UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 333-69864
LEASE INVESTMENT FLIGHT TRUST
(Exact name of registrant as specified in its charter)
51-65219
(IRS Employer I.D. No.)
DELAWARE
(State or other jurisdiction of incorporation or organization)
1100 North Market Street, Rodney Square North, Wilmington, Delaware 19890
(302) 651-1000
(Address and telephone number of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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This document consists of 65 pages.
1
Lease Investment Flight Trust
2001 Form 10-K Annual Report
Table of Contents
Page
PART I
Item 1. Business........................................................3
Item 2. Properties.....................................................27
Item 3. Legal Proceedings..............................................27
Item 4. Submission of Matters to a Vote of Security Holders............27
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................28
Item 6. Selected Financial Data........................................29
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.....36
Item 8. Financial Statements and Supplementary Data....................39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................54
PART III
Item 10. Directors and Executive Officers of the Registrant.............54
Item 11. Executive Compensation.........................................61
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................61
Item 13. Certain Relationships and Related Transactions.................62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.......................................................63
2
PART I
Item 1. Business
Introduction
Lease Investment Flight Trust ("LIFT") is a special-purpose statutory
business trust that was formed on June 13, 2001 ("Inception") under the laws of
the State of Delaware. On June 26, 2001 (the "Closing Date"), LIFT acquired one
direct subsidiary, LIFT Trust-Sub 1 ("LIFT 1"), a Delaware business trust, from
Automatic LIFT I, LP ("Automatic"), its beneficial owner. LIFT 1 has various
domestic and foreign subsidiaries that own or lease aircraft. The authorized
business of LIFT and its subsidiaries (collectively the "LIFT group"), all of
which were organized prior to June 26, 2001, is limited to acquiring, financing,
re-financing, owning, leasing, re-leasing, selling, maintaining and modifying
commercial jet aircraft. The names of LIFT's 35 subsidiaries and the number of
aircraft owned by each subsidiary are as follows:
Name of Subsidiary Number of Aircraft Owned
------------------ ------------------------
LIFT Trust Sub-1 0
LIFT SP Spain, LLC 5
LIFT Canada, LLC 2
LIFT GF UK, LLC 2
LIFT France, LLC 3
LIFT Turkey, LLC 2
LIFT Georgia, LLC 1
LIFT Portugal, LLC 1
LIFT Morocco, LLC 1
LIFT RS Brazil, LLC 1
LIFT EJ UK, LLC 1
LIFT VG Brazil, LLC 2
LIFT Indonesia, LLC 1
LIFT Arizona, LLC 1
LIFT Malaysia, LLC 1
LIFT Missouri, LLC 1
LIFT Italy, LLC 1
LIFT IB Spain, LLC 1
LIFT A2K UK, LLC 1
LIFT Russia, LLC 1
LIFT CEA China, LLC 5
ZIBAL Aircraft Leasing LLC 1
A320 Aircraft Leasing IX Corp 0
A320 Aircraft Leasing X Corp 0
MD82 Aircraft Leasing I Corporation 0
MD82 Aircraft Leasing II Corporation 0
MD82 Aircraft Leasing III Corporation 0
MD82 Aircraft Owner F Limited 1
MD82 Aircraft Owner G Limited 1
B737 Owner Limited 1
Sinope Limited 1
LIFT Ireland Leasing Limited 0
LIFT Indonesia Leasing, S.A.R.L. 0
LIFT Malaysian Leasing Limited 0
LIFT Bermuda Leasing Limited 0
3
The aircraft owned by Sinope Limited, B737 Owner Limited, MD82 Aircraft
Owner G Limited, and LIFT Italy, LLC are leased to LIFT Ireland Leasing Limited
and subleased to the ultimate operators. The aircraft owned by LIFT Indonesia,
LLC is leased to LIFT Indonesia Leasing, S.A.R.L. and subleased to the ultimate
operator. The aircraft owned by LIFT Russia, LLC is subleased to LIFT Bermuda
Leasing Limited and subleased to the ultimate operator. The aircraft owned by
LIFT Malaysia, LLC is leased to LIFT Malaysian Leasing Limited and subleased to
the ultimate operator. LIFT's principal executive offices are located at 1100
North Market Street, Rodney Square North, Wilmington, Delaware 19890. Its
telephone number is (302) 651-1000.
The beneficial interests in the LIFT group were originally purchased by
Automatic, which is affiliated with Automatic LLC. Automatic LLC is
headquartered in Orlando, Florida. Automatic LLC, through its operating
affiliates, originates, acquires and sells aircraft and services aircraft leases
and arranges various forms of financings in the aviation leasing industry.
Automatic subsequently sold 50.1% of the beneficial interests of LIFT to four
other affiliates of Automatic LLC. As a result, Automatic owns 49.9% of the
beneficial interests of LIFT while the other four affiliates of Automatic LLC
each own 12.525% of the beneficial interests of LIFT.
On the Closing Date, LIFT issued $1,429 million of asset-backed notes
(the "Initial Notes"). As of that date, the Initial Notes consisted of $400
million of Class A-1 Notes, $260 million of Class A-2 Notes, $425 million of
Class A-3 Notes, $60 million of Class B-1 Notes, $83 million of Class B-2 Notes,
$69 million of Class C-1 Notes, $72 million of Class C-2 Notes, $35 million of
Class D-1 Notes and $25 million of Class D-2 Notes. LIFT used the proceeds from
the sale of the Initial Notes to fund cash reserves of $83 million, pay
transaction expenses and make the payments described in the second following
paragraph.
Also on the Closing Date, LIFT 1 and its subsidiaries agreed with
General Electric Capital Corporation to purchase 39 commercial jet aircraft (the
"Initial Aircraft") from General Electric Capital Corporation and some of its
affiliates (collectively the "Seller") from the proceeds of $1,310.5 million of
bridge notes issued by LIFT 1 to Credit Suisse First Boston Corporation on the
Closing Date (the "Bridge Notes").
In addition, LIFT agreed with Automatic on the Closing Date to purchase
LIFT 1 and its subsidiaries under a beneficial interest purchase agreement, to
pay to Automatic the cash purchase price of approximately $5.5 million and to
repay the Bridge Notes on behalf of LIFT 1. LIFT made these payments with the
proceeds from the sale of the Initial Notes and from the sale of its beneficial
interest. As a result, LIFT 1 became a part of the LIFT group on the Closing
Date.
On December 18, 2001, LIFT completed an exchange offer whereby it
issued seven classes of new notes, also designated Class A-1, Class A-2, Class
A-3, Class B-1, Class B-2, Class C-1, and Class C-2 (the "Exchange Notes"), in
exchange for the seven corresponding classes of the Initial Notes. The terms of
the Exchange Notes are identical in all material respects to the Initial Notes,
except that the Exchange Notes are registered under the Securities Act of 1933,
as amended. The Class D-1 and Class D-2 Notes were not exchanged and remained
unregistered. $10 million of the Class A-2 and $34 million of the Class A-3
Initial Notes were not tendered in the exchange offer and remain outstanding.
The remaining outstanding Initial Notes and the outstanding Exchange Notes are
together referred to as the "Notes".
As of December 31, 2001, 38 of the LIFT group's 39 aircraft were on
lease to 24 different lessees in 17 different countries and one aircraft was
off-lease. For a detailed discussion of the value of the aircraft, see "The
Aircraft Portfolio."
4
The trust agreement governing LIFT (the "Trust Agreement") provides for
four trustees. One of the four trustees of LIFT is Wilmington Trust Company,
which acts as the statutory trustee and the owner trustee. The remaining three
trustees are the "controlling trustees" and have the authority to manage the
property and affairs of LIFT under the Trust Agreement. All of the controlling
trustees are independent from the Seller. One of the controlling trustees,
called the "equity trustee", has been appointed by the holders of LIFT's
beneficial interest, while the two other controlling trustees, called the
"independent controlling trustees", are independent of those holders. The
holders of the beneficial interest of LIFT may remove and replace the equity
trustee. Each independent controlling trustee may designate a replacement for
the other controlling trustee if such other controlling trustee resigns or his
office is deemed vacant.
The Trust Agreement requires that any decision relating to insolvency
proceedings, mergers or other reorganizations of LIFT be approved by a unanimous
vote of the controlling trustees. Any sale of aircraft, decisions requiring
LIFT's approval under the servicing agreement for the aircraft (the "Servicing
Agreement") or under the agreement with the administrative agent, and the
reduction of any required level of reserves must be approved by the equity
trustee and at least one of the independent controlling trustees. In order for
the controlling trustees to approve an aircraft sale on other than pre-approved
terms, they must confirm to the trustee under the Indenture, dated as of June
26, 2001, pursuant to which LIFT issued the Notes (the `Indenture"), prior to
the sale, that the sale will not materially and adversely affect the holders of
the Notes. The acquisition of additional aircraft by LIFT and the terms of any
related financing need only be approved by the equity trustee, subject to the
terms of the Trust Agreement and the Indenture, including confirmation by the
rating agencies rating the Notes that the transaction will not adversely affect
the rating on the Notes.
As is common with many other special purpose companies, LIFT and its
subsidiaries do not have any officers or other employees, except, in the case of
certain subsidiaries of LIFT, as may be required by applicable law. The LIFT
group has arranged for third-party service providers to provide aircraft
servicing, managerial services and financial advice. See "Part III, Item 10.
Directors and Executive Officers of the Registrant" for further information
regarding the management of the LIFT group.
The LIFT group may acquire additional commercial passenger or freight
aircraft from Automatic or the Seller using proceeds from the issuance of
additional notes and equity. The Indenture contains a number of conditions for
the acquisition of additional aircraft and for the financing of such an
acquisition. If these conditions are met, there is no limit under the Indenture
to the number of additional aircraft that the LIFT group may acquire.
All of the net revenues of the LIFT group are used to pay principal,
interest and other amounts due on the Notes or to provide for cash reserves for
some or all of the subclasses of Notes. Except for accruals for the payment of
anticipated expenses and required reserves, none of the revenues will be re-used
or retained in the business of the LIFT group. In addition, none of the earnings
of the LIFT group may be distributed to the holders of the beneficial interest
of LIFT until all Notes are repaid in full with the limited exception of
reimbursing any payments made by those holders to cure interest shortfalls.
Because the Notes do not provide for fixed principal payments, the
ultimate repayment of the Notes, the amount of individual payments over time and
the speed of repayment are fully a function of the LIFT group's ability to
collect revenues from the portfolio of the 39 aircraft and, if acquired,
additional aircraft. Set forth below in the "Risk Factors" section are a variety
5
of factors that, in addition to general economic conditions, could influence
materially the collection of revenues -- principally lease rents and sale
proceeds -- available for debt repayment.
References in this Form 10-K to the initial appraised value of aircraft
mean the average of three appraisals of the aircraft as of December 31, 2000.
For a further discussion of the appraisals, see "The Aircraft Portfolio -
Appraisal of Aircraft".
Forward-Looking Statements
Any statements contained herein that are not historical facts, or that
might be considered opinions or projections, whether expressed or implied, are
meant as, and should be considered, forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include, among others, statements relating to the
LIFT group's future plans, objectives, expectations and intentions and the
assumptions underlying or relating to such plans, objectives, expectations and
intentions, and may be identified by the use of words such as "expect," "may,"
"anticipate," "intend," "plan," "should," "believe," "estimate," "predict,"
"potential," "continue," or similar terms that relate to the future or express
uncertainty. Forward-looking statements are based on assumptions and opinions
concerning a variety of known and unknown risks. If any assumptions or opinions
prove incorrect, any forward-looking statements made on that basis may also
prove materially incorrect. Important factors that could cause actual results to
differ materially from the results reflected in the forward-looking statements
contained herein are described below under "Risk Factors." The LIFT group
assumes no obligation to update any forward-looking statements to reflect actual
results or changes in the factors affecting such forward-looking statements.
Risk Factors
The following summarizes certain risks that may materially affect the
business operations of the LIFT group and its ability to pay the interest,
principal and premium, if any, on the Notes in full at or before their final
maturity dates and to make cash distributions to the beneficial interest
holders. There may be additional risks and uncertainties not known at the
present. There can be no assurance that payments under the aircraft leases will
be adequate to pay the interest, principal and premium, if any, on the Notes in
accordance with their terms.
The LIFT group is a special purpose entity and therefore is relying on only a
limited number of revenue sources for its business.
It is unlikely that the LIFT group would be able to obtain any
alternate source of funds if any of its limited sources of funds prove to be
insufficient to pay the Notes and its other obligations. The sole sources of
payment for the Notes and the other obligations of the LIFT group are:
(1) Funds derived from the aircraft owned or to be acquired by them,
including: rent payments under the leases, security deposits,
maintenance reserves and other payments under existing leases and
any future leases, insurance and sales proceeds;
(2) liquidity reserves funded out of the proceeds of the Notes or that
may be funded out of the proceeds of any future notes or
beneficial interests in the LIFT group or provided through any
future credit facilities;
(3) net payments under swap or other hedging agreements;
6
(4) investment earnings; and
(5) net proceeds from the sale of any notes issued to refinance other
notes.
As a result of the terrorist attacks in the United States and the current world
economic situation, some if not most of the initial lessees may continue to
experience significantly lower revenues, increased costs and economic
uncertainties which may adversely affect the timely repayment of the Notes.
During the current financial year there has been a downturn in the
world economic climate with a consequential negative impact on the operating
conditions in the world aviation industry. On September 11, 2001, the United
States was attacked by terrorists who hijacked and crashed four United States
commercial aircraft, with significant loss of life, property damage and economic
disruption. As a result, air travel in the United States was suspended for
several days. The long-term effect that these terrorist attacks, the fallout
since then and the subsequent military action in Afghanistan may have for the
aviation industry over the longer term is not yet fully known. The pre-existing
economic downturn has been exacerbated by the events of September 11 in the U.S.
and the economic and political fallout since then. Subsequent to these events,
two significant European carriers (Swissair and Sabena) filed for bankruptcy and
major American carriers announced very large financial losses.
The short-term effects of the events of September 11, together with the
downturn in the world economic conditions which was already evident, have
included, among other things, a reduction in demand for air travel, leading to a
contraction of operations by airlines including grounding of aircraft by
airlines, bankruptcy and/or consolidation of airlines, fluctuations in the price
of fuel, increased costs due to new security measures adopted by the relevant
aviation authorities, and increased insurance premiums required by the insurance
markets. In particular, airlines worldwide are currently experiencing
difficulties in maintaining war insurance cover in the amounts required under
their leases with us and other lessors. While these insurance issues have been
mitigated in certain jurisdictions by a number of temporary government schemes,
in the absence of longer term satisfactory solutions on this matter, it may be
necessary for certain aircraft to be grounded.
Such consequences depending on their scope and duration, which the LIFT
group cannot predict at this time, are having a material adverse impact on the
financial condition of the LIFT group's lessees and their ability to perform
under their leases. As a result, a number of the LIFT group's leases were
restructured to reduce lease rates and to provide other financial accommodations
for lessees. The consequences of the events of September 11, 2001 may also lead
to reduced demand for the LIFT group's aircraft, which may impact its ability to
re-lease aircraft on a timely basis and at favorable rates and may reduce the
value of its aircraft. These effects could cause a reduction in the LIFT group's
cash flow, which would adversely affect the LIFT group's ability to make
payments on the Notes and to refinance the Notes as planned. Any significant
reduction in the appraised values of the LIFT group's portfolio beyond that
assumed in the Form S-4 Registration Statement of LIFT (Registration No.
333-69864) as amended, relating to the issuance of the Exchange Notes (the
"Registration Statement"), may require the LIFT group to accelerate the
scheduled principal payments on the Class A Notes and may result in delays of
scheduled principal payments to other noteholders.
As a result of the terrorist attacks in the United States, Moody's has
downgraded the Class D Notes, all three rating agencies that rate the Notes are
re-evaluating their ratings of securities issued by aircraft lease
7
securitization vehicles, including the Notes, and there may be additional
downgrades of some or all of the Notes by one or more of these rating agencies.
As a result of the recession, the terrorist attacks of September 11,
2001 and the significant adverse financial impact that these events have had on
the airline industry, the rating agencies that rate the Notes have re-evaluated
their ratings of securities issued by aircraft lease securitization vehicles. On
October 30, 2001, Moody's placed the Class D Notes on review for possible
downgrade. On March 18, 2002, Moody's downgraded the Class D Notes from Ba2 to
Ba3. On September 27, 2001, Standard & Poor's placed the Class D Notes on credit
watch with negative implications. On September 20, 2001, Fitch placed the Class
A, B, C and D Notes on rating watch negative, but on December 21, 2001 they
removed the Class A, B and C Notes from this placement without any change to the
ratings of these classes.
The LIFT group has no employees or managers of its own, and therefore its
ability to generate revenues depends on contracts with, and performance by,
independent third party service providers.
The LIFT group is especially dependent on service providers because
neither LIFT nor its subsidiaries have any employees or executive managers of
their own, except, in the case of certain subsidiaries of LIFT, as may be
required by applicable law.
Inadequate performance and/or resignations by service providers may
materially and adversely affect revenues and costs. In the absence of an
ownership stake, third party service providers may have no incentive to perform
beyond the strict requirements of their contract.
The LIFT group relies on contracts with GE Capital Aviation Services,
Limited ("GECAS"), an affiliate of General Electric Capital Corporation, as the
servicer, Phoenix American Financial Services, Inc. as the administrative agent,
Bankers Trust Company as the security trustee, Credit Suisse First Boston
Corporation as the financial advisor and the capital markets advisor and other
service providers for all asset servicing, executive and administrative
functions.
From time to time, the LIFT group may engage, on an arm's-length basis,
service providers in which the controlling trustees of the LIFT group have a
financial interest. In 2001, the LIFT group engaged Simat, Helliesen & Eichner,
Inc. ("SH&E") to provide services in connection with the provision of source
materials for certain economic descriptions in this Form 10-K. David Treitel,
the equity trustee of the LIFT group, is the Chairman and Chief Executive
Officer of SH&E. The foregoing engagement did not involve more than $60,000 in
amounts payable to SH&E in 2001.
Regarding these arrangements, please note that:
(1) any of these organizations may fail to perform its contractual
obligations adequately;
(2) any of these organizations may exercise contract termination
rights;
(3) The LIFT group may find it difficult to recover damages for poor
performance in light of contractual limitations;
(4) The LIFT group may not be able to terminate the contract itself --
in particular its rights to terminate the Servicing Agreement are
very limited; and
8
(5) The LIFT group may not have the legal right to locate satisfactory
replacements on favorable terms.
The aircraft servicer may face conflicts of interest that could result in
preferential treatment for a third party at the expense of the LIFT group. If
the servicer did prefer a third party in a conflict of interest, it could
adversely affect the LIFT group's revenues.
GECAS will from time to time have conflicts of interest that may
adversely affect its ability to perform its obligations as the servicer for the
LIFT group because it manages aircraft and other assets of other entities, in
particular for its affiliate, General Electric Capital Corporation, and its
group. These conflicts will arise if the servicer leases the LIFT group's
aircraft to the same entities that are also the lessees of other aircraft
managed by the servicer. In this circumstance, decisions affecting some aircraft
may unavoidably be adverse to others. If the servicer makes a decision adverse
to the LIFT group's interests, the LIFT group's revenues could suffer.
These conflicts may be particularly acute when a lessee in financial
distress needs to return some of its aircraft. Conflicts will also arise when
the aircraft of the LIFT group are being marketed for re-lease or sale at a time
when other aircraft managed by the servicer are being similarly marketed. These
circumstances may be especially sensitive where General Electric Capital
Corporation is providing financing for the marketed aircraft or where the
servicer's contractual arrangements have the effect of requiring preferential
treatment for other aircraft.
Under the terms of the Servicing Agreement with the servicer, the LIFT
group is not necessarily entitled to be informed of all conflicts of interest
involving the servicer and is limited in its right to replace the servicer
because of conflicts of interest.
Because the LIFT group's contract limits its remedies against the servicer for
poor performance, the LIFT group may at some point bear costs that will reduce
its available revenues.
Under the Servicing Agreement, the LIFT group may not in all cases have
the right to recover damages for inadequate performance. The LIFT group's right
to terminate the Servicing Agreement by reason of a failure of the servicer to
perform is, moreover, limited to those failures to perform that materially and
adversely affect the LIFT group as a whole.
In particular, the servicer is not contractually responsible for, among
other things:
(1) the transfer of aircraft, leases or other assets to any person
within the LIFT group;
(2) the adequacy of the terms of any aircraft lease, including rent
payments, maintenance reserves or security deposits;
(3) the reliability or creditworthiness of any lessee; and
(4) the terms of the Notes and the ability of the LIFT group to comply
with the terms of the Notes.
LIFT has agreed to indemnify the servicer and its affiliates for broad
categories of losses arising out of the performance of services for the aircraft
and leases held by subsidiaries of LIFT, unless the losses arise from the
servicer's gross negligence or willful misconduct.
9
Market interest rate fluctuations could change expected cash flows.
Interest rate exposure arises to the extent that the LIFT group's fixed
and floating rate obligations under the Notes do not correlate to either or both
of the mix of fixed and floating rate rental payments for different periods and
the timing of those payments. Although the LIFT group will attempt to hedge that
exposure as described in "Item 7A. Quantitative and Qualitative Disclosures
about Market Risk", there can be no assurance that it will be effective in
implementing its hedging goals. In addition, the premature termination of any
lease may result in the LIFT group incurring prepayment or cancellation costs
under its hedging agreements.
Changes in the aircraft portfolio could change expected cash flows.
The assumptions regarding the expected cash flows of the LIFT group are
subject not only to a variety of economic factors, but also to any substantial
change in the composition of the aircraft portfolio from that initially
contemplated. Any substantial change in that composition could significantly
alter expected cash flows and the nature and degree of risks affecting cash
flows. Three principal factors could affect the fleet composition:
(1) The exercise of purchase options by lessees. The exercise of a
lessee purchase option may result in sale proceeds lower than
target sale prices of the aircraft. Four lessees with respect to
five of the Initial Aircraft, representing 15.17% of the aggregate
initial appraised value, have unexpired options to purchase
aircraft.
(2) The loss of aircraft through casualty or governmental taking. The
proceeds of insurance and taking awards may not be sufficient to
compensate for the loss of the revenue otherwise available from
the affected aircraft.
(3) The purchase of additional aircraft. The LIFT group may acquire
additional commercial passenger or freight aircraft from Automatic
or the Seller. Although any additional aircraft may add to the
cash flows of the LIFT group and such acquisitions are subject to
confirmation by the rating agencies rating the Notes that the
agencies will not lower, qualify or withdraw any rating on the
Notes as a result and other requirements of the Indenture, the
LIFT group cannot predict the effect of additional aircraft on its
cash flows and ability to repay the Notes.
The LIFT group will not receive enough revenues from its current aircraft leases
to repay the Notes in full and therefore it will have to re-lease or sell the
aircraft in order to maintain its revenues or repay the Notes in full.
The LIFT group will need to re-lease aircraft as current leases expire
in order to continue to generate enough revenue to pay the Notes in full.
Failing re-leasing, it will need to attempt to sell the aircraft to provide
funds for Note payments. The LIFT group may be unable to re-lease or sell the
aircraft at satisfactory prices or on favorable terms, as discussed further in
the second following paragraph. Further, the LIFT group's ability to re-lease or
sell aircraft on favorable terms or without significant off-lease time is likely
to be adversely impacted by the effects of the September 11, 2001 terrorist
attacks in the United States.
10
The number and types of the aircraft that the LIFT group must place
with lessees through December 31, 2006 is presented in the table below. This
table shows the years in which the leases for these aircraft are contractually
scheduled to expire or will terminate. The table illustrates that the leases for
28 of the aircraft, representing approximately 58.78% of the aggregate initial
appraised value, are scheduled to expire or permit early termination on or
before December 31, 2006. The table assumes that, except as indicated, no lease
terminates prematurely, no aircraft are sold and no additional aircraft are
purchased. More aircraft will need to be re-leased to the extent leases
terminate prematurely.
Year Ending December 31,
------------------------
Aircraft Type 2002 2003 2004 2005 2006
- ------------- ---- ---- ---- ---- ----
B767-300ER............ - 1 - 1 1
B737-300.............. 1(a) 4 1 1 2
MD-82................. 1 3 - 1 3
A320-200.............. - 1 - - -
B747-400.............. - - - - -
B737-800.............. 1 - - - -
MD-11F................ - - - 1 -
B737-700.............. - - - - 1
B737-400.............. - - 1 1 -
B737-500.............. - - 1 - -
MD-83.................. - 1 - - -
--- --- --- --- ---
Total................. 3 10 3 5 7
(a) Lessee will return the aircraft in March 2002 and pay a termination fee.
The LIFT group may have difficulty in re-leasing or selling aircraft on
favorable terms.
The servicer, GECAS, has agreed to seek to re-lease aircraft serviced
by it as they become available upon the termination of any lease. The servicer
has not assured the LIFT group, and the LIFT group makes no assurances, that it
will be able to re-lease aircraft on a timely basis, at equally favorable rental
rates or otherwise on favorable lease terms. The LIFT group's ability to obtain
timely and favorable lease terms or to sell aircraft at attractive prices may be
adversely affected by unpredictable changes in general economic conditions,
passenger demand and the competitive strength of the airline industry. The
availability of commercial jet aircraft for lease or sale has periodically
experienced cycles of oversupply and undersupply, resulting in sharp decreases
and increases in aircraft values and lease rates. In addition, the September 11,
2001 terrorist attacks in the United States and the economic downturn have had
and are likely at least for the near term to continue to have a negative effect
on lease rates and aircraft values. Among other factors that could influence
lease terms and sales prices are the following:
(1) cyclical changes in interest rates and the availability of credit;
(2) fluctuations in the cost of fuels and other materials, labor
costs, costs associated with changing governmental regulations and
air traffic control constraints;
(3) manufacturer production levels, particularly increased production
of new aircraft, which makes older, used models less attractive;
(4) the cessation or announced cessation of production of particular
aircraft models, such as the MD series and Boeing 737-300s,
11
737-400s and 737-500s, of which there are 24 in the LIFT group's
initial portfolio, representing approximately 40.48% of the
aggregate initial appraised value;
(5) the operating history of particular aircraft, the identity of
their operators and legal and regulatory requirements affecting
their operation and transfer or leasing;
(6) changes in aircraft technology, either significant advances by
manufacturers or governmentally mandated modifications, that may
render older models substantially less attractive or may result in
modification costs that reduce net sales prices or rentals; and
(7) competition from aircraft manufacturers, airlines, aircraft
leasing companies, financial institutions, aircraft broker and
special purpose leasing vehicles that may have greater financial
resources and greater legal and financial flexibility to structure
and offer more favorable leasing, pricing or financing
alternatives.
Over the life of the aircraft portfolio, it is likely that some of the aircraft
lessees will experience financial difficulties which will cause them to delay or
miss rental payments to the LIFT group.
The ability of each aircraft lessee to perform its lease obligations
will depend not only on the managerial skills of its employees but also on
general economic conditions in the country or region in which it operates as
well as competition, fare levels, passenger demand, and operating costs,
including, but not limited to, the cost of fuel. Some of the LIFT group's
existing lessees are in a weak financial position, and this is likely to be the
case with future aircraft lessees as well. As the aircraft approach the end of
their realizable useful life, it is increasingly likely that the aircraft will
be leased to less creditworthy lessees. In a portfolio the size of the LIFT
group's, it should be expected that some aircraft lessees may at some point be
slow in paying or may fail to pay in full. In some instances, late payments are
recovered, together with default interest or other similar payments required by
the leases. In other instances, a restructuring of the lease is required,
involving anything from a simple rescheduling of payments to the termination of
a lease.
As of March 27, 2002, five lessees with respect to ten of the Initial
Aircraft, representing 19.11% of the aggregate initial appraised value, have
been granted reductions in or deferrals of one or more months of rental
payments. The deferred rental payments are payable over all or some part of the
remaining term of the lease. In addition, agreements have been entered into with
some lessees which grant rent reductions in return for other benefits to the
LIFT group, such as lease extensions. Also, as a result of the September 11,
2001 terrorist attacks in the United States, the financial position of the LIFT
group's existing lessees is very likely to be further weakened, and in some
cases significantly weakened, which in turn is likely to cause an increase in
delayed, missed or reduced rental payments.
A delayed or missed rental payment from a lessee decreases the LIFT
group's revenues, adversely affecting the timely or full repayment of the Notes.
A certain level of delinquency has been assumed for purposes of calculating the
estimated final payment date for the Notes. The LIFT group cannot assure,
however, that default levels will not increase over time.
Increased fuel prices could have a negative financial impact on the LIFT group's
current lessees and could adversely affect its ability to re-lease the aircraft.
Oil prices increased dramatically during 1999 and 2000, and many
airlines reported reduced levels of profitability due to higher fuel prices. In
the current economic downturn, however, oil prices have fallen quite
12
dramatically since September 2001. There has been some recent upward pressure on
prices but LIFT does not believe that these prices will return to pre-September
2001 levels in the near future. Any increases in fuel costs in the current low
yield environment could cause lessees to experience or exacerbate financial
difficulties which could cause these lessees to delay or miss their rental
payments. High fuel prices could also adversely affect the LIFT group's ability
to re-lease or sell aircraft on advantageous terms.
The LIFT group faces competition from a variety of entities.
In leasing and selling aircraft in its portfolio, the LIFT group faces
competition from a variety of entities. These include:
(1) the manufacturers of aircraft, such as Boeing and Airbus;
(2) financial institutions engaged in the leasing business and other
leasing companies, such as General Electric Capital Corporation
and International Lease Finance Corporation;
(3) banks and other financial institutions that have foreclosed on
aircraft collateral;
(4) airlines which are disposing of aircraft; and
(5) other aircraft portfolio entities formed for purposes similar to
those of the LIFT group.
Many, if not most, of these entities have greater resources, greater
financial flexibility and longer operating histories than the LIFT group.
Operational restrictions may harm the LIFT group's ability to compete.
The Indenture and other governing documents impose restrictions on how
the LIFT group operates its business. These restrictions may limit the ability
to compete effectively in the aircraft leasing market under certain
circumstances. For example, there are concentration limits contained in the
Indenture that restrict the LIFT group's ability to lease a certain percentage
of aircraft to any individual lessee, to lessees in particular countries, or to
lessees in particular geographical regions. Most of the LIFT group's competitors
do not operate under such restrictions.
The concentration of lessees in a particular geographical region may amplify the
LIFT group's exposure to local economic conditions.
The commercial aviation industry throughout the world generally is
highly sensitive to general economic conditions. Because a substantial portion
of business and, especially, leisure airline travel is discretionary, the
industry has tended to suffer during economic downturns. In addition, local
economic and political conditions can influence the performance of a lessee
located in a particular region. The effect of those local conditions on the LIFT
group will be more or less intense depending on the concentration of the number
of its lessees in that region.
European concentration. As of December 31, 2001, lessees based in
Europe operated aircraft accounting for 43.03% of the aggregate initial
appraised value of the Initial Aircraft. These lessees were divided between
lessees in the "developed" European markets of the United Kingdom, France,
Spain, Italy and Portugal, accounting for 31.91% of the aggregate initial
13
appraised value, and lessees in the "emerging" European markets of Russia and
Turkey, accounting for the remaining 11.12% of the aggregate initial appraised
value. The financial prospects for lessees in the "developed" European markets
can be expected to depend largely on the level of economic activity in Europe
generally and in the specific countries in which these lessees operate. Germany,
France and Italy experienced negative economic growth in the fourth quarter of
2001. While this has been mitigated somewhat by the moderate growth in other
economies such as Spain and Ireland, the euro area economy likely contracted in
the fourth quarter of 2001. Despite the weak fourth quarter, Europe's economy
finished 2001 with low but positive economic growth. France and Italy are widely
expected to resume low to moderate growth rates in 2002 and the United Kingdom
remains relatively healthy. One area of concern for European lessees is the
continued weakness of the euro. Low or negative growth rates and currency
weakness, combined with a possible upward movement in fuel prices, may have an
adverse effect on the ability of European lessees to meet their obligations
under their respective leases. In addition, commercial airlines in Europe
continue to face increased competitive pressures from international carriers, EU
domestic airlines and the new breed of low cost carriers. Several major airlines
in Europe have collapsed in the wake of the terrorist attacks in the United
States and many continue to operate on the verge of bankruptcy. There can be no
assurance that competitive pressures resulting from deregulation and continued
economic sluggishness will not have a material adverse impact on the operations
of its European lessees.
Russian concentration. As of December 31, 2001, one lessee based in
Russia operated an aircraft accounting for 5.49% of the aggregate initial
appraised value of the Initial Aircraft. The Russian lessee is the flag carrier
of that nation; however, as a result of the lack of definitive information about
its ownership, its corporate governance has often been the subject of
international scrutiny. Due to buoyant oil prices and a cheap currency, Russia's
economy has improved since 1998. According to a new study by the Organization
for Economic Cooperation and Development, Russian GDP growth has averaged 6.00%
over the last three years. The current environment of low oil prices is expected
to put downward pressure on government revenues, though this may be lessened due
to Russia's non-OPEC status.
Turkish concentration. As of December 31, 2001, one lessee based in
Turkey operated aircraft accounting for 5.63% of the aggregate initial appraised
value of the Initial Aircraft. After an estimated 8.20% contraction in 2001, GDP
growth of 2.00% is expected for 2002. While the government is committed to the
recovery program prescribed by the International Monetary Fund, the economy
remains saddled with high inflation, high debt and a volatile currency. The
damaging effect of the terrorist attacks in the United States on tourism will
exacerbate the difficulties faced by the Turkish economy, and may have an even
more marked impact on the charter business of the Turkish lessee. The low value
of the euro, which is the principal currency in which the Turkish lessee
receives its revenue, coupled with further risk of lire depreciation, may
adversely affect the ability of the lessee to meet its U.S. dollar-denominated
rental and other payments due under the leases.
North Africa and Middle East concentration. As of December 31, 2001,
lessees based in Northern Africa and the Middle East operated aircraft
accounting for 4.21% of the aggregate initial appraised value of the Initial
Aircraft. Political violence has had a significant adverse impact on the general
economic conditions in Northern Africa and the Middle East in recent years. The
economic prospects of the North African and Middle Eastern region are dependent
on the general political outlook, which can vary greatly from year to year.
Political upheaval or political violence associated with potential military
conflicts in this region could adversely affect the prospects of the lessees of
meeting their obligations. Any such factors could also affect the LIFT group's
ability to regain possession of the aircraft upon a default.
14
One lessee in this region is the flag carrier of Morocco. As of
December 31, 2001, this carrier operated aircraft accounting for 2.74% of the
aggregate initial appraised value of the Initial Aircraft. The other lessee,
based in Tunisia, operated aircraft accounting for 1.47% of the aggregate
initial appraised value of the Initial Aircraft. Both Morocco and Tunisia have
strong economic ties to Europe and are relatively stable politically.
Asia Pacific region concentration. As of December 31, 2001, lessees
based in the Asia Pacific region, including China, India, South Korea, Malaysia,
and Indonesia, operated aircraft accounting for 28.39% of the aggregate initial
appraised value of the Initial Aircraft. The commercial aircraft industry in the
Asia Pacific region was adversely affected by the severe economic and financial
difficulties experienced in the region during 1998 and 1999. Since 1999, there
has been some stabilization and recovery in the economies and airlines of this
region. Thus far, with the exception of Japan, the economic outlook of the Asian
economies has remained relatively positive. China and India, two rapidly growing
aviation markets, continue to experience high economic growth. South Korea and
Indonesia also continue to experience healthy growth, while Malaysia, after
nearly zero growth in 2001, is undergoing an export-led recovery in 2002. If a
sudden loss of confidence in Asian currencies or economies recurs as in 1998,
there would be a significant adverse impact on aircraft demand in this region.
Latin American concentration. As of December 31, 2001, lessees based in
Latin America operated aircraft accounting for 5.87% of the aggregate initial
appraised value of the Initial Aircraft. Both of the Latin American lessees are
based in Brazil. The prospects for lessee operations in Latin American countries
depend in part on the general level of political stability and economic activity
and policies in those countries. Future developments in the political systems or
economies of these countries or the implementation of future government policies
may materially affect lessee operations in those countries.
The Brazilian economy recovered from its economic difficulties of 1999,
but the fallout from the recent Argentine devaluation and last year's energy
crisis will cause growth for 2002 to be significantly lower than forecast.
Continued depreciation of the real, and other Latin American currencies, could
lead to difficulties for lessees in paying U.S. dollar-denominated obligations.
Mexico's economy, being more exposed to the U.S. economy, contracted
significantly in the fourth quarter of 2001. The airlines were badly affected by
the September 11, 2001 terrorist attacks in the United States and required a
government aid package similar to that administered in the U.S. Further
volatility, the risk of economic contagion and continuing low growth rates in
Latin America could lead to a material decrease in the LIFT group's leasing
revenues and an increase in default-related costs.
North American concentration. As of December 31, 2001, lessees based in
North America operated aircraft accounting for 17.45% of the aggregate initial
appraised value of the Initial Aircraft. Of these lessees, lessees based in
Canada operated aircraft accounting for 11.06% of the aggregate initial
appraised value and the remaining lessees, operating aircraft accounting for
6.39% of the aggregate initial appraised value, were based in the U.S. The U.S.
economic downturn began in April 2001 and airlines began experiencing a
reduction in traffic and softening of yields at that time. The September 11,
2001 terrorist attacks in the United States more than compounded these problems,
and U.S. and Canadian carriers, citing reduced air travel demand, competition
from low cost air carriers and increased costs, posted record losses in the
fourth quarter of 2001. Many lessees are returning aircraft and the number of
U.S. commercial aircraft in storage has reached record numbers. Also, the
significant bargaining power of unions in North America has resulted in
increased labor costs for North American carriers. Recent agreements with these
unions suggest that these costs will continue to increase despite recent events
and the current state of the North American airline industry. Over the last
decade, a number of the major North American passenger airlines have filed
15
Chapter 11 bankruptcy proceedings and several major United States airlines have
ceased operations altogether. One airline ceased operations immediately after
the September 11, 2001 terrorist attacks, and several others remain in danger of
bankruptcy. If the North American lessees of the LIFT group were to declare
bankruptcy or commence similar proceedings or if their financial condition were
to otherwise deteriorate, their ability to make timely and full rental payments
may be adversely affected.
In the early months of 2002, however, the U.S. economy has begun to
show signs of a recovery, indicating to some that the U.S. recession may be
ending.
Lease defaults will result in additional costs for the LIFT group.
Although the LIFT group has the right to repossess aircraft and
exercise remedies upon a lessee default, it may incur significant costs in the
process. Those costs include legal and other expenses of court or other
governmental proceedings, particularly if the lessee is contesting the
proceeding or is in bankruptcy, to obtain possession and re-registration of the
aircraft and flight and export permissions. Delays resulting from any such
proceedings would also increase the period of time during which the relevant
aircraft are not productively under lease. The LIFT group may, moreover, incur
substantial maintenance or repair costs that a defaulting lessee has failed to
pay and may need to pay off liens and governmental charges on the aircraft to
obtain possession or clear title and to re-market the aircraft effectively. Any
such cost or delays may adversely affect the amounts available to pay to the
holders of the Notes.
Maintenance costs may at times be paid by the LIFT group.
Any failure of an aircraft to be maintained or modified properly in
accordance with manufacturers' requirements or airworthiness directives and
other governmental requirements, including those relating to noise and emissions
standards, can impair the safety of the aircraft, result in grounding or
penalties and affect the ability to re-lease or to sell the aircraft. The costs
of maintenance can be substantial and may have a higher payment priority than
that of the Notes. In many cases, the lessee is required to provide for
maintenance or modifications. Lessees could, however, fail to pay those costs,
and the burden would fall on the LIFT group. In addition, the LIFT group as the
lessor is, in some instances, required to bear a portion of the maintenance
costs, and the pressure of competition may require it to bear an increasing
portion of those costs in the future. Although the LIFT group established a cash
reserve which was $83 million as of December 31, 2001, any significant
variations in the costs required to be paid directly by the LIFT group may
materially impair the ability of the LIFT group to make payments on the Notes.
Other operating costs may at times be paid by the LIFT group.
As in the case of maintenance costs, the LIFT group may incur other
operational costs upon a lessee default or where the terms of the lease require
it to pay a portion of those costs. Those costs include:
(1) the costs of casualty, liability and political risk insurance and
the liability costs or losses when insurance coverage has not been
or cannot be obtained as required or is insufficient in amount or
scope;
16
(2) the costs of licensing, exporting or importing an aircraft,
airport taxes, customs duties, air navigation charges and similar
governmental or quasi-governmental impositions, which can be
substantial;
(3) penalties and costs associated with the failure of lessees to keep
the aircraft registered under all appropriate local requirements;
and
(4) unreimbursed or unreimbursable withholding taxes and other taxes
or charges in some jurisdictions in respect of the aircraft, the
leases or payments under the leases, such as those due to changes
in law or inability to negotiate for or enforce reimbursement
obligations from lessees.
The failure to pay some of these costs can result in liens on the
aircraft, and the failure to register can result in a loss of insurance. These
matters can prevent the re-lease, sale or other use of the aircraft until the
problem is cured.
Aircraft type concentrations may amplify other risk factors.
The concentration of the types of aircraft held by the LIFT group may
amplify some of the factors noted above. As of December 31, 2001, the aircraft
owned by the LIFT group include eleven aircraft types, three of which represent
together 56.35% of the aggregate initial appraised value of the Initial
Aircraft, with Boeing 767-300ERs constituting 26.50%, Boeing 737-300s
constituting 18.85% and Boeing MD-82s constituting 11.00% of that aggregate
value. Also, narrowbody aircraft constitute 59.54%, widebody aircraft constitute
35.63% and a freighter aircraft constitutes 4.83% of the aggregate initial
appraised value of the Initial Aircraft.
There is currently a reduced demand for and an oversupply of widebody
aircraft, and there is also very little demand for discontinued aircraft types
such as the MD-82s and MD-83s. In both circumstances, this makes it more
difficult to lease or sell these aircraft at favorable rates.
The Aircraft Portfolio
The following tables set forth details of the Initial Aircraft as of
December 31, 2001. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments" for further
information about events that have occurred subsequent to December 31, 2001.
17
The following table identifies the 39 Initial Aircraft by type of
aircraft.
% of Portfolio by
Type of Number of Appraised Value as of
Manufacturer Aircraft Aircraft Body Type December 31, 2000
- ------------ -------- -------- --------- -----------------
Boeing B767-300ER 5 Widebody 26.50%
Boeing B737-300 10 Narrowbody 18.85
McDonnell Douglas MD-82 9 Narrowbody 11.00
Airbus A320-200 4 Narrowbody 10.96
Boeing B747-400 1 Widebody 9.13
Boeing B737-800 3 Narrowbody 8.37
McDonnell Douglas MD-11F 1 Freighter 4.83
Boeing B737-700 2 Narrowbody 4.56
Boeing B737-400 2 Narrowbody 2.88
Boeing B737-500 1 Narrowbody 1.71
McDonnell Douglas MD-83 1 Narrowbody 1.21
-- -------
Total 39 100.00%
All of the aircraft hold or are capable of holding a noise certificate
issued under Chapter 3 of Volume I, Part II of Annex 16 of the Chicago
Convention or have been shown to comply with the Stage 3 noise levels set out in
Section 36.5 of Appendix C of Part 36 of the United States Federal Aviation
Regulations.
The following table identifies the countries in which the lessees of
the 39 Initial Aircraft were based as of December 31, 2001.
% of Portfolio by
Number of Appraised Value as of
Country Aircraft December 31, 2000
- ------- -------- -----------------
United Kingdom............................... 4 12.32%
Canada....................................... 2 11.06
China........................................ 5 9.20
Malaysia..................................... 1 9.13
Spain........................................ 6 8.59
United States................................ 3 6.39
South Korea.................................. 2 6.29
France....................................... 3 6.10
Brazil....................................... 3 5.87
Turkey....................................... 2 5.63
Russia....................................... 1 5.49
Italy........................................ 1 2.86
Morocco...................................... 1 2.74
India........................................ 1 2.35
Portugal..................................... 1 2.04
Tunisia...................................... 1 1.47
Indonesia.................................... 1 1.42
Off-Lease.................................... 1 1.05
-- -------
Total........................................ 39 100.00%
18
The following table identifies the regions in which the 39 Initial
Aircraft were based as of December 31, 2001.
% of Portfolio by
Number of Appraised Value as of
Region Aircraft December 31, 2000
- ------ -------- -----------------
Developed Markets
Europe................................... 15 31.91%
North America............................ 5 17.45
Emerging Markets
Asia..................................... 10 28.39
Africa, Europe & Other .................. 5 15.33
Latin America............................ 3 5.87
Off-lease..................................... 1 1.05
--- ------
Total......................................... 39 100.00%
The following table identifies the lessees of the 39 Initial Aircraft
as of December 31, 2001.
% of Portfolio by
Number of Appraised Value as of
Lessee Aircraft December 31, 2000
- ------ -------- -----------------
Air Canada Capital Ltd...................... 2 11.06%
China Eastern Airlines. .................... 5 9.20
Malaysian Airline System Berhad............. 1 9.13
Societe Air France.......................... 3 6.10
Spanair S.A................................. 5 5.98
Air 2000 Limited............................ 1 5.73
Pegasus Hava Tasimaciligi A.S............... 2 5.63
Aeroflot - Russian Internatilna Airlines.... 1 5.49
Korean Airlines............................. 1 4.83
Go Fly Limited.............................. 2 4.41
American Airlines........................... 1 4.22
VARIG S.A................................... 2 4.16
Volare Airelines SpA........................ 1 2.86
Royal Air Maroc............................. 1 2.74
Iberworld Airlines, S.A..................... 1 2.61
Jet Airways................................. 1 2.35
easyJet Airline Co. Ltd..................... 1 2.18
SATA-Air Acores............................. 1 2.04
Nouvelair Tunisie........................... 1 1.47
Rio Sul, Servicos Aereso Regionais S.A...... 1 1.71
Asiana Airlines............................. 1 1.46
P.T. Garuda Indonesia....................... 1 1.42
Delta Air Lines............................. 1 1.09
America West Airlines, Inc. ................ 1 1.08
Off-Lease................................... 1 1.05
-- -------
Total....................................... 39 100.00%
Total Number of Lessees: 24
19
The following table identifies the 39 Initial Aircraft by year of
aircraft manufacture. The average age of the 39 Initial Aircraft and the average
age weighted by value of the 39 Initial Aircraft as of December 31, 2001 were
approximately 6.63 and 4.90 years, respectively.
% of Portfolio by
Number of Appraised Value as of
Year of Manufacture Aircraft December 31, 2000
- ------------------- -------- -----------------
1986...................................... 1 1.09%
1987...................................... 4 4.36
1988...................................... 1 1.21
1989...................................... 3 4.11
1990...................................... 4 5.02
1992...................................... 1 4.83
1993...................................... 1 1.47
1994...................................... 1 4.22
1997...................................... 2 3.66
1998...................................... 7 22.09
1999...................................... 11 36.45
2000...................................... 3 11.49
-- -------
Total..................................... 39 100.00%
20
Further particulars of the 39 Initial Aircraft, as of December 31, 2001
are contained in the table below:
Initial
Country in which Aircraft Engine Serial Date of Appraised
Region Aircraft is Based Lessee Type Type No. Manufacture Value*
- ------ ----------------- ------ ---- ---- -- ----------- ------
Europe (Developed) ($000)
United Kingdom Air 2000 B767-300ER CF6-80C2-B7F 29618 5/00 $ 88,898
France Air France B737-300 CFM56-3C1 28672 1/98 31,697
France Air France B737-300 CFM56-3C1 28673 2/98 31,347
France Air France B737-300 CFM56-3C1 28569 2/98 31,598
United Kingdom easyJet Airline B737-300 CFM56-3CI 29338 7/99 33,857
United Kingdom Go Fly Limited B737-300 CFM56-3C1 28602 8/99 34,140
United Kingdom Go Fly Limited B737-300 CFM56-3C1 28606 10/99 34,297
Spain Iberworld A320-200 CFM56-5B4 879 12/98 40,486
Portugal SATA- B737-300 CFM56-3C1 28570 3/98 31,577
AIR Acores
Spain Spanair MD82 JT8D-217A 49501 10/87 17,493
Spain Spanair MD82 JT8D-217A 49509 8/89 19,057
Spain Spanair MD82 JT8D-217A 49519 12/90 20,317
Spain Spanair MD83 JT8D-219 49578 3/88 18,777
Spain Spanair MD82 JT8D-217A 49507 10/87 17,133
Italy Volare A320-200 CFM56-5B4 1152 2/00 44,325
North America (Developed)
Canada Air Canada B767-300ER CF6-80C2-B6F 30108 11/99 86,253
Canada Air Canada B767-300ER CF6-80C2-B6F 30112 9/99 85,323
United States America West B737-300 CFM56-3B2 23384 8/87 16,823
United States American B767-300ER PW4060 26208 9/94 65,467
Airlines
United States Delta Air Lines B737-300 CFM56-3B2 23376 11/86 16,847
Asia (Emerging)
South Korea Asiana Airlines B737-400 CFM56-3C1 24469 7/89 22,603
China China Eastern MD82 JT8D-217A 49513 4/90 19,040
China China Eastern MD82 JT8D-217A 49515 10/90 19,278
China China Eastern MD82 JT8D-217A 49511 3/90 19,170
China China Eastern A320-200 CFM56-5B4 1093 10/99 42,573
China China Eastern A320-200 CFM56-5B4 1108 11/99 42,713
Indonesia Garuda Indonesia B737-400 CFM56-3C1 24512 9/89 22,090
India Jet Airways B737-700 CFM56-7B24 28609 11/99 36,413
South Korea Korean Airlines MD11F PW4460 48523 9/92 75,000
Malaysia Malaysian B747-400 PW4056 28427 3/98 141,867
Airlines System
Africa, Europe & Other (Emerging)
Russia Aeroflot B767-300ER CF6-80C2-B7F 30110 12/99 85,103
Tunisia Nouvelair Tunisie MD82 JT8D-217C 53147 8/93 22,773
Turkey Pegasus B737-800 CFM56-7B26 28591 4/99 42,427
Turkey Pegasus B737-800 CFM56-7B26 28628 6/00 45,066
Morocco Royal Air Maroc B737-800 CFM56-7B26 28592 5/99 42,443
Latin America (Emerging)
Brazil Rio Sul B737-500 CFM56-3C1 28565 11/97 26,477
Brazil VARIG B737-300 CFM56-3C1 28671 11/97 30,183
Brazil VARIG B737-700 CFM56-7B24 28584 12/98 34,323
Off-Lease MD82 JT8D-217A 49419 8/87 16,237
-----------
Total $ 1,551,491
* At December 31, 2000.
21
Appraisal of Aircraft
The LIFT group has agreed to deliver to Bankers Trust Company as the
security trustee, commencing in 2002, appraisals of the base value of each of
the aircraft owned by the LIFT group at least once each year by July 1. The
appraisals must come from at least three independent appraisers that are members
of the International Society of Transport Aircraft Trading or any similar
organization and be dated within 30 days prior to their delivery to the trustee.
Three independent appraisers, Aircraft Information Services, Inc., BK
Associates, Inc. and Morten Beyer & Agnew, Inc., provided appraisals of the
value of each of the Initial Aircraft as of December 31, 2000. The appraisals
assume, among other things, that the aircraft are utilized normally in an open,
unrestricted and stable market, adjusted where necessary to account for the
reported maintenance standard of the aircraft. Values calculated under these
assumptions are "base values." The current appraised value of each aircraft is
determined by taking the average of the base values contained in the three
appraisals. The appraisals were not based on a physical inspection of the
aircraft.
Based on the appraisals, the average of the aggregate base values
calculated by the appraisers for the Initial Aircraft as of December 31, 2000 is
$1,551,491,333. Base values are not a measure of the market or realizable value
of aircraft and you should not rely upon the base value in any analysis of the
market or realizable value of any Initial Aircraft. In addition, under ordinary
conditions the LIFT group expects the base values of the aircraft to decline
over time due to the aging of the aircraft, increasing maintenance expenses and
similar factors. The LIFT group also expects that the decline in base values has
been further accelerated as a result of the September 11, 2001 terrorist attacks
in the United States. The appraisals were conducted as of December 31, 2000, and
the LIFT group believes that the base values of the aircraft, if determined as
of any date subsequent to December 31, 2000, would be lower, and in some cases
significantly lower, than the base values in the appraisals.
The appraised base values obtained and to be obtained in the future
assume an "open, unrestricted stable market environment with a reasonable
balance of supply and demand" and other factors common for like appraisals. At
any point in the aircraft leasing cycle, however, there will be imbalances of
aircraft supply and demand and there may be particularly pronounced imbalances
for specific aircraft types. Although some Initial Aircraft may have market
values approximating or exceeding the appraised values given them, others, such
as the older aircraft or aircraft that are no longer in production, may have
market values below, and in some cases significantly below, those appraised base
values. At a cyclical low, the market value of most aircraft types is likely to
be less than, and in some cases significantly less than, the appraised base
values. In addition, the appraised base values of the Initial Aircraft will
likely decline, and in some cases significantly decline, over time due to aging,
increasing maintenance expenses and similar factors and have declined and may
continue to decline on account of the September 11, 2001 terrorist attacks in
the United States. Finally, appraised base values, if obtained upon delivery of
the Initial Aircraft, would be expected to be less, and in some cases
significantly less, than the initial appraised values, which were determined as
of December 31, 2000. Accordingly, you should not place undue reliance on the
indicated appraised values as an accurate depiction of current market or
realizable values at any one point in time, and you should realize that actual
current market or realizable values at any point in time may be substantially
less than appraisal values.
22
The Leases
Payment History.
The following description relates to the leases for the Initial
Aircraft in effect on December 31, 2001. Any leases of additional aircraft and
any future leases entered into for the re-lease of any Initial Aircraft may
differ from the description provided below.
As of December 31, 2001, there were 24 lessees under leases for the
Initial Aircraft in 17 different countries. The LIFT group recognized $77.0
million of rental income from operating leases and other income representing
cash in lieu of rental payments received from General Electric Capital
Corporation and the other sellers for the period from June 13, 2001 to December
31, 2001 (the "2001 Period"). This was comprised of $5.4 million from lessees
based in the United States of America and $71.6 million from lessees based
outside the United States of America. During the 2001 Period, 7.0% and 93.0% of
the rental and other income was derived from lessees based in the United States
of America and lessees based outside the United States of America, respectively,
including 10.7% from the United Kingdom, 10.3% from Canada, 10.0% from Spain,
9.2% from China and 9.0% from Indonesia.
As a general matter, weakly capitalized airlines are more likely than
well capitalized airlines to seek operating leases. It should be expected that
varying numbers of lessees at any point in time will be experiencing payment
difficulties.
The servicer has advised the LIFT group that in the servicer's
experience some lessees of aircraft similar to the aircraft owned by the LIFT
group and its affiliates fail to make timely lease, maintenance and other
payments from time to time over the course of their leases and that in most
instances, late payments are recovered, together with default interest or other
similar payments required by the leases. In some instances, the financial
difficulties of a portfolio's lessees may result in a formal or informal
restructuring. Restructurings may involve the voluntary termination of a lease
prior to its expiration and the arrangement of subleases from the lessee to
another aircraft operator. In addition, restructurings may involve reduced
rental payments for a specified period, which may be several months.
Management, Lease Terms.
All leases of the Initial Aircraft are managed by the servicer under
the Servicing Agreement. All of the leases for the Initial Aircraft are
operating leases. Under those leases, the lessees agreed to lease the Initial
Aircraft for a fixed term, although in some cases the lessees have purchase
options, termination rights and extension rights. Although most of the lease
documentation for the Initial Aircraft is fairly standardized in many respects,
significant variations do exist as a result of lessee negotiation.
Lease Payments and Security.
Each lease for the Initial Aircraft requires the lessee to pay periodic
rentals during the lease term. Most of the rental payments are payable on a
fixed rate basis and are not adjustable by reference to market interest rate
changes. Rentals under most of the leases for the Initial Aircraft are payable
monthly in advance. A number of the leases require the lessee to pay periodic
amounts as maintenance reserves or similar payments.
23
With some exceptions, the lessees are required to make payments without
withholding payment on account of any amounts the lessor may owe the lessee or
any claims the lessee may have against the lessor for any breach of contract.
Most leases include an obligation of the lessee to gross-up payments under the
lease where lease payments are subject to withholdings and other taxes, although
sometimes the gross-up amount will be limited to the amount that would have been
payable if such lease had never been transferred to the LIFT group. In addition,
changes in law may result in the imposition of withholding and other taxes and
charges that are not reimbursable by the lessee under the lease or that cannot
be so reimbursed under applicable law and lessees may fail to reimburse even
when obligated under the lease to do so. The leases for the Initial Aircraft
also require the lessee to indemnify the lessor for some tax liabilities
including, in some leases, value added tax and stamp duties, but generally
excluding income tax or its equivalent imposed on the lessor. The lessees must
also pay default interest on any overdue amounts.
Under the leases for the Initial Aircraft, the lessee must pay
operating expenses accrued or payable during the term of the lease, which would
normally include maintenance, overhaul, airport and navigation charges, certain
taxes, licenses, consents and approvals, aircraft registration and hull "all
risks" and public liability insurance premiums. The lessees are obliged to
remove liens on the Initial Aircraft other than liens permitted under the
leases.
As of December 31, 2001, lessees under 32 of the leases for the Initial
Aircraft, representing 78.09% of the aggregate initial appraised value, had
provided either or both cash security deposits and letters of credit to secure
their respective obligations.
Operation of the Initial Aircraft.
The leases require the lessees to operate the Initial Aircraft in
compliance with all applicable laws and regulations. The Initial Aircraft
generally must remain in the possession of the lessees, and any subleases of the
Initial Aircraft must be approved by the lessor. In some cases, the lessee may
have broad subleasing rights with re-registration rights. Under some of the
leases, the lessee may enter into charter or other arrangements for the leased
aircraft if the lessee does not part with operational control of the aircraft.
Generally, the lessees are not allowed to re-register the Initial Aircraft
without the lessor's permission, except in connection with a permitted sublease.
All of the leases for the Initial Aircraft permit the lessees to remove
or replace the engines and in some cases other equipment or components.
Sometimes lessees are allowed to enter into pooling arrangements for the
temporary borrowing of equipment, in some cases without the lessor's consent.
Under all of the leases, the lessees may deliver the Initial Aircraft, engines
and other equipment or components to their manufacturer for testing or similar
purposes, or to other parties for service, maintenance, repair or other work
required or permitted under the lease. The lessor's ability to repossess the
Initial Aircraft or engines, equipment or components from any sublessee,
transferee, manufacturer or other person may be restricted by liens or similar
rights and by applicable bankruptcy and similar laws, by legal or practical
impediments to the enforcement of the right of repossession or other remedies in
local courts and by requirements for de-registration of an aircraft from the
registry, or for export of an aircraft from, the country in which the lessee, or
other person having possession of the aircraft, or its operations are located.
24
Maintenance and Maintenance Reserves.
The leases for the Initial Aircraft specify maintenance standards and
the required condition of the Initial Aircraft upon redelivery to the lessor. In
addition, under some of the leases, depending on the condition of the leased
aircraft, including the airframe, engines, the auxiliary power unit or landing
gear at redelivery, the lessee may have to make adjustment payments to the
lessor. During the term of each lease, the lessee must ensure that the leased
aircraft is maintained in accordance with an agreed maintenance program designed
to provide that the aircraft meets applicable airworthiness and other regulatory
requirements. Under the leases for the Initial Aircraft, maintenance is
generally performed by the lessee or, for some of the regional lessees, by a
designated airline or other air authority approved maintenance provider. Under
most of the leases for the Initial Aircraft, the lessee must provide monthly
maintenance reserves. In some cases where the lessee has paid maintenance
reserves, those payments will be used to reimburse the lessee for maintenance
charges, including major airframe and engine overhauls.
Some of the leases for the Initial Aircraft do not require maintenance
reserves to be paid. In those cases the lessor must rely on the credit of the
lessee, reporting by the lessee or any credit support the lessee provides to
ensure that the lessee returns the leased aircraft in the condition required by
the lease upon termination, makes any payments required based on the aircraft's
return condition upon termination of the lease and performs scheduled
maintenance throughout the lease term.
The leases for the Initial Aircraft require the lessees to comply with
the airworthiness directives of the relevant aviation authorities and with
manufacturers' service bulletins. In most cases, the lessees share the cost of
compliance with the lessor, and many of the leases require the lessor to
contribute to the cost of compliance with selected airworthiness directives or
manufacturers' service bulletins if compliance costs are above a specified
threshold defined in the lease.
Lessees' Options.
As of December 31, 2001, the leases or side agreements between the
lessor and the lessee for five of the Initial Aircraft, representing 15.17% of
the aggregate initial appraised value, granted purchase options to the lessee or
its affiliates. None of the purchase options were exercisable as of December 31,
2001. The latest date on which a purchase option may be exercised is February
19, 2011 for a purchase on November 15, 2011. If a purchase option is exercised,
the proceeds realized from the exercise may not, in some circumstances, equal
the principal of the Notes allocable to the relevant aircraft.
As of December 31, 2001, fifteen lessees had the option to extend the
term of their lease. The rent payable during the extension period may vary from
the rent payable prior to the extension. As of December 31, 2001, eight of the
leases allowed the lessee to terminate its lease prior to the scheduled
expiration date.
Indemnification and Insurance of the Aircraft
Insurance Requirements.
The leases for the Initial Aircraft require the lessees to bear
responsibility and carry insurance for liabilities arising out of the operation
of the Initial Aircraft. These include liabilities for death or injury to
persons and damage to property that would ordinarily attach to the operator of
the aircraft, subject to customary exclusions. In addition, the lessees must
25
carry other types of insurance that are customary in the air transportation
industry. These include aircraft hull "all risks" and hull war risks insurance
at a value stipulated in the lease and aircraft spares insurance on a
replacement cost basis, in each case subject to customary deductibles. The
servicer must monitor the lessees' compliance with the insurance provisions of
the leases.
In addition, the LIFT group also has in place its own contingent
liability coverage. That coverage acts as a backup for LIFT in instances where a
lessee's policy does not satisfy the requirements of the lease and acts as
excess coverage above that provided by a lessee's policy. The LIFT group's
contingent third-party liability insurance covers all of the Initial Aircraft
and its contingent hull and hull war risks insurance covers some of the Initial
Aircraft. The amount of war third-party contingent liability insurance is
subject to limitations imposed by the air transportation insurance industry.
If any of the existing insurance policies are canceled or terminated
and if an aircraft is re-leased, the servicer may from time to time engage
insurance experts at the LIFT group's expense to advise and recommend the
appropriate amount of insurance coverage the LIFT group should procure.
Liability Insurance.
The leases for the Initial Aircraft require third party liability
insurance for a combined single limit for bodily injury and property damage in
minimum amounts ranging between $500 million and $750 million for each aircraft.
In general, liability coverage on each aircraft includes third party legal
liability, passenger legal liability, baggage legal liability, cargo legal
liability, mail and aviation general third party (including products) legal
liability. Post-September 11, 2001, the aviation insurance market has applied a
$50 million limit on war third party (non-passenger) liability insurance.
Lessees must either buy additional insurance in the limited commercial market or
obtain protection under applicable government schemes.
In some jurisdictions the LIFT group may be liable, as owner of an
aircraft, for obligations that may be insured against by the lessees even if the
LIFT group is not responsible for the loss that results in the obligation. In
addition, claims may be made against the LIFT group on the basis of alleged
responsibility for a loss, even if such claim is not ultimately sustained.
The losses for which coverage is provided include both operating costs
relating to the actual operation of the aircraft as well as losses to persons
and property resulting from the operation of the aircraft. The latter types of
losses are generally covered by the lessees' liability insurance.
Aircraft Property Insurance.
In addition to hull risk, hull war and allied peril risk and aircraft
spares insurance coverage obtained by the lessees, the LIFT group purchases
"total loss only" coverage with respect to some Initial Aircraft. The LIFT group
is required to maintain aircraft property insurance on its aircraft in an amount
equal to the greatest of a) the note target price (as defined in the Indenture),
b) the appraised value for such aircraft or c) 110% of the net book value of
such aircraft. In some cases, the lessor is allowed to increase the insured
value above the stipulated loss value consistent with industry practice. In
those cases the lessee is responsible for any increased premium that results.
Permitted deductibles range from $100,000 to $1,000,000; the deductibles,
however, apply only in the case of a partial loss.
The leases for the Initial Aircraft include provisions defining an
event of loss or a casualty occurrence so that upon total loss of the aircraft,
an agreed value is payable by the lessee. This payment is generally funded with
26
insurance proceeds. The air transportation insurance industry practice, however,
is to treat only a loss with likely repair costs of greater than 75% of the
insured value of the aircraft, including the engines, as a total loss.
All insurance policies currently in place contain a breach of warranty
endorsement so that the additional insureds continue to be protected even if the
lessee violates one or more of the provisions of the insurance policies. In many
cases, these endorsements also provide that this protection will only apply if
the additional insured has not caused, contributed to or knowingly condoned the
breach.
Generally, the leases for the Initial Aircraft require the lessee to
maintain, as part of its hull war and allied perils insurance, coverage for loss
or damage resulting from a governmental confiscation or requisition of the
applicable aircraft. In some countries, however, such as France and China, that
kind of insurance may not be obtainable by the lessee as it is not permitted
under those countries' laws. Following insurance market developments
post-September 11, 2001, cover for confiscation by the state of registration has
not been available from the insurance markets after January 1, 2002. That change
has been implemented as lessees renew their insurance. However, like other
"war"-related issues, this lack of availability is fluid and such cover may
become generally available in the future.
Item 2. Properties
The LIFT group has no ownership or leasehold interest in any real
property. For a description of the LIFT group's interest in other property,
including its aircraft, see "Item 1. Business."
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
27
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
a) Market Information.
As of the date of this Form 10-K, no equity securities of the LIFT
group have been registered with, or are listed on, any national exchange or
traded in any established market.
b) Holders.
There were five beneficial interest holders of LIFT's beneficial
interest certificates as of December 31, 2001.
c) Dividends.
As of the date of this Form 10-K, no distributions to the beneficial
interest holders have been paid or declared by LIFT. Under the terms of the
Indenture, LIFT is restricted from making distributions to the beneficial
interest holders until, among other things, all outstanding principal and
interest balances due on the outstanding Notes have been paid in full.
Recent Sales of Unregistered Securities.
The beneficial interest in LIFT was originally purchased by Automatic,
which is affiliated with Automatic LLC, on June 26, 2001 for $3 million in a
private sale exempt from registration under section 4(2) of the Securities Act
of 1933, as amended. Automatic subsequently sold 50.1% of the beneficial
interest of LIFT to four other affiliates of Automatic LLC. As a result,
Automatic owns 49.9% of the beneficial interest of LIFT while the other four
affiliates of Automatic LLC each own 12.525% of the beneficial interest of LIFT.
On June 26, 2001, LIFT issued $1,429 million of asset-backed notes to
Qualified Institutional Buyers, as such term is defined in Rule 144A under the
Securities Act of 1933, as amended, and to non-U.S. persons in offshore
transactions in accordance with Regulation S thereunder. Credit Suisse First
Boston Corporation, Lehman Brothers Inc. and Salomon Smith Barney Inc. acted as
initial purchasers. As of that date, these Initial Notes consisted of $400
million of Class A-1 Notes, $260 million of Class A-2 Notes, $425 million of
Class A-3 Notes, $60 million of Class B-1 Notes, $83 million of Class B-2 Notes,
$69 million of Class C-1 Notes, $72 million of Class C-2 Notes, $35 million of
Class D-1 Notes and $25 million of Class D-2 Notes. LIFT used part of the
proceeds from the sale of its beneficial interest and the Initial Notes of $3
million and $1,429 million, respectively, to purchase the Initial Aircraft for
$1,310.5 million and to fund initial cash reserves of $83.0 million.
On December 18, 2001, LIFT completed an exchange offer whereby it
issued seven classes of new notes, also designated Class A-1, Class A-2, Class
A-3, Class B-1, Class B-2, Class C-1 and Class C-2, in exchange for the seven
corresponding classes of the Initial Notes. The terms of these Exchange Notes
are identical in all material respects to the Initial Notes, except that the
Exchange Notes are registered under the Securities Act of 1933, as amended. The
Class D-1 and Class D-2 Notes were not exchanged and remain unregistered. $10
million of the Class A-2 and $34 million of the Class A-3 Initial Notes were not
tendered in the exchange offer and remain outstanding.
28
The Exchange Notes were registered on Form S-4 (file number 333-69864),
which became effective on November 7, 2001. The exchange offer commenced on
November 8, 2001 and ended on December 18, 2001. All Initial Notes that were
tendered were exchanged and global notes representing the Exchange Notes were
deposited with the trustee and book-entry depository on December 18, 2001.
Item 6. Selected Financial Data
The selected financial data in the following table have been derived
from, and should be read in conjunction with, the consolidated financial
statements of the LIFT group and notes thereto appearing elsewhere in this Form
10-K.
December 31,
2001
----
(in thousands)
Balance Sheet Data:
Aircraft, net $ 1,291,759
Total assets 1,418,808
Notes payable, net of unamortized discounts 1,387,444
Total liabilities 1,434,945
Total beneficial interest holders' equity (16,137)
Statement of Income Data (1):
Rental income from operating leases 64,693
Other Income 12,300
Interest expense 48,908
Depreciation expense 21,376
Net income 4,404
(1) Income Statement data for 2001 is for the period from Inception through
December 31, 2001.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with the risk factors set
forth herein.
On the Closing Date, LIFT issued $1,429.0 million of Initial Notes in
nine classes: Class A-1, Class A-2, Class A-3, Class B-1, Class B-2, Class C-1,
Class C-2, Class D-1 and Class D-2. LIFT used the proceeds from the sale of the
Initial Notes to fund cash reserves, pay transaction expenses and make the
payments described in the following paragraph. Also on the Closing Date, LIFT 1
issued $1,310.5 million of Bridge Notes to Credit Suisse First Boston
Corporation, the proceeds of which were used by LIFT 1 to pay to the Seller the
full aircraft purchase price for all 39 Initial Aircraft.
Also on the Closing Date, LIFT agreed with Automatic to purchase LIFT 1
and its subsidiaries under a beneficial interest purchase agreement, to pay to
Automatic the cash purchase price of approximately $5.5 million and to repay the
Bridge Notes on behalf of LIFT 1. As a result, LIFT 1 became a part of the LIFT
group on the Closing Date.
As of December 31, 2001, all of the 39 Initial Aircraft had been
delivered to the LIFT group.
29
The LIFT group consists of special purpose entities which own aircraft
subject to operating leases. The LIFT group's business consists of aircraft
leasing activities. The LIFT group may also engage in acquisitions of additional
aircraft and sales of aircraft. Any acquisitions of additional aircraft and the
related issuance of additional notes will require confirmation by the rating
agencies rating the Notes that they will not lower, qualify or withdraw their
ratings on the outstanding Notes as a result. The LIFT group's cash flows from
its leasing activities will be used to service the interest and principal on the
outstanding Notes and to make distribution of remaining amounts to the holders
of the beneficial interest certificates, after the payment of expenses incurred
by the LIFT group.
The LIFT group's ability to generate sufficient cash from its aircraft
assets to service the outstanding Notes and any additional notes will depend
primarily on the rental rates it can achieve on leases, the lessees' ability to
perform according to the terms of the leases and the prices it can achieve on
any aircraft sales. The LIFT group's ability to service the outstanding Notes
and any additional notes will also depend on the level of the LIFT group's
operating expenses, including maintenance obligations that are expected to
increase as the aircraft age, and any unforeseen contingent liabilities. The
Indenture requires that LIFT maintain a cash reserve balance on deposit in a
collections account and permits LIFT to establish a credit facility in order to
provide a source of liquidity for its obligations.
LIFT, may, under certain circumstances, issue additional notes to
acquire additional aircraft.
Critical Accounting Policies
The policies discussed below are considered by management of LIFT to be
critical to an understanding of the LIFT group's financial statements because
their application requires significant judgment, with financial reporting
results relying on estimation about the effect of matters that are inherently
uncertain. Specific risks for these critical accounting policies are described
in the following paragraphs. For all of these policies, management cautions that
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment.
Lease Revenue Recognition
Revenue under operating leases is recognized as rental income on a
straight-line basis over the lease term.
Depreciation
Aircraft are recorded at cost reflecting individual account values
established on the basis of appraisals by LIFT 1 and transferred at such cost to
LIFT. Aircraft are depreciated on a straight-line basis over the estimated life
to its estimated residual value. Generally, aircraft and aircraft equipment are
depreciated over estimated useful lives of 30 years from the date of manufacture
to a 15% estimated residual value. Certain major additions and modifications to
aircraft may be capitalized. The LIFT group's estimates are reviewed
periodically to ensure continued appropriateness. Should the estimates of
economic lives and salvage prove inappropriate because of future events, the
LIFT group's result of operations could be significantly adversely affected.
Aircraft Valuation
Aircraft are periodically reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". An
30
impairment loss is recognized when the fair value of the undiscounted future
cash flows of the aircraft is less than its net book value. The fair value of
the aircraft is based on independent appraisals of the aircraft and actual or
estimates of undiscounted future lease cash flows. The appraisals assume, among
other things, that the aircraft are utilized normally in an open, unrestricted
and stable market. Short-term fluctuations in the market place are disregarded
and it is assumed that there is no necessity either to dispose of a significant
number of aircraft simultaneously or to dispose of aircraft quickly.
The LIFT group determined the critical principles by considering
accounting policies that involve the most complex or subjective decisions or
assessments. The LIFT group identified the most critical accounting policies to
be those related to lease revenue recognition, depreciation methods and
valuation of aircraft. The LIFT group also states these accounting policies in
the notes to the consolidated financial statements and in relevant sections in
this discussion and analysis.
Recent Developments
Aircraft Novations
On August 3, 2001, a B737-700 aircraft that is currently leased to a
lessee based in India was delivered to the LIFT group. The aircraft with respect
to this lessee represents approximately 2.4% of the aggregate initial appraised
value of the Initial Aircraft.
On August 9, 2001, a B737-400 aircraft that is currently leased to a
lessee based in Indonesia was delivered to the LIFT group. The aircraft with
respect to this lessee represents approximately 1.4% of the aggregate initial
appraised value of the Initial Aircraft.
On September 27, 2001, a B747-400 aircraft that is currently leased to
a lessee based in Malaysia was delivered to the LIFT group. The aircraft with
respect to this lessee represents approximately 9.1% of the aggregate initial
appraised value of the Initial Aircraft.
On October 1, 2001, a B767-300ER aircraft that is currently leased to a
lessee based in Russia was delivered to the LIFT group. The aircraft with
respect to this lessee represents approximately 5.5% of the aggregate initial
appraised value of the Initial Aircraft.
On November 2, 2001, a B737-800 aircraft that is currently leased to a
lessee based in Morocco was delivered to the LIFT group. The aircraft with
respect to this lessee represents approximately 2.7% of the aggregate initial
appraised value of the Initial Aircraft.
On December 19, 2001, three B737-300 aircraft that are currently leased
to a lessee based in France were delivered to the LIFT group. The aircraft with
respect to this lessee represent approximately 6.1% of the aggregate initial
appraised value of the Initial Aircraft.
The Aircraft and Lessees
In October 2001, LIFT VG Brazil, LLC issued notices of default to a
lessee based in Brazil after this lessee failed to meet its contractual payments
to LIFT VG Brazil, LLC. In March 2002, LIFT VG Brazil, LLC entered into a
restructured lease agreement as discussed below. This lessee leases one B737-300
aircraft and one B737-700 aircraft, which represent a total of 4.2% of the
aggregate initial appraised value of the Initial Aircraft.
31
In November 2001, LIFT Ireland Leasing Limited entered into a
three-month rent deferral agreement with a lessee based in Italy in respect of
an A320-200 aircraft. The deferral commenced in November 2001 and is to be
repaid with interest over a period of five years. The aircraft with respect to
this lessee represents approximately 2.9% of the aggregate initial appraised
value of the Initial Aircraft.
In December 2001, LIFT Turkey, LLC entered into a rent deferral
agreement with a Turkish lessee in respect of two B737-800 aircraft. Under the
terms of this agreement, a portion of the rent has been deferred for three
months commencing December 2001. The lessee will repay the deferral with
interest over 36 months. The aircraft with respect to this lessee represent
approximately 5.6% of the aggregate initial appraised value of the Initial
Aircraft.
In December 2001, LIFT SP Spain, LLC entered into a restructuring
agreement with a Spanish lessee of three MD82 aircraft. This agreement extends
the leases for an average of seventeen months and amends the rents for 2001 and
2002. This lessee leases four MD82 aircraft and one MD83 aircraft, which
represent a total of 5.98% of the aggregate initial appraised value of the
Initial Aircraft.
In January 2002, LIFT Arizona, LLC entered into a restructuring
agreement with a lessee based in the United States with respect to a B737-300
aircraft. This agreement reduces the rent for seventeen months starting in
December 2001 and extends the lease for nineteen months. The aircraft with
respect to this lessee represents approximately 1.1% of the aggregate initial
appraised value of the Initial Aircraft.
In January 2002, LIFT RS Brazil, LLC issued a notice of default to a
Brazilian lessee with respect to a B737-500 aircraft after this lessee failed to
make payments to LIFT RS Brazil, LLC. LIFT RS Brazil, LLC is expected to enter
into a restructured lease agreement in April 2002 as discussed below. The
aircraft with respect to this lessee represents approximately 1.7% of the
aggregate initial appraised value of the Initial Aircraft.
In February 2002, LIFT Ireland Leasing Limited signed contracts with a
lessee based in Singapore for two-year leases of two MD-82 aircraft. One
aircraft is currently off-lease and is expected to be delivered in May 2002. The
other aircraft was delivered in March 2002, upon return from the previous lessee
based in Tunisia, who extended the lease of the aircraft to meet the lease
return conditions. These aircraft represent approximately 2.5% of the aggregate
initial appraised value of the Initial Aircraft.
In February 2002, LIFT Portugal, LLC signed an early termination
agreement, in exchange for an early termination fee, with a lessee based in
Portugal with respect to a B737-300 aircraft. The aircraft was returned in March
2002 and was delivered to a British lessee for a five-year lease in March 2002.
This aircraft represents approximately 2.0% of the aggregate initial appraised
value of the Initial Aircraft.
In February 2002, LIFT Morocco, LLC entered into an agreement with a
lessee based in Spain for a three-year lease of a B737-800 aircraft. This
aircraft, currently leased to a lessee based in Morocco, is scheduled to be
returned in May 2002 and be delivered to the Spanish lessee with immediate
effect. The aircraft with respect to this lessee represents approximately 2.7%
of the aggregate initial appraised value of the Initial Aircraft.
In March 2002, LIFT VG Brazil, LLC entered into a restructured lease
agreement with a Brazilian lessee for a B737-300 and a B737-700 aircraft, which
reduces rents starting from September 2001 and extends the leases for 24 months.
32
The aircraft with respect to this lessee represent approximately 4.2% of the
aggregate initial appraised value of the Initial Aircraft.
In April 2002, LIFT RS Brazil, LLC is expected to enter into a
restructured lease agreement with respect to a B737-500 aircraft, currently
leased to a Brazilian lessee, to defer a portion of the rent for six months
commencing in October 2001 and to extend the lease for fifteen months beyond the
current lease expiry. The deferral will be repaid with interest over a 36-month
period beginning March 2003. The aircraft with respect to this lessee represents
approximately 1.7% of the aggregate initial appraised value of the Initial
Aircraft.
The events discussed above caused a reduction in the LIFT group's
revenues by $0.3 million in 2001 and could result in a permanent reduction in
the LIFT group's revenues as well. These events and any similar future events
may give rise to the possibility that the LIFT group may not be able to pay
scheduled interest on certain Note classes on a monthly basis or may not be able
to repay in full the principal of certain Note classes by the final maturity
dates of those classes. For a description of the impact of assumed increased
levels of delinquency on gross revenues and of permanent changes in gross
revenues on the expected maturities, weighted average lives and yields of the
respective classes of Notes, see pages 93 to 100 of the Registration Statement.
Other Developments.
During the current financial year there has been a downturn in the
world economic climate with a consequential negative impact on the operating
conditions in the world aviation industry. On September 11, 2001, the United
States was attacked by terrorists who hijacked and crashed four United States
commercial aircraft, with significant loss of life, property damage and economic
disruption. As a result, air travel in the United States was suspended for
several days. The long-term effect that these terrorist attacks, the fallout
since then and the subsequent military action in Afghanistan may have for the
aviation industry over the longer term is not yet fully known. The pre-existing
economic downturn has been exacerbated by the events of September 11 in the U.S.
and the economic and political fallout since then. Subsequent to these events,
two significant European carriers (Swissair and Sabena) filed for bankruptcy and
major American carriers announced very large financial losses.
The short-term effects of the events of September 11, together with the
downturn in the world economic conditions which was already evident, have
included, among other things, a reduction in demand for air travel, leading to a
contraction of operations by airlines including grounding of aircraft by
airlines, bankruptcy and/or consolidation of airlines, fluctuations in the price
of fuel, increased costs due to new security measures adopted by the relevant
aviation authorities, and increased insurance premiums required by the insurance
markets. In particular, airlines worldwide are currently experiencing
difficulties in maintaining war insurance cover in the amounts required under
their leases with us and other lessors. While these insurance issues have been
mitigated in certain jurisdictions by a number of temporary government schemes,
in the absence of longer term satisfactory solutions on this matter it may be
necessary for certain aircraft to be grounded.
Such consequences depending on their scope and duration, which the LIFT
group cannot predict at this time, are having a material adverse impact on the
financial condition of the LIFT group's lessees and their ability to perform
under their leases. As a result, a number of the LIFT group's leases were
restructured to reduce lease rates and to provide other financial accommodations
for lessees. The consequences of the events of September 11, 2001 may also lead
to reduced demand for the LIFT group's aircraft, which may impact its ability to
re-lease aircraft on a timely basis and at favorable rates and may reduce the
33
value of its aircraft. These effects could cause a reduction in the LIFT group's
cash flow, which would adversely affect the LIFT group's ability to make
payments on the Notes and to refinance the Notes as planned. Any significant
reduction in the appraised values of the LIFT group's portfolio beyond that
assumed in the Registration Statement, may require the LIFT group to accelerate
the scheduled principal payments on the Class A Notes and may result in delays
of scheduled principal payments to other noteholders.
As a result of the recession, the terrorist attacks of September 11,
2001 and the significant adverse financial impact that these events have had on
the airline industry, the rating agencies that rate the Notes have re-evaluated
their ratings of securities issued by aircraft lease securitization vehicles. On
October 30, 2001, Moody's placed the Class D Notes on review for possible
downgrade. On March 18, 2002, Moody's downgraded the Class D Notes from Ba2 to
Ba3. On September 27, 2001, Standard & Poor's placed the Class D Notes on credit
watch with negative implications. On September 20, 2001, Fitch placed the Class
A, B, C and D Notes on rating watch negative, but on December 21, 2001 they
removed the Class A, B and C Notes from this placement without any change to the
ratings of these classes.
On December 18, 2001, LIFT completed an exchange offer whereby it
issued seven classes of new notes in exchange for the seven corresponding
classes of the Initial Notes discussed in "Item 1. Business - Introduction."
As of December 31, 2001, LIFT had repaid aggregate principal on the
Notes of $26.2 million, as compared to an estimate of $25.8 million that, based
on revenue and expense assumptions found in pages 93 to 95 of the Registration
Statement, was projected to have been repaid by December 31, 2001.
Results of Operations
LIFT was formed on June 13, 2001 and began significant operations on
June 26, 2001. As a result, the financial results during the 2001 Period are not
representative of a full year of operations. The LIFT group reported net income
of $4.4 million for the 2001 Period, on total revenues of $78.6 million. The
LIFT group's revenues consisted of rental income from operating leases, other
income representing cash in lieu of rental payments received from the Seller and
interest income earned on cash balances.
Rental income from aircraft subject to operating leases for the 2001
Period was $64.7 million. Other income for the 2001 Period was $12.3 million.
Interest income during the 2001 Period was $1.6 million. Interest
income consists primarily of interest earned on the LIFT group's cash balances,
which are invested in short-term highly liquid investments as permitted by the
Indenture. The amount of interest income earned varies based upon the current
interest rates paid on such investments and the level of cash balances held by
the LIFT group.
Interest expense, including interest rate swap expense of $17.2
million, was $48.9 million for the 2001 Period. The weighted average interest
rate on the Notes during the 2001 Period was 6.6%. The outstanding balance of
the Notes at December 31, 2001 was $1,387.4 million, net of unamortized note
discounts of $15.3 million. Interest expense varies based on the actual interest
rates on the floating rate Notes, the interest rate swap costs or proceeds and
the outstanding principal balances of the Notes.
34
Depreciation and amortization expense during the 2001 Period was $21.4
million. The depreciation and amortization expense is anticipated to be higher
in 2002 since the LIFT group did not own the aircraft throughout all of 2001.
Administrative and other expenses during the 2001 Period were $4.0
million. These expenses consist primarily of fees paid to service providers and
other general and administrative costs. The most significant of these fees was
the servicer fee, which amounted to $2.4 million in the 2001 Period. A
significant portion of the fees paid to the servicer corresponds to rental
payments due and received. These fees are based upon a fixed percentage of
rental receipts, and will vary with rental income of the LIFT group.
Liquidity
The LIFT group held cash and cash equivalents of $97.5 million and
restricted cash of $10.5 million at December 31, 2001. Restricted cash
represents security deposits from lessees that are required to be segregated
from other funds. The liquidity reserve amount, which is included in cash and
cash equivalents, was $83 million at December 31, 2001. The liquidity reserve
amount is required under the terms of the Indenture and is intended to serve as
a source of liquidity for the LIFT group's maintenance obligations and other
contingent costs.
LIFT has the ability to enter into certain credit facilities; however,
as of December 31, 2001, it had not done so.
The reduction of cash flow due to the lease rate restructurings,
discussed in "Recent Developments", following the crisis caused by the terrorist
attacks in the United States on September 11, 2001, the concern that the
aircraft will continue to be re-leased at reduced rates in the near future, the
level of lease payment delinquencies and the related increase in expenses may
adversely affect the timing and amounts available to pay to the holders of the
Notes.
Cash Flows from Operating Activities
The LIFT group's cash flows from operating activities depend on many
factors, including, but not limited to, the performance of lessees and the LIFT
group's ability to re-lease aircraft, the average interest rates of the Notes,
the efficiency of its interest rate hedging policies and the ability of interest
rate swap providers to perform under the terms of the swap agreements.
Net cash provided by operating activities for the 2001 Period amounted
to $36.6 million, primarily reflecting net income of $4.4 million adjusted by
non-cash depreciation and amortization expense of $21.4 million, security and
other deposits of $17.0 million, accounts payable and accrued liabilities of
$4.4 million and deferred rental and other income of $2.6 million. These were
partially offset by restricted cash of $10.5 million and rents receivable of
$3.2 million.
Cash Flows from Investing and Financing Activities
Net cash used in investing activities for the 2001 Period amounted to
$1,311.5 million, which primarily reflects the acquisition of the 39 Initial
Aircraft.
Net cash provided by financing activities for the 2001 Period amounted
to $1,372.4 million due to the receipt of proceeds from the issuance of the
Initial Notes of $1,412.9 million and the beneficial interest certificates of
35
$3.0 million, partially offset by $26.2 million of principal repayment on the
Notes and $17.2 million of debt issuance costs. The balance of the Notes was
$1,387.4 million, including unamortized discount of $15.3 million, at December
31, 2001. Generally, principal and interest is repaid on the Notes monthly based
upon the cash collected, the anticipated expenses and the cash balances held by
the LIFT group on the calculation date. As a result, monthly principal payments
on the Notes will vary depending on the LIFT group's revenues and expenses for
the month.
At December 31, 2001, the LIFT group was a party to an interest rate
swap agreement, which it entered into on Inception and which became effective on
the Closing Date. The net aggregate amounts due to be paid or received by the
LIFT group under the agreement are determined monthly and are due on the same
day as the payments under the Notes. The net economic effect of the interest
rate swap is to hedge the LIFT group's variable interest rate exposure against
movements in interest rates over the duration of certain lease terms. Please see
"Item 7A. Quantitative and Qualitative Disclosures about Market Risk" for
further information about this interest rate swap agreement.
New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS 144, which is
effective for fiscal years beginning after December 15, 2001 with earlier
application encouraged, addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", and the accounting and reporting provisions of APB 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business (as
previously defined in that Opinion). This Statement also amends ARB No. 51,
"Consolidated Financial Statements", to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The implementation
of this Statement is not expected to have a material effect on the LIFT group's
financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest incurred by the LIFT group on the Notes and the rental income
received by the LIFT group under operating leases are based on combinations of
variable and fixed measures of interest rates. The LIFT group is exposed to
interest rate risk to the extent that the mix of variable and fixed interest
obligations under the Notes do not correlate to the mix of variable and fixed
rents under operating leases. The LIFT group has engaged advisors to monitor
interest rates in order to mitigate its exposure to unfavorable variations. The
LIFT group utilizes interest rate swaps that shift the risk of fluctuations in
floating rates to the counterparty in exchange for fixed payments by the LIFT
group. Risks in the use of these instruments arise from the possible inability
of the counterparties to meet the terms of their contracts and from market
movements in securities values and interest rates.
The controlling trustees of LIFT, with the assistance of Credit Suisse
First Boston Corporation, are responsible for reviewing and approving the
overall interest rate management policies and transaction authority limits.
Counterparty risk will be monitored on an ongoing basis. Counterparties will be
subject to the prior approval of the controlling trustees. Currently, the LIFT
group's counterparty is an affiliate of Credit Suisse First Boston Corporation.
Future counterparties will consist primarily of the affiliates of major United
36
States and European financial institutions, including special-purpose derivative
vehicles that have credit ratings or that provide collateralization
arrangements, consistent with maintaining the ratings of the Notes.
LIFT has issued nine classes of Notes. The estimated fair value of
these Notes at December 31, 2001 was approximately $ 1,299.1 million. The terms
of each class of the Notes, the outstanding principal amount of each class of
the Notes at December 31, 2001 and the estimated fair value of each class of the
Notes are as follows (dollars in thousands):
Outstanding Expected
Principal Final Final Estimated
Class of Note Amount Interest Rate Payment Date Maturity Date Fair Value
- ------------- ------ ------------- ------------ ------------- ----------
Class A-1 $ 400,000 LIBOR + 0.390% July 15, 2003 July 15, 2031 $ 390,327
Class A-2 260,000 LIBOR + 0.430% July 15, 2004 July 15, 2031 253,386
Class A-3 401,767 LIBOR + 0.430% August 15, 2010 July 15, 2016 392,720
Class B-1 58,739 LIBOR + 1.120% May 15, 2018 July 15, 2031 54,071
Class B-2 81,255 7.124% May 15, 2018 July 15, 2031 75,862
Class C-1 69,000 LIBOR + 2.120% May 15, 2018 July 15, 2031 51,750
Class C-2 72,000 8.093% May 15, 2018 July 15, 2031 54,000
Class D-1 35,000 LIBOR + 2.000% May 15, 2018 July 15, 2031 15,750
Class D-2 25,000 8.000% May 15, 2018 July 15, 2031 11,250
---------- ----------
$1,402,761 $1,299,116
========== ==========
Expected final payment dates relating to the Notes are set forth in the
Indenture. They were determined based on the assumptions set forth in pages 93
to 95 of the Registration Statement. The actual final payment date for each
class of Notes is likely to occur earlier or later than the expected final
payment date as a result of various factors, including the fact that the
assumptions regarding revenues, interest, expenses, operating costs, stress case
scenarios and aircraft valuations have not corresponded to, and are not likely
in the future to correspond to, actual experience.
The one-month LIBOR rate with respect to the Notes as of December 31,
2001 was 1.90%.
The LIFT group is a party to a single floating-to-fixed interest rate
swap agreement with an affiliate of Credit Suisse First Boston Corporation under
which it receives fixed monthly payments based on one-month LIBOR and makes
fixed monthly payments based on a fixed rate, each measured against an
amortizing notional balance. The following table presents, as of December 31,
2001, the terms and estimated fair value of the LIFT group's swap agreement
(dollars in thousands):
Rate to be Rate to be
Notional paid by the received by the Maturity Estimated
Amount LIFT group LIFT group Date Fair Value
------ ---------- ---------- ---- ----------
$1,200,451 5.79% LIBOR June 15, 2011 $ (23,541)
37
The LIFT group expects to enter into additional swaps, or sell at
market values or unwind part or all of its initial swap and any future swaps on
a periodic basis, in its efforts to mitigate its exposure to unfavorable changes
in interest rates. Any changes in the LIFT group's policy regarding its use of
interest rate hedging products will be subject to periodic review by the rating
agencies.
The LIFT group is not exposed to significant foreign exchange risk
since rents from the lessees are made in U.S. dollars.
38
Item 8. Financial Statements and Supplementary Data
Lease Investment Flight Trust and Subsidiaries
Financial Statements as of December 31,
2001 and for the Period from Inception (June 13, 2001)
to December 31, 2001
together with the
Report of Independent Certified Public Accountants
39
Report of Independent Accountants
To the Controlling Trustees
Lease Investment Flight Trust
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, beneficial interest holders'
deficit and comprehensive loss, and of cash flows present fairly, in all
material respects, the financial position of Lease Investment Flight Trust (the
"Trust") and its subsidiaries at December 31, 2001, and the results of their
operations and their cash flows for the period from inception (June 13, 2001) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 8, 2002
40
Lease Investment Flight Trust and Subsidiaries
Consolidated Balance Sheet
(dollars in thousands)
December 31,
2001
------------
Assets
Cash and cash equivalents $ 97,499
Restricted cash 10,468
Rents receivable 3,186
Prepaids 315
Aircraft, net 1,291,759
Debt issuance cost, net 15,581
-----------
Total assets $ 1,418,808
===========
Liabilities and Beneficial Interest Holders' Deficit
Accounts payable and accrued liabilities $ 4,434
Deferred rental and other income 2,566
Derivative financial instruments 23,541
Security and other deposits 16,960
Notes payable:
Class A-1 400,000
Class A-2 260,000
Class A-3 401,767
Class B-1 58,739
Class B-2 81,255
Class C-1 69,000
Class C-2 72,000
Class D-1 35,000
Class D-2 25,000
Unamortized Class D discounts (15,317)
-----------
Total notes payable, net 1,387,444
-----------
Total liabilities 1,434,945
-----------
Beneficial interest holders' deficit:
Beneficial interest 7,404
Accumulated other comprehensive loss (23,541)
-----------
Total beneficial interest holders' deficit (16,137)
-----------
Total liabilities and beneficial interest holders' deficit $ 1,418,808
===========
The accompanying notes are an integral part of these financial statements.
41
Lease Investment Flight Trust and Subsidiaries
Consolidated Statement of Operations
(dollars in thousands)
Period from
Inception
(June 13, 2001)
to December 31, 2001
--------------------
Revenues:
Rental income from operating leases $64,693
Other income 12,300
Interest income 1,645
-------
Total revenues 78,638
-------
Expenses:
Interest 48,908
Depreciation and amortization 21,376
Administration and other 3,950
-------
Total expenses 74,234
-------
Net Income $ 4,404
=======
The accompanying notes are an integral part of these financial statements.
42
Lease Investment Flight Trust and Subsidiaries
Consolidated Statement of Beneficial Interest Holders' Deficit and Comprehensive Loss
For the Period from Inception (June 13, 2001) to December 31, 2001
(dollars in thousands)
Accumulated Total Beneficial
Other Comprehensive Beneficial Interest Interest
Loss Holders' Equity Holders' Deficit
------------------- ------------------- ----------------
Balance at June 13, 2001 $ -- $ -- $ --
Beneficial interest holders' contribution -- 3,000 3,000
Comprehensive income:
Net income -- 4,404 4,404
Other comprehensive loss:
change in fair value of derivative
financial instruments (23,541) -- (23,541)
--------
Total comprehensive loss (19,137)
-------- -------- --------
Balance at December 31, 2001 $(23,541) $ 7,404 $(16,137)
======== ======== ========
The accompanying notes are an integral part of these financial statements.
43
Lease Investment Flight Trust and Subsidiaries
Consolidated Statement of Cash Flows
(dollars in thousands)
Period from
Inception
(June 13, 2001)
to December 31, 2001
--------------------
Cash flows from operating activities:
Net income $ 4,404
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 21,376
Note discount amortization 781
Changes in assets and liabilities:
Rents receivable (3,186)
Restricted cash (10,468)
Prepaids (315)
Accounts payable and accrued liabilities 4,434
Deferred rental and other income 2,566
Security deposits 16,960
-----------
Net cash provided by operating activities 36,552
-----------
Cash flows from investing activities:
Purchase of aircraft (1,311,502)
-----------
Net cash used in investing activities (1,311,502)
-----------
Cash flows from financing activities:
Contribution of beneficial interest holders 3,000
Proceeds from notes payable 1,412,902
Debt issuance costs (17,214)
Repayment of notes payable (26,239)
-----------
Net cash provided by financing activities 1,372,449
-----------
Net increase in cash and cash equivalents 97,499
Cash and cash equivalents at beginning of period --
-----------
Cash and cash equivalents at end of period $ 97,499
===========
Supplemental cash flow information:
Cash paid for interest expense $ 44,305
===========
The accompanying notes are an integral part of these financial statements.
44
Lease Investment Flight Trust and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001
Note 1 - Organization
Lease Investment Flight Trust ("LIFT") is a special-purpose statutory
business trust that was formed on June 13, 2001 under the laws of the State of
Delaware. LIFT and its other subsidiaries, all of which were organized prior to
June 26, 2001 (collectively the "LIFT group"), are limited to acquiring,
financing, re-financing, owning, leasing, re-leasing, selling, maintaining and
modifying commercial aircraft.
The trust agreement governing LIFT (the "Trust Agreement") provides for
four trustees: an Owner Trustee and three Controlling Trustees. The Owner
Trustee will maintain the books and records of LIFT. The three Controlling
Trustees have the authority to manage the property and affairs of LIFT under the
Trust Agreement. One of the Controlling Trustees, the Equity Trustee, was
appointed by the beneficial interest holders, while the other two Controlling
Trustees are independent of the beneficial interest holders. LIFT does not have
any officers or employees and has arranged for GE Capital Aviation Services,
Limited ("GECAS"), Phoenix American Financial Services, Inc., Wilmington Trust
Company, Bankers Trust Company and Credit Suisse First Boston Corporation to
provide aircraft servicing, managerial services, and financial advice.
On the Closing Date, LIFT Trust-Sub 1 ("LIFT 1") and its subsidiaries
acquired the rights to 39 commercial jet aircraft (the "Initial Aircraft") from
General Electric Capital Corporation and certain of its affiliates (together the
"Seller") from the proceeds of bridge notes issued on the same date. Also on the
Closing Date, LIFT completed a securitization transaction in which it received
proceeds from a private placement offering of notes (the "Initial Notes") and
simultaneously paid for the cash purchase price of LIFT 1 and repaid the bridge
notes on behalf of LIFT 1. Automatic LIFT I, LP ("Automatic"), an affiliate of
Automatic, LLC, originally held the beneficial interest in LIFT and the
beneficial interest in LIFT 1. Automatic LLC, through its operating affiliates,
originates, acquires and sells aircraft and services aircraft leases and
arranges various forms of financings in the aviation leasing industry. Automatic
subsequently sold 50.1% of the beneficial interests of LIFT to four other
affiliates of Automatic LLC. As a result, Automatic owns 49.9% of the beneficial
interests of LIFT while the other four affiliates of Automatic LLC each own
12.525% of the beneficial interests of LIFT. The LIFT group's obligations,
including its debt obligations, are not obligations of, or guaranteed by any
lessee, Automatic, the Seller, the trustees and holders of the beneficial
interest of LIFT or any other person.
On December 18, 2001, LIFT completed an exchange offer whereby it
issued seven classes of new notes, also designated Class A-1, Class A-2, Class
A-3, Class B-1, Class B-2, Class C-1, and Class C-2 (the "Exchange Notes" and,
together with the Initial Notes, the "Notes"), in exchange for the seven
corresponding classes of the Initial Notes. The terms of the Exchange Notes are
identical in all material respects to the Initial Notes, except that the
Exchange Notes are registered under the Securities Act of 1933, as amended. The
Class D-1 and Class D-2 Notes were not exchanged and remained unregistered. $10
million of the Class A-2 and $34 million of the Class A-3 Initial Notes were not
tendered in the exchange offer and remain outstanding.
45
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America. All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. While management believes that the
estimates and related assumptions used in the preparation of the financial
statements are appropriate, actual results could differ from those estimates.
Significant estimates are made in the assessment of the collectibility of lease
payments, depreciable lives and estimated residual values of leased aircraft.
Cash and Cash Equivalents
The LIFT group classifies highly liquid investments with original
maturities of three months or less from the date of purchase as cash
equivalents.
Aircraft and Operating Leases
Aircraft are recorded at cost reflecting individual account values
established on the basis of appraisals by LIFT 1 and transferred at such cost to
LIFT. Aircraft are depreciated on a straight-line basis over the estimated life
to its estimated residual value. Generally, aircraft and aircraft equipment are
depreciated over estimated useful lives of 30 years from the date of manufacture
to a 15% estimated residual value. Certain major additions and modifications to
aircraft may be capitalized. The LIFT group's estimates are reviewed
periodically to ensure continued appropriateness.
Revenue under operating leases is recognized as rental income on a
straight-line basis over the lease term.
As of December 31, 2001, all of the Initial Aircraft had been
delivered. Pursuant to an asset purchase agreement with the Seller, the LIFT
group is entitled to all cash received (and earned) subsequent to June 26, 2001
by the Seller that relate to the aircraft identified for purchase. Accordingly,
the LIFT group recorded cash received from the Seller for lease payments for
undelivered aircraft as "other income" in its statement of operations. Other
cash transferred by the Seller representing security deposits paid by lessees,
prior to June 26, 2001, have been recorded by the LIFT group as security
deposits.
Aircraft are periodically reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". An
impairment loss is recognized when the fair value of the undiscounted future
cash flows of the aircraft is less than its net book value. The fair value of
the aircraft is based on independent appraisals of the aircraft and actual or
estimates of undiscounted future lease cash flows. The appraisals assume, among
46
other things, that the aircraft are utilized normally in an open, unrestricted
and stable market. Short-term fluctuations in the market place are disregarded
and it is assumed that there is no necessity either to dispose of a significant
number of aircraft simultaneously or to dispose of aircraft quickly.
Maintenance Reserves
Certain leases for the Initial Aircraft require the lessee to bear the
obligation for maintenance costs on airframes and engines, and require the
lessee to make certain payments to the lessor, calculated on measures of usage
to cover the expected costs of scheduled maintenance charges, including major
airframe and engine overhauls. Reserves are maintained at amounts considered
adequate to cover those expected payments for maintenance costs.
The sellers of the aircraft retained their respective reserve accounts
with respect to maintenance reserve payments, if any, on the Initial Aircraft.
Maintenance obligations will be paid from funds on deposit in the collections
account and, to the extent available for those purposes, funds obtained from any
cash collateral accounts or under eligible credit facilities that may be
established in the future. There is no assurance that cash flows generated from
the Initial Aircraft will be sufficient to satisfy maintenance obligations, to
pay expenses and to service interest and principal on the Notes.
The LIFT group had not made any maintenance reimbursements as of
December 31, 2001.
Income Taxes
The operating results of the LIFT group are included in the tax return
of the beneficial interest holders of LIFT. The LIFT group is, therefore, not
subject to U.S. Federal, State, and local income taxes.
Accounting for Derivatives and Hedging Activities
In the normal course of business, the LIFT group utilizes derivative
financial instruments to manage its exposure to interest rate risk. The LIFT
group will utilize one or more interest rate swaps that shift the risk of
fluctuations in floating rates to a counterparty in exchange for fixed payments
by the LIFT group. All derivatives are recognized on the balance sheet at their
fair value. On the date that the LIFT group entered into its derivative
contract, it designated the derivative as a hedge of the variability of future
cash flows that are to be received or paid in connection with a recognized asset
or liability (a "cash flow" hedge), to which the LIFT group is party. Changes in
the fair value of a derivative that is highly effective as - and that is
designated and qualifies as - a cash flow hedge, to the extent that the hedge is
effective, are recorded in other comprehensive income, until earnings are
affected by the variability of cash flows of the hedged transaction. Any hedge
ineffectiveness (which represents the amount by which the changes in the fair
value of the derivative exceed the variability in the cash flows of the
forecasted transaction) is recorded in current-period earnings. Changes in the
fair value of derivative trading and non-hedging instruments are reported in
current-period earnings.
The LIFT group formally documented all relationships between hedging
instruments and hedged items, as well as its risk-management objectives and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as cash flow hedges to specific
assets and liabilities on the balance sheet. The LIFT group also formally
assesses (both at the hedge's inception and on an ongoing basis) whether the
derivatives that are used in hedging transactions have been highly effective in
offsetting changes in the cash flows of hedged items and whether those
47
derivatives may be expected to remain highly effective in future periods. When
it is determined that a derivative is not (or has ceased to be) highly effective
as a hedge, the LIFT group discontinues hedge accounting prospectively.
Fair value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments", requires disclosure of the fair value of
financial instruments, for both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. Fair values of the LIFT group's financial instruments are based on
pricing models or formulas using assumptions about future interest rates,
interest volatility and other factors.
Risks and Uncertainties
During the current financial year there has been a downturn in the
world economic climate with a consequential negative impact on the operating
conditions in the world aviation industry. On September 11, 2001, the United
States was attacked by terrorists who hijacked and crashed four United States
commercial aircraft, with significant loss of life, property damage and economic
disruption. As a result, air travel in the United States was suspended for
several days. The long-term effect that these terrorist attacks, the fallout
since then and the subsequent military action in Afghanistan may have for the
aviation industry over the longer term is not yet fully known. The pre-existing
economic downturn has been exacerbated by the events of September 11 in the U.S.
and the economic and political fallout since then. Subsequent to these events,
two significant European carriers (Swissair and Sabena) filed for bankruptcy and
major American carriers announced very large financial losses.
The short-term effects of the events of September 11, together with the
downturn in the world economic conditions which was already evident, have
included, among other things, a reduction in demand for air travel, leading to a
contraction of operations by airlines including grounding of aircraft by
airlines, bankruptcy and/or consolidation of airlines, fluctuations in the price
of fuel, increased costs due to new security measures adopted by the relevant
aviation authorities, and increased insurance premiums required by the insurance
markets. In particular, airlines worldwide are currently experiencing
difficulties in maintaining war insurance cover in the amounts required under
their leases with us and other lessors. While these insurance issues have been
mitigated in certain jurisdictions by a number of temporary government schemes,
in the absence of longer term satisfactory solutions on this matter it may be
necessary for certain aircraft to be grounded.
Such consequences depending on their scope and duration, which the LIFT
group cannot predict at this time, are having a material adverse impact on the
financial condition of the LIFT group's lessees and their ability to perform
under their leases. As a result, a number of the LIFT group's leases were
restructured to reduce lease rates and to provide other financial accommodations
for lessees. The consequences of the events of September 11, 2001 may also lead
to reduced demand for the LIFT group's aircraft, which may impact its ability to
re-lease aircraft on a timely basis and at favorable rates and may reduce the
value of its aircraft. These effects could cause a reduction in the LIFT group's
cash flow, which would adversely affect the LIFT group's ability to make
payments on the Notes and to refinance the Notes as planned. Any significant
reduction in the appraised values of the LIFT group's portfolio beyond that
assumed in the Form S-4 Registration Statement of LIFT (Registration No.
333-69864) as amended, relating to the issuance of the Exchange Notes, may
require the LIFT group to accelerate the scheduled principal payments on the
Class A Notes and may result in delays of scheduled principal payments to other
noteholders.
48
As a result of the recession, the terrorist attacks of September 11,
2001 and the significant adverse financial impact that these events have had on
the airline industry, the rating agencies that rate the Notes have re-evaluated
their ratings of securities issued by aircraft lease securitization vehicles. On
October 30, 2001, Moody's placed the Class D Notes on review for possible
downgrade. On March 18, 2002, Moody's downgraded the Class D Notes from Ba2 to
Ba3. On September 27, 2001, Standard & Poor's placed the Class D Notes on credit
watch with negative implications. On September 20, 2001, Fitch placed the Class
A, B, C and D Notes on rating watch negative, but on December 21, 2001 they
removed the Class A, B and C Notes from this placement without any change to the
ratings of these classes.
Note 3 - Cash Balances
The LIFT group maintains various cash accounts as required by the trust
indenture dated June 26, 2001 (the "Indenture"), including rental accounts, a
collections account, an expense account, and the lessee funded accounts. In
addition, the equity owners of LIFT funded a contingent collateral account,
which is available, in very limited circumstances to support the Class A Notes.
All payments (with limited exceptions) under the leases, subsequent to
June 26, 2001, are deposited into the rental accounts and subsequently swept to
the collection account within one business day of receipt. LIFT maintains a cash
reserve balance in the collection account in such amount as is determined
monthly in accordance with the Indenture. At December 31, 2001, the cash
reserves included in the collection account were $83.0 million. The cash
reserves are intended to provide a source of liquidity for the payment of
expenses, swap payments and interest on certain classes of Notes. Expenses of
the LIFT group are generally paid out of the expense account which is generally
funded through transfers from the collections account.
The lessee-funded accounts are not available for general use. Security
deposits and maintenance reserve payments from lessees that are required to be
segregated from other funds are deposited into the lessee funded accounts. The
balances in the lessee funded accounts at December 31, 2001 were $10.5 million
and represented security deposits.
At December 31, 2001, the balance in a contingent collateral account
related to the Class A Notes was $3.0 million.
49
Note 4 - Aircraft under Operating Leases
On the Closing Date, LIFT 1 agreed to purchase 39 commercial jet
aircraft from the Seller having an aggregate cost of $1,310.5 million pursuant
to an asset purchase agreement. At December 31, 2001, all of the Initial
Aircraft had been delivered to the LIFT group, as follows:
December 31, 2001
-----------------
(in thousands)
Aircraft under operating lease $ 1,297,763
Accumulated depreciation (19,371)
-----------
Aircraft under operating lease, net 1,278,392
-----------
Aircraft off-lease 13,739
Accumulated depreciation (372)
-----------
Aircraft off-lease, net 13,367
-----------
Aircraft, net $ 1,291,759
===========
All aircraft are compliant with Stage 3 noise levels set out in the
United States Federal Aviation Regulations. An analysis of the various lessee
expiration periods of the aircraft under operating leases is as follows at
December 31, 2001:
On lease for a further period of:
More than five years....................................... 7
From one to five years..................................... 28
Less than one year......................................... 3
Off- lease................................................. 1
--
Total aircraft portfolio .................................. 39
==
As of December 31, 2001, 38 of the LIFT group's 39 aircraft were on
lease to 24 different lessees in 17 different countries. At December 31, 2001,
one aircraft was off-lease and was scheduled to be released in May 2002.
At December 31, 2001, future scheduled minimum lease payments to be
received under operating leases for the years ended December 31 are as follows
(dollars in thousands):
2002 $137,144
2003 120,488
2004 106,629
2005 86,797
2006 67,610
Thereafter 241,780
--------
Total $760,448
========
The LIFT group may acquire additional aircraft and related leases from
Automatic or the Seller using proceeds from the issuance of additional notes and
equity. Any such acquisition of additional aircraft by the LIFT group will be
50
subject to the terms of the Indenture and will require written confirmation from
the rating agencies rating the Notes that they will not lower, qualify or
withdraw their ratings on the Notes as a result of such issuance.
Note 5 - Notes Payable
On the Closing Date, LIFT completed a private placement offering of
$1,429.0 million of securitized notes on a basis exempt from registration under
the Securities Act of 1933, as amended. LIFT utilized the proceeds from such
Initial Notes as payment for the acquisition of LIFT 1 from Automatic and
repayment of the bridge note that LIFT 1 issued to acquire the Initial Aircraft.
On December 18, 2001, LIFT completed an exchange offer whereby it
issued seven classes of new notes, also designated Class A-1, Class A-2, Class
A-3, Class B-1, Class B-2, Class C-1, and Class C-2, in exchange for the seven
corresponding classes of the Initial Notes. The terms of the Exchange Notes are
identical in all material respects to the Initial Notes, except that the
Exchange Notes are registered under the Securities Act of 1933, as amended. The
Class D-1 and Class D-2 Notes were not exchanged and remained unregistered. $10
million of the Class A-2 and $34 million of the Class A-3 Initial Notes were not
tendered in the exchange offer and remain outstanding.
Underwriting and other debt issuance costs of $17.2 million which were
incurred in connection with the offering of the Initial Notes are being
amortized using the effective interest method over the expected life of the
Initial Notes, which is estimated to be 17 years.
The repayment terms of each class of Notes are such that certain
principal amounts are expected to be repaid on dates which are based on certain
operating assumptions (the "Expected Final Payment Dates") or refinanced through
the issuance of new notes, but in any event are ultimately due for repayment on
specified final maturity dates (the "Final Maturity Dates"). The interest rates,
Expected Final Payment Dates, Final Maturity Dates and estimated fair values
applicable to each class of the Notes at December 31, 2001 are listed as follows
(dollars in thousands):
Outstanding Expected
Principal Final Final Estimated
Class of Note Amount Interest Rates Payment Dates Maturity Dates Fair Values
- ------------- ------ -------------- ------------- -------------- -----------
Class A-1 $ 400,000 LIBOR + 0.390% July 15, 2003 July 15, 2031 $ 390,327
Class A-2 260,000 LIBOR + 0.430% July 15, 2004 July 15, 2031 253,386
Class A-3 401,767 LIBOR + 0.430% August 15, 2010 July 15, 2016 392,720
Class B-1 58,739 LIBOR + 1.120% May 15, 2018 July 15, 2031 54,071
Class B-2 81,255 7.124% May 15, 2018 July 15, 2031 75,862
Class C-1 69,000 LIBOR + 2.120% May 15, 2018 July 15, 2031 51,750
Class C-2 72,000 8.093% May 15, 2018 July 15, 2031 54,000
Class D-1 35,000 LIBOR + 2.000% May 15, 2018 July 15, 2031 15,750
Class D-2 25,000 8.000% May 15, 2018 July 15, 2031 11,250
---------- ----------
$1,402,761 $1,299,116
========== ==========
The 30-day LIBOR rate with respect to the Notes as of December 31, 2001 was
1.90%.
51
If the Class A-1 or Class A-2 Notes are not repaid on or before their
respective Expected Final Payment Dates, such class of Notes will accrue
interest thereafter at the stated interest rate plus 0.50% per annum.
The LIFT group has the right to make an optional redemption of any
Notes. Should the LIFT group choose to exercise an early redemption of any of
the Notes, it may be required to pay a redemption premium as required by the
Indenture.
The dates on which principal repayments on the Notes will actually
occur will depend on the cash flows generated by the rental income from the LIFT
group's portfolio of aircraft, the LIFT group's ability to refinance any or all
of the Notes and the amount of operating costs incurred in the ordinary course
of business. Amounts received by the LIFT group and available for distribution
are paid in accordance with the priorities specified in the Indenture.
Note 6 - Derivative Financial Instruments
Interest Rate Swap
Interest incurred by the LIFT group on the Notes and the yield from
rental income received by the LIFT group under operating leases are based on
combinations of variable and fixed measures of interest rates. The LIFT group is
exposed to interest rate risk to the extent that the mix of variable and fixed
interest obligations under the Notes do not correlate to the mix of variable and
fixed yields from rental income under leases. The LIFT group has engaged
advisors to monitor interest rates in order to mitigate its exposure to
unfavorable variations. The LIFT group will utilize one or more interest rate
swaps that shift the risk of fluctuations in floating rates to a counterparty in
exchange for fixed payments by the LIFT group. Risks in the use of these
instruments arise from the possible inability of the counterparties to meet the
terms of their contracts and from market movements in derivative values and
interest rates. Counterparty risk will be monitored on an ongoing basis and the
counterparties will be subject to the prior approval of the controlling
trustees. The counterparties will consist primarily of the affiliates of major
United States and European financial institutions and special-purpose derivative
vehicles that will have credit ratings, or will provide collateralization
arrangements, consistent with maintaining the ratings of the Notes.
At December 31, 2001, the LIFT group was a party to an interest rate
swap agreement which it entered into on June 13, 2001 and which became effective
on the Closing Date. Under the agreement, the LIFT group pays a fixed rate of
interest to the counterparty based on an amortizing notional amount and, in
turn, the counterparty pays the LIFT group a rate of interest based on the same
amortizing notional amount based on LIBOR as set out below (dollars in
thousands):
Rate to be Rate to be
Notional paid by the received by the Maturity Estimated
Amount LIFT group LIFT group Date Fair Value
------ ---------- ---------- ---- ----------
$1,200,451 5.79% LIBOR June 15, 2011 $ (23,541)
On December 31, 2001, the fair value of the interest rate swap was a
liability of approximately $23.5 million. At December 31, 2001, the LIFT group
estimated that $23.5 million will be transferred from other comprehensive income
to interest expense for the year ending December 31, 2002.
52
Note 7 - Commitments and Contingencies
In accordance with the terms of a servicing agreement (the "Servicing
Agreement"), GECAS is performing certain aircraft related services with respect
to the LIFT group's aircraft portfolio. Such activities include the collection
of rents and other amounts due from lessees, the monitoring of maintenance,
insurance and other obligations under the aircraft leases, the enforcement of
rights against the lessees, the remarketing of aircraft for re-lease or sale and
the performance of other specified aircraft-related services. In accordance with
the Servicing Agreement, fees payable to GECAS by LIFT include base fees and
fees calculated as a percentage of lease rentals received, in addition to
certain incentive-based fees.
The Servicing Agreement expires on the later of (i) the payment in full
of all amounts due on the Notes and other similar obligations and all amounts
due to the holders of beneficial interests in LIFT and (ii) the date on which
LIFT and its subsidiaries cease to own any aircraft. Each party has the right to
terminate the Servicing Agreement under specified circumstances.
Additionally, LIFT has arranged for Phoenix American Financial
Services, Inc., Wilmington Trust Company, Bankers Trust Company and Credit
Suisse First Boston Corporation to provide managerial services and financial
advice. The aggregate annual fee for these services is estimated to be $0.8
million.
Note 8 - Concentration of Credit Risk
Credit risk with respect to operating lease receivables is generally
diversified due to the number of lessees comprising the LIFT group's customer
base and the different geographic areas in which they operate. At December 31,
2001, the LIFT group had leased aircraft to 24 lessees in 17 countries. Also, at
December 31, 2001, eighteen of the aircraft were being leased to lessees
domiciled in certain emerging markets, including those located in Africa,
Eastern Europe, the Middle East, Latin America and Asia. The exposure of the
LIFT group's aircraft to particular countries and customers is managed partly
through concentration limits and through obtaining deposits from lessees and
certain cash reserves.
53
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Controlling and Independent Trustees.
The Trust Agreement governing LIFT provides for four trustees. One of
the four trustees of LIFT is Wilmington Trust Company, which is acting as the
statutory trustee and the owner trustee. The remaining three trustees are the
"controlling trustees" and have the authority to manage the property and affairs
of LIFT under the Trust Agreement. All of the controlling trustees are
independent from General Electric Capital Corporation. One of the controlling
trustees, called the "equity trustee", is appointed by the holders of LIFT's
beneficial interest, while the two other controlling trustees, called the
"independent controlling trustees" are independent of those holders. The holders
of the beneficial interest of LIFT may remove and replace the equity trustee,
and each independent controlling trustee may be replaced by the other
independent controlling trustee.
The Trust Agreement requires that any decision relating to insolvency
proceedings, merger or other reorganization of LIFT must be approved by a
unanimous vote of the controlling trustees. Any sale of any aircraft, decisions
requiring LIFT's approval under the Servicing Agreement or the agreement with
the administrative agent and the reduction of any required level of reserves
must be approved by the equity trustee and at least one of the independent
controlling trustees. The controlling trustees approving aircraft sales on other
than pre-approved terms must also confirm to the indenture trustee, prior to the
sale, that the sale will not materially and adversely affect the holders of the
Notes. The acquisition of additional aircraft by LIFT and the terms of any
related financing need only be approved by the equity trustee.
The controlling trustees and their respective ages and principal
activities are as follows:
Name Age Title
---- --- -----
Joseph E. Francht, Jr. 51 Independent Controlling Trustee
Jonathan M. Schofield 61 Independent Controlling Trustee
David H. Treitel 47 Equity Trustee
Joseph E. Francht, Jr. - Since 1998, Mr. Francht has been a private
investor and consultant. He was Senior Vice President and Treasurer at Northwest
Airlines from 1990-1998, where he was responsible for, among other things, all
capital markets transactions, aircraft financing activities and fleet planning
and analysis. He has also served as chairman of Northwest's Pension Investment
Committee and was on the Board of Directors of Champion Air, Inc. and Northwest
Aerospace Training Corporation. Prior to that, from 1972-1990, Mr. Francht was
employed as a corporate lending officer at Chase Manhattan Bank, now JP Morgan
Chase, and later, at Banque Paribas, now BNP Paribas, in several senior lending
positions, including Senior Vice President-Leveraged Capital Group.
Jonathan M. Schofield -- Mr. Schofield served as the Chairman and Chief
Executive Officer of Airbus Industrie of North America, Inc., a subsidiary of
Airbus Industrie, a manufacturer of large civil aircraft, from December 1992 to
54
February 2000. He continued to serve as Chairman from February 2000 until his
retirement on March 31, 2001. Prior to his career at Airbus, Mr. Schofield
served as President of United Technologies International, a wholly-owned
subsidiary of United Technologies Corporation, a diversified manufacturer of
industrial products, from 1989 to 1992. Mr. Schofield serves on the Board of
Directors of Aviall Inc., Dallas, TX, BE aerospace, Wellington, FL; FlightTime
Corporation, Waltham, MA; and SS&C Technologies, Windsor, CT.
David H. Treitel - Since 1996, Mr. Treitel has been the Chairman and
Chief Executive Officer of Simat, Helliesen & Eichner, Inc., a leading aviation
consulting firm based in New York City. Mr. Treitel has been with SH&E since
1977, and he served as the firm's President from 1993 to September 1998 and its
Executive Vice President from 1989 until 1993. Mr. Treitel also serves as a
director of Midwest Express Holdings, Inc. and a controlling trustee of Aircraft
Finance Trust, another aircraft securitization vehicle.
As is common with many other special purpose companies, neither LIFT
nor any of its subsidiaries will have any officers or other employees, except,
in the case of a subsidiary, as may be required by applicable law. The LIFT
group has arranged for GECAS, Phoenix American Financial Services, Inc.,
Wilmington Trust Company and Credit Suisse First Boston Corporation to provide
aircraft servicing, managerial services and financial advice.
The Servicer
The servicer and the LIFT group have entered into a Servicing Agreement
dated as of June 26, 2001. The Servicing Agreement sets forth the various duties
of GECAS as the servicer with respect to the management and administration of
the aircraft and the leases, the aircraft marketing activities to be performed
by the servicer and the aircraft management-related obligations of the servicer
in connection with offers and sales by the LIFT group of refinancing or
additional notes.
The servicer has agreed to provide its services in accordance with the
express terms of the Servicing Agreement. The terms of the Servicing Agreement
provide that the servicer will act in accordance with laws applicable to it,
with directions given by the administrative agent on behalf of the LIFT group,
with specified standards of care and with specified standards regarding
conflicts of interest. The duties and obligations of the servicer are limited to
those expressly set forth in the Servicing Agreement, and the servicer has not
undertaken any fiduciary or other implied duties or obligations to the LIFT
group, the holders of the Notes or any other person.
The servicer has agreed to perform the services required by the
Servicing Agreement with reasonable care and diligence at all times and, if a
conflict of interest arises as to an aircraft of the LIFT group and other
aircraft managed by GECAS, in good faith. In addition, to the extent that either
two or more particular aircraft of the LIFT group or an aircraft of the LIFT
group and other aircraft managed by GECAS have substantially similar objectively
identifiable characteristics that are relevant for purposes of the particular
services to be performed, the servicer has agreed not to discriminate among
those aircraft of the LIFT group or between any aircraft of the LIFT group and
any other managed aircraft on an unreasonable basis.
If the servicer in good faith determines that circumstances as to a
particular aircraft or lease require an arm's-length negotiation between the
servicer or any of its affiliates and the LIFT group and the servicer believes
it would not be appropriate for the servicer to act on behalf of the LIFT group,
55
the servicer has agreed to notify the LIFT group promptly and to withdraw from
acting as the servicer with respect to the matter and the LIFT group has agreed
to appoint an independent representative to act on its behalf. The servicer is
entitled to act on its own or its affiliates' behalf in those negotiations.
Neither the LIFT group nor the servicer may assign its rights and
obligations under the Servicing Agreement without the other's prior consent. The
servicer may, however, delegate some, but not all, of its duties to some of its
affiliates.
Aircraft services. The main categories of aircraft services being
provided by the servicer under the Servicing Agreement are:
(1) lease marketing and remarketing, lease negotiation and execution;
(2) collecting rental payments and other amounts due under leases,
aircraft maintenance, insurance monitoring and procurement, lease
compliance and enforcement and accepting delivery and redelivery
of aircraft;
(3) sales services and aircraft acquisition;
(4) monitoring aircraft maintenance and providing records and
information about the aircraft;
(5) using commercially reasonable efforts to keep the LIFT group in
compliance with terms of the Indenture that directly relate to the
operation of the aircraft;
(6) limited assistance in connection with the public or private
offerings of any notes, such as providing information relating to
the servicer and its affiliates for inclusion in any offering
document or prospectus, participating in marketing activities
solely with respect to the aircraft and providing underwriters,
rating agencies and other advisors with the reasonable opportunity
to conduct due diligence with respect to the servicer as it
relates to the aircraft;
(7) legal and other professional services with respect to the lease,
sale or financing of the aircraft, any amendment or modification
of any lease, the enforcement of the rights of the LIFT group
under any lease, any disputes that arise as to any aircraft or for
any other purpose that the servicer reasonably determines is
necessary in connection with the performance of its services; and
(8) periodic reporting of operational information relating to the
aircraft.
Operating guidelines. Under the Servicing Agreement, the servicer is
entitled to exercise such authority as is necessary to give it a practicable and
working autonomy in performing its services. The Servicing Agreement provides
that the servicer will give the LIFT group and its agents access to records
related to the aircraft under specified circumstances to enable the LIFT group
to monitor the performance by the servicer and not commingle any funds of the
LIFT group with its own funds. The LIFT group, acting through the administrative
agent or directly, has established monitoring and control procedures that it
expects will enable it to properly manage its and its subsidiaries' business and
assets.
The Servicing Agreement requires all transactions entered into by the
servicer on behalf of the LIFT group other than intercompany transactions to be
at arm's length and on market terms unless otherwise agreed or directed by the
56
administrative agent on the LIFT group's behalf. Transactions or matters on
behalf of the LIFT group that require the specific approval of the LIFT group
include:
(1) sales of or agreements to sell aircraft, other than as required by
a lease or the purchase agreement for the 39 Initial Aircraft;
(2) entering into any new leases if the lease does not comply with any
applicable operating covenants set forth under the Indenture or if
the lease grants a purchase option in favor of the lessee and
renewing or extending existing leases, other than as a result of
the exercise of an extension option;
(3) terminating any lease or leases to any single lessee for aircraft
then having an aggregate depreciated net book value in excess of
$75 million unless a substantially similar replacement or
substitute lease is put into place;
(4) unless provided for in the applicable budget, entering into any
contract for the modification or maintenance of aircraft where the
costs to be incurred by the LIFT group will exceed the greater of
the estimated aggregate cost of a heavy maintenance check for
similar aircraft and total refurbishment of the related engines
and available maintenance reserves or other collateral under the
related lease or if those costs would be outside the ordinary
course of the business of the LIFT group;
(5) issuing any guarantee on behalf of, or otherwise pledging the
credit of, the LIFT group, other than with respect to trade
payables in the ordinary course of business and other than
guarantees by LIFT of the obligations of its subsidiaries;
(6) entering into, amending or granting a waiver with respect to, any
transaction between the LIFT group and General Electric Capital
Corporation or any of its affiliates not contemplated in the
Servicing Agreement;
(7) incurring any actual or contingent liability, unless contemplated
in the applicable budget pursuant to a transaction of a type for
which the LIFT group's specific approval is otherwise required,
incurred in the ordinary course of the business of the LIFT group
or incurred in entering into a lease or performing any obligations
under a lease; and
(8) entering into any order or commitment to acquire, or acquiring,
aircraft or aircraft engines unless provided for in a lease, the
order or commitment to acquire a replacement engine has been
provided for in the applicable budget or the servicer determines
that the purchase or exchange of an engine is necessary or
appropriate.
Budgets. The Servicing Agreement calls for the administrative agent to
adopt each year a single lease operating budget for all aircraft owned by the
LIFT group and a single budget for the aircraft expenses related to all
aircraft.
Servicing fees and their payment priority. The Servicing Agreement
provides that the LIFT group will pay to the servicer a base fee of $150,000 per
month, which increases if additional aircraft are acquired by the LIFT group,
and a rent fee equal to 1% of the aggregate amount of basic rent due for all or
any part of a month for any aircraft of the LIFT group and 1% of the aggregate
57
basic rent actually paid for the month. The servicer also will receive a
disposition fee equal to 1% of the gross proceeds of the sale of any aircraft of
the LIFT group. The servicer also will be reimbursed for aircraft maintenance
costs and insurance, outside legal and professional advisory fees and other out
of pocket expenses incurred in connection with its performance. The aggregate
reimbursement expenses may be significant. The LIFT group has also agreed to
indemnify the servicer as described under "Risk Factors -- Because the LIFT
group's contract limits its remedies against the servicer for poor performance,
the LIFT group may at some point bear costs that will reduce its available
revenues." The subsidiaries of LIFT have guaranteed the obligations of LIFT to
the servicer.
The above fees and expense reimbursements are payable monthly in
arrears on the payment dates for the Notes. The payment of those fees and
expenses has a payment priority that is higher than that of all payments on the
Notes.
The servicer is also entitled to additional fees (the "Additional
Servicing Fees") consisting of an additional sales fee for each sale of an
aircraft, an additional disposition fee for each sale of an aircraft and an
additional rent-related fee based on basic rent actually paid. Additional
Servicing Fees are payable only after all amounts on the Notes have been paid in
full.
In addition, the servicer will be entitled to fees for aircraft
management services under the servicing agreement in connection with the offer
and sale by the LIFT group of refinancing and additional notes and any resales
of notes by any person who has any right to cause the LIFT group to assist in
the resale.
Term and termination. The term of the Servicing Agreement expires on
the later of (i) the date on which all amounts due on the Notes and other
similar obligations and all amounts due to the holders of the beneficial
interest in LIFT are paid in full and (ii) the date on which the LIFT group
ceases to hold any aircraft. Each party also has the right to terminate the
Servicing Agreement under specified circumstances.
The servicer has the right to terminate the Servicing Agreement if,
among other things, the LIFT group defaults in its payment and other obligations
under the Servicing Agreement and related documents, any material representation
or warranty made by LIFT or any of its subsidiaries is false or misleading in a
manner material to the servicer, LIFT or any of its subsidiaries become subject
to bankruptcy or other insolvency proceedings, neither LIFT nor any of its
subsidiaries holds any aircraft or the Indenture or any guaranty in favor of the
servicer ceases to be in effect.
The servicer may resign under the Servicing Agreement with respect to
all aircraft, or at its election, any affected aircraft if it reasonably
determines that directions given, or services required, would, if carried out be
unlawful under applicable law, be in violation of any corporate policy regarding
business practices or legal, ethical or social matters, be likely to lead to an
investigation by any governmental authority of the servicer or its affiliates,
expose the servicer to liabilities for which, in the servicer's good faith
opinion, adequate bond or indemnity has not been provided or place the servicer
in a conflict of interest with respect to which, in the servicer's good faith
opinion, the servicer could not continue to perform its obligations under the
Servicing Agreement. Whether or not it resigns, the servicer is not required to
take any action of the foregoing kind. The servicer may also resign in the event
it becomes subject to unindemnified taxes.
The LIFT group has the right to terminate the Servicing Agreement upon
payment in full of the Notes and other similar obligations. The LIFT group also
has the right to terminate the Servicing Agreement if, among other things, the
servicer ceases to be at least 75% owned directly or indirectly by General
Electric Capital Corporation or its ultimate parent, General Electric
Corporation, the servicer breaches its obligations under the Servicing Agreement
58
in a manner that is material to the LIFT group as a whole, the servicer, General
Electric Capital Corporation or General Electric Company becomes subject to
bankruptcy or insolvency proceedings, there are insufficient funds for the
payment on any Class A Note for a period of 60 days or at least 10 aircraft
remain off-lease but available for re-lease for a period of at least 90 days
following specified events set forth in the Indenture.
The LIFT group may remove the servicer for any affected aircraft if the
servicer has reasonably determined that directions given, or services required,
would, if carried out, place the servicer in a conflict of interest with respect
to which, in the servicer's good faith opinion, the servicer could not continue
to perform its obligations under the Servicing Agreement.
The servicer may not resign or be removed under the Servicing Agreement
and the Servicing Agreement may not be terminated, except as described above and
unless a replacement servicer has been appointed and the LIFT group has obtained
a confirmation from the rating agencies rating the Notes that they will not
lower, qualify or withdraw any rating as a result. If a replacement servicer has
not been appointed within 90 days after notice of any termination, resignation
or removal, the servicer may petition any court jurisdiction to appoint a
replacement servicer. The servicer may terminate the Servicing Agreement,
whether or not a replacement servicer has been appointed, if the LIFT group
fails, after the applicable cure periods, to pay amounts due to the servicer.
Corporate Management
Corporate management services for the LIFT group will be provided by
the administrative agent, Phoenix American Financial Services, Inc., the
financial advisor and capital markets advisor, Credit Suisse First Boston
Corporation, and the owner trustee, Wilmington Trust Company.
Administrative Agent
Phoenix American Financial Services, Inc. will act as the initial
administrative agent of the LIFT group. The administrative agent has agreed to
provide administrative, accounting and other services that include:
(1) monitoring the performance of the servicer and reporting its
conclusions to the controlling trustees of LIFT;
(2) acting as a liaison with various rating agencies to assess the
impact of management decisions on the ratings of the Notes and
coordinating responses to rating agency questions;
(3) maintaining accounting ledgers and providing draft accounts on a
quarterly and annual basis;
(4) preparing annual budgets for the LIFT group's approval;
(5) authorizing the payment of expenses and determining the amount of
expense accruals;
(6) coordinating any amendments to the agreements of the LIFT group,
with the approval of the LIFT group;
59
(7) supervising outside counsel and other professional advisers and
coordinating legal and other professional advice other than with
respect to any service or matter that is the responsibility of the
servicer or any additional servicer;
(8) preparing and coordinating press releases and reports to investors
and to the SEC, and managing investor relations;
(9) preparing or arranging for the preparation of and filing all
required tax returns; and
(10) overseeing the general operation of any liquidity facility and
advising the LIFT group as to the appropriate reserve levels for
the Notes.
In addition to its services on behalf of the LIFT group, the
administrative agent has agreed to act as the agent for the trustee and the
security trustee in managing the accounts in which the funds and investments of
the LIFT group will be held in the name of the security trustee and related
matters. The LIFT group is not entitled to direct the administrative agent as to
these matters. Phoenix American Financial Services, Inc.'s duties for the
trustee and the security trustee include:
(1) establishing and maintaining the accounts held in the name of the
security trustee and any other accounts;
(2) directing withdrawals and transfers from those accounts under the
Indenture;
(3) calculating certain monthly payments and making all other
calculations required under that Indenture;
(4) providing reports and other information required under the
Indenture;
(5) providing the trustee with information required by it to provide
its reports to the holders of the Notes; and
(6) subject to specified limitations and at the written direction of
the controlling trustees, directing the investment of the funds in
those accounts in investments permitted by the Indenture.
The administrative agent is entitled to a fee of $624,000 per year for
the first five years of the term and $660,000 per year for the remainder of the
term, plus an additional amount for any additional aircraft acquired in the
future, payable monthly in arrears in equal installments. The administrative
agent is entitled to be indemnified by the LIFT group against any loss or
liability incurred by the administrative agent in connection with its services
to the LIFT group or as the agent for the trustee and the security trustee,
other than through its own deceit, fraud, gross negligence or willful misconduct
or that of its officers, directors, agents and employees.
60
Capital Markets Advisor and Financial Advisor
Credit Suisse First Boston Corporation will act as the initial capital
markets advisor. The capital markets advisor is responsible for providing the
LIFT group with investment banking advice in connection with the issuance of
additional notes, financial advice to assist the LIFT group in evaluating
interest rate risk and other analytical advice. The LIFT group may remove the
capital markets advisor at any time on 90 days' written notice. Credit Suisse
First Boston Corporation will act as the initial financial advisor. The
financial advisor is responsible for assisting the LIFT group in developing
models for the purposes of analyzing the financial impact of aircraft lease,
sale and capital investment decisions. The agreement with the financial advisor
may be terminated by either the LIFT group or the financial advisor on 30 days'
written notice.
Owner Trustee
Wilmington Trust will act as the initial owner trustee of LIFT. The
owner trustee will maintain the books and records, including minute books and
records and trust certificate records, of LIFT. It will make available
telephone, facsimile and post office box facilities and will maintain LIFT's
principal place of business in Delaware.
Item 11. Executive Compensation
All trustees will be compensated for travel and other expenses incurred
by them in the performance of their duties. The independent controlling trustees
and the equity trustee receive a salary of $60,000 per annum for their services
in such capacity, as well as additional compensation in the event the LIFT group
acquires additional aircraft. The aggregate annual compensation for each
independent controlling trustee may not exceed $100,000 per annum. In addition,
Mr. Francht and Mr. Treitel also receive $10,000 and $5,000 per annum,
respectively, for their services as either managers or directors of subsidiaries
of LIFT.
Item 12. Security Ownership of Certain Beneficial Owners and Management
a) Security ownership of certain beneficial owners.
Name and Address of
Title of Class Beneficial Owner Percent of Class
- -------------- ---------------- ----------------
Beneficial Interest Certificate Automatic LIFT I, LP 49.9%
101 Convention Center Dr., Suite 850
Las Vegas, NV 89109
Beneficial Interest Certificate Automatic LIFT II, LP 12.525%
101 Convention Center Dr., Suite 850
Las Vegas, NV 89109
Beneficial Interest Certificate Automatic LIFT III, LP 12.525%
101 Convention Center Dr., Suite 850
Las Vegas, NV 89109
61
Beneficial Interest Certificate Automatic LIFT IV, LP 12.525%
101 Convention Center Dr., Suite 850
Las Vegas, NV 89109
Beneficial Interest Certificate Automatic LIFT V, LP 12.525%
101 Convention Center Dr., Suite 850
Las Vegas, NV 89109
Item 13. Certain Relationships and Related Transactions
None
62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a. Financial Statements.
The following are included in Part II of this report:
Page
----
Report of Independent Certified Public Accountants...............40
Consolidated Balance Sheet.......................................41
Consolidated Statement of Operations.............................42
Consolidated Statement of Changes in Beneficial Interest
Holders' Deficit and Comprehensive Loss......................43
Consolidated Statement of Cash Flows.............................44
Notes to Consolidated Financial Statements.......................45
b. Current Reports on Form 8-K.
During the quarterly period ended December 31, 2001, the LIFT group
filed reports on Form 8-K dated November 15, 2001 and December 17,
2001. Such reports on Form 8-K included copies of the monthly reports
to holders of the Notes.
c. Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit
Number
- ------
3.1 Amended and Restated Trust Agreement of Lease Investment Flight Trust
dated as of June 26, 2001.*
4.1 Indenture dated as of June 26, 2001 between Lease Investment Flight
Trust, Phoenix American Financial Services, Inc., LIFT Trust-Sub 1 and
Bankers Trust Company.*
4.2 Form of Global Note (included in Exhibit 4.1).*
4.3 Registration Rights Agreement dated as of June 26, 2001 between Lease
Investment Flight Trust and Credit Suisse First Boston Corporation.*
10.1 Asset Purchase Agreement dated as of June 26, 2001 among General
Electric Capital Corporation, the Sellers listed on Annex A thereto and
LIFT Trust-Sub 1.*
10.2 Security Trust Agreement dated as of June 26, 2001 between Lease
Investment Flight Trust, Bankers Trust Company, LIFT Trust-Sub 1 and
the other parties referred to therein.*
10.3 Servicing Agreement dated as of June 26, 2001 among GE Capital Aviation
Services, Limited and Lease Investment Flight Trust.*
10.4 Administrative Agency Agreement dated as of June 26, 2001 between
Bankers Trust Company, Lease Investment Flight Trust, Phoenix American
Financial Services, Inc. and the issuer subsidiaries identified
therein.*
10.5 Reference Agency Agreement dated as of June 26, 2001 between Bankers
Trust Company, Lease Investment Flight Trust and Phoenix American
Financial Services, Inc.*
10.6 Master Swap Agreement and Schedule dated as of June 26, 2001 between
Lease Investment Flight Trust and Credit Suisse First Boston
International.*
10.7 Beneficial Interest Purchase Agreement dated as of June 26, 2001
between Lease Investment Flight Trust and Automatic LIFT I, LP.*
63
21. Subsidiaries of Lease Investment Flight Trust.*
23.1 Consent of Aircraft Information Services, Inc.**
23.2 Consent of BK Associates, Inc.**
23.3 Consent of Morton, Beyer & Agnew.**
99.1 Appraisal of Aircraft Information Services, Inc.*
99.2 Appraisal of BK Associates, Inc.*
99.3 Appraisal of Morton, Beyer & Agnew.*
* Incorporated by reference to the Registration Statement on Form S-4
(File No. 333-69864) previously filed with the Securities and Exchange
Commission on September 21, 2001.
** Filed herewith.
d. Financial Statement Schedules.
All financial statement schedules are omitted because they are not
applicable or not required or because the required information is
included in the financial statements or notes thereto.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LEASE INVESTMENT FLIGHT TRUST
by Wilmington Trust Company,
not in its individual capacity but
solely as the Owner Trustee
March 27, 2002 By: /S/DAVID VANASKEY, JR.
-------------- ----------------------
Date Name: David Vanaskey, Jr.
Title: Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/JOSEPH E. FRANCHT, JR. Independent Controlling Trustee March 27, 2002
- ------------------------- --------------
Joseph E. Francht, Jr.
/S/JONATHAN M. SCHOFIELD Independent Controlling Trustee March 27, 2002
- ------------------------ --------------
Jonathan M. Schofield
/S/DAVID H. TREITEL Equity Trustee and Controlling March 27, 2002
- ------------------- Trustee --------------
David H. Treitel
/S/DAVID VANASKEY, JR. Owner Trustee March 27, 2002
- ---------------------- --------------
Wilmington Trust Company,
not in its individual
capacity but solely as
the Owner Trustee
65