As filed with the Securities and Exchange Commission on December 24, 2003
Registration No. 333-5650
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 20-F
-----------------
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended June 30, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission file number 333-5650
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
(Exact name of Registrant as specified in its charter)
JERSEY, CHANNEL ISLANDS
(Jurisdiction of incorporation or organization)
22 Grenville Street
St. Helier, Jersey
JE4 8PX Channel Islands
(Address of principal executive offices)
-----------------
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
(Title of Class)
ALPS 96-1 Pass Through Trust $245,673,000 Class A Pass Through Certificates,
Series A
ALPS 96-1 Pass Through Trust $56,868,750 Class B Pass Through Certificates,
Series A
ALPS 96-1 Pass Through Trust $50,044,500 Class C Pass Through Certificates,
Series A
ALPS 96-1 Pass Through Trust $40,945,500 Class D Pass Through Certificates,
Series A
Indicate the number of outstanding shares of each of the issuer's classes of
capital or Ordinary Shares as of the close of the period covered by the annual
report.
Shares, $1 par value................................................... 10
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
--- ---
================================================================================
TABLE OF CONTENTS
Page
----
Introduction
Definitions and Technical Terms................................................ 1
Forward-Looking Statements..................................................... 1
Certain Information............................................................ 1
Part I Item 1. Identity of Directors, Senior Management and Advisors................. 1
A. Directors and Senior Management.............................. Not applicable
B. Advisors..................................................... Not applicable
C. Auditors..................................................... Not applicable
Item 2. Offer Statistics and Expected Timetable............................... 2
A. Offer Statistics............................................. Not applicable
B. Method and Expected Timetable................................ Not applicable
Item 3. Key Information....................................................... 2
A. Selected Financial Data...................................... 2
B. Capitalization and Indebtedness.............................. Not applicable
C. Reasons for the Offer and Use of Proceeds.................... Not applicable
D. Risk Factors................................................. 3
Item 4. Information on the Company............................................ 26
A. History and Development of the Company....................... 26
B. Business Overview............................................ 28
C. Organizational Structure..................................... 37
D. Property, Plants and Equipment............................... 37
Item 5. Operating and Financial Review and Prospects.......................... 38
A. Operating Results............................................ 38
B. Liquidity and Capital Resources.............................. 46
C. Research and Development, Patents and Licenses............... Not applicable
D. Trend Information............................................ 50
E. Off-Balance Sheet Arrangements............................... 51
F. Tabular Disclosure of Contractual Obligations................ 51
Item 6. Directors, Senior Management and Employees............................ 52
A. Directors and Senior Management.............................. 52
B. Compensation................................................. 57
C. Board Practices.............................................. 58
D. Employees.................................................... 58
E. Share Ownership.............................................. 58
Item 7. Major Shareholders and Related Party Transactions..................... 58
A. Major Shareholders........................................... 58
B. Related Party Transactions................................... 59
C. Interests of Experts and Counsel............................. Not applicable
Item 8. Financial Information................................................. 59
A. Consolidated Statements and Other Financial Information......59
B. Significant Changes.......................................... 59
I
Page
----
Item 9. The Listing........................................................... 59
A. Offer and Listing Details.................................... 59
B. Plan of Distribution......................................... Not applicable
C. Markets...................................................... 60
D. Selling Shareholders......................................... Not applicable
E. Dilution..................................................... Not applicable
F. Expenses of the Issue........................................ Not applicable
Item 10. Additional Information............................................... 60
A. Share Capital................................................ Not applicable
B. Memorandum and Articles of Association....................... 60
C. Material Contracts........................................... 64
D. Exchange Controls............................................ 64
E. Taxation..................................................... 64
F. Dividends and Paying Agents.................................. Not applicable
G. Statement by Experts......................................... Not applicable
H. Documents on Display......................................... 66
I. Subsidiary Information....................................... Not applicable
Item 11. Quantitative and Qualitative Disclosures about Market Risk........... 66
Item 12. Description of Securities other than Equity Securities............... Not applicable
Part II Item 13. Defaults, Dividend Arrearages and Delinquencies..................... 67
Item 14. Material Modifications to the rights of Security Holders
and use of Proceeds................................................ 69
Item 15. Controls and Procedures.............................................. 69
Item 16. ............................................................. Not applicable
Item 16A. Audit Committee Financial Expert................................... Not applicable
Item 16B. Code of Ethics..................................................... Not applicable
Item 16C. Principal Accountant Fees and Services............................. 70
Item 16D. Exemption From the Listing Standards for Audit Committee........... Not applicable
Part III Item 17. ................................................................... Not applicable
Item 18. Financial Statements................................................. 71
Item 19. Exhibits............................................................. 71
Certain Definitions and Technical Terms........................................ 72
II
INTRODUCTION
Definitions and Technical Terms
This annual report on Form 20-F uses defined terms and technical terms.
Definitions for these terms can be found on pages 72 to 78 of this annual
report.
Forward-Looking Statements
This annual report contains forward-looking statements that involve risks
and uncertainties. In most cases, you can identify forward-looking statements by
terminology such as "may," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms or similar terminology. Such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and actual
results may differ materially from those in the forward-looking statements. In
evaluating these statements, you should specifically consider various factors,
including, without limitation, the information contained in this annual report
under "Item 3 - Key Information - Risk Factors," "Item 4 - Information on the
Company" and "Item 5 - Operating and Financial Review and Prospects."
Certain Information
Aircraft Lease Portfolio Securitisation 92-1 Limited was incorporated in
Jersey on May 13, 1992 (registered number 52674) as a private limited company
under the laws of Jersey and became a public limited company pursuant to a
special resolution passed on June 15, 1992. As used in this annual report on
Form 20-F, "we," "us," "our" and the "Company" refer to Aircraft Lease Portfolio
Securitisation 92-1 Limited and its subsidiaries, except where it is clear that
such terms mean only Aircraft Lease Portfolio Securitisation 92-1 Limited, and
"you" and "your" refer to the holders of Notes.
In this annual report, references to "United States" are to the United
States of America and references to "U.S. dollars," "dollars," "$" or "U.S. $"
are to United States dollars.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
A. Directors and Senior Management
Not applicable.
B. Advisors
Not applicable.
C. Auditors
Not applicable.
1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
A. Offer Statistics
Not applicable.
B. Method and Expected Timetable
Not applicable.
ITEM 3. key information
A. Selected Financial Data
The following table summarizes selected consolidated financial data and
operating information of the Company drawn from our audited financial
statements. The financial statements for each of the fiscal years ended June 30,
1999 through 2003 have been prepared in accordance with U.S. GAAP and audited by
KPMG, independent chartered accountants. The selected consolidated financial
data should be read in conjunction with the Consolidated Financial Statements
and notes thereto and "Item 5 - Operating and Financial Review and Prospects -
Operating Results."
Selected Consolidated Financial Data and Operations Information
FISCAL YEAR ENDED (1)
-------------------------------------------------------------------
June 30, June 30, June 20, June 30, June 30
2003 2002 2001 2000 1999
--------- -------- --------- ----------- -----------
OPERATIONS STATEMENT DATA:
Lease Revenue - Aircraft Leasing $19,758 $32,605 $37,948 $43,087 $47,373
Gain/(Loss) on sale of Aircraft (1,152) - - 284 (1,905)
--------- -------- ---------- ----------- -----------
Net Revenue 18,606 32,605 37,948 43,371 45,468
Net Expenses (49,266) (63,370) (90,984) (52,680) (52,993)
-------- -------- ----------- ----------- -----------
Loss before taxes (30,660) (30,765) (53,036) (9,309) (7,525)
Taxes (225) (24) (20) (20) (20)
Dividend - - - - -
--------- -------- ---------- ---------- ----------
Net Loss $(30,885) $(30,789) $(53,056) $(9,329) $(7,545)
--------- -------- ---------- ---------- ----------
BALANCE SHEET DATA:
Total assets $192,284 $254,987 $291,244 $340,876 $380,849
Total liabilities $356,455 $388,273 $393,741 $390,317 $420,961
Shareholders' deficit $(164,171) $(133,286) $(102,497) ($49,441) $(40,112)
OTHER DATA
Aircraft owned at period end 9 11 11 11 13
- ----------------
(1) All dollar amounts are listed in thousands.
B. Capitalization and Indebtedness
Not applicable.
2
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
The following summarizes certain risks which may materially affect our
ability to pay interest, principal and premium, if any, on the Notes in full at
or before their final maturity date.
The risks and uncertainties described below are not the only ones
facing our company. Additional risks and liabilities that we are not aware of at
present, or that we believe today are immaterial, may also impair our business
operations. Our business, financial condition and results of operations could be
materially adversely affected by any of these risks. If any of the following
risks actually occur, we may not be able to make the required payments on the
Notes.
Recent Developments
Continued negative trends caused by the depression in the aviation
industry have adversely affected our lessees and our ability to sell and lease
aircraft and thereby have adversely affected our revenue.
In the fiscal year ended June 30, 2003 and in the subsequent period to
date, we have continued to suffer from a very difficult business environment
given global economic conditions as exacerbated by the terrorist attacks of
September 11, 2001, the military action of the U.S. and its allies in
Afghanistan, the terrorist attacks in Bali and Saudi Arabia, the war in Iraq and
the outbreak of Severe Acute Respiratory Syndrome ("SARS"). Although the World
Health Organization recently removed the last remaining negative travel
recommendations related to SARS, some scientists have suggested the possibility
that new cases of SARS may emerge during the coming winter season. Each of these
events highlighted the deteriorating business fundamentals in the industry that
have been further weakened by passengers' fears and economic recession. Losses
of $10.54 billion were estimated for the global airline industry in calendar
year 2002, the second largest annual loss in aviation history.
The impact of these events has been seen in many airlines cutting their
flight schedules with many taking the opportunity to retire aircraft from
service. Industry experts indicate that the percentage of western built
commercial jet aircraft (excluding current production) "on-the-ground" and
available for lease or sale has increased from approximately 3% in the late
1990's to approximately 6% in 2003. In addition, many carriers chose to postpone
delivery of new aircraft purchases on which they had made firm commitments and
canceled orders for many on which they had options. Some carriers have filed for
bankruptcy (including Air Canada, one of our largest lessees as measured by
annual lease revenue) or consolidated, while others, including many of our
lessees, have suffered large losses or face severe financial difficulties. There
has been a significant increase of aircraft on the market available for sale or
lease (especially older technology and less fuel-efficient aircraft or models no
longer in production), increasing pressure on the rentals and sales prices
offered. The depressed aircraft market has made it difficult to sell aircraft at
reasonable prices. Lease rates have also been suffering from the increase in
availability of aircraft and this reduction in aircraft values. As a result, we
have experienced a significant decline in lease rates upon re-leasing or
extensions of leases, requests from certain lessees to restructure their leases
and an increasing number of "power-by-the-hour" leases in which lease rates are
based on the number of hours the lessee uses the aircraft. Our business has been
adversely affected by these negative developments in the industry, particularly
in respect of new aircraft leases which have mostly been based on
"power-by-the-hour" terms and the increased negotiating power by lessees to,
among other things, require that certain aircraft maintenance and overhaul costs
be paid by the Company. As a result of the
3
loss of investor appetite and the difficulty in obtaining financing for the
purchase of aircraft, there are few buyers of aircraft on operating lease and
the resulting illiquidity in the market has caused sale prices of aircraft to
further decline. There have been few aircraft sale transactions that we are
aware of in the past twelve months and the difficulty in selling aircraft in the
current market has had an adverse effect on sales prices generally. The sales
prices we received for the aircraft we sold in fiscal year 2003, in our efforts
to comply with the Trust Note Sales Goals, reflected the industry wide decline
in sales prices for older aircraft.
In fiscal year 2000, we determined that projected lease and sale
proceeds combined with lease and sale proceeds received indicated that proceeds
expected through to the final maturity dates of the Notes would not be
sufficient to repay the Class E Notes in full and may not be sufficient to repay
the Class D Notes in full. Recognizing this projected shortfall and the
potential for further deterioration in lease rates and sale values for older
aircraft, we considered the limited alternatives available to us, given the
restrictions imposed by the Deed of Charge on the Company's operations, to
maximize the proceeds available to pay noteholders the amounts owing to them at
the time such amounts become due. With the assistance of the Servicer, we
solicited bids for a sale of our aircraft portfolio.
By September 11, 2001, we were in advanced negotiations for a sale of
the Company to a prospective purchaser that would have, if consummated, resulted
in payment of all amounts owing to the Class A, Class B and Class C noteholders
and all amounts owing to the Class D noteholders except make-whole premium. As a
result of the terrorist attacks of September 11, 2001 and the resulting
disruption to the economy generally and the airline industry specifically, the
prospective purchaser initially put these negotiations on hold and ultimately
informed us that they were no longer interested in purchasing the portfolio.
Assuming we were able to find another prospective purchaser, the terms we
negotiated prior to September 11, 2001 would not be achievable at this time
given the current condition of the airline industry. Further, because the sale
values of most older aircraft have declined so significantly and with respect to
certain aircraft models there is currently no sales market, the Company was
unable to comply with the Trust Note Sales Goal for June 2003, and we believe
the Company will not be able to comply with the Trust Note Sales Goal for June
2004.
This difficult business environment has already had serious adverse
implications for our revenue, and consequently for our ability to pay
noteholders certain amounts due. At various times during fiscal year 2003,
certain target principal payments scheduled to be paid to holders of Class A,
Class B, Class C and Class D Notes, certain interest payments due to holders of
Class A, Class B, Class C and Class D Notes and all interest payments scheduled
to be paid to holders of Class E Notes were in arrears. As at the end of fiscal
year 2003, these arrears consisted of $2.042 million of Class A Note Target
Amount, $0.565 million of Class A Note step-up interest, $0.220 million of Class
B Note step-up interest, $4.304 million of Class C Note Target Amount, $0.206
million of Class C Note step-up interest, $5.177 million of Class D Note Target
Amount, $0.326 million of Class D Note step-up interest, $0.504 million of Class
D Note default interest, $2.805 million of Class D Note interest and $45.105
million of Class E Note interest. As of December 15, 2003, unpaid amounts of
target principal payments and interest consisted of $30.589 million of Class A
Note Target Amount, $0.741 million of Class A Note step-up interest, $0.305
million of Class B Note step-up interest, $4.304 million of Class C Note Target
Amount, $0.290 million of Class C Note step-up interest, $5.177 million of Class
D Note Target Amount, $0.661 million of Class D Note default interest, $0.482
million of Class D Note step-up interest, $4.612 million of Class D Note
interest and $48.560 million of Class E Note interest.
As a result of the continued decline in lease rental rates and market
values, our revenue has decreased significantly. In addition, several of our
leases are "power-by-the-hour" leases, where our receipts are dependent on the
lessees' use of the aircraft. These factors have had an adverse impact on our
4
cashflow, particularly as we are required to continue to sell our aircraft in
order to meet the Trust Note Sales Goals set out in the Deed of Charge and as
discussed below.
The rental amounts and sales proceeds received to date combined with
projected rental amounts and sale proceeds through the final maturity date of
the Notes indicate that there will not be sufficient proceeds to pay any further
interest on or repay the principal of the Class E Notes, pay any further
interest on or repay any further principal of the Class D Notes, repay any
further principal of the Class C Notes, repay some of the principal of the Class
B Notes or pay any further step-up interest on the Class A, B, C or D Notes.
Re-evaluation of our Notes by the rating agencies has resulted in
downgrades to our Class A, Class B, Class C and Class D Notes and could result
in some or all of these Notes being further downgraded by one or both of the
rating agencies.
In fiscal year 2003, Standard & Poor's announced on November 15, 2002
that it was lowering its ratings on each class of the Notes rated by Standard &
Poor's and removing them from credit watch. On March 25, 2003, Standard & Poor's
announced that it was placing each class of the Notes on credit watch with
negative implications. On June 5, 2003, Standard & Poor's again downgraded each
class of the Notes and also removed them from credit watch with negative
implications but at the same time placed each class on negative outlook.
In fiscal year 2003, Moody's announced on November 15, 2002 that it was
lowering its ratings on each class of the Notes rated by Moody's. Subsequent to
the fiscal year end, Moody's announced on October 1, 2003 that it was further
reducing the ratings on the Class A and Class B Notes.
The current ratings on each class of the Notes are as follows:
Moody's Standard & Poor's
--------- ---------------------
Class A A3 BBB-/Outlook negative
Class B Ba3 B/Outlook negative
Class C Caa1 CCC/Outlook negative
Class D Not rated CCC-/Outlook negative
Copies of the announcements of these downgrades by Standard & Poor's
and Moody's may be viewed at their respective web sites.
A rating is not a recommendation to buy, sell or hold Notes because
ratings do not comment as to market price or suitability for a particular
investor. A rating may be subject to revision, suspension or withdrawal at any
time by the assigning rating agency. Given the continuing difficulties in the
aircraft industry and their impact on the factors which determine our revenues,
there can be no assurance that the rating agencies will not take any further
action in respect of our Notes.
We were unable to repay any of the Notes by their expected final
payment date and current projections indicate that we will not have sufficient
funds to pay any further step-up interest on any of the Notes, pay any further
interest on or repay any further principal of the Class D and Class E Notes,
repay any further principal of the Class C Notes or to repay the principal of
the Class B Notes in full.
5
The September 11, 2001 terrorist attacks on the United States as well
as the military action of the U.S. and its allies in Afghanistan, the terrorist
attacks in Bali and Saudi Arabia, the war in Iraq and the outbreak of SARS have
each had a significant adverse effect on the aircraft industry in general and on
the Company. These events combined with the slowdown in the airline industry
prior to September 11, 2001 have negatively impacted projected rental amounts
and sale proceeds through to the final maturity date of the Notes. Our current
projections indicate that we will not have sufficient funds to pay any further
interest on or repay any further principal of the Class D and Class E Notes,
repay any further principal of the Class C Notes or to repay the principal of
the Class B Notes in full.
The Company did not have sufficient funds to repay the Class A Notes on
their expected final payment date of May 15, 2002 or to repay the Class B, Class
C or Class D Notes on their expected final payment date of July 15, 2002.
Failure to repay in full the principal of those Notes by such dates is not an
Event of Default; however, the Deed of Charge requires, to the extent the
Company does not repay in full the principal of those Notes by such dates, that
the Company pay to the Class A, Class B and Class C Noteholders additional
step-up interest of 0.50% per annum and to the Class D Noteholders additional
step-up interest of 1.00% per annum for each month until the earlier of the date
such Notes are repaid in full and their final maturity date of June 15, 2006.
These additional interest costs will only be paid to the extent there are
available collections in accordance with the priority of payments set forth in
the Deed of Charge. The Company paid some step-up interest in fiscal year 2002,
but our current projections indicate that we will not have sufficient funds to
pay any further step-up interest.
We were unable to comply with the Trust Note Sales Goal for June 2003
and we believe we will not be able to comply with the Trust Note Sales Goal for
June 2004.
The Deed of Charge sets out the following Trust Note Sales Goals which
require us to approve sales of our aircraft on an ongoing basis:
Aircraft to be Sold
(measured by Initial Appraised Value as of June 3, Date by which Sales Goals
1996) are to be Satisfied
$65,000,000 June 27, 2001
$130,000,000 June 27, 2002
$200,000,000 June 27, 2003
$454,950,000 June 27, 2004
We were in compliance with and had exceeded the Trust Note Sales Goals
as of June 27, 2001 and were required to sell a further $54,330,000 (as measured
by Initial Appraised Value) worth of aircraft to be in compliance with the Trust
Note Sales Goals as of June 27, 2002.
As discussed above, since September 11, 2001, the market for sale of
used aircraft has been extremely poor and it is not clear if and when the market
will improve in a meaningful way. Nevertheless, in order to meet the Trust Note
Sales Goals, following an extensive marketing effort by the Servicer, the
Company had entered into non-binding agreements to sell a B737-300 and an
A320-200 aircraft to two separate purchasers by June 27, 2002. However, as a
result of difficulties and delays outside the Company's control the sale of the
B737-300 aircraft was not completed until October 1, 2002 and the sale of the
A320-200 aircraft (which was ultimately sold to a different purchaser following
the withdrawal of the original prospective purchaser on November 5, 2002) was
not completed until December 20, 2002. As a result, the Company was not in
compliance with the Trust Note Sales Goals from November 5, 2002 until the
A320-200 aircraft was sold to such other purchaser on December 20, 2002.
6
In the period from June 1996 to date, we have sold five aircraft
totaling $133,190,000 (measured by Initial Appraised Value). We needed to sell
an additional $66,810,000 (measured by Initial Appraised Value) worth of
aircraft to comply with the June 2003 Trust Note Sales Goal and would need to
sell all of our aircraft to comply with the June 2004 Trust Note Sales Goal. At
our direction, the Servicer has been marketing each of our aircraft for sale in
order to meet the ongoing Trust Note Sales Goals. However, the current market
for sale of used aircraft is extremely poor and it is not clear if and when the
market will improve.
In fiscal year 2003, the marketing efforts of the Servicer resulted in
two offers to purchase the B757-200 aircraft, but both offers were at prices
significantly below the Class C Note Target Price. After careful consideration
of these offers, the Company's obligations under the Deed of Charge (notably,
the Business Objectives contained therein) and the current and possible future
market conditions for aircraft sales and leasing, we concluded that it would not
be consistent with the terms of the Deed of Charge for the Company to accept
either such offer.
We did not comply with the Trust Note Sales Goal for June 27, 2003 as
we were unable, given the current aircraft industry market conditions, to sell
sufficient aircraft at the sale prices required by our current Business
Objectives. Given the continuing depressed market for aircraft sales and the
requirement to achieve sale prices consistent with our current Business
Objectives, we believe the Company will not be able to comply with the Trust
Note Sales Goal for June 27, 2004.
Failure to comply with the Trust Note Sales Goals may, under certain
circumstances, constitute an Event of Default under the Deed of Charge if such
failure continues for 30 days or more after written notice thereof has been
given to the Company or the Security Trustee by holders of at least 25% of the
aggregate Outstanding Principal Balance of the Notes of any class which has been
materially adversely affected by such failure.
The Deed of Charge further provides that if an Event of Default were to
occur and be continuing an Enforcement Notice may only be served by 662/3% or
more of the aggregate Outstanding Principal Balance of the directing class,
which will be Class A so long as any Class A Notes are outstanding.
The Deed of Charge provides that the failure to comply with the Trust
Note Sales Goals gives the Noteholders the right to replace the Servicer at the
direction of Noteholders representing at least 75% of the aggregate Outstanding
Principal Balance of the Class A, Class B, Class C and Class D Notes. The Deed
of Charge also provides that, subject to the pre-emption rights of the Class D
and Class E Noteholders, to the extent the Trust Note Sales Goals are not
complied with prior to December 27, 2004, the Company is required to accept any
Sale Offer for the sale of an aircraft if the proposed sale price is at least
equal to the Class C Note Target Price. During the time that the Company has not
been in compliance with the Trust Note Sales Goals, the Company has been unable,
with the exception of the sale of the A320-200 aircraft in December 2002, to
sell aircraft at prices at or above the Class C Note Target Price. However, to
the extent the Company has not complied with the Trust Note Sales Goals, on or
after December 27, 2004, the Company will be required, subject to the
pre-emption rights of the Class D and Class E Noteholders, to accept any Sale
Offer for the sale of an aircraft if the proposed sale price is at least equal
to the Class A Note Target Price.
Our Business Objectives will change on June 27, 2004 in a way that is
potentially adverse to Class B and Class C Noteholders.
With respect to the re-leasing, marketing and sale of aircraft, the
Deed of Charge provides that our Business Objectives (as described in "Item 4 -
Information on the Company - B. Business Overview - Business Objectives") change
after certain dates. Accordingly, (i) prior to June 27, 2001 our Business
7
Objectives were to (x) re-lease aircraft to maximize rental payments so as to be
able to make required payments of interest and principal on the scheduled
payment dates with respect to each class of Notes and (y) market and sell
aircraft so as to repay the Outstanding Principal Balance of all Notes, (ii)
from June 27, 2001 through June 26, 2004 our Business Objectives are to (x)
re-lease aircraft to maximize rental payments so as to be able to make required
payments of interest and principal on the scheduled payment dates with respect
to the Senior Trust Notes and (y) market and sell aircraft so as to repay the
Outstanding Principal Balance of the Senior Trust Notes, and (iii) from June 27,
2004 through June 15, 2006 our Business Objectives will be to (x) re-lease
aircraft to maximize rental payments so as to be able to make required payments
of interest and principal on the scheduled payment dates with respect to the
senior most class of Notes (namely the Class A Notes) and (y) market and sell
aircraft so as to repay the Outstanding Principal Balance of the senior most
class of Notes.
Consistent with these requirements of the Deed of Charge, from June 27,
2001 and continuing through June 26, 2004 we have analyzed and will continue
through June 26, 2004 to analyze each potential sale or lease of aircraft with a
view toward maximizing cashflow to the holders of the Senior Trust Notes.
However, beginning on June 27, 2004 we will be required to analyze such options
with a view toward maximizing cashflow to only the holders of Class A Notes.
Although we are always cognizant of acting in the interest of all the Company's
noteholders, compliance with this requirement may in certain circumstances
dictate that aircraft be sold or leased in a manner that may not be in the best
interest of holders of Notes junior to Class A.
As a result of incorrect LIBOR calculations by the Reference Agent,
holders of Class A, Class B and Class C Notes were overpaid on certain payment
dates and holders of Class D and Class E Notes were underpaid by equivalent
amounts on such dates.
The Reference Agency Agreement requires that the Reference Agent
determine LIBOR as the per annum rate for deposits in United States dollars for
a period of one month that appears on Telerate Page 3750 as of 11:00 a.m.
(London time), rounded to the nearest 1/16 of one percentage point. The
Reference Agency Agreement further provides that based on this determination,
the Reference Agent shall determine the interest rate for each class of the
Company's floating rate notes.
The Reference Agent recently informed us that since the Closing Date
there have been a number of instances where LIBOR was not rounded to the nearest
1/16 of one percentage point. As a result on a number of Payment Dates since the
Closing Date, holders of Class A, Class B and Class C Notes received more
interest than they were entitled to, and holders of Class D and Class E Notes
received proportionately less interest than they were entitled to. The Trustee
has calculated that the cumulative effect of these incorrect interest payments
resulted in aggregate over payments of approximately $172,000, $70,000 and
$61,000 to the holders of Class A, Class B and Class C Notes, respectively, and
underpayments of approximately $215,000 and $88,000 to holders of Class D and
Class E Notes, respectively.
The Trustee is proposing that it will contact the holders of Class A,
Class B and Class C Notes to request that the incorrect overpayments be returned
so that the Trustee can properly allocate such funds to the appropriate holders
of Class D and Class E Notes. We can offer no assurance that the Trustee will be
successful in identifying precisely which holders of Class A, Class B and Class
C Notes received the overpayments, whether, even if identified, the Trustee will
be successful in having these funds returned or how long it will take for the
Trustee to actually complete this process.
8
Risks Relating to Payments on the Notes
Our assets are limited. Our current projections indicate that our
proceeds from leasing and selling aircraft will not be enough to pay any further
step-up interest on the Notes, pay any further interest on or repay any further
principal of the Class D and Class E Notes, repay any further principal of the
Class C Notes or to repay the principal of the Class B Notes in full.
We do not have, nor are we permitted or expected to have, any
significant assets other than our specific portfolio of aircraft and our rights
as lessor under the leases for these aircraft, including our rights to the
payments thereunder. Our ability to pay interest on and repay the principal of
the Notes is primarily dependent upon the receipt of rental payments under the
leases and of sales and other disposition proceeds in respect of the aircraft,
which depends upon a number of factors, including (i) the timing of the receipt
of payments under the leases and the ability of our lessees to make such
payments; (ii) our ability to sell the aircraft at the times and for the amounts
contemplated in the Prospectus and the timing of our receipt of the proceeds of
any such aircraft sales; (iii) our ability to re-lease any aircraft upon
termination of the existing lease with respect thereto, whether upon the
scheduled expiration date thereof or as a result of a lessee default thereunder
or otherwise, and to re-lease the aircraft on the scheduled re-lease date with
respect to such aircraft at the rates contemplated in the Prospectus; (iv) the
exercise by a lessee of an extension, early termination or purchase option under
the related lease; and (v) the occurrence of an event of loss under a lease with
respect to any aircraft and timing of our receipt of casualty insurance or other
proceeds, if any, in respect thereof. Many of these factors have been adversely
impacted by the current depression in the airline industry, accentuated by
reductions in travel following increased world wide terrorist action, the
ongoing threat of such action, the threat of continued military action in the
Middle East and elsewhere and the outbreak of SARS and the threat of future
similar outbreaks. The rental amounts and sale proceeds received to date
combined with projected rental amounts and sale proceeds through the final
maturity date of the Notes indicate that there will not be sufficient proceeds
to pay any further step-up interest on the Notes, pay any further interest on or
repay any further principal of the Class D and Class E Notes, repay any further
principal of the Class C Notes or to repay the principal of the Class B Notes in
full. See "Item 4 - Information on the Company - History and Development of the
Company," "Item 5 - Operating and Financial Review and Prospects - Liquidity and
Capital Resources - The Company's Cash Needs" and "Item 13 - Defaults, Dividend
Arrearages and Delinquencies."
The Deed of Charge requirement that the Company sell aircraft of a
certain value by specific dates reduces our ability to generate dependable funds
to pay noteholders amounts due, particularly as many of our expenses which are
required to be paid prior to payments to noteholders are fixed and do not
necessarily decrease proportionately with the decrease of our revenue generating
assets.
To the extent we are able to sell aircraft in anticipation of the legal
final maturity of the Notes in June 2006, we will reduce the diversification of
our portfolio and increase the Company's dependence upon each remaining
aircraft's lease revenues as a percentage of total lease revenue. Many of our
current leases are "power-by-the-hour" leases and our revenue from these leases
is primarily based on the number of hours these aircraft are in use and this
revenue is therefore a less dependable source of rental income than our revenue
from fixed leases. Further, many of our expenses are fixed and are not reduced
as aircraft are sold. Our lessees and future potential lessees also have had,
during this time of oversupply of and reduced demand for aircraft, and continue
to have greater bargaining power with regard to having us, as lessor, agree to
contribute towards certain maintenance, overhaul and AD expenses which in
earlier years had typically been fully covered by lessees. Further, even if
lessees are obligated to pay such costs pursuant to their leases, their weak
financial condition may leave them unable to do so in which case we may have to
cover such costs in order to keep the aircraft in use. As the size of our fleet
decreases and lease revenue decreases proportionately, these maintenance, AD and
other expenses increase as a percentage of our monthly revenue and, because they
are required to be paid in advance of principal and
9
interest on the Notes in accordance with the Deed of Charge, these expenses have
a significant impact on the funds available to pay principal and interest on the
Notes and may at times prevent us from making such payments on the Notes. To the
extent any remaining aircraft is off-lease or re-leased at reduced rates it will
also have a more significant impact on our funds available to pay noteholders
amounts due. This situation is further exacerbated by the current weak
environment in the aircraft industry because there is currently little to no
economically viable market for the sale of most of our aircraft which forces us
to sell the aircraft that attract better lease rates and which have longer lease
terms outstanding.
Our original assumptions about revenue and operating costs have not
matched actual experience and as a result we have been unable to make all Note
payments at the times and in the amounts that our assumptions indicated. We
expect that actual experience will continue to be more negative than our
original assumptions.
On the Closing Date, we determined the expected final payment dates for
the Notes based on assumptions about our future revenue and interest and
operating costs and possible future economic conditions. The purpose of these
assumptions was to illustrate the payment provisions of the Notes. Many of these
assumptions related to future political, economic and market conditions that
were outside our control and difficult or impossible to predict. Market interest
rates are an example of such an assumption. Other assumptions made at that time
related to future events that depend on the actions and future financial
condition of lessees or others with whom we deal. Insurance recoveries and
maintenance payments are examples of such assumptions. Further, our assumptions
at that time clearly did not anticipate events similar to the terrorist attacks
of September 11, 2001 or the outbreak of SARS. For the reasons discussed above,
our actual experience has not been consistent with the assumptions we made.
The Company did not have sufficient funds to repay the Class A Notes on
their expected final payment date of May 15, 2002 or to repay the Class B, Class
C or Class D Notes on their expected final payment date of July 15, 2002.
Failure to repay in full the principal of those Notes by such dates is not an
Event of Default; however, the Deed of Charge requires, to the extent the
Company does not repay in full principal of these Notes by such dates, that the
Company pay to the Class A, Class B and Class C Noteholders additional step-up
interest of 0.50% per annum and to the Class D Noteholders additional step-up
interest of 1.00% per annum for each month until the earlier of the date such
Notes are repaid in full and their final maturity date of June 15, 2006. These
additional interest costs would only be paid to the extent there are available
collections in accordance with the priority of payments set forth in the Deed of
Charge. We paid some step-up interest in fiscal year 2002, but our current
projections indicate that we will not have sufficient funds to pay any further
step-up interest.
The September 11, 2001 terrorist attacks on the United States as well
as the military action of the U.S. and its allies in Afghanistan, the terrorist
attacks in Bali and Saudi Arabia, the war in Iraq and the outbreak of SARS have
had a significant adverse effect on the aircraft industry in general and on the
Company. These events combined with the slowdown in the airline industry prior
to September 11, 2001 have negatively impacted projected rental amounts and sale
proceeds through to the final maturity date of the Notes. Current projections
indicate that there will not be sufficient proceeds to pay any further step-up
interest on the Notes, pay any further interest on or principal of the Class D
and Class E Notes, repay any further principal of the Class C Notes or to repay
the principal of the Class B Notes in full.
Your right to receive payments ranks junior to our operational fees and
expenses, certain other payments we may make and any more senior classes of
Notes.
Our operational fees (including fees of the Servicer, Administrative
Agent, Cash Manager, Financial Consultant and Trustee and legal and audit fees)
and expenses (including expenses payable under the terms of our leases, such as
payments in respect of ADs and reimbursement of maintenance and
10
overhaul costs discussed above and other corporate expenses such as premiums for
directors and officers liability insurance) and certain other payments that we
must make rank senior to the Notes and are payable out of our funds before any
payments are made on the Notes. Depending on the amount of these more senior
payments, and the amount of our lease revenue (which has decreased for many
reasons including required reduction of our portfolio and the reduction in
market lease rates for our aircraft - all as discussed herein) our ability to
make the required payments on the Notes is likely to be further reduced.
In addition, your right to receive payments of interest, principal and
any premium will rank junior to payments on more senior classes of Notes. Upon
the occurrence of an Event of Default, the holders of a class of Notes may not
exercise remedies under the Deed of Charge until all amounts we owe on more
senior classes of Notes and our other more senior obligations (such as payments
in respect of maintenance and ADs and other fixed costs discussed herein) have
been paid. In that case, holders of the most senior class of Notes will control
the exercise of these remedies. For example, see "Item 13 - Defaults, Dividend
Arrearages and Delinquencies."
We rely on lease payments and aircraft sales proceeds to make principal
payments on the Notes. To date, these lease payments and aircraft sales proceeds
have not met expectations and based on our current projections, future lease
payments and aircraft sales proceeds will not be sufficient to repay principal
in full to all noteholders.
The pre-existing downturn in the world economic climate and its
negative impact on the commercial aviation industry was exacerbated by the
terrorist attacks of September 11, 2001, as well as the military action of the
U.S. and its allies in Afghanistan, the terrorist attacks in Bali and Saudi
Arabia, the war in Iraq, the outbreak of SARS and the threat of further
terrorist attacks. The drop in passenger demand has resulted in reduction in
flight schedules and a consequent oversupply of aircraft (including aircraft
available for lease). We are experiencing declines in lease rates and a fall in
the realizable value for aircraft in open market sales. In addition, airlines
are seeking to agree reduced rentals in exchange for extended lease terms. Many
airlines have had financial difficulties as a result of the current environment,
resulting in the bankruptcy of two major European airlines (Sabena and Swissair)
and Chapter 11, or similar, bankruptcy protection for a number of airlines
including US Airways, United Airlines, Air Canada (one of our largest lessees as
measured by annual lease revenue) and Avianca. As a result, aircraft owned or
leased to these airlines may be put on the market for sale or lease thereby
increasing the supply of available aircraft at a time of decreasing demand. Any
further bankruptcies or consolidation may further increase supply of aircraft
for sale or lease and further reduce the number of potential lessees and
operators of particular models of aircraft, which would result in further
decreased aircraft values for any such models and lease rates in general.
Our ability to repay the principal of the Notes depends largely on our
ability to sell the aircraft for an amount that will be sufficient to repay the
outstanding principal on such Notes. In the event we are unable to sell the
aircraft, or if the proceeds of the sales of aircraft are less than such amount,
we will not have sufficient funds to pay all the principal of the Notes.
Aircraft appraisers have recently been reducing, and in some cases significantly
reducing, their appraised base values for aircraft. Further, the substantial
difficulties faced by airlines in the current market have reduced demand for and
increased supply of aircraft which has resulted in accelerated reductions in
aircraft values. The reductions in aircraft values to date have already
negatively impacted our ability to repay principal on the Class B, C, D and E
Notes, and there can be no assurance that we will be able to repay the holders
of the Class A Notes the full amount owed to them when due. The failure of the
Company to pay principal of the Class A, Class B, Class C or Class D Notes on
any day prior to the final maturity date because funds of the Company are not
available in accordance with the priorities described in the Prospectus, will
not constitute an Event of Default with respect to such class of Notes.
11
We rely on lease payments to make interest payments on the Notes. To
date, these lease payments have not met expectations and based on our current
projections we do not expect to have sufficient funds to pay any further step-up
interest on the Notes or any further interest on the Class D and Class E Notes
and in the future we may not have sufficient funds to pay all interest due to
the other noteholders in the amounts and on the dates contemplated.
Our ability to make payments of interest on the Notes when and in the
amounts due depends primarily upon our receipt of payments under the leases and
the re-lease of each of the aircraft and the timing and amount of proceeds from
such leases. The financial condition of certain of our lessees and many of the
airlines which utilize operating leases is generally weak, and as a result our
lessees are often in arrears, sometimes significantly. Further, as a result of
the decline in air travel experienced at the end of 2001 and during 2002 and
2003, many airlines are flying fewer aircraft and downsizing or reducing planned
growth of their fleets. In addition, a number of airlines have declared
bankruptcy (including Air Canada, one of our largest lessees as measured by
annual lease revenue) and ceased operations since September 11, 2001 and it is
expected that the industry will experience further consolidation as well as
additional bankruptcies in the near future. All of this may significantly impact
our ability to re-lease our aircraft on a timely basis and at favorable rates.
Further, the reduced revenue and increased expenses that many airlines are
encountering since the terrorist attacks are likely to continue to negatively
impact the already weak financial condition of these airlines, including our
lessees. This may result in an increase in delayed, missed or reduced rental
payments as has been the case for one of our largest lessees (as measured by
annual lease revenue), Air Canada (see "Item 4 - Information on the Company -
Aircraft Leasing"). In the event that one or more of the lessees does not make
the required payments under the leases or one or more of the aircraft are not
re-leased on or promptly after the applicable scheduled lease expiration date,
payments of interest on the Notes will not be made unless we are able to satisfy
our obligation to make such payments from payments on other leases that are
current or that are entered into following a repossession of the relevant
aircraft or out of collateral provided under the defaulted lease or other
amounts that may be on deposit in the lessee funded account or out of available
collections distributed on any payment date in accordance with the priority of
payments established for the Notes. No assurance can be given, however, that
amounts will be available from such other sources to satisfy our obligations to
pay interest on the Notes or that such other sources will exist. This situation
will also become more difficult assuming we are able to sell sufficient aircraft
to satisfy future Trust Note Sales Goals and thereby become more dependent on
the lease revenue from each aircraft remaining in our portfolio as a percentage
of total lease revenue. Our reliance on declining lease revenues is further
exacerbated by the increased requirements for us to contribute towards
maintenance, overhaul and AD costs (which are required to be paid in advance of
principal and interest on the Notes) that we are experiencing and expecting to
continue to experience as discussed elsewhere in these Risk Factors. Based on
current projections, we expect our lease payments will not be sufficient to pay
any remaining interest due on the Class D or Class E Notes. An Event of Default
occurs if we do not pay interest (excluding additional interest, default
interest or step-up interest) on any Note within five days of its due date. This
Event of Default occurred on several occasions prior to fiscal year 2003 when we
had insufficient funds to pay such interest in full to Class D Noteholders and
has now been ongoing since December 16, 2002. We expect this Event of Default to
continue as the Company does not expect to have sufficient funds to pay any
further Class D Note interest. See "Item 13 - Defaults, Dividend Arrearages and
Delinquencies" for a discussion of the limited remedies available upon the
occurrence of an Event of Default under these circumstances. Further, based on
our current projections we may not have sufficient funds to pay all interest due
to the other noteholders in the amounts and on the dates contemplated and we do
not expect to have sufficient funds to pay any step-up interest due to any
noteholders.
Our leases are all interest-rate-fixed leases (some leases are based on
"power-by-the-hour" fixed hourly rates and others on fixed monthly rates) and
our interest payments on the Notes are fixed and
12
floating rate obligations. If LIBOR materially increases it may adversely affect
our ability to make interest payments when due.
Our lease collections are invested based upon recommendations of the
Cash Manager. Based on these recommendations, we currently do not believe it is
necessary to invest our lease collections in swaps, options or other hedging
alternatives to protect against materially adverse movements in interest rates.
We may, however, invest in such instruments at any time if we and our advisors
determine it is appropriate. There can be no assurance that the strategy adopted
to invest or to not invest in such instruments at any time will be effective in
protecting your payments of interest in an environment of material increases to
LIBOR.
The Notes have a limited trading market. As a result you may be unable
to sell your Notes or the price of the Notes may suffer.
The Notes have a limited trading market, which may adversely affect
your ability to sell the Notes or the price at which you sell them. The Notes
are listed only on the Luxembourg Stock Exchange. No one has an obligation to
make a market in the Notes. We do not intend to seek approval for quotation
through any automated quotation system. Future trading prices for the Notes will
depend on many factors, including general economic conditions and our financial
condition, performance and prospects.
Risks Relating to Sales of Aircraft
Overview. Our ability to make payments of principal on the Notes will
be dependent principally upon our ability to lease and sell the aircraft and to
receive proceeds from such leases and sales at the times and for the amounts
initially contemplated by the Prospectus, which has been and will continue to be
affected by factors such as the demand for commercial jet aircraft in general,
demand for our aircraft in particular, the cost of comparable new aircraft, the
future value of our aircraft and the timing of the sale of our aircraft. Each of
these factors has been adversely impacted by the terrorist attacks of September
11, 2001 as well as the military action of the U.S. and its allies in
Afghanistan, the terrorist attacks in Bali and Saudi Arabia, the war in Iraq and
the outbreak of SARS all of which followed a pre-existing global economic
downturn.
The commercial aircraft market is cyclical. In addition, decreased
demand and excess supply of aircraft has decreased our revenue.
The market for commercial jet aircraft is cyclical and can produce
sharp increases and decreases in aircraft values and lease rates. Prior to
September 11, 2001, the aircraft leasing market was already experiencing a
reduction in demand, particularly for older widebody aircraft (which accounted
for two of our nine aircraft as at June 30, 2003). Decreases in aircraft values
and lease rates have caused and are likely to continue to cause a decrease in
our revenue.
Aircraft values and lease rates depend on various factors (many of
which have been adversely impacted by the depression in the airline industry)
that are outside our control, including:
o general economic conditions affecting lessee operations;
o used aircraft supply and demand;
o interest rates, currency exchange rates and credit
availability;
o fuel and other operating costs;
13
o manufacturer production levels and prices for new aircraft;
o passenger demand;
o retirement and obsolescence of aircraft models;
o re-introduction into service of aircraft previously in
storage;
o governmental regulations; and
o lack of capacity in the air traffic control system.
In addition to values for aircraft generally, the value of specific
aircraft may increase or decrease sharply depending on factors that are not
within our control, including:
o manufacturers merging or leaving the aircraft industry, such
as the merger between Boeing and McDonnell Douglas and the
bankruptcy of Fokker N.V., which led to the termination of
production of McDonnell Douglas and Fokker aircraft and a
resulting decrease in the values and lease rates of our MD
aircraft;
o the maintenance and operating history of the aircraft;
o the number of operators using a particular type of aircraft
(which may be reduced by bankruptcy or industry consolidation)
and the supply of that type of aircraft;
o legal or regulatory requirements that prevent us from
re-leasing or selling an aircraft in the condition that it is
in; and
o the discovery of manufacturing defects in an aircraft model.
See "Item 4 - Information on the Company - Business Overview -
Compliance with Governmental and Technical Regulation."
Although the two major manufacturers are now reducing their output in
response to the decline in the aircraft market, an increasing number of airlines
are also reducing their capacity and retiring older aircraft. Therefore there
has been an increasing number of aircraft available for sale and lease. This has
had and is expected to continue to have a negative impact on the proceeds
received from the sale of aircraft or the revenue to be received from their
lease. Therefore, there can be no assurance that we will be able to repay the
holders of the Class A Notes the full amount of principal owed to them when due.
Further, based on our current projections, we expect to have insufficient funds
to repay some Class B Note principal and any remaining Class C, Class D and
Class E Note principal.
The pool of potential purchasers for our aircraft is likely to be a
limited group. Various factors outside our control may further reduce their
interest in purchasing our aircraft which may adversely affect our ability to
pay principal on the Notes.
Although operators of aircraft may purchase one or more of the aircraft
in our portfolio, we expect that most of the aircraft will be sold with leases
in place, which makes it unlikely that aircraft operators will be purchasers of
our aircraft. Our aircraft are marketed principally as financial assets for
purchase by corporate, institutional and other investors who seek returns based
on a combination of the underlying rentals and the residual value of an aircraft
and, in certain cases, tax benefits. Our aircraft are marketed globally, and,
from time to time, sales of our aircraft with leases in place to purchasers in a
14
single country may represent a substantial portion of sales of our aircraft in
an attempt to maximize returns in the most favorable marketplace. In certain
countries, local financial intermediaries may be important to our efforts to
sell the aircraft. Adverse developments in particular financial markets, home
country regulatory requirements or changes in tax regimes, however, may impair
our ability to market the aircraft successfully in a particular country or to a
particular group of investors in such country or may require the creation of new
tax-advantaged structures. There can be no assurance that, at the time the
aircraft are marketed for sale, historical purchasers of assets such as the
aircraft, or other institutional and corporate investors, will desire to
purchase assets such as the aircraft, or that particular developments in
financial markets, regulatory requirements or tax regimes will not make the
purchase of the aircraft an unattractive investment. In addition, there can be
no assurance that it will be possible to create any such tax-advantaged
structures at or by the time the aircraft are being marketed for sale. Further,
the effect of the Trust Note Sales Goals contained in the Deed of Charge and
ultimately the final maturity of all Notes in June 2006 is to require us to sell
all of our remaining aircraft in a relatively short time frame. Given the
adverse impact of the terrorist attacks of September 11, 2001 and other
subsequent adverse events on the airline industry and, in particular, on
aircraft values, this obligates us to sell aircraft at a time when aircraft
values are significantly lower than they might otherwise be, which adversely
affects our ability to pay principal on the Notes.
We are competing with other aircraft sellers who have various
advantages in their ability to sell aircraft. This may adversely affect our
ability to sell our aircraft and the amount of proceeds we receive upon such
sale.
We have encountered and expect to continue to encounter competition
from sellers of other aircraft at the time we offer the aircraft for sale. There
are numerous other entities which own and sell aircraft that will compete with
us in the sale of our aircraft. These entities include, but are not limited to,
distributors, aircraft manufacturers, airlines, aircraft leasing companies,
financial institutions, public and private limited partnerships and funds with
investment objectives similar to ours and special purpose vehicles similar to
ours (such as Airplanes Group and AerCo Limited) formed for the purpose of
acquiring, leasing, re-leasing and selling aircraft. In addition, because the
Servicer performs lease management services with respect to our aircraft as well
as with respect to aircraft owned by third parties, our aircraft may be offered
for sale in competition with other aircraft for which the Servicer performs
management services. Some of these other entities with aircraft available for
sale have, or have access to, financial resources substantially greater than
ours and may be able to offer financing, management, remarketing and other
services, inducements or concessions that we are not able to provide. The
decline in the airline industry following the terrorist attacks of September 11,
2001 as well as the military action of the U.S. and its allies in Afghanistan,
the terrorist attacks in Bali and Saudi Arabia, the war in Iraq and the outbreak
of SARS and the subsequent decline in passenger demand caused the fragile
position many airlines were in to worsen considerably. A number of airlines have
either declared bankruptcy (including Air Canada, one of our largest lessees as
measured by annual lease revenue) or face bankruptcy in light of the depressed
market. The bankruptcies that have occurred and the threat of bankruptcy for
others has increased the number of aircraft on the market. The aircraft market
is experiencing an increase in supply at a time of decreasing demand. According
to Back Aviation Solutions, there were 902 western built commercial jet aircraft
available for sale and lease in mid September 2003. This is a decrease of 13
available aircraft since November 2002, an increase of 120 available aircraft
since June 2001 and an increase of 226 available aircraft since January 2001. It
is expected that it will take several years for the international aviation
industry to work out this backlog, during which time competition among lessors
will remain strong and lease rental rates and aircraft values are expected to
remain depressed.
15
We believe the appraised base value of our aircraft is significantly
higher than the actual value we would receive upon a sale of such aircraft. To
the extent the sale price of an aircraft is below the aircraft's appraised base
value, our ability to make payments on the Notes will be adversely affected.
Aircraft appraised base values do not necessarily reflect the market
value for an aircraft at a specific time. We determined the scheduled principal
payments on the Notes based on the assumptions set forth in the Prospectus with
respect to the appraised base value of the aircraft. If we sell an aircraft to
generate cash to make payments on the Notes, the proceeds of the sale are likely
to be significantly less than its appraised base value. We expect therefore to
have insufficient cash to make payments in full on some of the Notes. Market
lease rates may also depend on current market values for aircraft. If market
values are less than appraised base values, we may be unable to re-lease
aircraft at rental rates sufficient to repay the Notes.
We have obtained three desktop appraisals (without physical inspection)
of the appraised base value of each aircraft as of June 2003 from Avitas, AISI
and BK. Based on such desktop appraisals, the nine aircraft had an aggregate
appraised base value of $157,610,000, $222,520,000 and $237,350,000,
respectively, or an average aggregate appraised base value of approximately
$205,820,000.
The appraised base values were determined assuming an arm's-length,
cash transaction between willing and knowledgeable parties, with a reasonable
period of time available for marketing, assuming, among other things, sales of
the aircraft in an open, unrestricted stable market environment with a
reasonable balance of supply and demand, and assuming the maintenance status of
each aircraft with regard to such things as airframe, engines and landing gear
to be at its half-life condition (i.e., its condition at midpoint between
service intervals), adjusted to account for certain aspects of the actual
maintenance status of each aircraft, as provided to the Independent Appraisers.
As discussed in the Statement of Accounting Policies in the Financial
Statements contained in Item 18, the Directors undertake a review to determine
whether an impairment charge is required in respect of both aircraft held for
use and any aircraft held for sale. The Directors, in applying Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets ("SFAS 144"), have determined that the carrying
value for each of the Company's aircraft, all of which are classified as held
for use, is greater than the estimated undiscounted future net cashflows in
respect of such aircraft and have recorded an impairment charge for these
aircraft equal to the difference between their carrying value and fair value.
In applying SFAS 144 the Directors have used average Appraised Current
Market Value, which was in aggregate $163,316,667 as at June 30, 2003 for the
nine aircraft and represents the Independent Appraisers' opinion of the most
likely trading price that may be generated for an aircraft under current market
conditions. The Independent Appraisers assume that the aircraft are valued for
their highest, best use, that the parties to the hypothetical sale are willing,
able, prudent and knowledgeable, and under no unusual pressure for a prompt
sale, and that the transaction would be negotiated in an open and unrestricted
market on an arm's length basis.
Appraised Current Market Values have been estimated by the Independent
Appraisers based on value curves from the last downturn in the aircraft market.
An Appraised Current Market Value is an estimate of value and should not be
relied upon as a measure of current sales value; the proceeds realized upon a
sale of an aircraft may be less than the average Appraised Current Market Value,
particularly in current market conditions as discussed in "- Recent
Developments" above and in note 3 of the Financial Statements. In the current
environment, there is a lack of hard data available on which to base aircraft
valuations and therefore the appraisal process is more difficult.
16
The Directors believe that, as a result of the factors discussed above
and in note 3 of the Financial Statements, the sales value of the aircraft in
the current market may be less than the average Appraised Current Market Value
and the carrying value as at June 30, 2003. Also, if it were necessary to
dispose of an aircraft quickly, the proceeds from the sale of such aircraft
would probably be even less than the value in the current market. In that event,
further write-downs would most likely be required.
The application of the accounting policies in the fiscal year ended
June 30, 2003 has led to an impairment charge of $14.378 million. Previous
charges were made at June 30, 2002 and June 30, 2001 for $20.321 million and
$30.259 million, respectively. At June 30, 2002 the impairment charge carried
forward represents write-downs to average Appraised Current Market Values at
June 30, 2002 and June 30, 2001.
New and/or more technologically advanced aircraft may impair our
ability to re-lease or sell our aircraft. If we are unable to re-lease or sell
our aircraft on favorable terms, this will adversely affect our ability to make
payments on the Notes.
The availability of newer and/or more technologically advanced aircraft
or the introduction of increasingly stringent noise or emissions regulations may
make it more difficult for us to re-lease or sell aircraft. We expect that our
ability to manage these technological risks through modifications to the
aircraft and sale of aircraft will be limited.
Our maintenance expenses are increasing as our lease revenues are
declining. This will reduce the rental and sale proceeds available to make
payments on the Notes.
The standards of maintenance observed by our lessees and the condition
of the aircraft at the time of sale or re-lease may affect the future values of
and rental rates for the aircraft. Under each lease, it is the responsibility of
the relevant lessee to maintain the aircraft and to comply with all governmental
requirements applicable to the lessee or the aircraft, including, without
limitation, operational, maintenance and registration requirements and, in most
cases, manufacturer recommendations, although in certain cases the Company, as
lessor, has agreed to share the cost of certain required modifications to the
aircraft and certain overhaul costs. If a lessee does not perform such
obligations or if the aircraft is off-lease, we will be responsible for
maintenance obligations and for the cost, in whole or in part, of complying with
governmental requirements or manufacturer recommendations. Failure to perform
such required or recommended maintenance with respect to an aircraft (a) could
result in a grounding of such aircraft, (b) is likely to adversely affect the
value of that aircraft upon the sale thereof and (c) in the event of a re-lease
of such aircraft, is likely to require us to incur costs, which could be
substantial, in restoring such aircraft to an acceptable maintenance condition
prior to re-leasing. Because our maintenance costs are expenses that rank senior
to payments on the Notes, our ability to make payments on the Notes is further
reduced by these maintenance costs. In some cases, we may have an obligation to
reimburse the lessee or pay some or all of the cost of aircraft maintenance. Our
cash resources may not be sufficient both to fund maintenance requirements and
make payments on the Notes, especially as the aircraft continue to age.
Risks Relating to Leasing of Aircraft
Our funds available to make payments on the Notes will be reduced if we
are unable to re-lease aircraft quickly or on favorable terms.
We may not be able to re-lease the aircraft upon expiration of the
leases without incurring significant downtime prior to commencement of a new
lease. If we cannot re-lease the aircraft, we may not have enough revenue to
make payments on the Notes. Even if we can re-lease the aircraft, we may be
17
unable to receive favorable rental rates, especially if there is reduced demand
for aircraft on operating lease. The decline in the aircraft industry at the end
of 2001 and the subsequent depression and airline bankruptcies have
significantly reduced demand for and increased supply of aircraft generally,
including aircraft available for operating lease. Our cashflows are suffering as
a result of an oversupply of aircraft for lease, increased aircraft downtime and
an overall decline in lease rates. Our ability to re-lease aircraft and obtain
acceptable lease payments and terms may also suffer because of:
o economic conditions affecting the airline industry;
o the supply of competing aircraft and demand for particular
types;
o lessor competition;
o restrictions on our re-leasing flexibility under our operative
documents;
o increased bargaining power for lessees as they join airline
global alliances; and
o a reduction in the number of potential lessees due to airline
bankruptcies, liquidation or consolidation.
Aircraft re-leased during fiscal year 2003 were leased at rates
significantly below historic rates achieved on these aircraft. Further, two of
the aircraft which were re-leased during fiscal year 2003 were leased on
"power-by-the-hour" leases which allow for the lessee to pay for only the time
that the aircraft is being used.
We currently have no aircraft off-lease and we have no aircraft leases
scheduled to expire before March 2005, however there can be no assurance that
other aircraft will not come off-lease before expiration of their lease terms.
In the current circumstances, re-leasing our aircraft in a timely fashion at
reasonable rates represents a significant challenge to the Company. Any lack of
success in meeting this challenge may have a significant effect on our ability
to make payments on the Notes. Based on current projections, we expect our
cashflows will not be sufficient to pay any further interest due on the Class D
and Class E Notes. An Event of Default occurs if we do not pay interest
(excluding additional interest, default interest or step-up interest) on any
Note within five days of its due date. This Event of Default has occurred and is
continuing as we have had insufficient funds to pay such interest in full to
Class D Noteholders, and we now expect this Event of Default to continue for the
remaining term of the Notes. See "Item 13 - Defaults, Dividend Arrearages and
Delinquencies" for a discussion of the limited remedies available upon the
occurrence of an Event of Default under these circumstances.
Lessees in weak financial condition could fail to make lease payments
and may require the restructuring of their leases to avoid default. This would
reduce the revenue available to make payments on the Notes.
There is a significant risk that lessees in weak financial condition
may default on their obligations under the leases. If lessees do not make rent
and maintenance payments or are significantly in arrears, it will impair our
ability to make payments on the Notes. The ability of each lessee to perform its
obligations under its lease will depend primarily on its financial condition. A
lessee's financial condition may be affected by various factors beyond its
control, including competition, fare levels, passenger demand, operating costs,
the cost and availability of finance, and environmental and other governmental
regulation of the air transportation business. The economic conditions of the
regions where our lessees operate will also affect their ability to meet their
lease obligations. Many of our lessees are based or operate in regions such as
Asia that from time to time experience severe economic crises. You should
18
refer to "Item 4 - Information on the Company - Business Overview - Regional
Concentrations" for a detailed discussion of the regional concentrations of our
lessees and the economic trends of the regions that may impact the lessees'
financial conditions.
In addition, the events of September 11, 2001 as well as the military
action of the U.S. and its allies in Afghanistan, the terrorist attacks in Bali
and Saudi Arabia, the war in Iraq and the outbreak of SARS, have resulted in
airlines worldwide experiencing financial difficulties. Some of our lessees are
in a weak financial position. Investors should also expect this to be the case
with future lessees. As a result, a large proportion of lessees may consistently
be significantly in arrears in their rental payments or maintenance payments.
Also, as a result of the decline in the aircraft industry, the financial
position of many airlines, including our lessees, is likely to be weakened which
in turn may cause an increase in delayed, missed or reduced payments. Further,
in order to keep aircraft on lease and generating rental proceeds in this
difficult economic environment, many aircraft lessors, including the Company,
have agreed to rental holidays, rental restructurings, the early return of
aircraft and similar measures for some lessees. We expect this may continue to
occur with our lessees. We can also give no assurance that defaults, amounts in
arrears and the frequency of lease restructurings will not increase as the
market for aircraft on operating lease experiences a continued decline.
Our ability to re-lease aircraft and generate cash to make payments on
the Notes will be impaired if we cannot terminate leases and repossess aircraft
when a lessee defaults.
We have the contractual right to terminate a lease and repossess the
aircraft if there is an event of default under a lease. However, due to
circumstances outside our control, we may be prevented from terminating a
particular lease. Further, we may incur substantial costs if we terminate a
lease and repossess the aircraft. If we cannot repossess the aircraft, it will
not be available for re-lease or sale. In that event, or if we incur substantial
costs in terminating a lease and repossessing an aircraft, our revenue available
to make payment on the Notes will be reduced.
Our ability to terminate a lease and repossess the aircraft may be
limited by a number of factors, including the following:
o a lessee contesting our right to terminate the lease and
repossess the aircraft;
o our inability to export, deregister and redeploy the aircraft;
o legal restrictions on our ability to terminate or repossess
the aircraft; and
o the appointment of a trustee in bankruptcy or similar officer
in the case of a bankrupt or insolvent lessee.
Even if we are able to terminate the lease and repossess the aircraft,
we may incur substantial costs, including:
o the direct costs associated with the termination of the lease
or repossession of an aircraft, including technical and legal
costs;
o the cost of returning the aircraft to the appropriate
jurisdiction;
o the payment of debts and taxes secured by liens on the
aircraft that were not paid by the lessee;
19
o the costs of retrieving or recreating aircraft records that
are required for re-registering the aircraft;
o the costs of putting the aircraft back in a condition suitable
for leasing or sale; and
o costs of obtaining a certificate of airworthiness for the
aircraft.
Our revenue available to make payments on the Notes will be reduced if
aircraft insurance is not adequate to cover any losses or liabilities we incur.
Our lessees have obligations under the leases to maintain property and
liability insurance covering their operation of the aircraft. We can give no
assurance that this insurance will be adequate to cover any losses or
liabilities that we may incur in our business. For example, the loss or
liability from an aviation accident or other catastrophic event may exceed the
coverage limits in the policy. Other losses may not be covered by insurance.
There is also a risk that our lessees will not perform their insurance
obligations under the lease, which may mean that insurance will not be available
to us. In either case, we may be unable to make payments on the Notes if
insurance proceeds do not cover losses or liabilities we may incur.
As a consequence of the terrorist attacks of September 11, 2001,
airlines worldwide continue to experience difficulties in maintaining war
insurance cover in the amounts required under their leases with us and other
lessors. Until recently, our lessees have relied on government guarantees or
indemnities to provide coverage for third party liability (other than to
passengers) arising from war and terrorism risks, above a greatly reduced
ceiling of cover provided by the aviation insurance market as a reaction to the
events of September 11, 2001. Although most governments have now terminated
their guarantee or indemnity support, as of December 23, 2003 two of our eight
lessees continue to rely on such government support for this coverage. However,
there can be no assurance that if and when such government support is removed
our lessees will be able to replace that support by insurance coverage. If such
insurance coverage were not purchased or otherwise available from government
support, it may be necessary for the relevant aircraft to be grounded. Such
consequences would have a material adverse impact on the financial condition of
our lessees and their ability to perform under their leases. These effects could
cause a reduction in our revenue which would adversely affect our ability to
make payments on the Notes.
If we cannot obtain the required licenses, consents and approvals to
re-lease or sell aircraft, our revenue available to make payments on the Notes
may be reduced.
If we or, where applicable, the lessee cannot obtain required
government licenses, consents and approvals, we may be unable to re-lease or
sell aircraft. Several leases require specific licenses, consents or approvals.
These include licenses, consents or approvals from governmental or regulatory
authorities to certain lease payments and to the import, re-export or
deregistration of the aircraft. There is a risk that subsequent legal and
administrative changes will increase such requirements or that a license,
consent or approval, once given, will be withdrawn. We may be unable to receive
licenses, consents or approvals needed in connection with future re-leasing or
sale of an aircraft. In any such case, our revenue available to make payments on
the Notes may be reduced.
If withholding taxes are imposed on lease rentals, these taxes would
reduce our revenue available to make payments on the Notes.
We have attempted to structure our leases in such a way that either no
withholding taxes will be applicable to payments by the lessees under the leases
or, if withholding taxes are applicable, the lessees
20
would be required to pay corresponding additional amounts. If such taxes must be
paid and we cannot recover these additional amounts from the lessee, that amount
will be unavailable for Note payments.
United States federal income withholding taxes at a rate of 30% are
applicable to lease payments relating to an aircraft that was re-delivered in
October 2002 and was immediately placed on lease to Allegiant Air, a United
States airline, and that lease makes no provision for recovery of such taxes
from the lessee. The lease to Allegiant Air has a lease expiration date as of
the date of completion of the next "C Check" for this aircraft, which date is
estimated to be in March 2005. Allegiant Air also has one extension option on
the lease. If this extension is exercised, the estimated date of expiration
would be in June 2006. There can also be no assurance that any subsequent lease
will avoid United States or other withholding taxes.
If lessees do not comply with their obligations under their operating
leases it may increase our costs and reduce our revenue available to make
payments on the Notes.
The leases are all fixed term operating leases, under which we retain
substantially all of the risks and rewards associated with ownership of the
aircraft, including the aircraft's residual value. The leases are "net" leases
pursuant to which the lessees are obligated to make periodic rental payments and
generally assume responsibility for, inter alia, (i) maintaining the aircraft,
(ii) ensuring proper operation of the aircraft, (iii) providing indemnification
against and insurance for losses resulting from operation of the aircraft, (iv)
paying all costs of operating the aircraft and keeping the aircraft free of
liens (as defined in the relevant lease) (other than permitted liens under the
relevant lease) resulting from such operation and (v) complying with all
applicable governmental licensing, registration and other requirements,
including airworthiness directives (although in certain cases, the terms of the
relevant lease require the lessor to share the cost thereof). Failure of a
lessee to comply with such obligations could result in increased costs to us and
reduce our revenue available to make payments on the Notes.
Other Risks Related to the Sale and Leasing of the Aircraft
Restrictions in our operative and governing corporate documents may
impair our ability to compete effectively in the aircraft leasing market.
Our operative and governing corporate documents impose restrictions on
how we operate our business. These restrictions limit our ability to compete
effectively in the aircraft leasing market. For example, we cannot grant
privileged rental rates to airlines in return for equity investments in such
airlines. There are also restrictions on persons to whom we may lease aircraft
and limits on leasing to lessees in specific geographical regions. Most
competing aircraft lessors do not operate under similar restrictions.
If lessees do not discharge liens that attach to the aircraft, we may
be unable to repossess, re-lease or sell the aircraft.
Liens may attach to the aircraft in the course of their operation.
These liens may impair our ability to repossess, re-lease or sell the aircraft.
Liens that secure the payment of airport taxes, customs duties, air navigation
charges, landing charges, crew wages, repairer's charges or salvage charges
attach to the aircraft in the normal course of operation. The amounts that the
liens secure may be substantial and may exceed the value of the aircraft against
which the lien is asserted. In some jurisdictions, a holder of aircraft liens
may have the right to detain, sell or cause the forfeiture of the aircraft. The
lessees may fail to comply with their obligations under the leases to discharge
liens arising during the terms of the leases. Prior to terminating our lease
with Istanbul, Istanbul incurred a debt to Eurocontrol. Istanbul failed to
comply with their obligation under the lease to pay this debt and cause the
related lien to be discharged.
21
As owner of the aircraft, the Company was forced to settle this debt of
approximately $1.8 million with Eurocontrol (which was accrued for in the fiscal
years ended June 30, 2001 and 2002). The settlement of this debt, in fiscal year
2003, reduced our funds available to make payments on the Notes, and any other
similar debt we may be required to settle in the future in order to have liens
discharged would also reduce our revenue available to make payments on the
Notes.
Lessees may fail to maintain valid registration of the aircraft. The
impact of the loss of aircraft registration or the inability of the aircraft to
generate rental income for us could harm our ability to make payments on the
Notes.
All of the aircraft that are or will be operated must be registered
with an appropriate aviation authority. If an aircraft is operated without a
valid registration or other required licenses, certificates and approvals, the
lessee operator or, in some cases, the owner or lessor, may be subject to
penalties which may result in a lien being placed on the aircraft. Loss of
registration could have other adverse effects, including grounding of the
aircraft and loss of insurance, which may have an adverse effect on our ability
to make payments on the Notes.
Increased regulation of the aircraft industry may impair our ability to
re-lease or sell aircraft.
The aircraft industry is heavily regulated and aviation authorities may
adopt additional regulations in jurisdictions where our aircraft are registered
or operated. For example, as a result of the terrorist attacks in the United
States on September 11, 2001, installation of enhanced Ground Proximity Warning
Systems in all aircraft by 2005 has been mandated by the U.S. Federal Aviation
Administration ("FAA") and the European Joint Airworthiness Authorities and
further new security directives are under consideration by a number of aviation
authorities. To the extent the cost of complying with such regulations is
required to be borne by the Company rather than the lessees, we could incur
significant cash expenditures in order to comply with such regulations. Further,
additional regulations relating to security and aircraft noise and emissions,
may cause us to incur significant costs, depress the value of the aircraft and
impair our ability to re-lease or sell aircraft.
Reliance on Third Parties and Conflicts of Interest
We rely on third parties to manage our business. Our operations may
suffer and we may be unable to make payments on the Notes if our service
providers do not perform their obligations to us or if we have to replace them.
We have no employees or executive management resources of our own. We
therefore rely on several service providers for the leasing, re-leasing and sale
of the aircraft and all other executive and administrative responsibilities. If
these service providers do not perform their contractual obligations to us, our
operations may suffer and our revenue available to repay the Notes may be
reduced. We can give no assurance that we will continue our arrangements with
these service providers or that the service providers will continue their
relationship with us until the final maturity date of the Notes. If a service
provider resigns or we terminate its appointment, we may be unable to find
suitable replacement service providers that we can engage on suitable terms.
Additionally, our appointment of replacement service providers may cause a
lowering or withdrawal of the ratings on the Notes. You should refer to "Item 6
- - Directors, Senior Management and Employees - Directors and Senior Management"
for detailed information on the responsibilities delegated to service providers.
Babcock & Brown, as servicer will have conflicts of interest from their
other aircraft management activities. We may be unable to re-lease or sell
aircraft if they cannot resolve these conflicts.
22
Babcock & Brown own and manage other aircraft and may face conflicts of
interest in managing and marketing our aircraft for re-lease or sale.
Our Directors may have conflicts of interest.
From time to time our Directors may have conflicts of interest that
arise as a result of their other relationships in the aviation industry. See
"Item 6 - Directors, Senior Management and Employees - Directors and Senior
Management."
Bankruptcy Risks
If the Company were to be consolidated with another entity upon such
entity's bankruptcy our assets may be unavailable to repay the Notes and our
other obligations.
We have taken steps, described below, to ensure that our assets and
liabilities will not be consolidated with those of any other entity, including
WFC, in the event that such entity voluntarily or involuntarily becomes the
subject of an application for relief under applicable bankruptcy or insolvency
laws. At the time the Notes were issued, we received an opinion of U.S. counsel
concluding that neither our activities nor the activities of WFC would result in
a court holding that our assets and liabilities should be consolidated with
those of WFC in a proceeding under the applicable insolvency laws in the United
States. However, there can be no assurance that the circumstances upon which
such counsel based its opinion will not change, that a court of competent
jurisdiction would not find differently, that such opinion will prove to be
correct or that the law of another jurisdiction would not apply.
In addition, WFC warranted to us, among other things, that upon
delivery of the WFC Aircraft to us we would be the owner of the WFC Aircraft,
that the sale of the WFC Aircraft by it to us was a "true sale" of the WFC
Aircraft to us and that the conveyance was effective to transfer title to us.
WFC and the Company have treated the conveyance of the WFC Aircraft as a sale of
the WFC Aircraft and transfer of the related lease to us, and we have taken all
actions that are required to perfect our ownership interest in the WFC Aircraft
and the related lease. However, if WFC were to become a debtor in a bankruptcy
case under the U.S. Bankruptcy Code and a creditor or trustee-in-bankruptcy of
WFC or WFC itself were to take the position that the sale of WFC Aircraft to us
should be recharacterized as a pledge of the WFC Aircraft and the related lease
to secure a borrowing of WFC, then delays in payments of lease rentals to us on
the WFC Aircraft could occur. A court ruling in favor of any such creditor,
trustee or WFC could result in reductions in the amount of such payments and/or
forfeiture or subordination of our rights in the WFC Aircraft and the related
lease. Such delays or reductions and/or forfeiture also could result in delays
or reductions in our ability to make payments on the Notes. If the transfer of
the WFC Aircraft and the related lease to us is recharacterized as a pledge or a
lien on the property of WFC, our position with respect to WFC would be that of a
secured creditor of WFC with a claim in an amount equal to the purchase price of
the WFC Aircraft secured by such pledge or lien. On the other hand, if the
conveyance of the WFC Aircraft is treated as a sale, the WFC Aircraft and rental
payments under the related lease would not be part of WFC's bankruptcy estate
and would not be available to WFC's creditors. On the Closing Date, we received
an opinion of United States counsel concluding that, under applicable state law,
the sale of the WFC Aircraft and the related lease would constitute a true sale
from WFC to us and should not be characterized as a pledge of these assets to
secure a loan from us to WFC. However, there can be no assurance that the
circumstances upon which such counsel has based its opinion will not change,
that a court of competent jurisdiction would not find differently, that such
opinion would prove to be correct or that the law of another jurisdiction would
not apply.
23
Certain Income Tax Risks
If payments of principal or interest on the Notes become subject to
withholding tax, we will not make additional payments to you.
We will not make any additional payments to noteholders for any
withholding or deduction that is required under applicable law on payments on
the Notes. If we are required to make a withholding or deduction, whether
because of the implementation of the European Union Savings Tax Directive or for
any other reason, we will use reasonable efforts to avoid the application of
withholding taxes. If we cannot avoid the withholding taxes, we have the right
to redeem the Notes. If withholding taxes are imposed on interest payments on
the Notes and we do not redeem them, we will reduce the amount of interest that
you will receive by the amount of the withholding taxes.
Ownership of the Notes entails certain risks regarding the application
of the tax laws of Ireland, the United States, Jersey and the jurisdictions in
which the Company, its subsidiaries and the lessees are organized, reside or
operate. You should refer to "Item 10 - Additional Information - Taxation" for a
more detailed discussion of some of the possible tax consequences of owning the
Notes.
Our operations may become subject to income taxes, which would reduce
the revenue available to make payments on the Notes.
Our operations may be subject to the income tax laws of Ireland, the
United Kingdom, the United States, Jersey, France and other jurisdictions. There
is also a risk that the Servicer's future management of the aircraft might
expose the Company and its subsidiaries to tax liabilities outside Ireland and
the United Kingdom. If our income is subject to taxation, the revenue available
to make payments on the Notes would be reduced.
If our Irish subsidiary were to lose its Irish tax benefits our funds
available to make payments on the Notes will be reduced.
Our Irish tax-resident subsidiary is entitled to certain corporate tax
benefits for International Financial Services Center certified companies,
including a preferential corporation tax rate of 10% in respect of prescribed
leasing operations through December 31, 2005. The loss of these tax benefits
would reduce our funds available to make payments on the Notes.
Upon the scheduled termination of the Irish preferential 10%
corporation tax rate on December 31, 2005, the Company's Irish tax-resident
subsidiary will become subject to Irish corporation tax on its net trading
income, which would include leasing income, at a 12.5% rate as provided for in
the Irish Finance Act of 1999. This legislation provides for non-trading income
(for example, deposit interest) to be taxed at 25%. There can be no assurance
that these tax rates will not be changed in the future.
The activities of our service providers or loss of treaty benefits
could expose us to United States federal net income taxation, which could harm
our ability to make payments on the Notes.
24
The Company and its subsidiaries do not expect to have any material
United States federal net income tax liability. However, this conclusion may
depend, in part, on:
o the nature of such companies' income and operations, and
o in the case of the Company's Irish-resident subsidiary,
qualification for the benefits of the income tax treaty
between the United States and Ireland.
There can be no assurance that the activities of the Servicer, the
Administrative Agent and other service providers will not expose the Company and
its subsidiaries to United States federal net income tax on part or all of their
income, which would reduce the revenue available to make payments on the Notes.
United States withholding taxes currently apply to one lease, may
continue to do so, and may apply to other leases in the future.
United States federal income withholding taxes at a rate of 30% are
applicable to lease payments relating to an aircraft that was re-delivered in
October 2002 and was immediately placed on lease to Allegiant Air, a United
States airline, and that lease makes no provision for recovery of such taxes
from the lessee. The lease to Allegiant Air has a lease expiration date as of
the date of completion of the next "C Check" for this aircraft, which date is
estimated to be in March 2005. Allegiant Air also has one extension option on
the lease. If this extension is exercised, the estimated date of expiration
would be in June 2006. There can be no assurance, however, that any subsequent
lease will avoid United States withholding taxes. Likewise, there can be no
assurance that other leases will not become subject to United States federal
income tax withholding.
The Company has incurred tax liabilities in 2003 and may have incurred
additional tax liabilities in prior years, in respect of unpaid United States
withholding taxes relating to the investment of certain collections by the Cash
Manager.
The Cash Manager recently informed the Company that in past periods
certain Company collections had been invested in United States money market
funds, and that the Cash Manager apparently should have withheld United States
withholding taxes from such collections but failed to do so. Upon being informed
of these investments, the Company immediately directed the Cash Manager to cease
investing in such funds as the Deed of Charge provides that collections may not
be invested in investments that are subject to U.S. withholding tax. The Cash
Manager has indicated that withholding taxes of $9,991 are due and owing to the
United States government for investments relating to 2003, and has indicated its
intention to pay such amount from collections otherwise available for
distribution to Noteholders. The Cash Manager has further indicated that it is
reviewing its withholding tax obligations in respect of the years prior to 2003,
and has provided preliminary estimates of $104,165, $74,319 and $24,871 that may
be owed for 2000, 2001 and 2002, respectively. Although the estimates for 2000,
2001 and 2002 are preliminary they suggest that if withholding taxes are owed
for these three years, the amounts owed for each of these three years will be
greater than the amounts owed for 2003. Further, the Cash Manager has not yet
determined whether withholding taxes may be owed for years prior to 2000,
whether there may be additional liabilities for penalties and interest owing for
any years or provided even preliminary calculations of potential withholding
taxes owed for years prior to 2000 or penalties and interest for any year. The
Company has requested that the Cash Manager provide, on an expedited basis, its
analysis of whether such amounts are owing and its calculations as to what such
amounts are. The Company further understands that, whatever course of action the
Cash Manager ultimately determines to take, the Company may be liable for
withholding tax amounts not remitted by the Cash Manager to the United States
government. Although the investment of collections in investments subject to
withholding appears to have been inconsistent with the terms of the Deed of
Charge, the Company has not yet
25
determined the remedies, if any, that may be available in respect of withholding
liabilities it may ultimately bear. Accordingly, the United States withholding
tax liabilities associated with the investment of Company collections in United
States money market funds may be borne in full by the Company and ultimately the
Noteholders without the benefit of any contribution from the Cash Manager.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
The Company was incorporated in Jersey (registered number 52674) as a
private, limited liability company under the Companies (Jersey) Law 1991 on May
13, 1992, for an unlimited duration, and became a public company pursuant to a
special resolution passed on June 15, 1992. The registered office of the Company
is at 22 Grenville Street, St. Helier, Jersey, JE4 8PX, Channel Islands and its
telephone number is 011-44-1534-609000. The Company has an authorized share
capital of 15,000 ordinary shares, $1 par value per share, 10 of which have been
issued. All of the issued ordinary shares are held by the Nominees for the
benefit of the trustee of the ALPS Trust, a charitable trust established in
Jersey.
The Company has three direct wholly owned subsidiaries, one in each of
Ireland, England and France. The subsidiaries directly or indirectly lease
aircraft from the Company and sublease them to operators where commercial or
other reasons make it desirable to do so.
The Company was formed for the purpose of acquiring a portfolio of 14
commercial jet aircraft all of which were subject to operating leases. The
Company agreed to purchase such aircraft from GPA and received delivery and
legal title from GPA of the aircraft over the four month period from June 23,
1992 to October 30, 1992. One aircraft was sold on March 15, 1996, reducing the
fleet size to 13. The WFC Aircraft was purchased on November 27, 1996 from WFC,
and on July 24, 1997 the B747-283B aircraft was sold to WFC. Four further
aircraft were sold on July 2, 1999, June 27, 2000, October 1, 2002 and December
20, 2002, respectively.
In June 1996, the Company elected to refinance the Prior Debt through
the issuance of the Notes rather than remarketing and selling all 13 aircraft
during the one-year period prior to the originally scheduled maturity of the
Prior Debt in June 1997. The decision to refinance the Prior Debt was primarily
due to the uncertainty as to the ability of the Company to make payment in full
on the Old Class B Notes and Old Class M Notes under the then current schedule
for sale of the aircraft. In connection with the refinancing of the Prior Debt,
the Old Class A Notes and the Old Class M Notes were redeemed and the Old Class
B Notes were exchanged for the Class E Notes. The Company believed that the
revised schedule for sale of the Company's then current aircraft portfolio would
allow it to realize better returns on such aircraft, because the Company
expected at that time to sell such aircraft over a period of five to seven years
from the Closing Date (compared to fifteen months under the terms of the Prior
Debt).
The Class A, Class B, Class C and Class D Notes were issued on the
Closing Date with an aggregate face amount of approximately $394 million. The
proceeds together with cash balances previously held in reserve accounts were
utilized to repay the outstanding interest on the Old Notes, the $367 million of
outstanding principal on the Old Class A Notes and the Old Class M Notes, the
refinancing expenses of $13 million, the premium paid to the holders of certain
of the Old Notes of $4 million and to create an aircraft purchase reserve
account for the purchase of the WFC Aircraft. In addition, in connection with
such refinancing (i) the Old Class B Notes were exchanged for the Class E Notes,
and (ii) the Old SM Loan of $78 million was repaid.
The Company is obligated to pay interest on the Notes and a portion of
the principal of the Class A Notes from the revenue generated by the Company's
leasing operations. The Company was required to
26
sell one or more further aircraft having an aggregate Initial Appraised Value of
at least $66,810,000 by June 27, 2003 in order to comply with the Trust Note
Sales Goals. As discussed herein, due to current market conditions in the
aircraft industry it was not possible to meet the Trust Note Sales Goal for June
27, 2003 and remain in compliance with other requirements of the Deed of Charge.
Further, to comply with the Trust Note Sales Goal for June 27, 2004, the Company
would be required to sell all of its remaining aircraft. Proceeds from the sale
of aircraft are required to be used to pay principal of the Notes in the
priority set forth in the Deed of Charge. The Servicer has an ongoing
instruction from us to market each and every aircraft for sale and we are
continuing to review all alternatives in order to maximize the amount available
to pay outstanding principal and interest to the noteholders while attempting to
comply with our Business Objectives and the other requirements of the Deed of
Charge. However, selling any of the aircraft in the current industry environment
at prices consistent with compliance with our current Business Objectives is
extremely difficult and there can be no assurance that we will be able to repay
the holders of the Class A Notes the full amount owed to them when due. Further,
based on current projections, we expect to have insufficient funds to repay some
of the Class B Note principal and any remaining Class C, Class D and Class E
Note principal, and we expect to have insufficient funds to pay any further
step-up interest due on the Class A, Class B, Class C or Class D Notes or any
remaining interest due on the Class D and Class E Notes. An Event of Default
occurs if we do not pay interest (excluding additional interest, default
interest or step-up interest) on any Note within five days of its due date. This
Event of Default occurred on several occasions prior to fiscal year 2003 when we
had insufficient funds to pay such interest in full to Class D Noteholders and
has now been ongoing since December 16, 2002. The Company does not expect to
have sufficient funds to pay any further Class D Note interest. See "Item 3 -
Key Information - Risk Factors," and "Item 5 - Operating and Financial Review
and Prospects - Liquidity and Capital Resources" and see "Item 13 - Defaults,
Dividend Arrearages and Delinquencies" for a discussion of the limited remedies
available upon the occurrence of an Event of Default under these circumstances.
The Company did not have sufficient funds to repay the Class A Notes on
their expected final payment date of May 15, 2002 or to repay the Class B, Class
C or Class D Notes on their expected final payment date of July 15, 2002. The
Deed of Charge requires, to the extent the Company does not repay in full
principal on those Notes by such dates, that the Company pay to the Class A,
Class B and Class C Noteholders additional step-up interest of 0.50% per annum
and to the Class D Noteholders additional step-up interest of 1.00% per annum
for each month until the earlier of the date such Notes are repaid in full and
their final maturity date of June 15, 2006. These additional interest costs
would only be paid to the extent there are available collections in accordance
with the priority of payments set forth in the Deed of Charge. The Company paid
some step-up interest in fiscal year 2002, but our current projections indicate
that we will not have sufficient funds to pay any further step-up interest.
At various times during fiscal year 2003, certain target principal
payments scheduled to be paid to holders of Class A, Class B, Class C and Class
D Notes, certain interest payments due to holders of Class A, Class B, Class C
and Class D Notes, and all interest payments scheduled to be paid to holders of
Class E Notes were in arrears. As at the end of fiscal year 2003, these arrears
consisted of $2.042 million of Class A Note Target Amount, $0.565 million of
Class A Note step-up interest, $0.220 million of Class B Note step-up interest,
$4.304 million of Class C Note Target Amount, $0.206 million of Class C Note
step-up interest, $5.177 million of Class D Note Target Amount, $0.326 million
of Class D Note step-up interest, $0.504 million of Class D Note default
interest, $2.805 million of Class D Note interest, and $45.105 million of Class
E Note interest.
27
B. Business Overview
Business Objectives
Our business objectives pursuant to the Deed of Charge (the "Business
Objectives") are (a) to re-lease certain of the aircraft promptly after the
scheduled expiration date of the applicable original lease and to manage the
aircraft with a view towards receiving rental payments under the existing
leases, and, in the case of any renewed or replacement lease relating to any
aircraft, to maximize the amount of any rental payments thereunder so as to be
able to make the required payments of interest and principal on the scheduled
payment dates with respect to the Senior Trust Notes, (b) to market and sell the
aircraft at such times and for such amounts to realize, on an aggregate basis,
an amount sufficient to repay in full the Outstanding Principal Balance of each
class of the Senior Trust Notes and (c) to the extent consistent with the
objective described in clause (b) above, upon the sale of the aircraft, to
realize the value of the aircraft on an aggregate basis so as to provide the
maximum return to the Company on its investment therein, in all cases taking
into account the present and anticipated market conditions affecting the sale of
used aircraft and the commercial aviation industry generally. With respect to
the re-leasing, marketing and sale of aircraft described in clauses (a) and (b)
above, the Deed of Charge provides that our Business Objectives change after
certain dates. Accordingly, (i) prior to June 27, 2001 our Business Objectives
were to (x) re-lease aircraft to maximize rental payments so as to be able to
make required payments of interest and principal on the scheduled payment dates
with respect to each class of Notes and (y) market and sell aircraft so as to
repay the Outstanding Principal Balance of all Notes, (ii) from June 27, 2001
through June 26, 2004 our Business Objectives are to (x) re-lease aircraft to
maximize rental payments so as to be able to make required payments of interest
and principal on the scheduled payment dates with respect to the Senior Trust
Notes and (y) market and sell aircraft so as to repay the Outstanding Principal
Balance of the Senior Trust Notes, and (iii) from June 27, 2004 through June 15,
2006 our Business Objectives will be to (x) re-lease aircraft to maximize rental
payments so as to be able to make required payments of interest and principal on
the scheduled payment dates with respect to the senior most class of Notes
(namely the Class A Notes) and (y) market and sell aircraft so as to repay the
Outstanding Principal Balance of the senior most class of Notes.
The management and administration of the leases and the aircraft is
conducted principally by Babcock & Brown, as servicer.
Aircraft Leasing
As of June 30, 2003, our fleet of aircraft was comprised of nine
aircraft, all of which were on lease to eight lessees in eight countries. As of
June 30, 2003, the remaining terms of the leases ranged from approximately four
months to three years and eleven months. The following table shows the scheduled
terminations by aircraft type and lessee for the leases relating to our aircraft
as of June 30, 2003:
Aircraft Type Lessee Month and Year of Expiration
- ------------- --------------------- ----------------------------
B737 - 400 Asiana(1) December 2003
B737 - 400 Travel Service(2) October 2005
B737 - 400 Skynet March 2005
B737 - 500 China Southern(3) March 2004
B757 - 200 First Choice Airways(4) April 2005
B767 - 300ER Air Canada(5) March 2004
B767 - 300ER Air Canada May 2007
MD83 Meridiana(6) March 2004
MD83 Allegiant Air(7) October 2003
- ----------------------
(1) The Asiana lease terminated on December 13, 2003. Batavia has signed a
lease agreement, dated December 18, 2003, for this B737-400 aircraft for a
lease term beginning December 18, 2003 and ending on March 31, 2007.
28
- ----------------------
(2) Travel Service signed a lease amendment and extension agreement, dated
December 16, 2003, to extend this lease until March 31, 2007.
(3) China Southern signed a lease amendment and extension agreement, dated
December 17, 2003, to extend this lease until March 31, 2006.
(4) Formerly known as Air 2000 Limited.
(5) A Memorandum of Understanding, dated October 10, 2003, executed by Air
Canada extends the lease of this aircraft until March 31, 2007.
(6) Meridiana signed a lease amendment and extension agreement, dated October
5, 2003, to extend this lease until March 31, 2006.
(7) Allegiant Air signed a lease amendment and extension agreement, dated
October 9, 2003, to extend this lease until the next "C Check" for this
aircraft which is expected to occur in March 2005, with an option to extend
until the following "C Check," which is expected to occur in June 2006.
All of the leases relating to our aircraft are operating leases under
which we (i) will not recover fully the cost of each aircraft and (ii) retain
the benefit and assume the risk of the residual value of the aircraft. The
aircraft are included as assets on our balance sheet and depreciation is charged
to income over the estimated useful lives of the aircraft. See "Item 18 -
Financial Statements -Statement of Accounting Policies - Aircraft." Minimum
lease rentals in respect of the aircraft are reported as revenue over the term
of the lease on a straight line basis. Contingent rents are recorded as the
contingency is resolved.
All leases are on a "net" basis, under which the lessee is responsible
for all operating expenses, generally including, without limitation, fuel,
crews, airport and navigation charges, taxes, licenses, registration, insurance
and certain maintenance costs. However, in some of the more recently executed
leases, the Company has agreed to cover certain aircraft maintenance and
overhaul costs. Under the provisions of the leases, the lessee may also be
obligated to pay an agreed-upon charge based on the use of the aircraft as a
provision for certain future maintenance costs. Normally, such amounts could be
reclaimed by the lessee once the relevant maintenance has been completed by the
lessee. The leases contain specific provisions regarding maintenance standards
during the terms thereof and regarding the condition of the aircraft upon
redelivery to us. The lessee is responsible for compliance with all applicable
laws and regulations with respect to the aircraft. We require our lessees to
maintain the aircraft in accordance with an approved maintenance program
designed to ensure that the aircraft meets applicable regulatory requirements in
the jurisdictions where the lessee operates.
Babcock & Brown, on our behalf, is required to inspect or arrange for
the inspection of the condition of each aircraft at least once every 18 months.
Generally, we require a security deposit and/or a letter of credit from the
lessee as security for the performance of the lessee's obligations under the
lease although this has not been the case for all of the leases. In addition,
the leases contain extensive provisions regarding our rights and remedies in the
event of a default thereunder by the lessee. Notwithstanding the foregoing, no
assurance can be given that all lessees will comply with the terms of their
related leases or that all of the lease provisions discussed herein will be
enforceable against each lessee. As of November 30, 2003, the aggregate arrears
for all lessees was $150,000. On April 1, 2003, Air Canada filed for bankruptcy
protection under Canada's Companies Creditors Arrangement Act. Under the terms
of the court's order, Air Canada's lessors, who wanted to continue leasing their
aircraft to Air Canada, agreed to a 60 day moratorium on lease rentals. Air
Canada extended this moratorium until they completed their agreements with each
lessor. Following execution of a Memorandum of Understanding by Air Canada,
which became effective on October 20, 2003, all rental arrears for the two
aircraft leased by Air Canada in the amount of $1,548,350 were offset against
the Company's required contribution of $1,447,300 towards the S4C check on one
of the two aircraft. Air Canada paid the remaining arrears of $101,050 on
October 23, 2003.
29
Aircraft Fleet
As of June 30, 2003, our fleet was comprised of nine aircraft . Our
aircraft consist of widebody and narrowbody Stage 3 Aircraft. As of June 30,
2003, two of the aircraft were classified as widebody aircraft, being two Boeing
767-300ERs. The remaining seven aircraft were classified as narrowbody aircraft.
As of June 30, 2003, our aircraft, divided by manufacturer, were as
follows:
COMPANY FLEET
Net Book Value
Manufacturer Aircraft Type Number (in thousands of dollars)(1)
- ------------- ------------- ------ -----------------------
Boeing B737 - 400 3 $ 40,723
B737 - 500 1 12,557
B757 - 200 1 22,250
B767 - 300ER 2 69,859
McDonnell Douglas MD83 2 17,926
- --------
Total 9 $163,316
= ========
- --------------
(1) Net book value in respect of each of the nine aircraft is stated as of
June 30, 2003.
Aircraft Value
We have obtained three desktop appraisals (without physical inspection)
of the appraised base value of each aircraft as of June 2003 from Avitas, AISI
and BK. Based on such desktop appraisals, the aircraft had an aggregate
appraised base value of $157,610,000, $222,520,000 and $237,350,000,
respectively, or an average aggregate appraised base value of approximately
$205,820,000.
We obtained desktop appraisals (without physical inspections) of the
appraised base values of the nine aircraft as of June 2002 from Avitas, AISI,
and BK. Based on such desktop appraisals, the aircraft had an average aggregate
appraised base value of approximately $235,540,000, calculated as the average of
the appraised base values as determined by the Independent Appraisers.
For the purpose of the valuations, appraised base value is defined by
the International Society of Transport Aircraft Trading as the value of the
aircraft assuming an arm's-length, cash transaction between willing and
knowledgeable parties, with a reasonable period of time available for marketing,
assuming, among other things, sales of the aircraft in an open, unrestricted,
stable market environment with a reasonable balance of supply and demand, and
assuming the maintenance status of each aircraft with regard to such things as
airframe, engines and landing gear to be at its half-life condition (i.e., its
condition at midpoint between service intervals), adjusted to account for
certain aspects of the actual maintenance status of each aircraft, as provided
to the Independent Appraisers. Appraised base values, as so determined, are only
estimates of resale values in a hypothetical market environment.
We believe that the reduction in the average appraised base value of
the nine aircraft from $235,540,000 as of June 2002 to $205,820,000 as of June
2003 representing a reduction of 12.62% of the average appraised base value from
the prior year, is due primarily to the ageing of the aircraft and, with respect
to certain aircraft, those market conditions which have had a negative effect on
aircraft values.
30
As discussed in the Statement of Accounting Policies in the Financial
Statements contained in Item 18, the Directors undertake a review to determine
whether an impairment charge is required in respect of both aircraft held for
use and any aircraft held for sale. The Directors, in applying SFAS 144, have
determined that the carrying value for each of the Company's aircraft, all of
which are classified as held for use, is greater than the estimated undiscounted
future net cashflows in respect of such aircraft and have recorded an impairment
charge for these aircraft equal to the difference between their carrying value
and fair value.
In applying SFAS 144 the Directors have used average Appraised Current
Market Value, which was in aggregate $163,316,667 as at June 30, 2003 for the
nine aircraft, and represents the Independent Appraisers' opinion of the most
likely trading price that may be generated for an aircraft under current market
conditions. The Independent Appraisers assume that the aircraft are valued for
their highest, best use, that the parties to the hypothetical sale are willing,
able, prudent and knowledgeable, and under no unusual pressure for a prompt
sale, and that the transaction would be negotiated in an open and unrestricted
market on an arm's length basis.
Appraised Current Market Values have been estimated by the Independent
Appraisers based on value curves from the last downturn in the aircraft market.
An Appraised Current Market Value is an estimate of value and should not be
relied upon as a measure of current sales value; the proceeds realized upon a
sale of an aircraft may be less than the Appraised Current Market Value,
particularly in current market conditions as discussed in "Item 3 - Key
Information - Risk Factors - Recent Developments" and in note 3 of the Financial
Statements. In the current environment, there is a lack of hard data available
on which to base aircraft valuations and therefore the appraisal process is more
difficult.
The Directors believe that, as a result of the factors discussed above
and in note 3 of the Financial Statements, the sales value of the aircraft in
the current market may be less than the average Appraised Current Market Value
and the carrying value as at June 30, 2003. Also, if it were necessary to
dispose of an aircraft quickly, the proceeds from the sale of such aircraft
would probably be even less than the value in the current market. In that event,
further write-downs would most likely be required.
The application of the accounting policies in the fiscal year ended
June 30, 2003 has led to an impairment charge of $14.378 million. Previous
charges were made at June 30, 2002 and June 30, 2001 for $20,321,000 and
$30,259,000, respectively. At June 30, 2002 the impairment charge carried
forward represents write-downs to average Appraised Current Market Values at
June 30, 2002 and June 30, 2001.
Following the terrorist attacks of September 11, 2001 and other world
events that contributed to a significant downturn in the airline industry, many
airlines have been flying fewer aircraft and downsizing or reducing planned
growth of their fleets. In addition, since September 11, 2001 a number of
airlines have declared bankruptcy (including Air Canada, one of our largest
lessees as measured by annual lease revenue) and ceased operations and it is
expected that the industry will experience further consolidation as well as
additional bankruptcies in the near future. As a result, aircraft owned by or
leased to these airlines have been put on the market for sale or lease thereby
increasing the supply of available aircraft. Due to the loss of investor
appetite and the difficulty in obtaining financing for the purchase of aircraft,
there are fewer buyers of aircraft on operating lease and the resulting
illiquidity in the market has caused sale prices of aircraft to further decline.
Further, in the current environment there is a lack of hard data available on
which to base aircraft valuations and therefore the appraisal process is more
difficult. As discussed above, an appraisal is an estimate of value and should
not be relied upon as a measure of current sales value. We believe that as a
result of all of these factors the sales value of the aircraft in the current
market (as compared with the "open, unrestricted stable market environment with
a reasonable balance of supply and demand" assumed in the determination of the
appraised base values) is significantly less than the average appraised base
value and may be less than the average Appraised
31
Current Market Value and the carrying value as at June 30, 2003. Also, if it
were necessary to dispose of an aircraft quickly, the proceeds from the sale of
such aircraft would probably be even less than the value in the current market.
The effect of the Trust Note Sales Goals contained in the Deed of Charge is to
require that we sell all of our aircraft by June 27, 2004. Although we do not
believe it will be possible, given the current market conditions in the aircraft
industry, to comply with this requirement and achieve sale prices consistent
with our current Business Objectives, there can be no assurance that we will not
be forced to sell one or more aircraft in a distressed sale situation. The Deed
of Charge provides that, subject to the pre-emption rights of the Class D and
Class E Noteholders, to the extent the Trust Note Sales Goals are not complied
with prior to December 27, 2004, the Company is required to accept any Sale
Offer for the sale of an aircraft if the proposed sale price is at least equal
to the Class C Note Target Price. During the time that the Company has not been
in compliance with the Trust Note Sales Goals, the Company has been unable, with
the exception of the sale of the A320-200 aircraft in December 2002, to sell
aircraft at prices at or above the Class C Note Target Price. However, to the
extent the Company has not complied with the Trust Note Sales Goals, on or after
December 27, 2004, the Company will be required, subject to the pre-emption
rights of the Class D and Class E Noteholders, to accept any Sale Offer for the
sale of an aircraft if the proposed sale price is at least equal to the Class A
Note Target Price. See "Item 3 - Key Information - Risk Factors - Risks Relating
to Sales of Aircraft."
The foregoing indications of appraised base value provided by the
Independent Appraisers do not reflect the value of the leases, maintenance
reserves, security deposits or other related collateral, if any. All dollar
amounts listed under this subsection are rounded to the nearest $0.1 million.
Fleet Age Analysis
The weighted average age of our aircraft by net book value was 12.89
years as of June 30, 2003.
Lessees
The lessees of our aircraft as of June 30, 2003, such lessees' home
country and the respective aircraft type and date of manufacture are as set
forth below:
Lessee Country Aircraft Type Date of Manufacture
- --------------------- ------------------ -------------- -------------------
Air Canada Canada B767 - 300ER arch 1991
B767 - 300ER ugust 1991
Allegiant Air U.S.A. MD83 ugust 1989
Asiana(1) South Korea B737 - 400 ovember 1988
China Southern People's Republic of China B737 - 500 uly 1991
First Choice Airways(2) United Kingdom B757 - 200 arch 1991
Meridiana Italy MD83 uly 1989
Skynet Ireland B737 - 400 ctober 1989
Travel Service Czech Republic B737 - 400 arch 1989
- ---------------
(1) Beginning on December 18, 2003, this B737-400 aircraft will be leased
to Batavia whose home country is Indonesia.
(2) Formerly known as Air 2000 Limited.
In fiscal year 2003, four lessees accounted for more than 10% of our
leasing revenue (Air Canada 29.43%, Asiana 15.75%, Travel Service 13.30% and
China Southern 12.63%). There are no leases with respect to which the present
value of the lease payments due from the lessee (utilizing a discount rate equal
to the average coupon on the Notes) exceeds 10% of the original aggregate
principal balance of the Notes.
32
Distribution of Revenue by Geographic Area
The following table sets forth the dollar amount and percentage of
total lease revenue attributable to the indicated geographic areas for the
period from July 1, 2002 to and including June 30, 2003:
Amount Percentage
------------------------ -------------
(in thousands of dollars)
Europe $6,973 35.30
Americas $6,341 32.10
Asia/Pacific $6,444 32.60
------ -----
$19,758 100.00%
======= ======
Many foreign countries have currency and exchange laws regulating the
international transfer of currencies. We attempt to minimize our currency and
exchange risks by negotiating our aircraft leasing transactions in U.S. dollars
and all letters of credit and any other forms of credit enhancement obtained to
support various leases are denominated for payment in U.S. dollars.
Our revenue and income may be affected by political instability,
changes in national policy in the countries where our aircraft operate,
competitive pressures and other financial difficulties experienced by certain
air carriers, fuel shortages, labor stoppages, recessions and other political or
economic events adversely affecting world or regional trading markets or
impacting a particular customer. Many of these factors have been adversely
impacted by the terrorist attacks in the United States on September 11, 2001,
the military action of the U.S. and its allies in Afghanistan, the terrorist
attacks in Bali and Saudi Arabia, the war in Iraq, the outbreak of SARS and the
subsequent decline in the aircraft industry.
Regional Concentrations.
Asia Concentration - At June 30, 2003, 14% of our aircraft by appraised
base value at June 30, 2003 were leased by operators in Asia.
The Asian civil aviation industry had rebounded from the severe
economic difficulties in the region that began in 1998 and 1999 and was
performing satisfactorily with reasonable growth in passenger numbers prior to
the terrorist attack in Bali in October 2002 and the outbreak of SARS at the
beginning of 2003. The outbreak of SARS in the Asia-Pacific region had a
significant short-term impact on air travel to and within the region. Carriers
in the worst SARS-affected regions, such as Hong Kong, were affected
particularly badly with dramatic cuts in services of between 30% to 50%.
Although the crisis appears to now be under control with the World Health
Organization removing the last remaining negative travel recommendations for
Beijing on June 24, 2003, and most carriers having now restored the majority of
their flight schedules, some scientists have suggested the possibility that new
cases of SARS may emerge during the coming winter season.
European Concentration - At June 30, 2003, 36% of our aircraft by
appraised base value at June 30, 2003 were leased by operators based in
"developed" Europe.
The commercial aviation industry in Europe is very sensitive to general
economic conditions. Since air travel is largely discretionary, the industry
tends to suffer severe financial difficulties during slow economic periods. As a
result, the financial prospects for European lessees will depend on the level of
economic activity in Europe and in the specific countries where they operate. A
recession or other worsening of economic conditions in one or more of those
countries, particularly if combined with high fuel prices and/or a weak euro,
may adversely affect the European lessees' ability to meet their financial and
other obligations. Competitive pressures from continuing deregulation of the
airline industry by the
33
EU may also adversely affect European lessees' operations and their ability to
meet their obligations under the leases.
The first half of 2003 was poor for most European carriers as traffic
numbers declined due to the slow growth in the economy, the outbreak of war in
Iraq and SARS.
The European economy continues to perform sluggishly with low single
digit growth predicted for 2003. The appreciation of the euro against the U.S.
dollar over the past number of months should help those carriers operating in
the euro area to meet their U.S. dollar denominated obligations including fuel
and lease obligations.
North America Concentration - At June 30, 2003, 50% of our aircraft by
appraised base value at June 30, 2003 were leased by two airlines in North
America. As in Europe, the commercial aviation industry in North America is
highly sensitive to general economic conditions. Since air travel is largely
discretionary, the industry has suffered severe financial difficulties during
economic downturns. Over the last several years, nearly half of the major North
American passenger airlines have filed for Chapter 11 bankruptcy protection
(including Air Canada, one of our largest lessees (as measured by annual lease
revenue), and United Airlines, the second largest airline in the world) and
several major United States airlines have ceased operations. The decline in the
airline industry following the terrorist attacks of September 11, 2001 continues
to be a significant factor in the United States and additional bankruptcies of
other United States airlines remains likely.
Off lease aircraft - As at June 30, 2003, none of our aircraft were
off-lease.
Payment History
As of June 30, 2003, arrears equalled $1,285,583, $1,055,700 of which
were due from Air Canada as a result of their court authorized moratorium on
lease rentals. See "--North America Concentration" above. As of November 30,
2003 the aggregate arrears for all lessees equalled $150,000.
Competition
Our principal business is the provision of aircraft through leasing
transactions to aircraft operators. We focus on the leasing of
widebody/narrowbody Stage 3 Aircraft. A number of other parties provide aircraft
on operating leases similar to those provided by us, including International
Lease Finance Corporation, debis AirFinance B.V., Airbus Industrie Financial
Services, Boeing Capital Corporation, Pembroke Capital Limited, Ansett Worldwide
Aviation Services, GE Capital Aviation Services, Limited, GATX Corporation,
AerCo Limited, Airplanes Limited, Airplanes U.S. Trust and others. In addition,
there are a number of specialist operators who concentrate on particular regions
or types of customers and on specific aircraft types. Furthermore, we face
competition from airlines, aircraft manufacturers, aircraft brokers, banks and
other financial institutions who may provide aircraft for lease. Many of these
parties have access to financial resources substantially greater than those at
our disposal, which adversely affects our competitive position. Although we do
not believe it will be possible, given current market conditions in the aircraft
industry and the requirements to achieve sale prices consistent with our current
Business Objectives, we are also required to sell all of our aircraft by June
27, 2004 to comply with the Trust Note Sales Goals. Many entities sell used
aircraft so the competition for the sale of used aircraft is intense,
particularly under current market conditions. As discussed in "Item 3 - Key
Information - Risk Factors," the terrorist attacks of September 11, 2001 and
subsequent political, economic and other factors have significantly increased
the supply of aircraft available for sale and significantly decreased demand for
the purchase of such aircraft.
34
Compliance with Governmental and Technical Regulation
Our customers are generally subject to a high degree of regulation in
the various jurisdictions in which they operate. Such regulation also indirectly
affects our business operations. The nature of such regulation ranges from
compliance with technical, environmental and airworthiness standards to economic
regulation of the market for air travel. Some organizations and jurisdictions
have already begun to discuss the further tightening of noise and emissions
certification requirements for newly manufactured aircraft. Changes in
regulation which are adverse to our interests or our customers could have a
significant effect upon our results from operations or the value of our
aircraft.
In addition to general requirements regarding maintenance of aircraft,
aviation authorities issue airworthiness directives ("ADs") requiring the
operators of aircraft to take particular maintenance actions or make particular
modifications to a number of aircraft of designated types. ADs normally specify
a period in which to carry out the required action or modification and generally
enough time is allowed to permit the implementation of the AD in connection with
scheduled maintenance of the aircraft or engines. The lessees usually bear the
cost of compliance with ADs issued by applicable aviation authorities and
relevant manufacturers' recommendations. We may be required to contribute a
portion of such costs over a specified threshold. However, if a lessee fails to
perform ADs required on an aircraft or if an aircraft is off-lease, we would
bear the cost of compliance necessary for the aircraft to maintain its
certificate of airworthiness. In such circumstances, funds in the collection
account and lessee funded account will be available to mitigate the costs of
compliance, although such use would reduce the availability of such amounts to
cover the cost of scheduled maintenance. There can be no assurance that such
funds will be available at the time needed or that any funds available will be
sufficient for such purposes.
Other governmental regulations may apply to our aircraft, including
requirements relating to noise and emissions levels. Such regulations may be
imposed not only by the jurisdictions in which the aircraft are registered, but
also in jurisdictions where the aircraft operate. Chapter 3 of the Chicago
Convention establishes two progressively restrictive noise level standards that
correspond to the requirements for Stage 3 Aircraft. A number of jurisdictions
have adopted, or are in the process of adopting, noise regulations which will
require all aircraft to comply with the most restrictive of these standards. In
addition, local municipalities may have more stringent noise regulations than
those applicable to Stage 3 Aircraft.
Volume 2 of Annex 16 of the Chicago Convention also contains standards
and recommendations regarding limitations on vented fuel and smoke and gaseous
emissions for aircraft. While a number of countries have adopted regulations
implementing these recommendations, such regulations generally have been
prospective in nature, requiring only that newly manufactured engines meet
particular standards after a particular date. To the extent that these
regulations require modifications to the engines owned by us, they would be
treated similarly to ADs under the leases.
Aviation authorities in Europe and North America have recently adopted
regulations requiring the installation of enhanced ground proximity warning
systems and certain other systems by 2005. Depending on whether the costs of
complying with these regulations are borne by us or the lessees, installation of
these systems could result in significant cash capital expenditures of
approximately $500,000 per aircraft (operated in Europe or North America) by us
in 2003 through 2005.
As a result of the terrorist attacks of September 11, 2001, new
security directives may be adopted by aviation authorities. Depending on whether
the cost of complying with such directives would have to be borne by us or our
lessees, such directives could result in significant cash expenditures by us in
the future.
35
The FAA has previously announced an AD that requires operators of
MD-11, MD-80 and DC-10 aircraft to replace certain insulation blankets in order
to reduce the risk of fire. The estimated cost to implement this modification is
$665,000 per aircraft. We have two MD-80 series aircraft representing 12% of our
portfolio by appraised base value at June 30, 2003. This modification has been
implemented for one of our MD-80 series aircraft and the modification of our
other MD-80 series aircraft is expected to be completed in March 2005. The
significant costs incurred and to be incurred in causing these two MD-80 series
aircraft to comply with these standards, are adversely impacting our results of
operations.
The FAA has issued an AD mandating the installation of an overwing
heater blanket system or a primary upper wing ice detection system on MD-80
aircraft prior to May 7, 2004. The cost per aircraft of such modifications
ranges between $70,000 for the primary upper wing ice detection system and
$151,000 for the overwing heater blanket system. The choice of system will
depend on the operational requirements of the lessee. This modification has been
implemented on one of our MD-80 series aircraft and is expected to be completed
on the other MD-80 series aircraft in December 2003. The significant costs
incurred and to be incurred in causing these two MD-80 series aircraft to comply
with these standards, are adversely impacting our results of operations.
The FAA has issued an AD mandating the replacement of main landing gear
shock strut pistons on MD-80 and MD-90 aircraft prior to the accumulation of
30,000 cycles on the existing main landing gear shock strut pistons. The cost
for such replacement is approximately $265,000 per aircraft. Depending on
warranty credit provided by the manufacturer, the majority of this cost may be
claimed from the manufacturer. We have two MD-80 series aircraft representing
12% of our portfolio by appraised base value at June 30, 2003. In the event that
warranty credit is not available from the manufacturer for any aircraft, we
could incur significant costs in ensuring our MD-80 aircraft comply with these
standards, which will impact adversely on our results of operations.
In July 2001, the FAA issued an AD mandating the modification of
affected lapjoints on Boeing 737 aircraft when the aircraft has completed 50,000
cycles. The estimated cost to implement such modifications is approximately
$270,000 per aircraft. We have four Boeing 737 aircraft in our portfolio,
representing 32% of the portfolio by appraised base value at June 30, 2003.
Based on the current cycles completed to date by our Boeing 737 aircraft, our
Boeing 737 aircraft are not likely to require these modifications prior to 2005.
However, we could incur significant costs in ensuring that our Boeing 737
aircraft comply with these standards, which could impact adversely on our
results of operations.
The FAA has issued an AD mandating a re-design of the rudder systems of
Boeing 737 aircraft prior to November 2008. The average cost per aircraft of
such modifications is approximately $182,000. We have four Boeing 737 aircraft
in the portfolio, representing 32% of the portfolio by appraised base value at
June 30, 2003. It is expected that we will incur the full cost of this
modification, which will impact adversely on our results of operations.
The FAA recently published an AD that requires operators of Pratt &
Whitney PW4000 powered Airbus Industrie A300, Airbus Industrie A310, Boeing 747,
Boeing 767 and McDonnell Douglas MD-11 aircraft to replace the engine compressor
case on each engine installed on these aircraft before December 31, 2007. The
estimated cost to comply with this AD is approximately $430,000 per aircraft. We
have two PW4000 powered Boeing B767 aircraft representing 42% of our portfolio
by appraised base value at June 30, 2003. The series of engine modifications
required by this AD for these two aircraft are scheduled to be completed between
July 2005 and May 2007. We will incur significant costs in ensuring that our two
B767 aircraft comply with these new standards. This will impact adversely on our
results of operations.
36
Employees
We have no employees or executive management of our own. We therefore
rely on the Servicer, the Administrative Agent, the Financial Consultant, the
Cash Manager, the Insurance Advisor and the Company Secretary for the leasing,
releasing and sale of our aircraft and all other executive and administrative
functions.
Insurance
Pursuant to each lease, we require our lessees to carry the types of
insurance which are customary in the air transportation industry, including
comprehensive liability insurance and aircraft hull insurance. We further
require that we be named as an additional insured on hull and liability policies
carried by the lessees. All policies are to contain a breach of warranty
endorsement or severability of interest clause so that we continue to be
protected even if the operator/lessee violates one or more of the warranties or
conditions of the insurance policy. The coverage usually is worldwide, subject
to limitations consistent with comparable operators operating similar aircraft
on similar routes. The comprehensive liability insurance policies are generally
arranged on a combined single limit basis for comprehensive liabilities with an
amount not less than $500 million for each widebody aircraft and an amount of
not less than $350 million per narrowbody aircraft.
As a consequence of the terrorist attacks of September 11, 2001,
airlines worldwide continue to experience difficulties in maintaining war
insurance cover in the amounts required under their leases with us and other
lessors. Until recently, our lessees have relied on government guarantees or
indemnities to provide coverage for third party liability (other than to
passengers) arising from war and terrorism risks, above a greatly reduced
ceiling of cover provided by the aviation insurance market as a reaction to the
events of September 11, 2001. Although most governments have now terminated
their guarantee or indemnity support, as of December 23, 2003, two of our eight
lessees continue to rely on such government support for this coverage. There can
be no assurance that if and when such government support is removed our lessees
will be able to replace that support by insurance coverage. If such insurance
were not purchased or otherwise available from government support, it may be
necessary for the relevant aircraft to be grounded. Such consequences would have
a material adverse impact on the financial condition of our lessees and their
ability to perform under their leases. These effects could cause a reduction in
our revenue which would adversely affect our ability to make payments on the
Notes.
Babcock & Brown, as servicer, monitors the compliance by the lessees
with the foregoing requirements relating to insurance to be maintained in
respect of the aircraft and, to the extent of any insufficiencies or other
problems with respect to the required insurance coverage, negotiates and
arranges for appropriate additional insurance coverage.
C. Organizational Structure
The Company has three wholly-owned subsidiaries. They are ALPS 92-1 UK
Limited incorporated in England, Carotene Limited incorporated in Ireland and
ALPS 92-1 France SARL which was incorporated in France on December 15, 2003.
D. Property, Plants and Equipment
We have no ownership or leasehold interest in any real property. Our
registered and principal office is located at 22 Grenville Street, St. Helier,
Jersey JE4 8PX, Channel Islands. For a description of our interest in other
property, see "Item 4 - Information on the Company - Business Overview."
37
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following discussion is based on our financial statements which
were prepared under U.S. GAAP. We present our statements in U.S. dollars. Except
where otherwise indicated, all dollar amounts listed in this Item 5 are rounded
to the nearest $0.1 million.
We believe that our revenue and expenses were not materially affected
by inflation during the period from incorporation to and including June 30,
2003.
Overview
We commenced operations in 1992 to acquire and own a portfolio of 14
commercial passenger jet aircraft, re-lease the aircraft as necessary and sell
the aircraft in order to provide funds to pay the principal amount of the
Company's debt securities at maturity. Substantially all of our business
consists of aircraft operating lease activities and aircraft sales as required
to satisfy our Trust Note Sales Goals. We conduct some of our leasing operations
through our wholly owned subsidiaries Carotene Limited and ALPS 92-1 UK Limited,
which were established for the sole purpose of assisting us in accomplishing our
Business Objectives by leasing aircraft from us either directly or indirectly
and re-leasing them to operators where tax considerations or other business
factors make it desirable to do so. We sold one of our aircraft to GPA in March
1996, bought the WFC Aircraft in November 1996, and sold a B747-283B aircraft to
WFC in July 1997. On July 2, 1999, we sold a Fokker 100 aircraft to Besleasing,
on June 27, 2000, we sold a A300 B4-200 aircraft to Cebi Aviation S.A., on
October 1, 2002 we sold a B737-300 aircraft to JFM Aviation One LLC, and on
December 20, 2002 we sold an A320-200 aircraft to Transamerica Aviation, LLC.
Our net income consists principally of lease revenue and interest
income, reduced by interest expense, general and administrative expenses,
depreciation and, in some years, a provision for impairment in aircraft values.
Our results of operations have been and will continue to be determined
by significant factors such as (i) conditions in the civil aviation industry for
both leased and owned aircraft, (ii) the mix, relative age and popularity of the
various aircraft types in our portfolio of aircraft and (iii) our financial
resources and liquidity position relative to our competitors, most of whom
possess substantially greater financial resources. We have operated in a
difficult financial market environment since our formation in 1992. Although
there had been signs of recovery in the civil aviation industry, conditions
remained difficult through September 11, 2001 and have deteriorated
significantly as a result of the terrorist attacks on that date, the military
action of the U.S. and its allies in Afghanistan, the terrorist attacks in Bali
and Saudi Arabia, the war in Iraq, the outbreak of SARS and the continued
slowdown in the global economy.
Recent Developments
The continued slowdown in the global economy, together with the
economic and political fallout from the terrorist attacks in the United States
on September 11, 2001, the military action of the U.S. and its allies in
Afghanistan, the terrorist attacks in Bali and Saudi Arabia, the war in Iraq,
and the outbreak of SARS have all adversely affected the commercial aviation
industry.
This continued downturn in the commercial aviation industry has had and
continues to have a material adverse impact on the financial condition of our
lessees and their ability to perform under the leases. It has also resulted in
reduced demand for our aircraft, which impacts our ability to re-lease
38
aircraft on a timely basis and at favorable rates, and a reduction in the value
of our aircraft. These effects have caused a reduction in our cashflow which has
adversely affected our ability to make payments on the Notes.
The vulnerability of the Notes has been reflected in actions taken by
the rating agencies which re-evaluated several structured aircraft financings in
the wake of the terrorist attacks in the United States on September 11, 2001 and
several times since then.
The current ratings on each class of the Notes are as follows:
Moody's Standard & Poor's
------- -----------------
Class A A3 BBB-/Outlook negative
Class B Ba3 B/Outlook negative
Class C Caa1 CCC/Outlook negative
Class D Not rated CCC-/Outlook negative
A rating is not a recommendation to buy, sell or hold Notes because
ratings do not comment as to market price or suitability for a particular
investor. A rating may be subject to revision, suspension or withdrawal at any
time by the assigning rating agency. Given the continuing difficulties in the
aircraft industry and their impact on the factors which determine our revenues,
there can be no assurance that the rating agencies will not take any further
action in respect of our Notes.
Lease Revenue
Revenue decreased in fiscal year 2000 due to the sale of the Fokker 100
aircraft and the A300B4-200 aircraft in July 1999 and June 2000, respectively.
Revenue decreased in fiscal year 2001 due to the re-leasing of various aircraft
at reduced rates and the downtime of one of our B737-400 aircraft which was
subsequently leased to a lessee in India. Revenue decreased in fiscal year 2002
due to downtime of the B737-400 for approximately three months, reduced revenue
from the B757-200 which was on a "power-by-the-hour" lease but was not utilized
by the lessee for eight months, and new "power-by-the-hour" leases and lease
extensions negotiated with a number of lessees which generally result in reduced
and less dependable rental income. Revenue decreased further in fiscal year 2003
due to the sale of our B737-300 aircraft on October 1, 2002 and the sale of our
A320-200 aircraft on December 20, 2002 as well as the re-leasing or extension of
leases of various aircraft at reduced rates, the failure of a lessee to make
certain rental payments and downtime on one of our aircraft. One of our B737-400
aircraft now leased to Skynet was off lease from July 2002 to January 2003.
Following its filing for bankruptcy protection on April 1, 2003, Air Canada, one
of our largest lessees (as measured by annual lease revenue), ceased making
rental payments in respect of our two B767-300ER aircraft. Air Canada resumed
making payments in October 2003. In addition, a number of aircraft are leased on
"power-by-the-hour" leases which generally result in reduced and less dependable
rental income.
Our ability to make payments of interest will depend in part on the
successful re-leasing of our two aircraft with leases which expire in 2003 and
2004. See "Item 3 - Key Information - Risk Factors - Risks Relating to Leasing
of Aircraft." Such new leases may bear fixed or floating rate payments. The
rental rate achieved upon such re-leasing will be affected by a number of
factors including the age, condition and jurisdiction of registration of the
aircraft, the perceived credit risk of the lessee, demand for the particular
aircraft type, the availability and price of competing new and used aircraft,
the market into
39
which the aircraft is leased, the terms of the lease and general economic
factors such as interest rates, inflation and the general availability of
credit. The decline in the airline industry and the number of bankruptcies have
increased the number of aircraft on the market while demand has been dropping.
Further, uncertainty with respect to short to medium term future prospects of
the aircraft industry has resulted in many aircraft lessees requiring
restructuring of leases and many new leases being agreed only on a
"power-by-the-hour" basis. Many new leases and restructurings have also shifted
certain aircraft maintenance and overhaul costs to the Company, as lessor.
Generally, all lease restructurings result in reduced rates, deferred payments
or early returns of aircraft. "Power-by-the-hour" arrangements result in
generally lower and less dependable lease revenue. Currently three of our leases
are on "power-by-the-hour" arrangements. These conditions, particularly should
they continue, are likely to affect our lessees' ability to make rent and other
lease payments, are likely to impair our ability to re-lease aircraft on a
timely basis and at favorable rates and are likely to reduce the value of the
aircraft for possible sale. These factors have caused and are expected to
continue to cause a reduction in our revenue and are likely to have a
significant adverse effect on our ability to make payments on the Notes on a
timely basis and in full. See "Item 3 - Key Information - Risk Factors - Risks
Relating to Payments on the Notes."
Lease revenue attributable to lessees based in Europe has decreased
over the eight year period since fiscal year 1995, decreasing from $22.7 million
for fiscal year 1995 to $6.9 million for fiscal year 2003. Lease revenue
attributable to lessees based in Asia has also decreased from $13.6 million to
$6.4 million over the same period. Lease revenue attributable to lessees based
in North America has decreased from $11.4 million to $6.3 million and lease
revenue attributable to lessees based in South/Central America has decreased
from $6.6 million to zero over the same period. The decrease in lease revenue
attributable to lessees based in Europe, Asia and North America is primarily the
result of the portfolio being reduced from fourteen to nine aircraft during the
period and also a result of all aircraft being re-leased at lower rates. The
decrease in lease revenue attributable to lessees based in South/Central America
is the result of our leasing the aircraft to lessees in other regions upon
expiration of the leases to airlines in South/Central America. The most
significant decreases in lease rates have been in respect of the aircraft with
"power-by-the-hour" leases and in the reduced lease rates for the two B767-300ER
aircraft. In connection with the re-lease or sub-lease of an aircraft, we are
required to satisfy certain criteria regarding geographic concentrations and the
credit ratings of the countries of domicile of new lessees or sublessees unless
we receive confirmation from each applicable rating agency that not doing so
will not result in the withdrawal or lowering of such rating agency's
then-current rating of certificates representing interests in any class of the
Notes. All our current leases provide for rental payments based on fixed rates
(some lessees are based on "power-by-the-hour" fixed hourly rates and others on
fixed monthly rates) whereas the interest payments on the Notes are based on
fixed and floating rates. A material increase in LIBOR may adversely impact our
cashflow in respect of expenses. See "Item 3 - Key Information - Risk Factors -
Risks Relating to Payments on the Notes."
Sales Revenue
The Deed of Charge sets out the following Trust Note Sales Goals which
require us to approve sales of our aircraft on an ongoing basis:
Aircraft to be Sold
(measured by Initial Appraised Value as of June 3, Date by which Sales Goals
1996) are to be Satisfied
$65,000,000 June 27, 2001
$130,000,000 June 27, 2002
$200,000,000 June 27, 2003
$454,950,000 June 27, 2004
40
We were in compliance with and had exceeded the Trust Note Sales Goals
as of June 27, 2001 and were required to sell a further $54,330,000 (as measured
by Initial Appraised Value) worth of aircraft to be in compliance with the Trust
Note Sales Goals as of June 27, 2002.
As discussed above, since September 11, 2001, the market for sale of
used aircraft has been extremely poor and it is not clear if and when the market
will improve in a meaningful way. Nevertheless, in order to meet the Trust Note
Sales Goals, following an extensive marketing effort by the Servicer, the
Company had entered into non-binding agreements to sell a B737-300 and an
A320-200 aircraft to two separate purchasers by June 27, 2002. However, as a
result of difficulties and delays outside the Company's control the sale of the
B737-300 aircraft was not completed until October 1, 2002 and the sale of the
A320-200 aircraft (which was ultimately sold to a different purchaser following
the withdrawal of the original prospective purchaser on November 5, 2002) was
not completed until December 20, 2002. As a result, the Company was not in
compliance with the Trust Note Sales Goals from November 5, 2002 until the
A320-200 aircraft was sold to such other purchaser on December 20, 2002.
In the period from June 1996 to date, we have sold five aircraft
totaling $133,190,000 (measured by Initial Appraised Value). We needed to sell
an additional $66,810,000 (measured by Initial Appraised Value) worth of
aircraft to comply with the June 2003 Trust Note Sales Goal and would need to
sell all of our aircraft to comply with the June 2004 Trust Note Sales Goal. At
our direction, the Servicer has been marketing each of our aircraft for sale in
order to meet the ongoing Trust Note Sales Goals. However, the current market
for sale of used aircraft is extremely poor and it is not clear if and when the
market will improve.
In fiscal year 2003, the marketing efforts of the Servicer resulted in
two offers to purchase the B757-200 aircraft, but both offers were at prices
significantly below the Class C Note Target Price. After careful consideration
of these offers, the Company's obligations under the Deed of Charge (notably the
Business Objectives contained therein) and the current and possible future
market conditions for aircraft sales and leasing, we concluded that it would not
be consistent with the terms of the Deed of Charge for the Company to accept
either such offer.
We did not comply with the Trust Note Sales Goal for June 27, 2003 as
we were unable, given the current aircraft industry market conditions, to sell
sufficient aircraft at the sale prices required by our current Business
Objectives. Given the continuing depressed market for aircraft sales and the
requirement to achieve sale prices consistent with our current Business
Objectives, we believe the Company will not be able to comply with the Trust
Note Sales Goal for June 27, 2004.
Impairment
In accordance with SFAS 144, the Directors undertook a review to
determine whether an impairment charge is required in respect of the nine
aircraft, all of which were classified as held for use as at June 30, 2003.
This review has determined that the carrying value for each of the
aircraft is greater than the estimated undiscounted future net cashflows in
respect of such aircraft and the Directors have recorded an impairment charge
for these aircraft equal to the difference between their carrying value and fair
value. For the purpose of measuring impairment losses for long-lived assets,
fair value is the average Appraised Current Market Value as calculated by the
Independent Appraisers. The average Appraised Current Market Value was in the
aggregate $163,316,667 as at June 30, 2003 for the nine aircraft and represents
the Independent Appraisers' opinion of the most likely trading price that may be
generated for an aircraft
41
under current market conditions. The Independent Appraisers assume that the
aircraft are valued for their highest, best use, that the parties to the
hypothetical sale are willing, able, prudent and knowledgeable, and under no
unusual pressure for a prompt sale, and that the transaction would be negotiated
in an open and unrestricted market on an arm's length basis.
Appraised Current Market Values have been estimated by the Independent
Appraisers based on value curves from the last downturn in the aircraft market.
The Appraised Current Market Value is an estimate of value and should not be
relied upon as a measure of current sales value; the proceeds realized upon a
sale of an aircraft may be less than the Appraised Current Market Value,
particularly in current market conditions as discussed in "Item 3 - Key
Information - Risk Factors - Recent Developments" and in note 3 of the Financial
Statements. In the current environment, there is a lack of hard data available
on which to base aircraft valuations and therefore the appraisal process is more
difficult.
The Directors believe that as a result of the factors discussed above
and in note 3 of the Financial Statements the sales value of the aircraft in the
current market (as compared with the "open, unrestricted, stable market
environment with a reasonable balance of supply and demand" assumed in the
determination of appraised base values) is significantly less than the average
appraised base value and may be less than the average Appraised Current Market
Value and the carrying value as at June 30, 2003. Also, if it were necessary to
dispose of an aircraft quickly, the proceeds from the sale of such aircraft
would probably be even less than the value in the current market. In that event,
further write-downs would most likely be required.
The application of the accounting policies in the fiscal year ended
June 30, 2003 has led to an impairment charge of $14.378 million. Previous
charges were made at June 30, 2002 and at June 30, 2001 for $20.321 million and
$30.259 million, respectively. At June 30, 2002 the impairment charge carried
forward represents write-downs to average Appraised Current Market Values at
June 30, 2002 and June 30, 2001.
Recently Issued Accounting Standards
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS 123." This
Statement amends SFAS 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after December 15,
2002. The Company has no employee stock compensation plans and does not issue
equity instruments in exchange for goods and services. Accordingly, the
application of SFAS 148 does not have any effect on the Company's financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" ("FIN 45"), and interpretation of SFAS 5,
57 and 107 and a rescission of SFAS 34. This Interpretation elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
disclosure requirements are effective for financial statements of interim and
annual periods ending after December 31, 2002. The Company has adopted the
disclosure requirements and will apply the recognition and measurement
provisions for all guarantees entered into or modified after December 31, 2002.
In the period from January 1, 2003 to date the Company has not entered into any
guarantees.
42
On April 30, 2003, the FASB issued SFAS 149, "Amendment of SFAS 133 on
Derivative Instruments and Hedging Activities," to address (1) decisions reached
by the Derivatives Implementation Group, (2) developments in other FASB projects
that address financial instruments, and (3) implementation issues related to the
definition of a derivative. SFAS 149 has multiple effective date provisions
depending on the nature of the amendment to SFAS 133. The Company does not
utilise derivative instruments nor does it engage in hedging activities.
Accordingly, the application of SFAS 149 is not expected to have any effect on
future financial statements.
On May 15, 2003 the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 establishes standards for how an insurer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for all financial instruments entered into or modified after
May 31, 2003. For unmodified financial instruments existing at May 31, 2003,
SFAS 150 is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
non-public entities. As the Company does not currently have any equity
instruments outstanding, the new standard is not expected to have any effect on
future financial statements.
Critical Accounting Policies
We have determined the critical policies by considering those that
involve the most subjective decisions or assessments. The most critical
accounting policies are those related to adequacy of maintenance reserves,
impairment of aircraft values and depreciation methods since these policies
involve elements which require us to make assumptions as to matters that are
highly uncertain at the time the estimates were made. We also consider the going
concern assumption to be a critical element in our financial reporting.
Maintenance Reserves
In many of the lease contracts the lessee makes a payment into a fund
held by the Company, from which the costs of future maintenance checks are
reimbursed. The receipts from lessees are held in the maintenance reserve fund,
except where the Directors believe that a surplus exists, in which case such a
surplus, to the extent retainable by the Company is taken to income as a
reduction of expenses. Conversely, the Company also provides for additional
maintenance costs which are not expected to be paid out of the maintenance
reserves, and such costs are charged to expenses. The determination of the
adequacy of the maintenance reserves is based on an analysis of the lease
portfolio and reflects and takes into account the judgment of the Directors.
Impairment
The Directors have reviewed the Company's fleet for impairment in
accordance with SFAS 144. Under SFAS 144, the Company's policy is to evaluate
for impairment when an asset's carrying value is greater than its estimated
undiscounted future net cashflows. The amount of the impairment charge is the
difference between the asset's carrying value and its fair market value. The
Directors have concluded that the estimated undiscounted future net cashflows to
be generated by the Company's aircraft will be less than their carrying value.
Consequently the Company's aircraft have been written down to their fair value.
In determining fair value, the Directors use external valuations. For
the purposes of measuring impairment losses for aircraft held for use, fair
value is the average of the Appraised Current Market Values, as calculated by
the Independent Appraisers. The Appraised Current Market Value is an estimate of
value and therefore should be relied upon as a measure of current sales value;
the proceeds realized
43
upon a sale of an aircraft may be less than the average Appraised Current Market
Value, particularly in the current market conditions as discussed in "Item 3 -
Key Information - Risk Factors - Recent Developments" and in note 3 of the
Financial Statements. In the current environment, there is a lack of hard data
available on which to base aircraft valuations and therefore the appraisal
process is more difficult. The Directors believe that as a result of these
factors the sales value of the aircraft in the current market may be less than
the average Appraised Current Market Value and the carrying value as at June 30,
2003. Also, if it were necessary to dispose of an aircraft quickly, the proceeds
from the sale of such aircraft would probably be even less than the value in the
current market. In that event, further write-downs would most likely be
required.
Depreciation
Aircraft are recorded at cost and are depreciated at a rate calculated
to write off the cost of the assets to their estimated residual value on a
straight line basis over their estimated useful economic lives. The
determinations of useful life and residual value are critical to the calculation
of depreciation. The current estimates of residual value and useful economic
lives are 10% of cost, and 25 years from the date of manufacture.
Going Concern
The consolidated financial statements are prepared on the going concern
basis. Although the Company balance sheet shows that there are liabilities
considerably in excess of assets, the terms of the Notes are such that, prior to
the final maturity of the Notes, the Noteholders are only entitled to receive
interest and principal repayments in the event that cash is available. Therefore
the Directors believe that the Company is a going concern.
Results of Operations - Fiscal Year Ended June 30, 2003 compared with the Fiscal
Year Ended June 30, 2002
Aircraft Leasing
Lease revenue, which constitutes substantially all of our revenue, was
$19.8 million for the fiscal year ended June 30, 2003, a decrease of 39% from
the corresponding figure of $32.6 million for the fiscal year ended June 30,
2002. This decrease was due primarily to the sale of two of our aircraft during
fiscal year 2003, downtime of one of our aircraft between leases, the failure by
a lessee to make certain rental payments, reduced activity on
"power-by-the-hour" leases and by reduced rental rates negotiated by a number of
lessees.
General and Administrative Expenses
General and administrative expenses consist principally of aircraft
costs borne by the Company, lease management fees, cash management fees,
directors' and officers' insurance, and legal and professional fees. General and
administrative expenses have increased from $3.6 million for the fiscal year
ended June 30, 2002 to $5.9 million for the fiscal year ended June 30, 2003, an
increase of 64%. Lease management fees increased by 8% from $1.2 million in the
fiscal year ended June 30, 2002 to $1.3 million in the fiscal year ended June
30, 2003 as a result of aircraft sales. Aircraft costs of $1.9 million were
incurred in the fiscal year ended June 30, 2003 (compared to $0.8 million in the
prior fiscal year) as a result of redelivery conditions on an aircraft, the
lease in respect of which expired during the fiscal year. Our D&O insurance
premium increased from $275,000 in the fiscal year ended June 30, 2002 to
$480,000 in the fiscal year ended June 30, 2003 due to a general increase in D&O
insurance premiums across all industries. Legal and professional expenses have
increased from $0.8 million for the fiscal year
44
ended June 30, 2002 to $1.4 million in the fiscal year ended June 30, 2003, an
increase of 75%. This increase was due primarily to higher aircraft sales
activity.
Depreciation
Depreciation of $12.0 million was charged for the fiscal year ended
June 30, 2003 and $16.4 million for fiscal year ended June 30, 2002.
Impairment in Aircraft Values
In accordance with SFAS 144, the Directors of the Company reviewed the
carrying value of the aircraft against the sum of the estimated undiscounted
future net cashflows of the aircraft and determined that shortfalls existed for
each of the aircraft, all of which are classified as held for use, as their
carrying value was more than the sum of the estimated undiscounted future net
cashflows of these aircraft. The Directors therefore made an impairment charge
for each of these aircraft equal to the difference between their carrying value
and their fair value. A charge for impairment of the book value of aircraft of
$14.378 million was made for the fiscal year ended June 30, 2003. See "Overview
- - Impairment" above.
The decline in the fair value of the aircraft is due primarily to the
ageing of the aircraft, and with respect to certain aircraft, those market
conditions which have had a negative effect on aircraft values. These conditions
have continued to result in a reduction in lease rates.
Maintenance Reserves
The Company has provided for future expected lessor contributions to
AD, modification and overhaul costs of $3.565 million in respect of five
aircraft.
Bad Debts
A provision of $0.8 million has been made as at June 30, 2003 with
respect to amounts outstanding from Air Canada which filed for bankruptcy
protection during the fiscal year.
Results of Operations - Fiscal Year Ended June 30, 2002 compared with the Fiscal
Year Ended June 30, 2001
Aircraft Leasing
Lease revenue, which constitutes substantially all of our revenue, was
$32.6 million for the fiscal year ended June 30, 2002, a decrease of 14% from
the corresponding figure of $37.9 million for the fiscal year ended June 30,
2001. This decrease was due primarily to downtime of the B737-400 for
approximately three months, reduced revenue from the Company's B757-200 aircraft
which was on a "power-by-the-hour" lease but was not utilized by the lessee for
eight months, and by reduced rental rates negotiated by a number of lessees.
General and Administrative Expenses
General and administrative expenses consist principally of lease
management fees, cash management fees, directors' and officers' insurance and
legal and professional fees. General and administrative expenses have increased
from $3.0 million for the fiscal year ended June 30, 2001 to $3.6 million for
the fiscal year ended June 30, 2002, an increase of 20%. Lease management fees
decreased by 16.5% from $1.4 million in the fiscal year ended June 30, 2001 to
$1.2 million in the fiscal year ended
45
June 30, 2002 as a result of lower lease revenue income. Aircraft costs of $0.8
million were incurred in the fiscal year ended June 30, 2002 (none in prior
period) as a result of redelivery conditions on an aircraft the lease in respect
of which expired during the fiscal year. Our D&O insurance premium increased
from $190,000 in the fiscal year ended June 30, 2001 to $275,000 in the fiscal
year ended June 30, 2002 due to a general increase in D&O insurance premiums
across all industries.
Depreciation
Depreciation of $16.4 million was charged for the fiscal year ended
June 30, 2002 and $17.6 million for the fiscal year ended June 30, 2001.
Impairment in Aircraft Values
In accordance with Statement of Financial Accounting Standards No. 121,
the Directors of the Company reviewed the carrying value of the aircraft against
the sum of the estimated undiscounted future net cashflows of the aircraft and
determined that shortfalls existed for seven aircraft classified as held for use
as at June 30, 2002 as their carrying value was more than the sum of the
estimated undiscounted future net cashflows of these aircraft. The Directors
therefore made an impairment charge for each of these aircraft equal to the
difference between their carrying value and their fair value. In respect to the
two aircraft classified as held for sale at June 30, 2002, these assets have
been included as part of the portfolio at the lower of the carrying amount and
their estimated net realizable value less costs to sell. Gains or losses arising
on the revaluation of such assets have been taken to the charge for impairment.
A charge for impairment of the book value of aircraft of $20.32 million was made
for the fiscal year ended June 30, 2002. See "Overview - Impairment" above.
The decline in the fair value of the aircraft is due primarily to the
ageing of the aircraft, and with respect to certain aircraft, those market
conditions which have had a negative effect on aircraft values. These conditions
have continued to result in a reduction in lease rates.
Maintenance Reserves
The Company has provided for future expected lessor AD costs of $7.2
million in respect of four aircraft.
Bad Debts
There have been no bad debts during the fiscal year ended June 30,
2002.
B. Liquidity and Capital Resources
Cash position
We acquired the original 14 aircraft with a portion of the proceeds we
received from the issuance of the Prior Debt. On June 27, 1996, we refinanced
the Prior Debt with the issuance of the Notes, the aggregate principal amount of
which was $435,110,000 as of June 30, 1997. Operating expenses and payments of
interest on and certain payments of principal of the Notes have been satisfied
from rental income received by us in respect of the leases as well as sale
proceeds.
Our cash resources were reduced during fiscal year 2003. At June 30,
2003, cash resources equaled $26.5 million compared to $30.2 million at June 30,
2002. This reduction was due primarily to a reduction in the Liquidity Reserve
Amount following the sale of two aircraft.
46
Cash from Operating Activities
Net cash provided by operating activities amounted to $1.0 million in
fiscal year 2003, $16.1 million in fiscal year 2002 and $19.2 million in fiscal
year 2001. This reflects cash received in respect of lease rentals of $17.7
million in fiscal year 2003, $31.1 million in fiscal year 2002 and $38.1 million
in fiscal year 2001. Cash paid in respect of interest was $6.2 million in fiscal
year 2003 as compared to $12.33 million in fiscal year 2002. Cash paid in
respect of interest is paid under the Deed of Charge and is limited to the net
cash provided by operating activities. The decrease in net cash provided by
operating activities is primarily due to the reduction in lease rental income
and interest and principal payments made during the fiscal year ended June 30,
2003. During the fiscal year ended June 30, 2002, there were maintenance
payments of $5.4 million primarily in respect of the MD83 and B737-300 aircraft.
During the fiscal year ended June 30, 2003 there were maintenance payments of
$1.8 million primarily in respect of two B737-400, one B757-200 and one MD83
aircraft.
Cash from Investing and Financing Activities
In fiscal year 1993, we issued the Prior Debt and received cash of
$521.0 million. In addition, we received an escrow payment of $15.5 million from
GPA and the Old SM Loan of $78.1 million. These proceeds were used to finance
the acquisition of the original 14 aircraft for $521.0 million and the remaining
cash balances were invested in bank deposits and commercial paper.
In March 1996, we sold one aircraft to GPA for $25.0 million. On June
27, 1996, we refinanced the Prior Debt with the issuance of the Notes. Proceeds
of $380.6 million were received from the issuance of the Class A, Class B, Class
C and Class D Notes, net of expenses. The proceeds together with cash balances
previously held in reserve accounts were used to redeem the Old Class A Notes
and Old Class M Notes, which were discharged in full pursuant to written
instruments entered into by the parties, with the balance of the proceeds of
such Notes being held in bank deposits. The Old Class B Notes which were owned
by WFC were exchanged by WFC for the Class E Notes, and the Old SM Loan was
repaid.
From 1996 through June 30, 2003, approximately $199.3 million of
principal and $142.3 million of interest has been paid to the Noteholders.
The Company's Cash Needs
At various times during fiscal year 2003, certain target principal
payments scheduled to be paid to holders of Class A, Class B, Class C and Class
D Notes, certain interest payments due to holders of Class A, Class B, Class C
and Class D Notes and all interest payments scheduled to be paid to holders of
Class E Notes were in arrears. As at the end of fiscal year 2003, these arrears
consisted of $2.042 million of Class A Note Target Amount, $0.565 million of
Class A Note step-up interest, $0.220 million of Class B Note step-up interest,
$4.304 million of Class C Note Target Amount, $0.206 million of Class C Note
step-up interest, $5.177 million of Class D Note Target Amount, $0.326 million
of Class D Note step-up interest, $0.504 million of Class D Note default
interest, $2.805 million of Class D Note interest and $45.105 million of Class E
Note interest. Our current projections for the remainder of fiscal year 2004 and
thereafter indicate that we will not be able to pay any further interest on the
Class D and Class E Notes or any further step-up interest on the Class A, Class
B, Class C and Class D Notes.
The Company did not have sufficient funds to repay the Class A Notes on
their expected final payment date of May 15, 2002 or to repay the Class B, Class
C or Class D Notes on their expected final payment date of July 15, 2002.
Failure to repay in full the principal of those Notes by such dates is not an
Event of Default; however, the Deed of Charge requires, to the extent the
Company does not repay in full principal of those Notes by such dates, that the
Company pay to the Class A, Class B and Class C
47
Noteholders additional step-up interest of 0.50% per annum and to the Class D
Noteholders additional step-up interest of 1.00% per annum for each month until
the earlier of the date such Notes are repaid in full and their final maturity
date of June 15, 2006. These additional interest costs will only be paid to the
extent there are available collections in accordance with the priority of
payments set forth in the Deed of Charge. The Company paid some step-up interest
in fiscal year 2002, but our current projections indicate that we will not have
sufficient funds to pay any further step-up interest.
The timing and amount of principal payments on the Notes will be
primarily a function of the Target Balances (as such term is defined in the
Prospectus) for the respective classes of Notes. Such Target Balances were
determined based on certain assumptions, including among other things,
assumptions regarding the timing of receipt and amount of proceeds of aircraft
sales and lease payments. Our actual experience in selling and leasing aircraft
has resulted in proceeds received by us being significantly less than that
provided in these assumptions. For the reasons discussed under "Item 3 - Key
Information - Risk Factors" and "Item 5 - Operating and Financial Review and
Prospectus - Operating Results" we expect that the difference between these
assumptions and actual experience will increase as the industry experiences a
period of prolonged decline. The Servicer, at the Company's direction, is
marketing each of the aircraft for sale; however, the sales market for used
aircraft is extremely weak at this time. The Company is continuing to review all
alternatives in order to maximize the amount available to pay outstanding
principal and interest to the noteholders while attempting to comply with the
Business Objectives and the other requirements of the Deed of Charge. However,
there can be no assurance that we will be able to repay the holders of the Class
A Notes the full amount owed to them when due. Further, based on our current
projections, we expect to have insufficient funds to repay some of the Class B
Note principal and any remaining Class C, Class D and Class E Note principal.
Our operative documents restrict our ability to consider many traditional forms
of financing and thereby circumscribe the options available to us. We cannot
offer any assurance that viable alternative arrangements will be available to us
or that any alternative arrangement selected will be successful. See "Item 3 -
Key Information - Risk Factors," "Item 4 - Information on the Company - History
and Development of the Company" and "Item 13 - Defaults, Dividend Arrearages and
Delinquencies."
The Deed of Charge sets out the following Trust Note Sales Goals which
require us to approve sales of our aircraft on an ongoing basis:
Aircraft to be Sold
(measured by Initial Appraised Value as of June 3, Date by which Sales Goals
1996) are to be Satisfied
$65,000,000 June 27, 2001
$130,000,000 June 27, 2002
$200,000,000 June 27, 2003
$454,950,000 June 27, 2004
We were in compliance with and had exceeded the Trust Note Sales Goals
as of June 27, 2001 and were required to sell a further $54,330,000 (as measured
by Initial Appraised Value) worth of aircraft to be in compliance with the Trust
Note Sales Goals as of June 27, 2002.
As discussed above, since September 11, 2001, the market for sale of
used aircraft has been extremely poor and it is not clear if and when the market
will improve in a meaningful way. Nevertheless, in order to meet the Trust Note
Sales Goals, following an extensive marketing effort by the Servicer, the
Company had entered into non-binding agreements to sell a B737-300 and an
A320-200 aircraft to two separate purchasers by June 27, 2002. However, as a
result of difficulties and delays outside the Company's control the sale of the
B737-300 aircraft was not completed until October 1, 2002
48
and the sale of the A320-200 aircraft (which was ultimately sold to a different
purchaser following the withdrawal of the original prospective purchaser on
November 5, 2002) was not completed until December 20, 2002. As a result, the
Company was not in compliance with the Trust Note Sales Goals from November 5,
2002 until the A320-200 aircraft was sold to such other purchaser on December
20, 2002.
In the period from June 1996 to date, we have sold five aircraft
totaling $133,190,000 (measured by Initial Appraised Value). We needed to sell
an additional $66,810,000 (measured by Initial Appraised Value) worth of
aircraft to comply with the June 2003 Trust Note Sales Goal and would need to
sell all of our aircraft to comply with the June 2004 Trust Note Sales Goal. At
our direction, the Servicer has been marketing each of our aircraft for sale in
order to meet the ongoing Trust Note Sales Goals. However, the current market
for sale of used aircraft is extremely poor and it is not clear if and when the
market will improve.
In fiscal year 2003, the marketing efforts of the Servicer resulted in
two offers to purchase the B757-200 aircraft, but both offers were at prices
significantly below the Class C Note Target Price. After careful consideration
of these offers, the Company's obligations under the Deed of Charge (notably the
Business Objectives contained therein) and the current and possible future
market conditions for aircraft sales and leasing, we concluded that it would not
be consistent with the terms of the Deed of Charge for the Company to accept
either such offer.
We did not comply with the Trust Note Sales Goal for June 27, 2003 as
we were unable, given the current aircraft industry market conditions, to sell
sufficient aircraft at the sale prices required by our current Business
Objectives. Given the continuing depressed market for aircraft sales and the
requirement to achieve sale prices consistent with our current Business
Objectives, we believe the Company will not be able to comply with the Trust
Note Sales Goal for June 27, 2004.
Failure to comply with the Trust Note Sales Goals may, under certain
circumstances, constitute an Event of Default under the Deed of Charge if such
failure continues for 30 days or more after written notice thereof has been
given to the Company or the Security Trustee by holders of at least 25% of the
aggregate Outstanding Principal Balance of the Notes of any class which has been
materially adversely affected by such failure.
The Deed of Charge further provides that if an Event of Default were to
occur and be continuing an Enforcement Notice may only be served by 662/3% or
more of the aggregate Outstanding Principal Balance of the directing class,
which will be Class A so long as any Class A Notes are outstanding.
The Deed of Charge provides that the failure to comply with the Trust
Note Sales Goals gives the Noteholders the right to replace the Servicer at the
direction of Noteholders representing at least 75% of the aggregate Outstanding
Principal Balance of the Class A, Class B, Class C and Class D Notes. The Deed
of Charge also provides that, subject to the pre-emption rights of the Class D
and Class E Noteholders, to the extent the Trust Note Sales Goals are not
complied with prior to December 27, 2004, the Company is required to accept any
Sale Offer for the sale of an aircraft if the proposed sale price is at least
equal to the Class C Note Target Price. During the time that the Company has not
been in compliance with the Trust Note Sales Goals, the Company has been unable,
with the exception of the sale of the A320-200 aircraft in December 2002, to
sell aircraft at prices at or above the Class C Note Target Price. However, to
the extent the Company has not complied with the Trust Note Sales Goals, on or
after December 27, 2004, the Company will be required, subject to the
pre-emption rights of the Class D and Class E Noteholders, to accept any Sale
Offer for the sale of an aircraft if the proposed sale price is at least equal
to the Class A Note Target Price.
49
Except as noted below, the Company's collection account is required to
be maintained at a balance equal to $22,691,000 (the "Liquidity Reserve
Amount"). In March 2003, the level of the Liquidity Reserve Amount was reduced
from $23,907,000 with the approval of the rating agencies. Part of the Liquidity
Reserve Amount consists of maintenance reserves and security deposits received
in cash from certain lessees under the terms of their leases. The Liquidity
Reserve Amount may be used to pay for maintenance performed on aircraft, certain
contingencies in respect of the aircraft, repayment of cash security deposits
and, subject to Board approval, other Company expenses and liabilities,
including, among other things, interest due on the Class A, Class B and Class C
Notes and costs incurred in removing any lien imposed by Eurocontrol, in
performing airworthiness directives on the aircraft or in re-possessing or
re-leasing any aircraft, to the extent that available collections are not
sufficient therefor, in accordance with the priority of payments set out in the
Deed of Charge. The Company must augment the Liquidity Reserve Amount on a
monthly basis out of available collections to the extent it is used to pay such
interest, costs, expenses or liabilities. In accordance with the Deed of Charge,
the Company may in certain circumstances reduce the Liquidity Reserve Amount.
The balance of funds in the collection account may fall below the Liquidity
Reserve Amount at any time and the Company may continue to make payments
required on the Class A, Class B, Class C and Class D Notes provided that the
balance of funds in the collection account does not fall below the "Maintenance
Reserve Amount" (currently $10 million). The Company believes its maintenance
funding arrangements to be sufficient, based on anticipated future maintenance
expenses, to provide the Company with sufficient liquidity to meet its ongoing
maintenance liabilities.
C. Research and Development, Patents and Licenses
Not applicable.
D. Trend Information
We have continued to suffer from a difficult business environment.
During the past three years, there has been a general downturn in the world
economic climate, with a consequential negative impact on the commercial
aviation industry. Global economic conditions, exacerbated by the terrorist
attacks of September 11, 2001, the military action of the U.S. and its allies in
Afghanistan, the terrorist attacks in Bali and Saudi Arabia, the war in Iraq and
the outbreak of SARS have adversely impacted the commercial aviation industry.
As previously reported the resulting reduction in passenger numbers and
consequential reduction in flight schedules by airlines has caused a continued
decline in demand for aircraft. Some carriers, including United Airlines (the
second largest airline in the world), U.S. Airways and one of our largest
lessees (as measured by annual lease revenue), Air Canada, have filed for
bankruptcy, while others, including many of our lessees, have suffered large
losses or face severe financial difficulties. Oversupply of aircraft has
resulted in increased aircraft downtime, aircraft being parked, a fall in market
value of aircraft (especially older technology and less fuel-efficient aircraft
or models no longer in production) and lower lease rates throughout the
industry. We have ourselves experienced increased time between redelivery and
re-leasing of aircraft, a decline in lease rates upon re-leasing or extensions
of leases, and a decline in sales prices for our aircraft. We have had to
restructure a number of leases, resulting in rental reductions. There can be no
assurance that we may not have to agree further restructurings in the future. In
addition, we currently expect new ADs to be issued to improve security on
aircraft, the costs of compliance with which, to the extent that they are not
the responsibility of lessees under their leases or if the aircraft are not on
lease, will be our responsibility.
There has been a decline of 12.62% in the average appraised base value
of our fleet of nine aircraft from June 30, 2002 to June 30, 2003. The appraised
base values are based upon the value of the aircraft at normal utilization rates
in an open, unrestricted and stable market, and take into account long-term
trends, including current expectations of particular models becoming obsolete
more rapidly than
50
previous predictions. As a theoretical value, the appraised base value is not
indicative of market value and it is not likely that we would obtain the
appraised base value upon sale of any aircraft, since we might sell at a low
point in the business cycle, and since appraised base values are
forward-looking. Further, it is possible that certain of our aircraft,
particularly the MD-80s and 737-400/500s, may be permanently impaired, which
would negatively impact the future appraised base values of these models.
Current interest rates are low by historic standards which has
generally been beneficial for our lessees. Any future increases in interest
rates may adversely affect the ability of our lessees to perform their
obligations under the leases.
See "Item 3 - Key Information - Risk Factors" and "Item 5 - Operating
and Financial Review and Prospects - Operating Results" for a discussion of
additional trends affecting our operations.
E. Off-Balance Sheet Arrangements
None.
F. Tabular Disclosure of Contractual Obligations
Payments due by period as at June 30, 2003
-----------------------------------------------------------------------------------------
$million
------------------------------------------------------------------------------------------
Total less than 1 1-3 years 3-5 years more than
year 5 years
---------------- -------------- --------------- ------------- ----------------
Contractual Obligations
(i) Long-Term Debt Obligations - $282.183 - $282.183 - -
Notes
(ii) Purchase Obligations - $1.4154 $0.4718 $0.9436 - -
Servicer and Cash Manager Fees
---------------- -------------- --------------- ------------- ----------------
Total $283.5984 $0.4718 $283.1266 - -
================ ============== =============== ============= ================
(i) The Company is obligated to pay interest on the Notes and a portion of
the principal of the Class A Notes from the revenue generated by the
Company's leasing operations. Proceeds from the sale of aircraft are
required to be used to pay principal of the Notes in the priority set
forth in the Deed of Charge.
The matters described in "Item 3 - Key Information - Risk Factors -
Risks Relating to Payments on Notes" have had a significant adverse
effect on the Company's revenue and on the Company's ability to make
payments on the Notes on a timely basis and in full. Current
projections indicate that there will not be sufficient funds to pay any
further interest on or repay any principal of the Class E Notes, pay
any further interest on or repay any further principal of the Class D
Notes, repay any further principal of the Class C Notes, repay the
principal of the Class B Notes in full or pay any further step-up
interest on the Class A, B, C or D Notes.
Upon the final maturity date of the Notes (June 15, 2006) the cash
available will be applied to pay principal and interest on the Notes in
the order of priorities set forth in the Deed of Charge. The Class E
Notes will not receive any principal or interest payments until the
outstanding principal
51
amount of each of the Class A, Class B, Class C and the Class D Notes
is reduced to zero and all interest due on these Notes is paid in full.
The failure of the Company to pay principal of the Class A, Class B,
Class C or Class D Notes on any day prior to their final maturity date
due to insufficient cash collections will not constitute an Event of
Default with respect to such class of Notes. The limited recourse
nature of the Notes means that no payments will be payable in excess of
the available collections.
(ii) The annual commitment to the Servicer is $454,800 plus 2% of all lease
rentals collected. The annual commitment to the Cash Manager is
$17,000.
ITEM 6. directors, senior management and employees
A. Directors and Senior Management
Board of Directors
Our Directors and their ages, business addresses and principal
activities are as follows:
Name Age Business Address Principal Activities
- ---------------------------- --- ------------------------------ ---------------------------------
Mr. Frederick W. Bradley, Jr. 76 764 Norgate, Westfield Retired - Senior Vice President,
New Jersey, United States 07090 Citibank, N.A., Citicorp
Mr. G. Adrian Robinson 54 Timbers, Dean Street Aerospace Consultant
East Farleigh, Maidstone
Kent ME15 OHS, England
Mr. Brian L. Chamness 44 1403 W. Lusher Ave. Consultant, Whirlpool Financial
Elkhart, Indiana, United States Corporation
46517
The present principal occupation and other affiliations of our
Directors are as follows:
Frederick W. Bradley, Jr. - Mr. Bradley has served as a Director of the
Company and as Chairman of the Board since June 15, 1992. From 1969 until 1992,
Mr. Bradley was a Senior Vice President of Citibank N.A., in charge of the
bank's global airline and aerospace business having joined Citibank in 1958. Mr.
Bradley served as the Chairman of the Board of ALPS 94-1 Limited from June 2,
1994 to October 18, 2001 and as Chairman of the Board of AerCo Limited from June
23, 1998 to October 18, 2001. Mr. Bradley is also a Director of First Citicorp
Life Insurance Co., and the Institute of Air Transport Paris, France and is
president of the International Air Transport Association's (IATA) International
Airline Training Fund of the United States. Mr. Bradley retired as a Director of
America West Airlines, Inc. in 1999 after serving seven years on its Board.
G. Adrian Robinson - Mr. Robinson has served as a Director of the
Company since June 27, 1996. Mr. Robinson has been an aerospace consultant since
1992. From 1990 to 1992, Mr. Robinson was a Deputy General Manager of The Nippon
Credit Bank. Until 1989, he was a Managing Director, Special Finance Group, of
Chemical Bank, which he joined in 1986. Mr. Robinson has served as a Director of
ALPS 94-1 Limited since June 2, 1994, as a Director of AerCo Limited since June
23, 1998 and as the Chairman of the Boards of ALPS 94-1 Limited and AerCo
Limited since October 18, 2001.
52
Mr. Robinson also provides consulting services from time to time to First Choice
Airways, one of the lessees.
Brian L. Chamness - Mr. Chamness served as a Director of the Company
from January 28, 1998 to June 30, 2000 and was re-appointed as a Director on
June 12, 2002. Mr. Chamness was a Vice President of WFC from January 1998 to
June 2000 and was a member of the Board of Directors of WFC from April 1999 to
June 2000. Mr. Chamness currently serves as a consultant to WFC.
Mr. Bradley and Mr. Robinson both serve for two year terms as
Directors, but there is no limit to the number of terms they may serve. Mr.
Chamness serves for a term of unlimited duration until removed or replaced by
WFC. Mr. Robinson's term expired in the second calendar quarter of 2002, when he
was re-appointed to the Board and Mr. Bradley's term expired in the second
calendar quarter of 2003, when he was re-appointed to the Board. Mr. Robinson's
term expires again in the second calendar quarter of 2004. Mr. Robinson is the
Chairman of the Board and a Director of AerCo Limited, a competitor of the
Company in the aircraft leasing industry.
Our Directors are non-executive and we do not and will not have any
employees or executive officers. Accordingly, the Board of Directors relies upon
the Servicer, the Administrative Agent, the Cash Manager and the other service
providers for all asset servicing, executive and administrative functions under
the service provider agreements. Certain individuals other than the Directors
listed above serve as Directors of various subsidiaries of the Company.
In accordance with our Memorandum and Articles of Association, the
holder of the Class E Notes, currently WFC, is entitled to appoint one member of
the Board of Directors. Since June 12, 2002, Mr. Chamness has been the Director
elected to the Board by WFC.
Audit Committee
The Audit Committee of the Company, established in September 2002,
consists of the two Independent Directors. The duties of the Audit Committee
include the following:
o to consider the appointment of the external auditors, the
audit engagement terms and audit fee, and any questions of
resignation or dismissal of the external auditors;
o to discuss and agree with the external auditors before the
audit commences the nature and scope of the audit;
o to pre-approve all permissible non-audit services performed by
the external auditors. (Audit services include the statutory
audit of group and subsidiary companies, the review of annual
reports and other related work). Pre-approval is delegated to
any member to cater for matters arising between meetings,
however, the full committee shall approve at the next
scheduled meeting;
o to review from time to time the cost effectiveness of the
audit and the independence and objectivity of the external
auditors;
o to review the submission to the Board in relation to any
audited accounts, focusing particularly on:
o critical accounting policies and practices and any
changes in accounting policies and practice;
53
o all alternative treatments of financial information
presented under U.S. GAAP that have been or are to be
discussed with the Board and the treatment preferred
by the auditors;
o major judgmental areas;
o significant adjustments resulting from the audit;
o any unadjusted audit differences;
o the going concern assumption;
o compliance with accounting standards (and in
particular accounting standards adopted in the
financial year for the first time);
o compliance with legal requirements;
o to discuss problems and reservations arising from the audit,
and any matters the external auditors may wish to discuss;
o to review the external auditors' management letter and
management's response;
o to review, on behalf of the Board, the Company's system of
internal and disclosure controls and procedures (including
financial, operational compliance and risk management) and
make recommendations to the board;
o to review adequacy of financial and non-financial information
provided to the Board by the third party service providers;
o to consider the major findings of internal investigations and
management's response;
o to review the Company's operating, financial and accounting
policies and practices;
o to consider other matters as defined by the Board; and
o to report on all of the above matters to the Board.
Corporate Management
Servicer
The Servicer, Babcock & Brown, provides a wide range of services
including:
o lease marketing and negotiation of lease agreements;
o aircraft sales;
o aircraft lease management including:
- calculation, invoicing and collection of cash due
under leases;
54
- monitoring each lessee's performance of its aircraft
maintenance obligations;
- arranging for aircraft inspections;
- accepting delivery and redelivery of aircraft;
- monitoring lessee insurance compliance and arranging
for alternative insurance where appropriate and to
the extent commercially available;
- monitoring of cash and lease security provisions;
- monitoring lessee compliance under the leases;
- enforcement of our rights under the leases;
o preparation of budgets;
o preparation of Board agendas and reports;
o arranging valuations, and monitoring and advising us on
regulatory developments;
o periodic reporting of operational, financial and other
information on our aircraft and leases; and
o providing us with data and information relating to our
aircraft and the commercial aviation industry.
The Servicer is paid an annual asset based servicing fee of $454,800.
The asset based servicing fee is payable monthly in arrears in equal
installments.
The Servicer is paid lease incentive fees which are the aggregate of
(i) 1% of the basic rent amount received; (ii) 1% of the basic rent amount due;
and (iii) an amount equal to 10% of the amount by which the basic rent is
exceeded for each aircraft which is placed on a new lease. The lease incentive
fees are payable monthly in arrears.
The Servicer is also paid a sales incentive fee in respect of the sale
of aircraft calculated as follows:
(i) 1.25% of the net sale proceeds up to 87% of the depreciated value of such
aircraft; plus (ii) 15% of the amount by which the net sale proceeds exceed 87%
of the depreciated value of such
aircraft.
In certain circumstances, we or the Servicer may terminate the
Servicing Agreement.
Administrative Agent and Company Secretary
Due to the liquidation of the United Kingdom partnership of Arthur
Andersen, the previous administrative agent, Andersen Corporate Services
(Jersey) Limited, and the previous company secretary, Andersen Secretaries
(Jersey) Limited, which were both wholly owned by the United Kingdom partnership
of Arthur Andersen, were replaced by Mourant & Co. Limited and Mourant & Co.
Secretaries Limited, respectively, on October 1, 2003. Our Administrative Agent
(in conjunction with the Company Secretary) provides administrative and
accounting services to the Board of Directors including:
55
o maintaining the corporate books and records,
including our minute book and share register and the
register of Notes;
o making available to us telephone, telecopy and post
office facilities, and maintaining our registered
office in Jersey, at which it will accept service of
process in Jersey and other notices sent to us;
o providing other general administrative services;
o providing administrative services to us in connection
with the closings of the sale and re-lease of our
aircraft;
o providing various types of accounting assistance;
o coordinating with the Financial Consultant with
respect to various financial matters;
o assisting us in connection with any hedging strategy;
o assisting with the preparation, filing and
distributions of all reports which need to be
prepared, filed and/or distributed by us (including
reports required to be filed under the securities
laws of the United States but excluding reports
relating to the aircraft and the Luxembourg Stock
Exchange);
o coordinating any amendments to the transaction
documents (other than the leases), subject to the
terms of such agreements and approval by the Board of
Directors; and
o authorizing payment of certain bills and expenses,
subject to approvals by the Board of Directors.
The Administrative Agent may resign on 30 days' written notice, as long
as we have engaged another person or entity to perform the services that were
being provided by the Administrative Agent. We may remove the Administrative
Agent at any time on account of a material breach of its obligations.
The Administrative Agent also may be asked by the Board of Directors to
provide other administrative services, including such other actions as may be
appropriate to facilitate the transactions contemplated by the Prospectus and
our operative documents and to assist the Board of Directors in carrying out its
duties.
The fee for the Administrative Agent's services to the Company is based
on the number of hours worked by each employee of the Administrative Agent on
affairs of the Company multiplied by the hourly rates of each such employee.
Mourant & Co. Limited provides administrative and secretarial services to other
corporate entities including other securitization vehicles, and is affiliated
with Mourant du Feu & Jeune, the law firm that acts as Jersey legal counsel for
the Company.
Cash Manager
The Cash Manager, Deutsche Bank Trust Company Americas (f/k/a Bankers
Trust Company), provides cash management and related services to us. In the
ordinary course of our business, the Cash Manager will inform the Servicer of
the aggregate deposits in the collection account on a daily basis and with
respect to each payment period, provide such other information as shall be
required in connection with our accounts and make disbursements in accordance
with the Deed of Charge. The Cash Manager is
56
authorized to invest the funds held by us in the collection account and the
lessee funded account in prescribed investments and on permitted terms at our
direction.
In addition, the Cash Manager receives the data provided by the
Servicer and the Financial Consultant with respect to the aircraft, leases and
other matters and calculates certain monthly payments and makes all other
calculations as required under the Cash Management Agreement. The Cash Manager
will also provide the Trustee with such information as is required by the
Trustee to provide its report to the noteholders.
The Cash Manager may resign on 30 days' written notice, as long as we
have engaged another person or entity to perform the services that were being
provided by the Cash Manager. We may remove the Cash Manager at any time on
account of a material breach of its obligations.
The Cash Manager receives a fee of $17,000 per year for its services to
the Company.
Financial Consultant
The Financial Consultant, Deutsche Bank Trust Company Americas (f/k/a
Bankers Trust Company), develops financial models, revenue projections and
forecasts and provides computational services to assist the Board of Directors
in making lease, sale and hedging decisions, and in analyzing the budget. The
Financial Consultant may resign on 30 days' written notice, as long as we have
engaged another person or entity to perform the services that were being
provided by the Financial Consultant. We may remove the Financial Consultant at
any time on account of a material breach of its obligations.
The Financial Consultant receives a fee of $32,000 per year for its
services to the Company.
Auditors
Since September 11, 2003, the Company's auditors have been KPMG
Ireland. Prior to that date the Company's auditors had been KPMG Channel
Islands. KPMG Channel Islands had informed us that it did not intend to register
with the U.S. Public Company Accounting Oversight Board (the "PCAOB") in
accordance with a new requirement of the PCAOB that any independent auditor of a
company subject to the U.S. Securities and Exchange Commission's periodic
reporting requirements register with the PCAOB. Therefore, KPMG Channel Islands
would no longer be in a position to continue as independent auditor to the
Company. It also informed us that KPMG Ireland, which had intended to so
register with the PCAOB, had expressed its willingness to accept appointment as
independent auditor to the Company.
There were no disagreements between KPMG Channel Islands and the
Company or any other reportable events that caused us to replace KPMG Channel
Islands with KPMG Ireland. This replacement was approved by both the Audit
Committee and the Board of Directors of the Company.
B. Compensation
All Directors are compensated for travel and other expenses incurred by
them in performing their duties as Directors. The Company currently pays each
Independent Director a fee of $58,600 per annum, which fee may be increased only
in accordance with Articles of Association of the Company and the Deed of
Charge, for his services. Each Independent Director is also entitled to an
additional fee of $1,000 for each day, or portion thereof, on which he is
required to travel (excluding the quarterly Board meetings in Jersey) on account
of Company business. Non-Independent Directors receive no remuneration for their
services.
57
Additionally, Mr. Robinson is paid fees of approximately Euro 6,400 per
annum, fees of up to (pound)3,000 per annum and fees of Euro 4,000 per annum as
compensation for acting as a Director of the Company's wholly owned Irish,
English and French subsidiaries, respectively.
The Company has no other officers.
C. Board Practices
None of the Directors have service contracts and none of the Directors
are entitled to benefits on termination of their employment. The Company does
not have a remuneration committee. In September 2002, the Company established an
Audit Committee which currently consists of the two Independent Directors. Prior
to this time, audit committee matters were considered at the regular meetings of
the full Board. See "- Directors and Senior Management - Board of Directors" and
"--Audit Committee" for additional information concerning our Directors and the
Audit Committee, respectively.
D. Employees
Our Directors are non-executive and we do not and will not have any
employees or executive officers. Accordingly, the Board of Directors relies upon
the Servicer, the Administrative Agent, the Cash Manager, the Financial
Consultant and the other service providers for all asset servicing, executive
and administrative functions under the service provider agreements.
E. Share Ownership
None of our Directors own any shares of the Company nor do they have
options to purchase shares of the Company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Our Ordinary Shares are not listed on any national exchange or traded
in any established market. The beneficial ownership of the Ordinary Shares as of
the date of this report on Form 20-F is presented below.
BENEFICIAL OWNERSHIP OF THE COMPANY
Title of Class Identity of Person or Group Amount Owned Percent of Class
- -------------- --------------------------- ------------ ---------------
Ordinary Shares Mourant & Co. Trustees 10 100%
Limited, as trustee of the
ALPS Trust,
22 Grenville Street,
St. Helier, Jersey,
Channel Islands
All ten Ordinary Shares issued are held by the Nominees (five shares
each) for the benefit of Mourant & Co. Trustees Limited as trustee of the ALPS
Trust, a Jersey charitable trust.
58
Under the deed of covenant entered into on June 27, 1996 by Mourant &
Co. Trustees Limited as trustee of the ALPS Trust (the "charitable trust
trustee"), WFC and the Company, the charitable trust trustee agreed that it will
not, and will procure that the Nominees will not, without the prior written
approval of the holder of the Class E Notes, transfer any part of the shares in
the Company held by them or any interest therein unless the transferee shall
enter into a covenant identical to that contained in the deed of covenant in
favour of the holder of the Class E Notes (including a covenant not to amend
certain provisions of our Articles without the prior written approval of the
holder of the Class E Notes).
See "Item 10 - Additional Information - Articles of Association" for a
description of the voting rights available to holders of our Ordinary Shares.
B. Related Party Transactions
WFC owns the Class E Notes and is entitled to appoint one Director to
the Board for as long as it owns such Notes. Currently, Brian Chamness, a
consultant to WFC, is the Director serving on the Board at the request of WFC.
Mourant & Co. Limited is the Administrative Agent and Mourant & Co.
Secretaries Limited is the Company Secretary. Their affiliate, Mourant de Feu &
Jeune, is Jersey, Channel Islands legal counsel to the Company and its
directors.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. financial information
A. Consolidated Statements and Other Financial Information.
Consolidated financial statements are listed in Item 18.
We are not a party to any material legal proceedings.
B. Significant Changes
There have been significant changes which have occurred since the date
of the annual financial statements. These events are explained in Note 15 of
"Item 18 - Financial Statements."
ITEM 9. The listing
A. Offer and Listing Details
The Class A, Class B, Class C and Class D Notes are listed for trading
on the Luxembourg Stock Exchange. Additionally, in the United States at least
one investment bank makes a secondary market in such classes of Notes, but
without any obligation to do so. There can be no assurance that a secondary
market will continue or develop further for any class of Notes or that the
market will provide liquidity of investment or that it will remain for the term
of the Notes.
59
B. Plan of Distribution
Not applicable.
C. Markets
The Class A, Class B, Class C and Class D Notes are listed on the
Luxembourg Stock Exchange.
D. Selling Shareholders
Not applicable
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. Additional information
A. Share Capital
Not applicable
B. Memorandum and Articles of Association
The following summary contains a description of the material provisions
of our Memorandum and Articles of Association (which we refer to as our
Memorandum and our Articles respectively) and does not purport to be complete
and is qualified in its entirety by reference to our Memorandum and Articles,
copies of which are incorporated by reference at Exhibit 1 hereto.
Registration and Objects
The Company is a public limited liability company incorporated pursuant
to the Companies (Jersey) Law 1991 (which we refer to as the Companies Law). We
are registered under number 52674 in the register of companies maintained by the
Jersey Registrar of Companies.
Our objects and purposes are set out in paragraph 4 of our Memorandum.
The purposes of the Company are, inter alia, the following:
o to own, manage and lease out aircraft,
o to purchase and dispose of aircraft,
o to borrow or raise money and to raise or secure the
repayment of such sums of money in such manner and
upon such terms and conditions as the Directors of
the Company shall think fit,
60
o to engage in currency exchange and interest rate
transactions and any other financial or other
transactions of whatever nature, and
o to establish companies for the purpose of carrying on
any business or acquiring and undertaking any
property or liability of the Company.
Directors
We are managed by a Board of Directors which will consist of no more
than three persons and no less than two persons at any time. See "Item 6 -
Directors, Senior Management and Employees."
Transactions in which our Directors are Interested
Our Articles provide that if a Director has disclosed to the Board of
Directors the nature and extent of any of his material interests, a Director
notwithstanding his office:
o may be a party to, or otherwise interested in, any
transaction or arrangement with the Company or in
which the Company is otherwise interested;
o may be a Director or other officer of, or employed
by, or a party to any transaction or arrangement
with, or otherwise interested in, any body corporate
promoted by the Company or in which the Company is
otherwise interested or which engages in transactions
similar to those engaged in by the Company and might
present a conflict of interest for such Director in
discharging his duties;
o shall not, by reason of his office, be accountable to
the Company for any benefit which he derives from any
such office or employment or from any such
transaction or arrangement or from any interest in
any such body corporate and no such transaction or
arrangement shall be liable to be avoided on the
ground of any such interest or benefit.
Directors' Compensation
All Directors are compensated for travel and other expenses incurred by
them in the performance of their duties. Our Articles provide for each
Independent Director to be paid an aggregate fee of $50,000 per annum for his
services (or such higher amount, not exceeding $100,000 per annum, as shall be
fixed by the holders of our shares). On October 24, 2003, our shareholders
approved an increase in these fees based on the change in the U.S. Consumer
Price Index from June 1996 to June 2003. As a result each Independent Director
now receives a fee of $58,600 per annum for his services. Each Independent
Director is also entitled to an additional fee of $1,000 for each day, or
portion thereof, on which he is required to travel (excluding the quarterly
Board meetings held in Jersey) on account of Company business. Our Articles
provide that the Director appointed by the holder of the Company's Class E Notes
is not entitled to remuneration for his services. The provisions of our Articles
may only be changed by special resolution passed by the holders of our shares
(as to which see `Changes to Shareholders' Rights' below).
Directors' Borrowing Powers
Our Articles provide for our Directors to exercise all borrowing powers
of the Company. The exercise of such powers is limited as a result of the
contractual restrictions on our power to borrow contained in the Deed of Charge.
61
Directors' Age Limits
There is no provision in our Articles or in the Companies Law as a
result of which our Directors would be required to retire from office upon
reaching a certain age.
Directors' Share Ownership Requirements
There is no provision in our Articles or in the Companies Law requiring
our Directors to hold shares in the Company in order to be able to hold the
position of Director.
Rights, Preferences and Restrictions Relating to Shares
We have an authorized share capital consisting of 15,000 ordinary
shares of $1 nominal value per share of which 10 have been issued and are fully
paid (See "Item 7 - Major Shareholders and Related Party Transactions - Major
Shareholders"). The rights, preferences and restrictions attaching to the shares
are as follows:
Dividend Rights
We may distribute dividends to our shareholders from distributable
profits in each fiscal year. These distributions are subject to the requirements
of the Companies Law. For the purpose of calculating amounts available for
distribution, profits and losses must be accumulated in so far as not previously
utilized or written off in a reduction or re-organization of capital. Any
dividends must be distributed to our shareholders in proportion to their
shareholdings. Under our Articles, the holders of the 10 issued shares in the
Company are entitled to a fixed cumulative dividend of $1,500 per annum (to the
extent the Company has distributable profits in any year) and to any additional
dividends paid out of surplus profits of the Company. Under our Articles,
dividends not claimed within ten years from the date of declaration shall, if
our Directors so resolve, be forfeited and shall from that time belong to the
Company.
Voting Rights
Each holder of our shares is entitled to one vote per share at any
general meeting of our shareholders.
Rights to share in the Profits
See "Dividend Rights" above.
Rights in the Event of Liquidation
In the event that we are liquidated, our assets remaining after payment
of our debts, liquidation expenses and all of our remaining obligations will be
used to pay to the holders of the 10 issued shares in the Company any arrears of
the preferential dividend to which they are entitled and the balance, if any,
will be distributed to repay in full the nominal value of our shares. Any
surplus will then be distributed proportionately among our shareholders in
proportion to their shareholdings.
Redemption of Shares
Our shares are not redeemable shares.
Sinking Fund
Our shares are not subject to any sinking fund.
62
Liability to further Capital Calls
Shareholders are not liable to further capital calls.
Principal Shareholder Restrictions
There are no provisions in our Articles or in the Companies Law which
would discriminate against any existing or prospective holder of our shares as a
result of such shareholder owning a substantial number of shares.
Changes to Shareholders' Rights
The provisions of our Articles, which set out the rights attaching to
our shares, may only be amended by a special resolution (which is a resolution
passed either by a majority of not less than two thirds of votes cast in person
or by proxy at a meeting of shareholders or passed by way of written resolution
signed by or on behalf of each shareholder).
Shareholders' Meetings
The Company is required to hold an annual general meeting and may also
hold extraordinary general meetings. All meetings of our shareholders other than
the annual general meeting are called extraordinary general meetings.
Annual general meetings are convened by the Directors each year and
must be held not more than 18 months after the previous annual general meeting.
The Economic Development Committee of the States (government) of Jersey has the
power to call an annual general meeting of a Jersey company if that company
fails to do so and the Royal Court of Jersey also has the power in certain
circumstances set out in the Companies Law to call a meeting of a Jersey
company. The holders of at least one tenth in nominal value of our shares may
requisition a meeting of shareholders.
At least twenty one days' notice of the annual general meeting and of
any meeting at which a special resolution is to be proposed is required.
Fourteen days' notice of any other meeting is required. An annual general
meeting may however be held at short notice provided that all the shareholders
entitled to attend and vote at the meeting agree. Any other meeting may be held
at short notice if a majority of shareholders together holding at least ninety
five per cent of the shares given a right to attend and vote at such meeting
agree.
All shareholders or their proxies may attend and vote at the annual
general meeting and extraordinary general meetings. Resolutions may be proposed
either as special resolutions or as ordinary resolutions. A special resolution
requires the affirmative vote of a majority of not less than two thirds of votes
cast and an ordinary resolution requires the affirmative vote of a simple
majority of votes cast.
The Companies Law contains provisions governing the convening and
holding of meetings of shareholders which are reflected in our Articles.
Limitation on Security Ownership
There are no restrictions under Jersey law or our Articles that limit
the right of non-resident or foreign shareholders to hold or exercise voting
rights in respect of our shares.
63
Change in Control
There are no provisions in our Articles that would have the effect of
delaying, deferring or preventing a change in our control and that would operate
only with respect to a merger, acquisition or corporate restructuring involving
the Company or any of our subsidiaries. See, however, "Item 7 - Major
Shareholders and Related Party Transactions - Major Shareholders" for a
description of certain contractual restrictions on the transfer of shares by the
existing shareholders.
Disclosure of Share Holdings
There are no provisions in our Articles or in the Companies Law whereby
persons acquiring, holding or disposing of a certain percentage of our shares
are required to make disclosure of their ownership percentage.
Jersey Law and our Memorandum and Articles
The content of our Memorandum and Articles is largely derived from an
established body of corporate law and therefore they mirror the Companies Law in
their provisions. There are no provisions in our Memorandum and Articles
concerning changes of capital where these provisions would be considered more
restrictive than that required by the Companies Law.
C. Material Contracts
None.
D. Exchange Controls
There are currently no Jersey foreign exchange control restrictions on
the payment of interest or principal on the Notes. There are no restrictions
under Jersey law or under our Articles that limit the right of non-resident or
foreign owners to hold or vote the Notes.
E. Taxation
Certain Jersey Tax Considerations
The following summary is based upon advice provided by Mourant du Feu &
Jeune ("Jersey Tax Counsel") as to the tax treatment under Jersey law of the
Company and the tax treatment under Jersey law in relation to the purchase,
ownership and disposition of the Notes. The discussion is based on an
interpretation of laws, regulations, rulings and decisions, including certain
letters from the Comptroller of Income Tax in Jersey and the Director of the
Jersey Financial Services Department (the functions of which were taken over by
the Jersey Financial Services Commission with effect from July 1, 1998), all of
which are currently in effect and are subject to change. Any such change may be
applied retroactively and may adversely affect the Jersey tax consequences
described herein.
Income Taxes
The Company will qualify as an "exempt company" under Article 123A of
the Income Tax (Jersey) Law 1961, as amended (the "1961 Law"), as long as it
makes the returns of information and pays the fees as required by that Article
and, subject to concessions obtained from the Comptroller of Income Tax in
Jersey, as long as no Jersey resident has a beneficial interest (for purposes of
the 1961 Law) in the Company. As an exempt company, the Company will be treated
for purposes of the 1961 Law as not
64
resident in Jersey and will pay no Jersey income tax other than on income
arising in Jersey (but, by long standing concession, excluding bank deposit
interest arising in Jersey) and on profits of its trade (if any) carried on
through an established place of business in Jersey. Based upon the foregoing and
the concessions obtained from the Comptroller of Income Tax in Jersey, in the
opinion of Jersey Tax Counsel, the Company will not be subject to Jersey income
tax.
Withholding Taxes
Based upon the Company's qualification as an exempt company, in the
opinion of Jersey Tax Counsel, no withholding tax will be deducted from interest
and other amounts paid on the Notes on account of Jersey taxes.
In the event that any Jersey withholding tax is imposed, noteholders
should note that there is no income tax treaty between the United States and
Jersey that would apply to reduce or eliminate such withholding.
Noteholders should note further that the Company will not be obligated
under the terms of the Notes to make any additional payments in respect of any
such withholding tax. Accordingly, in the event that withholding were to be
required on account of Jersey taxes, distributions to noteholders would be less
than those which would be made on the Notes in the absence of any such
withholding tax.
Other Taxes
There is no taxation of capital gains (other than with respect to
certain tax avoidance transactions) in Jersey. As a result, the capital gains of
the Company on its investments will not be subject to taxation in Jersey. There
is no value added tax or other relevant taxation in Jersey.
European Union Directive on the Taxation of Savings Income
On June 3, 2003, the EU Council of Economic and Finance Ministers
adopted a directive on the taxation of savings income in the form of interest
payments (the "EU Savings Tax Directive"). It is proposed that, subject to a
number of important conditions being met, each EU Member State will, from
January 1, 2005, be required to provide to the tax authorities of another EU
Member State details of payments of interest (or other similar income) paid by a
person within its jurisdiction to or for the benefit of an individual resident
in that other EU Member State; however, Austria, Belgium and Luxembourg will
instead apply a withholding tax system for a transitional period in relation to
such payments.
Jersey is not subject to the EU Savings Tax Directive. However, the
Policy & Resources Committee of the States of Jersey has announced that, in
keeping with Jersey's policy of constructive international engagement, Jersey
proposed to introduce a withholding tax system in respect of payments of
interest, or other similar income, made to an individual beneficial owner
resident in an EU Member State by a paying agent situate in Jersey (the terms
"beneficial owner" and "paying agent" are defined in the EU Savings Tax
Directive). The withholding tax system would apply for a transitional period
prior to the implementation of a system of automatic communication to EU Member
States of information regarding such payments. During this transitional period,
such an individual beneficial owner resident in an EU Member State will be
entitled to request a paying agent not to withhold tax from such payments but
instead to apply a system by which the details of such payments are communicated
to the tax authorities of the EU Member State in which the beneficial owner is
resident.
65
Under the current proposals in respect of the implementation of such a
withholding tax system in Jersey the Company would not be obligated to levy
withholding tax in respect of interest payments made by it to a paying agent.
The States of Jersey has not yet adopted measures to implement these
proposals but is expected to adopt such measures on the same timetable as EU
Member States and other relevant third countries.
Certain Tax Considerations Regarding Subsidiaries
The Irish subsidiary is subject to Irish corporation tax at the rate of
10% of its taxable profits.
The U.K. subsidiary is subject to U.K. corporation tax at an effective
rate of up to 19% depending on the level of profits that this subsidiary
generates.
The French subsidiary is subject to French corporation tax at the rate
of 33 1/3% of its taxable profits.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The documents concerning us which are referred to herein may be
inspected at the Securities and Exchange Commission, or at our registered office
at 22 Grenville Street, St. Helier, Jersey JE4 8PX, Channel Islands. You may
read and copy any documents filed or furnished by us at the SEC's public
reference rooms in Washington D.C., New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the reference rooms. Our
SEC filings since November 1, 2002 are also available to the public on the SEC
Internet site (http://www.sec.gov).
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk and Management
The leasing revenues of the Company are generated from lease rental
payments which are all fixed rate (some leases are based on "power-by-the-hour"
fixed hourly rates and others on fixed monthly rates). In general, an exposure
to interest rate risk arises when the Company's fixed and floating interest rate
obligations on its Notes do not correlate to the fixed rate lease rental
payments for different rental periods. This interest rate exposure can be
managed through the use of interest rate swaps and other derivative instruments.
Our lease collections are invested based upon recommendations of the Cash
Manager. We have determined that it is not necessary to invest our lease
collections in swaps, options or other hedging alternatives. Although we may
invest in such instruments if we and our advisors determine that such
investments are appropriate, we and our advisors do not currently anticipate any
need for such investments in the foreseeable future. There can be no assurance
that the strategy adopted to invest or to
66
not invest in such instruments at any time will be effective in protecting your
payments of interest in an environment of material increases to LIBOR.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
During fiscal year 2003 and to date, regular interest payments due to
holders of Class D Notes were in arrears. The Deed of Charge provides that, so
long as the Class A, Class B or Class C Notes are outstanding, the only remedy
available to holders of Class D Notes for an Event of Default caused by failure
to pay regular Class D Note interest is that default interest of 1% of such
unpaid interest shall accrue and be owed to holders of Class D Notes in
accordance with the priority of payments set forth in the Deed of Charge. As at
the end of fiscal year 2003, arrears consisted of $2.042 million of Class A Note
Target Amount, $0.565 million of Class A Note step-up interest, $0.220 million
of Class B Note step-up interest, $4.304 million of Class C Note Target Amount,
$0.206 million of Class C Note step-up interest, $5.177 million of Class D Note
Target Amount, $0.326 million of Class D Note step-up interest, $0.504 million
of Class D Note default interest, $2.805 million of regular Class D Note
interest and $45.105 million of Class E Note interest. As of December 15, 2003,
the unpaid amounts consisted of $30.589 million of Class A Note Target Amount,
$0.741 million of Class A Note step-up interest, $0.305 million of Class B Note
step-up interest, $4.304 million of Class C Note Target Amount, $0.290 million
of Class C Note step-up interest, $5.177 million of Class D Note Target Amount,
$4.612 million of regular Class D Note interest, $0.661 million of Class D Note
default interest, $0.482 million of Class D Note step-up interest and $48.560
million of Class E Note interest. Our inability, during fiscal year 2003 or to
date, to pay these amounts, other than the $4.612 million of regular Class D
Note interest (discussed above), does not constitute an Event of Default.
The Company did not have sufficient funds to repay the Class A Notes on
their expected final payment date of May 15, 2002 or to repay the Class B, Class
C or Class D Notes on their expected final payment date of July 15, 2002.
Failure to repay in full the principal of those Notes by such dates is not an
Event of Default; however, the Deed of Charge requires, to the extent the
Company does not repay in full principal of those Notes by such dates, that the
Company pay to the Class A, Class B and Class C Noteholders additional step-up
interest of 0.50% per annum and to the Class D Noteholders additional step-up
interest of 1.00% per annum for each month until the earlier of the date such
Notes are repaid in full and their final maturity date of June 15, 2006. These
additional interest costs will only be paid to the extent there are available
collections in accordance with the priority of payments set forth in the Deed of
Charge. The Company paid some step-up interest in fiscal year 2002, but our
current projections indicate that we will not have sufficient funds to pay any
further step-up interest. Our current projections also indicate that we will not
have sufficient funds to pay any further Class D Note interest.
67
The Deed of Charge sets out the following Trust Note Sales Goals which
require us to approve sales of our aircraft on an ongoing basis:
Aircraft to be Sold
(measured by Initial Appraised Value as of June 3, Date by which Sales Goals
1996) are to be Satisfied
$65,000,000 June 27, 2001
$130,000,000 June 27, 2002
$200,000,000 June 27, 2003
$454,950,000 June 27, 2004
We were in compliance with and had exceeded the Trust Note Sales Goals
as of June 27, 2001 and were required to sell a further $54,330,000 (as measured
by Initial Appraised Value) worth of aircraft to be in compliance with the Trust
Note Sales Goals as of June 27, 2002.
As discussed above since September 11, 2001, the market for sale of
used aircraft has been extremely poor and it is not clear when the market will
improve in a meaningful way. Nevertheless, in order to meet the Trust Note Sales
Goals, following an extensive marketing effort by the Servicer, the Company had
entered into non-binding agreements to sell a B737-300 and an A320-200 aircraft
to two separate purchasers by June 27, 2002. However, as a result of
difficulties and delays outside the Company's control the sale of the B737-300
aircraft was not completed until October 1, 2002 and the sale of the A320-200
aircraft (which was ultimately sold to a different purchaser following the
withdrawal of the original prospective purchaser on November 5, 2002) was not
completed until December 20, 2002. As a result, the Company was not in
compliance with the Trust Note Sales Goals from November 5, 2002 until the
A320-200 aircraft was sold to such other purchaser on December 20, 2002.
In the period from June 1996 to date, we have sold five aircraft
totaling $133,190,000 (measured by Initial Appraised Value). We needed to sell
an additional $66,810,000 (measured by Initial Appraised Value) worth of
aircraft to comply with the June 2003 Trust Note Sales Goal and would need to
sell all of our aircraft to comply with the June 2004 Trust Note Sales Goal. At
our direction, the Servicer has been marketing each of our aircraft for sale in
order to meet the ongoing Trust Note Sales Goals. However, the current market
for sale of used aircraft is extremely poor and it is not clear if and when the
market will improve.
In fiscal year 2003, the marketing efforts of the Servicer resulted in
two offers to purchase the B757-200 aircraft, but both offers were at prices
significantly below the Class C Note Target Price. After careful consideration
of these offers, the Company's obligations under the Deed of Charge (notably the
Business Objectives contained therein) and the current and possible future
market conditions for aircraft sales and leasing, we concluded that it would not
be consistent with the terms of the Deed of Charge for the Company to accept
either such offer.
We did not comply with the Trust Note Sales Goal for June 27, 2003 as
we were unable, given the current aircraft industry market conditions, to sell
sufficient aircraft at the sale prices required by our current Business
Objectives. Given the continuing depressed market for aircraft sales and the
requirement to achieve sale prices consistent with our current Business
Objectives, we believe the Company will not be able to comply with the Trust
Note Sales Goal for June 27, 2004.
Failure to comply with the Trust Note Sales Goals may, under certain
circumstances, constitute an Event of Default under the Deed of Charge if such
failure continues for 30 days or more after written notice thereof has been
given to the Company or the Security Trustee by holders of at least 25% of the
68
aggregate Outstanding Principal Balance of the Notes of any class which has been
materially adversely affected by such failure.
The Deed of Charge further provides that if an Event of Default were to
occur and be continuing an Enforcement Notice may only be served by 662/3% or
more of the aggregate Outstanding Principal Balance of the directing class,
which will be Class A so long as any Class A Notes are outstanding.
The Deed of Charge provides that the failure to comply with the Trust
Note Sales Goals gives the Noteholders the right to replace the Servicer at the
direction of Noteholders representing at least 75% of the aggregate Outstanding
Principal Balance of the Class A, Class B, Class C and Class D Notes. The Deed
of Charge also provides that, subject to the pre-emption rights of the Class D
and Class E Noteholders, to the extent the Trust Note Sales Goals are not
complied with prior to December 27, 2004, the Company is required to accept any
Sale Offer for the sale of an aircraft if the proposed sale price is at least
equal to the Class C Note Target Price. During the time that the Company has not
been in compliance with the Trust Note Sales Goals, the Company has been unable,
with the exception of the sale of the A320-200 aircraft in December 2002, to
sell aircraft at prices at or above the Class C Note Target Price. However, to
the extent the Company has not complied with the Trust Note Sales Goals, on or
after December 27, 2004, the Company will be required, subject to the
pre-emption rights of the Class D and Class E Noteholders, to accept any Sale
Offer for the sale of an aircraft if the proposed sale price is at least equal
to the Class A Note Target Price. See "Item 3 - Risk Factors," "Item 4 -
Information on the Company - History and Development of the Company" and "Item 5
- - Operating and Financial Review and Prospects - Liquidity and Capital
Resources."
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Chairman of the Board of Directors of the Company acting
on the recommendation of the Board of Directors of the Company, after evaluating
the effectiveness of the Company's "disclosure controls and procedures" (as
defined in Exchange Act Rule 15d-15(e)) as of a date (the "Evaluation Date") as
of the end of the period covered by this annual report, has concluded that as of
the Evaluation Date, our disclosure controls and procedures were effective based
on their evaluation of these controls and procedures required by paragraph (b)
of Exchange Act Rule 15d-15.
The Company's disclosure controls and procedures are designed
to provide reasonable assurance of achieving their objectives, and the Company's
Board of Directors have concluded that these controls and procedures are
effective at the "reasonable assurance" level. However, the Company believes
that a control system, no matter how well designed or operated, cannot provide
absolute assurance that the objectives of the control system are met, and that
no evaluation of controls can provide absolute assurance that various types of
corporate operational risks within a company, particularly one such as this that
relies exclusively on third parties for all services, will be detected in a
timely manner. See for example "Item 3 - Key Information - Risk Factors - As a
result of incorrect LIBOR calculations by the Reference Agent, holders of Class
A, Class B, and Class C Notes were overpaid on certain payment dates and holders
of Class D and Class E Notes were underpaid by equivalent amounts on such dates;
and - The Company has incurred tax liabilities in 2003 and may have incurred
additional tax
69
liabilities in prior years, in respect of unpaid United States withholding taxes
relating to the investment of certain collections by the Cash Manager."
(b) Changes in Internal Controls
There were no changes in the internal controls of the Company
over financial reporting identified in connection with the evaluation required
by Exchange Act Rule 15d-15(d) that occurred during our last fiscal year that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 16.
Not applicable
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Not applicable.
Item 16B. CODE OF ETHICS
Not applicable.
Item 16C. PRINCIPAL ACCOUNTANT'S FEES AND SERVICES
Year Ended June 30, 2003 Year Ended June 30, 2002
% Approved by Board / % Approved by Board /
U.S.$ Audit Committee U.S.$ Audit Committee
--------------- --------------------------- ------------ --------------------------
Audit Fees 85,063 100% 62,227 100%
Audit-Related Fees 39,626 100% 40,271 100%
Tax Fees 5,763 100% 5,603 100%
All Other Fees 18,208 100% 23,441 100%
--------------- --------------------------- ------------ --------------------------
Total 148,660 100% 131,542 100%
=============== =========================== ============ ==========================
The Audit Committee of the Company, established in September 2002 and
which consists of the two Independent Directors has adopted a policy of
pre-approving all audit and non-audit services provided by the Company's
Principal Accountant. Prior to the establishment of the Audit Committee all
audit and non-audit fees were approved by the Board.
Audit related fees in the table above for the years ended June 30, 2003
and 2002 relate to review of our annual report on Form 20-F.
Tax fees in the table above for the years ended June 30, 2003 and 2002
relate to tax filing in Ireland
70
All Other Fees in the table above for the year ended June 30, 2003 and
2002 relate to tax advice, accounting advice and statutory filings for our
subsidiaries.
Item 16D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
Not applicable.
PART III
ITEM 17.
Not applicable
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 through F-21.
ITEM 19. EXHIBITS
1. Memorandum and Articles of Association of Aircraft Lease
Portfolio Securitisation 92-1 Limited.
8. List of subsidiaries.
12. Rule 15d-14(a) Certification.
13. Section 1350 Certification.
71
CERTAIN DEFINITIONS AND TECHNICAL TERMS
"A300B4 - 200 aircraft" ................................ The Airbus A300B4 - 200 aircraft with serial number 127
which we sold to Cebi Aviation S.A. on June 27, 2000.
"Administrative Agency Agreement"....................... The Administrative and Secretarial Services Agreement,
dated October 1, 2003, between the Administrative Agent
and the Company pursuant to which the Administrative
Agent maintains the corporate books and records and
provides certain administrative, secretarial and other
services to the Company.
"Administrative Agent".................................. Mourant & Co. Limited.
"ADs"................................................... Shall have the meaning set forth on page 35.
"AISI".................................................. Aircraft Information Services, Inc.
"Allegiant Air"......................................... Allegiant Air, Inc.
"ALPS 94-1 Limited"..................................... Aircraft Lease Portfolio Securitization 94-1 Limited.
"ALPS Trust"........................................... The charitable trust for whose benefit the Nominees
hold 10 Ordinary Shares of the Company.
"Asiana"................................................ Asiana Airlines, Inc.
"Avitas"................................................ Avitas, Inc.
"B747-283B Aircraft".................................... The B747-283B aircraft with serial number 22381 which
we sold to WFC on July 24, 1997.
"Babcock & Brown"....................................... Babcock & Brown Limited.
"Batavia"............................................... PT Metro Batavia.
"Besleasing"............................................ Besleasing Mobiliaria - Sociedade de Locacao Financeira S.A.
"BK".................................................... BK Associates, Inc.
"Business Day".......................................... A day on which commercial banks and foreign exchange
markets settle payments in U.S. dollars in London,
England and New York, New York.
"Business Objectives"................................... Shall have the meaning set forth on page 28.
72
"Cash Management Agreement"............................. The Cash Management Agreement, dated as of the Closing
Date, between the Company and the Cash Manager,
pursuant to which the Cash Manager provides certain
cash management, computational and other related
services to the Company.
"Cash Manager".......................................... Deutsche Bank Trust Company Americas (f/k/a Bankers
Trust Company).
"China Southern"........................................ China Southern Airlines.
"Class A Notes"......................................... The Company's Class A Notes issued on the Closing Date.
"Class A Note Target Price"............................. Shall have the meaning set forth in the Deed of Charge.
"Class B Notes"......................................... The Company's Class B Notes issued on the Closing Date.
"Class B Note Target Price"............................. Shall have the meaning set forth in the Deed of Charge.
"Class C Notes"......................................... The Company's Class C Notes issued on the Closing Date.
"Class C Note Target Price"............................. Shall have the meaning set forth in the Deed of Charge.
"Class D Notes"......................................... The Company's Class D Notes issued on the Closing Date.
"Class D Note Target Price"............................. Shall have the meaning set forth in the Deed of Charge.
"Class E Notes"......................................... Collectively, the Class E-1 Note and the Class E-2 Note.
"Class E-1 Note"........................................ The Company's Class E-1 Note issued on the Closing Date
in a principal amount of $82,918,150.
"Class E-2 Note"........................................ The Company's Class E-2 Note issued on the Closing Date
in a principal amount of $100.
"Closing Date".......................................... The Closing Date of the refinancing of the Company,
June 27, 1996.
"Company"............................................... Aircraft Lease Portfolio Securitisation 92-1 Limited, a
public limited liability company incorporated in
Jersey, together with, unless the context otherwise
requires, any subsidiaries thereof.
73
"Company Secretary"..................................... Mourant & Co. Secretaries Limited
"debis AirFinance"...................................... debis AirFinance Ireland plc (formerly known as AerFi
Group plc and, prior to that, GPA Group plc), together
with its consolidated subsidiaries.
"Deed of Charge"........................................ The Deed of Charge, Assignment and Priorities, dated as
of the Closing Date, among inter alia the Company,
Deutsche Trustee Company Limited (f/k/a Bankers Trustee
Company Limited) as security trustee, Deutsche Bank
Trust Company Americas (f/k/a/ Bankers Trust Company),
the Cash Manager, the Servicer, the holder of the Class
E-1 Note and certain other persons to secure, among
other things, the Notes.
"EU".................................................... The European Union.
"Eurocontrol"........................................... European Organisation for the Safety of Air Navigation,
the centralized European agency established in 1960
pursuant to an international convention relating to
cooperation for the safety of air navigation.
"EU Savings Tax Directive".............................. Shall have the meaning set forth on page 65.
"Event of Default"...................................... An event of default with respect to the Notes under the
Deed of Charge.
"Exchange Act Rule"..................................... A rule from the Rules and Regulations promulgated under
the U.S. Securities Exchange Act of 1934, as amended.
"FASB".................................................. The Financial Accounting Standards Board.
"Financial Consultant".................................. Deutsche Bank Trust Company Americas (f/k/a Bankers
Trust Company).
"First Choice Airways".................................. First Choice Airways Limited (formerly known as Air
2000 Limited).
"Fokker 100 aircraft"................................... The Fokker 100 aircraft with serial number 11287 which
we sold to Besleasing on July 2, 1999.
"GPA"................................................... GPA Group plc (renamed AerFi Group plc, effective
November 23, 1998 and renamed debis AirFinance Ireland
plc, effective December 20, 2000), together with its
consolidated subsidiaries.
74
"Independent Appraisers"................................ AISI, Avitas and BK.
"Independent Directors"................................. Directors of the Company who are independent of holders
of the Class E Notes.
"Initial Appraised Value"............................... The average appraised base value of each of the 14
aircraft owned by the Company on the Closing Date (or,
in the case of the WFC Aircraft, acquired by the
Company subsequent thereto) as of June 3, 1996 obtained
from AISI, Avitas and BK, and as set forth on Exhibit V
of the Deed of Charge.
"Insurance Advisor"..................................... Aon Group Limited.
"Istanbul".............................................. Istanbul Hava Yollari A.S.
"Jersey Tax Counsel".................................... Mourant du Feu & Jeune.
"LIBOR"................................................. London Interbank Offered Rate for deposits in U.S.
dollars as determined in accordance with the terms of
the relevant Note.
"Liquidity Reserve Amount".............................. Shall have the meaning set forth on page 50.
"Malev"................................................. Malev RT.
"Meridiana"............................................. Meridiana S.p.A.
"Nominees".............................................. Collectively, Juris Limited and Lively Limited, the
nominees for the trustee of the ALPS Trust.
"Notes"................................................. The Company's Class A Notes, Class B Notes, Class C
Notes, Class D Notes and Class E Notes. The Notes have
been issued pursuant to the Deed of Charge. Holders of
each class of the Pass Through Certificates, Series A
referenced on the cover page of this Form 20-F derive
their rights to payments from the payments due on the
related class of the Notes. Therefore, all references
to noteholders, Notes and any class thereof throughout
this Form 20-F should be read to apply equally to the
certificateholders, certificates and any class thereof,
respectively.
"Note Target Price"..................................... Shall have the meaning set forth in the Deed of Charge.
"Old Class A Notes"..................................... The $208,400,000 Secured Class A1 Floating Rate Notes
due 1997, the $104,200,000 Secured Class
75
A2 Floating Rate Notes due 1997 and the $70,400,000 Secured
Class A3 Floating Rate Notes due 1997 issued by the Company.
"Old Class B Notes"..................................... The $104,000,000 Secured Class B Fixed Rate Notes due
1997 issued by the Company.
"Old Class M Notes"..................................... The $34,000,000 Secured Class M Floating Rate Notes due
1997 issued by the Company.
"Old Notes"............................................. The Old Class A, Old Class B and Old Class M Notes.
"Old SM Loan"........................................... The $78,150,000 loan made to the Company pursuant to
the Supermezzanine Loan Agreement, dated June 16,1992,
among the Company, Citibank, N.A. and Credit Lyonnais,
originally payable in 1997.
"Ordinary Shares"....................................... The Company's 15,000 authorized ordinary shares, par
value $1 per share of which 10 have been issued.
"Outstanding Principal Balance"......................... With respect to any of the Notes at any time, the
outstanding principal balance as of the Closing
Date less all amounts distributed to the holder
thereof and allocable to principal thereon
on previous Payment Dates.
"Payment Date".......................................... The 15th day of each month (or, if such day is not a
Business Day, the next succeeding Business Day).
"Prior Debt"............................................ The Old Notes and the Old SM Loan.
"Prospectus"............................................ The prospectus related to the Class A, Class B,
Class C and Class D Notes, dated January 27, 1997.
"Reference Agency Agreement"............................ The Reference Agency Agreement, dated as of the Closing
Date, among the Company, the Cash Manager and the
Reference Agent.
"Reference Agent"....................................... Deutsche Bank Trust Company Americas (f/k/a Bankers
Trust Company).
"Sale Offer"............................................ Shall have the meaning set forth in the Deed of Charge.
"SARS".................................................. Severe Acute Respiratory Syndrome.
"Security Trustee"...................................... Deutsche Trustee Company Limited (f/k/a Bankers Trustee
Company Limited).
76
"Senior Trust Notes".................................... The Class A, Class B and Class C Notes.
"Servicer".............................................. Babcock & Brown or any replacement servicer appointed
in accordance with the terms of the Servicing Agreement.
"Servicing Agreement"................................... The Servicing Agreement, dated as of the Closing Date,
between the Company and Babcock & Brown pursuant to
which Babcock & Brown provides, among other things,
certain management services with respect to the leases
and certain sales and marketing and re-leasing services
with respect to the aircraft to the Company.
"SFAS 144".............................................. Shall have the meaning set forth on page 16.
"Skynet"................................................ Skynet Airlines Ltd.
"Stage 3 Aircraft"...................................... An aircraft type that holds or is capable of holding a
noise certificate issued under Chapter 3 of Volume
1, Part II of Annex 16 of the Chicago Convention or has
been shown to comply with Stage 3 Noise Levels set
out in Section 36.5 of Appendix C of Part 36 of the
United States Federal Aviation Regulations.
"Travel Service"........................................ Travel Servis a.s.
"Trustee"............................................... Deutsche Bank Trust Company Americas (f/k/a Bankers
Trust Company).
"Trust Note Sales Goals"................................ The Company must approve for sale (subject to the
rights of the holders of certain Notes to approve sales
of aircraft as set forth in Clause 10.10(b)(ii) of the
Deed of Charge) sufficient aircraft to meet the Trust
Note Sales Goals. The Trust Note Sales Goals require
that aircraft having an Initial Appraised Value of at
least (i) $65,000,000 be sold by the fifth anniversary
of the Closing Date, (ii) $130,000,000 be sold by the
sixth anniversary of the Closing Date, (iii)
$200,000,000 be sold by the seventh anniversary of the
Closing Date and (iv) $454,950,000 be sold by the
eighth anniversary of the Closing Date. The Deed of
Charge provides that if the Company fails to meet any
of the Trust Note Sales Goals set forth in clause (i),
(ii) or (iii) above, then, at the direction of the
holders of the Class A, Class B, Class C and Class D
Notes representing in the aggregate 75% of the
77
Outstanding Principal Balance of such Notes, the
Company shall replace the Servicer under the Servicing
Agreement and, if the Company fails to meet the Trust
Note Sales Goal set forth in clause (iv) above, then,
at the direction of the holders of the Class A, Class
B, Class C and Class D Notes representing in the
aggregate 66 2/3% of the Outstanding Principal Balance
of such Notes, the Company shall replace the Servicer
under the Servicing Agreement. The Deed of Charge
provides that on or after the fifth, sixth, seventh and
eighth anniversaries of the Closing Date, if and so
long as the aggregate Initial Appraised Value of the
aircraft then owned by the Company exceeds
$389,950,000, $324,950,000, $254,950,000 and $0,
respectively, the Company must accept any Sale Offer in
respect of the sale of an aircraft if the proposed sale
price is at least equal to the Class C Note Target
Price (as defined in the Deed of Charge). On or after
the date that is eight years and six months following
the Closing Date, the Company must accept any Sale
Offer in respect of the sale of an aircraft if the
proposed sale price is at least equal to the Note
Target Price for the then most senior outstanding class
of Notes.
"U.S. GAAP"............................................. Generally accepted accounting principles applicable in the
United States.
"WFC"................................................... Whirlpool Financial Corporation.
"WFC Aircraft".......................................... The Boeing 767-300ER aircraft with manufacturer's
serial number 24952 sold by WFC to the Company on
November 27, 1996.
78
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AIRCRAFT LEASE PORTFOLIO
SECURITISATION 92-1 LIMITED
By: /s/ Frederick W. Bradley, Jr.
--------------------------------
Name: Frederick W. Bradley, Jr.
Title: Chairman of the Board
Dated: December 23, 2003
79
Index to Exhibits
Exhibit No. Description
- ----------- -----------
1. Memorandum and Articles of Association of Aircraft
Lease Portfolio Securitisation 92-1 Limited.
8. List of subsidiaries.
12. Rule 15d-14(a) Certification.
13. Section 1350 Certification
80
Exhibit 1
COMPANIES (JERSEY) LAW 1991
MEMORANDUM OF ASSOCIATION
of
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1
LIMITED (reprinted with amendments up to and including 12 December 2003)
1. The name of the Company is Aircraft Lease Portfolio Securitisation 92-1
Limited.
2. The share capital of the Company is U.S.$15,000 divided into 15,000 shares
of U.S.$1 each.
3. The liability of the members is limited.
4. The Company is established for the following purposes:-
(a) To carry on business as brokers or agents for the sale, leasing out,
purchase, exchange, charter, hire, demise, acquisition, disposal,
construction, equipping, maintenance, repair, improvement, or
alteration of aircraft, ships, vessels, spacecraft, craft and vehicles
of all kinds.
(b) To establish, maintain and operate air transport, shipping and road
transport services and all ancillary services.
(c) To act as chartering agents, merchants, freight contractors,
warehousemen, wharfingers, lightermen, stevedores and forwarding
agents, and as underwriters and insurers of aircraft, ships, vessels,
craft and vehicles of all kinds and of goods and other property and as
consultants on air and maritime affairs, and as providers of
management and training services of all kinds.
(d) To own, manage, work, trade with and lease out aircraft, ships,
vessels, craft and vehicles of all kinds with all necessary and
convenient equipment, or any shares or interests in aircraft, ships,
vessels, craft and vehicles of all kinds, including shares, stocks, or
securities of companies possessed of or interested in any aircraft,
ships, vessels, craft and vehicles of all kinds.
(e) To purchase, take in, exchange, charter, hire, demise, lease out,
acquire, dispose of, construct, equip, maintain, repair, improve, or
alter, aircraft, ships, vessels, spacecraft and vehicles of all kinds.
(f) To carry on all or any of the businesses of carriers by air, land or
water, agents for, or managers of, aircraft and air transport
services, shipowners, ship-brokers, shipping and other agents,
forwarding agents, freight contractors, warehousemen, cargo
contractors and agents, importers, exporters, dealers in oils and
petrol, general commission agents, brokers and factors. To buy, sell,
manufacture, repair, alter, exchange, let on hire, import, export and
deal in all kinds of articles and things which may be required for the
purpose of any of the businesses referred to in this Memorandum or
commonly supplied or dealt in by persons in any such businesses or
which may seem capable of being profitably dealt with in connection
with any of the said businesses.
(g) To borrow or raise money and to raise or secure the repayment of such
sum or sums of money in such manner and upon such terms and conditions
in all respects as the Directors of the Company shall think fit and in
particular, without prejudice to the generality of the foregoing, by
the issue of unsecured notes or bonds or by the issue of notes, bonds,
1
debentures, mortgages, charges or other security charged upon the
undertaking or the whole or any part of the property of the Company
and upon such terms and conditions and in such manner and for such
consideration as they may direct.
(h) As an object of the Company and as a pursuit in itself or otherwise,
and whether for the purpose of making a profit or avoiding a loss or
for any other purpose whatsoever, to engage in currency exchange and
interest rate transactions and any other financial or other
transactions of whatever nature, including (without limiting the
foregoing) any transaction for the purposes of, or capable of being
for the purposes of, avoiding, reducing, minimising, hedging against
or otherwise managing the risk of any loss, cost, expense or liability
arising, or which may arise, directly or indirectly, from a change or
changes in any interest rate or currency exchange rate or in the price
or value of any property, asset, commodity, index or liability or from
any other risk or factor affecting the Company's business, including
but not limited to dealings, whether involving purchases, sales or
otherwise, in foreign currency, spot and forward exchange rate
contracts, forward rate agreements, caps, floors and collars, futures,
options, swaps, and any other currency interest rate and other hedging
arrangements and such other instruments as are similar to, or
derivatives of, any of the foregoing.
(i) To establish, regulate and discontinue agencies, and to undertake and
transact all kinds of agency business which an ordinary individual may
legally undertake.
(j) To establish, promote and aid in promoting, constitute, form or
organise, companies, syndicates or partnerships of all kinds for the
purpose of carrying on any business or acquiring and undertaking any
property or liability of the Company, or of advancing directly or
indirectly the objects thereof, or for any other purpose which the
Company may think expedient, and to acquire, hold and dispose of
shares and other interests in any such company, syndicate or
partnership.
(k) To enter into guarantees, contracts of indemnity and suretyships of
all kinds, whether or not the Company shall derive a benefit from the
same, on such terms and in such manner as the Directors see fit, and
in particular but without prejudice to the generality of the
foregoing, to guarantee, underwrite or secure, with or without
consideration, and whether by personal obligation or by creating a
security interest over or by mortgaging or charging or providing any
other security over the whole or any part of the undertaking, property
or assets (whether present or future) and uncalled capital of the
Company or by the creation and issue of any securities of the Company,
the performance of any obligations or commitments or satisfaction of
any liabilities of any person or company including, but without
prejudice to the generality of the foregoing, any company which is for
the time being a subsidiary or holding company of the Company or
another subsidiary of a holding company of the Company or is otherwise
associated with the Company.
(l) To carry on all of the said businesses or any one or more of them as a
distinct or separate business or as the principal business of the
Company, to carry on any other business or undertake any other purpose
which may seem to the Company capable of being conveniently carried on
in conjunction with the above or any one of the above or calculated
directly or indirectly to enhance the value of or render more
profitable any of the Company's property or rights.
(m) To take out, acquire, surrender and assign policies of insurance and
assurance with any insurance company or companies which the Company
may think fit payable at fixed or uncertain dates or upon the
happening of any contingency whatsoever and to pay the premiums
thereon.
2
(n) To carry on any business which the Company is authorised to carry on
by means or through the agency of any subsidiaries and to enter into
any agreement with any such subsidiary for taking the profits and
bearing the losses of any business so carried on or for financing any
such subsidiary or guaranteeing its liabilities or to make any other
arrangement which may seem desirable, with reference to any business
so carried on, including power at any time and either temporarily or
permanently to close any such business.
(o) To do all or any of the above things in any part of the world and
either as principals, agents, trustees, contractors or otherwise and
either alone or in conjunction with others and either by or through
agents, sub-contractors, trustees or otherwise.
5. The Company is a public company.
3
We the subscribers to this memorandum of association, wish to be formed into a
company pursuant to this memorandum, and we agree to take the number of shares
shown opposite our respective names.
Corporate names and Signatures Number of shares
registered office of for and on behalf taken by each
subscribers of subscribers subscriber
- -------------------- ------------------- ----------------
Juris Limited
18 Grenville Street /s/ 5
St. Helier -------------------
Jersey Director
Channel Islands.
Lively Limited
18 Grenville Street /s/ 5
St. Helier -------------------
Jersey Director
Channel Islands.
Witness to the above signatures: /s/ Marjorie Mauger,
-----------------------
Marjorie Mauger,
18, Grenville Street
St. Helier
Jersey
Channel Islands.
COMPANIES (JERSEY) LAW 1991
ARTICLES OF ASSOCIATION
of
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1
LIMITED (reprinted with amendments up to and including 12 December 2003)
Interpretation
1. In these Articles, if not inconsistent with the subject or context, the
words in the first column of the following table shall bear the meanings
set opposite to them respectively in the second column.
Words Meanings
- ------------------------------------ -----------------------------------------------------------------------------
Affiliate As to any person, any other person that, directly or indirectly,
controls, is controlled by or is under the common control with such
person or is a director of officer of such person. For the purposes
of this definition, the term "control" (including the terms
"controlling", "controlled by" and "under the common control with" )
of a person means possession, direct or indirect, of the power to vote
5% or more of the voting stock of such person or to direct or cause
the direction of the management and policies of such person, whether
through the ownership of voting stock, by contract or otherwise.
another tax favourable jurisdiction In the context of an action to be taken, any place previously approved
by the Board of the Directors of the Company on the basis of
appropriate advice, in which the action to be taken would be unlikely
to be treated for taxation purposes as carrying on a trade or business
or creating a permanent establishment in that jurisdiction, and by
either such reason or otherwise render the Company liable to payment
of an amount of tax in such jurisdiction which in the opinion of the
Directors is more than a minimal amount.
these Articles These Articles of Association in their present form or as from time to
time altered.
auditors Auditors (if any) of the Company appointed pursuant to these Articles.
bankrupt Shall have the meaning defined in the Interpretation (Jersey) Law,
1954.
Class E Notes The U.S. dollar denominated Class E Notes to be constituted by a
resolution of the Board of the Directors of the Company.
Class E Note Director Any Director who is appointed by the holder or holders of a majority
in aggregate principal amount of the Class E Notes in
accordance with Article 99A(i).
clear days In relation to the period of a notice, shall mean that
period excluding the day when the notice is served or deemed to be
served and the day for which it is given or on which it is to take effect.
1
Words Meanings
- ------------------------------------ -----------------------------------------------------------------------------
Directors The directors of the Company for the time being.
holding company Shall have the meaning defined in the Law.
the Law The Companies (Jersey) Law 1991.
Independent Director A Director who is not at the time of his appointment or at any time
during his service as Director, and has not been for the twenty-four
months prior to his appointment as Director, an employee, consultant,
officer or director of any holder of the Class E Notes or any Affiliate of
any such person.
Member A person whose name is entered in the Register as the holder of shares in
the Company.
month Calendar month.
notice A written notice unless otherwise specifically stated.
Office The registered office of the Company.
paid up Shall include credited as paid up.
present in person In relation to general meetings of the Company and to
meetings of the holders of any class of shares, shall include present by
attorney or by proxy or, in the case of a corporate shareholder, by
representative.
Register The register of Members to be kept pursuant to Article 26 hereof.
Secretary Any person appointed by the Directors to perform any of the duties of
secretary of the Company (including a temporary or assistant secretary), and
in the event of two or more persons being appointed as joint secretaries
any one or more of the persons so appointed.
Special Resolution A resolution of the Company passed as a special resolution in
accordance with the Law.
Trustee The trustee for the time being of the Alps 96-1 Pass Through Trust to be
formed under the laws of the State of New York pursuant to a trust agreement
and to whom it is proposed the Company will issue debt instruments.
2. In these Articles, unless there be something in the subject or context
inconsistent with such construction:-
(a) the word "may" shall be construed as permissive and the word "shall"
shall be construed as imperative;
(b) the word "signed" shall be construed as including a signature or
representation of a signature affixed by mechanical or other means;
(c) the words "in writing" shall be construed as including written,
printed, telexed,
2
electronically transmitted or any other mode of representing or
reproducing words in a visible form;
(d) words importing "persons" shall be construed as including companies or
associations or bodies of persons whether corporate or unincorporate;
(e) words importing the singular number shall be construed as including
the plural number and vice versa; ( f) words importing the masculine
gender only shall be construed as including the feminine gender; and
(g) references to enactments are to such enactments as are from time to
time modified, re-enacted or consolidated and shall include any
enactment made in substitution for an enactment that is repealed.
3. The headings herein are for convenience only and shall not affect the
construction of these Articles.
Preliminary
4. The preliminary expenses incurred in forming the Company may be discharged
out of the funds of the Company.
5. The business of the Company shall be commenced as soon after the
incorporation of the Company as the Directors think fit.
Share Capital and Shares
6. The share capital of the Company is as specified in the Memorandum of
Association and the shares of the Company shall have the rights and be
subject to the conditions contained in these Articles.
7. Without prejudice to any special rights for the time being conferred on the
holders of any class of shares (which special rights shall not be varied or
abrogated except with such consent or sanction as is required by Article 19
hereof and subject to the Law) any share in the Company may be issued with
such preferred, deferred or other special rights, or such restrictions,
whether in regard to dividends, return of capital, voting or otherwise, as
the Company may from time to time, by Special Resolution, determine.
8. Subject to Articles 14 to 17 hereof, the unissued shares for the time being
in the capital of the Company shall be at the disposal of the Directors,
and they may (subject to the provisions of Article 7 hereof) allot, grant
options over, or otherwise dispose of them to such persons at such times
and on such terms as they think proper, but so that no shares shall be
issued at a discount.
9. The Company may issue fractions of shares in accordance with and subject to
the provisions of the Law, provided that:-
(a) a fraction of a share shall be taken into account in determining the
entitlement of a Member as regards dividends or on a winding up; and
(b) a fraction of a share shall not entitle a Member to a vote in respect
thereof.
3
10. The Company may:-
(a) issue; or
(b) convert any existing non-redeemable shares (whether issued or not)
into,
shares which are to be redeemed, or are liable to be redeemed at the
option of the Company or the holder thereof, on such terms and in such
manner as may be determined by Special Resolution it being provided
that the Company shall not receive or pay any redemption of shares in
any part of the world except in or from the Island of Jersey.
11. The Company may pay commissions as permitted by the Law. Subject to the
provisions of the Law, any such commission may be satisfied either by the
payment of cash or by the allotment of fully or partly paid shares or
partly in one way and partly in the other.
12. Save as permitted by the Law, the Company shall not give financial
assistance directly or indirectly for the purpose of, or in connection
with, the acquisition made or to be made by any person of any shares in the
Company or its holding company (if any).
13. Except as required by law, no person shall be recognised by the Company as
holding any share upon any trust, and the Company shall not be bound by or
recognise any equitable, contingent, future or partial interest in any
share, or (except only as by these Articles otherwise provided or as by law
required) any interest in any fraction of a share, or any other right in
respect of any share, except an absolute right to the entirety thereof in
the registered holder.
Alteration of Share Capital
14. The Company may, by altering its Memorandum of Association by Special
Resolution, alter its share capital in any manner permitted by the Law.
15. Any new shares created on an increase or other alteration of share capital
shall be issued upon such terms and conditions as the Company in general
meeting shall direct.
16. Unless otherwise directed by the Company in general meeting all new shares
shall be offered to the Members in proportion to the existing shares held
by them. Such offers shall be made by notice specifying the number of
shares to which the Member is entitled and prescribing the period within
which the offer will remain open, and upon the expiry of such period the
offer, if not accepted, shall be deemed to have been declined. All such
shares, if offered to the Members and not taken up by them, shall be
disposed of by the Directors in such manner as the Directors think most
beneficial to the Company.
17. Any capital raised by the creation of new shares shall, unless otherwise
provided by the conditions of issue of the new shares, be considered as
part of the original capital, and the new shares shall be subject to the
provisions of these Articles with reference to the payment of calls,
transfer and transmission of shares, lien or otherwise, applicable to the
existing shares in the Company.
Reduction of Share Capital
18. Subject to the provisions of the Law, the Company may, by Special
Resolution, reduce its share capital in any way.
4
Variation of Rights
19. Whenever the capital of the Company is divided into different classes of
shares, the special rights attached to any class, unless otherwise provided
by the terms of issue of the shares of that class, may be varied or
abrogated, either whilst the Company is a going concern or during or in
contemplation of a winding up, with the consent in writing of the holders
of the majority of the issued shares of that class, or with the sanction of
a resolution passed at a separate meeting of the holders of shares of that
class, but not otherwise. To every such separate meeting all the provisions
of these Articles and of the Law relating to general meetings of the
Company or to the proceedings thereat shall apply, mutatis mutandis, except
that the necessary quorum shall be two persons holding or representing at
least one-third in nominal amount of the issued shares of that class but so
that if at any adjourned meeting of such holders a quorum as above defined
is not present, those holders who are present in person shall be a quorum.
20. The special rights conferred upon the holders of any class of shares issued
with preferred or other special rights shall be deemed to be varied by the
reduction of the capital paid up on such shares and by the creation of
further shares ranking in priority thereto, but shall not (unless otherwise
expressly provided by these Articles or by the conditions of issue of such
shares) be deemed to be varied by the creation or issue of further shares
ranking after or pari passu therewith.
Share Certificates
21. Every Member shall be entitled:-
(a) without payment, to one certificate for all his shares of each class
and, when part only of the shares comprised in a certificate is sold
or transferred, to a new certificate for the remainder of the shares
so comprised; or
(b) upon payment of such sum for each certificate as the Directors shall
from time to time determine, to several certificates each for one or
more of his shares of any class.
22. Every certificate shall be issued within two months after allotment or
lodgment of transfer (or within such other period as the conditions of
issue shall provide), shall be under seal, and shall specify the shares to
which it relates and the amount paid up thereon and if so required by the
Law, the distinguishing numbers of such shares.
23. In respect of a share held jointly by several persons, the Company shall
not be bound to issue more than one certificate, and delivery of a
certificate for a share to one of several joint holders shall be sufficient
delivery to all such holders.
24. If a share certificate is defaced, lost or destroyed, it may be renewed on
payment of such fee and on such terms (if any) as to evidence and indemnity
and the payment of out-of-pocket expenses of the Company in relation
thereto as the Directors think fit.
Joint Holders of Shares
25. Where two or more persons are registered as the holders of any share they
shall be deemed to hold the same as joint tenants with the benefit of
survivorship, subject to the following provisions:-
(a) the Company shall not be bound to register more than four persons as
the joint holders of any share;
(b) the joint holders of any share shall be liable, severally as well as
jointly, in respect of all payments to be made in respect of such
share;
5
(c) any one of such joint holders may give a good receipt for any
dividend, bonus or return of capital payable to such joint holders;
(d) only the senior of the joint holders of a share shall be entitled to
delivery of the certificate relating to such share or to receive
notices from the Company or to attend general meetings of the Company
and any notice given to the senior joint holder shall be deemed notice
to all the joint holders; and
(e) for the purpose of the provisions of this Article, seniority shall be
determined by the order in which the names of the joint holders appear
in the Register.
Register of Members
26. The Directors shall keep or cause to be kept at the Office or at such other
place in the Island of Jersey where it is made up, as the Directors may
from time to time determine, a Register in the manner required by the Law.
In each year the Directors shall prepare or cause to be prepared and filed
an annual return containing the particulars required by the Law.
Lien
27. The Company shall have a first and paramount lien on every share (not being
a fully paid share) for all monies, whether presently payable or not,
called or payable at a fixed time in respect of such shares; and the
Company shall also have a first and paramount lien on all shares (other
than fully paid shares) registered in the name of a single Member for all
the debts and liabilities of such Member or his estate to the Company,
whether the same shall have been incurred before or after notice to the
Company of any interest of any person other than such Member and whether
the period for the payment or discharge of the same shall have actually
commenced or not, and notwithstanding that the same are joint debts or
liabilities of such Member or his estate and any other person whether a
Member or not. The Company's lien (if any) on a share shall extend to all
dividends or other monies payable thereon or in respect thereof. The
Directors may resolve that any share shall, for such period as they think
fit, be exempt from the provisions of this Article.
28. The Company may sell, in such manner as the Directors think fit, any shares
on which the Company has a lien, but no sale shall be made unless some
monies in respect of which the lien exists are presently payable, and
fourteen days have expired after a notice, stating and demanding payment of
the monies presently payable and giving notice of intention to sell in
default, shall have been served on the holder for the time being of the
shares or the person entitled by reason of his death or bankruptcy to the
shares.
29. The net proceeds of such sale, after payment of the costs of such sale,
shall be applied in or towards payment or satisfaction of the debt or
liability in respect whereof the lien exists, so far as the same is
presently payable, and any residue shall (subject to a like lien for debts
or liabilities not presently payable as existed upon the shares prior to
the sale) be paid to the person entitled to the shares at the time of the
sale. For giving effect to any such sale the Directors may authorise a
person to execute an instrument of transfer of the shares sold to the
purchaser thereof. The purchaser shall be registered as the holder of the
shares so transferred and he shall not be bound to see to the application
of the purchase money nor shall his title to the shares be affected by any
irregularity or invalidity in the proceedings in reference to the sale.
Calls on Shares
30. The Directors may, subject to the provisions of these Articles and to any
conditions of allotment, from time to time make calls upon the Members in
respect of any monies unpaid on their shares (whether on account of the
amount of the shares or by way of premium) provided that (except as
otherwise fixed by the conditions of application or allotment) no call on
any share shall be payable
6
within fourteen days of the date appointed for payment of the last
preceding call, and each Member shall (subject to being given at least
fourteen clear days' notice specifying the time or times and place of
payment) pay to the Company at the time or times and place so specified the
amount called on his shares.
31. A call may be made payable by instalments. A call may be postponed or
wholly or in part revoked as the Directors may determine. A call shall be
deemed to have been made at the time when the resolution of the Directors
authorising the call was passed.
32. If a sum called in respect of a share is not paid before or on the day
appointed for payment thereof, the person from whom the sum is due may be
required to pay interest on the sum from the day appointed for payment
thereof to the time of actual payment at a rate determined by the Directors
not exceeding the rate of ten per cent per annum.
33. Any sum which by or pursuant to the terms of issue of a share becomes
payable upon allotment or at any fixed date, whether on account of the
amount of the share or by way of premium, shall, for all the purposes of
these Articles, be deemed to be a call duly made and payable on the date on
which, by or pursuant to the terms of issue, the same becomes payable, and
in case of non-payment, all the relevant provisions of these Articles as to
payment of interest, forfeiture or otherwise shall apply as if such sum had
become payable by virtue of a call duly made and notified.
34. The Directors may make arrangements on the issue of shares for a difference
between the holders in the amount of calls to be paid and in the times of
payment.
35. The Directors may, if they think fit, receive from any Member willing to
advance the same, all or any part of the money uncalled and unpaid upon the
shares held by him beyond the sums actually called up thereon as a payment
in advance of calls. Any such payment in advance of calls shall extinguish,
so far as the same shall extend, the liability upon the shares in respect
of which it is advanced. The Company may pay interest upon the money so
received, or upon so much thereof as from time to time exceeds the amount
of the calls then made upon the shares in respect of which it has been
received, at such rate as the Directors shall think fit provided that any
amount paid up in advance of calls shall not entitle the holder of the
shares upon which such amount is paid to participate in respect thereof in
any dividend until the same would but for such advance become presently
payable.
Forfeiture of Shares
36. If a Member fails to pay any call or instalment of a call on or before the
day appointed for payment thereof, the Directors may at any time
thereafter, during such time as any part of such call or instalment remains
unpaid, serve a notice on him requiring payment of so much of the call or
instalment as is unpaid, together with any interest which may have accrued
and any expenses which may have been incurred by the Company by reason of
such non-payment.
37. The notice shall name a further day (not earlier than fourteen days from
the date of service thereof) on or before which and the place where the
payment required by the notice is to be made, and shall state that in the
event of non-payment at or before the time and at the place appointed, the
shares on which the call was made will be liable to be forfeited.
38. If the requirements of any such notice as aforesaid are not complied with,
any share in respect of which such notice has been given may at any time
thereafter, before payment of all calls and interest due in respect thereof
have been made, be forfeited by a resolution of the Directors to that
effect, and such forfeiture shall include all dividends which shall have
been declared on the forfeited shares and not actually paid before the
forfeiture.
7
39. When any share has been forfeited in accordance with these Articles, notice
of the forfeiture shall forthwith be given to the holder of the share or
the person entitled to the share by transmission, as the case may be, and
an entry of such notice having been given, and of the forfeiture with the
date thereof, shall forthwith be made in the Register opposite to the entry
of the share; but no forfeiture shall be invalidated in any manner by any
omission or neglect to give such notice or to make such entry as aforesaid.
40. A forfeited share may be sold, re-allotted or otherwise disposed of, either
to the person who was before forfeiture the holder thereof or entitled
thereto, or to any other person, upon such terms and in such manner as the
Directors think fit, and at any time before a sale, re-allotment or
disposition the forfeiture may be cancelled on such terms as the Directors
think fit. The Directors may, if necessary, authorise some person to
transfer a forfeited share to any other person as aforesaid.
41. A Member whose shares have been forfeited shall cease to be a Member in
respect of the forfeited shares but shall, notwithstanding the forfeiture,
remain liable to pay to the Company all monies which at the date of
forfeiture were presently payable by him to the Company in respect of the
shares, with interest thereon at a rate determined by the Directors not
exceeding ten per cent per annum from the date of forfeiture until payment
and the Directors may enforce payment without any allowance for the value
of the shares at the time of forfeiture.
42. An affidavit by a Director or the Secretary that a share has been duly
forfeited on the date stated therein shall be conclusive evidence of the
facts so stated as against all persons claiming to be entitled to the share
and such affidavit and the receipt of the Company for the consideration (if
any) given for the share on the sale, re-allotment or disposal thereof,
together with the certificate for the share delivered to a purchaser or
allottee thereof, shall (subject to the execution of a transfer if the same
be so required) constitute good title to the share and the person to whom
the share is sold, re-allotted or disposed of shall be registered as the
holder of the share and shall not be bound to see to the application of the
consideration (if any), nor shall his title to the share be affected by any
irregularity or invalidity in the proceedings in respect of the forfeiture,
sale, re-allotment or disposal of the share.
43. The provisions of these Articles as to forfeiture shall apply in the case
of non-payment of any sum which by the terms of issue of a share becomes
payable at a fixed time, whether on account of the amount of the share or
by way of premium, as if the same had been payable by virtue of a call duly
made and notified.
Transfer and Transmission of Shares
44. All transfers of shares shall be effected by notice (a "Transfer Notice")
in the usual common form or in any other form approved by the Directors.
45. All Transfer Notices shall be signed by or on behalf of the transferor and,
in the case of a partly paid share, by the transferee. The transferor shall
be deemed to remain the holder of the share until the name of the
transferee is entered on the Register in respect thereof.
46. The Directors may in their absolute discretion, and without assigning any
reason therefor, refuse to register any transfer of shares, including,
without limitation, a transfer of shares to a person of whom they do not
approve and a transfer of shares on which the Company has a lien.
47. The Directors may decline to recognise any Transfer Notice, unless:-
(a) the Transfer Notice is deposited at the Office or such other place as
the Directors may appoint accompanied by the certificate for the
shares to which it relates and such other evidence as the Directors
may reasonably require to show the right of the transferor to make the
transfer; and
8
(b) the Transfer Notice is in respect of only one class of shares.
48. If the Directors refuse to register any transfer of shares they shall,
within two months after the date on which the Transfer Notice was lodged
with the Company, send to the proposed transferor and transferee notice of
the refusal.
49. All Transfer Notices relating to transfers of shares which are registered
shall be retained by the Company, but any Transfer Notices relating to
transfers of shares which the Directors decline to register shall (except
in any case of fraud) be returned to the person depositing the same.
50. The registration of transfers of shares or of any class of shares may be
suspended whenever the Directors determine.
51. Unless otherwise decided by the Directors in their sole discretion, no fee
shall be charged in respect of the registration of any probate, letters of
administration, certificate of marriage or death, power of attorney or
other document relating to or affecting the title to any shares.
52. In respect of any allotment of any share the Directors shall have the same
right to decline to approve the registration of any renouncee of any
allottee as if the application to allot and the renunciation were a
transfer of a share under these Articles.
53. In the case of the death of a Member, the survivors or survivor, where the
deceased was a joint holder, and the executors or administrators of the
deceased, where he was a sole or only surviving holder, shall be the only
persons recognised by the Company as having any title to his interest in
the shares, but nothing in this Article shall release the estate of a
deceased joint holder from any liability in respect of any share jointly
held by him.
54. Any guardian of an infant Member and any curator or guardian or other legal
representative of a Member under legal disability and any person becoming
entitled to a share in consequence of the death or insolvency or bankruptcy
of a Member may, upon such evidence as to his title being produced as may
from time to time be required by the Directors and subject as hereinafter
provided, elect either to be registered himself as the holder of the share
or to have some person nominated by him registered as the holder thereof.
55. If the person so becoming entitled shall elect to be registered himself, he
shall deliver or send to the Company a Transfer Notice signed by him
stating that he so elects. If he shall elect to have another person
registered, he shall testify his election by signing a Transfer Notice in
favour of that person. All the limitations, restrictions and provisions of
these Articles relating to the right to transfer and the registration of
transfers of shares shall be applicable to any such Transfer Notice as
aforesaid as would have existed had such transfer occurred before the
death, insolvency or bankruptcy of the Member concerned.
56. A person becoming entitled to a share by reason of the death or insolvency
or bankruptcy of a Member shall be entitled to the same dividends and other
advantages to which he would be entitled if he were the registered holder
of the share, except that he shall not, before being registered as a Member
in respect of the share, be entitled in respect of it to exercise any right
conferred by membership in relation to meetings of the Company provided
always that the Directors may at any time give notice requiring any such
person to elect either to be registered himself or to transfer the share
and if the notice is not complied with within one month such person shall
be deemed to have so elected to be registered himself and all the
restrictions on the transfer and transmission of shares contained in these
Articles shall apply to such election.
9
Gemeral Meetings
57. Unless all of the Members agree in writing to dispense with the holding of
annual general meetings and any such agreement remains valid in accordance
with the Law, the provisions of Article 58 hereof shall apply with regard
to annual general meetings of the Company.
58. An annual general meeting shall be held once in every calendar year, either
in the Island of Jersey or in another tax favourable jurisdiction, at such
time and place as may be determined by the Directors; but so long as the
Company holds its first annual general meeting within eighteen months of
its incorporation it need not hold it in the year of its incorporation or
in the following year. All other general meetings shall be called
extraordinary general meetings.
59. The Directors may whenever they think fit, and upon a requisition made in
writing by Members in accordance with the Law the Directors shall, convene
an extraordinary general meeting of the Company.
60. At any extraordinary general meeting called pursuant to a requisition,
unless such meeting is called by the Directors, no business other than that
stated in the requisition as the objects of the meeting shall be
transacted.
Class Meetings
61. Save as is provided in this Article and otherwise in these Articles, all
the provisions of these Articles and of the Law relating to general
meetings of the Company and to the proceedings thereat shall apply, mutatis
mutandis, to every class meeting. At any class meeting the holders of
shares of the relevant class shall, on a poll, have one vote in respect of
each share of that class held by each of them.
Notice of General Meetings
62. At least twenty-one clear days' notice shall be given of every annual
general meeting and of every general meeting called for the passing of a
Special Resolution, and at least fourteen clear days' notice shall be given
of all other general meetings. Every notice shall specify the place, the
day and the time of the meeting and in the case of special business, the
general nature of such business and, in the case of an annual general
meeting, shall specify the meeting as such. Notice of every meeting shall
be given in the manner hereinafter mentioned to all the Members and to the
Directors and to the auditors.
63. A meeting of the Company shall,
notwithstanding that it is called by shorter notice than that specified in
Article 62 hereof, be deemed to have been duly called if it is so agreed:-
(a) in the case of an annual general meeting, by all the Members entitled
to attend and vote thereat; and
(b) in the case of any other meeting, by a majority in number of Members
having a right to attend and vote at the meeting, being a majority
together holding not less than ninety-five per cent in nominal value
of the shares giving that right.
64. In every notice calling a meeting of the Company there shall appear with
reasonable prominence a statement that a Member entitled to attend and vote
is entitled to appoint one or more proxies to attend and vote instead of
him and that a proxy need not also be a Member.
65. It shall be the duty of the Company, subject to the provisions of the Law,
on the calling of a meeting on the requisition in writing of such number of
Members as is specified by the Law:-
10
(a) to give to the Members entitled to receive notice of general meetings
and to the Directors notice of any resolution which may properly be
moved and which it is intended to move at that meeting; and
(b) to circulate to Members entitled to have notice of any general meeting
sent to them, any statement of not more than one thousand words with
respect to the matter referred to in any proposed resolution or the
business to be dealt with at that meeting.
66. The accidental omission to give notice of a meeting to, or the non-receipt
of notice of a meeting by, any person entitled to receive notice shall not
invalidate the proceedings at that meeting.
Proceedings at General Meetings
67. No general meeting shall be held except in the Island of Jersey or in
another tax favourable jurisdiction.
67A. The business of an annual general meeting shall be to receive and consider
the accounts of the Company and the reports of the Directors and auditors,
to elect Directors (if necessary), to elect auditors and fix their
remuneration, to sanction a dividend if thought fit so to do, and to
transact any other business of which notice has been given.
68. No business shall be transacted at any general meeting except the
adjournment of the meeting unless a quorum of Members is present at the
time when the meeting proceeds to business. Such quorum shall consist of
not less than two Members present in person, but so that not less than two
individuals will constitute the quorum, provided that, if at any time all
of the issued shares in the Company are held by or by a nominee for a
holding company, such quorum shall consist of the Member present in person.
69. If within half an hour from the time appointed for the meeting a quorum is
not present, or if during the meeting a quorum ceases to be present, the
meeting, if convened by or upon the requisition of Members, shall be
dissolved. If otherwise convened the meeting shall stand adjourned to the
same day in the next week at the same time and place or such day, time and
place as the Directors shall determine.
70. The chairman (if any) of the Directors shall preside as chairman at every
general meeting of the Company. If there is no such chairman, or if at any
meeting he is not present the Members present in person shall choose one of
the Directors present to be chairman, or if no Director shall be present
and willing to take the chair the Members present in person shall choose
one of their number to be chairman.
71. The chairman may with the consent of any meeting at which a quorum is
present (and shall if so directed by the meeting) adjourn the meeting from
time to time and from place to place, but no business shall be transacted
at any adjourned meeting other than the business left unfinished at the
meeting from which the adjournment took place. When a meeting is adjourned
for thirty days or more, notice of the adjourned meeting shall be given as
in the case of the original meeting. Save as aforesaid, it shall not be
necessary to give any notice of any adjourned meeting or of the business to
be transacted at an adjourned meeting.
72. Except where otherwise provided in the Law or in these Articles, all
resolutions shall be adopted if approved by a majority of the votes cast.
In the event of an equality of votes at any general meeting, whether upon a
show of hands or on a poll, the chairman shall not be entitled to a second
or casting vote.
73. At any general meeting every question shall be decided in the first
instance by a show of hands and, unless a poll is demanded by the chairman
11
or by any Member, a declaration by the chairman that a resolution has on a
show of hands been carried or not carried, or carried or not carried by a
particular majority or lost, and an entry to that effect in the minutes of
the meeting shall be conclusive evidence of the fact without proof of the
number or proportion of the votes recorded in favour of or against such
resolution.
74. If a poll is demanded in the manner mentioned above, it shall be taken at
such time (within twenty-one days) and in such manner as the chairman
directs and the results of such poll shall be deemed to be the resolution
of the Company in general meeting. A poll may be demanded upon the election
of the chairman and upon a question of adjournment and such poll shall be
taken forthwith without adjournment. Any business other than that upon
which a poll has been demanded may proceed pending the taking of the poll.
75. Minutes of all resolutions and proceedings of general meetings shall be
duly and regularly entered in books kept for that purpose at the Office and
shall be available for inspection by a Member during business hours without
charge. A Member may require a copy of any such minutes in such manner, and
upon payment of such sum, as provided in the Law.
76. If a Member is by any means in communication with one or more other Members
so that each Member participating in the communication can hear what is
said by any other of them, each Member so participating in the
communication is deemed to be present in person at a meeting with the other
Members so participating, notwithstanding that all the Members so
participating are not present together in the same place. A meeting at
which any or all of the Members participate as aforesaid shall be deemed to
be a general meeting of the Company for the purposes of these Articles
notwithstanding any other provisions of these Articles and all of the
provisions of these Articles and of the Law relating to general meetings of
the Company and to the proceedings thereat shall apply, mutatis mutandis,
to every such meeting.
77. A resolution in writing (including a Special Resolution but excluding a
resolution removing an auditor) signed by all Members who would be entitled
to receive notice of and to attend and vote at a general meeting at which
such a resolution would be proposed, or by their duly appointed attorneys,
shall be as valid and effectual as if it had been passed at a general
meeting of the Company duly convened and held. Any such resolution may
consist of several documents in the like form each signed by one or more of
the Members or their attorneys and signature in the case of a corporate
body which is a Member shall be sufficient if made by a director or other
duly authorised officer thereof or its duly appointed attorney.
78. (1) On a show of hands every Member present in person shall have one vote.
(2) Subject to any special voting powers or restrictions for the time
being attached to any shares, as may be specified in the terms of
issue thereof or these Articles, on a poll every Member present in
person shall have one vote for each share held by him.
79. Where there are joint registered holders of any share, such persons shall
not have the right of voting individually in respect of such share but
shall elect one of their number to represent them and to vote whether in
person or by proxy in their name. In default of such election the person
whose name appears first in order in the Register in respect of such share
shall be the only person entitled to vote in respect thereof.
80. A Member for whom a special or general attorney is appointed or who is
suffering from some other legal incapacity or interdiction in respect of
whom an order has been made by any court having jurisdiction (whether in
the Island of Jersey or elsewhere) in matters concerning legal incapacity
or interdiction may vote, whether on a show of hands or on a poll, by his
attorney, curator, or other person authorised in that behalf appointed by
that court, and any such attorney, curator or other person may vote by
proxy. Evidence to the satisfaction of the Directors of the
12
authority of such attorney, curator or other person may be required by the
Directors prior to any vote being exercised by such attorney, curator or
other person.
81. The Directors and the auditors shall be entitled to receive notice of and
to attend and speak at any meeting of Members. Save as aforesaid and as
provided in Article 80 hereof, no person shall be entitled to be present or
take part in any proceedings or vote either personally or by proxy at any
general meeting unless he has been registered as owner of the shares in
respect of which he claims to vote.
82. (1) No objection shall be raised to the qualification of any voter except
at the meeting or adjourned meeting at which the vote objected to is given
or tendered, and every vote not disallowed at such meeting shall be valid
for all purposes. Any such objection made in due time shall be referred to
the chairman of the meeting whose decision shall be final and conclusive.
(2) Where a person is authorised under Article 90 hereof to represent a
body corporate at a general meeting of the Company the Directors or
the chairman of the meeting may require him to produce a certified
copy of the resolution from which he derives his authority.
83. On a poll a Member entitled to more than one vote need not use all his
votes or cast all the votes he uses in the same way.
84. The instrument appointing a proxy shall be in writing under the hand of the
appointor or of his attorney duly authorised in writing or if the appointor
is a corporation either under seal or under the hand of an officer or
attorney duly authorised. A proxy need not be a Member.
85. The instrument appointing a proxy and the power of attorney or other
authority (if any) under which it is signed, or a notarially certified copy
of that power or authority, shall be deposited at the Office within such
time (not exceeding forty-eight hours) before the time for holding the
meeting or adjourned meeting or for the taking of a poll at which the
person named in the instrument proposes to vote as the Directors may from
time to time determine.
86. The instrument appointing a proxy may be in any common form or in any other
form approved by the Directors including the following form:-
"Aircraft Lease Portfolio Securitisation 92-1 Limited
I/We _________________________ of ______________________ being a Member/Members
of the above named Company hereby appoint _________________ of
_______________________ or failing him ____________________ of _________________
as _____ my/our proxy to vote for me/us on my/our behalf at the (annual or
extraordinary as the case may be) general meeting of the Company to be held on
the _____ day of ______________ and at any adjournment thereof.
Signed this __________________ day of ______________"
87. Unless the contrary is stated thereon the instrument appointing a proxy
shall be as valid as well for any adjournment of the meeting as for the
meeting to which it relates.
88. A vote given in accordance with the terms of an instrument of proxy shall
be valid notwithstanding the previous death or insanity of the principal or
revocation of the proxy or of the authority under which the proxy was
executed provided that no intimation in writing of such death, insanity or
revocation shall have been received by the Company at the Office before the
commencement of the meeting or adjourned meeting or the taking of the poll
at which the proxy is used.
13
89. The Directors may at the expense of the Company send by post or otherwise
to the Members instruments of proxy (with or without provision for their
return prepaid) for use at any general meeting or at any separate meeting
of the holders of any class of shares of the Company either in blank or
nominating in the alternative any one or more of the Directors or any other
persons. If for the purpose of any meeting invitations to appoint as proxy
a person or one or more of a number of persons specified in the invitations
are issued at the Company's expense they shall be issued to all (and not to
some only) of the Members entitled to be sent a notice of the meeting and
to vote thereat by proxy.
Corporate Members
90. Any body corporate which is a Member may by resolution of its directors or
other governing body authorise such person as it thinks fit to act as its
representative at any meeting of Members (or of any class of Members) and
the person so authorised shall be entitled to exercise on behalf of the
body corporate which he represents the same powers as that body corporate
could exercise if it were an individual.
Directors
91. The number of Directors shall not be more than three and shall not be less
than two. At all times the Directors shall include a majority of persons
resident outside the Republic of Ireland and a majority of persons resident
outside the United Kingdom and at no time shall all of the Directors be
resident in the United States of America. Save as provided in Article 99A,
no person shall be appointed as a Director of the Company unless that
person has been approved by the existing Directors (if any) as having
sufficient knowledge and experience in the aircraft leasing industry, such
approval not to be unreasonably withheld. At all times the Director
appointed pursuant to Article 99A shall constitute a minority of the
Directors. The Company shall keep or cause to be kept at the Office a
register of its Directors in the manner required by the Law.
92. A Director need not be a Member but shall nevertheless be entitled to
receive notice of and to attend and speak at any general meeting or at any
separate meeting of the holders of any class of shares in the Company.
93. The Directors shall be paid out of the funds of the Company their
travelling and other expenses properly and necessarily expended by them in
attending meetings of the Directors or Members or otherwise on the affairs
of the Company. The Independent Directors shall also each be paid by way of
remuneration for their services a sum equal to US$50,000 per annum (or such
higher amount, not exceeding US$100,000 per annum as shall be fixed by the
Company in general meeting) which shall be deemed to accrue from day to
day. If any Director shall be appointed agent or to perform extra services
or to make any special exertions or to go or reside abroad for any of the
purposes of the Company, the Directors may remunerate such Director
therefor either by a fixed sum or by commission or participation in profits
or otherwise or partly one way and partly in another as they think fit, and
such remuneration may be either in addition to or in substitution for his
remuneration, if any, hereinbefore provided. The Director appointed
pursuant to Article 99A(i) shall not be entitled to remuneration for his
services as a Director.
Alternate Directors
94. Any Director may at his sole discretion and at any time and from time to
time appoint any person (other than a person disqualified by law from being
a director of a company) as an alternate Director to attend and vote in his
place at any meetings of Directors at which he is not personally present it
being provided that a Director may only appoint a person as an alternate
Director who is also resident in the same jurisdiction as that Director or
in another tax favourable jurisdiction. Each Director shall be at liberty
to appoint under this Article more than one alternate Director
14
provided that only one such alternate Director may at any one time act on
behalf of the Director by whom he has been appointed. Every such
appointment shall be effective and the following provisions shall apply in
connection therewith:-
(a) every alternate Director while he holds office as such shall be
entitled to notice of meetings of Directors and to attend and to
exercise all the rights and privileges of his appointor at all such
meetings at which his appointor is not personally present;
(b) every alternate Director shall ipso facto vacate office if and when
his appointment expires or the Director who appointed him ceases to be
a Director of the Company or removes the alternate Director from
office by notice under his hand served upon the Company;
(c) every alternate Director shall be entitled to be paid all travelling,
hotel and other expenses reasonably incurred by him in attending
meetings. The remuneration (if any) of an alternate Director shall be
payable out of the remuneration payable to the Director appointing him
as may be agreed between them;
(d) a Director may act as alternate Director for another Director and
shall be entitled to vote for such other Director as well as on his
own account, but no Director shall at any meeting be entitled to act
as alternate Director for more than one other Director; and
(e) a Director who is also appointed an alternate Director shall be
considered as two Directors for the purpose of making a quorum of
Directors when such quorum shall exceed two.
95. The instrument appointing an alternate Director may be in any form approved
by the Directors including the following form:-
"Aircraft Lease Portfolio Securitisation 92-1 Limited
I, __________________ a Director of the above named Company, in pursuance of the
power in that behalf contained in the Articles of Association of the Company, do
hereby nominate and appoint _______________ of ______________________ to act as
alternate Director in my place at the meeting of the Directors to be held on the
__________ day of _____________________ and at any adjournment thereof which I
am unable to attend and to exercise all my duties as a Director of the Company
at such meeting.
Signed this ___________________ day of ______________"
96. Save as otherwise provided in Article 94(b) hereof, any appointment or
removal of an alternate Director shall be by notice signed by the Director
making or revoking the appointment and shall take effect when lodged at the
Office or otherwise notified to the Company in such manner as is approved
by the Directors.
Executive Directors
97. The Directors may from time to time appoint one or more of their number to
be the holder of any executive office on such terms and for such periods as
they may determine. The appointment of any Director to any executive office
shall be subject to termination if he ceases to be a Director, but without
prejudice to any claim for damages for breach of any contract of service
between him and the Company.
98. The Directors may entrust to and confer upon a Director holding any
executive office any of the powers exercisable by the Directors, upon such
terms and conditions and with such restrictions as they think fit, and
either collaterally with or to the exclusion of their own powers and may
from time to time revoke, withdraw, alter or vary all or any of such
powers.
15
Appointment of Directors
99. The Directors of the Company holding office on the date of adoption of
these Articles, two of whom shall be Independent Directors, shall hold
office, subject as hereinafter provided, until they resign, are removed or
are disqualified in accordance with Article 103 hereof. At the second
quarterly meeting of the Directors in each calendar year commencing 1997 to
be held pursuant to Article 109 hereof one of the two Independent Directors
then in office shall retire from office and be eligible for re-election. At
the second quarterly meeting of the Directors to be held in each subsequent
calendar year the Independent Director who shall not have retired in the
previous calendar year (or his successor) shall retire from office and be
eligible for re-election. The remaining Directors shall (subject to the
provisions of Article 91 hereof) elect a person to fill each vacancy
created pursuant to the foregoing provisions of this Article and in the
case of an equality of votes the chairman elected in accordance with
Article 114 hereof shall have a second or casting vote. For so long as a
Director has been appointed pursuant to Article 99(A)(i) and is holding
office there shall not be less than two Independent Directors holding
office.
99A. (i) For so long as any amount is outstanding or payable in
respect of the Class E Notes, the holder or holders of a majority in
aggregate principal amount of the Class E Notes shall be entitled to:-
(a) nominate and appoint one Director at any time;
(b) remove any Director appointed pursuant to sub-paragraph (i)(a)
above; and
(c) nominate and appoint a new Director to take the place of any
Director nominated and appointed pursuant to sub-paragraph (i)(a)
above who vacates his office for any reason.
(ii) The Independent Directors shall not have the right to remove Directors
appointed pursuant to this Article.
100. Subject to the provisions of Articles 91 and 99 hereof, the Independent
Directors shall have power at any time and from time to time to appoint any
person to be an Independent Director in order to ensure that the provisions
of these Articles as to the number of Independent Directors required to be
in office are fulfilled. If at any time there are no Independent Directors
holding office the Company in general meeting (and not, for the avoidance
of doubt, the Class E Note Director) shall be entitled to nominate and
appoint such number of Independent Directors as are required to be in
office pursuant to these Articles. For the purpose of making such
appointment the Class E Note Director shall be entitled to make
recommendation to the Members and the Members may, if they think fit, at
the expense of the Company hire an independent adviser to make
recommendations. The Members, in making the appointment, shall be entitled
but not bound to act in accordance with any such recommendations. Any
Independent Director so appointed shall hold office until he resigns, is
removed or is disqualified in accordance with Article 103 hereof.
101. At any general meeting at which an Independent Director retires or is
removed from office the remaining Independent Director shall elect an
Independent Director to fill the vacancy, unless the Company in general
meeting (subject always to Article 91) determines to reduce the number of
Independent Directors in office. If there is no remaining Independent
Director the Company shall elect an Independent Director to fill the
vacancy, unless the Company in general meeting (and not, for the avoidance
of doubt, the Class E Note Director) (subject always to Article 91)
determines to reduce the number of Independent Directors in office. For the
purpose of making such appointment the Class E Note Director shall be
entitled to make recommendations to the Members and the Members may, if
they think fit, at the expense of the Company hire an independent adviser
16
to make recommendations. The Members, in making the appointment, shall be
entitled but not bound to act in accordance with any such recommendations.
102. Seven clear days' notice shall be given to the Company of the intention of
any Member to propose any person for election to the office of Independent
Director provided always that, if the Members present at a general meeting
unanimously consent, the chairman of such meeting may waive the said notice
and submit to the meeting the name of any person duly qualified and willing
to act.
Resignation, Disqualification and Removal of Directors
103. The office of a Director shall be vacated if:-
(a) he resigns his office by notice to the Company; or
(b) he ceases to be a Director by virtue of any provision of the Law or he
becomes prohibited or disqualified by law from being a Director; or
(c) he becomes bankrupt or makes any arrangement or composition with his
creditors generally; or
(d) he is removed from office by resolution of the Members; or
(e) in the case of a Director appointed pursuant to Article 99A(i) he is
removed from office pursuant to Article 99A(i); or
(f) in the case of an Independent Director, he ceases to be an Independent
Director within the meaning of that term contained in these Articles;
or
(g) in the case of an Independent Director, he becomes due for retirement
by rotation pursuant to Article 91.
Powers of Directors
104. The business of the Company shall be managed by the Directors who may
exercise all such powers of the Company as are not by the Law or these
Articles required to be exercised by the Company in general meeting, and
the power and authority to represent the Company in all transactions
relating to real and personal property and all other legal or judicial
transactions, acts and matters and before all courts of law shall be vested
in the Directors. The Directors' powers shall be subject to any regulations
of these Articles, to the provisions of the Law and to such regulations,
being not inconsistent with the aforesaid regulations or provisions, as may
be prescribed by the Company in general meeting, but no regulations made by
the Company in general meeting shall invalidate any prior act of the
Directors which would have been valid if such regulations had not been
made.
105. The Directors, or any Director duly authorised by the Board, may (i) enter
into any contract or sign any document on behalf of the Company, (ii)
appoint any person to be the attorney-in-fact, agent or employee (a
"Representative") of the Company for such purposes and on such conditions
as they determine (including authority for the Representative to delegate
his powers), and (iii) undertake any other official act on behalf of the
Company, subject to the following restrictions:
(1) the Directors, or any committee of the Directors, duly authorised Director,
or Representative, may only enter into any contract or sign any document on
behalf of the Company in the Island of Jersey or another tax favourable
jurisdiction;
(2) the Directors, and any committee of the Directors, shall undertake or
perform official acts on
17
behalf of the Company only while present in the Island of Jersey or another
tax favourable jurisdiction, provided that receiving and reviewing
documents and information, and conferring with other Directors by
telephone, shall not constitute an official act for this purpose unless
such conferring constitutes the making of a decision of the Board or of a
committee of the Board;
(3) no person resident in the United Kingdom shall be appointed to be a
Representative unless the Directors shall have received advice of competent
counsel and on that basis shall be satisfied that the appointment of such
Representative and the activities to be undertaken by the Representative on
behalf of the Company in accordance with the terms of his appointment
(which activities, including the scope of the Representative's authority to
act on behalf of and bind the Company, shall be specified by the Directors
and considered by counsel in giving its advice) are not expected to, taken
in conjunction with the other activities of the Company and its Directors
and Representatives, result in the Company being treated as carrying on a
trade or business or having a permanent establishment in the United Kingdom
and by either such reason or otherwise render the Company liable to payment
of an amount of tax which in the opinion of the Directors is more than a
minimal amount.
(4) no person resident in the United States of America (the "United States")
shall be appointed to be a Representative (other than Bankers Trust Company
or affiliates of Babcock & Brown Limited ("Babcock") acting pursuant to and
in accordance with the Servicing Agreement dated on or about the date of
adoption of these Articles between Babcock and the Company (the "Servicing
Agreement")) unless the Directors shall have received advice of competent
counsel and on that basis shall be satisfied that the appointment of such
Representative and the activities to be undertaken by the Representative on
behalf of the Company in accordance with the terms of his appointment
(which activities, including the scope of the Representative's authority to
act on behalf of and bind the Company, shall be specified by the Directors
and considered by counsel in giving its advice) are not expected to, taken
in conjunction with the other activities of the Company and its Directors
and Representatives, result in the Company being treated as carrying on a
trade or business or having a permanent establishment in the United States
and by either such reason or otherwise render the Company liable to payment
of an amount of tax which in the opinion of the Directors is more than a
minimal amount.
(5) no person resident in the Republic of Ireland ("Ireland") shall be
appointed to be a Representative (other than Babcock or its affiliates
acting pursuant to and in accordance with the Servicing Agreement) unless
the Directors shall have received advice of competent counsel and on that
basis shall be satisfied that the appointment of such Representative and
the activities to be undertaken by the Representative on behalf of the
Company in accordance with the terms of his appointment (which activities,
including the scope of the Representative's authority to act on behalf of
and bind the Company, shall be specified by the Directors and considered by
counsel in giving its advice) are not expected to, taken in conjunction
with the other activities of the Company and its Directors and
Representatives, result in the Company being treated as carrying on a trade
or business or having a permanent establishment in Ireland and by either
such reason or otherwise render the Company liable to payment of an amount
of tax which in the opinion of the Directors is more than a minimal amount.
(6) the Company shall not maintain any bank account in Ireland.
Transactions with Directors
106. A Director, including an alternate Director, may hold any other office or
place of profit under the Company (other than the office of auditor) in
conjunction with his office of Director and may act in a professional
capacity to the Company on such terms as to tenure of office, remuneration
and otherwise as the Directors may determine.
18
107. Subject to the provisions of the Law, and provided that he has disclosed to
the Directors the nature and extent of any of his material interests, a
Director notwithstanding his office:-
(a) may be a party to, or otherwise interested in, any transaction or
arrangement with the Company or in which the Company is otherwise
interested;
(b) may be a director or other officer of, or employed by, or a party to
any transaction or arrangement with, or otherwise interested in, any
body corporate promoted by the Company or in which the Company is
otherwise interested or which engages in transactions similar to those
engaged in by the Company and might present a conflict of interest for
such Director in discharging his duties; and
(c) shall not, by reason of his office, be accountable to the Company for
any benefit which he derives from any such office or employment or
from any such transaction or arrangement or from any interest in any
such body corporate and no such transaction or arrangement shall be
liable to be avoided on the ground of any such interest or benefit.
108. For the purposes of Article 107:-
(a) a general notice given to the Directors that a Director is to be regarded
as having an interest of the nature and extent specified in the notice in
any transaction or arrangement in which a specified person or class of
persons is interested shall be deemed to be a disclosure that the Director
has an interest in any such transaction of the nature and extent so
specified; and
(b) an interest of which a Director has no knowledge and of which it is
unreasonable to expect him to have knowledge shall not be treated as an
interest of that Director.
Proceedings of Directors
109. The Directors shall meet together on a regular basis for the despatch of
business and may adjourn and otherwise regulate their meetings as they
think fit. No meeting of the Directors, including a meeting held by
telephone or other means of communication in accordance with Article 116
hereof and no resolution in writing passed in accordance with Article 117
hereof shall be held or signed respectively unless each of the Directors
participating therein is present in the Island of Jersey or another tax
favourable jurisdiction. Without prejudice to the generality of the
foregoing the Directors shall hold in each calendar quarter at least one
meeting in Jersey at which a quorum of Directors is physically present and
shall hold such other meetings as the Directors deem appropriate and such
meetings shall be held in accordance with these Articles. Questions arising
at any meeting shall be determined by a majority of votes. In case of an
equality of votes the chairman elected in accordance with Article 114 shall
have a second or casting vote. A Director who is also an alternate Director
shall be entitled, in the absence of the Director whom he is representing,
to a separate vote on behalf of such Director in addition to his own vote.
Any Director who is unable to attend any meeting of the Directors may
submit a written summary of his views on the matter or matters to be
considered at such meeting and those persons present at such meeting shall
give such views due consideration. A Director may, and the Secretary on the
requisition of a Director shall, at any time, summon a meeting of the
Directors by giving to each Director and alternate Director not less than
twenty-four hours' notice of the meeting provided that any meeting may be
convened at shorter notice and in such manner as each Director or his
alternate Director shall approve provided further that unless otherwise
resolved by the Directors notices of Directors' meetings need not be in
writing.
110. A meeting of the Directors at which a quorum is present shall be competent
to exercise all powers and discretions for the time being exercisable by
the Directors. The quorum necessary for the
19
transaction of the business of the Directors may be fixed by the Directors,
and unless so fixed at any other number shall be two provided that not less
than 50% (fifty percent) of the persons making up a quorum shall be
Independent Directors. For the purposes of this Article and subject to the
provisions of Article 94(e) hereof and the preceding sentence of this
Article 110 an alternate Director shall be counted in a quorum, but so that
not less than two individuals will constitute the quorum.
111. A Director, notwithstanding his interest, may be counted in the quorum
present at any meeting at which he is appointed to hold any office or place
of profit under the Company, or at which the terms of his appointment are
arranged, but he may not vote on his own appointment or the terms thereof.
112. A Director, notwithstanding his interest, may be counted in the quorum
present at any meeting at which any contract or arrangement in which he is
interested is considered and, subject to the provisions of Articles 107 and
108 hereof, he may vote in respect of any such contract or arrangement.
113. The continuing Directors or a sole continuing Director may act
notwithstanding any vacancies in their number, but, if the number of
Directors is less than the number fixed as the quorum, the continuing
Directors or Director may act only for the purpose of filling vacancies or
of calling a general meeting of the Company. If there are no Directors or
no Director is able or willing to act, then any Member or the Secretary may
summon a general meeting for the purpose of appointing Directors.
114. The Directors may from time to time elect from their number, and remove, an
Independent Director to act as a chairman and/or deputy chairman and/or
vice-chairman and determine the period for which they are to hold office.
Provided always that only an Independent Director may be elected as
chairman, the chairman if present shall preside at all meetings of the
Directors. If no such chairman be elected, or at any meeting at which the
chairman is not present, the Directors present shall choose one of their
number who is an Independent Director to be the chairman of the Meeting. In
the case of the meeting of Directors held in each calendar year at which an
Independent Director shall retire by rotation pursuant to Article 91
hereof, the Independent Director not retiring shall act as chairman of such
meeting.
115. The Directors may delegate any of their powers to committees consisting of
such Directors or Director or such other persons as they think fit. Any
committee so formed shall in the exercise of the powers so delegated
conform to any regulations that may be imposed on it by the Directors. The
meetings and proceedings of any such committee consisting of two or more
persons shall be governed by the provisions of these Articles regulating
the meetings and proceedings of the Directors, so far as the same are
applicable and are not superseded by any regulations made by the Directors
under this Article provided that no such committee shall have any power to
act in any part of the world except whilst present in the Island of Jersey
or another tax favourable jurisdiction.
116. If a Director is by any means in communication with one or more other
Directors so that each Director participating in the communication can hear
what is said by any other of them, each Director so participating in the
communication is deemed to be present at a meeting with the other Directors
so participating, notwithstanding that all the Directors so participating
are not present together in the same place.
117. A resolution in writing of which notice has been given to all of the
Directors or to all of the members of a committee appointed pursuant to
Article 115 hereof (as the case may be), if signed by a majority of the
Directors or of the members of such committee (as the case may be), shall
be valid and effectual as if it had been passed at a meeting of the
Directors or of the relevant
20
committee duly convened and held and may consist of two or more documents
in like form each signed by one or more of the Directors or members of the
relevant committee.
118. All acts done bona fide by any meeting of Directors or of a committee
appointed by the Directors or by any person acting as a Director shall,
notwithstanding that it is afterwards discovered that there was some defect
in the appointment of any such Director or committee or person acting as
aforesaid, or that they or any of them were disqualified or had vacated
office or were not entitled to vote, be as valid as if every such person
had been duly appointed and was qualified and had continued to be a
Director or a member of a committee appointed by the Directors and had been
entitled to vote.
Minute Book
119. The Directors shall cause all resolutions in writing passed in accordance
with Articles 77 and 117 hereof and minutes of proceedings at all general
meetings of the Company or of the holders of any class of the Company's
shares and of the Directors and of committees appointed by the Directors to
be entered in books kept for the purpose at the Office. Any minutes of a
meeting, if purporting to be signed by the chairman of the meeting or by
the chairman of the next succeeding meeting, shall be evidence of the
proceedings.
Secretary
120. The Secretary shall be appointed by the Directors and any secretary so
appointed may be removed by the Directors. The Secretary shall at all times
be resident in the Island of Jersey. Anything required or authorised to be
done by or to the Secretary may, if the office is vacant or there is for
any other reason no secretary capable of acting, be done by or to any
assistant or deputy secretary or if there is no assistant or deputy
secretary capable of acting, by or to any officer of the Company authorised
generally or specially in that behalf by the Directors provided that any
provisions of these Articles requiring or authorising a thing to be done by
or to a Director and the Secretary shall not be satisfied by its being done
by or to the same person acting both as Director and as, or in place of,
the Secretary. The Company shall keep or cause to be kept at the Office a
register of particulars with regard to its Secretary in the manner required
by the Law.
Seals
121. The Company shall have a common seal and may in accordance with the Law
have an official seal for use outside of the Island and an official seal
for sealing securities issued by the Company or for sealing documents
creating or evidencing securities so issued.
122. The Directors shall provide for the safe custody of all seals and no seal
shall be used except by the authority of a resolution of the Directors or
of a committee of the Directors authorised in that behalf by the Directors.
123. The Directors may from time to time make such regulations as they think fit
determining the persons and the number of such persons who shall sign every
instrument to which a seal is affixed and until otherwise so determined
every such instrument shall be signed by one Director and shall be
countersigned by the Secretary or by a second Director. The Company may, in
writing, authorise an agent appointed for the purpose to affix any official
seal to a document to which the Company is a party.
Authentication of Documents
124. Any Director or the Secretary or any person appointed by the Directors for
the purpose shall have power to authenticate any documents affecting the
constitution of the Company (including the Memorandum of Association and
these Articles) and any resolutions passed by the Company or
21
the Directors and any books, records, documents and accounts relating to
the business of the Company, and to certify copies thereof or extracts
therefrom as true copies or extracts; and where books, records, documents
or accounts are elsewhere than at the Office, the local manager or other
officer or the company having the custody thereof shall be deemed to be a
person appointed by the Directors as aforesaid.
Dividends
125. Subject to the provisions of the Law, the Company may by resolution declare
dividends in accordance with the respective rights of the Members, but no
dividend shall exceed the amount recommended by the Directors.
126. The holders of the shares in the capital of the Company issued to the
Subscribers to the Memorandum of Association shall be entitled to receive
out of the profits of the Company resolved to be distributed, a fixed
cumulative preferential dividend at the rate of US$1,500 per annum
(regardless of the number of such shares in issue from time to time)
payable amongst such holders rateably according to the number of such
shares held by each of them. For the avoidance of doubt whenever the
profits of the Company in respect of any period shall be more than
sufficient to pay the aforesaid fixed cumulative preferential dividend in
respect of such period, the holders of the shares entitled to such fixed
preferential dividend shall be entitled to participate in the surplus pari
passu with the holders of all other shares entitled to the payment of
dividends (subject always to any particular rights or limitations as to
dividend for the time being attached to any other class of shares as may be
specified in these Articles or upon which such shares shall be issued and
to any contractual limitations which may be entered into by the Company
limiting payment of such surplus).
127. Subject to any particular rights or limitations as to dividend for the time
being attached to any shares, as may be specified in these Articles or upon
which such shares may be issued, all dividends shall be declared,
apportioned and paid pro-rata according to the amounts paid up on the
shares (otherwise than in advance of calls) during any portion or portions
of the period in respect of which the dividend is paid.
128. Subject to the provisions of the Law, the Directors may, if they think fit,
from time to time pay to the Members such interim dividends as appear to
the Directors to be justified. If at any time the share capital of the
Company is divided into different classes, the Directors may pay such
interim dividends in respect of those shares in the capital of the Company
which confer on the holders thereof deferred or non-preferred rights, as
well as in respect of those shares which confer on the holders thereof
preferential rights with regard to dividend. The Directors may also pay
half-yearly, or at other suitable intervals to be settled by them, any
dividend which may be payable at a fixed rate if they are of the opinion
that the profits of the Company justify the payment. Provided the Directors
act bona fide they shall not incur any personal liability to the holders of
shares conferring a preference for any damage that they may suffer by
reason of the payment of an interim dividend on any shares having deferred
or non-preferred rights.
129. The Directors may carry forward to the accounts of the succeeding year or
years any balance of profit which they do not think fit either to divide or
to place to reserve.
130. The Directors may deduct from any dividend or other monies payable to any
Member on or in respect of a share all sums of money (if any) presently
payable by him to the Company on account of calls or otherwise in relation
to the shares of the Company.
131. All unclaimed dividends may be invested or otherwise made use of by the
Directors for the benefit of the Company until claimed. No dividend shall
bear interest as against the Company.
22
132. Any dividend which has remained unclaimed for a period of ten years from
the date of declaration thereof shall, if the Directors so resolve, be
forfeited and cease to remain owing by the Company and shall thenceforth
belong to the Company absolutely.
133. Any dividend or other monies payable on or in respect of a share may be
paid by cheque or warrant sent through the post to the registered address
of the Member or person entitled thereto, and in the case of joint holders
to any one of such joint holders, or to such person and to such address as
the holder or joint holders may in writing direct. Every such cheque or
warrant shall be made payable to the order of the person to whom it is sent
or to such other person as the holder or joint holders may in writing
direct, and payment of the cheque or warrant shall be a good discharge to
the Company. Every such cheque or warrant shall be sent at the risk of the
person entitled to the money represented thereby.
134. A general meeting declaring a dividend may, upon the recommendation of the
Directors, direct payment of such dividend wholly or in part by the
distribution of specific assets, and in particular of paid up shares or
debentures of any other company, and the Directors shall give effect to
such resolution; and where any difficulty arises in regard to the
distribution they may settle the same as they think expedient, and in
particular may issue certificates representing part of a shareholding or
fractions of shares, and may fix the value for distribution of such
specific assets or any part thereof, and may determine that cash payment
shall be made to any Members upon the footing of the value so fixed, in
order to adjust the rights of Members, and may vest any specific assets in
trustees upon trust for the persons entitled to the dividend as may seem
expedient to the Directors, and generally may make such arrangements for
the allotment, acceptance and sale of such specific assets or certificates
representing part of a shareholding or fractions of shares, or any part
thereof, and otherwise as they think fit.
135. Any resolution declaring a dividend on the shares of any class, whether a
resolution of the Company in general meeting or a resolution of the
Directors, or any resolution of the Directors for the payment of a fixed
dividend on a date prescribed for the payment thereof, may specify that the
same shall be payable to the persons registered as the holders of shares of
the class concerned at the close of business on a particular date,
notwithstanding that it may be a date prior to that on which the resolution
is passed (or, as the case may be, that prescribed for payment of a fixed
dividend), and thereupon the dividend shall be payable to them in
accordance with their respective holdings so registered, but without
prejudice to the rights inter se in respect of such dividend of transferors
and transferees of any shares of the relevant class.
Reserve Fund
136. Before the declaration of a dividend the Directors may set aside any part
of the net profits of the Company to create a reserve fund, and may apply
the same either by employing it in the business of the Company or by
investing it in such a manner (not being the purchase of or by way of loan
upon the shares of the Company) as they think fit. Such reserve fund may be
applied for the purpose of maintaining the property of the Company,
replacing wasting assets, meeting contingencies, forming an insurance fund,
or equalising dividends or special dividends, or for any other purpose for
which the net profits of the Company may lawfully be used, and until the
same shall be applied it shall remain undivided profits.
Share Premium Account
137. There shall be transferred to a share premium account, as required by the
Law, the amount or value of any premium paid up on shares issued by the
Company and the sums for the time being standing to the credit of the share
premium account shall be applied only in accordance with the Law.
23
Capitalisation
138. The Company may, upon the recommendation of the Directors, resolve that it
is desirable to capitalise any undistributed profits of the Company
(including profits carried and standing to any reserve or reserves) not
required for paying the fixed dividends on any shares entitled to fixed
preferential dividends with or without further participation in profits, or
any sum carried to reserve as a result of the sale or revaluation of the
assets of the Company (other than goodwill) or any part thereof or, subject
as hereinafter provided, any sum standing to the credit of the Company's
share premium account or capital redemption reserve fund and accordingly
that the Directors be authorised and directed to appropriate the profits or
sum resolved to be capitalised to the Members in the proportion in which
such profits or sum would have been divisible amongst them had the same
been applicable and had been applied in paying dividends, and to apply such
profits or sum on their behalf, either in or towards paying up the amounts,
if any, for the time being unpaid on any shares held by such Members
respectively, or in paying up in full either at par or at such premium as
the said resolution may provide, any unissued shares or debentures of the
Company, such shares or debentures to be allotted and distributed, credited
as fully paid up, to and amongst such Members in the proportions aforesaid,
or partly in one way and partly in the other provided that the share
premium account and the capital redemption reserve fund and any unrealised
profits may not be applied in the paying up of any debentures of the
Company.
139. Whenever such a resolution as aforesaid shall have been passed, the
Directors shall make all appropriations and applications of the profits or
sum resolved to be capitalised thereby, and all allotments and issues of
fully paid shares or debentures, if any, and generally shall do all acts
and things required to give effect thereto, with full power to the
Directors to make such provision by the issue of certificates representing
part of a shareholding or fractions of shares or by payments in cash or
otherwise as they think fit in the case of shares or debentures becoming
distributable in fractions, and also to authorise any person to enter on
behalf of all the Members entitled to the benefit of such appropriations
and applications into an agreement with the Company providing for the
allotment to them respectively, credited as fully paid up, of any further
shares or debentures to which they may be entitled upon such
capitalisation, and any agreement made under such authority shall be
effective and binding on all such Members.
Accounts and Audit
140. The Company shall keep accounting records at the Office or such other place
in the Island of Jersey as the Directors may from time to time determine
and the Directors shall prepare accounts of the Company, made up to such
date in each year as the Directors shall from time to time determine, in
accordance with and subject to the provisions of the Law.
141. No Member shall have any right to inspect any accounting records or other
book or document of the Company except as conferred by the Law or
authorised by the Directors or by resolution of the Company.
142. The Directors, or the Company by resolution in general meeting, may from
time to time appoint auditors for any period or periods to examine the
accounts of the Company and to report thereon in accordance with the Law.
Notices
143. Any notice to be given to or by any person pursuant to these Articles shall
be in writing, save as provided in Article 109 hereof. In the case of joint
holders of a share, all notices shall be given to that one of the joint
holders whose name stands first in the Register in respect of the joint
holding and notice so given shall be sufficient notice to all the joint
holders.
24
144. Any notice may be posted to or left at the registered address of any
person, and any notice so posted shall be deemed to be served one clear day
after the day it was posted.
145. Any Member present in person at any meeting of the Company shall, for all
purposes, be deemed to have received due notice of such meeting and, where
requisite, of the purposes for which such meeting was convened.
146. Any notice or document served on a Member shall, notwithstanding that such
Member be then dead or bankrupt and whether or not the Company has notice
of his death or bankruptcy, be deemed to have been duly served on such
Member as sole or joint holder, unless his name shall at the time of the
service of the notice or document have been removed from the Register, and
such service shall for all purposes be deemed a sufficient service of such
notice or document on all persons interested (whether jointly with or as
claiming through or under him) in the shares of such Member it being
provided that any such notice or document to be sent by the Company shall
be sent from the Island of Jersey.
147. Notwithstanding any of the provisions of these Articles, any notice to be
given by the Company to a Director or to a Member may be given in any
manner agreed in advance by any such Director or Member.
Winding Up
148. If the Company is wound up, the holders of the shares entitled to the fixed
cumulative preferential dividend pursuant to Article 126 of these Articles
shall be entitled to receive out of the surplus assets of the Company the
arrears (if any) of the preferential dividend aforesaid down to the date of
commencement of the winding-up, whether earned or declared or not in
priority to any other payment out of the surplus assets, and thereafter to
participate rateably with the holders of all other classes of shares in the
residue (if any) of such surplus assets as shall remain after paying off
the capital paid up on the shares (including those entitled to the fixed
cumulative preferential dividend) in the Company.
149. Subject to any particular rights or limitations for the time being attached
to any shares, as may be specified in these Articles or upon which such
shares may be issued, if the Company is wound up, the assets available for
distribution among the Members shall be applied first in repaying to the
Members the amount paid up on their shares respectively, and if such assets
shall be more than sufficient to repay to the Members the whole amount paid
up on their shares, the balance shall be distributed among the Members in
proportion to the amount which at the time of the commencement of the
winding up had been actually paid up on their said shares respectively.
150. If the Company is wound up, the Company may, with the sanction of a Special
Resolution and any other sanction required by the Law, divide the whole or
any part of the assets of the Company among the Members in specie and the
liquidator or, where there is no liquidator, the Directors, may, for that
purpose, value any assets and determine how the division shall be carried
out as between the Members or different classes of Members, and with the
like sanction, vest the whole or any part of the assets in trustees upon
such trusts for the benefit of the Members as he with the like sanction
determines, but no Member shall be compelled to accept any assets upon
which there is a liability.
25
Indemnity
151. In so far as the Law allows, every present or former officer of the Company
shall be indemnified out of the assets of the Company against any loss or
liability incurred by him by reason of being or having been such an
officer.
152. The Directors are empowered to arrange for the purchase and maintenance in
the name of and at the expense of the Company of insurance cover for the
benefit of any officer or former officer of the Company, the Secretary and
any agent, servant or employee of the Company against any liability which
is incurred by any such person by reason of the fact that he is or was an
officer of the Company, the Secretary or an agent, servant or employee of
the Company or by reason of any act or omission by or of any such person.
Non-Application of Standard Table
153. The regulations constituting the Standard Table in the Companies (Standard
Table) (Jersey) Order 1992 shall not apply to the Company.
26
ARTICLES OF ASSOCIATION
INDEX
ARTICLE PAGE No.
- ------- --------
Accounts and Audit 24
Alteration of Share Capital 4
Alternate Directors 14
Appointment of Directors 16
Authentication of Documents 21
Calls on Shares 6
Capitalisation 24
Class Meetings 10
Corporate Members 14
Directors 14
Dividends 22
Executive Directors 15
Forfeiture of Shares 7
General Meetings 10
Indemnity 26
Interpretation 1
Joint Holders of Shares 5
Lien 6
Minute Book 21
Non-Application of Standard Table 26
Notice of General Meetings 10
Notices 24
Powers of Directors 17
Preliminary 3
Proceedings at General Meetings 11
Proceedings of Directors 19
Reduction of Share Capital 4
Register of Members 6
Reserve Fund 23
Resignation, Disqualification and Removal of Directors 17
Seals 21
Secretary 21
Share Capital and Shares 3
Share Certificates 5
Share Premium Account 23
Transactions with Directors 18
Transfer and Transmission of Shares 8
Variation of Rights 5
Winding Up 25
27
Signatures for and on behalf of the Subscribers to the Memorandum of Assocation
Juris Limited /s/
------------------------
Director
Lively Limited /s/
------------------------
Director
Witness to the above signatures /s/ Marjorie Mauger
------------------------
Marjorie Mauger,
18 Grenville Street
St. Helier,
Jersey,
Channel Islands
EXHIBIT 8
LIST OF SUBSIDIARIES
1. Carotene Limited - incorporated in Ireland.
2. ALPS 92-1 UK Limited - incorporated in England and Wales.
3. ALPS 92-1 France SARL - incorporated in France.
EXHIBIT 12
I, Frederick W. Bradley, Jr., the Chairman of the Board of Directors of
Aircraft Lease Portfolio Securitisation 92-1 Limited (the "Company"), certify
that:
(1) I have reviewed this annual report on Form 20-F of the
Company;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cashflows of the Company as of, and
for, the periods presented in this annual report;
(4) I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rule
15d-15(e)) and internal control over financial reporting for
the Company and I have:
(a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under my supervision, to ensure that
material information relating to the Company,
including its consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) designed such internal control over financial
reporting, or caused such internal control over
financial reporting to be designed under my
supervision, to provide reasonable assurance
regarding the reliability of financial reporting and
the preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the Company's
disclosure controls and procedures and presented in
this report my conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
(d) disclosed in this report any change in the Company's
internal control over financial reporting that
occurred during the period covered by this annual
report that has materially affected, or is reasonable
likely to materially affect, the Company's internal
control over financial reporting; and
(5) I have disclosed, based on my most recent evaluation of
internal control over financial reporting, to the auditors of
the Company and the audit committee of the Board of Directors
of the Company:
(a) all significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely
affect the Company's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Company's internal controls over
financial reporting.
Date: December 23, 2003
By: /s/ Frederick W. Bradley, Jr.
-----------------------------
Frederick W. Bradley, Jr.
Chairman of the Board1
- ------------
1 The Company is a special purpose vehicle that does not employ and has not
employed an individual as a chief executive officer or chief financial officer
and does not have and has not had any employees or executive officers since its
inception. For all executive management functions the Company retains and relies
upon its third party aircraft Servicer, Administrative Agent and Cash Manager.
These third party service providers are required to perform these executive
management functions in accordance with the requirements of the Servicing
Agreement, Administrative Agency Agreement and Cash Management Agreement,
respectively. With respect to the information contained in the annual report,
all information regarding the aircraft, the leases and the lessees is provided
by the Servicer pursuant to the Servicing Agreement. The Cash Manager calculates
monthly payments and makes all other calculations required by the Cash
Management Agreement. Pursuant to the Administrative Agency Agreement, the
Administrative Agent uses the information provided by the Servicer and the Cash
Manager and other information the Administrative Agent acquires in the
performance of its services to the Company, to maintain financial records of the
Company and prepare financial reports including the annual financial statements.
All members of the Board of Directors of the Company, including the Chairman,
are non-executives.
EXHIBIT 13
I, Frederick W. Bradley, Jr., the Chairman of the Board of Directors of
Aircraft Lease Portfolio Securitisation 92-1 Limited (the "Company"), certify
that:
1. this annual report on Form 20-F fully complies with the requirements
of Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2. the information contained in this annual report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
Date: December 23, 2003
By: /s/ Frederick W. Bradley, Jr.
-----------------------------
Frederick W. Bradley, Jr.
Chairman of the Board1
- ------------
1 The Company is a special purpose vehicle that does not employ and has not
employed an individual as a chief executive officer or chief financial officer
and does not have and has not had any employees or executive officers since its
inception. For all executive management functions the Company retains and relies
upon its third party aircraft Servicer, Administrative Agent and Cash Manager.
These third party service providers are required to perform these executive
management functions in accordance with the requirements of the Servicing
Agreement, Administrative Agency Agreement and Cash Management Agreement,
respectively. With respect to the information contained in the annual report,
all information regarding the aircraft, the leases and the lessees is provided
by the Servicer pursuant to the Servicing Agreement. The Cash Manager calculates
monthly payments and makes all other calculations required by the Cash
Management Agreement. Pursuant to the Administrative Agency Agreement, the
Administrative Agent uses the information provided by the Servicer and the Cash
Manager and other information the Administrative Agent acquires in the
performance of its services to the Company, to maintain financial records of the
Company and prepare financial reports including the annual financial statements.
All members of the Board of Directors of the Company, including the Chairman,
are non-executives.
AIRCRAFT LEASE PORTFOLIO
SECURITISATION 92-1 LIMITED
Financial Statements for the years ended
30 June 2003, 2002 and 2001 together with
independent auditors' report
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
REPORT AND FINANCIAL STATEMENTS 2003
CONTENTS Page
- -------- ----
Independent auditors' report 1
Consolidated statements of operations 2
Consolidated balance sheets 3
Consolidated statement of cash flows 4
Consolidated statements of changes in shareholders' deficit 5
Organisation of group 6
Statement of accounting policies 7
Notes to the consolidated financial statements 10
INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
We have audited the accompanying consolidated balance sheets as of 30 June 2003
and 2002, and the related consolidated statements of operations, changes in
shareholders' deficit and cashflows for each of the years in the three year
period ended 30 June 2003. These financial statements are the responsibility of
the directors. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting policies used and
significant estimates made by the directors as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described more fully in notes 1 and 3 to the financial statements the
September 11, 2001 terrorist attacks on the United States, as well as the
military action of the United States and its allies in Afghanistan, the
terrorist attacks in Bali and Saudi Arabia, the war in Iraq and the outbreak of
the Severe Acute Respiratory Syndrome (SARS) virus combined with the slowdown in
the aircraft industry prior to September 11, 2001, have all had a significant
adverse effect on the aircraft industry in general and on the Group. These
events have adversely affected the ability of the Company's lessees to make rent
and other payments and the Company's ability to re-lease aircraft on a timely
basis and at rates similar to those previously obtained in the market and have
also reduced the value that the Company's aircraft would realise on sale. These
events have had a significant adverse effect on the Company's revenue and on the
Company's ability to make payments on the Notes on a timely basis and in full.
Current projections indicate that there will not be sufficient funds to pay any
further step up interest on any of the Notes, pay any further interest on or
repay any principal of the Class E Notes, pay any further interest on or repay
any further principal of the Class D Notes, repay any further principal of the
Class C Notes, or to repay the principal of the Class B Notes in full.
In our opinion the financial statements referred to above present fairly in all
material respects, the consolidated financial position of the Group as of 30
June 2003 and 2002, and the results of their consolidated operations and
cashflows for each of the years in the three year period ended 30 June 2003, in
conformity with generally accepted accounting principles in the United States of
America.
KPMG
Chartered Accountants
Dublin
December 23, 2003
1
F-1
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended Year ended
30 June 30 June 30 June
2001 2002 2003
Note US$'000 US$'000 US$'000
---- ---------- ---------- ----------
REVENUES
Aircraft leasing 2,6 37,948 32,605 19,758
Interest income 1,782 781 728
- --------------- ---------- ---------- ----------
39,730 33,386 20,486
---------- ---------- ----------
EXPENSES
General and administrative expenses 3,018 3,565 5,867
Interest expense 7 27,862 19,110 18,631
Amortisation of refinancing costs 13 1,176 - -
Depreciation 1 17,588 16,360 11,999
Impairment in aircraft values 1 30,259 20,321 14,378
Loss on sale of aircraft - - 1,152
Provision for maintenance charges 4 10,108 4,569 (1,684)
Bad debt expense 2,374 77 803
Interest on lessee deposits 381 149 -
- --------------------------- ---------- ---------- ----------
Total expenses 92,766 64,151 51,146
---------- ---------- ----------
NET LOSS BEFORE INCOME TAXES (53,036) (30,765) (30,660)
Income taxes 9 (20) (24) (225)
---------- ---------- ----------
NET LOSS (53,056) (30,789) (30,885)
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
F-2
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
CONSOLIDATED BALANCE SHEETS
30 June 30 June
2002 2003
Note US$'000 US$'000
----- ---------- ----------
ASSETS
Cash and cash equivalents 6,274 3,806
Restricted cash 23,907 22,691
Trade receivables 8 1,487 2,471
Aircraft - core portfolio 1 189,693 163,316
Aircraft - available for sale 1 33,626 -
---------- ----------
TOTAL ASSETS 254,987 192,284
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Interest payable 7 36,853 49,295
Prepaid and deferred lease revenue 924 208
Accrued expenses and other liabilities 9,709 4,043
Income taxes payable 23 247
Long-term debt 3 319,283 282,183
Maintenance reserves 4 19,023 17,797
Security deposits 5 2,458 2,682
---------- ----------
TOTAL LIABILITIES 388,273 356,455
Share capital, 15,000 shares authorised at $1
par value, 10 shares issued and outstanding
- -
Retained deficit (133,286) (164,171)
---------- ----------
Shareholders' deficit (133,286) (164,171)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT 254,987 192,284
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
Signed on behalf of the Board:
Director
December 23, 2003
3
F-3
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
Note Year ended Year ended Year ended
30 June 30 June 30 June
2001 2002 2003
Note US$'000 US$'000 US$'000
---- ----------- ---------- ----------
NET LOSS FOR THE YEAR (53,056) (30,789) (30,885)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 1 17,588 16,360 11,999
Amortisation 13 1,176 - -
Impairment in aircraft values 1 30,259 20,321 14,378
Loss on sale of aircraft - - 1,152
Changes in:
Accounts receivable 8 2,195 (492) (984)
Interest payable 7 8,010 6,779 12,442
Accrued expenses, other liabilities and
income taxes payable 5,074 4,391 (5,442)
Prepaid and deferred lease revenue (120) 184 (716)
Maintenance 4 9,489 (283) (1,226)
Security deposits 5 (1,385) (332) 224
----------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES
19,230 16,139 942
----------- ---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES
Proceeds from sale of aircraft - - 32,474
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment on long term debt 3 (17,641) (16,207) (37,100)
Dividends relating to a prior year (2) - -
----------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES
(17,643) (16,207) (37,100)
----------- ---------- ----------
NET (DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS 1,587 (68) (3,684)
CASH AND CASH EQUIVALENTS AT START OF YEAR
28,662 30,249 30,181
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR
30,249 30,181 26,497
=========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
F-4
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
Share Retained Shareholders'
Shares Shares Capital Earnings Equity
Authorised Issued US$'000 US$'000 US$'000
----------- ------- -------- --------- ------------
Balance 30 June 2000 15,000 10 - (49,441) (49,441)
Net loss - - - (53,056) (53,056)
----------- ------- -------- --------- ------------
Balance 30 June 2001 15,000 10 - (102,497) (102,497)
Net loss - - - (30,789) (30,789)
----------- ------- -------- --------- ------------
Balance 30 June 2002 15,000 10 - (133,286) (133,286)
Net loss - - - (30,885) (30,885)
----------- ------- -------- --------- ------------
Balance 30 June 2003 15,000 10 - (164,171) (164,171)
=========== ======= ======== ========= ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
F-5
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
ORGANISATION OF GROUP
Background
Aircraft Lease Portfolio Securitisation 92-1 Limited (the "Company") was
incorporated in Jersey, Channel Islands as a private company on May 13, 1992 and
was re-registered as a public company on June 15, 1992. The Company has three
wholly owned subsidiaries, Carotene Limited, a company incorporated in the
Republic of Ireland, ALPS 92-1 UK Limited, a company incorporated under the laws
of England and Wales and ALPS 92-1 France SARL, a company incorporated in France
on December 15, 2003 (together the "Subsidiaries" and, together with the
Company, the "Group").
The Company was formed for the purpose of acquiring a portfolio of 14 commercial
jet aircraft all of which were subject to operating leases. The Company agreed
to purchase such aircraft from debis AirFinance (formerly known as AerFi Group
plc and, prior to that, GPA Group plc) and received delivery and legal title
from GPA Group plc of the aircraft over the four month period from June 23, 1992
to October 30, 1992. One aircraft was sold on March 15, 1996, reducing the fleet
size to 13. An additional aircraft (the "WFC Aircraft") was purchased on
November 27, 1996 from Whirlpool Financial Corporation ("WFC") and on July 24,
1997 one aircraft was sold to WFC and the fleet of aircraft was reduced from 14
to 13. Two aircraft were sold in the year ended June 30, 2000 reducing the fleet
size to 11. In the year ended June 30, 2003 two aircraft were sold on October 1,
2002 and December 20, 2002, respectively, reducing the fleet size to 9.
In June 1996 the Company elected to refinance the debt raised to finance the
initial aircraft acquisition in 1992 (the "Prior Debt") through the issuance of
notes (the "Notes") rather than remarketing and selling all 13 aircraft during
the one-year period prior to the originally scheduled maturity of the Prior Debt
in June 1997. The decision to refinance the Prior Debt was primarily due to
uncertainty as to the ability of the Company to make payment in full on the Old
Class B Notes and Old Class M Notes under the then current schedule for sale of
the aircraft. In connection with the refinancing of the Prior Debt, the Old
Class A Notes and the Old Class M Notes were redeemed and the Old Class B Notes
were exchanged for the Class E Notes which are held by WFC. The Company believed
that the revised schedule for sale of the Company's then current aircraft
portfolio would allow it to realise better returns on such aircraft, because the
Company expected at that time to sell such aircraft over a period of five to
seven years from June 1996 (compared to fifteen months under the terms of the
Prior Debt).
The Class A, Class B, Class C and Class D Notes were issued on June 27, 1996
with an aggregate face amount of approximately US$394 million. The proceeds
together with cash balances previously held in reserve accounts were utilized to
repay the outstanding interest on the Prior Debt, the US$367 million of
outstanding principal on the Prior Debt, the refinancing expenses of US$13
million, the premium paid to the holders of certain of the Prior Debt of US$4
million and to create an aircraft purchase reserve account for the purchase of
the WFC Aircraft. In addition the super mezzanine loan of US$78 million was
repaid by the Company in connection with such refinancing.
Upon receipt of the proceeds of the Notes, the mortgages over the aircraft and
the security in respect of the leases and certain other property in favour of
the previous security trustee were released and transferred to the new security
trustee, Bankers Trustee Company Limited (now renamed Deutsche Trustee Company
Limited) (the "Security Trustee"), for the benefit of the holders of the Notes.
The Company is obligated to pay interest on the Notes and a portion of the
principal of the Class A Notes from the cash flows generated by the Group's
leasing operations. Proceeds from the sale of aircraft are required to be used
to pay principal of the Notes in the priority set forth in the deed of charge
entered into by the Company on June 27, 1996 (the "Deed of Charge").
6
F-6
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
STATEMENT OF ACCOUNTING POLICIES
Basis of preparation
The accounting policies followed in the preparation of the accompanying
consolidated financial statements conform with generally accepted accounting
principles in the United States.
The consolidated financial statements are prepared on the going concern basis
and under the historic cost convention and are stated in US dollars, which is
the principal operating currency of the Group and of the aviation industry.
Although the Group balance sheet shows that there are liabilities considerably
in excess of assets, the terms of the Notes are such that, prior to the final
maturity of the Notes, the Noteholders are only entitled to receive interest and
principal repayments to the extent that cash is available. Therefore the
Directors believe that the Group is a going concern.
Basis of consolidation
The consolidated financial statements include the results of the Subsidiaries.
All intercompany profits, transactions and account balances have been eliminated
in the consolidated financial statements.
Revenue recognition
The Group enters into operating leases with aircraft operators. Rental income
from operating leases is recorded on a straight line basis over the lease terms.
Lease rentals received in accordance with individual lease agreements are a
mixture of payments in advance and in arrears. Some lease rentals are based on
"power by the hour" fixed hourly rates and others on fixed monthly rates.
Revenue from leases with escalating or scheduled rental increases ("stepped
rentals") is recognised on a straight line basis over the lives of those leases.
Maintenance reserves
In most lease contracts the lessee has the obligation for maintenance costs on
airframes and engines, and in many lease contracts the lessee makes a full or
partial prepayment, calculated at an hourly rate, into a fund held by the Group,
from which maintenance expenditures for major checks are disbursed. The balance
of these funds is included in the provision for maintenance except where the
Directors estimate that a surplus exists, in which case any surplus, to the
extent retainable by the Group, is taken to income as a reduction of expenses.
In addition, the Group may incur maintenance costs on the re-leasing of the
aircraft due to the requirement to restore the aircraft to an acceptable
maintenance condition prior to leasing. In some lease contracts, the Group is
required to make a contribution to the fund if the maintenance expenditure
exceeds the amount in the fund.
Taxation
The Company has been granted exempt company status by the Jersey taxation
authorities. It pays an exempt company fee of (pound)600 per annum. Taxation is
provided on the profits of the Subsidiaries at the current rates.
Aircraft
Aircraft have been divided into two classes: (i) Aircraft held for use and (ii)
Aircraft held for sale at the balance sheet date.
(i) Aircraft held for use
Aircraft held for use are stated at cost less accumulated depreciation less
impairment charges. Cost comprises the net purchase price of the aircraft
acquired by the Company. The aircraft are depreciated on a straight line basis
so as to write off the cost of the assets to a residual value of 10% over a
period of 25 years from the date of manufacture. The estimates of useful lives,
depreciation rates and residual values are reviewed periodically by the
Directors of the Company.
The Directors have applied Statement of Financial Accounting Standards ("SFAS")
144, Accounting for the Impairment or Disposal of Long-Lived Assets, as at June
30, 2003. Under the terms of this accounting standard, the Directors of the
Company review the carrying value of the aircraft against the sum of the
estimated undiscounted future net cashflows including the estimated eventual
sales values of the aircraft. This review has determined that shortfalls exist
for each of the aircraft, all of which are classified as held for use, where
their carrying value was greater than the sum of these undiscounted cashflows.
The application of SFAS 144 has resulted in an impairment charge for these
aircraft equal to the difference between their carrying value and fair value. In
determining fair value, the Directors use external valuations. For the purposes
of measuring impairment losses for long-lived assets, fair value is the average
of the "Appraised Current Market Values", as calculated by three independent
professional aircraft appraisers (the "Appraisers").
7
F-7
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
STATEMENT OF ACCOUNTING POLICIES
Aircraft (continued)
(ii) Aircraft held for sale
Aircraft held for sale are defined as those where there were active discussions
being held at the balance sheet date with specific identified buyers. In respect
of these aircraft held for sale, the asset is separately identified and included
as part of the portfolio at the lower of the carrying amount and its estimated
net realizable value less costs to sell. Depreciation is discontinued and gains
or losses arising on the revaluation of such assets are taken to the provision
for impairment. At June 30, 2003 no aircraft were held for sale.
Cash and cash equivalents
Cash and cash equivalents include demand deposits with banks and all highly
liquid investments with an original maturity of 3 months or less.
Restricted cash
Except as noted below, the Company's collection account is required to be
maintained at a balance equal to US$22,691,000 (the "Liquidity Reserve Amount").
In March 2003, the level of the Liquidity Reserve Amount was reduced from
$23,907,000 with the approval of the rating agencies which rate the Notes. Part
of the Liquidity Reserve Amount consists of maintenance reserves and security
deposits received in cash from certain lessees under the terms of their leases.
The Liquidity Reserve Amount may be used to pay for maintenance performed on
aircraft, certain contingencies in respect of the aircraft, repayment of cash
security deposits and, subject to Board approval, other Group expenses and
liabilities, including, among other things, interest due on the Class A Notes,
Class B Notes and Class C Notes and costs incurred in removing any lien imposed
by Eurocontrol, in performing airworthiness directives on the aircraft or in
re-possessing or re-leasing any aircraft, to the extent that available
collections are not sufficient therefor, in accordance with the priority of
payments set out in the Deed of Charge.
The Company must augment the Liquidity Reserve Amount on a monthly basis out of
available collections to the extent it is used to pay such interest, costs,
expenses or liabilities. In accordance with the Deed of Charge the Company may
in certain circumstances reduce the Liquidity Reserve Amount. The balance of
funds in the collection account may fall below the Liquidity Reserve Amount at
any time and the Company may continue to make payments required on the Class A
Notes, Class B Notes, Class C Notes and Class D Notes provided that the balance
of funds in the collection account does not fall below the "Maintenance Reserve
Amount" (currently US$10 million).
Political risk insurance
The Group paid political risk insurance premiums in respect of certain aircraft
to its insurers in the fiscal year ended June 30, 2001. These were recoverable
under most leases from the lessee and are included in amounts billed to aircraft
operations. The Group recognised the insurance premiums paid as an expense and
accounted for the amount recovered from lessees on an accruals basis. No
political risk insurance premiums were paid by the Group in the fiscal years
ended June 30, 2002 and June 30, 2003.
Foreign currency
Transactions in foreign currencies are translated into US dollars at the
exchange rate prevailing as of the date of the transaction. Assets and
liabilities denominated in foreign currencies are translated into US dollars at
the rate of exchange prevailing at the year end. Any gain or loss arising from a
change in exchange rates subsequent to the date of the transaction is included
in the Statement of Operations. The Group's foreign exchange transactions are
not significant, as all revenues and most costs are denominated in US dollars.
Use of estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the amounts of reported assets and liabilities as of the date of the
financial statements. The same is true of revenues and expenses reported for the
year. Actual results could differ from those estimates.
The determination of the maintenance provision is based on an analysis of the
lease portfolio and reflects an amount which, in the Directors' judgement, is
adequate to provide for all potential costs at the balance sheet date.
Bad debt provision
The Directors review all outstanding debtors and full provisions are made for
those amounts believed to be unrecoverable.
8
F-8
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
STATEMENT OF ACCOUNTING POLICIES
Recently Issued Accounting Standards
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
148 "Accounting for stock based compensation - transition and disclosure, an
amendment to SFAS 123". This statement amends SFAS 123 `Accounting for stock -
based compensation', to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal
years ending after December 15, 2002. The Company has no employee stock
compensation plans and does not issue equity instruments in exchange for goods
and services. Accordingly the application of SFAS 148 does not have any effect
on the Company's financial statements.
In November 2002, the FASB issued Interpretation no. 45 "Guarantor's accounting
and disclosure requirements for guarantees, including indirect guarantees of
indebtedness to others" ("FIN 45") and interpretation of SFAS 5, 57 and 107 and
a rescission of SFAS 34. This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognise, at inception of a guarantee, a liability for
the fair value of the obligation under the guarantee. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 31, 2002. The Company has adopted the disclosure
requirements and will apply the recognition and measurement provisions for all
guarantees entered into or modified after December 31, 2002. In the period from
January 1, 2003 to date the Company has not entered into any guarantees.
On April 30, 2003 the FASB issued SFAS 149, "Amendment of SFAS 133 on Derivative
Instruments and Hedging Activities", to address (1) decisions reached by the
Derivatives Implementation Group, (2) developments in other FASB projects that
address financial instruments, and (3) implementation issues related to the
definition of a derivative. SFAS 149 has multiple effective date provisions
depending on the nature of the amendments to SFAS 133. The Company does not
utilise derivative instruments nor does it engage in hedging activities.
Accordingly, the application of SFAS 149 is not expected to have any effect on
future financial statements.
On May 15, 2003 the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS 150
establishes standards for how an insurer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for all financial instruments entered into or modified after
May 31, 2003. For unmodified financial instruments existing at May 31, 2003,
SFAS 150 is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
non-public entities. As the Company does not currently have any equity
instruments outstanding, the new standard is not expected to have any effect on
future financial statements.
9
F-9
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. AIRCRAFT
30 June 30 June
2002 2003
US$'000 US$'000
--------- --------
COST LESS IMPAIRMENT
Beginning of year 378,524 304,406
Impairment write-down (20,321) (14,378)
Reclassification to aircraft available for (53,797) -
sale
-------- --------
End of year 304,406 290,028
-------- --------
ACCUMULATED DEPRECIATION
Beginning of year 118,524 114,713
Depreciation expense 16,360 11,999
Reclassification to aircraft available for sale (20,171) -
-------- --------
End of year 114,713 126,712
-------- --------
Net carrying value - core portfolio 189,693 163,316
Net carrying value - available for sale 33,626 -
-------- --------
223,319 163,316
======== =========
Average Appraised Base Value at the end of
year (unaudited) 279,500 205,820
======== =========
Number of aircraft at the end of the year 11 9
======== =========
The "Appraised Base Value" represents the Appraisers' opinion of the
underlying economic value of an aircraft assuming an arm's-length, cash
transaction between willing and knowledgeable parties, with a reasonable
period of time available for marketing, assuming, among other things,
sales of the aircraft in an open, unrestricted stable market environment
with a reasonable balance of supply and demand, and assuming the
maintenance status of each aircraft with regard to such things as
airframe, engines and landing gear to be at its half-life condition (i.e.
its condition at midpoint between service intervals), adjusted to account
for certain aspects of the actual maintenance status of each aircraft, as
provided to the Appraisers.
As discussed in the Statement of Accounting Policies, the Directors
undertake a review to determine whether an impairment charge is required
in respect of both aircraft held for use and any aircraft held for sale.
The Directors have determined that the carrying value for each of the
Company's aircraft, all of which are classified as held for use, is
greater than the estimated undiscounted future cashflows in respect of
such aircraft and have recorded an impairment charge for these aircraft
equal to the difference between their carrying value and fair value.
In applying SFAS 144 the Directors have used average Appraised Current
Market Value, which was in aggregate US$163,316,667 as at June 30, 2003
for the nine aircraft, and represents the Appraisers' opinion of the most
likely trading price that may be generated for an aircraft under current
market conditions. The Appraisers assume that the aircraft are valued for
their highest, best use, that the parties to the hypothetical sale are
willing, able, prudent and knowledgeable, and under no unusual pressure
for a prompt sale, and that the transaction would be negotiated in an
open and unrestricted market on an arm's length basis.
10
F-10
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. AIRCRAFT (CONTINUED)
Appraised Current Market Values have been estimated by the Appraisers
based on value curves from the last downturn in the aircraft market. An
appraisal is an estimate of value and should not be relied upon as a
measure of current sales value; the proceeds realized upon a sale of an
aircraft may be less than the Appraised Current Market Value,
particularly in current market conditions as discussed in note 3. In the
current environment, there is a lack of hard data available on which to
base aircraft valuations and therefore the appraisal process is more
difficult.
The Directors believe that as a result of the factors discussed above and
in note 3 the sales value of the aircraft in the current market may be
less than the average Appraised Current Market Value and the carrying
value as at June 30, 2003. Also, if it were necessary to dispose of an
aircraft quickly, the proceeds from the sale of such aircraft would
probably be even less than the value in the current market. In that
event, further write-downs would most likely be required.
The application of the accounting policies in the fiscal year ended June
30, 2003 has led to an impairment charge of US$14.378 million. Previous
charges were made at June 30, 2002 and June 30, 2001 for US$20.321
million and US$30.259 million, respectively. At June 30, 2002 the
impairment charge carried forward represents write-downs to average
Appraised Current Market Values at June 30, 2002 and 2001.
The decline in the fair value of the aircraft is due primarily to the
ageing of the aircraft and those market conditions (described in note 3)
which have had a negative effect on aircraft values. These conditions
have also resulted in a reduction in lease rates.
The Deed of Charge sets out the following "Trust Note Sales Goals" which
require the Company to approve sales of aircraft on an ongoing basis:
Aircraft to be Sold (measured by Date by which Sales Goals are
Initial Appraised Value as of June 3, to be Satisfied
1996)
US$65,000,000 June 27, 2001
US$130,000,000 June 27, 2002
US$200,000,000 June 27, 2003
US$454,950,000 June 27, 2004
The Company was in compliance with and had exceeded the Trust Note Sales
Goals as of June 27, 2001 and was required to sell a further US$54.33
million (as measured by Initial Appraised Value) worth of aircraft to be
in compliance with the Trust Note Sales Goals as of June 27, 2002.
In order to meet the Trust Note Sales Goals, following an extensive
marketing effort by Babcock & Brown, the Group's aircraft servicer (the
"Servicer"), the Company entered into non-binding agreements to sell a
B737-300 aircraft (MSN 24914 on lease to Malev) and an A320-200 aircraft
(MSN 283 on lease to Air Canada) to two separate purchasers by June 27,
2002. These aircraft were therefore classified as held for sale as at
June 30, 2002.
The sale of MSN 24914 was completed on October 1, 2002. Despite extensive
efforts to complete the sale of MSN 283, the Company was informed by the
prospective purchaser on November 5, 2002 that it had decided not to
proceed with the transaction for reasons outside the Company's control.
MSN 283 was subsequently sold to a different purchaser on December 20,
2002. As a result, the Company was not in compliance with the Trust Note
Sales Goals from November 5, 2002 to December 20, 2002.
11
F-11
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. AIRCRAFT (CONTINUED)
In the period from June 1996 to date, the Company has sold five aircraft
totalling US$133.19 million (measured by Initial Appraised Value). The
Company needed to sell an additional US$66.81 million (measured by
Initial Appraised Value) worth of aircraft to comply with the June 2003
Trust Note Sales Goal and would need to sell all the aircraft to comply
with the June 2004 Trust Notes Sales Goal. At the direction of the
Company, the Servicer has been marketing each of the aircraft for sale in
order to meet the ongoing Trust Note Sales Goals. However, the current
market for sale of used aircraft is extremely poor and it is not clear if
and when the market will approve.
In the fiscal year ended June 30, 2003 the marketing efforts of the
Servicer resulted in two offers to purchase the B757-200 aircraft with
MSN 25054, but both offers were at prices significantly below the Class C
Note Target Price (as defined in the Deed of Charge). After careful
consideration of these offers, the Company's obligations under the Deed
of Charge (notably, the Business Objectives (as defined below) contained
therein) and the current and possible future market conditions for
aircraft sales and leasing, the Company concluded that it would not be
consistent with the terms of the Deed of Charge for the Company to accept
either such offer.
The Company did not comply with the Trust Note Sales Goal for June 27,
2003 as it was unable, given the current aircraft industry market
conditions, to sell sufficient aircraft at the sales prices required by
the Company's current business objectives (the "Business Objectives") set
out in the Deed of Charge. Given the continuing depressed market for
aircraft sales and the requirement to achieve sales prices consistent
with the Company's current Business Objectives, the Company believes it
will not be able to comply with the Trust Note Sales Goal for June 27,
2004.
Failure to comply with the Trust Note Sales Goals may, under certain
circumstances, constitute an event of default under the Deed of Charge if
such failure continues for 30 days or more after written notice thereof
has been given to the Company or the Security Trustee by holders of at
least 25% of the aggregate outstanding principal balance of the Notes of
any class which has been materially adversely affected by such failure.
The Deed of Charge further provides that if an event of default were to
occur and be continuing, an enforcement notice may only be served by 66
2/3% or more of the aggregate outstanding principal balance of the
directing class of the Noteholders, which will be Class A so long as any
Class A Notes are outstanding. The Deed of Charge further provides that
the failure to comply with the Trust Note Sales Goals gives the
Noteholders the right to replace the Servicer at the direction of
Noteholders representing at least 75% of the aggregate outstanding
principal balance of the Class A, Class B, Class C and Class D Notes. The
Deed of Charge also provides that, subject to the pre-exemption rights of
the Class D and Class E Noteholders, to the extent the Trust Note Sales
Goals are not complied with prior to December 27, 2004, the Company is
required to accept any Sale Offer (as defined in the Deed of Charge) for
the sale of an aircraft if the proposed sale price is at least equal to
the Class C Note Target Price. During the time that the Company has not
been in compliance with the Trust Notes Sales Goals, the Company has been
unable, with the exception of the sale of the A320-200 aircraft in
December 2002, to sell aircraft at prices at or above the Class C Note
Target Price. However, to the extent the Company has not complied with
the Trust Note Sales Goals, on or after December 27, 2004, the Company
will be required, subject to the pre-exemption rights of the Class D and
Class E Noteholders, to accept any Sale Offer for the sale of an aircraft
if the proposed sale price is at least equal to the Class A Note Target
Price (as defined in the Deed of Charge).
The market conditions described in note 3 have had a significant adverse
effect on aircraft values in general and therefore have negatively
impacted the price of the aircraft sold during the year, and are also
expected to impact on future sales prices.
12
F-12
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. OPERATING LEASES
As at June 30, 2003 all of the aircraft were leased on operating leases
to eight lessees. As set out in the table below, the aircraft leased to
Asiana was redelivered on December 13, 2003 and on December 18, 2003 the
aircraft was re-leased to Batavia, an Indonesian lessee.
The following table shows the scheduled terminations by aircraft type and
lessee for the leases relating to the aircraft as of June 30, 2003:
Manufacturer's Month and year of % of Revenue Year
Aircraft type Serial number Lessee expiration ended 30 June 2003
------------- -------------- ------------------- ----------------- -------------------
B737-400 23869 Asiana December 2003(1) 15.75%
B737-400 23870 Travel Servis October 2005(2) 13.30%
B737-400 24519 Skynet March 2005 4.23%
B737-500 24898 China Southern March 2004 (3) 12.63%
B757-200 25054 First Choice Airways April 2005 (4) 2.71%
B767-300ER 24952 Air Canada March 2004 (5) 20.23%
B767-300ER 25000 Air Canada May 2007 9.20%
MD83 49785 Meridiana March 2004 (6) 5.90%
MD83 49786 Allegiant Air October 2003 (7) 3.53%
(1) The Asiana lease terminated on December 18, 2003. Batavia has signed a
lease agreement dated December 13, 2003 for this aircraft for a lease term
beginning December 18, 2003 and ending on March 31, 2007.
(2) Travel Servis signed a lease amendment and extension agreement dated
December 16, 2003 to extend this lease until March 31, 2007.
(3) China Southern signed a lease amendment and extension in agreement dated
December 17, 2003 to extend this lease for twenty four months until March
31, 2006.
(4) Formerly known as Air 2000.
(5) A memorandum of understanding dated October 10, 2003 executed by Air Canada
extends this lease for thirty six months until March 31, 2007.
(6) Meridiana signed a lease amendment and extension agreement dated October 5,
2003 to extend this lease until March 31, 2006.
(7) Allegiant Air signed a lease amendment and extension agreement dated
October 9, 2003 to extend this lease until the next C check for this
aircraft (estimated to occur in March 2005) with an option to extend until
the following C check (estimated to occur in June 2006).
The following is a schedule of future minimum lease rentals receivable under
operating leases as of December 23, 2003. A number of leases operate on a "power
by the hour" basis and, as such, future rentals are dependent upon lessee usage.
Some of these "power by the hour" leases have no minimum rentals and are
therefore not included in the schedule.
Year ending 30 June US$'000
------------------- --------
2004 10,585
2005 7,882
2006 5,054
2007 2,673
2008 -
--------
26,194
========
The above minimum lease rentals would be reduced to the extent that any of the
aircraft are sold while on lease. The leases have charges attached to them such
that they represent security for the Notes issued by the Company, as described
in note 3 below.
13
F-13
3. LONG TERM DEBT
The Notes are secured by a first priority security interest over the
Company's assets, which consist of the aircraft, the leases and amounts
on deposit in certain accounts.
Outstanding Outstanding
principal principal
balance as at balance as at
Notes Expected final Interest rate Step up interest June 2002 30 June 2003
Notes Payment date* (per annum)** rate (per annum) US$'000 US$'000
------- -------------- ------------- -------------- ------------- --------------
Class A 15 May 2002 LIBOR+0.37% 0.5% 113,505 85,618
Class B 15 July 2002 LIBOR+0.95% 0.5% 47,254 40,064
Class C 15 July 2002 LIBOR+1.35% 0.5% 41,583 39,560
Class D 15 July 2002 12.75% 1.0% 34,023 34,023
Class E N/A 10.00% N/A 82,918 82,918
319,283 282,183
* as determined at date of issue based on certain assumptions made
at the time of issue.
** payable monthly in arrears.
The Company is obligated to pay interest on the Notes and a portion of
the principal of the Class A Notes from the revenue generated by the
Company's leasing operations. Proceeds from the sale of aircraft are
required to be used to pay principal of the Notes in the priority set
forth in the Deed of Charge.
At various times during fiscal year 2003, certain target principal
payments scheduled to be paid to holders of the Class A, Class B, Class C
and Class D Notes, certain interest payments due to holders of the Class
A, Class B, Class C and Class D Notes and all interest payments scheduled
to be paid to holders of the Class E Note were in arrears. As at June 30,
2003, these arrears consisted of US$2.042 million of Class A Note Target
Principal, US$4.304 million of Class C Note Target Principal, US$5.177
million of Class D Note Target Principal, US$0.565 million of Class A
Note step up interest, US$0.220 million of Class B Note step up interest,
US$0.207 million of Class C Note step up interest, US$2.805 million of
Class D Note regular interest, US$0.326 million of Class D Note step up
interest, US$0.504 million of Class D Note default interest and US$45.105
million of Class E Note interest. The failure to pay all of the regular
interest (excluding default and step up interest) owing to the holders of
the Class D Notes at certain times during the fiscal year ended June 30,
2003 was an event of default under the Deed of Charge.
The Deed of Charge provides that, so long as the Class A Notes, Class B
Notes or Class C Notes are outstanding, the only remedy available to
holders of the Class D Notes for an event of default caused by failure to
pay regular Class D Note interest is that default interest of 1% of such
unpaid interest shall accrue and be owed to holders of the Class D Notes
in accordance with the priority of payments set forth in the Deed of
Charge.
The Company did not have sufficient funds to repay the Class A Notes on
their expected final payment date of May 15, 2002 and did not have
sufficient funds to repay the Class B, Class C or Class D Notes on their
expected final payment date of July 15, 2002. Failure to repay in full
the principal of those Notes by such dates is not an event of default,
however the Deed of Charge requires that, to the extent the Company does
not repay in full the principal of those Notes by such dates, the Company
pay these Noteholders additional step-up interest as per the rates stated
in the above table for each month until the earlier of the date such
Notes are repaid in full and their final maturity date of June 15, 2006.
These additional interest costs will be paid only to the extent that
there are available collections in accordance with the priority of
payments set out in the Deed of Charge. The Company paid some step-up
interest in fiscal year 2002, but its current projections indicate that
it will not have sufficient funds to pay any further step-up interest
during fiscal year 2004 or beyond. The Company's current projections also
indicate that it will not have sufficient funds to pay any further Class
D Note interest.
14
F-14
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. LONG TERM DEBT (CONTINUED)
Global economic conditions, as exacerbated by the September 11, 2001
terrorist attacks on the United States as well as the military action of
the U.S. and its allies in Afghanistan, the terrorist attacks in Bali and
Saudi Arabia, the war in Iraq and the outbreak of the Severe Acute
Respiratory Syndrome (SARS) virus, have each had a significant adverse
effect on the airline industry in general and on the Group. Although the
World Health Organisation recently removed the last remaining negative
travel recommendations related to SARS, some scientists have suggested
the possibility that new cases of SARS may emerge during the coming
winter season.
Each of these events highlighted the deteriorating business fundamentals
in the industry that have been further weakened by passengers' fears and
economic recession. The impact of these events has been seen in most
airlines cutting their flight schedules with many taking the opportunity
to retire aircraft from service. Some carriers have filed for bankruptcy
(including Air Canada, one of the Company's largest lessees as measured
by annual lease revenue) or consolidated, while others, including many of
the Company's lessees, have suffered large losses or face severe
financial difficulties.
There has been a significant increase of aircraft on the market available
for sale or lease (especially older technology and less fuel-efficient
aircraft or models no longer in production), increasing pressure on the
rentals and sales prices offered. As a result of the loss of investor
appetite and the difficulty in obtaining financing for the purchase of
aircraft, there are few buyers of aircraft on operating lease and the
resulting illiquidity in the market has caused sale prices of aircraft to
further decline. There have been few aircraft sale transactions of which
the Company is aware in the last twelve months. The sales prices the
Company received for the two aircraft sold in the fiscal year ended June
30, 2003, in an attempt to comply with the Trust Note Sales Goals,
reflected the industry wide decline in sales prices for older aircraft.
Lease rates have also been suffering from the increase in availability of
aircraft and the reduction in aircraft values. As a result, the Company
has experienced a significant decline in lease rates upon re-leasing or
extensions of leases, requests from certain lessees to restructure their
leases and an increasing number of "power-by-the-hour" leases in which
lease rates are based on the number of hours the lessee uses the
aircraft. The Company's lessees and future potential lessees also have
had, during this time of oversupply of and reduced demand for aircraft,
and continue to have greater bargaining power with regard to having the
Company, as lessor, agree to contribute towards certain maintenance,
overhaul and airworthiness directive expenses which in earlier years had
typically been fully covered by lessees.
These factors have negatively impacted projected rental amounts and sale
proceeds through to the final maturity date of the Notes (June 15, 2006)
and consequently have had a significant adverse effect on the Company's
ability to make payments on the Notes on a timely basis and in full.
Current projections indicate that there will not be sufficient funds to
pay any further interest on or repay the principal of the Class E Notes,
pay any further interest on or repay any further principal of the Class D
Notes, repay any further principal of the Class C Notes, repay the
principal of the Class B Notes in full or pay any further step-up
interest on the Class A, B, C or D Notes.
Upon the final maturity date of the Notes (June 15, 2006) the cash
available will be applied to pay principal and interest on the Notes in
the following order:
1. Classes A, B, and C regular interest
2. Class A principal
3. Class B principal
4. Class C principal
5. Class D regular interest
6. Class D principal
7. Classes A, B, C and D step-up interest and default interest
8. Class E interest
9. Class E principal
15
F-15
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. LONG TERM DEBT (CONTINUED)
The Class E Notes will not, except in certain circumstances, receive any
principal payments until the outstanding principal amount of each of the
Class A Notes, Class B Notes, Class C Notes and the Class D Notes is
reduced to zero and all interest due on these Notes is paid in full.
The failure of the Company to pay principal on the Notes on any day prior
to their final maturity date due to insufficient cash collections will
not constitute an event of default under the Deed of Charge. The limited
recourse nature of the Notes means that no payments will be payable in
excess of the available collections.
4. MAINTENANCE RESERVES
30 June 30 June 30 June
2001 2002 2003
US$'000 US$'000 US$'000
-------- -------- --------
Opening balance 9,817 19,306 19,023
Received during year 5,850 6,574 2,774
Claims by lessees (6,469) (11,426) (2,316)
Provision for maintenance in year 10,108 4,569 (1,684)
-------- -------- --------
Closing balance 19,306 19,023 17,797
-------- -------- --------
Due within one year 2,380 5,388 5,622
Due after one year 16,926 13,635 12,175
-------- -------- --------
19,306 19,023 17,797
======== ======== ========
As at June 30, 2003 all of the lessees are responsible under the terms of
their leases to maintain the aircraft and six of the lessees provide
security for such obligations through regular contributions to
maintenance reserves held by the Group. In addition, the Group may incur
maintenance costs on the re-leasing of the aircraft due to the
requirement to restore the aircraft to an acceptable maintenance
condition prior to leasing. In addition, in some lease contracts, the
Group is required to make a contribution where the maintenance
expenditure exceeds the amount in the fund.
Inherent uncertainties make it difficult to determine whether the future
obligations of the Group to meet future maintenance payments can be met
out of the proceeds of future maintenance receipts.
Whilst any surplus in maintenance funds at the termination of a lease
previously generally accrued to the Group, due to current economic
factors in the airline industry, lessees have been exerting pressure on
lessors to transfer any excess maintenance funds upon the re-leasing of
an aircraft. In order to re-lease aircraft, the Group is granting
maintenance credits as part of the terms of the new leases and expects to
continue to grant such credits on new leases. Lessor contributions to
maintenance costs resulted in a provision of US$1,684,000 being released
in the year ended June 30, 2003 (2002 - a charge of US$4,569,000).
5. SECURITY DEPOSITS
Security deposits of US$2,682,000 at June 30, 2003 and of US$2,458,000 at
June 30, 2002 are held as security for obligations in accordance with the
terms of certain leases. The deposits are held as cash and are included
within the restricted cash balance.
16
F-16
6. REVENUES AND CONCENTRATION OF CREDIT RISK
i) Distribution of leasing revenues by geographic area
For the year For the year For the year
ended ended ended
30 June 30 June 30 June
2001 2002 2003
US$'000 US$'000 US$'000
------------ ------------ -------------
Europe 20,305 15,198 6,973
Americas 11,140 10,022 6,341
Asia/Pacific 6,503 7,385 6,444
------------ ------------ -------------
37,948 32,605 19,758
============ ============ =============
ii) Concentration of credit risk
Credit risk with respect to trade accounts receivable is generally
diversified due to the Group's fleet of aircraft being comprised of nine
aircraft, all of which were on lease to eight lessees in eight countries
as at June 30, 2003.
The Group manages its exposure to leases with lessees based in particular
countries through obtaining security in the form of deposits, letters of
credit and guarantees.
The Group continually evaluates the financial position of lessees and,
based on this evaluation, the amounts outstanding and the available
security, makes an appropriate provision for doubtful debts.
Four lessees accounted for 29.43%, 15.75%, 13.30% and 12.63% respectively
of the Group's aggregate lease revenues for the year ended June 30, 2003.
No other lessee accounted for more than 10% of the Group's aggregate
lease revenues for such period.
7. INTEREST EXPENSE
Statement of Operations
-----------------------------------------------
For the year For the year For the year
ended ended ended
30 June 2001 30 June 2002 30 June 2003
----------- ------------ -------------
Accrual 30 Accrual 30
June 2002 Paid June 2003
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
----------- --------- ---------- ---------- ---------- ----------
New notes
Class A 147 (1,977) 599 (8,624) (3,438) (2,429)
Class B 60 (1,120) 246 (3,233) (1,567) (1,306)
Class C 59 (1,198) 237 (3,014) (1539) (1,376)
Class D 519 (1,894) 3,454 (4,699) (4,619) (4,829)
785 (6,189) 4,536 (19,570) (11,163) (9,940)
----------- --------- ---------- ---------- ---------- ----------
Class E 36,068 - 44,759 (8,292) (7,947) (8,691)
----------- --------- ---------- ---------- ---------- ----------
Total 36,853 (6,189) 49,295 (27,862) (19,110) (18,631)
============ ========= ========== ========== ========== ===========
8. TRADE RECEIVABLES
30 June 30 June 30 June
2001 2002 2003
US$'000 US$'000 US$'000
---------- ---------- ----------
Gross receivables 995 1,487 3,273
Allowance for bad debts - - (802)
---------- ---------- ----------
Net receivables 995 1,487 2,471
========== ========== ==========
17
F-17
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
The Company pays an annual charge (currently (pound)600) to qualify as a
tax exempt company under Jersey law. This fee is included in the profit
and loss accounts as it is not dependent on the Company's results. ALPS
92-1 UK Limited is subject to UK taxation on its profits at the
applicable rate and Carotene Limited is subject to Irish taxation on its
profits at the applicable rate. Taxable income is the same as book income
for both of these entities. Accordingly, there are no deferred taxes. Net
operating loss carry forwards at June 30, 2003 were zero.
30 June 30 June 30 June
2001 2002 2003
US$'000 US$'000 US$'000
-------- ------- --------
Foreign corporation tax 20 24 11
Foreign witholding tax (i) - - 214
-------- ------- --------
20 24 225
======== ======= ========
(i) Provision has been made in respect of unpaid United States
withholding taxes relating to the investment of certain collections by
the Cash Manager. The charge above represents the Directors' current best
estimate as to the possible amounts that may eventually become payable in
respect of these liabilities.
10. COMMITMENTS
The Group has no long-term contracts other than those with its service
providers as at June 30, 2003.
The annual commitment to Babcock & Brown, the Servicer, is US$454,800
plus 2% of all lease rentals collected.
The annual commitment to Deutsche Bank Trust Company Americas (formerly
Bankers Trust Company), the cash manager, is US$17,000.
The annual commitment to Mourant & Co. Limited, the administrative agent,
is based on the number of hours worked by each employee of the
administrative agent on the affairs of the Company multiplied by the
hourly rate of each such employee.
The holders of the shares in the Company are entitled to receive, out of
the distributable profits of the Company, a fixed cumulative preferential
dividend at a rate of US$1,500 per annum. As the Company did not have
distributable profits as at June 30, 2003, it did not pay a dividend.
Cumulative unpaid preferential dividends as at June 30, 2003 were
US$9,000.
18
F-18
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The book values and fair values of the Company's financial assets and
financial liabilities as at June 30, 2003 are set out below:
Estimated
Book Value Fair Value
June 30, 2003 June 30, 2003
Financial Assets US$'000 US$'000
-------------------------------------------------- -------------- -------------
Cash 3,806 3,806
Restricted Cash 22,691 22,691
-------------- -------------
Total 26,497 26,497
============== =============
Financial Liabilities
Indebtedness
Class A 85,618 68,494
Class B 40,064 20,032
Class C 39,560 5,934
Class D 34,023 340
Class E 82,918 -
-------------- -------------
282,183 94,800
-------------- -------------
Other
Aircraft Maintenance reserves due after one 12,175 12,175
year
Security deposits due after one year 2,682 2,682
-------------- -------------
14,857 14,857
-------------- -------------
Total 297,040 109,657
============== =============
Although the estimated fair values of the Class A to D Notes outstanding
have been determined by reference to prices as at June 30, 2003 provided
by an independent third party, these fair values do not necessarily
reflect the market value of these Notes at a specific time and should not
be relied upon as a measure of the value that could be realized by a
noteholder upon sale.
The Directors have considered the fair value of the Class E Notes at June
30, 2003 and, due to the current uncertainty in the aviation industry and
the particular characteristics of these Notes, do not believe it to be
appropriate, or possible, to estimate with any degree of certainty, a
fair value of these Notes in the current economic climate.
The fair value of aircraft maintenance reserves and security deposits,
which are subject to floating rates, where applicable, is their par
value.
19
F-19
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED PARTY TRANSACTIONS
a) Babcock & Brown Limited
Babcock & Brown acts as Servicer to the Group. In addition to managing
the Group's aircraft, Babcock & Brown also manages aircraft owned by
other third parties. Babcock & Brown may from time to time have conflicts
of interest in performing its obligations to the Group and other entities
to which it provides management, marketing and other services.
Babcock & Brown receives an annual fee as Servicer which amounted to
US$1,323,686 for the year ended June 30, 2003 (2002: US$1,180,714,
2001:US$1,375,358).
b) Brian Chamness
Mr B. Chamness, a director of the Company, was formerly an officer of
WFC, the holder of the Class E Notes. He now acts as a consultant to WFC.
12. RELATED PARTY TRANSACTIONS (CONTINUED)
c) Mr G. Adrian Robinson
During the year the Group has entered into a lease agreement for aircraft
MSN 25054 with Air 2000 (now re-named First Choice Airways). Mr G. Adrian
Robinson, a director of the Company, provides consulting services to
First Choice Airways from time to time.
d) Mourant & Co. Limited
Mourant & Co. Limited acts as administrative agent to the Company and its
subsidiary, Mourant & Co. Secretaries Limited, acts as the secretary of
the Company. Mourant & Co. Limited and Mourant & Co. Secretaries Limited
are affiliated with Mourant du Feu & Jeune, the law firm that acts as
Jersey legal counsel to the Group.
13. CAPITALISED REFINANCING COSTS
30 June 30 June 30 June
2001 2002 2003
US$'000 US$'000 US$'000
--------- --------- ---------
Balance at start of year 1,176 - -
Amortised during year (1,176) - -
--------- --------- ---------
Balance at end of year - - -
========= ========= =========
During the refinancing of the Company in June 1996 costs were incurred in
relation to the Notes. These refinancing costs were capitalised and
amortised over the then expected life of the Notes.
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
i) Income tax
The Group made income tax payments of $1,528 during the year ended June
30, 2003, $3,631 during the year ended June 30, 2002 and $17,748 during
the year ended June 30, 2001.
ii) Interest paid
The Company made net interest payments of $6,189,513 during the year
ended June 30, 2003, $12,331,000 during the year ended June 30, 2002 and
$19,852,000 during the year ended June 30, 2001.
20
F-20
AIRCRAFT LEASE PORTFOLIO SECURITISATION 92-1 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS
i) Due to the liquidation of the United Kingdom partnership of Arthur
Andersen, the previous administrative agent, Andersen Corporate Services
(Jersey) Limited, and the previous company secretary, Andersen
Secretaries (Jersey) Limited, which were both wholly owned by the United
Kingdom partnership of Arthur Andersen, were replaced by Mourant & Co.
Limited and Mourant & Co. Secretaries Limited, respectively on October 1,
2003. The rating agencies which rate the Notes have confirmed that these
changes will not result in a downgrade or withdrawal of their respective
ratings of the Notes.
ii) On September 11, 2003 KPMG Channel Islands were replaced as the
Company's auditors by KPMG Ireland. There were no disagreements between
KPMG Channel Islands and the Company or any other reportable event that
caused the Company to replace KPMG Channel Islands with KPMG Ireland.
iii) The interest and principal arrears of the Company have increased
subsequent to the year end. At December15, 2003, the unpaid amounts
consisted of US$30.589 million of Class A Note Target Principal, US$0.741
million of Class A Note step-up interest, US$0.305 million of Class B
Note step-up interest, US$4.304 million of Class C Note Target Principal,
US$0.290 million of Class C Note step-up interest, US$5.177 million of
Class D Note Target Principal, US$4.612 million of Class D Note regular
interest, US$0.661 million of Class D Note default interest, US$0.482
million of Class D Note step-up interest and US$48.560 million of Class E
Note interest.
iv) On December 15, 2003 the Company incorporated a third wholly owned
subsidiary, ALPS 92-1 France SARL, to facilitate the leasing of one of
the Company's B737-400 aircraft to an Indonesian lessee.
21
F-21