UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
__________________
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
__________________
Commission File No. 333-69864
__________________
LEASE INVESTMENT FLIGHT TRUST
-----------------------------
(Exact name of registrant as specified in its charter)
51-65219
(IRS Employer Identification 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)
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
--- ---
This document consists of 22 pages.
Lease Investment Flight Trust
FORM 10-Q - For the Quarterly Period Ended June 30, 2002
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001............................................3
b) Consolidated Statements of Operations - Three Months
and Six Months Ended June 30, 2002 and Period from
Inception (June 13, 2001) to June 30, 2001...................4
c) Consolidated Statement of Changes in Beneficial
Interest Holders' Deficit and Comprehensive Loss -
Six Months Ended June 30, 2002 and Year
Ended December 31, 2001......................................5
d) Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2002 and Period from Inception
(June 13, 2001) to June 30, 2001.............................6
e) Notes to Consolidated Financial Statements...................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.............................................17
Part II. Other Information
Item 5. Other Information.......................................20
Item 6. Exhibits and Reports on Form 8-K........................20
Signatures ........................................................21
2
Part I. Financial Information
-----------------------------
Item 1. Financial Statements
Lease Investment Flight Trust and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
Assets
Cash and cash equivalents $ 102,213 $ 97,499
Restricted cash 10,905 10,468
Rents receivable and other assets 2,925 3,501
Aircraft, net 1,269,263 1,291,759
Debt issuance cost, net 14,018 15,581
Deferred charges 4,889 2,777
----------- -----------
Total assets $ 1,404,213 $ 1,421,585
=========== ===========
Liabilities and Beneficial Interest Holders' Deficit
Accounts payable and accrued liabilities $ 6,541 $ 4,434
Deferred rental income 5,424 5,343
Derivative financial instruments 63,740 23,541
Security and other deposits 24,008 16,960
Notes payable:
Class A-1 400,000 400,000
Class A-2 260,000 260,000
Class A-3 382,397 401,767
Class B-1 57,763 58,739
Class B-2 79,905 81,255
Class C-1 69,000 69,000
Class C-2 72,000 72,000
Class D-1 35,000 35,000
Class D-2 25,000 25,000
Unamortized Class D discounts (14,562) (15,317)
----------- -----------
Total notes payable, net 1,366,503 1,387,444
----------- -----------
Total liabilities 1,466,216 1,437,722
----------- -----------
Beneficial interest holders' deficit:
Beneficial interest 1,737 7,404
Accumulated other comprehensive loss (63,740) (23,541)
----------- -----------
Total beneficial interest holders' deficit (62,003) (16,137)
----------- -----------
Total liabilities and beneficial interest holders'
deficit $ 1,404,213 $ 1,421,585
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
Lease Investment Flight Trust and Subsidiaries
Consolidated Statements of Operations
(unaudited)
(dollars in thousands)
Period from
Three Months Six Months Inception
Ended Ended (June 13, 2001)
June 30, 2002 June 30, 2002 to June 30, 2001
------------- ------------- ----------------
Revenues:
Rental income from operating
leases $ 34,406 $ 70,188 $ 1,517
Other income 1,518 1,518 570
Interest income 491 972 46
-------- -------- --------
Total revenues 36,415 72,678 2,133
-------- -------- --------
Expenses:
Interest 23,040 46,045 1,310
Depreciation and amortization 12,017 24,059 507
Operating 3,709 4,977 5
Administration and other 1,735 3,264 498
-------- -------- --------
Total expenses 40,501 78,345 2,320
-------- -------- --------
Net Loss $ (4,086) $ (5,667) $ (187)
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
Lease Investment Flight Trust and Subsidiaries
Consolidated Statements of Changes in Beneficial Interest Holders'
Deficit and Comprehensive Loss
(unaudited)
(dollars in thousands)
Accumulated
Other Beneficial Total Beneficial
Comprehensive Interest Interest
Income (Loss) Holders' Equity Holders' Deficit
------------- --------------- ----------------
Balance at December 31, 2001 $(23,541) $ 7,404 $(16,137)
Comprehensive income:
Net Loss -- (5,667) (5,667)
Other Comprehensive Loss:
changes in fair value of
derivative financial
instruments (40,199) -- (40,199)
--------
Total comprehensive loss (45,866)
-------- -------- --------
Balance at June 30, 2002 $(63,740) $ 1,737 $(62,003)
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
Lease Investment Flight Trust and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
Period from
Six Months Inception
Ended (June 13, 2001)
June 30, 2002 to June 30, 2001
------------- ----------------
(unaudited)
Cash Flows from Operating Activities:
Net loss $ (5,667) $ (187)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 24,059 507
Note discount amortization 755 20
Changes in assets and liabilities:
Rents receivable and other assets 576 (1,392)
Restricted cash (437) (10,093)
Deferred charges (2,112) --
Accounts payable and accrued liabilities 2,107 2,429
Deferred rental income 81 6,149
Security and other deposits 7,048 10,095
----------- -----------
Net cash provided by operating
activities 26,410 7,528
----------- -----------
Cash Flows from Investing Activities:
Purchase of aircraft -- (954,209)
Deposit for aircraft purchases -- (356,925)
----------- -----------
Net cash used in investing
activities -- (1,311,134)
----------- -----------
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 (21,696) --
----------- -----------
Net cash (used in) provided by
financing activities (21,696) 1,398,688
----------- -----------
Net Increase in Cash and Cash Equivalents 4,714 95,082
Cash and Cash Equivalents at Beginning of
Period 97,499 --
----------- -----------
Cash and Cash Equivalents at End of Period $ 102,213 $ 95,082
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest expense $ 45,560 $ --
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
6
Lease Investment Flight Trust and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
June 30, 2002
Note 1 - Organization
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 LIFT I"), its beneficial owner. LIFT 1 has
various domestic and foreign subsidiaries that own or lease aircraft. The
authorized business of LIFT and its subsidiaries, all of which were organized
prior to the Closing Date (collectively, the "LIFT group"), is limited to
acquiring, financing, re-financing, owning, leasing, re-leasing, selling,
maintaining and modifying commercial aircraft.
On the Closing Date, LIFT 1 and its subsidiaries entered into an
agreement to acquire 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 (the
"Bridge Notes"). 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.
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.
Note 2 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the rules and regulations of the Securities and
Exchange Commission for interim financial statements. Accordingly, these interim
statements do not include all of the information and disclosures required for
complete financial statements. In the opinion of the controlling trustees, based
upon the advice of LIFT's administrative agent, all adjustments (consisting
solely of adjustments of a normal recurring nature) necessary for a fair
statement of these interim results have been included. All intercompany accounts
and transactions have been eliminated. The results for the interim periods are
not necessarily indicative of the results to be expected for the year ending
December 31, 2002.
These interim unaudited consolidated financial statements should be
read in conjunction with the LIFT group's consolidated financial statements and
accompanying notes included in LIFT's Annual Report on Form 10-K (Registration
7
No. 333-69864) for the year ended December 31, 2001 filed with the Securities
and Exchange Commission on March 28, 2002 (the "Annual Report").
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 the controlling trustees, based upon
the advice of LIFT's administrative agent, believe that the estimates and
related assumptions used in the preparation of the consolidated financial
statements are appropriate, actual results could differ from those estimates.
Significant estimates are made in the assessment of the collectibility of
receivables, depreciable lives and estimated residual values of leased aircraft.
Risks and Uncertainties
On September 11, 2001, terrorists hijacked and crashed four United
States commercial aircraft, with attendant significant loss of life, property
damage and economic disruption. Any additional terrorist attacks, the
anti-terrorist activity in Afghanistan and throughout the world, any further
military or economic responses by the United States, including any changes to
the United States aircraft industry by way of law, regulation or otherwise, may
increase airline costs or cause declines in air travel demand. In addition to
the September 11, 2001 events, the decline in the United States and the
worldwide economy has adversely affected both the LIFT group and its lessees.
Revenues and expenses of the LIFT group's lessees are also likely to be affected
by the lessees' ability to operate in the current competitive environment and
worsening economic conditions. These and other factors have led to increased
bankruptcies and consolidations of airlines. Higher costs (including increased
costs for security measures, insurance and fuel) are expected to adversely
impact their financial position.
Uncertainty with respect to the short to medium term future prospects
of the aircraft industry following the current general world economic downturn,
which was exacerbated by the terrorist attacks of September 11, 2001 has
affected the ability of the LIFT group's lessees to comply with the terms of
their leases, causing restructuring of lease agreements. Such restructurings
have included reduced rental rates, deferred payments or early returns of
aircraft. The recent restructurings of the LIFT group's leases caused a
reduction of $2.8 million in the LIFT group's revenues for the six months ended
June 30, 2002 (the "2002 Period"), and could result in a permanent reduction in
the LIFT group's revenues as well. For a further discussion of the lease
restructurings, see "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The events discussed above have also contributed to an excess of
aircraft in the market place, which has resulted in a significant number of
aircraft being parked. These excess aircraft impact the market by causing
decreases in the market value of the aircraft, a more competitive leasing
market, reductions in lease rates, increased storage costs and increased
downtime. These events have impaired the ability of the LIFT group to re-lease
aircraft on a timely basis and at favorable rates and may reduce the value of
the aircraft for possible sale. In addition, market values of some aircraft
types have declined significantly following the terrorist attacks of September
11, 2001, and it is possible that the market values of certain aircraft types
may never recover. These factors have had and will likely continue to have an
adverse effect on the cash flow generated from the LIFT group's aircraft. Such
reductions in cash flows will have a negative impact on the amount and timing of
8
payments that will be made by the LIFT group on the Notes. There can be no
assurances as to if and when the aircraft leasing market, and subsequently cash
flows to the LIFT group, will improve.
Reclassifications
Certain reclassifications have been made to prior year data to conform
with the current year.
Note 3 - Derivative Financial Instruments
Interest Rate Swap Agreements
At June 30, 2002, LIFT 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, LIFT pays a fixed rate of interest to the
counterparty based on an amortizing notional amount and, in turn, the
counterparty pays LIFT 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 received by Maturity Estimated
Amount LIFT LIFT Date Fair Value
------ ----------- ------------- ----------- ----------
$1,179,551 5.79% LIBOR June 15, 2011 $ (63,740)
On June 30, 2002, the fair value of the interest rate swap was a
liability of approximately $63.7 million compared to a liability of
approximately $23.5 million on December 31, 2001, a decrease in fair value of
the derivative of $40.2 million.
The one-month LIBOR with respect to the interest rate swap as of June
30, 2002 was 1.84%.
Note 4 - Subsequent Event
Automatic LIFT I, an affiliate of Automatic LLC, owns 49.9% of the
beneficial interests of LIFT and four affiliates of Automatic LIFT I (together
with Automatic LIFT I, the "Automatic LIFT LPs") each own 12.525% of the
beneficial interests of LIFT. Prior to July 31, 2002, 99.9% of the limited
partnership interests of each of the Automatic LIFT LPs was owned by Automatic
Aircraft, LP, an affiliate of Automatic LLC ("Automatic Aircraft"). On July 31,
2002, Automatic Aircraft reorganized its ownership of the Automatic LIFT LPs by
organizing Flight Lift LLC, a Delaware limited liability company ("Flight
Lift"), and contributing to Flight Lift the percentage of limited partnership
interests of the Automatic LIFT LPs indicated below:
Automatic LIFT I, LP 99.9%
Automatic LIFT II, LP 49.9998%
Automatic LIFT III, LP 49.9998%
Automatic LIFT IV, LP 49.9998%
Automatic LIFT V, LP 49.9998%
Flight Lift is managed and controlled by Automatic Aircraft. In
exchange for a contribution of cash and treasury securities, Flight Lift issued
to an institutional investor a preferred membership interest in Flight Lift
9
resulting in such institutional investor holding an indirect 60% economic
interest in LIFT. This institutional investor has no rights to affect the
management or control of LIFT. Following such transaction, the Automatic LIFT
LPs continue to hold and control, collectively, 100% of the beneficial interests
of LIFT.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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.
LIFT and its subsidiaries are special-purpose entities, a number of
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 distribute any 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 liabilities. The timing and
amount of maintenance related expenditures can fluctuate significantly from
period to period, which may affect the cash availability to service the
outstanding Notes. The Indenture, dated June 26, 2001, under which the Notes
were issued (the "Indenture") requires that LIFT maintain a cash reserve balance
on deposit in its 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.
References in this Form 10-Q to the aggregate appraised value at April
30, 2002 mean the average of the three base value appraisals of the Initial
Aircraft as of April 30, 2002. For a further discussion of the appraisals, see
"Recent Developments - Other Developments."
10
Recent Developments
The Aircraft and Lessees
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 the remaining lease term
commencing in December 2001. The aircraft with respect to this lessee represents
approximately 1.2% of the aggregate appraised value at April 30, 2002.
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. In July 2002, LIFT RS Brazil, LLC entered
into a restructured lease agreement with this lessee, to defer a portion of the
rent for six months commencing with October 2001 and to extend the lease for
fifteen months beyond the current lease expiration. The deferral will be repaid
with interest over a 36-month period beginning March 2003. The aircraft with
respect to this lessee represents approximately 1.8% of the aggregate appraised
value at April 30, 2002.
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. This early termination fee, which
is to be paid by this lessee in twelve equal monthly installments commencing
April 2002, was recognized as other income. The aircraft was returned in March
2002 and subsequently delivered to a British lessee on a five-year lease. This
aircraft represents approximately 2.0% of the aggregate appraised value at April
30, 2002.
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 was delivered in April 2002 upon its early return from the previous
lessee based in Morocco. The aircraft with respect to this lessee represents
approximately 2.9% of the aggregate appraised value at April 30, 2002.
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
reduced rent starting from September 2001 and extended the leases for 24 months.
The aircraft with respect to this lessee represent approximately 4.3% of the
aggregate appraised value at April 30, 2002.
In March 2002, an MD-82 aircraft owned by MD 82 Aircraft Owner G
Limited was delivered to a lessee based in Singapore on a two-year lease
following redelivery from the previous lessee based in Tunisia. This lessee
based in Singapore signed another contract with MD 82 Aircraft Owner F Limited
for a two-year lease of an MD-82 aircraft. In May 2002, the lessee terminated
both lease agreements and the leases were simultaneously novated to a lessee
based in Indonesia. This current Indonesian lessee previously subleased one of
these aircraft from the original lessee based in Singapore. This second aircraft
was previously off-lease and was delivered in June 2002. The two aircraft with
respect to this Indonesian lessee represent approximately 2.3% of the aggregate
appraised value at April 30, 2002.
In April 2002, MD82 Aircraft Leasing I Corporation signed a letter of
intent with a lessee based in China for a three-year extension with respect to
an MD-82 aircraft. This aircraft represents approximately 1.1% of the aggregate
appraised value at April 30, 2002.
11
In April 2002, MD82 Aircraft Leasing II Corporation signed a letter of
intent with a lessee based in China for a three-year extension with respect to
an MD-82 aircraft. This aircraft represents approximately 1.0% of the aggregate
appraised value at April 30, 2002.
In April 2002, MD82 Aircraft Leasing III Corporation signed a letter of
intent with a lessee based in China for a three-year extension with respect to
an MD-82 aircraft. This aircraft represents approximately 1.1% of the aggregate
appraised value at April 30, 2002.
In May 2002, a British lessee exercised its early termination option
under the lease agreement entered into with LIFT A2K UK, LLC, with respect to a
B767-300ER aircraft. The lease will now end in May 2003. The aircraft with
respect to this lessee represents approximately 5.9% of the aggregate appraised
value at April 30, 2002.
In June 2002, LIFT VG Brazil, LLC repossessed both of its aircraft, a
B737-300 and a B737-700, from a lessee based in Brazil due to the lessee's
non-compliance with the restructuring agreement signed in March 2002. The total
amount of rent and maintenance reserve payments outstanding under the leases for
the two aircraft with respect to this lessee was approximately $0.7 million at
June 30, 2002. LIFT VG Brazil, LLC holds security deposits in the amount of $1.1
million against the arrearages of this lessee. The aircraft with respect to this
lessee represent approximately 4.3% of the aggregate appraised value at April
30, 2002.
In June 2002, LIFT VG Brazil, LLC signed a letter of intent with a
lessee based in Norway for a three-year lease with respect to the B737-300
aircraft that was returned early from a Brazilian lessee. The aircraft is
expected to be delivered in August 2002. This aircraft represents approximately
2.0% of the aggregate appraised value at April 30, 2002.
The lease restructuring events discussed above and in pages 31 to 33 of
the Annual Report caused a reduction of $2.8 million in the LIFT group's
revenues for the 2002 Period, 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 Form S-4 Registration
Statement of LIFT (Registration No. 333-69864), as amended, relating to the
issuance of the Exchange Notes (the "Registration Statement").
Current Market Conditions
On September 11, 2001, terrorists hijacked and crashed four United
States commercial aircraft, with attendant significant loss of life, property
damage and economic disruption. Any additional terrorist attacks, the
anti-terrorist activity in Afghanistan and throughout the world, any further
military or economic responses by the United States, including any changes to
the United States aircraft industry by way of law, regulation or otherwise, may
increase airline costs or cause declines in air travel demand. In addition to
the September 11, 2001 events, the decline in the United States and the
worldwide economy has adversely affected both the LIFT group and its lessees.
Revenues and expenses of the LIFT group's lessees are also likely to be affected
by the lessees' ability to operate in the current competitive environment and
worsening economic conditions. These and other factors have led to increased
12
bankruptcies and consolidations of airlines. Higher costs (including increased
costs for security measures, insurance and fuel) are expected to adversely
impact their financial position.
Uncertainty with respect to the short to medium term future prospects
of the aircraft industry following the current general world economic downturn,
which was exacerbated by the terrorist attacks of September 11, 2001 has
affected the ability of the LIFT group's lessees to comply with the terms of
their leases, causing restructuring of lease agreements. Such restructurings
have included reduced rental rates, deferred payments or early returns of
aircraft.
The events discussed above have also contributed to an excess of
aircraft in the market place, which has resulted in a significant number of
aircraft being parked. These excess aircraft impact the market by causing
decreases in the market value of the aircraft, a more competitive leasing
market, reductions in lease rates, increased storage costs and increased
downtime. These events have impaired the ability of the LIFT group to re-lease
aircraft on a timely basis and at favorable rates and may reduce the value of
the aircraft for possible sale. In addition, market values of some aircraft
types have declined significantly following the terrorist attacks of September
11, 2001, and it is possible that the market values of certain aircraft types
may never recover. These factors have had and will likely continue to have an
adverse effect on the cash flow generated from the LIFT group's aircraft. Such
reductions in cash flows will have a negative impact on the amount and timing of
payments that will be made by the LIFT group on the Notes. There can be no
assurances as to if and when the aircraft leasing market, and subsequently cash
flows to the LIFT group, will improve.
Other Developments
Under the terms of the Indenture, LIFT is required to obtain annual
appraisals of the LIFT group's aircraft. In May 2002, LIFT received appraisals
of the adjusted base values of the aircraft as of April 30, 2002 from three
independent appraisers that are members of the International Society of
Transport Aircraft Trading, as required by the Indenture. The average of the
aggregate of the three appraisals of the aircraft at April 30, 2002 was $1,392.7
million.
Under current conditions, the LIFT group expects future annual
appraisals of the aircraft to reflect further reductions, and in some cases
significant reductions, of the adjusted base values of the aircraft as a result
of sales or dispositions of aircraft, changes in the composition of the aircraft
types, geographical concentrations and lessees of the aircraft portfolio, the
aging of the aircraft and related increased maintenance expenses, economic or
other events affecting the commercial aviation industry, and other factors.
The annual appraisals are based on the assumptions and methodologies
utilized by each appraiser and are prepared without physical inspection of the
aircraft. Appraisals that are based on other assumptions and methodologies may
result in valuations that are materially different from those contained in such
appraisals. In addition, the appraisals 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
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 as a result of such aircraft supply and demand
imbalances, the condition of the aircraft, market and economic conditions and
other factors. At a cyclical low, the market value of most aircraft types is
13
likely to be less than, and in some cases significantly less than, the appraised
base values. 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.
In addition, market values of some aircraft types have declined
significantly following the terrorist attacks of September 11, 2001, and it is
possible that the market values of certain aircraft types may never recover. As
discussed in the previous paragraph, the appraised values set forth in the
appraisals generally assume a stable market environment and certain other market
conditions, and the extent to which the events of September 11, 2001 have been
taken into account in determining these appraised values varies among the
appraisals. Each of the appraisals notes that current market values of aircraft
have been adversely affected by such events and indicates that the long-term
impact on aircraft values of those events is uncertain.
The book value of the LIFT group's aircraft may differ from the base
value of the aircraft determined by the appraisals in accordance with the
Indenture.
Aircraft are periodically reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". An impairment loss is recognized
when the fair value of the undiscounted future cash flows of the aircraft is
less than their net book value. The fair value of the aircraft is based on the
independent appraisals of the aircraft and estimates of undiscounted future 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.
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 May 7, 2002, Fitch removed the Class D Notes from
rating watch negative without any change to the ratings of that class.
As of June 30, 2002, LIFT had repaid $47.9 million of principal on the
Notes, as compared to an estimate of $48.7 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 June 30, 2002.
Automatic LIFT I, an affiliate of Automatic LLC, owns 49.9% of the
beneficial interests of LIFT and four affiliates of the Automatic LIFT LPs, each
own 12.525% of the beneficial interests of LIFT. Prior to July 31, 2002, 99.9%
of the limited partnership interests of each of the Automatic LIFT LPs was owned
by Automatic Aircraft. On July 31, 2002, Automatic Aircraft reorganized its
ownership of the Automatic LIFT LPs by organizing Flight Lift, a Delaware
limited liability company, and contributing to Flight Lift the percentage of
limited partnership interests of the Automatic LIFT LPs indicated below:
14
Automatic LIFT I, LP 99.9%
Automatic LIFT II, LP 49.9998%
Automatic LIFT III, LP 49.9998%
Automatic LIFT IV, LP 49.9998%
Automatic LIFT V, LP 49.9998%
Flight Lift is managed and controlled by Automatic Aircraft. In
exchange for a contribution of cash and treasury securities, Flight Lift issued
to an institutional investor a preferred membership interest in Flight Lift
resulting in such institutional investor holding an indirect 60% economic
interest in LIFT. This institutional investor has no rights to affect the
management or control of LIFT. Following such transaction, the Automatic LIFT
LPs continue to hold and control, collectively, 100% of the beneficial interests
of LIFT.
Results of Operations
Results of operations for the period from Inception to June 30, 2001
(the "2001 Period") were determined from the date of commencement of operations
June 13, 2001 to June 30, 2001 and thus are not indicative of an entire three-
or six-month period. Therefore, historical data are not comparable to the
results of operations for the three months ended June 30, 2002 (the "2002
Quarter") and the 2002 Period.
The LIFT group reported a net loss of $4.1 million during the 2002
Quarter on total revenues of $36.4 million, and a net loss of $5.7 million on
total revenues of $72.7 million during the 2002 Period, both compared to a net
loss of $0.2 million on total revenues of $2.1 million for the 2001 Period. The
net loss was primarily caused by the reduction in revenue due to the recent
lease restructuring events discussed above under "Recent Developments - The
Aircraft and Lessees," and the increase in aircraft maintenance- and
delivery-related expenses. The LIFT group's revenues consisted of rental income
from operating leases, interest income earned on cash balances and other income.
Rental income from operating leases was $34.4 million for the 2002
Quarter and $70.2 million for the 2002 Period.
Other income, which was $1.5 million for both the 2002 Quarter and the
2002 Period, consisted of the early termination fee received from a former
lessee.
Interest income during the 2002 Quarter and the 2002 Period was $0.5
million and $1.0 million, respectively, compared to less than $0.1 million
during the 2001 Period. The LIFT group's cash balances 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 for the 2002 Quarter and the 2002 Period, including
interest rate swap expense of $11.8 million and $23.6 million, respectively, was
$23.0 million and $46.0 million, respectively, compared to interest expense of
$1.3 million, including interest rate swap expense of $0.3 million, for the 2001
Period. Interest expense is paid on LIFT's outstanding Notes. The weighted
average interest rate on the Notes was 6.5% for both the 2002 Quarter and the
2002 Period. The outstanding balance of the Notes at June 30, 2002 was $1,366.5
million, net of unamortized note discounts of $14.6 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.
15
Depreciation and amortization expense was $12.0 million and $24.1
million for the 2002 Quarter and the 2002 Period, respectively, compared to $0.5
million during the 2001 Period.
Operating expense was $3.7 million and $5.0 million for the 2002
Quarter and the 2002 Period, respectively, compared to less than $0.1 million
for the 2001 Period. Operating expense consists primarily of aircraft
maintenance expense and lease-related costs. Most of the LIFT group's lease
contracts 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. Under the
provisions for many leases, for certain airframe and engine overhauls, the
lessee is reimbursed for costs incurred up to, but not exceeding, related
payments made by the lessee to the lessor based on those measures of usage.
Reserves are maintained at amounts considered adequate to cover those expected
payments for maintenance costs.
Administrative and other expenses were $1.7 million and $3.3 million
for the 2002 Quarter and the 2002 Period, respectively, compared to $0.5 for the
2001 Period. 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 $1.2 million and $2.3 million for the
2002 Quarter and 2002 Period, respectively, both compared to less than $0.1 for
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 $102.2 million, and
restricted cash of $10.9 million, at June 30, 2002. The liquidity reserve
amount, which is included in cash and cash equivalents, was $83.0 million at
June 30, 2002. 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
swap and interest payments, maintenance obligations and other contingent costs.
The Class A contingent collateral amount of $3.0 million, funded by the
initial beneficial interest holders on the Closing Date, will be returned with
interest to the initial beneficial interest holders under the terms found in
pages 123 and 124 of the Registration Statement. In very limited circumstances
the Class A contingent collateral amount will be available to support the Class
A 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 effectiveness 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 2002 Period amounted
to $26.4 million, primarily reflecting non-cash depreciation and amortization
expense of $24.1 million, security and other deposits of $7.0 million and
accounts payable and accrued liabilities of $2.1 million. These were partially
offset by a net loss of $5.7 million and deferred charges of $2.1 million.
16
Cash Flows from Financing Activities
Net cash used for financing activities for the 2002 Period amounted to
$21.7 million, which reflects principal repayment on the Notes. As a result, the
balance of the Notes was $1,366.5 million, including unamortized discount of
$14.6 million, at June 30, 2002. 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 June 30, 2002, LIFT 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. The net aggregate amounts due to be paid or received by LIFT 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
LIFT's variable interest rate exposure against movements in interest rates over
the duration of certain lease terms. Please see "Item 3. Quantitative and
Qualitative Disclosures about Market Risk" for further information about this
interest rate swap agreement.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest incurred by LIFT 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. LIFT utilizes
interest rate swaps that shift the risk of fluctuations in floating rates to the
counterparty in exchange for fixed payments by LIFT. 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, LIFT's
counterparty is an affiliate of Credit Suisse First Boston Corporation. Future
counterparties may consist primarily of the affiliates of major United 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 the
Notes at June 30, 2002 was approximately $1,271.9 million. The terms of each
class of the Notes, the outstanding principal amount at June 30, 2002 and the
estimated fair value of each class of the Notes are as follows (dollars in
thousands):
17
Outstanding Expected
Class Principal Final Final Estimated
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 $ 388,250
Class A-2 260,000 LIBOR + 0.430% July 15, 2004 July 15, 2031 252,363
Class A-3 382,397 LIBOR + 0.430% August 15, 2010 July 15, 2016 374,749
Class B-1 57,763 LIBOR + 1.120% May 15, 2018 July 15, 2031 51,986
Class B-2 79,905 7.124% May 15, 2018 July 15, 2031 71,914
Class C-1 69,000 LIBOR + 2.120% May 15, 2018 July 15, 2031 55,200
Class C-2 72,000 8.093% May 15, 2018 July 15, 2031 57,600
Class D-1 35,000 LIBOR + 2.000% May 15, 2018 July 15, 2031 11,550
Class D-2 25,000 8.000% May 15, 2018 July 15, 2031 8,250
------ ----------
$1,381,065 $1,271,862
========== ==========
The estimated fair value of the Notes, as determined by LIFT, is
calculated as the present value of the future cash flows expected to be received
by each class of Notes, using a discount rate that is indicative of the current
market for securities with similar risk characteristics. However, these
estimated fair values do not necessarily reflect the market value of these Notes
at a specific time and should not be relied upon as a measure of the value that
would be realized by a noteholder upon sale. In particular, their actual value
may be affected by the level of trading and/or demand for these Notes in the
market place and the level of uncertainty as regards the short to medium term
future prospects of the aircraft industry following the current general world
economic downturn, which was exacerbated by the terrorist attacks of September
11, 2001. Further, expectations of future cash flows are based on assumptions
that are subject to a variety of known and unknown risks.
At June 30, 2002, LIFT was a party to a single floating-to-fixed
interest rate swap with an affiliate of Credit Suisse First Boston Corporation
under which LIFT receives monthly payments based on one-month LIBOR and makes
monthly payments based on a fixed rate, each measured against an amortizing
notional balance based on the expected payment schedule of the floating notes.
To the extent the actual payment schedule on the floating notes differs
significantly from the expected payment schedule, there will be a mismatch
between the outstanding principal amount of the floating notes and the notional
amount of the interest rate swap. To the extent LIFT does not, or is unable to,
add additional interest rate swaps up to the outstanding principal of the
floating notes, LIFT would be exposed to variations in interest payments on the
uncovered principal portion of the floating notes. The following table presents,
as of June 30, 2002, the terms and estimated fair value of LIFT's swap agreement
(dollars in thousands):
Rate to be Rate to be
Notional paid by received by Maturity Estimated
Amount LIFT LIFT Date Fair Value
------ ----------- ------------- ----------- ----------
$1,179,551 5.79% LIBOR June 15, 2011 $ (63,740)
18
The estimated fair value of the swap agreement is calculated as the
present value of the future cash flows expected to be exchanged by the
counterparties using a discount rate indicative of the current market for
interest rate swaps of similar interest rate risk characteristics. This
estimated fair value does not necessarily reflect the market value of the swap
agreement at a specific time and should not be relied upon as a measure of the
value that would be realized by LIFT upon termination. The actual value may be
affected by market conditions at the time of any swap unwind.
LIFT 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. There can be no assurance that LIFT will be able to enter into
additional swaps, or sell or unwind any initial or future swaps, to mitigate its
exposure to unfavorable changes in interest rates. Any changes in LIFT'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 US dollars.
19
Part II. Other Information
--------------------------
Item 5. Other Information
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 in Exhibit 99.1. 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.
Controlling Trustee Certification
A certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 was submitted to the Securities and Exchange Commission along with this
Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits (numbered in accordance with Item 601 of Regulation S-K)
99.1 Other information - Important risk factors.
b. Reports on Form 8-K
During the quarterly period ended June 30, 2002, the LIFT group filed
reports on Form 8-K dated April 15, 2002, May 15, 2002 and June 17,
2002. Such reports on Form 8-K included copies of the monthly reports to
holders of the Notes.
20
SIGNATURES
Pursuant to the requirements 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
August 14, 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 August 14, 2002
- ------------------------- ---------------
Joseph E. Francht, Jr.
/S/JONATHAN M. SCHOFIELD Independent Controlling Trustee August 14, 2002
- ------------------------ ---------------
Jonathan M. Schofield
/S/DAVID H. TREITEL Equity Trustee and Controlling August 14, 2002
- ------------------------ Trustee ---------------
David H. Treitel
/S/DAVID VANASKEY, JR. Owner Trustee August 14, 2002
- ------------------------ ---------------
Wilmington Trust Company, not
in its individual capacity but
solely as the Owner Trustee
21