AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED 30 June 2003
AIRCRAFT LEASE PORTFOLIO
SECURITISATION 92-1 LIMITED
Consolidated Financial Statements for
the year ended
30 June 2004, 2003 and 2002 together
with
report of independent registered
public
accounting firm
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
CONSOLIDATED FINANCIAL STATEMENTS 2004
CONTENTS Page
Report of independent registered public accounting firm 1
Consolidated statements of operations 2
Consolidated balance sheets 3
Consolidated statement of cash flows 4
Consolidated statements of changes in shareholders' equity 5
Organisation of group 6
Statement of accounting policies 7
Notes to the consolidated financial statements 9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the board of directors and shareholders of Aircraft Lease Portfolio Securitisation
92-1 Limited
We have audited the accompanying consolidated balance sheets of Aircraft Lease
Portfolio Securitisation 92-1 Limited (the "Group") as of June 30, 2004 and 2003, and
the related consolidated statements of operations, changes in shareholders' deficit
and cashflows for each of the years in the three year period ended June 30, 2004.
These financial statements are the responsibility of the directors. Our
responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by the directors as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly in all
material respects, the consolidated financial position of the Group as of June 30,
2004 and 2003, and the results of their consolidated operations and cashflows for each
of the years in the three year period ended June 30, 2004, in conformity with
generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that the Group will
continue as a going concern. Notes 1 and 4 to the financial statements set out
certain matters that have had a significant adverse effect on the ability of the
Group's lessees to make rent and other payments and consequently on the Group's
ability to make interest and principal payments on its notes on the timely basis and
in full. In addition, Note 1 describes the Required Sales Provision under the Deed of
Charge, which could require the Group 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 Group's ability to continue as a going concern. The
Directors' assessment of these matters is set out in Note 1. The financial statements
do not include any adjustments that might result from the outcome of those
uncertainties.
KPMG
Chartered Accountants
Dublin
1 October 2004
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
Note Year Year Year
ended ended ended
June 30, June 30, June 30,
2002 2003 2004
US$'000 US$'000 US$'000
REVENUES
Aircraft leasing 3,7 32,605 19,758 15,175
Interest income 781 728 211
-------- -------- --------
33,386 20,486 15,386
-------- -------- --------
EXPENSES
General and administrative 3,565 5,867 3,196
expenses
Interest expense 8 19,110 18,631 17,213
Depreciation 2 16,360 11,999 10,798
Impairment in aircraft values 2 20,321 14,378 13,053
Loss on sale of aircraft - 1,152 -
Lessor contributions to - - 176
maintenance
Provision for maintenance 5 4,569 (1,684) 6,695
charges
Bad debt expense 77 803 194
Interest on lessee deposits 149 - -
-------- -------- --------
Total expenses 64,151 51,146 51,325
-------- -------- --------
NET LOSS BEFORE INCOME TAXES (30,765) (30,660) (35,939)
Income taxes 10 (24) (225) (7)
-------- -------- --------
NET LOSS (30,789) (30,885) (35,946)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
CONSOLIDATED BALANCE SHEETS
Note June 30, June 30,
2003 2004
US$'000 US$'000
ASSETS
Cash and cash equivalents 3,806 2,909
Restricted cash 22,691 21,976
Trade receivables 9 2,471 1,786
Aircraft - held for use 2 163,316 139,465
-------- --------
TOTAL ASSETS 192,284 166,136
======== ========
LIABILITIES AND SHAREHOLDERS'
DEFICIT
Interest payable 8 49,295 63,429
Prepaid and deferred lease 208 117
revenue
Accrued expenses and other 4,043 10,909
liabilities
Income taxes payable 247 7
Long-term debt 4 282,183 274,319
Maintenance reserves 5 17,797 15,519
Security deposits 6 2,682 1,953
-------- --------
TOTAL LIABILITIES 356,455 366,253
Share capital, 15,000 shares
authorised at $1 par value, 10
shares issued and outstanding - -
Retained deficit (164,171)(200,117)
-------- --------
Shareholders' deficit (164,171)(200,117)
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT 192,284 166,136
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
Signed on behalf of the Board:
Director
1 October 2004
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
Note Year Year Year
ended ended ended
June 30, June 30, June 30,
30, 2002 2003 2004
US$'000 US$'000 US$'000
NET LOSS FOR THE YEAR (30,789) (30,885) (35,946)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation 2 16,360 11,999 10,798
Impairment in aircraft values 2 20,321 14,378 13,053
Loss on sale of aircraft - 1,152 -
Changes in:
Accounts receivable 9 (492) (984) 685
Interest payable 8 6,779 12,442 14,134
Accrued expenses, other
liabilities and income taxes 4,391 (5,442) 6,626
payable
Prepaid and deferred lease 184 (716) (91)
revenue
Maintenance 5 (283) (1,226) (2,278)
Security deposits 6 (332) 224 (729)
-------- -------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 16,139 942 6,252
-------- -------- --------
NET CASH PROVIDED BY INVESTING
ACTIVITIES
Proceeds from sale of aircraft - 32,474 -
-------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES
Repayment on long term debt 4 (16,207) (37,100) (7,864)
-------- -------- --------
NET CASH USED IN FINANCING
ACTIVITIES (16,207) (37,100) (7,864)
-------- -------- --------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS (68) (3,684) (1,612)
CASH AND CASH EQUIVALENTS AT
START OF YEAR 30,249 30,181 26,497
-------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF YEAR 30,181 26,497 24,885
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
Share Retained Shareholders'
Shares Shares Capital Earnings Deficit
Authorised Issued US$'000 US$'000 US$'000
Balance June 30, 2004 15,000 10 - (102,497) (102,497)
Net loss - - - (30,789) (30,789)
---------- -------- --------- --------- ---------
Balance June 30, 2004 15,000 10 - (133,286) (133,286)
Net loss - - - (30,885) (30,885)
---------- -------- --------- --------- ---------
Balance June 30, 2004 15,000 10 - (164,171) (164,171)
Net loss - - - (35,946) (35,946)
---------- -------- --------- --------- ---------
Balance June 30, 2004 15,000 10 - (200,117) (200,117)
========== ======== ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
ORGANISATION OF GROUP
Background
Aircraft Lease Portfolio Securitisation 92-1 Limited (the "Company") was incorporated
in Jersey, Channel Islands as a private company on May 13, 1992 and was re-registered
as a public company on June 15, 1992. The Company has three wholly owned
subsidiaries, Carotene Limited, a company incorporated in the Republic of Ireland,
ALPS 92-1 UK Limited, a company incorporated under the laws of England and Wales, and
ALPS 92-1 France SARL, a company incorporated under the laws of France on December 15,
2003 (together the "Subsidiaries" and, together with the Company, the "Group").
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 debis AirFinance (formerly known as AerFi Group plc and,
prior to that, GPA Group plc) and received delivery and legal title from GPA Group plc
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. An additional
aircraft (the "WFC Aircraft") was purchased on November 27, 1996 from Whirlpool
Financial Corporation ("WFC") and on July 24, 1997 one aircraft was sold to WFC and
the fleet of aircraft was reduced from 14 to 13. Two aircraft were sold in the year
ended June 30, 2000 reducing the fleet size to 11. In the year ended June 30, 2003 two
aircraft were sold on October 1, 2002 and December 20, 2002, respectively, reducing
the fleet size to 9. In the year ended June 30, 2004 no aircraft were sold, thus the
fleet size has remained at 9.
In June 1996 the Company elected to refinance the debt raised to finance the initial
aircraft acquisition in 1992 (the "Prior Debt") through the issuance of notes (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 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 which are
held by WFC. The Company believed that the revised schedule for sale of the Company's
then current aircraft portfolio would allow it to realise 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 June 1996 (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 June 27, 1996 with an
aggregate face amount of approximately US$394 million. The proceeds together with
cash balances previously held in reserve accounts were utilized to repay the
outstanding interest on the Prior Debt, the US$367 million of outstanding principal on
the Prior Debt, the refinancing expenses of US$13 million, the premium paid to the
holders of certain of the Prior Debt of US$4 million and to create an aircraft
purchase reserve account for the purchase of the WFC Aircraft. In addition the super
mezzanine loan of US$78 million was repaid by the Company in connection with such
refinancing.
Upon receipt of the proceeds of the Notes, the mortgages over the aircraft and the
security in respect of the leases and certain other property in favour of the previous
security trustee were released and transferred to the new security trustee, Bankers
Trustee Company Limited (now renamed Deutsche Trustee Company Limited) (the "Security
Trustee"), for the benefit of the holders of the Notes.
The Company is obligated to pay interest on the Notes and a portion of the principal
of the Class A Notes from the cash flows generated by the Group'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 entered into by the Company on
June 27, 1996 (the "Deed of Charge").
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
STATEMENT OF ACCOUNTING POLICIES
Basis of preparation
The accounting policies followed in the preparation of the accompanying consolidated
financial statements conform with generally accepted accounting principles in the
United States.
The consolidated financial statements are prepared on the going concern basis and
under the historic cost convention and are stated in US dollars, which is the
principal operating currency of the Group and of the aviation industry (see note 1
below).
Basis of consolidation
The consolidated financial statements include the results of the Subsidiaries. All
intercompany profits, transactions and account balances have been eliminated in the
consolidated financial statements.
Revenue recognition
The Group enters into operating leases with aircraft operators. Rental income from
operating leases is recorded on a straight line basis over the lease terms. Lease
rentals received in accordance with individual lease agreements are a mixture of in
advance and in arrears. Some lease rentals are based on "power by the hour" fixed
hourly rates and others on fixed monthly rates. Revenue from leases with escalating
or scheduled rental increases ("stepped rentals") is recognised on a straight line
basis over the lives of those leases.
Maintenance reserves
In most lease contracts the lessee has the obligation for maintenance costs on
airframes and engines, and in many lease contracts the lessee makes a full or partial
prepayment, calculated at an hourly rate, into a fund held by the Group, from which
maintenance expenditures for major checks are disbursed. The balance of these funds
is included in the provision for maintenance except where the Directors estimate that
a surplus exists, in which case any surplus, to the extent retainable by the Group, is
taken to income as a reduction of expenses. In addition, the Group may incur
maintenance costs on the re-leasing of the aircraft due to the requirement to restore
the aircraft to an acceptable maintenance condition prior to leasing. In some lease
contracts, the Group is required to make a contribution to the fund if the maintenance
expenditure exceeds the amount in the fund.
Taxation
The Company has been granted exempt company status by the Jersey taxation
authorities. It pays an exempt company fee of £600 per annum. Taxation is provided
on the profits of the Subsidiaries at the current rates.
Aircraft
Aircraft have been divided into two classes: (i) Aircraft held for use and (ii)
Aircraft held for sale at the balance sheet date.
(i) Aircraft held for use
Aircraft held for use are stated at cost less accumulated depreciation less impairment
charges. Cost comprises the net purchase price of the aircraft acquired by the
Company. The aircraft are depreciated on a straight line basis so as to write off the
cost of the assets to a residual value of 10% over a period of 25 years from the date
of manufacture. The estimates of useful lives, depreciation rates and residual values
are reviewed periodically by the Directors of the Company.
Under the terms of Statement of Financial Accounting Standards ("SFAS") 144,
Accounting for the Impairment of Long-Lived Assets the Directors of the Company review
the carrying value of the aircraft against the sum of the estimated undiscounted
future net cashflows including the estimated eventual sales values of the aircraft.
This review has determined that shortfalls exist for eight of the aircraft, all of
which are classified as held for use, where their carrying value was greater than the
sum of these undiscounted cashflows.
As a result the Directors have recorded an impairment charge for these aircraft equal
to the difference between their carrying value and fair value. In determining fair
value, the Directors use external valuations. For the purposes of measuring
impairment losses for long-lived assets, fair value is the average of the "Appraised
Current Market Value", as calculated by three independent professional aircraft
appraisers (the "Appraisers").
Aircraft (continued)
(ii) Aircraft held for sale
Aircraft held for sale are those where there were active discussions being held at the
balance sheet date with specific identified buyers and for which a sale is expected to
qualify for recognition within one year. In respect of these aircraft held for sale,
the asset is separately identified and included as part of the portfolio at the lower
of the carrying amount and its estimated net realizable value less costs to sell.
Depreciation is discontinued and gains or losses arising on the revaluation of such
assets are taken to the provision for impairment. At June 30, 2004 no aircraft were
held for sale.
Cash and cash equivalents
Cash and cash equivalents include demand deposits with banks and all highly liquid
investments with an original maturity of 3 months or less.
Restricted cash
Except as noted below, the Company's collection account is required to be maintained
at a balance equal to US$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 which rate the Notes. 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 Group expenses and
liabilities, including, among other things, interest due on the Class A Notes, Class B
Notes and Class C Notes and costs incurred in removing any lien imposed by
Eurocontrol, in performing airworthiness directives 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 Notes, Class B Notes and
Class C Notes provided that the balance of funds in the collection account does not
fall below the "Maintenance Reserve Amount" (currently US$10 million). 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.
Foreign currency
Transactions in foreign currencies are translated into US dollars at the exchange rate
prevailing as of the date of the transaction. Assets and liabilities denominated in
foreign currencies are translated into US dollars at the rate of exchange prevailing
at the year end. Any gain or loss arising from a change in exchange rates subsequent
to the date of the transaction is included in the Statement of Operations. The
Group's foreign exchange transactions are not significant, as all revenues and most
costs are denominated in US dollars.
Use of estimates
In preparing the financial statements in conformity with generally accepted accounting
principles, the Directors are required to make estimates and assumptions that affect
the amounts of reported assets and liabilities as of the date of the financial
statements. The same is true of revenues and expenses reported for the year. Actual
results could differ from those estimates.
The determination of the maintenance provision is based on an analysis of the lease
portfolio and reflects an amount which, in the Directors' judgement, is adequate to
provide for all potential costs at the balance sheet date.
Bad debt provision
The Directors review all outstanding debtors and full provisions are made for those
amounts believed to be unrecoverable.
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GOING CONCERN BASIS OF PREPARATION
These consolidated financial statements have been prepared on the going concern
basis, which assumes that the Group will continue in operational existence for a
reasonable period of time, up to one year beyond the date of these financial
statements. This means in particular that the profit and loss account and balance
sheet assume no intention or necessity to liquidate or curtail significantly the
scale of the Group's operations.
Note 4 below 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. This note 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.
Payment Obligations
The Group has faced strong competitive challenges to keep its aircraft
on-lease, at satisfactory lease rates.
These factors have negatively impacted past cashflows and projected rental
amounts and sale proceeds through to the final maturity date of the Notes
(June 15, 2006) and consequently have had a significant adverse effect 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 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.
Events of Default
During fiscal year 2004 and to date, certain target principal payments
scheduled to be paid to holders of the Class A, Class C and Class D Notes,
certain interest payments due to holders of the Class A, Class B and Class C
Notes and all interest payments due to holders of the Class D and Class E
Notes were in arrears. 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 or to make payments of target principal of those Notes on any
date prior to their final maturity date due to insufficient cash collections
is not an event of default under the Deed of Charge. The failure to pay any
regular interest (excluding default and step up interest) owing to the
holders of the Class D Notes during the fiscal year ended June 30, 2004
constitutes an event of default under the Deed of Charge. The Deed of Charge
provides that, so long as the Class A Notes, Class B Notes or Class C Notes
are outstanding, the holders of the 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 the Class D
Notes in accordance with the priority of payments set forth in the Deed of
Charge.
Failure to pay regular interest on the Class A Notes, should this occur,
would also constitute an event of default under the Deed of Charge. As the
Class A Notes are the most senior Class of Notes outstanding, in such
circumstances the Security Trustee could at its discretion, and if requested
to do so by holders representing 25% or more of the aggregate outstanding
principal balance of the Class A Notes would be required, to serve a
Protection Notice under the Deed of Charge, which would enable the Security
Trustee to convert any floating charges which it holds over the Group's
assets into fixed charges. An event of default in respect of the payment of
regular interest on the Class A Notes would also entitle the holders of 66 ?
% or more in aggregate outstanding principal balance of the Class A Notes to
serve an Enforcement Notice on the Company declaring all unpaid principal of
and interest on the Class A Notes to be immediately due and payable. This
would entitle the Security Trustee to, amongst other things, enforce the
security held for the benefit of Noteholders which would require the
realisation of the Group's assets. Current cashflow projections indicate
that there will be sufficient funds to pay regular interest on the Class A,
Class B and Class C Notes, when due for a reasonable period of time, up to
one year beyond the date of these financial statements.
These projections are dependent upon, amongst other things, the following :
- - the continuing performance of the Group's lessees in accordance with the terms of
the existing lease arrangements.
- - actual operating expenses being incurred in-line with projections.
- - the extent to which, as contracted under certain existing lease arrangements, the
Group is required to make contributions to lessees where the maintenance
expenditure exceeds the amount, if any, collected and in the maintenance
reserve fund attributable to each lessee.
Required Sales of Aircraft
The Deed of Charge provides that, to the extent the Company has not complied
with the Trust Note Sales Goals (as to which, see note 2 below), on or after
June 27, 2004 and up until December 26, 2004, the Company is required,
subject to the pre-emption rights of the Class D and Class E Noteholders, to
accept any offers to purchase its aircraft which include a proposed sale
price at least equal to the Class C Note Target Price.
The Deed of Charge further provides that, to the extent the Company has not
complied with the Trust Notes 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 offers to purchase its aircraft which
include a proposed sale price 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
US$77.472 million) plus accrued and unpaid Class A Note regular interest at
the time of sale and certain then outstanding expenses of the Company.
The factors outlined above give rise to substantial doubt about the Group's
ability to continue as a going concern.
The Directors consider, however, that it is appropriate to prepare the financial
statements on a going concern basis at this time, on the basis of the following:
- - current cashflow projections which indicate, amongst other things, that there
will be sufficient funds to pay regular interest on the Class A, Class B and
Class C Notes when due for a reasonable period of time up to one year beyond
the date of these financial statements;
- - the fact that the failure of the Company to pay principal of the Notes on any day
prior to their final maturity date due to insufficient cash collections will
not constitute an event of default under the Deed of Charge;
- - the limited recourse nature of the Notes means that no amounts will be payable in
excess of the Company's available collections, including the proceeds of
disposal of its assets;
- - as of the date of these financial statements no offer has been received for the
purchase of any of the Company's aircraft which may be required to be
accepted in accordance with the provisions of the Deed of Charge described
above which require the Company to accept offers to purchase its aircraft in
certain circumstances.
The financial statements do not include any adjustments that would arise in the event that
the Group was unable to continue as a going concern.
2. AIRCRAFT
June 30, June 30,
2003 2004
US$'000 US$'000
COST LESS IMPAIRMENT
Beginning of year 304,406 290,028
Impairment write-down (14,378) (13,053)
------- -------
End of year 290,028 276,975
------- -------
ACCUMULATED DEPRECIATION
Beginning of year 114,713 126,712
Depreciation expense 11,999 10,798
------- -------
End of year 126,712 137,510
------- -------
Net carrying value - held for use 163,316 139,465
------- -------
163,316 139,465
======= =======
Average Appraised Base Value
at the end of year 205,820 176,620
======= =======
Number of aircraft at the end of the year 9 9
======= =======
The "Appraised Base Value" represents the Appraisers' opinion of the underlying
economic value of an 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 Appraisers.
As discussed in the Statement of Accounting Policies, 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 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 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 US$138,300,000 as at June 30, 2004
for the nine aircraft. The Appraisers' assessment of Appraised Current Market
Value reflects the underlying economic value of aircraft and engines in normal
market conditions. The 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.
2. AIRCRAFT (CONTINUED)
Appraised Current Market Values have been estimated by the 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 the Company's
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 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 US$13.053 million. Previous charges were made
at June 30, 2003, June 30, 2002 and June 30, 2001 for US$14.378 million,
US$20.321 million and US$30.259 million respectively.
The decline in the fair value of the aircraft is due primarily to the ageing of
the aircraft and those market conditions (described in note 4) which have had a
negative effect on aircraft values. These conditions have also resulted in a
reduction in lease rates.
The Deed of Charge sets out the following "Trust Note Sales Goals" which required
the Company to approve sales of aircraft on an ongoing basis:
Aircraft to be Sold Date by which Sales
(measured by Initial Goals were to be
Appraised Value as of Satisfied
June 3, 1996)
US$65,000,000 June 27, 2001
US$130,000,000 June 27, 2002
US$200,000,000 June 27, 2003
US$454,950,000 June 27, 2004
The Company was in compliance with and had exceeded the Trust Note Sales Goals as
of June 27, 2001 and was required to sell a further US$54.33 million (as measured
by Initial Appraised Value) worth of aircraft to be in compliance with the Trust
Note Sales Goals as of June 27, 2002.
In order to meet the June 2002 Trust Note Sales Goal, following an extensive
marketing effort by Babcock & Brown, the Group's aircraft servicer (the
"Servicer"), the Company had entered into non-binding agreements to sell a
B737-300 aircraft (MSN 24914 on lease to Malev) and an A320-200 aircraft (MSN 283
on lease to Air Canada) to two separate purchasers by June 27, 2002. These
aircraft were therefore classified as held for sale as at June 30, 2002.
The sale of MSN 24914 was completed on October 1, 2002. Despite extensive
efforts to complete the sale of MSN 283, the Company was informed by the
prospective purchaser on November 5, 2002 that it had decided not to proceed with
the transaction for reasons outside the Company's control. MSN 283 was
subsequently sold to a different purchaser on December 20, 2002. As a result,
the Company was not in compliance with the Trust Note Sales Goals from November
5, 2002 to December 20, 2002.
2. AIRCRAFT (CONTINUED)
In the period from June 1996 to date, the Company has sold five aircraft
totalling US$133.19 million (measured by Initial Appraised Value). The Company
needed to sell an additional US$66.81 million (measured by Initial Appraised
Value) worth of aircraft to comply with the June 2003 Trust Note Sales Goal and
needed to sell all the aircraft to comply with the June 2004 Trust Notes Sales
Goal. At the direction of the Company, the Servicer has periodically been
marketing each of the 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 the Company's
aircraft is extremely poor and it is not likely the market for the Company's
aircraft will improve prior to the final maturity date of the Notes.
The Company did not comply with the Trust Note Sales Goals for June 27, 2003 or
for June 27, 2004 as it was unable, given the then current aircraft industry
market conditions, to sell sufficient aircraft at the sales prices required by
the Company's then current business objectives (the "Business Objectives") set
out in the Deed of Charge.
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 66 2/3% or more of the aggregate
outstanding principal balance of the directing class of the Noteholders, which
will be Class A so long as any Class A Notes are outstanding. The Deed of Charge
further 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 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 (as
defined in the Deed of Charge) 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 Notes 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 market conditions described in note 4 have had a significant adverse effect
on aircraft values in general and are also expected to impact on future sales
prices.
3. OPERATING LEASES
As at June 30, 2004 eight of the aircraft were leased on operating leases to
seven lessees and one aircraft was off-lease.
The following table shows the scheduled terminations by aircraft type and lessee
for the leases relating to the aircraft as of June 30, 2004:
% of Revenue
Manufacturer's Month and year Year ended
Aircraft type Serial number Lessee of expiration June 30, 2004
B737-400 23869 Batavia March 2007 13.74%
B737-400 23870 Travel Service March 2007 14.94%
B737-400 24519 AOG(1) 11.70%
_
B737-500 24898 China Southern March 2006 14.17%
B757-200 25054 First Choice(2) April 7.91%
2005
B767-300ER 24952 Air Canada March 2007 14.61%
B767-300ER 25000 Air Canada May 2007 13.26%
MD83 49785 Meridiana March 2006 5.77%
MD83 49786 Allegiant January 2005 3.90%
Air(3)
(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 Airlines for a five year term ending on
July 27, 2009.
(2) First Choice 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).
The following is a schedule of future minimum rental payments receivable under
operating leases as of the date of these financial statements. A number of
leases operate on a "power by the hour" basis and, as such, future rentals are
dependent upon lessee usage. Some of these "power by the hour" leases have no
minimum rentals and are therefore not included in the schedule.
Year ending June 30, US$'000
2005 9,687
2006 8,079
2007 4,440
2008 1,740
------
23,946
======
The above minimum lease rentals would be reduced to the extent that any of the
aircraft are sold while on lease.
The leases have charges attached to them such that they represent security for
the Notes issued by the Company, as described in note 4 below.
4. LONG TERM DEBT
The Notes are secured by a first priority security interest over the Company's
assets, which consist of the aircraft, the leases and amounts on deposit in
certain accounts.
Outstanding Outstanding
Step up principal principal
Expected Interest interest balance as balance as
Notes final payment rate rate (per at June 30, at June 30,
(per annum) annum) 2003 2004
date(1) (2) US$'000 US$'000
Class A 15 May 2002 LIBOR+0.37% 0.5% 85,618 77,754
Class B 15 July 2002 LIBOR+0.95% 0.5% 40,064 40,064
Class C 15 July 2002 LIBOR+1.35% 0.5% 39,560 39,560
Class D 15 July 2002 12.75% 1.0% 34,023 34,023
Class E N/A 10.00% N/A 82,918 82,918
-------- --------
282,183 274,319
======== ========
(1) as determined at date of issue based on certain assumptions made at the time
of issue.
(2) payable monthly in arrears.
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.
During fiscal year 2004, certain target principal payments scheduled to be paid
to holders of the Class A, Class C and Class D Notes, certain interest payments
due to holders of the Class A, Class B and Class C Notes and all interest
payments due to holders of the Class D and Class E Notes were in arrears. As at
June 30, 2004, these arrears consisted of US$70.810 million of Class A Note
Target Principal, US$4.304 million of Class C Note Target Principal, US$5.177
million of Class D Note Target Principal, US$0.942 million of Class A Note step
up interest, US$0.407 million of Class B Note step up interest, US$0.390 million
of Class C Note step up interest, US$7.130 million of Class D Note regular
interest, US$0.665 million of Class D Note step up interest, US$1.042 million of
Class D Note default interest and US$52.705 million of Class E Note interest.
The failure to pay any regular interest (excluding default and step up interest)
owing to the holders of the Class D Notes during the fiscal year ended June 30,
2004 constitutes an event of default under the Deed of Charge.
The Deed of Charge provides that, so long as the Class A Notes, Class B Notes or
Class C Notes are outstanding, the holders of the 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 the Class D
Notes in accordance with the priority of payments set forth in the Deed of Charge.
The Company did not have sufficient funds to repay the Class A Notes on their
expected final payment date of May 15, 2002 and did not have sufficient funds 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 due to insufficient cash collections is not an event of default, however
the Deed of Charge requires that, to the extent the Company does not repay in
full the principal of those Notes by such dates, the Company pay these
Noteholders additional step-up interest as per the rates stated in the above
table 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 be paid only to the extent that there are available collections in
accordance with the priority of payments set out in the Deed of Charge. The
Company paid some step up interest in fiscal year 2002 but the Company has not
been able to pay any step up interest in fiscal years 2003 or 2004, and its
current projections indicate that it will not have sufficient funds to pay any
further step up interest during fiscal year 2005 or beyond. The Company's
current projections also indicate that it will not have sufficient funds to pay
any further Class D Note or Class E Note interest.
4. LONG TERM DEBT (CONTINUED)
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.
The impact of these events has been seen in many airlines cutting their flight
schedules with many taking the opportunity to retire aircraft from service.
During this period, many carriers chose to postpone delivery of new aircraft
purchases on which they had made firm commitments and canceled orders for many on
which they had options. 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, the Company's largest lessee, as measured by the
Company's 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 in September 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 the Company can obtain for its 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 the Company's lessees, have suffered large losses
or face severe financial difficulties. Indeed, Skynet, one of the Company's
lessees from January 2003 to May 2004, has ceased operations and returned the
aircraft the Company 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.
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 have
also been suffering from the increase since September 2001 in availability of
aircraft and this reduction in aircraft values. Although in the past twelve
months the number of used aircraft available for lease and sale has begun to
decrease and lease rates have now begun to increase, the resulting positive
impact has been less significant for older aircraft such as those in the
Company's portfolio. Further, the potential for volatility as a result of
airline restructurings or liquidation, or the occurrence of other world events
remains. The Company has experienced a significant decline in lease rates upon
re-leasing or extensions of leases as compared to lease rates prior to September
2001 and the Company has received requests from certain lessees to restructure
their leases. Although the situation is now improving, the Company's 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 airworthiness directives 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 the Company's 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 the Company's 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.
These factors have negatively impacted projected rental amounts and sale proceeds
through to the final maturity date of the Notes (June 15, 2006) and consequently
have had a significant adverse effect 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 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.
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 following order:
1. Classes A, B, and C regular interest
2. Class A principal
3. Class B principal
4. Class C principal
5. Class D regular interest
6. Class D principal
7. Classes A, B, C and D step up interest and default interest
8. Class E interest
9. Class E principal
The Class E Notes will not, except in certain circumstances, receive any
principal payments until the outstanding principal amount of each of the Class A
Notes, Class B Notes, Class C Notes 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 Notes on any day prior to
their final maturity date due to insufficient cash collections will not
constitute an event of default under the Deed of Charge. The limited recourse
nature of the Notes means that no amounts will be payable in excess of the
available collections.
5. MAINTENANCE RESERVES
June 30, June 30, June 30,
2002 2003 2004
US$'000 US$'000 US$'000
Opening balance 19,306 19,023 17,797
Received during year 6,574 2,774 4,233
Claims by lessees (11,426) (2,316) (13,206)
Provision for maintenance 4,569 (1,684) 6,695
in year
------- ------- -------
Closing balance 19,023 17,797 15,519
------- ------- -------
Due within one year 5,388 5,622 4,455
Due after one year 13,635 12,175 11,064
------- ------- -------
19,023 17,797 15,519
======= ======= =======
As at June 30, 2004 all of the lessees of the eight aircraft on lease are
responsible under the terms of their leases to maintain the aircraft and five of
the lessees provide security for such obligations through regular contributions
to maintenance reserves held by the Group. In addition, the Group may incur
maintenance costs on the re-leasing of the aircraft due to the requirement to
restore the aircraft to an acceptable maintenance condition prior to leasing. In
addition, in some lease contracts, the Group is required to make a contribution
where the maintenance expenditure exceeds the amount in the fund.
Inherent uncertainties make it difficult to determine whether the future
obligations of the Group to meet future maintenance payments can be met out of
the proceeds of future maintenance receipts.
Whilst any surplus in maintenance funds at the termination of a lease previously
generally accrued to the Group, due to current economic factors in the airline
industry, lessees have been exerting pressure on lessors to transfer any excess
maintenance funds upon the re-leasing of an aircraft. In order to re-lease
aircraft, the Group is granting maintenance credits as part of the terms of the
new leases and expects to continue to grant such credits on new leases. Lessor
contributions to maintenance costs resulted in a provision of US$6,695,000 being
charged as an expense in the year ended June 30, 2004 (2003 - a release of
US$1,684,000).
6. SECURITY DEPOSITS
Security deposits of US$1,953,000 at June 30, 2004 and of US$2,682,000 at June
30, 2003 are held as security for obligations in accordance with the terms of
certain leases. The deposits are held as cash and are included within the
restricted cash balance.
7. REVENUES AND CONCENTRATION OF CREDIT RISK
i) Distribution of leasing revenues by geographic area
For the For the For the
year year year
ended ended ended
June 30, June 30, June 30,
2002 2003 2004
US$'000 US$'000 US$'000
Europe 15,198 6,973 6,118
Americas 10,022 6,341 4,822
Asia/Pacific 7,385 6,444 4,235
------- ------- -------
32,605 19,758 15,175
======= ======= =======
ii) Concentration of credit risk
Credit risk with respect to trade accounts receivable is generally diversified
due to the Group's fleet of aircraft being comprised of nine aircraft, eight of
which were on lease to seven lessees in seven countries as at June 30, 2004.
The Group manages its exposure to leases with lessees based in particular
countries through obtaining security in the form of deposits, letters of credit
and guarantees.
The Group continually evaluates the financial position of lessees and, based on
this evaluation, the amounts outstanding and the available security, makes an
appropriate provision for doubtful debts.
Four lessees accounted for 27.87%, 14.94%, 14.17% and 11.70% respectively of the
Group's aggregate lease revenues for the year ended June 30, 2004. No other
lessee accounted for more than 10% of the Group's aggregate lease revenues for
such period.
8. INTEREST EXPENSE
Statement of Operations
For the For the For the
year year year
ended ended ended
June 30, June 30, June 30,
2002 2003 2004
Accrual Accrual
June 30, Paid June 30,
2003 US$'000 2004 US$'000 US$'000 US$'000
US$'000 US$'000
New notes
Class A 599 (1,238) 1,011 (3,438) (2,429) (1,650)
Class B 246 (845) 452 (1,567) (1,306) (1,051)
Class C 237 (996) 441 (1,539) (1,376) (1,200)
Class D 3,454 - 8,474 (4,619) (4,829) (5,020)
------ ------ ------ ------ ------ ------
4,536 (3,079) 10,378 (11,163) (9,940) (8,921)
Class E 44,759 - 53,051 (7,947) (8,691) (8,292)
------ ------ ------ ------ ------ ------
Total 49,295 (3,079) 63,429 (19,110) (18,631) (17,213)
====== ====== ====== ====== ====== ======
9. TRADE RECEIVABLES
June 30, June 30, June 30,
2002 2003 2004
US$'000 US$'000 US$'000
Gross receivables 1,487 3,273 1,786
Allowance for bad debts - (802) -
------- ------- -------
Net receivables 1,487 2,471 1,786
======= ======= =======
10. INCOME TAXES
The Company pays an annual charge (currently £600) to qualify as a tax exempt
company under Jersey law. This fee is included in the profit and loss accounts
as it is not dependent on the Company's results. ALPS 92-1 UK Limited is subject
to UK taxation on its profits at the applicable rate, Carotene Limited is subject
to Irish taxation on its profits at the applicable rate and ALPS 92-1 France SARL
is subject to French taxation on its profits at the applicable rate. Taxable
income is the same as book income for all of these entities. All of the tax
losses were incurred in the ultimate parent company, a Jersey tax exempt company,
and accordingly no deferred tax assets were recorded. Net operating loss carry
forwards at June 30, 2004 were zero.
June 30, June 30, June 30,
2002 2003 2004
US$'000 US$'000 US$'000
Corporation tax 24 11 7
Foreign withholding tax (i) - 214 -
------- ------- -------
24 225 7
======= ======= =======
i) Provision has been made in the year ended June 30, 2003 in respect of unpaid
United States withholding taxes relating to the investment of certain collections
by the Cash Manager. The foreign withholding tax charge above as at June 30, 2003
represents the Directors' current best estimate of these liabilities.
11. COMMITMENTS
The Group has no long-term contracts other than those with its service providers
as at June 30, 2004.
The annual commitment to Babcock & Brown, the Servicer, is US$454,800 plus 1% of
the basic rent amount received and 1% of the basic rent amount due.
The annual commitment to Deutsche Bank Trust Company Americas (formerly Bankers
Trust Company), the Cash Manager, is US$17,000.
The annual commitment to Mourant & Co. Limited, the Administrative Agent, is
based on the number of hours worked by each employee of the Administrative Agent
on the affairs of the Company multiplied by the hourly rate of each such employee.
The holders of the shares in the Company are entitled to receive out of the
distributable profits of the Company a fixed cumulative preferential dividend at
a rate of US$1,500 per annum. As the Company did not have distributable profits
as at June 30, 2004, it did not pay a dividend. Total unpaid cumulative
preferential dividends as at June 30, 2004 were US$10,500.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values and fair values of the Company's financial assets and financial
liabilities as at June 30, 2004 are set out below:
Estimated
Book Value Fair Value
June 30, 2004 June 30, 2004
Financial Assets US$'000 US$'000
Cash 2,909 2,909
Restricted Cash 21,976 21,976
-------- -------
Total 24,885 24,885
======== =======
Financial Liabilities
Indebtedness
Class A 77,754 62,203
Class B 40,064 20,032
Class C 39,560 1,978
Class D 34,023 0
Class E 82,918 -
-------- -------
274,319 84,213
-------- -------
Other
Aircraft Maintenance
reserves due after one year 11,064 11,064
Security deposits due after one year 1,953 1,953
-------- -------
13,017 13,017
-------- -------
Total 287,336 97,230
======== =======
Although the estimated fair values of the Class A to D Notes outstanding have
been determined by reference to prices as at June 30, 2004 provided by an
independent third party, these fair values do not necessarily reflect the market
value of these Notes at a specific time and should not be relied upon as a
measure of the value that could be realized by a noteholder upon sale.
The Directors have considered the fair value of the Class E Notes at June 30,
2004 and, due to the current uncertainty in the aviation industry and the
particular characteristics of these Notes, do not believe it to be appropriate,
or possible, to estimate with any degree of certainty, a fair value of these
Notes in the current economic climate.
The fair value of aircraft maintenance reserves and security deposits, which are
subject to floating rates, where applicable, is their par value.
13. RELATED PARTY TRANSACTIONS
a) Babcock & Brown Limited
Babcock & Brown acts as Servicer to the Group. In addition to managing the
Group's aircraft, Babcock & Brown also manages aircraft owned by other third
parties. Babcock & Brown may from time to time have conflicts of interest in
performing its obligations to the Group and other entities to which it provides
management, marketing and other services.
Babcock & Brown receives an annual fee as Servicer which amounted to US$828,945
for the year ended June 30, 2004 (2003: US$1,323,686, 2002: US$1,180,714).
13. RELATED PARTY TRANSACTIONS (CONTINUED)
b) Brian Chamness
Mr B. Chamness, a director of the Company, was formerly an officer of WFC, the
holder of the Class E Notes. He now acts as a consultant to WFC.
c) Mr G. Adrian Robinson
The Group leases aircraft MSN 25054 to First Choice Airways (formerly Air 2000).
Mr G. Adrian Robinson, a director of the Company, provides consulting services to
First Choice Airways from time to time.
d) Mourant & Co. Limited
Mourant & Co. Limited acts as Administrative Agent to the Company and its
subsidiary, Mourant & Co. Secretaries Limited, acts as the secretary of the
Company. Mourant & Co. Limited and Mourant & Co. Secretaries Limited are
affiliated with Mourant du Feu & Jeune, the law firm that acts as Jersey legal
counsel to the Group.
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
i) Income tax
The Group made income tax payments of $18,152 during the year ended June 30,
2004, $1,528 during the year ended June 30, 2003 and $3,631 during the year ended
June 30, 2002.
ii) Interest paid
The Company made net interest payments of $3,076,100 during the year ended June
30, 2004, $6,189,513 during the year ended June 30, 2003 and $12,331,000 during
the year ended June 30, 2002.
15. SUBSEQUENT EVENTS
i) The interest and principal arrears of the Company have increased subsequent to
the year end. At September 15, 2004, the unpaid amounts consisted of US$77.472
million of Class A Note Target Principal, US$1.042 million of Class A Note
step-up interest, US$0.458 million of Class B Note step-up interest, US$4.304
million of Class C Note Target Principal, US$0.441 million of Class C Note
step-up interest, US$5.177 million of Class D Note Target Principal, US$8.215
million of Class D Note regular interest, US$1.127 million of Class D Note
default interest, US$0.750 million of Class D Note step-up interest and US$54.779
million of Class E Note interest.
ii) The deficit in the actual amount of cash held by the Company representing the
Liquidity Reserve Amount as compared to the required level of cash has increased
subsequent to the year end. At September 30, 2004, the actual amount of cash
held was US$857,000 below such required level.
