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 December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 33-99970-01
-------------------
Airplanes Limited Airplanes U.S. Trust
Exact Name of Registrants as specified in memorandum of association
or trust agreement
Jersey, Channel Islands Delaware
(State or other jurisdiction of incorporation or organization)
7359 13-3521640
SIC Code (I.R.S. Employer Identification No.)
Airplanes Limited Airplanes U.S. Trust
22 Grenville Street 1100 North Market Street,
St. Helier Rodney Square North
Jersey, JE4 8PX Wilmington, Delaware
Channel Islands 19890-0001
(011 44 1534 609 000) (302-651-1000)
(Addresses and telephone numbers, including area codes, of
Registrants' principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Issuer Class December 31, 1998
Airplanes Limited Common Stock, $1.00 par value 30
<PAGE>
Airplanes Limited and Airplanes U.S. Trust
Form 10-Q for the Three Month Period Ended December 31, 1998
Index
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited) 3
o Unaudited Condensed Balance Sheets - December 31, 1998 and March 31, 1998
o Unaudited Condensed Statements of Operations - Three Months Ended
December 31, 1998 and December 31, 1997
o Unaudited Condensed Statements of Operations - Nine months Ended
December 31, 1998 and December 31, 1997
o Unaudited Condensed Statements of Changes in Shareholders Deficit / Net
Liabilities - Nine months Ended December 31, 1998 and December 31, 1997
o Unaudited Condensed Statements of Cash Flows - Nine months Ended
December 31, 1998 and December 31, 1997
o Notes to the Unaudited Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8 - K 32
Signatures
Index to Exhibits
<PAGE>
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
AIRPLANES GROUP
UNAUDITED CONDENSED BALANCE SHEETS
March 31, Dec-31
---------------------------------------- -----------------------------------------
1998 1998
---------------------------------------- -----------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ ------------ ------------ ------------ ------------
($millions) ($millions)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash 212 6 218 204 6 210
Accounts receivable
Trade receivables 19 4 23 24 6 30
Allowance for doubtful debts (9) (1) (10) (12) (3) (15)
Amounts due from Airplanes Trust 33 - 33 32 32
Intercompany capital lease 38 - 38 37 - 37
Net investment in capital and sales
type leases 61 38 99 21 37 58
Aircraft, net 2,993 344 3,337 2,867 256 3,123
Other assets 5 - 5 8 - 8
============ ============ ============ ============ ============ ============
Total assets 3,352 391 3,743 3,149 334 3,483
============ ============ ============ ============ ============ ============
LIABILITIES
Accrued expenses and other liabilities 437 36 473 540 46 586
Amounts due to Airplanes Limited - 33 33 32 - 32
Intercompany capital lease - 38 38 - 37 37
Indebtedness 3,715 363 4,078 3,529 344 3,873
Provision for maintenance 292 23 315 266 16 282
Deferred income taxes 54 48 102 51 48 99
------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total liabilities 4,498 541 5,039 4,418 491 4,909
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Net liabilities (1,146) (150) (1,296) (1,269) (157) (1,426)
------------ ------------ ------------ ------------ ------------ ------------
============ ============ ============ ============ ============ ============
3,352 391 3,743 3,149 334 3,483
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
<TABLE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended December 31,
---------------------------------------------------------------------------------
1997 1998
--------------------------------------- ---------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ ----------- ----------- ----------- -----------
($millions) ($millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Aircraft leasing 126 19 145 121 10 131
Aircraft Sales 36 48 84 2 - 2
Expenses
Cost of Aircraft Sold (31) (49) (80) (1) - (1)
Depreciation and amortisation (42) (6) (48) (40) (4) (44)
Net interest expense (96) (9) (105) (102) (10) (112)
Provision for maintenance (16) (6) (22) (17) - (17)
Bad and doubtful debts 1 - 1 - (1) (1)
Provision for loss making leases, net (10) - (10) 3 - 3
Other lease costs (4) - (4) (3) - (3)
Selling, general and administrative
expenses (8) (1) (9) (9) - (9)
------------ ------------ ----------- ----------- ----------- -----------
Operating (loss) before
provision for income taxes (44) (4) (48) (46) (5) (51)
Income tax benefit/(charge) 1 - 1 - - -
============ ============ =========== =========== =========== ===========
Net (loss) (43) (4) (47) (46) (5) (51)
============ ============ =========== =========== =========== ===========
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
<PAGE>
<TABLE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Nine Months Ended December 31,
---------------------------------------------------------------------------------
1997 1998
---------------------------------------- ---------------------------------------
Airplanes Airplanes Airplanes Airplanes
Limited Trust Combined Limited Trust Combined
------------ ------------ ------------ ----------- ----------- ------------
($millions) ($millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Aircraft leasing 394 56 450 367 32 399
Aircraft Sales 46 48 94 28 94 122
Expenses
Cost of Aircraft Sold (41) (49) (90) (25) (85) (110)
Depreciation and amortisation (129) (17) (146) (120) (12) (132)
Net interest expense (278) (30) (308) (287) (30) (317)
Provision for maintenance (54) (16) (70) (50) (3) (53)
Bad and doubtful debts - - - (3) (1) (4)
Provision for loss making leases, net 5 2 7 8 1 9
Other lease costs (21) (1) (22) (18) (1) (19)
Selling, general and administrative
expenses (27) (2) (29) (25) (2) (27)
------------ ------------ ------------ ----------- ----------- ------------
Operating (loss) before
provision for income taxes (105) (9) (114) (125) (7) (132)
Income tax benefit/(charge) 2 - 2 2 - 2
============ ============ ============ =========== =========== ============
Net (loss) (103) (9) (112) (123) (7) (130)
============ ============ ============ =========== =========== ============
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
<PAGE>
<TABLE>
AIRPLANES GROUP
UNAUDITED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT/NET LIABILITIES
Nine Months Ended December 31, 1997 and December 31, 1998
Airplanes Limited Airplanes Trust Combined
---------------------------------------- ---------------- -----------
Share Net Shareholders' Net Shareholders
Capital Liabilities Deficit Liabilities Deficit/ Net
Liabilities
---------------------------------------- ---------------- -----------
($millions) ($millions) ($millions) ($millions) ($millions)
<S> <C> <C> <C> <C> <C>
Balance at March 31 1997 0 1,005 1,005 141 1,146
Net loss for the period 0 103 103 9 112
========== ========== =============== ================ ===========
Balance at December 31, 1997 0 1,108 1,108 150 1,258
========== ========== =============== ================ ===========
Balance at March 31 1998 0 1,146 1,146 150 1,296
Net loss for the period 0 123 123 7 130
========== ========== =============== ================ ===========
Balance at December 31, 1998 0 1,269 1,269 157 1,426
========== ========== =============== ================ ===========
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
<PAGE>
<TABLE>
AIRPLANES GROUP
UNAUDITED CONDENSED STATEMENTS OF CASHFLOWS
Nine Months Ended December 31,
-----------------------------------------------------------------------
1997 1998
----------------------------------- ----------------------------------
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 (103) (9) (112) (123) (7) (130)
Adjustment to reconcile (net loss)
to net cash provided by operating activities:
Depreciation and amortisation 129 17 146 120 12 132
Aircraft maintenance, net 7 1 8 (23) (2) (25)
Profit on disposal of aircraft (5) 1 (4) (3) (9) (12)
Deferred income taxes (2) - (2) (2) - (2)
Provision for loss making leases (5) (2) (7) (8) (1) (9)
Provision for Bad Debts - - - 3 1 4
Accrued and deferred interest expense 102 19 121 130 12 142
Changes in operating assets & liabilities:
Accounts receivable, net 14 (1) 13 (6) (1) (7)
Intercompany account movements 28 (28) - (15) 15 -
Amounts due to GPA (5) 2 (3) - - -
Other accruals and liabilities 27 (9) 18 (22) (2) (24)
Other assets (1) - (1) 4 - 4
========== ========== =========== ========== ========== ==========
Net cash provided by/(utilised in) operating activities 186 (9) 177 55 18 73
========== ========== =========== ========== ========== ==========
Cash flows from investing activities
Purchase/Sale of aircraft 64 25 89 42 79 121
Intercompany account movements - - - 79 (79) -
Capital and sales type leases 14 - 14 6 - 6
========== ========== =========== ========== ========== ==========
Net cash provided by investing activities 78 25 103 127 - 127
========== ========== =========== ========== ========== ==========
Cash flows from financing activities
Decrease in indebtedness (159) (16) (175) (190) (18) (208)
========== ========== =========== ========== ========== ==========
Net cash used in financing activites (159) (16) (175) (190) (18) (208)
========== ========== =========== ========== ========== ==========
Net increase in cash 105 - 105 (8) - (8)
Cash at beginning of period 219 6 225 212 6 218
---------- ---------- ----------- ---------- ---------- ----------
Cash at end of period 324 6 330 204 6 210
========== ========== =========== ========== ========== ==========
Cash paid in respect of :
Interest 173 17 190 169 17 186
========== ========== =========== ========== ========== ==========
The accompanying notes are an integral part of the unaudited condensed financial statements
</TABLE>
<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 December 31, 1998 represents the aggregate of
the Class A - D Notes and Class E Notes in issue (net of approximately $0.4
million of discounts on issue and net of $13 million of Class E Notes
subsequently canceled as referred to above). Airplanes Limited and
Airplanes Trust have each fully and unconditionally guaranteed each others'
obligations under the relevant notes.
<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 December 31, 1998 and for the three and nine month periods ending
December 31, 1998 and December 31, 1997. Such adjustments are of a normal,
recurring nature. The results of operations for the three and nine months
ended December 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
The accompanying financial statements of Airplanes Limited and Airplanes
Trust have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
requirements of the Report on Form 10-Q. Consequently, they do not include
all the disclosure normally required by generally accepted accounting
principles. For further information regarding Airplanes Group and its
financial condition, results of operations and cash flows, refer to the
audited financial statements and notes thereto included in Airplanes
Group's annual Report on Form 10-K for the year ended March 31, 1998,
previously filed with the Securities and Exchange Commission.
<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 December 31, 1998, 24 of these Aircraft had been sold and one Aircraft
had suffered a constructive total loss. At December 31, 1998, 202 of the
remaining 204 Aircraft were on lease to 75 operators in 41 countries.
On March 16, 1998, the Trust issued additional Class A Certificates in
three separate subclasses (A-6 through A-8) and new Class B Certificates
(the "1998 Refinancing Certificates" and together with the 1996
Certificates, the "Certificates"). Also on this date, the Trust completed
an underwritten offering of the 1998 Refinancing Certificates (the
"Refinancing") in exchange for an interest in two corresponding Subclass A-
6, Subclass A-7, Subclass A-8 and Class B notes issued by Airplanes Limited
and Airplanes Trust (the "1998 Refinancing Notes and together with the 1996
Notes, the "Notes"). Airplanes Limited and Airplanes Trust have each
guaranteed the other's obligations under their respective 1998 Refinancing
Notes (the "Refinancing Guarantees" and together with the 1996 Guarantees,
the "Guarantees"). The proceeds of this offering were used to refinance
the Trust's Subclass A-1, Subclass A-2, Subclass A-3 and existing Class B
1996 Certificates.
On November 20, 1998, AerFi Group and its subsidiary, AerFi, Inc.
transferred their Class E Notes to General Electric Capital Corporation.
The discussion and analysis which follows is based primarily on the
combined operating results of Airplanes Limited and Airplanes Trust and not
on their results reported as individual entities. 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.
1999 Aircraft Value Appraisals
Under the terms of the Notes, Airplanes Group is obliged to obtain annual
appraisals of the base value of each of the Aircraft from at least three
independent appraisers no earlier than 90 days and not later than 30 days
prior to March 31 of each year. When these appraisals indicate a base
value decline greater than the depreciation assumed under the terms of the
Notes, excess cashflow is redirected, to the extent required, to the Class
A Notes via the Class A Principal Adjustment Amount.
Airplanes Group has recently obtained appraisals of the Aircraft as of
February 5, 1999. On the basis of these appraisals, the average appraised
base value of the Aircraft was approximately $3,511 million compared with
$3,729 million at January 23, 1998, the date of the previous base value
appraisals. The decrease in the period since January 23, 1998 was
approximately $61 million more than the decrease implied by the Aircraft
depreciation schedules that form part of the terms of the Notes. Greater
than implied decreases in value occurred across most of the portfolio, with
significantly greater than implied decreases being experienced by the F100
Aircraft, the B737-400 Aircraft and, to a lesser extent, the A320 Aircraft,
B737-300 Aircraft, DHC8 Aircraft and MD11 Aircraft. These greater than
implied decreases are due primarily, in the case of the Fokker 100s, to
Fokker exiting the industry, in the case of the A320-200s and B737-
300/400/500s due primarily to continued effects of price discounting by
Boeing and Airbus in respect of deliveries due within the next two to three
years, in the case of DHC8s due primarily to the growth of regional jets
and in the case of MD11s to the Boeing/McDonnell Douglas merger and the
announcement of the discontinuance of the McDonnell Douglas product lines.
The decrease in appraised base values will result in the requirement for a
Principal Adjustment Amount of $34 million on the Class A Notes which will
begin to be paid from the February 16, 1999 Payment Date. The payment of
the Class A Principal Adjustment Amount will result in a reallocation of
cashflows in favour of the Class A Notes until such time as the Class A
target loan to value ratios implied by the terms of the Notes have been
restored. Accordingly, during this period there will be a suspension of
payments of the Class E Minimum Interest Amount and a deferral of payments
of the Class C and D Scheduled Principal Amounts.
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 January 11, 1999 Calculation Date (the "Period"),
gross revenue cashflows after selling, general and administrative expenses,
operating costs and expenditure due to aircraft downtime, defaults,
repossession and bad debts ("Net Gross Revenue Cashflows") were $16 million
in excess of the 1998 Assumptions as a result of Aircraft sales.
Sales proceeds of $121 million were received in the Period in respect of
the sale of 17 Aircraft (six DC8-71Fs, eight DC9s, one B737-300, one B737-
200A and one A300-B4-100). The 1998 Assumptions reflected sales proceeds
of $47 million in respect of the sale of three DC8-71F Aircraft only.
Airplanes Group's cashflows in the Period were also positively affected by
the receipt of default interest on overdue lease rentals from lessees of $1
million. The 1998 Assumptions did not assume any payment of default
interest.
However, apart from Aircraft Sales, Net Gross Revenue Cashflows were $58
million lower than the 1998 Assumptions. Lease revenues receipts were $10
million lower than the 1998 Assumptions primarily as a result of revenue
foregone due to Aircraft sales, in addition to a number of lessees going
into arrears on their rental payments which was partially offset by the
fact that the revenue lost through downtime and default was lower than
assumed in the 1998 Assumptions. Net maintenance costs were also higher
than the 1998 Assumptions by approximately $31 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 events such as lease extensions and early
redeliveries. Net interest rate swap payments were $2 million greater than
those assumed in the 1998 Assumptions.
In addition, other leasing costs were approximately $12 million greater
than assumed in the 1998 Assumptions primarily as a result of considerable
costs incurred in relation to two A300 Aircraft. In addition, repossession
costs exceeded the 1998 Assumptions by $3 million. These repossession
costs were primarily in respect of the three MD83 Aircraft repossessed from
Sunways and the 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 repossessed from an
Indonesian lessee and subsequently sold in June 1998.
In the Period, because sales proceeds received exceeded the 1998
Assumptions, distributions of principal to the Class A Certificate holders
were $19 million greater than assumed and distributions of principal to the
Class B Certificate holders were $6 million greater than assumed. There
were lower than assumed interest payments to the floating rate Class A and
Class B Certificate holders as a result of the lower principal balances
outstanding due to the greater than assumed principal amortisation. In
addition, payments of $2 million in respect of the minimum and supplemental
hedge amounts in the Period were not assumed in the 1998 Assumptions.
As at the January 11, 1999 Calculation Date, Airplanes Group retained $10
million in the Collection and Expense Accounts more than anticipated in the
1998 Assumptions.
Recent Developments
Trading conditions in the civil aviation industry have been adversely
affected by the severe economic and financial difficulties experienced in
Asia and the Far East. This downturn has undermined business confidence in
the region and has had an adverse impact on the results of operations of
some of Airplanes Group's lessees in the region which may adversely affect
Airplanes Group's future revenues and cashflows. The economies of
Indonesia, Thailand, Korea, Malaysia and the Philippines have experienced
particularly acute difficulties resulting in many business failures,
significant depreciation of local currencies against the dollar (the
currency in which lease payments are payable), sovereign and corporate
credit ratings downgrades and defaults, and in certain cases,
internationally organized financial stability measures. The economic
difficulties in Indonesia have resulted in civil disturbances and a change
of government in that country. Several airlines in the region have
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 December 31, 1998, Airplanes Group leased 16
Aircraft, representing 9.32% of its portfolio by Appraised Value, to
operators in Asia and the Far East.
Philippine Airlines ("PAL"), the lessee of one Aircraft representing 0.61%
of the portfolio by Appraised Value, has been adversely affected by the
ongoing Asian economic crisis. On June 19, 1998, PAL filed a petition for
approval of a rehabilitation plan at the Philippine SEC and subsequently,
the Philippine SEC appointed an Interim Receiver. PAL was instructed by
the Philippine SEC to submit a Rehabilitation Plan within 30 days.
Following a number of applications for extension of this time limit, PAL
filed the Rehabilitation Plan with the Philippine SEC on December 7, 1998.
It is unclear whether PAL will receive support for its proposed
Rehabilitation Plan from its creditors or whether it will be approved by
the Philippine SEC. At December 31, 1998, PAL was approximately $1.7
million in arrears in respect of rental payments and maintenance reserves.
There can be no assurance, however, that PAL will ultimately repay its
arrearages or be able to pay future lease rentals. Airplanes Group may
encounter delays or difficulties in recovering possession of its Aircraft
which is operated within the Philippines or terminating the lease. If the
Aircraft is recovered, the technical costs required to ensure the Aircraft
is in a suitable condition for re-leasing may be significant.
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
address its current financial crisis could result in the crisis spreading to
other Latin America economies and economies in other emerging markets. Future
developments in the political systems or economies of Brazil and other Latin
America countries may have a material adverse effect on lessee operations in
those countries. At December 31, 1998, Airplanes Group leased 71 Aircraft
representing 34.60% of its portfolio by Appraised Value to operators in Latin
America of which 16 Aircraft representing 14.32% of the portfolio by Appraised
Value were leased to operators in Brazil. Accordingly further deterioration in
the Latin American economies, especially Brazil, could lead to a material
decrease in Airplanes Group's leasing revenues and an increase in default
related costs.
During the three months ended December 31, 1998, the Servicer, on behalf of
Airplanes Group, entered into a restructuring agreement with a Brazilian
lessee, which leases two B767 Aircraft or 3.12% of the portfolio by
Appraised Value. The restructured amount of approximately $4.2 million is
being repaid over 12 months of which $0.9 million was repaid at December
31, 1998.
At December 31, 1998, a North American lessee of one B747 Aircraft (1.05%
of the portfolio by Appraised Value), was $2.2 million in arrears in
respect of rental payments and maintenance reserves. The Servicer, on
behalf of Airplanes Group, has entered into a restructuring agreement with
this lessee to repay the restructured principal amount in monthly
installments through October 1999 and thereafter, interest on a monthly
basis with the final payment due in February 2013.
The U.S. Federal Aviation Administration (the "FAA") has indicated that it
will develop within the next six months a new test specification for
insulation for the purpose of increasing fire safety on aircraft. The FAA
has also begun discussion with the international aviation authorities on
this matter. In addition, the FAA has indicated that it will propose
requiring the use of improved insulation once the new test standard is
developed. It is possible that additional service bulletins, new
maintenance practices and mandatory airworthiness directives may be issued
while the new standard for insulation is developed. 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.
<PAGE>
Results of Operations - Three Months Ended December 31, 1998 Compared with
Three Months Ended December 31, 1997.
There is considerable uncertainty facing the world's economy due to the
continuing Asian financial crisis, the substantial difficulties facing the
Russian political and financial system, the devaluation of the Brazilian
currency and increasing concerns about future economic growth in Europe and
the United States. Although a number of lessees performed poorly,
Airplanes Group's results of operations for the three months ended December
31, 1998 continued to be relatively stable. Overall, Airplanes Group
generated $22 million in cash from operations in the three months to
December 31, 1998 compared to $71 million in the same period of the
previous year. The decrease in cash generated from operations in the three
month period to December 31, 1998 is primarily attributable to an increase
in net outflow of maintenance reserves due to the acceleration of
maintenance events (including as a result of Aircraft repossessions) in the
amount of $7 million and the return of $7 million in maintenance reserves
due to a Latin American lessee as a result of the restructuring of its
leases, together with lease revenues foregone of $8 million following
Aircraft sales. In addition, during December 1997, one Latin American
lessee prepaid one year's rental in the amount of $15 million which
represents revenue foregone in the period to December 31, 1998. There was
a net loss after taxation for the three months to December 31, 1998 of $51
million (Airplanes Limited: $46 million; Airplanes Trust: $5 million)
compared to a net loss after taxation for the three months to December 31,
1997 of $47 million (Airplanes Limited: $43 million; Airplanes Trust: $4
million). The increase in the net loss for the period was primarily
attributable to the additional interest being charged on the accrued but
unpaid Class E Note interest.
Leasing Revenues
Leasing revenues (which include maintenance reserve receipts which
Airplanes Group receives from certain of its lessees) for the three months
ended December 31, 1998 were $131 million (Airplanes Limited: $121 million;
Airplanes Trust: $10 million) compared with $145 million (Airplanes
Limited: $126 million; Airplanes Trust: $19 million) for the three months
ended December 31, 1997. The decrease in 1998 was primarily attributable
to the reduction in the number of Aircraft on lease in the period to
December 31, 1998, as a consequence of Aircraft sales. At December 31,
1998, Airplanes Group had 202 of its 204 Aircraft on lease (Airplanes
Limited: 184 Aircraft; Airplanes Trust: 18 Aircraft) compared to 215 of
its 221 Aircraft on lease (Airplanes Limited: 192 Aircraft; Airplanes
Trust: 23 Aircraft) at December 31, 1997. In addition, there was a lower
interest rate environment (which impacts the pricing of certain lease
rentals) in the period to December 31, 1998.
Aircraft Sales
Sales revenues of $2 million (Airplanes Limited: $2 million; Airplanes
Trust: Nil) in respect of the sale of two DC9-14 Aircraft and six DC9-15
Aircraft were received in the three months ended December 31, 1998. The
net book value of these eight Aircraft at the date of sale was $1 million
(Airplanes Limited: $1 million; Airplanes Trust: Nil). In the three
months ended December 31, 1997, Airplanes Group received sales revenues of
$84 million (Airplanes Limited: $36 million, Airplanes Trust: $48 million)
in respect of the sale of six Aircraft. The net book value of these six
Aircraft at the date of sale, was $80 million (Airplanes Limited: $31
million; Airplanes Trust: $49 million).
Depreciation and Amortization
The charge for depreciation and amortization in the three months ended
December 31, 1998 amounted to $44 million (Airplanes Limited: $40 million;
Airplanes Trust: $4 million) compared with $48 million (Airplanes Limited:
$42 million; Airplanes Trust: $6 million) for the comparative period in
1997. The decrease arose as a result of the reduction in the number of
Aircraft owned by Airplanes Group.
Net Interest Expense
Net interest expense was $112 million (Airplanes Limited: $102 million;
Airplanes Trust: $10 million) in the three month period ended December 31,
1998 compared to $105 million (Airplanes Limited: $96 million; Airplanes
Trust : $9 million) in the three month period ended December 31, 1997. 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 $10 million; a reduction in the value of swaptions of $2
million; and lower average debt in the three months to December 31, 1998.
The weighted average interest rate on the Class A - D Notes during the
three months to December 31, 1998 was 6.69% and the average debt in respect
of the Class A - D Notes outstanding during the period was $3,312 million.
The Class E Notes accrue interest at a rate of 20% per annum (as adjusted
by reference to the U.S. consumer price index, effective March 28, 1996).
The weighted average interest rate on the Class A - D Notes during the
three months to December 31, 1997 was 6.87% and the average debt in respect
of the Class A - D Notes outstanding during the period was $3,665 million.
Although LIBOR was lower in the three months ended December 31, 1998 as
compared with the three months ended December 31, 1997, the weighted
average interest rate on the Class A-D Notes only decreased marginally
during the three months ended December 31, 1998 as compared to the three
months ended December 31, 1997. 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 December 31, 1998 in Airplanes
Group's net interest expense of $112 million (Airplanes Limited: $102
million; Airplanes Trust: $10 million) and cash paid in respect of
interest of $73 million (Airplanes Limited: $67 million; Airplanes Trust:
$6 million) is substantially accounted for by the fact that Airplanes Group
accrues interest on the Class E Notes at a rate substantially higher than
the per annum rate of 1% actually paid in cash in the three months ended
December 31, 1998.
Net interest expense is stated after deducting interest income earned
during the relevant period. In the three months ended December 31, 1998,
Airplanes Group earned interest income (including lessee default interest)
of $3 million (Airplanes Limited: $3 million; Airplanes Trust: Nil)
compared with $4 million in the three months ended December 31, 1997
(Airplanes Limited: $4 million; Airplanes Trust: Nil). The decrease is
primarily as a result of lower average cash balances and lower interest
rates in the three months to December 31, 1998.
At December 31, 1998, Airplanes Group had options on interest rate swaps
("Swaptions") with a notional principal of $296 million. During the three
months ended December 31, 1998, the value of the Swaptions decreased by
approximately $2 million as swap rates increased. As Swaptions do not
qualify for hedge accounting under US GAAP, the decrease in fair value of
$2 million has been included in net interest expense in the statement of
operations.
Bad Debt and Loss-Making Lease Provisions
Airplanes Group's practice is to provide specifically for any amounts due
but unpaid by lessees based primarily on the amount due in excess of
security held and also taking into account the financial strength and
condition of a lessee and the economic conditions existing in the lessee's
operating environment. A number of Airplanes Group's lessees failed to
meet their contractual obligations in the three month period ended December
31, 1998, resulting in the requirement for additional provisions in respect
of bad and doubtful debts in respect of these lessees, while the credit
exposure with regard to certain other carriers improved in the period.
Overall, there was a net charge of $1 million in respect of bad and
doubtful debts (Airplanes Limited: Nil; Airplanes Trust: $1 million) in
the three months ended December 31, 1998, compared with an overall net
credit of $1 million for the three months ended December 31, 1997
(Airplanes Limited: $1 million; Airplanes Trust: Nil). The overall net
charge in 1998 was primarily as a result of provisions required in respect
of one Philippine lessee, one North American lessee, one Mexican lessee and
one Ukrainian lessee, which were partially offset by a reduction in the
provisions required in respect of one Brazilian lessee and one Canadian
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. The only significant `loss making' lease signed in the three
months to December 31, 1998 was in respect of one B767 aircraft on lease to
a Latin American lessee. Consequently, there was an overall net
utilisation of $3 million (Airplanes Limited: $3 million; Airplanes Trust:
Nil) in respect of `loss making' lease provisions in the three months ended
December 31, 1998, compared with the three month period to December 31,
1997, where there was an overall net provision of $10 million (Airplanes
Limited: $10 million; Airplanes Trust: Nil). The provision required in
1997 was primarily required in respect of six Fokker 100 Aircraft on lease
to a Brazilian lessee which were restructured in the three months ended
December 31, 1997. The reduced rental payable under the revised terms of
these leases required an additional 'loss making' lease provision of $13
million in the quarter ended December 31, 1997.
Other Lease Cost
Other lease costs in the three months ended December 31, 1998 amounted to
$3 million (Airplanes Limited: $3 million; Airplanes Trust: Nil) compared
to other lease costs of $4 million (Airplanes Limited: $4 million;
Airplanes Trust: $Nil) in the three months to December 31, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period to
December 31, 1998 amounted to $9 million (Airplanes Limited: $9 million;
Airplanes Trust: Nil). This is a comparable expense to that incurred in
the three months to December 31, 1997 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 of $9
million in the three months to December 31, 1998 include $6 million
(Airplanes Limited: $5 million; Airplanes Trust: $1 million) relating to
GECAS servicing fees comparable with the $6 million incurred in the period
to December 31, 1997 (Airplanes Limited: $6 million; Airplanes Trust:
Nil).
A further significant element of Airplanes Group's actual selling, general
and administrative expenses reported in the period to December 31, 1998 was
$2 million (Airplanes Limited: $2 million; Airplanes Trust: Nil) in
respect of administrative agency and cash management fees payable to AerFi,
similar to the charge of $2 million for the period to December 31, 1997.
Operating Loss
The operating loss for the three months ended December 31, 1998 was $51
million (Airplanes Limited: $46 million; Airplanes Trust: $5 million)
compared with an operating loss of $48 million for the three months ended
December 31, 1997 (Airplanes Limited: $44 million; Airplanes Trust: $4
million). Airplanes Limited and Airplanes Trust are expected to continue
to report substantial losses in the future.
Taxes
There was no tax charge required in the three months to December 31, 1998, as
compared with an overall tax benefit of $1 million in the same period in 1997
(Airplanes Limited: $1 million; Airplanes Trust:
Nil).
Net Loss
The net loss after taxation for the three months ended December 31, 1998
was $51 million (Airplanes Limited: $46 million; Airplanes Trust: $5
million) compared with a net loss after taxation for the three months ended
December 31, 1997 of $47 million (Airplanes Limited: $43 million;
Airplanes Trust: $4 million).
<PAGE>
Financial Resources and Liquidity
There was an overall net decrease in cash of $9 million for the three months to
December 31, 1998, compared with a $95 million increase in cash for the three
months to December 31, 1997. The significant increase in cash in 1997 was as a
result of the five Aircraft sales which occurred during December 1997, in
addition to the prepayment by one Latin American lessee during December 1997 of
one year's rentals in the amount of $15 million.
Liquidity
The cash balances at December 31, 1998 amounted to $210 million (Airplanes
Limited: $204 million; Airplanes Trust: $6 million) compared to cash
balances at December 31, 1997 of $330 million (Airplanes Limited: $324
million; Airplanes Trust: $6 million.)
Operating Activities
Net cash provided by operating activities in the three months ended
December 31, 1998 amounted to $22 million (Airplanes Limited: $19 million;
Airplanes Trust: $3 million) compared with $71 million in the three months
ended December 31, 1997 (Airplanes Limited: $81 million; Airplanes Trust:
$(10) million). This includes cash paid in respect of interest of $61
million in the three months to December 31, 1998 (Airplanes Limited: $55
million; Airplanes Trust: $6 million) compared with $64 million in the
three months to December 31, 1997 (Airplanes Limited: $58 million;
Airplanes Trust: $6 million). The decrease in cash provided by operating
activities in the three month period to December 31, 1998 is primarily
attributable to lease revenues foregone of $8 million following Aircraft
sales, an increase in net outflows of maintenance reserves primarily due to
the acceleration of maintenance events (including as a result of Aircraft
repossessions) in the amount of $7 million and the return of $7 million in
maintenance reserves to a Latin American lessee as a result of the
restructuring of its leases. In addition, in the three months ended
December 31, 1997, one Latin American lessee prepaid one year's rental in
the amount of $15 million which represents revenue foregone in the period
to December 31, 1998.
Investing and Financing Activities
Cash flows from investing activities in the three months to December 31,
1998 reflects proceeds of $2 million from the sale of eight DC9 Aircraft.
In the three months ended December 31, 1997, Airplanes Group received sales
proceeds of $80 million (Airplanes Limited: $64 million; Airplanes Trust
$16 million) from the sale of six Aircraft (three DC8 Aircraft, two DC10-
30F Aircraft and one DC10 Aircraft). In addition, the insurance proceeds
in respect of one DC9 Aircraft which suffered a constructive loss during
October 1997 were received in December 1997. Finally, the reduction in
cash provided by capital and sale type leases to $2 million (Airplanes
Limited: $2 million; Airplanes Trust: Nil) as compared with $4 million in
the comparative period to December 31, 1997 (Airplanes Limited: $4 million;
Airplanes Trust: Nil) was primarily due to the sale of two DC-10 Aircraft
during December 1997 and one B737-200 Aircraft during May 1998.
Cash flows from financing activities in the three months to December 31,
1998 primarily reflect the repayment of $34 million of principal on
Subclass A-6, Class B Notes and Class C Notes by Airplanes Group (Airplanes
Limited: $31 million; Airplanes Trust: $3 million) compared with $60
million of principal repaid on Subclass A-5 and Class B Notes by Airplanes
Group (Airplanes Limited: $54 million; Airplanes Trust: $6 million) in the
three months to December 31, 1997. The decrease in principal repayments in
the three months ended December 31, 1998 as compared to the three months
ended December 31, 1997, is due to a reduction in cash provided by both
investing and operating activities as discussed above.
Indebtedness
Airplanes Group's indebtedness consisted of Class A-E Notes in the amount of
$3,873 million (Airplanes Limited: $3,529 million; Airplanes Trust: $344
million) at December 31, 1998 and $4,224 million (Airplanes Limited: $3,848
million; Airplanes Trust: $376 million) at December 31, 1997. Airplanes Group
had $591 million Class E Notes outstanding at December 31, 1998. In order to
repay principal on the Subclass A-4, A-7 and A-8 Notes on their expected
maturity dates, Airplanes Group will have to refinance such Notes in the
capital markets. In order to avoid stepped up interest costs, $200 million
of Subclass A-4 Notes, $550 million of Subclass A-7 Notes and $700 million
in Subclass A-8 Notes will have to be refinanced through the sale of
further pass-through certificates by March 2003, 2001 and 2003,
respectively. There can be no assurance that the Trust will be able to
sell further pass-through certificates in the amounts and at the times
required and any failure to do so may have the impact of increasing
Airplanes Group's borrowing costs.
Interest Rate Management
The leasing revenues of Airplanes Group are generated primarily from lease
rental payments which are either fixed or floating. In the case of
floating rate leases, an element of the rental varies in line with changes
in LIBOR, generally six-month LIBOR. Some leases carry fixed and floating
rental payments for different rental periods. There has been an increasing
tendency for fixed rate leases to be written and approximately two thirds
of the leases are fixed rate leases.
In general, an interest rate exposure arises to the extent that Airplanes
Group's fixed and floating interest obligations in respect of the Class A-D
Notes do not correlate to the mix of fixed and floating rental payments for
different rental periods. This interest rate exposure can be managed
through the use of interest rate swaps. The Class A and B Notes bear
floating rates of interest and the Class C and D Notes bear fixed rates of
interest. The mix of fixed and floating rental payments contains a higher
percentage of fixed rate payments than the percentage of fixed rate
interest payments on the Notes, including as a result of the fact that the
reset periods on floating rental payments are generally longer than the
monthly reset periods on the floating rate Notes. In order to correlate
the contracted fixed and floating rental payments to the fixed and floating
interest payments on the Notes, Airplanes Group enters into interest rate
swaps (the `Swaps'). Under the Swaps, Airplanes Group pays fixed amounts
and receives floating amounts on a monthly basis. The Swaps amortize
having regard to the expected paydown schedule of the Class A and B Notes,
the expiry dates of the leases under which lessees are contracted to make
fixed rate rental payments and the LIBOR reset dates under the floating
rates leases. At least every three months, and in practice more
frequently, AerFi Financial Services (Ireland) Limited, a subsidiary of
AerFi Group, as Airplanes Group's administrative agent (the "Administrative
Agent"), seeks to enter into additional swaps or sell at market value or
unwind part or all of the Swaps and any future swaps in order to rebalance
the fixed and floating mix of interest obligations and the fixed and
floating mix of rental payments. At December 31, 1998, Airplanes Group had
unamortized Swaps with an aggregate notional principal balance of $2,355
million. The aggregate notional principal of these Swaps will be reduced
to $1,790 million by the end of the fiscal year ended March 31, 1999.
These Swaps will be further reduced to an aggregate notional principal
balance of $995 million by the year ended March 31, 2000, to an aggregate
notional principal balance of $670 million by the year ended March 31, 2001
and to an aggregate notional principal balance of $360 million by the year
ended March 31, 2002. None of the Swaps have maturity dates extending
beyond March 15, 2003. In addition, at December 31, 1998, Airplanes Group
had forward dated Swaps with an aggregate notional principal balance of $40
million. The fair values of the Swaps at December 31, 1998 was a negative
$18 million.
Additional interest rate exposure will arise to the extent that lessees
owing fixed rate rental payments default and interest rates have declined
between the contract date of the lease and the date of default. This
exposure is managed through the purchase of Swaptions. Airplanes Group
will purchase Swaptions which, if exercised, will allow Airplanes Group to
enter into interest rate swap transactions under which it will pay floating
amounts and received fixed amounts. These Swaptions can be exercised in
the event of defaults by lessees owing fixed rate rental payments in
circumstances where interest rates have declined since the contract date of
such leases. Because not all lessees making fixed rate rental payments are
expected to default and not all lessee defaults are expected to occur
following a decline in interest rates, Airplanes Group will purchase
Swaptions in aggregate in a notional amount less than the full extent of
the exposure associated with the lessees making fixed rate rental payments.
This notional amount (the `Target Hedge') will be varied from time to time
to reflect, inter alia, changes in the mix of payment bases under future
leases. From time to time the Administrative Agent may also sell at market
value or unwind part or all of the outstanding Swaptions, for example, to
reflect any decreases in the Target Hedge. In the period from March 28,
1996 to December 31, 1998, Airplanes Group purchased Swaptions for interest
rate swaps with an aggregate notional principal balance of $473 million and
sold Swaptions with an aggregate notional principal balance of $177
million. The net aggregate notional principal balance of Swaptions at
December 31, 1998 therefore amounted to $296 million. The fair values of
the Swaptions at December 31, 1998 was $5 million and because the Swaptions
do not qualify for hedge accounting under U.S. GAAP, the increase in this
amount since March 31, 1998 of $4 million and the decrease since September
30, 1998 of $2 million have been included in interest expense for the nine
and three months ended December 31, 1998, respectively.
Through the use of the Swaps, Swaptions and other interest rate hedging
products, it is Airplanes Group's policy not to be adversely exposed to
material movements in interest rates. There can be no assurance, however,
that Airplanes Group's interest rate risk management strategies will be
effective in this regard.
The Directors of Airplanes Limited and the Controlling Trustees of Airplanes
Trust are responsible for reviewing and approving the overall interest rate
management policy and transaction authority limits. Specific hedging contracts
are approved by officers of the Administrative Agent acting within the overall
policies and limits.
Counterparty risk is monitored on an ongoing basis. Counterparties are subject
to the prior approval of the Directors of Airplanes Limited and the Controlling
Trustees of Airplanes Trust. Airplanes Group's counterparties consist of the
affiliates of major U.S. and European financial institutions which have credit
ratings, or which provide collateralisation arrangements, consistent with
maintaining the ratings of the Class A Notes.
Year 2000 Compliance
Many existing computer systems use only two digits to identify a year in
the date field. These systems were designed and developed without
considering the impact of the Year 2000. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000.
Airplanes Group is in the process of assessing the potential impact of the
Year 2000 issue on its operations. Because all of its operational
functions have been delegated to GECAS (as "Servicer"), the Administrative
Agent and AerFi Cash Manager Limited (as "Cash Manager"), in accordance
with the terms of their respective service agreements, Airplanes Group has
no information systems of its own and does not currently expect to incur
any material expenditure making information systems Year 2000 compliant.
Likewise, having regard to its agreements with its servicers, Airplanes
Group does not expect to incur any material costs as a result of such
servicers ensuring that their information systems are Year 2000 compliant.
Airplanes Group may nonetheless suffer a material adverse impact on its
business and results of operations if information technology upon which the
Servicer, the Administrative Agent and the Cash Manager rely is not Year
2000 compliant. For example, if the Servicer's information systems were
not Year 2000 compliant, it could impact materially on the Servicer's
performance of its obligations under the Servicing Agreement with Airplanes
Group, which in turn could have a material adverse effect on the business
and results of operations of Airplanes Group.
The Servicer, the Administrative Agent and the Cash Manager have confirmed
to Airplanes Group that they are in the process of reviewing their Year
2000 exposure and identifying the steps that will need to be taken to
ensure that their systems are Year 2000 compliant. Airplanes Group has
entered into an agreement with the Servicer regarding a Year 2000
consulting arrangement. Under this arrangement the Servicer is obliged to
provide Airplanes Group with certain Year 2000 consulting services,
including: testing hardware and software used or provided by the Servicer
under the Servicing Agreement and reporting periodically on the Servicer's
own Year 2000 compliance; surveying aircraft and engine manufacturers,
lessees and other third parties regarding Year 2000 compliance and advising
Airplanes Group with respect to the survey results to Airplanes Group;
suggesting modifications to pro forma leases and other contracts; and
assessing Year 2000-related insurance issues. Airplanes Group will pay no
explicit fee for these consulting services, but has provided the Servicer
with a waiver of liability and certain indemnities in connection with their
performance.
The Administrative Agent has also established a Task Force, which includes
external advisors, to oversee the development and implementation of a Year
2000 Plan for Airplanes Group, to (a) achieve Year 2000 compliance in the
Administrative Agent's and Cash Manager's computer systems, (b) co-ordinate
the Year 2000 consulting services to be provided by the Servicer, (c)
assess Year 2000 compliance of suppliers and customers and (d) report to
Airplanes Group on the adequacy of the measures and procedures to address
that risk. The Administrative Agent reports to Airplanes Group on an
ongoing basis on these matters and expects to submit a definitive report to
Airplanes Group by June 30, 1999 on Airplanes Group's Year 2000 remaining
exposure, to identify the steps that have been, or should be, taken to
minimise that exposure and to identify the elements of any contingency plan
in case any of the measures outlined fail to deal with Year 2000 issues.
Airplanes Group may also suffer an adverse impact on its business and
results of operations if its lessees, suppliers, financial institutions,
technical advisors and others with which it conducts business are not Year
2000 compliant. The Servicer has circulated a survey to aircraft and
engine manufacturers and the lessees with which it deals on behalf of
Airplanes Group to determine the extent of such parties' exposure to Year
2000 risks and the status of their Year 2000 compliance efforts. The
Administrative Agent has also circulated a survey to those third parties
with which it deals on behalf of Airplanes Group to determine the extent of
such third parties' exposure to Year 2000 risks and the status of their
Year 2000 compliance efforts.
In addition, aircraft and air traffic control and airport infrastructures
depend heavily upon microprocessors and software technology. Major
manufacturers, including Boeing, have begun a Year 2000 review of the
systems employed on their aircraft and are expected to advise owners,
operators and service providers of the steps to be taken to address any
Year 2000 problems that are identified. Among the aircraft systems that
have been identified as being susceptible to Year 2000 problems are certain
on-board aircraft management and navigation systems. The Servicer has
circulated a survey of aircraft and engine parts manufacturers and
suppliers to determine the extent to which their products are Year 2000
compliant. These review programs are still ongoing and thus the nature and
the extent of the risks posed by the potential failure of aircraft and/or
of air traffic control systems as a result of Year 2000 problems has not
been fully determined. Any failure of the systems employed by Airplanes
Group's Aircraft to be Year 2000 compliant could have a material adverse
effect on Airplanes Group's business and results of operations. Likewise,
any failure of the systems employed by civil aviation authorities to manage
the air traffic control systems in the various countries where lessees
operate the Aircraft could have the same adverse effect. For example, any
such failures would impair the ability of the lessee to operate the
Aircraft, which could impair its ability to pay rentals to Airplanes Group.
Moreover, it is currently not clear whether or to what extent
manufacturers, owners or lessees will be responsible for the costs
necessary to bring aircraft systems into Year 2000 compliance.
The 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 endorsements ("Year 2000 endorsements"): (i) hull and aircraft
liability coverage in respect of accidental loss of or damage to insured
aircraft and for liability arising out of an accident to 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 a Year 2000
occurrence. Therefore, the effect of the Year 2000 endorsements is to
provide that losses (including consequential losses) arising from a Year
2000 occurrence will only be paid where they result from an accident with
an aircraft or an injury to a third party. Insurers will provide Year 2000
endorsements to those airlines which satisfy insurers that they have
identified and are adequately addressing the Year 2000 issues affecting
that airline. Airplanes Group, in conjunction with the Servicer, is
currently assessing the Year 2000 status of all of its lessees' aviation
insurance.
The Year 2000 endorsements are currently available to Airplanes Group in
respect of any of its 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 insurances
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 subject to specific conditions including
(i) that Airplanes Group require any operator of an Aircraft to ensure that
the operator's policy contains Year 2000 endorsements no later than
August 1, 1999; and
(ii) that Airplanes Group report to the insurers details of any lessee which
does not have the benefit of Year 2000 endorsements. In that event, the
insurer has the right to exclude coverage under the endorsements in
Airplanes Group's contingent policy for that lessee's Aircraft.
Pending the outcome of the Year 2000 reviews by the Administrative Agent,
the Cash Manager and the Servicer, it is not possible to determine at this
time the extent, if any, to which Airplanes Group's business and results of
operations may be exposed as a result of any failure by lessees, aircraft
or engine manufacturers or aviation or airport authorities to address Year
2000 issues. In addition, the extent of the insurances available in
respect of Year 2000 problems may be limited. Accordingly, failure by
lessees, aircraft or engine manufacturers or aviation or airport
authorities to address the Year 2000 issue could have a material adverse
impact on the ability of Airplanes Group to make payments on the Notes.
New Accounting Pronouncement
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") was issued
in June 1998. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value.
Airplanes Group is currently reviewing implementation of the requirements
of SFAS No. 133. Airplanes Group is required to implement SFAS No. 133 by
April 1, 2000.
<PAGE>
Results of Operations - Nine months Ended December 31, 1998 Compared with
Nine months Ended December 31, 1997.
Airplanes Group's results of operations for the nine months ended December
31, 1998 continued to be relatively stable. However, as discussed in - "
Results of Operations - Three months ended December 31, 1998 compared with
three months ended December 31, 1997" - there is considerable uncertainty
facing the world's economy. Overall, Airplanes Group generated $73 million
in cash from operations in the nine months to December 31, 1998 compared to
$177 million in the same period of the previous year. The decrease in cash
generated from operations in the nine month period to December 31, 1998 is
primarily attributable to lease revenues foregone of $25 million following
Aircraft sales, a net negative movement in receivables of $21 million, an
increase in net outflow of maintenance reserves primarily due to the
acceleration of maintenance events in the amount of $19 million (including
as a result of Aircraft repossessions) and the return of $7 million in
maintenance reserves to a Latin American lessee as a result of the
restructuring of its leases. In addition, one Latin American lessee
prepaid one years rental in the amount of $15 million during December 1997
which represents revenue foregone in the period to December 31, 1998.
There was a net loss after taxation for the nine months to December 31,
1998 of $130 million (Airplanes Limited: $123 million; Airplanes Trust: $7
million) compared to a net loss after taxation for the nine months to
December 31, 1997 of $112 million (Airplanes Limited: $103 million;
Airplanes Trust: $9 million)
Leasing Revenues
Leasing revenues (which include maintenance reserve receipts which
Airplanes Group receives from certain of its lessees) for the nine months
ended December 31, 1998 were $399 million (Airplanes Limited: $367 million;
Airplanes Trust: $32 million) compared with $450 million (Airplanes
Limited: $394 million; Airplanes Trust: $56 million) for the nine months
ended December 31, 1997. The decrease in 1998 was primarily attributable
to the reduction in the number of Aircraft on lease in the period to
December 31, 1998, as a result of Aircraft sales. At December 31, 1998,
Airplanes Group had 202 of its 204 Aircraft on lease (Airplanes Limited:
184 Aircraft; Airplanes Trust: 18 Aircraft) compared to 215 of its 221
Aircraft on lease (Airplanes Limited: 192 Aircraft; Airplanes Trust: 23
Aircraft) at December 31, 1997. Leasing revenues were also adversely
affected by the restructuring during October 1997 of leases in respect of
six Fokker 100 Aircraft on lease to a Brazilian lessee. These leases had
an average remaining lease term of 29 months. In consideration for an
extension of the leases for 119 months, the revised terms of the leases
included reduced rental rates for these Aircraft and no maintenance reserve
payments, which resulted in a decrease in rental rates of approximately 24%
in the nine months to December 31, 1998 compared with the nine months to
December 31, 1997. In addition, there was a lower interest rate
environment (which impacts the pricing of certain lease rentals) in the
period to December 31, 1998.
Aircraft Sales
Sales revenues of $122 million (Airplanes Limited: $28 million; Airplanes
Trust: $94 million) in respect of the sale of 17 Aircraft (eight DC9s, six
DC8-71Fs, one B737-300, one B737-200A and one A300-B4-100) were received in
the nine months ended December 31, 1998. The net book value of the 17
Aircraft at the date of sale, net of maintenance reserves, was $110 million
(Airplanes Limited: $25 million; Airplanes Trust: $85 million). Seven
Aircraft were sold in the same period in 1997 generating sales revenue of
$94 million (Airplanes Limited; $46 million; Airplanes Trust: $48
million). These Aircraft had net book values of $90 million (Airplanes
Limited: $41, Airplanes Trust $49 million).
Depreciation and Amortization
The charge for depreciation and amortization in the nine months ended
December 31, 1998 amounted to $132 million (Airplanes Limited: $120
million; Airplanes Trust: $12 million) compared with $146 million
(Airplanes Limited: $129 million; Airplanes Trust: $17 million) for the
comparative period in 1997. The decrease arose as a result of the
reduction in the number of Aircraft owned by Airplanes Group.
Net Interest Expense
Net interest expense was $317 million (Airplanes Limited: $287 million;
Airplanes Trust: $30 million) in the nine month period ended December 31,
1998 compared to $308 million (Airplanes Limited: $278 million; Airplanes
Trust : $30 million) in the nine month period ended December 31, 1997. The
increase in net interest expense was primarily due to a combination of
offsetting factors: additional interest being charged on accrued but unpaid
Class E Note interest of $29 million; lower average debt in the nine months
to December 31, 1998; and a gain recognized on the value of Swaptions of $4
million.
The weighted average interest rate on the Class A - D Notes during the nine
months to December 31, 1998 was 6.80% and the average debt in respect of
the Class A - D Notes outstanding during the period was $3,366 million.
The Class E Notes accrue interest at a rate of 20% per annum (as adjusted
by reference to the U.S. consumer price index, effective March 28, 1996).
The weighted average interest rate on the Class A - D Notes during the nine
months to December 31, 1997 was 6.83% and the average debt in respect of
the Class A - D Notes outstanding during the period was $3,723 million.
Although LIBOR was lower in the nine months ended December 31, 1998 as
compared with the nine months ended December 31, 1997, the weighted average
interest rate on the Class A-D Notes only decreased marginally during the
nine months ended December 31, 1998 as compared to the nine months ended
December 31, 1997. This was as a result of 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 nine months ended December 31, 1998 in Airplanes
Group's net interest expense of $317 million (Airplanes Limited: $287
million; Airplanes Trust: $30 million) and cash paid in respect of
interest of $188 million (Airplanes Limited: $171 million; Airplanes
Trust: $17 million) is substantially accounted for by the fact that
Airplanes Group accrues interest on the Class E Notes at a rate
substantially higher than the per annum rate of 1% actually paid in cash in
the nine months ended December 31, 1998.
Net interest expense is stated after deducting interest income earned
during the relevant period. In the nine months ended December 31, 1998,
Airplanes Group earned interest income (including lessee default interest)
of $11 million (Airplanes Limited: $11 million; Airplanes Trust: Nil)
compared with $12 million in the nine months ended December 31, 1997
(Airplanes Limited: $11 million; Airplanes Trust: $1 million). The
decrease is primarily as a result of marginally lower lessee default
interest in addition to lower interest rates in the nine months to December
31, 1998.
At December 31, 1998, Airplanes Group had Swaptions with a notional
principal of $296 million. As swap rates fell significantly in the nine
months ended December 31, 1998, the value of the Swaptions increased by
approximately $4 million during the nine months ended December 31, 1998.
As Swaptions do not qualify for hedge accounting under US GAAP, the
increase in fair value of $4 million has been netted against interest
expense in the statement of operations.
Bad Debt and Loss-Making Lease Provisions
See "Results of Operations - Three months ended December 31, 1998 compared
with three months ended December 31, 1997" 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 nine month period ended
December 31, 1998, 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 $4 million in
respect of bad and doubtful debts (Airplanes Limited: $3 million;
Airplanes Trust: $1 million) in the nine months ended December 31, 1998,
compared with no overall net provision required for the nine months ended
December 31, 1997. The overall provision in 1998 was primarily as a result
of provisions required for various lessees including one Indonesian lessee,
one North American lessee, one Brazilian lessee and one Peruvian lessee,
which were partially offset by a reduction in the provisions required in
respect of one Canadian lessee, one Irish lessee and one Mexican lessee.
In respect of `loss making' lease provisions, there was an overall net
utilisation of $9 million (Airplanes Limited: $8 million; Airplanes Trust:
$1 million) in the nine months ended December 31, 1998. In the nine month
period to December 31, 1997, there was an overall net utilization of $7
million (Airplanes Limited: $5 million; Airplanes Trust: $2 million). In
the nine months ended December 31, 1998, the only significant provision
required was in respect of three DC8-71F Aircraft on lease to one Latin
American lessee.
Other Lease Costs
Other lease costs in the nine months ended December 31, 1998 amounted to
$19 million (Airplanes Limited: $18 million; Airplanes Trust: $1 million)
compared to other lease costs of $22 million (Airplanes Limited: $21
million; Airplanes Trust: $1 million) in the nine months to December 31,
1997. The reduction in the charge in the nine months to December 31, 1998,
was primarily due to the fact that in the nine months to December 31, 1997,
there was an increase in technical expenses of $5 million which related
primarily to two B737-200 Aircraft which redelivered in the previous
quarter and a provision required of $4 million (including $3 million
relating to potential costs payable to Eurocontrol, the European air
traffic control regulator) in respect of three MD83 Aircraft which were on
lease to a Turkish lessee which ceased to trade on October 3, 1997. In the
nine months ended December 31, 1998, technical expenses of $5 million were
required in respect of the four Fokker 100 Aircraft repossessed from
Sempati.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine month period to
December 31, 1998 amounted to $27 million (Airplanes Limited: $25 million;
Airplanes Trust: $2 million). This is a comparable expense to that incurred in
the nine months to December 31, 1997 of $29 million (Airplanes Limited:
$27 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 $27
million in the nine months to December 31, 1998 include $18 million
(Airplanes Limited: $17 million; Airplanes Trust: $1 million) relating to
GECAS servicing fees as compared to the expense incurred in respect of
GECAS servicing fees in the comparative period to December 31, 1997 of $20
million (Airplanes Limited: $19 million; Airplanes Trust: $1 million).
This reduction resulted from a lower fee base as a result of Aircraft
sales.
A further significant element of Airplanes Group's actual selling, general
and administrative expenses reported in the period to December 31, 1998 was
$7 million (Airplanes Limited: $6 million; Airplanes Trust: $1 million) in
respect of administrative agency and cash management fees payable to AerFi,
which is similar to the charge of $7 million for the period to December 31,
1997 (Airplanes Limited: $6 million; Airplanes Trust: $1 million).
Operating Loss
The operating loss for the nine months ended December 31, 1998 was $132 million
(Airplanes Limited: $125 million; Airplanes Trust: $7 million) compared with an
operating loss of $114 million for the nine months ended December 31, 1997
(Airplanes Limited: $105 million; Airplanes Trust: $9 million). Airplanes
Limited and Airplanes Trust are expected to continue to report substantial
losses in the future.
Taxes
There was a tax benefit in the nine months to December 31, 1998 of $2
million as a result of continuing operating losses (Airplanes Limited: $2
million; Airplanes Trust: Nil) compared with an overall tax benefit of $2
million in the same period in 1997 (Airplanes Limited: $2 million;
Airplanes Trust: Nil).
<PAGE>
Net Loss
The net loss after taxation for the nine months ended December 31, 1998 was
$130 million (Airplanes Limited: $123 million; Airplanes Trust: $7
million) compared with a net loss after taxation for the nine months ended
December 31, 1997 of $112 million (Airplanes Limited: $103 million;
Airplanes Trust: $9 million).
Financial Resources and Liquidity
There was a decrease in cash of $8 million for the nine months to December
31, 1998 compared to a net increase of $105 million for the nine months to
December 31, 1997.
Liquidity
The cash balances at December 31, 1998 amounted to $210 million (Airplanes
Limited: $204 million; Airplanes Trust: $6 million) compared to cash
balances at December 31, 1997 of $330 million (Airplanes Limited: $324
million; Airplanes Trust: $6 million.)
Operating Activities
Net cash provided by operating activities in the nine months ended December
31, 1998 amounted to $73 million (Airplanes Limited: $55 million;
Airplanes Trust: $18 million) compared with $177 million in the nine months
ended December 31, 1997 (Airplanes Limited: $186 million; Airplanes Trust:
$(9) million). This includes cash paid in respect of interest of $186
million in the nine months to December 31, 1998 (Airplanes Limited: $169
million; Airplanes Trust: $17 million) compared with $190 million in the
nine months to December 31, 1997 (Airplanes Limited: $173 million;
Airplanes Trust: $17 million). The decrease in cash provided by operating
activities in the nine month period to December 31, 1998 is primarily
attributable to lease revenues foregone of $25 million following Aircraft
sales, a net negative movement in receivables of $21 million, an increase
in net outflows of maintenance reserves primarily due to the acceleration
of maintenance events in the amount of $19 million (including as a result
of Aircraft repossessions), and the return of $7 million in maintenance
reserves to a Latin American lessee as a result of the restructuring of its
leases. In addition during December, 1997, one Latin American lessee
prepaid one year's rental in the amount of $15 million which represents
revenue foregone in the period to December 31, 1998.
Investing and Financing Activities
Cash flows from investing activities in the nine months to December 31,
1998 primarily reflects proceeds of $121 million from the sale of 17
Aircraft. These Aircraft consist of eight DC9s, six DC8-71Fs, one B737-
300, one B737-200A and one A300-B4-100. The cash provided by capital and
sale type leases was $6 million (Airplanes Limited: $6 million; Airplanes
Trust: Nil) as compared with $14 million in the comparative period to
December 31, 1997 (Airplanes Limited: $14 million; Airplanes Trust: Nil).
This reduction was primarily due to the sale of two DC-10 Aircraft during
December 1997 and one B737-300 Aircraft during May 1998.
Cash flows from financing activities in the nine months to December 31, 1998
primarily reflect the repayment of $208 million of principal on Subclass A-5,
Subclass A-6 and Class B Notes by Airplanes Group (Airplanes Limited: $190
million; Airplanes Trust: $18 million) compared to $175 million of
principal on Subclass A-5 and Class B Notes repaid by Airplanes Group
(Airplanes Limited: $159 million; Airplanes Trust: $16 million) in the
nine months to December 31, 1997. The higher amount of principal
repayments in the nine months ended December 31, 1998 is due to a higher
amount of cash provided by investing activities as discussed above.
<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 six spare engines (the
"Repossessed Assets") from VASP, a Brazilian airline, which had defaulted
under its lease agreements with AerFi. On May 10, 1993, at a full hearing,
the Brazilian courts gave a decision fully validating the repossession
injunction. VASP appealed this decision to the High Court of the State of
Sao Paolo (the "High Court"). On December 18, 1996, the High Court found
in favor of VASP in its appeal against the court order granting AerFi
repossession and export of the Repossessed Assets. AerFi was instructed to
return the Repossessed Assets for lease by VASP under the terms of the
original lease agreements between AerFi and VASP, within thirty days of
notification by VASP that it requires return of the assets. The decision
of the High Court was stayed pending a number of clarificatory motions by
both sides before the same court. In responding to those motions, the High
Court granted VASP the right to seek damages against AerFi in lieu of the
return of the Repossessed Assets. AerFi has sought leave to appeal the
December 1996 decision and the court's responses to the clarificatory
motions to the Brazilian superior courts, including the Federal Supreme
Court. In addition, AerFi has filed a writ of mandamus with the Brazilian
courts seeking to overturn the decision of the High Court and has sought a
stay on the High Court's decisions pending its appeals.
Seven of the thirteen aircraft which were repossessed by 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 serve AerFi with the notice requiring return of the
Repossessed Assets within thirty days of the notice. However, the High
Court has referred all matters concerning the notice to a lower court.
Should VASP commence any action before the lower court in respect of the
notice, AerFi will challenge a number of matters relating to the notice
including its validity. In addition, VASP sought an order against AerFi
from the High Court for alleged damages arising from the repossession and
export of the Repossessed Assets and AerFi's alleged failure to comply with
the court order requiring return of the Repossessed Assets. AerFi
challenged VASP's application on a number of grounds, including its
validity. The High Court rejected VASP's application and held that if VASP
believes it has an action for damages against AerFi, VASP must commence
such an action in accordance with normal Brazilian court procedures before
a court of first instance. The only immediate risk to the Repossessed
Assets would arise where they are located in Brazil and if VASP was
successful in enforcing its judgment having sought repossession rather than
damages.
AerFi has informed Airplanes Group that it has been advised that the
decision of the High Court in December 1996 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
On August 21, 1998, AerFi, GECAS and General Electric Capital Corporation
entered into an agreement, which contemplated the consummation of a number
of transactions, including the acquisition by General Electric Capital
Corporation of the Class E Notes issued by Airplanes Group and held by
AerFi Group and AerFi, Inc. a Delaware corporation and a wholly-owned
subsidiary of AerFi Group. The transactions contemplated by this agreement
closed on November 20, 1998 ("AerFi Restructuring Closing Date"). On the
AerFi Restructuring Closing Date, Edward Hansom, the Director of Airplanes
Limited and the Controlling Trustee of Airplanes Trust appointed by AerFi
Group as Class E Noteholder resigned and General Electric Capital
Corporation, as the new holder of the Class E Notes, appointed Brian
Hayden, Managing Director, Technical, GECAS as a new Director of Airplanes
Limited and a new Controlling Trustee of Airplanes Trust.
In addition, on November 20, 1998, William Franke resigned as Chairman of
Airplanes Limited and Airplanes Trust upon becoming a director of AerFi
Group. William McCann, an Independent Director of Airplanes Limited and an
Independent Controlling Trustee of Airplanes Trust, was elected Chairman of
both entities.
AeroUSA, Inc. and AeroUSA 3, Inc., both Connecticut corporations, have in
the past filed United States federal consolidated tax returns and certain
state and local tax returns with 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.
Subsequent to the AerFi Restructuring Closing Date, Aero USAInc. and
AeroUSA 3, Inc., now file United States federal consolidated tax returns
and certain state and local tax returns with General Electric Capital
Corporation. In addition, on the AerFi Restructuring Closing Date,
Airplanes Group entered into a Tax Sharing Agreement with General Electric
Capital Corporation which is substantially similar to the Tax Sharing
Agreement between Airplanes Group and AerFi which was in place prior to the
AerFi Restructuring Closing Date, and which terminated on the AerFi
Restructuring Closing Date, except with respect to those provisions
relating to the position prior to the date on which AeroUSA, Inc. and
AeroUSA 3, Inc. were deconsolidated from AerFi, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule of Airplanes Limited
27.2 Financial Data Schedule of Airplanes U.S. Trust
(b) Reports on Form 8-K: Filed for event dates November 13, 1998;
December 14, 1998 and January 14, 1999 (relating to the
monthly report to holders of the Certificates).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
each registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 9, 1999 AIRPLANES LIMITED
By: /s/ WILLIAM M. MCCANN
-------------------------------
William M. McCann
Director and Principal
Accounting Officer
Date: February 9, 1999 AIRPLANES U.S. TRUST
By: /s/ WILLIAM M. MCCANN
-------------------------------
William M. McCann
Controlling Trustee and
Principal Accounting Officer
<PAGE>
AIRPLANES LIMITED AND AIRPLANES U.S. TRUST
INDEX TO EXHIBITS
EXHIBIT NUMBER
27.1 Financial Data Schedule of Airplanes Limited
27.2 Financial Data Schedule of Airplanes U.S. Trust
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