SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 33-99970-01
---------
Airplanes Limited Airplanes U.S. Trust
Exact Name of Registrants as specified in
memorandum of association or trust agreement
Jersey, Channel Islands Delaware
(State or other jurisdiction of incorporation or organization)
7359 13-3521640
SIC Code (I.R.S. Employer Identification No.)
Airplanes Limited Airplanes U.S. Trust
22 Grenville Street 1100 North Market Street,
St. Helier Rodney Square North
Jersey, JE4 8PX Wilmington, Delaware
Channel Islands 19890-0001
(011 44 1534 609 000) (302-651-1000)
(Addresses and telephone numbers, including area codes,
of Registrants' principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Issuer Class June 30, 1999
Airplanes Limited Common Stock, $1.00 par value 30
<PAGE>
Airplanes Limited and Airplanes U.S. Trust
Form 10-Q for the Three Month Period Ended June 30, 1999
Index
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited) 3
o Unaudited Condensed Balance Sheets - June 30, 1999 and
March 31, 1999
o Unaudited Condensed Statements of Operations - Three Months
Ended June 30, 1999 and June 30, 1998
o Unaudited Condensed Statements of Changes in Shareholders
Deficit/Net Liabilities - Three months Ended June 30, 1999
and June 30, 1998
o Unaudited Condensed Statements of Cash Flows - Three months
Ended June 30, 1999 and June 30, 1998
o Notes to the Unaudited Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative Qualitative Disclosures about Market Risks 19
Part II. Other Information
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8 - K 25
Signatures
Index to Exhibits
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
AIRPLANES GROUP
UNAUDITED CONDENSED BALANCE SHEETS
<TABLE>
March 31, June 30,
-------------------------------- --------------------------------
1999 1999
-------------------------------- --------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
--------- --------- -------- --------- --------- --------
($millions) ($millions)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash 218 6 224 210 6 216
Accounts receivable
Trade receivables 38 5 43 46 4 50
Allowance for doubtful debts (14) (3) (17) (17) (1) (18)
Amounts due from Airplanes Trust 0 35 35 33 33
Intercompany capital lease 36 36 36 36
Net investment in capital and sales
type leases 20 36 56 18 36 54
Aircraft, net 2,820 252 3,072 2,780 248 3,028
Other assets 4 0 4 3 0 3
----- ----- ----- ----- ----- -----
Total assets 3,122 331 3,453 3,076 326 3,402
===== ===== ===== ===== ===== =====
LIABILITIES
Accrued expenses and other liabilities 581 51 632 626 56 682
Amounts due to Airplanes Limited 35 0 35 33 0 33
Intercompany capital lease - 36 36 0 36 36
Indebtedness 3,500 342 3,842 3,458 338 3,796
Provision for maintenance 266 17 283 268 17 285
Deferred income taxes 51 48 99 53 48 101
----- ----- ----- ----- ----- -----
Total liabilities 4,433 494 4,927 4,438 495 4,933
----- ----- ----- ----- ----- -----
Net Liabilities (1,311) (163) (1,474) (1,362) (169) (1,531)
----- ----- ----- ----- ----- -----
3,122 331 3,453 3,076 326 3,402
===== ===== ===== ===== ===== =====
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
3
<PAGE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended June 30,
-------------------------------------------------------------------
1998 1999
-------------------------------- --------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
--------- --------- -------- --------- --------- --------
($millions) ($millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Aircraft leasing 123 11 134 118 11 129
Aircraft Sales 24 94 118 2 - 2
Other Income 1 - 1
Expenses
Cost of Aircraft Sold (22) (85) (107) (1) - (1)
Depreciation and amortization (40) (4) (44) (39) (4) (43)
Net interest expense (95) (9) (104) (100) (10) (110)
Provision for maintenance (16) (1) (17) (14) (1) (15)
Bad and doubtful debts (4) (1) (5) (8) (1) (9)
Provision for loss making leases, net 1 - 1 3 - 3
Other lease costs (4) (1) (5) (3) - (3)
Selling, general and
administrative expenses (8) (1) (9) (8) (1) (9)
----- ----- ----- ----- ----- -----
Operating (loss) before provisions
for income tax (41) 3 (38) (49) (6) (55)
Income tax benefit/(charge) - - - (2) - (2)
----- ----- ----- ----- ----- -----
Net (loss) (41) 3 (38) (51) (6) (57)
===== ===== ===== ===== ===== =====
</TABLE>
4
<PAGE>
AIRPLANES GROUP
UNAUDITED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT/NET LIABILITIES
Three Months Ended June 30, 1998 and June 30, 1999
<TABLE>
Airplanes Limited Airplanes Trust Combined
---------------------------------------- ---------------- -----------
Share Net Shareholders' Net Shareholders
Capital Liabilities Deficit Liabilities Deficit/ Net
Liabilities
---------------------------------------- ---------------- -----------
($millions) ($millions) ($millions) ($millions) ($millions)
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1998 0 1,146 1,146 150 1,296
Net loss for the period 41 41 (3) 38
---------- ---------- ---------- -------------- ----------
Balance at September 30, 1995 0 1,187 1,187 147 1,334
========== ========== ========== ============== ==========
Balance at March 31, 1999 0 1,311 1,311 163 1,474
Net loss for the period 51 51 6 57
--------------------------------------- --------------- ----------
Balance at September 30, 1996 1,362 1,362 169 1,531
========== ========== ========== ============== ==========
</TABLE>
5
<PAGE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF CASHFLOWS
<TABLE>
Three Months Ended June 30,
-------------------------------------------------------------------
1998 1999
-------------------------------- --------------------------------
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 (41) 3 (38) (51) (6) (57)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 40 4 44 39 4 43
Aircraft maintenance, net (7) (1) (8) 3 - 3
Profit on disposal of aircraft (2) (9) (11) (1) - (1)
Deferred income taxes - - - 2 - 2
Provision for loss making lease (1) - (1) (3) - (3)
Provision for Bad Debts 4 1 5 8 1 9
Accrued and deferred interest expense 42 4 46 52 5 57
Changes in operating assets and liabilities:
Accounts receivable, net (5) - (5) (17) 2 (15)
Intercompany account movements (10) 10 - 2 (2) -
Other accruals and liabilities (8) (1) (9) (3) - (3)
----- ----- ----- ----- ----- -----
Net cash provided by/(utilized in)
operating activities 12 11 23 31 4 35
===== ===== ===== ===== ===== =====
Cash flows from investing activities
Purchase/Sale of aircraft 39 79 118 2 - 2
Intercompany movements - Airplanes Group 79 (79)
Capital and sales type leases 3 - 3 2 - 2
----- ----- ----- ----- ----- -----
Net cash provided by
investing activities 121 - 121 4 - 4
===== ===== ===== ===== ===== =====
Cash flows from financing activities
Decrease in indebtedness (128) (11) (139) (43) (4) (47)
----- ----- ----- ----- ----- -----
Net cash used in
financing activites (128) (11) (139) (43) (4) (47)
===== ===== ===== ===== ===== =====
Net increase/(decrease) in cash 5 - 5 (8) - (8)
Cash at beginning of period 212 6 218 218 6 224
----- ----- ----- ----- ----- -----
Cash at end of period 217 6 223 210 6 216
===== ===== ===== ===== ===== =====
Cash paid in respect of:
Interest 53 6 59 51 5 56
===== ===== ===== ===== ===== =====
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
6
<PAGE>
Airplanes Group
Notes to the Unaudited Condensed Financial Statements
1. Securitization Transaction
On March 28, 1996, ("the Closing Date"), AerFi Group plc ("AerFi Group")
and its subsidiary undertakings ("AerFi") re-financed on a long term basis
certain indebtedness due to commercial banks and other senior secured debt. The
re-financing was effected through a major aircraft securitization transaction
("the Transaction").
Under the terms of the Transaction, the following special purpose vehicles
were formed: Airplanes Limited, a special purpose company formed under the laws
of Jersey, Channel Islands ("Airplanes Limited"), and Airplanes U.S. Trust, a
trust formed under the laws of Delaware ("Airplanes Trust" and together with
Airplanes Limited, "Airplanes Group"). Airplanes Group acquired directly or
indirectly from AerFi a portfolio of 229 commercial aircraft (collectively, the
"Aircraft") and related leases (the "Leases"). The Transaction was effected by
transferring existing subsidiaries of AerFi that owned the Aircraft to
Airplanes Limited and Airplanes Trust, respectively. References to Airplanes
Group in these notes to the unaudited condensed financial statements may relate
to Airplanes Limited and Airplanes Trust on a combined or individual basis as
applicable.
Simultaneously with such transfers, Airplanes Group issued notes of $4,048
million in aggregate principal amount in four classes: Class A, Class B, Class
C and Class D ("Notes") with approximately 90% of the principal amount of Notes
in each class being issued by Airplanes Limited and approximately 10% by
Airplanes Trust. Airplanes Group also issued Class E Notes of $604 million
ranking after the Notes and these were taken up by AerFi as part consideration
for the transfer of the Aircraft and certain related lease receivables. Of the
$604 million Class E Notes issued, approximately $13 million were subsequently
canceled on July 30, 1996 under the terms of the Transaction. On March 16,
1998, Airplanes Group successfully completed a refinancing of $2,437 million of
Class A and Class B Notes. On November 20, 1998, AerFi Group and its
subsidiary, AerFi, Inc. transferred their Class E Notes to General Electrical
Capital Corporation. Indebtedness at June 30, 1999 represents the aggregate of
the Class A - D Notes and Class E Notes in issue (net of approximately $0.4
million of discounts on issue and net of $13 million of Class E Notes
subsequently canceled as referred to above). Airplanes Limited and Airplanes
Trust have each fully and unconditionally guaranteed each others' obligations
under the relevant notes.
7
<PAGE>
2. Basis of Preparation
The accompanying unaudited condensed financial statements of Airplanes
Limited, Airplanes Trust and the combined unaudited condensed balance sheets,
statements of operations, statement of changes in shareholders deficit/net
liabilities and statements of cash flows of Airplanes Group (together the
"financial statements") have been prepared on a going concern basis in
conformity with United States generally accepted accounting principles. The
financial statements are presented on a historical cost basis.
The accompanying financial statements for Airplanes Limited and Airplanes
Trust reflect all adjustments which in the opinion of management are necessary
to present a fair statement of the information presented as of June 30, 1999
and for the three month periods ending June 30, 1999 and June 30, 1998. Such
adjustments are of a normal, recurring nature. The results of operations for
the three months ended June 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
The accompanying financial statements of Airplanes Limited and Airplanes Trust
have been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with the requirements of
the Report on Form 10-Q. Consequently, they do not include all the disclosure
normally required by generally accepted accounting principles. For further
information regarding Airplanes Group and its financial condition, results of
operations and cash flows, refer to the audited financial statements and notes
thereto included in Airplanes Group's annual Report on Form 10-K for the year
ended March 31, 1999, previously filed with the Securities and Exchange
Commission.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
On March 28, 1996, Airplanes Pass Through Trust (the "Trust") issued $4,048
million of Pass Through Certificates (the "1996 Certificates") in four classes
- - Class A, Class B, Class C and Class D. The Class A 1996 Certificates were
further subdivided into five separate subclasses (A-1 through A-5). Each class
and subclass of the Certificates represents an interest in two corresponding
classes or subclasses of notes (collectively, the "1996 Notes") issued by
Airplanes Limited ("Airplanes Limited") and Airplanes U.S. Trust ("Airplanes
Trust"). Airplanes Limited, together with Airplanes Trust and their respective
subsidiaries comprise Airplanes Group ("Airplanes Group"). Airplanes Limited
and Airplanes Trust have each fully and unconditionally guaranteed (the "1996
Guarantees") the other's obligations under each class or subclass of 1996
Notes. Also on March 28, 1996, Airplanes Group received the net proceeds from
an underwritten offering of the 1996 Certificates (the "Underwritten Offering")
in exchange for the 1996 Notes. Airplanes Group used such net proceeds,
together with approximately $604 million in aggregate principal amount of a
fifth class of Airplanes Group notes (the "Class E Notes") to acquire certain
subsidiaries of AerFi Group plc ("AerFi Group" and, together with its
subsidiaries and affiliates, "AerFi"). Of the $604 million of Class E Notes
issued, approximately $13 million were canceled in July 1996 based on the
purchase price adjustment provisions in the agreements pursuant to which these
subsidiaries of AerFi Group were sold to Airplanes Group. The acquired
subsidiaries owned 229 aircraft (the "Aircraft") and related leases to 82
aircraft operators in 40 countries as at March 31, 1996. As at June 30, 1999,
27 of these Aircraft had been sold and one Aircraft had suffered a constructive
total loss. At June 30, 1999, 200 of the remaining 201 Aircraft were on lease
to 73 operators in 38 countries.
On March 16, 1998, the Trust issued additional Class A Certificates in three
separate subclasses (A-6 through A-8) and new Class B Certificates (the "1998
Refinancing Certificates" and together with the 1996 Certificates, the
"Certificates"). Also on this date, the Trust completed an underwritten
offering of the 1998 Refinancing Certificates (the "Refinancing") in exchange
for an interest in two corresponding Subclass A-6, Subclass A-7, Subclass A-8
and Class B notes issued by Airplanes Limited and Airplanes Trust (the "1998
Refinancing Notes and together with the 1996 Notes, the "Notes"). Airplanes
Limited and Airplanes Trust have each guaranteed the other's obligations under
their respective 1998 Refinancing Notes (the "Refinancing Guarantees" and
together with the 1996 Guarantees, the "Guarantees"). The proceeds of this
offering were used to refinance the Trust's Subclass A-1, Subclass A-2,
Subclass A-3 and existing Class B 1996 Certificates.
On November 20, 1998, AerFi Group and its subsidiary, AerFi, Inc. transferred
their Class E Notes to General Electric Capital Corporation.
The discussion and analysis which follows is based primarily on the combined
operating results of Airplanes Limited and Airplanes Trust and not on their
results reported as individual entities.
9
<PAGE>
It should be noted, however, that the Notes and the Guarantees comprise
obligations of two different legal entities owning different assets. The
Directors of Airplanes Limited and the Controlling Trustees of Airplanes Trust
believe that a combined discussion is the most appropriate basis of
presentation because, inter alia, Airplanes Limited and Airplanes Trust are not
intended to be regarded as separate businesses but rather on the basis of one
combined aircraft fleet. Furthermore, each of Airplanes Limited and Airplanes
Trust has fully and unconditionally guaranteed the performance of the other
under their respective Notes. The Guarantees have been structured to ensure
that no payments are made on a junior class of Notes of Airplanes Limited or
Airplanes Trust, as the case may be, before any amounts due and payable on a
more senior class of Notes of Airplanes Limited or Airplanes Trust,
respectively, are paid pursuant to the Guarantees.
General
Substantially all of Airplanes Group's business is expected to consist of
aircraft operating lease activities. However, Airplanes Group may also engage
in aircraft sales subject to certain limitations and guidelines. Airplanes
Group's revenues and operating results are determined by a number of
significant factors including (i) trading conditions in the civil aviation
industry, and in particular, the market for aircraft on operating leases, (ii)
the mix, relative age and popularity of the various aircraft types in the
portfolio of Aircraft owned by Airplanes Group and (iii) Airplanes Group's
financial resources and liquidity position relative to its competitors who may
possess substantially greater financial resources.
Cashflow Performance Relative to March 1998 Assumptions
The March 16, 1998 prospectus relating to the Refinancing contained various
assumptions (the "1998 Assumptions") regarding Airplanes Group's future
revenues and cash inflows. In the period from the March 10, 1998 Calculation
Date to the July 9, 1999 Calculation Date (the "Period"), the cash performance
of Airplanes Group was $11 million ahead of the 1998 Assumptions. This was
entirely due to Aircraft sales of $86 million not assumed in the 1998
Assumptions. This positive sales variance was substantially offset by Net
Operating Cashflows which were $76 million lower than the 1998 Assumptions in
the Period. ("Net Operating Cashflows" comprise gross lease revenue cashflows
after selling, general and administrative expenses, maintenance costs,
operating costs (including interest costs) and expenditure due to Aircraft
downtime, defaults, repossession and bad debts.) In addition, during the
Period, Airplanes Group exercised an option to purchase shares in an airline
which had been granted under the terms of the lease of an aircraft to this
lessee. The shares were subsequently sold yielding net proceeds of $1 million.
At July 15, 1999, having made the principal and interest distributions on that
date, Airplanes Group held cash balances of $185 million, $169 million in the
liquidity reserve and $16 million in the expense account. The cash balances
retained by Airplanes Group in the form of the liquidity reserve and expense
account decreased by $11 million between March 1998 and May 1999 which, when
combined with the positive cash performance of $11 million, resulted in
principal distributions in the Period of $22 million
10
<PAGE>
higher than the 1998 Assumptions.
Aircraft Sales
Sales proceeds of $133 million were received in the Period in respect of the
sale of 20 Aircraft which included six DC8-71Fs, one B737-300, four B737-200A
and one A300-B4-100 which was scrapped. In addition, Airplanes Group disposed
of eight DC9 Aircraft pursuant to a lessee purchase option, all of which were
over 25 years old at date of sale and the proceeds received for these Aircraft
were negligible. The 1998 Assumptions reflected sales proceeds of $47 million
in respect of the sale of three DC8-71F Aircraft only.
Net Operating Cashflows
Net Operating Cashflows were $76 million lower than the 1998 Assumptions in the
Period due to the following:
Lease revenue receipts
Lease revenue receipts were $37 million lower than the 1998 Assumptions in
the Period. This negative variance is primarily as a result of a number of
lessees (in particular Brazilian lessees as a result of currency
difficulties) going into arrears on their rental payments ($34 million),
revenue foregone due to Aircraft sales ($17 million) and other net
negative variances ($8 million) due to differences in lease rates and
interest rate movements. These factors were partially offset by the fact
that revenue lost through downtime and defaults was $22 million lower than
assumed in the 1998 Assumptions.
Net maintenance costs
Net maintenance costs were higher than the 1998 Assumptions by
approximately $30 million (the 1998 Assumptions assumed that net
maintenance cashflows would be zero) primarily due to the acceleration of
maintenance events in the amount of $19 million due to Aircraft
repossessions, the return of $7 million in maintenance reserves to a Latin
American lessee as a result of the restructuring of its leases and a
greater than expected incidence of maintenance events in the Period.
Maintenance expenditure may vary significantly from period to period as it
is impacted by the timing and incidence of checks, where checks are
performed, the type and age of the aircraft as well as events such as
lease extensions and early redeliveries. In addition to maintenance
expenditure, Airplanes Group also incur technical costs with respect to
the Aircraft which are included in "Other leasing/repossession costs".
Other leasing/repossession costs
Other leasing costs were approximately $17 million greater than the 1998
Assumptions in the Period. The 1998 Prospectus assumed that other leasing
costs would amount to 2% of lease revenues. Since March 1998 other leasing
costs have amounted to approximately 5% of lease revenues. In general,
other leasing costs have exceeded the 1998 Assumption primarily due to
high transition costs on Aircraft redelivering in the Period and the level
of payments made in the form of lessor contributions
11
<PAGE>
to certain technical costs during the term of certain leases. This
included payments made in the form of lessor contributions to engine
refurbishment costs on two A300 Aircraft.
In addition, repossession costs at 1% of lease revenues received exceeded
the 1998 Assumption of 0.8% by $1 million. These repossession costs were
primarily in respect of three MD83 Aircraft repossessed from Sunways and
four F100 Aircraft repossessed from Sempati. To a lesser extent they were
also related to one B737-400 Aircraft repossessed from Nordic East and one
B737-200A Aircraft which was redelivered from an Indonesian lessee and
subsequently sold in June 1998.
Net interest payments (including hedging costs)
Net interest payments (including hedging costs) were $14 million lower
than the 1998 Assumptions due to the following:
Interest payments on the floating rate Class A ($13 million) and Class B
($2 million) Notes were lower than assumed as a result of a combination of
lower principal balances outstanding due to the greater than assumed
principal amortisation and the lower interest rate environment. Also,
since the February 1999 Payment Date there has been a suspension of
payments of Class E Minimum Interest Amount ($3 million) due to the
reallocation of cashflows to the more senior Note classes as a result of a
greater than assumed reduction in aircraft valuations in the period to
February 5, 1999.
Net interest swap payments were $5 million greater than the 1998
Assumptions. In addition, payments of $2 million in respect of the Minimum
and Supplemental Hedge Payments in the Period were not assumed in the 1998
Assumptions.
Airplanes Group's cashflows in the Period were also positively affected by
the receipt of default interest on overdue lease rentals from lessees of
$1 million. The 1998 Assumptions did not assume any payment of default
interest. Interest income receipts were $2 million higher than the 1998
Assumptions due to higher cash balances retained in Airplanes Group.
Security deposits
There was a net decrease of $5 million in lessee security deposits held by
Airplanes Group over the Period which was not assumed in the 1998
Assumptions. This decrease was represented by an equivalent movement in
the Liquidity Reserve.
Principal Distributions
As a result of the above, Airplanes Group repaid $22 million more debt in the
Period than assumed. Distributions of principal to the Class A
Certificateholders were $22 million greater than assumed and distributions of
principal to the Class B Certificateholders were $7 million greater than
assumed. The February 1999 decrease in aircraft valuations has resulted in a
reallocation of cashflows in favour of the Class A Notes through the payment of
Class A Principal Adjustment Amounts. Accordingly, since the February 1999
Payment Date there has been a deferral of payments of the Class C and D
Scheduled Principal Amounts ($6 million and $1 million respectively). Following
the distributions to Certificateholders on July 15, 1999, the Class A Principal
Adjustment Amount outstanding was $17 million.
12
<PAGE>
Recent Developments
The aircraft leasing industry is being adversely affected by a rapid increase
in the numbers of aircraft available for lease or sale, with a corresponding
negative impact on aircraft values and lease rates of certain aircraft types.
Airplanes Group has eighteen aircraft to remarket in the next six months. These
comprise (5 x B737 300's / 400's, 2 x A300, 2 x ATR 42, 2 x MD83, 3 x DHC
8-300's, 1 x DC8-73 and 3 x B767's). As a result of the current over supply of
aircraft in the market place, Airplanes Group may experience difficulties in
placing these aircraft at satisfactory lease rates and without incurring
substantial downtime.
Trading conditions in the civil aviation industry have been adversely affected
by the severe economic and financial difficulties experienced in Latin America.
This downturn has undermined business confidence in the region and has had an
adverse impact on the results of operations of some of Airplanes Group's
lessees in the region which may adversely affect Airplanes Group's future
revenues and cashflows.
Brazil has experienced significant downturns in its economy and financial
markets, with large decreases in financial asset prices and, since it devalued
its currency on January 13, 1999, dramatic decreases in the value of its
currency. Continued weakness in the value of the Brazilian real, as well as
general deterioration in the Brazilian economy will mean that lessees may be
unable to generate sufficient revenues in Brazilian currency to pay the
dollar-denominated rental payments under the leases. Failure by Brazil to
overcome its current financial crisis could result in the crisis spreading to
other Latin American economies and economies in other emerging markets. Future
developments in the political systems or economies of Brazil and other Latin
America countries may have a material adverse effect on lessee operations in
those countries. At June 30, 1999, Airplanes Group leased 68 Aircraft
representing 33.28% of its portfolio by Appraised Value to operators in Latin
America of which 15 Aircraft representing 12.97% of the portfolio by Appraised
Value were leased to operators in Brazil. Accordingly further deterioration in
the Latin American economies, especially Brazil, could lead to a material
decrease in Airplanes Group's leasing revenues and an increase in default
related costs.
During the three months ended June 30, 1999, the Servicer, on behalf of
Airplanes Group, entered into a restructuring agreement with a Brazilian
lessee, the lessee of a B767 Aircraft representing 1.73% of the portfolio by
Appraised Value. The restructured amount of approximately $8 million is being
repaid over 24 months commencing in September 1999.
In addition, the Servicer is currently in negotiation with two other Brazilian
lessees with regard to restructuring outstanding receivables. One lessee leases
three MD11 Aircraft and three B737-500 Aircraft (7.99% of the portfolio by
Appraised Value) and one lessee leases eight F100 aircraft (3.26% of the
portfolio by Appraised Value).
Colombia has recently suffered as a result of the deterioration in the value of
the Colombian Peso and the resulting negative impact on the Colombian economy.
Airplanes Group leases to three Colombian lessees which operate nine Aircraft,
representing 5.14% of the portfolio by
13
<PAGE>
Appraised Value. Continued weakness in the value of the Colombian Peso, as well
as general deterioration in the Colombian economy, will mean that these lessees
may be unable to generate sufficient revenues in the Colombian currency to pay
the dollar denominated rental payments under the leases. The Servicer is
currently in discussions with one Colombian lessee (3.67% of the Portfolio by
Appraised Value) regarding a possible restructuring of its receivable balances.
The economies of Indonesia, Thailand, South Korea, Malaysia and the Philippines
have experienced particularly acute difficulties resulting in many business
failures, significant depreciation of local currencies against the dollar (the
currency in which lease payments are payable), sovereign and corporate credit
ratings downgrades and defaults, and in certain cases, internationally
organized financial stability measures. The economic difficulties in Indonesia
have resulted in civil disturbances and a change of government in that country.
Several airlines in the region have announced their intention to reschedule
their aircraft purchase obligations, reduce headcount and eliminate certain
routes. Since 1990, the market in this region for aircraft on operating lease
has demonstrated significant growth rates. However, should the recessionary
conditions that now prevail in large parts of the region last for a significant
period of time these will have an adverse impact on operators in the region as
well as global aircraft demand. At June 30, 1999, Airplanes Group leased 16
Aircraft, representing 9.37% of its portfolio by Appraised Value, to operators
in Asia and the Far East.
Philippine Airlines ("PAL"), the lessee of one Aircraft representing 0.61% of
the portfolio by Appraised Value, has been adversely affected by the ongoing
Asian economic crisis. On June 19, 1998, PAL filed a petition for approval of a
rehabilitation plan at the Philippine SEC and subsequently, the Philippine SEC
appointed an Interim Receiver. PAL was instructed by the Philippine SEC to
submit a Rehabilitation Plan within 30 days. Following a number of applications
for extension of this time limit, PAL filed the Rehabilitation Plan with the
Philippine SEC on December 7, 1998. It is unclear whether PAL will receive
support for its proposed Rehabilitation Plan from its creditors. During the
quarter to June 30, 1999, $2.6 million of receivables balances were
restructured. The balance will be repaid over 36 months commencing in September
1999. There can be no assurance, however, that PAL will ultimately repay its
arrearages or be able to pay future lease rentals. Airplanes Group may
encounter delays or difficulties in recovering possession of its Aircraft which
is operated within the Philippines or terminating the lease. If the Aircraft is
recovered, the technical costs required to ensure the Aircraft is in a suitable
condition for re-leasing may be significant.
At June 30, 1999, a North American lessee of one B747 Aircraft (1.05% of the
portfolio by Appraised Value), was $3.3 million in arrears in respect of
aircraft rental payments and maintenance reserves. The Servicer, on behalf of
Airplanes Group, had previously entered into a restructuring agreement with
this lessee to repay the restructured principal amount in monthly installments
through October 1999 and thereafter, interest on a monthly basis with the final
payment due in February 2013. At June 30, 1999, in addition to the current
arrears $1.1m remains outstanding in relation to this restructuring amount.
The U.S. Federal Aviation Administration (the "FAA") has indicated that it will
develop in the
14
<PAGE>
near term a new test specification for insulation for the purpose of increasing
fire safety on aircraft. The FAA has also begun discussion with the
international aviation authorities on this matter. In addition, the FAA has
indicated that it will propose requiring the use of improved insulation once
the new test standard is developed. It is possible that additional service
bulletins, new maintenance practices and mandatory airworthiness directives may
be issued while the new standard for insulation is developed. If new standards
for insulation are implemented, Airplanes Group could incur significant costs
in ensuring the Aircraft comply with these standards which could impact
adversely on Airplanes Group's results of operations. It is currently not clear
whether or to what extent manufacturers, owners or lessees would be responsible
for the costs necessary to bring aircraft in compliance with such new test
standards.
15
<PAGE>
Results of Operations - Three Months Ended June 30, 1999 Compared with Three
Months Ended June 30, 1998.
There is considerable uncertainty facing the world's economy due to the
continuing Asian financial crisis, the substantial difficulties facing the
Russian political and financial system, the devaluation of the Brazilian
currency and increasing concerns about future economic growth in Europe and the
United States. Despite this and although a number of lessees performed poorly,
Airplanes Group's results of operations for the three months ended June 30,
1999 continued to be relatively stable. Overall, Airplanes Group generated $35
million in cash from operations in the three months to June 30, 1999 compared
to $23 million in the same period of the previous year. The increase in cash
generated from operations in the three month period to June 30, 1999 is
primarily attributable to a reduction in technical costs and in net outflow of
maintenance reserves due to the timing of maintenance events. In addition,
there was a decrease in cash paid in respect of interest. This had been
partially offset by a reduction in lease revenues due to aircraft sales and an
increase in the level of receivables. There was a net loss after taxation for
the three months to June 30, 1999 of $57 million (Airplanes Limited: $51
million; Airplanes Trust: $6 million) compared to a net loss after taxation for
the three months to June 30, 1998 of $38 million (Airplanes Limited: $41
million; Airplanes Trust: net profit of $3 million). The increase in the net
loss for the period was primarily attributable to additional interest being
charged on accrued but unpaid Class E Note interest, and a reduction in the
profit on Aircraft sold.
Leasing Revenues
Leasing revenues (which include maintenance reserve receipts which Airplanes
Group receives from certain of its lessees) for the three months ended June 30,
1999 were $129 million (Airplanes Limited: $118 million; Airplanes Trust: $11
million) compared with $134 million (Airplanes Limited: $123 million; Airplanes
Trust: $11 million) for the three months ended June 30, 1998. The decrease in
1999 was primarily attributable to the reduction in the number of Aircraft on
lease in the period to June 30, 1999, as a consequence of Aircraft sales. At
June 30, 1999, Airplanes Group had 200 of its 201 Aircraft on lease (Airplanes
Limited: 183 Aircraft; Airplanes Trust: 18 Aircraft) compared to 202 of its 204
Aircraft on lease (Airplanes Limited: 184 Aircraft; Airplanes Trust: 18
Aircraft) at June 30, 1998. In addition, there was a lower interest rate
environment (which impacts the pricing of certain lease rentals) in the period
to June 30, 1999.
Aircraft Sales
Sales revenues of $2 million (Airplanes Limited: $2 million; Airplanes Trust:
Nil) in respect of the sale of one B737-200, and an engine from an A300
Aircraft, the airframe of which had previously been sold, were received in the
three months ended June 30, 1999. The net book value of the Aircraft and engine
at the date of sale, net of maintenance reserves of $1 million, was $1 million
(Airplanes Limited: $1 million; Airplanes Trust: Nil). In the three months
ended June 30, 1998, Airplanes Group received sales revenues of $118 million
(Airplanes Limited: $24 million, Airplanes Trust: $94 million) in respect of
the sale of eight Aircraft. The net book value of these eight Aircraft at the
date of sale, net of maintenance reserves of $7
16
<PAGE>
million, was $107 million (Airplanes Limited: $22 million; Airplanes Trust: $85
million).
Other Income
During the quarter to June 30, 1999 Airplanes Group exercised an option to
purchase shares in an airline which had been granted to the lessor under the
terms of the lease of an Aircraft to this lessee. The shares were subsequently
sold yielding a profit of $1 million.
Depreciation and Amortization
The charge for depreciation and amortization in the three months ended June 30,
1999 amounted to $43 million (Airplanes Limited: $39 million; Airplanes Trust:
$4 million) compared with $44 million (Airplanes Limited: $40 million;
Airplanes Trust: $4 million) for the comparative period in 1998. The decrease
arose as a result of the reduction in the number of Aircraft owned by Airplanes
Group.
Net Interest Expense
Net interest expense was $110 million (Airplanes Limited: $100 million;
Airplanes Trust: $10 million) in the three month period ended June 30, 1999
compared to $104 million (Airplanes Limited: $95 million; Airplanes Trust: $9
million) in the three month period ended June 30, 1998. The increase in net
interest expense was primarily due to a combination of offsetting factors:
additional interest charged on accrued but unpaid Class E Note interest of $12
million; a reduction in the value of swaptions of $1 million; and lower
interest rates and average debt in the three months to June 30, 1999.
The weighted average interest rate on the Class A - D Notes during the three
months to June 30, 1999 was 6.34% and the average debt in respect of the Class
A - D Notes outstanding during the period was $3,239 million. The Class E Notes
accrue interest at a rate of 20% per annum (as adjusted by reference to the
U.S. consumer price index, effective March 28, 1996). The weighted average
interest rate on the Class A - D Notes during the three months to June 30, 1998
was 6.85% and the average debt in respect of the Class A - D Notes outstanding
during the period was $3,440 million. Although LIBOR was lower in the three
months ended June 30, 1999 as compared with the three months ended June 30,
1998, the reduction in the weighted average interest rate on the Class A-D
Notes was less than the reduction in LIBOR. This was due to substantial amounts
of Airplanes Group's floating rate notes having been paid down over time with
relatively small payments on the fixed rate notes resulting in an increase in
the relative proportion of fixed rate notes as compared with floating rate
notes.
The difference for the three months ended June 30, 1999 in Airplanes Group's
net interest expense of $110 million (Airplanes Limited: $100 million;
Airplanes Trust: $10 million) and cash paid in respect of interest of $56
million (Airplanes Limited: $51 million; Airplanes Trust: $5 million) is
substantially accounted for by the fact that interest on the Class E Notes is
accrued but unpaid, in the three months ended June 30, 1999.
Net interest expense is stated after deducting interest income earned during
the relevant period.
17
<PAGE>
In the three months ended June 30, 1999, Airplanes Group earned interest income
(including lessee default interest) of $3 million (Airplanes Limited: $3
million; Airplanes Trust: Nil) compared with $4 million in the three months
ended June 30, 1998 (Airplanes Limited: $4 million; Airplanes Trust: Nil). The
decrease is primarily as a result of lower average cash balances and lower
interest rates in the three months to June 30, 1999.
At June 30, 1999, Airplanes Group had options on interest rate swaps
("Swaptions") with a notional principal of $289 million. During the three
months ended June 30, 1999, the value of the Swaptions decreased by
approximately $1 million as swap rates increased. As Swaptions do not qualify
for hedge accounting under US GAAP, the decrease in fair value of $1 million
has been included in net interest expense in the statement of operations.
Bad Debt and Loss-Making Lease Provisions
Airplanes Group's practice is to provide specifically for any amounts due but
unpaid by lessees based primarily on the amount due in excess of security held
and also taking into account the financial strength and condition of a lessee
and the economic conditions existing in the lessee's operating environment. A
number of Airplanes Group's lessees failed to meet their contractual
obligations in the three month period ended June 30, 1999, resulting in the
requirement for additional provisions in respect of bad and doubtful debts in
respect of these lessees, while the credit exposure with regard to certain
other carriers improved in the period. Overall, there was a net charge of $9
million in respect of bad and doubtful debts (Airplanes Limited: $8 million;
Airplanes Trust: $1 million) in the three months ended June 30, 1999, compared
with an overall net charge of $5 million for the three months ended June 30,
1998 (Airplanes Limited: $4 million; Airplanes Trust: $1 million). The overall
net charge in 1999 was primarily as a result of provisions required in respect
of two Brazilian lessees, one Philippine lessee, one North American lessee, one
Colombian lessee and one Irish lessee.
A lease agreement is deemed to be `loss making' in circumstances where the
contracted rental payments are insufficient to cover the depreciation and
allocated interest attributable to the aircraft plus certain direct costs, such
as legal fees and registration costs, attributable to the lease over its term.
For these purposes, interest is allocated to individual aircraft based on the
weighted average interest cost of the principal balance of the Notes and the
Class E Notes (excluding, in the case of the Class E Notes, the element of
interest (9% per annum) which is payable only in the event that the principal
amount of all the Notes is repaid). This results in a significant number of
leases being `loss making' while still being cash positive. There were no
significant `loss making' leases signed in the three months to June 30, 1999.
Consequently, there was an overall net utilisation of $3 million (Airplanes
Limited: $3 million; Airplanes Trust: Nil) in respect of `loss making' lease
provisions in the three months ended June 30, 1999, compared with the three
month period to June 30, 1998, where there was an overall net utilisation of $1
million (Airplanes Limited: $1 million; Airplanes Trust: Nil). The only
significant provision required in the period to June 30, 1998 was in respect of
three DC8-71F Aircraft on lease to one Latin American lessee.
Other Lease Cost
Other lease costs in the three months ended June 30, 1999 amounted to $3
million (Airplanes
18
<PAGE>
Limited: $3 million; Airplanes Trust: Nil) compared to other lease costs of $5
million (Airplanes Limited: $4 million; Airplanes Trust: $1 million) in the
three months to June 30, 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period to June
30, 1999 amounted to $9 million (Airplanes Limited: $8 million; Airplanes
Trust: $ 1 million). This is a comparable expense to that incurred in the three
months to June 30, 1998 of $9 million (Airplanes Limited: $8 million; Airplanes
Trust: $1 million).
The most significant element of selling, general and administrative expenses
are 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 in the three months to June 30, 1999 and
the three months to June 30, 1998 include $6 million (Airplanes Limited: $5
million; Airplanes Trust: $1 million) relating to GECAS servicing fees.
A further significant element of Airplanes Group's actual selling, general and
administrative expenses reported in the period to June 30, 1999 was $2 million
(Airplanes Limited: $2 million; Airplanes Trust: Nil) in respect of
administrative agency and cash management fees payable to AerFi, similar to the
charge of $2 million for the period to June 30, 1998.
Operating Profit/(Operating Loss)
The operating loss for the three months ended June 30, 1999 was $55 million
(Airplanes Limited: $49 million; Airplanes Trust: $6 million) compared with an
operating loss of $38 million for the three months ended June 30, 1998
(Airplanes Limited: $41 million; Airplanes Trust: a net profit of $3 million).
Airplanes Limited and Airplanes Trust are expected to continue to report
substantial losses in the future.
Taxes
There was a tax charge of $2 million (Airplanes Limited: $2 million; Airplanes
Trust : Nil) required in the three months to June 30, 1999, as compared with no
overall tax charge required in the same period in 1998.
Net Loss
The net loss after taxation for the three months ended June 30, 1999 was $57
million (Airplanes Limited: $51 million; Airplanes Trust: $6 million) compared
with a net loss after taxation for the three months ended June 30, 1998 of $38
million (Airplanes Limited: $41 million; Airplanes Trust: a net profit of $3
million).
19
<PAGE>
Financial Resources and Liquidity
There was an overall net decrease in cash of $8 million for the three months to
June 30, 1999, compared with a net increase in cash of $5 million for the three
months to June 30, 1998.
Liquidity
The cash balances at June 30, 1999 amounted to $216 million (Airplanes Limited:
$210 million; Airplanes Trust: $6 million) compared to cash balances at June
30, 1998 of $223 million (Airplanes Limited: $217 million; Airplanes Trust: $6
million.)
Operating Activities
Net cash provided by operating activities in the three months ended June 30,
1999 amounted to $35 million (Airplanes Limited: $31 million; Airplanes Trust:
$4 million) compared with $23 million in the three months ended June 30, 1998
(Airplanes Limited: $12 million; Airplanes Trust: $11 million). This includes
cash paid in respect of interest of $56 million in the three months to June 30,
1999 (Airplanes Limited: $51 million; Airplanes Trust: $5 million) compared
with $59 million in the three months to June 30, 1998 (Airplanes Limited: $53
million; Airplanes Trust: $6 million). The increase in cash provided by
operating activities in the three month period to June 30, 1999 is primarily
attributable to a reduction in the level of technical expenditure and
maintenance payments in the three month period to June 30, 1999. In addition,
there was a decrease in the cash paid in respect of interest in the three month
period to June 1999. This has been partially offset by a reduction in lease
revenues due to aircraft sales and an increase in the level of receivables.
Investing and Financing Activities
Cash flows from investing activities in the three months to June 30, 1999
reflects proceeds of $2 million from the sale of one B737-200A Aircraft and an
engine from an A300 Aircraft, the airframe of which was previously sold. In the
three months ended June 30, 1998, Airplanes Group received sales proceeds of
$118 million (Airplanes Limited: $39 million; Airplanes Trust $79 million) from
the sale of eight Aircraft (six DC8 Aircraft which were sold to Emery, one
B737-200 Aircraft which was sold to Ryanair and one B737-300 Aircraft which was
sold to Varig under the early exercise of its purchase option). Finally, the
cash provided by capital and sales type leases was $2 million (Airplanes
Limited: $2 million; Airplanes Trust: Nil) as compared with $3 million in the
comparative period to June 30, 1998 (Airplanes Limited: $3 million; Airplanes
Trust: Nil).
Cash flows from financing activities in the three months to June 30, 1999
primarily reflect the repayment of $47 million of principal on Subclass A-6 and
Class B Notes by Airplanes Group (Airplanes Limited: $43 million; Airplanes
Trust: $4 million) compared with $139 million of principal repaid on Subclass
A-5, Subclass A6, Class B and Class C Notes by Airplanes Group (Airplanes
Limited: $128 million; Airplanes Trust: $11 million) in the three months to
June 30, 1998. The decrease in principal repayments in the three months ended
June 30, 1999 as
20
<PAGE>
compared to the three months ended June 30, 1998, is due to a reduction in cash
provided by both investing and operating activities as discussed above.
Indebtedness
Airplanes Group's indebtedness consisted of Class A-E Notes in the amount of
$3,796 million (Airplanes Limited: $3,458 million; Airplanes Trust: $338
million) at June 30, 1999 and $3,940 million (Airplanes Limited: $3,589
million; Airplanes Trust: $351 million) at June 30, 1998. Airplanes Group had
$591 million Class E Notes outstanding at June 30, 1999 and June 30, 1998. In
order to repay principal on the Subclass A-4, A-7 and A-8 Notes on their
expected maturity dates, Airplanes Group will have to refinance such Notes in
the capital markets. In order to avoid stepped up interest costs, $200 million
of Subclass A-4 Notes, $550 million of Subclass A-7 Notes and $700 million in
Subclass A-8 Notes will have to be refinanced through the sale of further
pass-through certificates by March 2003, 2001 and 2003, respectively. There can
be no assurance that the Trust will be able to sell further pass-through
certificates in the amounts and at the times required and any failure to do so
may have the impact of increasing Airplanes Group's borrowing costs.
Year 2000 Compliance
Many existing computer systems only use two digits to identify a year in the
date field. These systems were designed and developed without considering the
impact of the Year 2000. If not corrected, many computer applications could
fail or create erroneous results by or at the Year 2000. Airplanes Group is in
the process of assessing the potential impact of 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 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 have reviewed
their Year 2000 exposure and are taking the steps necessary to ensure that
their systems are Year 2000 compliant. The Servicer, Administrative Agent, and
Cash Manager do not believe that occurrences of Year 2000 failures will have a
material adverse effect on their ability to meet their obligations to Airplanes
Group.
Airplanes Group may also suffer an adverse impact on its business and results
of operations if its suppliers, financial institutions, lessees and others with
which it conducts business are not Year 2000 compliant. The Servicer and
Administrative Agent are conducting surveys of the third parties with which
they deal 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. The Servicer and Administrative Agent are reviewing the
responses of those third parties received to-date and have contacted all third
parties whose responses are outstanding.
As of July 16, 1999, the Servicer has surveyed 65 of Airplanes Group's 73
lessees, the purpose of which is to determine the extent of each lessee's
exposure to Year 2000 risks and the status
21
<PAGE>
of their Year 2000 compliance efforts. The Servicer has received responses from
32 of Airplanes Group's current lessees. Based on these responses, 30 lessees
have confirmed that they are implementing a Year 2000 plan. Of these, 19
lessees have completed a questionnaire sent to them by the Servicer and in
response to a specific question, 18 lessees have confirmed that they will be
able to continue to operate their business and meet their contractual
obligations without error or interruption through, on, and after January 1,
2000. The Servicer has written to most of the lessees where responses are
outstanding. Airplanes Group cannot give any assurance that lessees will
provide significantly more information on their Year 2000 compliance efforts.
Accordingly, Airplanes Group cannot assess whether lessees will be able to
become Year 2000 compliant and continue their operations.
Where a lessee is not Year 2000 complaint, this could result in lost revenue
for the lessee and an inability to make lease payments to Airplanes Group.
Noncompliance by the lessee's financial institutions could also adversely
affect the ability to process lease payments.
The worst case scenario would arise where a large number of lessees are unable
to operate their Aircraft and generate revenues and as a result, are unable to
make lease payments to Airplanes Group. Currently Airplanes Group is unable to
determine the likelihood or magnitude of any resulting lost revenue or whether
the consequences of Year 2000 failures will have a material impact on Airplanes
Group's business or financial position.
If a lessee cannot operate its Aircraft and cannot make contractual lease
payments, as a result of that lessee not being Year 2000 compliant, Airplanes
Group's contingency plans include the Servicer repossessing Aircraft from
lessees in default and then attempting to re-lease such Aircraft to a Year 2000
compliant lessee. Airplanes Group cannot give any assurance that the Servicer
would be able to re-lease such Aircraft at favourable terms or at all, or that
there may not be a significant delay in re-leasing. If a significant number of
Aircraft could not be re-leased at favourable terms or at all, it may have a
material adverse effect on Airplanes Group's business.
Aircraft and air traffic control systems also depend heavily on microprocessors
and software technology. If the systems employed by the Aircraft are not Year
2000 compliant, Airplanes Group's business and results of operations may be
adversely affected. Major aircraft manufacturers, including Boeing and Airbus,
are conducting Year 2000 reviews of the systems employed on their aircraft and
are advising 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 problems
are certain on-board aircraft management and navigation systems.
As regards air traffic control systems, there can be no assurance that such
systems will be compliant in the many countries world-wide in which the Group's
lessees operate.
The nature and extent of the risks posed by potential failure of aircraft and
air traffic control systems because of Year 2000 problems have not been fully
determined. Airplanes Group cannot give any assurance that its lessees will
follow the advice of aircraft manufacturers
22
<PAGE>
regarding the steps to be taken to address Year 2000 compliance. It is not
clear whether or to what extent manufacturers, owners or lessees will be
responsible for the costs necessary to make aircraft systems Year 2000
compliant. Accordingly, 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 associated with the Aircraft. Such expenditure could, however,
have a material adverse impact on the ability of Airplanes Group to make
payments on the Notes.
The aviation insurance markets have sought to exclude any claims for losses
incurred as a result of Year 2000 problems under existing policies. However,
the application of this exclusion may be mitigated by the availability of the
following limited writeback endorsement ("Year 2000 endorsements"); (i) hull
and aircraft liability coverage in respect of accidental loss or damage to
insured aircraft and for liability arising out of an accident involving the
insured aircraft as a result of a Year 2000 occurrence and (ii) non aircraft
liability coverage with regard to liability caused by an accident and arising
out of a risk insured under the policy as a result of Year 2000 failure.
Therefore, the effect of the Year 2000 endorsement is to provide that losses
(including consequential losses) arising from a Year 2000 failure will only be
paid where they result from an accident involving an aircraft or an injury to a
third party. Insurers will provide Year 2000 endorsements to those airlines
which satisfy insurers that they have identified and are adequately addressing
the Year 2000 issues affecting the airline. Airplanes Group, in conjunction
with the Servicer and its insurance brokers, is currently assessing the Year
2000 status of all of its lessees' aviation insurance.
The Year 2000 endorsements are currently available to Airplanes Group in
respect of any off-lease Aircraft. In addition, Airplanes Group maintains
contingent insurance designed to protect the lessor in circumstances where the
lessor fails to collect from the insurance required to be provided by the
lessee. In respect of any insured claims for losses incurred as a result of
Year 2000 problems, Airplanes Group's contingent insurances are not available
if the operator's policy does not contain Year 2000 endorsements.
New Accounting Pronouncement
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") was issued in June 1998.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
Airplanes Group is currently reviewing implementation of the requirements of
SFAS No. 133. Airplanes Group is required to implement SFAS No. 133 by April 1,
2001.
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<PAGE>
Item 3 Quantitative and Qualitative Disclosures about Market Risks
Interest Rate Sensitivity
Airplanes Group's principal market risk exposure is to changes in interest
rates. This exposure arises from its Notes and the derivative instruments used
by Airplanes Group to manage its interest rate risk.
The terms of each subclass of Notes, including the outstanding principal amount
and estimated fair value as of June 30, 1999, are as follows:
<TABLE>
Annual Interest Estimated
Rate Principal Amount Expected Final Final Fair Value at
Subclass of Notes (Payable Monthly) at quarter end Payment Date Maturity Date June 30, 1999
- ----------------- ----------------- -------------- ------------- ------------- -------------
$ Millions $ Millions
<S> <C> <C> <C> <C> <C>
Subclass A-4 (LIBOR+.62%) 200 March 15, 2003 March 15, 2019 199.6
Subclass A-6 (LIBOR+.34%) 694 January 15, 2004 March 15, 2019 690.9
Subclass A-7 (LIBOR+.26%) 550 March 15, 2001 March 15, 2019 547.6
Subclass A-8 (LIBOR+.375%) 700 March 15, 2003 March 15, 2019 694.7
Class B (LIBOR+.75%) 309 March 15, 2009 March 15, 2019 300.4
Class C (8.15%) 367 March 15, 2011 March 15, 2019 357.5
Class D (10.875%) 400 March 15, 2012 March 15, 2019 388.0
------ --------
3,220 3,178.7
====== ========
</TABLE>
Interest Rate Management
The leasing revenues of Airplanes Group are generated primarily from lease
rental payments which are either fixed or floating. In the case of floating
rate leases, an element of the rental varies in line with changes in LIBOR,
generally six-month LIBOR. Some leases carry fixed and floating rental payments
for different rental periods. There has been an increasing tendency for fixed
rate leases to be written and approximately two thirds of the leases are fixed
rate leases.
In general, an interest rate exposure arises to the extent that Airplanes
Group's fixed and floating interest obligations in respect of the Class A-D
Notes do not correlate to the mix of fixed and floating rental payments for
different rental periods. This interest rate exposure can be managed through
the use of interest rate swaps. The Class A and B Notes bear floating rates of
interest and the Class C and D Notes bear fixed rates of interest. The mix of
fixed and floating rental payments contains a higher percentage of fixed rate
payments than the percentage of fixed rate interest payments on the Notes,
including as a result of the fact that the reset periods on floating rental
payments are generally longer than the monthly reset periods on the floating
rate Notes. In order to correlate the contracted fixed and floating rental
payments to the fixed and floating interest payments on the Notes, Airplanes
Group enters into interest rate swaps (the 'Swaps'). Under the Swaps, Airplanes
Group pays fixed amounts and receives floating amounts on a monthly basis. The
Swaps amortize having regard to the expected paydown schedule of the Class A
and B Notes, the expiry dates of the leases under which
24
<PAGE>
lessees are contracted to make fixed rate rental payments and the LIBOR reset
dates under the floating rates leases. At least every three months, and in
practice more frequently, AerFi Financial Services (Ireland) Limited, a
subsidiary of AerFi Group, as Airplanes Group's administrative agent (the
"Administrative Agent"), seeks to enter into additional swaps or sell at market
value or unwind part or all of the Swaps and any future swaps in order to
rebalance the fixed and floating mix of interest obligations and the fixed and
floating mix of rental payments. At June 30, 1999, Airplanes Group had
unamortized Swaps with an aggregate notional principal balance of $2,245
million. The aggregate notional principal of these Swaps will be reduced to
$1,140 million by the end of the fiscal year ended March 31, 2000. These Swaps
will be further reduced to an aggregate notional principal balance of $805
million by the year ended March 31, 2001, to an aggregate notional principal
balance of $500 million by the year ended March 31, 2002 and to an aggregate
notional principal balance of $30 million by the year ended March 31, 2003.
None of the Swaps have maturity dates extending beyond June 2003. The aggregate
fair value of the Swaps at June 30, 1999 was $8 million.
Airplanes Group Swap Book at June 30, 1999
<TABLE>
Swap No. Notional Amount (i) Effective Final Fixed Rate Estimated Fair Market Value
($ Millions) Date Maturity Date Payable (ii) as at June 30, 1999
<S> <C> <C> <C> <C> <C>
1 10 10/28/96 7/15/99 5.8600% ($7,255)
2 50 1/15/99 7/15/99 4.9760% $478
3 135 1/25/99 7/15/99 4.9175% $7,860
4 135 2/22/99 8/15/99 4.9975% $26,034
5 45 3/15/99 8/15/99 5.0125% $9,165
6 150 3/18/99 9/15/99 4.9900% $57,475
7 5 9/15/97 10/15/99 5.9050% ($10,721)
8 65 4/15/99 10/15/99 4.9600% $66,982
9 70 4/15/99 10/15/99 4.9850% $53,518
10 10 9/22/97 2/15/00 5.7450% ($24,029)
11 10 12/15/97 4/15/00 6.3900% ($75,819)
12 145 5/17/99 4/15/00 5.0665% $205,886
13 35 6/24/97 6/15/00 5.9825% ($114,540)
14 15 7/15/97 6/15/00 6.0600% ($80,272)
15 10 2/17/98 6/15/00 5.5475% $909
16 35 12/15/97 10/16/00 5.8475% ($90,800)
17 70 1/6/97 11/15/00 6.1100% ($266,207)
18 15 1/15/97 11/15/00 6.0550% ($54,530)
19 10 8/15/97 12/15/00 5.9800% ($25,889)
20 40 3/16/98 1/15/01 5.7750% $44,039
21 20 12/23/97 3/15/01 5.8175% $33,753
22 205 3/28/96 4/15/01 6.0925% ($731,681)
23 60 9/30/97 6/15/01 6.0650% ($294,597)
24 45 10/28/97 6/15/01 5.9600% ($161,182)
25 60 11/4/97 8/15/01 5.9170% ($158,708)
26 35 4/15/98 9/17/01 5.7425% $163,900
27 15 1/27/98 12/17/01 5.5900% $191,604
28 70 3/16/98 12/17/01 5.5150% $609,287
29 60 4/15/98 2/15/02 5.6050% $214,422
30 40 4/15/98 4/15/02 5.7150% $68,840
31 15 5/27/98 4/15/02 5.8260% $191,285
32 0 8/16/99 15/4/02 5.6750% $461,370
33 10 10/27/98 5/15/02 4.7675% $383,090
34 15 5/17/99 6/17/02 5.8750% $149,411
25
<PAGE>
Swap No. Notional Amount (i) Effective Final Fixed Rate Estimated Fair Market Value
($ Millions) Date Maturity Date Payable (ii) as at June 30, 1999
<S> <C> <C> <C> <C> <C>
35 10 2/16/99 7/15/02 5.8025% $95,749
36 15 9/15/98 8/15/02 5.3900% $278,470
37 150 7/15/98 12/15/02 5.7160% $1,187,778
38 35 8/25/98 2/15/03 5.6785% $639,613
39 5 10/15/98 2/15/03 4.8850% $928,050
40 15 11/16/98 2/15/03 4.9450% $512,892
41 50 12/15/98 2/15/03 5.0540% $1,899,773
42 110 6/1/99 3/15/03 5.7550% $193,202
43 0 1/18/00 3/15/03 5.2725% $472,514
44 0 2/15/00 3/15/03 5.1365% $586,796
45 145 6/21/99 6/15/03 6.0000% ($22,456)
----------
$7,615,459
==========
</TABLE>
(i) While some of the above may have a fixed maturity date, many amortise
over the period to the final maturity date.
(ii) Each of the above Swaps is calculated on a monthly fixed actual/360
adjusted basis, with the exception of Swap No. 22 which is calculated on
a monthly fixed 30/360 unadjusted basis.
(iii) Under all Swaps Airplanes Group receives floating at one month LIBOR,
reset monthly.
Additional interest rate exposure will arise to the extent that lessees owing
fixed rate rental payments default and interest rates have declined between the
contract date of the lease and the date of default. This exposure is managed
through the purchase of Swaptions. Airplanes Group purchases Swaptions which,
if exercised, will allow Airplanes Group to enter into interest rate swap
transactions under which it will pay floating amounts and received fixed
amounts. These Swaptions can be exercised in the event of defaults by lessees
owing fixed rate rental payments in circumstances where interest rates have
declined since the contract date of such leases. Because not all lessees making
fixed rate rental payments are expected to default and not all lessee defaults
are expected to occur following a decline in interest rates, Airplanes Group
purchases Swaptions in aggregate in a notional amount less than the full extent
of the exposure associated with the lessees making fixed rate rental payments.
This notional amount (the `Target Hedge') will be varied from time to time to
reflect, inter alia, changes in the mix of payment bases under future leases
and in the prevailing level of interest rates. From time to time the
Administrative Agent may also sell at market value or unwind part or all of the
outstanding Swaptions, for example, to reflect any decreases in the Target
Hedge. In the period from March 28, 1996 to June 30, 1999, Airplanes Group
purchased Swaptions for interest rate swaps with an aggregate notional
principal balance of $483 million and sold Swaptions with an aggregate notional
principal balance of $194 million. The net aggregate notional principal balance
of Swaptions at June 30, 1999 therefore amounted to $289 million. The fair
values of the Swaptions at June 30, 1999 was $0.5 million and because the
Swaptions do not qualify for hedge accounting under U.S. GAAP, the decrease in
this amount since March 31, 1999 of $1 million has been included in interest
expense for the three months ended June 30, 1999.
27
<PAGE>
Airplanes Group Swaption Book at June 30, 1999
<TABLE>
Swaption No. Notional Amount (i) Effective Final Fixed Rate Estimated Fair Market
($ Millions) Date Maturity Date Receivable (ii) Value as at June 30, 1999
<S> <C> <C> <C> <C> <C>
1 10 3/16/98 10/15/00 5.000% 3,927
2 4 5/15/98 10/16/00 5.000% 1,572
3 25 9/15/98 11/15/00 5.200% 74,196
7 7 2/17/98 1/15/01 5.000% 3,433
5 24 1/15/98 5/15/01 5.000% 23,191
6 50 9/15/98 12/15/01 5.300% 32,048
7 30 1/15/98 4/15/02 5.000% 51,733
8 20 2/17/98 4/15/02 5.100% 37,262
9 14 4/15/98 4/15/02 5.100% 26,083
10 15 3/16/98 3/15/03 5.100% 37,252
11 50 7/15/98 3/15/03 5.100% 121,885
12 20 4/15/98 6/15/03 5.100% 55,156
13 10 9/15/98 9/15/03 5.300% 17,391
14 10 2/16/99 2/15/04 5.400% 56,782
-------
541,911
=======
</TABLE>
(i) Under each Swaption, if exercised, Airplanes Group would receive fixed
amounts at the rate indicated above on a monthly fixed 30/360 unadjusted
basis.
(ii) Under each Swaption, if exercised, Airplanes Group would pay floating
amounts at one month LIBOR, reset monthly.
Through the use of the Swaps, Swaptions and other interest rate hedging
products, it is Airplanes Group's policy not to be adversely exposed to
material movements in interest rates. There can be no assurance, however, that
Airplanes Group's interest rate risk management strategies will be effective in
this regard.
The Directors of Airplanes Limited and the Controlling Trustees of Airplanes
Trust are responsible for reviewing and approving the overall interest rate
management policy and transaction authority limits. Specific hedging contracts
are approved by officers of the Administrative Agent acting within the overall
policies and limits. Counterparty risk is monitored on an ongoing basis.
Counterparties are subject to the prior approval of the Directors of Airplanes
Limited and the Controlling Trustees of Airplanes Trust. Airplanes Group's
counterparties consist of the affiliates of major U.S. and European financial
institutions which have credit ratings, or which provide collateralisation
arrangements, consistent with maintaining the ratings of the Class A Notes.
The quantitative disclosure and other statements in this section are
forward-looking statements that involve risks and uncertainties. Although
Airplanes Group's policy is to limit its exposure to changes in interest rates,
it could suffer higher cashflow losses as a result of actual future changes in
interest rates. It should also be noted that Airplanes Group's future exposure
to interest rate movements will change as the composition of its lease
portfolio changes or if it issues new subclasses of additional notes or
refinancing notes with different interest rate provisions from the Notes.
Please refer to "Risk Factors" for more information about risks, especially
lessee credit risk, that could intensify Airplanes Group's exposure to changes
in interest rates.
28
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
VASP
On November 5, 1992, AerFi 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 AerFi. 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 AerFi repossession and export of the
Repossessed Assets. AerFi was instructed to return the Repossessed Assets for
lease by VASP under the terms of the original lease agreements between AerFi
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
AerFi in lieu of the return of the Repossessed Assets. AerFi 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 Federal
Supreme Court. In addition, AerFi has filed a writ of mandamus and a recission
action with the High Court seeking to overturn the December 1996 decision of
the High Court and has sought a stay on the High Court's decisions pending its
appeals.
Seven of the thirteen aircraft which were repossessed by AerFi from VASP
following the 1992 injunction and the 1993 decision are now owned by Airplanes
Group although none of them are habitually based in Brazil. However, a number
of these aircraft operate into Brazil from time to time. The judgment of the
High Court only applies to those assets which are the subject matter of the
proceedings. VASP sought to have AerFi return the Repossessed Assets, in
connection with which the High Court served notice on AerFi for return of the
Repossessed Assets for the account, and at the risk, of VASP. AerFi has
challenged a number of matters relating to the notice, including its validity.
In addition, VASP filed a petition for calculation of the amount which it
alleges should be paid by AerFi, based on the High Court decision, seeking
damages in respect of (i) AerFi's alleged failure to comply with the court
order requiring return of the Repossessed Assets and (ii) the period during
which VASP was prevented from using the Repossessed Assets. AerFi has
challenged VASP's petition on the basis that if VASP believes it has an action
for alleged damages against AerFi in respect of the period during which VASP
was prevented from using the Repossessed Assets, VASP must commence such an
action in accordance with normal Brazilian court procedures before a court of
first instance. These preliminary matters still await a decision by the lower
court. Before the High Court, AerFi successfully challenged VASP's petition for
calculation of alleged damages arising from AerFi's alleged failure to comply
with the court order requiring return of the Repossessed Assets. As a
consequence, VASP, should it seek to recover such alleged damages, will have to
prove the existence and extent of its alleged damages. The only immediate risk
to the Repossessed Assets would arise where they are located in Brazil and
where VASP was successful in enforcing its judgement having sought repossession
rather than damages.
29
<PAGE>
On June 10, 1999, the High Court, pending further consideration of AerFi's
recission action, stayed all proceedings by VASP which seek to implement the
December 1996 decision. VASP has appealed this decision of the High Court.
VASP sought to serve AerFi 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, AerFi will challenge a
number of matters relating to the notice including its validity. In addition,
VASP sought an order against AerFi from the High Court for alleged damages
arising from the repossession and export of the Repossessed Assets and AerFi's
alleged failure to comply with the court order requiring return of the
Repossessed Assets. AerFi challenged VASP's application on a number of grounds,
including its validity. The High Court rejected VASP's application and held
that if VASP believes it has an action for damages against AerFi, VASP must
commence such an action in accordance with normal Brazilian court procedures
before a court of first instance. The only immediate risk to the Repossessed
Assets would arise where they are located in Brazil and if VASP was successful
in enforcing its judgment having sought repossession rather than damages.
AerFi has informed Airplanes Group that it has been advised that the December
1996 decision of the High Court in this matter is incorrect as a matter of
Brazilian law. AerFi 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. AerFi has advised Airplanes
Group that it believes the outcome of these matters will not have a material
adverse effect on Airplanes Group's liquidity, results of operations or
financial condition.
Other Matters
Prior to the transfer of the E Notes by AerFi to General Electric Capital
Corporation, AeroUSA, Inc. and AeroUSA 3, Inc., both Connecticut corporations,
have filed United States federal consolidated tax returns and certain state and
local tax returns with AerFi, Inc., and its subsidiaries. There are ongoing tax
audits by certain state and local tax authorities with respect to taxes
previously reported by AerFi, Inc. and its subsidiaries. AerFi believes that
none of these audits will have a material adverse impact upon the liquidity,
results of operations, financial condition or liquidity of AeroUSA, Inc or
AeroUSA 3, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule of Airplanes Limited
27.2 Financial Data Schedule of Airplanes U.S. Trust
(b) Reports on Form 8-K: Filed for event dates April 13, 1999; May 13,
1999 and June 11, 1999 (relating to the monthly report to holders of
the Certificates).
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1999 AIRPLANES LIMITED
By: /s/ WILLIAM M. MCCANN
-------------------------------
William M. McCann
Director and Principal
Accounting Officer
Date: August 13, 1999 AIRPLANES U.S. TRUST
By: /s/ WILLIAM M. MCCANN
-------------------------------
William M. McCann
Controlling Trustee and
Principal Accounting Officer
<PAGE>
AIRPLANES LIMITED AND AIRPLANES U.S. TRUST
INDEX TO EXHIBITS
EXHIBIT NUMBER
27.1 Financial Data Schedule of Airplanes Limited
27.2 Financial Data Schedule of Airplanes U.S. Trust
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001004539
<NAME> AIRPLANES LIMITED
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 210
<SECURITIES> 0
<RECEIVABLES> 46
<ALLOWANCES> (17)
<INVENTORY> 0
<CURRENT-ASSETS> 239
<PP&E> 4,105
<DEPRECIATION> 1,307
<TOTAL-ASSETS> 3,076
<CURRENT-LIABILITIES> 152
<BONDS> 3,458
0
0
<COMMON> 0
<OTHER-SE> (1,362)
<TOTAL-LIABILITY-AND-EQUITY> 3,076
<SALES> 1
<TOTAL-REVENUES> 121
<CGS> (1)
<TOTAL-COSTS> 53
<OTHER-EXPENSES> 8
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 100
<INCOME-PRETAX> (49)
<INCOME-TAX> (2)
<INCOME-CONTINUING> (51)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001004540
<NAME> AIRPLANES US TRUST
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 4
<ALLOWANCES> (1)
<INVENTORY> 0
<CURRENT-ASSETS> 9
<PP&E> 422
<DEPRECIATION> 138
<TOTAL-ASSETS> 326
<CURRENT-LIABILITIES> 5
<BONDS> 338
0
0
<COMMON> 0
<OTHER-SE> (169)
<TOTAL-LIABILITY-AND-EQUITY> 326
<SALES> 0
<TOTAL-REVENUES> 11
<CGS> 0
<TOTAL-COSTS> 5
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (6)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
