SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 December 31, 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 December 31, 1997
Airplanes Limited Common Stock, $1.00 par value 30
Airplanes Limited and Airplanes U.S. Trust
Form 10-Q for the Three Month Period Ended December 31, 1997
Index
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited) 3
o Unaudited Condensed Balance Sheets - December 31, 1997
and March 31, 1997
o Unaudited Condensed Statements of Operations - Three
Months Ended December 31, 1997 and December 31, 1996
o Unaudited Condensed Statements of Operations - Nine Months
Ended December 31, 1997 and December 31, 1996
o Unaudited Condensed Statements of Changes in Shareholders
Deficit / Net Liabilities - Nine Months Ended December
31, 1997 and December 31, 1996
o Unaudited Condensed Statements of Cash Flows - Nine Months Ended
December 31, 1997 and December 31, 1996
o Notes to the Unaudited Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8 - K 28
Signatures
Index to Exhibits
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<TABLE>
AIRPLANES GROUP
UNAUDITED CONDENSED BALANCE SHEETS
March 31, December 31,
----------------------------------------- ----------------------------------------
1997 1997
----------------------------------------- ----------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ ------------ ------------ ------------ ------------
($millions) ($millions)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash 219 6 225 324 6 330
Accounts receivable
Trade receivables 39 2 41 24 3 27
Allowance for doubtful debts (12) (1) (13) (11) (1) (12)
Amounts due from Airplanes Trust 56 - 56 28 - 28
Amounts due from GPA - 2 2 1 - 1
Net investment in capital and sales
type leases 94 - 94 58 58
Aircraft, net 3,242 395 3,637 3,073 350 3,423
Other assets 5 1 6 5 - 5
============ ============ ============ ============ ============ ============
Total assets 3,643 405 4,048 3,502 358 3,860
============ ============ ============ ============ ============ ============
LIABILITIES
Accrued expenses and other liabilities 295 24 319 416 33 449
Amounts due to Airplanes Limited - 56 56 - 28 28
Amounts due to GPA 4 - 4 - - -
Indebtedness 4,005 392 4,397 3,848 376 4,224
Provision for maintenance 287 26 313 291 23 314
Deferred income taxes 57 48 105 55 48 103
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities 4,648 546 5,194 4,610 508 5,118
------------ ------------ ------------ ------------ ------------ ------------
Net liabilities (1,005) (141) (1,146) (1,108) (150) (1,258)
------------ ------------ ------------ ------------ ------------ ------------
3,643 405 4,048 3,502 358 3,860
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
<TABLE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended December 31,
----------------------------------------------------------------------------------
1996 1997
----------------------------------------------------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ ------------ ------------ ------------ ------------
($millions) ($millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Aircraft leasing 134 16 150 126 19 145
Aircraft Sales - - - 36 48 84
Expenses
Cost of Aircraft Sold - - - (31) (49) (80)
Depreciation and amortisation (44) (7) (51) (42) (6) (48)
Net interest expense (91) (9) (100) (96) (9) (105)
Provision for maintenance (19) (3) (22) (16) (6) (22)
Bad and doubtful debts - (1) (1) 1 - 1
Provision for loss making leases, net 2 2 4 (10) - (10)
Other lease costs (4) (1) (5) (4) - (4)
Selling, general and administrative
expenses (8) (1) (9) (8) (1) (9)
------------ ------------ ------------ ------------ ------------ ------------
Operating (loss) before
provision for income taxes (30) (4) (34) (44) (4) (48)
Income tax benefit/(charge) - - - 1 - 1
------------ ------------ ------------ ------------ ------------ ------------
Net (loss) (30) (4) (34) (43) (4) (47)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
<TABLE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Nine Months Ended December 31,
----------------------------------------------------------------------------------
1996 1997
---------------------------------------- ----------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ ------------ ------------ ------------ ------------
($millions) ($millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Aircraft leasing 405 54 459 394 56 450
Aircraft Sales - - - 46 48 94
Expenses
Cost of Aircraft Sold - - - (41) (49) (90)
Depreciation and amortisation (136) (19) (155) (129) (17) (146)
Net interest expense (260) (26) (286) (278) (30) (308)
Provision for maintenance (57) (15) (72) (54) (16) (70)
Bad and doubtful debts - - - - - -
Provision for loss making leases, net 9 5 14 5 2 7
Other lease costs (23) (7) (30) (21) (1) (22)
Selling, general and administrative
expenses (24) (3) (27) (27) (2) (29)
------------ ------------ ------------ ------------ ------------ ------------
Operating (loss) before
provision for income taxes (86) (11) (97) (105) (9) (114)
Income tax benefit/(charge) (1) 1 - 2 2
------------ ------------ ------------ ------------ ------------ ------------
Net (loss) (87) (10) (97) (103) (9) (112)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
<TABLE>
AIRPLANES GROUP
UNAUDITED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT/NET LIABILITIES
Nine Months Ended December 31, 1996 and December 31, 1997
Airplanes Limited Airplanes Trust Combined
---------------------------------------- ----------------- -----------
Share Net Shareholders' Net Shareholders
Capital Liabilities Deficit Liabilities Deficit/ Net
Liabilities
---------------------------------------- ----------------- -----------
($millions) ($millions) ($millions) ($millions) ($millions)
<S> <C> <C> <C> <C> <C>
Balance at March 31 1996 0 893 893 123 1,016
Net loss for the period 87 87 10 97
----------- ----------- -------------- ----------------- -----------
Balance at December 31, 1996 0 980 980 133 1,113
=========== =========== ============== ================= ===========
Balance at March 31 1997 0 1,005 1,005 141 1,146
Net loss for the period 103 103 9 112
----------- ----------- -------------- ----------------- -----------
Balance at December 31, 1997 0 1,108 1,108 150 1,258
=========== =========== ============== ================= ===========
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
<TABLE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF CASHFLOWS
Nine Months Ended December 31,
-----------------------------------------------------------------------
1996 1997
---------------------------------- -----------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
---------- ---------- ---------- ----------- ---------- ----------
($millions) ($millions)
<S>
Cash flows from operating activities <C> <C> <C> <C> <C> <C>
Net loss (87) (10) (97) (103) (9) (112)
Adjustment to reconcile (net loss)
to net cash provided by operating activities:
Depreciation and amortisation 136 19 155 129 17 146
Aircraft maintenance, net 14 7 21 7 1 8
Profit on disposal of aircraft - - - (5) 1 (4)
Deferred income taxes 1 (1) - (2) - (2)
Provision for loss making leases (9) (5) (14) (5) (2) (7)
Accrued and deferred interest expense 90 9 99 102 19 121
Changes in operating assets & liabilities:
Accounts receivable, net (9) (6) (15) 14 (1) 13
Intercompany account movements 9 (7) 2 28 (28) -
Amounts due to GPA - - - (5) 2 (3)
Other accruals and liabilities 25 7 32 27 (9) 18
Other assets (1) - (1) (1) - (1)
---------- ---------- ---------- ----------- ---------- ----------
Net cash provided by operating activities 169 13 182 186 (9) 177
========== ========== ========== =========== ========== ==========
Cash flows from investing activities
Purchase/Sale of aircraft 44 (45) (1) 64 25 89
Intercompany movements - Airplanes Group (44) 44 - -
Capital and sales type leases 14 - 14 14 14
Net cash provided by
---------- ---------- ---------- ----------- ---------- ----------
investing activities 14 (1) 13 78 25 103
========== ========== ========== =========== ========== ==========
Cash flows from financing activities
Decrease in indebtedness (163) (12) (175) (159) (16) (175)
Net cash used in
---------- ---------- ---------- ----------- ---------- ----------
financing activites (163) (12) (175) (159) (16) (175)
========== ========== ========== =========== ========== ==========
Net increase in cash 20 - 20 105 - 105
Cash at beginning of period 214 6 220 219 6 225
---------- ---------- ---------- ----------- ---------- ----------
Cash at end of period 234 6 240 324 6 330
========== ========== ========== =========== ========== ==========
Cash paid in respect of:
Interest 182 18 200 173 17 190
========== ========== ========== =========== ========== ==========
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
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, 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
December 31, 1997 represents the aggregate of the Class A - D Notes and Class E
Notes in issue (net of approximately $2 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 December 31,
1997 and for the three and nine month periods ended December 31, 1997 and
December 31, 1996. Such adjustments are of a normal, recurring nature. The
results of operations for the three and nine months ended December 31, 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 seven
Aircraft have been sold and one Aircraft suffered a constructive total loss.
At December 31, 1997, 215 of the remaining 221 owned Aircraft were on lease to
75 operators in 38 countries.
On December 30, 1997, Airplanes Group filed a registration statement with the
U.S. Securities and Exchange Commission for the issue of $850 million in new
debt securities. The new securities will be issued to refinance Airplanes
Group's outstanding $850 million of Subclass A-1 Certificates. The
refinancing is expected to occur on March 16, 1998, which is the expected
final payment date for the Subclass A-1 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.
1998 Aircraft Value Appraisals
Under the terms of the Notes, Airplanes Group is obliged to obtain annual
appraisals of the base value of each of the Aircraft from at least three
independent appraisers no earlier than 90 days and not later than 30 days
prior to March 31 of each year. When these appraisals indicate a base value
decline greater than the depreciation assumed under the terms of the Notes,
excess cashflow is redirected, to the extent required, to the Class A Notes
via the Class A Principal Adjustment Amount.
Airplanes Group has recently obtained appraisals of the Aircraft as of January
23, 1998. On the basis of these appraisals, the average appraised base value
of the Aircraft was approximately $4,084 million compared with $3,859 million
at February 25, 1997, the date of the previous base value appraisals. The
decrease in the period since February 25, 1997 was approximately $84 million
more than the expected decrease assumed by the Aircraft depreciation schedules
that form part of the terms of the Notes. Greater than assumed decreases in
value occurred across the portfolio, with significant impacts resulting from
decreases in the values of Fokker 100s, and to a lesser extent, MD11s and
MD83s. These greater than assumed decreases are due primarily, in the case of
the Fokker 100s, to Fokker exiting the industry, and in the case of MD11s and
MD83s, to the Boeing/McDonnell Douglas merger. Airplanes Group's four
B767-300ER Aircraft suffered greater than assumed decreases in value due in
part to the competition this Aircraft type now faces from the relatively new
A330-200 aircraft. Finally, greater than assumed decreases were also
experienced with respect to the values of A320-200s and B737-300/400/500s due
primarily to continued price discounting by Boeing and Airbus. Although the
decrease in appraised base values was approximately $84 million greater than
the depreciation assumed under the terms of the Notes, Airplanes Group's
cashflow generation since March 28, 1996 (the date of issue of the Notes) has
also exceeded original assumptions and a Class A Principal Adjustment Amount
of only $7 million is expected to be required to be made on the February 17,
1998 Payment Date. See "Cashflow Performance Relative to March 1996
Assumptions" below. Accordingly, there will be no suspension of payments
ranking more junior to the Class A Principal Adjustment Amount, such as Class
C Scheduled Principal and Class E Minimum Interest, as a result of the 1998
Aircraft appraisals.
Cashflow Performance Relative to March 1996 Assumptions
The March 28, 1996 prospectus relating to the Certificates and underlying
Notes contained various assumptions (the "Assumptions") regarding Airplanes
Group's future revenues and cash inflows. In the period from March 28, 1996
to the January 9, 1998 Calculation Date, Airplanes Group generated cashflows
of $172 million in excess of the Assumptions.
Lease revenues have exceeded the Assumptions by $36 million primarily as the
downtime and default experience of Airplanes Group has been better than
assumed in March 1996 and also because of the prepayment in December 1997 by
one South American lessee of one year's rental in the amount of $15 million.
Lease revenues have been greater than assumed in March 1996 partially as a
result of a higher interest rate environment than was reflected in the
Assumptions. Net maintenance reserve cashflows have exceeded the Assumptions
by approximately $28 million (the Assumptions assumed that net maintenance
cashflows would be zero). The most significant factor contributing to the
greater cashflow generation relative to the Assumptions, however, was sales
proceeds of $94 million from the sale of seven Aircraft (three DC8-71Fs, two
DC10-30Fs and two DC10-30s). The Assumptions reflected no sales of Aircraft.
Airplanes Group's cashflows in the period have been positively affected by the
receipt of cash from other sources which the Assumptions had assumed would be
cash neutral such as purchase price adjustment payments from GPA ($13
million), default interest paid by lessees ($5 million), net lessee security
deposits retained ($4 million) and Aircraft insurance proceeds from insurers
($3 million). A number of other items, including interest earnings on cash
balances, resulted in gross revenues exceeding the Assumptions for the period
to January 9, 1998 by approximately $9 million.
The positive contributions to Airplanes Group's cashflows relative to the
Assumptions were partially offset by other leasing costs being approximately
$10 million greater than assumed in March 1996 primarily as a result of
technical costs arising on conversion of one B747 Aircraft. In addition, as a
result of considerable costs incurred in the repossession of Aircraft from a
number of lessees, repossession costs were $3 million greater than those
contained in the Assumptions. Finally, the Assumptions reflected a receipt of
$4 million in respect of a finance lease but this cash was not received due to
the restructuring of the lease.
In the period to January 9, 1998, Airplanes Group's actual selling, general
and administrative expenses and net interest rate swap payments were
approximately the same as those reflected in the Assumptions. With respect to
the Notes and Class E Notes, the increase in gross revenues compared with the
Assumptions resulted in greater than assumed distributions of principal to the
Class A5 Certificate holders ($123 million greater than assumed) and to the
Class B Certificate holders ($9 million greater than assumed). There were
also higher interest payments to the floating rate note Class A and Class B
Certificate holders as a result of the higher interest rate environment that
actually prevailed in the period to January 9, 1998 compared with the interest
rate levels reflected in the Assumptions. The impact of generally higher than
assumed interest rates was partially offset, however, by the lower principal
balances outstanding due to the greater than assumed principal amortisation.
In addition, payments of $3 million in respect of the minimum and supplemental
hedge amounts in the period were not assumed in March 1996.
These factors were partially offset by lower distributions of interest to the
Class E Note holders in the amount of $2 million as a result of the
cancellation of $13 million of Class E Note Principal due to the purchase
price adjustment and the deferral of the Class E Note coupon during the period
from February to July 1997 as a result of a fall in the February 25, 1997
Aircraft appraisals.
As at the January 9, 1998 Calculation Date, Airplanes Group retained $23
million in the Collection and Expense Accounts more than anticipated in the
prospectus. Included in this $23 million is an accrual in respect of costs
(including underwriting fees) expected to be incurred in the refinancing of
the Subclass A-1 Certificates which is expected to occur in March 1998.
Recent Developments
Although Airplanes Group has to date generated cashflows in excess of the
Assumptions, the recent severe downturn in the economies of Asia and the Far
East 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 and Malaysia 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 ratings
downgrades, and in certain cases, internationally organized financial
stability measures. 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 and
the recessionary conditions that are now expected to prevail in large parts of
the region for a significant period of time will have an adverse impact on
global aircraft demand. At January 23, 1998, Airplanes Group leased 20
Aircraft representing approximately 10.44% of its portfolio by appraised
value, to operators in Asia and the Far East.
One Indonesian lessee was already experiencing financial difficulties prior to
the current regional economic difficulties. This lessee is currently more
than $1 million in arrears in its payment obligations which had been
restructured as recently as December 1996. This lessee leases four Fokker 100
Aircraft from Airplanes Group, which have recently experienced significant
reductions in realizable rental rates with other lessees. See "Results of
Operations - Three Months Ended December 31, 1997 Compared with Three Months
Ended December 31, 1996 - Revenues" below. To the extent Fokker 100 Aircraft
are redelivered from this Indonesian lessee, it may prove difficult to place
such aircraft types without a material reduction in rental rates. Also, if the
Aircraft were redelivered from this lessee, the technical costs required to
ensure the Aircraft are in suitable condition for releasing could be
significant. Airplanes Group's other Indonesian lessee has also fallen into
arrears with its payment obligations and has requested a partial deferral of
its rentals.
Results of Operations - Three Months Ended December 31, 1997 Compared with
Three Months Ended December 31, 1996.
Airplanes Group's results of operations for the three months ended December
31, 1997 reflected a continuation of generally favourable industry conditions
for the period notwithstanding the fact that certain of its lessees continued
to experience difficult trading conditions. Overall there was a net increase
in cash of $95 million in the three months to December 31, 1997 compared to a
decrease of $9 million in the same period of the previous year. The net
increase in cash in the three month period to December 31, 1997 was primarily
attributable to the proceeds of $84 million received in respect of the sale of
six Aircraft, (three DC8-71Fs, two DC10-30Fs and one DC10-30), the prepayment
of one year's rentals in the amount of $15 million by one South American lessee
and a reduction in maintenance claims paid for the three months ended December
31, 1997. In addition, in the three months ended December 31, 1996, Airplanes
Group refunded $14 million of maintenance receipts to a lessee which were
replaced by letters of credit. This increase in cash provided by operating
and investing activities in the three months ended December 31, 1997 resulted
in higher distributions of principal to Certificateholders. Overall, there
was an increase in the net loss to $48 million for the three months to
December 31, 1997 compared to $34 million for the three months to December 31,
1996 which was primarily attributable to an increase in the provision required
for loss making leases as a result of restructuring the leases of six Fokker
100 Aircraft on lease to a Brazilian lessee.
Leasing Revenues
There was a $5 million decrease in leasing revenues (which include maintenance
reserve receipts which Airplanes Group receives from certain of its lessees)
for the three months ended December 31, 1997 to $145 million (Airplanes
Limited: $126 million; Airplanes Trust: $19 million) compared with $150
million (Airplanes Limited: $134 million; Airplanes Trust: $16 million) for
the three months ended December 31, 1996. The decrease in 1997 was primarily
attributable to the rental rates for three MD11 Aircraft on lease to Varig
being approximately one-third lower than the contracted rentals received under
such Aircraft's previous lease agreements which were in effect during the
period to December 31, 1996. Leasing revenues were also adversely affected by
the restructuring of leases in respect of six Fokker 100 Aircraft on lease to
a Brazilian lessee with 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 rental rates reduced by approximately 24% and no
maintenance reserve payments. Finally, there was a reduction in the number of
Aircraft on lease in the period to December 31, 1997 primarily due to Aircraft
sales. At December 31, 1997, Airplanes Group had 215 of its 221 owned
Aircraft on lease (Airplanes Limited: 192 Aircraft, Airplanes Trust: 23
Aircraft) compared to 223 of its 229 owned Aircraft (Airplanes Limited: 199
Aircraft; Airplanes Trust: 24 Aircraft) at December 31, 1996. These factors
were partially offset by a marginally higher interest rate environment (which
impacts the pricing of certain lease rentals).
Aircraft Sales
Sales revenues of $84 million (Airplanes Limited: $36 million; Airplanes
Trust: $48 million) in respect of the sale of six Aircraft were received in
the three months ended December 31, 1997. No Aircraft were sold in the same
period in 1996. The net book value of these Aircraft at the date of sale was
$80 million (Airplanes Limited: $31 million; Airplanes Trust: $49 million).
Depreciation and Amortization
The charge for depreciation and amortization in the three months ended
December 31, 1997 amounted to $48 million (Airplanes Limited: $42 million;
Airplanes Trust: $6 million) compared with $51 million (Airplanes Limited: $44
million; Airplanes Trust: $7 million) for the comparative period in 1996. The
decrease arose as a result of the depreciation charge being calculated on the
revised aircraft book values net of all valuation provisions required, in
addition to the reduction in the number of aircraft owned by Airplanes Group .
Net Interest Expense
Net interest expense amounted to $105 million (Airplanes Limited: $96 million;
Airplanes Trust: $9 million) in the three month period ended December 31, 1997
compared to $100 million (Airplanes Limited: $91 million; Airplanes Trust : $9
million) in the three month period ended December 31, 1996. The increase in
net interest expense was primarily due to additional interest being charged on
accrued but unpaid Class E Note interest of $3 million in addition to a
marginally higher interest rate during the three months to December 31, 1997.
This has been partially offset by lower average debt in the three months to
December 31, 1997 including, in particular, a significant reduction in the
Subclass A-5 Notes.
The weighted average interest rate on the Class A - D Notes during the three
months to December 31, 1997 was 6.87% and the average debt in respect of the
Class A - D Notes outstanding during the period was $3,665 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
December 31, 1996 was 6.58% and the average debt in respect of the Class A - D
Notes outstanding during the period was $3,894 million.
The difference between Airplanes Group's $105 million of net interest expense
for the three months ended December 31, 1997 (Airplanes Limited: $96 million;
Airplanes Trust: $9 million) and Airplanes Group's cash paid in respect of
interest of $64 million for the same period (Airplanes Limited: $58 million;
Airplanes Trust: $6 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 December 31, 1997.
Net interest expense is stated after deducting interest income earned during
the relevant period. In the three months ended December 31, 1997, Airplanes
Group earned interest income (including lessee default interest) of $4 million
(Airplanes Limited: $4 million; Airplanes Trust: nil) compared with $5 million
in the three months ended December 31, 1996 (Airplanes Limited: $5 million;
Airplanes Trust: nil). The decrease is primarily as a result of lower lessee
default interest in the three months to December 31, 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 December 31, 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 credit
of $1 million in respect of bad and doubtful debts (Airplanes Limited: $1
million; Airplanes Trust: nil) in the three months ended December 31, 1997
compared with the overall net charge of $1 million for the three months ended
December 31, 1996 (Airplanes Limited: nil; Airplanes Trust: $1 million). The
overall net credit in 1997 was primarily as a result of the reduction in the
provisions required for various lessees including one previous Indonesian
lessee and one Mexican lessee which were partially offset by a provision
required in respect of one Turkish 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. In the
three months to December 31, 1997, there was an overall net provision required
in respect of "loss making leases" of $10 million (Airplanes Limited: $10
million; Airplanes Trust: nil) compared with the three month period to
December 31, 1996 where there was an overall net utilization of $4 million
(Airplanes Limited: $2 million; Airplanes Trust: $2 million). The increase in
the provision required is primarily in respect of six Fokker 100 Aircraft on
lease to a Brazilian lessee which were restructured in the three months ended
December 31, 1997. The reduced rentals payable under the revised terms of
these leases required an additional 'loss making' lease provision of
approximately $13 million in the three months ending December 31, 1997. In
addition, a provision of $4 million was required in respect of one A300
aircraft which was leased to a Turkish lessee during November 1997 for five
years.
Other Lease Costs
Other lease costs in the three months ended December 31, 1997 amounted to $4
million (Airplanes Limited: $4 million; Airplanes Trust: nil) compared with
other lease costs of $5 million (Airplanes Limited: $4 million; Airplanes
Trust: $1 million) in the three months to December 31, 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period to
December 31, 1997 amounted to $9 million (Airplanes Limited: $8 million;
Airplanes Trust: $1 million) which is comparable to that incurred in the three
months to December 31, 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 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 December 31, 1997 include $6 million (Airplanes Limited: $5 million;
Airplanes Trust: $1 million) relating to GECAS servicing fees comparable with
the $6 million incurred in the comparative period to December 31, 1996.
A further significant element of Airplanes Group's actual selling, general and
administrative expenses reported in the period to December 31, 1997 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 December 31, 1996.
Operating Loss
The operating loss for the three months ended December 31, 1997 was $48
million (Airplanes Limited: $44 million; Airplanes Trust: $4 million)
compared with an operating loss of $34 million for the three months ended
December 31, 1996 (Airplanes Limited: $30 million; Airplanes Trust: $4
million). Airplanes Limited and Airplanes Trust are expected to continue to
report substantial losses in the future.
Taxes
There was an overall deferred tax benefit of $1 million in the three months to
December 31, 1997 (Airplanes Limited: $1 million; Airplanes Trust: nil),
compared with no overall tax charge in the same period in 1996 (Airplanes
Limited: nil; Airplanes Trust: nil).
Net Loss
The net loss after taxation for the three months ended December 31, 1997 was
$47 million (Airplanes Limited: $43 million; Airplanes Trust: $4 million)
compared with a net loss after taxation for the three months ended December
31, 1996 of $34 million (Airplanes Limited: $30 million; Airplanes Trust: $4
million).
Financial Resources and Liquidity
The was an overall net increase in cash of $95 million for the three months to
December 31, 1997 compared with a $9 million decrease for the three months to
December 31, 1996. The significant increase in cash is primarily as a result
of the six Aircraft sales which occurred in the three months ended December
31, 1997. In addition, one South American lessee prepaid one year's rentals in
the amount of $15 million in December 1997.
Liquidity
The cash balances at December 31, 1997 amounted to $330 million (Airplanes
Limited: $324 million ; Airplanes Trust: $6 million) compared to cash balances
at December 31, 1996 of $240 million (Airplanes Limited: $234 million ;
Airplanes Trust: $6 million.)
Operating Activities
Net cash provided by operating activities in the three months ended December
31, 1997 amounted to $71 million (Airplanes Limited: $81 million; Airplanes
Trust: $(10) million) compared with $34 million in the three months ended
December 31, 1996 (Airplanes Limited: $28 million; Airplanes Trust: $6
million). This reflects cash paid in respect of interest of $64 million in
the three months to December 31, 1997 (Airplanes Limited: $58 million;
Airplanes Trust: $6 million) compared with $69 million in the three months to
December 31, 1996 (Airplanes Limited: $62 million; Airplanes Trust: $7
million). The increase in cash from operations generated in the three month
period to December 31, 1997 is primarily attributable to the prepayment of one
year's rentals in the amount of $15 million by one South American lessee. In
addition, there was a reduction in maintenance claims paid for the three
months ended December 31, 1997 as compared to the three months ended December
31, 1996.
Investing and Financing Activities
Cash flows from investing activities in the three months to December 31, 1997
primarily reflects the proceeds from the sale of six Aircraft. These Aircraft
consist of three DC8-71F Aircraft sold to Emery as part of an agreement to
sell to Emery six DC8-71F Aircraft currently on lease to that airline. The
three additional DC8 aircraft are due to deliver by March 15, 1998. Two
DC10-30F Aircraft were also sold to Varig under an early exercise of its
purchase options with respect to those Aircraft and one DC-10 Aircraft was
sold to Gemini Air Cargo. In addition, the insurance proceeds in respect of
one DC-9 Aircraft formerly on lease to a Mexican lessee which suffered a
constructive total loss during October 1997 were received in December 1997.
The cash provided by capital and sale type leases was $4 million (Airplanes
Limited: $4 million; Airplanes Trust: nil) as compared with $5 million in the
comparative period to December 31, 1996 (Airplanes Limited: $5 million;
Airplanes Trust: nil).
Cash flows from financing activities in the three months to December 31, 1997
reflect the repayment of $60 million of principal on Subclass A-5 and Class B
Notes by Airplanes Group (Airplanes Limited: $54 million; Airplanes Trust: $6
million) compared with $48 million of principal repaid on Subclass A-5 and
Class B Notes by Airplanes Group (Airplanes Limited: $43 million; Airplanes
Trust: $5 million) in the three months to December 31, 1996. The higher
amount of principal repayments in the three months ended December 31, 1997 is
due to a higher amount of cash provided by operating and investing activities
as discussed above.
Indebtedness
Airplanes Group's indebtedness consisted of Class A-E Notes in the amount of
$4,224 million (Airplanes Limited: $3,848 million; Airplanes Trust: $376
million) at December 31, 1997 and $4,459 million (Airplanes Limited: $4,058
million; Airplanes Trust: $401 million) at December 31, 1996. Airplanes Group
had $591 million of Class E Notes outstanding at December 31, 1997. 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
March 1998, 1999, 2001 and 2003, respectively. On December 30, 1997 Airplanes
Group filed a registration statement with the U.S. Securities and Exchange
Commission for the issue of $850 million in new debt securities. The new
securities will be issued to refinance the Company's outstanding $850 million
of Subclass A-1 Certificates. The refinancing is expected to occur on March
16, 1998, which is the expected final payment date for the Subclass A-1
Certificates. 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. 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 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 December 31, 1997, Airplanes Group had
unamortized Swaps with an aggregate notional principal balance of $2,680
million. None of the Swaps have maturity dates extending beyond August 2001.
The fair values of the Swaps at December 31, 1997 was a negative $2.8 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 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 and prevailing
interest rates. 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 December 31, 1997, Airplanes Group purchased Swaptions for interest
rate swaps with an aggregate notional principal balance of $177 million and
sold Swaptions with an aggregate notional principal balance of $25 million.
The net aggregate notional principal balance of Swaptions at December 31, 1997
therefore amounted to $152 million. The fair value of the Swaptions at
December 31, 1997 was $1.5 million and because the Swaptions do not qualify
for hedge accounting under U.S. GAAP, this amount has been included in income
for the three and nine months ended December 31, 1997.
Through the use of 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.
Results of Operations - Nine Months Ended December 31, 1997 Compared with Nine
Months Ended December 31, 1996.
Airplanes Group results of operations for the nine months ended December 31,
1997 reflected a continuation of reasonably favourable industry conditions for
the period notwithstanding the fact that certain of its lessees continued to
experience difficult trading conditions. Overall there was a net increase in
cash of $105 million in the nine months to December 31, 1997 compared to a net
increase of $20 million in the same period of the previous year. The net
increase in cash in the nine month period to December 31, 1997 was primarily
attributable to the proceeds received of $94 million in respect of the sale of
seven Aircraft, (three DC8-71Fs, two DC10-30Fs and two DC10-
30s) the prepayment of one year's rentals in the amount of $15 million by one
South American lessee and a reduction in maintenance claims paid for the nine
months ended December 31, 1997.
Overall, there was an increase in the net loss to $112 million for the nine
months to December 31, 1997 compared to $97 million for the nine months to
December 31, 1996 primarily attributable to an increase in net interest
expense due to additional interest of $24 million being charged on accrued but
unpaid Class E Note interest.
Leasing Revenues
There was a $9 million decrease in leasing revenues for the nine months ended
December 31, 1997 to $450 million (Airplanes Limited: $394 million; Airplanes
Trust: $56 million) compared with $459 million (Airplanes Limited: $405
million; Airplanes Trust: $54 million) for the nine months ended December 31,
1996. The decrease in 1997 was primarily attributable to the reduced rental
rates for three MD11 Aircraft on lease to Varig which are approximately
one-third lower than the contracted rentals received under such Aircraft's
previous lease agreements which were in effect during the period to December
31, 1996. Leasing revenues were also adversely affected by the restructuring
of leases in respect of six Fokker 100 Aircraft on lease to a Brazilian lessee
with 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 rental rates reduced by approximately 24% and no maintenance reserve
payments. Finally, there was a reduction in the number of Aircraft on lease
primarily due to the Aircraft sold in the period ended December 31, 1997. At
December 31, 1997 Airplanes Group had 215 of its 221 owned Aircraft on lease
(Airplanes Limited: 192 Aircraft; Airplanes Trust: 23 Aircraft) compared to
223 of its 229 owned Aircraft (Airplanes Limited: 199 Aircraft; Airplanes
Trust: 24 Aircraft) at December 31, 1996. These factors were partially offset
by a marginally higher interest rate environment (which impacts the pricing of
certain lease rentals).
Aircraft Sales
Sales revenues of $94 million (Airplanes Limited: $46 million; Airplanes
Trust: $48 million) in respect of the sale of seven Aircraft were received in
the nine months ended December 31, 1997. No Aircraft were sold in the same
period of the previous year. The net book value of these Aircraft at the date
of sale was $90 million (Airplanes Limited: $41 million; Airplanes Trust: $49
million).
Depreciation and Amortization
The charge for depreciation and amortization in the nine months ended December
31, 1997 amounted to $146 million (Airplanes Limited: $129 million; Airplanes
Trust: $17 million) compared with $155 million (Airplanes Limited: $136
million; Airplanes Trust: $19 million) for the comparative period in 1996.
The decrease arose as a result of the depreciation charge being calculated on
the revised aircraft book values net of all valuation provisions required, in
addition to a reduction in the number of Aircraft owned by Airplanes Group.
Net Interest Expense
Net interest expense amounted to $308 million (Airplanes Limited: $278
million; Airplanes Trust: $30 million) in the nine month period ended December
31, 1997 compared to $286 million (Airplanes Limited: $260 million; Airplanes
Trust : $26 million) in the nine month period ended December 31, 1996. The
increase in net interest expense was primarily due to additional interest
being charged on accrued but unpaid Class E Note interest of $24 million, in
addition to a marginally higher interest rate environment during the nine
months to December 31, 1997. This was partially offset by lower average debt
in the nine months to December 31, 1997 including in particular, a reduction
in the principal amount of the Subclass A-5 Notes.
The weighted average interest rate on the Class A - D Notes during the nine
months to December 31, 1997 was 6.83% and the average debt in respect of the
Class A - D Notes outstanding during the period was $3,723 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 nine months to
December 31, 1996 was 6.60% and the average debt in respect of the Class A - D
Notes outstanding during the period was $3,963 million.
The difference between Airplanes Group's $308 million of net interest expense
for the nine months ended December 31, 1997 (Airplanes Limited: $278 million;
Airplanes Trust: $30 million) and Airplanes Group's cash paid in respect of
interest of $190 million (Airplanes Limited: $173 million; Airplanes Trust:
$17 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 the period ended December 31, 1997.
Furthermore, as a result of the greater than expected decrease in Aircraft
appraised values as at February 25, 1997 as compared to the Initial Appraised
Values, no interest payments on the Class E Notes were made from February 17,
1997 until July 15,1997.
Net interest expense is stated after deducting interest income earned during
the relevant period. In the nine months ended December 31, 1997, Airplanes
Group earned interest income (including lessee default interest) of $12
million (Airplanes Limited: $11 million; Airplanes Trust: $1 million)
comparable to $12 million in the nine months ended December 31, 1996
(Airplanes Limited: $12 million; Airplanes Trust: nil).
Bad Debt and Loss-Making Lease Provisions
See "Results of Operations - Three Months Ended December 31, 1997 Compared
with Three Months ended December 31, 1996" 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 nine month
period ended December 31, 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 no net provision required in respect of bad and
doubtful debts in the nine months ended December 31, 1997 comparable with no
net charge required for the nine months ended December 31, 1996. While there
was no overall net charge required in the nine months ended December 31, 1997
there was a requirement for provisions against receivable balances due from
two Turkish lessees and one Peruvian lessee. These, however, were offset by a
reduction in the provisions required in respect two Mexican lessees.
In the nine months to December 31, 1997 there was an overall net 'loss making
leases' provision utilised of $7 million (Airplanes Limited: $5 million;
Airplanes Trust: $2 million) compared with a net 'loss making leases'
provision utilised of $14 million (Airplanes Limited: $9 million; Airplanes
Trust: $5 million) in the nine month period to December 31, 1996. The net
provision utilised of $7 million in the nine months ended December 31, 1997 is
due to the fact that the only significant provisions required were in respect
of leases signed in the three months ended December 31, 1997. See "Results of
Operations - Three Months Ended December 31, 1997 compared with Three Months
Ended December 31, 1996 - Bad Debt and Loss Making Lease Provisions.
Other Lease Costs
Other lease costs in the nine months ended December 31, 1997 amounted to $22
million (Airplanes Limited: $21 million; Airplanes Trust: $1 million) compared
to other lease costs of $30 million (Airplanes Limited: $23 million; Airplanes
Trust: $7 million) in the nine months to December 31, 1996. The reduction in
the charge in the nine months to December 31, 1997, was primarily due to the
fact that in the nine months to December 31, 1996, other lease costs included
provisions for maintenance and other costs of $15 million in respect of two
DC10-30 Aircraft, which were sold on April 4, 1997 and November 10, 1997,
respectively. This was partially offset by an increase in technical costs of
$5 million which relate primarily to two B737-200 Aircraft which were
redelivered to Airplanes Group in the three months ended June 30, 1997 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. All three MD83 Aircraft have since been de-
registered and are subject to non-binding letters of intent for lease by new
operators with delivery dates during March and April 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine month period to
December 31, 1997 amounted to $29 million (Airplanes Limited: $27 million;
Airplanes Trust: $2 million). This is a comparable expense to that incurred
in the nine months to December 31, 1996 of $27 million (Airplanes Limited: $24
million; Airplanes Trust: $3 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 $29 million in the nine months
to December 31, 1997 include $20 million (Airplanes Limited: $19 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 December 31, 1996 of $18 million (Airplanes Limited: $16 million;
Airplanes Trust: $2 million). The increase is largely attributable to a
cashflow incentive fee.
A further significant element of Airplanes Group's actual selling, general and
administrative expenses reported in the period to December 31, 1997 was $7
million (Airplanes Limited: $6 million; Airplanes Trust: $1 million) in
respect of administrative agency and cash management fees payable to GPA,
which is similar to the charge of $7 million for the period to December 31,
1996 (Airplanes Limited: $6 million; Airplanes Trust: $1 million).
Operating Loss
The operating loss for the nine months ended December 31, 1997 was $114
million (Airplanes Limited: $105 million; Airplanes Trust: $9 million)
compared with an operating loss of $97 million for the nine months ended
December 31, 1996 (Airplanes Limited: $86 million; Airplanes Trust: $11
million).
Taxes
There was an overall deferred tax benefit of $2 million in the nine months to
December 31, 1997 (Airplanes Limited: $2 million; Airplanes Trust: nil),
compared with no overall tax charge 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 after taxation for the nine months ended December 31, 1997 was
$112 million (Airplanes Limited: $103 million; Airplanes Trust: $9 million)
compared with a net loss after taxation for the nine months ended December 31,
1996 of $97 million (Airplanes Limited: $87 million; Airplanes Trust: $10
million).
Financial Resources and Liquidity
The net increase in cash for the nine months to December 31, 1997 was $105
million compared to $20 million for the nine months to December 31, 1996.
The increase in the net cash generated is primarily as a result of the seven
Aircraft sales and the related increase in the net cash provided by investing
activities.
Liquidity
The cash balances at December 31, 1997 amounted to $330 million (Airplanes
Limited: $324 million; Airplanes Trust: $6 million) compared to cash balances
at December 31, 1996 of $240 million (Airplanes Limited: $234 million ;
Airplanes Trust: $6 million.)
Operating Activities
Net cash provided by operating activities in the nine months ended December
31, 1997 amounted to $177 million (Airplanes Limited: $186 million; Airplanes
Trust: $(9) million) compared with $182 million in the nine months ended
December 31, 1996 (Airplanes Limited: $169 million; Airplanes Trust: $13
million). This reflects cash paid in respect of interest of $190 million in
the nine months to December 31, 1997 (Airplanes Limited: $173 million;
Airplanes Trust: $17 million) compared with $200 million in the nine months to
December 31, 1996 (Airplanes Limited: $182 million; Airplanes Trust: $18
million). The decrease in cash from operations generated in the nine month
period to December 31, 1997 is primarily attributable to the increase in both
maintenance claims and technical costs for the nine months ended December 31,
1997 as compared to the nine months ended December 31, 1996. In addition in
the period to December 31, 1996, there was a receipt from GPA of $13 million
pursuant to the purchase price adjustment provisions of Airplanes Group's
agreement to acquire certain subsidiaries of GPA Group resulting in an
increase in the cash provided by operating activities during 1996. These
factors were partially offset by the prepayment during December 1997 of one
year's rentals in the amount of $15 million by one South American lessee.
Investing and Financing Activities
Cash flows from investing activities in the nine months to December 31, 1997
primarily reflect the proceeds from the sale of seven Aircraft. These
aircraft consist of three DC8-71F Aircraft sold to Emery, two DC10-30F
Aircraft sold to Varig under the early exercise of purchase options and two
DC-10 Aircraft, one of which was sold to DAS Air Cargo and the other to Gemini
Air Cargo. In addition the insurance proceeds in respect of one DC-9
Aircraft, formerly on lease to a Mexican Lessee, which suffered a constructive
total loss during October 1997, were received in December 1997. Cash flows
from financing activities in the nine months to December 31, 1997 primarily
reflect the repayment of $175 million of principal on Subclass A-5 and Class B
Notes by Airplanes Group (Airplanes Limited: $159 million; Airplanes Trust:
$16 million) compared to $175 million of principal on Subclass A-5 and Class B
Notes repaid by Airplanes Group (Airplanes Limited: $163 million; Airplanes
Trust: $12 million) in the nine months to December 31, 1996.
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 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 has filed a writ of mandamus to the
High Court 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. 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 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
AeroUSA, Inc. and AeroUSA 3, Inc., both Connecticut corporations, have in the
past filed and will continue to file United States federal consolidated tax
returns and certain state and local tax returns with GPA, Inc., and its
subsidiaries. GPA, Inc. is a Delaware corporation and a wholly-owned
subsidiary of GPA Group. 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..
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 November 14,
1997; December 15, 1997 and January 15, 1998 (relating to
the monthly report to holders of the Certificates) and
December 30, 1997 (relating to a press release).
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: February 4, 1998 AIRPLANES LIMITED
By: /s/ WILLIAM M. MCCANN
----------------------------
William M. McCann
Director and Principal
Accounting Officer
Date: February 4, 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
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001004539
<NAME> AIRPLANES LIMITED
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
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<PERIOD-END> DEC-31-1997
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<TABLE> <S> <C>
<ARTICLE> 5
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<NAME> AIRPLANES U.S. TRUST
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
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</TABLE>
