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 June 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
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(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 18 pages.
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Aircraft Finance Trust
FORM 10-Q - For the Quarterly Period Ended June 30, 2000
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999...........................................3
b) Consolidated Statements of Income - Three and
Six Months Ended June 30, 2000 and the period
from Inception (April 13, 1999) to June 30, 1999............4
c) Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2000 and the period from Inception
(April 13, 1999) to June 30, 1999...........................5
d) Consolidated Statements of Changes in Beneficial
Interest Holders' Equity - Year Ended December 31, 1999
and Six Months Ended June 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............................................14
Part II. Other Information
Item 5. Other Information......................................16
Item 6. Exhibits and Reports on Form 8-K.......................16
Signatures .......................................................17
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)
June 30, December 31,
2000 1999
---------- -------------
Assets
Cash and cash equivalents $ 79,007 $ 72,682
Restricted cash 17,030 19,468
Rents and other receivables 3,937 4,122
Aircraft, net 1,150,092 1,170,564
Other assets 283 138
---------- ----------
Total assets $1,250,349 $1,266,974
========== ==========
Liabilities and Beneficial Interest Holders' Equity
Accounts payable and accrued liabilities $ 3,992 $ 5,819
Deferred rental income 4,767 7,031
Security and other deposits 33,802 30,385
Notes payable:
Class A-1 512,500 512,500
Class A-2 348,691 368,897
Class B 124,794 124,798
Class C 106,000 106,000
Class D 64,000 64,000
---------- ----------
Total notes payable 1,155,985 1,176,195
---------- ----------
Total liabilities 1,198,546 1,219,430
---------- ----------
Beneficial interest holders' equity 51,803 47,544
---------- ----------
Total liabilities and beneficial interest
holders' equity $1,250,349 $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)
Period from
Three Months Six Months Inception
Ended Ended (April 13, 1999)
June 30, 2000 June 30, 2000 to June 30, 1999
------------- ------------- ----------------
Revenues:
Rental and other income
from operating leases $38,237 $73,940 $23,309
Interest income 1,465 2,677 585
------- ------- -------
Total revenues 39,702 76,617 23,894
------- ------- -------
Expenses:
Interest expense 19,548 39,015 12,248
Depreciation expense 10,695 21,372 7,260
Operating expense 4,562 8,921 35
Administration and other 1,519 3,050 970
------- ------- -------
Total expenses 36,324 72,358 20,513
------- ------- -------
Net Income $ 3,378 $ 4,259 $ 3,381
======= ======= =======
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
Six Months Inception
Ended (April 13, 1999)
June 30, 2000 to June 30, 1999
------------- ----------------
Cash Flows from Operating Activities:
Net income $ 4,259 $ 3,381
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 21,372 7,260
Changes in assets and liabilities:
Rents and other receivables 185 (2,238)
Restricted cash 2,438 (19,402)
Other assets (145) (349)
Accounts payable and accrued liabilities (1,827) 3,774
Deferred rental income (2,264) 6,192
Security and other deposits 3,417 19,954
----------- -----------
Net cash provided by operating activities 27,435 18,572
----------- -----------
Cash Flows from Investing Activities:
Aircraft improvements (900) (20)
Purchase of aircraft -- (1,196,087)
----------- -----------
Net cash used in investing activities (900) (1,196,107)
----------- -----------
Cash Flows from Financing Activities:
Issuance of beneficial interest -- 39,087
Proceeds from notes payable -- 1,209,000
Repayment of notes payable (20,210) (7,414)
----------- -----------
Net cash (used in) provided by financing
activities (20,210) 1,240,673
----------- -----------
Net Increase in Cash and Cash Equivalents 6,325 63,138
Cash and Cash Equivalents at Beginning of Period 72,682 --
----------- -----------
Cash and Cash Equivalents at End of Period $ 79,007 $ 63,138
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest expense $ 39,137 $ 8,750
=========== ===========
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 4,259
-------
Balance at June 30, 2000 $51,803
=======
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)
June 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, 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 and the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, these interim statements do not include all
of the information and disclosures required for annual 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 intercompany accounts and transactions have been
eliminated. The results for the interim periods are not necessarily indicative
of the results to be expected for the entire year.
These interim unaudited consolidated financial statements should be
read in conjunction with Aircraft Finance's consolidated financial statements
and accompanying notes included in the 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 June 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 have an effective date of July 15, 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. On June
30, 2000, the aggregate fair value of these interest rate swap agreements was
approximately $34.4 million.
The following table presents, as of June 30, 2000, a summary of the
terms of the Aircraft Finance's interest rate swap agreements (dollars in
thousands):
Rate to be
Fixed Rate to be received
Notional paid by Aircraft by Aircraft Maturity Estimated
Amount Finance Finance Date fair value
------ ------- ------- ---- ----------
$ 60,000 5.50% LIBOR January 15, 2002 $ 1,377,189
175,000 5.56% LIBOR October 15, 2002 5,615,559
345,000 5.65% LIBOR January 15, 2004 15,491,381
230,000 5.71% LIBOR November 15, 2004 11,893,112
20,000 (i) 7.13% LIBOR January 15, 2002 -
20,000 (i) 7.14% LIBOR October 15, 2002 -
15,000 (i) 7.17% LIBOR May 15, 2005 -
(i) Entered into in June 2000 with an effective date of July 15, 2000.
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
8
<PAGE>
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 plans to adopt SFAS
133 and SFAS 138 beginning in the year 2001. Adoption of SFAS 133 and SFAS 138
are not expected to have a significant impact on Aircraft Finance's results of
operations, cash flows or financial position.
9
<PAGE>
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
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.
10
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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
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.
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 at December 31, 1999.
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 June 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 of the aircraft 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 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.
During the six month period ended June 30, 2000, there were two lessees
on non-accrual status. The total amount of rent and maintenance reserve payments
outstanding under the leases for the three aircraft from these two lessees
amounted to approximately $5.0 million as of June 30, 2000, after the
application of certain security deposits. One of these lessees, based in Brazil,
owed approximately $1.0 million at June 30, 2000 for outstanding maintenance
reserve payments, after the application of a $1.0 million security deposit. The
other lessee, based in Turkey, owed approximately $4.0 million at June 30, 2000
for outstanding rent and maintenance reserve payments, after the application of
$0.5 million of security deposits and a letter of credit. Aircraft Finance holds
additional security deposits and a letter of credit in the aggregate of $0.5
million against the remaining arrearages of this Turkish lessee.
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 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.
11
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In July, 2000, a second B737-400 aircraft was returned from a Turkish
lessee and is currently being re-marketed for lease. This second aircraft also
represents approximately 2.6% of the aggregate appraised value at December 31,
1999.
As a result of the new and extended leases discussed above, in
aggregate, monthly lease revenues are approximately $0.3 million or 2.4% lower
than anticipated in the Offering Memorandum dated April 21, 1999 ("Assumed
Case"). As of June 30, 2000, Aircraft Finance has repaid principal of $53.0
million, as compared to $47.2 million anticipated under the Assumed Case.
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.
As previously discussed, Aircraft Finance has entered into agreements
with two lessees for the two off-lease aircraft. 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 the quarter ended June 30, 2000.
On August 15, 2000, Wayne Lippman resigned as Equity Trustee of
Aircraft Finance effective upon the appointment of Martin Kalb as successor
Equity Trustee.
Results of Operations
Results of operations for the period from April 13, 1999 ("Inception")
to June 30, 1999 reflect combined results for the period from the commencement
of operations to June 30, 1999. As a result, historical results of operations
for the period from Inception to June 30, 1999 is not comparable to the three
and six month periods ended June 30, 2000.
Aircraft Finance reported net income of $3.4 million on total revenues
of $39.7 million during the three months ended June 30, 2000, and net income of
$4.3 million on total revenues of $76.6 million during the six months ended June
30, 2000, both compared to net income of $3.4 million, on total revenues of
$23.9 million for the period from Inception to June 30, 1999. Aircraft Finance's
revenues consisted of rental and other income from operating leases and interest
income earned on cash balances.
Rental income from aircraft subject to operating leases was $38.2
million and $73.9 million during the three and six months ended June 30, 2000,
respectively, compared to rental income of $23.3 during the period from
Inception to June 30, 1999. Despite additional defaults of three leases based in
Brazil and Turkey, with the application of $1.3 million of security deposits
these leases contributed $0.5 million to rental and other income during the
three months ended June 30, 2000. The defaults of these leases negatively
impacted rental and other income from operating leases by approximately $1.8
million (net of security deposits applied) during the six months ended June 30,
2000.
12
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Interest income during the three and six months ended June 30, 2000 was
$1.5 million and $2.7 million, respectively, compared to $0.6 million during the
period from Inception to June 30, 1999. 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 $1.7 million
and $2.7 million, was $19.5 million and $39.0 million during the three and six
months ended June 30, 2000, respectively, compared to interest expense of $12.2
million which included $0.8 million of interest rate swap expense during the
period from Inception to June 30, 1999. The weighted average interest rate on
the Notes during the three and six months ended June 30, 2000 was 6.7% and 6.6%,
respectively. 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 six months ended June 30,
2000 was $10.7 million and $21.4 million, respectively, compared to $7.3 million
during period from Inception to June 30, 1999.
Operating expense during the three and six months ended June 30, 2000
was $4.6 million and $8.9 million, respectively, compared to less than $0.1
million during the period from Inception to June 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.
Administrative and other expenses during the three and six months ended
June 30, 2000 were $1.5 million and $3.1 million, respectively, compared to $1.0
million for the period from Inception to June 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 $2.2 million during the three and six months
ended June 30, 2000, respectively, compared to $0.9 million during the period
from Inception to June 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 $79.0 million, and
restricted cash of $17.0 million at June 30, 2000. The liquidity reserve amount,
which is included in cash and cash equivalents, was $52.0 million at June 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.
13
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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 six months ended June
30, 2000 amounted to $27.4 million, primarily reflecting non-cash depreciation
expense of $21.4 million, net income of $4.3 million, a decrease in restricted
cash of $2.4 million and an increase in security and other deposits of $3.4
million. These were offset by decreases in accounts payable and accrued
liabilities of $1.8 million and deferred rental income of $2.3 million.
Cash Flows from Investing and Financing Activities
Net cash used in investing activities for the six months ended June 30,
2000 amounted to $0.9 million for capitalized aircraft improvements and aircraft
delivery costs.
Net cash used in financing activities for the six months ended June 30,
2000 amounted to $20.2 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 June 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 have 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
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.
14
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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 June 30, 2000 was approximately $1,145 million. The
terms of each class of the Notes, including the outstanding principal amount at
June 30, 2000, are as follows:
Outstanding
Class of Principal Expected Final Final
Notes Amount Interest Rate Payment Date Maturity Date
----- ------ ------------- ------------ -------------
Class A-1 $ 512,500,000 LIBOR + 0.48% May 15, 2004 May 15, 2024
Class A-2 348,691,457 LIBOR + 0.50% June 15, 2008 May 15, 2024
Class B 124,793,872 LIBOR + 1.15% May 15, 2016 May 15, 2024
Class C 106,000,000 8.00% July 15, 2016 May 15, 2024
Class D 64,000,000 11.00% August 15, 2016 May 15, 2024
-------------
$1,155,985,329
Aircraft Finance was a party to seven interest rate swap agreements at
June 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.
The following table presents, as of June 30, 2000, the terms of
Aircraft Finance's interest rate swap agreements:
Rate to be
Fixed Rate to be received
Notional paid by Aircraft by Aircraft Maturity Estimated
Amount Finance Finance Date fair value
------ ------- ------- ---- ----------
$ 60,000,000 5.50% LIBOR January 15, 2002 $ 1,377,189
175,000,000 5.56% LIBOR October 15, 2002 5,615,559
345,000,000 5.65% LIBOR January 15, 2004 15,491,381
230,000,000 5.71% LIBOR November 15, 2004 11,893,112
20,000,000 (i) 7.13% LIBOR January 15, 2002 -
20,000,000 (i) 7.14% LIBOR October 15, 2002 -
15,000,000 (i) 7.17% LIBOR May 15, 2005 -
(i) Entered into in June 2000 Aircraft Finance with an effective date
of July 15, 2000.
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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Part II. Other Information
--------------------------
Item 5. Other Information
On August 15, 2000, Wayne Lippman resigned as Equity Trustee of
Aircraft Finance effective upon the appointment of Martin Kalb as successor
Equity Trustee.
Martin Kalb -- Mr. Kalb has served as Executive Vice President,
Secretary and General Counsel to UniCapital Corporation since May 1998 and
Assistant Secretary of UniCapital Air Group, Inc. since December 1998. From
October 1997 to May 1998, Mr. Kalb served as a consultant to UniCapital
providing services consistent with the duties and responsibilities of Executive
Vice President, Secretary and General Counsel of UniCapital. From 1987 until
November 1997, he was a senior partner in the Miami, Florida office of Greenberg
Traurig Hoffman Lipoff Rosen & Quentel, P.A., where his practice focused upon
mergers and acquisitions, income taxation and estate planning.
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)
b. Reports on Form 8-K
During the quarterly period ended June 30, 2000, Aircraft Finance filed
reports on Form 8-K dated April 17, 2000, May 15, 2000 and June 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
August 10, 2000 By: /S/CHARISSE L. RODGERS
--------------- ----------------------------------------
Date Name: Charisse L. Rodgers
Title: Senior Financial Services Officer
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 August 10, 2000
------------------------------ ---------------
David H. Treitel
/S/RICHARD E. CAVANAGH Independent Controlling Trustee August 10, 2000
------------------------------ ---------------
Richard E. Cavanagh
/S/WAYNE D. LIPPMAN Equity Trustee and Controlling August 10, 2000
------------------------------ Trustee ---------------
Wayne D. Lippman
/S/CHARISSE L. RODGERS Owner Trustee August 10, 2000
------------------------------ ---------------
Wilmington Trust Company, not
in its individual capacity but
solely as the Owner Trustee
17
