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 September 30, 1998
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 September 30, 1998
Airplanes Limited Common Stock, $1.00 par value 30
Airplanes Limited and Airplanes U.S. Trust
Form 10-Q for the Three Month Period Ended September 30, 1998
Index
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited) 3
o Unaudited Condensed Balance Sheets - September 30, 1998
and March 31, 1998
o Unaudited Condensed Statements of Operations -
Three Months Ended September 30, 1998
and September 30, 1997
o Unaudited Condensed Statements of Operations - Six Months Ended
September 30, 1998 and
September 30, 1997
o Unaudited Condensed Statements of Changes in Shareholders
Deficit / Net Liabilities - Six Months Ended September 30, 1998
and September 30, 1997
o Unaudited Condensed Statements of Cash Flows - Six Months Ended
September 30, 1998 and September 30, 1997
o Notes to the Unaudited Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8 - K 31
Signatures
Index to Exhibits
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
AIRPLANES GROUP
UNAUDITED CONDENSED BALANCE SHEETS
March 31, September 30,
---------------------------------------- -----------------------------------------
1998 1998
---------------------------------------- -----------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ ------------ ------------ ------------ ------------
($millions) ($millions)
ASSETS
Cash 212 6 218 213 6 219
Accounts receivable
Trade receivables 19 4 23 23 4 27
Allowance for doubtful debts (9) (1) (10) (12) (1) (13)
Amounts due from Airplanes Trust 33 - 33 - 34 34
Intercompany capital lease 38 - 38 37 37
Amounts due from GPA - - - - - -
Net investment in capital and sales
type leases 61 38 99 28 37 65
Aircraft, net 2,993 344 3,337 2,902 260 3,162
Other assets 5 0 5 11 11
============ ============ ============ ============ ============ ============
Total assets 3,352 391 3,743 3,202 340 3,542
============ ============ ============ ============ ============ ============
LIABILITIES
Accrued expenses and other liabilities 437 36 473 509 43 552
Amounts due to Airplanes Limited - 33 33 34 - 34
Intercompany capital lease - 38 38 - 37 37
Amounts due to GPA - - - - - -
Indebtedness 3,715 363 4,078 3,558 347 3,905
Provision for maintenance 292 23 315 272 17 289
Deferred income taxes 54 48 102 52 48 100
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities 4,498 541 5,039 4,425 492 4,917
------------ ------------ ------------ ------------ ------------ ------------
Net liabilities (1,146) (150) (1,296) (1,223) (152) (1,375)
============ ============ ============ ============ ============ ============
3,352 391 3,743 3,202 340 3,542
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the unaudited condensed
financial statements
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
---------------------------------------------------------------------------------
1997 1998
--------------------------------------- ---------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ ----------- ----------- ----------- -----------
($millions) ($millions)
Revenues
Aircraft leasing 134 19 153 123 11 134
Aircraft Sales - 10 10 2 - 2
Expenses
Cost of Aircraft Sold - (10) (10) (2) - (2)
Depreciation and amortisation (44) (5) (49) (40) (4) (44)
Net interest expense (92) (11) (103) (90) (11) (101)
Provision for maintenance (19) (5) (24) (17) (2) (19)
Bad and doubtful debts 1 - 1 1 1 2
Provision for loss making leases, net 7 1 8 4 1 5
Other lease costs (11) (1) (12) (11) - (11)
Selling, general and administrative
expenses (9) (1) (10) (8) (1) (9)
------------ ------------ ----------- ----------- ----------- -----------
Operating (loss) before
provision for income taxes (33) (3) (36) (38) (5) (43)
Income tax benefit/(charge) 1 - 1 2 - 2
============ ============ =========== =========== =========== ===========
Net (loss) (32) (3) (35) (36) (5) (41)
============ ============ =========== =========== =========== ===========
The accompanying notes are an integral part of the unaudited
condensed financial statements
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Six Months Ended September 30,
---------------------------------------------------------------------------------
1997 1998
--------------------------------------- ---------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ ----------- ----------- ----------- -----------
($millions) ($millions)
Revenues
Aircraft leasing 269 37 306 246 22 268
Aircraft Sales - 10 10 26 94 120
Expenses
Cost of Aircraft Sold - (10) (10) (24) (85) (109)
Depreciation and amortisation (87) (11) (98) (80) (8) (88)
Net interest expense (182) (21) (203) (185) (20) (205)
Provision for maintenance (39) (10) (49) (33) (3) (36)
Bad and doubtful debts (1) - (1) (3) - (3)
Provision for loss making leases, net 15 2 17 5 1 6
Other lease costs (17) (1) (18) (15) (1) (16)
Selling, general and administrative
expenses (19) (1) (20) (16) (2) (18)
------------ ------------ ----------- ----------- ----------- -----------
Operating (loss) before
provision for income taxes (61) (5) (66) (79) (2) (81)
Income tax benefit/(charge) 1 - 1 2 - 2
============ ============ =========== =========== =========== ===========
Net (loss) (60) (5) (65) (77) (2) (79)
============ ============ =========== =========== =========== ===========
The accompanying notes are an integral part of the unaudited
condensed financial statements
AIRPLANES GROUP
UNAUDITED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT/NET LIABILITIES
Six Months Ended September 30, 1997 and September 30, 1998
Airplanes Limited Airplanes Trust Combined
----------------------------------------- ---------------------------------------
Share Net Shareholders' Net Shareholders
Capital Liabilities Deficit Liabilities Deficit/ Net
Liabilities
----------------------------------------- ---------------- ----------
($millions) ($millions) ($millions) ($millions) ($millions)
Balance at March 31 1997 0 1,005 1,005 141 1,146
Net loss for the period 60 60 5 65
========== =========== =============== ================ ==========
Balance at September 30, 1997 0 1,065 1,065 146 1,211
========== =========== =============== ================ ==========
Balance at March 31 1998 0 1,146 1,146 150 1,296
Net loss for the period 77 77 2 79
========== =========== =============== ================ ==========
Balance at September 30, 1998 0 1,223 1,223 152 1,375
========== =========== =============== ================ ==========
The accompanying notes are an integral part of the unaudited
condensed financial statements
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF CASHFLOWS
Six Months Ended September 30,
-----------------------------------------------------------------------
1997 1998
----------------------------------- ----------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
---------- ---------- ----------------------- ---------- ----------------
($millions) ($millions)
Cash flows from operating activities
Net loss (60) (5) (65) (77) (2) (79)
Adjustment to reconcile (net loss)
to net cash provided by operating activities:
Depreciation and amortisation 87 11 98 80 8 88
Aircraft maintenance, net 2 1 3 (18) (1) (19)
Profit on disposal of aircraft - - - (2) (9) (11)
Deferred income taxes (1) - (1) (2) - (2)
Provision for loss making leases (15) (2) (17) (5) (1) (6)
Provision for Bad Debts - - - 3 - 3
Accrued and deferred interest expense 68 9 77 81 9 90
Changes in operating assets & liabilities:
Accounts receivable, net 4 (1) 3 (2) (2) (4)
Intercompany account movements 18 (18) - (12) 12 -
Other accruals and liabilities 4 6 10 (9) 1 (8)
Other assets (2) - (2) (1) - (1)
========== ========== =========== ========== ========== ==========
Net cash provided by/(utilised in)
operating activities 105 1 106 36 15 51
========== ========== =========== ========== ========== ==========
Cash flows from investing activities
Purchase/Sale of aircraft - 9 9 41 79 120
Intercompany account movements - - - 79 (79) -
Capital and sales type leases 10 - 10 4 - 4
========== ========== =========== ========== ========== ==========
Net cash provided by investing activities 10 9 19 124 - 124
========== ========== =========== ========== ========== ==========
Cash flows from financing activities
Decrease in indebtedness (105) (10) (115) (159) (15) (174)
========== ========== =========== ========== ========== ==========
Net cash used in financing activites (105) (10) (115) (159) (15) (174)
========== ========== =========== ========== ========== ==========
Net increase in cash 10 - 10 1 - 1
Cash at beginning of period 219 6 225 212 6 218
---------- ---------- ----------- ---------- ---------- ----------
Cash at end of period 229 6 235 213 6 219
========== ========== =========== ========== ========== ==========
Cash paid in respect of :
Interest 115 11 126 104 11 115
========== ========== =========== ========== ========== ==========
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. The re-financing was
effected through a major aircraft securitization transaction (`the
Transaction").
Under the terms of the Transaction, the following special purpose vehicles
were formed: 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" and together with
Airplanes Limited, "Airplanes Group"). Airplanes Group 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. On March 16,
1998, Airplanes Group successfully completed a refinancing of $2,437 million of
Class A and Class B Notes. Indebtedness at September 30, 1998 represents the
aggregate of the Class A - D Notes and Class E Notes in issue (net of
approximately $0.4 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 September 30,
1998 and for the three and six month periods ending September 30, 1998 and
September 30, 1997. Such adjustments are of a normal, recurring nature. The
results of operations for the three and six months ended September 30, 1998 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, 1998, 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 "1996 Certificates") in four classes
- - Class A, Class B, Class C and Class D. The Class A 1996 Certificates were
further subdivided into five separate subclasses (A-1 through A-5). Each class
and subclass of the Certificates represents an interest in two corresponding
classes or subclasses of notes (collectively, the "1996 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 "1996
Guarantees") the other's obligations under each class or subclass of 1996
Notes. Also on March 28, 1996, Airplanes Group received the net proceeds from
an underwritten offering of the 1996 Certificates (the "Underwritten Offering")
in exchange for the 1996 Notes. Airplanes Group 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 canceled in July 1996 based on the purchase
price adjustment provisions in 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 82
aircraft operators in 40 countries as at March 31, 1996. As at September 30,
1998, sixteen of these Aircraft had been sold and one Aircraft had suffered a
constructive total loss. At September 30, 1998, 210 of the remaining 212
Aircraft were on lease to 75 operators in 40 countries.
On March 16, 1998, the Trust issued additional Class A Certificates in three
separate subclasses (A-6 through A-8) and new Class B Certificates (the "1998
Refinancing Certificates" and together with the 1996 Certificates, the
"Certificates"). Also on this date, the Trust completed an underwritten
offering of the 1998 Refinancing Certificates (the "Refinancing") in exchange
for an interest in two corresponding Subclass A-6, Subclass A-7, Subclass A-8
and Class B notes issued by Airplanes Limited and Airplanes Trust (the "1998
Refinancing Notes and together with the 1996 Notes, the "Notes"). Airplanes
Limited and Airplanes Trust have each guaranteed the other's obligations under
their respective 1998 Refinancing Notes (the "Refinancing Guarantees" and
together with the 1996 Guarantees, the "Guarantees"). The proceeds of this
offering were used to refinance the Trust's Subclass A-1, Subclass A-2,
Subclass A-3 and existing Class B 1996 Certificates.
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.
Cashflow Performance Relative to March 1998 Assumptions
The March 16, 1998 prospectus relating to the Certificates and underlying Notes
contained various assumptions (the "1998 Assumptions") regarding Airplanes
Group's future revenues and cash inflows. In the period from the March 10, 1998
Calculation Date to the October 9, 1998 Calculation Date (the "Period"), gross
revenue cashflows after selling, general and administrative expenses, operating
costs and expenditure due to aircraft downtime, defaults, repossession and bad
debts ("Net Gross Revenue Cashflows") were in excess of the 1998 Assumptions as
a result of Aircraft sales.
Sales proceeds of $120 million were received in the Period in respect of the
sale of nine Aircraft (six DC8-71Fs, one B737-300, one B737-200A and one
A300-B4-100). The 1998 Assumptions reflected sales proceeds of $47 million in
respect of the sale of three DC8-71F Aircraft only. Airplanes Group's cashflows
in the period were also positively affected by the receipt of default interest
on overdue lease rentals from lessees of $1 million. The 1998 Assumptions did
not assume any payment of default interest.
However, apart from Aircraft Sales, Net Gross Revenue Cashflows were lower than
the 1998 Assumptions. Lease revenues receipts were $12 million lower than the
1998 Assumptions primarily as a result of revenue foregone due to Aircraft
sales, in addition to a number of lessees going into arrears on their rental
payments. This was partially offset by the fact that the revenue lost through
downtime and default was lower than assumed in the 1998 Assumptions. Net
maintenance reserve cashflows were also lower than the 1998 Assumptions by
approximately $16 million (the 1998 Assumptions assumed that net maintenance
cashflows would be zero). Net interest rate swap payments were $0.5 million
greater than those contained in the 1998 Assumptions.
In addition, other leasing costs were approximately $8 million greater than
assumed in the 1998 Assumptions primarily as a result of considerable costs
incurred in relation to the following aircraft: two A300 Aircraft, one of three
MD-83 Aircraft which were repossessed from Sunways in October 1997 and one B747
Aircraft. In addition, repossession costs exceeded the 1998 Assumptions by $3
million. These repossession costs were primarily in respect of the three MD83
Aircraft repossessed from Sunways and to a lesser extent in respect of one
B737-400 Aircraft repossessed from Nordic East and one B737-200A Aircraft which
was repossessed from an Indonesian Lessee and subsequently sold in June 1998.
In the Period, because sales proceeds received exceeded the 1998 Assumptions,
distributions of principal to the Class A Certificate holders were $35 million
greater than assumed and distributions of principal to the Class B Certificate
holders were $7 million greater than assumed. There were lower than assumed
interest payments to the floating rate Class A and Class B Certificate holders
as a result of the lower principal balances outstanding due to the greater than
assumed principal amortisation. In addition, payments of $2 million in respect
of the minimum and supplemental hedge amounts in the Period were not assumed in
the 1998 Assumptions.
As at the October 9, 1998 Calculation Date, Airplanes Group retained $12
million in the Collection and Expense Accounts more than anticipated in the
1998 Assumptions.
Recent Developments
Trading conditions in the civil aviation industry have been adversely affected
by the severe economic and financial difficulties experienced in Asia and the
Far East. This downturn has undermined business confidence in the region and
has had an adverse impact on the results of operations of some of Airplanes
Group's lessees in the region which may adversely affect Airplanes Group's
future revenues and cashflows. The economies of Indonesia, Thailand, Korea,
Malaysia and the Philippines have experienced particularly acute difficulties
resulting in many business failures, significant depreciation of local
currencies against the dollar (the currency in which lease payments are
payable), sovereign and corporate credit ratings downgrades and defaults, and
in certain cases, internationally organized financial stability measures. The
economic difficulties in Indonesia have resulted in civil disturbances and a
change of government in that country. Several airlines in the region have
recently announced their intention to reschedule their aircraft purchase
obligations, reduce headcount and eliminate certain routes. Since 1990, the
market in this region for aircraft on operating lease has demonstrated
significant growth rates. However, should the recessionary conditions that are
now expected to prevail in large parts of the region last for a significant
period of time these will have an adverse impact on operators in the region as
well as global aircraft demand. At September 30, 1998, Airplanes Group leased
16 Aircraft, representing 9.32% of its portfolio by Appraised Value, to
operators in Asia and the Far East.
The economy of Russia has recently experienced severe economic and financial
difficulties, including the significant devaluation of the ruble against the
dollar. The downturn in Russia's economy is likely to impact adversely business
confidence in the region, reduce demand for air travel and could also have an
adverse impact on the results of operations of Airplanes Group.
The downturn in Asia and Russia has currently begun to undermine business
confidence in Latin America with adverse affects on the economies of countries
in that region. Recently, for example, Brazil has experienced significant
downturns in its financial markets, with large decreases in financial asset
prices and considerable pressure for a devaluation of the Brazilian currency.
The Brazilian government has responded to these pressures with a series of
austerity measures including increased interest rates, public spending cuts and
tax increases. This has led to widespread expectations that economic growth in
Brazil will be significantly reduced through at least 1998 with the real
possibility of a recession that would adversely affect the operations of
Airplanes Group's Brazilian customers. Failure by Brazil to address its current
financial crisis could result in the crisis spreading to other Latin America
economies, especially Mexico. Future developments in the political systems or
economies of Brazil and other Latin America countries may have a material
adverse effect on lessee operations in those countries. At September 30, 1998,
Airplanes Group leased 78 Aircraft representing 34.42% of its portfolio by
Appraised Value to operators in Latin America. At September 30, 1998, Airplanes
Group leased 15 Aircraft representing 14.18% of the portfolio by Appraised
Value to operators in Brazil.
During the three months ended September 30, 1998, the Servicer, on behalf of
Airplanes Group, entered into a restructuring agreement with a Brazilian
lessee, which leases two B767 Aircraft or 3.08% of the portfolio by Appraised
Value. The restructured amount of approximately $4.2 million is being repaid
over 12 months commencing September 1998.
Philippine Airlines ("PAL"), the lessee of one Aircraft representing 0.61% of
the portfolio by Appraised Value, has been adversely affected by the ongoing
Asian economic crisis. On June 19, 1998 PAL filed a petition for approval of a
rehabilitation plan at the Philippine SEC and subsequently the Philippine SEC
appointed an Interim Receiver. PAL was instructed by the Philippine SEC to
submit a Rehabilitation Plan within 30 days. Following a number of applications
for extension of this time limit, PAL currently has until November 21, 1998 to
file the Rehabilitation Plan with the Philippine SEC. Notwithstanding the
formal termination of the lease agreement for the Aircraft on September 30,
1998, PAL put the Aircraft back into service in early October and continued to
operate it until October 29, 1998 when it was grounded as its Certificate of
Airworthiness reached its scheduled expiry and was not renewed. PAL and the
Interim Receiver have proposed that in return for the short term renewal of the
Certificate, PAL will meet future debts as they arise and will immediately
return the Aircraft should the Servicer reject the Rehabilitation Plan. The
Servicer is currently considering the situation. At September 30, 1998, PAL was
approximately $1.2 million in arrears in respect of rental payments and
maintenance reserves. There can be no assurance, however, that PAL will
ultimately repay its arrearages or be able to pay future lease rentals.
Airplanes Group may encounter delays or difficulties in recovering possession
of its Aircraft which is operated within the Philippines or terminating the
lease. If the Aircraft is recovered, the technical costs required to ensure the
Aircraft is in a suitable condition for re-leasing may be significant.
At September 30, 1998, a North American lessee of one B747 Aircraft (1.0% of
the Portfolio by Appraised Value), was $2.2 million in arrears in respect of
rental payments and maintenance reserves and is currently discussing a
short-term restructuring with the Servicer.
The U.S. Federal Aviation Administration (the "FAA") has indicated that it will
develop within the next six months a new test specification for insulation for
the purpose of increasing fire safety on aircraft. The FAA has also begun
discussion with the international aviation authorities on this matter. In
addition, the FAA has indicated that it will propose requiring the use of
improved insulation once the new test standard is developed. It is possible
that additional service bulletins, new maintenance practices and mandatory
airworthiness directives may be issued while the new standard for insulation is
developed. It new standards for insulation are implemented, Airplanes Group
could incur significant costs on the Aircraft complying with these standards
which could impact adversely on Airplanes Group's results of operations. It is
currently not clear whether or to what extent manufacturers, owners or lessees
would be responsible for the costs necessary to bring aircraft in compliance
with such new test standards.
Results of Operations - Three Months Ended September 30, 1998 Compared with
Three Months Ended September 30, 1997.
While the aircraft operating leasing market remains healthy, there is
considerable uncertainty facing the world's economy due to the continuing Asian
financial crisis, the substantial difficulties facing the Russian political and
financial system and increasing concerns about future economic growth in Europe
and the United States. The likely impact on other markets remains unclear,
although certain countries in Latin America are facing similar financial
problems to those experienced by Asian countries in 1997. Airplanes Group's
results of operations for the three months ended September 30, 1998 reflected
this continuation of reasonably favorable industry conditions, although a
number of lessees performed poorly. Overall, Airplanes Group generated $28
million in cash from operations in the three months to September 30, 1998
compared to $60 million in the same period of the previous year. The decrease
in cash generated from operations in the three month period to September 30,
1998 is primarily attributable to lease revenues foregone following Aircraft
sales and also an increase in technical costs for the three months ended
September 30, 1998 to $28 million as compared with $17 million in the three
months ended September 30, 1997. There was a net loss after taxation for the
three months to September 30, 1998 of $41 million (Airplanes Limited: $36
million; Airplanes Trust: $5 million) compared to a net loss after taxation for
the three months to September 30, 1997 of $35 million (Airplanes Limited: $32
million; Airplanes Trust: $3 million). The increase in the net loss for the
period was primarily attributable to the additional interest being charged on
the accrued but unpaid Class E Note interest.
Leasing Revenues
Leasing revenues (which include maintenance reserve receipts which Airplanes
Group receives from certain of its lessees) for the three months ended
September 30, were $134 million (Airplanes Limited: $123 million; Airplanes
Trust: $11 million) compared with $153 million (Airplanes Limited: $134
million; Airplanes Trust: $19 million) for the three months ended September 30,
1997. The decrease in 1998 was primarily attributable to the reduction in the
number of Aircraft on lease in the period to September 30, 1998, as a
consequence of Aircraft sales. At September 30, 1998, Airplanes Group had 210
of its 212 Aircraft on lease (Airplanes Limited: 192 Aircraft; Airplanes Trust:
18 Aircraft) compared to 224 of its 228 Aircraft on lease (Airplanes Limited:
200 Aircraft; Airplanes Trust: 24 Aircraft) at September 30, 1997. Leasing
revenues were also adversely affected by the restructuring during October 1997
of leases in respect of six Fokker 100 Aircraft on lease to a Brazilian lessee.
These leases had an average remaining lease term of 29 months. In consideration
for an extension of the leases for 119 months, the revised terms of the leases
included reduced rental rates for these Aircraft and no maintenance reserve
payments, which resulted in a decrease in rental rates of approximately 24% in
the three months to September 30, 1998 compared with the three months to
September 30, 1997. In addition, there was a lower interest rate environment
(which impacts the pricing of certain lease rentals) in the period to September
30, 1998.
Aircraft Sales
Sales revenues of $2 million (Airplanes Limited: $2 million; Airplanes Trust:
Nil) in respect of the sale of one A300-B4-100 Aircraft were received in the
three months ended September 30, 1998. No Aircraft were sold in the same
period in 1997. The net book value of the A300-B4-100 Aircraft at the date of
sale, net of maintenance reserves, was $2 million (Airplanes Limited: $2
million; Airplanes Trust: Nil).
Depreciation and Amortization
The charge for depreciation and amortization in the three months ended
September 30, 1998 amounted to $44 million (Airplanes Limited: $40 million;
Airplanes Trust: $4 million) compared with $49 million (Airplanes Limited:
$44 million; Airplanes Trust: $5 million) for the comparative period in
1997. The decrease arose as a result of the reduction in the number of
Aircraft owned by Airplanes Group.
Net Interest Expense
Net interest expense was $101 million (Airplanes Limited: $90 million;
Airplanes Trust: $11 million) in the three month period ended September 30,
1998 compared to $103 million (Airplanes Limited: $92 million; Airplanes Trust
: $11 million) in the three month period ended September 30, 1997. The decrease
in net interest expense was primarily due to a combination of offsetting
factors: a gain recognized on the value of swaptions of $6 million; lower
average debt in the three months to September 30, 1998 resulting largely from
Aircraft sales; and additional interest charged on accrued but unpaid Class E
Note interest of $9 million.
The weighted average interest rate on the Class A - D Notes during the three
months to September 30, 1998 was 6.86% and the average debt in respect of the
Class A - D Notes outstanding during the period was $3,346 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 September 30,
1997 was 6.81% and the average debt in respect of the Class A - D Notes
outstanding during the period was $3,724 million. Although LIBOR was lower in
the three months ended September 30, 1998 as compared with the three months
ended September 30, 1997, the weighted average interest rate on the Class A-D
Notes actually increased slightly during the three months ended September 30,
1998 as compared to the three months ended September 30, 1997. This increase
occurred because substantial amounts of Airplanes Group's floating rate notes
have been paid down over time with relatively small payments on the fixed rate
notes resulting in an increase in the relative proportion of fixed rate notes
as compared with floating rate notes.
The difference for the three months ended September 30, 1998 in Airplanes
Group's net interest expense of $101 million (Airplanes Limited: $90 million;
Airplanes Trust: $11 million) and cash paid in respect of interest of $56
million (Airplanes Limited: $51 million; Airplanes Trust: $5 million) is
substantially accounted for by the fact that Airplanes Group accrues interest
on the Class E Notes at a rate substantially higher than the per annum rate of
1% actually paid in cash in the three months ended September 30, 1998.
Net interest expense is stated after deducting interest income earned during
the relevant period. In the three months ended September 30, 1998, Airplanes
Group earned interest income (including lessee default interest) of $3 million
(Airplanes Limited: $3 million; Airplanes Trust: Nil) compared with $4 million
in the three months ended September 30, 1997 (Airplanes Limited: $4 million;
Airplanes Trust: Nil). The decrease is primarily as a result of marginally
lower lessee default interest and lower interest rates in the three months to
September 30, 1998.
At September 30, 1998, Airplanes Group had options on interest rate swaps
("Swaptions") with a notional principal of $296 million. As swap rates fell
significantly in the three months ended September 30, 1998 (approximately 1% on
the three year rate), the value of the Swaptions increased by approximately $6
million during the three months ended September 30, 1998. As Swaptions do not
qualify for hedge accounting under US GAAP, the increase in fair value of $6
million has been netted against interest expense in the statement of
operations.
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 September 30, 1998,
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 credit
of $2 million in respect of bad and doubtful debts (Airplanes Limited: $1
million; Airplanes Trust: $1 million) in the three months ended September 30,
1998, compared with an overall net credit of $1 million for the three months
ended September 30, 1997 (Airplanes Limited: $1 million; Airplanes Trust: Nil).
The overall net credit in 1998 was primarily as a result of the reduction in
the provisions required for various lessees including one Indonesian lessee,
one Irish lessee and one North American lessee, which were partially offset by
provisions required in respect of one North American lessee.
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. There were no
significant `loss making' leases signed in the three months to September 30,
1998. Consequently, there was an overall net utilisation of $5 million
(Airplanes Limited: $4 million; Airplanes Trust: $1 million) in respect of
`loss making' lease provisions in the three months ended September 30, 1998,
compared with the three month period to September 30, 1997 where there was an
overall net utilization of $8 million (Airplanes Limited: $7 million; Airplanes
Trust: $1 million).
Other Lease Costs
Other lease costs in the three months ended September 30, 1998 amounted to $11
million (Airplanes Limited: $11 million; Airplanes Trust: Nil) compared to
other lease costs of $12 million (Airplanes Limited: $11 million; Airplanes
Trust: $1 million) in the three months to September 30, 1997. A significant
amount of the $11 million charge in the three months to September 30, 1998,
relates to additional technical expenses of $5 million required in respect of
the four Fokker 100 Aircraft repossessed from Sempati, prior to it ceasing to
trade on June 5, 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period to
September 30, 1998 amounted to $9 million (Airplanes Limited: $8 million;
Airplanes Trust: $1 million). This is a comparable expense to that
incurred in the three months to September 30, 1997 of $10 million
(Airplanes Limited: $9 million; Airplanes Trust: $1 million). The reduction
resulted from lower fee base as a result of aircraft sales.
The most significant element of selling, general and administrative expenses is
the aircraft servicing fees paid to 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 $9 million in the three months to
September 30, 1998 include $6 million (Airplanes Limited: $5 million; Airplanes
Trust: $1 million) relating to GECAS servicing fees as compared to the expense
incurred in respect of GECAS servicing fees in the comparative period to
September 30, 1997 of $7 million (Airplanes Limited: $6 million; Airplanes
Trust: $1 million). This reduction resulted from a lower fee base as a result
of aircraft sales.
A further significant element of Airplanes Group's actual selling, general and
administrative expenses reported in the period to September 30, 1998 was $2
million (Airplanes Limited: $2 million; Airplanes Trust: Nil) in respect of
administrative agency and cash management fees payable to GPA, similar to the
charge of $2 million for the period to September 30, 1997.
Operating Loss
The operating loss for the three months ended September 30, 1998 was $43
million (Airplanes Limited: $38 million; Airplanes Trust: $5 million) compared
with an operating loss of $36 million for the three months ended September 30,
1997 (Airplanes Limited: $33 million; Airplanes Trust: $3 million). Airplanes
Limited and Airplanes Trust are expected to continue to report substantial
losses in the future.
Taxes
There was a tax benefit in the three months to September 30, 1998, of $2
million as a result of continuing operating losses (Airplanes Limited: $2
million; Airplanes Trust: Nil), as compared with an overall tax benefit of
$1 million in the same period in 1997 (Airplanes Limited: $1 million; Airplanes
Trust: Nil).
Net Loss
The net loss after taxation for the three months ended September 30, 1998
was $41 million (Airplanes Limited: $36 million; Airplanes Trust: $5 million)
compared with a net loss after taxation for the three months ended September
30, 1997 of $35 million (Airplanes Limited: $32 million; Airplanes Trust: $3
million).
Financial Resources and Liquidity
The was an overall net decrease in cash of $4 million for the three months to
September 30, 1998, compared with a $8 million increase in cash for the three
months to September 30, 1997.
Liquidity
The cash balances at September 30, 1998 amounted to $219 million (Airplanes
Limited: $213 million ; Airplanes Trust: $6 million) compared to cash
balances at September 30, 1997 of $235 million (Airplanes Limited: $229
million ; Airplanes Trust: $6 million.)
Operating Activities
Net cash provided by operating activities in the three months ended September
30, 1998 amounted to $28 million (Airplanes Limited: $24 million; Airplanes
Trust: $4 million) compared with $60 million in the three months ended
September 30, 1997 (Airplanes Limited: $55 million; Airplanes Trust: $5
million). This includes cash paid in respect of interest of $56 million in the
three months to September 30, 1998 (Airplanes Limited: $51 million; Airplanes
Trust: $5 million) compared with $64 million in the three months to September
30, 1997 (Airplanes Limited: $59 million; Airplanes Trust: $5 million). The
decrease in cash from operations generated in the three month period to
September 30, 1998 is primarily attributable to lease revenues foregone
following Aircraft sales and also an increase in technical costs for the three
months ended September 30, 1998 as compared to the three months ended September
30, 1997.
Investing and Financing Activities
Cash flows from investing activities in the three months to September 30, 1998
reflects proceeds of $2 million from the sale of one A300-B4-100 Aircraft. In
addition, the reduction in the cash provided by capital and sale type leases to
$1 million (Airplanes Limited: $1 million; Airplanes Trust: Nil) as compared
with $5 million in the comparative period to September 30, 1997 (Airplanes
Limited: $5 million; Airplanes Trust: Nil) was primarily due to the sale of two
DC-10 Aircraft during December 1997 and one B737-200 Aircraft during May 1998.
Cash flows from financing activities in the three months to September 30, 1998
primarily reflect the repayment of $35 million of principal on Subclass A-6,
Class B Notes and Class C Notes by Airplanes Group (Airplanes Limited: $31
million; Airplanes Trust: $4 million) compared with $57 million of principal
repaid on Subclass A-5 and Class B Notes by Airplanes Group (Airplanes Limited:
$52 million; Airplanes Trust: $5 million) in the three months to September 30,
1997. The decrease in principal repayments in the three months ended September
30, 1998 as compared to the three months ended September 30, 1997 is due to a
reduction in cash provided by operating activities as discussed above.
Indebtedness
Airplanes Group's indebtedness consisted of Class A-E Notes in the amount of
$3,905 million (Airplanes Limited: $3,558 million; Airplanes Trust: $347
million) at September 30, 1998 and $4,283 million (Airplanes Limited: $3,901
million; Airplanes Trust: $382 million) at September 30, 1997. Airplanes Group
had $591 million Class E Notes outstanding at September 30, 1998. In order to
repay principal on the Subclass A-4, A-7 and A-8 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, $200 million of
Subclass A-4 Notes, $550 million of Subclass A-7 Notes and $700 million in
Subclass A-8 Notes will have to be refinanced through the sale of further
pass-through certificates by March 2003, 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.
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. There has been an increasing tendency for fixed
rate leases to be written and approximately two thirds of the leases are fixed
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 enters into interest rate swaps (the `Swaps'). Under the Swaps, Airplanes
Group pays fixed amounts and receives floating amounts on a monthly basis. The
Swaps amortize having regard to the expected paydown schedule of the Class A
and B Notes, the expiry dates of the leases under which lessees are contracted
to make fixed rate rental payments and the LIBOR reset dates under the floating
rates leases. At least every three months, and in practice more frequently, 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 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 September 30,
1998, Airplanes Group had unamortized Swaps with an aggregate notional
principal balance of $2,405 million. The aggregate notional principal of these
Swaps will be reduced to $1,300 million by the end of the fiscal year ended
March 31, 1999. These Swaps will be further reduced to an aggregate notional
principal balances of $890 million by the year ended March 31, 2000, to an
aggregate notional principal balance of $565 million by the year ended March
31, 2001 and to an aggregate notional principal balance of $255 million by the
year ended March 31, 2002. None of the Swaps have maturity dates extending
beyond February 2003. The fair values of the swaps at September 30, 1998 was a
negative $29 million.
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 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 aggregate 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 outstanding Swaptions, for example, to
reflect any decreases in the Target Hedge. In the period from March 28, 1996 to
September 30, 1998, Airplanes Group purchased Swaptions for interest rate swaps
with an aggregate notional principal balance of $473 million and sold Swaptions
with an aggregate notional principal balance of $177 million. The net aggregate
notional principal balance of Swaptions at September 30, 1998 therefore
amounted to $296 million. The fair values of the Swaptions at September 30,
1998 was $8 million and because the Swaptions do not qualify for hedge
accounting under U.S. GAAP, the increase in this amount since March 31, 1998
($6 million) has been included in income for the three and six months ended
September 30, 1998.
Through the use of the 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 which have credit
ratings, or which provide collateralisation arrangements, consistent with
maintaining the ratings of the Class A Notes.
Year 2000 Compliance
Many existing computer systems use only two digits to identify a year in the
date field. These systems were designed and developed without considering the
impact of the Year 2000. If not corrected, many computer applications could
fail or create erroneous results by or at the Year 2000.
Airplanes Group is in the process of assessing the potential impact of the Year
2000 issue on its operations. Because all of its operational functions have
been delegated to GECAS (as "Servicer"), the Administrative Agent and GPA Cash
Manager Limited (as "Cash Manager"), in accordance with the terms of their
respective service agreements, Airplanes Group has no information systems of
its own and does not currently expect to incur any material expenditure making
information systems Year 2000 compliant. Likewise, having regard to its
agreements with its servicers, Airplanes Group does not expect to incur any
material costs as a result of such servicers ensuring that their information
systems are Year 2000 compliant. Airplanes Group may, nonetheless suffer a
material adverse impact on its business and results of operations if
information technology upon which the Servicer, Administrative Agent and Cash
Manager rely is not Year 2000 compliant. For example, if the Servicer's
information systems were not Year 2000 compliant, it could impact materially on
the Servicer's performance of its obligations under the Servicing Agreement
with Airplanes Group, which in turn could have a material adverse effect on the
business and results of operations of Airplanes Group.
The Servicer, Administrative Agent and Cash Manager have confirmed to Airplanes
Group that they are in the process of reviewing their Year 2000 exposure and
identifying the steps that will need to be taken to ensure that their systems
are Year 2000 compliant. Airplanes Group has reached an agreement in principle
with the Servicer regarding a Year 2000 consulting arrangement. Under this
arrangement (which is subject to negotiation of a definitive agreement), the
Servicer would provide Airplanes Group with certain Year 2000 consulting
services, including: testing hardware and software used or provided by the
Servicer under the Servicing Agreement and reporting periodically on the
Servicer's own Year 2000 compliance; surveying aircraft and engine
manufacturers, lessees and other third parties regarding Year 2000 compliance
and advising Airplanes Group with respect to the survey results; suggesting
modifications to pro forma leases and other contracts; and assessing Year
2000-related insurance issues. Airplanes Group would pay no explicit fee for
these consulting services, but would provide the Servicer with a waiver of
liability and certain indemnities in connection with their performance.
The Administrative Agent has also established a Task Force, which includes
external advisors, to oversee the development and implementation of a Year 2000
Plan for Airplanes Group, (a) to achieve Year 2000 compliance in the
Administrative Agent's and Cash Manager's computer systems, (b) reviewing the
Year 2000 consulting services to be provided by the Servicer, (c) to assess
Year 2000 compliance of suppliers and customers and (d) to report to Airplanes
Group on the adequacy of the measures and procedures to address that risk. The
Year 2000 Plan will include a proposed contingency plan in case any of the
measures outlined fails to deal with Year 2000 issues. The Administrative Agent
expects to report to Airplanes Group by December 31, 1998 on Airplanes Group's
Year 2000 exposure and to identify the steps that have been, or should be,
taken to minimise that exposure.
Airplanes Group may also suffer an adverse impact on its business and results
of operations if its lessees, suppliers, financial institutions, technical
advisors and others with which it conducts business are not Year 2000
compliant. The Servicer has circulated a survey of the third parties with which
it deals on behalf of Airplanes Group to determine the extent of such third
parties' exposure to Year 2000 risks and the status of their Year 2000
compliance efforts.
In addition, aircraft and air traffic control and airport infrastructures
depend heavily upon microprocessors and software technology. Major
manufacturers, including Boeing, have begun a Year 2000 review of the systems
employed on their aircraft and are expected to advise owners, operators and
service providers of the steps to be taken to address any Year 2000 problems
that are identified. Among the aircraft systems that have been identified as
being susceptible to Year 2000 are certain on-board aircraft management and
navigation systems. The Servicer has circulated a survey of aircraft and
aircraft parts manufacturers and suppliers to determine the extent to which
their products are Year 2000 compliant. These review programs are still ongoing
and thus the nature and the extent of the risks posed by the potential failure
of aircraft and air traffic control systems as a result of Year 2000 problems
has not been fully determined. Any failure of the systems employed by Airplanes
Group's Aircraft to be Year 2000 compliant could have a material adverse effect
on Airplanes Group's business and results of operations. Likewise, any failure
of the systems employed by civil aviation authorities to manage the air traffic
control systems in the various countries where lessees operate the Aircraft
could have the same adverse effect. For example, any such failures would impair
the ability of the lessee to operate the Aircraft, which could impair its
ability to pay rentals to Airplanes Group. Moreover, it is currently not clear
whether or to what extent manufacturers, owners or lessees will be responsible
for the costs necessary to bring aircraft systems into Year 2000 compliance.
Certain insurers have taken the position that because Year 2000 issues have
been widely publicized, claims for losses incurred as a result of the Year 2000
problems may be denied under existing policies. Accordingly, there can be no
assurance that any losses that Airplanes Group may incur as a result of Year
2000 problems will be covered under its existing insurance. In addition,
insurers in the London market have recently adopted recommendations to exclude
Year 2000 losses from future aviation policies, subject to purchase of a
specific endorsement.
Pending a report to Airplanes Group from the Administrative Agent, the Cash
Manager and the Servicer of the outcome of their Year 2000 reviews, it is not
possible to determine at this time the extent, if any, to which Airplanes
Group's business and results of operations may be exposed as a result of any
failure by lessees, aircraft or engine manufacturers or aviation or airport
authorities to address Year 2000 issues. Failure by lessees, aircraft or engine
manufacturers or aviation or airport authorities to address the Year 2000 issue
could have a material adverse impact on the ability of Airplanes Group to make
payments on the Notes.
New Accounting Pronouncement
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") was issued in June 1998.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
Airplanes Group is currently reviewing implementation of the requirements of
SFAS No. 133.
Results of Operations - Six Months Ended September 30, 1998 Compared with Six
Months Ended September 30, 1997.
Airplanes Group's results of operations for the six months ended September 30,
1998 reflected a continuation of reasonably favorable industry conditions.
However, as discussed in - " Results of Operations - Three months ended
September 30, 1998 compared with three months ended September 30, 1997" - there
is considerable uncertainty facing the world's economy. Overall, Airplanes
Group generated $51 million in cash from operations in the six months to
September 30, 1998 compared to $106 million in the same period of the previous
year. The decrease in cash generated from operations in the six month period to
September 30, 1998 is primarily attributable to lease revenues foregone
following Aircraft sales and also an increase in maintenance claims and
technical costs for the six months ended September 30, 1998 to $63 million as
compared with $52 million for the six months ended September 30, 1997. There
was a net loss after taxation for the six months to September 30, 1998 of $79
million (Airplanes Limited: $77 million; Airplanes Trust: $2 million) compared
to a net loss after taxation for the six months to September 30, 1997 of $65
million (Airplanes Limited: $60 million; Airplanes Trust: $5 million)
Leasing Revenues
Leasing revenues (which include maintenance reserve receipts which Airplanes
Group receives from certain of its lessees) for the six months ended September
30, were $268 million (Airplanes Limited: $246 million; Airplanes Trust: $22
million) compared with $306 million (Airplanes Limited: $269 million; Airplanes
Trust: $37 million) for the six months ended September 30, 1997. The decrease
in 1998 was primarily attributable to the reduction in the number of Aircraft
on lease in the period to September 30, 1998, as a result of Aircraft sales. At
September 30, 1998, Airplanes Group had 210 of its 212 Aircraft on lease
(Airplanes Limited: 192 Aircraft; Airplanes Trust: 18 Aircraft) compared to 224
of its 228 Aircraft on lease (Airplanes Limited: 200 Aircraft; Airplanes Trust:
24 Aircraft) at September 30, 1997. Leasing revenues were also adversely
affected by the restructuring during October 1997 of leases in respect of six
Fokker 100 Aircraft on lease to a Brazilian lessee. See "Results of Operations
- - Three months ended September 30, 1998 compared with three months ended
September 30, 1997". In addition there was a lower interest rate environment
(which impacts the pricing of certain lease rentals) in the period to September
30, 1998.
Aircraft Sales
Sales revenues of $120 million (Airplanes Limited: $26 million; Airplanes
Trust: $94 million) in respect of the sale of nine Aircraft (six DC8-71Fs, one
B737, 300, one B737-200A and one A300-B4-100) were received in the six months
ended September 30, 1998. The net book value of the nine Aircraft at the date
of sale, net of maintenance reserves, was $109 million (Airplanes Limited: $24
million; Airplanes Trust: $85 million). One Aircraft was sold in the same
period in 1997 generating sales revenue of $10 million (Airplanes Limited; Nil;
Airplanes Trust: $10 million). This Aircraft had a net book value of $10
million (Airplanes Limited: Nil, Airplanes Trust $10 million).
Depreciation and Amortization
The charge for depreciation and amortization in the six months ended
September 30, 1998 amounted to $88 million (Airplanes Limited: $80 million;
Airplanes Trust: $8 million) compared with $98 million (Airplanes Limited:
$87 million; Airplanes Trust: $11 million) for the comparative period in
1997. The decrease arose as a result of the reduction in the number of
Aircraft owned by Airplanes Group.
Net Interest Expense
Net interest expense was $205 million (Airplanes Limited: $185 million;
Airplanes Trust: $20 million) in the six month period ended September 30, 1998
compared to $203 million (Airplanes Limited: $182 million; Airplanes Trust :
$21 million) in the six month period ended September 30, 1997. The increase in
net interest expense was primarily due to a combination of offsetting factors:
additional interest being charged on accrued but unpaid Class E Note interest
of $18 million; lower average debt in the six months to September 30, 1998
resulting largely from Aircraft sales; and a gain recognized on the value of
Swaptions of $6 million.
The weighted average interest rate on the Class A - D Notes during the six
months to September 30, 1998 was 6.85% and the average debt in respect of the
Class A - D Notes outstanding during the period was $3,393 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 six months to September 30,
1997 was 6.80% and the average debt in respect of the Class A - D Notes
outstanding during the period was $3,751 million. Although LIBOR was lower in
the six months ended September 30, 1998 as compared with the six months ended
September 30, 1997, the weighted average interest rate on the Class A-D Notes
actually increased slightly during the six months ended September 30, 1998 as
compared to the six months ended September 30, 1997. This increase occurred
because substantial amounts of Airplanes Group's floating rate notes have been
paid down over time with relatively small payments on the fixed rate notes
resulting in an increase in the relative proportion of fixed rate notes as
compared with floating rate notes.
The difference for the six months ended September 30, 1998 in Airplanes Group's
net interest expense of $211 million (Airplanes Limited: $191 million;
Airplanes Trust: $20 million) and cash paid in respect of interest of $115
million (Airplanes Limited: $104 million; Airplanes Trust: $11 million) is
substantially accounted for by the fact that Airplanes Group accrues interest
on the Class E Notes at a rate substantially higher than the per annum rate of
1% actually paid in cash in the six months ended September 30, 1998.
Net interest expense is stated after deducting interest income earned during
the relevant period. In the six months ended September 30, 1998, Airplanes
Group earned interest income (including lessee default interest) of $7 million
(Airplanes Limited: $7 million; Airplanes Trust: Nil) compared with $8 million
in the six months ended September 30, 1997 (Airplanes Limited: $7 million;
Airplanes Trust: $1 million). The decrease is primarily as a result of
marginally lower lessee default interest in addition to lower interest rates in
the six months to September 30, 1998.
At September 30, 1998, Airplanes Group had Swaptions with a notional principal
of $296 million. As swap rates fell significantly in the six months ended
September 30, 1998 (approximately 1% on the three year rate), the value of the
Swaptions increased by approximately $6 million during the six months ended
September 30, 1998. As Swaptions do not qualify for hedge accounting under US
GAAP, the increase in fair value of $6 million has been netted against interest
expense in the statement of operations.
Bad Debt and Loss-Making Lease Provisions
See "Results of Operations - Three months ended September 30, 1998 compared
with three months ended September 30, 1997" for a discussion of Airplanes
Group's accounting practices in respect of delinquent receivables and
provisions for "loss making leases". While a small number of Airplanes Group's
lessees failed to meet their contractual obligations in the six month period
ended September 30, 1998, 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 $3 million in respect of
bad and doubtful debts (Airplanes Limited: $3 million; Airplanes Trust: Nil) in
the six months ended September 30, 1998, compared with the overall net
provision required of $1 million for the six months ended September 30, 1997
(Airplanes Limited: $1 million; Airplanes Trust: Nil). The overall provision in
1998 was primarily as a result of provisions required for various lessees
including one Indonesian lessee, one Brazilian lessee and one Peruvian lessee,
which were partially offset by a reduction in the provisions required in
respect of one Irish lessee and one Mexican lessee.
In respect of `loss making' lease provisions, there was an overall net
utilisation of $6 million (Airplanes Limited: $5 million; Airplanes Trust: $1
million) in the six months ended September 30, 1998. In the six month period to
September 30, 1997, there was an overall net utilization of $17 million
(Airplanes Limited: $15 million; Airplanes Trust: $2 million). In the six
months ended September 30, 1998, the only significant provision required was in
respect of three DC8-71F Aircraft on lease to one Latin American lessee.
Other Lease Costs
Other lease costs in the six months ended September 30, 1998 amounted to $16
million (Airplanes Limited: $15 million; Airplanes Trust: $1 million) compared
to other lease costs of $18 million (Airplanes Limited: $17 million; Airplanes
Trust: $1 million) in the six months to September 30, 1997. The reduction in
the charge in the six months to September 30, 1998, was primarily due to the
fact that in the six months to September 30, 1997, there was an increase in
technical expenses of $5 million which related primarily to two B737-200
Aircraft which redelivered in the previous quarter and a provision required of
$4 million (including $3 million relating to potential costs payable to
Eurocontrol, the European air traffic control regulator) in respect of three
MD83 Aircraft which were on lease to a Turkish lessee which ceased to trade on
October 3, 1997. In the six months ended September 30, 1998, technical expenses
of $5 million were required in respect of the four Fokker 100 Aircraft
repossessed from Sempati.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six month period to
September 30, 1998 amounted to $18 million (Airplanes Limited: $16 million;
Airplanes Trust: $2 million). This is a comparable expense to that
incurred in the six months to September 30, 1997 of $20 million (Airplanes
Limited: $19 million; Airplanes Trust: $1 million).
The most significant element of selling, general and administrative expenses is
the aircraft servicing fees paid to 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 $18 million in the six months to
September 30, 1998 include $12 million (Airplanes Limited: $11 million;
Airplanes Trust: $1 million) relating to GECAS servicing fees as compared to
the expense incurred in respect of GECAS servicing fees in the comparative
period to September 30, 1997 of $13 million (Airplanes Limited: $12 million;
Airplanes Trust: $1 million). This reduction resulted from a lower fee base as
a result of Aircraft sales.
A further significant element of Airplanes Group's actual selling, general and
administrative expenses reported in the period to September 30, 1998 was $4
million (Airplanes Limited: $4 million; Airplanes Trust: Nil) in respect of
administrative agency and cash management fees payable to GPA, which is similar
to the charge of $4 million for the period to September 30, 1997 (Airplanes
Limited: $4 million; Airplanes Trust: Nil).
Operating Loss
The operating loss for the six months ended September 30, 1998 was $81
million (Airplanes Limited: $79 million; Airplanes Trust: $2 million)
compared with an operating loss of $66 million for the six months ended
September 30, 1997 (Airplanes Limited: $61 million; Airplanes Trust: $5
million). Airplanes Limited and Airplanes Trust are expected to continue to
report substantial losses in the future.
Taxes
There was a tax benefit in the six months to September 30, 1998 of $2
million as a result of continuing operating losses (Airplanes Limited: $2
million; Airplanes Trust: Nil) compared with an overall tax benefit of $1
million in the same period in 1997 (Airplanes Limited: $1 million; Airplanes
Trust: Nil).
Net Loss
The net loss after taxation for the six months ended September 30, 1998
was $79 million (Airplanes Limited: $77 million; Airplanes Trust: $2 million)
compared with a net loss after taxation for the six months ended September
30, 1997 of $65 million (Airplanes Limited: $60million; Airplanes Trust: $5
million).
Financial Resources and Liquidity
There was an increase in cash of $1 million for the six months to September 30,
1998 compared to a net increase of $10 million for the six months to September
30, 1997.
Liquidity
The cash balances at September 30, 1998 amounted to $219 million (Airplanes
Limited: $213 million ; Airplanes Trust: $6 million) compared to cash
balances at September 30, 1997 of $235 million (Airplanes Limited: $229
million ; Airplanes Trust: $6 million.)
Operating Activities
Net cash provided by operating activities in the six months ended September 30,
1998 amounted to $51 million (Airplanes Limited: $36 million; Airplanes Trust:
$15 million) compared with $106 million in the six months ended September 30,
1997 (Airplanes Limited: $105 million; Airplanes Trust: $1 million). This
includes cash paid in respect of interest of $115 million in the six months to
September 30, 1998 (Airplanes Limited: $104 million; Airplanes Trust: $11
million) compared with $126 million in the six months to September 30, 1997
(Airplanes Limited: $115 million; Airplanes Trust: $11 million). The decrease
in cash from operations generated in the six month period to September 30, 1998
is primarily attributable to lease revenues foregone following Aircraft sales
and also an increase in both maintenance claims and technical costs for the six
months ended September 30, 1998 as compared to the six months ended September
30, 1997.
Investing and Financing Activities
Cash flows from investing activities in the six months to September 30, 1998
primarily reflects proceeds of $120 million from the sale of nine Aircraft.
These Aircraft consist of six DC8-71Fs, one B737-300, one B737-200A and one
A300-B4-100. The cash provided by capital and sale type leases was $4 million
(Airplanes Limited: $4 million; Airplanes Trust: Nil) as compared with $10
million in the comparative period to September 30, 1997 (Airplanes Limited: $10
million; Airplanes Trust: Nil). This reduction was primarily due to the sale of
two DC-10 Aircraft during December 1997 and one B737-300 Aircraft during May
1998.
Cash flows from financing activities in the six months to September 30, 1998
primarily reflect the repayment of $174 million of principal on Subclass A-5,
Subclass A-6 and Class B Notes by Airplanes Group (Airplanes Limited: $159
million; Airplanes Trust: $15 million) compared to $115 million of principal on
Subclass A-5 and Class B Notes repaid by Airplanes Group (Airplanes Limited:
$105 million; Airplanes Trust: $10 million) in the six months to September 30,
1997. The higher amount of principal repayments in the six months ended
September 30, 1998 is due to a higher amount of cash provided by investing
activities as discussed above.
Part II. Other Information
Item 1. Legal Proceedings
VASP On November 5, 1992, GPA obtained a preliminary injunction for
repossession and export of thirteen aircraft and six 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 has filed a writ of mandamus with the
Brazilian courts seeking to overturn the decision of the High Court and has
sought a stay on the High Court's decisions pending its appeals.
Seven of the thirteen aircraft which were repossessed by GPA from VASP
following the 1992 injunction and the 1993 decision are now owned by Airplanes
Group although none of them are habitually based in Brazil. However, 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 sought to serve GPA with the notice requiring return of the Repossessed
Assets within thirty days of the notice. However, the High Court has referred
all matters concerning the notice to a lower court. Should VASP commence any
action before the lower court in respect of the notice, GPA will challenge a
number of matters relating to the notice including its validity. In addition,
VASP sought an order against GPA from the High Court for alleged damages
arising from the repossession and export of the Repossessed Assets and GPA's
alleged failure to comply with the court order requiring return of the
Repossessed Assets. GPA challenged VASP's application on a number of grounds,
including its validity. The High Court rejected VASP's application and held
that if VASP believes it has an action for damages against GPA, VASP must
commence such an action in accordance with normal Brazilian court procedures
before a court of first instance. The only immediate risk to the Repossessed
Assets would arise where they are located in Brazil and if 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 December 1996 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.
Other Matters On August 21, 1998, GPA, GECAS and GE Capital entered into the
1998 Omnibus Agreement, which contemplated the consummation of a number of
transactions, including the acquisition by GE Capital of the Class E Notes
issued by Airplanes Group and held by GPA Group and GPA Inc, a Delaware
corporation and a wholly-owned subsidiary of GPA Group. The transactions
contemplated by the 1998 Omnibus Agreement are due to close by November 19,
1998 ("Closing Date"). On the Closing Date, Edward Hansom, the Director of
Airplanes Limited and the Controlling Trustee of Airplanes Trust appointed by
GPA will resign and GE Capital, as the new holder of the Class E Notes, is
expected to appoint a new Director of Airplanes Limited and a new Controlling
Trustee of Airplanes Trust.
Aero USA, Inc. and AeroUSA 3, Inc., both Connecticut corporations, have in the
past filed United States federal consolidated tax returns and certain state and
local tax returns with GPA, Inc., and its subsidiaries. There are ongoing tax
audits by certain state and local tax authorities with respect to taxes
previously reported by GPA. Inc. and its subsidiaries. GPA believes that none
of these audits will have a material adverse impact upon the liquidity, results
of operations, financial condition or liquidity of AeroUSA, Inc or AeroUSA 3,
Inc.
Subsequent to the Closing Date, Aero USA, Inc. and Aero USA 3, Inc., will file
United States federal consolidated tax returns and certain state and local tax
returns with GE Capital. In addition, on the Closing Date, Airplanes Group will
enter into a Tax Sharing Agreement with GE Capital which is substantially
similar to the Tax Sharing Agreement currently in place between Airplanes Group
and GPA, which will terminate on the Closing Date, except with respect to those
provisions relating to the position prior to the date on which Aero USA, Inc.
and Aero USA 3, Inc. were deconsolidated from GPA, 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 August 14, 1998;
September 11, 1998 and October 14, 1998 (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: November 13, 1998 AIRPLANES LIMITED
By: /s/ WILLIAM M. MCCANN
--------------------------
William M. McCann
Director and Principal
Accounting Officer
Date: November 13, 1998 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