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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
COMMISSION FILE NUMBER 33-99970
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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, ST. HELIER 1100 NORTH MARKET STREET,
JERSEY, JE4 8PX RODNEY SQUARE NORTH
CHANNEL ISLANDS WILMINGTON, DELAWARE 19890-0001
(011 44 1534 609 000) (1-302-651-1000)
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(Addresses and telephone numbers, including area codes, of Registrants'
principal executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
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- -------------------------------------------- --------------------------------------------
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
None
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(Title of class)
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(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
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OUTSTANDING AT
ISSUER CLASS JUNE -- , 1998
Airplanes Limited Ordinary Shares, $1.00 par value 30
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AIRPLANES LIMITED AND AIRPLANES U.S. TRUST
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 43
Item 3. Legal Proceedings........................................... 43
Item 4. Submission of Matters to a Vote of Security-Holders......... 44
PART II
Item 5. Market for Registrants' Common Equity and Related
Stockholder Matters......................................... 44
Item 6. Selected Combined Financial Data............................ 45
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 48
Item 8. Financial Statements and Supplementary Data................. 61
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 62
PART III
Item 10. Directors and Executive Officers of the Registrants......... 62
Item 11. Executive Compensation...................................... 76
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 76
Item 13. Certain Relationships and Related Transactions.............. 77
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 77
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Airplanes Limited is a limited liability company ("Airplanes Limited")
formed under the laws of Jersey, Channel Islands. Airplanes U.S. Trust is a
Delaware business trust ("Airplanes Trust"). Airplanes Limited and Airplanes
Trust together with, unless the context otherwise requires, each of their
subsidiaries is referred to as "Airplanes Group". Airplanes Group is in the
business of leasing aircraft to aircraft operators around the world. At March
31, 1998, Airplanes Group owned 215 aircraft (the "Aircraft") which it leased to
75 lessees in 38 countries.
On March 28, 1996, Airplanes Group issued debt in order to purchase the
Aircraft. On March 16, 1998, a significant amount of that debt was refinanced
(approximately 60% of original debt issued on March 28, 1996). The rental
payments that are received from leasing the Aircraft are used to pay interest
and principal on such debt. Airplanes Group also issued a class of debt, the
Class E Notes, which represent certain limited current income rights and rights
to the residual interest in Airplanes Group. GPA Group plc and its subsidiaries
hold a majority of the Airplanes Group Class E Notes. Upon completion of the MOU
Transaction described below, GE Capital Corporation will acquire the economic
interest in the Airplanes Group Class E Notes currently held by GPA Group plc.
AIRPLANES PASS THROUGH TRUST
On March 28, 1996, Airplanes Pass Through Trust (the "Trust") issued $4,048
million of Pass Through Certificates (collectively, the "1996 Certificates").
The 1996 Certificates were issued in four classes -- Class A, Class B, Class C
and Class D. The Class 1996 A Certificates were further subdivided into five
separate subclasses (A-1 through A-5). Each Certificate represents an interest
in two corresponding classes or subclasses of notes (collectively, the "1996
Notes") issued by Airplanes Limited and Airplanes Trust. Airplanes Limited and
Airplanes Trust have each 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 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, $13 million were cancelled in July 1996 based on the purchase price
adjustment provisions in the agreements that governed the sale of these GPA
Group subsidiaries to Airplanes Group. On March 28, 1996, these GPA Group
subsidiaries owned 229 Aircraft which were on lease to approximately 83 aircraft
operators in approximately 40 different countries. The acquisition of these
subsidiaries and the resulting acquisition of the Aircraft and related leases is
referred to as the "Acquisition".
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 "1998 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.
At March 31, 1998, 13 of the original 229 Aircraft had been sold and one
had suffered a constructive total loss. A "constructive total loss" occurs when
an aircraft is damaged and the cost of repair exceeds the value of
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the aircraft. Of the remaining 215 Aircraft in the portfolio owned by Airplanes
Group (the "Portfolio"), 211 were on lease to 75 operators in 38 countries. The
number of Aircraft in the Portfolio at March 31, 1998 gives effect to the
delivery of six DC8 Aircraft to Emery Worldwide Airlines, Inc. ("Emery"), as if
all of such deliveries occurred prior to March 31, 1998. Contracts for the sale
of these six DC8 Aircraft were signed prior to March 31, 1998. The Aircraft were
delivered to Emery during April 1998. Three other DC8 Aircraft were sold and
delivered to Emery on December 30, 1997.
AIRPLANES LIMITED
Airplanes Limited is a special purpose limited liability company formed
under the laws of Jersey, Channel Islands for an unlimited duration. Airplanes
Limited was created for certain limited purposes, including the following:
- directly or indirectly acquiring, financing, re-financing, owning,
leasing, re-leasing, maintaining and modifying the Aircraft;
- selling the Aircraft within the limits set forth in the Airplanes
Limited Trust Indenture (the "Airplanes Limited Trust Indenture") dated
as of March 28, 1996 among Airplanes Limited, Airplanes Trust and
Bankers Trust Company, as Trustee (the "Airplanes Limited Indenture
Trustee");
- guaranteeing the obligations of Airplanes Trust and the subsidiaries of
Airplanes Trust;
- entering into certain hedging contracts as described in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations"; and
- establishing and providing loans or guarantees in connection with its
subsidiaries.
Airplanes Limited has one direct subsidiary, Airplanes Holdings Limited
("Holding Co."). Airplanes Limited holds 95% of the ordinary share capital in
Holding Co. GPA Group holds the remaining 5% of the ordinary share capital of
Holding Co. GPA Group holds 5% of Holding Co. to ensure that Holding Co. and
certain of the other Transferred Companies (as defined below) continue to be
entitled to certain corporate tax benefits for Shannon, Ireland certified
companies. In connection with GPA's proposed MOU Transaction (as defined below)
with GE Capital Aviation Services Limited ("GECAS") and GE Capital Corporation
("GE Capital"), GPA Group's 5% holding in Holding Co. may be restructured.
However, Airplanes Group has been advised by GPA Group that any such
restructuring is not expected to adversely affect the Irish tax benefits
available to Airplanes Group. See "Item 10 -- Directors and Executive Officers
of the Registrants -- GPA as Administrative Agent and Cash Manager" in this
Report for a description of the "MOU Transaction". Airplanes Limited operates
its business through its direct and indirect subsidiaries. Airplanes Limited and
its subsidiaries are permitted to lease Aircraft to or from, or sell Aircraft to
or buy Aircraft from, other members of Airplanes Group.
On March 28, 1996, Airplanes Limited indirectly acquired 206 of the
Aircraft and related leases through the acquisition of the Holding Co. capital
stock. As of March 31, 1998, Holding Co. owned (i) 30 of the Aircraft and
related leases, (ii) twelve wholly owned subsidiaries which owned 167 of the
Aircraft (the "Aircraft Owning Companies") and (iii) ten other wholly owned
subsidiaries ("Special Lessors"). The Special Lessors do not own any Aircraft.
The business of the Special Lessors is to lease certain of the Aircraft from the
Aircraft Owning Companies and sublease such Aircraft to various aircraft
operators. The Aircraft Owning Companies, the Special Lessors, AeroUSA (as
defined below) and AeroUSA 3 (as defined below) are collectively referred to as
the "Transferred Companies". The Special Lessors are largely incorporated in
various European jurisdictions. Additional Special Lessors may be incorporated
in other jurisdictions in the future.
Airplanes Limited has a Board of Directors but has, and will have, no
employees or executive officers. Accordingly, the Board relies, for all asset
servicing, executive and administrative functions, upon (i) GECAS, as Servicer
(the "Servicer"), pursuant to the Servicing Agreement (the "Servicing
Agreement") dated as of March 28, 1996, as amended, among Airplanes Limited,
AeroUSA (as defined
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below), Holding Co., Airplanes Trust, GPA Cash Manager Limited ("GPA Cash
Manager") and GECAS; (ii) GPA Financial Services (Ireland) Limited ("GPA
Financial"), as Administrative Agent (the "Administrative Agent"), pursuant to
the Administrative Agency Agreement (the "Administrative Agency Agreement")
dated as of March 28, 1996 among GPA Financial, GPA Group, Airplanes Limited,
Holding Co., Airplanes Trust and AeroUSA (as defined below); (iii) GPA Cash
Manager, as Cash Manager (the "Cash Manager"), pursuant to the Cash Management
Agreement (the "Cash Management Agreement") dated as of March 28, 1996 among GPA
Cash Manager, GPA Group, Airplanes Limited, Airplanes Trust and Bankers Trust
Company, as Indenture Trustee, (as defined below) under each of the Trust
Indentures (as defined below) and as Security Trustee (the "Security Trustee")
pursuant to the Security Trust Agreement (the "Security Trust Agreement") dated
as of March 28, 1996 among Airplanes Limited, Airplanes Trust, Mourant & Co.
Secretaries Limited, the Issuer Subsidiaries listed therein, GPA Financial, GPA
Cash Manager, GPA Group, GECAS, the Indenture Trustees (as defined below), the
Reference Agent named therein and the Security Trustee; and (iv) various other
service providers.
The Airplanes Limited Board consists of five members, one of whom was
appointed by the holder or holders of a majority in aggregate principal amount
of the Class E Notes and the other four of whom are Independent Directors (as
defined below). Certain significant transactions or proceedings of Airplanes
Limited may only be approved by a unanimous vote of all the Directors of
Airplanes Limited. These transactions and proceedings principally relate to
certain insolvency proceedings, amendments to Airplanes Limited's Memorandum or
Articles of Association, mergers or, subject to certain exceptions, sale of all
or substantially all of Airplanes Limited's assets. The succeeding Independent
Directors (as defined below) generally will be appointed by a majority of the
then standing Directors. "Independent Directors" will not be officers, directors
or employees of GPA Group, GECAS, GE Capital, any holder of the Class E Notes or
any affiliate of these persons.
GE Capital has the right to acquire at any time up to and including October
29, 2001, up to 90% of the ordinary share capital of GPA Group (the "Call
Right"). If GE Capital were to exercise this Call Right and acquire 90% of the
ordinary share capital of GPA Group, GE Capital would pay approximately $59
million. The purchase price depends on certain factors set forth in the terms
governing the exercise of the option. If GE Capital acquires 90% or more of the
ordinary share capital of GPA Group, the holder of a majority in aggregate
principal amount of the Class E Notes would be entitled to dismiss the
then-acting Directors of Airplanes Limited and Controlling Trustees (as defined
below) of Airplanes Trust and to appoint new Directors and Controlling Trustees
(as defined below). The above right to dismiss will only be valid if (i) GE
Capital guarantees the performance by GECAS of its obligations under the
Servicing Agreement, if GECAS is then the Servicer, (ii) GE Capital shall then
have a rating of at least Aa1 or AA+ on its long-term, senior unsecured debt
obligations from Moody's Investor Service Inc. ("Moody's") or Standard & Poor's
Ratings Group ("Standard and Poor's"), respectively and (iii) each of Airplanes
Limited and Airplanes Trust shall continue to have a committee of at least three
Independent Directors or Independent Trustees (as defined below), as applicable,
who will have the right to review and approve, by a vote of at least two of the
three committee members, any transactions of Airplanes Group (other than as
described two paragraphs below) in which GE Capital or any of its affiliates is
an interested party. There can be no assurance that GE Capital will elect to
exercise its rights to acquire any ordinary share capital of GPA Group.
On June 8, 1998, GPA Group entered into a non-binding memorandum of
understanding (the "MOU") with GE Capital and GECAS in relation to a number of
matters, including restructuring of GE Capital's Call Right (the "MOU
Transaction"). Completion of the MOU Transaction will be subject to the
negotiation and execution of definitive agreements and the approval of GPA
Group's ordinary shareholders. Upon completion of the MOU Transaction, GPA will
conduct business under a new name. The MOU Transaction will result in the
restructuring of the Call Right such that GE Capital will hold an option to
acquire a passive investment of up to 24.9% in GPA.
The principal components of the MOU Transaction are described below under
"Item 10: Directors and Executive Officers of the Registrants -- GPA as
Administrative Agent and Cash Manager".
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At such time, if any, as the Directors of Airplanes Limited and Controlling
Trustees (as defined below) of Airplanes Trust have been appointed by the holder
of a majority in aggregate principal amount of the Class E Notes, the Directors
of Airplanes Limited and Controlling Trustees (as defined below) of Airplanes
Trust shall have the authority, acting on a simple majority vote, without any
independent committee veto rights, to cause Airplanes Group to sell, directly or
indirectly, all of the assets of Airplanes Group. Such sale can be through a
stock or an asset sale, to any person who provides as consideration any
combination of cash, obligations of the United States government or of corporate
issuers rated at least AA+ or its equivalent and Class E Notes which will be
sufficient to repay or defease, as the case may be, the Notes in accordance with
their terms, discharge any Class E Notes not so transferred and pay, with
respect to Airplanes Limited, the discounted present value of the Annual
Dividend Amount (as defined below) (the "Discounted Annual Dividend Amount"),
plus any arrears of the Annual Dividend Amount (as defined below).
Airplanes Limited has an authorized share capital of 10,000 ordinary
shares, $1 par value per share. Thirty of these shares have been issued. All of
the issued capital stock of Airplanes Limited is held by Juris Limited and
Lively Limited, each a Jersey company, for the benefit of certain charitable
trusts (the "Charitable Trusts") established under the laws of Jersey. The
holders of the issued capital stock of Airplanes Limited are entitled under the
Articles of Association of Airplanes Limited to an annual fixed cumulative
preferential dividend of $4,500 (the "Annual Dividend Amount"). The Annual
Dividend Amount will be paid only when Airplanes Limited has distributable
profits which may lawfully be so paid as dividends and no event of default
("Event of Default") with respect to any class of Certificates has occurred and
is continuing. An "Event of Default" under the Certificates is defined as the
occurrence and continuance of a "Note Event of Default" under either the
Airplanes Limited Trust Indenture or the Airplanes Trust Trust Indenture (the
"Airplanes Trust Trust Indenture" and, together with the Airplanes Limited Trust
Indenture, the "Trust Indentures") dated as of March 28, 1996 among Airplanes
Trust, Airplanes Limited and Bankers Trust Company, as Trustee (the "Airplanes
Trust Indenture Trustee" and, together with the Airplanes Limited Indenture
Trustee, the "Indenture Trustees").
AIRPLANES TRUST
Airplanes Trust is a business trust formed pursuant to the Airplanes Trust
Agreement under the laws of Delaware for certain limited purposes, including:
- acquiring, financing, re-financing and owning the shares of capital
stock of AeroUSA, Inc. ("AeroUSA"), a Connecticut corporation and a
wholly owned subsidiary of Airplanes Trust;
- guaranteeing the obligations of Airplanes Limited;
- entering into certain hedging contracts as described in "Item 7
Management's Discussion and Analysis of Financial Condition and Results
of Operations"; and
- establishing and providing loans or guarantees in connection with its
subsidiaries.
GPA, Inc., a wholly owned subsidiary of GPA Group ("GPA, Inc."), holds the
residual ownership interest in all of the property of Airplanes Trust, including
the AeroUSA shares. Upon repayment in full of all indebtedness of Airplanes
Trust, the AeroUSA shares will be transferred back to GPA, Inc. pursuant to its
residual ownership interest. On March 28, 1996, Airplanes Trust indirectly
acquired 23 of the Aircraft and related leases through the acquisition of all of
the capital stock of AeroUSA. AeroUSA was an indirect wholly owned
aircraft-owning subsidiary of GPA Group. As of March 31, 1998, Airplanes Trust
indirectly owned 18 Aircraft and related leases.
Airplanes Trust has one direct subsidiary, AeroUSA. AeroUSA itself has one
direct subsidiary, AeroUSA 3, Inc., a Connecticut corporation ("AeroUSA 3"). The
shares of AeroUSA and AeroUSA 3 are held by separate voting trusts in order to
satisfy regulations of the U.S. Federal Aviation Administration regarding the
U.S. citizenship of the owners of U.S.-registered aircraft. First Security Bank,
National Association acts as trustee of the voting trusts. Airplanes Trust holds
voting trust certificates representing shares of AeroUSA. Airplanes Trust
operates its business through AeroUSA. AeroUSA and its subsidiary are
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also permitted to lease Aircraft to or from or sell Aircraft to, or buy Aircraft
from, other members of Airplanes Group.
The trustees of Airplanes Trust consist of Wilmington Trust Company, as
Delaware Trustee, and the "Controlling Trustees". The Controlling Trustees are
the same individuals who act as Directors of Airplanes Limited. Airplanes Trust
has no, and will have no, employees or executive officers. Accordingly, the
Controlling Trustees rely upon the Servicer, the Administrative Agent, the Cash
Manager and the other service providers for all asset servicing, executive and
administrative functions pursuant to the respective service provider agreements.
One member of the Board of Controlling Trustees was appointed by the holder of a
majority in aggregate principal amount of the Class E Notes and the other four
are Independent Trustees. Any succeeding Independent Trustees will be appointed
by a majority of the then acting Independent Trustees. "Independent Trustees"
will not be officers, directors or employees of GPA Group, GECAS, GE Capital,
any holder of the Class E Notes or any affiliate of these persons. Approval of
certain significant transactions or proceedings with respect to Airplanes Trust
or AeroUSA may only be obtained by a unanimous vote of all the Controlling
Trustees. These transactions and proceedings principally relate to certain
insolvency proceedings, amendments to Airplanes Trust's or AeroUSA's constituent
documents, mergers or, subject to certain exceptions, sale of all or
substantially all of Airplanes Trust's or AeroUSA's assets. The composition of
Airplanes Trust's Board of Controlling Trustees will be determined in the same
manner as the composition of the Board of Directors of Airplanes Limited is
determined.
The indirect ownership of the Aircraft by two entities (Airplanes Limited
and Airplanes Trust) reflects GPA Group's corporate structure prior to the
Acquisition. It would not be tax-efficient in Ireland or the United States to
have a single direct or indirect owner of the Aircraft.
THE TRUST AND TRUSTEE
The Trust consists of eight separate trusts, each of which has been
organized under the laws of the State of New York pursuant to a Trust Agreement
(the "Trust Agreement") among Airplanes Trust, Airplanes Limited and the Trustee
thereunder (the "Trustee") on behalf of the holders of each class or subclass of
Certificates. The Trust was created to acquire and hold the Notes and the
Guarantees. The Trust has no significant assets other than the Notes and the
Guarantees. The Trust Agreement does not permit the Trustee to engage in any
activities with respect to any class or subclass of Certificates other than
holding the Notes and the Guarantees, issuing the Certificates, acting as paying
agent with respect to the Certificates and engaging in certain other activities
related to the Certificates. Bankers Trust Company is the Trustee for each of
the Trusts. The Trustee is also the Indenture Trustee under each of the Trust
Indentures pursuant to which the Notes are issued.
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RISK FACTORS
The following summarizes certain risks which may materially affect the
ability of Airplanes Limited and Airplanes Trust to pay the interest, principal
and premium, if any, on the Notes (and hence, the ability of the Trust to pay
interest, principal and premium, if any, on the Certificates) in full at or
before their respective final maturity dates. There can be no assurance that
Rental Payments (as defined below) under the leases will be adequate to pay the
interest, principal and premium, if any, on the Notes in accordance with their
terms.
RISKS RELATING TO AIRPLANES GROUP AND CERTAIN THIRD PARTIES
LIMITED RESOURCES OF THE TRUST
The Notes and the Guarantees are solely obligations of Airplanes Limited
and Airplanes Trust. The Trust does not have, nor is it expected to have, any
significant assets or sources of funds other than the Notes and the Guarantees.
Neither the Certificates nor the Notes are obligations of, or guaranteed by, the
Trustee, the Indenture Trustees, GPA Group or any affiliate of the foregoing.
Furthermore, neither the Certificates nor the Notes are obligations of, or
guaranteed by, GE Capital, GECAS or any of their affiliates.
RELIANCE ON SUBSIDIARIES TO MAKE PAYMENTS
Substantially all of the assets of Airplanes Limited and Airplanes Trust
are the shares of their direct subsidiaries and loans to their direct and
indirect subsidiaries. Accordingly, Airplanes Limited and Airplanes Trust depend
on intercompany loan and other payments from their direct and indirect
subsidiaries to make payments on the Notes. The ability of Airplanes Limited and
Airplanes Trust to make payments on the Notes will therefore be affected by,
among other things, the imposition of withholding or other taxes on payments
within Airplanes Group, including payments by such subsidiaries to Airplanes
Limited and Airplanes Trust and the payment by such subsidiaries of amounts due
to other creditors, including lessees and tax authorities. To the extent that
these obligations to lessees and other creditors significantly exceed
expectations, or to the extent that unforeseen and significant tax liabilities
arise, there may be a significant adverse impact upon payments on the Notes.
Airplanes Limited has guaranteed the obligations of many of its subsidiaries to
lessees. Payments on these guarantees, comprise part of the expenses incurred by
any Airplanes Group member in the course of the business activities permitted to
be conducted by it under the Trust Indenture (the "Expenses"). These payments
rank senior in priority of payment to any payments on any class of Notes.
The ability of Airplanes Limited's and Airplanes Trust's subsidiaries to
make payments on their intercompany obligations to Airplanes Limited and
Airplanes Trust, and Airplanes Limited's and Airplanes Trust's ultimate ability
to pay interest and premium, if any, on, and repay the principal of, the Notes,
will be primarily dependent upon the receipt of payments under the leases and,
in the case of each of the Subclass A-4, A-7 and A-8 Notes, the ability of
Airplanes Group to refinance the Outstanding Principal Balance of such Notes by
issuing new notes ("Refinancing Notes") in the future. Receipt of sufficient
payments under the leases will depend upon a number of factors, including
without limitation (i) the timing of receipt of rental payments (together with
certain other payments the lessees are obliged to make pursuant to the terms of
the leases, the "Rental Payments") and the ability of the lessees to make such
payments; (ii) the ability to re-lease any Aircraft upon expiration or
termination of a lease without excessive levels of downtime and at sufficient
rental rates; (iii) the possible exercise by a lessee of a Purchase Option or an
early termination option and (iv) future maintenance costs associated with
re-leasing Aircraft. There can be no assurance that the Rental Payments actually
received during the term of the leases will be sufficient to meet amounts due
under the Notes.
LACK OF SECURITY INTEREST
As stated above, none of the Trustee, the Indenture Trustees or the
Certificateholders has or will have any security interest, mortgage, charge or
other similar interest in any of the Aircraft or the leases. As a result, such
parties do not have available to them certain rights upon a Note Event of
Default which would have been available to them had their interests in the
Aircraft and the leases been directly secured by such assets. The Security
Trustee has been granted a security interest in one-third of the ordinary share
capital of Holding Co.,
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certain of its subsidiaries and the subsidiaries of Airplanes Trust. In
addition, the Accounts (other than certain "Rental Accounts") are held in the
name of the Security Trustee.
POSSIBLE CONTINGENT LIABILITIES OF TRANSFERRED COMPANIES
The Aircraft and leases were acquired through the purchase by Airplanes
Limited of 95% of the issued and outstanding capital stock of Holding Co. and
the purchase by Airplanes Trust of all of the issued and outstanding capital
stock of AeroUSA. Holding Co. and AeroUSA in turn own, directly or indirectly,
100% of the ordinary share capital of the Transferred Companies. Prior to the
sale of the Transferred Companies, GPA Group took steps to ensure that there
were no material contingent liabilities related to any of the Transferred
Companies. No assurances can be given that pre-transfer liabilities will not be
identified in the future. GPA has indemnified Airplanes Group against certain
losses, if any, suffered by Airplanes Group (including any Transferred Company
or any of their directors) as a result of, among other things, the breach of
GPA's representations and warranties in the Stock Purchase Agreements, pursuant
to which the shares of Holding Co. and AeroUSA were purchased (the "Stock
Purchase Agreements"), that there were no liabilities, actual or contingent of a
Transferred Company that existed at the time of transfer but were not disclosed
in the financial statements of the relevant Transferred Company or otherwise
disclosed to Airplanes Group. Many of the representations and warranties are
qualified by standards relating to their materiality in relation to Airplanes
Group. The maximum amount that may be recovered from GPA as a result of such
indemnification or any breach of representation or warranty contained in the
Stock Purchase Agreements shall be an amount approximately equal to the purchase
price paid in the Acquisition. The representations and warranties of GPA
contained in the Stock Purchase Agreements only survive until March 28, 1999.
TAX LIABILITIES OF AEROUSA. For so long as GPA holds the Class E Notes and
residual interest in Airplanes U.S. Trust, AeroUSA and AeroUSA 3 will continue
to file U.S. federal consolidated tax returns and certain state and local tax
returns with GPA, Inc. and its subsidiaries (the "GPA U.S. Tax Group"). There
are ongoing tax audits by certain state and local tax authorities with respect
to tax returns previously made by the GPA U.S. Tax Group. GPA Group believes
that none of these audits will have a material adverse impact upon the financial
condition or liquidity of AeroUSA or AeroUSA 3. AeroUSA, Airplanes Trust, GPA,
Inc. and GPA Group have entered into a Tax Sharing Agreement (the "Tax Sharing
Agreement") dated as of March 28, 1996 pursuant to which GPA indemnified AeroUSA
against any U.S. federal, state or local tax liabilities ("Tax Liabilities"), if
any, suffered by AeroUSA or AeroUSA 3 that are (i) related to any tax period or
portion thereof prior to March 28, 1996 or (ii) related to any tax period or
portion thereof on or following March 28, 1996 and are Tax Liabilities that
AeroUSA or AeroUSA 3 would not have incurred if they were not and never had been
members of the GPA U.S. Tax Group. Furthermore, under the Tax Sharing Agreement,
with respect to GPA U.S. Tax Group returns, (i) AeroUSA shall be liable to GPA,
Inc. for its share of Tax Liabilities based on the amount of Tax Liabilities
that AeroUSA would have incurred if it and AeroUSA 3 were not and never had been
members of the GPA U.S. Tax Group (the "Stand-alone Tax Liability") and (ii) to
the extent that any amount payable by any member of the GPA U.S. Tax Group
(other than AeroUSA or AeroUSA 3) in respect of Tax Liabilities for any tax
period following March 28, 1996 is reduced to reflect a tax asset generated by
AeroUSA or AeroUSA 3, then GPA Group will pay to AeroUSA, at the time such tax
savings are realized, an amount equal to the difference between the actual taxes
paid for such tax period and the amount of taxes that would have been payable in
the absence of such tax asset. With respect to a liability of AeroUSA described
in clause (i) of the preceding sentence, AeroUSA will pay such amounts to GPA,
Inc. in cash only to the extent that payments due to taxing authorities are
attributable to the Stand-alone Tax Liability of AeroUSA and AeroUSA 3; the
remainder of any amounts payable to GPA, Inc. described in clause (i) will be
paid in the form of subordinated, non-interest paying AeroUSA notes. Tax
warranties of GPA and the indemnity of GPA for Tax Liabilities related to any
tax period or portion thereof prior to March 28, 1996 only survive until March
28, 2003. In connection with the MOU Transaction, GE Capital may acquire GPA's
economic interest in the outstanding Class E Notes. Airplanes Group and its
advisors are analyzing the impact such acquisition may have on Tax Liabilities
of Airplanes Group. Until such analysis is complete it is not possible to assess
the cash flow impact, if any, on Airplanes Group.
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The receipt by Airplanes Group from GPA of any amounts pursuant to
indemnities against tax and other liabilities of the Transferred Companies will
depend upon the financial condition and liquidity of GPA at the time any claim
is made. Furthermore, to the extent any tax or other claims are successfully
made against the Transferred Companies and not indemnified by GPA or paid from
Airplanes Group's available cash flow, because the Notes are not secured
directly or indirectly by the Aircraft or the leases, substantially all of the
assets of the Transferred Companies, including the Aircraft, would be available
for attachment and satisfaction of any such claim.
INABILITY OF CERTIFICATEHOLDERS OR TRUSTEE TO PARTICIPATE IN MANAGEMENT
Except to the limited extent described herein, neither the Trustee nor any
Certificateholder has any right to participate in the management or affairs of
Airplanes Group. In particular, such parties cannot supervise the functions
relating to the leases and the re-lease of the Aircraft, which functions have
generally been delegated to the Servicer under the Servicing Agreement.
RELIANCE UPON SERVICE PROVIDERS
Because Airplanes Group neither has nor will have executive management
resources of its own, Airplanes Group relies upon the Servicer, the
Administrative Agent, the Cash Manager and other service providers for all asset
servicing, executive and administrative functions pursuant to the respective
service provider agreements. While Airplanes Group has retained GECAS as the
Servicer and wholly owned subsidiaries of GPA Group as the Cash Manager and
Administrative Agent, there can be no assurance that Airplanes Group will
continue its arrangements with these organizations until the Notes are paid in
full or that such organizations will continue their relationship with Airplanes
Group until such time. Failure of these foregoing organizations to perform their
respective contractual obligations to Airplanes Group could have a material
adverse effect upon Airplanes Group's operations, which could adversely affect
Airplanes Group's ability to repay the Notes and consequently affect the amount
of payments made in respect of the Certificates. In the event that the Servicer,
the Administrative Agent or the Cash Manager were to resign or have their
respective contracts terminated pursuant to their respective contractual
arrangements with, or on behalf of, Airplanes Group, there can be no assurance
that suitable replacement service providers could be found, or found in a timely
manner, and engaged on terms acceptable to Airplanes Group or that would not
cause a downgrading in the then current rating relating to the Certificates. The
loss of the Servicer, the Administrative Agent or the Cash Manager under such
circumstances could have a material adverse effect on Airplanes Group's ability
to make payments on the Notes.
RELIANCE UPON SERVICE PROVIDERS FOR CERTAIN TAX BENEFITS. In addition, in
the event that either GECAS or a GPA subsidiary no longer serves as Servicer or
Administrative Agent and Cash Manager, respectively, on behalf of Airplanes
Group or either such party fails to maintain, among other things, certain
employment levels in Ireland, or GPA fails to hold 5% of the capital stock of
Holding Co., certain corporate tax and other tax benefits currently afforded to
Holding Co. and other Irish tax resident Transferred Companies may be lost.
Holding Co. and other Irish tax resident Transferred Companies are currently
entitled to pay Irish corporate tax at a reduced rate of 10% and may deduct
interest payments to Airplanes Limited on intercompany loans from their income
in computing their liability to Irish tax. If such benefits were lost, these
companies would be subject to Irish corporate taxation at general Irish
statutory rates (currently 32%) and may lose the ability to deduct such interest
payments to Airplanes Limited. The loss of such tax benefits would likely lead
to a downgrade in the current ratings of the Certificates and would have a
material adverse effect on Airplanes Limited's ability to pay interest,
principal and premium, if any, on the Airplanes Limited Notes. In connection
with the MOU Transaction, GPA Group's 5% holding in Holding Co. may be
restructured. However, Airplanes Group has been advised by GPA Group that any
such restructuring is not expected to adversely affect the Irish tax benefits
available to Airplanes Group.
CONFLICTS OF INTEREST OF GECAS
In addition to acting as Servicer, GECAS also participates in the
management of certain aircraft assets owned by Aircraft Lease Portfolio
Securitization 94-1 Limited ("ALPS 94-1"), GE Capital and its affiliates
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and other third parties, including GPA and its affiliates. (ALPS 94-1 is a
special purpose vehicle with investment objectives similar to those of Airplanes
Group.) The board of directors of ALPS 94-1 has announced that it is proposing
to refinance ALPS 94-1 which includes, replacing GECAS as servicer of the
refinanced entity. In addition to its role as Servicer, upon completion of the
MOU Transaction, GE Capital will acquire the economic interest in the
outstanding Airplanes Group Class E Notes currently held by GPA. GECAS will from
time to time have conflicts of interest in performing its obligations to
Airplanes Group and the other entities to which it provides management services
and with respect to the aircraft for which it provides such services. Under the
terms of the Servicing Agreement, the Servicer is not obliged to disclose
conflicts of interest. Therefore, Airplanes Group will not always be aware of
all conflicts of interest involving the Servicer. Such conflicts may be
particularly acute in situations involving GE Capital or its affiliates or
investment vehicles sponsored by GE Capital or its affiliates (collectively, "GE
Group"). Under certain of GECAS's aircraft servicing arrangements (including the
ALPS 94-1 Servicing Agreement), such conflicts will not entitle the entities to
whom GECAS provides services to replace GECAS as servicer except in certain
limited circumstances.
As of March 31, 1998, the portfolio of aircraft managed by GECAS and its
affiliates (the "GECAS Managed Portfolio") comprised approximately 860 aircraft.
At such date, the owned portfolio of GE Group was comprised of 502 aircraft or
58% of the GECAS Managed Portfolio. GECAS announced in early 1996 it had entered
into a multi-year order for five Boeing 777's and 102 Boeing 737 jet aircraft,
and options for 76 Boeing 737 jet aircraft of which 25 Boeing 737 jet aircraft
were purchased in the period up to March 31, 1998. Under the agreement with
Boeing, GECAS also may purchase up to a further 76 Boeing 737 jet aircraft. In
addition, in the same period GECAS purchased 16 Boeing 737 jet aircraft, which
were not included in the order announced in 1996. On July 15, 1996, GECAS
entered into an order for a combination of 40 A319, A320 or A321 aircraft and
five A340 aircraft, and options for a further 40 A319, A320 or A321 aircraft and
five A340 aircraft. Ten aircraft under this Airbus order were delivered in the
period to March 31, 1998. From time to time, GE Group is likely to acquire
additional new and used aircraft that are expected to be included in the GECAS
Managed Portfolio and to be managed by GECAS and its affiliates and, in
addition, GECAS may from time to time provide aircraft services to various third
parties. GECAS also manages, and may in the future form and sponsor, additional
aircraft or equipment leasing programs, some of which may have investment
objectives that are the same as, or similar to, those of Airplanes Group. It is
likely that, at various times, the aircraft in any such programs will compete
with the Aircraft when the Aircraft are being marketed for re-lease or sale, and
such programs may create additional conflicts of interest with respect to the
marketing of the Aircraft for re-lease or sale. Conflicts of interest may also
arise that involve the provision by GE Group of aircraft or engine financing to
third parties, including the lessees. Moreover, certain of GECAS's marketing and
servicing arrangements with its affiliates and other third parties include
provisions that may have the effect, in certain circumstances, of requiring
GECAS to give preference to such affiliates, other third parties or their
respective aircraft over the Aircraft. Particularly acute conflicts of interest
may arise when a lessee in financial distress needs to return some of its
aircraft and its fleet consists of a mixture of GE Capital-owned aircraft and GE
Capital-managed aircraft.
GECAS acts as servicer of 82 Stage 3 and eight Stage 2 aircraft (as of
March 31, 1998) that are owned or leased-in (i.e., an aircraft that is not owned
but is leased from a third party and then sub-leased to an airline) by GPA or
its affiliates pursuant to an amended and restated management agreement between
GECAS and GPA dated as of March 28, 1996 (the "GPA Management Agreement"). In
addition, in connection with ALPS 94-1, GECAS services 27 Stage 3 aircraft (as
at March 31, 1998) and provides certain other services, which primarily relate
to the sale and lease of aircraft after the expiration of their initial lease
terms.
Pursuant to the terms of the Servicing Agreement, GECAS has agreed to
perform the services required thereby with reasonable care and diligence at all
times (the "GECAS Services Standard"). If a conflict of interest arises
regarding GECAS's management of two particular Aircraft, or aircraft assets
other than those owned by the Airplanes Group, on the one part, and Aircraft, on
the other part, the Servicer is required to perform the services in good faith
and to the extent that two particular Aircraft or the Aircraft and other
aircraft then managed by GECAS are substantially similar in terms of objectively
identifiable characteristics
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that are relevant for purposes of the particular services to be performed, the
Servicer will not discriminate, (a) among the Aircraft or (b) between any of the
Aircraft and any other aircraft then managed by GECAS on an unreasonable basis
(the "GECAS Conflicts Standard").
Under certain limited circumstances in which a conflict of interest arises
with respect to a particular Aircraft or lease that requires, in the good faith
opinion of the Servicer, an arm's-length negotiation between the Servicer or any
of its affiliates and Airplanes Group, the Servicing Agreement provides that the
Servicer shall be entitled to withdraw from acting as Servicer with respect to
such Aircraft or lease in connection with the negotiation of the issue giving
rise to such conflict of interest and Airplanes Group shall be entitled to
appoint an independent representative to act on behalf of Airplanes Group with
respect to such negotiation. The Servicer shall be entitled to act on behalf of
itself or any of its affiliates with respect to such negotiation. In the event
that the Servicer reasonably determines that certain services required to be
carried out under the Servicing Agreement would place the Servicer in a conflict
of interest such that the Servicer could not, in its good faith opinion, perform
its obligations within the requirements of the Servicing Agreement, the Servicer
may resign as Servicer for all Aircraft, or, at its election, for any affected
Aircraft, such resignation to become effective upon the appointment of a
replacement servicer.
LIMITATION OF LIABILITY ON THE PART OF THE SERVICER
Pursuant to the Servicing Agreement, the Servicer and its affiliates are
not liable or accountable to any person, other than Airplanes Limited, AeroUSA
and Holding Co., to the limited extent described below, under any circumstances,
for any liabilities, obligations, losses, damages, penalties, taxes, suits,
judgments, costs, fees, expenses and disbursements directly or indirectly
arising out of, in connection with or related to, the management by the Servicer
of the Aircraft or other aircraft assets ("Losses"). Furthermore Airplanes
Limited, AeroUSA and Holding Co. jointly and severally indemnify the Servicer
and its affiliates on an after-tax basis for any Losses, unless such Losses are
finally adjudicated to have resulted directly from the Servicer's gross
negligence or wilful misconduct in respect of its obligation to apply the GECAS
Services Standard or the GECAS Conflicts Standard in respect of its performance
of the services under the Servicing Agreement. Airplanes Limited, AeroUSA and
Holding Co. also jointly and severally indemnify the Servicer and its affiliates
on an after-tax basis for any losses that may be imposed on, incurred by or
asserted against, the Servicer and its affiliates, directly or indirectly,
arising out of, in connection with or related to, the Servicer or any of its
affiliates' involvement in connection with the structuring or implementation of
any aspect of the Acquisition, the Underwritten Offering or related
transactions. Airplanes Limited, AeroUSA and Holding Co. are entitled to
terminate the Servicing Agreement if the Servicer fails in any material respect
to perform any material service thereunder to either the GECAS Services Standard
or the GECAS Conflicts Standards and such failure has a material adverse effect
on Airplanes Group taken as a whole. The Servicer does not assume any liability
or accountability for (i) the direct or indirect transfer of the Aircraft, the
leases related thereto, the receivables related thereto or any other assets to
any person within the Airplanes Group, (ii) the adequacy of the terms of any
lease relating to any Aircraft to the extent any such lease was novated, amended
or modified in connection with the direct or indirect transfer of the Aircraft
or the leases to or among the Transferred Companies on or prior to March 28,
1996, (iii) the reliability or creditworthiness of any lessee with respect to
its obligations under any lease, (iv) the adequacy of the Rental Payments
derived from the leases to support the various obligations of Airplanes Group,
(v) the adequacy of certain Maintenance Reserves (as defined below) or security
deposits relating to the Aircraft ("Security Deposits"), (vi) the terms and
conditions of the Notes or Refinancing Notes, (vii) the ability of Airplanes
Limited and Airplanes Trust to comply with the terms and conditions of the
Notes, the Guarantees or any Refinancing Notes or any additional Notes and
(viii) the structuring or implementation of any aspect of the various
transactions which established Airplanes Group.
The duties and obligations of the Servicer are limited to those expressly
set forth in the Servicing Agreement and the Servicer does not have any
fiduciary or other implied duties or obligations to Airplanes Group or any other
person, including any Certificateholder.
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CONFLICTS OF INTEREST OF GPA
GPA currently holds substantially all of the Class E Notes issued by
Airplanes Group. Completion of the MOU Transaction would result in GE Capital
acquiring GPA's economic interest in the outstanding Airplanes Group Class E
Notes. GPA Financial acts as Administrative Agent and GPA Cash Manager acts as
Cash Manager for Airplanes Group. In addition, GPA holds all of the Class E
Notes issued by ALPS 94-1 and, as a result, has access to certain potential
benefits relating to the aircraft it sold to ALPS 94-1. The board of directors
of ALPS 94-1 has announced that it is proposing to refinance ALPS 94-1 and in
connection therewith the refinanced entity will be purchasing ten aircraft from
GPA. In addition, it is proposed that subsidiaries of GPA Group will act as
administrative agent and cash manager to the refinanced entity. Finally, as at
March 31, 1998, GPA owned and leased-in a significant fleet of 87 Stage 3
aircraft and six Stage 2 aircraft. Of the 87 Stage 3 aircraft, 26 aircraft are
leased-in. As at March 31, 1998, after giving effect on a pro forma basis to the
MOU Transaction and the refinancing of ALPS 94-1, GPA would have owned and
leased-in a fleet of 61 Stage 3 aircraft and six Stage 2 aircraft. Of such 61
Stage 3 aircraft, 17 aircraft would have been leased-in.
GPA Financial may from time to time have conflicts of interest in
performing its obligations to Airplanes Group as Administrative Agent resulting
from GPA's interests in its own aircraft and GPA's interests in ALPS 94-1. These
conflicts may arise, for instance, when GPA Financial, as Administrative Agent,
advises Airplanes Group as to the annual budget to be adopted for Airplanes
Group and with respect to decisions by Airplanes Group to re-lease or sell
Aircraft.
Pursuant to the Administrative Agency Agreement, GPA Financial is
obligated, in performing its services as Administrative Agent, to devote the
same amount of time and attention and will be required to exercise the same
level of skill, care and diligence in the performance of its services as it
would if it were administering such services on its own behalf (the
"Administrative Agent's Services Standard"). In addition, if any conflicts of
interest arise with respect to GPA Financial's role as Administrative Agent and
its other interests, the Administrative Agency Agreement requires GPA Financial
to report such conflict promptly to Airplanes Group and to act in a manner that
treats Airplanes Group equally with the entities giving rise to the conflict of
interest, does not violate the Administrative Agent's Services Standard and
would not be reasonably likely to have a material adverse effect on Airplanes
Group (the "Administrative Agent's Conflict Duties").
Given the limited discretion that may be exercised by GPA Cash Manager in
its role as Cash Manager, it is unlikely that conflicts of interest in
connection with its services in such capacity will arise relative to GPA's other
interests.
ABSENCE OF PROFITABLE OPERATIONS
Airplanes Group has incurred net losses since its inception and expects to
continue to incur net losses. See "Item 7: Management's Discussion and Analysis
of Financial Condition and Results of Operations". There can be no assurance
that Airplanes Group will achieve or sustain profitability in the future.
CONFLICTS OF INTEREST OF LEGAL COUNSEL
Airplanes Group and GPA Group are represented by the same Jersey and United
States legal counsel, and it is anticipated that such multiple representation
will continue in the future. Without independent legal representation, the terms
of the agreements negotiated between Airplanes Group and GPA could
disproportionately benefit one party over the other. Should a significant
dispute arise in the future between Airplanes Group and GPA or any of their
respective affiliates, Airplanes Group anticipates that it will retain separate
counsel to represent it in such matter.
AIRCRAFT RISKS
RISK OF OPERATIONAL RESTRICTIONS AFFECTING AIRPLANES GROUP'S ABILITY TO
COMPETE
In connection with re-leasing of the Aircraft, Airplanes Group may
encounter competition from, among others, other aircraft leasing companies
(including GPA and International Lease Finance Corporation),
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airlines, aircraft manufacturers, aircraft owners, financial institutions
(including GE Capital and its affiliates), aircraft brokers, special purpose
vehicles (including ALPS 94-1) formed for the purpose of acquiring, leasing and
selling aircraft and public and private limited partnerships and funds with
investment objectives similar to those of Airplanes Group (including investment
vehicles sponsored by GE Capital and its affiliates). Airplanes Group is subject
to restrictions in the Trust Indentures and the constituent documents of
Airplanes Limited and Airplanes Trust that will impair Airplanes Group's
operational flexibility. For instance, GPA has in the past granted concessionary
rental rates to airlines in return for equity investments in order to place
aircraft on lease and minimize the number of aircraft on the ground. GPA has
also entered into similar arrangements with troubled lessees in order to
restructure the obligations of those lessees while maximizing the number of
aircraft remaining on viable leases to such lessees and minimizing the overall
cost to GPA. It can be expected that Airplanes Group will encounter similar
commercial situations in the future but its ability to offer a flexible,
market-driven, response will be limited by certain contractual constraints. In
addition, certain competing aircraft lessors (including GE Capital and its
affiliates) have, or have access to, financial resources substantially greater
than those of Airplanes Group, may have a lower overall cost of capital and may
provide financial services or other benefits to potential lessees that Airplanes
Group cannot provide. Airplanes Group is also subject to certain limitations as
to eligible lessees and geographic diversification of the lessees that must be
satisfied in order to maintain the ratings of the Certificates. Airplanes
Group's competitors may not be subject to such limitations.
CYCLICALITY OF SUPPLY OF AND DEMAND FOR AIRCRAFT
GENERAL FACTORS CAUSING FLUCTUATION IN SUPPLY AND DEMAND. The aircraft
leasing market in general is affected by various factors that are not within the
control of Airplanes Group such as interest rates, the availability of credit
and other general economic conditions; manufacturer production levels and price
discounting; passenger demand; retirement and obsolescence of aircraft models;
re-introduction into service of aircraft previously in storage; fuel costs;
governmental regulation and air traffic control infrastructure constraints. The
effects of deregulation of commercial aviation in the United States and the
increasing trend toward deregulation in other significant jurisdictions where
lessees currently, or may in the future, operate aircraft, may contribute to
further uncertainty in the commercial aviation industry. The availability of
commercial jet aircraft for lease or sale has periodically experienced cycles of
oversupply and undersupply, primarily as a result of the cyclicality of the
world economy. The condition of the aviation industry will vary at different
points in the business cycle for lessors and sellers of aircraft at the times
when the Aircraft are being marketed for re-lease or sale, and there can be no
assurance such conditions will allow re-lease or, where applicable, sale, on
satisfactory terms. Despite the relatively strong demand currently prevailing
for aircraft on operating lease in general, an oversupply of certain types of
used Stage 3 aircraft continues to exist, in particular, older widebody
aircraft. Also, as airlines increasingly have the option to use jet aircraft
with similar seat capacities to turboprop aircraft, the market for turboprop
aircraft, in particular ATR 42-300s, remains problematic in respect of both the
lease rates achievable and used aircraft values. ATR 42-300 Aircraft represented
0.66% of the Portfolio by Appraised Value at March 31, 1998.
FLUCTUATION OF SUPPLY AND DEMAND DUE TO ISOLATED EVENTS. In addition to
the general factors discussed above, the values of specific aircraft types will
also be affected by developments not within the control of Airplanes Group such
as manufacturers exiting the industry or ceasing to produce certain aircraft
types in the Portfolio and the introduction by manufacturers of new and more
efficient aircraft that compete directly with aircraft types in the Portfolio,
particularly if such new aircraft types are introduced at discounted prices.
The bankruptcy of Fokker N.V. and the discontinuation of its aircraft
manufacturing operations have resulted in significant reductions of values and
lease rates for Fokker aircraft, which reductions may continue. See "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Year Ended March 31, 1998 Compared with
Year Ended March 31, 1997." Uncertainty as to the long-term marketability for
lease or sale of Fokker 100 aircraft generally is expected to lead to further
reductions in value for this aircraft type, which could be significant. 6.85% of
the Aircraft in the Portfolio by Appraised Value are Fokker 100s. Also, the
merger between Boeing and McDonnell Douglas Corporation may adversely affect the
value of aircraft manufactured by McDonnell Douglas Corporation and
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lease rates that Airplanes Group is able to obtain on those aircraft. Boeing has
announced that it will cease production of MD83 aircraft in 1999 and that it
will cease production of MD11 aircraft in 2000. 19.46% of the Aircraft in the
Portfolio by Appraised Value are MD11s and MD83s.
All of the major manufacturers are implementing programs to shorten the
lead times and reduce the cost of manufacturing commercial aircraft, including
reorganization of design and production systems and business arrangements with
suppliers which have resulted in shifts in aircraft ordering patterns such that
purchasers are able to acquire aircraft at shorter lead times than previously
required. Some manufacturers are also considering the use of lower cost
production locations than those they currently use. These developments have
resulted in decreases in the prices of new aircraft when adjusted for inflation.
Boeing has introduced a new series of B737 aircraft at attractive prices and
Airbus has continued to offer A320, A319 and A321 aircraft at competitive
prices. This price discounting is the primary cause of declines in the value of
existing A320 aircraft and B737-300/400 and 500 series aircraft. A320-200 and
B737-300/400 and 500 Aircraft represented 38.11% of the Portfolio by Appraised
Value at January 23, 1998. Depending on the extent to which cost savings
continue to be achieved and passed on to the manufacturers' customers, these
factors could have an adverse impact on the ability of Airplanes Group to
re-lease or sell the Aircraft and on the Rental Payments from future leases of
the Aircraft.
RISK OF DECLINE IN AIRCRAFT VALUES
The Purchase Price paid by Airplanes Group to GPA for the Aircraft was
calculated largely on the basis of the Initial Appraised Value (the average of
three appraisals performed by independent appraisers as of October 31, 1995)
(the "Initial Appraised Value") of the Aircraft which assumes an "open,
unrestricted stable market environment with a reasonable balance of supply and
demand and with full consideration of the Aircraft's highest and best use,
presuming an arm's length, cash transaction between willing, able and
knowledgeable parties, acting prudently, with an absence of duress and with a
reasonable period of time available for marketing adjusted to account for the
maintenance status of each aircraft" (each such value so ascertained is referred
to herein as the "Base Value"). Base Values of aircraft are often greater, and
often substantially greater than, the current market values of such aircraft.
The Initial Appraised Value was more than, and may have been substantially more
than, the value of aircraft in the market at the time of purchase, given
overcapacity in the aviation industry at that time.
The value of specific Aircraft will depend on the factors identified above
under "Aircraft Risks -- Cyclicality of Supply of and Demand for Aircraft" as
well as on a number of other factors that are not within the control of
Airplanes Group, such as market and economic condition of the aircraft, the
particular maintenance and operating history of the aircraft, the number of
operators using each type of aircraft, the supply of each type of aircraft and
any regulatory and legal requirements that must be satisfied before the aircraft
can be sold. Values of the Aircraft may be adversely affected by changes in the
competitive and financial position of the relevant commercial aircraft
manufacturer, by the withdrawal of such manufacturer from the commercial
aviation market, or from the maintenance and spare parts markets, or by
unexpected manufacturing defects that may surface.
Updated appraisals of the Aircraft were obtained by Airplanes Group on
January 23, 1998. On the basis of these three updated appraisals, the average
appraised Base Value of the Aircraft at January 23, 1998 based on a Portfolio of
215 Aircraft was approximately $3,766 million compared with $3,984 million based
on the February 25, 1997 appraisals. This decrease was approximately $83 million
more than the expected decrease implied by the aircraft depreciation schedules
that form part of the terms of the Notes. Based on a Portfolio of 221 Aircraft
at January 23, 1998, which includes the six Aircraft that were delivered to
Emery during April, 1998, the average appraised base value of the Portfolio at
January 23, 1998 was approximately $3,859 million compared with $4,085 million
based on the February 25, 1997 appraisals. This decrease was approximately $84
million more than the expected decrease implied by the aircraft depreciation
schedules that form part of the terms of the Notes. Greater than expected
decreases in value occurred across the Portfolio with significant impacts
resulting from decreases in values of Fokker 100s and, to a lesser extent, MD11s
and MD83s. These greater than expected decreases were due primarily, in the case
of the Fokker 100s, to Fokker exiting the industry, and in the case of the MD11s
and MD83s, to a combination of the Boeing/McDonnell Douglas
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merger and the announcement by Boeing that it will cease production of MD83
aircraft in 1999. Boeing has also recently announced that it will cease
production of MD11 aircraft in 2000. Airplanes Group also suffered greater than
expected decreases in the value of its B767-300ER Aircraft due in part to the
competition this aircraft type now faces from the relatively new A330-200
aircraft. Finally, greater than expected decreases also occurred with respect to
the values of A320-200s and B737-300/400/500s due primarily to continued price
discounting by Boeing and Airbus.
Any reduction in Aircraft values may adversely affect Airplanes Group's
ability to maintain the current rental rates and may adversely affect its
ability to make payments on the Notes.
EXERCISE OF PURCHASE OPTIONS AT PRICES BELOW ESTIMATED FAIR MARKET VALUE OR
NET BOOK VALUE
As of March 31, 1998, five Lessees with respect to 20 Aircraft,
representing 8.28% of the Portfolio by Appraised Value, have options to purchase
Aircraft at prices below estimated fair market value at the option exercise
date. (For the purposes of this analysis, estimated fair market value has been
arrived at by deducting the estimated depreciation (as calculated by Airplanes
Group's existing depreciation policy) from January 23, 1998 to the option
exercise date from the Appraised Value of each Aircraft as determined as of
January 23, 1998).
In the event that a significant number of options to purchase Aircraft are
exercised at prices below estimated fair market value or Airplanes Group's
estimated net book value at the option exercise date, the amount and timing of
principal payments to certain Certificateholders and the average lives of the
Certificates may be adversely affected.
SALES OF AIRCRAFT AT PRICES BELOW AIRCRAFT APPRAISED VALUES
Airplanes Group believes that, due to current overcapacity in the aviation
industry with respect to certain aircraft types such as certain turboprop, Stage
2 and older widebody aircraft, the value of the Aircraft in the current market
(as compared with the "stable market environment with a reasonable balance of
supply and demand" and the other factors assumed in the determination of Base
Value) is less than, and is likely to be substantially less than the Initial
Appraised Value or the Appraised Value. Furthermore, neither the Initial
Appraised Value nor the Appraised Value nor the value of the Aircraft in the
current market should be relied upon as a measure of the realizable value of the
Aircraft. If it were necessary to dispose of Aircraft in a distress situation,
and particularly if a large number of Aircraft were required to be sold, the
proceeds from such a sale of Aircraft would be substantially less than the value
in the current market. However, Airplanes Group does not expect to have to sell
Aircraft to provide for payment of principal and interest on the Notes, and does
not anticipate conducting any distress sales. Nevertheless, following a Note
Event of Default, there can be no assurance that Aircraft, if sold, would not be
sold at prices significantly less than the Initial Appraised Value or the
Appraised Value of such Aircraft. In addition, prior to a Note Event of Default,
each Trust Indenture permits Airplanes Group to sell Aircraft at prices below a
specified target price in certain limited circumstances and in limited aggregate
amounts, which may adversely affect the amount and timing of principal payments
to certain Certificateholders and may, in turn, affect the average lives of the
Certificates. At March 31, 1998, Airplanes Group had sold 13 Aircraft (for an
aggregate of $186 million) with an appraised value of $220 million (based on the
February 25, 1997 appraisals). While two of the 13 Aircraft were sold at prices
below the specified target prices these transactions were in accordance with the
provisions in the Trust Indentures outlined above. (The sale of 13 Aircraft
assumes that the delivery of the additional six aircraft to Emery occurred prior
to March 31, 1998).
LESSEE DEFAULTS RESULTING IN LIENS ON AIRCRAFT
Liens which secure the payment of, inter alia, airport taxes, customs
duties, air navigation charges (including charges imposed by Eurocontrol),
landing charges, crew wages, repairer's charges or salvage ("Liens") are likely,
depending on the jurisdiction in question, to attach to the Aircraft in the
normal course of operation. The sums which such Liens secure may be substantial
and may, with certain jurisdictions or limited types of Liens (particularly
fleet liens), exceed the value of the Aircraft in respect of which the Lien is
being asserted.
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In some jurisdictions, aircraft Liens may give the holder thereof the right
to detain or, in limited cases, sell or cause the forfeiture of the Aircraft,
and, until discharged, such Liens could adversely affect the ability of
Airplanes Group to repossess, re-lease or sell the Aircraft. In particular,
under the laws of the United Kingdom, if a particular lessee (whether or not it
is a European operator) defaults in payments to Eurocontrol of air navigation
charges (relating to navigation services provided within European airspace by
Eurocontrol), the Civil Aviation Authority of the United Kingdom (the "CAA") has
the right to detain, pending payment, any aircraft operated by the defaulting
operator at the time of detention when a relevant aircraft is located at any
designated airport within the United Kingdom. Furthermore, if such charges are
not paid within a specified period, the CAA has the power to sell the detained
aircraft to satisfy the outstanding charges. These charges may also relate to a
period when the detained aircraft was being operated by a prior operator. A
similar form of "fleet lien" is granted to certain airport authorities under the
laws of the United Kingdom and in Ireland in relation to unpaid airport landing
fees.
Under each of the current Airplanes Group leases, the relevant lessee is
responsible for, and required to discharge, all such Liens arising during the
term of such leases, with the exception of those arising by reason of, inter
alia, Airplanes Group's or the lessor's own acts or those created by, or arising
by reason of, debts or liabilities of Airplanes Group's predecessors in title or
any previous operator. However, there can be no assurance that future leases
will contain such conditions or that the lessees will comply with such
obligations. Any failure to remove Liens could adversely affect Airplanes
Group's ability to repossess, re-lease or sell an Aircraft if a lessee defaults.
The Servicer is not obligated under the terms of the Servicing Agreement to
remove any Liens from Aircraft.
FAILURE TO MAINTAIN REGISTRATION OF AIRCRAFT
All of the Aircraft which are being operated must be duly registered at all
times with an appropriate aviation authority. Generally, failure to maintain the
registration of any Aircraft which is on lease would be a default under the
applicable lease, entitling Airplanes Group to exercise its rights and remedies
thereunder. If an Aircraft were to be operated without a valid registration, the
lessee operator or, in some cases, the owner or lessor, may be subject to
penalties which could constitute or result in a Lien being placed on such
Aircraft. Loss of registration could have other adverse effects, including
inability to operate the Aircraft and loss of insurance, which in turn could
have a material adverse effect on the ability of Airplanes Group to pay interest
and principal on the Notes. However, there can be no assurance that future
leases will contain such terms or that lessees will comply with such terms.
TECHNOLOGICAL RISKS
Airplanes Group's ability to lease or sell the Aircraft may be adversely
affected to the extent that the availability for lease or sale of newer, more
technologically advanced aircraft or the introduction of increasingly stringent
noise or emissions regulations make the Aircraft less competitive. This risk,
which is common to all aircraft lessors, is particularly significant for
Airplanes Group given its need to repay principal and interest on the Notes over
a relatively long period, which will require that many of the Aircraft be leased
or sold close to the end of their useful economic life. Furthermore, the extent
to which Airplanes Group is able to manage these technological risks through
modifications to aircraft and sale of aircraft is expected to be limited and any
sales or modification of aircraft will depend on Airplanes Group's ability to
satisfy the criteria set forth under the Trust Indentures.
YEAR 2000 RISK
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 has
recently begun a process of assessing the potential impact of this issue on its
operations. Because all of its operational functions have been delegated to the
Servicer, Administrative Agent and Cash Manager in accordance with the terms of
their respective service agreements, Airplanes Group has no information systems
of its own. Airplanes Group may, however, suffer a material adverse impact on
its business and results of
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operations if information technology upon which the Servicer, Administrative
Agent and Cash Manager rely is not Year 2000 compliant. The Servicer,
Administrative Agent and Cash Manager 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 may also suffer an adverse impact on its business and
results of operations if its suppliers, financial institutions, technical
advisors, lessees and others with which it conducts business are not Year 2000
compliant. The Servicer is currently preparing 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 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 is also preparing 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 at a relatively early stage and thus,
the nature and the extent of the risks posed by the potential failure of
aircraft and aircraft 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. 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.
Because the assessment of the Year 2000 risks relevant to Airplanes Group
is still at an early stage, Airplanes Group is currently not able to make any
estimate of the amount, if any, it may be required to spend to remediate Year
2000 problems. Such expenditures could, however, have a material adverse impact
on the ability of Airplanes Group to make payments on the Notes.
AIRCRAFT TYPE CONCENTRATIONS
At March 31, 1998, two aircraft types contained in the Portfolio each
represented over 10% of the Portfolio by Appraised Value: Boeing 737-400s
constituted 15.61% and McDonnell Douglas MD83s constituted 13.15%. Also, at
March 31, 1998, narrowbody Aircraft constituted 82.89% of the Portfolio by
Appraised Value (excluding turboprops, narrowbody Aircraft constituted 77.57% of
the Portfolio by Appraised Value).
At March 31, 1998, 15 Aircraft or 17.11% of the Portfolio by Appraised
Value, were widebody aircraft. These widebody Aircraft include four B767-300ERs
(6.86% of the Portfolio by Appraised Value), three MD11s (6.31% of the Portfolio
by Appraised Value), one B767-200ER (1.40% of the Portfolio by Appraised Value),
one B747-200 (0.99% of the Portfolio by Appraised Value), two A300-B4-200s
(0.66% of the Portfolio by Appraised Value), three A300-B4-100s (0.46% of the
Portfolio by Appraised Value) and one A300-C4-200 (0.43% of the Portfolio by
Appraised Value). The rental rates obtained by Airplanes Group from a new lessee
in respect of the three MD11 Aircraft are approximately one-third lower than the
contracted rentals under previous lease agreements for these Aircraft and will
adversely affect Airplanes Group's operating cash flows. The decline in rental
rates received for the three MD-11s reflected the uncertainty concerning future
production of MD11 aircraft following the merger between McDonnell Douglas and
Boeing. Boeing has since announced that it will cease production of MD11
aircraft in 2000 which may further affect the rental rates achievable for MD11
aircraft.
GOVERNMENT REGULATION
In addition to the general requirements regarding maintenance of the
Aircraft, aviation authorities from time to time issue Airworthiness Directives
("ADs") requiring the operators of aircraft to take particular maintenance
actions or make particular modifications with respect to all aircraft of certain
designated types.
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Certain manufacturer recommendations may also be issued. To the extent that a
lessee fails to perform ADs required to maintain its Certificate of
Airworthiness or other manufacturer requirements in respect of an Aircraft (or
if the Aircraft is not currently subject to a lease), Airplanes Group may have
to bear (or, to the extent required under the relevant lease, share) the cost of
compliance. Other governmental regulations relating to noise and emissions
levels may be imposed not only by the jurisdictions in which the Aircraft are
registered, possibly as part of the airworthiness requirements, but also in
other jurisdictions where the Aircraft operate. A number of jurisdictions have
adopted, or are in the process of adopting, noise regulations which ultimately
will require all aircraft to comply with the most restrictive currently
applicable standards. Such regulations restrict the future operation of aircraft
that do not meet Stage 3 (as defined in "-- The Aircraft, Related Leases and
Collateral") noise requirements and ultimately will prohibit the operation of
such aircraft in the relevant jurisdictions early in the next century (December
31, 1999 in the case of the United States). As 6.64% of the Aircraft by
Appraised Value did not meet, at March 31, 1998, the Stage 3 requirements, these
regulations may adversely affect Airplanes Group. Furthermore, there can be no
assurance that no new ADs or noise or emissions reduction requirements will not
be adopted in the future that could result in significant costs to Airplanes
Group or adversely affect the value of, or its ability to re-lease, Stage 2 or
Stage 3 Aircraft. Certain organizations and jurisdictions are currently
considering tightening noise and emissions certification requirements for newly
manufactured aircraft.
RISKS RELATING TO THE LEASES
EXPOSURE TO DOWNSIDE RISK AS OWNER OF AIRCRAFT
Most of the current Airplanes Group leases are operating leases, under
which Airplanes Group retains substantially all of the risks and rewards
associated with ownership of the Aircraft, including the Aircraft's residual
value. Eleven of the existing leases are finance leases, which effectively
transfer the benefits and risks of ownership of the Aircraft from Airplanes
Group to the finance lessee. The existing operating leases are "net" leases
pursuant to which the lessees are obliged to make Rental Payments and generally
assume responsibility for, among other things, (i) maintaining the Aircraft,
(ii) ensuring proper operation of the Aircraft, (iii) providing indemnification
and insurance for losses resulting from operation of the Aircraft, (iv) paying
all costs of operating the Aircraft and keeping the Aircraft free of liens (as
defined in the relevant lease, other than permitted liens under the relevant
lease) resulting from such operation and (v) complying with all governmental
licensing and other requirements, including ADs (except in certain cases where
the terms of the relevant lease require the lessor to share the cost thereof).
INABILITY TO RE-LEASE AIRCRAFT ON FAVORABLE TERMS
Upon termination of any lease, the Servicer is obligated, pursuant to the
terms of the Servicing Agreement, to use commercially reasonable efforts on
behalf of Airplanes Group to re-lease the related Aircraft. There can be no
assurance, however, that Airplanes Group will be able to obtain rental rates and
lease terms (including maintenance and redelivery condition agreements) in the
future comparable to those contained in the existing leases. Airplanes Group's
ability to re-lease Aircraft, as well as its ability to obtain such rental rates
and such terms, may be adversely affected by, among other things, restrictions
imposed by the Trust Indentures, the economic condition of the airline industry,
the supply of competing aircraft, other matters affecting the demand for
particular aircraft types and competition from lessors offering leases on more
favorable terms than Airplanes Group.
The expected number of Aircraft that Airplanes Group must place with
lessees through December 31, 2002 is made up of the sum of (i) Aircraft in
Airplanes Group's existing Portfolio that are currently available for marketing,
and (ii) Aircraft coming to the end of their lease terms before December 31,
2002, less the aggregate of (a) Aircraft which are currently the subject of a
lease extending through December 31, 2002, (b) Aircraft which are the subject of
a non-binding letter of intent to sell or lease and (c) any Aircraft sold prior
to December 31, 2002. Additional Aircraft may need to be re-leased if such
Aircraft become available through premature terminations of leases or if letters
of intent do not result in leases or if Aircraft subject to lease agreements are
not delivered. Airplanes Group's expected re-leasing requirements from March 31,
1998 through the year 2002 are shown in the following table:
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AIRPLANES GROUP LEASE PLACEMENT REQUIREMENT
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
TO DECEMBER 31,
--------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Aircraft available for marketing(1)...................... 4 -- -- -- --
Contracted lease expirations (including expirations of
leases that are assumed to result from letters of
intent)(2)............................................. 50 31 50 31 36
Less Aircraft subject to contract or letter of
intent(2)(3)........................................... (29) -- (2) (5) (2)
---- ---- ---- ---- ----
Placement requirement(4)(5).............................. 25 31 48 26 34
==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) Aircraft available for marketing consist of those Aircraft which were not in
revenue service with lessees as of March 31, 1998.
(2) Excluded from these Aircraft are six DC8 Aircraft on lease to Emery which
Airplanes Group has contracted to sell and which were delivered to Emery
during April, 1998.
(3) Airplanes Group's lease placement requirement assumes that letters of intent
will in due course be reflected in binding contracts. Although letters of
intent are not legally binding, most of GPA Group's and Airplanes Group's
letters of intent have, historically, resulted in lease agreements between
the parties thereto.
(4) Assumes that Aircraft coming to the end of currently contracted lease terms
which are not, as of March 31, 1998, the subject of an additional agreement
or letter of intent need to be re-leased only once more before the year
2002.
(5) Assumes that no current Airplanes Group lease entered into by Airplanes
Group terminates prematurely and that there are no sales of Aircraft.
There can be no assurance that, with significant numbers of Aircraft to
re-lease in the future, Airplanes Group will be able continually to re-lease
such Aircraft without significant periods of downtime or without any adverse
effect on the rental rates it is able to obtain, especially during downturns in
demand for aircraft on operating lease and that the ability of Airplanes Group
to make payments of interest, principal and premium, if any, on the Notes will
not be adversely affected thereby.
REQUIREMENT FOR CERTAIN LICENSES AND APPROVALS
A number of leases require specific licenses, consents or approvals for
different aspects of the leases. These include consents from governmental or
regulatory authorities to certain payments under the leases and to the import,
re-export or de-registration of the Aircraft. No assurance can be given that
such requirements may not be increased by subsequent changes in applicable law
or administrative practice or that a consent, once given, will not be withdrawn.
Furthermore, consents needed in connection with future re-leasing or sale of an
Aircraft may not be forthcoming. Any such event could have an adverse impact on
Airplanes Group's ability to re-lease or sell aircraft.
RISK OF DECLINE IN RENTAL RATES
Future rental rates and the ability to re-lease Aircraft worldwide both
depend upon a number of factors that are not within the control of Airplanes
Group. See "-- Aircraft Risks -- Cyclicality of Supply of and Demand for
Aircraft; Risk of Decline in Aircraft Values" and "-- Failure to Perform
Aircraft Maintenance". Both the bankruptcy of Fokker N.V., the manufacturer of
6.85% of the Aircraft by Appraised Value, and the combination of the merger
between Boeing and McDonnell Douglas Corporation (McDonnell Douglas Corporation
is the manufacturer of 30.39% of the Aircraft by Appraised Value) followed by
the announcement by Boeing that it will cease production of MD83 aircraft in
1999, has adversely affected the rental rates that Airplanes Group is able to
obtain on Aircraft manufactured by Fokker N.V. and McDonnell Douglas
Corporation, and may adversely affect its ability to make payments of interest
and premium, if any,
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on, and principal of, the Notes. The rental rates obtained by Airplanes Group
from Varig, S.A. ("Varig") in 1997 in respect of three MD11 Aircraft are
approximately one-third lower than the contracted rentals under the previous
lease agreements for these Aircraft and this will adversely affect Airplanes
Group's operating cash flows. Boeing has since announced that it will cease
production of MD11 aircraft which may adversely affect MD11 rental rates
further. In addition, the rental rates obtained by Airplanes Group from TAM in
October 1997 in respect of six Fokker 100 Aircraft are approximately 24% lower
than the contracted rentals under the previous lease agreements for these
Aircraft and this will also adversely affect Airplanes Group's operating cash
flows.
FAILURE TO PERFORM AIRCRAFT MAINTENANCE
The standards of maintenance observed by the various lessees and the
condition of the Aircraft at the time of sale or lease may affect the future
values and rental rates for the Aircraft. Under the leases, it is primarily the
responsibility of the relevant lessee to maintain the Aircraft and to comply
with all governmental requirements applicable to the lessee and the Aircraft,
including, without limitation, operational, maintenance, and registration
requirements and in most cases, manufacturer recommendations or ADs (although in
certain cases the relevant lessor has agreed to share the cost of complying with
certain ADs or manufacturer recommendations). Failure of a lessee to perform
required or recommended maintenance with respect to an Aircraft during the term
of the lease could result in a grounding of such Aircraft and is likely to
require Airplanes Group to incur costs, which could be substantial, to restore
such Aircraft to an acceptable maintenance condition prior to re-leasing.
RISK OF MAINTENANCE LIABILITIES EXCEEDING MAINTENANCE RESERVES
At March 31, 1998, Airplanes Group had provisions for maintenance of $315
million (the "Maintenance Reserves"). Currently, Airplanes Group holds
approximately $80 million in cash (the "Maintenance Reserve Amount") in respect
of maintenance reserve liabilities which, together with projected future
maintenance reserve payments under the leases, is believed by Airplanes Group,
following consultation with the Administrative Agent, to be sufficient, based on
an analysis of anticipated future maintenance expenses, to provide Airplanes
Group with sufficient liquidity to meet its maintenance liabilities. This amount
of cash has been determined to be appropriate for the funding of Airplanes
Group's maintenance reserve liabilities based on an analysis of Airplanes
Group's, GPA's and overall industry historical experience of the frequency and
cost of maintenance checks performed by lessees relative to the projected
maintenance payments to be made to Airplanes Group under the terms of the
leases.
In addition, remaining cash balances held in the Expense Account and the
Collection Account at any date ($236.4 million at May 11, 1998) will, in
accordance with the priority of payments, be available to discharge maintenance
liabilities together with other Required Expense Amounts as they fall due for
payment.
There can be no assurance, however, that Airplanes Group's future
maintenance requirements will correspond to Airplanes Group's or GPA's
historical experience, or the industry's experience overall, particularly as the
Aircraft age. Furthermore, there can be no assurance that actual maintenance
reserve payments by lessees and other cash received by Airplanes Group will not
be significantly less than projected. Actual maintenance reserve payments by
lessees will depend upon numerous factors including defaults and the ability of
Airplanes Group to obtain satisfactory maintenance terms in leases. An
increasing number of leases do not provide for any maintenance reserve payments
to be made by lessees as security for their maintenance obligations. Any
significant variations in such factors may materially adversely affect the
ability of Airplanes Group to make payments of interest, principal and premium,
if any, on the Notes.
LIABILITY, LOSS AND INSURANCE
The lessees are required under Airplanes Group's current leases to
indemnify the related lessor (and generally, if different, the owner) for, and
insure against, liabilities arising out of use and operation of the Aircraft,
including third party claims for death or injury to persons and damage to
property for which Airplanes Group may be deemed liable. Any insurance proceeds
received by Airplanes Group in respect of
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such claims shall be paid first to the applicable lessor in the event of loss of
the Aircraft, to effect repairs or in the case of liability insurance, for
indemnification of third party liabilities, with the balance, after deduction
for all amounts due and payable by the lessee under the applicable lease, to be
paid to the lessee. The lessees are also required to maintain public liability,
property damage and hull all risks insurance on the Aircraft at agreed levels
subject to hull deductibles which generally range from $250,000 to $1 million.
Although Airplanes Group believes that the insurance required under the leases
will be adequate to cover all likely claims, there can be no assurance that one
or more catastrophic events will not exceed coverage limits. The lessees are
required under the leases to provide evidence of insurance, and the insurers
must notify Airplanes Group if any lessee insurance is to be cancelled or
terminated. In such event, the Servicer is obligated, pursuant to the terms of
the Servicing Agreement, to use commercially reasonable efforts to procure
alternative insurance coverage to the extent commercially available in the
relevant insurance market. However, any inadequate insurance coverage or default
by the lessees in fulfilling their indemnification or insurance obligations will
affect the proceeds that would be received upon an event of loss under the
respective leases or claim under the relevant liability insurance.
With respect to certain leases, the lessor may arrange separate political
risk repossession insurance for its own benefit, covering (a) confiscation,
nationalization and requisition of title of the relevant Aircraft by the
government of the country of registry and denegation and deprivation of legal
title and rights, and (b) the failure of the authorities in that country to
allow de-registration and export of the Aircraft, subject to the conditions of
the policies.
RISK OF WITHHOLDING TAX ON LEASE RENTALS
Airplanes Group endeavors to structure its leases in such a way that either
no withholding taxes will be applicable to payments by the lessees under the
leases, or (in the event of such taxes being or becoming applicable) the lessees
will be obliged to pay corresponding additional amounts. However, there can be
no assurances that leases to which Airplanes Group may become a party as a
result of re-leasing the Aircraft will not result in the imposition of
withholding or other taxes in circumstances where the lessee has not agreed to,
or is unable to, pay compensatory additional amounts.
RISK OF LESSEE DEFAULT
DETERIORATION IN FINANCIAL CONDITION OF LESSEES
The ability of each lessee to perform its obligations under its lease will
depend primarily on such lessee's financial condition. A lessee's financial
condition may be affected by various factors beyond the control of Airplanes
Group, including competition, fare levels, passenger demand, operating costs
(including the price and availability of jet fuel and labor costs), economic
conditions in the countries in which the lessees operate and environmental and
other governmental regulation of or affecting the air transportation business.
Many of Airplanes Group's existing lessees are in a relatively weak financial
position. There can be no assurance as to the extent to which lessees will be
able to perform their financial and other obligations under the leases.
As of March 31, 1998, amounts outstanding for a period greater than 30 days
in respect of Rental Payments, Maintenance Reserves, and other miscellaneous
amounts due under the leases (net of default interest and certain cash in
transit) amounted to approximately $13.5 million in respect of 25 Lessees (who
had a combined total of 85 Aircraft on lease as of such date) and one former
lessee ($1.7 million of the $13.5 million related to this former lessee). Of the
total $13.5 million, $2.7 million was in arrears for a period greater than 30
days, $1.8 million was in arrears for a period greater than 60 days and $9.0
million was in arrears for a period greater than 90 days. Certain of these
lessees as well as certain other lessees have consistently been significantly in
arrears in their Rental Payments and have recently experienced or are currently
experiencing financial difficulties. In addition to these amounts five further
lessees were being allowed formal deferrals of rent, maintenance and
miscellaneous payments totaling approximately $13.3 million at March 31, 1998.
Of the total $13.3 million, $0.2 million was outstanding for greater than 60
days and $13.1 million was outstanding for greater than 90 days. Such lessees
are being allowed deferrals of rentals, maintenance and miscellaneous payments
for periods of up to 70 months.
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<PAGE> 23
Of the $13.5 million in arrears greater than 30 days, $4.0 million
represented arrears with respect to the two Indonesian lessees operating four
Fokker 100 Aircraft and two B737-200A Aircraft. Since March 31, 1998, the four
Fokker 100 Aircraft have been recovered from one lessee and de-registered and
Airplanes Group is in the process of terminating the related leases. One
B737-200A Aircraft has also been recovered from the other lessee and GECAS as
Servicer is in discussion with the lessee in respect of the second B737-200A.
Airplanes Group expects to incur costs in restoring the Aircraft to a suitable
technical condition for re-lease which costs have been estimated at $10 million
and have been provided for in the Financial Statements as at March 31, 1998.
There can be no assurance that more lessees will not become in arrears or
in default for any reason.
RISK OF REGIONAL ECONOMIC DOWNTURNS AFFECTING LESSEE FINANCIAL CONDITION
EUROPEAN CONCENTRATION. At March 31, 1998, Airplanes Group leased 64
Aircraft representing 35.24% of the Portfolio by Appraised Value to 28 aircraft
operators in Europe.
The commercial aviation industry in European countries, as in the rest of
the world generally, is highly sensitive to general economic conditions. Because
a substantial portion of airline travel (business and especially leisure) is
discretionary, the industry has tended to suffer severe financial difficulties
during economic downturns. Accordingly, the financial prospects for European
lessees can be expected to depend largely on the level of economic activity in
Europe generally and in the specific countries in which such lessees operate. A
recession or other worsening of economic conditions in one or more of these
countries may have a material adverse effect on the ability of European lessees
to meet their financial and other obligations under the leases. In addition,
commercial airlines in Europe face, and can be expected to continue to face,
increased competitive pressures, in part as a result of the continuing
deregulation of the airline industry by the European Union (the "EU"). There can
be no assurance that competitive pressures resulting from such deregulation will
not have a material adverse impact on the operations of such lessees.
LATIN AMERICAN CONCENTRATION. At March 31, 1998, the lessees with respect
to 34.06% of the Aircraft by Appraised Value operated in Latin America,
principally Brazil, Mexico, Colombia and Chile. The prospects for lessee
operations in these countries can be expected to be dependent in part on the
general level of political stability and economic activity and policies in those
countries. Although certain countries in Latin America have experienced
substantial improvement in their economies in the past several years, which has
resulted in increased political stability and overall increased economic growth,
there can be no assurance that such progress can be maintained or that further
progress will be made. Future developments in the political systems or economies
of these countries or the implementation of future governmental policies in
these countries may have a material adverse effect on lessee operations in those
countries.
The economy of the Latin American region as a whole and of particular Latin
American countries may be materially affected by developments in other countries
in Latin America and also by developments in countries in other regions of the
world that are perceived to demonstrate similar "emerging market"
characteristics. For example, in December 1994 a decrease in capital inflow to
Mexico coupled with a large current account deficit led to diminishing foreign
exchange reserves which ultimately forced Mexico to allow the peso to float
freely. The subsequent devaluation of the peso led to a currency crisis in
Mexico which dampened investor confidence and resulted in lower levels of
foreign investment in Latin America in general. In October 1997, Brazil
experienced significant downturns in its financial markets, with large decreases
in Brazilian financial asset prices and considerable pressure for a devaluation
of the Brazilian currency. The loss of confidence in the Brazilian markets and
currency has been associated with the economic crises currently affecting
"emerging markets" in Asia. See "-- Asia Pacific Concentration" below. The
Brazilian government responded to these pressures with a series of austerity
measures including increased interest rates, public spending cuts and tax
increases. These measures led to widespread expectations that economic growth in
Brazil will be significantly reduced in 1998 with the real possibility of a
recession that could adversely affect the operations of Airplanes Group's
Brazilian customers.
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Airplanes Group has entered into rent deferral and restructuring
arrangements with certain significant Brazilian and Mexican lessees who have
experienced difficulties in the past four years due to overcapacity and adverse
market conditions. See "-- The Lessees -- Latin America" below.
NORTH AMERICAN CONCENTRATION. At March 31, 1998, Airplanes Group leased 40
Aircraft representing 16.14% of its Portfolio by Appraised Value, to operators
in North America. Airline industry profitability in North America has enjoyed a
sustained improvement since 1993 due to a combination of traffic growth in line
with the overall expansion of the economy in that region and relatively small
growth in aircraft seat capacity leading to a significant increase in load
factors.
In 1996 and early 1997 a number of significant new aircraft orders were
announced by North American airlines. However, even in the prevailing robust
industry environment some airlines are reporting losses or very low profits due
to either unsuccessful competitive initiatives in respect of fares and/or
capacity, or uncompetitive cost structures. In the next few years airline profit
margins are likely to come under pressure due to a combination of labor cost
increases and increased aircraft ownership costs as new aircraft are delivered
and a large number of Stage 2 aircraft are hush-kitted. In the early 1990s,
several North American airlines who are currently lessees of Airplanes Group
entered into plans of reorganization or sought the protection of bankruptcy,
insolvency or other similar proceedings. There can be no assurance that such
events will not re-occur in respect of these or other North American lessees of
Airplanes Group and adversely affect the ability of such lessees to make timely
and full Rental Payments under their respective leases.
Airplanes Group has entered into rent deferral and restructuring
arrangements with certain significant North American lessees. See "-- The
Lessees -- North America" below.
ASIAN CONCENTRATION. At March 31, 1998, Airplanes Group leased 20
Aircraft, representing 10.42% of its Portfolio by Appraised Value, to operators
in Asia. Trading conditions in the civil aviation industry in Asia have been
adversely affected by the severe economic and financial difficulties experienced
recently in the region. 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, corporate debt defaults and internationally
organized financial stability measures. The economic difficulties in Indonesia
have recently resulted in civil disturbance in Indonesia and a change in
government. This downturn in the region's economies and the resulting civil
unrest has undermined business confidence and has had an adverse impact on the
results of operations of Airplanes Group's lessees in the region and
consequently on Airplanes Group's revenues and cash flows. 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.
One Indonesian lessee, which operated four Fokker 100 Aircraft, was already
experiencing financial difficulties prior to the current regional economic
difficulties and is currently in arrears in its payment obligations which had
been restructured in December 1996. Airplanes Group's other Indonesian lessee,
which operated two B737-200A Aircraft, has also fallen into arrears with its
payment obligations and has requested a partial deferral of its rental. The four
Fokker 100 Aircraft and one of the B737-200A Aircraft have been recovered from
the lessees and Airplanes Group is in the process of terminating the related
leases. GECAS, as Servicer, is in discussion with the lessee in respect of the
second B737-200A. Airplanes Group expects to incur costs in restoring these
Aircraft to a suitable technical condition for release, which costs have been
provided for in the Financial Statements as at March 31, 1998. See "-- The
Lessees -- Asia" below.
INABILITY TO TERMINATE LEASES OR REPOSSESS AIRCRAFT
Airplanes Group's rights and remedies in the event of a default under each
lease include the right of the relevant lessor to terminate such lease and to
repossess the related Aircraft. If a defaulting lessee contests such termination
and repossession or is bankrupt or under court protection, however, it may be
difficult, expensive and time-consuming for Airplanes Group to enforce its
rights. As a consequence of the large number of
23
<PAGE> 25
jurisdictions Airplanes Group leases its Aircraft to, it is likely that
Airplanes Group will encounter enforcement delays or difficulties in various
jurisdictions. Airplanes Group may incur direct costs associated with
repossession of an Aircraft which include legal and similar costs, the direct
costs of returning the Aircraft to an appropriate jurisdiction and any necessary
maintenance to make the Aircraft available for re-leasing or sale. Maintenance
costs with respect to repossessed aircraft may be significant. In particular, in
connection with the ongoing recovery by Airplanes Group of possession of six
Aircraft from two Indonesian lessees, five of which have been recovered, it is
anticipated that significant expenditures may be required in order to restore
such Aircraft to a suitable condition for re-lease. Repossession does not
necessarily imply an ability to export or deregister and profitably redeploy the
Aircraft. In cases where a lessee or other operator flies only domestic routes,
repossession may be more difficult, especially if the jurisdiction permits the
lessee to resist deregistration and the Aircraft is registered in such
jurisdiction. In addition, in connection with the repossession of an aircraft,
the aircraft owner may also find it necessary to pay debts secured by
outstanding Liens as well as, in certain jurisdictions, taxes to the extent not
paid by the lessee. Significant costs may also be incurred in retrieving or
recreating aircraft records in a repossession. Aircraft records are generally
required for obtaining a Certificate of Airworthiness for the Aircraft.
Airplanes Group may suffer adverse consequences as a result of a lessee
default and the related termination of the lease and repossession of the related
Aircraft. Airplanes Group's exercise of its rights and remedies (including
repossession) upon a lessee default also may be subject to the limitations and
requirements of applicable law, including the need to obtain a court order for
repossession of the Aircraft and/or to obtain consents or approvals for
deregistration or re-export of the Aircraft. When a defaulting lessee is the
subject of a bankruptcy, protective administration, insolvency or similar event,
additional limitations and requirements may apply. Certain jurisdictions will
give rights to the trustee in bankruptcy or a similar officer to assume or
reject the lease or to assign it to a third party, or will entitle the lessee or
another third party to retain possession of the Aircraft (without performing the
obligations under the relevant lease) for a period that cannot be determined in
advance. Accordingly, in such circumstances, Airplanes Group may be delayed in,
or prevented from, enforcing certain of its rights under a lease and in
re-leasing the affected Aircraft. Further, the premature termination of leases
may, in certain circumstances, lead Airplanes Group to incur substantial swap
breakage costs under its agreements with Swap Providers ("Swap Agreements").
RISKS RELATING TO PAYMENTS ON THE CERTIFICATES
FACTORS AFFECTING THE AMOUNT AND TIMING OF PAYMENTS UNDER THE CERTIFICATES
The ability of Airplanes Group to re-lease Aircraft upon expiration or
termination of the related leases, as well as other events outside of Airplanes
Group's control, will affect payments on, and the weighted average lives of, the
Notes and, accordingly, the Certificates, and may therefore affect the yield on
the Certificates. Early terminations, whether as a result of lessee defaults or
otherwise, may cause Aircraft to be re-leased earlier and more frequently and at
lower rental rates than expected, and could adversely affect payments on the
Certificates. The exercise of purchase options by certain lessees (the "Purchase
Options") or the occurrence of termination events cannot be predicted and may be
influenced by a variety of economic and other factors, including future interest
rates and the availability and market value of aircraft at future dates.
CASH FLOW FROM AIRCRAFT AND LEASES UNPREDICTABLE; FAILURE OF ACTUAL
EXPERIENCE TO MATCH ASSUMPTIONS
The expected repayment schedules of the Notes were arrived at on the basis
of certain assumptions. It is highly unlikely that the assumptions will be
consistent with Airplanes Group's experience for numerous reasons. Any inability
of Airplanes Group to find financially able and willing lessees of the Aircraft
at acceptable rental rates will affect the timing and amount of proceeds
realized from leases of Aircraft. In addition, other economic and political
factors, such as prevailing interest rates and the availability of credit and
market demand for aircraft rentals cannot be assured. Rental Payments, insurance
recoveries, Maintenance Reserve payments, expenses and liabilities will often be
dependent upon the actions of third parties, which are difficult to predict and
are generally not within Airplanes Group's control. Accordingly, collections and
other realizations with respect to certain leases and Aircraft could occur at
substantially different times and levels
24
<PAGE> 26
than anticipated and may not occur at all. As a result, there can be no
assurance that Airplanes Group will be able to repay the initial outstanding
principal balance on any class or subclass of the Notes.
SUBORDINATION PROVISIONS
The Expenses and certain other payments are senior in priority of payment
to the Notes and will be paid out of funds on deposit in the Collection Account
before any payments are made on the Notes.
EARLY REDEMPTION AND DEFEASANCE
The Notes, and the corresponding Certificates, may be redeemed on any date
on which an interest payment is due, in whole or in part, at the applicable
redemption price, plus accrued but unpaid interest; provided, however, that
there shall have been paid in full all accrued and unpaid interest and other
amounts with respect to all subclasses and classes of Notes ranking equally or
prior to the Notes to be redeemed on such date. In addition, each class or
subclass of Notes may be redeemed in whole but not in part on any interest
payment date, without premium, upon the occurrence of certain adverse tax events
affecting Airplanes Group. Finally, all classes and subclasses of the Notes may
be redeemed or defeased, in whole, at the applicable redemption price plus
accrued and unpaid interest in the case of any subclass or class of Notes being
redeemed, in connection with any sale of all or substantially all of the assets
of Airplanes Group. Certain classes or subclasses of the Notes may be redeemed
at such time as other classes or subclasses of the Notes are being defeased.
INABILITY TO REFINANCE CERTAIN CERTIFICATES
The Subclass A-4, A-7, and A-8 Certificates and the corresponding
subclasses of Notes are expected to reach their expected final payment dates
before Airplanes Group has received sufficient funds to pay all of the principal
on such Notes and the corresponding Certificates. Airplanes Group will attempt
to refinance each of the Subclass A-4, A-7 and A-8 Certificates with the net
cash proceeds realized from public offerings and sales by a trust of refinancing
certificates (the "Refinancing Certificates"). The Refinancing Certificates will
rank equally with the remaining outstanding subclasses of Class A Certificates
but their interest rate, average life, principal payment provisions, redemption
provisions and other economic terms will be determined by the Directors of
Airplanes Limited and the Controlling Trustees of Airplanes Trust at the time of
issuance and may be substantially different from those applicable to the
Certificates to be refinanced. No assurance can be given, however, as to
Airplanes Group's ability to refinance Certificates in this manner. Any attempt
to issue Refinancing Certificates may be adversely affected by conditions in the
capital markets generally or the market's then current perception of the
commercial aviation industry, the operating lease business or Airplanes Group in
particular. Any failure to sell Refinancing Certificates on acceptable terms at
the required times will result in failure to refinance the Subclass A-4, A-7 and
A-8 Certificates. This may increase the overall cost of borrowing, and may
affect the liquidity and market prices of the Certificates generally.
TAX RISKS
Ownership of the Certificates entails certain risks with respect to the
application of Irish tax laws, United States federal tax laws, Jersey tax laws
and the tax laws of the jurisdictions in which the Transferred Companies and the
lessees are organized, reside or operate. In addition, the tax consequences of
the purchase of the Certificates depend to some extent upon an investor's
individual circumstances.
Whether any of Airplanes Limited, Holding Co. or the Transferred Companies
will be subject to United States federal income tax may depend on the manner in
which the activities of the Servicer and Administrative Agent are performed for
Airplanes Limited, Holding Co. and the Transferred Companies and the application
of the recently ratified income tax treaty between the United States and Ireland
(the "Treaty"). There can be no assurance that the activities of the Servicer or
Administrative Agent will not expose Airplanes Limited, Holding Co. and the
Transferred Companies to United States federal income tax on their income.
Airplanes Limited, Holding Co. and the Transferred Companies, with the support
of the Irish authorities, have sought a ruling from the United States'
authorities under the Treaty to the effect that
25
<PAGE> 27
Airplanes Limited, Holding Co. and the Transferred Companies would be deemed to
meet certain requirements necessary for eligibility for Treaty benefits.
However, there can be no assurance that Airplanes Limited, Holding Co. and the
Transferred Companies would not be subject to United States federal income tax
on some or all of their income under the Treaty and/or that their application to
the United States authorities will be successful.
Airplanes Limited, Airplanes Trust and AeroUSA do not intend to be (and
have taken steps designed to ensure that they will not be) treated as doing
business in Ireland and, therefore, do not expect to be subject to Irish income
tax. However, if the operations of Airplanes Limited, Airplanes Trust or AeroUSA
differ from those intended or expected, Airplanes Limited or Airplanes Trust
could become subject to Irish taxes.
IMPOSITION OF WITHHOLDING TAX
Neither the Trustee nor Airplanes Group will make any additional payments
to Certificateholders in respect of any withholding or deduction required to be
made by applicable law with respect to payments made on either the Notes or the
Certificates. In the event that Airplanes Group is or will be required to make a
withholding or deduction, it will use reasonable efforts to avoid the
application of such withholding taxes and may in certain circumstances redeem
the Notes (which would result in repayment of the Certificates) in the event
such withholding taxes cannot be avoided. In the event any withholding taxes are
imposed with respect to the Notes and Airplanes Group does not redeem the Notes,
the net amount of interest received by the Trustee and passed through to the
Certificateholders will be reduced by the amount of the withholding or
deduction.
LOSS OF CERTAIN IRISH TAX BENEFITS
Airplanes Limited owns 95% of the capital stock of Holding Co. and the
remaining 5% is owned by GPA Group. The 5% shareholding by GPA Group is intended
to ensure that Holding Co. and certain other Transferred Companies will continue
to be entitled to certain corporate tax benefits for Shannon, Ireland certified
companies. If GPA Group or GECAS were to reduce or relocate their respective
operations for any reason such that either party failed to maintain, among other
things, certain employment levels in Ireland or GPA Financial or GECAS were to
resign or be terminated in accordance with the terms of the Administrative
Agency Agreement and the Servicing Agreement, respectively, then Holding Co.
(and the other Irish tax resident Transferred Companies) may become subject to
Irish corporate taxation at general Irish statutory rates (currently 32%) and
may lose the ability to deduct interest payments to Airplanes Limited from their
income in computing their liability to Irish tax. Such a loss of tax benefits
would likely lead to a downgrade in the then current rating on the Certificates
and would have a materially adverse effect on Airplanes Limited's ability to pay
interest, principal and premium, if any, on the Notes issued by Airplanes
Limited. In connection with the MOU Transaction, GPA Group's 5% holding in
Holding Co. may be restructured. However, Airplanes Group has been advised by
GPA Group that any such restructuring is not expected to adversely affect the
Irish tax benefits available to Airplanes Group.
The Servicing Agreement sets out certain tax-related undertakings
(including maintaining minimum employment levels in Ireland) with respect to the
Servicer which are designed to maintain a favorable tax treatment in Ireland for
Holding Co. and the Irish tax resident Transferred Companies. In the event that
the Servicer fails to perform such undertakings and a material tax event occurs,
Airplanes Group's sole remedy will be to terminate the Servicing Agreement and
replace GECAS as the Servicer. In such circumstances, there is no assurance that
the Airplanes Group would be able to find a servicer to replace GECAS.
Upon the scheduled termination of the preferential tax rate on December 31,
2005, Holding Co. and the other Irish tax resident Transferred Companies will
become subject to Irish corporate tax on their net trading income at a 12 1/2%
rate as announced by the Minister for Finance of Ireland on December 3, 1997.
According to such announcement, non-trading income will be taxed at 25%. There
can be no assurance that the announced rates will be adopted as law in Ireland
or that, if adopted, such rates will not thereafter be changed. However,
assuming Holding Co. and the other Irish tax resident Transferred Companies
continue to be entitled to the benefit of the 10% corporate tax rate for
Shannon, Ireland certified companies until
26
<PAGE> 28
December 31, 2005, they will continue to be able to deduct interest payments to
Airplanes Limited in computing their Irish income tax liability and will
continue to be in a position to make such interest payments without deduction
for withholding beyond 2005.
THE AIRCRAFT, RELATED LEASES AND COLLATERAL
PORTFOLIO INFORMATION -- THE AIRCRAFT
At March 31, 1998, Aircraft representing 93.36% by Appraised Value hold or
are capable of holding a noise certificate issued under Chapter 3 of Volume 1,
Part II of Annex 16 of the Chicago Convention (the "Chicago Convention") or have
been shown to comply with the Stage 3 noise levels set out in Section 36.5 of
Appendix C of Part 36 of the United States Federal Aviation Regulations ("Stage
3 aircraft") (assuming for this purpose that turboprop Aircraft are Stage 3
aircraft). The remaining 6.64% of the Aircraft by Appraised Value are of an
aircraft type that holds or is capable of holding a noise certificate issued
under Chapter 2 of the Chicago Convention or have been shown to comply with the
Stage 2 noise levels ("Stage 2 aircraft") and do not comply with the
requirements for a Stage 3 aircraft. Stage 2 aircraft are noisier than Stage 3
aircraft. A number of jurisdictions have adopted or are in the process of
adopting, noise regulations restricting the future operation of aircraft that do
not meet Stage 3 noise requirements.
27
<PAGE> 29
The following table sets forth the exposure of the Portfolio to certain
individual lessees, calculated as of March 31, 1998 by reference to the
Appraised Value of the Aircraft as of January 23, 1998.
<TABLE>
<CAPTION>
NUMBER OF % OF PORTFOLIO BY
LESSEE(1) AIRCRAFT APPRAISED VALUE
- --------- --------- -----------------
<S> <C> <C>
Varig....................................................... 4 6.78
Aerovias de Mexico S.A. de C.V. ("AEROMEXICO").............. 11 5.64
Canadian Airlines International Limited ("CANADIAN
AIRLINES")................................................ 13 5.57
Turk Hava Yollari A.O. ("THY").............................. 7 4.79
Burlington Air Express, Inc. ("BURLINGTON AIR")............. 10 4.20
Aerovias Nacionales de Colombia S.A. ("AVIANCA")............ 5 3.59
Airtours International Airways Limited ("AIRTOURS")......... 4 3.34
Transbrasil................................................. 2 3.05
Compania Mexicana de Aviacion S.A. de C.V ("MEXICANA")...... 8 2.87
Transportes Aereos Regionais S.A. ("TAM")................... 6 2.58
Air Espana S.A. ("AIR EUROPA").............................. 4 2.51
Malev....................................................... 7 2.40
China Southern.............................................. 4 2.26
Other (62 Lessees).......................................... 126 48.66
Off-Lease(2)................................................ 4 1.76
--- ------
Total.................................................. 215 100.00
=== ======
</TABLE>
- ---------------
(1) Total number of Lessees = 75
(2) Of the four Aircraft off-lease, two are the subject of lease contracts and
one is the subject of a non-binding letter of intent to lease and one is
expected to be sold for scrap after March 31, 1998.
28
<PAGE> 30
The following table sets forth the exposure of Airplanes Group's portfolio
of Aircraft by type of aircraft, calculated by reference to the number of
Aircraft at March 31, 1998 and the Appraised Value of the Aircraft as of January
23, 1998. For the purpose of the following table, turboprop Aircraft are assumed
to be Stage 3 aircraft.
<TABLE>
<CAPTION>
NUMBER OF ENGINE % OF PORTFOLIO BY
MANUFACTURER TYPE OF AIRCRAFT AIRCRAFT BODY TYPE STAGE APPRAISED VALUE
- ------------ ---------------- --------- ---------- ------ -----------------
<S> <C> <C> <C> <C> <C>
Boeing (46.10%)................ 727-200A 2 Narrowbody 2 0.22
737-200A 30 Narrowbody 2 4.51
737-200QC 2 Narrowbody 2 0.44
737-300 11 Narrowbody 3 6.49
737-400 22 Narrowbody 3 15.61
737-500 11 Narrowbody 3 6.22
747-200BC 1 Widebody 3 0.99
757-200 3 Narrowbody 3 3.36
767-200ER 1 Widebody 3 1.40
767-300ER 4 Widebody 3 6.86
McDonnell Douglas (30.39%)..... DC8-71F 18 Narrowbody 3 7.58
DC8-73CF 1 Narrowbody 3 0.52
DC9-14 2 Narrowbody 2 0.05
DC9-15 6 Narrowbody 2 0.15
DC9-32 6 Narrowbody 2 0.79
DC9-51 4 Narrowbody 2 0.49
MD11 3 Widebody 3 6.31
MD82 2 Narrowbody 3 0.96
MD83 23 Narrowbody 3 13.15
MD87 1 Narrowbody 3 0.40
Airbus (11.34%)................ A300-B4-100 3 Widebody 3 0.46
A300-B4-203 2 Widebody 3 0.66
A300-C4-203 1 Widebody 3 0.43
A320-200 12 Narrowbody 3 9.79
Fokker (6.85%)................. F100 16 Narrowbody 3 6.85
Bombardier De Havilland
(4.53%)...................... DHC8-100 5 Turboprop 3 0.82
DHC8-102 1 Turboprop 3 0.13
DHC8-300 6 Turboprop 3 1.45
DHC8-300A 9 Turboprop 3 2.14
Other (0.78%).................. METRO-III 3 Turboprop 3 0.12
ATR42-300 3 Turboprop 3 0.48
ATR42-320 1 Turboprop 3 0.18
--- ------
215 100.00
=== ======
</TABLE>
29
<PAGE> 31
The following table sets forth the exposure of the Portfolio as of March
31, 1998 to countries in which lessees are domiciled, calculated by reference to
the Appraised Value of the Aircraft at January 23, 1998.
<TABLE>
<CAPTION>
NUMBER OF % OF PORTFOLIO BY
COUNTRY(1) AIRCRAFT APPRAISED VALUE
- ---------- --------- -----------------
<S> <C> <C>
Brazil...................................................... 15 14.11
United States............................................... 24 9.89
Turkey...................................................... 13 8.78
Mexico...................................................... 27 8.70
Canada...................................................... 16 6.25
United Kingdom.............................................. 9 4.71
Colombia.................................................... 8 4.65
Spain....................................................... 8 4.56
China....................................................... 6 3.61
Italy....................................................... 5 3.00
Chile....................................................... 10 2.96
Sweden...................................................... 2 2.84
Ireland..................................................... 5 2.43
Other Countries (25 countries).............................. 63 21.76
Off-Lease(2)................................................ 4 1.76
--- ------
Total.................................................. 215 100.00
=== ======
</TABLE>
- ---------------
(1) Total number of countries = 38
(2) Of the four Aircraft off-lease, two are subject to lease contracts and one
is the subject of a non-binding letter of intent to lease and one is
expected to be sold for scrap after March 31, 1998.
The following table sets forth the exposure of the Portfolio by regions in
which lessees are domiciled, calculated by reference to number of Aircraft as of
March 31, 1998 and the Appraised Value of the Aircraft as of January 23, 1998.
<TABLE>
<CAPTION>
NUMBER OF % OF PORTFOLIO BY
REGION AIRCRAFT APPRAISED VALUE
- ------ --------- -----------------
<S> <C> <C>
Europe (excluding CIS Countries)............................ 64 35.24
Latin America............................................... 77 34.06
North America............................................... 40 16.14
Asia & Far East............................................. 20 10.42
Africa...................................................... 3 1.56
Others (including CIS Countries)............................ 3 0.51
Australia & New Zealand..................................... 4 0.30
Off-Lease(1)................................................ 4 1.76
--- ------
Total.................................................. 215 100.00
=== ======
</TABLE>
- ---------------
(1) Of the four Aircraft off-lease, two are subject to lease contracts and one
is the subject of a non-binding letter of intent to lease and one is
expected to be sold for scrap after March 31, 1998.
30
<PAGE> 32
The following table sets forth the exposure of the Portfolio by year of
aircraft manufacture or conversion to freighter, calculated as of March 31, 1998
by reference to the Appraised Value of the Aircraft as of January 23, 1998.
<TABLE>
<CAPTION>
NUMBER OF % OF PORTFOLIO BY
YEAR OF MANUFACTURER/FREIGHTER CONVERSION AIRCRAFT APPRAISED VALUE
- ----------------------------------------- --------- -----------------
<S> <C> <C>
1988........................................................ 15 5.10
1989........................................................ 9 4.44
1990........................................................ 19 9.68
1991........................................................ 43 23.43
1992........................................................ 54 39.81
1993........................................................ 7 3.34
Other....................................................... 68 14.20
--- ------
Total..................................................... 215 100.00%
=== ======
</TABLE>
The following table sets forth the exposure of the Portfolio by seat
category calculated as of March 31, 1998 by reference to the Appraised Value as
of January 23, 1998.
<TABLE>
<CAPTION>
NUMBER OF % OF PORTFOLIO BY
SEAT CATEGORY AIRCRAFT TYPES AIRCRAFT APPRAISED VALUE
- ------------- -------------- --------- -----------------
<S> <C> <C> <C>
less than 51 DHC8, Metro-III, ATR42............................ 28 5.32
51-90 DC9-14/15......................................... 8 0.19
91-120 B737-200, B737-500, DC9-32/51, MD87, F100......... 68 19.26
121-170 B727-200,B737-300/400, MD82/83, A320-200.......... 72 46.22
171-240 B757-200, B767-200ER.............................. 4 4.76
241-350 B767-300ER, MD11, A300............................ 13 14.71
351 and above B747-200(1)....................................... 1 0.99
Freighter B737-200C, DC8-71F/73CF........................... 21 8.54
--- ------
215 100.00
=== ======
</TABLE>
- ---------------
(1) At March 31, 1998, this Aircraft was undergoing conversion to freighter
configuration, which was completed by April 30, 1998.
31
<PAGE> 33
Further particulars of the Portfolio as of March 31, 1998 (except for Appraised
Values which are as of January 23, 1998) are contained in the table below.
AIRPLANES GROUP PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
AIRCRAFT ENGINE SERIAL
REGION COUNTRY LESSEE TYPE CONFIGURATION NUMBER
- ------ ------- ------ ------------- --------------- ------
<S> <C> <C> <C> <C> <C>
Africa Tunisia Nouvelair Tunisie MD83 JT8D-219 49442
Tunisia Nouvelair Tunisie MD83 JT8D-219 49624
Tunisia Nouvelair Tunisie MD83 JT8D-219 49672
Asia & Far East China China Southern B737-500 CFM56-3C1 24897
China China Southern B737-500 CFM56-3C1 25182
China China Southern B737-500 CFM56-3C1 25183
China China Southern B737-500 CFM56-3C1 25188
China China Southwest B757-200 RB211-695E4-37 26156
China Xiamen B737-200QC JT8D-17A 23066
India Jet Airways B737-400 CFM56-3C1 24345
India Jet Airways B737-400 CFM56-3C1 24687
India Jet Airways B737-500 CFM56-3C1 25191
Indonesia PT Mandala Airlines B737-200A JT8D-15 22396
Indonesia PT Mandala Airlines B737-200A JT8D-17A 23023
Indonesia Sempati F100 TAY650-15 11336
Indonesia Sempati F100 TAY650-15 11339
Indonesia Sempati F100 TAY650-15 11347
Indonesia Sempati(1) F100 TAY650-15 11266
Malaysia Air Asia B737-300 CFM58-3C1 24907
Pakistan Pakistan Int. Airline A300-B4-203 CF6-50C2 269
Philippines Philippine Airlines B737-300 CFM56-3B1 24770
South Korea Asiana Airlines B737-400 CFM56-3C1 24493
South Korea Asiana Airlines B737-400 CFM56-3C1 24520
Australia & New Zealand Australia National Jet Systems DHC8-100 PW121 229
New Zealand Air Nelson METRO-III TPE331-11 705
New Zealand Air Nelson METRO-III TPE331-11 711
New Zealand Air Nelson METRO-III TPE331-11 712
Europe Austria Rheintalflug DHC8-300 PW123 307
France Air France A320-200 CFM56-5A3 203
France Air France A320-200 CFM56 220
France Air Liberte, S.A. MD83 JT8D-219 49943
Germany Estago
Anlagen-Vermietungs MD83 JT8D-219 49620
Hungary Malev B737-200A JT8D-15 21735
Hungary Malev B737-200A JT8D-15 22090
Hungary Malev B737-200A JT8D-17A 22803
Hungary Malev B737-200A JT8D-17A 22804
Hungary Malev B737-200A JT8D-15 22979
Hungary Malev B737-400 CFM56-3C1 26069
Hungary Malev B737-400 CFM56-3C1 26071
Ireland Aer Lingus B737-400 CFM56-3C1 24689
Ireland Aer Lingus B737-400 CFM56-3C1 24690
Ireland Aer Lingus B737-400 CFM56-3C1 25180
Ireland Transaer International A300-B4-100 CF6-50C2 12
Ireland Transaer International A300-B4-100 CF6-50C2 20
Italy Air One SpA B737-300 CFM56-3C1 25179
Italy Air One SpA B737-300 CFM56-3C1 25187
Italy Eurofly MD83 JT8D-219 49390
Italy Eurofly MD83 JT8D-219 49631
Italy Meridiana SpA MD83 JT8D-219 49792
Netherlands Schreiner Airways DHC8-300 PW123 232
Netherlands Schreiner Airways DHC8-300A PW123 276
Netherlands Schreiner Airways DHC8-300A PW123 283
Netherlands Schreiner Airways DHC8-300A PW123 298
Netherlands Schreiner Airways DHC8-300A PW123 300
<CAPTION>
APPRAISED
VALUE AT
DATE OF JANUARY 23,
MANUFACTURE/ 1998
REGION CONVERSION (US$000'S)
- ------ ------------- -----------
<S> <C> <C>
Africa 29-Apr-87 19,375
01-Aug-88 19,433
01-Jul-88 20,030
Asia & Far East 26-Feb-91 20,635
03-Feb-92 21,513
14-Feb-92 21,587
12-Mar-92 21,362
25-Nov-92 42,410
09-Dec-83 8,382
01-Jun-89 24,412
25-May-90 26,572
10-Apr-92 21,267
01-Feb-81 6,727
30-Mar-83 7,153
05-Jun-91 16,367
01-Jul-91 16,420
01-Oct-91 16,493
17-Aug-90 11,889
01-Mar-91 24,507
11-Aug-83 12,652
01-Oct-90 22,962
14-Jul-89 24,397
21-Dec-89 24,802
Australia & New Zealand 01-Sep-90 7,000
01-Aug-88 1,483
01-Mar-88 1,490
01-Jun-88 1,467
Europe 01-Dec-91 8,977
01-Sep-91 29,520
01-Sep-91 29,757
01-Jul-91 23,568
01-Jul-88 19,772
01-Jun-79 5,922
01-May-80 6,455
14-Feb-83 7,160
01-Feb-83 7,120
01-Mar-83 6,940
02-Nov-92 28,337
13-Nov-92 28,298
03-Jul-90 26,202
01-Jul-90 25,655
21-Jan-92 27,480
20-May-75 5,850
01-Oct-75 6,150
12-Feb-92 26,107
14-Mar-92 25,767
01-Apr-86 19,250
14-Jun-89 20,765
01-Nov-89 21,118
20-Oct-90 8,163
13-May-91 8,853
01-Sep-91 8,963
01-Apr-92 9,202
01-Apr-92 9,275
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
AIRCRAFT ENGINE SERIAL
REGION COUNTRY LESSEE TYPE CONFIGURATION NUMBER
- ------ ------- ------ ------------- --------------- ------
<S> <C> <C> <C> <C> <C>
Europe Netherlands Transavia B737-300 CFM56-3C1 24905
Norway Wideroe's Flyveselskap
a/s DHC8-300 PW123 293
Norway Wideroe's Flyveselskap
a/s DHC8-300 PW123 342
Spain Air Europa B737-300 CFM56-3B2 23749
Spain Air Europa B737-300 CFM56-3B2 23923
Spain Air Europa B737-400 CFM56-3C1 24906
Spain Air Europa B737-400 CFM56-3C1 24912
Spain IBERIA(5) DC8-71F CFM56-2C1 45945
Spain Spanair MD83 JT8D-219 49626
Spain Spanair MD83 JT8D-219 49709
Spain Spanair MD83 JT8D-219 49938
Sweden Blue Scandinavia AB B757-200 RB2110-535E4-37 26151
Sweden SAS B767-300ER PW4060 25411
Switzerland Edelweiss Air AG MD83 JT8D-219 49935
Switzerland Edelweiss Air AG MD83 JT8D-219 49951
Turkey Istanbul B737-400 CFM56-3C1 24683
Turkey Istanbul B737-400 CFM56-3C1 24691
Turkey MNG Airlines A300-C4-203 CF6-50C2 83
Turkey Pegasus B737-400 CFM56-3C1 24684
Turkey Pegasus B737-400 CFM56-3C1 26081
Turkey Sun Express B737-400 CFM56-3C1 25190
Turkey Turk Hava Yollari B737-400 CFM56-3C1 24917
Turkey Turk Hava Yollari B737-400 CFM56-3C1 25181
Turkey Turk Hava Yollari B737-400 CFM56-3C1 25184
Turkey Turk Hava Yollari B737-400 CFM56-3C1 25261
Turkey Turk Hava Yollari B737-500 CFM56-3C1 25288
Turkey Turk Hava Yollari B737-500 CFM56-3C1 25289
Turkey Turk Hava Yollari B737-400 CFM56-3C1 26065
United Kingdom Airtours International A320-200 CFM56 294
United Kingdom Airtours International A320-200 CFM56 301
United Kingdom Airtours International A320-200 CFM56 348
United Kingdom Airtours International A320-200 CFM56-5A3 349
United Kingdom British Midland B737-500 CFM56-3C1 25185
United Kingdom Brymon Airways DHC8-300A PW123 296
United Kingdom Brymon Airways DHC8-300 PW123 334
United Kingdom Titan Airways ATR42-300 PW120 109
United Kingdom Titan Airways ATR42-300 PW120 113
Latin America Antigua Liat DHC8-102 PW120-A 113
Antigua Liat DHC8-100 PW120-A 140
Antigua Liat DHC8-100 PW120-A 144
Antigua Liat(4) DHC8-100 PW120-A 270
Argentina Aerolineas Argentinas B737-200A JT8D-17 21192
Argentina LAPA B737-200A JT8D-17 21193
Argentina LAPA B737-200A JT8D-17 21196
Argentina LAPA B737-200A JT8D-15 22278
Argentina LAPA B737-200A JT8D-15 22368
Argentina LAPA B737-200A JT8D-15 22369
Argentina LAPA B737-200A JT8D-15 22633
Argentina LAPA B737-200QC JT8D-17A 23065
Aruba Air Aruba MD83 JT8D-219 49950
Brazil Rio Sul B737-500 CFM56-3C1 25186
Brazil Rio Sul B737-500 CFM56-3C1 25192
Brazil Rio Sul B737-500 CFM56-3C1 26075
Brazil TAM F100 TAY650-15 11304
Brazil TAM F100 TAY650-15 11305
Brazil TAM F100 TAY650-15 11371
Brazil TAM (Meridionais) F100 TAY650-15 11284
Brazil TAM (Meridionais) F100 TAY650-15 11285
Brazil TAM (Meridionais) F100 TAY650-15 11348
<CAPTION>
APPRAISED
VALUE AT
DATE OF JANUARY 23,
MANUFACTURE/ 1998
REGION CONVERSION (US$000'S)
- ------ ------------- -----------
<S> <C> <C>
Europe 01-Feb-91 24,723
01-Oct-91 9,077
01-Dec-92 10,435
01-May-87 20,337
01-Apr-88 21,730
24-Feb-91 26,300
14-Jun-91 26,347
19-May-92 15,322
22-Oct-88 19,378
01-Dec-88 19,930
01-Dec-90 22,325
23-Jul-92 42,303
15-Jan-92 64,820
26-Sep-90 22,175
25-Aug-91 23,183
07-Aug-90 25,695
09-Aug-90 25,757
01-May-79 16,145
01-Apr-90 25,677
10-Mar-93 29,003
07-Apr-92 27,992
24-Jun-91 26,838
03-Feb-92 27,658
02-Mar-92 27,748
09-Apr-92 27,807
16-Jun-92 21,300
12-Jun-92 21,297
01-May-92 27,923
02-Apr-92 31,642
22-Apr-92 31,415
17-Jun-92 31,157
30-Oct-92 31,707
18-Feb-92 21,207
01-Oct-91 9,283
08-Oct-92 9,920
14-Oct-88 5,513
18-Nov-88 5,537
Latin America 01-Sep-88 4,922
01-Mar-89 5,160
01-Mar-89 5,590
01-May-91 6,337
01-Mar-76 4,742
01-Jul-76 4,628
01-Jul-76 4,680
19-Mar-80 6,048
01-Sep-80 6,187
01-Sep-80 6,468
01-Mar-81 7,243
15-Oct-96 8,263
01-Nov-91 23,552
11-Mar-92 21,188
14-Apr-92 21,158
23-Oct-92 21,613
27-Feb-91 16,000
19-Apr-91 16,127
19-Dec-91 17,050
31-Jul-90 15,683
01-Aug-90 15,658
06-Aug-91 16,553
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
AIRCRAFT ENGINE SERIAL
REGION COUNTRY LESSEE TYPE CONFIGURATION NUMBER
- ------ ------- ------ ------------- --------------- ------
<S> <C> <C> <C> <C> <C>
Latin America Brazil Transbrasil B767-300ER PW4060 24948
Brazil Transbrasil B767-200ER PW4056 25421
Brazil VARIG MD11 CF6-80C2-D1F 48499
Brazil VARIG MD11 CF6-80C2-D1F 48500
Brazil VARIG MD11 CF6-80C2-D1F 48501
Brazil VARIG(1) B737-300 CFM56-3B2 26852
Chile Fast Air(5) DC8-71F CFM56-2C1 45810
Chile Fast Air(5) DC8-71F CFM56-2C1 45970
Chile Fast Air(5) DC8-71F CFM56-2C1 45976
Chile Fast Air(5) DC8-71F CFM56-2C1 45996
Chile Fast Air(5) DC8-71F CFM56-2C1 45997
Chile Lan Chile Airlines B737-200A JT8D-15 21960
Chile Lan Chile Airlines B737-200A JT8D-15 22397
Chile Lan Chile Airlines B737-200A JT8D-17A 22407
Chile Lan Chile Airlines B737-200A JT8D-15 22632
Chile Lan Chile Airlines B737-200A JT8D-17A 23024
Colombia ACES ATR42-320 PW121-5A1 284
Colombia Avianca B757-200 RB211-535E4-37 26154
Colombia Avianca MD83 JT8D-219 49939
Colombia Avianca MD83 JT8D-219 49946
Colombia Avianca MD83 JT8D-219 53120
Colombia Avianca MD83 JT8D-219 53125
Colombia Tampa(5) DC8-71F CFM56-2C1 45849
Colombia Tampa(5) DC8-71F CFM56-2C1 46066
Mexico Aerocalifornia DC9-14 JT8D-7B 45736
Mexico Aerocalifornia DC9-14 JT8D-7B 45743
Mexico Aerocalifornia DC9-15 JT8D-7A 45785
Mexico Aerocalifornia DC9-15 JT8D-7B 45786
Mexico Aerocalifornia DC9-15 JT8D-7A 47059
Mexico Aerocalifornia DC9-15 JT8D-7A 47085
Mexico Aerocalifornia DC9-15 JT8D-7A 47122
Mexico Aerocalifornia DC9-15 JT8D-7A 47126
Mexico Aeromexico B767-300ER PW4060 26200
Mexico Aeromexico B767-300ER PW4060 26204
Mexico Aeromexico DC9-32 JT8D-17 48125
Mexico Aeromexico DC9-32 JT8D-17 48126
Mexico Aeromexico DC9-32 JT8D-17 48127
Mexico Aeromexico DC9-32 JT8D-17 48128
Mexico Aeromexico DC9-32 JT8D-17 48129
Mexico Aeromexico DC9-32 JT8D-17 48130
Mexico Aeromexico MD82 JT8D-217 49660
Mexico Aeromexico MD82 JT8D-217A 49667
Mexico Aeromexico MD87 JT8D-219 49673
Mexico Mexicana F100 TAY650-15 11309
Mexico Mexicana F100 TAY650-15 11319
Mexico Mexicana F100 TAY650-15 11374
Mexico Mexicana F100 TAY650-15 11375
Mexico Mexicana F100 TAY650-15 11382
Mexico Mexicana F100 TAY650-15 11384
Mexico Mexicana B727-200A JT8D-17R 21346
Mexico Mexicana B727-200A JT8D-17R 21600
Netherlands Antilles ALM DHC8-300C PW123 230
Netherlands Antilles ALM DHC8-300C PW123 242
Peru Aerosanta B737-200A JT8D-17 21206
Trinidad & Tobago BWIA International MD83 JT8D-219 49789
North America Canada BOMBARDIER INC DHC8-300 PW123 244
Canada BOMBARDIER INC DHC8-300A PW123 266
Canada BOMBARDIER INC DHC8-300A PW123 267
Canada Canadian Airlines A320-200 CFM56-5A1 174
<CAPTION>
APPRAISED
VALUE AT
DATE OF JANUARY 23,
MANUFACTURE/ 1998
REGION CONVERSION (US$000'S)
- ------ ------------- -----------
<S> <C> <C>
Latin America 19-Jul-91 62,190
14-Jan-92 52,783
31-Dec-91 77,133
01-Mar-92 79,643
01-Sep-92 80,740
20-Apr-92 17,846
09-Apr-92 15,865
15-Oct-92 15,532
10-Aug-91 16,482
29-Oct-92 15,983
07-Dec-93 15,388
01-Mar-80 6,007
01-Feb-81 6,418
01-Sep-80 6,740
01-Feb-82 6,225
01-May-83 6,707
01-Jan-92 6,943
22-Sep-92 41,807
26-Oct-90 22,422
18-Jul-91 23,077
29-Jul-92 23,957
02-Apr-92 24,037
09-Mar-91 16,495
24-Apr-91 16,283
01-Aug-66 983
01-May-66 840
01-Nov-66 892
01-Mar-67 1,035
01-May-67 887
01-Jul-67 887
01-Dec-67 853
01-Oct-68 933
01-Sep-92 65,537
01-Oct-92 65,965
01-Apr-80 4,840
01-Apr-80 4,860
01-Jul-80 4,850
01-Aug-80 4,903
01-Nov-80 4,938
01-Dec-80 5,195
01-Mar-88 18,128
21-Jan-88 18,065
01-Dec-88 15,048
16-May-91 16,007
05-Apr-91 15,962
20-Jan-92 16,920
01-Dec-92 16,977
01-Jan-93 16,970
01-Jan-93 17,030
01-Oct-80 4,093
01-Nov-80 4,062
01-Feb-91 8,730
01-Nov-90 8,633
26-Feb-76 4,940
23-Sep-89 21,352
North America 01-Dec-90 8,075
20-Mar-91 8,717
04-Apr-91 8,772
1-Apr-91 29,438
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
AIRCRAFT ENGINE SERIAL
REGION COUNTRY LESSEE TYPE CONFIGURATION NUMBER
- ------ ------- ------ ------------- --------------- ------
<S> <C> <C> <C> <C> <C>
North America Canada Canadian Airlines A320-200 CFM56-5A1 175
Canada Canadian Airlines A320-200 CFM56-5A1 232
Canada Canadian Airlines A320-200 CFM56-5A1 284
Canada Canadian Airlines A320-200 CFM56-5A1 309
Canada Canadian Airlines A320-200 CFM56-5A1 404
Canada Canadian Airlines(1) B737-200A JT8D-9A 20922
Canada Canadian Airlines(1) B737-200A JT8D-9A 20958
Canada Canadian Airlines(1) B737-200A JT8D-9A 20959
Canada Canadian Airlines(1) B737-200A JT8D-9A 21115
Canada Canadian Airlines(1) B737-200A JT8D-9A 21639
Canada Canadian Airlines(1) B737-200A JT8D-9A 21712
Canada Canadian Airlines(1) B737-200A JT8D-9A 22873
United States of America Alleghany Airlines DHC8-100 PW121 258
United States of America America West B737-300 CFM56-3B1 23499
United States of America America West B737-300 CFM56-3B1 23500
United States of America Burlington Air
Express(5) DC8-71F CFM56-2C1 45811
United States of America Burlington Air
Express(5) DC8-71F CFM56-2C1 45813
United States of America Burlington Air
Express(5) DC8-71F CFM56-2C1 45946
United States of America Burlington Air
Express(5) DC8-71F CFM56-2C1 45971
United States of America Burlington Air
Express(5) DC8-71F CFM56-2C1 45973
United States of America Burlington Air
Express(5) DC8-71F CFM56-2C1 45978
United States of America Burlington Air
Express(5) DC8-71F CFM56-2C1 45993
United States of America Burlington Air
Express(5) DC8-71F CFM56-2C1 45994
United States of America Burlington Air
Express(5) DC8-71F CFM56-2C1 45998
United States of America Burlington Air
Express(5) DC8-71F CFM56-2C1 46065
United States of America Frontier B737-300 CFM56-3B1 23177
United States of America Hawaiian Airlines DC9-51 JT8D-17 47742
United States of America Hawaiian Airlines DC9-51 JT8D-17 47784
United States of America Hawaiian Airlines DC9-51 JT8D-17 47796
United States of America Hawaiian Airlines DC9-51 JT8D-17 48122
United States of America Idefix ATR42-300 PW120 249
United States of America Reno Air MD-83 JT8D-219 49941
United States of America Reno Air MD-83 JT8D-219 49949
United States of America SAT(5) DC8-73CF CFM56-2C1 46091
United States of America Tower Air(4) B747-200BC JT9D-7Q 21730
United States of America TWA MD83 JT8D-219 49575
Others Cyprus Fornax Aircraft Leasing B737-200A JT8D-17 21685
Lithuania Lithuanian Airlines B737-200A JT8D-15 22453
Ukraine Ukraine International B737-200A JT8D-17A 22802
Off Lease Off Lease A300-B4-100 CF6-50C2 9
Off Lease - Lease
Spanair (3) MD83 JT8D-219 49336
Off Lease - Lease
Transaer (3) A300-B4-203 CF6-50C2 131
Off Lease - Lease LOI
Travel Servis (2) B737-400 CFM56-3C1 24911
<CAPTION>
APPRAISED
VALUE AT
DATE OF JANUARY 23,
MANUFACTURE/ 1998
REGION CONVERSION (US$000'S)
- ------ ------------- -----------
<S> <C> <C>
North America 01-Apr-91 29,422
01-Oct-91 29,547
09-Mar-92 30,552
13-May-92 30,457
01-Jan-94 34,267
01-Aug-74 2,082
01-Jan-75 2,397
01-Nov-74 2,397
01-Dec-75 2,897
01-Nov-78 4,119
01-Feb-79 4,510
01-Jul-82 7,837
01-Jan-91 6,700
01-Jun-88 20,983
01-Jun-88 20,592
30-May-91 15,263
28-Apr-92 16,013
23-Apr-92 15,733
13-Feb-92 15,907
27-Feb-92 15,880
23-Apr-93 16,068
23-Jun-93 16,068
01-Sep-94 15,708
21-May-93 15,273
12-Jan-92 16,107
01-Apr-86 18,808
01-Jun-77 4,162
01-May-79 4,562
01-Apr-79 4,632
26-Jan-81 5,173
01-Jun-91 6,997
01-Dec-90 22,170
05-Aug-91 23,100
01-Dec-89 19,723
07-Jun-79 37,473
01-Oct-87 19,363
Others 01-Jan-79 5,737
01-Mar-81 6,165
01-Feb-83 7,373
Off Lease 26-Dec-74 5,200
05-Oct-90 22,012
07-Feb-81 12,135
01-Apr-91 26,843
---------
3,766,296
=========
</TABLE>
- ---------------
(1) Aircraft Lease Receivable Book Values are used for the Aircraft subject to
Finance Leases (9 in total) rather than the Appraised Values of these
Aircraft.
(2) "Lease LOI" denotes Aircraft subject to non-binding Letter of Intent for
operating lease. This Aircraft was delivered to the lessee subsequent to
March 31, 1998.
(3) These Aircraft are subject to lease contracts and are scheduled for delivery
to the relevant lessee after March 31, 1998.
(4) As these Aircraft only became subject to Finance Leases (2 in total)
subsequent to January 23, 1998, they have been included at their Appraised
Values.
35
<PAGE> 37
(5) The following table sets forth the date of original manufacture for the
Aircraft that were converted to freighter Aircraft:
<TABLE>
<CAPTION>
DATE OF
SERIAL NO. MANUFACTURE
- ---------- -----------
<S> <C>
45810............................ May-67
45811............................ Aug-67
45813............................ Jan-67
45849............................ Apr-67
45945............................ Mar-68
45946............................ Mar-68
45970............................ Mar-68
45971............................ May-68
45973............................ May-68
45976............................ Jul-68
</TABLE>
<TABLE>
<CAPTION>
DATE OF
SERIAL NO. MANUFACTURE
- ---------- -----------
<S> <C>
45978............................ Jul-68
45993............................ Aug-68
45994............................ Aug-68
45996............................ Oct-68
45997............................ Oct-68
45998............................ Oct-68
46065............................ Jun-69
46066............................ Jun-69
46091............................ Apr-70
</TABLE>
APPRAISALS
The Appraisers have provided Appraisals (without physical inspection) of
the value of each of the Aircraft at normal utilization rates in an open,
unrestricted and stable market as of January 23, 1998, adjusted to account for
the reported maintenance standard of the Aircraft. The Appraisals do not reflect
the value of the leases, Maintenance Reserves, Security Deposits or other
Related Collateral, if any. The Appraisals explain the methodology used to
determine the values for the Aircraft. Based on the Appraisals, the aggregate
Base Values calculated by each of the three Appraisers based on a Portfolio of
215 Aircraft are $3,909 million in the case of BK Associates, Inc., $3,887
million in the case of Aircraft Information Services, Inc. and $3,545 million in
the case of Airclaims Limited ($3,992 million, $3,980 million and $3,648
million, respectively, if the six Aircraft which were delivered to Emery during
April 1998 are included in the Portfolio). The aggregate Appraised Value of the
Aircraft is $3,766 million ($3,859 million if the six Aircraft which were
delivered to Emery during April 1998 are included in the Portfolio), which is
approximately $14 million lower than the average of the aggregate Base Values
calculated by the three Appraisers because Aircraft subject to finance leases
have been included in the computation of the Appraised Value of the Portfolio at
Airplanes Group's net book value (which represents the value of amounts payable
by the finance lessees) rather than the Aircraft's Base Value. Airplanes Group
believes that, due to current excess supply of certain aircraft in the market,
including in particular certain turboprop, Stage 2 and older wide-body aircraft,
the value of the Aircraft in the current market (as compared with the "stable
market environment with a reasonable balance of supply and demand" and the other
factors assumed in the determination of Base Value) is less than, and is likely
to be substantially less than, the Appraised Value. Furthermore, neither the
Appraised Value nor the value of the Aircraft in the current market should be
relied upon as a measure of the realizable value of the Aircraft. If it were
necessary to dispose of Aircraft in a distress situation, and particularly if a
large number of Aircraft were required to be sold, the proceeds from such a sale
would be substantially less than even the value in the current market. However,
Airplanes Group does not expect to have to sell Aircraft to provide for payment
of principal and interest on the Notes, and does not anticipate conducting any
distress sales. Nevertheless, there can be no assurance that Airplanes Group
would not have to sell one or more Aircraft in a distress sale situation at
prices significantly less than their Appraised Value.
Rental rates and aircraft values depend on a number of factors that are not
within the control of Airplanes Group. See "-- Risk Factors -- Aircraft Risks --
Cyclicality of Supply of and Demand for Aircraft" and "-- Risk of Decline in
Aircraft Values" and "-- Risks Relating to the Leases -- Risk of Decline in
Rental Rates" above.
The standards of maintenance observed by the lessees and the condition of
the Aircraft at the time of sale may also affect the rental rates and values of
the Aircraft. Under each existing lease, it is the responsibility of the lessee
to maintain the Aircraft and to comply with all governmental requirements
applicable to such lessee or the Aircraft, including, without limitation,
operational, maintenance and registration requirements, and, in most cases,
manufacturer recommendations, although in certain cases the lessor has agreed to
participate in the cost of certain required modifications to the Aircraft. For a
description of general economic and industry
36
<PAGE> 38
specific factors affecting rental rates and aircraft values, as well as certain
risks associated with a lessee's failing to perform its obligations under a
lease, see "-- Risk Factors -- Aircraft Risks -- Cyclicality of Supply of and
Demand for Aircraft" and "-- Risk of Decline in Aircraft Values" and "-- Risks
Relating to the Leases -- Risk of Decline in Rental Rates" and "-- Failure to
Perform Aircraft Maintenance" above.
THE LEASES
GENERAL
All leases are managed by the Servicer pursuant to the Servicing Agreement.
There is a reasonable degree of standardization in Airplanes Group's
existing lease documentation although variations do exist as a result of lessee
negotiation. Under the majority of the existing leases, the lessee is
responsible for all operating expenses, including maintenance, fuel, crews,
airport and navigation charges, taxes, licenses, registration and insurance,
including public liability insurance as described below.
Each Airplanes Group current lease requires the lessee to make periodic
Rental Payments during the lease term. The majority of current leases had an
original term in excess of five years and certain existing leases include
options for the lessee or the lessor to extend the term of the lease with Rental
Payments either similar to the rent payable during the original term or at
future market rates. Substantially all existing Airplanes Group lessees are
required to make payments to the relevant lessor without set-off or
counterclaim, and most existing leases include an obligation of the relevant
lessee to gross-up payments under such lease where payments are subject to
withholding and other taxes.
Each Airplanes Group existing lease specifies certain provisions regarding
the rights and remedies of the lessor in the event of a default by the relevant
lessee in the performance of its financial or other obligations under such
lease. These remedies include the right to terminate the lease and/or to
repossess the Aircraft. Depending on the jurisdiction, the rights of the lessor
may be significantly impaired if there is an event of default due to the
relevant lessee's bankruptcy, as a result of, inter alia, extended mandatory
waiting periods between default and repossession, or reductions in the amount
of, or delays in the receipt of, payments under the lease.
MAINTENANCE
The leases contain detailed provisions specifying maintenance standards and
the required conditions of Aircraft upon redelivery and these conditions must
generally be met at the lessee's expense. During the term of each lease,
Airplanes Group requires the lessee to maintain the applicable Aircraft in
accordance with a maintenance program approved by the state of registration.
Certain of the leases require the lessee to pay cash Maintenance Reserves
(approximately 56% of the leases by Appraised Value) or to provide maintenance
letters of credit or guarantees (approximately 10% of the leases by Appraised
Value) or a combination of both (approximately 2% of the leases by Appraised
Value). With respect to other leases, there is a specific redelivery condition
whereby the lessor relies on the credit of the lessee and the ability of the
lessee to comply with the maintenance requirements.
At least 90% of the leases provide for the Aircraft to be redelivered in a
specified condition upon expiration of the lease and/or stipulate the payments
to be made by the lessee to the lessor or, in certain cases, by the lessor to
the lessee to reflect the extent to which the actual redelivery condition of the
Aircraft falls below or exceeds the redelivery condition specified in the lease.
Heavy maintenance on significant components of an Aircraft, such as the
airframe and the engines, is generally required to be performed on a cycle of
several years and the cost of such maintenance may be material in relation to
the value of the Aircraft, with the overhaul of a single such component often
exceeding $1 million. Pursuant to the leases, if and when an Aircraft is
transferred from one lessee to another between maintenance overhauls, the
transferring lessee is generally required to pay for that portion of the
succeeding overhaul that can be attributed to its use of the Aircraft under its
lease.
37
<PAGE> 39
Many of the leases require the lessees to pay maintenance reserves or
"supplemental rent" amounts in respect of their obligations to maintain the
Aircraft. Generally, each such lease in the Portfolio bears an associated
liability on the part of the lessor to reimburse the lessee for maintenance
performed on the Aircraft, engines or parts. The obligation of Airplanes Group
to lessees not funded by reserves with respect to maintenance is included within
expenses and thus ranks in priority to any payments on the Notes. At March 31,
1998, Airplanes Group recorded approximately $315 million of maintenance reserve
liabilities. A Liquidity Reserve Amount of approximately $174.4 million is
currently maintained in the Collection Account of which $80 million relates to
the Maintenance Reserve Amount. Airplanes Group believes, following consultation
with the Administrative Agent, that this amount of $80 million, together with
projected future maintenance payments under the leases, will be sufficient,
based on an analysis of anticipated future maintenance expenses, to provide
Airplanes Group with sufficient liquidity to meet its maintenance liabilities.
This amount of cash has been determined by Airplanes Group and GPA Group to be
appropriate for the funding of Airplanes Group's maintenance reserve liabilities
based on an analysis of Airplanes Group's, GPA's and overall industry historical
experience of the frequency and cost of maintenance checks performed by lessees
relative to the projected maintenance payments to be made to Airplanes Group
under the terms of the leases.
There can be no assurance, however, that Airplanes Group's maintenance
requirements will correspond to historical experience or the industry's
experience overall, particularly as the Aircraft get older. Furthermore there
can be no assurance that actual maintenance payments by lessees and other cash
received by Airplanes Group will not be significantly less than projected.
Actual maintenance payments by lessees will depend upon numerous factors
including defaults and the ability of Airplanes Group to obtain satisfactory
maintenance terms in leases. An increasing number of leases do not provide for
any maintenance payments to be made by lessees as security for their maintenance
obligations. Any significant variations in such factors may materially adversely
affect the ability of Airplanes Group to make payments of interest, principal
and premium, if any, on the Notes.
INDEMNIFICATION AND INSURANCE
Under the terms of each lease, the lessees are required to carry the types
of insurance which are customary in the air transportation industry, including
comprehensive liability insurance and aircraft hull insurance. The relevant
lessor (and generally, if different, the owner) is named as an additional
insured on hull and liability policies carried by the lessees. The lessees are
responsible for insurance for any liabilities arising out of the operation of
the Aircraft, including any liabilities for death or injury to persons and
damage to property that ordinarily would attach to the operator of the Aircraft,
subject to customary exclusions. The coverage is usually worldwide, subject to
limitations consistent with individual operators. Under the Servicing Agreement,
the Servicer is required to monitor the lessee's performance of their respective
obligations with the insurance provisions of the applicable leases.
In certain jurisdictions, liabilities for risks for which the lessees are
required to provide insurance may also attach to the lessors and Airplanes
Group, as direct and indirect owners of the Aircraft, irrespective of fault.
Under Airplanes Group's existing leases, the lessees are currently obliged to
indemnify against such claims certain named parties and, in most cases, their
respective successors, assigns, shareholders, employees, affiliates and agents.
Under most leases, each lessee is obliged to indemnify Airplanes Limited or
Airplanes Trust, as applicable, the lessor, the relevant Aircraft Owning Company
and the Indenture Trustee as named indemnitees under the applicable lease. Most
of the leases also require the lessee to maintain the liability insurance for a
specified period between one and three years after termination of such lease to
cover liabilities that may have arisen prior to terminations but that became
known thereafter.
With respect to certain leases, the lessor may arrange separate political
risk repossession insurance for its own benefit, covering (a) confiscation,
nationalization and requisition of title of the relevant Aircraft by the
government of the country of registry and denegation and deprivation of legal
title and rights, and (b) the failure of the authorities in that country to
allow de-registration and export of the Aircraft, subject to the conditions of
the policies.
38
<PAGE> 40
THE LESSEES
As of March 31, 1998, there were 75 lessees in 38 countries throughout the
world.
Despite the continued economic recovery in the air transport industry over
the last two years, a number of the lessees remain in a relatively weak
financial position and there can be no assurance that the rate of lessee
defaults will not increase in the future. As of March 31, 1998, amounts
outstanding for a period greater than 30 days in respect of Rental Payments,
Maintenance Reserves and other miscellaneous amounts due under the leases (net
of amounts in respect of default interest and certain cash in transit) amounted
to $13.5 million in respect of 25 lessees (who had a combined total of 85
Aircraft on lease as of such date) and one former lessee ($1.7 million of the
$13.5 million related to this former lessee). Of the total $13.5 million, $2.7
million was in arrears for a period greater than 30 days, $1.8 million was in
arrears for a period greater than 60 days and $9.0 million was in arrears for a
period greater than 90 days. Certain of these lessees, as well as certain other
lessees, have consistently been significantly in arrears in their respective
Rental Payments and/or are known to be currently experiencing financial
difficulties. As of March 31, 1998, in addition to the $13.5 million in respect
of payments past due more than 30 days, five further lessees were being allowed
deferrals of rent, maintenance and miscellaneous payments totaling $13.3
million. Of the total $13.3 million, $0.2 million was outstanding for greater
than 60 days and $13.1 million was outstanding for greater than 90 days. Such
lessees are being allowed deferrals of rentals, maintenance and miscellaneous
payments for periods of up to 70 months.
In the past, restructurings have typically involved delaying rental
payments for periods of up to 12 months. In certain circumstances, rescheduling
arrangements for periods between 12 months and 60 months have been agreed. In
addition, certain restructurings have involved voluntary terminations of leases
prior to lease expiration, the replacement of Aircraft with less expensive
aircraft and the arrangement of sub-leases from the lessee to another aircraft
operator. In other cases, it has been necessary to repossess Aircraft from
lessees which have defaulted and re-lease the Aircraft to other lessees. The
premature termination of leases may, in certain circumstances, lead Airplanes
Group to incur substantial swap breakage costs under its agreements with Swap
Providers. See "Management Discussion and Analysis of Financial Condition and
Results of Operations -- Interest Rate Management".
Of the $13.5 million in arrears greater than 30 days, $4.0 million
represented arrears with respect to the two Indonesian lessees operating four
Fokker 100 Aircraft and two B737-200A Aircraft. The four Fokker 100 Aircraft and
one of the B737-200A Aircraft have been recovered from the lessees and Airplanes
Group is in the process of terminating the related leases. Airplanes Group
expects to incur significant costs in restoring the Aircraft to a suitable
technical condition for re-lease which costs have been estimated at $10 million
and have been provided for in the Financial Statements as at March 31, 1998.
The most significant deferrals, rescheduled amounts and difficult accounts,
as of March 31, 1998, are referred to below. See "-- Risk of Regional Economic
Downturns Affecting Lessee Financial Condition --".
Latin America
Lessees with respect to 34.06% of the Aircraft by Appraised Value operate
in Latin America, principally Brazil, Mexico, Colombia and Chile. The prospects
for lessee operations in these countries can be expected to be in part dependent
on the general level of political stability and economic activity and policies
in those countries. Although certain countries in Latin America have experienced
substantial improvement in their economies in the past several years which has
resulted in increased political stability and overall increased economic growth,
there can be no assurance that such progress can be maintained or that further
progress will be made. Future developments in the political systems or economies
of these countries or the implementation of future governmental policies in
these countries may have a material effect on lessee operations in those
countries.
39
<PAGE> 41
Brazil
In October 1997, Brazil 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 loss of confidence in
the Brazilian markets and currency has been associated with the economic crises
currently affecting "emerging markets" in Asia. See "-- Asia Pacific
Concentration" below. The Brazilian government has responded to these pressures
with a series of austerity measures including increased interest rates, public
spending cuts and tax increases. These measures led to widespread expectations
that economic growth in Brazil will be significantly reduced in 1998 with the
real possibility of a recession that could adversely affect the operations of
Airplanes Group's Brazilian customers.
At March 31, 1998, 15 Aircraft (or 14.11% of Airplanes Group's Portfolio by
Appraised Value) were leased to four Brazilian lessees. At March 31, 1998,
Airplanes Group had four Aircraft on lease to Varig (which included three MD11s
and one B737-300) representing 6.78% of the Portfolio by Appraised Value. Since
March 31, 1998, Varig exercised its option to purchase the B737-300 Aircraft,
which delivered on May 29, 1998. In 1994, GPA entered into a rescheduling
agreement with Varig to reschedule the repayment of $14 million in arrears over
a 48 month period. Airplanes Group assumed part of GPA's rights and obligations
under such agreement as part of the Acquisition. GPA signed this formal deferral
agreement in January 1995, under which all deferred obligations are due to be
repaid by April 1999. At March 31, 1998, the amounts outstanding for a period
greater than 90 days in respect of Varig's deferred obligations to Airplanes
Group were approximately $0.55 million. Also at March 31, 1998, there were
amounts outstanding of $0.27 million for a period greater than 30 days in
respect of one of the other three Brazilian lessees (of which $0.25 million was
outstanding for a period greater than 90 days). As at September 30, 1997,
Airplanes Group had six Fokker 100 Aircraft on lease to a Brazilian lessee, with
an average remaining lease term of 29 months. During the month ended October 31,
1997 all six leases were restructured. In consideration for an extension of the
leases for 119 months, the revised terms of the leases include rental rates
reduced by approximately 24%, no maintenance reserve payments and the return by
Airplanes Group of all previously paid maintenance reserves within 12 months.
Mexico
Mexico continues to be a significant market for aircraft, and at March 31,
1998, 27 Aircraft representing 8.70% of the Portfolio by Appraised Value, were
being operated by three Mexican operators. In December 1996, a restructuring was
completed with one Mexican lessee, Aerocalifornia, which operates eight Aircraft
representing 0.19% of the Portfolio by Appraised Value. These Aircraft are
subject to operating leases with options to purchase the Aircraft on lease
expiry. Under the restructuring agreement, all repayments were to be made over
the six month period ending June 30, 1997, after which title to the Aircraft
would transfer to the lessee under the terms of the finance leases. The lessee
failed to comply with its obligations under this agreement. A revised agreement
was entered into during January 1998 under which the lessee agreed to repay the
outstanding balance by April 1998. Since March 31, 1998, the lessee has repaid
all its obligations under this agreement and title to the Aircraft is expected
to be transferred to this lessee during June 1998. In January 1996, a formal
deferral arrangement was signed with Mexicana, another Mexican lessee which
operates eight Aircraft representing 2.87% of the Portfolio by Appraised Value.
Mexicana has agreed to repay its obligations over the four year period ending
December 31, 1999. At March 31, 1998, the amounts outstanding for a period
greater than 30 days in respect of Mexicana's deferred balance were $5.20
million (all of which was outstanding for a period greater than 90 days). The
third Mexican lessee has performed satisfactorily in the year ended March 31,
1998 and had no amounts outstanding for a period greater than 30 days at March
31, 1998.
North America
North America is an important market for Airplanes Group's Aircraft with
16.14% of the Portfolio by Appraised Value being operated in this region. At
March 31, 1998, Airplanes Group had 24 Aircraft (or 9.89% of the Portfolio by
Appraised Value) on lease to ten U.S.-based aircraft operators and 16 Aircraft
(or 6.25% of the Portfolio by Appraised Value) on lease to two Canadian aircraft
operators. Airline industry profitability in
40
<PAGE> 42
North America has enjoyed a sustained improvement since 1993 due to a
combination of traffic growth in line with the overall expansion of the economy
in that region and relatively small growth in aircraft seat capacity, leading to
a significant increase in load factors. In 1996 and early 1997 a number of
significant new aircraft orders were announced by North American airlines.
However, even in the prevailing robust industry environment some airlines are
reporting losses or very low profits due to either unsuccessful competitive
initiatives in respect of fares and/or capacity, or uncompetitive cost
structures. In the next few years airline profit margins are likely to come
under pressure due to a combination of labor cost increases and increased
aircraft ownership costs as new aircraft are delivered and a large number of
Stage 2 aircraft are hush-kitted. In the early 1990s, several North American
airlines who are currently lessees of Airplanes Group entered into plans of
reorganization or sought the protection of bankruptcy, insolvency or other
similar proceedings. There can be no assurance that such events will not
re-occur in respect of these or other North American lessees of Airplanes Group
and adversely affect the ability of such lessees to make timely and full Rental
Payments under their respective existing leases.
In December 1996, Canadian Airlines, Airplanes Group's third largest lessee
at March 31, 1998 by Appraised Value, approached its creditors including
Airplanes Group with proposals to reschedule its obligations. Canadian Airlines
indicated that this approach was part of a general plan designed to address its
financial difficulties. Airplanes Group has 13 Aircraft on lease to Canadian
Airlines, consisting of six A320s on operating leases and seven 737-200A
Aircraft on finance leases. After a series of negotiations between GECAS, as
Servicer to Airplanes Group, and Canadian Airlines, agreement in principle was
reached on a rescheduling plan which granted Canadian Airlines a deferral of
operating lease rentals for a three month period from December 1996 to February
1997 and a deferral of finance lease principal payments in respect of six of the
seven Aircraft on finance leases, for the six month period from December 1996 to
May 1997. The deferred payments are to be repaid with interest over a two and a
half year period commencing October 1998. The agreement in principle resulted in
a loss of cashflow to Airplanes Group of approximately $6.40 million over the
six months to May 1997.
Airplanes Group has its only B747-200BC (0.99% of the Portfolio by
Appraised Value) on lease to Tower Air. During March 1998, Airplanes Group and
Tower Air reached an agreement which allowed Tower Air a deferral of their
security deposit and of two months rental. These deferrals are all scheduled to
be repaid by September 1998. In addition, during September 1997, in
consideration for Tower Air extending the lease term to 180 months with revised
rental rates, Airplanes Group agreed to a cargo conversion of the Aircraft at a
cost of approximately $10 million, which was completed by April 1998.
Asia
As of March 31, 1998, 20 Aircraft representing 10.42% of the Portfolio by
Appraised Value were on lease to 10 aircraft operators in this region. Trading
conditions in the civil aviation industry in Asia have been adversely affected
by the severe economic and financial difficulties experienced recently in the
region. 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 internationally organized financial
stability measures. The economic difficulties in Indonesia have recently
resulted in civil disturbances and a change in 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 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 March 31, 1998, six Aircraft (or 1.99% of the Portfolio by Appraised
Value) were on lease to two aircraft operators in Indonesia. One Indonesian
lessee (the lessee of four Fokker 100 Aircraft comprising 1.62% of the Portfolio
by Appraised Value) was already experiencing financial difficulties prior to the
current regional economic difficulties. This lessee, which had been restructured
as recently as December 1996, had $3.38 million outstanding for a period of
greater than 30 days at March 31, 1998. Since March 31, 1998, all four Aircraft
have been recovered from the lessee and deregistered. Airplanes Group is in the
process of
41
<PAGE> 43
terminating the related leases. Airplanes Group's other Indonesian lessee (the
lessor of two B737-200A Aircraft comprising 0.37% of the Portfolio by Appraised
Value) has also fallen into arrears with its payment obligations and has
requested a partial deferral of its rental. Airplanes Group has recovered
possession of one of the B737-200A Aircraft since March 31, 1998 and GECAS, as
Servicer, is in discussion with the lessee in respect of the second B737-200A.
Airplanes Group may encounter delays or difficulties in recovering possession of
the Aircraft or terminating such leases. See "Risk Factors--Risk of Lessee
Default--Inability to Terminate leases or Repossess Aircraft". The estimated
technical costs of an aggregate amount of $10 million required to ensure that
the Aircraft recovered from Indonesian lessees are in suitable condition for
re-leasing have been provided for in the Financial Statements as at March 31,
1998. Finally, given the recent significant reductions in realizable rental
rates on Fokker 100 aircraft, it may prove difficult to place the recovered
Fokker 100 Aircraft. See "Risk Factors--Aircraft Risks--Risk of Decline in
Aircraft Values" and "Risk Factors--Risks Relating to the Leases--Inability to
Re-Lease Aircraft on Favourable Terms".
Europe (excluding CIS)
As of March 31, 1998, 64 Aircraft representing 35.24% of the Portfolio by
Appraised Value were on lease to 28 aircraft operators in this region. The
commercial aviation industry in European countries, as in the rest of the world
generally, is highly sensitive to general economic conditions. Because a
substantial portion of airline travel (business and especially leisure) is
discretionary, the industry has tended to suffer severe financial difficulties
during economic downturns. Accordingly, the financial prospects for European
lessees can be expected to depend largely on the level of economic activity in
Europe generally and in the specific countries in which such lessees operate. A
recession or other worsening of economic conditions in one or more of these
countries may have a material adverse effect on the ability of European lessees
to meet their financial and other obligations under the leases. In addition,
commercial airlines in Europe face, and can be expected to continue to face,
increased competitive pressures, in part as a result of the continuing
deregulation of the airline industry by the EU. There can be no assurance that
competitive pressures resulting from such deregulation will not have a material
adverse impact on the operations of such lessees.
Additional Considerations
In addition, certain lessees have experienced periodic difficulties in
meeting their maintenance obligations under the related leases. Such
difficulties have arisen from, inter alia, the failure of the applicable lessee
to have in place a sufficiently well established maintenance program, adverse
climate and other environmental conditions in the locations where such related
Aircraft are operated or financial and labor difficulties experienced by the
relevant lessee. A continuous failure by a lessee to meet its maintenance
obligations under the relevant lease: (a) could result in a grounding of the
Aircraft; (b) in the event of a re-lease of such Aircraft would likely cause
Airplanes Group to incur costs, which may be substantial, in restoring such
Aircraft to an acceptable maintenance condition; and (c) would be likely
adversely to affect the value of the Aircraft.
DOWNTIME
At March 31, 1998, four Aircraft were off-lease. Of these Aircraft, two are
the subject of lease contracts, one is the subject of a non-binding letter of
intent to lease and one is expected to be sold for scrap after March 31, 1998.
PURCHASE OPTIONS
At March 31, 1998, lessees with respect to 63 Aircraft had the benefit of
options to purchase Aircraft at various dates between 1998 and 2004 at prices
generally at or above their estimated appraised value at the exercise date.
Since March 31, 1998 one lessee exercised its option to purchase one B737-300
Aircraft, which delivered on May 29, 1998. Five lessees with respect to 20
Aircraft, representing 8.28% of the Portfolio by Appraised Value, have options
to purchase Aircraft at prices below estimated appraised value at the option
exercise date. (For the purposes of this analysis, the estimated appraised value
has been arrived at by deducting the estimated depreciation (as calculated by
Airplanes Group's existing depreciation policy) from January 23, 1998 to the
option exercise date from the Appraised Value of each Aircraft).
42
<PAGE> 44
ITEM 2. PROPERTIES
Airplanes Group has no ownership or leasehold interest in any real
property.
Airplanes Limited's registered and principal office is located at 22
Grenville Street, St. Helier, Jersey, JE4 8PX, Channel Islands and its telephone
number is 011-44-1534-609000.
Airplanes Trust's principal office is located at 1100 North Market Street,
Rodney Square North, Wilmington, Delaware 19890-0001, care of Wilmington Trust
Company and its telephone number is 1-302-651-1000.
For a description of Airplanes Group's interest in other property, see
"Item 1. Business -- The Aircraft, Related Leases and Collateral".
ITEM 3. LEGAL PROCEEDINGS
On November 5, 1992, GPA obtained a preliminary injunction for repossession
and export of thirteen aircraft and three spare engines (the "Repossessed
Assets") from VASP, a Brazilian airline, which had defaulted under its lease
agreements with GPA. On May 10, 1993, at a full hearing, the Brazilian courts
gave a decision fully validating the repossession injunction. VASP appealed this
decision to the High Court of the State of Sao Paolo (the "High Court"). On
December 18, 1996, the High Court found in favor of VASP in its appeal against
the court order granting GPA repossession and export of the Repossessed Assets.
GPA was instructed to return the Repossessed Assets for lease by VASP under the
terms of the original lease agreements between GPA and VASP, within thirty days
of notification by VASP that it requires return of the assets. The decision of
the High Court was stayed pending a number of clarificatory motions by both
sides before the same court. In responding to those motions, the High Court
granted VASP the right to seek damages against GPA in lieu of the return of the
Repossessed Assets. GPA has sought leave to appeal the December 1996 decision
and the court's responses to the clarificatory motions to the Brazilian Superior
Court of Justice and the Federal Supreme Court. In addition, GPA has filed a
writ of mandamus with the High Court seeking to overturn the decision of the
High Court and has sought a stay on the decision pending its appeals.
Seven of the thirteen aircraft which were repossessed by GPA from VASP
following the 1992 injunction and the 1993 decision are in the Portfolio,
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 has advised
Airplanes Group that it 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 where VASP was
successful in enforcing its judgment having sought repossession rather than
damages.
GPA has informed Airplanes Group that it has been advised that the decision
of the High Court in this matter is incorrect as a matter of Brazilian law. GPA
has further informed Airplanes Group that it is actively pursuing all courses of
action that may be available to it, including appeals to superior courts and
intends to defend its position vigorously and to pursue each of its claims and
counter claims against VASP. GPA has advised Airplanes Group that it believes
the outcome of these matters will not have a material adverse effect on
Airplanes Group's liquidity, results of operations or financial condition.
43
<PAGE> 45
AeroUSA and AeroUSA 3 have in the past filed, and will continue to file,
U.S. 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 tax returns previously reported
by GPA, Inc. and its subsidiaries. GPA Group believes that none of these audits
will have a material adverse impact upon the liquidity, results of operations or
the financial condition of AeroUSA.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The ordinary shares of Airplanes Limited are not listed on any national
exchange or traded in any established market. The beneficial ownership of the
Airplanes Limited ordinary shares as of the date of this Report on Form 10-K is
presented below.
<TABLE>
<CAPTION>
TITLE OF CLASS NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS
- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Common Stock................ Mourant & Co. Trustees Limited, 10 Shares 33 1/3%
as trustee of Holdings Trust I
22 Grenville Street
St. Helier
Jersey, Channel Islands
Common Stock................ Mourant & Co. Trustees Limited, 10 Shares 33 1/3%
as trustee of Holdings Trust II
22 Grenville Street
St. Helier
Jersey, Channel Islands
Common Stock................ Mourant & Co. Trustees Limited, 10 Shares 33 1/3%
as trustee of Holdings Trust III
22 Grenville Street
St. Helier
Jersey, Channel Islands
</TABLE>
Pursuant to the Shareholders Agreement between Mourant & Co. Trustees
Limited, as trustee of the Charitable Trusts (the "Charitable Trust Trustees"),
Juris Limited and Lively Limited and the Airplanes Limited Indenture Trustee
(the "Shareholders Agreement"), the Charitable Trust Trustees have agreed that,
as long as the Airplanes Limited Notes are outstanding, they will not, without
the prior written approval of the Airplanes Limited Indenture Trustee and all
the Directors of Airplanes Limited, transfer any part of the capital stock or
any interest therein unless the transferee (a) is a trustee of a trust formed
for charitable purposes substantially identical to those for which the
Charitable Trusts are established and (b) enters into an agreement substantially
identical to the Shareholders Agreement in favor of the Airplanes Limited
Indenture Trustee. Pursuant to the instruments of trust establishing Holdings
Trust I, Holdings Trust II and Holdings Trust III, a certificate given by the
Directors of Airplanes Limited to the Charitable Trust Trustees that their
voting of the capital stock in a specified manner is in the best commercial
interests of Airplanes Limited shall, for the purposes of the exercise of the
Charitable Trust Trustees' discretion, be conclusive that any such action is in
the best commercial interests of Airplanes Limited.
For additional information regarding the capital stock of Airplanes Limited
and for a discussion relating to the payment of dividends, see "Item 1. Business
- -- Airplanes Limited".
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<PAGE> 46
ITEM 6. SELECTED COMBINED FINANCIAL DATA
The selected combined financial data set out below for each of the years in
the five-year period ended March 31, 1998 have been extracted from the audited
financial statements of Airplanes Limited and Airplanes Trust, which have been
audited by KPMG -- Dublin, Ireland, independent chartered accountants. These
financial statements have been prepared in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP"). The audited financial
statements of Airplanes Limited and Airplanes Trust as at March 31, 1997 and
1998, and for each of the years ended March 31, 1996, 1997 and 1998 are included
elsewhere in this Report on Form 10-K (the "Financial Statements").
The selected combined financial data set forth below are presented on the
basis that the Aircraft have been operated separately from GPA within the
Airplanes Group for all periods presented or from the date of acquisition by
GPA, as appropriate. It should be noted, however, that Airplanes Group has
conducted independent business operations only since March 28, 1996.
Accordingly, for prior periods adjustments and allocations have been made of,
among other items, historical indebtedness, net interest expense, selling,
general and administrative expenses and tax amounts, as further described in
Note 2 to the Financial Statements and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations". While Airplanes
Group believes that the selected combined financial data set forth below are an
appropriate presentation, such data for the period prior to March 28, 1996 are
not necessarily indicative of the financial results that might have occurred had
Airplanes Group been an independently financed and managed group during the
periods up to March 28, 1996. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations".
The selected combined financial data set forth below combine the operating
results, assets, liabilities and cash flows of each of Airplanes Limited and
Airplanes Trust. The separate balance sheets, statements of operations,
statements of changes in shareholders' deficit/net liabilities and statements of
cash flows of Airplanes Limited and Airplanes Trust are contained in the
Financial Statements included in Item 8 of this Report on Form 10-K, and it
should be noted 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
presentation is most appropriate because, inter alia, the assets of Airplanes
Limited and Airplanes Trust are to be managed on the basis of one combined
aircraft fleet, and 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 Trust or Airplanes Limited, 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.
The selected combined financial data should be read in conjunction with,
and are qualified in their entirety by reference to, the Financial Statements
included in this Report on Form 10-K.
Aircraft assets are stated on the predecessor cost basis (i.e., reflecting
GPA's historical cost less accumulated depreciation). As at the date of the
Underwritten Offering GPA held substantially all of the Class E Notes through
which it has access to certain of the benefits inherent in the Aircraft. The
difference between such predecessor cost basis and the amount of Airplanes
Group's indebtedness is a significant component of Total Shareholders' Deficit
in the Combined Balance Sheet Data. Upon completion of the MOU Transaction, GE
Capital will acquire GPA's economic interest in the Airplanes Group Class E
Notes. The transfer of the economic interest in the Airplanes Group Class E
Notes will not require a restatement of the carrying value of the aircraft
assets.
45
<PAGE> 47
COMBINED STATEMENT OF OPERATIONS DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,(1)
------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
($MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues(2)
Aircraft leasing.................................. 526 608 616 604 585
Aircraft sales.................................... -- -- -- -- 94
---- ---- ---- ---- ----
Expenses
Cost of Aircraft sales............................ -- -- -- -- (90)
Depreciation and amortization..................... (185) (208) (207) (223) (192)
Net interest expense(3)(4)........................ (252) (348) (368) (383) (411)
Provision for maintenance......................... (71) (88) (97) (91) (88)
Bad and doubtful debts............................ (20) (33) 28 -- --
Provision for loss making leases and downtime,
net(5)......................................... (27) (5) 15 12 17
Other lease costs................................. (19) (17) (21) (21) (30)
Selling, general and administrative expenses...... (26) (34) (35) (38) (38)
Income tax benefit.................................. 13 16 13 10 3
---- ---- ---- ---- ----
Net loss............................................ (61) (109) (56) (130) (150)
==== ==== ==== ==== ====
</TABLE>
COMBINED BALANCE SHEET DATA(1)
<TABLE>
<CAPTION>
MARCH 31,(1)
-----------------------------------------------------
1995 1996 1997 1998
----------- ----------- ----------- -----------
($MILLIONS)
<S> <C> <C> <C> <C>
Aircraft, net, and net investment in capital and sales
type leases............................................. 4,181 3,965 3,731 3,436
----------- ----------- ----------- -----------
Total assets.............................................. 4,386 4,236 4,048 3,743
=========== =========== =========== ===========
Indebtedness(3)......................................... (4,602) (4,634) (4,397) (4,078)
Provision for maintenance............................... (268) (311) (313) (315)
Total liabilities......................................... (5,228) (5,252) (5,194) (5,039)
=========== =========== =========== ===========
Net liabilities........................................... (842) (1,016) (1,146) (1,296)
</TABLE>
COMBINED STATEMENT OF CASH FLOWS AND OTHER DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,(1)
------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
($MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash paid in respect of interest(3)(4)........ 222 303 323 265 267
Net cash provided by operating activities
(after payment of interest)................. 189 177 216 224 214
Net cash (used in)/provided by investing
activities.................................. (514) (23) 13 19 101
Net cash (used in)/provided by financing
activities.................................. 325 (154) (144) (238) (322)
---- ---- ---- ---- ----
Net increase/(decrease) in cash............... NIL NIL 85 5 (7)
==== ==== ==== ==== ====
</TABLE>
SELECTED RATIOS(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,(1)
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
($MILLIONS)
<S> <C> <C> <C> <C> <C>
Deficiency of Combined Earnings to Combined Fixed
Charges(6)..................................... (74) (125) (69) (140) (153)
</TABLE>
- ---------------
(1) The financial statements of Airplanes Group are stated in U.S. dollars which
is the principal operating currency of Airplanes Group and the aviation
industry.
(2) Aircraft leasing revenues include Maintenance Reserve receipts. See Note 17
to the Financial Statements.
(3) For all periods and dates prior to March 28, 1996, net interest expense,
indebtedness and cash paid in respect of interest have been based on certain
assumptions as described more fully in Note 2 to the Financial Statements.
For all periods and dates since March 28, 1996, net interest expense,
indebtedness
46
<PAGE> 48
and cash paid in respect of interest have reflected the actual terms of the
Notes and Airplanes Group's Class E Notes.
(4) Net interest expense is significantly higher than cash paid in respect of
interest in all periods reflecting the high interest rate accruing on the
Class E Notes (20% adjusted for inflation) relative to the lower amount of
cash interest payable on the Class E Notes for so long as the Notes remain
outstanding. Net interest expense is stated after crediting interest income
of $6 million in 1994, $9 million in 1995, $8 million in 1996, $17 million
in 1997 and $16 million in 1998. See Note 2(iii) to the Financial
Statements.
(5) A lease agreement is deemed to be "loss making" in circumstances where the
contracted rental payments are insufficient to cover depreciation and
interest attributable to the Aircraft plus certain direct costs attributable
to the lease over its term. Following the adoption of FAS 121 "Accounting
for the Impairment of Long Lived Assets and Long Lived Assets to Be Disposed
Of" ("FAS 121") with effect from April 1, 1996, Airplanes Group no longer
makes separate provisions for downtime costs because under FAS 121 Airplanes
Group's assessment of the need for separate downtime provisions is
incorporated in its impairment assessment. See Note 4(b) to the Financial
Statements.
(6) Represents the amount by which Airplanes Group's loss before income taxes
and fixed charges exceeded fixed charges. Fixed charges consists of interest
expense. Because Airplanes Group's fixed charges exceeded earnings for all
periods presented, a ratio of earnings to fixed charges is not presented.
47
<PAGE> 49
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion and analysis of Airplanes Group's financial
condition and results of operations is presented as though the Aircraft have
been operated and financed separately from GPA within the Airplanes Group in all
periods under review or from their date of acquisition by GPA, as appropriate.
It should be noted, however, that Airplanes Group only acquired the Aircraft on
March 28, 1996 and, therefore, has not conducted any business operations in the
periods under review prior to March 28, 1996. Accordingly, adjustments and
allocations have been made with respect to, among other things, historical
indebtedness, net interest expense, selling, general and administrative expenses
and tax amounts as further described below and in Note 2 to the Financial
Statements for periods prior to March 28, 1996. While Airplanes Group believes
that the following discussion and analysis is an appropriate presentation, it is
not necessarily indicative of the financial results that might have occurred had
Airplanes Group been an independently financed and managed group during the
period to March 28, 1996.
The following discussion and analysis 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 and the Controlling Trustees believe that
a combined discussion is the most appropriate basis of presentation because,
among other things, Airplanes Limited and Airplanes Trust are not intended to be
regarded as separate businesses but rather on the basis of one combined aircraft
fleet and 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 Trust or Airplanes Limited, 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 future business is expected to
consist of aircraft operating lease activities. Airplanes Group may also engage
in aircraft sales subject to certain limitations and guidelines. Airplanes
Group's revenues and operating cash flows 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 and (iii) Airplanes Group's financial resources and liquidity position
relative to its competitors who may possess substantially greater financial
resources.
The effect of changes in currency rates on Airplanes Group is minimal
because Airplanes Group conducts its business almost entirely in U.S. dollars.
RESULTS OF OPERATIONS -- YEAR ENDED MARCH 31, 1998 COMPARED WITH YEAR ENDED
MARCH 31, 1997
Airplanes Group results of operations for the year ended March 31, 1998
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, in particular Asian lessees as a result
of the recent severe downturn in the economies of Asia which 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. See "Item 2:
Business -- The Aircraft, Related Leases and Collateral -- The Lessees -- Asia."
Overall, there was an increase in the net loss to $150 million for the year
ended March 31, 1998 compared to $130 million for the year ended March 31, 1997,
which was primarily attributable to an increase in net interest expense due to
additional interest of approximately $32 million being charged on accrued but
unpaid Class E Note interest. This reflected the fact that there was no net
increase in the bad debts provision in the year ended March 31, 1998 and there
was a net utilisation of a loss-making lease provision of $17 million in the
year ended to March 31, 1998.
48
<PAGE> 50
Since March 31, 1998, Airplanes Group has taken early redelivery of four
Fokker 100 Aircraft which were on lease to an Indonesian Lessee. The estimated
cost of restoring these Aircraft to a suitable technical condition for re-lease
is $10 million and this was fully provided for at March 31, 1998. This did not
have an adverse impact on the results for the year ended March 31, 1998 as a
result of maintenance reserve provisions, including lessee credit risk
provisions, in respect of these Aircraft.
Overall Airplanes Group generated $214 million in cash from operations in
the year ended March 31, 1998 compared with $224 million in the year ended March
31, 1997. The decrease in cash from operations generated in the year to March
31, 1998 is primarily attributable to the decrease in lease revenue receipts (as
a result of Aircraft sales and reduced rentals for the three MD11 Aircraft on
lease to Varig) and an increase in technical costs for the year ended March 31,
1998 as compared to the year ended March 31, 1997. In addition, in the period to
March 31, 1997, 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 Latin American lessee.
LEASING REVENUES
There was a $19 million decrease in leasing revenues (which includes
maintenance reserve receipts which Airplanes Group receives from certain
lessees) for the year ended March 31, 1998 to $585 million (Airplanes Limited:
$512 million; Airplanes Trust: $73 million) compared with $604 million
(Airplanes Limited: $532 million; Airplanes Trust: $72 million) for the year
ended March 31, 1997. The decrease in 1998 is primarily due 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 March 31,
1997. In addition, there was a reduction in the number of Aircraft on lease
primarily as a result of the Aircraft sold in the year ended March 31, 1998. At
March 31, 1998, Airplanes Group had 217 of its 221 Aircraft (including the six
Emery Aircraft which were contracted to be sold at March 31, 1998, but did not
deliver until April 1998) on lease (Airplanes Limited: 194 Aircraft; Airplanes
Trust: 23 Aircraft) compared to 223 of its 229 Aircraft (Airplanes Limited: 199
Aircraft; Airplanes Trust: 24 Aircraft) at March 31, 1997. 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. 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: $37 million; Airplanes
Trust: $57 million) in respect of the sale of seven Aircraft and the insurance
proceeds received in respect of one Aircraft which suffered a constructive total
loss during October 1997 were received in the year ended March 31, 1998. No
Aircraft were sold in the year ended March 31, 1997. The net book value of the
Aircraft sold at the date of sale was $90 million (Airplanes Limited: $32
million; Airplanes Trust: $58 million).
DEPRECIATION AND AMORTIZATION
The charge for depreciation and amortization in the year ended March 31,
1998 amounted to $192 million (Airplanes Limited: $170 million; Airplanes Trust:
$22 million) compared with $223 million (Airplanes Limited: $191 million;
Airplanes Trust: $32 million) for the comparative period in 1997. The decrease
arose primarily as a result of additional depreciation of $15 million required
in the year ended March 31, 1997, as a result of the application of FAS 121, in
respect of two DC10 Aircraft. In addition a decrease arose as a result of the
depreciation charge being calculated on the revised aircraft book values net of
all valuation provisions required, and due to the reduction in the number of
Aircraft owned by Airplanes Group.
49
<PAGE> 51
NET INTEREST EXPENSE
Net interest expense amounted to $411 million (Airplanes Limited: $373
million; Airplanes Trust: $38 million) in the year ended March 31, 1998 compared
to $383 million (Airplanes Limited: $343 million; Airplanes Trust: $40 million)
in the year ended March 31, 1997. The increase in net interest expense was
primarily due to additional interest being charged on accrued but unpaid Class E
Note interest of $32 million, in addition to a marginally higher interest rate
environment during the year ended March 31, 1998 which was partially offset by
lower average debt in the year ended March 31, 1998.
The weighted average interest rate of the Class A - D Notes during the year
ended March 31, 1998 was 6.83% and the average debt in respect of the Class A -
D Notes outstanding during the period was $3,678 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 year ended to March 31, 1997 was 6.61%
and the average debt in respect of the Class A - D Notes outstanding during the
period was $3,936 million.
The difference between Airplanes Group's $411 million of net interest
expense for the year ended March 31, 1998 (Airplanes Limited: $373 million;
Airplanes Trust: $38 million) and Airplanes Group's cash paid in respect of
interest of $267 million (Airplanes Limited: $245 million; Airplanes Trust: $22
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 March 31, 1998. 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 year ended March 31, 1998, Airplanes Group
earned interest income (including lessee default interest) of $16 million
(Airplanes Limited: $16 million; Airplanes Trust: nil) comparable to $17 million
in the year ended March 31, 1997 (Airplanes Limited: $17 million; Airplanes
Trust: nil).
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 year ended March 31, 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 year. Overall, there was no net provision required in
respect of bad and doubtful debts in the year ended March 31, 1998 or in the
year ended March 31, 1997. While there was no overall net charge required in the
year ended March 31, 1998 there was a requirement for provisions against
receivable balances due from one Indonesian lessee and one Peruvian lessee.
These, however, were offset by a reduction in the provisions required in respect
two Mexican lessees.
A lease agreement is deemed to be "loss making" in circumstances where the
contracted rental payments are insufficient to cover the depreciation and
allocated interest attributable to the aircraft plus certain direct costs, such
as legal fees and registration costs, attributable to the lease over its term.
For these purposes, interest is allocated to individual aircraft based on the
weighted average interest cost of the remaining principal balance of the Class
A-E Notes (with Class E Note interest assumed to be 11%) or, in periods prior to
March 28, 1996, with indebtedness from GPA equivalent to the appraised value of
such aircraft at October 31, 1995.
In the year ended March 31, 1998, there was an overall net "loss making
leases" provision utilised of $17 million (Airplanes Limited: $14 million;
Airplanes Trust: $3 million) compared with a net "loss making leases" provision
utilised of $5 million (Airplanes Limited: $1 million; Airplanes Trust: $4
million) in the year to March 31, 1997. The increase in the net provision
utilised to $17 million in the year ended March 31, 1998 reflects the release of
a provision of $5 million which was provided for in 1997 in respect of one B747
and the
50
<PAGE> 52
reduction in the number of loss-making leases signed in the period. The only
significant provisions required in the year were in respect of the six Fokker
100 Aircraft on lease to a Brazilian lessee which were restructured in October
1997 and one A300 Aircraft which was leased to a Turkish lessee for five years
in November 1997.
OTHER LEASE COSTS
Other lease costs in the year ended March 31, 1998 amounted to $30 million
(Airplanes Limited: $29 million; Airplanes Trust: $1 million) compared to other
lease costs of $21 million (Airplanes Limited: $20 million; Airplanes Trust: $1
million) in the year ended to March 31, 1997. The increase in the charge in the
year ended to March 31, 1998, was primarily due to an increase in technical
costs of $6 million which relate primarily to two B737-200 Aircraft which were
redelivered early to Airplanes Group and a provision required of $5 million
(including $3 million relating to 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 two of the Aircraft delivered to new
lessees during March 1998. The third Aircraft is the subject of a lease contract
and is due to deliver to the lessee during June 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for both the year ended March
31, 1998 and 1997 amounted to $38 million (Airplanes Limited: $35 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 $38 million in the years ended
March 31, 1998 and 1997 include $26 million (Airplanes Limited: $24 million;
Airplanes Trust: $2 million) relating to GECAS servicing fees.
A further significant element of Airplanes Group's actual selling, general
and administrative expenses reported in the years ended March 31, 1998 and 1997
was $9 million (Airplanes Limited: $8 million; Airplanes Trust: $1 million) in
respect of administrative agency and cash management fees payable to GPA.
OPERATING LOSS
The operating loss for the year ended March 31, 1998 was $153 million
(Airplanes Limited: $144 million; Airplanes Trust: $9 million) compared with an
operating loss of $140 million for the year ended March 31, 1997 (Airplanes
Limited: $122 million; Airplanes Trust: $18 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 $3 million in the year ended
to March 31, 1998 (Airplanes Limited: $3 million; Airplanes Trust: nil),
compared with a deferred tax benefit in the same period in 1997 of $10 million
(Airplanes Limited: $10 million; Airplanes Trust: nil).
NET LOSS
The net loss after taxation for the year ended March 31, 1998 was $150
million (Airplanes Limited: $141 million; Airplanes Trust: $9 million) compared
with a net loss after taxation for the year ended March 31, 1997 of $130 million
(Airplanes Limited: $112 million; Airplanes Trust: $18 million).
RESULTS OF OPERATIONS -- YEAR ENDED MARCH 31, 1997 COMPARED WITH YEAR ENDED
MARCH 31, 1996
During the year ended March 31, 1997 there was a continuation of the
recovery in the air transport industry which had affected Airplanes Group's
results of operations positively in 1996. There was no net increase in the
provision for bad debts in the year ended March 31, 1997 and the number of
aircraft off-lease at March 31, 1997 was six compared with eleven at March 31,
1996. In general, however, in each of 1996 and
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<PAGE> 53
1997, there was no material increase in lease rates. The older widebody aircraft
(which include A300s, DC10s and a B747) as well as turboprops (which include
ATR42s, Metro-IIIs and DHC8s) remained problematic in respect of the ability to
place the aircraft with lessees, the lease rates achievable and used aircraft
values. At March 31, 1997, of the six aircraft off lease, two were DC10s and one
was an A300. The majority of older widebody aircraft on lease at March 31, 1997
were loss-making, with the result that approximately 41% of the loss making
lease provision required for Airplanes Group as a whole was in respect of four
A300s and a B747. Furthermore, the rental rates obtained by Airplanes Group from
Varig for three MD-11 Aircraft were approximately one-third lower than the
contracted rentals under the previous lease agreements for these Aircraft and
this will adversely affect Airplanes Group's operating cashflows.
When comparing the results for each of the two entities of Airplanes Trust
and Airplanes Limited, it should be noted that two MD83 aircraft were
transferred from Airplanes Limited to Airplanes Trust in the quarter ending June
30, 1997.
REVENUES
There was a small reduction in revenues for the year ended March 31, 1997
which were $604 million (Airplanes Limited: $532 million; Airplanes Trust: $72
million) compared with $616 million (Airplanes Limited: $556 million; Airplanes
Trust: $60 million) for the year ended March 31, 1996. The small reduction is a
result of marginally lower interest rates in 1997 (which impacts the pricing of
certain lease rentals) partially offset by a greater number of aircraft on
lease. At March 31, 1997, Airplanes Group had 223 Aircraft on lease (Airplanes
Limited: 199 Aircraft; Airplanes Trust: 24 Aircraft) compared with 218 Aircraft
on lease at March 31, 1996 (Airplanes Limited: 197 Aircraft; Airplanes Trust: 21
Aircraft). Maintenance Reserve receipts, which Airplanes Group receives from
certain of its lessees to provide against the future cost of maintaining leased
Aircraft, are included in revenues.
DEPRECIATION AND AMORTIZATION
The charge for depreciation and amortization in the year ended March 31,
1997 amounted to $223 million (Airplanes Limited: $191 million; Airplanes Trust:
$32 million) compared with $207 million (Airplanes Limited: $183 million;
Airplanes Trust: $24 million) for the year ended March 31, 1996. The increased
charge is primarily as a result of additional depreciation of $15 million
(Airplanes Limited: $9 million; Airplanes Trust: $6 million) required, as a
result of the application of FAS 121, in respect of two DC10 Aircraft. The
adoption of FAS 121 did not have a material impact on the results for the year
ended March 31, 1997. These two DC10 Aircraft were sold subsequent to March 31,
1997.
NET INTEREST EXPENSE
Net interest expense amounted to $383 million in the year ended March 31,
1997 (Airplanes Limited: $343 million; Airplanes Trust: $40 million) compared
with $368 million for the year ended March 31, 1996 (Airplanes Limited: $335
million; Airplanes Trust: $33 million). In the period to March 28, 1996, net
interest expense has been determined on the basis set out in Note 2 to the
Financial Statements. This assumed that until March 28, 1996, Airplanes Group's
debt was owed to GPA and was approximately equal to the appraised value of the
Aircraft at October 31, 1995 plus the value of certain receivables acquired from
GPA by Airplanes Group. No repayment of principal was assumed but any excess
cash generated in Airplanes Group's business while part of GPA was assumed to be
distributed back to GPA. At March 28, 1996, the actual aggregate amount of all
classes of Notes issued was $4,652 million. Of the $604 million Class E Notes
issued, $13 million were cancelled in July 1996 under the terms of the
transaction relating to certain purchase price adjustments. It has been assumed
that the indebtedness assumed owed to GPA at March 28, 1996 was repaid from the
proceeds of the Existing Notes issued. The interest charge has been calculated
until March 28, 1996 based on the assumption that all of the debt accrued
interest at an assumed historic rate (based on GPA's assumed average cost of
debt) of 8.2% in the year ended March 31, 1996.
The interest charge for the year ended March 31, 1997 is based on the
actual debt outstanding during the period and the actual terms of the Existing
Notes and the Class E Notes. The weighted average interest rate
52
<PAGE> 54
on the Class A-D Notes during the year to March 31, 1997 was 6.61% and the
average principal amount of debt in respect of the Class A-D Notes outstanding
during the year was $3,936 million. The Class E Notes together with accrued and
unpaid Class E Note interest accrue interest at a rate of 20% per annum (as
adjusted by reference to the U.S. consumer price index).
The difference in Airplanes Group's net interest expense and cash paid in
respect of interest in the year to March 31, 1996 is substantially accounted for
by the assumption that Airplanes Group paid cash interest only at the per annum
rate of 1% on the portion of indebtedness to GPA which was assumed, for the
purpose of the financial statements, to be refinanced by the Class E Notes (the
Class E Note Portion). The Class E Note Portion was assumed to represent
approximately 15% of total indebtedness to GPA in each period under review prior
to March 28, 1996.
The difference in Airplanes Group's net interest expense and cash paid in
respect of interest in the year ended March 31, 1997 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 period. Furthermore, as a result of the greater than expected decrease in
Appraised Values (as at February 25, 1997) compared to the Initial Appraised
Values, no cash interest was paid on the Class E Notes on the Payment Dates in
February 1997 through July 1997.
Net interest expense is stated after deducting interest income earned
during the relevant period. In the year ended March 31, 1997, Airplanes Group
earned interest income (including lessee default interest) of $17 million
(Airplanes Limited: $17 million; Airplanes Trust: $0 million) compared with $8
million in the year ended March 31, 1996 (Airplanes Limited: $7 million;
Airplanes Trust: $1 million). The increase is primarily attributable to cash
balances in the year ended March 31, 1997 being higher than those assumed in the
period to March 31, 1996 and a higher level of default interest being earned in
the year to March 31, 1997.
The overall increase in net interest expense for the year ended March 31,
1997, despite marginally lower interest rates, a lower average principal amount
of Class A-D Notes outstanding and higher interest income, is primarily due to
the accrual of interest on outstanding and unpaid accrued Class E Note interest.
BAD DEBT, DOWNTIME AND LOSS-MAKING LEASE PROVISIONS
While certain of Airplanes Group's lessees continued to experience
financial difficulties in the year ended March 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 major
carriers improved in the period reflecting a somewhat improved trading
environment in certain regions. Overall there was no charge required in respect
of the provision for bad and doubtful debts in the year ended March 31, 1997.
This arose principally as a result of the release of provisions in respect of
one Mexican lessee and the use of a provision made in respect of one Indonesian
lessee following the conclusion of a restructuring agreement with the lessee
during 1997. These factors were offset by an increase in the provisions required
in respect of one Indian lessee, one Canadian lessee and one Peruvian lessee.
This is compared with a net credit in respect of bad and doubtful debts for the
year ended March 31, 1996 of $28 million (Airplanes Limited: $27 million;
Airplanes Trust $1 million), primarily as a result of a reduction in significant
provisions required in respect of two Brazilian lessees and one Mexican lessee.
Following the adoption of FAS 121, with effect from April 1, 1996,
Airplanes Group no longer makes separate provisions in respect of downtime costs
because under FAS 121, Airplanes Group's assessment of the need for downtime
provisions is incorporated in its impairment assessment. (See Note 4(b) to the
Financial Statements). Downtime provisions at March 31, 1996 of $7 million
(Airplanes Limited: $4 million; Airplanes Trust: $3 million) were released
during the year to March 31, 1997. In the year to March 31, 1996, the net
provision released was also $7 million (Airplanes Limited: a release of $8
million; Airplanes Trust: a charge of $1 million).
Due to the continuation of the recovery of the industry during the year
ended March 31, 1997, the provision for loss-making leases at March 31, 1997 had
decreased by $5 million as compared to the provision at March 31, 1996. Overall,
however, the net provision released of $5 million (Airplanes Limited: $1
million;
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<PAGE> 55
Airplanes Trust: $4 million) in the year to March 31, 1997, was a reduction
compared to the net provision released in the year to March 31, 1996, of $8
million (Airplanes Limited: $10 million; Airplanes Trust a net charge of $2
million) which can be primarily attributed to the level of provisions required
in respect of two loss-making leases (one A300 and the B747-200) signed in the
year to March 31, 1997.
OTHER LEASE COSTS
Other lease costs in the year ended March 31, 1997 amounted to $21 million
(Airplanes Limited: $20 million; Airplanes Trust: $1 million) compared with $21
million in 1996 (Airplanes Limited: $20 million; Airplanes Trust: $1 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year to March 31, 1997
amounted to $38 million (Airplanes Limited: $35 million; Airplanes Trust: $3
million). This is slightly higher than selling, general and administrative
expenses incurred in the year to March 31, 1996 of $35 million (Airplanes
Limited: $32 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 $38 million in the year to March
31, 1997 include $26 million (Airplanes Limited: $24 million; Airplanes Trust:
$2 million) relating to the GECAS servicing fee compared to $22 million
(Airplanes Limited: $20 million; Airplanes Trust: $2 million) for the year ended
March 31, 1996. 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 March 31, 1997 was $9
million (Airplanes Limited: $8 million; Airplanes Trust: $1 million) in respect
of administrative agency and cash management fees payable to GPA. Arrangements
with GPA in respect of administrative agency services and cash management
services only became effective on March 28, 1996.
OPERATING LOSS
The operating loss for the year ended March 31, 1997 was $140 million
(Airplanes Limited: $122 million; Airplanes Trust: $18 million) compared with an
operating loss of $69 million for the year ended March 31, 1996 (Airplanes
Limited: $48 million; Airplanes Trust: $21 million).
TAXES
Tax provisions and deferred tax assets and liabilities have been calculated
as if Airplanes Limited and Airplanes Trust were separate taxable entities from
GPA. There was a tax benefit of $10 million in 1997, primarily as a result of
overprovision of deferred tax in prior years, (Airplanes Limited: $10 million;
Airplanes Trust: $0 million) compared with a tax benefit of $13 million in 1996
(Airplanes Limited: $5 million; Airplanes Trust: $8 million), as a result of
continuing operating losses.
NET LOSS
The net loss for 1997 after taxation was $130 million (Airplanes Limited:
$112 million; Airplanes Trust: $18 million) compared with a net loss for the
year ended 1996 of $56 million (Airplanes Limited: $43 million; Airplanes Trust:
$13 million).
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FINANCIAL RESOURCES AND LIQUIDITY
OVERVIEW
Prior to the 1996 Offering, Airplanes Group had not operated as a separate
business and consequently, had not been financed as such. GPA managed its cash
resources centrally and cash generated by the subsidiaries of Airplanes Limited
and Airplanes Trust was assumed to be transferred to GPA for the purpose of
servicing GPA's indebtedness.
The cash balances at March 31, 1998 amounted to $218 million (Airplanes
Limited: $212 million; Airplanes Trust: $6 million) compared to cash balances at
March 31, 1997 of $225 million (Airplanes Limited: $219 million; Airplanes
Trust: $6 million.)
OPERATING ACTIVITIES
Operating cash flows depend on many factors including the performance of
lessees and Airplanes Group's ability to re-lease Aircraft, the average cost of
the Notes, the efficacy of Airplanes Group's interest rate hedging policies, the
ability of Airplanes Group's swap providers to perform under the terms of their
swap and similar obligations and whether Airplanes Group will be able to
refinance certain subclasses of Notes that have not been repaid with lease cash
flows.
Net cash provided by operating activities in the year ended March 31, 1998
amounted to $214 million (Airplanes Limited: $183 million; Airplanes Trust: $31
million) compared with $224 million in the year ended March 31, 1997 (Airplanes
Limited: $214 million; Airplanes Trust: $10 million). This reflects cash paid in
respect of interest of $267 million in the year ended March 31, 1998 (Airplanes
Limited: $245 million; Airplanes Trust: $22 million) compared with $265 million
in the year ended March 31, 1997 (Airplanes Limited: $237 million; Airplanes
Trust: $28 million). The decrease in cash from operations generated in the year
ended March 31, 1998 is primarily attributable to a decrease in lease revenue
receipts (as a result of Aircraft sales and the reduced rentals on the MD11
Aircraft on lease to Varig) and an increase in technical costs for the year
ended March 31, 1998, primarily as a result of the conversion costs arising on
one B747-200BC Aircraft, as compared to the year ended March 31, 1997. In
addition in the period to March 31, 1997, 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 1997. These factors
were partially offset by the prepayment during December 1997 of one year's
rentals in the amount of $15 million by one Latin American lessee.
INVESTING AND FINANCING ACTIVITIES
Cash flows from investing activities in the year ended March 31, 1998,
which amounted to $101 million (Airplanes Limited: $80 million; Airplanes Trust:
$21 million), 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 year ended March 31, 1998
primarily reflect the refinancing of $2,437 million of Subclass A-1, Subclass
A-2, Subclass A-3 and Class B Notes, which occurred on March 16, 1998 (Airplanes
Limited: $2,218 million, Airplanes Trust: $219 million). These were repaid with
the proceeds from the new Notes issued in the amount of $2,419 million (net of
refinancing expenses of $18 million). In addition, in the year ended March 31,
1998, $305 million of principal on the Subclass A-5 and Class B Notes was repaid
by Airplanes Group (Airplanes Limited: $281 million, Airplanes Trust: $24
million) compared to $238 million of principal on Subclass A-5 and Class B Notes
repaid by Airplanes Group (Airplanes Limited: $216 million; Airplanes Trust $22
million) in the year ended March 31, 1997. The increase in the repayment of
Notes in the year ended March 31, 1998 is primarily due to the increase in cash
provided by the investing activities as a result of the Aircraft sales.
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INDEBTEDNESS
Airplanes Group's indebtedness consisted of Class A-E Notes in the amount
of $4,097 million (Airplanes Limited: $3,732 million; Airplanes Trust: $365
million) at March 31, 1998 and $4,401 million (Airplanes Limited: $4,009
million; Airplanes Trust: $392 million) at March 31, 1997. Airplanes Group had
$591 million of Class E Notes outstanding at March 31, 1998 and 1997.
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 in 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.
1998 Aircraft Value Appraisals
Under the terms of the Notes, Airplanes Group is required annually to
commission an appraisal of the Aircraft. The purpose of the appraisal is to
redirect, when appropriate, excess cash flow to the Class A Notes and to
maintain and reduce the loan to value ratios for each class of Notes. Reductions
in appraised values cannot affect interest payments to be made on the Class A-D
Notes, but can cause the suspension of scheduled principal payments on the Class
C and D Notes (which are scheduled to commence in May 1998 and 1999,
respectively) and interest payments on the Class E Notes.
Updated appraisals of the Aircraft were obtained by Airplanes Group on
January 23, 1998. On the basis of these three updated appraisals, the average
appraised Base Value of the Aircraft, based on a Portfolio of 215 Aircraft, was
approximately $3,766 million compared with $3,984 million based on the February
25, 1997 appraisals. This decrease was approximately $83 million more than the
expected decrease implied by the aircraft depreciation schedules that form part
of the terms of the Notes. Based on a Portfolio of 221 Aircraft at January 23,
1998, which includes the six Aircraft that were delivered to Emery during April,
1998, the average appraised base value of the Portfolio at January 23, 1998 was
approximately $3,859 million compared with $4,085 million based on the February
25, 1997 appraisals. This decrease was approximately $84 million more than the
expected decrease implied 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 values
of Fokker 100s and, to a lesser extent, MD11s and MD83s. These greater than
expected decreases were due primarily, in the case of the Fokker 100s, to Fokker
exiting the industry, and in the case of the MD11s and MD83s, to a combination
of the Boeing/McDonnell Douglas merger and the announcement by Boeing that it
will cease production of MD83 aircraft in 1999. Boeing has since announced that
it will cease production of MD11 aircraft in 2000. Airplanes Group also suffered
greater than expected decreases in value of its B767-300ER Aircraft due in part
to the competition this aircraft type now faces from the relatively new A330-200
aircraft. Finally, greater than expected decreases also occurred 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 was required to be made on the March 16,
1998 Payment Date. Accordingly, there was no suspension of payments ranking more
junior to the Class A Principal Adjustment Amount, as a result of the 1998
Aircraft appraisals.
Cash Flow Performance Relative to March 1996 Assumptions
The March 28, 1996 prospectus relating to the Certificates and underlying
Notes contained various assumptions (the "1996 Assumptions") regarding Airplanes
Group's future revenues and cash inflows. In the
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period from March 28, 1996 to the March 10, 1998 Calculation Date, Airplanes
Group generated cashflows of $166 million in excess of the 1996 Assumptions.
Lease revenues (net of downtime) have exceeded the 1996 Assumptions by $32
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 Latin 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 1996 Assumptions. The 1996 Assumptions had not assumed any aircraft
sales, which negatively impacted the lease revenues by $7 million compared to
the 1996 Assumptions. Net maintenance reserve cashflows have exceeded the 1996
Assumptions by approximately $33 million (the 1996 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 1996 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 1996 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 1996 Assumptions for
the period to March 10, 1998 by approximately $7 million.
The positive contributions to Airplanes Group's cashflows relative to the
1996 Assumptions were partially offset by other leasing costs being
approximately $14 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 $6 million greater
than those contained in the 1996 Assumptions. Finally, the 1996 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 March 10, 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 1996 Assumptions. With respect
to the Notes and Class E Notes, the increase in gross revenues compared with the
1996 Assumptions resulted in greater than assumed distributions of principal to
the Subclass A-5 Certificate holders ($115 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 Class A and Class B
Certificate holders as a result of the higher interest rate environment that
actually prevailed in the period to March 10, 1998 compared with the interest
rate levels reflected in the 1996 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
amortization. In addition, payments of $4 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 Class E Note interest after the Payment Date in
February 1997 up to the Payment Date in July 1997 as a result of a fall in the
February 25, 1997 Aircraft appraisals.
As at the March 10, 1998 Calculation Date, Airplanes Group retained $27
million more in the Collection and Expense Accounts than anticipated in the 1996
Assumptions. Included in this $27 million is an amount in respect of a portion
of the total costs (including underwriting fees) that were incurred in
connection with the issuance of the 1998 Refinancing Certificates.
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
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periods. Slightly more than half of the leases are fixed rate leases and there
has been an increasing tendency for fixed rate leases to be written.
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
rate leases. At least every three months, and in practice more frequently, GPA
Financial, as Airplanes Group's 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 March 31,
1998, Airplanes Group had unamortized Swaps with an aggregate notional principal
balance of $2,545 million. The aggregate notional principal balance of these
Swaps will be reduced to $960 million by March 31, 1999, to an aggregate
notional principal balance of $570 million by March 31, 2000 and to an aggregate
notional principal balance of $295 million by March 31, 2001. None of the Swaps
have maturity dates extending beyond January 2002. The fair values of the Swaps
at March 31, 1998 was a negative $2.4 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 purchases Swaptions which, if exercised, will allow Airplanes
Group to enter into interest rate swap transactions under which it will pay
floating amounts and receive 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 purchases 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, among other things, changes in the mix of payments
bases under future leases and in the prevailing level of interest rates. On each
Payment Date Airplanes Group purchases Swaptions with an aggregate notional
amount equal to the quotient of (i) the difference, if positive, between the
Target Hedge and aggregate notional amount of Swaptions owned by Airplanes Group
immediately prior to such purchase divided by (ii) the number of Payment Dates
remaining until the Payment Date in May 1998 or, after May 15, 1998, one. The
payment of premium for any such Swaptions may be made at two points in the
Priority of Payments. Fifty percent of any such payment for any month is a
"MINIMUM HEDGE PAYMENT" and is paid in the order of priority of payments set
forth under "Description of Securities -- The Notes and the Guarantees --
Priority of Payments". The other 50% of any such premium payable is expended as
a "SUPPLEMENTAL HEDGE PAYMENT" and is paid in the order of priority of payments
set forth under "Description of Securities -- The Notes and the Guarantees --
Priority of Payments". If there are not sufficient amounts available for
distribution, with the result that a Supplemental Hedge Payment would not be
made, then Airplanes Group will reduce the aggregate notional amount of the
Swaptions bought in any given month to reflect the amount that can be bought for
the premium payable as a Minimum Hedge Payment. From time to time the
Administrative Agent may also sell at market value or unwind part or all of the
initial and any future Swaptions, for example, to reflect any decreases in the
Target Hedge.
In the period from March 28, 1996 to March 31, 1998, Airplanes Group
purchased Swaptions with an aggregate notional principal balance of $283 million
and sold Swaptions with an aggregate notional principal
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balance of $57 million. The net aggregate notional principal balance of
Swaptions at March 31, 1998 therefore amounted to $226 million. The fair value
of the Swaptions at March 31, 1998 was $1.8 million and because the Swaptions do
not qualify for hedge accounting under U.S. GAAP, this amount has been included
in income for the fiscal year ended March 31, 1998.
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 whose credit ratings are consistent with maintaining the ratings of
the Class A Certificates.
YEAR 2000
As discussed above under "Item 1: Risk Factors -- Year 2000 Risk",
Airplanes Group has begun a process of assessing the potential impact of the
Year 2000 issue on its operations. Because such assessment is still at a
relatively early stage, Airplanes Group is currently not able to make any
estimate of the amount, if any, it may be required to spend to remedy Year 2000
problems. Such expenditures could, however, have a material adverse impact on
the ability of Airplanes Group to make payments on the Notes.
THE ACCOUNTS
Substantially all of Airplanes Group's cash inflows and outflows occur
through certain bank accounts prescribed by the Trust Indentures and the
Security Trust Agreement, which the Cash Manager, acting on behalf of the
Security Trustee, has established. The accounts are as follows: (i) the
Collection Account, (ii) the Lessee Funded Account, (iii) the Expense Account
and (iv) the Rental Accounts. Each of the Collection Account, the Expense
Account, most of the Rental Accounts and the Lessee Funded Account have been
established at a bank having (i) a long-term unsecured debt rating of not less
than AA, or the equivalent, by certain rating agencies or (ii) a certificate of
deposit rating of A-1+ by Standard & Poor's, P-1 by Moody's and that is
acceptable to other relevant rating agencies. Where required by the terms of the
relevant leases, certain Rental Accounts may be established at banks having
ratings of less than AA, or the equivalent, by certain rating agencies or a
certificate of deposit rating of less than A-1+ by Standard & Poor's and P-1 by
Moody's. Except where local legal or regulatory reasons do not permit, all of
such accounts are held in the names of the Security Trustee, who has sole
dominion and control over the Accounts, including, among others, the sole power
to direct withdrawals from or transfers among such accounts. Subject to certain
conditions set forth in the Cash Management Agreement, the Security Trustee has
delegated such authority over the Accounts to the Cash Manager; provided that
the Security Trustee is not responsible for the acts or omissions of the Cash
Manager.
For as long as any Notes remain outstanding, funds on deposit in the
Accounts will be invested and reinvested at Airplanes Group's written direction
(which direction may be delegated, at Airplanes Group's discretion, to the Cash
Manager pursuant to the terms of the Cash Management Agreement) in one or more
investments permitted under the Trust Indentures, maturing, in the case of the
Collection Account and Expense Account, such that sufficient funds shall be
available to make required payments on the first succeeding scheduled interest
payment date on the Notes after such investments are made; provided that
investment and reinvestment of funds in the Lessee Funded Account must be made
in a manner and with maturities that conform to the requirements of the related
leases. Investment earnings on funds deposited in any Account, net of losses and
investment expenses, will, to the extent permitted by the terms of such related
leases in the case of such funds in the Lessee Funded Account, be deposited in
the Collection Account and treated as collections.
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RENTAL ACCOUNTS
The lessees make all payments under the leases directly into the applicable
Rental Accounts. Pursuant to the Cash Management Agreement, the Cash Manager
transfers, or causes to be transferred, all funds deposited into the Rental
Accounts into the Collection Account as collections within one business day of
receipt thereof (other than certain limited amounts, if any, required to be left
on deposit for local legal or regulatory reasons).
THE COLLECTION ACCOUNT
Collections include all amounts received by Airplanes Group, including (i)
Rental Payments, (ii) payments under any letter of credit, letter of comfort,
letter of guarantee or other assurance in respect of a lessee's obligations
under a lease, (iii) the Liquidity Reserve Amount in the Collection Account,
(iv) amounts received in respect of claims for damages or in respect of any
breach of contract for nonpayment of any of the foregoing (including any amounts
received from any Airplanes Group subsidiary, whether by way of distribution,
dividend, repayment of a loan or otherwise and any proceeds received in
connection with a lessee's restructuring), (v) net proceeds of any Aircraft sale
or amounts received under certain agreements or purchase options under which a
person acquires or is entitled to acquire legal title, or the economic benefits
of ownership of an Aircraft, (vi) proceeds of any insurance payments in respect
of any Aircraft or any indemnification proceeds, (vii) certain amounts
transferred from the Lessee Funded Account to the Collection Account, (viii) net
payments to Airplanes Group under any Swap Agreement, (ix) investment income, if
any, on all amounts on deposit in the accounts (in each case to the extent
consistent with the terms of applicable related leases) and (x) any other
amounts received by any member of Airplanes Group other than certain funds
required to be segregated from Airplanes Group's other funds, certain funds to
be applied in connection with a redemption, certain funds received in connection
with a refinancing issue of Notes and certain amounts required to be paid over
to any third party (collectively, the "COLLECTIONS").
Collections on deposit in the Collection Account are calculated by the Cash
Manager on the fourth business day immediately preceding each interest payment
date. The portion of the Airplanes Group Expenses that are due and payable or
anticipated to become due and payable over the next interest accrual period on
the Notes (the Required Expense Amount) and that have not been paid directly by
the Cash Manager to Expense payees is transferred into the Expense Account on
each interest payment date and the Cash Manager may, from time to time, transfer
other amounts into the Expense Account in respect of unanticipated Expenses
falling due and payable within such interest accrual period. To the extent funds
are available therefore on any interest payment date, the Cash Manager also
transfers amounts in respect of expenses and costs that are not regular, monthly
recurring expenses but are anticipated to become due and payable in any future
interest accrual period ("PERMITTED ACCRUALS"). Amounts received in respect of
certain segregated Security Deposits and Maintenance Reserves are transferred
directly into the Lessee Funded Account.
LIQUIDITY RESERVE AMOUNT
All Collections received by Airplanes Group are either transferred to
another Account as described above and below, paid to the appropriate third
party on behalf of Airplanes Group or held in the Collection Account as a part
of the Liquidity Reserve Amount, a balance required to be held by Airplanes
Group in the Collection Account pursuant to the Cash Management Agreement and
each Trust Indenture. The Liquidity Reserve Amount is (i) the Maintenance
Reserve Amount, currently equal to $80 million as of May 11, 1998, (ii) a
"SECURITY DEPOSIT RESERVE AMOUNT", equal to approximately $54.4 million as of
May 11, 1998, and (iii) a "MISCELLANEOUS RESERVE AMOUNT", equal to $40 million
as of May 11, 1998.
The Liquidity Reserve Amount at May 11, 1998 equaled approximately $174.4
million and may be increased or decreased from time to time by an action of the
Board of Directors or Board of Controlling Trustees in light of significant
changes in, among other things, the condition of the Aircraft, the terms and
conditions of future leases, the financial condition of the lessees or
prevailing industry conditions; provided that the Airplanes Group will obtain
confirmation in advance in writing from the applicable rating agencies that any
such proposed reduction in the Liquidity Reserve Amount (other than a reduction
attributable solely to a
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decrease in the Security Deposit Reserve Amount as a result of Airplanes Group
entering into future leases requiring lower security deposits than expired
leases) will not result in a lowering or withdrawal by any such rating agencies
of their respective ratings of any class of Certificates. If the balance of
funds on deposit in the Collection Account should fall below the Liquidity
Reserve Amount at any time (including as a result of Airplanes Group's
determination that the Liquidity Reserve Amount should be increased, as required
by the applicable rating agencies or otherwise), Airplanes Group may continue to
make all payments, including required payments on the Notes, which rank prior
to, or equally with, payments of accrued and unpaid interest on the Class D
Notes and any Permitted Accruals, provided that the balance of funds in the
Collection Account does not fall below the sum of the Maintenance Reserve Amount
and the Miscellaneous Reserve Amount at their then current levels. However, the
balance of funds in the Collection Account may fall below the sum of the
Maintenance Reserve Amount and the Miscellaneous Reserve Amount, at their then
current levels, and Airplanes Group may continue to make payments of (i) all
accrued and unpaid interest on, and, on the final maturity date of any class or
subclass thereof, principal of such class or subclass of, the most senior class
of Notes then outstanding to avoid a Note Event of Default; and (ii) payments
under Airplanes Group's swap agreements.
At such time as the aggregate outstanding principal balance of the Notes is
less than or equal to the Liquidity Reserve Amount, the balance of funds, if
any, in the Collection Account will be distributed in accordance with the
priority of payments established for the Notes.
THE LESSEE FUNDED ACCOUNTS
Pursuant to the terms of the leases, certain lessee Security Deposits and
supplemental rent payments to provide for Maintenance Reserves may be required
to be segregated from other Airplanes Group funds. Amounts received from lessees
in respect of such Security Deposits and maintenance obligations are held in the
Lessee Funded Account. Amounts on deposit in the Lessee Funded Account are
accounted for, and, if required by any lease, segregated, on a per lease basis.
Funds on deposit in the Lessee Funded Account are used to make certain
maintenance and security deposit repayment related payments (or such other
payments as may be required or permitted under the terms of the relevant leases)
or may be applied against maintenance-related payments otherwise required to be
made by the lessee during the term of the related lease and will not be used to
make payments in respect of the Notes or the Certificates at any time, including
after a Note Event of Default. In certain circumstances where lessees relinquish
their rights to receive certain maintenance and security deposit payments upon
the expiration of a lease, surplus funds may be credited from the Lessee Funded
Account to the Collection Account.
THE EXPENSE ACCOUNT
On each Payment Date on the Notes, the Cash Manager withdraws from the
funds deposited in the Collection Account an amount equal to the Required
Expense Amount, which amount is then used to pay the Expenses. To the extent
that the Required Expense Amount has not been paid directly by the Cash Manager
to Expense payees, the Required Expense Amount is deposited into the Expense
Account. In addition, in the period between interest payment dates on the Notes,
the Cash Manager may make further withdrawals of cash from the Collection
Account in order to satisfy Expenses due and payable prior to the next interest
payment date on the Notes that were not previously anticipated to become so due
and payable on the previous interest payment date. If funds on deposit in the
Collection Account are less than the Required Expense Amount on any Payment Date
on the Notes, Airplanes Group will be unable to pay the Required Expense Amount
in full on such date, which may lead to a default under one or more of Airplanes
Group's various service agreements or other contracts under which the Expenses
arise.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
report. See "Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K".
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
DIRECTORS AND CONTROLLING TRUSTEES
The Directors and the Controlling Trustees of Airplanes Limited and
Airplanes Trust, respectively, their respective ages and principal activities
are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICES HELD WITH THE REGISTRANTS
- ---- --- ---------------------------------
<S> <C> <C>
Roy M. Dantzic................. 53 Independent Director, Airplanes Limited
Controlling Trustee, Airplanes Trust
William A. Franke.............. 61 Independent Director and Chairman, Airplanes Limited
Controlling Trustee and Chairman, Airplanes Trust
Hugh R. Jenkins................ 64 Independent Director, Airplanes Limited
Controlling Trustee, Airplanes Trust
William M. McCann.............. 54 Independent Director, Airplanes Limited
Controlling Trustee, Airplanes Trust
Edward J. Hansom............... 40 E Note Director, Airplanes Limited
E Note Controlling Trustee, Airplanes Trust
</TABLE>
Certain individuals other than the Directors and Controlling Trustees
listed above serve as directors of various subsidiaries of Airplanes Group.
Roy Dantzic started his career with Coopers & Lybrand qualifying as a
chartered accountant in 1968. He moved into the City of London in 1970 and spent
the next 10 years in corporate advisory work, principally as a director of
Samuel Montagu. In 1980, the British Government appointed Mr. Dantzic as Finance
Director of British National Oil Corporation and he served in such capacity
until 1984. Between 1985 and 1989 he was a director of the corporate broking
division of Wood McKenzie. In 1989 he joined the board of Stanhope Properties
and served as its Finance Director from 1992 until the company was acquired in
1995. In August 1995, Mr. Dantzic became a director of the corporate broking
division of Merrill Lynch International Ltd. He has served as a non executive
director on the boards of Central Electricity Generating Board, British Nuclear
Fuels Limited, Saxon Oil Limited and Total Oil Holdings Ltd. Mr. Dantzic is
currently managing director of the property division of BG plc and non-executive
chairman of Associated British Cinemas.
William Franke is Chairman and Chief Executive Officer of America West
Holdings Corporation since February 1997 and since 1992, Chairman of the Board
of its principal subsidiary, America West Airlines, Inc., an airline and was the
subsidiary's Chief Executive Officer from December 1993 until February 1997. Mr.
Franke is a Managing Partner of Newbridge Latin American, L.P., a private equity
investment fund focussed on Latin America, and is owner and president of Franke
& Company, Inc., a financial advisory firm. He is currently a director of
Central Newspapers, Inc., publisher of the Phoenix and Indianapolis morning
newspapers, Phelps Dodge Corporation, a major mining and manufacturing company
and Beringer Wine Estates. He is also a director of the Air Transport
Association of America.
Hugh Jenkins has spent over 20 years in senior investment management
positions. Most recently with the Prudential Corporation Plc, a large life
insurance company where from 1989 to December 1995 he was an Executive Director
and Chairman/Chief Executive of its investment management subsidiary with
overall responsibility for the Group's investments worldwide. His previous
appointments included: 1986-1989 Group Investment Director of Allied Dunbar
Insurance Plc, 1985-1986 Director of Heron International, N.V. and
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from 1973-1985 as Director-General of Investments for the pension plans of the
National Coal Board. He is currently Chairman, Thorn Plc and a non-executive
Director of The Rank Organisation Plc, EMI Plc, Johnson Matthey Plc and Gartmore
European Investment Trust Plc.
William McCann, a chartered accountant, became a partner in Craig
Gardner/Price Waterhouse in 1972. From 1987 to 1995, he was the Managing Partner
of Craig Gardner/Price Waterhouse in the Republic of Ireland. From 1991 to 1995
he was a member of the Price Waterhouse World Board. Mr. McCann currently is
Chairman of the Electricity Supply Board, Ireland, Deputy Chairperson of the
Irish Takeover Panel and a Director of the Central Bank of Ireland. He is also a
Director of Canada Life Assurance (Ireland) Limited, Murray Global Accumulation
Funds plc and is Chairman or a Director of a number of other companies. He is a
Board Member of the University College Dublin Graduate School of Business.
On March 28, 1996, Edward Hansom was appointed a Director of Airplanes
Limited and a Controlling Trustee of Airplanes Trust by GPA Group as majority
holder of the Class E Notes. Mr. Hansom is Chief Financial Officer of GPA Group.
He joined GPA Group in December 1988 from the treasury division of Schroders.
Prior to taking up his current position in May, 1997, Mr. Hansom was General
Manager, Treasury of GPA Group. Mr. Hansom is also a director of ALPS 94-1.
The Board of Directors and the Controlling Trustees of Airplanes Limited
and Airplanes Trust, respectively, are non-executive Directors and Controlling
Trustees, as the case may be. Further, as is common with many other special
purpose companies, neither Airplanes Limited nor Airplanes Trust has, or will
have, any employees or executive officers. Accordingly, the Board of Directors
and the Controlling Trustees will each rely upon the Servicer, the
Administrative Agent, the Cash Manager and the other service providers for all
asset servicing, executive and administrative functions pursuant to the
respective service provider agreements.
THE SERVICER
GECAS provides various aircraft-related services to Airplanes Group as
Servicer under the Servicing Agreement. Upon completion of the MOU Transaction,
GE Capital will acquire the economic interest in the Airplane's Group Class E
Notes currently held by GPA Group.
GENERAL
GECAS and its affiliates are the world's largest managers of commercial
aircraft. As of March 31, 1998, the GECAS Managed Portfolio consisted of 860
aircraft, which are on lease to more than 160 lessees in 54 countries throughout
the world. GECAS announced in early 1996 that it had entered into a multi-year
order for five Boeing 777s and 102 Boeing 737 jet aircraft, and options for 76
Boeing 737 jet aircraft of which twenty-five aircraft have been delivered in
period to March 31, 1998. In addition GECAS purchased sixteen Boeing 737 jet
aircraft, which were not included in the order book announced in 1996. Under the
agreement with Boeing, GECAS also may purchase up to 76 additional Boeing 737
jet aircraft. On July 15, 1996, GECAS entered into a multi-year order for 40
A320 aircraft and five A340 aircraft, and options for a further 40 A320 aircraft
and five A340 aircraft. Ten aircraft under this order were delivered in the
period to March 31, 1998. As a global commercial aviation financial services
company, GECAS and its affiliates (i) offer a broad range of financial products
to airlines and aircraft operators, aircraft owners, lenders and investors,
including financing leases, operating leases, tax-advantaged and other
incentive-based financing and debt and equity financing and (ii) provide asset
management, marketing and technical support services to aircraft owners, lenders
and investors, including GE Capital, GPA and their respective affiliates, ALPS
94-1 and certain third parties. GECAS, together with GECAS, Inc., has access to
approximately 214 employees worldwide and has operations in Stamford,
Connecticut; Shannon, Ireland; San Francisco, California; and a number of other
locations, including Beijing, Dallas, Hong Kong, Miami and Singapore.
GECAS is headquartered in Shannon, Ireland and at March 31, 1998 had 115
employees.
One of GECAS's principal businesses is providing a broad range of financial
products to airlines and aircraft operators and to aircraft owners, lenders and
investors throughout the world. To meet the fleet
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financing needs of its airline customers, GECAS and its affiliates offer such
financing options as financing leases (including both direct financing and
leveraged leases), operating leases and other structured finance transactions,
as well as general corporate financing, including direct debt (both senior and
subordinated) and equity and debtor-in-possession financing. In conjunction with
this business, GECAS and its affiliates are responsible for developing,
negotiating and consummating aircraft-related investment opportunities in the
aviation industry for its affiliate, GE Capital, including the acquisition of
aircraft for GE Capital. On behalf of GE Capital or its affiliates, GECAS will
likely offer aircraft or engine financing to customers of the GE Aircraft
Engines Division, and will also likely offer, on behalf of GE Group, other
financial products to such customers, including in connection with a
restructuring or other modification of such customer's existing financing
provided by the GE Aircraft Engines Division, or otherwise.
With respect to its owner, lender and investor customers, GECAS intends to
continue to market a range of products that are intended to allow financial
institutions and other investors to realize the benefits of aircraft ownership
while the aircraft are managed by GECAS. GECAS expects to arrange and negotiate
the sale of aircraft with operating leases in place, rental rates, tax benefits
and related assets from the portfolio it manages, as well as structured pooled
financings and other incentive-driven transactions.
GECAS offers a broad range of management services to aircraft owners,
lenders and investors, including collection of rental payments, arranging and
monitoring of aircraft maintenance performed by others, limited technical
inspection of aircraft, arranging and monitoring insurance, arranging for
aircraft valuations, registration and deregistration of aircraft, monitoring
compliance with lease agreements and enforcement of lease provisions against
lessees, confirming compliance with applicable ADs and facilitating delivery and
redelivery of aircraft. GECAS devotes substantial resources to marketing for
sale and re-lease of the aircraft that it manages. Generally, to the extent an
aircraft is on lease at the time it is being marketed for sale, it is a more
attractive candidate to be sold to potential financial investors when compared
to an aircraft that is not currently under lease. GECAS arranges for its
customers, including GE Capital, GPA and their respective affiliates and certain
third parties, the sale of both unencumbered aircraft and aircraft that are
subject to operating leases to investors who seek a return on their investment
from a combination of future rental payments, the aircraft's residual value and,
in certain instances, tax benefits. GECAS identifies potential purchasers,
determines which aircraft satisfy the specific needs of a particular airline or
investor, negotiates commercial terms and executes the sale of such aircraft.
GECAS's lease marketing activities serve both its airline customer base and its
investor customer base. GECAS designs tax-advantaged transactions as well as
operating lease structures, both to meet the varying needs of its customers and
to facilitate the subsequent sale of the leased aircraft to financial investors.
The aircraft and lease marketing services provided by GECAS include planning,
negotiation and execution of leases and remarketing aircraft for re-lease prior
to expiration of a lease term.
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The table below sets forth the different aircraft comprising the GECAS
Managed Portfolio as of March 31, 1998 by manufacturer and by whether the
aircraft are owned and managed by affiliates of GE Capital or simply managed for
third parties.
<TABLE>
<CAPTION>
GE CAPITAL OTHER MANAGED AIRPLANES
AIRCRAFT TYPE AND CLASS FLEET(1) THIRD PARTIES(2) GROUP TOTAL
- ----------------------- ---------- ---------------- --------- -----
<S> <C> <C> <C> <C>
Airbus
A300............................................ 19 1 6 26
A310............................................ 8 -- -- 8
A319............................................ 10 -- -- 10
A320............................................ 22 9 12 43
A321............................................ 1 -- -- 1
Boeing
B727............................................ 19 2 2 23
B737-200........................................ 53 13 32 98
B737-300/400/500(3)............................. 188 21 44 253
B737-700........................................ 2 -- -- 2
B747............................................ 24 1 1 26
B757-200........................................ 27 3 3 33
B767-200ER...................................... 8 -- 1 9
B767-300ER...................................... 24 3 4 31
McDonnell Douglas
DC8............................................. 9 2 19 30
DC9............................................. 8 24 18 50
DC10............................................ 11 1 -- 12
MD11............................................ -- 2 3 5
MD82............................................ 20 6 2 28
MD83............................................ 20 8 23 51
MD87............................................ -- -- 1 1
MD88............................................ 14 -- -- 14
Fokker
F100............................................ 1 13 16 30
Other Jets........................................ 10 2 -- 12
Turboprops........................................ 4 32 28 64
--- --- --- ---
Total........................................ 502 143 215 860
--- --- --- ---
Body Type:
Widebody........................................ 95 8 15 118
Narrowbody...................................... 407 135 200 742
Stage Compliance:(4)
Stage 2......................................... 81 19 52 152
Stage 3......................................... 421 124 163 708
</TABLE>
- ---------------
(1) Certain aircraft included in the GE Capital fleet are owned by joint
ventures or pursuant to other arrangements in which unaffiliated parties
have interests.
(2) The third parties comprise primarily GPA and ALPS 94-1.
(3) For purposes of this table, 10 B737 aircraft have been included in the GE
Capital fleet but both GPA and GE Capital are included in the lease chain.
(4) Turboprop aircraft have been classified as Stage 3 compliant.
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THE SERVICING AGREEMENT
The Servicer and its affiliates have not assumed and are not responsible
for, or guarantors of, and shall not assume or be responsible for, or guarantors
of, any liabilities of Airplanes Limited, Airplanes Trust, Holding Co. or any of
their affiliates, including, without limitation, any payments due with respect
to the Notes.
The Servicer provides services pursuant to the terms of the Servicing
Agreement on behalf of Airplanes Group (except in certain circumstances
described below where a substitute servicer may perform such services). The
Servicing Agreement (a) sets forth the various duties of the Servicer with
respect to the management and administration of the Aircraft and the leases, (b)
sets forth certain aircraft marketing activities to be performed by the Servicer
and (c) sets forth certain Aircraft management-related obligations of the
Servicer in connection with offers and sales by Airplanes Group of Refinancing
Certificates.
The Servicer provides the services in accordance with the express terms of
the Servicing Agreement, which, inter alia, provides that the Servicer will act
in accordance with applicable law and with directions given by Holding Co., on
behalf of Airplanes Limited, AeroUSA and Holding Co., from time to time in
accordance with the Servicing Agreement. In addition, under the Servicing
Agreement, the Servicer agrees to perform its services in accordance with the
GECAS Services Standard and the GECAS Conflicts Standard.
The duties and obligations of the Servicer are limited to those expressly
set forth in the Servicing Agreement and the Servicer does not have any
fiduciary or other implied duties or obligations to the Airplanes Group or any
other person, including any Certificateholder.
In addition to managing the Aircraft, GECAS also manages aircraft assets
owned by ALPS 94-1, GE Group and other third parties, including GPA. In the
course of conducting such activities, GECAS will from time to time have
conflicts of interest in performing its obligations on behalf of Airplanes
Group. Under certain circumstances, the Servicer may resign from the performance
of its duties pursuant to the Servicing Agreement in relation to all the
Aircraft generally or, in certain circumstances, one or more Aircraft
individually, provided in either case that a replacement servicer has been
appointed that complies with certain criteria. With respect to the negotiation
of certain conflicts of interest, the Servicer may withdraw from representing
Airplanes Group, which shall be required to appoint an independent
representative to represent Airplanes Group as to such negotiation, and the
Servicer shall be entitled to act on behalf of itself or any of its affiliates
with respect to such negotiation.
Pursuant to the Servicing Agreement, the Servicer is not liable or
accountable to any person, other than Airplanes Limited, AeroUSA and Holding Co.
to the limited extent described below, under any circumstances, for any Losses
and Airplanes Limited, AeroUSA and Holding Co. jointly and severally indemnify
the Servicer and its affiliates on an after-tax basis for any Losses, unless
such Losses are finally adjudicated to have resulted directly from the
Servicer's gross negligence or wilful misconduct in respect of its obligation to
apply the GECAS Services Standard or the GECAS Conflicts Standard in respect of
its performance of the services under the Servicing Agreement. Airplanes
Limited, AeroUSA and Holding Co. also jointly and severally indemnify the
Servicer and its affiliates on an after-tax basis for any losses that may be
imposed on, incurred by or asserted against, the Servicer or any of its
affiliates, directly or indirectly, arising out of, in connection with or
related to, the Servicer or any of its affiliates' involvement (or alleged
involvement) in connection with the structuring or implementation of any aspect
of the Acquisition, the Underwritten Offering or related transactions. Airplanes
Limited, Holding Co. and AeroUSA are entitled jointly to terminate the Servicing
Agreement if the Servicer fails to perform in any material respect any material
service thereunder to either the GECAS Services Standard or the GECAS Conflicts
Standard and such failure has a material adverse effect on Airplanes Group taken
as a whole.
Notwithstanding anything to the contrary stated above, the Servicer is not
obligated to take or refrain from taking any action that it believes is
reasonably likely to (i) violate any applicable law with respect to GECAS or its
affiliates, (ii) violate any established written policies of GE, in effect from
time to time, applicable to GE Group related to business practices with respect
to legal, ethical and social matters ("GE Policy") or (iii) lead to an
investigation by any governmental authority.
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AIRCRAFT SERVICES
Pursuant to the Servicing Agreement, the Servicer has, inter alia,
undertaken:
-- to grant Airplanes Group and its agents, including the Administrative
Agent, access to certain information and personnel of the Servicer under
specified circumstances to enable Airplanes Group to monitor the
Servicer's compliance with the Servicing Agreement and otherwise for the
purposes of Airplanes Group's business
-- not to commingle with its own funds any funds of Airplanes Group.
The main categories of services being provided by the Servicer pursuant to
the Servicing Agreement in respect of the Aircraft (the "Services") are:
-- lease marketing services, including, subject to the terms of the Trust
Indentures and the Servicing Agreement, re-marketing, lease negotiation
and execution (including, without limitation, negotiating final lease
terms)
-- Aircraft assets management services, including lease rent collection,
Aircraft maintenance, insurance, contract compliance of, and enforcement
against, lessees, and accepting delivery and re-delivery of Aircraft
-- Aircraft sales services as, when and to the extent directed by Airplanes
Group
-- monitoring of maintenance and provision of records and information with
respect to the Aircraft
-- arranging for valuations and monitoring regulatory developments
-- using commercially reasonable efforts to keep Airplanes Group in
compliance with certain covenants under the Notes directly relating to
the operation of the Aircraft
-- providing to Airplanes Group certain data and information relating to
the Aircraft
-- certain limited Aircraft-related assistance in connection with the
public or private offerings of Refinancing Certificates, including
consenting to public disclosure relating to the Servicer and its
affiliates contained in any prospectus, certain limited Aircraft-related
participation in marketing activities solely with respect to the
Aircraft and the Servicer and the Services, and providing Airplanes
Group, underwriters, rating agencies and/or other advisors with the
reasonable opportunity to conduct due diligence with respect to the
Servicer as it relates to the Aircraft
-- legal and other professional services in relation to the Aircraft (other
than in relation to litigation not arising in the ordinary course of the
operating lease business by or against Airplanes Group, or any of its
affiliates)
-- periodic reporting of operational information relating to the Aircraft
OPERATING GUIDELINES
Under the Servicing Agreement, the Servicer is entitled to exercise such
authority as is necessary to give it a practicable and working autonomy in
performing the Services, while at the same time Holding Co., acting on behalf of
Airplanes Group through the Administrative Agent and in its own capacity, has
established monitoring and control procedures which are expected to enable it
properly to manage the business and assets of the Airplanes Group.
Pursuant to the terms of the Servicing Agreement, the Servicer is required
to comply with the GECAS Services Standard and the GECAS Conflicts Standard in
the performance of the Services. All transactions to be entered into by the
Servicer on behalf of Airplanes Group (other than with other persons within
Airplanes Group) are required to be at arm's length and on fair market value
terms unless otherwise agreed or directed by Airplanes Group. Certain
transactions or matters with respect to Aircraft require the specific approval
of Airplanes Group, including:
-- sales of Aircraft (other than as required by a lease)
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-- the entering into of any leases (including renewals or extensions,
unless any such lease had originally been approved) if the lease does
not comply with any applicable operating covenants governing the
Certificates
-- terminating any lease or leases (without substitution of, or replacement
by, another substantially similar lease) to any single lessee with
respect to Aircraft then having an aggregate depreciated net book value
in excess of $200 million
-- unless provided for in the applicable budget, entering into any contract
for the modification or maintenance of Aircraft where the costs to be
incurred (A) exceed the greater of (i) the estimated aggregate cost of a
heavy maintenance check for similar aircraft and (ii) available
Maintenance Reserves or other collateral under the related lease or (B)
are outside the ordinary course of Airplanes Group's business
-- issuing any guarantee on behalf of, or otherwise pledging the credit of,
other than with respect to trade payables in the ordinary course of
business, Airplanes Limited, Airplanes Trust, Holding Co. or any of
their subsidiaries (other than in connection with entering into a lease
with respect to an Aircraft)
-- any transaction with GE Capital or any of its affiliates not
contemplated in the Servicing Agreement.
BUDGETS
Holding Co. will adopt an annual budget each year with respect to all
Aircraft owned by Airplanes Group. Under the Servicing Agreement, the Servicer
has undertaken to use reasonable commercial efforts to attempt to achieve the
budget each year.
MANAGEMENT FEES
Airplanes Limited, AeroUSA and Holding Co. are, jointly and severally,
obligated to pay a fee (the "Asset Based Servicing Fee") to the Servicer,
pursuant to the Servicing Agreement, in a per annum amount equal to
approximately 0.495% of an agreed book value of each Aircraft, payable monthly
in arrears on a pro rata basis for the period such Aircraft is under management.
Airplanes Group is obliged to pay for certain expenses incurred or approved by
the Servicer on behalf of Airplanes Group in connection with the Servicer's
performance of the Services. These expenses include, among other expenses,
Aircraft maintenance costs and insurance, outside professional advisory fees
(including legal fees) and other out of pocket expenses, all of which in the
aggregate may constitute a significant additional component of Airplanes Group's
total overhead costs. In the year ended March 31, 1998 Aircraft Maintenance
Reserve expenditures amounted to $88 million. Other expenses, including outside
professional advisory fees, insurance and other out of pocket expenses amounted
to $29 million. The Servicer is also entitled to certain additional fees based
on (i) the aggregate annual cash flow generated by the leases in excess of
certain cash flow targets and (ii) sales of Aircraft at the direction of
Airplanes Group. Such fees are subject to a mandatory aggregate annual minimum
fee in the amount of $1.5 million. In the year ended March 31, 1998, the
Servicer was paid $1.5 million in such additional fees.
In addition, the Servicer is entitled to certain additional fees in
connection with various Aircraft management-related services required to be
provided by the Servicer pursuant to the Servicing Agreement in connection with
any offerings and sales by the Airplanes Group of Refinancing Certificates.
TERM AND TERMINATION
The Servicing Agreement is for a non-cancellable initial term expiring on
the earlier of (i) March 28, 2014 (which is prior to the final maturity date of
certain Certificates) or (ii) payment in full of all amounts outstanding to be
paid under the Notes. Each party will have the right to terminate the Servicing
Agreement under certain circumstances. The Servicer has the right to terminate
the Servicing Agreement if, among other things:
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-- Airplanes Limited, AeroUSA and/or Holding Co. fails to pay when due (i)
any servicing fees if not paid within five days of notice of such
failure, or (ii) any other amount payable by Airplanes Limited, AeroUSA
or Holding Co. to the Servicer if not paid within ten days of notice of
such failure
-- Airplanes Limited, AeroUSA, Holding Co. or any of their subsidiaries
fail to perform or observe or violate in any material respect any
material term, covenant, condition or agreement to be performed or
observed by it under the Servicing Agreement
-- any material representation or warranty by any person within the
Airplanes Group pursuant to the Servicing Agreement or any other related
document shall be false or misleading in any material respect and such
misrepresentation or breach of warranty is reasonably likely to have a
material adverse effect on the Servicer or its rights and obligations
under the Servicing Agreement
-- an involuntary proceeding is commenced in respect of Airplanes Limited,
Airplanes Trust, AeroUSA, Holding Co. or certain subsidiaries of any of
such entities under applicable bankruptcy, insolvency, receivership or
similar law, and such proceeding shall continue undismissed for 75 days
or any such person shall go into liquidation, suffer a receiver or
mortgagee to take possession of all or substantially all of its assets
or a voluntary proceeding is commenced in respect of Airplanes Limited,
Airplanes Trust, AeroUSA, Holding Co. or certain subsidiaries of any of
such entities under bankruptcy, insolvency, receivership or similar law
or any such person shall make a general assignment for the benefit of
its creditors
-- no person within Airplanes Group owns any Aircraft
-- the Trust Indentures shall cease to be in full force and effect
-- any guarantee in favor of the Servicer by any person within Airplanes
Group ceases to be legal, valid and binding.
Airplanes Limited, AeroUSA and Holding Co. have the right to terminate the
Servicing Agreement upon:
-- the Servicer ceasing to be at least 75% owned, directly or indirectly,
by GE Capital or GE
-- the Servicer failing in any material respect to perform any material
services required pursuant to the Servicing Agreement in accordance with
the GECAS Services Standard or the GECAS Conflicts Standard and such
failure having a material adverse effect on Airplanes Group taken as a
whole
-- commencement of an involuntary proceeding in respect of GE, GE Capital
or the Servicer under bankruptcy, insolvency, receivership or similar
law, if such proceeding continues undismissed for 75 days or any such
person shall go into liquidation, suffer a receiver or mortgagee to take
possession of all or substantially all of its assets or commencement of
a voluntary proceeding in respect of GE, GE Capital or the Servicer
under bankruptcy, insolvency, receivership or similar law or any such
person shall make a general assignment for the benefit of its creditors.
The Servicer may resign from performing the services pursuant to the
Servicing Agreement if it reasonably determines that directions given, or
services required, would, if carried out (i) be unlawful under applicable law,
(ii) be in violation of GE Policy, (iii) be likely to lead to an investigation
by any governmental authority, (iv) expose the Servicer to liabilities for which
adequate indemnity has not been provided or (v) place the Servicer in a conflict
of interest with respect to which, in the Servicer's good faith opinion, the
Servicer could not continue to perform its obligations under the Servicing
Agreement in accordance with its terms.
The Servicer may not resign from its obligations under the Servicing
Agreement nor may the Servicing Agreement be terminated, except upon expiration
of the Servicing Agreement at the end of the term thereof, unless a replacement
servicer has been appointed and accepted such appointment and the applicable
rating agencies have confirmed to Airplanes Group that no lowering or withdrawal
of the then current ratings of any Certificates will result from such
appointment. In the event that a replacement servicer has not been appointed
within 90 days after any termination of the Servicing Agreement or resignation
by the Servicer, the Servicer
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may petition any court of competent jurisdiction for the appointment of a
replacement servicer. Notwithstanding any other term to the contrary, the
Servicer may terminate the Servicing Agreement, whether or not a replacement
servicer has been appointed and accepted such appointment, in the event that
Airplanes Limited, AeroUSA or Holding Co. have failed, after the applicable cure
periods, to pay amounts due to the Servicer.
TAX STATUS
By virtue of GPA Group's ownership of 5% of the issued and outstanding
ordinary share capital of Holding Co. and the continued ability of GPA Group and
GECAS to satisfy certain employment levels in Shannon, Ireland, it is intended
that the Irish tax resident Transferred Companies will continue to benefit from
their status as Shannon certified companies. In connection with the MOU
Transaction, GPA Group's 5% holding in Holding Co. may be restructured. However,
any such restructuring is not expected to adversely effect the Irish tax
benefits available to Airplanes Group. As a result of their status as Shannon
certified companies, the Irish tax resident Transferred Companies are intended
to enjoy reduced rates of corporation tax and advance corporation tax together
with improved entitlements to capital allowances. In addition, the benefits
include the right to pay interest, in certain circumstances, without paying
Irish withholding tax and to deduct payments of interest in computing liability
for corporate tax. There can be no assurance that the future management of the
Aircraft by the Servicer in accordance with the terms of the Servicing Agreement
will not expose Holding Co. or the Irish tax resident Transferred Companies to
tax liabilities outside Ireland. The Servicing Agreement sets out certain
tax-related undertakings with respect to the Servicer which are designed to
maintain a favorable tax treatment in Ireland for Holding Co. and the Irish tax
resident Transferred Companies.
These tax-related undertakings include the following:
-- maintaining minimum levels of employment in Ireland, if required for
Holding Co. or the Irish tax resident Transferred Companies to maintain
their Shannon licences and tax certification
-- holding meetings of the board of directors of the Servicer in Shannon no
less frequently than quarterly and only occasionally outside Shannon
-- the Servicer's transaction approval committee (meeting in Shannon not
less frequently than monthly and meeting outside Ireland only
occasionally) shall be comprised of at least five persons, a majority of
whom shall be employees of the Servicer, and such committee shall have
and regularly exercise the power to approve contracts
-- except in certain circumstances, contracts entered into by the Servicer
with respect to the purchase, sale, lease or other disposition of
Aircraft shall either be signed in Ireland or signed outside of Ireland
pursuant to a limited power of attorney
-- the managing director (but not necessarily the chairman of the board of
directors) of the Servicer will be an officer and employee of the
Servicer based in Shannon
-- the Servicer shall not itself maintain an office outside Shannon
-- the Servicer shall compensate any of its affiliates for services
provided outside Ireland to the Servicer to the extent services are
provided by express agreement in respect of the Aircraft.
In the event that the Servicer breaches a tax-related undertaking as a
result of its gross negligence or wilful misconduct and Airplanes Group
experiences a material tax event (broadly defined as incurrence of aggregate
liability for taxes of $29 million in any one or more years during the term of
the Servicing Agreement, provided that, if the aggregate liability for any one
year does not exceed $4 million, it will not be taken into account), Airplanes
Group's sole remedy, upon six months' prior written notice, will be to terminate
the Servicing Agreement. Subject to compliance with certain procedural
guidelines set forth in the Servicing Agreement, the Servicer has the right for
any good faith commercial reason, as determined in its sole discretion, to
modify the tax-related undertakings. Any such modification could lead to a loss
of any favorable tax treatment afforded to Holding Co. and other Irish tax
resident Transferred Companies in Ireland.
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ASSIGNMENT OF SERVICING AGREEMENT
The Servicing Agreement and the rights and obligations of the Servicer, on
the one hand, and Airplanes Limited, Holding Co. and AeroUSA, jointly and
severally, on the other hand, are not assignable by any of such parties other
than with the prior consent of the other parties. However, the Servicer may
delegate any portion, but not all, of its duties to GE Capital or GE or any 75%
or more owned subsidiary of GE Capital or GE.
PRIORITY PAYMENT OF SERVICING FEES AND REIMBURSABLE EXPENDITURES
The fees and expenses of the Servicer rank senior in priority of payment to
all payments of interest, principal and premium, if any, on the Notes.
The joint and several obligations of Airplanes Limited, Holding Co. and
AeroUSA under the Servicing Agreement have been guaranteed for the benefit of
the Servicer by each entity within Airplanes Group.
GPA AS ADMINISTRATIVE AGENT AND CASH MANAGER
INTRODUCTION TO GPA
GPA is a significant lessor of modern (post-1985) commercial aircraft and
is a major participant in the global commercial aviation industry. GPA leases
aircraft to a wide range of airlines throughout the world. GPA Group sold, or is
the parent of the seller of, each of the Transferred Companies and, through
wholly-owned subsidiaries, provides administrative, accounting, liability
management, financial consulting and cash management services to Airplanes Group
in its capacity as Administrative Agent and Cash Manager. As the majority holder
of the Class E Notes, GPA Group is entitled to nominate one Director of
Airplanes Limited and one Controlling Trustee of Airplanes Trust.
In 1996, GE Capital was granted the Call Right. If GE Capital exercises
this right, it will be obliged to make an offer to all other ordinary
shareholders to purchase their ordinary shares. Alternatively, GE Capital may
make a general offer to all ordinary shareholders (a "GENERAL OFFER") on or
before October 29, 2001. If GE Capital were to exercise this option to acquire
90% of the ordinary share capital of GPA under the Call Right, GE Capital would
pay approximately $59 million. If GE Capital were to exercise its option to
acquire 100% of the ordinary share capital of GPA under the Call Right or a
General Offer, GE Capital would pay approximately $65 million.
In connection with the Call Right, GPA and GE Capital entered into an
agreement (the "GENERAL AGREEMENT") in which GPA agreed, among other things, and
subject to certain exceptions, to various restrictions on its business and on
its ability to change its capital structure. GPA has also agreed to refrain from
taking certain other actions which have the effect of reducing the value of, or
imposing materially adverse conditions on the exercise of, the Call Right.
Additionally, under the General Agreement GPA has made comprehensive
representations and warranties and has agreed to indemnify GE Capital for losses
based on breaches of covenants, inaccuracies in representations and warranties
or for any liabilities of GPA. The General Agreement ceases upon the earlier of
exercise in full or expiry of the Call Right.
On June 8, 1998, GPA Group entered into a nonbinding memorandum of
understanding (the "MOU") with GE Capital and GECAS in relation to a number of
matters, including restructuring of the Call Right (the "MOU Transaction").
Completion of the MOU Transaction will be subject to the negotiation and
execution of definitive agreements and the approval of GPA Group's ordinary
shareholders. Upon completion of the MOU Transaction, GPA will conduct business
under a new name.
The principal components of the MOU Transaction are:
- Replacement of the existing Call Right with a new option (the "NEW GE
OPTION"), exercisable at any time until October 29, 2001, to acquire a
passive investment of up to 24.9% in GPA (after exercise) at an option
price of $0.06 per ordinary share (equivalent to the per share price
under the existing Call Right).
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- GPA's servicing agreement with GECAS would be amended to provide, among
other things, for its termination on October 29, 2001 in consideration
for a $61.25 million fee to be paid by GPA upon completion of the MOU
Transaction.
- GPA to sell nine aircraft to GE Capital for an aggregate purchase price
equal to GPA's net book value (approximately $274 million).
- GPA to assign to GE Capital its rights under a purchase agreement with
The Boeing Company for four new Boeing 737 aircraft. GE Capital will
reimburse GPA for all purchase price installments previously paid by
GPA.
- GE Capital to acquire GPA's economic interest in the outstanding Class E
Notes issued by Airplanes Limited and Airplanes U.S. Trust that are held
by GPA Group. GECAS will continue as Servicer of Airplanes Group's 215
aircraft.
- GE Capital to have the option, exercisable at any time until October 29,
2001, to pay GPA $36 million in satisfaction of GE Capital's obligation
to make deferred payments to GPA relating to 18 aircraft it previously
purchased from GPA. (This amount is equal to GPA's book value of the
deferred payments.)
- GPA to satisfy its obligations as lessee under nine aircraft head leases
from GE Capital for a $36 million cash payment and assignment of its
rights under the relevant subleases.
- GPA to change its name upon completion of the MOU Transaction. GPA, GE
Capital, GECAS and their affiliates will agree not to use the "GPA" or
"Guinness Peat Aviation" names or logos.
In connection with the MOU Transaction, GPA also plans to seek one or more
new equity investors to acquire a significant minority stake in GPA Group (which
may include both ordinary shares to be acquired from GPA Group's current
shareholders and newly issued ordinary shares). GPA expects that completion of
the MOU Transaction will depend on such an acquisition being made. GPA is
currently in preliminary discussions with a limited number of potential
investors.
The MOU Transaction (other than the aircraft sales described above),
including the agreement reached with any new investor(s), will require approval
by GPA Group's ordinary shareholders in the form of a special resolution (i.e.,
requiring a 75% majority at a general meeting). GPA expects to convene an
extraordinary general meeting of ordinary shareholders for the purpose of
obtaining shareholder approval once definitive agreements with GE Capital and
GECAS have been signed.
The MOU is nonbinding and the final terms of the MOU Transaction will be
contained in definitive agreements to be negotiated and executed by the parties.
As a result, the MOU Transaction, if agreed, may differ from the transactions
described above. In addition to shareholder approval, completion of the
Transaction will be subject to any required contractual, governmental or
regulatory approvals and other customary closing conditions. See "Risk Factors
- -- Risks Relating to Tax".
At March 31, 1998, GPA had a total of 93 aircraft in its portfolio.
Eighty-nine of these aircraft were on lease to 38 lessees in 20 countries. Of
the 93 aircraft, 26 were leased in-leased out where GPA effectively assumes the
credit risk of the airline by leasing the aircraft from investors to whom it has
previously sold the aircraft. Overall, narrowbody aircraft (including
turboprops) constitute 88.62% of GPA's portfolio by appraised value and Stage 3
aircraft (including turboprops) constitute 97.20% of GPA's portfolio by
appraised value. At March 31, 1998, 18.79% of the aircraft were Airbus A320s,
14.20% were Boeing 737-300s and 12.45% were Boeing 737-400s in each case
calculated on the basis of appraisals of the aircraft's base values at January
23, 1998 (determined on the same basis as the calculation for the values of the
Aircraft). At March 31, 1998, 35.36% of GPA's aircraft were on lease to three
airlines of which 14.73% were on lease to one U.S. airline, 11.20% were on lease
to one Chinese airline, and 9.43% were on lease to one Brazilian airline in each
case by appraised value at January 23, 1998. In addition to its remaining, owned
aircraft, GPA currently owns all of the Airplanes Class E Notes. GPA will also
continue to have an interest in the aircraft owned by ALPS 94-1 by virtue of its
subordinated debt investments in that company. The board of directors of ALPS
94-1 has announced that it is proposing to refinance ALPS 94-1 and it is
proposed that subsidiaries of
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GPA Group will act as administrative agent and cash manager to the refinanced
entity. Also, because GPA has certain access to certain potential benefits
arising from the Aircraft through its ownership of the Airplanes Class E Notes
(although GPA no longer owns legal title to the Aircraft and has no rights of
access to the Aircraft themselves), the Aircraft and the Notes are consolidated
with GPA's assets and liabilities on GPA's consolidated balance sheet.
As of March 31, 1998, after giving effect on a pro forma basis to the MOU
Transaction and the refinancing of ALPS 94-1, GPA would have 67 aircraft in its
portfolio of which 64 were on lease to 30 lessees in 19 countries. In addition,
GPA will have access to certain potential benefits arising from the 35 aircraft
to be owned by the refinanced ALPS 94-1 entity, AerCo Limited. Of the 67
aircraft, 17 would be leased in-leased out. Overall, on the same pro forma basis
as of March 31, 1998, narrowbody aircraft (including turboprops) would
constitute 84.10% of GPA's portfolio by appraised value and Stage 3 aircraft
(including turboprops) would constitute 95.28% of GPA's portfolio by appraised
value. Also giving effect to the MOU Transaction and the ALPS 94-1 refinancing
as of March 31, 1998, GPA would own or lease-in five aircraft types which
represent over 10% each of its portfolio by appraised value. Airbus A320
aircraft would constitute 17.07%, MD11 aircraft would constitute 15.90%,
ATR42-300 would constitute 13.11%, Fokker 100 aircraft would constitute 13.07%
and MD83 aircraft would constitute 10.26%. 35.93% of GPA's portfolio (by
appraised value) would be on lease to North American airlines, 25.16% would be
on lease to European airlines, 21.25% would be on lease to Latin American
airlines and 11.23% would be on lease to Asian airlines. 34.99% of GPA's
portfolio would be on lease to three airlines, of which 15.90% would be on lease
to one Brazilian airline, 10.93% would be on lease to one U.S. airline and 8.16%
would be on lease to another U.S. airline, in each case by appraised value.
GPA would no longer have an indirect interest in the Aircraft owned by
Airplanes Group because its economic interest in the Airplanes Group Class E
Notes would be transferred to GE Capital.
At March 31, 1998, GPA employed 30 people who perform those functions for
which GPA has not delegated responsibility to GECAS pursuant to the GPA
Management Agreement. These include, inter alia, (a) monitoring GECAS's
performance under the GPA Management Agreement, (b) decisions with respect to
GPA's orders and options for future aircraft deliveries, (c) management of all
GPA's liabilities and certain assets, (d) performance of all finance, treasury
and legal and regulatory functions not specifically provided by GECAS, (e)
performance of all corporate secretarial activities, (f) management of all
shareholder matters, (g) arrangement and procurement of all insurance other than
insurance relating to the assets managed pursuant to the GPA Management
Agreement, (h) GPA employee matters and (i) preparation and adoption of annual
budgets. Accordingly, GPA performs all accounting and financial reporting
functions for its own fleet and a wholly-owned subsidiary of GPA also performs
such functions for Airplanes Group pursuant to the Administrative Agency
Agreement.
REMAINING GPA INDEBTEDNESS
The Acquisition was part of a broader restructuring of GPA that involved
the refinancing of GPA indebtedness with the net proceeds of the Underwritten
Offering, the elimination or re-scheduling of GPA's aircraft and engine orders
and the settlement of certain litigation. GPA's intent was to refinance
substantially all of its bank loans and other senior, secured debt and to
enhance its ability to meet remaining secured and unsecured debt obligations as
they mature. At March 31, 1996, GPA had approximately $531 million in secured
debt and approximately $1,044 million in unsecured debt. Since March 31, 1996,
GPA has continued to restructure its indebtedness and capital structure,
including through the purchase of certain notes which it had previously issued.
At March 31, 1998, GPA had approximately $387 million in secured debt and
approximately $127 million in unsecured debt. As of March 31, 1998, GPA had cash
on hand of $286 million ($160 million of which were restricted cash balances).
The following table indicates the maturities of GPA's remaining indebtedness as
of March 31, 1998.
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<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
------------------------------------------
1999 2000 2001 2002 THEREAFTER
---- ---- ---- ---- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Secured facilities................................. 37 34 140 19 157
Unsecured facilities............................... 71 1 -- 52 3
--- ---- --- --- ----
Total(1)........................................... 108 35 140 71 160
=== ==== === === ====
</TABLE>
- ---------------
(1) As of March 31, 1998 GPA had cash on hand of $286.4 million ($159.8 million
of which were restricted cash balances) and as of the same date but giving
effect on a pro forma basis to the MOU Transaction, the refinancing of ALPS
94-1 and the restructuring of Novel Limited, a subsidiary of GPA Group, GPA
would have cash on hand of $411.6 million ($133.8 million of which would
have been restricted cash balances).
GPA's ability to meet its remaining obligations as they fall due depends
upon various factors, including many of the same factors that will affect the
financial condition and business of Airplanes Group. In particular, GPA's cash
flow from operations may be adversely affected by any financial difficulties
experienced by certain of its more significant lessees. In addition, for so long
as GE Capital's right to acquire not less than 90% of GPA Group's ordinary share
capital remains outstanding, GPA Group is unlikely to be able to raise
additional share capital. If GPA were to become unable to meet its obligations
as they fall due or if GPA Group or any of its affiliates were to become subject
to a bankruptcy proceeding, a liquidator, examiner or creditor may be able to
challenge the validity of the sale of the Transferred Companies. Furthermore,
any inability of GPA, GPA Financial or GPA Cash Manager to continue operations
may adversely affect the performance of the roles of the Administrative Agent
and Cash Manager and may result in the loss by Holding Co. and other Irish tax
resident Transferred Companies of certain corporate tax benefits for Shannon
certified companies and the loss by Holding Co. and the other Irish tax resident
Transferred Companies of their ability to deduct payments of interest on their
indebtedness to Airplanes Limited for purposes of computing their Irish tax
liability.
ADMINISTRATIVE AGENT
GPA Financial acts as the Administrative Agent of Airplanes Group.
The Administrative Agent is responsible for providing administrative and
accounting services to the Directors and Controlling Trustees. The
Administrative Agent's duties include:
<TABLE>
<S> <C>
(a) monitoring the performance of the Servicer (including the
Servicer's compliance with the Servicing Agreement) and
reporting on such performance to Airplanes Group;
(b) assisting Airplanes Group in establishing a program for
compliance by the Servicer with the Servicing Agreement;
(c) acting as liaison with various rating agencies to confirm
the rating impact of certain decisions and coordinating
responses to rating agency questions;
(d) the maintenance on behalf of Airplanes Group of accounting
ledgers and the provision on a quarterly and annual basis of
draft accounts on a combined basis for Airplanes Group as
well as, on a quarterly and annual basis, on an individual
company basis for certain companies. However, Airplanes
Group retains responsibility for the ledgers and accounts
including all discretionary decisions and judgments relating
to the preparation and maintenance thereof, and Airplanes
Group retains responsibility for, and prepares, its
financial statements;
(e) preparing annual budgets and presenting them to Airplanes
Group for approval;
(f) authorizing payment of certain bills and expenses;
(g) to the extent required by Airplanes Group or the parties
thereto, coordinating any amendments to the transaction
agreements, subject to the terms of such agreements and
approval by Airplanes Group;
(h) supervising outside counsel and coordinating legal advice
received by Airplanes Group other than with respect to the
Servicer's performance under the Servicing Agreement;
</TABLE>
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<TABLE>
<S> <C>
(i) preparing and coordinating reports to investors (including
preparing press releases and managing investor relations)
and to the Securities and Exchange Commission with the
assistance of outside counsel and auditors, if appropriate;
(j) preparing for the approval of Airplanes Group and filing all
required tax returns with the assistance of outside counsel
and auditors, if appropriate;
(k) maintaining, or monitoring the maintenance of, the books and
records of Airplanes Group other than those maintained by
the Company Secretary (as defined below) and the Delaware
Trustee (as defined below);
(l) preparing an agenda and any required papers for meetings of
the governing bodies of the entities within Airplanes Group;
(m) assisting Airplanes Group in developing and implementing its
interest rate management policy and developing financial
models, cash flow projections and forecasts, to the extent
required by Airplanes Group, and in making aircraft lease,
sale and capital investment decisions;
(n) advising Airplanes Group as to the appropriate levels of the
Liquidity Reserve Amount; and
(o) providing additional services upon the request of Airplanes
Group upon terms to be agreed at the time of any such
request.
</TABLE>
The Administrative Agent also provides other administrative services,
including (a) assistance in arranging refinancings of all or a portion of the
Notes, and (b) undertaking an effort to avoid any adverse change in the tax
status of the various members of Airplanes Group. Airplanes Limited, AeroUSA and
Holding Co. are, jointly and severally, obligated to pay a fee (the
"Administrative Fee") to the Administrative Agent in a per annum amount equal to
$6 million, payable monthly in arrears. The Administrative Agent is also
entitled to an additional fee (the "Reducing Fee") in an amount equal to $2
million per annum, payable monthly in arrears, which is reduced by certain
agreed amounts in the event that Airplanes Group sells, retires or disposes of
76 or more of the Aircraft. Both the Administrative Fee and the Reducing Fee
will, from time to time, be adjusted for inflation. The Administrative Agent is
also entitled to be reimbursed for certain expenses incurred in connection with
the performance of its services under the Administrative Agency Agreement. The
Administrative Agent may resign on 60 days' written notice in certain
circumstances. Airplanes Group may remove the Administrative Agent on 120 days'
written notice with or without cause, as long as Airplanes Group has, with the
consent of the Servicer, engaged another person or entity to perform the
services that were being provided by the Administrative Agent.
CASH MANAGER
GPA Cash Manager acts as the Cash Manager. The Cash Manager provides cash
management and related services to Airplanes Group. In the ordinary course of
Airplanes Group's business, the Cash Manager will inform the Servicer and the
Administrative Agent of the aggregate deposits in the Accounts as required and
provide such other information as shall be required in connection with the
Accounts. Subject to certain limitations and at the direction of Airplanes
Group, the Cash Manager is authorized to invest the funds held by Airplanes
Group in the Collection Account and the Lessee Funded Account in certain
prescribed investments on permitted terms. At all times, the Accounts will be
maintained in the name of the Security Trustee, except that certain Rental
Accounts which, for certain legal or other regulatory reasons, cannot be
established in the name of the Security Trustee, will be maintained in the names
of such parties as are specified in the relevant leases and maintained with
another bank that has a rating of AA or the equivalent or higher or any other
responsible or reputable bank.
In addition, the Cash Manager receives certain data provided by the
Servicer with respect to the Aircraft and leases of Airplanes Group and
calculates certain monthly payments and makes all other calculations as required
under the Cash Management Agreement. The Cash Manager also provides the Trustee
with such information as is required by the Trustee to provide its reports to
the Certificateholders.
The Cash Manager receives a fee of $1 million per annum from Airplanes
Group in respect of its services to Airplanes Group. The Cash Manager is
entitled to indemnification by Airplanes Group for, and is held harmless
against, any loss or liability incurred by the Cash Manager (other than through
its own deceit, fraud,
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wilful default or gross negligence (or simple negligence in the handling of
funds) or that of its officers, directors, agents and employees).
The Cash Manager may resign on 30 days' written notice as long as Airplanes
Group has engaged another person or entity to perform the services that were
being provided by the Cash Manager. Airplanes Group may remove the Cash Manager
at any time with or without cause.
COMPANY SECRETARY
The Company Secretary (with respect to any company, the entity which
provides its secretarial services, the "Company Secretary") maintains company
books and records, including minute books and stock transfer records. It makes
available telephone, telecopy, telex and post office box facilities and
maintains a registered office in the relevant jurisdictions.
Mourant & Co. Secretaries Limited acts as Company Secretary for Airplanes
Limited.
DELAWARE TRUSTEE
Wilmington Trust Company maintains the books and records, including minute
books and records and trust certificate records, of Airplanes Trust. It makes
available telephone, telecopy, telex and post office box facilities and
maintains its principal place of business in Delaware.
ITEM 11. EXECUTIVE COMPENSATION
All Directors and Controlling Trustees are compensated for travel and other
expenses incurred by them in the performance of their duties. Airplanes Limited
and Airplanes Trust pays each Independent Director and Independent Trustee, as
the case may be, an aggregate fee of $75,000 per annum for their services in
both capacities. The Chairman of Airplanes Limited and Airplanes Trust receives
an additional $50,000 per annum for his services in such capacity. Neither the
Director nor the Controlling Trustee appointed by the holder of a majority in
aggregate principal amount of the Class E Notes receives remuneration from
Airplanes Limited or Airplanes Trust for his services. In addition, Mr. Dantzic,
Mr. Jenkins and Mr. McCann receive $7,500, $2,500 and $7,500, respectively, per
annum for their services as directors of Holding Co. and certain of its
subsidiaries. Mr. Dantzic, Mr. Jenkins and Mr. McCann are also entitled to
receive an additional $1,000 in respect of each board meeting of the above
companies which they attend, subject to a maximum payment of $5,000 per annum
for each of them. Mr. Franke receives an aggregate of $2,500 per annum from
AeroUSA and AeroUSA 3 for his services as a director of those companies and is
also entitled to receive an additional $1,000 in respect of each board meeting
of these companies which he attends, subject to a maximum payment of $5,000 per
annum.
The Directors and the Controlling Trustees do not and will not receive any
additional cash or non-cash compensation (either in the form of stock options,
stock appreciation rights or pursuant to any long-term incentive plan, benefit
or actuarial plan or any other similar arrangements of any kind) as salary or
bonus for their services as Directors or Controlling Trustees. None of the
Directors or Controlling Trustees has an employment contract with either
Airplanes Limited or Airplanes Trust or serves as a member of a compensation
committee of either Airplanes Limited or Airplanes Trust. The compensation of
the Directors of Airplanes Limited is set forth in the Articles of Association
of Airplanes Limited and that of the Controlling Trustees is set forth in the
Airplanes U.S. Trust Amended and Restated Trust Agreement among GPA, Inc., as
Settlor, Wilmington Trust Company as the Delaware Trustee, and the Controlling
Trustees referred to therein. None of the Directors or Controlling Trustees has
any beneficial ownership in any of the equity securities of Airplanes Limited,
Airplanes Trust or any of the subsidiaries of Airplanes Limited or Airplanes
Trust.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Airplanes Group has had and currently maintains various relationships with
GPA. First, GPA acted as promoter in establishing the entities that comprise
Airplanes Group. Second, Airplanes Group purchased substantially all of its
assets from GPA. See "Item 1. Business -- Introduction". Third, GPA is a holder
of 5% of the ordinary share capital of Holding Co. Fourth, subsidiaries of GPA
Group act as the Administrative Agent and Cash Manager for Airplanes Group. See
"Item 10. Directors and Executive Officers of the Registrants -- Corporate
Management". Fifth, Mr. Hansom, an employee of GPA Group, is a Director of
Airplanes Limited and a Controlling Trustee of Airplanes Trust. Sixth, GPA holds
a majority of the Airplanes Group Class E Notes. Upon completion of the MOU
Transaction GE Capital will acquire the economic interest in the outstanding
Airplanes Group Class E Notes currently held by GPA.
Airplanes Group also maintains two relationships with America West. First,
Mr. Franke, a Director of Airplanes Limited and a Controlling Trustee of
Airplanes Trust, is a director and executive officer of America West. Second,
Airplanes Group has three Aircraft under sub-sublease to America West.
Finally, GPA also has relationships with America West, in that GPA has 8
aircraft subleased to America West.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). Financial Statements: the response to this portion of Item
14 is submitted as a separate section of this report beginning on page F-1.
Schedules: Schedule II is submitted as a separate section of this report
beginning on page S-1.
(a)(3) and (c). Exhibits:
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of Atlanta Holdings Limited
dated November 3, 1995 and Certificate of Incorporation on
change of name to Airplanes Limited dated November 29, 1995*
3.2 Memorandum and Articles of Association of Airplanes
Limited**
3.3 Airplanes U.S. Trust Amended and Restated Trust Agreement
among GPA, Inc., as Settlor, Wilmington Trust Company, as
the Delaware Trustee, and the Controlling Trustees referred
to therein**
4.1 Pass Through Trust Agreement dated as of March 28, 1996
among Airplanes Limited, Airplanes U.S. Trust and Bankers
Trust Company, as Trustee**
4.2 Trust Supplement No. 4 dated as of March 28, 1996 to the
Pass Through Trust Agreement**
4.3 Trust Supplement No. 5 dated as of March 28, 1996 to the
Pass Through Trust Agreement**
4.4 Trust Supplement No. 7 dated as of March 28, 1996 to the
Pass Through Trust Agreement**
4.5 Trust Supplement No. 8 dated as of March 28, 1996 to the
Pass Through Trust Agreement**
4.6 Trust Supplement No. 9 dated as of March 16, 1996 to the
Pass Through Trust Agreement***
4.7 Trust Supplement No. 10 dated as of March 16, 1996 to the
Pass Through Trust Agreement***
4.8 Trust Supplement No. 11 dated as of March 16, 1996 to the
Pass Through Trust Agreement***
4.9 Trust Supplement No. 12 dated as of March 16, 1996 to the
Pass Through Trust Agreement***
4.10 Trust Supplement A dated as of March 16, 1996 to the Pass
Through Trust Agreement
4.11 Form of Subclass A-4 Pass Through Certificate**
4.12 Form of Subclass A-5 Pass Through Certificate**
</TABLE>
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<TABLE>
<S> <C>
4.13 Form of Subclass A-6 Pass Through Certificate***
4.14 Form of Subclass A-7 Pass Through Certificate***
4.15 Form of Subclass A-8 Pass Through Certificate***
4.16 Form of Class B Pass Through Certificate***
4.17 Form of Class C Pass Through Certificate**
4.18 Form of Class D Pass Through Certificate**
4.19 Airplanes Limited Indenture dated as of March 28, 1996 among
Airplanes Limited, Airplanes U.S. Trust and Bankers Trust
Company, as Trustee**
4.20 Supplement No. 1 to the Airplanes Limited Indenture***
4.21 Airplanes U.S. Trust Indenture dated as of March 28, 1996
among Airplanes U.S. Trust, Airplanes Limited and Bankers
Trust Company, as Trustee**
4.22 Supplement No. 2 to the Airplanes Trust Indenture***
4.23 Form of Floating Rate Subclass A-4 Note**
4.24 Form of Floating Rate Subclass A-5 Note**
4.25 Form of Floating Rate Subclass A-6 Note***
4.26 Form of Floating Rate Subclass A-7 Note***
4.27 Form of Floating Rate Subclass A-8 Note***
4.28 Form of Floating Rate Class B Note**
4.29 Form of 8.15% Class C Note**
4.30 Form of 10.875% Class D Note**
4.31 Form of 20.00% (inflation adjusted) Class E Note**
10.1 Stock Purchase Agreement dated as of March 28, 1996 among
GPA, Inc., GPA Group plc and Airplanes U.S. Trust**
10.2 Stock Purchase Agreement dated as of March 28, 1996 among
GPA Group plc, Skyscape Limited and Airplanes Limited**
10.3 Administrative Agency Agreement dated as of March 28, 1996
among GPA Financial Services (Ireland) Limited, GPA Group
plc, Airplanes Limited, GPA II Limited, Airplanes U.S. Trust
and AeroUSA, Inc.**
10.4 Servicing Agreement dated as of March 28, 1996 among GE
Capital Aviation Services, Limited, Airplanes Limited,
AeroUSA, Inc., GPA II Limited, Airplanes U.S. Trust and GPA
Cash Manager Limited**
10.5 Reference Agency Agreement dated as of March 28, 1996 among
Airplanes Limited, Airplanes U.S. Trust Bankers Trust
Company, as Airplanes Limited Indenture Trustee and
Airplanes U.S. Trust Indenture Trustee, Bankers Trust
Company, as Reference Agent and GPA Cash Manager Limited, as
Cash Manager**
10.6 Secretarial Services Agreement dated as of March 28, 1996
between Airplanes Limited and Mourant & Co. Secretaries
Limited, as Company Secretary**
10.7 Cash Management Agreement dated as of March 28, 1996 between
GPA Cash Manager Limited, as Cash Manager, GPA Group plc,
Airplanes Limited, Airplanes U.S. Trust and Bankers Trust
Company, as Trustee under each of the Airplanes Limited
Indenture, the Airplanes U.S. Trust Indenture and the
Security Trust Agreement**
10.8 Form of Swap Agreement**
10.9 Security Trust Agreement dated as of March 28, 1996 among
Airplanes Limited, Airplanes U.S. Trust, Mourant & Co.
Secretaries Limited, the Issuer Subsidiaries listed therein,
GPA Financial Services (Ireland) Limited, GPA Cash Manager
Limited, GPA Group plc, GE Capital Aviation Services,
Limited, Bankers Trust Company, as Airplanes U.S. Trust
Indenture Trustee and Airplanes Limited Indenture Trustee,
Bankers Trust Company, as Reference Agent, and Bankers Trust
Company, as Security Trustee**
12 Statement re Computation of Ratios
21 Subsidiaries of the Registrants*
23.1 Consent of Aircraft Information Services, Inc.
23.2 Consent of BK Associates, Inc.
</TABLE>
78
<PAGE> 80
<TABLE>
<S> <C>
23.3 Consent of Airclaims Limited
27 Financial Data Schedule
99.1 Appraisal of Aircraft Information Services, Inc. relating to
the Aircraft***
99.2 Appraisal of BK Associates, Inc. relating to the Aircraft***
99.3 Appraisal of Airclaims Limited relating to the Aircraft***
</TABLE>
- ---------------
* Incorporated by reference to the Registration Statement on Form S-1 (File
No. 33-99970), previously filed with the Securities and Exchange Commission.
** Incorporated by reference to the Report on Form 10-Q for the quarterly
period ended December 31, 1995, previously filed with the Securities and
Exchange Commission.
*** Incorporated by reference to the Registration Statement on Form S-1 (File
No. 333-43453), previously filed with the Securities and Exchange
Commission.
(b) Reports on Form 8-K: filed for event dates January 15, 1998, February
16, 1998 and March 16, 1998 (relating to the monthly report to holders of the
Certificates).
(d) Not applicable.
79
<PAGE> 81
AIRPLANES GROUP
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Changes in Shareholders' Deficit/Net
Liabilities............................................... F-5
Statements of Cash Flows.................................... F-6
Notes to the Financial Statements........................... F-7
</TABLE>
F-1
<PAGE> 82
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF AIRPLANES LIMITED
AND THE CONTROLLING TRUSTEES OF AIRPLANES U.S. TRUST
We have audited the accompanying balance sheets of Airplanes Limited and
Airplanes U.S. Trust as of March 31, 1998 and 1997, and the related statements
of operations, changes in shareholders' deficit/net liabilities and cashflows
for each of the years in the three year period ended March 31, 1998. These
financial statements represent certain specified leasing operations of GPA Group
plc (as defined in Notes 1 and 2) up to March 28, 1996 and the leasing
operations of Airplanes Limited and Airplanes U.S. Trust in the period from
March 28, 1996 to March 31, 1998 (as defined in Notes 1 and 2). These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. These standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of Airplanes Limited and
Airplanes U.S. Trust as at March 31, 1998 and 1997, and the results of their
operations and cash flows for each of the years in the three year period ended
March 31, 1998, in conformity with generally accepted accounting principles in
the United States.
KPMG
Chartered Accountants
Dublin, Ireland
June 15, 1998
F-2
<PAGE> 83
AIRPLANES GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------------
1997 1998
-------------------------------- --------------------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
NOTES LIMITED TRUST COMBINED LIMITED TRUST COMBINED
----- --------- --------- -------- --------- --------- --------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.............................. 5 219 6 225 212 6 218
Accounts receivable............... 6
Trade receivables................. 39 2 41 19 4 23
Allowance for doubtful debts...... (12) (1) (13) (9) (1) (10)
Amounts due from Airplanes
Trust........................... 7 56 -- 56 33 -- 33
Intercompany capital lease........ 8 -- -- -- 38 -- 38
Amounts due from GPA.............. 9 -- 2 2 -- -- --
Net investment in capital and
sales type leases............... 10 94 -- 94 61 38 99
Aircraft, net..................... 11 3,242 395 3,637 2,993 344 3,337
Other assets...................... 5 1 6 5 -- 5
------ ---- ------ ------ ---- ------
Total assets...................... 3,643 405 4,048 3,352 391 3,743
====== ==== ====== ====== ==== ======
LIABILITIES
Accrued expenses and other
liabilities..................... 12 295 24 319 437 36 473
Amounts due to Airplanes
Limited......................... 7 -- 56 56 -- 33 33
Intercompany capital lease........ 8 -- -- -- -- 38 38
Amounts due to GPA................ 13 4 -- 4...... -- -- --
Indebtedness...................... 14 4,005 392 4,397 3,715 363 4,078
Provision for maintenance......... 15 287 26 313 292 23 315
Deferred income taxes............. 21 57 48 105 54 48 102
------ ---- ------ ------ ---- ------
Total liabilities................. 4,648 546 5,194 4,498 541 5,039
------ ---- ------ ------ ---- ------
Net liabilities................... (1,005) (141) (1,146) (1,146) (150) (1,296)
------ ---- ------ ------ ---- ------
3,643 405 4,048 3,352 391 3,743
====== ==== ====== ====== ==== ======
</TABLE>
Commitments and Contingent Liabilities (Notes 22 and 23)
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 84
AIRPLANES GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------------------------------
1996 1997
-------------------------------- --------------------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
NOTES LIMITED TRUST COMBINED LIMITED TRUST COMBINED
----- --------- --------- -------- --------- --------- --------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Aircraft leasing......... 17 556 60 616... 532 72 604
Aircraft sales........... 17 -- -- -- -- -- --
EXPENSES
Cost of aircraft sold.... -- -- -- -- -- --
Depreciation and
amortisation........... (183) (24) (207) (191) (32) (223)
Net interest expense..... 18 (335) (33) (368) (343) (40) (383)
Provision for
maintenance............ (79) (18) (97) (70) (21) (91)
Bad and doubtful debts... 27 1 28 -- -- --
Provision for loss making
leases, net............ 19 18 (3) 15 5 7 12
Other lease costs........ (20) (1) (21) (20) (1) (21)
Selling, general and
administrative
expenses............... 20 (32) (3) (35) (35) (3) (38)
---- --- ---- ---- --- ----
OPERATING LOSS BEFORE
INCOME TAXES........... (48) (21) (69) (122) (18) (140)
Income tax benefit....... 21 5 8 13 10 -- 10
---- --- ---- ---- --- ----
NET LOSS................. (43) (13) (56) (112) (18) (130)
==== === ==== ==== === ====
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1998
--------------------------------
AIRPLANES AIRPLANES
LIMITED TRUST COMBINED
--------- --------- --------
($MILLIONS)
<S> <C> <C> <C>
REVENUES
Aircraft leasing......... 512 73 585
Aircraft sales........... 37 57 94
EXPENSES
Cost of aircraft sold.... (32) (58) (90)
Depreciation and
amortisation........... (170) (22) (192)
Net interest expense..... (373) (38) (411)
Provision for
maintenance............ (68) (20) (88)
Bad and doubtful debts... -- -- --
Provision for loss making
leases, net............ 14 3 17
Other lease costs........ (29) (1) (30)
Selling, general and
administrative
expenses............... (35) (3) (38)
---- --- ----
OPERATING LOSS BEFORE
INCOME TAXES........... (144) (9) (153)
Income tax benefit....... 3 -- 3
---- --- ----
NET LOSS................. (141) (9) (150)
==== === ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 85
AIRPLANES GROUP
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT/NET LIABILITIES
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
AIRPLANES
AIRPLANES LIMITED TRUST COMBINED
---------------------------------------- ----------- ------------
SHARE SHAREHOLDERS
CAPITAL NET SHAREHOLDERS NET DEFICIT/NET
(NOTE 15) LIABILITIES DEFICIT LIABILITIES LIABILITIES
----------- ----------- ------------ ----------- ------------
($MILLIONS) ($MILLIONS) ($MILLIONS) ($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1995.......... -- 772 772 70 842
Net loss for the fiscal year....... -- 43 43 13 56
Distributions to/(Contributions
from) GPA, net................... -- 124 124 45 169
Deferred interest on indebtedness
to GPA (Note 2(iii))............. -- (46) (46) (5) (51)
Ordinary shares issued, $1 par
value per share (Note 16)........ -- -- -- -- --
--- ----- ----- --- -----
BALANCE AT MARCH 31, 1996.......... -- 893 893 123 1,016
Net loss for the fiscal year....... -- 112 112 18 130
--- ----- ----- --- -----
BALANCE AT MARCH 31, 1997.......... -- 1,005 1,005 141 1,146
--- ----- ----- --- -----
Net loss for the fiscal year....... -- 141 141 9 150
--- ----- ----- --- -----
BALANCE AT MARCH 31, 1998.......... -- 1,146 1,146 150 1,296
=== ===== ===== === =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 86
AIRPLANES GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------------------------------
1996 1997
-------------------------------- --------------------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST COMBINED LIMITED TRUST COMBINED
--------- --------- -------- --------- --------- --------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss....................... (43) (13) (56) (112) (18) (130)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and
amortisation................. 183 24 207 191 32 223
Aircraft maintenance, net...... 34 9 43 11 (9) 2
(Profit)/loss on disposal of
aircraft..................... -- -- -- -- -- --
Deferred income taxes.......... (5) (8) (13) (10) -- (10)
Provision for loss making
leases....................... (18) 3 (15) (5) (7) (12)
Accrued and deferred interest
expense...................... 48 5 53 123 11 134
Changes in operating assets and
liabilities:
Accounts receivable, net....... 18 -- 18 1 -- 1
Other accruals and
liabilities.................. (19) -- (19) 18 3 21
Other assets................... (2) -- (2) (3) (2) (5)
----- ------ ----- ------ --- ----
NET CASH PROVIDED BY OPERATING
ACTIVITIES................... 196 20 216 214 10 224
===== ====== ===== ====== === ====
CASH FLOWS FROM INVESTING
ACTIVITIES
Sale/(Purchase) of aircraft.... (3) -- (3) 44 (44) --
Capital and sales type
leases....................... 16 -- 16 19 -- 19
----- ------ ----- ------ --- ----
NET CASH PROVIDED BY/(USED IN)
INVESTING ACTIVITIES......... 13 -- 13 63 (44) 19
===== ====== ===== ====== === ====
CASH FLOWS FROM FINANCING
ACTIVITIES
Repayment of notes............. -- -- -- (216) (22) (238)
Issue of A-E notes............. 4,221 413 4,634 -- -- --
Issue of refinanced notes
(net of costs)............... -- -- -- -- -- --
Amounts due from Airplanes
Trust to Airplanes Limited... (56) 56 --
Repayment of indebtedness to
GPA.......................... (4,192) (410) (4,602) -- --
Distributions to GPA Group
plc.......................... (147) (29) (176) -- -- --
----- ------ ----- ------ --- ----
NET CASH PROVIDED BY/(USED IN)
FINANCING ACTIVITIES......... (118) (26) (144) (272) 34 (238)
----- ------ ----- ------ --- ----
NET INCREASE/(DECREASE) IN
CASH......................... 91 (6) 85 5 -- 5
Cash at beginning of year...... 123 12 135 214 6 220
----- ------ ----- ------ --- ----
Cash at end of year............ 214 6 220 219 6 225
===== ====== ===== ====== === ====
CASH PAID IN RESPECT OF:
Interest....................... 294 29 323 237 28 265
===== ====== ===== ====== === ====
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1998
--------------------------------
AIRPLANES AIRPLANES
LIMITED TRUST COMBINED
--------- --------- --------
($MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss....................... (141) (9) (150)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and
amortisation................. 170 22 192
Aircraft maintenance, net...... 9 1 10
(Profit)/loss on disposal of
aircraft..................... (5) 1 (4)
Deferred income taxes.......... (3) -- (3)
Provision for loss making
leases....................... (14) (3) (17)
Accrued and deferred interest
expense...................... 147 16 163
Changes in operating assets and
liabilities:
Accounts receivable, net....... 17 (2) 15
Other accruals and
liabilities.................. 3 6 9
Other assets................... -- (1) (1)
------ ---- ------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................... 183 31 214
====== ==== ======
CASH FLOWS FROM INVESTING
ACTIVITIES
Sale/(Purchase) of aircraft.... 63 21 84
Capital and sales type
leases....................... 17 -- 17
------ ---- ------
NET CASH PROVIDED BY/(USED IN)
INVESTING ACTIVITIES......... 80 21 101
====== ==== ======
CASH FLOWS FROM FINANCING
ACTIVITIES
Repayment of notes............. (2,494) (247) (2,741)
Issue of A-E notes............. -- -- --
Issue of refinanced notes
(net of costs)............... 2,201 218 2,419
Amounts due from Airplanes
Trust to Airplanes Limited... 23 (23) --
Repayment of indebtedness to
GPA.......................... -- -- --
Distributions to GPA Group
plc.......................... -- -- --
------ ---- ------
NET CASH PROVIDED BY/(USED IN)
FINANCING ACTIVITIES......... (270) (52) (322)
------ ---- ------
NET INCREASE/(DECREASE) IN
CASH......................... (7) -- (7)
Cash at beginning of year...... 219 6 225
------ ---- ------
Cash at end of year............ 212 6 218
====== ==== ======
CASH PAID IN RESPECT OF:
Interest....................... 245 22 267
====== ==== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 87
AIRPLANES GROUP
NOTES TO THE 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 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 91% of the principal amount of notes in
each class being issued by Airplanes Limited and 9% approximately by Airplanes
Trust. Airplanes Group also issued Class E Notes 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. Airplanes Limited and Airplanes
Trust have each fully and unconditionally guaranteed each others' obligations
under the relevant notes.
On March 16, 1998 Airplanes Group successfully completed a refinancing of
$2,437 million related to Class A and Class B Notes.
2. BASIS OF PREPARATION
The accompanying financial statements of Airplanes Limited, Airplanes Trust
and the combined balance sheets, statements of operations, statements of changes
in shareholders' deficit/net liabilities and cash flows of Airplanes Group
(together the "FINANCIAL STATEMENTS") have been prepared on a going concern
basis and on the bases and using the assumptions set out below and in accordance
with the accounting policies set out in Note 4 and in conformity with United
States generally accepted accounting principles:
The financial statements are presented on an historical cost basis as if
Airplanes Limited and Airplanes Trust had been organised as single economic
entities for all periods presented.
Accordingly, the financial statements reflect the results of operations,
assets and liabilities relating to the aircraft transferred to Airplanes Limited
and Airplanes Trust, from the date of original acquisition of controlling
interest by GPA of each aircraft. For all periods prior to the Closing Date, the
financial statements have been prepared on the bases and assumptions set out
below. For the period subsequent to the Closing Date the financial statements
reflect the actual results of Airplanes Limited and Airplanes Trust.
Bases and Assumptions
(i) Prior to the Closing Date, an allocation of certain costs such as
selling, general and administrative expenses of GPA to Airplanes Limited and
Airplanes Trust was made. The most significant element of these costs related to
aircraft management fees, substantially all of which were asset based fees
calculated as an annual percentage of a reference net book value of aircraft
under management. Management believes that the bases for these allocations are
reasonable.
Airplanes Group has entered into a Servicing Agreement with GE Capital
Aviation Services Limited ("GECAS") under which GECAS provides, inter alia,
lease management and aircraft asset management services in return for a fee.
Airplanes Group has also entered into an Administration Agency Agreement and a
F-7
<PAGE> 88
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
2. BASIS OF PREPARATION -- (CONTINUED)
Cash Management Agreement with GPA. In the years to March 31, 1998 and March 31,
1997, $26.2 million and $9 million were charged by GECAS and GPA respectively.
(ii) In the period prior to the Closing Date it was assumed that Airplanes
Group was financed with indebtedness to GPA in an amount equivalent to the
aggregate amount of all classes of notes (A, B, C, D and E) originally expected
to be issued by Airplanes Group pursuant to the Transaction of $4,602 million.
It was also assumed that such indebtedness built up as and when Airplanes Group
acquired aircraft, at an amount equal to the appraised value (based on the value
of each Aircraft given a stable market with a reasonable balance of supply and
demand and a reasonable period of time available for marketing) of the aircraft
at October 31, 1995. In addition, it was assumed that no repayment of debt was
made prior to the Closing Date.
At the Closing Date the actual aggregate amount of all classes of notes
issued was $4,652 million. Of the $604 million Class E Notes issued,
approximately $13 million were surrendered and cancelled under the terms of the
Transaction (after giving effect to certain purchase price adjustments). It was
assumed that the indebtedness to GPA (explained above) was repaid from the
proceeds of the Notes and the Class E Notes. Details of the terms of the various
classes of Notes issued by Airplanes Group are set out in Note 14.
Indebtedness at March 31, 1998 represents the aggregate of the Class A -- E
Notes in issue. The $556 million decrease since the Closing Date represents
actual cash repayments.
(iii) The interest charged on Airplanes Group's indebtedness to GPA in the
periods prior to the Closing Date is based on GPA's average cost of debt of
7.83% and 8.25% for the years ended March 31, 1995 and 1996, respectively. In
the period subsequent to the Closing Date interest expense is based on the terms
of the notes issued. Details of the interest rates applicable to the various
classes of Notes are set out in Note 14.
In respect of the portion of the indebtedness to GPA which is represented
by the E Note (assumed in these financial statements to be approximately 15% of
total indebtedness up until the Closing Date), the Statements of Cash Flows in
the periods prior to the Closing Date give effect to cash payments for interest
of only 1% per annum and the balance is deferred and reflected as a movement in
net liabilities.
(iv) Airplanes Group's cash balances were maintained throughout the period
to the Closing Date at the amount originally assumed to be retained by Airplanes
Group on completion of the securitization transaction of $135 million. Cash
generated from or absorbed by the activities of Airplanes Group during the
period up to the Closing Date is reflected as distributions to or transfers from
GPA. The cash balances as at March 31, 1998, and March 31, 1997, represent the
actual cash balances held by Airplanes Group at those dates.
(v) In the period prior to the Closing Date, Airplanes Group's tax
provisions and deferred income tax assets and liabilities have been determined
as if the underlying taxable entities of Airplanes Limited and Airplanes Trust
were separate taxable entities from GPA.
At March 31, 1998 and March 31, 1997 the deferred income tax assets and
liabilities represent the assets and liabilities of Airplanes Limited and
Airplanes Trust at that Date.
3. RELATIONSHIP WITH GPA GROUP PLC AND MANAGEMENT ARRANGEMENTS
Airplanes Group's portfolio has been acquired entirely from GPA pursuant to
the Transaction.
With effect from the Closing Date, GECAS provides, in consideration for
management fees, certain management services to Airplanes Group pursuant to a
servicing agreement entered into by GECAS with certain members of Airplanes
Group and their subsidiaries. Under certain circumstances GECAS may resign from
the performance of its duties in relation to the management of all the aircraft
generally or, the management of one or more aircraft individually, provided in
either case that a replacement has been
F-8
<PAGE> 89
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
3. RELATIONSHIP WITH GPA GROUP PLC AND MANAGEMENT ARRANGEMENTS -- (CONTINUED)
appointed to manage the aircraft. In addition, Airplanes Group will, under
certain circumstances, have the right to terminate the servicing agreement.
As a holder of the majority of the Class E Notes, GPA has the right to
appoint one director to the board of Airplanes Limited and one of the
controlling trustees of Airplanes Trust. Airplanes Limited initially has a board
of directors of five directors, including the director appointed by the holders
of the Class E Notes. The controlling trustees of Airplanes Trust are the same
individuals. GE Capital Corporation ("GE CAPITAL"), GECAS' indirect parent, has
an option to acquire at least 90% of the ordinary shares of GPA Group at any
time up to October 29, 2001. If GE Capital acquires 90% or more of the ordinary
share capital of GPA Group and certain other conditions are met, the holder of a
majority in aggregate principal amount of the Class E Notes will have the right
to appoint all of the directors of Airplanes Limited and the trustees of
Airplanes Trust, provided that an independent committee of at least three
directors/trustees is established and maintained to review the terms of certain
transactions between Airplanes Limited and Airplanes Trust on the one hand, and
GECAS or any of its affiliates on the other.
Certain cash management and administrative services are being provided by
GPA subsidiaries to Airplanes Group, pursuant to a cash management agreement and
administrative agency agreement entered into by a GPA subsidiary with Airplanes
Group.
Although Airplanes Group's portfolio will at all times be held in two
different entities, Airplanes Limited and Airplanes Trust, Airplanes Group is
managed and the note covenants structured on the basis of a single economic
entity owning a single aircraft portfolio.
On June 8, 1998, GPA Group entered into a nonbinding memorandum of
understanding (the "MOU") with GE Capital and GECAS in relation to a number of
matters, including restructuring of the Call Right (the "MOU Transaction").
Completion of the MOU Transaction will be subject to the negotiation and
execution of definitive agreements and the approval of GPA Group's ordinary
shareholders. Upon completion of the MOU Transaction, GPA will conduct business
under a new name.
The principal components of the MOU Transaction are:
- Replacement of the existing Call Right with a new option (the "NEW GE
OPTION"), exercisable at any time until October 29, 2001, to acquire a
passive investment of up to 24.9% in GPA (after exercise) at an option
price of $0.06 per ordinary share (equivalent to the per share price
under the existing Call Right).
- GPA's servicing agreement with GECAS would be amended to provide, among
other things, for its termination on October 29, 2001 in consideration
for a $61.25 million fee to be paid by GPA upon completion of the MOU
Transaction.
- GPA to sell nine aircraft to GE Capital for an aggregate purchase price
equal to GPA's net book value (approximately $274 million).
- GPA to assign to GE Capital its rights under a purchase agreement with
The Boeing Company for four new Boeing 737 aircraft. GE Capital will
reimburse GPA for all purchase price installments previously paid by
GPA.
- GE Capital to acquire GPA's economic interest in the outstanding Class E
Notes issued by Airplanes Limited and Airplanes U.S. Trust that are held
by GPA Group. GECAS will continue as Servicer of Airplanes Group's 215
aircraft.
- GE Capital to have the option, exercisable at any time until October 29,
2001, to pay GPA $36 million in satisfaction of GE Capital's obligation
to make deferred payments to GPA relating to
F-9
<PAGE> 90
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
3. RELATIONSHIP WITH GPA GROUP PLC AND MANAGEMENT ARRANGEMENTS -- (CONTINUED)
18 aircraft it previously purchased from GPA. (This amount is equal to
GPA's book value of the deferred payments.)
- GPA to satisfy its obligations as lessee under nine aircraft head leases
from GE Capital for a $36 million cash payment and assignment of its
rights under the relevant subleases.
- GPA to change its name upon completion of the MOU Transaction. GPA, GE
Capital, GECAS and their affiliates will agree not to use the "GPA" or
"Guinness Peat Aviation" names or logos.
In connection with the MOU Transaction, GPA also plans to seek one or more
new equity investors to acquire a significant minority stake in GPA Group (which
may include both ordinary shares to be acquired from GPA Group's current
shareholders and newly issued ordinary shares). GPA expects that completion of
the MOU Transaction will depend on such an acquisition being made. GPA is
currently in preliminary discussions with a limited number of potential
investors.
The MOU Transaction (other than the aircraft sales described above),
including the agreement reached with any new investor(s), will require approval
by GPA Group's ordinary shareholders in the form of a special resolution (i.e.,
requiring a 75% majority at a general meeting). GPA expects to convene an
extraordinary general meeting of ordinary shareholders for the purpose of
obtaining shareholder approval once definitive agreements with GE Capital and
GECAS have been signed.
The MOU is nonbinding and the final terms of the MOU Transaction will be
contained in definitive agreements to be negotiated and executed by the parties.
As a result, the MOU Transaction, if agreed, may differ from the transactions
described above. In addition to shareholder approval, completion of the
Transaction will be subject to any required contractual, governmental or
regulatory approvals and other customary closing conditions.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Airplanes Group's accounting policies conform with United States generally
accepted accounting principles. The following paragraphs describe the main
accounting policies followed in these financial statements.
(a) Revenue Recognition
Revenue from aircraft on operating leases is recognised as income as it
accrues over the period of the leases. Unearned revenue from capital and sales
type leases is amortised and included in income.
(b) Aircraft
Aircraft, including engines, are stated at cost less accumulated
depreciation.
Airplanes Group adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("FAS 121") with effect from April 1, 1996. The statement
requires the recognition of an impairment loss for an asset held for use when
the estimate of undiscounted future cashflows expected to be generated by the
asset is less than its carrying amount. Measurement of impairment loss is to be
recognised based on the fair value of the asset. Fair market values reflects the
underlying economic value of the aircraft, including engines, in normal market
conditions (where supply and demand are in reasonable equilibrium) and assumes
adequate time for a sale and a willing buyer and seller. Short term fluctuations
in the market place are disregarded and it is assumed that there is no necessity
either to dispose of a significant number of aircraft simultaneously or to
dispose of
F-10
<PAGE> 91
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
aircraft quickly. The fair market value of the assets is based on independent
valuations of the aircraft in the fleet and estimates of discounted future cash
flows.
FAS 121 also requires that long-lived assets to be disposed of, be reported
at the lower of the carrying amount or fair value less estimated disposal costs.
Prior to the adoption of FAS 121, additional depreciation was charged to
reduce the book value of specific assets to fair market value where a permanent
diminution was considered to have occurred. Where fair market value was greater
than book value, no adjustment was made.
Additionally prior to the implementation of FAS 121, Airplanes Group made
provisions for downtime costs where aircraft were off lease and were expected to
be on the ground for a period prior to re-leasing. Such costs included
depreciation, allocated interest costs and any other attributable costs expected
to be incurred over the period to the estimated re-lease date. Following the
adoption of FAS 121 Airplanes Group's assessment of the need for downtime
provisions is incorporated in its impairment assessment.
The adoption of FAS 121 did not have a material impact on these financial
statements.
Cost comprises the invoiced cost net of manufacturers' discounts.
Depreciation is calculated on a straight line basis. The estimates of useful
lives and residual values are reviewed periodically. The current estimates for
residual values are generally 15% of cost, and for useful lives are as follows:
<TABLE>
<CAPTION>
YEARS FROM
----- ----------------
<S> <C> <C>
Stage 2 aircraft............................................ 20-25 Manufacture date
Refurbished and upgraded aircraft -- converted to
freighters................................................ 20 Conversion date
Turboprop aircraft.......................................... 22.5 Manufacture date
All other aircraft.......................................... 25 Manufacture date
</TABLE>
(c) Net Investment in Capital and Sales Type Leases
The amounts due from lessees under capital leases, where the entire cost of
the asset is recovered, are shown in the balance sheet at the net amount
receivable under these leases. The related finance revenue is recognised as
income over the period of the lease in proportion to the amounts outstanding.
(d) Provision for Maintenance
In most lease contracts the lessee has the obligation for maintenance costs
on airframes and engines and in many lease contracts the lessee makes a full or
partial prepayment, calculated at an hourly rate, from which maintenance
expenditures for major checks are disbursed. The undisbursed portion of these
prepayments are included in the provision for maintenance.
Maintenance provisions also include the directors' estimate of maintenance
costs which are Airplanes Group's primary responsibility and certain amounts in
respect of the risk of lessees defaulting on obligations, which could results in
Airplanes Group incurring maintenance costs which are the lessee's primary
responsibility.
(e) Allowance for doubtful debts
Allowances are made for doubtful debts where it is considered that there is
a significant risk of non recovery.
F-11
<PAGE> 92
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The assessment of risk of non recovery is primarily based on the extent to
which amounts outstanding exceed the expected value of security held, together
with an assessment of the financial strength and condition of a lessee and the
economic conditions existing in the lessee's operating environment.
(f) Provision for Loss Making Leases
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 cost attributable to the relevant aircraft, together with
direct costs such as legal fees and other costs attributable to the lease over
its term. At March 31, 1998 and March 31, 1997, the attributable allocated
interest cost excludes the element of the interest on the Class E Notes, 9% per
annum, which is payable only in the event that the principal amount on all the
Notes is repaid. Provision is made for the expected losses on such leases.
(g) Taxation
Income taxes are accounted for under the asset and liability method.
Deferred income tax assets and liabilities are recognised for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognised in the period that includes
the enactment date.
Income tax is provided based on the results for the year. Airplanes
Limited's underlying taxable entities in Ireland are subject to Irish Corporate
Income Tax on approved trading operations at a rate of 10% until December 31,
2005. Airplanes Trust's underlying taxable entities in the US are subject to US
Federal and State taxes on their trading operations.
(h) Concentrations of Credit Risk
Financial instruments which potentially subject Airplanes Group to
significant concentrations of credit risk consist primarily of trade accounts
receivable and interest rates swaps and similar hedging instruments. Details of
Airplanes Group's interest rate swaps and similar hedging instruments are set
out at (i) below.
Credit risk with respect to trade accounts receivable is generally
diversified due to the number of lessees comprising Airplanes Group's customer
base and the different geographic areas in which they operate. At March 31, 1998
Airplanes Group owned 221 aircraft which it leased to 76 lessees in 38
countries. The geographic concentrations of leasing revenues is set out in Note
17.
Many of Airplanes Group's lessees are in a relatively weak financial
position because of the difficult economic conditions in the civil aviation
industry as a whole and because, in general, weakly capitalised airlines are
more likely to seek operating leases.
The exposure of Airplanes Group's aircraft to particular countries and
customers is managed partly through concentration limits provided for under the
terms of the notes and through obtaining security from lessees by way of
deposits, letters of credit and guarantees. Airplanes Group will continue to
manage its exposure to particular countries, regions and lessees through
concentration limits. In the normal course of its business Airplanes Group (and
in the past GPA) has reached agreements with certain of its lessees to
restructure their leases and defer certain receivable balances. Details of
accounts receivable, deferred balances and provision for bad and doubtful debts
are set out in Note 6.
F-12
<PAGE> 93
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Mexico is a significant market for Airplanes Group's aircraft and at March
31, 1998, 27 of Airplanes Group's aircraft were being operated by 3 Mexican
lessees. Difficult market conditions and substantial over-capacity continue to
have an adverse effect on the Mexican air transport sector and restructuring
negotiations with certain of Airplanes Group's Mexican lessees have been
concluded, while negotiations with other lessees are continuing. Receivable
balances with Mexican lessees in total were $7 million at March 31, 1998, of
which $5.5 million has been deferred, and in respect of which allowances of $0.3
million for doubtful debts have been made.
Airplanes Group's Brazilian lessees also continue to experience significant
difficulties due to over-capacity and adverse market conditions. At March 31,
1998, 15 of Airplanes Group's aircraft were being operated by 4 Brazilian
lessees. Restructuring arrangements have been agreed with certain of the
Brazilian lessees allowing for rescheduling of balances owing to Airplanes
Group. Receivable balances with Brazilian lessees in total were $0.5 million at
March 31, 1998, of which $0.5 million has been deferred, and in respect of which
allowances of $0.1 million for doubtful debts have been made.
Canadian Airlines, Airplanes Group's third largest lessee at March 31, 1998
by Appraised Value, approached its creditors including Airplanes Group, with
proposals to reschedule its obligations. A rescheduling plan granted Canadian
Airlines a deferral of operating lease rentals for a three month period and a
deferral of finance lease principal payments for the six month period commencing
from December 1997. The deferred payments are to be repaid with interest over a
two and a half year period commencing October 1998. Receivable balances at March
31, 1998 were $6.6 million of which $1.8 million of doubtful debt provisions
have been made.
Trading conditions in the civil aviation industry in Asia have been
adversely affected by the severe economic and financial difficulties experienced
recently in the region where at March 31, 1998 5 of Airplanes Group's aircraft
were being operated by 4 lessees. Receivables balances including balances from
lessees where the aircraft were returned during the year totalled $4.3 million,
in respect of which allowances of $1.7 million for doubtful debts have been
made.
(i) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" defines the fair value of a financial instrument
as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Fair values of financial instruments have been determined with reference to
available market information and the valuation methodologies discussed below.
However, considerable management judgement is required in interpreting market
data to arrive at estimates of fair values. Accordingly, the estimates presented
herein may not be indicative of the amounts that Airplanes Group could realise
in a current market exchange.
(i) The fair value of cash, trade receivables and trade payables
approximates the carrying amount because of the nature and short maturity
of these instruments.
(ii) The fair value of the A, B, C and D Notes issued by Airplanes
Group outstanding at March 31, 1998 and 1997 was $3,573 million and $3,865
million respectively. While the amount subscribed for the E Notes was based
on the appraised value of the aircraft at the Closing Date, the fair value
of these Notes at March 31, 1998 cannot be determined, as it represents the
holders' residual interest in the aircraft owned by Airplanes Group.
(iii) Airplanes Group manages its interest rate exposure through the
use of interest rate swaps and options to enter into interest rate swaps
("Swaptions"). At March 31, 1998 and 1997 Airplanes Group had entered into
interest rate swaps with an aggregate notional principal amount of $2.55
billion and
F-13
<PAGE> 94
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
$2.79 billion respectively. Under these swap arrangements Airplanes Group
will pay fixed and receive floating amounts on a monthly basis. The
objective of Airplanes Group's interest rate risk management policy is to
correlate the contracted fixed and floating rental payments in its
portfolio to the fixed and floating interest payments on the bonds, taking
into account the expected amortisation of Class A and Class B Notes. The
fair value of these Swaps at March 31, 1998 and 1997 was an unrealised loss
of $2.35 million and an unrealised profit of $8.77 million respectively.
Interest rate exposures which may arise in the event that lessees paying
fixed rate rentals default is managed in part through the purchase of Swaptions.
At March 31, 1998 and 1997 Airplanes Group had entered into swaptions with a
notional value of $226 million and $76 million respectively. The fair value of
the swaptions at March 31, 1998 and 1997 was $1.8 million and $0.3 million
respectively.
Airplanes Group is exposed to losses in the event of non-performance by
counterparties to interest rate swap agreements or in the event of defaults by
lessees. However, Airplanes Group does not anticipate non-performance by the
counterparties and other parties and accounts for hedging losses resulting from
lessee defaults as they are incurred.
Counterparty risk is monitored on an ongoing basis. Counterparties are
subject to the prior approval of the Directors of Airplanes Limited and the
Controlling Trustees of Airplanes Trust. Airplanes Group's counterparties at
March 31, 1998 comprise three major U.S./European financial institutions.
(j) Foreign Currency Transactions
Airplanes Group's foreign currency transactions are not significant as
virtually all revenues and most costs are denominated in US dollars.
(k) Year 2000
The assessment of the Year 2000 risks relevant to Airplanes Group is still
at an early stage. Airplanes Group is currently unable to make any estimate of
the amount, if any, that may be required to address the Year 2000 issue.
Airplanes Group will expense all costs as incurred.
5. CASH
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C>
Cash.............................................. 219 6 212 6
=== === === ===
</TABLE>
Substantially all of the cash balances at March 31, 1998 and 1997 are held
for specific purposes under the terms of the Transaction. Included in the cash
balances at March 31, 1998 and 1997 is restricted cash of $6 million.
F-14
<PAGE> 95
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C>
Trade receivables................................. 39 2 19 4
Allowance for doubtful debts...................... (12) (1) (9) (1)
--- --- --- ---
27 1 10 3
=== === === ===
Included in trade receivables are deferred amounts
as follows:-
Gross deferred lease receivables................ 16 -- 12 --
Allowance for doubtful debts.................... (2) -- (2) --
--- --- --- ---
14 -- 10 --
=== === === ===
</TABLE>
Deferred lease receivables at March 31, 1998 represent deferrals of rent,
maintenance and miscellaneous payments due from lessees. The most significant of
these lessees are located in Mexico where the air transport sector is suffering
from substantial over capacity and the effects of difficult economic conditions
(see Note 4(h)) and in North America as a result of the deferral agreement
reached with Canadian airlines.
Receivables include amounts classified as due after one year of $17 million
(Airplanes Limited $17 million and Airplanes Trust $Nil) at March 31, 1998 and
$8 million (Airplanes Limited $8 and Airplanes Trust $Nil) at March 31, 1997.
7. AMOUNTS DUE FROM AIRPLANES TRUST TO AIRPLANES LIMITED
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C>
Amount receivable from Airplanes Trust............ 56 (56) 33 (33)
=== === === ===
</TABLE>
Included in the balance of $33 million at March 31, 1998 was $80 million in
respect of aircraft sales and purchases. Included in the balance of $56 million
at March 31, 1997 was $43 million in respect of aircraft sales and purchases.
The remaining balance represents the net amount due to Airplanes Limited in
respect of Airplanes Trust's trading activities, including servicing of its'
debt obligations.
F-15
<PAGE> 96
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8. INTERCOMPANY CAPITAL LEASE
During the year an aircraft owned by Airplanes Limited was leased to
Airplanes Trust for onward lease to a third party. Both of these leases are
capital leases. A summary of the net components (payable by Airplanes Trust to
Airplanes Limited) of the investment in this lease as at March 31, 1998 is as
follows:
<TABLE>
<CAPTION>
MARCH 31
------------
1997 1998
---- ----
($MILLIONS)
<S> <C> <C>
Total minimum lease payments receivable/payable............. -- 61
Less unearned revenue....................................... -- (23)
--- ---
-- 38
=== ===
</TABLE>
Minimum future payments to be received/paid on this capital lease at March
31, 1998 are as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE
PAYABLES RECEIVABLE
-------------------
($MILLIONS)
<S> <C>
1999........................................................ 5
2000........................................................ 5
2001........................................................ 5
2002........................................................ 5
2003........................................................ 5
Thereafter.................................................. 36
--
61
==
</TABLE>
The capital lease with the third party is included within Note 10.
9. AMOUNTS DUE FROM GPA
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C>
Amounts due from GPA.............................. -- 2 -- --
=== === === ===
</TABLE>
The amounts due from GPA at March 31, 1997 related to a cash adjustment
amount in respect of the difference between the collateralized value of the
receivables which were originally assumed to be transferred and the actual
balances which were transferred at the Closing Date.
F-16
<PAGE> 97
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
10. NET INVESTMENT IN CAPITAL AND SALES TYPE LEASES
The following are the components of the net investment in capital and sales
type leases:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS)
<S> <C> <C> <C> <C>
Total minimum lease payments receivable........... 77 -- 57 61
Estimated residual values of leased assets........ 39 -- 23 --
Less unearned revenue............................. (22) -- (19) (23)
--- --- --- ---
Net investment in capital and sales type leases... 94 -- 61 38
=== === === ===
</TABLE>
Aggregate lease rentals in respect of such capital and sales type leases
for the years ended March 31, 1996, 1997 and 1998 amounted to $28 million,
(Airplanes Limited $28 million, Airplanes Trust $ nil) $28 million (Airplanes
Limited $28 million, Airplanes Trust $ nil) and $26 million (Airplanes Limited
$26 million, Airplanes Trust $ nil) respectively.
Unearned revenue of $8 million (Airplanes Limited $8 million, Airplanes
Trust $ nil) $9 million (Airplanes Limited $9 million, Airplanes Trust $ nil)
and $8 million (Airplanes Limited $8 million, Airplanes Trust $ nil) for the
years ended March 31, 1996, 1997 and 1998, respectively, was amortised and
included in revenue.
Minimum future payments to be received on such capital leases for aircraft
at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE
PAYABLES RECEIVABLE
----------------------
AIRPLANES AIRPLANES
LIMITED TRUST
--------- ---------
($MILLIONS)
<S> <C> <C>
Years ending March 31,
1999...................................................... 15 5
2000...................................................... 15 5
2001...................................................... 13 5
2002...................................................... 8 5
2003...................................................... 2 5
Thereafter 4 36
-- --
57 61
== ==
</TABLE>
F-17
<PAGE> 98
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
11. AIRCRAFT
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C>
AIRCRAFT
Cost.............................................. 4,281 554 4,187 486
Less Accumulated depreciation..................... (1,039) (159) (1,194) (142)
------ ------ ------ ------
3,242 395 2,993 344
====== ====== ====== ======
FLEET ANALYSIS
On operating lease for a further period of:
More than five years............................ 425 74 155 54
From one to five years.......................... 2,277 283 2,102 202
Less than one year.............................. 493 25 659 88
Non revenue earning aircraft:
Available for lease............................. 6 -- 3 --
Available for lease, subject to letters of
intent 41 13 74 --
------ ------ ------ ------
3,242 395 2,993 344
====== ====== ====== ======
</TABLE>
Certain aircraft are subject to purchase options granted to existing
lessees.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- ---------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST LIMITED TRUST
--------- --------- --------- --------- --------- ---------
($MILLIONS) ($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Depreciation expense..................... 180 23 185 30 168 22
=== === === === === ===
</TABLE>
Depreciation expense for 1998 includes $2.1m of additional depreciation
charged during the year in relation to the write down of the carrying values of
three A300 aircraft, in accordance with FAS 121. Depreciation expense for 1997
includes $15m of additional depreciation charged during the year in relation to
the write down of the carrying values of two DC10-30 aircraft.
At March 31, 1998 Airplanes Group owned 221 (1997: 229) aircraft. Since the
year end six of these aircraft have been sold realising a profit of $8.2
million.
F-18
<PAGE> 99
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
12. ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C>
Accrued expenses and other liabilities include:
Unearned revenue.................................. 17 2 27 2
Provisions for loss making leases (Note 19)....... 58 6 44 3
Interest accrued.................................. 126 11 270 27
Other accruals.................................... 34 2 42 --
Trade payables.................................... 1 -- 1 --
Deposits received................................. 59 3 53 4
--- --- --- ---
295 24 437 36
=== === === ===
Of which:
Payable within one year........................... 87 5 90 5
Payable after one year............................ 208 19 347 31
--- --- --- ---
295 24 437 36
=== === === ===
</TABLE>
13. AMOUNTS DUE TO GPA
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C>
Amounts due....................................... 4 -- -- --
=== === === ===
</TABLE>
The amounts due to GPA at March 31, 1997 relate to cash balances retained
by Airplanes Group on the Closing Date in excess of those required in accordance
with the terms of the Transaction, in respect of security deposits and letters
of credit which were not novated from GPA at the Closing Date.
F-19
<PAGE> 100
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
14. INDEBTEDNESS
The components of the debt are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C>
Indebtedness in respect of Notes issued:
Subclass A-1...................................... 773 77 -- --
Subclass A-2...................................... 683 67 -- --
Subclass A-3...................................... 455 45 -- --
Subclass A-4...................................... 182 18 182 18
Subclass A-5...................................... 345 29 85 8
Subclass A-6...................................... -- -- 775 75
Subclass A-7...................................... -- -- 502 49
Subclass A-8...................................... -- -- 638 62
Class B........................................... 328 33 307 30
Class C........................................... 341 34 341 34
Class D........................................... 364 36 364 36
Class E........................................... 538 53 538 53
----- --- ----- ---
4,009 392 3,732 365
Discounts/costs arising on issue of Notes......... (4) -- (17) (2)
----- --- ----- ---
4,005 392 3,715 363
===== === ===== ===
</TABLE>
Debt maturity
The repayment terms of the A, B, C and D Notes are such that certain
principal amounts are expected to be repaid based on certain assumptions ("The
Expected Final Payment Date") or refinanced through the issue of new Notes by
specified Expected Final Payment Dates but in any event are ultimately due for
repayment on specified final maturity dates ("the Final Maturity Date"). The
Expected Final Payment Dates, Final Maturity Dates, Principal Amount and
interest rates applicable to each class of note are set out below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT EXPECTED FINAL FINAL
CLASS/SUBCLASS OF NOTES INTEREST RATES YEAR END PAYMENT DATE MATURITY DATE
- ----------------------- ----------------- ---------------- -------------- -------------
($ MILLIONS)
<S> <C> <C> <C> <C>
Subclass A-4........... (LIBOR+.62%) 200 March 15, 2003 March 15, 2019
Subclass A-5........... (LIBOR+.35%) 94 March 15, 1999 March 15, 2019
Subclass A-6........... (LIBOR+.34%) 850 January 15, 2004 March 15, 2019
Subclass A-7........... (LIBOR+.26%) 550 March 15, 2001 March 15, 2019
Subclass A-8........... (LIBOR+.375%) 700 March 15, 2003 March 15, 2019
Class B................ (LIBOR+.75%) 337 March 15, 2009 March 15, 2019
Class C................ (8.15%) 375 March 15, 2011 March 15, 2019
Class D................ (10.875%) 400 March 15, 2012 March 15, 2019
Class E................ (See below) 591 See below See below
-----
4,097
=====
</TABLE>
F-20
<PAGE> 101
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
14. INDEBTEDNESS -- (CONTINUED)
These following notes were refinanced on March 16, 1998 in their entirety
and were replaced by the A-6, A-7, A-8 and B notes as set out below. Discounts
on Notes issued and costs arising on refinanced Notes are netted against debt on
the balance sheet. These amounts are accreted to the income statement over the
expected life of the refinanced Notes.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT EXPECTED FINAL FINAL
CLASS/SUBCLASS OF NOTES INTEREST RATES AT REFINANCING PAYMENT DATE MATURITY DATE
- ----------------------- -------------- ---------------- -------------- -------------
($ MILLIONS)
<S> <C> <C> <C> <C>
Subclass A-1............... (LIBOR+.25%) 850 March 15, 1998 March 15, 2006
Subclass A-2............... (LIBOR+.32%) 750 March 15, 1999 March 15, 2009
Subclass A-3............... (LIBOR+.47%) 500 March 15, 2001 March 15, 2015
Class B.................... (LIBOR+1.10%) 337 March 15, 2009 March 15, 2019
-----
2,437
=====
</TABLE>
The dates on which principal repayments on the Notes will actually occur
will depend on the cash generated by Airplanes Group and in the event that the
sub-class A-4, A-7 and A-8 are not repaid or refinanced by the Expected Final
Maturity Date, additional interest will arise.
LIBOR on the Class A and Class B Notes equates to the London interbank
offered rate for one month US dollar deposits.
Interest on the Class C and Class D fixed rate Notes is calculated on the
basis of a 360-day year, consisting of twelve 30-day months.
The Class E Notes accrue interest for each Interest Accrual Period at a
rate of 20% per annum. The stated interest rate on the Class E Notes is adjusted
by reference to the U.S. Consumer Price Index. Except for the Class E Note
Minimum Interest Amount plus the Class E Note Supplemental Interest Amount, each
of which are paid at a rate of 1% and 10% multiplied by the Outstanding
Principal Balance of the Class E Note, respectively, no interest will be payable
on the Class E Notes until all of the interest, principal and premium, if any,
on the Notes have been repaid in full. The principal on the Class E notes will
be repaid, subject to adequate funds being available after the interest on the E
Note.
In general the priority of the principal payments on the Notes is as set
out below;
1. Specified minimum principal amounts on the A and the B Notes in that
order.
2. Additional amounts on the A Notes in the event that the value of the
fleet falls below specified amounts.
3. Scheduled principal repayments on the C and D Notes in that order.
4. Specified additional amounts on the B Notes and the A Notes in that
order.
5. Thereafter cash available to repay the principal on the Notes is
applied on each payment date to repay the outstanding principal on
the D Notes, the C Notes, the B Notes and the A Notes in that order.
On each payment date the priority of the principal amounts outstanding in
respect of the various sub-classes of A Notes is A-5, A-6, A-7 and A-8 in that
order.
F-21
<PAGE> 102
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
15. PROVISION FOR MAINTENANCE
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C>
Balance at April, 1............................... 276 35 287 26
Receivable during year............................ 70 21 68 20
Expenditure/Transfers............................. (59) (30) (63) (23)
--- --- --- ---
Balance at March, 31.............................. 287 26 292 23
=== === === ===
</TABLE>
The reserve for maintenance includes maintenance reserve funds received
from lessees, provisions to cover the directors' estimate of maintenance costs
where Airplanes Group has the primary obligation for maintenance and in certain
cases provisions to cover the risk of lessees defaulting on obligations, which
could result in Airplanes Group incurring maintenance costs which are the
lessees' primary responsibility.
16. SHARE CAPITAL
<TABLE>
<CAPTION>
AIRPLANES LIMITED
MARCH 31,
------------------
1997 1998
------- -------
($)
<S> <C> <C>
Ordinary shares, par value $1
Authorised 10,000........................................... 10,000 10,000
====== ======
Issued 30................................................... 30 30
====== ======
</TABLE>
The holders of the issued ordinary shares are entitled to an annual
cumulative preferential dividend of $4,500. As Airplanes Limited does not have
distributable profits this dividend has not been paid. As at March 31, 1998 the
total unpaid cumulative preferential dividend amounted to $9,000.
F-22
<PAGE> 103
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
17. REVENUES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- ---------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST LIMITED TRUST
--------- --------- --------- --------- --------- ---------
($MILLIONS) ($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
The distribution of revenues by
geographic area is as follows:
Europe................................. 195 2 193 1 192 1
North America.......................... 58 56 51 58 57 118
South America.......................... 185 1 180 12 222 9
Asia/rest of world..................... 118 1 108 1 78 2
--- --- --- --- --- ---
556 60 532 72 549 130
=== === === === === ===
Of which, sales revenue to third parties
represents............................. -- -- -- -- (37) (57)
=== === === === === ===
Leasing revenue.......................... 556 60 532 72 512 73
--- --- --- --- --- ---
Of which, maintenance revenue
represents............................. 78 14 70 21 68 20
=== === === === === ===
</TABLE>
At March 31, 1998, Airplanes Group had contracted to receive the following
minimum rentals under operating leases:
<TABLE>
<CAPTION>
1998
----------------------
AIRPLANES AIRPLANES
LIMITED TRUST
--------- ---------
($MILLIONS)
<S> <C> <C>
Year ending March 31,
1999...................................................... 386 32
2000...................................................... 310 29
2001...................................................... 225 21
2002...................................................... 166 15
2003...................................................... 75 7
Thereafter................................................ 92 1
----- ---
1,254 105
===== ===
</TABLE>
Contracted rentals are based on actual rates up to the first recalculation
date, and thereafter are based on a budget LIBOR of 5.6%, and include aircraft
subject to Letters of Intent to lease.
Each of Airplanes Limited and Airplanes Trust operates in one business
segment, the leasing of aircraft.
For Airplanes Limited no customer accounted for more than 10% of revenue in
fiscal 1996, 1997 or 1998. For Airplanes Trust: (a) two lessees each accounted
for more than 10% of leasing revenue for the year ended March 31, 1996, and
individually these lessees accounted for 32% and 31% of leasing revenue,
respectively, (b) two lessees each accounted for more than 10% of leasing
revenue for the year ended March 31, 1997, and individually these lessees
accounted for 37% and 31% of leasing revenue respectively and (c) two lessees
each accounted for more than 10% of leasing revenue in the year ended March 31,
1998 and individually these lessees accounted for 38% and 29% of leasing revenue
respectively.
F-23
<PAGE> 104
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
18. NET INTEREST EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- ---------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST LIMITED TRUST
--------- --------- --------- --------- --------- ---------
($MILLIONS) ($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest on GPA indebtedness............. 339 34 -- -- -- --
Interest on Notes issued................. 3 -- 360 40 389 38
Interest income.......................... (7) (1) (17) -- (16) --
--- --- --- --- --- ---
335 33 343 40 373 38
=== === === === === ===
Cash paid in respect of interest......... 294 29 237 28 245 22
=== === === === === ===
</TABLE>
As set out in Note 2, Basis of Preparation, interest charges included in
the Statement of Operations relating to indebtedness to GPA are based on GPA's
average cost of debt of 8.25% for the year ended March 31, 1996. For periods up
to March 28, 1996 the Statement of Cash Flows gives effect to cash payments for
interest only of 1% per annum on that portion of the indebtedness assumed to be
refinanced by the E Notes (assumed in these financial statements to be
approximately 15% of total indebtedness) and the balance is deferred and
reflected as a movement in net liabilities.
For all periods subsequent to March 28, 1996 the Statement of Operations
and the Statement of Cash Flows includes the actual amounts charged and paid
respectively.
19. LOSS MAKING LEASES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1997 1998
---------------------- ----------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST
--------- --------- --------- ---------
($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C>
Provision......................................... 54 2 16 --
Utilisation....................................... (59) (9) (30) (3)
--- --- --- ---
Net utilisation................................... (5) (7) (14) (3)
=== === === ===
</TABLE>
Provision is made for the expected losses where a lease agreement is deemed
to be loss making. The charge in respect of the loss making lease provisions and
the utilisation of these provisions are reflected on a net basis in the
Statement of Operations. These provisions are utilised as the corresponding
actual losses arise over the period of the lease. The actual losses are
reflected within the depreciation expense, interest expense or other costs
within the Statement of Operations.
20. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- ---------------------
AIRPLANES AIRPLANES AIRPLANES AIRPLANES AIRPLANES AIRPLANES
LIMITED TRUST LIMITED TRUST LIMITED TRUST
--------- --------- --------- --------- --------- ---------
($MILLIONS) ($MILLIONS) ($MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
GECAS Management fees.................... 20 2 24 2 24 2
Other selling, general and administrative
expenses............................... 12 1 11 1 11 1
--- --- --- --- --- ---
32 3 35 3 35 3
=== === === === === ===
</TABLE>
F-24
<PAGE> 105
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
20. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- (CONTINUED)
In the years ended March 31, 1998 and 1997 other selling, general and
administrative expenses included an amount of $9 million (Airplanes Limited $8
million, Airplanes Trust $1 million) payable to GPA in respect of Administration
and Cash Management fees.
21. PROVISION FOR INCOME TAXES
References to Airplanes Limited and Airplanes Trust in the context of this
footnote refer to the underlying taxable entities of Airplanes Limited
(primarily Irish entities) and Airplanes Trust (primarily US entities).
(a) Airplanes Limited
Income tax benefit of Airplanes Limited consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1996 1997 1998
----- ----- -----
($MILLIONS)
<S> <C> <C> <C>
Current income tax.......................................... -- -- --
Deferred income tax......................................... 5 10 3
--- --- ---
5 10 3
=== === ===
</TABLE>
Airplanes Limited's income from approved activities in Ireland is taxable
at a rate of 10% until December 31, 2005.
A reconciliation of differences between actual income tax benefit of
Airplanes Limited for 1996, 1997 and 1998 and the expected tax benefit based on
a tax rate of 10% is shown below:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1996 1997 1998
----- ----- -----
($MILLIONS)
<S> <C> <C> <C>
Tax benefit at 10%.......................................... 5 12 16
Non deductible E Note interest.............................. -- (12) (13)
Release of over provision in respect of prior year.......... -- 10 --
--- --- ---
Actual tax benefit.......................................... 5 10 3
=== === ===
</TABLE>
E Note interest is not deductible for tax purposes in Ireland.
The deferred tax provision at March 31, 1996 was based on calculations of
losses forward and capital allowances of Airplanes Limited at December 31, 1995
adjusted on an estimated basis to March 31, 1996. The release of the over
provision in respect of the prior year primarily relates to the finalisation of
these estimates.
Airplanes Limited has net operating loss carryforwards of approximately
$1,103 million as of March 31, 1998, which are available for offset against
future taxable income with no restrictions to expiration.
F-25
<PAGE> 106
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
21. PROVISION FOR INCOME TAXES -- (CONTINUED)
The deferred tax assets and liabilities of Airplanes Limited are summarised
below:
<TABLE>
<CAPTION>
MARCH 31,
------------
1997 1998
---- ----
($MILLIONS)
<S> <C> <C>
Deferred tax assets relating to:
Net operating loss carryforwards.......................... 79 111
Deferred tax liability relating to:
Aircraft.................................................. 136 165
--- ---
Net deferred tax liability.................................. 57 54
=== ===
</TABLE>
(b) Airplanes Trust
Income tax benefit of Airplanes Trust consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1996 1997 1998
----- ----- -----
($MILLIONS)
<S> <C> <C> <C>
Current income tax:
Federal................................................... -- -- --
State..................................................... -- -- --
--- --- ---
Total current............................................... -- -- --
--- --- ---
Deferred income tax:
Federal................................................... 6 -- --
State..................................................... 2 -- --
--- --- ---
Total deferred.............................................. 8 -- --
--- --- ---
8 -- --
=== === ===
</TABLE>
A reconciliation of differences between actual income tax benefit of
Airplanes Trust for 1996, 1997, and 1998 and the expected tax benefit based on
the U.S. Federal statutory tax rate of 35% in 1996, 1997, and 1998 is shown
below:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1996 1997 1998
----- ----- -----
($MILLIONS)
<S> <C> <C> <C>
Tax benefit at statutory rate............................... 7 6 3
State taxes, net of Federal tax............................. 1 1 --
Non deductible E-Note interest.............................. -- (5) (6)
Increase/Decrease on valuation allowance.................... -- (2) 3
--- --- ---
8 -- --
=== === ===
</TABLE>
Airplanes Trust has Federal tax net operating loss carryforwards of
approximately $116 million as of March 31, 1998, which expire beginning in 2007.
In the event of a change of ownership of Airplanes Trust, the net operating loss
carryforwards could become limited pursuant to Internal Revenue Code Section
382.
F-26
<PAGE> 107
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
21. PROVISION FOR INCOME TAXES -- (CONTINUED)
Deferred tax assets and liabilities of Airplanes Trust are summarised
below:
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31,
------------
1997 1998
---- ----
($MILLIONS)
<S> <C> <C>
Deferred tax assets relating to:
Net operating loss carryforwards.......................... 40 47
Other..................................................... 6 6
Valuation allowance....................................... (19) (16)
--- ---
27 37
--- ---
Deferred tax liabilities relating to:
Aircraft.................................................. 75 85
--- ---
Net deferred tax liability.................................. 48 48
=== ===
</TABLE>
Although all of the aircraft are owned by Airplanes Trust, for tax
purposes, certain of the aircraft are treated as being leased from third parties
under US "safe-harbor lease" tax rules. Under existing tax laws, certain events
could reverse the cumulative effect of this tax treatment, in which case
Airplanes Trust would be required to make payments to the third parties under
the tax indemnification clauses included in the lease agreements. As of March
31, 1996, 1997 and 1998 the maximum potential exposure under these provisions is
$9 million, $7 million and $4 million, respectively. The Trust believes that no
events have taken place which could cause such payments to become due.
Pursuant to a tax sharing agreement between Airplanes Trust and GPA,
Airplanes Trust is liable to GPA for its share of the consolidated tax liability
in years subsequent to the completion of the Transaction, in which Airplanes
Trust generates taxable income. However, Airplanes Trust shall satisfy this
liability in cash only to the extent that payments due to tax authorities from
GPA are attributable to Airplanes Trust's share of the consolidated tax
liability; the remainder will be paid in the form of subordinated notes.
Conversely, Airplanes Trust is entitled to be reimbursed by GPA for any tax
benefits provided subsequent to the completion of the Transaction, to GPA from
Airplanes Trust's tax losses. GPA has also indemnified Airplanes Trust for any
tax liabilities of AeroUSA, Inc. (a subsidiary of Airplanes Trust) that relate
to tax years prior to the completion of the Transaction. In the year ended March
31, 1998 no tax sharing will occur as both groups will be in a loss position.
22. COMMITMENTS
Capital Commitments
Airplanes Group did not have any material contractual commitments for
capital expenditures at March 31, 1998.
23. CONTINGENT LIABILITIES
Guarantees
Airplanes Limited and Airplanes Trust have unconditionally guaranteed each
others' obligations under all classes of notes issued by Airplanes Limited and
Airplanes Trust, respectively, pursuant to the securitization transaction,
details of which are set out in Note 1.
F-27
<PAGE> 108
AIRPLANES GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
23. CONTINGENT LIABILITIES -- (CONTINUED)
Foreign Taxation
The international character of the Group's operations gives rise to some
uncertainties with regard to the impact of taxation in certain countries. The
position is kept under continuous review and the Group provides for all known
liabilities.
F-28
<PAGE> 109
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
TO THE BOARD OF DIRECTORS OF AIRPLANES LIMITED
AND THE CONTROLLING TRUSTEES OF AIRPLANES U.S. TRUST:
Under date of June 15, 1998, we reported on the balance sheets of Airplanes
Limited and Airplanes U.S. Trust as of March 31, 1997 and 1998, and the related
statements of operations, changes in shareholders' deficit/net liabilities and
cash flows for each of the years in the three year period ended March 31, 1998,
which are included in this Report on Form 10-K. In connection with our audits of
the aforementioned financial statements, we also audited the related financial
statement schedule in this Report on Form 10-K. This financial statement
schedule is the responsibility of the companies' management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG
Chartered Accountants
Dublin, Ireland
June 15, 1998
S-1
<PAGE> 110
AIRPLANES GROUP
VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE
SCHEDULE II
<TABLE>
<CAPTION>
BALANCE AT CHARGED/(RELEASED) DEDUCTION
BEGINNING TO COSTS AND (WRITE-OFFS/ BALANCE AT
AIRPLANES LIMITED OF YEAR EXPENSES TRANSFERS) END OF YEAR
- ----------------- ---------- ------------------ ------------ -----------
($MILLIONS)
<S> <C> <C> <C> <C>
Year ended March 31,
1994.................................... 25 17 (3) 39
1995.................................... 39 34 (7) 66
1996.................................... 66 (27) (27) 12
1997.................................... 12 2 (2) 12
1998.................................... 12 1 (4) 9
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED/(RELEASED) DEDUCTION
BEGINNING TO COSTS AND (WRITE-OFFS/ BALANCE AT
AIRPLANES TRUST OF YEAR EXPENSES TRANSFERS) END OF YEAR
- --------------- ---------- ------------------ ------------ -----------
($MILLIONS)
<S> <C> <C> <C> <C>
Year ended March 31,
1994.................................... 3 3 (1) 5
1995.................................... 5 (1) 1 5
1996.................................... 5 (1) (3) 1
1997.................................... 1 -- -- 1
1998.................................... 1 -- -- 1
</TABLE>
S-2
<PAGE> 111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Airplanes U.S. Trust has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AIRPLANES U.S. TRUST
By: /s/ ROY M. DANTZIC
-------------------------------
Roy M. Dantzic
Controlling Trustee
Dated: June 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on June 29, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ HUGH R. JENKINS Controlling Trustee
- --------------------------------------------- (principal executive officer)
Hugh R. Jenkins
/s/ ROY M. DANTZIC Controlling Trustee
- --------------------------------------------- (principal financial officer)
Roy M. Dantzic
/s/ WILLIAM M. MCCANN Controlling Trustee
- --------------------------------------------- (principal accounting officer)
William M. McCann
/s/ WILLIAM A. FRANKE Controlling Trustee
- ---------------------------------------------
William A. Franke
/s/ EDWARD J. HANSOM Controlling Trustee
- ---------------------------------------------
Edward J. Hansom
</TABLE>
<PAGE> 112
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Airplanes Limited has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AIRPLANES LIMITED
By: /s/ ROY M. DANTZIC
-------------------------------
Roy M. Dantzic
Director
Dated: June 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on June 29, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ HUGH R. JENKINS Director
- --------------------------------------------- (principal executive officer)
Hugh R. Jenkins
/s/ ROY M. DANTZIC Director
- --------------------------------------------- (principal financial officer)
Roy M. Dantzic
/s/ WILLIAM M. MCCANN Director
- --------------------------------------------- (principal accounting officer)
William M. McCann
/s/ WILLIAM A. FRANKE Director
- ---------------------------------------------
William A. Franke
/s/ EDWARD J. HANSOM Director
- ---------------------------------------------
Edward J. Hansom
</TABLE>
<PAGE> 113
AIRPLANES LIMITED AND AIRPLANES U.S. TRUST
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
3.1 Certificate of Incorporation of Atlanta Holdings Limited
dated November 3, 1995 and Certificate of Incorporation on
change of name to Airplanes Limited dated November 29, 1995*
3.2 Memorandum and Articles of Association of Airplanes
Limited**
3.3 Airplanes U.S. Trust Amended and Restated Trust Agreement
among GPA, Inc., as Settlor, Wilmington Trust Company, as
the Delaware Trustee, and the Controlling Trustees referred
to therein**
4.1 Pass Through Trust Agreement dated as of March 28, 1996
among Airplanes Limited, Airplanes U.S. Trust and Bankers
Trust Company, as Trustee**
4.2 Trust Supplement No. 4 dated as of March 28, 1996 to the
Pass Through Trust Agreement**
4.3 Trust Supplement No. 5 dated as of March 28, 1996 to the
Pass Through Trust Agreement**
4.4 Trust Supplement No. 7 dated as of March 28, 1996 to the
Pass Through Trust Agreement**
4.5 Trust Supplement No. 8 dated as of March 28, 1996 to the
Pass Through Trust Agreement**
4.6 Trust Supplement No. 9 dated as of March 16, 1996 to the
Pass Through Trust Agreement***
4.7 Trust Supplement No. 10 dated as of March 16, 1996 to the
Pass Through Trust Agreement***
4.8 Trust Supplement No. 11 dated as of March 16, 1996 to the
Pass Through Trust Agreement***
4.9 Trust Supplement No. 12 dated as of March 16, 1996 to the
Pass Through Trust Agreement***
4.10 Trust Supplement A dated as of March 16, 1996 to the Pass
Through Trust Agreement
4.11 Form of Subclass A-4 Pass Through Certificate**
4.12 Form of Subclass A-5 Pass Through Certificate**
4.13 Form of Subclass A-6 Pass Through Certificate***
4.14 Form of Subclass A-7 Pass Through Certificate***
4.15 Form of Subclass A-8 Pass Through Certificate***
4.16 Form of Class B Pass Through Certificate***
4.17 Form of Class C Pass Through Certificate**
4.18 Form of Class D Pass Through Certificate**
4.19 Airplanes Limited Indenture dated as of March 28, 1996 among
Airplanes Limited, Airplanes U.S. Trust and Bankers Trust
Company, as Trustee**
4.20 Supplement No. 1 to the Airplanes Limited Indenture***
4.21 Airplanes U.S. Trust Indenture dated as of March 28, 1996
among Airplanes U.S. Trust, Airplanes Limited and Bankers
Trust Company, as Trustee**
4.22 Supplement No. 2 to the Airplanes Trust Indenture***
4.23 Form of Floating Rate Subclass A-4 Note**
4.24 Form of Floating Rate Subclass A-5 Note**
4.25 Form of Floating Rate Subclass A-6 Note***
4.26 Form of Floating Rate Subclass A-7 Note***
4.27 Form of Floating Rate Subclass A-8 Note***
4.28 Form of Floating Rate Class B Note***
4.29 Form of 8.15% Class C Note**
4.30 Form of 10.875% Class D Note**
4.31 Form of 20.00% (inflation adjusted) Class E Note**
10.1 Stock Purchase Agreement dated as of March 28, 1996 among
GPA, Inc., GPA Group plc and Airplanes U.S. Trust**
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
10.2 Stock Purchase Agreement dated as of March 28, 1996 among
GPA Group plc, Skyscape Limited and Airplanes Limited**
10.3 Administrative Agency Agreement dated as of March 28, 1996
among GPA Financial Services (Ireland) Limited, GPA Group
plc, Airplanes Limited, GPA II Limited, Airplanes U.S. Trust
and AeroUSA, Inc.**
10.4 Servicing Agreement dated as of March 28, 1996 among GE
Capital Aviation Services, Limited, Airplanes Limited,
AeroUSA, Inc., GPA II Limited, Airplanes U.S. Trust and GPA
Cash Manager Limited**
10.5 Reference Agency Agreement dated as of March 28, 1996 among
Airplanes Limited, Airplanes U.S. Trust Bankers Trust
Company, as Airplanes Limited Indenture Trustee and
Airplanes U.S. Trust Indenture Trustee, Bankers Trust
Company, as Reference Agent and GPA Cash Manager Limited, as
Cash Manager**
10.6 Secretarial Services Agreement dated as of March 28, 1996
between Airplanes Limited and Mourant & Co. Secretaries
Limited, as Company Secretary**
10.7 Cash Management Agreement dated as of March 28, 1996 between
GPA Cash Manager Limited, as Cash Manager, GPA Group plc,
Airplanes Limited, Airplanes U.S. Trust and Bankers Trust
Company, as Trustee under each of the Airplanes Limited
Indenture, the Airplanes U.S. Trust Indenture and the
Security Trust Agreement**
10.8 Form of Swap Agreement**
10.9 Security Trust Agreement dated as of March 28, 1996 among
Airplanes Limited, Airplanes U.S. Trust, Mourant & Co.
Secretaries Limited, the Issuer Subsidiaries listed therein,
GPA Financial Services (Ireland) Limited, GPA Cash Manager
Limited, GPA Group plc, GE Capital Aviation Services,
Limited, Bankers Trust Company, as Airplanes U.S. Trust
Indenture Trustee and Airplanes Limited Indenture Trustee,
Bankers Trust Company, as Reference Agent, and Bankers Trust
Company, as Security Trustee**
12 Statement re Computation of Ratios
21 Subsidiaries of the Registrants*
23.1 Consent of Aircraft Information Services, Inc.
23.2 Consent of BK Associates, Inc.
23.3 Consent of Airclaims Limited
27 Financial Data Schedule - Airplanes Group
27.1 Financial Data Schedule - Airplanes Limited
27.2 Financial Data Schedule - Airplanes U.S. Trust
99.1 Appraisal of Aircraft Information Services, Inc. relating to
the Aircraft***
99.2 Appraisal of BK Associates, Inc. relating to the Aircraft***
99.3 Appraisal of Airclaims Limited relating to the Aircraft***
</TABLE>
- ---------------
* Incorporated by reference to the Registration Statement on Form S-1 (File
No. 33-99970), previously filed with the Securities and Exchange Commission.
** Incorporated by reference to the Report on Form 10-Q for the quarterly
period ended December 31, 1995, previously filed with the Securities and
Exchange Commission.
*** Incorporated by reference to the Registration Statement on Form S-1 (File
No. 333-43453), previously filed with the Securities and Exchange
Commission.
<PAGE> 1
Exhibit 4.10
PASS THROUGH TRUST AGREEMENT SUPPLEMENT A
PASS THROUGH TRUST AGREEMENT SUPPLEMENT A, dated as of March 16, 1998 (the
"Pass Through Trust Agreement Supplement"), among AIRPLANES LIMITED, a limited
liability company incorporated in Jersey, Channel Islands ("Airplanes
Limited"), AIRPLANES U.S. TRUST, a Delaware business trust created pursuant to
the Amended and Restated Trust Agreement dated as of March 11, 1996 ("Airplanes
Trust" and, together with Airplanes Limited, the "Note Issuers") and BANKERS
TRUST COMPANY, a New York banking corporation ("Bankers Trust"), as trustee
(the "Trustee"), to the Pass Through Trust Agreement dated as of March 28, 1996
(the "Pass Through Trust Agreement") among the Note Issuers and the Trustee.
Capitalized terms used herein but not defined herein shall have the meanings
given to such terms in the Pass Through Trust Agreement.
W I T N E S S E T H:
WHEREAS, the Note Issuers intend to supplement certain provisions in the
Pass Through Trust Agreement in accordance with Section 8.01(3) of the Pass
Through Trust Agreement; and
WHEREAS, all of the conditions and requirements necessary to make this
Pass Through Trust Agreement Supplement, when duly executed and delivered, a
legal, valid and binding instrument in accordance with its terms and for the
purposes herein expressed, have been done, performed and fulfilled, and the
execution and delivery of this Pass Through Trust Agreement Supplement in the
form and with the terms hereof have been in all respects duly authorized.
NOW, THEREFORE, in consideration of the premises herein, it is agreed
among the Note Issuers and the Trustee as follows:
ARTICLE I
MODIFICATIONS
Section 1.01. Modifications. The Pass Through Trust Agreement is,
effective as of the date hereof, hereby modified as follows:
(a) The following definition shall be added to Section 1.01:
DTC: Means The Depository Trust Company, a New York
Corporation.
(b) The second paragraph of Section 4.03(f) is hereby amended and
restated in its entirety to read as follows:
<PAGE> 2
"Notwithstanding the above, any notice specifying the rate, amount
or Payment Date in respect of the Certificates of any class or
subclass bearing interest at a floating rate or in respect of any
repayment of principal on any Notes or Certificates or in respect
of Step-Up Interest payable on any Certificates shall, for so long
as such Certificates are listed on the Luxembourg Stock Exchange
and so long as the rules of the Luxembourg Stock Exchange so
require, be given to the Luxembourg Stock Exchange and the Listing
Agent. Such notice requirement shall be satisfied until such time
as any Definitive Certificates of such class or subclass are issued
and so long as the Notes and Certificates of such class or subclass
are held through Cedel, Euroclear or DTC by delivery of the
relevant notice to Cedel, Euroclear or DTC, as the case may be, for
communication by them to the Noteholders and Certificateholders of
such class or subclass without need for publication in the
Luxemburger Wort; provided, however, that notices specifying that
Step-Up Interest is payable on any Certificates or a redemption of
any Notes pursuant to Section 3.10 of the Indentures or a
Refinancing of any Notes pursuant to Section 2.07 of the Indentures
shall be published in the Luxemburger Wort."
ARTICLE II
THE PASS THROUGH TRUST AGREEMENT TRUSTEE
Section 2.01. The Pass Through Trust Agreement Trustee. The Trustee
shall not be responsible in any manner whatsoever for or in respect of the
validity or sufficiency of this Pass Through Trust Agreement Supplement or the
due execution hereof by the Note Issuers, or for or in respect of the recitals
and statements contained herein, all of which recitals and statements are made
solely by the Note Issuers.
Except as herein otherwise provided, no duties, responsibilities or
liabilities are assumed, or shall be construed to be assumed by the Trustee
other than as set forth in the Pass Through Trust Agreement, and this Pass
Through Trust Agreement Supplement is executed and accepted on behalf of the
Trustee, subject to all the terms and conditions set forth in the Pass Through
Trust Agreement, upon the effectiveness thereof, as fully to all intents as if
the same were herein set forth at length.
ARTICLE III
MISCELLANEOUS PROVISIONS
<PAGE> 3
Section 3.01. Pass Through Trust Agreement Ratified. Except and so far
as herein expressly provided, all of the provisions, terms and conditions of
the Pass Through Trust Agreement are in all respects ratified and confirmed;
and the Pass Through Trust Agreement and this Pass Through Trust Agreement
Supplement shall be taken, read and construed as one and the same instrument.
Section 3.02. GOVERNING LAW. THIS PASS THROUGH TRUST AGREEMENT
SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK.
Section 3.03. Execution in Counterparts. This Pass Through Trust
Agreement Supplement may be executed in any number of counterparts, each of
which shall be an original, but such counterparts shall together constitute but
one and the same instrument.
IN WITNESS WHEREOF, the Trustee and the Note Issuers have caused this Pass
Through Trust Agreement Supplement to be duly executed as of the day and year
first written above.
AIRPLANES LIMITED
By: /s/ Roy M. Dantzic
---------------------
Name: Roy M. Dantzic
Title: Director
AIRPLANES U.S. TRUST
By: /s/ Roy M. Dantzic
---------------------
Name: Roy M. Dantzic
Title: Controlling Trustee
BANKERS TRUST COMPANY, Trustee
By: /s/ Louis Bodi
---------------------
Name: Luis Bodi
Title: Vice President
<PAGE> 1
EXHIBIT 12
COMPUTATION OF DEFICIENCY OF COMBINED EARNINGS
TO COMBINED FIXED CHARGES
The following computations of the deficiency of combined earnings to
combined fixed charges has been based upon the audited Financial Statements of
Airplanes Limited and Airplanes U.S. Trust for the five year period ended March
31, 1998 included in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
($ MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating loss before income tax.................... (74) (125) (69) (140) (153)
Add: interest expense............................... 258 357 376 400 427
---- ---- ---- ---- ----
EARNINGS............................................ 184 232 307 260 274
---- ---- ---- ---- ----
FIXED CHARGES:
Interest expense.................................... 258 357 376 400 427
---- ---- ---- ---- ----
DEFICIT OF EARNINGS TO FIXED CHARGES................ (74) (125) (69) (140) (153)
==== ==== ==== ==== ====
</TABLE>
2
<PAGE> 1
EXHIBIT 23.1
AIS LOGO
CONSENT OF APPRAISER
We consent to the use of our reports included herein and to the references
to our firm in the Airplanes Limited and Airplanes U.S. Trust Report on Form
10-K for the fiscal year ended March 31, 1998.
Dated: June 29, 1998
Aircraft Information Services Inc.
By: /s/ JOHN D. MCNICOL
------------------------------------
John D. McNicol
Vice President -- Appraisals &
Forecasts
Headquarters, 26072 Merit Circle, Suite 183, Laguna Hills, CA 92653
TEL: 714-582-8888 FAX: 714-582-8887 E-MAIL: [email protected]
<PAGE> 1
EXHIBIT 23.2
CONSENT OF APPRAISER
We consent to the use of our reports included herein and to the references
to our firm in the Airplanes Limited and Airplanes U.S. Trust Report on Form
10-K for the fiscal year ended March 31, 1998.
Dated: June 29, 1998
BK Associates Inc.
By: /s/ JOHN F. KUTZ
------------------------------------
Name: John F. Kutz
Title: President
<PAGE> 1
EXHIBIT 23.3
CONSENT OF APPRAISER
We consent to the use of our reports included herein and to the references
to our firm in the Airplanes Limited and Airplanes U.S. Trust Report on Form
10-K for the fiscal year ended March 31, 1998.
Date: June 29, 1998
Airclaims limited
By: /s/ E. PIENIAZEK
------------------------------------
Name: E. Pieniazek
Title: Director
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<NAME> AIRPLANES GROUP
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 225
<SECURITIES> 0
<RECEIVABLES> 23
<ALLOWANCES> 13
<INVENTORY> 0
<CURRENT-ASSETS> 237
<PP&E> 4,772
<DEPRECIATION> 1,336
<TOTAL-ASSETS> 3,743
<CURRENT-LIABILITIES> 118
<BONDS> 4,078
0
0
<COMMON> 0
<OTHER-SE> (1,298)
<TOTAL-LIABILITY-AND-EQUITY> 3,743
<SALES> 4
<TOTAL-REVENUES> 679
<CGS> (90)
<TOTAL-COSTS> 293
<OTHER-EXPENSES> 30
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 411
<INCOME-PRETAX> (153)
<INCOME-TAX> 3
<INCOME-CONTINUING> (150)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (150)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001004539
<NAME> AIRPLANES LTD
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 219
<SECURITIES> 0
<RECEIVABLES> 19
<ALLOWANCES> 12
<INVENTORY> 0
<CURRENT-ASSETS> 228
<PP&E> 4,248
<DEPRECIATION> 1,194
<TOTAL-ASSETS> 3,352
<CURRENT-LIABILITIES> 108
<BONDS> 3,715
0
0
<COMMON> 0
<OTHER-SE> (1,146)
<TOTAL-LIABILITY-AND-EQUITY> 3,352
<SALES> 5
<TOTAL-REVENUES> 549
<CGS> (32)
<TOTAL-COSTS> 253
<OTHER-EXPENSES> 29
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 373
<INCOME-PRETAX> (144)
<INCOME-TAX> 3
<INCOME-CONTINUING> (141)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (141)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001004540
<NAME> AIRPLANES TRUST
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 4
<ALLOWANCES> 1
<INVENTORY> 0
<CURRENT-ASSETS> 9
<PP&E> 524
<DEPRECIATION> 142
<TOTAL-ASSETS> 391
<CURRENT-LIABILITIES> 10
<BONDS> 363
0
0
<COMMON> 0
<OTHER-SE> (150)
<TOTAL-LIABILITY-AND-EQUITY> 391
<SALES> (1)
<TOTAL-REVENUES> 130
<CGS> (58)
<TOTAL-COSTS> 40
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> (9)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
