Item 1. Business
Introduction
Aircraft Finance Trust was formed on April 13, 1999 as a Delaware business trust and is a special purpose company. The authorized business of Aircraft Finance Trust and its present and future subsidiaries is limited to buying, owning, leasing and selling commercial jet aircraft and related activities. Aircraft Finance Trust currently has three subsidiaries: AFT Trust-Sub I, which is a Delaware business trust, Aircraft Finance Trust Ireland Limited, which is an Irish corporation, and Aircraft Finance France S.A.R.L., which is a French Corporation (collectively "Aircraft Finance"). All of Aircraft Finance's aircraft are owned by AFT Trust-Sub I. Three of these aircraft are leased by AFT Trust-Sub I to Aircraft Finance Trust Ireland Limited and one is leased to Aircraft Finance France S.A.R.L. for sublease to the ultimate user. Aircraft Finance's principal executive offices are located at 1100 North Market Street, Rodney Square North, Wilmington, Delaware 19890. Its telephone number is (302) 651-1000.
The beneficial interests in Aircraft Finance were originally purchased by UniCapital AFT-I, Inc. (51%) and UniCapital AFT-II, Inc. (49%), each of which were wholly-owned subsidiaries of UniCapital Air Group Inc., a wholly-owned subsidiary of UniCapital Corporation (UniCapital). During 1999, UniCapital AFT-I, Inc. sold 49.9% of its beneficial interest in Aircraft Finance to third party financial services companies. UniCapital Air Group, Inc. entered into an agreement during 1999 to sell its interest in UniCapital AFT-I, Inc. to one of the financial services companies. At December 31, 2000, these financial services companies own 51% of Aircraft Finance, and UniCapital Air Group, Inc. owns 49% through its subsidiaries. On December 11, 2000, UniCapital Corporation announced that it had filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code.
On May 5, 1999, Aircraft Finance issued $1,209 million of asset-backed notes (the "Initial Notes"). As of that date, the Initial Notes consisted of $512.5 million of Class A-1 Notes, $400 million of Class A-2 Notes, $126.5 million of Class B Notes, $106 million of Class C Notes and $64 million of Class D Notes. On January 20, 2000, Aircraft Finance completed an exchange offer whereby Aircraft Finance issued four classes of new notes, also designated Class A-1, Class A-2, Class B and Class C (the "Exchange Notes"), 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 unregistered. $3 million of the Class A-2 Initial Notes were not tendered in the exchange offer and remain outstanding. The remaining outstanding Initial Notes and the outstanding Exchange Notes are together referred to as the Notes.
Also on May 5, 1999, Aircraft Finance and its subsidiaries agreed with General Electric Capital Corporation to purchase 36 commercial jet aircraft from General Electric Capital Corporation and some of its affiliates under a master aircraft purchase agreement. Aircraft Finance paid the purchase price of approximately $1,196 million in full for these initial aircraft with the proceeds from the sale of the Initial Notes and from the sale of its beneficial interest. Remaining proceeds were used to fund cash reserves of $52 million. At December 31, 2000, all of the initial aircraft were on lease to 22 lessees based in 14 countries. For a detailed discussion of the value of the aircraft, see "The Aircraft Portfolio".
The trust agreement governing Aircraft Finance provides for four trustees. One of the four trustees of Aircraft Finance is Wilmington Trust Company, which is acting as the statutory trustee and the owner trustee. The remaining three trustees are the "controlling trustees" and have the authority to manage the property and affairs of Aircraft Finance under the trust agreement. All of the controlling trustees are independent from General Electric Capital Corporation. One of the controlling trustees, called the "equity trustee", has been appointed by the holders of Aircraft Finance's beneficial interest, while the two other controlling trustees, called the "independent controlling trustees", are independent of those holders. The holders of the beneficial interest of Aircraft Finance may remove and replace the equity trustee. Each independent controlling trustee may designate a replacement for the other controlling trustee if such other controlling trustee resigns or his office is deemed vacant.
The trust agreement requires that any decision relating to insolvency proceedings, mergers or other reorganizations of Aircraft Finance must be approved by a unanimous vote of the controlling trustees. Any sale of aircraft, decisions requiring Aircraft Finance's approval under the servicing agreement for the aircraft or under the agreement with the administrative agent, and the reduction of any required level of reserves must be approved by the equity trustee and at least one of the independent controlling trustees. In order for the controlling trustees to approve an aircraft sale on other than pre-approved terms, they must confirm to the indenture trustee, prior to the sale, that the sale will not materially and adversely affect the holders of the Notes. The acquisition of additional aircraft by Aircraft Finance and the terms of any related financing need only be approved by the equity trustee, subject to the terms of the trust agreement and the indenture, including confirmation by the rating agencies that the transaction will not adversely affect the rating on the Notes.
As is common with many other special purpose companies, Aircraft Finance will not have any officers or other employees, except, in the case of a subsidiary, as may be required by applicable law. Aircraft Finance has arranged for third-party service providers to provide aircraft servicing, managerial services and financial advice. See "Part III, Item 10. Directors and Executive Officers of the Registrant" for further information regarding the management of Aircraft Finance.
Aircraft Finance may acquire additional commercial passenger or freight aircraft from General Electric Capital Corporation or UniCapital or their respective affiliates. The indenture under which the Notes were issued contains a number of conditions for the acquisition of additional aircraft and for the financing of such an acquisition. If these conditions are met, there is no limit under the indenture to the number of additional aircraft that Aircraft Finance may acquire.
All of the net revenues of Aircraft Finance and its subsidiaries are used to pay principal, interest and other amounts due on the Notes or to provide for cash reserves for some or all of the subclasses of Notes. Except for accruals for the payment of anticipated expenses and required reserves, none of the revenues will be re-used or retained in the business of Aircraft Finance or its subsidiaries. In addition, none of the earnings of Aircraft Finance may be distributed to the holders of its beneficial interest until all Notes are repaid in full with the limited exception of reimbursing any payments made by those holders to cure interest shortfalls.
Because the Notes do not provide for fixed principal payments, the ultimate repayment of the Notes, the amount of individual payments over time and the speed of repayment are fully a function of Aircraft Finance's ability to collect revenues from the portfolio of the 36 aircraft and, if acquired, additional aircraft. Set forth below in the Risk Factors section are a variety of factors that, in addition to general economic conditions, could influence materially the collection of revenues -- principally lease rents and sale proceeds -- available for debt repayment.
References in this Form 10-K to the appraised value of aircraft at December 31, 2000 means the average of three appraisals of the aircraft as of December 31, 2000. For further discussion of the appraisals, see "The Aircraft Portfolio - - Appraisal of Aircraft".
Risk Factors
The following summarizes certain risks that may materially affect the business operations of Aircraft Finance and its ability to pay the interest, principal and premium, if any, on the Notes in full at or before their final maturity dates and to make cash distributions to the beneficial interest holders. There may be additional risks and uncertainties not known at the present. There can be no assurance that payments under the aircraft leases will be adequate to pay the interest, principal and premium, if any, on the Notes in accordance with their terms.
It should be noted that this Annual Report on Form 10-K (Form 10-K) contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. These statements relate to Aircraft Finance's future plans, objectives, expectations and intentions, and the assumptions underlying or relating to any of these statements. These statements may be identified by the use of words such as "expect," "may," "anticipate," "intend" and "plan". 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. Aircraft Finance's actual results may differ materially from those discussed in the forward-looking statements contained in this Form 10-K based on risks, including those discussed below.
Aircraft Finance is a special purpose entity and therefore is relying on only a limited number of revenue sources for its business.
It is unlikely that Aircraft Finance would be able to obtain any alternate source of funds if any of its limited sources of funds prove to be insufficient to pay the Notes and its other obligations. The sole sources of payment for the Notes and the other obligations of Aircraft Finance and its subsidiaries are:
(1) funds derived from the aircraft owned or to be acquired by them, including: rents, deposits, maintenance reserves and other payments under existing leases and any future leases, insurance proceeds, proceeds from the sale of aircraft and any payments by General Electric Capital Corporation as to several initial Brazilian leases;
(2) liquidity reserves funded out of the proceeds of the Initial Notes or that may be funded out of the proceeds of any future notes or beneficial interests in Aircraft Finance or provided through any future credit facilities;
(3) net payments under swap or other hedging agreements;
(4) investment earnings; and
(5) net proceeds from the sale of any notes issued to refinance other notes.
Aircraft Finance has no employees or managers of its own, and therefore its ability to generate revenues depends on contracts with, and performance by, independent third party service providers.
Inadequate performance and/or resignations by service providers may materially and adversely affect revenues and costs. In the absence of an ownership stake, third party service providers may have no incentive to perform beyond the strict requirements of their contract. Aircraft Finance is especially dependent on service providers because neither Aircraft Finance nor its subsidiaries have any employees or executive managers of its own.
Aircraft Finance relies on contracts with GE Capital Aviation Services, Limited, an affiliate of General Electric Capital Corporation, as the servicer, Phoenix American Financial Services, Inc., as successor to Resource/Phoenix Incorporated, as the administrative agent, Bankers Trust Company as the financial advisor and security trustee, Lehman Brothers Inc. as the capital markets advisor and other service providers for all asset servicing, executive and administrative functions.
Regarding these arrangements, please note that:
(1) any of these organizations may fail to perform its contractual obligations adequately;
(2) any of these organizations may exercise contract termination rights;
(3) Aircraft Finance may find it difficult to recover damages for poor performance in light of contractual limitations;
(4) Aircraft Finance may not be able to terminate the contract itself -- in particular its rights to terminate the aircraft servicing agreement are very limited; and
(5) Aircraft Finance may not have the legal right to locate satisfactory replacements on favorable terms.
The aircraft servicer may face conflicts of interest that could result in preferential treatment for a third party at the expense of Aircraft Finance. If the sevicer did prefer a third party in a conflict of interest, it could adversely affect Aircraft Finance's revenues.
GE Capital Aviation Services, Limited will from time to time have conflicts of interest that may adversely affect its ability to perform its obligations as the servicer for Aircraft Finance because it manages aircraft and other assets of other entities, in particular for its affiliate, General Electric Capital Corporation and its group. These conflicts will arise if the servicer leases Aircraft Finance's aircraft to the same entities that are also the lessees of other aircraft managed by the servicer. In this circumstance, decisions affecting some aircraft may unavoidably be adverse to others. If the servicer makes a decision adverse to Aircraft Finance's interests, Aircraft Finance's revenues could suffer.
These conflicts may be particularly acute when a lessee in financial distress needs to return some of its aircraft. Conflicts will also arise when the aircraft of Aircraft Finance are being marketed for re-lease or sale at a time when other aircraft managed by the servicer are being similarly marketed. These circumstances may be especially sensitive where General Electric Capital Corporation is providing financing for the marketed aircraft or where the servicer's contractual arrangements have the effect of requiring preferential treatment for other aircraft.
Under the terms of its servicing agreement with the servicer, Aircraft Finance is not necessarily entitled to be informed of all conflicts of interest involving the servicer and is limited in its right to replace the servicer because of conflicts of interest.
Because Aircraft Finance's contract limits its remedies against the servicer for poor performance, Aircraft Finance may at some point bear costs that will reduce its available revenues.
Under the aircraft servicing agreement, Aircraft Finance may not in all cases have the right to recover damages for inadequate performance. Aircraft Finance's right to terminate the servicing agreement by reason of a failure of the servicer to perform is, moreover, limited to those failures to perform that materially and adversely affect Aircraft Finance and its subsidiaries as a whole.
In particular, the servicer is not contractually responsible for, among other things:
(1) the transfer of aircraft, leases or other assets to any person within Aircraft Finance;
(2) the adequacy of the terms of any aircraft lease, including rent payments, maintenance reserves or security deposits;
(3) the reliability or creditworthiness of any lessee; and
(4) the terms of the Notes and the ability of Aircraft Finance to comply with the terms of the Notes.
Aircraft Finance has agreed to indemnify the servicer and its affiliates for broad categories of losses arising out of the performance of services for the aircraft and leases held by subsidiaries of Aircraft Finance, unless the losses arise from the servicer's gross negligence or willful misconduct.
Market interest rate fluctuations could change expected cash flows.
Interest rate exposure arises to the extent that Aircraft Finance's fixed and floating rate obligations under the Notes do not correlate to either or both of the mix of fixed and floating rate rental payments for different periods and the timing of those payments. Although Aircraft Finance will attempt to hedge that exposure as described in "Item 7A. Quantitative and Qualitative Disclosures about Market Risk", it makes no assurance that it will be effective in implementing its hedging goals. In addition, the premature termination of any lease may result in Aircraft Finance incurring prepayment or cancellation costs under its hedging agreements.
Changes in the aircraft portfolio could change expected cash flows.
The assumptions regarding the expected cash flow of Aircraft Finance are subject not only to a variety of economic factors, but also to any substantial change in the composition of the aircraft portfolio from that initially contemplated. Any substantial change in that composition could significantly alter expected cash flows and the nature and degree of risks affecting cash flows. Three principal factors could affect the fleet composition.
(1) The exercise of purchase options by lessees. The exercise of a lessee purchase option may result in sale proceeds lower than target sale prices of the aircraft if payments on the Notes have not been made as assumed. Two lessees with respect to three of the aircraft,
representing 11.8% of the aggregate appraised value at December 31, 2000, have unexpired options to purchase aircraft.
(2) The loss of aircraft through casualty or governmental taking. The proceeds of insurance and taking awards may not be sufficient to compensate for the loss of the revenue otherwise available from the affected aircraft.
(3) The purchase of additional aircraft. Aircraft Finance may acquire additional commercial passenger or freight aircraft from General Electric Capital Corporation or UniCapital or their respective affiliates. Although any additional aircraft may add to the cash flow of Aircraft Finance and such acquisitions are subject to confirmation by the rating agencies rating the Notes that the agencies will not lower, qualify or withdraw any rating on the Notes as a result and other requirements of the indenture governing the Notes, Aircraft Finance cannot predict the effect of additional aircraft on its cash flows and ability to repay the Notes.
Aircraft Finance will not receive enough revenues from its current aircraft leases to repay the Notes in full and therefore it will have to re-lease or sell the aircraft in order to repay the Notes in full.
Aircraft Finance will need to re-lease aircraft as current leases expire in order to continue to generate enough revenue to pay the Notes in full. Failing re-leasing, it will need to attempt to sell the aircraft to provide funds for note payments. Aircraft Finance may be unable to sell the aircraft at satisfactory prices if market conditions decline.
Over the life of the aircraft portfolio, it is likely that some of the aircraft lessees will experience financial difficulties which will cause them to delay or miss rental payments to Aircraft Finance.
The ability of each aircraft lessee to perform its lease obligations will depend not only on the managerial skills of its employees but also on general economic conditions in the country or region in which it operates as well as competition, fare levels, passenger demand, and operating costs, including, but not limited to, the cost of fuel. Some of Aircraft Finance's existing lessees are in a weak financial position, and this is likely to be the case with future aircraft lessees as well. As the aircraft approach the end of their realizable useful life, it is increasingly likely that the aircraft will be leased to less creditworthy lessees. In a portfolio the size of Aircraft Finance's, it should be expected that some aircraft lessees may at some point be slow in paying or may fail to pay in full. In most instances, late payments are recovered, together with default interest or other similar payments required by the leases. In other instances, a restructuring of the lease is required, involving anything from a simple rescheduling of payments to the termination of a lease.
A delayed or missed rental payment from a lessee decreases Aircraft Finance's revenues, adversely affecting the timely or full repayment of the Notes. A certain level of delinquency has been assumed for purposes of calculating the estimated final payment date for the Notes. Aircraft Finance cannot assure, however, that default levels will not increase over time, particularly if the current favorable economic conditions do not continue.
Increased fuel prices could have a negative financial impact on Aircraft Finance's current lessees and could adversely affect its ability to re-lease the aircraft.
Oil prices have increased in recent years, and many airlines have reported reduced levels of profitability due to higher fuel prices. To the extent that fuel prices remain at their current levels or increase further, this could cause lessees to experience financial difficulties which could cause them to delay or miss their rental payments. High fuel prices could also adversely affect Aircraft Finance's ability to re-lease or sell aircraft on advantageous terms.
Aircraft Finance faces competition from a variety of entities.
In leasing and selling aircraft in its portfolio, Aircraft Finance faces competition from a variety of entities. These include:
(1) the manufacturers of aircraft, such as Boeing and Airbus;
(2) financial institutions engaged in the leasing business and other leasing companies, such as General Electric Capital Corporation and International Lease Finance Corporation;
(3) banks and other financial institutions that have foreclosed on aircraft collateral;
(4) airlines which are disposing of aircraft; and
(5) other aircraft portfolio entities formed for purposes similar to those of Aircraft Finance.
Many, if not most, of these entities have greater resources, greater financial flexibility and longer operating histories than Aircraft Finance.
Operational restrictions may harm Aircraft Finance's ability to compete.
The indenture governing the Notes and other governing documents impose restrictions on how Aircraft Finance operates its business. These restrictions may limit the ability to compete effectively in the aircraft leasing market under certain circumstances. For example, there are concentration limits contained in the indenture that restrict Aircraft Finance's ability to lease a certain percentage of aircraft to any individual lessee, to lessees in particular countries, or to lessees in particular geographical regions. Most of Aircraft Finance's competitors do not operate under such restrictions.
The concentration of lessees in a particular geographical region may amplify Aircraft Finance's exposure to local economic conditions.
The commercial aviation industry throughout the world generally is highly sensitive to general economic conditions. Because a substantial portion of business and, especially, leisure airline travel is discretionary, the industry has tended to suffer during economic downturns. In addition, local economic and political conditions can influence the performance of a lessee located in a particular region. The effect of those local conditions on Aircraft Finance will be more or less intense depending on the concentration of the number of its lessees in that region.
European concentration. As of December 31, 2000, lessees based in Europe account for aircraft having 50.12% of the aggregate appraised value at December 31, 2000, with all 50.12% based in "developed" European markets as opposed to "emerging" European markets. The financial prospects for European lessees can be expected to depend largely on the level of economic activity in Europe generally and in the specific countries in which these lessees operate. A recession or
other worsening of economic conditions in one or more of these countries, particularly if combined with high fuel prices and/or a weak euro, may have a material adverse effect on the ability of European lessees to meet their financial and other obligations under the leases. In addition, commercial airlines in Europe face, and can be expected to continue to face, increased competitive pressures, in part as a result of the continuing deregulation of the airline industry by the EU. There can be no assurance that competitive pressures resulting from such deregulation will not have a material adverse impact on the operations of our European lessees.
Asia Pacific region concentration. As of December 31, 2000, lessees based in the Asia Pacific region, including China and India, account for aircraft having 14.51% of the aggregate appraised value at December 31, 2000. The commercial aircraft industry in Asia was adversely affected by the severe economic and financial difficulties experienced in the region during 1998 and 1999. Since 1999, there has been some stabilization and recovery in the economies of this region. If the recessionary conditions that prevailed in large parts of the region were to recur, they would have an adverse impact on global aircraft demand.
Latin American concentration. As of December 31, 2000, lessees based in Latin America account for aircraft having 10.64% of the aggregate appraised value at December 31, 2000. The prospects for lessee operations in Latin American countries depend in part on the general level of political stability and economic activity and policies in those countries. Future developments in the political systems or economies of these countries or the implementation of future government policies may materially affect lessee operations in those countries.
During 1999, Brazil experienced significant downturns in its economy and financial markets, including large decreases in financial asset prices and dramatic decreases in the value of its currency. While there has been some stabilization in the Brazilian economy within the last twelve months, any future general deterioration in the Brazilian economy could lead to a material decrease in Aircraft Finance's leasing revenues and an increase in default related costs.
North American concentration. As of December 31, 2000, lessees based in North America account for aircraft having 24.75% of the aggregate appraised value at December 31, 2000. The commercial aircraft 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 past several years, nearly half of the major North American passenger airlines have entered into plans of reorganization or sought protection through bankruptcy, insolvency or other similar proceedings and several major U.S. airlines have ceased operations.
On January 10, 2001, Trans World Airlines, Inc. ("TWA"), one of Aircraft Finance's lessees, filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). TWA leases one aircraft from Aircraft Finance, which represents 4.9% of the aircraft by aggregate appraised value as of December 31, 2000. On March 23, 2001, TWA paid rents due as of March 22, 2001. There can be no assurances that TWA will continue to make the rental and other payments required under the leases with Aircraft Finance. TWA's failure to make such payments would have an adverse impact on Aircraft Finance's revenues and cash flows. By order of Judge Peter J. Walsh dated March 12, 2001, the Bankruptcy Court authorized American Airlines, Inc.'s ("American") bid, submitted on February 28, 2001, to sell substantially all of TWA's assets to American. As of March 30, 2001, Aircraft Finance is in negotiations with American with respect to the TWA lease. However, there are no assurances that such negotiations will not reduce lease payments, or that the related aircraft will not be returned to Aircraft Finance.
Maintenance costs may at times be paid by Aircraft Finance.
Any failure of an aircraft to be maintained or modified properly in accordance with manufacturer's requirements or airworthiness directives and other governmental requirements, including those relating to noise and emissions standards, can impair the safety of the aircraft, result in grounding or penalties and affect the ability to re-lease or to sell the aircraft. The costs of maintenance can be substantial and may have a higher payment priority than that of the Notes. In many cases, the lessee is required to provide for maintenance or modifications. Lessees could, however, fail to pay those costs, and the burden would fall on Aircraft Finance. In addition, Aircraft Finance as the lessor is, in some instances, required to bear a portion of the maintenance costs, and the pressure of competition may require it to bear an increasing portion of those costs in the future. Although Aircraft Finance established a cash reserve which is $52 million as of December 31, 2000, any significant variations in the costs required to be paid directly by Aircraft Finance may materially impair the ability of Aircraft Finance to make payments on the Notes.
Other operating costs may at times be paid by Aircraft Finance.
As in the case of maintenance costs, Aircraft Finance may incur other operational costs upon a lessee default or where the terms of the lease require it to pay a portion of those costs. Those costs include:
(1) the costs of casualty, liability and political risk insurance and the liability costs or losses when insurance coverage has not been or cannot be obtained as required or is insufficient in amount or scope;
(2) the costs of licensing, exporting or importing an aircraft, airport taxes, customs duties, air navigation charges and similar governmental or quasi-governmental impositions, which can be substantial; and
(3) penalties and costs associated with the failure of lessees to keep the aircraft registered under all appropriate local requirements.
The failure to pay some of these costs can result in liens on the aircraft, and the failure to register can result in a loss of insurance. These matters can prevent the re-lease, sale or other use of the aircraft until the problem is cured.
Aircraft Finance will need to re-lease or sell aircraft to maintain its revenues.
The number and types of the aircraft that Aircraft Finance must place with lessees through December 31, 2005 is presented in the table below. That table shows the years in which the leases for those aircraft are contractually scheduled to expire or have terminated. The table illustrates that the leases for 33 of the aircraft, representing approximately 89.6% of the aggregate appraised value at December 31, 2000, are scheduled to expire or permit early termination on or before December 31, 2005. The table assumes that, except as indicated, no lease terminates prematurely, no aircraft are sold and no additional aircraft are purchased. More aircraft will need to be re-leased to the extent leases terminate prematurely.
Year Ending December 31, ------------------------ Aircraft Type 2001 2002 2003 2004 2005 - ------------- ---- ---- ---- ---- ---- B737-300................... 1(a) 2 - 4 4 B737-400................... - 2 1 - 2 B767-300ER................. - - - - - B767-300ER................. - - 1 1 1 A310-300................... - - 1 - - A320-200................... - - 2 4 1 DC-10-30................... - 2 - - - MD-83...................... 1 1(b) 1 1 - ----- ------ ----- --- --- Total...................... 2 7 6 10 8
(a) Lessee returned the aircraft in January 2001 and paid a termination fee. (b) An early termination option is assumed to be exercised.
Aircraft Finance may have difficulty in re-leasing or selling aircraft at favorable terms.
The servicer, GE Capital Aviation Services, Limited, has agreed to seek to re-lease aircraft serviced by it as they become available upon the termination of any lease. The servicer has not assured Aircraft Finance, and Aircraft Finance makes no assurances, that it will be able to re-lease aircraft on a timely basis, at equally favorable rental rates or otherwise on favorable lease terms. Aircraft Finance's ability to obtain timely and favorable lease terms or to sell aircraft at attractive prices may be adversely affected by unpredictable changes in general economic conditions, passenger demand and the competitive strength of the airline industry. The availability of commercial jet aircraft for lease or sale has periodically experienced cycles of over supply and under supply, resulting in sharp decreases and increases in aircraft values and lease rates. Among other factors that could influence lease terms and sales prices are the following:
(1) cyclical changes in interest rates and the availability of credit;
(2) fluctuations in the cost of fuels and other materials, labor costs, costs associated with changing governmental regulations and air traffic control constraints;
(3) manufacturer production levels, particularly increased production of new aircraft, as announced by Boeing and Airbus, which makes older, used models less attractive, especially in Asia where an oversupply is already perceived to exist;
(4) the cessation or announced cessation of production of particular aircraft models, such as, after the merger of Boeing and McDonnell Douglas, the MD-80, of which there are four in Aircraft Finance's initial portfolio, representing approximately 7.0% of the aggregate appraised value at December 31, 2000 of the portfolio;
(5) the operating history of particular aircraft, the identity of its operators and legal and regulatory requirements affecting its operation and transfer or leasing;
(6) changes in aircraft technology, either significant advances by manufacturers or governmentally mandated modifications, that may render older models substantially less attractive or may result in modification costs that reduce net sales prices or rentals; and
(7) competition from aircraft manufacturers, airlines, aircraft leasing companies, financial institutions, aircraft broker and special purpose leasing vehicles that may have greater financial resources and greater legal and financial flexibility to structure and offer more favorable leasing, pricing or financing alternatives.
Aircraft type concentrations may amplify other risk factors.
The concentration of the types of aircraft held by Aircraft Finance may amplify some of the factors noted above. The aircraft owned by Aircraft Finance include eight aircraft types, three of which represent together 70.2% of the aggregate appraised value at December 31, 2000, with Boeing 737-300s constituting 27.9%, Boeing 767-300ERs constituting 23.9% and Airbus A320-200s constituting 18.4% of that aggregate appraised value. Also, narrowbody aircraft constitute 65.5% of the aggregate appraised value at December 31, 2000.
The Aircraft Portfolio
The following tables set forth details of the aircraft owned by Aircraft Finance as of December 31, 2000. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments" for further information about events that have occurred subsequent to December 31, 2000.
The following table identifies the 36 aircraft by type of aircraft. % of Aircraft by Type of Number of Appraised Value as of Manufacturer Aircraft Aircraft Body Type December 31, 2000 - ------------ -------- -------- --------- ----------------- Boeing B737-300 11 Narrowbody 27.9% B737-400 5 Narrowbody 12.2% B767-200ER 2 Widebody 5.4% B767-300ER 4 Widebody 23.9%
Airbus A310-300 1 Widebody 2.5% A320-200 7 Narrowbody 18.4% McDonnell Douglas DC-10-30 2 Widebody 2.7% MD-83 4 Narrowbody 7.0% --- ---------- Total 36 100.0%
All of the aircraft hold or are capable of holding a noise certificate issued under Chapter 3 of Volume I, Part II of Annex 16 of the Chicago Convention or have been shown to comply with the Stage 3 noise levels set out in Section 36.5 of Appendix C of Part 36 of the United States Federal Aviation Regulations.
The following table identifies the countries in which the lessees of the 36 aircraft are based, calculated as of December 31, 2000. % of Aircraft by Number of Appraised Value as of Country Aircraft December 31, 2000 - ------- -------- ----------------- U.K......................................... 7 21.9% U.S......................................... 5 12.9% Italy....................................... 2 9.1% Belgium..................................... 1 2.6% Brazil...................................... 3 8.0% Canada...................................... 4 11.9% China....................................... 2 5.1% France...................................... 2 6.4% Indonesia................................... 1 2.6% India....................................... 2 4.3% Philippines................................. 1 2.5% Spain....................................... 3 5.0% Ireland..................................... 2 5.1% Mexico........................................ 1 2.6% --- --------- Total....................................... 36 100.0%
The following table identifies the regions in which the 36 aircraft are based, calculated as of December 31, 2000.
% of Aircraft by Number of Appraised Value as of Region Aircraft December 31, 2000 - ------ -------- ----------------- Developed Markets Europe................................ 17 50.1% North America......................... 9 24.8% Emerging Markets Asia.................................. 6 14.5% Latin America......................... 4 10.6% ---- ------- Total...................................... 36 100.0%
The following table identifies the current lessees of the 36 aircraft, calculated as of December 31, 2000.
% of Aircraft by Number of Appraised Value as of Lessee Aircraft December 31, 2000 - ------ -------- ----------------- Air 2000 Limited........................... 1 7.1% Airtours International Airways Limited..... 2 4.7% America West Airlines, Inc................. 1 2.7% Linee Aeree Italiane S.p.A................. 1 7.1% British Airways............................ 1 2.6% British Midland Airways PLC................ 3 7.5% Canadian Airlines International Ltd........ 3 9.3% China Eastern Airlines Corporation Limited. 2 5.1% City Bird.................................. 1 2.7% Continental Airlines, Inc.................. 2 2.7% Eurofly S.p.A.............................. 1 1.9% Frontier Airlines, Inc..................... 1 2.6% Garuda Indonesian Airlines, pt............. 1 2.6% Jet Airways (India) Limited................ 2 4.3% Philippine Airlines........................ 1 2.5% Royal Aviation, Inc........................ 1 2.6% Spanair S.A................................ 3 5.0% Societe de Transport Aerien Regional....... 2 6.4% VARIG...................................... 3 8.0% TWA........................................ 1 4.9% Virgin Express S.A. N.V.................... 2 5.1% Mexicana................................... 1 2.6% --- --------- Total...................................... 36 100.0%
Total Number of Lessees: 22
The following table lists the 36 aircraft by seat category.
% of Aircraft by Number of Appraised Value as of Seat Category Aircraft Types Aircraft December 31, 2000 - ------------- -------------- -------- ----------------- 121-170 B737-300, B737-400, MD-83 20 47.1% 135-180 A320-200 7 18.4% 171-240 A310-300, B767-200ER, B767-300ER 7 31.8% 240+ DC-10-30 2 2.7% --- --------- Total 36 100.0%
The following table identifies the aircraft by year of aircraft manufacture. The weighted average age of the 36 aircraft as of December 31, 2000 is approximately 6.4 years.
% of Aircraft by Number of Appraised Value as of Year of Manufacture Aircraft December 31, 2000 - ------------------- -------- ----------------- 1980....................................... 1 1.2% 1982....................................... 1 1.4% 1986....................................... 1 1.5% 1987....................................... 2 5.4% 1988....................................... 1 2.5% 1989....................................... 1 1.7% 1991....................................... 6 15.9% 1992....................................... 4 11.2% 1993....................................... 1 2.6% 1996....................................... 5 12.9% 1997....................................... 10 26.8% 1998....................................... 1 2.7% 1999....................................... 2 14.2% ---- --------- Total...................................... 36 100.0%
Further particulars of the 36 aircraft, calculated as of December 31, 2000, are contained in the table below:
Appraisal of Aircraft.
Aircraft Finance has agreed to deliver to Bankers Trust Company as the security trustee, commencing in 2000, appraisals of the base value of each of the aircraft at least once each year by May 31. The appraisals must come from at least three independent appraisers that are members of the International Society of Transport Aircraft Trading or any similar organization and be dated within 30 days prior to their delivery to the trustee.
Three appraisers, Aircraft Information Services, Inc., BK Associates, Inc. and Morten Beyer & Agnew, Inc., provided appraisals of the value of each of the aircraft as of December 31, 2000. The appraisals assume, among other things, that the aircraft are utilized normally in an open, unrestricted and stable market, adjusted where necessary to account for the reported maintenance standard of the aircraft. Values calculated under these assumptions are "base values." The current appraised value of each aircraft is determined by taking the average of the base values contained in the three appraisals. The appraisals were not based on a physical inspection of the aircraft.
Based on the appraisals, the aggregate of the current appraised values for the aircraft as of December 31, 2000 is $1,177,403,333 compared to $1,256,133,667 and $1,322,643,333 as of December 31, 1999 and 1998, respectively. These base values should not be relied upon as a measure of the market or realizable value of any initial aircraft. In addition, the base values of the aircraft are expected to decline over time due to the aging of the aircraft, increasing maintenance expenses and similar factors. The appraisals listed above were as of December 31, 2000, and the base values of the aircraft, if determined as of any date subsequent to December 31, 2000, would be expected to be lower than the base values in the appraisals.
The appraised base values obtained and to be obtained assume an "open, unrestricted stable market environment with a reasonable balance of supply and demand" and other factors common for like appraisals. At any point in the aircraft leasing cycle, however, there will be imbalances of aircraft supply and demand and there may be particularly pronounced imbalances for specific aircraft types. Consequently, although some initial aircraft may have market values approximating or exceeding the appraised values given them, others, such as the older aircraft, may have market values below, and in some cases significantly below, those appraised base values. At a cyclical low, the market value of most aircraft types is likely to be less than, and in some cases significantly less than, the appraised base values. Accordingly, you should not place undue reliance on the indicated appraised values as an accurate depiction of current market or realizable values at any one point in time.
The Leases.
As of December 31, 2000, there were 22 lessees under leases for the aircraft in 14 different countries. Aircraft Finance recognized $100 million and $145 million of rental and other income from operating leases, respectively. This was comprised of $14 million in the 1999 Period and $22 million in the 2000 Period from lessees based in the United States of America and $86 million in the 1999 Period and $123 million in the 2000 Period from lessees based outside the United States of America. During the year ended December 31, 2000, 15% of the rental and other income was derived from lessees based in the United States of America, and 85% from lessees based outside the United States of America, including 21% from the United Kingdom, 10% from Canada, 9% from Italy and 7% from Brazil. The following description relates to the leases for the aircraft in effect on December 31, 2000. Any leases of additional aircraft and any future leases entered into for the re-lease of any aircraft may differ from the description provided below.
As a general matter, weakly capitalized airlines are more likely than well capitalized airlines to seek operating leases. It should be expected that varying numbers of lessees at any point in time will be experiencing payment difficulties.
The servicer has advised Aircraft Finance that in the servicer's experience some lessees of aircraft similar to the aircraft owned by Aircraft Finance and its affiliates fail to make timely lease, maintenance and other payments from time to time over the course of their leases. In most instances, late payments are recovered, together with default interest or other similar payments required by the leases. In some instances, the financial difficulties of a portfolio's lessees may result in a formal or informal restructuring. Restructurings may involve the voluntary termination of a lease prior to its expiration and the arrangement of subleases from the lessee to another aircraft operator. In addition, restructurings may involve reduced rental payments for a specified period, which may be several months.
Management, Lease Terms.
All leases of the aircraft will be managed by the servicer under the servicing agreement. All of the leases for the initial aircraft are operating leases. Under those leases, the lessees agreed to lease the aircraft for a fixed term, although in some cases the lessees have purchase options, termination rights and extension rights. Although most of the lease documentation for the initial aircraft is fairly standardized in many respects, significant variations do exist as a result of lessee negotiation.
Lease Payments and Security.
Each lease for an initial aircraft requires the lessee to pay periodic rentals during the lease term. A number of the leases require the lessee to pay periodic amounts as maintenance reserves.
The lessees are required to make payments without withholding payment on account of any amounts the lessor may owe the lessee or any claims the lessee may have against the lessor for any breach of contract. Each lease includes an obligation of the lessee to gross-up payments under the lease where lease payments are subject to withholdings and other taxes, although sometimes the gross-up amount will be limited to the amount that would have been payable if such lease had never been transferred to Aircraft Finance. The leases for the initial aircraft also require the lessee to indemnify the lessor for some tax liabilities including, in some leases, value added tax and stamp duties, but generally excluding income tax or its equivalent imposed on the lessor. The lessees must also pay default interest on any overdue amounts. In the lease with British Airways, the lessee may exercise remedies if the lessor breaches its covenant not to interfere with the lessee's use of the aircraft.
Under the leases for the initial aircraft, the lessee must pay operating expenses accrued or payable during the term of the lease, which would normally include maintenance, operating, overhaul, airport and navigation charges, certain taxes, licenses, consents and approvals, aircraft registration and hull "all risks" and public liability insurance premiums. The lessees are obliged to remove liens on the aircraft other than liens permitted under the leases.
Under all but six of the leases for the initial aircraft, the lessee has provided security deposits to secure its obligations. In eleven of the leases, the lessee has provided only cash security deposits. In ten of the leases, the lessee has provided only a letter of credit. In the remaining nine leases, the lessee has provided both letters of credit and a cash security deposit.
Rentals.
Most of the rental payments are payable on a fixed rate basis and are not adjustable by reference to market interest rate changes. Rentals under most of the leases for the initial aircraft are payable monthly in advance.
Operation of the Original Aircraft.
The leases require the lessees to operate the aircraft in compliance with all applicable laws and regulations. The initial aircraft generally must remain in the possession of the lessees, and any subleases of the aircraft must be approved by the lessor. Under some of the leases, the lessee may enter into charter or other arrangements for the aircraft if the lessee does not part with operational control of the aircraft. Generally, the lessees are not allowed to re-register the aircraft without the lessor's permission, except in connection with a permitted sublease if operating in specified countries.
All of the leases for the initial aircraft permit the lessees to remove or replace the engines and in some cases other equipment or components. Sometimes lessees are allowed to enter into pooling arrangements for the temporary borrowing of equipment, in some cases without the lessor's consent. Under all of the leases, the lessees may deliver the aircraft, engines and other equipment or components to their manufacturer for testing or similar purposes, or to other parties for service, maintenance, repair or other work required or permitted under the lease. The lessor's ability to repossess the aircraft or engines,
equipment or components from any sublessee, transferee, manufacturer or other person may be restricted by liens or similar rights and by applicable bankruptcy and similar laws.
Maintenance and Maintenance Reserves.
The leases for the aircraft specify maintenance standards and the required condition of the aircraft upon redelivery to the lessor. In addition, under some of the leases, depending on the condition of the aircraft, including the airframe, engines, the auxiliary power unit or landing gear at redelivery, the lessee may have to make adjustment payments to the lessor. During the term of each lease, the lessee must ensure that the aircraft is maintained in accordance with an agreed maintenance program designed to provide that the aircraft meets applicable airworthiness and other regulatory requirements. Under the leases for the initial aircraft, maintenance is generally performed by the lessee or, for some of the regional lessees, by a designated airline or other air authority approved maintenance provider. Under most of the leases for the initial aircraft, the lessee must provide monthly maintenance reserves. In some cases where the lessee has paid maintenance reserves, those payments will be used to reimburse the lessee for maintenance charges, including major airframe and engine overhauls.
Some of the leases for the initial aircraft do not require maintenance reserves to be paid. In those cases the lessor must rely on the credit of the lessee or any credit support the lessee provides to ensure that the lessee returns the aircraft in the condition required by the lease upon termination, makes any payments required based on the aircraft's return condition upon termination of the lease and performs scheduled maintenance throughout the lease term.
Some of the leases for the initial aircraft require the lessor to contribute to the cost of the first maintenance event in respect to the airframe, engines, auxiliary power unit or landing gear. Such lessor contributions are generally determined on a pro-rated basis, based upon the condition of these components at delivery to the lessee.
The leases for the initial aircraft require the lessees to comply with the airworthiness directives of the relevant aviation authorities and with manufacturers' service bulletins. The lessees primarily bear the cost of compliance. Some of the leases, however, require the lessor to contribute to the cost of compliance with selected airworthiness directives or manufacturers' service bulletins if compliance costs are above a specified threshold.
Lessees' Options.
The leases or side agreements between the lessor and the lessee for three of the aircraft, representing 11.8% of the aggregate appraised value at December 31, 2000 of the aircraft, grant purchase options to the lessee or its affiliates. None of the purchase options were exercisable as of December 31, 2000. The latest date on which a purchase option may be exercised is December 31, 2003 for a purchase on April 30, 2005, or if all lease extension options are exercised, April 30, 2010. If a purchase option is exercised, the proceeds realized from the exercise may not, in some circumstances, equal the principal of the Notes allocable to the relevant aircraft.
Seven of the leases for the 36 aircraft give the lessee the option to extend the term of the lease. The rent payable during the extension period varies from lease to lease. Three of the leases allow the lessee to terminate its lease prior to the scheduled expiration date, though sometimes the lessee must pay a fee or fulfill other requirements.
Indemnification and Insurance of the Aircraft.
Insurance Requirements. The leases for the initial aircraft require the lessees to bear responsibility and carry insurance for any liabilities arising out of the operation of the aircraft. These include any liabilities for death or injury to persons and damage to property that would ordinarily attach to the operator of the aircraft, subject to customary exclusions. In addition, the lessees must carry other types of insurance that are customary in the air transportation industry. These include aircraft hull all risks and hull war risks insurance at a value stipulated in the lease and aircraft spares insurance on a replacement cost basis, in each case subject to customary deductibles. The servicer must monitor the lessees' compliance with the insurance provisions of the leases.
In addition, Aircraft Finance also has in place its own contingent liability coverage. That coverage covers both a liability that exceeds the coverage provided by a lessee's policy and instances in which a lessee's policy lapses for any reason. Aircraft Finance and its subsidiaries' contingent third-party liability insurance covers all of the aircraft, and their contingent hull and hull war risks insurance covers some of the aircraft. The amount of the contingent liability policies may or may not exceed the amount required under the relevant lease. The amount of third-party contingent liability compliance insurance is subject to limitations imposed by the air transportation insurance industry.
If any of the existing insurance policies are canceled or terminated and if an aircraft is re-leased, the servicer may from time to time engage insurance experts at Aircraft Finance's expense to advise and recommend the appropriate amount of insurance coverage Aircraft Finance should procure.
Liability Insurance. The leases for the initial aircraft require third party liability insurance for a combined single limit for bodily injury and property damage in minimum amounts ranging between $500 million and $750 million for each aircraft. In general, liability coverage on each aircraft includes third party legal liability, passenger legal liability, baggage legal liability, cargo legal liability, mail and aviation general third party (including products) legal liability.
In some jurisdictions Aircraft Finance may be liable, as owner of an aircraft, for obligations that may be insured against by the lessees even if Aircraft Finance is not responsible for the loss that results in the obligation. In addition, claims may be made against Aircraft Finance or its subsidiary on the basis of alleged responsibility for a loss, even if such claim is not ultimately sustained.
The losses for which coverage is provided include both operating costs relating to the actual operation of the aircraft as well as losses to persons and property resulting from the operation of the aircraft. The latter types of losses are generally covered by the lessees' liability insurance.
Aircraft Property Insurance. In addition to hull risk, hull war and allied peril risk and aircraft spares insurance coverage obtained by the lessees, Aircraft Finance will also purchase "total loss only" coverage with respect to some initial aircraft. Aircraft Finance is required to maintain aircraft property insurance on its aircraft in an amount equal to the greatest of a) the note target price, b) the appraised value for such aircraft or c) 110% of the net book value of such aircraft. In some cases, the lessor is allowed to increase the insured value above the stipulated loss value consistent with industry practice. In those cases the lessee is responsible for any increased premium that results. Permitted deductibles range from $100,000 to $1,000,000; the deductibles, however, apply only in the case of a partial loss.
The leases for the initial aircraft include provisions defining an event of loss or a casualty occurrence so that upon total loss of the airframe, with or without loss of the engines, an agreed value is payable by the lessee. This
payment is generally funded with insurance proceeds. The air transportation insurance industry practice, however, is to treat only a loss with likely repair costs of greater than 75% of the insured value of the aircraft, including the engines, as a total loss. Where insurance proceeds exceed the cost of repair or the amount required to be insured under the lease, most leases require the lessor to pay to the lessee the balance of the insurance proceeds received under the hull all risks or war risks policy after deduction of all amounts payable by the lessee to the lessor under the lease.
All insurance policies currently in place contain a breach of warranty endorsement so that the additional insureds continue to be protected even if the lessee violates one or more of the provisions of the insurance policies. In many cases, these endorsements also provide that this protection will only apply if the additional insured has not caused, contributed to or knowingly condoned the breach.
An insurance advisor has confirmed to the servicer that the insurance currently detailed in the current insurance certificates as to the initial aircraft meets customary practices.
Generally, the leases for the initial aircraft require the lessee to maintain as part of its hull war and allied perils insurance coverage for loss or damage resulting from a governmental confiscation or requisition of the applicable aircraft. In some countries, however, such as France and China, that kind of insurance may not be obtainable by the lessee.
Item 2.
Item 2. Properties
Aircraft Finance has no ownership or leasehold interest in any real property. For a description of Aircraft Finance's interest in other property, including its aircraft, see "Item 1. Business."
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
a) Market Information.
As of the date of this Annual Report on Form 10-K (Form 10-K), no equity securities of Aircraft Finance have been registered with, or are listed on any national exchange or traded in any established market.
b) Holders.
There were ten beneficial interest holders of Aircraft Finance's beneficial interest certificates at December 31, 2000.
c) Dividends.
As of the date of this Form 10-K, no distributions to the beneficial interest holders have been paid or declared by Aircraft Finance. Under the terms of the indenture, Aircraft Finance is restricted from making distributions to the beneficial interest holders until, among other things, all outstanding principal and interest balances due on the outstanding Notes have been paid in full.
Recent Sales of Unregistered Securities.
On May 5, 1999, Aircraft Finance issued $1,209 million of asset-backed notes (the Initial Notes) to Qualified Institutional Buyers as such term is defined in Rule 144A under the Securities Act of 1933, as amended, and to non-U.S. persons in offshore transactions in accordance with Regulations thereunder. Lehman Brothers Inc., Credit Suisse First Boston Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as initial purchasers. As of that date, the Initial Notes consisted of $512.5 million of Class A-1 Notes, $400 million of Class A-2 Notes, $126.5 million of Class B Notes, $106 million of Class C Notes and $64 million of Class D Notes. On January 20, 2000, Aircraft Finance completed an exchange offer whereby Aircraft Finance issued four classes of new notes, also designated Class A-1, Class A-2, Class B and Class C (the Exchange Notes), 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 unregistered. $3 million of the Class A-2 Initial Notes were not tendered in the exchange offer and remain outstanding.
The Exchange Notes were registered on Form S-4 (file number 333-82153) which became effective on December 20, 1999. The exchange offer commenced on December 20, 1999 and ended on January 20, 2000. All Initial Notes that were tendered were exchanged and global notes representing the Exchange Notes were deposited with the trustee and book-entry depository on January 25, 2000.
The proceeds from the sale of the beneficial interest and the Initial Notes of $39.1 million and $1,209 million, respectively, were used to purchase the initial aircraft for $1,196.1 million and to fund the initial cash reserves of $52 million. Issuance related costs incurred in connection with the offering were paid by the seller of the aircraft.
Item 6.
Item 6. Selected Financial Data
The selected financial data in the following table have been derived from, and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K, of Aircraft Finance.
December 31, 2000 1999 ---- ---- (in thousands) (in thousands)
Balance Sheet Data: Aircraft, net $1,129,322 $1,170,564 Total assets 1,227,224 1,266,974 Notes payable 1,126,843 1,176,195 Total liabilities 1,174,266 1,219,430 Total beneficial interest holders' equity 52,958 47,544
Statement of Income Data (1): Rental and other income from operating leases 145,117 100,331 Interest expense 78,100 51,482 Depreciation expense 42,784 28,488 Net income 5,414 8,457
(1) Income Statement data for 1999 is for the period from inception (April 13, 1999) through December 31, 1999.
Item 7.
Item 7. 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 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, Aircraft Finance completed an exchange offer whereby Aircraft Finance issued four classes of new notes (the "Exchange Notes") 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 remain unchanged. $3 million of the Class A-2 Initial Notes were not tendered in the exchange offer and remain outstanding.
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 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 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 unforseen contingent liabilities. The indenture governing the Notes requires that Aircraft Finance maintain a cash reserve balance on deposit in the 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
Under the terms of the indenture, Aircraft Finance is required to obtain annual appraisals of its aircraft. In February 2001, Aircraft Finance received appraisals of the adjusted base values of the aircraft as of December 31, 2000 from three independent appraisers that are members of the International Society of Transport Aircraft Trading. The average of the three appraisals was $1,177.4 million. Such average is below the assumed portfolio values set forth in the indenture relating to the notes for certain months in 2001. This reduction in the appraised value of the portfolio resulted in an increased scheduled principal payment to the Class A Notes in March 2001.
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 2.5% of the aggregate appraised value of all aircraft owned at December 31, 2000.
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 December 31, 2000, all current rent amounts due under these leases had been paid. The two aircraft with respect to this lessee represent approximately 4.6% of the aggregate appraised value at December 31, 2000.
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 2.0% of the aggregate appraised value at December 31, 2000.
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 2.7% of the aggregate appraised value at December 31, 2000.
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 2.6% of the aggregate appraised value at December 31, 2000.
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, 2000.
In July 2000, a second B737-400 aircraft was returned from a Turkish lessee. On December 5, 2000 this aircraft was delivered to an Indonesian lessee for a lease term of 60 months. This aircraft represents approximately 2.6% of the aggregate appraised value at December 31, 2000.
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 2.6% of the aggregate appraised value at December 31, 2000.
On November 29, 2000, Phoenix American Incorporated (PAI), an affiliate of Resource/Phoenix Incorporated (RP), agreed to buy substantially all of RP's assets. RP was the initial administrative agent for Aircraft Finance. Phoenix American Financial Services Inc. (PAFS), an affiliate of PAI, will act as the administrative agent of Aircraft Finance in place of RP.
In January 2001, a B737-300 aircraft formerly leased by a lessee based in Ireland was returned early. Aircraft Finance has entered into a letter of intent with a lessee based in the United Kingdom for a short term lease of 6 months. The projected delivery date of the aircraft is March 31, 2001. This aircraft represents approximately 2.4% of the aggregate appraised value at December 31, 2000.
On January 10, 2001, Trans World Airlines, Inc. ("TWA"), one of Aircraft Finance's lessees, filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). TWA leases one aircraft from Aircraft Finance, which represents 4.9% of the aircraft by aggregate appraised value as of December 31, 2000. On March 23, 2001, TWA paid rents due as of March 22, 2001. There can be no assurances that TWA will continue to make the rental and other payments required under the leases with Aircraft Finance. TWA's failure to make such payments would have an adverse impact on Aircraft Finance's revenues and cash flows. By order of Judge Peter J. Walsh dated March 12, 2001, the Bankruptcy Court authorized American Airlines, Inc.'s ("American") bid, submitted on February 28, 2001, to sell substantially all of TWA's assets to American. As of March 30, 2001, Aircraft Finance is in negotiations with American with respect to the TWA lease. However, there are no assurances that such negotiations will not reduce lease payments, or that the related aircraft will not be returned to Aircraft Finance.
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.
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 39.04% 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. Donald G. Butler has been appointed by the holders of the beneficial interests in Aircraft Finance as the new equity trustee of Aircraft Finance.
During the year ended December 31, 2000, there were four lessees on non-accrual status. With respect to these lessees three aircraft have been returned early, as discussed above, and the other is still under lease. The total amount of rent and maintenance reserve payments outstanding under the leases for the five aircraft from these four lessees amounted to approximately $6.5 million as of December 31, 2000. One of these lessees, based in Brazil, owed approximately $1.0 million at December 31, 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 $1.3 million at December 31, 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 December 31, 2000 for outstanding rent and maintenance reserve payments after the application of $1.1 million of cash security deposits and letters of credit. The fourth lessee, also based in the United States, owed approximately $0.6 million at December 31, 2000 for outstanding rent.
As of December 31, 2000, Aircraft Finance has repaid aggregate principal on the Notes of $82.2 million, as compared to $70.2 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 99.4. 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.
Results of Operations
Results of operations from the period from April 13, 1999 ("Inception") to December 31, 1999 reflect results from the commencement of operations to December 31, 1999. As a result, historical results of operations for the period from Inception to December 31, 1999 are not comparable to the year ended December 31, 2000.
Aircraft Finance reported net income of $5.4 million on total revenues of $150.7 million for the year ended December 31, 2000 ("2000 Period"), compared to net income of $8.5 million on total revenues of $103 million during the period
from inception (April 13, 1999) to December 31, 1999 ("1999 Period"). Aircraft Finance's revenues consisted of rental and other income from operating leases and interest income earned on cash balances. Net income decreased by $3.1 million from the 1999 Period to the 2000 Period due mainly to increases in interest expense, depreciation expense, and operating expenses.
Rental and other income from aircraft subject to operating leases for the 2000 Period was $145.1 million compared to $100.3 million for the 1999 Period. The increase in rental income is primarily due to twelve months of operation for the 2000 Period compared to approximately eight months for the 1999 Period. The decrease in rental income on an annualized basis was impacted by four lessees on non-accrual status, off lease time for six aircraft and lower rentals on re-marketed aircraft.
Interest income during the 2000 Period was $5.6 million, compared to $2.7 million during the 1999 Period. 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. In addition to higher average cash balances during 2000, interest rates earned on those balances were also higher during the 2000 Period.
Interest expense, net of interest rate swap income of $7.1 million, was $78.1 million for the 2000 Period compared to $51.5 million, net of interest rate swap expenditures of $1.2 million, for the 1999 Period. The weighted average interest rate on the Notes during the 2000 Period was 6.68% compared to 6.47% during the 1999 Period. The outstanding balance of the Notes at December 31, 2000 was $1,126.8 million compared to $1,176.2 million at December 31, 1999. Interest expense varies based on the actual interest rates on the floating rate Notes, the interest rate swap costs and the outstanding principal balances of the Notes.
Depreciation expense during the 1999 Period and the 2000 Period was $28.5 million and $42.8 million, respectively. Depreciation expense in the 2000 Period was higher than that in the 1999 Period due to the fact that there were 12 months of operations in the 2000 Period and approximately 8 months of operations in the 1999 Period. On an annualized basis, depreciation expense in the 2000 Period approximated that of the 1999 Period.
Operating expense during the 1999 Period and the 2000 Period was $10.6 million and $18.5 million, respectively. The increase in operating expenses was primarily the result of direct lease expenses incurred in connection with several aircraft being re-leased or repossessed during the 2000 Period. Operating expense primarily consists 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. Under the provisions for many leases, for certain airframe and engine overhauls, the lessee is reimbursed for costs incurred up to, but not exceeding, related payments made by the lessee, to the lessor based on those measures of usage. Reserves are maintained at amounts considered adequate to cover those estimated expenditures for maintenance costs.
Administrative and other expenses during the 1999 Period and the 2000 Period were $4.0 million and $6.0 million, respectively. 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 $3.1 million in the 1999 Period and $4.4 million in the 2000 Period. A significant portion of the fees paid to the Servicer correspond 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. Annualized, the increase in administrative expenses was mainly due to legal costs incurred in the 2000 Period in connection with several aircraft repossessions as well as the formation of a French subsidiary.
Liquidity
Aircraft Finance held cash and cash equivalents of $76.7 million and restricted cash of $17.8 million at December 31, 2000, compared to cash and cash equivalents of $72.7 million and restricted cash of $19.5 million at December 31, 1999. The liquidity reserve amount, which is included in cash and cash equivalents, was $52 million at December 31, 2000 and December 31, 1999. 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.
Aircraft Finance has the ability to enter into certain credit facilities, however, as of December 31, 2000, had not done so.
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 cost 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 swap agreements and the ability of Aircraft Finance to refinance certain subclasses of Notes that have not been repaid with lease cash flows.
Net cash provided by operating activities for the 2000 Period amounted to $54.9 million, which was generated primarily from a $7.1 million increase in security and other deposits and lease cash flows, net of operating expense and interest expense on the Notes. Other items included in net cash provided by operating activities included a $1.7 million decrease in restricted cash, partially offset by a $2.1 million decrease in deferred rental income.
Net cash provided by operating activities for the 1999 Period amounted to $56.5 million ,which was generated primarily from security and other deposits and lease cash flows, net of operating expense and interest expense on Notes. Other items included in net cash provided by operating activities was deferred rental income of $7.0 million. These were partially offset by restricted cash of $19.5 million.
Cash Flows from Investing and Financing Activities
Net cash used in investing activities for the 2000 Period amounted to $1.5 million for capitalized aircraft improvements.
Net cash used in investing activities for the 1999 Period amounted to $1,199.1 million, due to $1,196.1 million for the purchase of aircraft and $3.0 million for capitalized aircraft improvements and aircraft delivery costs.
Net cash used in financing activities for the 2000 Period amounted to $49.4 million of principal repayments on the Notes. As a result, the balance of these Notes was $1,126.8 million at December 31, 2000. Generally, principal and interest are 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.
Net cash provided by financing activities for the 1999 Period amounted to $1,215.3 million due to the receipt of proceeds from the Notes of $1,209 million, issued on May 5, 1999, as well as the issuance of the beneficial interest certificates for $39.1 million, partially offset by $32.8 million of
principal repayment on the Notes. As a result, the balance of these Notes was $1,176.2 million at December 31, 1999.
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 December 31, 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 interest rates over the duration of the lease terms. Please see "Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest incurred by Aircraft Finance on the Notes and the rental and other 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 December 31, 2000 was approximately $1,121 million. The terms of each class of the Notes, including the outstanding principal amount at December 31, 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-2 322,800,722 LIBOR + 0.50% June 15, 2008 May 15, 2024 Class B 121,541,899 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
Aircraft Finance is a party to seven interest rate swap agreements. 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 December 31, 1999 and 2000, the estimated fair values of these interest rate swaps were approximately $34 million and $1.7 million, respectively.
Expected final payment dates relating to the Notes are set forth in the indenture. They were determined based on the assumptions set forth in the Registration Statement relating to the issuance of the Exchange Notes. The actual final payments for each Class of Notes is likely to occur earlier or later than the Expected Final Payment Date as a result of various factors, including the assumptions regarding revenues, interest, expenses, operating costs, stress case scenarios and aircraft valuations. These assumptions have not, and are not likely in the future to correspond to actual experience.
The one month LIBOR rate with respect to the Notes as of December 31, 1999 and 2000 was 6.46% and 6.71%, respectively.
The following table presents, as of December 31, 2000, the terms of Aircraft Finance's interest rate swap agreements:
Fixed Rate to be Rate to be Notional paid by Aircraft received by Aircraft Maturity Estimated Amount Finance Finance Date fair value ------ ------- ------- ---- ---------- 60,000,000 5.50% LIBOR January 15, 2002 213,499 20,000,000 7.13% LIBOR January 15, 2002 (257,881) 175,000,000 5.56% LIBOR October 15, 2002 546,368 20,000,000 7.14% LIBOR October 15, 2002 (474,311) 345,000,000 5.65% LIBOR January 15, 2004 1,387,700 230,000,000 5.71% LIBOR November 15, 2004 1,048,718 15,000,000 7.17% LIBOR May 15, 2005 (752,810)
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.
Item 8.
Item 8. Financial Statements and Supplementary Data
Aircraft Finance Trust and Subsidiaries
Financial Statements as of December 31, 1999 and 2000 and for the Period from Inception (April 13, 1999) to December 31, 1999 and for the year ended December 31, 2000 together with the Report of Independent Certified Public Accountants
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Trustees:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of changes in beneficial interest present fairly, in all material respects, the financial position of Aircraft Finance Trust and its subsidiaries as of December 31, 1999 and 2000, and the results of their operations and their cash flows for the period from inception (April 13, 1999) to December 31, 1999 and the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida March 20, 2001
Aircraft Finance Trust and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
December 31, December 31, 2000 1999 ---------- ----------
Assets
Cash and cash equivalents $ 76,658 $ 72,682 Restricted cash 17,761 19,468 Rents and other receivables 3,352 4,122 Aircraft, net 1,129,322 1,170,564 Other assets 131 138 ---------- ----------
Total assets $1,227,224 $1,266,974 ========== ==========
Liabilities and Beneficial Interest Holders' Equity
Accounts payable and accrued liabilities $ 5,007 $ 5,819 Deferred rental income 4,927 7,031 Security and other deposits 37,489 30,385 Notes payable: Class A-1 512,500 512,500 Class A-2 322,801 368,897 Class B 121,542 124,798 Class C 106,000 106,000 Class D 64,000 64,000 ---------- ---------- Total Notes payable 1,126,843 1,176,195 ---------- ----------
Total liabilities 1,174,266 1,219,430 ---------- ----------
Commitments and contingencies (Note 9) --
Beneficial interest holders' equity: Beneficial interest 52,958 47,544 ---------- ----------
Total liabilities and beneficial interest holders' equity $1,227,224 $1,266,974 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
Aircraft Finance Trust and Subsidiaries
Consolidated Statements of Income
(dollars in thousands)
Period from Inception Year Ended (April 13, 1999) December 31, 2000 to December 31,1999 ----------------- -------------------
Revenues: Rental and other income from operating leases $145,117 $100,331 Interest income 5,629 2,679 -------- --------
Total revenues 150,746 103,010 -------- --------
Expenses: Interest expense 78,100 51,482 Depreciation expense 42,784 28,488 Operating expense 18,460 10,632 Administration and other 5,988 3,951 -------- --------
Total expenses 145,332 94,553 -------- --------
Net Income $ 5,414 $ 8,457 ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
Aircraft Finance Trust and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
Period from Inception Year Ended (April 13, 1999) December 31, 2000 to December 31, 1999 ----------------- -------------------- Cash Flows from Operating Activities: Net income $ 5,414 $ 8,457 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 42,784 28,488 Changes in assets and liabilities: Rents and other receivables 770 (4,122) Restricted cash 1,707 (19,468) Other assets 7 (138) Accounts payable and accrued liabilities (812) 5,819 Deferred rental income (2,104) 7,031 Security and other deposits 7,104 30,385 ----------- -----------
Net cash provided by operating activities 54,870 56,452 ----------- -----------
Cash Flows from Investing Activities: Purchase of aircraft -- (1,196,087) Aircraft improvements (1,542) (2,965) ----------- -----------
Net cash used in investing activities (1,542) (1,199,052) ----------- -----------
Cash Flows from Financing Activities: Issuance of beneficial interest -- 39,087 Proceeds from notes payable -- 1,209,000 Repayment of notes payable (49,352) (32,805) ----------- -----------
Net cash (used in) provided by financing activities (49,352) 1,215,282 ----------- -----------
Net Increase in Cash and Cash Equivalents 3,976 72,682
Cash and Cash Equivalents at Beginning of Period 72,682 -- ----------- -----------
Cash and Cash Equivalents at End of Period $ 76,658 $ 72,682 =========== ===========
Supplemental Cash Flow Information: Cash Paid for Interest Expense $ 78,198 $ 47,883 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
Aircraft Finance Trust and Subsidiaries
Consolidated Statement of Changes in Beneficial Interest
(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 5,414 -------
Balance at December 31, 2000 $52,958 =======
The accompanying notes are an integral part of these consolidated financial statements.
Aircraft Finance Trust and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 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.
The Trust Agreement provides for four trustees, an Owner Trustee and three controlling trustees. The three controlling trustees have the authority to manage the property and affairs of Aircraft Finance under the Trust Agreement. One of the controlling trustees, the equity trustee, is appointed by the beneficial interest holders, while the other two controlling trustees are independent of the beneficial interest holders. Aircraft Finance does not have any officers or employees. Aircraft Finance has contracted with certain third parties to provide aircraft servicing, lease administration and accounting services and financial and capital market advisory services.
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 36 commercial jet aircraft.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and includes the accounts of Aircraft Finance and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the estimates and related assumptions used in the preparation of the financial statements are appropriate, actual results could differ from those estimates. Significant estimates are made in the assessment of the collectibility of 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.
Cash and Cash Equivalents
Aircraft Finance classifies highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents.
Operating Leases
Aircraft are recorded at cost and depreciated on a straight-line basis over the estimated life to their estimated salvage value. Generally, aircraft and aircraft equipment are depreciated over estimated useful lives of 30 years from the date of manufacture to a 15% estimated salvage value. Certain major additions and modifications to aircraft may be capitalized. Aircraft Finance's estimates are reviewed periodically to ensure continued appropriateness.
Revenue under operating leases is recognized as rental income on a straight-line basis over the lease term. In addition, certain leases provide for contingent rental payments based on measures of usage.
Aircraft Finance will generally place lessees on non-accrual status when the cumulative amount of outstanding rent receivables due from such lessee is equivalent to three monthly payments or if other circumstances warrant such treatment. Upon placement on to non-accrual status, all outstanding receivables accrued but not paid will be reversed against income. Subsequent payments from lessees placed on to non-accrual status will be recognized on a cash basis as received. The Lessee will not be placed back on to current accrual status unless they become current with all past due amounts and they further demonstrate an improvement in their financial position.
In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), the recognition of an impairment loss for an asset held for use is required when the estimate of undiscounted future cash flows expected to be generated by the asset is less than its carrying amount. Measurement of an impairment loss is to be recognized based on the fair value of the asset. Fair value reflects the underlying economic value of the aircraft, including engines, in normal market conditions (where supply and demand are in reasonable equilibrium) and assumes adequate time for a sale and a willing buyer and seller. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of aircraft simultaneously or to dispose of aircraft quickly. The fair value of the assets is based on independent valuations of the aircraft and/or estimates of discounted future cash flows. The appraisals assume, among other things, that the aircraft are utilized normally in an open, unrestricted and stable market, adjusted where necessary to account for the reported maintenance standard of the aircraft. Values calculated under these assumptions are "base values." The current appraised value of each aircraft is determined by taking the average of the base values contained in the three appraisals. The appraisals were not based on a physical inspection of the aircraft. SFAS 121 also requires that long-lived assets to be disposed of be reported at the lower of the carrying amount or fair value less estimated disposal costs.
Maintenance Reserves
Most 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.
Income Taxes
The operating results of Aircraft Finance are included in the tax returns of their beneficial interest holders. As such, Aircraft Finance is not subject to U.S. Federal, State and local income taxes.
Derivative Financial Instruments
Derivative financial instruments, as defined in Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments", used by Aircraft Finance include interest rate swaps. Aircraft Finance utilizes interest rate swaps to synthetically alter the repricing characteristics of variable-rate interest obligations, effectively allowing Aircraft Finance to pay a fixed interest rate on certain notes, reducing its exposure to unfavorable variations in the LIBOR rate charged on those variable rate interest obligations. Risks arise from the use of such instruments from the possible inability of the counterparties to meet the terms of their contracts and from market movements in values and interest rates. Aircraft Finance does not enter into interest rate swaps for trading purposes.
In accounting for interest rate swaps, the net differential to be paid or received on the interest rate swap is recognized as a yield adjustment to the related asset or liability over the life of the swap agreement. If the related liability is disposed of, the swap agreement is marked to market. Thereafter, the interest rate swap is accounted for in the consolidated financial statements at its fair value with any unrealized gains and losses recognized in the period incurred. If the interest rate swap agreement is terminated, the gain or loss is deferred and amortized over the remaining life of the related asset or liability.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of the fair value of financial instruments, for both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. Fair value of Aircraft Finance's financial instruments are based on pricing models or formulas using assumptions about future interest rates, interest volatility and other factors (swaps, swaptions and interest rate floors).
Note 3 - Cash Balances
Aircraft Finance maintains various cash accounts as required by the Trust indenture, including a Rental Account, a Collections Account, an Expense Account, the Lessee Funded Accounts and restricted reserve accounts related to one lessee.
All payments under the leases are deposited into the Rental Account and subsequently swept to the Collection Account within one business day of receipt. Aircraft Finance maintains a cash reserve balance in the Collection Account in an amount determined monthly in accordance with the Trust indenture. At December 31, 2000, the cash reserves included in the Collection Account were $52 million. The cash reserves are intended to provide a source of liquidity for the payment
of expenses, swap payments and interest on certain classes of notes. Expenses of Aircraft Finance are generally paid out of the Expense Account, which is funded through transfers from the Collections Account.
The Lessee Funded Accounts and certain lessee reserve accounts are not available for general use. Security deposits and maintenance reserve payments from lessees that are required to be segregated from other funds are deposited into the Lessee Funded Accounts. Lessee reserve accounts include a deposit from the Seller of the aircraft that can be drawn upon by Aircraft Finance should such lessee be delinquent on any of its rent payments. The balances in the Lessee Funded Accounts and the one lessee reserve account were $11.00 million and $6.75 million at December 31, 2000, and $12.72 million and $6.75 million at December 31, 1999, respectively.
Note 4 - Aircraft Under Operating Leases
On May 5, 1999, Aircraft Finance purchased 36 commercial jet aircraft from General Electric Capital Corporation and certain of its subsidiaries having an aggregate cost of $1,196 million pursuant to a Master Aircraft Purchase Agreement. Aircraft Finance financed these purchases primarily through the net proceeds from Aircraft Finance's private placement of asset-backed notes and proceeds from the issuance of beneficial interests. At December 31, 2000, Aircraft Finance had 36 aircraft on lease, as follows:
December 31, 2000 December 31, 1999 ----------------- ----------------- (in thousands) (in thousands)
Aircraft under operating lease $ 1,200,594 $ 1,167,431 Accumulated depreciation (71,272) (27,842) ----------- ----------- Aircraft under operating lease, net 1,129,322 1,139,589
Aircraft off-lease -- 31,620 Accumulated depreciation -- (645) ----------- ----------- Aircraft off-lease, net -- 30,975
Aircraft, net $ 1,129,322 $ 1,170,564 =========== ===========
All aircraft are compliant with Stage 3 noise levels set out in the United States Federal Aviation Regulations. As of December 31, 2000, Aircraft Finance's 36 aircraft were on lease to 22 airlines in 14 countries. An analysis of the various lessee expiration periods of the aircraft under operating leases is as follows at December 31, 2000:
On lease for a further period of: More than five years.......................................... 3 From one to five years........................................ 31 Less than one year............................................ 2 --
Total aircraft portfolio...................................... 36 ==
At December 31, 2000 future scheduled minimum lease contract payments to be received under operating leases for the years ended December 31, are as follows: (dollars in thousands)
2001................................................. $129,057 2002................................................. 117,748 2003................................................. 92,723 2004................................................. 64,116 2005................................................. 29,962 Thereafter........................................... 38,789 --------
Total................................................ $472,395 ========
Additional contingent rentals are earned by Aircraft Finance based on certain lessee's usage. Contingent rentals amounting to $15.23 million and $11.56 million were earned by Aircraft Finance during the year ended December 31, 2000 and the period from inception (April 13, 1999) to December 31, 1999, respectively.
During the year ended December 31, 2000, there were four lessees on non-accrual status, and as such, were reversed from income. With respect to these lessees, three aircraft have been returned early and subsequently re-leased, and the other is still under lease. The total amount of rent and maintenance reserve payments outstanding under the leases for the five aircraft from these four lessees amounted to approximately $6.5 million as of December 31, 2000. Subsequent collection of all delinquent receivables is considered unlikely.
Note 5 - Notes Payable
On May 5, 1999 (the "Initial Closing Date"), Aircraft Finance completed a private placement offering of $1,209 million of securitized notes (the "Initial Notes") on a basis exempt from registration under the Securities Act of 1933, as amended. Aircraft Finance utilized the proceeds from the Initial Notes as payment for the acquisition of 36 commercial jet aircraft. Underwriting and certain other issuance related costs incurred in connection with the offering were paid by the Seller.
On January 20, 2000, Aircraft Finance completed an exchange offer whereby Aircraft Finance issued four classes of new notes (the "Exchange Notes" or "Notes") 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 remain unchanged. $3 million of the Class A-2 Initial Notes were not tendered in the exchange offer and remain outstanding.
The repayment terms of each class of Initial Notes are such that certain principal amounts are expected to be repaid on dates which are based on certain operating assumptions (the "Expected Final Payment Date") or refinanced through the issuance of new notes, but in any event are ultimately due for repayment on specified final maturity dates (the "Final Maturity Date"). The Expected Final Payment Dates, Final Maturity Dates and interest rates applicable to each class of the Initial Notes are listed as follows: (dollars in thousands)
Initial Expected Final Final Class of Note Principal Amount Interest Rate Payment Date Maturity Date - ------------- ---------------- ------------- ------------ -------------
Class A-1 $ 512,500 LIBOR + 0.48% May 15, 2004 May 15, 2024 Class A-2 400,000 LIBOR + 0.50% June 15, 2008 May 15, 2024 Class B 126,500 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 ------------ $ 1,209,000 ============
Expected final payment dates relating to the Notes are set forth in the indenture. They were determined based on the assumptions set forth in the Registration Statement relating to the issuance of the Exchange Notes. The actual final payments for each Class of Notes is likely to occur earlier or later than the Expected Final Payment Date as a result of various factors, including the assumptions regarding revenues, interest, expenses, operating costs, stress case scenarios and aircraft valuations. These assumptions have not, and are not likely in the future to correspond to actual experience.
The one-month LIBOR rate with respect to these notes as of December 31, 2000 was 6.71%.
If the Class A-1 Notes are not repaid on or before their Expected Final Payment Date, such class of notes will accrue interest thereafter at the stated interest rate plus 0.50% per annum ("Maturity Step-Up Interest").
Aircraft Finance has the right to make an optional redemption of any Notes. Should Aircraft Finance choose to exercise an early redemption of any of the Notes, it may be required to pay a redemption premium as required by the Trust indenture.
The dates on which principal repayments on the Notes will actually occur will depend on the cash flows generated by the rental income from the Aircraft Finance's portfolio of aircraft, Aircraft Finance's ability to refinance any or all of the Notes and the amount of operating costs incurred in the ordinary course of business. Amounts received by Aircraft Finance and available for distribution are paid in accordance with the priorities specified in the Trust indenture. As of December 31, 2000 and December 31, 1999 the estimated fair value of the Notes was approximately $1,121 million and $1,167 million, respectively.
Note 6 - Derivative Financial Instruments
Interest Rate Swap Agreements
One of the 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, at December 31, 2000, Aircraft Finance was a party to seven interest rate swap agreements which four of them were entered into on May 5, 1999 and the other three on 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 LIBOR. On December 31, 2000 and December 31, 1999, the fair values of these interest rate swaps was approximately $1.7 million and $34 million, respectively.
The following table presents, as of December 31, 2000, a summary of the terms of the Aircraft Finance's interest rate swap agreements: (dollars 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 $ 213 175,000 5.56% LIBOR October 15, 2002 546 345,000 5.65% LIBOR January 15, 2004 1,388 230,000 5.71% LIBOR November 15, 2004 1,049 20,000 7.14% LIBOR October 15, 2002 (474) 20,000 7.13% LIBOR January 15, 2002 (258) 15,000 7.17% LIBOR May 15, 2005 (753)
Note 7 - New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities". In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", to defer the effective date of FAS 133 by one year. In June 2000, the FASB issued Statement of Financial Accounting Standard No. 138 ("FAS 138") "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133". FAS 138 amends the accounting and reporting standards of FAS 133 for certain derivative instruments and certain hedging activities. FAS 133, as amended, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Trust). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their 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. For cash-flow hedge transactions, in which the Trust is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income.
The Trust estimates that it will record an adjustment of approximately $1.7 million (gain) in other comprehensive income to recognize at fair value all derivative instruments that will be designated as cash flow hedging instruments.
Note 8 - Related Party
On May 5, 1999, UniCapital Corporation (parent company of the initial beneficial interest holders) purchased approximately $3.8 million of the Class D Notes. UniCapital Corporation subsequently sold these notes to an unrelated party in July 1999.
On June 21, 2000 Wayne Lippman, an employee, at that time, of UniCapital Air Group, Inc. an affiliated company of UniCapital Corporation, tendered his resignation as equity trustee of Aircraft Finance effective upon appointment of a replacement. Donald G. Butler, co-founder and Executive Vice President of TransCapital Corporation, has been appointed by the holders of the beneficial interest in Aircraft Finance as the new equity trustee of Aircraft Finance. The acquisition of additional aircraft by Aircraft Finance and the
terms of any related financing need only be approved by the equity trustee, subject to the terms of the trust agreement and the indenture, including confirmation by the rating agencies that the transaction will not adversely affect the rating on the Notes. Further, any sale of any aircraft, decisions requiring Aircraft Finance's approval under the Servicing Agreement with GECAS or the agreement with the administrative agent and the reduction of any required level of reserves must be approved by the equity trustee and at least one of the Independent controlling trustees.
Note 9 - Commitments and Contingencies
In accordance with the terms of a servicing agreement (the "Servicing Agreement"), GE Capital Aviation Services, Limited, ("GECAS") is performing certain aircraft related services with respect to Aircraft Finance's aircraft portfolio. Such activities include the collection of rents and other amounts due from lessees, the monitoring of maintenance, insurance and other obligations under the aircraft leases, the enforcement of rights against the lessees, the remarketing of aircraft for re-lease or sale and the performance of other specified aircraft-related services. In accordance with the Servicing Agreement, fees payable to GECAS by Aircraft Finance include base fees and fees calculated as a percentage of lease rentals received, in addition to certain incentive based fees.
The Servicing Agreement expires on the latter of (i) the payment in full of all amounts due on the notes and other similar obligations and all amounts due to the holders of beneficial interests in Aircraft Finance and (ii) the date on which Aircraft Finance and its subsidiaries cease to own any aircraft. Each party has the right to terminate the Servicing Agreement under specified circumstances.
Additionally, Aircraft Finance has contracted with third parties to provide administrative, financial and capital markets advisory and trust services. As of December 30, 2000, included in Administration and other expenses, is approximately $4.4 million and $0.5 million respectively of Servicer and Administrative fees.
Note 10 - Concentration of Credit Risk
Credit risk with respect to operating lease receivables is generally diversified due to the number of lessees comprising Aircraft Finance's customer base and the different geographic areas in which they operate. During the period from inception (April 13, 1999) to December 31, 1999 (the "1999 Period") and the year ended December 31, 2000 (the "2000 Period") Aircraft Finance recognized $100 million and $145 million of rental and other income from operating leases, respectively. This was comprised of $14 million in the 1999 period and $22 million in the 2000 period from lessees based in the United States and $86 million in the 1999 period and $123 million in the 2000 period from lessees based outside the United States. At December 31, 2000, 36 of Aircraft Finance's 36 aircraft were on lease to 22 lessees in 14 countries. Also, on December 31, 2000, ten of the aircraft are being leased to lessees domiciled in certain emerging markets, including those located in Latin America and Asia. The exposure of Aircraft Finance's aircraft to particular countries and customers is managed partly through concentration limits and through obtaining deposits from lessees and certain cash reserves.
At December 31, 2000, Aircraft Finance held cash reserves of $6.75 million that are available to fund delinquent rentals and other payments due from one certain lessee. Such amounts are not available for general use. The reserve amount is required to be returned to the Seller after two years from the delivery date of the aircraft, providing the lessee has not been delinquent for
more than sixty days on any single rental payment during the last year of such two year period. Any unused reserve amount must be returned to the Seller at lease expiration.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Controlling and Independent Trustees.
The trust agreement governing Aircraft Finance provides for four trustees. One of the four trustees of Aircraft Finance is Wilmington Trust Company, which is acting as the statutory trustee and the owner trustee. The remaining three trustees are the "controlling trustees" and have the authority to manage the property and affairs of Aircraft Finance under the trust agreement. All of the controlling trustees are independent from General Electric Capital Corporation. One of the controlling trustees, called the "equity trustee", is appointed by the holders of Aircraft Finance's beneficial interest, while the two other controlling trustees, called the "independent controlling trustees" are independent of those holders. The holders of the beneficial interest of Aircraft Finance may remove and replace the equity trustee, and each independent controlling trustee may be replaced by the other independent controlling trustee.
The trust agreement requires that any decision relating to insolvency proceedings, merger or other reorganization of Aircraft Finance must be approved by a unanimous vote of the controlling trustees. Any sale of any aircraft, decisions requiring Aircraft Finance's approval under the servicing agreement for the aircraft or the agreement with the administrative agent and the reduction of any required level of reserves must be approved by the equity trustee and at least one of the independent controlling trustees. The controlling trustees approving aircraft sales on other than pre-approved terms must also confirm to the indenture trustee, prior to the sale, that the sale will not materially and adversely affect the holders of the Notes. The acquisition of additional aircraft by Aircraft Finance and the terms of any related financing need only be approved by the equity trustee.
The controlling trustees, their respective ages and principal activities are as follows:
Name Age Title ---- --- ----- David H. Treitel 46 independent controlling trustee Richard E. Cavanagh 54 independent controlling trustee Donald G. Butler 57 equity trustee
David H. Treitel -- Mr. Treitel is the Chairman and Chief Executive Officer of Simat, Helliesen & Eichner, Inc. (SH&E), a leading aviation consulting firm based in New York City. Mr. Treitel has been with SH&E since 1977, and prior to taking up his current position at SH&E in 1996, he served as the firm's President from 1993 to September 1998 and its Executive Vice President from 1989 until 1993. Mr. Treitel also serves as a director of Midwest Express Holdings, Inc.
Richard E. Cavanagh -- Mr. Cavanagh is the President and Chief Executive Officer of The Conference Board, Inc., a global business research and membership enterprise supported by some 3,000 corporate members in 67 countries and based in New York City. Prior to taking up his current position in 1995, he served for eight years as the Executive Dean of the Kennedy School of Government at Harvard
University. Before that, he was a partner of McKinsey & Company, Inc., an international management consulting firm. During his 17 years with McKinsey, he took a two-year public service leave and held senior positions in the White House Office of Management & Budget. He co-authored the management book The Winning Performance. Mr. Cavanagh serves as a director of Airplanes Limited and Airplanes U.S. Trust (other aircraft securitization vehicles), the BlackRock Mutual Fund family, Arch Chemicals (formerly Olin), The Fremont Group (formerly Bechtel Investments) and The Guardian Life Insurance Company.
Donald G. Butler -- Mr. Butler is a co-founder and Executive Vice President of TransCapital Corporation, that was started in 1976. Mr. Butler's responsibilities include the management of TransCapital's commercial aircraft business have encompassed originating, overseeing and/or successfully marketing the interests in over 70 commercial aircraft with an aggregate value in excess of $1.6 billion and includes the development of an asset management system to oversee and manage the aviation assets. The company's principal geographic focus and business has been North America and Europe. In November, 1990, Mr. Butler presented INVESTMENT OPPORTUNITIES IN AGING AIRCRAFT at the Avmark Services, Ltd. International Conference on Understanding Aging Aircraft.
As is common with many other special purpose companies, neither Aircraft Finance nor any of its subsidiaries will have any officers or other employees, except, in the case of a subsidiary, as may be required by applicable law. Aircraft Finance has arranged for GE Capital Aviation Services, Limited (GECAS), Phoenix American Financial Services, Inc. (PAFS), Wilmington Trust Company, Bankers Trust Company and Lehman Brothers Inc. to provide aircraft servicing, managerial services and financial advice.
The Servicer
The servicer and Aircraft Finance have entered into a servicing agreement dated as of May 5, 1999. The servicing agreement sets forth the various duties of GECAS as the servicer with respect to the management and administration of the aircraft and the leases, the aircraft marketing activities to be performed by the servicer and the aircraft management-related obligations of the servicer in connection with offers and sales by Aircraft Finance of refinancing or additional notes.
The servicer has agreed to provide its services in accordance with the express terms of the servicing agreement. The terms of the servicing agreement provide that the servicer will act in accordance with laws applicable to it, with directions given by the administrative agent on behalf of Aircraft Finance, with specified standards of care and with specified standards regarding conflicts of interest. The duties and obligations of the servicer are limited to those expressly set forth in the servicing agreement, and the servicer has not undertaken any fiduciary or other implied duties or obligations to Aircraft Finance, the holders of the notes or any other person.
The servicer has agreed to perform the services required by the servicing agreement with reasonable care and diligence at all times and, if a conflict of interest arises as to an Aircraft Finance aircraft and other aircraft managed by GECAS, in good faith. In addition, to the extent that either two or more particular Aircraft Finance aircraft or an Aircraft Finance aircraft and other aircraft managed by GECAS have substantially similar objectively identifiable characteristics that are relevant for purposes of the particular services to be performed, the servicer has agreed not to discriminate among those Aircraft Finance aircraft or between any of the Aircraft Finance aircraft and any other
managed aircraft on an unreasonable basis and, in the case of the two aircraft leased to VARIG, on the basis of General Electric Capital Corporation's interest in the reserve deposits established for the VARIG leases.
If the servicer in good faith determines that circumstances as to a particular aircraft or lease require an arm's-length negotiation between the servicer or any of its affiliates and Aircraft Finance and the servicer believes it would not be appropriate for the servicer to act on behalf of Aircraft Finance, the servicer has agreed to notify Aircraft Finance promptly and to withdraw from acting as the servicer with respect to the matter and Aircraft Finance has agreed to appoint an independent representative to act on its behalf. The servicer is entitled to act on its own or its affiliates' behalf in those negotiations.
Neither Aircraft Finance nor the servicer may assign its rights and obligations under the servicing agreement without the other's prior consent. The servicer may, however, delegate some, but not all, of its duties to some of its affiliates.
Aircraft services. The main categories of aircraft services being provided by the servicer under the servicing agreement are:
(1) lease marketing and remarketing, lease negotiation and execution;
(2) collecting rental payments and other amounts due under leases, aircraft maintenance, insurance monitoring and procurement, lease compliance and enforcement and accepting delivery and redelivery of aircraft;
(3) sales services and aircraft acquisition;
(4) monitoring aircraft maintenance and providing records and information about the aircraft;
(5) using commercially reasonable efforts to keep Aircraft Finance in compliance with terms of the indenture that directly relate to the operation of the aircraft;
(6) limited assistance in connection with the public or private offerings of any notes, such as providing information relating to the servicer and its affiliates for inclusion in any offering document or prospectus, participating in marketing activities solely with respect to the aircraft and providing underwriters, rating agencies and other advisors with the reasonable opportunity to conduct due diligence with respect to the servicer as it relates to the aircraft;
(7) legal and other professional services with respect to the lease, sale or financing of the aircraft, any amendment or modification of any lease, the enforcement of the rights of Aircraft Finance and its subsidiaries under any lease, any disputes that arise as to any aircraft or for any other purpose that the servicer reasonably determines is necessary in connection with the performance of its services; and
(8) periodic reporting of operational information relating to the aircraft.
Operating guidelines. Under the servicing agreement, the servicer is entitled to exercise such authority as is necessary to give it a practicable and working autonomy in performing its services. The servicing agreement provides that the servicer will give Aircraft Finance and its agents access to records
related to the aircraft under specified circumstances to enable Aircraft Finance to monitor the performance by the servicer and not commingle any funds of Aircraft Finance with its own funds. Aircraft Finance, acting through the administrative agent or directly, has established monitoring and control procedures that it expects will enable it to properly manage its and its subsidiaries' business and assets.
The servicing agreement requires all transactions entered into by the servicer on behalf of Aircraft Finance and its subsidiaries other than intercompany transactions to be at arm's length and on market terms unless otherwise agreed or directed by the administrative agent on Aircraft Finance's behalf. Transactions or matters on behalf of Aircraft Finance and its subsidiaries that require the specific approval of Aircraft Finance include:
(1) sales of or agreements to sell aircraft, other than as required by a lease or the purchase agreement for the initial 36 aircraft;
(2) entering into any new leases if the lease does not comply with any applicable operating covenants set forth under the indenture governing the notes or if the lease grants a purchase option in favor of the lessee and renewing or extending existing leases, other than as a result of the exercise of an extension option;
(3) terminating any lease or leases to any single lessee for aircraft then having an aggregate depreciated net book value in excess of $75 million unless a substantially similar replacement or substitute lease is put into place;
(4) unless provided for in the applicable budget, entering into any contract for the modification or maintenance of aircraft where the costs to be incurred by Aircraft Finance and its subsidiaries will exceed the greater of the estimated aggregate cost of a heavy maintenance check for similar aircraft and total refurbishment of the related engines and available maintenance reserves or other collateral under the related lease or if those costs would be outside the ordinary course of the business of Aircraft Finance and its subsidiaries;
(5) issuing any guarantee on behalf of, or otherwise pledging the credit of, Aircraft Finance or any of its subsidiaries, other than with respect to trade payables in the ordinary course of business and other than guarantees by Aircraft Finance of the obligations of its subsidiaries;
(6) entering into, amending or granting a waiver with respect to, any transaction between Aircraft Finance or its subsidiaries and General Electric Capital Corporation or any of its affiliates not contemplated in the servicing agreement;
(7) incurring any actual or contingent liability, unless contemplated in the applicable budget pursuant to a transaction of a type for which Aircraft Finance's specific approval is otherwise required, incurred in the ordinary course of the business of Aircraft Finance and its subsidiaries or incurred in entering into a lease or performing any obligations under a lease; and
(8) entering into any order or commitment to acquire, or acquiring, aircraft or aircraft engines unless provided for in a lease, the order or commitment to acquire a replacement engine has been provided for in the applicable budget or the servicer determines that the purchase or exchange of an engine is necessary or appropriate.
Budgets. The servicing agreement calls for the administrative agent to adopt each year a single lease operating budget for all aircraft owned by Aircraft Finance and its subsidiaries and a single budget for the aircraft expenses related to all aircraft.
Servicing fees and their payment priority. The servicing agreement provides that Aircraft Finance will pay to the servicer a base fee of $150,000 per month, which increases if additional aircraft are acquired by Aircraft Finance and a rent fee equal to 1% of the aggregate amount of basic rent due for all or any part of a month for any Aircraft Finance aircraft and 1% of the aggregate basic rent actually paid for the month. The servicer also will receive a disposition fee equal to 1% of the gross proceeds of the sale of any Aircraft Finance aircraft. The servicer also will be reimbursed for aircraft maintenance costs and insurance, outside legal and professional advisory fees and other out of pocket expenses incurred in connection with its performance. The aggregate reimbursement expenses may be significant. Aircraft Finance has also agreed to indemnify the servicer as described under "Risk Factors -- Because Aircraft Finance's contract limits its remedies against the servicer for poor performance, Aircraft Finance may at some point bear costs that will reduce its available revenues." The subsidiaries of Aircraft Finance have guaranteed the obligations of Aircraft Finance to the servicer.
The above fees and expense reimbursements are payable monthly in arrears on the payment dates for the Notes. The payment of those fees and expenses has a payment priority that is higher than that of all payments on the Notes. The servicer has agreed to allocate a portion of the fees payable to it to UniCapital to the extent of the two initial and any other aircraft acquired from UniCapital.
The servicer is also entitled to additional fees (the "Additional Servicing Fees") consisting of an additional sales fee for each sale of an aircraft, an additional disposition fee for each sale of an aircraft and an additional rent-related fee based on basic rent actually paid. Additional Servicing Fees are payable only after all amounts on the Notes have been paid in full.
In addition, the servicer will be entitled to fees for aircraft management services under the servicing agreement in connection with the offer and sale by Aircraft Finance of refinancing and additional notes and any resales of notes by any person who has any right to cause Aircraft Finance to assist in the resale.
Term and termination. The term of the servicing agreement expires on the later of the payment in full of all amounts due on the Notes and other similar obligations and all amounts due to the holders of the beneficial interest in Aircraft Finance and Aircraft Finance and its subsidiaries ceasing to hold any aircraft. Each party also has the right to terminate the servicing agreement under specified circumstances.
The servicer has the right to terminate the servicing agreement if, among other things, Aircraft Finance defaults in its payment and other obligations under the servicing agreement and related documents, any material representation or warranty made by Aircraft Finance or its subsidiaries is false or misleading in a manner material to the servicer, Aircraft Finance or its subsidiaries become subject to bankruptcy or other insolvency proceedings, neither Aircraft Finance nor any of its subsidiaries holds any aircraft or the indenture or any guaranty in favor of the servicer ceases to be in effect.
The servicer may resign under the servicing agreement with respect to all aircraft, or at its election, any affected aircraft if it reasonably determines that directions given, or services required, would, if carried out be unlawful under applicable law, be in violation of any corporate policy regarding business practices or legal, ethical or social matters, be likely to lead to an investigation by any governmental authority of the servicer or its affiliates, expose the servicer to liabilities for which, in the servicer's good faith opinion, adequate bond or indemnity has not been provided or place the servicer in a conflict of interest with respect to which, in the servicer's good faith opinion, the servicer could not continue to perform its obligations under the servicing agreement. Whether or not it resigns, the servicer is not required to take any action of the foregoing kind. The servicer may also resign in the event it becomes subject to unindemnified taxes.
Aircraft Finance has the right to terminate the servicing agreement upon payment in full of the Notes and other similar obligations. Aircraft Finance also has the right to terminate the servicing agreement if, among other things, the servicer ceases to be at least 75% owned directly or indirectly by General Electric Capital Corporation or its ultimate parent, General Electric Corporation, the servicer breaches its obligations under the servicing agreement in a manner that is material to Aircraft Finance and its subsidiaries as a whole, the servicer, General Electric Capital Corporation or General Electric Company becomes subject to bankruptcy or insolvency proceedings, there are insufficient funds for the payment on any Class A Note for a period of 60 days or at least 10 aircraft remain off-lease but available for re-lease for a period of at least 90 days following specified events set forth in the indenture.
Aircraft Finance may remove the servicer for any affected aircraft if the servicer has reasonably determined that directions given, or services required, would, if carried out, place the servicer in a conflict of interest with respect to which, in the servicer's good faith opinion, the servicer could not continue to perform its obligations under the servicing agreement.
The servicer may not resign or be removed under the servicing agreement and the servicing agreement may not be terminated, except as described above and unless a replacement servicer, which may be UniCapital, has been appointed and Aircraft Finance has obtained a confirmation from the rating agencies rating the Notes that they will not lower, qualify or withdraw any rating as a result. If a replacement servicer has not been appointed within 90 days after notice of any termination, resignation or removal, the servicer may petition any court jurisdiction to appoint a replacement servicer. The servicer may terminate the servicing agreement, whether or not a replacement servicer has been appointed, if Aircraft Finance fails, after the applicable cure periods, to pay amounts due to the servicer.
Corporate Management
Corporate management services for Aircraft Finance will be provided by the administrative agent, Phoenix American Financial Services, Inc., the financial advisor, Bankers Trust Company, the owner trustee, Wilmington Trust Company and the capital markets advisor, Lehman Brothers Inc.
Administrative Agent
On November 29, 2000, Phoenix American Incorporated (PAI), an affiliate of Resource/Phoenix Incorporated (RP), agreed to buy substantially all of RP's assets. RP was the initial administrative agent for Aircraft Finance. Phoenix American Financial Services Inc. (PAFS), an affiliate of PAI, will act as the
administrative agent of Aircraft Finance. The administrative agent has agreed to provide administrative, accounting and other services that include:
(1) monitoring the performance of the servicer and reporting its conclusions to the controlling trustees of Aircraft Finance;
(2) acting as a liaison with various rating agencies to assess the impact of management decisions on the ratings of the notes and coordinating responses to rating agency questions;
(3) maintaining accounting ledgers and providing draft accounts on a quarterly and annual basis;
(4) preparing annual budgets for Aircraft Finance's approval;
(5) authorizing the payment of expenses and determining the amount of expense accruals;
(6) coordinating any amendments to the agreements of Aircraft Finance and its subsidiaries, with the approval of Aircraft Finance;
(7) supervising outside counsel and other professional advisers and coordinating legal and other professional advice other than with respect to any service or matter that is the responsibility of the servicer or any additional servicer;
(8) preparing and coordinating press releases and reports to investors and to the SEC, and managing investor relations;
(9) preparing or arranging for the preparation of and filing all required tax returns; and
(10) overseeing the general operation of any liquidity facility and advising Aircraft Finance as to the appropriate reserve levels for the Notes.
In addition to its services on behalf of Aircraft Finance, the administrative agent has agreed to act as the agent for the trustee and the security trustee in managing the accounts in which the funds and investments of Aircraft Finance will be held in the name of the security trustee and related matters. Aircraft Finance is not entitled to direct the administrative agent as to these matters. Phoenix American Financial Services, Inc.'s duties for the trustee and the security trustee include:
(1) establishing and maintaining the accounts held in the name of the security trustee and any other accounts;
(2) directing withdrawals and transfers from those accounts under the indenture governing the notes;
(3) calculating certain monthly payments and making all other calculations required under that indenture;
(4) providing reports and other information required under that indenture;
(5) providing the trustee with information required by the trustee to provide its reports to the holders of the Notes; and
(6) subject to specified limitations and at the written direction of the controlling trustees, directing the investment of the funds in those accounts in investments permitted by that indenture.
The administrative agent is entitled to a fee of $497,000 per year, plus an additional amount for any additional aircraft acquired in the future, payable monthly in arrears in equal installments. The administrative agent is entitled to be indemnified by Aircraft Finance against any loss or liability incurred by the administrative agent in connection with its services to Aircraft Finance or as the agent for the trustee and the security trustee, other than through its own deceit, fraud, gross negligence or willful misconduct or that of its officers, directors, agents and employees.
Financial Advisor
Bankers Trust Company will act as the initial financial advisor. The financial advisor is responsible for assisting Aircraft Finance in developing models for the purposes of analyzing the financial impact of aircraft lease, sale and capital investment decisions. The agreement with the financial advisor may be terminated by either Aircraft Finance or the financial advisor on 30 days' written notice.
Owner Trustee
Wilmington Trust will act as the initial owner trustee. The owner trustee will maintain the books and records, including minute books and records and trust certificate records, of Aircraft Finance. It will make available telephone, facsimile and post office box facilities and will maintain Aircraft Finance's principal place of business in Delaware.
Capital Markets Advisor
Lehman Brothers Inc. will act as the initial capital markets advisor. The capital markets advisor is responsible for providing Aircraft Finance with investment banking advice in connection with the issuance of additional notes, financial advice to assist Aircraft Finance in evaluating interest rate risk and other analytical advice. Aircraft Finance may remove the capital markets advisor at any time on 90 days' written notice.
Item 11.
Item 11. Executive Compensation
All trustees will be compensated for travel and other expenses incurred by them in the performance of their duties. The independent controlling trustees receive a salary of $60,000 per annum for their services in such capacity, as well as additional compensation in the event Aircraft Finance acquires additional aircraft. The aggregate annual compensation for each independent controlling trustee may not exceed $100,000 per annum. The equity trustee appointed by the beneficial interest holders does not receive any compensation from Aircraft Finance for his services.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
a) Security ownership of certain beneficial owners.
Name and Address of Title of Class Beneficial Owner Percent of Class - -------------- ---------------- ----------------
Beneficial Interest Certificate UniCapital AFT-II, Inc. 19% 10800 Biscayne Boulevard Miami, Florida 33161
Beneficial Interest Certificate UniCapital AFT-III, Inc. 30% 1209 Orange Street Wilmington, DE 19801
Beneficial Interest Certificate IBC Aircraft Services, Inc. 20% 1200 San Bernardo Laredo, Texas 78042-1359
Beneficial Interest Certificate General Bank 10% 800 West 6th Street Los Angeles, CA 90017
Beneficial Interest Certificate TransCapital Corporation *8.5% 11130 Sunrise Valley Drive Reston, VA 20191
* TransCapital Corporation owns 7.40% of the beneficial interest directly and 1.1% indirectly through its wholly-owned subsidiary UniCapital AFT-I, Inc.
Item 13.
Item 13. Certain Relationships and Related Transactions
a) Transactions with management and others.
On May 5, 1999, UniCapital Corporation, the parent company of the initial beneficial interest holders, purchased approximately $3.8 million of the Class D Notes. UniCapital Corporation subsequently sold these Notes to an unrelated party in July 1999. Also on May 5, 1999, General Electric Capital Corporation, parent company of the aircraft servicer, purchased approximately $48.2 million of the Class D Notes.
Aircraft Finance and its subsidiaries have acquired title to 36 Aircraft from General Electric Capital Corporation and its affiliates under the master aircraft purchase agreement dated as of May 5, 1999. Two of the aircraft were acquired by General Electric Capital Corporation affiliates from affiliates of UniCapital on May 5, 1999. These two aircraft were acquired by Aircraft Finance for $85.9 million. UniCapital has indicated that it may at some point sell additional aircraft to Aircraft Finance. The servicer has agreed to allocate a portion of the fees payable to it to UniCapital to the extent of the two initial and any other aircraft acquired from UniCapital. On December 11, 2000, UniCapital Corporation announced that it had filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code.
b) Certain business relationships.
Donald G. Butler, the equity trustee and one of the three controlling trustees of Aircraft Finance, is an employee of TransCapital Corporation, the parent company of UniCapital AFT-I, Inc.. The acquisition of additional aircraft by Aircraft Finance and the terms of any related financing need only be approved by the equity trustee, subject to the terms of the trust agreement and the indenture, including confirmation by the rating agencies that the transaction will not adversely affect the rating on the Notes.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a. Financial Statements.
The following are included in Part II of this report: Page
Report of Independent Certified Public Accountants.........34 Consolidated Balance Sheet.................................35 Consolidated Statement of Income...........................36 Consolidated Statement of Cash Flows.......................37 Consolidated Statement of Changes in Beneficial Interest...38 Notes to Consolidated Financial Statements.................39
b. Current Reports on Form 8-K.
During the quarterly period ended December 31, 2000, Aircraft Finance filed reports on Form 8-K dated October 16, 2000, November 15, 2000 and December 15, 2000. Such reports on Form 8-K included copies of the monthly reports to holders of the Notes.
c. Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit Number
3.1 Certificate of Trust of Aircraft Finance Trust.* 3.2 Amended and Restated Trust Agreement of Aircraft Finance Trust dated as of May 4, 1999.* 4.1 Indenture dated as of May 5, 1999 between Aircraft Finance Trust, Resource/Phoenix, Inc. and Bankers Trust Company.* 4.2 Form of Global Note (included in Exhibit 4.1).* 4.4 Registration Rights Agreement dated as of May 5, 1999 between Aircraft Finance Trust and Lehman Brothers Inc.* 4.5 Form of Restricted Global Note.** 4.6 Form of Exchange Notes.** 10.1 Master Aircraft Purchase Agreement, dated as of May 5, 1999 among General Electric Capital Corporation, Aircraft Finance Trust, the Sellers listed on Annex A thereto and AFT Trust-Sub I.* 10.2 Security Trust Agreement dated as of May 5, 1999 between Aircraft Finance Trust, Bankers Trust Company, AFT Trust-Sub I and Aircraft Finance Trust Ireland, Limited.* 10.3 Servicing Agreement dated as of May 5, 1999 among GE Capital Aviation Services, Limited and Aircraft Finance Trust.* 10.4 Administrative Agency Agreement dated as of May 5, 1999 between Bankers Trust Company, Aircraft Finance Trust, ReSource/Phoenix, Inc., AFT Trust-Sub I and Aircraft Finance Trust Ireland, Limited.* 10.5 Reference Agency Agreement dated as of May 5, 1999 between Bankers Trust Company, Aircraft Finance Trust and ReSource/Phoenix, Inc.* 10.6 Master Swap Agreement and Schedule dated as of May 5, 1999 between Aircraft Finance Trust and Lehman Brothers Financial Products Inc.* 21. Subsidiaries of Aircraft Finance Trust.* 23.1 Consent of Aircraft Information Services, Inc.**
23.2 Consent of BK Associates, Inc.** 23.3 Consent of Morton, Beyer & Agnew.** 27.1 Financial Data Schedule.** 99.1 Appraisal of Aircraft Information Services, Inc.*** 99.2 Appraisal of BK Associates, Inc.*** 99.3 Appraisal of Morton, Beyer & Agnew.*** 99.4 Other information - Analysis of actual cash flows versus assumed case. ***
* Incorporated by reference to the Registration Statement on Form S-4 (File No. 333-82153) previously filed with the Securities and Exchange Commission on July 2, 1999. ** Incorporated by reference to the 1999 form 10-K (File No. 333-82153) previously filed with the Securities and Exchange Commission on March 22, 2000. *** Filed herewith.
d. Financial Statement Schedules.
All financial statement schedules are omitted because they are not applicable, not required or because the required information is included in the financial statements or notes thereto.
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
March 22, 2001 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 March 22, 2001 - ------------------------------ -------------- David H. Treitel
/S/RICHARD E. CAVANAGH Independent Controlling Trustee March 22, 2001 - ------------------------------ -------------- Richard E. Cavanagh
/S/DONALD G. BUTLER Equity Trustee and Controlling March 22, 2001 - ------------------------------ Trustee -------------- Donald G. Butler
/S/CHARISSE L. RODGERS Owner Trustee March 22, 2001 - ------------------------------ -------------- Wilmington Trust Company, not in its individual capacity but solely as the Owner Trustee