of the Directors
are entitled to benefits on termination of their office. The Company does
not have a remuneration committee. In September 2002, the Company
established an Audit Committee which currently consists of the two
Independent Directors. Prior to this time, audit committee matters were
considered at the regular meetings of the full Board. See "- Directors and
Senior Management - Board of Directors" and "-Audit Committee" for
additional information concerning our Directors and the Audit Committee,
respectively.
D. Employees
Our Directors are non-executive and we do not and will not have any
employees or executive officers. Accordingly, the Board of Directors relies
upon the Servicer, the Administrative Agent, the Cash Manager, the Financial
Consultant and the other service providers for all asset servicing,
executive and administrative functions under the service provider agreements.
E. Share Ownership
None of our Directors own any shares of the Company nor do they have
options to purchase shares of the Company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Our Ordinary Shares are not listed on any national exchange or traded
in any established market. The beneficial ownership of the Ordinary Shares
as of the date of this report on Form 20-F is presented below.
BENEFICIAL OWNERSHIP OF THE COMPANY
Identity of Person
Title of Class or Group Amount Owned Percent of Class
Ordinary Shares Mourant & Co. 10 100%
Trustees Limited,
as trustee of the
ALPS Trust,
22 Grenville
Street,
St. Helier,
Jersey, Channel
Islands
All ten Ordinary Shares issued are held by the Nominees (five shares
each) for the benefit of Mourant & Co. Trustees Limited as trustee of the
ALPS Trust, a Jersey charitable trust.
Under the deed of covenant entered into on June 27, 1996 by Mourant &
Co. Trustees Limited as trustee of the ALPS Trust (the "charitable trust
trustee"), WFC and the Company, the charitable trust trustee agreed that it
will not, and will procure that the Nominees will not, without the prior
written approval of the holder of the Class E Notes, transfer any part of
the shares in the Company held by them or any interest therein unless the
transferee shall enter into a covenant identical to that contained in the
deed of covenant in favour of the holder of the Class E Notes (including a
covenant not to amend certain provisions of our Articles without the prior
written approval of the holder of the Class E Notes).
See "Item 10 - Additional Information - Articles of Association" for a
description of the voting rights available to holders of our Ordinary Shares.
B. Related Party Transactions
WFC owns the Class E Notes and is entitled to appoint one Director to
the Board for as long as it owns such Notes. Currently, Brian Chamness, a
consultant to WFC, is the Director serving on the Board at the request of
WFC.
Mourant & Co. Limited is the Administrative Agent and Mourant & Co.
Secretaries Limited is the Company Secretary. Their affiliate, Mourant du
Feu & Jeune, is Jersey, Channel Islands legal counsel to the Company and its
directors.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. financial information
A. Consolidated Statements and Other Financial Information.
Consolidated financial statements are listed in Item 18.
We are not a party to any material legal proceedings.
B. Significant Changes
There have been significant changes which have occurred since the date
of the annual financial statements. These changes are explained in Note 15
of "Item 18 - Consolidated Financial Statements."
ITEM 9. The listing
A. Offer and Listing Details
The Class A, Class B, Class C and Class D Notes are listed for trading
on the Luxembourg Stock Exchange. Additionally, in the United States at
least one investment bank makes a secondary market in such classes of Notes,
but without any obligation to do so. There can be no assurance that a
secondary market will continue or develop further for any class of Notes or
that the market will provide liquidity of investment or that it will remain
for the term of the Notes.
B. Plan of Distribution
Not applicable.
C. Markets
The Class A, Class B, Class C and Class D Notes are listed on the
Luxembourg Stock Exchange.
D. Selling Shareholders
Not applicable
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. Additional information
A. Share Capital
Not applicable
B. Memorandum and Articles of Association
The following summary contains a description of the material
provisions of our Memorandum and Articles of Association (which we refer to
as our Memorandum and our Articles respectively) and does not purport to be
complete and is qualified in its entirety by reference to our Memorandum and
Articles, copies of which were previously filed.
Registration and Objects
The Company is a public limited liability company incorporated
pursuant to the Companies (Jersey) Law 1991 (which we refer to as the
Companies Law). We are registered under number 52674 in the register of
companies maintained by the Jersey Registrar of Companies.
Our objects and purposes are set out in paragraph 4 of our Memorandum.
The purposes of the Company are, inter alia, the following:
o to own, manage and lease out aircraft,
o to purchase and dispose of aircraft,
o to borrow or raise money and to raise or secure the repayment of such
sums of money in such manner and upon such terms and
conditions as the Directors of the Company shall think fit,
o to engage in currency exchange and interest rate transactions and any
other financial or other transactions of whatever nature, and
o to establish companies for the purpose of carrying on any business or
acquiring and undertaking any property or liability of the
Company.
Directors
We are managed by a Board of Directors which will consist of no more
than three persons and no less than two persons at any time. See "Item 6 -
Directors, Senior Management and Employees."
Transactions in which our Directors are Interested
Our Articles provide that if a Director has disclosed to the Board of
Directors the nature and extent of any of his material interests, a Director
notwithstanding his office:
o may be a party to, or otherwise interested in, any transaction or
arrangement with the Company or in which the Company is
otherwise interested;
o may be a Director or other officer of, or employed by, or a party to
any transaction or arrangement with, or otherwise interested
in, any body corporate promoted by the Company or in which
the Company is otherwise interested or which engages in
transactions similar to those engaged in by the Company and
might present a conflict of interest for such Director in
discharging his duties;
o shall not, by reason of his office, be accountable to the Company for
any benefit which he derives from any such office or
employment or from any such transaction or arrangement or
from any interest in any such body corporate and no such
transaction or arrangement shall be liable to be avoided on
the ground of any such interest or benefit.
Directors' Compensation
All Directors are compensated for travel and other expenses incurred
by them in the performance of their duties. Our Articles provide for each
Independent Director to be paid an aggregate fee of $50,000 per annum for
his services (or such higher amount, not exceeding $100,000 per annum, as
shall be fixed by the holders of our shares). On October 24, 2003, our
shareholders approved an increase in these fees based on the change in the
U.S. Consumer Price Index from June 1996 to June 2003. As a result each
Independent Director now receives a fee of $58,600 per annum for his
services. Each Independent Director is also entitled to an additional fee
of $1,000 for each day, or portion thereof, on which he is required to
travel (excluding the quarterly Board meetings held in Jersey) on account of
Company business. Our Articles provide that the Director appointed by the
holder of the Company's Class E Notes is not entitled to remuneration for
his services. The provisions of our Articles may only be changed by special
resolution passed by the holders of our shares (as to which see 'Changes to
Shareholders' Rights' below).
Directors' Borrowing Powers
Our Articles provide for our Directors to exercise all borrowing
powers of the Company. The exercise of such powers is limited as a result
of the contractual restrictions on our power to borrow contained in the Deed
of Charge.
Directors' Age Limits
There is no provision in our Articles or in the Companies Law as a
result of which our Directors would be required to retire from office upon
reaching a certain age.
Directors' Share Ownership Requirements
There is no provision in our Articles or in the Companies Law
requiring our Directors to hold shares in the Company in order to be able to
hold the position of Director.
Rights, Preferences and Restrictions Relating to Shares
We have an authorized share capital consisting of 15,000 ordinary
shares of $1 nominal value per share of which 10 have been issued and are
fully paid (See "Item 7 - Major Shareholders and Related Party Transactions
- - Major Shareholders"). The rights, preferences and restrictions attaching
to the shares are as follows:
Dividend Rights
We may distribute dividends to our shareholders from distributable
profits in each fiscal year. These distributions are subject to the
requirements of the Companies Law. For the purpose of calculating amounts
available for distribution, profits and losses must be accumulated in so far
as not previously utilized or written off in a reduction or re-organization
of capital. Any dividends must be distributed to our shareholders in
proportion to their shareholdings. Under our Articles, the holders of the
10 issued shares in the Company are entitled to a fixed cumulative dividend
of $1,500 per annum (to the extent the Company has distributable profits in
any year) and to any additional dividends paid out of surplus profits of the
Company. Under our Articles, dividends not claimed within ten years from
the date of declaration shall, if our Directors so resolve, be forfeited and
shall from that time belong to the Company.
Voting Rights
Each holder of our shares is entitled to one vote per share at any
general meeting of our shareholders.
Rights to share in the Profits
See "Dividend Rights" above.
Rights in the Event of Liquidation
In the event that we are liquidated, our assets remaining after
payment of our debts, liquidation expenses and all of our remaining
obligations will be used to pay to the holders of the 10 issued shares in
the Company any arrears of the preferential dividend to which they are
entitled and the balance, if any, will be distributed to repay in full the
nominal value of our shares. Any surplus will then be distributed
proportionately among our shareholders in proportion to their shareholdings.
Redemption of Shares
Our shares are not redeemable shares.
Sinking Fund
Our shares are not subject to any sinking fund.
Liability to further Capital Calls
Shareholders are not liable to further capital calls.
Principal Shareholder Restrictions
There are no provisions in our Articles or in the Companies Law which
would discriminate against any existing or prospective holder of our shares
as a result of such shareholder owning a substantial number of shares.
Changes to Shareholders' Rights
The provisions of our Articles, which set out the rights attaching to
our shares, may only be amended by a special resolution (which is a
resolution passed either by a majority of not less than two thirds of votes
cast in person or by proxy at a meeting of shareholders or passed by way of
written resolution signed by or on behalf of each shareholder).
Shareholders' Meetings
The Company is required to hold an annual general meeting and may also
hold extraordinary general meetings. All meetings of our shareholders other
than the annual general meeting are called extraordinary general meetings.
Annual general meetings are convened by the Directors each year and
must be held not more than 18 months after the previous annual general
meeting. The Economic Development Committee of the States (government) of
Jersey has the power to call an annual general meeting of a Jersey company
if that company fails to do so and the Royal Court of Jersey also has the
power in certain circumstances set out in the Companies Law to call a
meeting of a Jersey company. The holders of at least one tenth in nominal
value of our shares may requisition a meeting of shareholders.
At least twenty one days' notice of the annual general meeting and of
any meeting at which a special resolution is to be proposed is required.
Fourteen days' notice of any other meeting is required. An annual general
meeting may however be held at short notice provided that all the
shareholders entitled to attend and vote at the meeting agree. Any other
meeting may be held at short notice if a majority of shareholders together
holding at least ninety five per cent of the shares given a right to attend
and vote at such meeting agree.
All shareholders or their proxies may attend and vote at the annual
general meeting and extraordinary general meetings. Resolutions may be
proposed either as special resolutions or as ordinary resolutions. A
special resolution requires the affirmative vote of a majority of not less
than two thirds of votes cast and an ordinary resolution requires the
affirmative vote of a simple majority of votes cast.
The Companies Law contains provisions governing the convening and
holding of meetings of shareholders which are reflected in our Articles.
Limitation on Security Ownership
There are no restrictions under Jersey law or our Articles that limit
the right of non-resident or foreign shareholders to hold or exercise voting
rights in respect of our shares.
Change in Control
There are no provisions in our Articles that would have the effect of
delaying, deferring or preventing a change in our control and that would
operate only with respect to a merger, acquisition or corporate
restructuring involving the Company or any of our subsidiaries. See,
however, "Item 7 - Major Shareholders and Related Party Transactions - Major
Shareholders" for a description of certain contractual restrictions on the
transfer of shares by the existing shareholders.
Disclosure of Share Holdings
There are no provisions in our Articles or in the Companies Law
whereby persons acquiring, holding or disposing of a certain percentage of
our shares are required to make disclosure of their ownership percentage.
Jersey Law and our Memorandum and Articles
The content of our Memorandum and Articles is largely derived from an
established body of corporate law and therefore they mirror the Companies
Law in their provisions. There are no provisions in our Memorandum and
Articles concerning changes of capital where these provisions would be
considered more restrictive than that required by the Companies Law.
C. Material Contracts
None.
D. Exchange Controls
There are currently no Jersey foreign exchange control restrictions on
the payment of interest or principal on the Notes. There are no
restrictions under Jersey law or under our Articles that limit the right of
non-resident or foreign owners to hold or vote the Notes.
E. Taxation
Certain Jersey Tax Considerations
The following summary is based upon advice provided by Mourant du Feu
& Jeune ("Jersey Tax Counsel") as to the tax treatment under Jersey law of
the Company and the tax treatment under Jersey law in relation to the
purchase, ownership and disposition of the Notes. The discussion is based
on an interpretation of laws, regulations, rulings and decisions, including
certain letters from the Comptroller of Income Tax in Jersey and the
Director of the Jersey Financial Services Department (the functions of which
were taken over by the Jersey Financial Services Commission with effect from
July 1, 1998), all of which are currently in effect and are subject to
change. Any such change may be applied retroactively and may adversely
affect the Jersey tax consequences described herein.
Income Taxes
The Company will qualify as an "exempt company" under Article 123A of
the Income Tax (Jersey) Law 1961, as amended (the "1961 Law"), as long as it
makes the returns of information and pays the fees as required by that
Article and, subject to concessions obtained from the Comptroller of Income
Tax in Jersey, as long as no Jersey resident has a beneficial interest (for
purposes of the 1961 Law) in the Company. As an exempt company, the Company
will be treated for purposes of the 1961 Law as not resident in Jersey and
will pay no Jersey income tax other than on income arising in Jersey (but,
by long standing concession, excluding bank deposit interest arising in
Jersey) and on profits of its trade (if any) carried on through an
established place of business in Jersey. Based upon the foregoing and the
concessions obtained from the Comptroller of Income Tax in Jersey, in the
opinion of Jersey Tax Counsel, the Company will not be subject to Jersey
income tax.
Withholding Taxes
Based upon the Company's qualification as an exempt company, in the
opinion of Jersey Tax Counsel, no Jersey withholding tax will be deducted
from interest and other amounts paid on the Notes on account of Jersey taxes.
In the event that any Jersey withholding tax is imposed, noteholders
should note that there is no income tax treaty between the United States and
Jersey that would apply to reduce or eliminate such withholding.
Noteholders should note further that the Company will not be obligated
under the terms of the Notes to make any additional payments in respect of
any such withholding tax. Accordingly, in the event that withholding were
to be required on account of Jersey taxes, distributions to noteholders
would be less than those which would be made on the Notes in the absence of
any such withholding tax.
Other Taxes
There is no taxation of capital gains (other than with respect to
certain tax avoidance transactions) in Jersey. As a result, the capital
gains of the Company on its investments will not be subject to taxation in
Jersey. There is no value added tax or other relevant taxation in Jersey.
European Union Directive on the Taxation of Savings Income
On June 3, 2003, the EU Council of Economic and Finance Ministers
adopted a directive on the taxation of savings income in the form of
interest payments (the "EU Savings Tax Directive"). It is proposed that,
subject to a number of important conditions being met, each EU Member State
will, from July 1, 2005, be required to provide to the tax authorities of
another EU Member State details of payments of interest (or other similar
income) paid by a person within its jurisdiction to or for the benefit of an
individual resident in that other EU Member State; however, Austria, Belgium
and Luxembourg will instead apply a withholding tax system for a
transitional period in relation to such payments.
Jersey is not subject to the EU Savings Tax Directive. However, the
Policy & Resources Committee of the States of Jersey has announced that, in
keeping with Jersey's policy of constructive international engagement,
Jersey proposes to introduce a withholding tax system in respect of payments
of interest, or other similar income, made to an individual beneficial owner
resident in an EU Member State by a paying agent situate in Jersey (the
terms "beneficial owner" and "paying agent" are defined in the EU Savings
Tax Directive). The withholding tax system would apply for a transitional
period prior to the implementation of a system of automatic communication to
EU Member States of information regarding such payments. During this
transitional period, such an individual beneficial owner resident in an EU
Member State will be entitled to request a paying agent not to withhold tax
from such payments but instead to apply a system by which the details of
such payments are communicated to the tax authorities of the EU Member State
in which the beneficial owner is resident.
Under the current proposals in respect of the implementation of such a
withholding tax system in Jersey the Company would not be obligated to levy
withholding tax in respect of interest payments made by it to a paying agent.
The States of Jersey has not yet adopted measures to implement these
proposals but is expected to adopt such measures on the same timetable as EU
Member States and other relevant third countries.
Certain Tax Considerations Regarding Subsidiaries
The Irish subsidiary is subject to Irish corporation tax at the rate
of 10% on its trading income and 25% on its non-trading income.
The U.K. subsidiary is subject to U.K. corporation tax at an effective
rate of up to 19% depending on the level of profits that this subsidiary
generates.
The French subsidiary is subject to French corporation tax at the rate
of 33 1/3% of its taxable profits.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The documents concerning us which are referred to herein may be
inspected at the Securities and Exchange Commission, or at our registered
office at 22 Grenville Street, St. Helier, Jersey JE4 8PX, Channel Islands.
You may read and copy any documents filed or furnished by us at the SEC's
public reference rooms in Washington D.C., New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the
reference rooms. Our SEC filings since November 1, 2002 are also available
to the public on the SEC Internet site (http://www.sec.gov).
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk and Management
The leasing revenues of the Company are generated from lease rental
payments which are all fixed rate (some leases are based on
"power-by-the-hour" fixed hourly rates and others on fixed monthly rates).
In general, an exposure to interest rate risk arises when the Company's
fixed and floating interest rate obligations on its Notes do not correlate
to the fixed rate lease rental receipts for different rental periods. This
interest rate exposure can be managed through the use of interest rate swaps
and other derivative instruments. Our lease collections are invested based
upon recommendations of the Cash Manager. We have determined that it is not
necessary to invest our lease collections in swaps, options or other hedging
alternatives. Although we may invest in such instruments if we and our
advisors determine that such investments are appropriate, we and our
advisors do not currently anticipate any need for such investments in the
foreseeable future. There can be no assurance that the strategy adopted to
invest or to not invest in such instruments at any time will be effective in
protecting your payments of interest in an environment of material increases
to LIBOR.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
During fiscal year 2004 and to date, regular interest payments due to
holders of Class D Notes were in arrears. The Deed of Charge provides that,
so long as the Class A, Class B or Class C Notes are outstanding, the
holders of Class D Notes are not permitted to serve an Enforcement Notice on
the Company in respect of an Event of Default caused by failure to pay Class
D Note regular interest; however, default interest of 1% of such unpaid
interest shall accrue and be owed to holders of Class D Notes in accordance
with the priority of payments set forth in the Deed of Charge. As at the end
of fiscal year 2004, arrears consisted of $70.810 million of Class A Note
Target Amount, $0.942 million of Class A Note step-up interest, $0.407
million of Class B Note step-up interest, $4.304 million of Class C Note
Target Amount, $0.390 million of Class C Note step-up interest, $5.177
million of Class D Note Target Amount, $0.665 million of Class D Note
step-up interest, $1.042 million of Class D Note default interest, $7.130
million of Class D Note regular interest and $52.705 million of Class E
Note interest. As of September 15, 2004, the unpaid amounts consisted of
$77.472 million of Class A Note Target Amount, $1.042 million of Class A
Note step-up interest, $0.458 million of Class B Note step-up interest,
$4.304 million of Class C Note Target Amount, $0.441 million of Class C Note
step-up interest, $5.177 million of Class D Note Target Amount, $1.127
million of Class D Note default interest, $0.750 million of Class D Note
step-up interest, $8.215 million of Class D Note regular interest and
$54.779 million of Class E Note interest. Our inability, during fiscal year
2004 or to date, to pay these amounts, other than the $8.215 million of
Class D Note regular interest (discussed above), does not constitute an
Event of Default.
The Company did not have sufficient funds to repay the Class A Notes
on their expected final payment date of May 15, 2002 or to repay the Class
B, Class C or Class D Notes on their expected final payment date of July 15,
2002. Failure to repay in full the principal of those Notes by such dates
is not an Event of Default; however, the Deed of Charge requires, to the
extent the Company does not repay in full principal of those Notes by such
dates, that the Company pay to the Class A, Class B and Class C Noteholders
additional step-up interest of 0.50% per annum and to the Class D
Noteholders additional step-up interest of 1.00% per annum for each month
until the earlier of the date such Notes are repaid in full and their final
maturity date of June 15, 2006. These additional interest costs will only
be paid to the extent there are available collections in accordance with the
priority of payments set forth in the Deed of Charge. The Company paid some
step-up interest in fiscal year 2002, but our current projections indicate
that we will not have sufficient funds to pay any further step-up interest.
Our current projections also indicate that we will not have sufficient funds
to pay any further Class D Note interest.
The Deed of Charge sets out the following Trust Note Sales Goals which
required us to approve sales of our aircraft on an ongoing basis:
Aircraft to be Sold
(measured by Initial Appraised Date by which Sales Goals
Value as of June 3, 1996) were to be Satisfied
$65,000,000 June 27, 2001
$130,000,000 June 27, 2002
$200,000,000 June 27, 2003
$454,950,000 June 27, 2004
We were in compliance with and had exceeded the Trust Note Sales Goals
as of June 27, 2001 and were required to sell a further $54,330,000 (as
measured by Initial Appraised Value) worth of aircraft to be in compliance
with the Trust Note Sales Goals as of June 27, 2002.
As discussed above since September 11, 2001, the market for sale of
older used aircraft such as our aircraft has been extremely poor.
Nevertheless, in order to meet the June 2002 Trust Note Sales Goal,
following an extensive marketing effort by the Servicer, the Company had
entered into non-binding agreements to sell a B737-300 and an A320-200
aircraft to two separate purchasers by June 27, 2002. However, as a result
of difficulties and delays outside the Company's control the sale of the
B737-300 aircraft was not completed until October 1, 2002 and the sale of
the A320-200 aircraft (which was ultimately sold to a different purchaser
following the withdrawal of the original prospective purchaser on November
5, 2002) was not completed until December 20, 2002. As a result, the
Company was not in compliance with the Trust Note Sales Goals from November
5, 2002 until the A320-200 aircraft was sold to such other purchaser on
December 20, 2002.
In the period from June 1996 to date, we have sold five aircraft
totaling $133,190,000 (measured by Initial Appraised Value). We needed to
sell an additional $66,810,000 (measured by Initial Appraised Value) worth
of aircraft to comply with the June 2003 Trust Note Sales Goal and needed to
sell all of our aircraft to comply with the June 2004 Trust Note Sales
Goal. At our direction, the Servicer has periodically been marketing each
of our aircraft for sale in order to meet the ongoing Trust Note Sales Goals
in a manner consistent with the requirements of the Deed of Charge.
However, the current market for sale of older used aircraft such as our
aircraft is extremely poor and it is not likely the market for our aircraft
will improve prior to the final maturity date of the Notes.
In fiscal year 2003, the marketing efforts of the Servicer resulted in
two offers to purchase the B757-200 aircraft, but both offers were at prices
significantly below the Class C Note Target Price. After careful
consideration of these offers, the Company's obligations under the Deed of
Charge (notably the Business Objectives contained therein) and the then
current and possible future market conditions for aircraft sales and
leasing, we concluded that it would not be consistent with the terms of the
Deed of Charge for the Company to accept either such offer.
We did not comply with the Trust Note Sales Goals for June 27, 2003 or
for June 27, 2004 as we were unable, given the then current aircraft
industry market conditions, to sell sufficient aircraft at the sale prices
required by our then current Business Objectives.
Failure to comply with the Trust Note Sales Goals may, under certain
circumstances, constitute an Event of Default under the Deed of Charge if
such failure continues for 30 days or more after written notice thereof has
been given to the Company or the Security Trustee by holders of at least 25%
of the aggregate Outstanding Principal Balance of the Notes of any class
which has been materially adversely affected by such failure.
The Deed of Charge further provides that if an Event of Default were
to occur and be continuing an Enforcement Notice may only be served by
662/3% or more of the aggregate Outstanding Principal Balance of the
directing class, which will be Class A so long as any Class A Notes are
outstanding.
The Deed of Charge provides that the failure to comply with the June
2004 Trust Note Sales Goal gives the Noteholders the right to replace the
Servicer at the direction of Noteholders representing at least 66 2/3% of
the Outstanding Principal Balance of the Class A, Class B, Class C and Class
D Notes. The Deed of Charge also provides that, subject to the pre-emption
rights of the Class D and Class E Noteholders, to the extent the Trust Note
Sales Goals are not complied with prior to December 27, 2004, the Company is
required to accept any Sale Offer for the sale of an aircraft if the
proposed sale price is at least equal to the Class C Note Target Price.
During the time that the Company has not been in compliance with the Trust
Note Sales Goals, the Company has been unable, with the exception of the
sale of the A320-200 aircraft in December 2002, to sell aircraft at prices
at or above the Class C Note Target Price. However, to the extent the
Company has not complied with the Trust Note Sales Goals, on or after
December 27, 2004, the Company may be required to sell aircraft in
accordance with the Required Sale Provision. See "Item 3 - Risk Factors,"
"Item 4 - Information on the Company - History and Development of the
Company" and "Item 5 - Operating and Financial Review and Prospects -
Liquidity and Capital Resources."
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Chairman of the Board of Directors of the Company acting on
the recommendation of the Board of Directors of the Company, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in Exchange Act Rule 15d-15(e)) as of a date (the
"Evaluation Date") as of the end of the period covered by this annual report,
has concluded that as of the Evaluation Date, our disclosure controls and
procedures were effective based on their evaluation of these controls and
procedures required by paragraph (b) of Exchange Act Rule 15d-15.
The Company's disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives, and the
Company's Board of Directors have concluded that these controls and
procedures are effective at the "reasonable assurance" level. However, the
Company believes that a control system, no matter how well designed or
operated, cannot provide absolute assurance that the objectives of the
control system are met, and that no evaluation of controls can provide
absolute assurance that various types of corporate operational risks within
a company, particularly one such as this that relies exclusively on third
parties for all services, will be detected in a timely manner. See for
example "Item 3 - Key Information - Risk Factors - As a result of incorrect
LIBOR calculations by the Reference Agent, holders of Class A, Class B, and
Class C Notes were overpaid on certain payment dates and holders of Class D
and Class E Notes were underpaid by equivalent amounts on such dates" and "-
The Company has incurred tax liabilities in 2003 and may have incurred
additional tax liabilities in prior years, in respect of unpaid United
States withholding taxes relating to the investment of certain collections
by the Cash Manager."
(b) Changes in Internal Controls
There were no changes in the internal controls of the Company
over financial reporting identified in connection with the evaluation
required by Exchange Act Rule 15d-15(d) that occurred during our last fiscal
year that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 16.
Reserved.
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
We have no audit committee financial expert as defined in
Section 407 of the Sarbanes-Oxley Act of 2002. Our audit committee members
are financially literate professionals whose qualifications and experience
are set forth above under "Item 6 - Directors, Senior Management and
Employees" and who collectively have the skills and experience required to
discharge fully the duties of the audit committee. Out audit committee
members are non-executive directors of the Company. While we have no
executive management of our own, we have access to independent expert
advice, including that of the administrative agent, for all our financial
reporting services. Since the Company is a liquidating trust whose purpose
is to service the Notes through the leasing, re-leasing and sale of
aircraft, we believe that the primary interest and focus of our Noteholders
is the amount of funds available to pay principal and interest on the Notes.
Item 16B. CODE OF ETHICS
The Company has adopted a code of ethics. The code is applicable only
to the Directors of the Company as the Company is a special purpose vehicle
that does not employ any principal executive officer or principal financial
officer or other employees. All members of the Board of Directors of the
Company are non-executive. A copy of the code of ethics for the Company is
available upon request from the Administrative Agent.
Item 16C. PRINCIPAL ACCOUNTANT'S FEES AND SERVICES
Year Ended June 30, 2004 Year Ended June 30, 2003
% Approved by % Approved by
Board / Audit Board / Audit
U.S.$ Committee U.S.$ Committee
Audit Fees 108,312 100% 85,063 100%
Audit-Related Fees 60,849 100% 39,626 100%
Tax Fees 9,127 100% 5,763 100%
All Other Fees 18,255 100% 18,208 100%
----------- ------------------- --------- ------------------
----------- ------------------- --------- ------------------
Total 196,544 100% 148,660 100%
=========== =================== ========= ==================
The Audit Committee of the Company, established in September 2002 and
which consists of the two Independent Directors has adopted a policy of
pre-approving all audit and non-audit services provided by the Company's
Principal Accountant. Prior to the establishment of the Audit Committee all
audit and non-audit fees were approved by the Board.
Audit related fees in the table above for the years ended June 30,
2004 and 2003 relate to review of our annual report on Form 20-F.
Tax fees in the table above for the years ended June 30, 2004 and 2003
relate to tax filing in Ireland.
All Other Fees in the table above for the year ended June 30, 2004 and
2003 relate to tax advice, accounting advice and statutory filings for our
subsidiaries.
Item 16D. Exemption From the Listing Standards for Audit Committee
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
None.
PART III
ITEM 17.
Not applicable
ITEM 18. CONSOLIDATED FINANCIAL STATEMENTS
See pages F-1 through F-21.
ITEM 19. EXHIBITS
8. List of subsidiaries.
31. Rule 15d-14(a) Certification.
32. Section 1350 Certification.
CERTAIN DEFINITIONS AND TECHNICAL TERMS
"A300B4 - 200 aircraft" ............... The Airbus A300B4 - 200 aircraft with
serial number 127 which we sold to
Cebi Aviation S.A. on June 27, 2000.
"Administrative Agency Agreement"...... The Administrative and Secretarial
Services Agreement, dated October 1,
2003, between the Administrative Agent
and the Company pursuant to which the
Administrative Agent maintains the
corporate books and records and
provides certain administrative,
secretarial and other services to the
Company.
"Administrative Agent"................. Mourant & Co. Limited.
"ADs".................................. Airworthiness directives.
"AISI"................................. Aircraft Information Services, Inc.
"Allegiant Air"........................ Allegiant Air, LLC.
"ALPS 94-1 Limited".................... Aircraft Lease Portfolio
Securitization 94-1 Limited.
"ALPS Trust".......................... The charitable trust for whose benefit
the Nominees hold 10 Ordinary Shares
of the Company.
"Avitas"............................... Avitas, Inc.
"B747-283B Aircraft"................... The B747-283B aircraft with serial
number 22381 which we sold to WFC on
July 24, 1997.
"Babcock & Brown"...................... Babcock & Brown Limited.
"Batavia".............................. PT Metro Batavia.
"Besleasing"........................... Besleasing Mobiliaria - Sociedade de
Locacao Financeira S.A.
"BK"................................... BK Associates, Inc.
"Business Day"......................... A day on which commercial banks and
foreign exchange markets settle
payments in U.S. dollars in London,
England and New York, New York.
"Business Objectives".................. Shall have the meaning set forth on
page 29.
"Cash Management Agreement"............ The Cash Management Agreement, dated
as of the Closing Date, between the
Company and the Cash Manager, pursuant
to which the Cash Manager provides
certain cash management, computational
and other related services to the
Company.
"Cash Manager"......................... Deutsche Bank Trust Company Americas
(f/k/a Bankers Trust Company).
"China Southern"....................... China Southern Airlines.
"Class A Notes"........................ The Company's Class A Notes issued on
the Closing Date.
"Class A Note Target Amount".......... Shall have the meaning set forth in
the Deed of Charge.
"Class A Note Target Price"............ Shall have the meaning set forth in
the Deed of Charge.
"Class B Notes"........................ The Company's Class B Notes issued on
the Closing Date.
"Class B Note Target Amount".......... Shall have the meaning set forth in
the Deed of Charge.
"Class B Note Target Price"............ Shall have the meaning set forth in
the Deed of Charge.
"Class C Notes"........................ The Company's Class C Notes issued on
the Closing Date.
"Class C Note Target Amount"........... Shall have the meaning set forth in
the Deed of Charge.
"Class C Note Target Price"............ Shall have the meaning set forth in
the Deed of Charge.
"Class D Notes"........................ The Company's Class D Notes issued on
the Closing Date.
"Class D Note Target Amount".......... Shall have the meaning set forth in
the Deed of Charge.
"Class D Note Target Price"............ Shall have the meaning set forth in
the Deed of Charge.
"Class E Notes"........................ Collectively, the Class E-1 Note and
the Class E-2 Note.
"Class E-1 Note"....................... The Company's Class E-1 Note issued on
the Closing Date in a principal amount
of $82,918,150.
"Class E-2 Note"....................... The Company's Class E-2 Note issued on
the Closing Date in a principal amount
of $100.
"Closing Date"......................... The Closing Date of the refinancing of
the Company, June 27, 1996.
"Company".............................. Aircraft Lease Portfolio
Securitisation 92-1 Limited, a public
limited liability company incorporated
in Jersey, together with, unless the
context otherwise requires, any
subsidiaries thereof.
"Company Secretary".................... Mourant & Co. Secretaries Limited
"debis AirFinance"..................... debis AirFinance Ireland plc (formerly
known as AerFi Group plc and, prior to
that, GPA Group plc), together with
its consolidated subsidiaries.
"Deed of Charge"....................... The Deed of Charge, Assignment and
Priorities, dated as of the Closing
Date, among inter alia the Company,
Deutsche Trustee Company Limited
(f/k/a Bankers Trustee Company
Limited) as security trustee, Deutsche
Bank Trust Company Americas (f/k/a/
Bankers Trust Company), the Cash
Manager, the Servicer, the holder of
the Class E-1 Note and certain other
persons to secure, among other things,
the Notes.
"DTC".................................. The Depository Trust Company
"Enforcement Notice"................... A notice given by holders of Notes of
a class representing at least 662/3%
in aggregate Outstanding Principal
Balance of Notes of that class to the
Company, with a copy to the Security
Trustee, declaring all unpaid
principal of and interest on the Notes
of such class to be immediately due
and payable.
"EU"................................... The European Union.
"Eurocontrol".......................... European Organisation for the Safety
of Air Navigation, the centralized
European agency established in 1960
pursuant to an international
convention relating to cooperation for
the safety of air navigation.
"EU Savings Tax Directive"............. Shall have the meaning set forth on
page 68.
"Event of Default"..................... An event of default with respect to
the Notes under the Deed of Charge.
"Exchange Act Rule".................... A rule from the Rules and Regulations
promulgated under the U.S. Securities
Exchange Act of 1934, as amended.
"FAA".................................. The U.S. Federal Aviation
Administration.
"FASB"................................. The Financial Accounting Standards
Board.
"Financial Consultant"................. Deutsche Bank Trust Company Americas
(f/k/a Bankers Trust Company).
"First Choice Airways"................. First Choice Airways Limited (f/k/a
Air 2000 Limited).
"Fokker 100 aircraft".................. The Fokker 100 aircraft with serial
number 11287 which we sold to
Besleasing on July 2, 1999.
"GPA".................................. GPA Group plc (renamed AerFi Group
plc, effective November 23, 1998 and
renamed debis AirFinance Ireland plc,
effective December 20, 2000), together
with its consolidated subsidiaries.
"IATA"................................. International Air Transport
Association.
"ICAO"................................. International Civil Aviation
Organization.
"Independent Appraisers"............... AISI, Avitas and BK.
"Independent Directors"................ Directors of the Company who are
independent of holders of the Class E
Notes.
"Initial Appraised Value".............. The average appraised base value of
each of the 14 aircraft owned by the
Company on the Closing Date (or, in
the case of the WFC Aircraft, acquired
by the Company subsequent thereto) as
of June 3, 1996 obtained from AISI,
Avitas and BK, and as set forth on
Exhibit V of the Deed of Charge.
"Insurance Advisor".................... Aon Group Limited.
"Istanbul"............................. Istanbul Hava Yollari A.S.
"JAA".................................. The European Joint Airworthiness
Authorities.
"Jersey Tax Counsel"................... Mourant du Feu & Jeune.
"LIBOR"................................ London Interbank Offered Rate for
deposits in U.S. dollars as determined
in accordance with the terms of the
relevant Note.
"Liquidity Reserve Amount"............. Shall have the meaning set forth on
page 51.
"Maintenance Expenses"................. Shall having the meaning set forth on
page 5.
"Meridiana"............................ Meridiana S.p.A.
"Nominees"............................. Collectively, Juris Limited and Lively
Limited, the nominees for the trustee
of the ALPS Trust.
"Notes"................................ The Company's Class A Notes, Class B
Notes, Class C Notes, Class D Notes
and Class E Notes. The Notes have
been issued pursuant to the Deed of
Charge. Holders of each class of the
Pass Through Certificates, Series A
referenced on the cover page of this
Form 20-F derive their rights to
payments from the payments due on the
related class of the Notes.
Therefore, all references to
noteholders, Notes and any class
thereof throughout this Form 20-F
should be read to apply equally to the
certificateholders, certificates and
any class thereof, respectively.
"Note Target Price".................... Shall have the meaning set forth in
the Deed of Charge.
"Old Class A Notes".................... The $208,400,000 Secured Class A1
Floating Rate Notes due 1997, the
$104,200,000 Secured Class A2 Floating
Rate Notes due 1997 and the
$70,400,000 Secured Class A3 Floating
Rate Notes due 1997 issued by the
Company.
"Old Class B Notes".................... The $104,000,000 Secured Class B Fixed
Rate Notes due 1997 issued by the
Company.
"Old Class M Notes".................... The $34,000,000 Secured Class M
Floating Rate Notes due 1997 issued by
the Company.
"Old Notes"............................ The Old Class A, Old Class B and Old
Class M Notes.
"Old SM Loan".......................... The $78,150,000 loan made to the
Company pursuant to the Supermezzanine
Loan Agreement, dated June 16,1992,
among the Company, Citibank, N.A. and
Credit Lyonnais, originally payable in
1997.
"Ordinary Shares"...................... The Company's 15,000 authorized
ordinary shares, par value $1 per
share of which 10 have been issued.
"Outstanding Principal Balance"........ With respect to any of the Notes at
any time, the outstanding principal
balance as of the Closing Date less
all amounts distributed to the holder
thereof and allocable to principal
thereon on previous Payment Dates.
"Payment Date"......................... The 15th day of each month (or, if
such day is not a Business Day, the
next succeeding Business Day).
"PCAOB"................................ The U.S. Public Company Accounting
Oversight Board.
"Prior Debt"........................... The Old Notes and the Old SM Loan.
"Prospectus"........................... The prospectus related to the Class A,
Class B, Class C and Class D Notes,
dated January 27, 1997.
"Reference Agency Agreement"........... The Reference Agency Agreement, dated
as of the Closing Date, among the
Company, the Cash Manager and the
Reference Agent.
"Reference Agent"...................... Deutsche Bank Trust Company Americas
(f/k/a Bankers Trust Company).
"Required Sale Provision".............. Shall have the meaning set forth on
page 8.
"RPK".................................. Revenue Passenger Kilometers.
"Sale Offer"........................... Shall have the meaning set forth in
the Deed of Charge.
"SARS"................................. Severe Acute Respiratory Syndrome.
"Security Trustee"..................... Deutsche Trustee Company Limited
(f/k/a Bankers Trustee Company
Limited).
"Senior Trust Notes"................... The Class A, Class B and Class C Notes.
"Servicer"............................. Babcock & Brown or any replacement
servicer appointed in accordance with
the terms of the Servicing Agreement.
"Servicing Agreement".................. The Servicing Agreement, dated as of
the Closing Date, between the Company
and Babcock & Brown pursuant to which
Babcock & Brown provides, among other
things, certain management services
with respect to the leases and certain
sales and marketing and re-leasing
services with respect to the aircraft
to the Company.
"SFAS 144"............................. Shall have the meaning set forth on
page 17.
"Skynet"............................... Skynet Airlines Ltd.
"Stage 3 Aircraft"..................... An aircraft type that holds or is
capable of holding a noise certificate
issued under Chapter 3 of Volume 1,
Part II of Annex 16 of the Chicago
Convention or has been shown to comply
with Stage 3 Noise Levels set out in
Section 36.5 of Appendix C of Part 36
of the United States Federal Aviation
Regulations.
"Transaero"............................ Transaero Airlines.
"Travel Service"....................... Travel Service a.s.
"Trustee".............................. Deutsche Bank Trust Company Americas
(f/k/a Bankers Trust Company).
"Trust Note Sales Goals"............... The Company must approve for sale
(subject to the rights of the holders
of certain Notes to approve sales of
aircraft as set forth in Clause
10.10(b)(ii) of the Deed of Charge)
sufficient aircraft to meet the Trust
Note Sales Goals. The Trust Note
Sales Goals require that aircraft
having an Initial Appraised Value of
at least (i) $65,000,000 be sold by
the fifth anniversary of the Closing
Date, (ii) $130,000,000 be sold by the
sixth anniversary of the Closing Date,
(iii) $200,000,000 be sold by the
seventh anniversary of the Closing
Date and (iv) $454,950,000 be sold by
the eighth anniversary of the Closing
Date. The Deed of Charge provides
that if the Company fails to meet any
of the Trust Note Sales Goals set
forth in clause (i), (ii) or (iii)
above, then, at the direction of the
holders of the Class A, Class B, Class
C and Class D Notes representing in
the aggregate 75% of the Outstanding
Principal Balance of such Notes, the
Company shall replace the Servicer
under the Servicing Agreement and, if
the Company fails to meet the Trust
Note Sales Goal set forth in clause
(iv) above, then, at the direction of
the holders of the Class A, Class B,
Class C and Class D Notes representing
in the aggregate 66 2/3% of the
Outstanding Principal Balance of such
Notes, the Company shall replace the
Servicer under the Servicing
Agreement. The Deed of Charge provides
that on or after the fifth, sixth,
seventh and eighth anniversaries of
the Closing Date, if and so long as
the aggregate Initial Appraised Value
of the aircraft then owned by the
Company exceeds $389,950,000,
$324,950,000, $254,950,000 and $0,
respectively, the Company must accept
any Sale Offer in respect of the sale
of an aircraft if the proposed sale
price is at least equal to the Class C
Note Target Price (as defined in the
Deed of Charge). On or after the date
that is eight years and six months
following the Closing Date, the
Company must accept any Sale Offer in
respect of the sale of an aircraft if
the proposed sale price is at least
equal to the Note Target Price for the
then most senior outstanding class of
Notes.
"U.S. GAAP"............................ Generally accepted accounting
principles applicable in the United
States.
"WFC".................................. Whirlpool Financial Corporation.
"WFC Aircraft"......................... The Boeing 767-300ER aircraft with
manufacturer's serial number 24952
sold by WFC to the Company on November
27, 1996.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements
for filing on Form 20-F and has duly caused this annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AIRCRAFT LEASE PORTFOLIO
SECURITISATION 92-1 LIMITED
By: /s/ Frederick W. Bradley, Jr.
Name: Frederick W. Bradley, Jr.
Title: Chairman of the Board
Dated: October 1, 2004
Index to Exhibits
Exhibit No. Description
8. List of subsidiaries.
31. Rule 15d-14(a) Certification.
32. Section 1350 Certification
EXHIBIT 8
LIST OF SUBSIDIARIES
1.....Carotene Limited - incorporated in Ireland.
2.....ALPS 92-1 UK Limited - incorporated in England and Wales.
3.....ALPS 92-1 France SARL - incorporated in France.
EXHIBIT 31
I, Frederick W. Bradley, Jr., the Chairman of the Board of Directors
of Aircraft Lease Portfolio Securitisation 92-1 Limited (the "Company"),
certify that:
(1) I have reviewed this annual report on Form 20-F of the Company;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cashflows of the Company as of, and
for, the periods presented in this annual report;
(4) I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rule
15d-15(e)) for the Company and I have:
(a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under my supervision, to ensure that material
information relating to the Company, including its
consolidated subsidiaries, is made known to the Board of
Directors of the Company by others within those entities,
particularly during the period in which this annual report
is being prepared;
(b) Reserved.
(c) evaluated the effectiveness of the Company's disclosure
controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Company's
internal control over financial reporting that occurred
during the period covered by this annual report that has
materially affected, or is reasonable likely to materially
affect, the Company's internal control over financial
reporting; and
(5) I have disclosed, based on my most recent evaluation of internal
control over financial reporting, to the auditors of the Company
and the audit committee of the Board of Directors of the Company:
(a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the Company's ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Company's internal controls over financial
reporting.
Date: October 1, 2004
By: /s/ Frederick W. Bradley, Jr.
Frederick W. Bradley, Jr.
Chairman of the Board (1)
- --------
1 The Company is a special purpose vehicle that does not employ and has not
employed an individual as a chief executive officer or chief financial
officer and does not have and has not had any employees or executive
officers since its inception. For all executive management functions the
Company retains and relies upon its third party aircraft Servicer,
Administrative Agent and Cash Manager. These third party service providers
are required to perform these executive management functions in accordance
with the requirements of the Servicing Agreement, Administrative Agency
Agreement and Cash Management Agreement, respectively. With respect to the
information contained in the annual report, all information regarding the
aircraft, the leases and the lessees is provided by the Servicer pursuant to
the Servicing Agreement. The Cash Manager calculates monthly payments and
makes all other calculations required by the Cash Management Agreement.
Pursuant to the Administrative Agency Agreement, the Administrative Agent
uses the information provided by the Servicer and the Cash Manager and other
information the Administrative Agent acquires in the performance of its
services to the Company, to maintain financial records of the Company and
prepare financial reports including the annual financial statements.
All members of the Board of Directors of the Company, including the
Chairman, are non-executives.
EXHIBIT 32
I, Frederick W. Bradley, Jr., the Chairman of the Board of Directors
of Aircraft Lease Portfolio Securitisation 92-1 Limited (the "Company"),
certify that:
1. this annual report on Form 20-F fully complies with the
requirements of Section 15(d) of the Securities Exchange Act of 1934, as
amended; and
2. the information contained in this annual report fairly presents,
in all material respects, the financial condition and results of operations
of the Company.
Date: October 1, 2004
By: /s/ Frederick W. Bradley, Jr.
Frederick W. Bradley, Jr.
Chairman of the Board(1)
- --------
1 The Company is a special purpose vehicle that does not employ and has not
employed an individual as a chief executive officer or chief financial
officer and does not have and has not had any employees or executive
officers since its inception. For all executive management functions the
Company retains and relies upon its third party aircraft Servicer,
Administrative Agent and Cash Manager. These third party service providers
are required to perform these executive management functions in accordance
with the requirements of the Servicing Agreement, Administrative Agency
Agreement and Cash Management Agreement, respectively. With respect to the
information contained in the annual report, all information regarding the
aircraft, the leases and the lessees is provided by the Servicer pursuant to
the Servicing Agreement. The Cash Manager calculates monthly payments and
makes all other calculations required by the Cash Management Agreement.
Pursuant to the Administrative Agency Agreement, the Administrative Agent
uses the information provided by the Servicer and the Cash Manager and other
information the Administrative Agent acquires in the performance of its
services to the Company, to maintain financial records of the Company and
prepare financial reports including the annual financial statements.
All members of the Board of Directors of the Company, including the
Chairman, are non-executives.
