UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
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Commission File No. 333-82153
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AIRCRAFT FINANCE TRUST
----------------------
(Exact name of registrant as specified in its charter)
51-6512392
(IRS Employer Identification No.)
DELAWARE
(State or other jurisdiction of incorporation or organization)
1100 North Market Street, Rodney Square North, Wilmington, Delaware 19890
(302) 651-1000
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
This document consists of 24 pages.
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Aircraft Finance Trust
FORM 10-Q - For the Quarterly Period Ended September 30, 2000
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999...........................................3
b) Consolidated Statements of Income - Three and Nine
Months Ended September 30, 2000 and Three Months
Ended and the Period from Inception (April 13,
1999) to September 30, 1999.................................4
c) Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2000 and the Period from Inception
(April 13, 1999) to September 30, 1999......................5
d) Consolidated Statements of Changes in Beneficial
Interest Holders' Equity - Period Ended December 31,
1999 and Nine Months Ended September 30, 2000...............6
e) Notes to Consolidated Financial Statements..................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................15
Part II. Other Information
Item 5. Other Information......................................17
Item 6. Exhibits and Reports on Form 8-K.......................17
Signatures .......................................................18
2
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Part I. Financial Information
-----------------------------
Item 1. Financial Statements
Aircraft Finance Trust and Subsidiaries
Consolidated Balance Sheets
(unaudited)
(dollars in thousands)
September 30, December 31,
2000 1999
-------------- ------------
Assets
Cash and cash equivalents $ 80,077 $ 72,682
Restricted cash 17,403 19,468
Rents and other receivables 3,225 4,122
Aircraft, net 1,139,067 1,170,564
Other assets 198 138
---------- ----------
Total assets $1,239,970 $1,266,974
========== ==========
Liabilities and Beneficial Interest Holders' Equity
Accounts payable and accrued liabilities $ 4,065 $ 5,819
Deferred rental income 5,390 7,031
Security and other deposits 34,390 30,385
Notes payable:
Class A-1 512,500 512,500
Class A-2 337,929 368,897
Class B 122,803 124,798
Class C 106,000 106,000
Class D 64,000 64,000
---------- ----------
Total notes payable 1,143,232 1,176,195
---------- ----------
Total liabilities 1,187,077 1,219,430
---------- ----------
Beneficial interest holders' equity 52,893 47,544
---------- ----------
Total liabilities and beneficial interest
holders' equity $1,239,970 $1,266,974
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
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Aircraft Finance Trust and Subsidiaries
Consolidated Statements of Income
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Period from
Ended Ended Ended Inception
September 30, September 30, September 30, (April 13, 1999) to
2000 1999 2000 September 30, 1999
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental and other income
from operating leases $ 35,920 $ 42,839 $109,860 $ 66,148
Interest income 1,493 1,009 4,170 1,594
-------- -------- -------- --------
Total revenues 37,413 43,848 114,030 67,742
-------- -------- -------- --------
Expenses:
Interest 19,649 19,599 58,664 31,847
Depreciation 10,671 10,564 32,043 17,823
Operating 4,528 8,221 13,449 8,256
Administration and other 1,475 1,552 4,525 2,523
-------- -------- -------- --------
Total expenses 36,323 39,936 108,681 60,449
-------- -------- -------- --------
Net Income $ 1,090 $ 3,912 $ 5,349 $ 7,293
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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Aircraft Finance Trust and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Period from
Nine Months Inception
Ended (April 13, 1999) to
September 30, 2000 September 30, 1999
------------------ -------------------
Cash Flows from Operating Activities:
Net income $ 5,349 $ 7,293
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation expense 32,043 17,823
Changes in assets and liabilities:
Rents and other receivables 897 (7,622)
Restricted cash 2,065 (19,966)
Other assets (60) (243)
Accounts payable and accrued
liabilities (1,754) 12,108
Deferred rental income (1,641) 6,903
Security and other deposits 4,005 19,966
----------- -----------
Net cash provided by operating
activities 40,904 36,262
----------- -----------
Cash Flows from Investing Activities:
Aircraft improvements (546) (1,698)
Purchase of aircraft -- (1,196,087)
----------- -----------
Net cash used in investing
activities (546) (1,197,785)
----------- -----------
Cash Flows from Financing Activities:
Issuance of beneficial interest -- 39,087
Proceeds from notes payable -- 1,209,000
Repayment of notes payable (32,963) (21,976)
----------- -----------
Net cash (used in) provided by
financing activities (32,963) 1,226,111
----------- -----------
Net Increase in Cash and Cash
Equivalents 7,395 64,588
Cash and Cash Equivalents at
Beginning of Period 72,682 --
----------- -----------
Cash and Cash Equivalents at
End of Period $ 80,077 $ 64,588
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest expense $ 58,810 $ 28,380
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
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Aircraft Finance Trust and Subsidiaries
Consolidated Statements of Changes in Beneficial Interest Holders' Equity
(unaudited)
(dollars in thousands)
Beneficial
Interest
--------
Issuance of Beneficial Interest (May 5, 1999) $39,087
Net income 8,457
-------
Balance at December 31, 1999 47,544
Net income 5,349
-------
Balance at September 30, 2000 $52,893
=======
The accompanying notes are an integral part of these
consolidated financial statements.
6
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Aircraft Finance Trust and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
September 30, 2000
Note 1 - Organization
Aircraft Finance Trust is a special-purpose statutory business trust
that was formed on April 13, 1999 under the laws of Delaware. Aircraft Finance
Trust and its two subsidiaries (collectively, "Aircraft Finance") were formed to
conduct certain limited activities, including buying, owning, leasing and
selling commercial jet aircraft and related activities.
On May 5, 1999, Aircraft Finance completed a securitization transaction
in which it received proceeds from a private placement offering of notes,
received proceeds from the issuance of beneficial interest certificates and
simultaneously paid for the acquisition of 36 commercial jet aircraft.
Note 2 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the rules and regulations of the Securities and
Exchange Commission for interim financial statements. Accordingly, these interim
statements do not include all of the information and disclosures required by
generally accepted accounting principals for complete financial statements. In
the opinion of management, all adjustments (consisting solely of adjustments of
a normal recurring nature) necessary for a fair statement of these interim
results have been included. All inter-company accounts and transactions have
been eliminated. The results for the interim periods are not necessarily
indicative of the results to be expected for the year ended December 31, 2000.
These interim unaudited consolidated financial statements should be
read in conjunction with Aircraft Finance's consolidated financial statements
and accompanying notes included in its Annual Report on Form 10-K for the year
ended December 31, 1999 filed with the Securities and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While management believes that the estimates and related
assumptions used in the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates. Significant
estimates are made in the assessment of the collectibility of receivables,
depreciable lives and estimated salvage values of leased aircraft and estimates
of expected maintenance and overhaul costs in connection with certain leases of
aircraft.
7
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Reclassification
Certain reclassifications have been made to prior year data to conform
with the current year.
Note 3 - Derivative Financial Instruments
Interest Rate Swap Agreements
One of Aircraft Finance's original interest rate swap agreements
expired on April 15, 2000; however, Aircraft Finance entered into three new
interest rate swap agreements in June 2000. As a result, Aircraft Finance was a
party to seven interest rate swap agreements at September 30, 2000. Four of
these agreements were entered into on May 5, 1999 and the other three were
effective on July 15, 2000. Under the agreements, Aircraft Finance will pay a
fixed rate of interest on the notional amount to the counter-party and, in turn,
the counter-party will pay Aircraft Finance a rate of interest on the notional
amount based on 30-day LIBOR. On September 30, 2000, the aggregate fair value of
these interest rate swap agreements was approximately $22.1 million.
The following table presents, as of September 30, 2000, a summary of
the terms of Aircraft Finance's interest rate swap agreements (in thousands):
Fixed Rate to be paid Rate to be
Notional by Aircraft received by Aircraft Maturity Estimated
Amount Finance Finance Date Fair Value
------ ------- ------- ---- ----------
$ 60,000 5.50% LIBOR January 15, 2002 $ 861
175,000 5.56% LIBOR October 15, 2002 3,571
345,000 5.65% LIBOR January 15, 2004 10,249
230,000 5.71% LIBOR November 15, 2004 8,045
20,000 7.13% LIBOR January 15, 2002 (117)
20,000 7.14% LIBOR October 15, 2002 (195)
15,000 7.17% LIBOR May 15, 2005 (289)
Note 4 - New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities". SFAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and it requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The accounting for changes in the fair value of
such derivatives will vary based on the intended use of the derivative. In June
1999, the FASB issued Statement of Financial Accounting Standard No. 137 ("SFAS
137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133". SFAS 137 deferred the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued Statement of Financial Accounting Standard No. 138
("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133". SFAS 138 amends the
accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging activities. Aircraft Finance will adopt SFAS 133
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and SFAS 138 in the year 2001. Aircraft Finance estimates that, at September 30,
2000, the effect on its financial statements of adopting SFAS No. 133, as
amended, would have been to increase Beneficial Interest Holders' Equity by
approximately $22.1 million. The transition effect as of January 1, 2001, cannot
be estimated at this time because it is subject to the following unknown
variables as of that date: (1) actual hedged positions, and (2) market values of
hedged positions.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On May 5, 1999, Aircraft Finance issued $1,209 million of Asset Backed
Notes (the "Initial Notes"). The Initial Notes were issued in five classes;
Class A-1, Class A-2, Class B, Class C and Class D. The Initial Notes were
issued simultaneously with the execution of an agreement for the sale of the
beneficial interest of Aircraft Finance for $39 million and an agreement to
acquire 36 commercial jet aircraft for $1,196 million. On January 20, 2000 four
classes of the Initial Notes were exchanged for four corresponding classes of
new notes (the "Exchange Notes"), as more fully discussed below. The remaining
outstanding Initial Notes and the outstanding Exchange Notes are together
referred to as (the "Notes").
Aircraft Finance is a special purpose entity, which owns aircraft
subject to operating leases. Aircraft Finance's business consists of aircraft
leasing activities. Aircraft Finance may also engage in acquisitions of
additional aircraft and sales of aircraft. Any acquisitions of additional
aircraft and the related issuance of additional notes will require confirmation
by the rating agencies that they will not lower, qualify or withdraw their
ratings on the outstanding Notes as a result. Aircraft Finance's cash flows from
such activities will be used to service the interest and principal on the
outstanding Notes and to make distribution of remaining amounts to the holders
of the beneficial interest certificates, after the payment of expenses incurred
by Aircraft Finance.
Aircraft Finance's ability to generate sufficient cash from its
aircraft assets to service the outstanding Notes will depend primarily on the
rental rates it can achieve on leases, the lessees' ability to perform according
to the terms of the leases and the prices it can achieve on any aircraft sales.
Aircraft Finance's ability to service the outstanding Notes will also depend on
the level of Aircraft Finance's operating expenses, including maintenance
obligations that are expected to increase as the aircraft age, and any
unforeseen contingent liabilities. The indenture governing the Notes requires
that Aircraft Finance maintain a cash reserve balance on deposit in a
collections account and permits Aircraft Finance to establish a credit facility,
in order to provide a source of liquidity for Aircraft Finance's obligations.
Any statements contained herein that are not historical facts, or that
might be considered an opinion or projection, whether expressed or implied, are
meant as, and should be considered, forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are based on assumptions and opinions concerning a variety of known
and unknown risks. If any assumptions or opinions prove incorrect, any
forward-looking statements made on that basis may also prove materially
incorrect. Aircraft Finance assumes no obligation to update any forward-looking
statements to reflect actual results or changes in the factors affecting such
forward-looking statements.
Recent Developments
The Aircraft and Lessees
In February 2000, a B737-300 aircraft formerly leased to a Dutch lessee
was delivered for lease to a lessee based in the Philippines for a lease term of
57 months. The aircraft with respect to this lessee represents approximately
2.6% of the aggregate appraised value of all aircraft owned at December 31,
1999.
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In March 2000, Aircraft Finance entered into a restructuring agreement
with Canadian Airlines, a lessee of two Airbus A320-200 aircraft. Under the
restructuring agreement, Canadian Airlines, a subsidiary of Air Canada, was
replaced by Air Canada Capital LTD as the new lessee. Air Canada guarantees
these leases. Pursuant to this restructuring, the cash security deposits of $1.5
million held by Aircraft Finance in connection with these aircraft were returned
to Canadian Airlines. As of September 30, 2000, all current rent amounts due
under these leases had been paid. The two aircraft with respect to this lessee
represent approximately 4.5% of the aggregate appraised value at December 31,
1999.
In April 2000, Aircraft Finance entered into an agreement for one MD-83
aircraft, currently leased to an Italian lessee, to extend the lease from April
2000 to November 2001. The aircraft with respect to this lessee represents
approximately 1.9% of the aggregate appraised value at December 31, 1999.
In April 2000, a B737-400 aircraft formerly leased to a Turkish lessee
was returned early and re-delivered to a new lessee (based in Belgium) in April
2000 for a lease term of 36 months. This aircraft represents approximately 2.6%
of the aggregate appraised value at December 31, 1999.
In May 2000, a B737-300 aircraft formerly leased to Transbrasil was
returned early. In July 2000, this aircraft was delivered to VARIG for a lease
term of 60 months. The aircraft with respect to this lessee represents
approximately 2.7% of the aggregate appraised value at December 31, 1999.
In June 2000, a B767-300ER aircraft formerly leased to a Swedish lessee
was delivered for lease to a Canadian lessee for a lease term of 36 months. The
aircraft with respect to this lessee represents approximately 4.7% of the
aggregate appraised value at December 31, 1999.
In July 2000, a second B737-400 aircraft was returned from a Turkish
lessee. Aircraft Finance has entered into a letter of intent to lease this
aircraft to an Indonesian lessee for a term of 60 months with an anticipated
delivery date in November 2000. This aircraft represents approximately 2.6% of
the aggregate appraised value at December 31, 1999.
In September 2000, an A320-200 aircraft formerly leased by a lessee
based in the United States was returned early. In October 2000, this aircraft
was delivered to a lessee based in Mexico for a lease term of 60 months. This
aircraft represents approximately 2.4% of the aggregate appraised value at
December 31, 1999.
Other Developments
On January 20, 2000, Aircraft Finance completed an exchange offer
whereby Aircraft Finance issued four classes of new notes, the Exchange Notes,
designated Class A-1, A-2, B and C, in exchange for the four corresponding
classes of the Initial Notes. The terms of the Exchange Notes are identical in
all material respects to the Initial Notes, except that the Exchange Notes are
registered under the Securities Act of 1933, as amended. The Class D Notes were
not exchanged and remain unchanged. $3 million of the Class A-2 Initial Notes
were not tendered in the exchange offer and remain outstanding.
Under the terms of the indenture, Aircraft Finance is required to
obtain annual appraisals of its aircraft. In February 2000, Aircraft Finance
received appraisals of the adjusted base values of the aircraft as of December
31, 1999 from three independent appraisers that are members of the International
Society of Transport Aircraft Trading, as required by the indenture. The
aggregate of the average of the three appraisals (the current appraised value)
of the aircraft at December 31, 1999 was $1,256.1 million. The appraisals at
December 31, 1999 did not indicate a decline in value of the aircraft
11
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sufficiently in excess of the value decline assumed under the terms of the
indenture to require excess cash flows, as defined, to be redirected to the
Class A Notes.
As previously discussed, Aircraft Finance has entered into agreements
with two lessees for the two aircraft formerly leased to Turkish and Brazilian
lessees. As a result of these agreements, the concentration of the five largest
lessees is 38.8% of the most recent appraised value of the portfolio. One of the
concentration limits in the indenture requires the five largest lessees not to
exceed 35% of the most recent appraised value of the portfolio. Under the
indenture, Aircraft Finance is not permitted to enter into a lease agreement
that would exceed certain concentration limits unless it receives rating agency
confirmation that the rating agencies will not downgrade, qualify, or withdraw
their ratings on the Notes. Aircraft Finance received such rating agency
confirmations from the rating agencies during June 2000.
On June 21, 2000, Wayne Lippman tendered his resignation as Equity
Trustee of Aircraft Finance effective upon the appointment of a replacement. At
September 30, 2000 a replacement had not been appointed.
During the nine month period ended September 30, 2000, there were three
lessees on non-accrual status. All aircraft with respect to these lessees have
been returned early, as discussed above. The total amount of rent and
maintenance reserve payments outstanding under the leases for the four aircraft
from these three lessees amounted to approximately $5.8 million as of September
30, 2000. One of these lessees, based in Brazil, owed approximately $1.0 million
at September 30, 2000 for outstanding maintenance reserve payments, after the
application of a $1.0 million cash security deposit. The second lessee based in
the United States owed approximately $1.2 million at September 30, 2000 for
outstanding maintenance reserve payments after the application of $0.8 million
of cash security deposits and a letter of credit. The third lessee, based in
Turkey, owed approximately $3.6 million at September 30, 2000 for outstanding
rent and maintenance reserve payments after the application of $1.1 million of
cash security deposits and letters of credit.
As of September 30, 2000, Aircraft Finance has repaid principal on the
Notes of $65.8 million, as compared to $58.7 million anticipated in the Offering
Memorandum dated April 21, 1999. For a more detailed analysis of Aircraft
Finance's performance compared to the assumptions in the Offering Memorandum,
see Exhibit 99.1. Aircraft Finance's ability to generate sufficient cash from
its aircraft assets to service the outstanding Notes will depend primarily on
the rental rates it can achieve on leases, the lessees' ability to perform
according to the terms of the leases and the prices it can achieve on any
aircraft sales. Aircraft Finance's ability to service the outstanding Notes will
also depend on the level of Aircraft Finance's operating expenses, including
maintenance obligations that are expected to increase as the aircraft age, and
any unforeseen contingent liabilities. The indenture governing the Notes
requires that Aircraft Finance maintain a cash reserve balance on deposit in a
collections account and permits Aircraft Finance to establish a credit facility,
in order to provide a source of liquidity for Aircraft Finance's obligations.
12
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Results of Operations
Results of operations for the period from April 13, 1999 ("Inception")
to September 30, 1999 reflect results for the period from the commencement of
operations to September 30, 1999. As a result, historical results of operations
for the period from Inception to September 30, 1999 are not comparable to the
nine months ended September 30, 2000.
Aircraft Finance reported net income of $1.1 million on total revenues
of $37.4 million during the three months ended September 30, 2000, compared to
net income of $3.9 million, on total revenues of $43.8 million for the three
months ended September 30, 1999. Aircraft Finance reported net income of $5.3
million on total revenues of $114.0 million during the nine months ended
September 30, 2000, compared to net income of $7.3 million, on total revenues of
$67.7 million for the period from Inception to September 30, 1999. Aircraft
Finance's revenues consisted of rental and other income from operating leases
and interest income earned on cash balances.
Rental and other income from aircraft subject to operating leases was
$35.9 million and $109.9 million during the three and nine months ended
September 30, 2000, respectively, compared to rental and other income of $42.8
million and $66.1 million during the three months ended September 30, 1999 and
the period from Inception to September 30, 1999, respectively. Rental and other
income from operating leases was negatively impacted for the three and nine
months ended September 30, 2000, primarily due to three lessees being put on
non-accrual status, off-lease time for six aircraft and lower rentals on
re-marketed aircraft. See "Recent Developments" for further details.
Interest income during the three and nine months ended September 30,
2000 was $1.5 million and $4.2 million, respectively, compared to $1.0 million
and $1.6 million during the three months ended September 30, 1999 and the period
from Inception to September 30, 1999, respectively. Interest income consists
primarily of interest earned on Aircraft Finance's cash balances, which are
invested in short-term highly liquid investments as permitted by the indenture.
The amount of interest income earned varies based upon the current interest
rates paid on such investments and the level of cash balances held by Aircraft
Finance.
Interest expense, net of interest rate swap proceeds of $2.3 million
and $4.9 million, was $19.6 million and $58.7 million during the three and nine
months ended September 30, 2000, respectively. Interest expense for the three
months ended September 30, 1999 was $19.6 million, which included $0.6 million
of interest rate swap expense, and for the period from Inception to September
30, 1999 was $31.8 million, which included $1.4 million of interest rate swap
expense. The weighted average interest rate on the Notes during the three and
nine months ended September 30, 2000 was 6.7%. Interest expense varies based on
the actual interest rates on the floating rate Notes, the interest rate swap
costs or proceeds and the outstanding principal balances of the Notes.
Depreciation expense during the three and nine months ended September
30, 2000 was $10.7 million and $32.0 million, respectively, compared to $10.6
million for the three months ended September 30, 1999 and $17.8 million during
period from Inception to September 30, 1999.
Operating expense during the three and nine months ended September 30,
2000 was $4.5 million and $13.4 million, respectively, compared to $8.2 million
for the three months ended September 30, 1999, and $8.3 million during the
period from Inception to September 30, 1999. Operating expense consists
primarily of aircraft maintenance expense and lease related costs. Most of
Aircraft Finance's lease contracts require the lessee to bear the obligation for
maintenance costs on airframes and engines, and require the lessee to make
certain payments to the lessor, calculated on measures of usage to cover the
expected costs of scheduled maintenance charges, including major airframe and
engine overhauls. Reserves are maintained at amounts considered adequate to
cover those expected payments for maintenance costs.
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Administration and other expenses during the three and nine months
ended September 30, 2000 were $1.5 million and $4.5 million, respectively,
compared to $1.6 million for the three months ended September 30, 1999 and $2.5
million for the period from Inception to September 30, 1999. These expenses
consist primarily of fees paid to the service providers and other general and
administrative costs. The most significant of these fees was the servicer fee,
which amounted to $1.1 million and $3.3 million during the three and nine months
ended September 30, 2000, respectively, compared to $1.1 million for the three
months ended September 30, 1999 and $2.0 million during the period from
Inception to September 30, 1999. A significant portion of the fees paid to the
servicer corresponds to rental payments due and received. These fees are based
upon a fixed percentage of rental receipts, and will vary with rental income of
Aircraft Finance.
Liquidity
Aircraft Finance held cash and cash equivalents of $80.1 million, and
restricted cash of $17.4 million at September 30, 2000. The liquidity reserve
amount, which is included in cash and cash equivalents, was $52.0 million at
September 30, 2000. The liquidity reserve amount is required under the terms of
the indenture and is intended to serve as a source of liquidity for Aircraft
Finance's maintenance obligations and other contingent costs.
Cash Flows from Operating Activities
Aircraft Finance's cash flows from operating activities depend on many
factors including, but not limited to, the performance of lessees and Aircraft
Finance's ability to re-lease aircraft, the average interest rates of the Notes,
the efficiency of its interest rate hedging policies, the ability of interest
rate swap providers to perform under the terms of the interest rate swap
agreements and whether Aircraft Finance will be able to refinance certain
subclasses of Notes that have not been repaid with lease cash flows.
Net cash provided by operating activities for the nine months ended
September 30, 2000 amounted to $40.9 million, primarily reflecting non-cash
depreciation expense of $32.0 million, net income of $5.3 million, a decrease in
restricted cash of $2.1 million an increase in security and other deposits of
$4.0 million and a decrease in rents and other receivables of $0.9 million.
These were offset by decreases in accounts payable and accrued liabilities of
$1.8 million and a decrease in deferred rental income of $1.6 million.
Cash Flows from Investing and Financing Activities
Net cash used in investing activities for the nine months ended
September 30, 2000 amounted to $0.5 million for capitalized aircraft
improvements and aircraft delivery costs.
Net cash used in financing activities for the nine months ended
September 30, 2000 amounted to $33.0 million due to principal repayment on the
Notes. Generally, principal and interest is repaid on certain Notes monthly
based upon the cash collected, the anticipated expenses and the cash balances
held by Aircraft Finance on the calculation date. As a result, monthly principal
payments on the Notes will vary depending on Aircraft Finance's revenues and
expenses for the month.
One of Aircraft Finance's original interest rate swap agreements
expired on April 15, 2000; however, Aircraft Finance entered into three new
interest rate swap agreements in June, 2000. As a result, Aircraft Finance was a
party to seven interest rate swap agreements at September 30, 2000. Four of
these agreements were entered into on May 5, 1999 and the other three were
entered into on June 29, 2000 but had an effective date of July 15, 2000. The
net aggregate amounts due to be paid or received by Aircraft Finance under these
agreements is determined monthly and is due on the same day as the payments
under the Notes. The net economic effect of these interest rate swaps was to
hedge Aircraft Finance's variable interest rate exposure from movements in
14
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interest rates over the duration of the lease terms. Please see "Item 3.
Quantitative and Qualitative Disclosures about Market Risk" for further
information about these interest rate swap agreements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest incurred by Aircraft Finance on the Notes and the rental
income received by Aircraft Finance under operating leases are based on
combinations of variable and fixed measures of interest rates. Aircraft Finance
is exposed to interest rate risk to the extent that the mix of variable and
fixed interest obligations under the Notes do not correlate to the mix of
variable and fixed rents under operating leases. Aircraft Finance has engaged
advisors to monitor interest rates in order to mitigate its exposure to
unfavorable variations. Aircraft Finance utilizes interest rate swaps that shift
the risk of fluctuations in floating rates to the counterparty in exchange for
fixed payments by Aircraft Finance. Risks in the use of these instruments arise
from the possible inability of the counterparties to meet the terms of their
contracts and from market movements in securities values and interest rates.
The controlling trustees of Aircraft Finance, with the assistance of
Bankers Trust Company and Lehman Brothers Inc., are responsible for reviewing
and approving the overall interest rate management policies and transaction
authority limits. Counterparty risk will be monitored on an ongoing basis.
Counterparties will be subject to the prior approval of the controlling
trustees. Currently, Aircraft Finance's counterparty is an affiliate of Lehman
Brothers Inc. Future counterparties will consist primarily of the affiliates of
major United States and European financial institutions, including
special-purpose derivative vehicles, that have credit ratings, or that provide
collateralization arrangements, consistent with maintaining the ratings of the
Notes.
Aircraft Finance is a party to five classes of Notes. The estimated
fair value of these Notes at September 30, 2000 was approximately $1,134
million. The terms of each class of the Notes, including the outstanding
principal amount at September 30, 2000, are as follows (in thousands):
Outstanding
Class of Principal Expected Final Final
Notes Amount Interest Rate Payment Date Maturity Date
----- ------ ------------- ------------ -------------
Class A-1 $ 512,500 LIBOR + 0.48% May 15, 2004 May 15, 2024
Class A-2 337,929 LIBOR + 0.50% June 15, 2008 May 15, 2024
Class B 122,803 LIBOR + 1.15% May 15, 2016 May 15, 2024
Class C 106,000 8.00% July 15, 2016 May 15, 2024
Class D 64,000 11.00% August 15, 2016 May 15, 2024
-----------
$ 1,143,232
Aircraft Finance was a party to seven interest rate swap agreements at
September 30, 2000. Under the agreements, Aircraft Finance will pay a fixed rate
of interest on the notional amount to the counterparty and, in turn, the
counterparty will pay Aircraft Finance a rate of interest on the notional amount
based on 30-day LIBOR.
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The following table presents, as of September 30, 2000, the terms of
Aircraft Finance's interest rate swap agreements (in thousands):
Fixed Rate to be Rate to be
Notional paid by Aircraft received by Aircraft Maturity Estimated
Amount Finance Finance Date Fair Value
------ ------- ------- ---- ----------
$ 60,000 5.50% LIBOR January 15, 2002 $ 861
175,000 5.56% LIBOR October 15, 2002 3,571
345,000 5.65% LIBOR January 15, 2004 10,249
230,000 5.71% LIBOR November 15, 2004 8,045
20,000 7.13% LIBOR January 15, 2002 (117)
20,000 7.14% LIBOR October 15, 2002 (195)
15,000 7.17% LIBOR May 15, 2005 (289)
Aircraft Finance expects to enter into additional swaps, or sell at
market values or unwind part or all of its initial swaps and any future swaps on
a periodic basis in its efforts to mitigate its exposure to unfavorable changes
in interest rates. Any changes in Aircraft Finance's policy regarding its use of
interest rate hedging products will be subject to periodic review by the rating
agencies.
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<PAGE>
Part II. Other Information
--------------------------
Item 5. Other Information
On June 21, 2000, Wayne Lippman tendered his resignation as Equity
Trustee of Aircraft Finance effective upon the appointment of a successor Equity
Trustee. At September 30, 2000 a replacement had not been appointed.
Item 6. Exhibits and Reports of Form 8-K
a. Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedule (in electronic format only)
99.1 Other information - Analysis of actual cash flows versus assumed
case
b. Reports on Form 8-K
During the quarterly period ended September 30, 2000, Aircraft Finance
filed reports on Form 8-K dated July 17, 2000, August 15, 2000 and September 15,
2000. Such reports on Form 8-K included copies of the monthly reports to holders
of the Notes.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AIRCRAFT FINANCE TRUST
by Wilmington Trust Company,
not in its individual capacity but
solely as the Owner Trustee
November 10, 2000 By: /S/CHARISSE L. RODGERS
--------------- ----------------------------------------
Date Name: Charisse L. Rodgers
Title: Assistant Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/DAVID H. TREITEL Independent Controlling Trustee November 10, 2000
---------------------------- ---------------
David H. Treitel
/S/RICHARD E. CAVANAGH Independent Controlling Trustee November 10, 2000
---------------------------- ---------------
Richard E. Cavanagh
/S/CHARISSE L. RODGERS Owner Trustee November 10, 2000
---------------------------- ---------------
Wilmington Trust Company,
not in its individual
capacity but solely as the
Owner Trustee
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