SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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Airplanes Limited Airplanes U.S. Trust
Exact Name of Registrants as specified in
memorandum of association or trust agreement
Jersey, Channel Islands Delaware
(State or other jurisdiction of incorporation or organization)
7359 13-3521640
SIC Code (I.R.S. Employer Identification No.)
Airplanes Limited Airplanes U.S. Trust
22 Grenville Street 1100 North Market Street,
St. Helier Rodney Square North
Jersey, JE4 8PX Wilmington, Delaware
Channel Islands 19890-0001
(011 44 1534 609 000) (302-651-1000)
(Addresses and telephone numbers, including area codes,
of Registrants' principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Issuer Class September 30, 1999
Airplanes Limited Common Stock, $1.00 par value 30
<PAGE>
Airplanes Limited and Airplanes U.S. Trust
Form 10-Q for the Three Month Period Ended September 30, 1999
Index
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited) 3
o Unaudited Condensed Balance Sheets - September 30, 1999 and
March 31, 1999
o Unaudited Condensed Statements of Operations - Three Months Ended
September 30, 1999 and September 30, 1998
o Unaudited Condensed Statement of Operations - Six Months ended
September 30, 1999 and September 30, 1998.
o Unaudited Condensed Statements of Changes in Shareholders
Deficit / Net Liabilities - Six months Ended September 30, 1999
and September 30, 1998
o Unaudited Condensed Statements of Cash Flows - Six Months Ended
September 30, 1999 and September 30, 1998
o Notes to the Unaudited Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risks 30
Part II. Other Information
Item 1. Legal Proceedings 36
Item 6. Exhibits and Reports on Form 8 - K 37
Signatures
Index to Exhibits,
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
AIRPLANES GROUP
UNAUDITED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
--------------------------------------------- ---------------------------------------------
1999 1999
--------------------------------------------- ---------------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ -------------- -------------- -------------- -------------- -------------
($millions) ($millions)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash 218 6 224 207 6 213
Accounts receivable
Trade receivables 38 5 43 42 5 47
Allowance for doubtful debts (14) (3) (17) (16) (2) (18)
Amounts due from Airplanes Limited 0 35 35 34 34
Intercompany capital lease 36 - 36 35 35
Net investment in capital and sales
type leases 20 36 56 17 35 52
Aircraft, net 2,820 252 3,072 2,742 244 2,986
Other assets 4 0 4 2 0 2
------------ -------------- -------------- -------------- -------------- -------------
Total assets 3,122 331 3,453 3,029 322 3,351
============ ============== ============== ============== ============== =============
LIABILITIES
Accrued expenses and other liabilities 581 51 632 679 61 740
Amounts due from Airplanes Trust 35 0 35 34 0 34
Intercompany capital lease - 36 36 0 35 35
Indebtedness 3,500 342 3,842 3,407 333 3,740
Provision for maintenance 266 17 283 271 18 289
Deferred income taxes 51 48 99 54 48 102
------------ -------------- -------------- -------------- -------------- -------------
Total liabilities 4,433 494 4,927 4,445 495 4,940
------------ -------------- -------------- -------------- -------------- -------------
Net liabilities (1,311) (163) (1,474) (1,416) (173) (1,589)
------------ -------------- -------------- -------------- -------------- -------------
3,122 331 3,453 3,029 322 3,351
============ ============== ============== ============== ============== =============
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
financial statements
3
<PAGE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------------------------------------
1998 1999
------------------------------------------ ------------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ --------------------------- ------------ ----------------
($millions) ($millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Aircraft leasing 123 11 134 121 10 131
Aircraft Sales 2 - 2 - - -
Other Income - - - - - -
Expenses
Cost of Aircraft Sold (2) - (2) - - -
Depreciation and amortisation (40) (4) (44) (40) (4) (44)
Net interest expense (90) (11) (101) (105) (11) (116)
Provision for maintenance (17) (2) (19) (19) (1) (20)
Bad and doubtful debts 1 1 2 1 2 3
Provision for loss making leases, net 4 1 5 3 1 4
Other lease costs (11) - (11) (5) (1) (6)
Selling, general and administrative
expenses (8) (1) (9) (9) - (9)
------------ ------------ ------------ ------------ ------------ ------------
Operating (loss) before
provision for income taxes (38) (5) (43) (53) (4) (57)
Income tax benefit/(charge) 2 - 2 (1) - (1)
------------ ------------ ------------ ------------ ------------ ------------
Net (loss) (36) (5) (41) (54) (4) (58)
============ ============ ============ ============ ============ ============
</TABLE>
4
<PAGE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended September 30,
---------------------------------------------------------------------------------------
1998 1999
------------------------------------------ ------------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ ------------ ------------ ------------ ------------
($millions) ($millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Aircraft leasing 246 22 268 239 21 260
Aircraft Sales 26 94 120 2 - 2
Other Income - 1 - 1
Expenses
Cost of Aircraft Sold (24) (85) (109) (1) - (1)
Depreciation and amortisation (80) (8) (88) (79) (8) (87)
Net interest expense (185) (20) (205) (205) (21) (226)
Provision for maintenance (33) (3) (36) (33) (2) (35)
Bad and doubtful debts (3) - (3) (7) 1 (6)
Provision for loss making leases, net 5 1 6 6 1 7
Other lease costs (15) (1) (16) (8) (1) (9)
Selling, general and administrative
expenses (16) (2) (18) (17) (1) (18)
------------ ------------ ------------ ------------ ------------ ------------
Operating (loss) before
provision for income taxes (79) (2) (81) (102) (10) (112)
Income tax benefit/(charge) 2 - 2 (3) - (3)
------------ ------------ ------------ ------------ ------------ ------------
Net (loss) (77) (2) (79) (105) (10) (115)
============ ============ ============ ============ ============ ============
</TABLE>
5
<PAGE>
AIRPLANES GROUP
UNAUDITED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT/NET LIABILITIES
<TABLE>
<CAPTION>
Six Months Ended September 30 1998 and September 30 1999
Airplanes Limited Airplanes Trust Combined
---------------------------------------- --------------- ------------
Share Net Shareholders' Net Shareholders
Capital Liabilities Deficit Liabilities Deficit/ Net
Liabilities
---------------------------------------- ---------------- -----------
($millions) ($millions) ($millions) ($millions) ($millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31 1998 0 1,146 1,146 150 1,296
Net loss for the period 77 77 2 79
----------- ----------- -------------- ---------------- -----------
Balance at September 30, 1998 0 1,223 1,223 152 1,375
=========== =========== ============== ================ ===========
Balance at March 31 1999 0 1,311 1,311 163 1,474
Net loss for the period 105 105 10 115
----------- ----------- -------------- ---------------- -----------
Balance at September 30, 1999 0 1,416 1,416 173 1,589
=========== =========== ============== ================ ===========
</TABLE>
6
<PAGE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
Six Months Ended September 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 (77) (2) (79) (105) (10) (115)
Adjustment to reconcile (net loss)
to net cash provided by operating activities:
Depreciation and amortisation 80 8 88 79 8 87
Aircraft maintenance, net (18) (1) (19) 6 1 7
Profit on disposal of aircraft (2) (9) (11) (1) - (1)
Deferred income taxes (2) - (2) 3 - 3
Provision for loss making leases (5) (1) (6) (6) (1) (7)
Provision for Bad Debts 3 - 3 7 (1) 6
Accrued and deferred interest expense 81 9 90 110 11 121
Changes in operating assets & liabilities:
Accounts receivable, net (2) (2) (4) (10) 1 (9)
Intercompany account movements (12) 12 - - - -
Other accruals and liabilities (9) 1 (8) (1) - (1)
Other Assets (1) - (1) (2) - (2)
----------- ----------- ------------ ----------- ----------- ------------
Net cash provided by/(utilised in)
operating activities: 36 15 51 80 9 89
=========== =========== ============ =========== =========== ============
Cash flows from investing activities
Purchase/Sale of aircraft 41 79 120 - - -
Intercompany movements - Airplanes Group 79 (79)
Capital and sales type leases 4 - 4 4 - 4
----------- ----------- ------------ ----------- ----------- ------------
Net cash provided by
investing activities 124 - 124 4 - 4
=========== =========== ============ =========== =========== ============
Cash flows from financing activities
Decrease in indebtedness (159) (15) (174) (95) (9) (104)
Net cash used in ----------- ----------- ------------ ----------- ----------- ------------
financing activites (159) (15) (174) (95) (9) (104)
=========== =========== ============ =========== =========== ============
Net increase/ (decrease) in cash 1 - 1 (11) - (11)
Cash at beginning of period 212 6 218 218 6 224
----------- ----------- ------------ ----------- ----------- ------------
Cash at end of period 213 6 219 207 6 213
=========== =========== ============ =========== =========== ============
Cash paid in respect of:
Interest 104 11 115 97 10 107
=========== =========== ============ =========== =========== ============
</TABLE>
7
<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 September 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.
8
<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 September 30,
1999 and for the three and six month periods ending September 30, 1999 and
September 30, 1998. Such adjustments are of a normal, recurring nature. The
results of operations for the three and six months ended September 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.
9
<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 September 30, 1999, 27 of these Aircraft had been sold and
one Aircraft had suffered a constructive total loss. At September 30, 1999, 196
of the remaining 201 Aircraft were on lease to 73 operators in 39 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
10
<PAGE>
results reported as individual entities. It should be noted, however, that the
Notes and the Guarantees comprise obligations of two different legal entities
owning different assets. The Directors of Airplanes Limited and the Controlling
Trustees of Airplanes Trust believe that a combined discussion is the most
appropriate basis of presentation because, inter alia, Airplanes Limited and
Airplanes Trust are not intended to be regarded as separate businesses but
rather on the basis of one combined aircraft fleet. Furthermore, each of
Airplanes Limited and Airplanes Trust has fully and unconditionally guaranteed
the performance of the other under their respective Notes. The Guarantees have
been structured to ensure that no payments are made on a junior class of Notes
of Airplanes Limited or Airplanes Trust, as the case may be, before any amounts
due and payable on a more senior class of Notes of Airplanes Limited or
Airplanes Trust, respectively, are paid pursuant to the Guarantees.
General
Substantially all of Airplanes Group's business is expected to consist of
aircraft operating lease activities. However, Airplanes Group may also engage in
aircraft sales subject to certain limitations and guidelines. Airplanes Group's
revenues and operating results are determined by a number of significant factors
including (i) trading conditions in the civil aviation industry, and in
particular, the market for aircraft on operating leases, (ii) the mix, relative
age and popularity of the various aircraft types in the portfolio of Aircraft
owned by Airplanes Group and (iii) Airplanes Group's financial resources and
liquidity position relative to its competitors who may possess substantially
greater financial resources.
Cashflow Performance Relative to March 1998 Assumptions
The March 16, 1998 prospectus relating to the 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
October 8, 1999 Calculation Date (the "Period"), the cash performance of
Airplanes Group was $7 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 $80 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 Airplanes Group had
been granted under the terms of a lease of an Aircraft to this lessee. The
shares were subsequently sold yielding net proceeds of $1 million.
At October 15, 1999, having made the principal and interest distributions on
that date, Airplanes Group held cash balances of $183 million, $169 million in
the liquidity reserve and $14 million in the expense account. The cash balances
retained by Airplanes Group in the form of the liquidity reserve and expense
account decreased by $13 million between March 1998 and October 1999 which, when
combined with the positive cash performance of $7 million, resulted in principal
distributions in the Period of $20 million higher than the 1998 Assumptions.
11
<PAGE>
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 $80 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 ($30 million), revenue foregone due to
Aircraft sales ($22 million) and other net negative variances ($10 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
$25 million lower than assumed in the 1998 Assumptions.
Net maintenance costs
Net maintenance costs were higher than the 1998 Assumptions by approximately $28
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 incurs technical costs with respect to the Aircraft which
are included in "Other leasing/repossession costs".
Other leasing/repossession costs
Other leasing costs were approximately $26 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 delivering to new lessees in the Period and the level of payments made
in the form of lessor contributions to defray certain technical costs during the
term of certain leases. These contributions included mainly, payments made in
the form of lessor contributions to engine refurbishment costs on two A300
Aircraft.
12
<PAGE>
In addition, repossession costs at 0.9% of lease revenues received exceeded the
1998 Assumptions of 0.8%. 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 September 1998.
Net interest payments (including hedging costs)
Net interest payments (including hedging costs) were $16 million lower than the
1998 Assumptions due to the following:
Interest payments on the floating rate Class A ($17 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 the Class E Minimum
Interest Amount ($4 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 $7 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.
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 $20 million more debt in the
Period than assumed. Distributions of principal to the Class A
Certificateholders were $38 million greater than assumed and distributions of
principal to the Class B Certificateholders were $7 million lower 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 ($9 million and $2 million respectively). Following the distributions to
Certificateholders on October 15, 1999, the Class A Principal Adjustment Amount
outstanding was $9 million.
13
<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 twenty Aircraft to remarket before March 31, 2000. These
comprise (4 x B737 300's / 400's, 4 x B727/B737-200A's, 2 x A300, 6 x DHC
8-300's, 2 x DC8-71F and 2 x B767). 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. At
present it appears that some consolidation may take place in Brazil with the
possible merger of a number of airlines being suggested by market analysts.
Future developments in the political systems or economies of Brazil and other
Latin America countries may have a material adverse effect on lessee operations
in those countries. At September 30, 1999, Airplanes Group leased 67 Aircraft
representing 31.44% 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.
The Servicer is currently in negotiation with two 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 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
14
<PAGE>
rental payments under the leases. During the three months ended September 30,
1999 the Servicer, on behalf of Airplanes Group entered into a restructuring
agreement with a Colombian lessee. The restructured amount of $7 million
consisting of lease rental and maintenance payments is due to be repaid before
December 31, 1999.
At September 30, 1999 five lessees operate thirteen aircraft representing 8.84%
of the aircraft by Appraised Value at January 18, 1999, in Turkey, which was hit
by a severe earthquake in August 1999. Four of these carriers operate charter
flights which are heavily dependent on foreign tourists travelling to Turkey.
Damage caused by the earthquake and any fall-off in tourist traffic may
adversely affect the ability of these carriers to operate and meet their
obligations under the leases.
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 September 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 June19, 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 a revised Rehabilitation Plan with
the Philippine SEC on March 15, 1999. It is unclear whether PAL will receive
support for its proposed Rehabilitation Plan from its creditors. During the
quarter to September 30, 1999, $2.6 million of receivables balances were
restructured by the Servicer. The balance will be repaid over 36 months with the
first payment having been received 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.
The U.S. Federal Aviation Administration (the "FAA") has indicated that it will
develop in the near term a new test specification for insulation for the purpose
of increasing fire safety on aircraft. The FAA has also begun discussion with
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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.
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Results of Operations - Three Months Ended September 30, 1999 Compared with
Three Months Ended September 30, 1998.
There is considerable uncertainty facing the markets in which Airplanes Group's
lessees operate 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. Despite this and although a small number of lessees performed poorly,
Airplanes Group's results of operations for the three months ended September 30,
1999 continued to be relatively stable. Overall, Airplanes Group generated $54
million in cash from operations in the three months to September 30, 1999
compared to $28 million in the same period of the previous year. The increase in
cash generated from operations in the three month period to September 30, 1999
is primarily attributable to a reduction in technical costs and a net inflow 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 September 30, 1999 of $58 million (Airplanes Limited: $54 million;
Airplanes Trust: $4 million) compared to a net loss after taxation for the three
months to September 30, 1998 of $41 million (Airplanes Limited: $36 million;
Airplanes Trust: $5 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.
Leasing Revenues
Leasing revenues (which include maintenance reserve receipts which Airplanes
Group receives from certain of its lessees) for the three months ended September
30, 1999 were $131 million (Airplanes Limited: $121 million; Airplanes Trust:
$10 million) compared with $134 million (Airplanes Limited: $123 million;
Airplanes Trust: $11 million) for the three months ended September 30, 1998. The
decrease in 1999 was primarily attributable to the reduction in the number of
Aircraft on lease in the period to September 30, 1999, as a consequence of
Aircraft sales and a greater number of Aircraft off lease during the three
months ended September 30, 1999. At September 30, 1999, Airplanes Group had 196
of its 201 Aircraft on lease (Airplanes Limited: 178 Aircraft; Airplanes Trust:
18 Aircraft) compared to 210 of its 212 Aircraft on lease (Airplanes Limited:
192 Aircraft; Airplanes Trust: 18 Aircraft) at September 30, 1998. In addition,
there was a lower interest rate environment (which impacts the pricing of
certain lease rentals) in the period to September 30, 1999.
Aircraft Sales
There were no sales in the three months ended September 30, 1999. Sales revenues
of $2 million (Airplanes Limited: $2million; Airplanes Trust: Nil) in respect of
the sale of one A300-B4-100 Aircraft were received in the three months ended
September 30, 1998. The net book value of the A300-B4-100 Aircraft at the date
of sale, net of maintenance reserves, was $2 million (Airplanes Limited: $2
million, Airplanes Trust: Nil).
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Depreciation and Amortization
The charge for depreciation and amortization in the three months ended September
30, 1999 amounted to $44 million (Airplanes Limited: $40 million; Airplanes
Trust: $4 million) compared with $44 million (Airplanes Limited: $40 million;
Airplanes Trust: $4 million) for the comparative period in 1998.
Net Interest Expense
Net interest expense was $116 million (Airplanes Limited: $105 million;
Airplanes Trust: $11 million) in the three month period ended September 30, 1999
compared to $101 million (Airplanes Limited: $90 million; Airplanes Trust: $11
million) in the three month period ended September 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 $13
million and lower average debt and interest rates in the three months to
September 30, 1999. In addition, the net interest expense for the three month
period ended September 30, 1998 included a one-time gain of $6 million
recognised on the value of swaptions.
The weighted average interest rate on the Class A - D Notes during the three
months to September 30, 1999 was 6.57% and the average debt in respect of the
Class A - D Notes outstanding during the period was $3,187 million. The Class E
Notes accrue interest at a rate of 20% per annum (as adjusted by reference to
the U.S. consumer price index, effective March 28, 1996). The weighted average
interest rate on the Class A - D Notes during the three months to September 30,
1998 was 6.86% and the average debt in respect of the Class A - D Notes
outstanding during the period was $3,346 million. Although LIBOR was lower in
the three months ended September 30, 1999 as compared with the three months
ended September 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 September 30, 1999 in Airplanes
Group's net interest expense of $116 million (Airplanes Limited: $105 million;
Airplanes Trust: $11 million) and cash paid in respect of interest of $51
million (Airplanes Limited: $46 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 September 30, 1999.
Net interest expense is stated after deducting interest income earned during the
relevant period. In the three months ended September 30, 1999, Airplanes Group
earned interest income (including lessee default interest) of $3 million
(Airplanes Limited: $3 million; Airplanes Trust: Nil) compared with $3 million
in the three months ended September 30, 1998 (Airplanes Limited: $3 million;
Airplanes Trust: Nil).
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At September 30, 1999, Airplanes Group had options on interest rate swaps
("Swaptions") with a notional principal of $289 million. During the three months
ended September 30, 1999, the value of the Swaptions decreased by approximately
$0.2 million as swap rates increased. As Swaptions do not qualify for hedge
accounting under US GAAP, the decrease in fair value 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.
While a small number of Airplanes Group's lessees failed to meet their
contractual obligations in the three month period ended September 30, 1999,
resulting in the requirement for additional provisions in respect of bad and
doubtful debts in respect of these lessees, the credit exposure with regard to
certain other carriers improved in the period. Overall, there was a net credit
of $3 million in respect of bad and doubtful debts (Airplanes Limited: $1
million; Airplanes Trust: $2 million) in the three months ended September 30,
1999, compared with an overall net credit of $2 million for the three months
ended September 30, 1998 (Airplanes Limited: $1 million; Airplanes Trust: $1
million). The overall net credit in 1999 was primarily as a result of provisions
released in respect of one US lessee and one Irish lessee which was offset by
provisions required in relation to one Colombian lessee.
A lease agreement is deemed to be `loss making' in circumstances where the
contracted rental payments are insufficient to cover the depreciation and
allocated interest attributable to the aircraft plus certain direct costs, such
as legal fees and registration costs, attributable to the lease over its term.
For these purposes, interest is allocated to individual aircraft based on the
weighted average interest cost of the principal balance of the Notes and the
Class E Notes (excluding, in the case of the Class E Notes, the element of
interest (9% per annum) which is payable only in the event that the principal
amount of all the Notes is repaid). This results in a significant number of
leases being `loss making' while still being cash positive. There were no
significant `loss making' leases signed in the three months to September 30,
1999, or in the three months to September 30, 1998. Consequently, there was an
overall net utilisation of $4 million (Airplanes Limited: $3 million; Airplanes
Trust: $1 million) in respect of `loss making' lease provisions in the three
months ended September 30, 1999, compared with the three month period to
September 30, 1998, where there was an overall net utilisation of $5 million
(Airplanes Limited: $4 million; Airplanes Trust: $1 million).
Other Lease Cost
Other lease costs, comprising mainly Aircraft related technical expenditure, in
the three months ended September 30, 1999 amounted to $6 million (Airplanes
Limited: $5 million; Airplanes Trust: $1 million) compared to other lease costs
of $11 million (Airplanes Limited: $11 million; Airplanes Trust: Nil) in the
three months to September 30, 1998. A significant amount of the $11 million
charge in the three months ended September 30, 1998 related to additional
technical expenses of $5 million required in respect of four Fokker 100 Aircraft
repossessed from Sempati, prior to it ceasing to trade on June 5, 1998.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period to
September 30, 1999 amounted to $9 million (Airplanes Limited: $9 million;
Airplanes Trust: Nil). This is a comparable expense to that incurred in the
three months to September 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 September 30, 1999 and the
three months to September 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 September 30, 1999 was $3
million (Airplanes Limited: $3 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 September 30, 1998.
Operating Loss
The operating loss for the three months ended September 30, 1999 was $57 million
(Airplanes Limited: $53 million; Airplanes Trust: $4 million) compared with an
operating loss of $43 million for the three months ended September 30, 1998
(Airplanes Limited: $38 million; Airplanes Trust: $5 million). Airplanes Limited
and Airplanes Trust are expected to continue to report substantial losses in the
future.
Taxes
There was a tax charge of $1 million (Airplanes Limited: $1 million; Airplanes
Trust : Nil) required in the three months to September 30, 1999, as compared
with a tax benefit of $2 million (Airplanes Limited: $2 million; Airplanes
Trust: Nil) for the three months ended September 30, 1998.
Net Loss
The net loss after taxation for the three months ended September 30, 1999 was
$58 million (Airplanes Limited: $54 million; Airplanes Trust: $4 million)
compared with a net loss after taxation for the three months ended September 30,
1998 of $41 million (Airplanes Limited: $36 million; Airplanes Trust: $5
million).
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Financial Resources and Liquidity
There was an overall net decrease in cash of $3 million for the three months to
September 30, 1999, compared with a net decrease in cash of $4 million for the
three months to September 30, 1998.
Liquidity
The cash balances at September 30, 1999 amounted to $213 million (Airplanes
Limited: $207 million; Airplanes Trust: $6 million) compared to cash balances at
September 30, 1998 of $219 million (Airplanes Limited: $213 million; Airplanes
Trust: $6 million.)
Operating Activities
Net cash provided by operating activities in the three months ended September
30, 1999 amounted to $54 million (Airplanes Limited: $49 million; Airplanes
Trust: $5 million) compared with $28 million in the three months ended September
30, 1998 (Airplanes Limited: $24 million; Airplanes Trust: $4 million). This
includes cash paid in respect of interest of $51 million in the three months to
September 30, 1999 (Airplanes Limited: $46 million; Airplanes Trust: $5 million)
compared with $56 million in the three months to September 30, 1998 (Airplanes
Limited: $51 million; Airplanes Trust: $5 million). The increase in cash
provided by operating activities in the three month period to September 30, 1999
is primarily attributable to a reduction in the level of technical expenditure
and maintenance payments in the three month period to September 30, 1999. In
addition, there was a decrease in the cash paid in respect of interest in the
three month period to September 1999. There has also been a reduction in
receivables balances in the three month period to September 30, 1999.
Investing and Financing Activities
Cash flows from investing activities in the three months to September 30, 1999
reflects a cash outflow of $2 million (Airplanes Limited: $2 million; Airplanes
Trust: Nil) of costs capitalised in relation to Aircraft expenditure. In the
three months ended September 30, 1998, Airplanes Group received sales proceeds
of $2 million (Airplanes Limited: $2 million; Airplanes Trust: Nil) from the
sale of one A300-B4-100 Aircraft. Finally, the cash provided by capital and
sales type leases was $2 million (Airplanes Limited: $2 million; Airplanes
Trust: Nil) as compared with $1 million in the three months ended September 30,
1998 (Airplanes Limited: $1 million; Airplanes Trust: Nil).
Cash flows from financing activities in the three months to September 30, 1999
primarily reflect the repayment of $57 million of principal on Subclass A-6 and
Class B Notes by Airplanes Group (Airplanes Limited: $52 million; Airplanes
Trust: $5 million) compared with $35 million of principal repaid on Subclass A6,
Class B and Class C Notes by Airplanes Group (Airplanes Limited: $31 million;
Airplanes Trust: $4 million) in the three months to September 30, 1998. The
increase in principal repayments in the three months ended September 30, 1999 as
compared to the three months ended September 30, 1998, is due to an increase in
cash provided by operating activities as discussed above.
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Indebtedness
Airplanes Group's indebtedness consisted of Class A-E Notes in the amount of
$3,740 million (Airplanes Limited: $3,407 million; Airplanes Trust: $333
million) at September 30, 1999 and $3,905 million (Airplanes Limited: $3,558
million; Airplanes Trust: $347 million) at September 30, 1998. Airplanes Group
had $591 million Class E Notes outstanding at September 30, 1999 and September
30, 1998. In order to repay principal on the Subclass A-4, A-7 and A-8 Notes on
their expected maturity dates, Airplanes Group will have to refinance such Notes
in the capital markets. In order to avoid stepped up interest costs, $200
million of Subclass A-4 Notes, $550 million of Subclass A-7 Notes and $700
million in Subclass A-8 Notes will have to be refinanced through the sale of
further pass-through certificates by March 2003, 2001 and 2003, respectively.
There can be no assurance that the Trust will be able to sell further
pass-through certificates in the amounts and at the times required and any
failure to do so may have the impact of increasing Airplanes Group's borrowing
costs.
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 have taken the steps designed 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 have reviewed the responses of
those third parties received to-date and have contacted third parties whose
responses are outstanding.
As of November 2, 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 of their Year 2000 compliance
efforts. Based on the responses to this survey, 31 lessees have confirmed that
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they are implementing a Year 2000 plan. Of these, 18 lessees have completed a
questionnaire sent to them by the Servicer and in response to a specific
question, 17 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
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 regarding the steps to be taken to
address Year 2000 compliance. Accordingly, Airplanes Group is currently not able
to make any estimate of the amount, if any, it may be required to spend to
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remediate Year 2000 problems associated with the Aircraft although no material
expenditures have been incurred in this regard to-date. 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. The Servicer has confirmed that all Airplanes Group's lessees have
obtained Year 2000 endorsements.
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 September
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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Results of Operations - Six Months Ended September 30, 1999 Compared with Six
Months Ended September 30, 1998.
Airplanes Group's results of operations for the six months ended September 30,
1999 reflected a continuation of reasonably favorable industry conditions.
However, as discussed in - " Results of Operations - Three months ended
September 30, 1999 compared with three months ended September 30, 1998" - there
is considerable uncertainty facing the world's economy. Overall, Airplanes Group
generated $89 million in cash from operations in the six months to September 30,
1999 compared to $51 million in the same period of the previous year. The
increase in cash generated from operations in the six month period to September
30, 1999 is primarily attributable to a reduction in technical costs and a net
inflow of maintenance reserves due to the timing of maintenance events. In
addition, there was a decrease in cash paid in respect of interest. There was a
net loss after taxation for the six months to September 30, 1999 of $115 million
(Airplanes Limited: $105 million; Airplanes Trust: $10 million) compared to a
net loss after taxation for the six months to September 30, 1998 of $79 million
(Airplanes Limited: $77 million; Airplanes Trust: $2 million)
Leasing Revenues
Leasing revenues (which include maintenance reserve receipts which Airplanes
Group receives from certain of its lessees) for the six months ended September
30, 1999 were $260 million (Airplanes Limited: $239 million; Airplanes Trust:
$21 million) compared with $268 million (Airplanes Limited: $246 million;
Airplanes Trust: $22 million) for the six months ended September 30, 1998. The
decrease in 1999 was primarily attributable to the reduction in the number of
Aircraft on lease in the period to September 30, 1998, as a result of Aircraft
sales and a greater number of Aircraft off lease during the three months ended
September 30, 1999. At September 30, 1999, Airplanes Group had 196 of its 201
Aircraft on lease (Airplanes Limited: 178 Aircraft; Airplanes Trust: 18
Aircraft) compared to 210 of its 212 Aircraft on lease (Airplanes Limited: 192
Aircraft; Airplanes Trust: 18 Aircraft) at September 30, 1998. In addition,
there was a lower interest rate environment (which impacts the pricing of
certain lease rentals) in the period to September 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 Aircraft, and an engine from an A300
Aircraft, the airframe of which had previously been sold, were received in the
six months ended September 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). Sales revenues of
$120 million (Airplanes Limited: $26 million; Airplanes Trust: $94 million) in
respect of the sale of nine Aircraft (six DC8-71Fs, one B737, 300, one B737-200A
and one A300-B4-100) were received in the same period in 1998. The net book
value of the nine Aircraft at the date of sale, net of maintenance reserves, was
$109 million (Airplanes Limited: $24 million; Airplanes Trust: $85 million).
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Other Income
During the six months ended September 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 six months ended September
30, 1999 amounted to $87 million (Airplanes Limited: $79 million; Airplanes
Trust: $8 million) compared with $88 million (Airplanes Limited: $80 million;
Airplanes Trust: $8 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 $226 million (Airplanes Limited: $205 million;
Airplanes Trust: $21 million) in the six month period ended September 30, 1999
compared to $205 million (Airplanes Limited: $185 million; Airplanes Trust : $20
million) in the six month period ended September 30, 1998. The increase in net
interest expense was primarily due to a combination of offsetting factors:
additional interest being charged on accrued but unpaid Class E Note interest of
$23 million and lower average debt and interest rates in the six months to
September 30, 1999. In addition, the net interest expense for the six month
period ended September 30, 1998 included a one-time gain of $6 million,
recognised on the value of swaptions.
The weighted average interest rate on the Class A - D Notes during the six
months to September 30, 1999 was 6.45% and the average debt in respect of the
Class A - D Notes outstanding during the period was $3,216 million. The Class E
Notes accrue interest at a rate of 20% per annum (as adjusted by reference to
the U.S. consumer price index, effective March 28, 1996). The weighted average
interest rate on the Class A - D Notes during the six months to September 30,
1998 was 6.85% and the average debt in respect of the Class A - D Notes
outstanding during the period was $3,393 million. Although LIBOR was lower in
the six months ended September 30, 1999 as compared with the six months ended
September 30, 1998, the weighted average interest rate on the Class A-D Notes
actually increased slightly during the six months ended September 30, 1999 as
compared to the six months ended September 30, 1998. This increase occurred
because substantial amounts of Airplanes Group's floating rate notes have been
paid down over time with relatively small payments on the fixed rate notes
resulting in an increase in the relative proportion of fixed rate notes as
compared with floating rate notes.
The difference for the six months ended September 30, 1998 in Airplanes Group's
net interest expense of $226 million (Airplanes Limited: $205 million; Airplanes
Trust: $21 million) and cash paid in respect of interest of $107 million
(Airplanes Limited: $97 million; Airplanes Trust: $10 million) is substantially
accounted for by the fact that interest on the Class E Notes is accrued but
unpaid in the six months ended September 30, 1998.
26
<PAGE>
Net interest expense is stated after deducting interest income earned during the
relevant period. In the six months ended September 30, 1999, Airplanes Group
earned interest income (including lessee default interest) of $6 million
(Airplanes Limited: $6 million; Airplanes Trust: Nil) compared with $7 million
in the six months ended September 30, 1997 (Airplanes Limited: $7 million;
Airplanes Trust: Nil million). The decrease is primarily as a result of
marginally lower lessee default interest in addition to lower interest rates in
the six months to September 30, 1999.
At September 30, 1999, Airplanes Group had Swaptions with a notional principal
of $289 million. The value of the Swaptions decreased by approximately $0.7
million during the six months ended September 30, 1999. As Swaptions do not
qualify for hedge accounting under US GAAP, the decrease in fair value of $0.7
million has been included in interest expense in the statement of operations.
Bad Debt and Loss-Making Lease Provisions
See "Results of Operations - Three months ended September 30, 1999 compared with
three months ended September 30, 1998" for a discussion of Airplanes Group's
accounting practices in respect of delinquent receivables and provisions for
"loss making leases". A number of Airplanes Group's lessees failed to meet their
contractual obligations in the six month period ended September 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 provision required of $6 million in respect of bad and doubtful debts
(Airplanes Limited: $7 million; Airplanes Trust: a credit of $1 million) in the
six months ended September 30, 1999, compared with the overall net provision
required of $3 million for the six months ended September 30, 1998 (Airplanes
Limited: $3 million; Airplanes Trust: Nil). The overall provision in 1999 was
primarily as a result of provisions required for various lessees including two
Brazilian lessees and one Colombian lessee, which were partially offset by a
reduction in the provisions required in respect of one Irish lessee and one US
lessee.
In respect of `loss making' lease provisions, there was an overall net
utilisation of $7 million (Airplanes Limited: $6 million; Airplanes Trust: $1
million) in the six months ended September 30, 1999. In the six month period to
September 30, 1998, there was an overall net utilization of $6 million
(Airplanes Limited: $5 million; Airplanes Trust: $1 million). There were no
significant "loss making" leases signed in the six months to September 30, 1999.
In the six months ended September 30, 1998, the only significant provision
required was in respect of three DC8-71F Aircraft on lease to one Latin American
lessee.
27
<PAGE>
Other Lease Costs
Other lease costs in the six months ended September 30, 1999 amounted to $9
million (Airplanes Limited: $8 million; Airplanes Trust: $1 million) compared to
other lease costs of $16 million (Airplanes Limited: $15 million; Airplanes
Trust: $1 million) in the six months to September 30, 1998. The reduction in the
charge in the six months to September 30, 1999, was primarily due to the fact
that in the six months to September 30, 1998, there was an increase in technical
expenses of $5 million which related primarily to four Fokker 100 aircraft
repossessed from Sempati.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six month period to
September 30, 1999 amounted to $18 million (Airplanes Limited: $17 million;
Airplanes Trust: $1 million). This is a comparable expense to that incurred in
the six months to September 30, 1998 of $18 million (Airplanes Limited: $16
million; Airplanes Trust: $2 million).
The most significant element of selling, general and administrative expenses is
the aircraft servicing fees paid to GECAS. Substantially all of these amounts
represent asset based fees calculated as an annual percentage of agreed values
of Aircraft under management pursuant to a servicing agreement. Selling, general
and administrative expenses of $18 million in the six months to September 30,
1999 include $12 million (Airplanes Limited: $11 million; Airplanes Trust: $1
million) relating to GECAS servicing fees as compared to the expense incurred in
respect of GECAS servicing fees in the comparative period to September 30, 1998
of $12 million (Airplanes Limited: $11 million; Airplanes Trust: $1 million).
A further significant element of Airplanes Group's actual selling, general and
administrative expenses reported in the period to September 30, 1999 was $5
million (Airplanes Limited: $5 million; Airplanes Trust: Nil) in respect of
administrative agency and cash management fees payable to AerFi, compared with
the charge of $4 million for the period to September 30, 1998 (Airplanes
Limited: $4 million; Airplanes Trust: Nil).
Operating Loss
The operating loss for the six months ended September 30, 1999 was $112 million
(Airplanes Limited: $102 million; Airplanes Trust: $10 million) compared with an
operating loss of $81 million for the six months ended September 30, 1998
(Airplanes Limited: $79 million; Airplanes Trust: $2 million). Airplanes Limited
and Airplanes Trust are expected to continue to report substantial losses in the
future.
Taxes
There was a tax charge in the six months to September 30, 1999 of $3 million
(Airplanes Limited: $3 million; Airplanes Trust: Nil) compared with an overall
tax benefit of $2 million in the same period in 1998 (Airplanes Limited: $2
million; Airplanes Trust: Nil).
28
<PAGE>
Net Loss
The net loss after taxation for the six months ended September 30, 1999 was $115
million (Airplanes Limited: $105 million; Airplanes Trust: $10 million) compared
with a net loss after taxation for the six months ended September 30, 1998 of
$79 million (Airplanes Limited: $77 million; Airplanes Trust: $2 million).
Financial Resources and Liquidity
There was a decrease in cash of $11 million for the six months to September 30,
1999 compared to a net increase of $1 million for the six months to September
30, 1998.
Liquidity
The cash balances at September 30, 1999 amounted to $213 million (Airplanes
Limited: $207 million ; Airplanes Trust: $6 million) compared to cash balances
at September 30, 1998 of $219 million (Airplanes Limited: $213 million ;
Airplanes Trust: $6 million.)
Operating Activities
Net cash provided by operating activities in the six months ended September 30,
1999 amounted to $89 million (Airplanes Limited: $80 million; Airplanes Trust:
$9 million) compared with $51 million in the six months ended September 30, 1998
(Airplanes Limited: $36 million; Airplanes Trust: $15 million). This includes
cash paid in respect of interest of $107 million in the six months to September
30, 1999 (Airplanes Limited: $97 million; Airplanes Trust: $10 million) compared
with $115 million in the six months to September 30, 1998 (Airplanes Limited:
$104 million; Airplanes Trust: $11 million). The increase in cash from
operations generated in the six month period to September 30, 1999 is primarily
attributable to a reduction in both maintenance claims and technical costs for
the six months ended September 30, 1999 as compared to the six months ended
September 30, 1998. In addition, there has been a reduction in cash paid in
respect of interest in the six month period ended September 30, 1999.
Investing and Financing Activities
Cash flows from investing activities in the six months to September 30, 1999
primarily reflects proceeds of $2 million from the sale of one B737-200 Aircraft
and one engine. This has been offset by $2 million (Airplanes Limited: $2
million; Airplanes Trust: Nil) of costs capitalised in relation to Aircraft
expenditures. The cash provided by capital and sale type leases was $4 million
(Airplanes Limited: $4 million; Airplanes Trust: Nil) as compared with $4
million in the comparative period to September 30, 1998 (Airplanes Limited: $4
million; Airplanes Trust: Nil).
Cash flows from financing activities in the six months to September 30, 1999
primarily reflect the repayment of $104 million of principal on Subclass A-6 and
Class B Notes by Airplanes Group (Airplanes Limited: $95 million; Airplanes
Trust: $9 million) compared to $174 million of principal on Subclass A-5,
Subclass A-6 and Class B Notes repaid by Airplanes Group (Airplanes Limited:
$159 million; Airplanes Trust: $15 million) in the six months to September 30,
1998. The higher amount of principal repayments in the six months ended
September 30, 1999 is due to a higher amount of cash provided by operating
activities as discussed above.
29
<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 September 30, 1999, are as follows:
<TABLE>
<CAPTION>
Annual Interest Estimated
Rate Principal Amount Expected Final Final Fair Value at
Subclass of Notes (Payable Monthly) at quarter end Payment Date Maturity Date September 30, 1999
- ----------------- ----------------- -------------- ------------ ------------- ------------------
$ Millions $ Millions
<S> <C> <C> <C> <C> <C>
Subclass A-4 (LIBOR+.62%) 200 March 15, 2003 March 15, 2019 199
Subclass A-6 (LIBOR+.34%) 641 January 15, 2004 March 15, 2019 638
Subclass A-7 (LIBOR+.26%) 550 March 15, 2001 March 15, 2019 548
Subclass A-8 (LIBOR+.375%) 700 March 15, 2003 March 15, 2019 683
Class B (LIBOR+.75%) 304 March 15, 2009 March 15, 2019 294
Class C (8.15%) 367 March 15, 2011 March 15, 2019 340
Class D (10.875%) 400 March 15, 2012 March 15, 2019 360
------ ------
3,162 3,062
===== =====
</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. One
reason for this is the fact that the reset periods on floating rental payments
are generally longer than the monthly reset periods on the floating rate Notes.
In order to correlate the contracted fixed and floating rental payments to the
fixed and floating interest payments on the Notes, Airplanes Group enters into
interest rate swaps (the `Swaps'). Under the Swaps, Airplanes Group pays fixed
amounts and receives floating amounts on a monthly basis. The Swaps amortize
having regard to the expected paydown schedule of the Class A and B Notes, the
expiry dates of the leases under which lessees are contracted to make fixed rate
rental payments and the LIBOR reset dates under the floating rates leases. At
least every three months, and in practice more frequently, AerFi Financial
Services (Ireland) Limited, a subsidiary of AerFi Group, as Airplanes Group's
30
<PAGE>
administrative agent (the "Administrative Agent"), seeks to enter into
additional swaps or sell at market value or unwind part or all of the Swaps and
any future swaps in order to rebalance the fixed and floating mix of interest
obligations and the fixed and floating mix of rental payments. At September 30,
1999, Airplanes Group had unamortized Swaps with an aggregate notional principal
balance of $2,140 million. The aggregate notional principal of these Swaps will
be reduced to $1,455 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 $905 million by the year ended March 31, 2001, to an aggregate notional
principal balance of $600 million by the year ended March 31, 2002 and to an
aggregate notional principal balance of $110 million by the year ended March 31,
2003. None of the Swaps have maturity dates extending beyond November 2003. The
aggregate fair value of the Swaps at September 30, 1999 was $11 million.
Airplanes Group Swap Book at September 30, 1999
<TABLE>
<CAPTION>
Swap No. Notional Amount (i) Effective Date Final Fixed Rate Estimated Fair Market
($ Millions) Maturity Date Payable (ii) Value as at September 30,
1999
<S> <C> <C> <C> <C> <C>
1 5 09/15/97 10/15/99 5.9050% ($2,184)
2 35 04/15/99 10/15/99 4.9850% $11,493
3 65 04/15/99 10/15/99 4.9600% $22,713
4 145 07/30/99 01/15/00 5.5100% $69,913
5 10 09/22/97 02/15/00 5.7450% $1,462
6 210 09/15/99 03/15/00 5.6825% ($1,569)
7 0 10/15/99 03/15/00 5.7750% $15,217
8 10 12/15/97 04/15/00 6.3900% ($34,676)
9 140 05/17/99 04/15/00 5.0665% $151,137
10 20 06/24/97 06/15/00 5.9825% ($33,278)
11 15 07/15/97 06/15/00 6.0600% ($33,449)
12 5 02/17/98 06/15/00 5.5475% $8,083
13 25 12/15/97 10/15/00 5.8475% ($10,116)
14 60 01/06/97 11/15/00 6.1100% ($93,472)
15 15 01/15/97 11/15/00 6.0550% ($37,191)
16 10 08/15/97 12/15/00 5.9800% ($14,517)
17 20 12/23/97 03/15/01 5.8175% $27,124
18 180 03/28/96 04/15/01 6.0925% ($191,115)
19 55 09/30/97 06/15/01 6.0650% ($121,052)
20 45 10/28/97 06/15/01 5.9600% ($30,125)
21 60 11/04/97 08/15/01 5.9170% $7,919
22 40 04/15/98 09/15/01 5.7425% $250,553
23 70 03/16/98 12/15/01 5.5150% $747,986
24 15 01/27/98 12/15/01 5.5900% $229,512
25 40 03/16/98 01/15/02 5.7750% $145,706
26 60 04/15/98 02/15/02 5.6050% $339,330
27 40 04/15/98 04/15/02 5.7150% $168,033
28 15 05/27/98 04/15/02 5.8260% $160,648
29 80 08/16/99 04/15/02 5.6750% $455,651
30 10 10/27/98 05/15/02 4.7675% $349,070
31 20 05/17/99 06/15/02 5.8750% $214,147
32 10 02/16/99 07/15/02 5.8025% $129,119
33 20 09/15/98 08/15/02 5.3900% $272,240
34 150 07/15/98 12/15/02 5.7160% $1,670,017
35 20 08/25/98 02/15/03 5.6785% $600,726
36 15 10/15/98 02/15/03 4.8850% $874,285
37 15 11/16/98 02/15/03 4.9450% $479,606
38 65 12/15/98 02/15/03 5.0540% $1,857,147
39 0 02/15/00 03/15/03 5.1365% $571,053
40 0 01/18/00 03/15/03 5.2725% $518,332
41 110 06/01/99 03/15/03 5.7550% $447,626
42 145 06/21/99 06/15/03 6.0000% $439,458
43 60 07/15/99 08/15/03 6.1000% $299,574
44 0 01/18/00 10/15/03 6.4650% ($65,201)
45 10 08/17/99 11/15/03 6.6100% ($269,088)
----------
$10,597,848
===========
</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. 18 which is calculated on a
monthly fixed 30/360 unadjusted basis.
(iii) Under all Swaps Airplanes Group receives floating at one month LIBOR,
which resets monthly.
Pursuant to a decision of the Directors of Airplanes Limited and the Controlling
Trustees of Airplanes Trust on November 8, 1999, Airplanes Group either
re-couponed or unwound and replaced 30 of its portfolio of 44 Swaps. Twenty of
these Swaps were adjusted so that Airplanes Group's fixed payment rate more
closely reflected current market rates. Airplanes Group received a net cash
payment of US$9.33 million with respect to these 20 Swaps. In addition, ten of
the 30 Swaps were terminated, in return for a net payment to Airplanes Group of
US$1.92 million. In aggregate therefore, Airplanes Group is due to receive on
November 15, 1999, a net cash inflow of US$11.25 million, but will now have
higher ongoing swap costs as a result of re-calibrating the Swaps to current
market rates. Simultaneously with these terminations, Airplanes Group put in
place a replacement Swap to maintain a fully hedged position. These adjustments
and terminations released the positive value in Airplanes Group's Swaps and
allowed that value to be available to be applied to additional payments of the
Class A Principal Adjustment Amount. These transactions were conducted in
accordance with Airplanes Group's interest rate risk management policies.
The realized gain on the termination of these Swaps will be deferred and the
recognized over the life of the hedged transaction in accordance with the
guidance provided in ET Issue No. 84-7, "Termination of Interest Rate Swaps".
31
<PAGE>
Airplanes Group Swap Book at November 15, 1999
<TABLE>
<CAPTION>
Notional Amount Effective Final Existing New Fixed
($ Millions) from Date Maturity Fixed Rate Rate from
Swap November 15, 1999 Date Payable November 15, 1999
To December 15, 1999
<S> <C> <C> <C> <C> <C>
1 145 7/30/99 1/15/00 5.5100% 5.8300%
2 10 9/22/97 2/15/00 5.7450%
3 160 10/15/99 3/15/00 5.7750%
4 125 9/15/99 3/15/00 5.6825% 6.0600%
5 10 12/15/97 4/15/00 6.3900%
6 25 5/17/99 4/15/00 5.0665% 5.9800%
7 5 2/17/98 6/15/00 5.5475% 5.9500%
8 15 7/15/97 6/15/00 6.0600%
9 20 6/24/97 6/15/00 5.9825%
10 105 10/15/99 7/15/00 5.8650%
11 20 12/15/97 10/15/00 5.8475%
12 15 1/15/97 11/15/00 6.0550%
13 10 8/15/97 12/15/00 5.9800%
14 75 10/28/99 1/15/01 5.9250%
15 20 12/23/97 3/15/01 5.8175%
16 155 3/28/96 4/15/01 6.0925%
17 45 10/28/97 6/15/01 5.9600%
18 15 5/27/98 4/15/02 5.8260% 6.2800%
19 45 8/16/99 4/15/02 5.6750% 6.2250%
20 10 10/27/98 5/15/02 4.7675% 6.2900%
21 415 11/15/99 6/15/02 6.1200%
22 10 2/16/99 7/15/02 5.8025% 6.2700%
23 20 9/15/98 8/15/02 5.3900% 6.1700%
24 150 7/15/98 12/15/02 5.7160% 6.2400%
25 70 12/15/98 2/15/03 5.0540% 6.2840%
26 10 11/16/98 2/15/03 4.9450% 6.3900%
27 20 10/15/98 2/15/03 4.8850% 6.3800%
28 20 8/25/98 2/15/03 5.6785% 6.3900%
29 0 1/18/00 3/15/03 5.2725% 6.3850%
30 0 2/15/00 3/15/03 5.1365% 6.3965%
31 90 6/1/99 3/15/03 5.7550% 6.2200%
32 90 6/21/99 6/15/03 6.0000% 6.3100%
33 110 7/15/99 8/15/03 6.1000% 6.2900%
34 0 1/18/00 10/15/03 6.4650%
35 10 8/17/99 11/15/03 6.6100% 6.3300%
</TABLE>
- ----------
(i) The Swaps with a new fixed rate represent the Swaps that have been
re-calibrated.
(ii) Swap No. 21 with a notional principal amount of US$415m replaced the 10
Swaps that were terminated.
Additional interest rate exposure will arise to the extent that lessees owing
fixed rate rental payments default and interest rates have declined between the
32
<PAGE>
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 September 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
September 30, 1999 therefore amounted to $289 million. The fair values of the
Swaptions at September 30, 1999 was $0.4 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 $0.7 million has been included in interest expense for
the six months ended September 30, 1999.
Airplanes Group Swaption Book at September 30, 1999
<TABLE>
<CAPTION>
Swaption No. Notional Amount (i) Effective Final Fixed Rate Estimated Fair Market
($ Millions) Date Maturity Date Receivable (ii) Value as at September 30,
1999
<S> <C> <C> <C> <C> <C>
1 14 5/15/98 10/15/00 5.000% 2,336
2 25 9/15/98 11/15/00 5.200% 5,113
3 7 2/17/98 1/15/01 5.000% 1,686
4 24 1/15/98 5/15/01 5.000% 16,409
5 50 9/15/98 12/15/01 5.300% 37,354
6 30 1/15/98 4/15/02 5.000% 38,349
7 34 2/17/98 9/15/02 5.100% 50,324
8 15 3/16/98 3/15/03 5.100% 29,561
9 50 7/15/98 3/15/03 5.100% 95,983
10 20 4/15/98 6/15/03 5.100% 43,659
11 10 9/15/98 9/15/03 5.300% 19,889
15 10 2/16/99 2/15/04 5.400% 40,805
-- ------
289 381,468
=======
</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, which resets monthly.
33
<PAGE>
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" in the Airplanes Group Form 10-K filed with the SEC on June 30, 1999
for more information about risks, especially lessee credit risk, that
could intensify Airplanes Group's exposure to changes in interest rates.
34
<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. In addition,
AerFi 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.
35
<PAGE>
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 July 13, 1999;
August 12, 1999; September 13, 1999; October 13, 1999 and
November 10, 1999 (relating to the monthly report to holders
of the Certificates).
36
<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: November 15, 1999 AIRPLANES LIMITED
By: /s/ WILLIAM M. MCCANN
---------------------
William M. McCann
Director and Principal
Accounting Officer
Date: November 15, 1999 AIRPLANES U.S. TRUST
By: /s/ WILLIAM M. MCCANN
---------------------
William M. McCann
Controlling Trustee and
Principal Accounting Officer
37
<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
38
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001004539
<NAME> AIRPLANES LIMITED
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
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<SECURITIES> 0
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<CURRENT-LIABILITIES> 153
<BONDS> 3,407
0
0
<COMMON> 0
<OTHER-SE> (1,416)
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<INCOME-PRETAX> (102)
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<NET-INCOME> (105)
<EPS-BASIC> 0
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001004540
<NAME> AIRPLANES U.S. TRUST
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
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0
0
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<CGS> 0
<TOTAL-COSTS> 10
<OTHER-EXPENSES> 1
<LOSS-PROVISION> (1)
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> (10)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10)
<EPS-BASIC> 0
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</TABLE>
