SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 33-99970-01
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Airplanes Limited Airplanes U.S. Trust
Exact Name of Registrants as specified in memorandum of association or
trust agreement
Jersey, Channel Islands Delaware
(State or other jurisdiction of incorporation or organization)
7359 13- 3521640
SIC Code (I.R.S. Employer Identification No.)
Airplanes Limited Airplanes U.S. Trust
22 Grenville Street 1100 North Market Street,
St. Helier Rodney Square North
Jersey, JE4 8PX Wilmington, Delaware
Channel Islands 19890-0001
(011 44 1534 609 000) (302-651-1000)
(Addresses and telephone numbers, including area codes, of Registrants'
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Issuer Class June 30, 1997
Airplanes Limited Common Stock, $1.00 par value 30
Airplanes Limited and Airplanes U.S. Trust
Form 10-Q for the Three Month Period Ended June 30, 1997
Index
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited) 3
o Unaudited Condensed Balance Sheets - June 30, 1997
and March 31, 1997
o Unaudited Condensed Statements of Operations - Three
Months Ended June 30, 1997 and June 30, 1996
o Unaudited Condensed Statements of Changes in Shareholders
Deficit / Net Liabilities - Three Months Ended June 30,
1997 and June 30, 1996
o Unaudited Condensed Statements of Cash Flows - Three Months
Ended June 30, 1997 and June 30, 1996
o Notes to the Unaudited Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8 - K 20
Signatures
Index to Exhibits
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
AIRPLANES GROUP
UNAUDITED CONDENSED BALANCE SHEETS
March 31, June 30,
------------------------------------- -------------------------------------
1997 1997
------------------------------------- -------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
--------- ----------- -------- -------- --------- --------
($millions) ($millions)
ASSETS
Cash 219 6 225 221 6 227
Accounts receivable
Trade receivables 39 2 41 41 4 45
Allowance for doubtful debts (12) (1) (13) (13) (1) (14)
Amounts due from Airplanes Trust 56 - 56 49 - 49
Amounts due from GPA - 2 2 - 2 2
Net investment in capital and sales
type leases 94 - 94 89 - 89
Aircraft, net 3,242 395 3,637 3,200 377 3,577
Other assets 5 1 6 4 1 5
------ ------ ------ ------ ------ ------
Total assets 3,643 405 4,048 3,591 389 3,980
====== ====== ====== ====== ====== ======
LIABILITIES
Accrued expenses and other liabilities 295 24 319 322 26 348
Amounts due to Airplanes Limited - 56 56 - 49 49
Amounts due to GPA 4 - 4 4 - 4
Indebtedness 4,005 392 4,397 3,952 387 4,339
Provision for maintenance 287 26 313 288 23 311
Deferred income taxes 57 48 105 57 48 105
------ ------ ------ ------ ------ ------
Total liabilities 4,648 546 5,194 4,623 533 5,156
------ ------ ------ ------ ------ ------
Net liabilities (1,005) (141) (1,146) (1,032) (144) (1,176)
------ ------ ------ ------ ------ ------
3,643 405 4,048 3,591 389 3,980
====== ====== ====== ====== ====== ======
The accompanying notes are an integral part of the unaudited condensed
financial statements
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
--------------------------------------------------------------------------------
1996 1997
------------------------------------- -------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
--------- ----------- -------- -------- --------- --------
($millions) ($millions)
Revenues
Aircraft leasing 131 20 151 135 18 153
Expenses
Depreciation and amortisation (45) (6) (51) (43) (6) (49)
Net interest expense (85) (9) (94) (90) (10) (100)
Provision for maintenance (15) (7) (22) (20) (5) (25)
Bad and doubtful debts - - - (2) - (2)
Provision for loss making leases, net - - - 8 1 9
Other lease costs (3) (3) (6) (6) - (6)
Selling, general and administrative
expenses (8) (1) (9) (9) (1) (10)
----- ----- ----- ----- ----- -----
Operating (loss) before
provision for income taxes (25) (6) (31) (27) (3) (30)
Income tax benefit/(charge) (1) 1 - - - -
----- ----- ----- ----- ----- -----
Net (loss) (26) (5) (31) (27) (3) (30)
===== ===== ===== ===== ===== =====
The accompanying notes are an integral part of the unaudited condensed
financial statements
AIRPLANES GROUP
UNAUDITED STATEMENTS OF CHANGES
IN SHAREHOLDERS' DEFICIT/NET LIABILITIES
Three Months Ended June 30 1996 and June 30 1997
Airplanes Limited Airplanes Trust Combined
--------------------------------------------- --------------- ------------
Share Net Shareholders' Net Shareholders
Capital Liabilities Deficit Liabilities Deficit/Net
Liabilities
--------------------------------------------- --------------- ------------
($millions) ($millions) ($millions) ($millions) ($millions)
Balance at March 31 1996 0 893 893 123 1,016
Net loss for the period 26 26 5 31
----- ----- ----- ----- -----
Balance at June 30, 1996 0 919 919 128 1,047
===== ===== ===== ===== =====
Balance at March 31 1997 0 1,005 1,005 141 1,146
Net loss for the period 27 27 3 30
----- ----- ----- ----- -----
Balance at June 30, 1997 0 1,032 1,032 144 1,176
===== ===== ===== ===== =====
The accompanying notes are an integral part of the unaudited condensed
financial statements
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF CASHFLOWS
Three Months Ended June 30,
--------------------------------------------------------------------------------
1996 1997
------------------------------------- -------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
--------- ----------- -------- -------- --------- --------
($millions) ($millions)
Cash flows from operating activities
Net loss (26) (5) (31) (27) (3) (30)
Adjustment to reconcile (net loss)
to net cash provided by operating
activities:
Depreciation and amortisation 45 6 51 43 6 49
Aircraft maintenance, net 10 6 16 1 - 1
Deferred income taxes 1 (1) - - - -
Provision for loss making leases - - - (8) (1) (9)
Accrued and deferred interest expense 31 5 36 35 3 38
Changes in operating assets
& liabilities:
Accounts receivable, net (1) (2) (3) (1) (2) (3)
Intercompany account movements 8 (8) - 7 (7) -
Amounts due to GPA (4) 1 (3) - - -
Other accruals and liabilities 1 2 3 - - -
----- ----- ----- ----- ----- -----
Net cash provided by/(utilised in)
operating activities 65 4 69 50 (4) 46
===== ===== ===== ===== ===== =====
Cash flows from investing activities
Purchase/Sale of aircraft 52 (52) - - 9 9
Intercompany movements -
Airplanes Group (52) 52 - -
Capital and sales type leases 5 - 5 5 - 5
----- ----- ----- ----- ----- -----
Net cash provided by
investing activities 5 - 5 5 9 14
===== ===== ===== ===== ===== =====
Cash flows from financing activities
Decrease in indebtedness (51) (4) (55) (53) (5) (58)
----- ----- ----- ----- ----- -----
Net cash used in
financing activites (51) (4) (55) (53) (5) (58)
===== ===== ===== ===== ===== =====
Net increase in cash 19 - 19 2 - 2
Cash at beginning of period 214 6 220 219 6 225
----- ----- ----- ----- ----- -----
Cash at end of period 233 6 239 221 6 227
===== ===== ===== ===== ===== =====
Cash paid in respect of:
Interest 56 4 60 56 10 66
===== ===== ===== ===== ===== =====
The accompanying notes are an integral part of the unaudited condensed
financial statements
Airplanes Group
Notes to the Unaudited Condensed Financial Statements
1. Securitization Transaction
On March 28, 1996 ("the Closing Date"), GPA Group plc and its
subsidiary undertakings ("GPA") re-financed on a long term basis certain
indebtedness due to commercial banks and other senior secured debt, most of
which was due to mature in September 1997. The re-financing was effected
through a major aircraft securitization transaction ("the Transaction").
Under the terms of the Transaction, a combination ("Airplanes
Group") comprising Airplanes Limited, a special purpose company formed under
the laws of Jersey, Channel Islands ("Airplanes Limited"), and Airplanes U.S.
Trust, a trust formed under the laws of Delaware ("Airplanes Trust"), together
acquired directly or indirectly from GPA a portfolio of 229 commercial
aircraft (collectively, the "Aircraft") and related leases (the "Leases").
The Transaction was effected by transferring existing subsidiaries of GPA that
owned the Aircraft to Airplanes Limited and Airplanes Trust, respectively.
References to Airplanes Group in these notes to the unaudited condensed
financial statements may relate to Airplanes Limited and Airplanes Trust on a
combined or individual basis as applicable.
Simultaneously with such transfers, Airplanes Group issued
notes of $4,048 million in aggregate principal amount in four classes: Class
A, Class B, Class C and Class D ("Notes") with approximately 90% of the
principal amount of notes in each class being issued by Airplanes Limited and
approximately 10% by Airplanes Trust. Airplanes Group also issued Class E
Notes of $604 million ranking after the Notes and these were taken up by GPA
as part consideration for the transfer of the Aircraft and certain related
lease receivables. Of the $604 million Class E Notes issued, approximately
$13 million were subsequently canceled on July 30, 1996 under the terms of the
Transaction. Indebtedness at June 30, 1997 represents the aggregate of the
Class A - D Notes and Class E Notes in issue (net of approximately $4 million
of discounts on issue and net of $13 million of Class E Notes subsequently
canceled as referred to above). Airplanes Limited and Airplanes Trust have
each fully and unconditionally guaranteed each others' obligations under the
relevant notes.
2. Basis of Preparation
The accompanying unaudited condensed financial statements of
Airplanes Limited, Airplanes Trust and the combined unaudited condensed
balance sheets, statements of operations, statement of changes in shareholders
deficit/net liabilities and statements of cash flows of Airplanes Group
(together the "financial statements") have been prepared on a going concern
basis in conformity with United States generally accepted accounting
principles. The financial statements are presented on a historical cost basis.
The accompanying financial statements for Airplanes Limited and
Airplanes Trust reflect all adjustments which in the opinion of management are
necessary to present a fair statement of the information presented as of June
30, 1997 and for the three months ending June 30, 1997 and June 30, 1996. Such
adjustments are of a normal, recurring nature. The results of operations for
the three months ended June 30, 1997 are not necessarily indicative of the
results to be expected for the full year.
The accompanying financial statements of Airplanes Limited and
Airplanes Trust have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance with
the requirements of the Report on Form 10-Q. Consequently, they do not include
all the disclosure normally required by generally accepted accounting
principles. For further information regarding Airplanes Group and its financial
condition, results of operations and cash flows, refer to the audited financial
statements and notes thereto included in Airplanes Group's annual Report on
Form 10-K for the year ended March 31, 1997, previously filed with the
Securities and Exchange Commission.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
On March 28, 1996, Airplanes Pass Through Trust (the "Trust") issued $4,048
million of Pass Through Certificates (the "Certificates") in four classes -
Class A, Class B, Class C and Class D. The Class A Certificates were further
subdivided into five separate sub classes. Each class and subclass of the
Certificates represents fractional undivided beneficial interests in two
corresponding classes or subclasses of notes (collectively, the "Notes")
issued by Airplanes Limited ("Airplanes Limited") and Airplanes U.S. Trust
("Airplanes Trust"). Airplanes Limited, together with Airplanes Trust and
their respective subsidiaries comprise Airplanes Group, ("Airplanes Group").
Airplanes Limited and Airplanes Trust have each fully and unconditionally
guaranteed (the "Guarantees") the other's obligations under each class or
subclass of Notes. Also on March 28, 1996, Airplanes Group received the net
proceeds from an underwritten offering of the Certificates (the "Underwritten
Offering") in exchange for the Notes and used such net proceeds, together with
approximately $604 million in aggregate principal amount of a fifth class of
Airplanes Group notes (the "Class E Notes") to acquire certain subsidiaries
of GPA Group plc ("GPA Group" and, together with its subsidiaries and
affiliates, "GPA"). Of the $604 million of Class E Notes issued, approximately
$13 million were subsequently canceled pursuant to the purchase price
adjustment provisions of the agreements pursuant to which these subsidiaries
of GPA Group were sold to Airplanes Group. The acquired subsidiaries owned 229
aircraft (the "Aircraft") and related leases to approximately 82 aircraft
operators in approximately 40 different countries as at March 31, 1996. Since
then one Aircraft has been sold and at June 30, 1997, 223 of the remaining 228
owned Aircraft were on lease to 79 operators in 40 countries.
The discussion and analysis which follows is based primarily on the combined
operating results of Airplanes Limited and Airplanes Trust and not on their
results reported as individual entities. It should be noted, however, that the
Notes and the Guarantees comprise obligations of two different legal entities
owning different assets. The Directors of Airplanes Limited and the
Controlling Trustees of Airplanes Trust believe that a combined discussion is
the most appropriate basis of presentation because, inter alia, Airplanes
Limited and Airplanes Trust are not intended to be regarded as separate
businesses but rather on the basis of one combined aircraft fleet.
Furthermore, each of Airplanes Limited and Airplanes Trust has fully and
unconditionally guaranteed the performance of the other under their respective
Notes. The Guarantees have been structured to ensure that no payments are made
on a junior class of Notes of Airplanes Limited or Airplanes Trust, as the
case may be, before any amounts due and payable on a more senior class of
Notes of Airplanes Limited or Airplanes Trust, respectively, are paid pursuant
to the Guarantees.
General
Substantially all of Airplanes Group's business is expected to consist of
aircraft operating lease activities. However, Airplanes Group may also engage
in aircraft sales subject to certain limitations and guidelines. Airplanes
Group's revenues and operating results are determined by a number of
significant factors including (i) trading conditions in the civil aviation
industry, and in particular, the market for aircraft on operating leases, (ii)
the mix, relative age and popularity of the various aircraft types in the
portfolio of Aircraft owned by Airplanes Group and (iii) Airplanes Group's
financial resources and liquidity position relative to its competitors who may
possess substantially greater financial resources.
Results of Operations - Three Months Ended June 30, 1997 Compared with Three
Months Ended June 30, 1996.
Airplanes Group's results of operations for the three months ended June 30,
1997 reflected a continuation of reasonably favorable industry conditions.
There was a utilisation of a loss making lease provision of $9 million and the
number of aircraft off-lease at June 30, 1997 was five compared to eight at
June 30, 1996. Overall, Airplanes Group generated $46 million in cash from
operations in the three months to June 30, 1997 compared to $69 million in the
same period of the previous year. The decrease in cash generated from
operations in the three month period to June 30, 1997 is primarily
attributable to increased maintenance claims for the three months ended June
30, 1997 as compared to the same period to June 30, 1996. In addition,
maintenance receipts previously received in cash from a particular lessee were
replaced by letters of credit in the year to March 31, 1997.
Overall, there was a net loss for the three months to June 30, 1997 of $30
million (Airplanes Limited: $27 million; Airplanes Trust: $3 million) compared
to a net loss after taxation for the three months to June 30, 1996 of $31
million (Airplanes Limited: $26 million; Airplanes Trust: $5 million)
Revenues
Revenues (which include maintenance reserve receipts which Airplanes Group
receives from certain of its lessees) for the three months ended June 30, 1997
remained relatively unchanged at $153 million (Airplanes Limited: $135 million;
Airplanes Trust: $18 million) compared with $151 million (Airplanes Limited:
$131 million; Airplanes Trust: $20 million) for the three months ended June
30, 1996. The marginal increase in 1997 primarily reflects a generally
higher interest rate environment (which impacts the pricing of certain lease
rentals) in addition to a decrease in the number of aircraft off lease. The
small decrease in Airplanes Trust revenues is primarily attributable to a
decrease in maintenance revenues. At June 30, 1997, Airplanes Group had 223
Aircraft on lease (Airplanes Limited: 199 Aircraft; Airplanes Trust: 24
Aircraft) compared with 221 Aircraft on lease at June 30, 1996 (Airplanes
Limited: 198 Aircraft; Airplanes Trust: 23 Aircraft).
Depreciation and Amortization
The charge for depreciation and amortization in the three months ended June 30,
1997 amounted to $49 million (Airplanes Limited: $43 million; Airplanes Trust:
$6 million) compared with $51 million (Airplanes Limited: $45 million;
Airplanes Trust: $6 million) for the comparative period in 1996.
Net Interest Expense
Net interest expense amounted to $100 million (Airplanes Limited: $90 million;
Airplanes Trust: $10 million) in the three month period ended June 30, 1997
compared to $94 million (Airplanes Limited: $85 million; Airplanes Trust : $9
million) in the three month period ended June 30, 1996. The increase in the
net interest expense is primarily due to additional interest being charged on
the accrued but unpaid Class E note interest, in addition to, a higher
interest rate environment for the three months to June 30, 1997. This has
been partially offset by lower average debt in the three months to June 30,
1997.
The interest charge is based on the actual debt outstanding during the period
and the actual terms of the Notes and the Class E Notes. The weighted average
interest rate on the Class A - D Notes during the three months to June 30,
1997 was 6.80% and the average debt in respect of the Class A - D Notes
outstanding during the period was $3,779 million. The Class E Notes accrue
interest at a rate of 20% per annum (as adjusted by reference to the U.S.
consumer price index, effective March 28, 1996). The weighted average interest
rate on the Class A - D Notes during the three months to June 30, 1996 was
6.58% and the average debt in respect of the Class A - D Notes outstanding
during the period was $4,029 million.
The difference in Airplanes Group's net interest expense and cash paid in
respect of interest is accounted for by the fact that Airplanes Group paid no
interest on the Class E Notes in the quarter ended June 30, 1997.
Net interest expense is stated after deducting interest income earned during
the relevant period. In the three months ended June 30, 1997, Airplanes Group
earned interest income (including lessee default interest) of $4 million
(Airplanes Limited: $4 million; Airplanes Trust: nil) compared with $3 million
in the three months ended June 30, 1996 (Airplanes Limited: $3 million;
Airplanes Trust: nil). The increase is primarily attributable to a higher
level of default interest being earned and received in the three months to
June 30, 1997.
Bad Debt and Loss-Making Lease Provisions
Airplanes Group's practice is to provide specifically for any amounts due but
unpaid by lessees based primarily on the amount due in excess of security held
and also taking into account the financial strength and condition of a lessee
and the economic conditions existing in the lessee's operating environment.
While a small number of Airplanes Group's lessees failed to meet their
contractual obligations in the three month period ended June 30, 1997,
resulting in the requirement for additional provisions in respect of bad and
doubtful debts in respect of these lessees, the credit exposure with regard to
certain other carriers improved in the period. Overall, there was a net
provision required of $2 million in respect of bad and doubtful debts
(Airplanes Limited: $2 million; Airplanes Trust: nil) in the three months
ended June 30, 1997. There was no net movement in the provision required in
respect of bad and doubtful debts for the three months ended June 30, 1996
(Airplanes Limited: nil; Airplanes Trust: nil). The net charge in 1997 was
primarily as a result of the requirement for provisions against receivable
balances due from one Indonesian lessee and one North American lessee, which
were partially offset by a reduction of provisions required in respect two
Mexican lessees.
A lease agreement is deemed to be 'loss making" in circumstances where the
contracted rental payments are insufficient to cover the depreciation and
allocated interest attributable to the aircraft plus certain direct costs,
such as legal fees and registration costs, attributable to the lease over its
term. For these purposes, interest is allocated to individual aircraft based
on the weighted average interest cost of the principal balance of the Notes
and the Class E Notes (excluding, in the case of the Class E Notes, the
element of interest (9% per annum) which is payable only in the event that the
principal amount of all the Notes is repaid). This results in a significant
number of leases being "loss making' while still being cash positive. While
there were no significant 'loss making' leases signed in the three months to
June 30, 1997, there was an overall provision utilised of $9 million
(Airplanes Limited: $8 million; Airplanes Trust: $1 million) in respect of
'loss making' lease provisions. However, in the three month period to June
30, 1996, there was no net change in the provision for 'loss making' leases
(Airplanes Limited: nil; Airplanes Trust: nil) as the gross provisions of $7
million utilised in the period to June 30, 1996, were offset by a provision
required in respect of a loss making lease for one B747 Aircraft in the
period.
Other Lease Costs
Other lease costs in the three months ended June 30, 1997 amounted to $6
million (Airplanes Limited: $6 million; Airplanes Trust: nil) compared to
other lease costs of $6 million (Airplanes Limited: $3 million; Airplanes
Trust: $3 million) in the three months to June 30, 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period to
June 30, 1997 amounted to $10 million (Airplanes Limited: $9 million;
Airplanes Trust: $1 million).This is a comparable expense to that incurred in
the three months to June 30, 1996 of $9 million (Airplanes Limited: $8
million; Airplanes Trust: $1 million).
The most significant element of selling, general and administrative expenses
is the aircraft servicing fees paid to GE Capital Aviation Services, Limited
("GECAS"). Substantially all of these amounts represent asset based fees
calculated as an annual percentage of agreed values of Aircraft under
management pursuant to a servicing agreement. Selling, general and
administrative expenses of $10 million in the three months to June 30, 1997
include $6 million (Airplanes Limited: $5 million; Airplanes Trust: $1
million) relating to GECAS servicing fees. This is a similar charge to the
expense incurred in respect of GECAS servicing fees in the comparative period
to June 30, 1996 of $6 million (Airplanes Limited: $5 million; Airplanes
Trust: $1 million).
A further significant element of Airplanes Group's actual selling, general and
administrative expenses reported in the period to June 30, 1997 was $2 million
(Airplanes Limited: $2 million; Airplanes Trust: nil) in respect of
administrative agency and cash management fees payable to GPA, which is
similar to the charge of $2 million for the period to June 30, 1996.
Operating Loss
The operating loss for the three months ended June 30, 1997 was $30 million
(Airplanes Limited: $27 million; Airplanes Trust: $3 million) compared with an
operating loss of $31 million for the three months ended June 30, 1996
(Airplanes Limited: $25 million; Airplanes Trust: $6 million). Airplanes
Limited and Airplanes Trust are expected to continue to report substantial
losses in the future.
Taxes
There was no tax benefit or charge in the three months to June 30, 1997, as a
result of continuing operating losses (Airplanes Limited: nil; Airplanes
Trust: nil), compared with no overall tax benefit in the same period in 1996
(Airplanes Limited: a charge of $1 million; Airplanes Trust: a benefit of $1
million).
Net Loss
The net loss for the three months ended June 30, 1997 after taxation was $30
million (Airplanes Limited: $27 million; Airplanes Trust: $3 million) compared
with a net loss after taxation for the three months ended June 30, 1996 of $31
million (Airplanes Limited: $26 million; Airplanes Trust: $5 million).
Financial Resources and Liquidity
The net increase in cash for the three months to June 30, 1997 was $2 million
compared to $19 million for the three months to June 30, 1996. The reduction
in the net cash generated is primarily as a result of a decrease in the net
cash provided by operating activities.
Liquidity
The cash balances at June 30, 1997 amounted to $227 million (Airplanes Limited:
$221 million; Airplanes Trust: $6 million) compared to cash balances at June
30, 1996 of $239 million (Airplanes Limited: $233 million; Airplanes Trust: $6
million.)
Operating Activities
Net cash provided by operating activities in the three months ended June 30,
1997 amounted to $46 million (Airplanes Limited: $50 million; Airplanes
Trust: a net cash outflow of $4 million) compared with $69 million in the
three months ended June 30, 1996 (Airplanes Limited: $65 million; Airplanes
Trust: $4 million). This includes cash paid in respect of interest of $66
million in the three months to June 30, 1997 (Airplanes Limited: $56 million;
Airplanes Trust: $10 million) compared with $60 million in the three months to
June 30, 1996 (Airplanes Limited: $56 million; Airplanes Trust: $4 million).
The decrease in cash from operations generated in the three month period to
June 30, 1997 is primarily attributable to increased maintenance claims for
the three months ended June 30, 1997 as compared to the three months to June
30, 1996. In addition, maintenance receipts previously received in cash from
a lessee were replaced by letters of credit in the year ended March 31, 1997.
Investing and Financing Activities
Cash flows from investing and financing activities in the three months to June
30, 1997 primarily reflect the repayment of $58 million of principal on
Subclass A-5 and Class B Notes by Airplanes Group (Airplanes Limited: $53
million; Airplanes Trust: $5 million). This is similar to the repayment of
$55 million of principal on Subclass A-5 and Class B Notes by Airplanes Group
(Airplanes Limited: $51 million; Airplanes Trust: $4 million) in the three
months to June 30, 1996. Also, included in the cash flows from investing and
financing activities is $9 million from the sale of a DC10 Aircraft on April
4, 1997.
Indebtedness
Airplanes Group's indebtedness consists of Class A-E Notes in the amount of
$4,339 million (Airplanes Limited: $3,952 million; Airplanes Trust: $387
million) at June 30, 1997 and $4,579 million (Airplanes Limited: $4,170
million; Airplanes Trust: $409 million) at June 30, 1996. Airplanes Group has
$591 million Class E Notes outstanding. In order to repay principal on the
Subclass A-1, A-2, A-3 and A-4 Notes on their expected maturity dates,
Airplanes Group will have to refinance such Notes in the capital markets. In
order to avoid stepped up interest costs, $850 million of Subclass A-1 Notes,
$750 million of Subclass A-2 Notes, $500 million of Subclass A-3 Notes and
$200 million in Subclass A-4 Notes will have to be refinanced through the sale
of further pass-through certificates by 1998, 1999, 2001 and 2003,
respectively. There can be no assurance that the Trust will be able to sell
further pass-through certificates in the amounts and at the times required and
any failure to do so may have the impact of increasing Airplanes Group's
borrowing costs.
Under the terms of the Notes, Airplanes Group is required annually to
commission an appraisal of the Aircraft. The purpose of the appraisal is to
redirect, when appropriate, excess cash flow to the Class A Notes and to
maintain and reduce the loan to value ratios for each Class of Notes.
Reductions in appraised values cannot affect interest payments to be made on
the Class A-D Notes, but can cause the suspension of interest payments on the
Class E Notes. Airplanes Group obtained updated appraisals of the Aircraft
from three independent aircraft appraisers as of February 25, 1997. On the
basis of these three updated appraisals, the average appraised Base Value of
the Aircraft was approximately $4,207 million compared with $4,527 million as
of October 31, 1995. This decrease was approximately $155 million more than
the expected decrease implied by the aircraft depreciation schedules that form
part of the terms of the Notes. Greater than expected decreases in value
occurred across the Aircraft, with significant percentage decreases being
experienced by the older, widebody Aircraft (A300s and DC10s), the Fokker 100s,
and to a lesser extent the MD83s and B737-500s.
However, Airplanes Group's strong operating cashflow performance since March
28, 1996, allowed greater than expected amortisation of the Class A Notes.
Accordingly, at March 17, 1997, Principal Adjustments Amounts of approximately
$39 million in aggregate were required to be paid under the terms of the Notes
from available cashflow and applied to reduce the outstanding principal
balance of the Subclass A-5 Notes so as to restore the loan to value ratios.
In the period from March 17, 1997, to July 15, 1997, cashflows from Airplanes
Group have been sufficient to restore loan to value ratios such that on July
15, 1997 payment of interest on the Class E Notes recommenced. However, there
can be no assurance that aircraft appraisers will not further reduce their
appraised values for Aircraft in the future or that Aircraft values will not
fall.
Interest Rate Management
The leasing revenues of Airplanes Group are generated primarily from lease
rental payments which are either fixed or floating. In the case of floating
rate leases, an element of the rental varies in line with changes in LIBOR,
generally six-month LIBOR. Some leases carry fixed and floating rental
payments for different rental periods. The majority of leases are floating
rate leases.
In general, an interest rate exposure arises to the extent that Airplanes
Group's fixed and floating interest obligations in respect of the Class A-D
Notes do not correlate to the mix of fixed and floating rental payments for
different rental periods. This interest rate exposure can be managed through
the use of interest rate swaps. The Class A and B Notes bear floating rates
of interest and the Class C and D Notes bear fixed rates of interest. The mix
of fixed and floating rental payments contains a higher percentage of fixed
rate payments than the percentage of fixed rate interest payments on the
Notes, including as a result of the fact that the reset periods on floating
rental payments are generally longer than the monthly reset periods on the
floating rate Notes. In order to correlate the contracted fixed and floating
rental payments to the fixed and floating interest payments on the Notes,
Airplanes Group initially entered into interest rate swaps with an aggregate
notional principal amount of $2.62 billion (the "Initial Swaps"). Under these
Initial Swaps, Airplanes Group pays fixed amounts and receives floating
amounts on a monthly basis. The Initial Swaps amortize having regard to the
minimum amortization schedule of the Class A and B Notes, the expiry dates of
the leases then existing under which lessees were contracted to make fixed
rate rental payments and the LIBOR reset dates under the floating rates
leases. At least every three months, GPA Financial Services (Ireland) Limited,
a subsidiary of GPA Group, as Airplanes Group's administrative agent (the
"Administrative Agent") seeks to enter into additional swaps or sell at market
value or unwind part or all of the Initial Swaps and any future swaps in order
to rebalance the fixed and floating mix of interest obligations and the fixed
and floating mix of rental payments. At June 30, 1997, Airplanes Group had
unamortized swaps with an aggregate notional principal balance of $2,810
million. This consisted of $780 million in respect of the unamortized balance
of the notional amount of the Initial Swaps and $2,030 million in respect of
the unamortized balance of the notional amount of additional swaps
("additional swaps") entered into by Airplanes Group since March 28, 1996 in
order to rebalance Airplanes Group's mix of fixed and floating interest rate
obligations and the fixed and floating mix of rental payments. None of the
additional swaps have maturity dates extending beyond November 2000. As of
June 30, 1997, of the $780 million aggregate notional amount of the
unamortized balance of the Initial Swaps, an amortizing swap with a notional
amount of $270 million had a final maturity date of October 1998 and an
amortizing swap with a notional amount of $510 million had a final maturity
date of April 2001. The fair values of the swaps at June 30, 1997 was $2.4
billion.
Additional interest rate exposure will arise to the extent that lessees owing
fixed rate rental payments default and interest rates have declined between
the contract date of the lease and the date of default. This exposure is
managed through the purchase of options on interest rate swaps ("Swaptions").
Airplanes Group will purchase Swaptions which, if exercised, will allow
Airplanes Group to enter into interest rate swap transactions under which it
will pay floating amounts and received fixed amounts. These Swaptions can be
exercised in the event of defaults by lessees owing fixed rate rental payments
in circumstances where interest rates have declined since the contract date of
such leases. Because not all lessees making fixed rate rental payments are
expected to default and not all lessee defaults are expected to occur
following a decline in interest rates, Airplanes Group will purchase Swaptions
in a notional amount less than the full extent of the exposure associated with
the lessees making fixed rate rental payments. This notional amount (the
"Target Hedge") will be varied from time to time to reflect, inter alia,
changes in the mix of payments bases under future leases. From time to time
the Administrative Agent may also sell at market value or unwind part or all
of the initial and any future Swaptions, for example, to reflect any decreases
in the Target Hedge. In the period from March 28, 1996 to June 30, 1997,
Airplanes Group purchased Swaptions for interest rate swaps with an aggregate
notional principal balance of $101 million and sold Swaptions with an
aggregate notional principal balance of $25 million. The net aggregate notional
principal balance of Swaptions at June 30, 1997 therefore amounted to $76
million. The fair values of the Swaptions at June 30, 1997 was $0.3 million
and because the Swaptions do not qualify for hedge accounting under U.S. GAAP,
this amount has been included in income for the year ended June 30, 1997.
Through the use of interest rate swaps, Swaptions and other interest rate
hedging products, it is Airplanes Group's policy not to be adversely exposed
to material movements in interest rates. There can be no assurance, however,
that Airplanes Group's interest rate risk management strategies will be
effective in this regard.
The Directors of Airplanes Limited and the Controlling Trustees of Airplanes
Trust are responsible for reviewing and approving the overall interest rate
management policy and transaction authority limits. Specific hedging contracts
are approved by officers of the Administrative Agent acting within the overall
policies and limits.
Counterparty risk is monitored on an ongoing basis. Counterparties are
subject to the prior approval of the Directors of Airplanes Limited and the
Controlling Trustees of Airplanes Trust. Airplanes Group's counterparties
consist of the affiliates of major U.S. and European financial institutions
where credit ratings or collateralisation arrangements are consistent with
maintaining the ratings of the Class A Notes.
Part II. Other Information
Item 1. Legal Proceedings
On November 5, 1992, GPA obtained a preliminary injunction for repossession and
export of thirteen aircraft and three spare engines (the "Repossessed Assets")
from VASP, a Brazilian airline, which had defaulted under its lease agreements
with GPA. On May 10, 1993, at a full hearing, the Brazilian courts gave a
decision fully validating the repossession injunction. VASP appealed this
decision to the High Court of the State of Sao Paolo (the "High Court"). On
December 18, 1996, the High Court found in favor of VASP in its appeal against
the court order granting GPA repossession and export of the Repossessed
Assets. GPA was instructed to return the Repossessed Assets for lease by VASP
under the terms of the original lease agreements between GPA and VASP, within
thirty days of notification by VASP that it requires return of the assets.
The decision of the High Court was stayed pending a number of clarificatory
motions by both sides before the same court. In responding to those motions,
the High Court granted VASP the right to seek damages against GPA in lieu of
the return of the Repossessed Assets. GPA has sought leave to appeal the
December 1996 decision and the court's responses to the clarificatory motions
to the Brazilian Superior Court of Justice and the Federal Supreme Court. In
addition, GPA is preparing a writ of mandamus to the High Court seeking to
overturn the decision of the High Court and is seeking a stay on the decision
pending its appeals.
Seven of the thirteen aircraft which were repossessed by GPA from VASP
following the 1992 injunction and the 1993 decision are owned by Airplanes
Group. Although none of them are habitually based in Brazil, a number of
these aircraft operate into Brazil from time to time.
The judgment of the High Court only applies to those assets which are the
subject matter of the proceedings. VASP has requested that notification be
sent to GPA that it requires return of the Repossessed Assets. While the
notification has not been served as yet, the only immediate risk to the
Repossessed Assets would arise where they are located in Brazil and where VASP
was successful in enforcing its judgment having sought repossession rather
than damages.
GPA has informed Airplanes Group that it has been advised that the decision of
the High Court in this matter is incorrect as a matter of Brazilian law. GPA
has further informed Airplanes Group that it is actively pursuing all courses
of action that may be available to it, including appeals to superior courts
and intends to defend its position vigorously and to pursue each of its claims
and counter claims against VASP. GPA has advised Airplanes Group that it
believes the outcome of these matters will not have a material adverse effect
on Airplanes Group's liquidity, results of operations or financial condition.
AeroUSA, Inc. and AeroUSA 3, Inc., both Connecticut corporations, have in the
past filed and will continue to file United States federal and state
consolidated tax returns with GPA, Inc., and its subsidiaries (the "GPA U.S.
Tax Group"). GPA, Inc. is a Delaware corporation and a wholly-owned
subsidiary of GPA Group. AeroUSA, Inc. and AeroUSA 3, Inc. also file certain
other state and local tax returns on an unconsolidated basis. There are
ongoing tax audits by certain state and local tax authorities with respect to
taxes previously reported by the GPA U.S. Tax Group or members thereof. GPA
believes that none of these audits will have a material adverse impact on the
financial position or liquidity of AeroUSA, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule of Airplanes Limited
27.2 Financial Data Schedule of Airplanes U.S. Trust
(b) Reports on Form 8-K: Filed for event dates April 15, 1997;
May 15, 1997; June 16, 1997 and July 15, 1997 (relating to
the monthly report to holders of the Certificates).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, each registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: August 7, 1997 AIRPLANES LIMITED
By: /s/ WILLIAM M. MCCANN
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William M. McCann
Director and Principal
Accounting Officer
Date: August 7, 1997 AIRPLANES U.S. TRUST
By: /s/ WILLIAM M. MCCANN
-----------------------
William M. McCann
Controlling Trustee and
Principal Accounting Officer
AIRPLANES LIMITED AND AIRPLANES U.S. TRUST
INDEX TO EXHIBITS
EXHIBIT NUMBER
27.1 Financial Data Schedule of Airplanes Limited
27.2 Financial Data Schedule of Airplanes U.S. Trust