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As filed with the Securities and Exchange Commission on August 11, 1999
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 333-66973
AERCO LIMITED
(Exact name of Registrant as specified in its charter)
JERSEY, CHANNEL ISLANDS
(Jurisdiction of incorporation or organization)
AERCO LIMITED
22 GRENVILLE STREET
ST. HELIER
JERSEY, JE4 8PX
CHANNEL ISLANDS
(Address of principal executive offices)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT.
None
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT.
None
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
OF THE ACT.
TITLE OF EACH CLASS
Subclass A-1 Notes due July 15, 2023
Subclass A-2 Notes due July 15, 2023
Subclass B-1 Notes due July 15, 2023
Subclass C-1 Notes due July 15, 2023
The number of outstanding shares in the capital of AerCo Limited as of March 31,
1999:
20 Shares, U.S. $1 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
PART I
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PAGE
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Item 1 Description of Business........................... 1
Item 2 Description of Property........................... 28
Item 3 Legal Proceedings................................. 28
Item 4 Control of Registrant............................. 28
Item 5 Nature of Trading Market.......................... 29
Item 6 Exchange Controls and Other Limitations Affecting
Security Holders.................................. 29
Item 7 Taxation.......................................... 29
Item 8 Selected Financial Data........................... 34
Item 9 Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 38
Item 9A Quantitative and Qualitative Disclosures about
Market Risk....................................... 46
Item 10 Directors and Officers of Registrant............... 49
Item 11 Compensation of Directors and Officers............. 58
Item 12 Options to Purchase Securities from Registrant or
Subsidiaries...................................... 58
Item 13 Interest of Management in Certain Transactions..... 58
PART II
Item 14 Description of Securities to be Registered......... 58
PART III
Item 15 Defaults upon Senior Securities.................... 58
Item 16 Changes in Securities, Changes in Security for
Registered Securities and Use of Proceeds......... 58
PART IV
Item 17 Financial Statements............................... 59
Item 18 Financial Statements............................... 59
Item 19 Financial Statements and Exhibits.................. 59
Exhibit Index............................................... 59
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PART I
ITEM 1. -- DESCRIPTION OF BUSINESS
GENERAL
AerCo Limited ("AerCo") was incorporated in Jersey (registered number
71839) as a public, limited company under the Companies (Jersey) Law 1991 on
June 4, 1998 for an unlimited duration. AerCo was formed for the purpose of
indirectly acquiring a portfolio of 35 commercial jet aircraft all of which are
subject to operating leases (the "Aircraft"). The registered office of AerCo is
at 22 Grenville Street, St. Helier, Jersey JE4 8PX, Channel Islands and its
telephone number is 011 44 1534 609000. AerCo has an authorized share capital of
10,000 ordinary shares, $1 par value per share (the "capital stock"), 20 of
which have been issued. Nineteen shares of the issued capital stock are held by
Juris Limited and Lively Limited, each a Jersey limited liability company
(together, the "Nominees"), for the benefit of the AerCo Holding Trust, a
charitable trust established under the laws of Jersey (the "Charitable Trust").
AerFi Group plc ("AerFi") holds one share of the issued capital stock.
AerCo's direct wholly owned subsidiaries are Aircraft Lease Portfolio
Securitization 94-1 Limited ("ALPS 94-1"), AerCo Ireland Limited, AerCo Ireland
II Limited and AerCo USA Inc. AerCo operates its business principally through
its direct and indirect subsidiaries but also has acquired and directly leases
Aircraft. AerCo's business therefore principally consists of, and its revenues
are derived principally from leasing aircraft and making loans to its
subsidiaries. AerCo together with its subsidiaries is referred to in this
document as the "AerCo group". At June 30, 1999, AerCo group owned 34 Aircraft
which were on lease to 26 lessees in 18 countries. Subsequent to June 30, 1999
one Aircraft was sold.
On July, 15 1998, AerCo purchased all of the outstanding capital stock of
ALPS 94-1, another securitization vehicle, from the trustees of a charitable
trust ("the ALPS 94-1 Trust") for a nominal amount. This purchase price
reflected the very limited economic entitlements of these trustees as
shareholders of ALPS 94-1. On July 15, 1998, ALPS 94-1 was the owner of 25
commercial jet aircraft.
On July 15, 1998, AerCo also purchased all of the capital stock of three
wholly-owned newly incorporated subsidiaries of AerFi, AerCo Ireland Limited,
AerCo Ireland II Limited and AerCo USA Inc. (together the "AerFi transferred
companies") for a net purchase price equal to $0.3 million. On July 15, 1998,
the AerFi transferred companies were the owners of ten commercial jet aircraft
(the "AerFi transferred aircraft").
On July 15, 1998, AerCo loaned ALPS 94-1 a portion of the net cash proceeds
from the issuance of notes (the "old Notes") for the purpose of immediately
redeeming or repaying ALPS 94-1's existing financial indebtedness and paying
fees and other expenses payable by ALPS 94-1 in connection with the refinancing
of ALPS 94-1 and the offering.
On July 15, 1998, AerCo loaned each AerFi transferred company a portion of
the net proceeds from the issuance of the old Notes to immediately repay its
indebtedness to AerFi. All letters of credit, guarantees or similar arrangements
securing obligations of any lessee of the AerFi transferred aircraft were
transferred to, renewed, amended or reissued in the name of, an AerFi
transferred company.
ALPS 94-1 and GECAS, the former servicer to ALPS 94-1 and current servicer
to AerFi, also reached an agreement to terminate the existing ALPS 94-1
servicing agreement, in exchange for a termination fee. ALPS 94-1 agreed, upon
termination of the ALPS 94-1 servicing agreement to waive all claims it may have
against GECAS, its affiliates and their representatives. ALPS 94-1 also agreed
to indemnify GECAS, its affiliates and their representatives for any losses they
may have incurred in connection with the termination of the ALPS 94-1 servicing
agreement, the offering and the issuance of the old Notes and the refinancing of
ALPS 94-1.
The trustees of the ALPS 94-1 Trust made no representations, warranties or
indemnities in selling their shares to AerCo. AerFi made customary
representations and warranties in the share purchase agreement for the
acquisition of the AerFi transferred companies and aircraft, including
representations relating to solvency, undisclosed contingent liabilities and
insurance. AerFi indemnified AerCo group for breaches of its representations and
warranties relating to the AerFi transferred companies and the AerFi transferred
aircraft. These
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representations and warranties survive until July 15, 2001. AerCo group's
potential recovery under them is limited to approximately $185 million.
AerCo financed the purchase of the Aircraft through the issuance of the old
Notes. On April 16, 1999 AerCo commenced an exchange offer under which the old
Notes were exchanged for new notes (the "Notes") which were registered with the
Securities and Exchange Commission. AerCo is obliged to pay interest on and
principal of the Notes from the cash flows generated by AerCo's leasing
operations and from the sale of the Aircraft as such interest and principal
becomes due and payable. AerCo may sell any of the Aircraft at any time and from
time to time in a manner consistent with AerCo's business objectives and subject
to receiving proceeds from any such sale sufficient to make principal payments
in respect of the Notes which will reduce the outstanding principal balance
thereof to certain target amounts of the initial aggregate principal balances.
See "Item 9 -- Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources."
Babcock & Brown Limited ("Babcock & Brown") acts as Servicer to AerCo
group. AerFi Administrative Services Limited ("AerFi Administrative Services")
acts as Administrative Agent to AerCo group. AerFi Cash Manager II Limited
("AerFi Cash Manager II") acts as Cash Manager to AerCo group.
RISK FACTORS
The following summarizes certain risks which may materially affect the
ability of AerCo to pay interest, principal and premium, if any, on the Notes in
full at or before their respective final maturity dates. There can be no
assurance that Rental Payments (as defined below) under the leases will be
adequate to pay the interest, principal and premium, if any, on the Notes in
accordance with their terms. The risks and uncertainties described below are not
the only ones facing AerCo.
THERE IS NO SECURITY INTEREST IN THE AIRCRAFT -- YOU CANNOT SELL THE AIRCRAFT TO
REPAY THE NOTES IF WE DO NOT MEET OUR OBLIGATIONS UNDER THE NOTES.
Neither the trustee, the security trustee nor any noteholder has any
security interest, mortgage, charge or other similar interest in any Aircraft.
If there is an event of default, they will not be able to sell the Aircraft to
repay the Notes or exercise similar remedies which they would have if they had a
security interest in the Aircraft.
OUR SUBSIDIARIES MAY HAVE CONTINGENT LIABILITIES THAT ARE UNKNOWN TO US -- IF WE
HAVE TO PAY SUCH LIABILITIES, WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES.
There is a risk that our subsidiaries could have material contingent
liabilities that are unknown to us. For example, our subsidiaries could have
incurred liabilities to third parties from operating and leasing the Aircraft
before we acquired them. When we acquired the ALPS 94-1 capital stock, we
obtained no representations, warranties or indemnities from the seller. AerFi
Group indemnified us for breaches of their representations and warranties
relating to the AerFi transferred companies and Aircraft which they sold to us.
These representations and warranties survive until July 15, 2001. Our potential
recovery under them is limited to approximately $185 million. If such a
contingent liability becomes known and we are called on to pay it, we may be
unable to recover the amount of the liability from AerFi, the former
shareholders of ALPS 94-1 or any other person. If we have to pay any such
liability, we may be unable to make the required payments on the Notes.
WE RELY ON THIRD PARTIES TO MANAGE OUR BUSINESS -- OUR OPERATIONS MAY SUFFER AND
WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES IF OUR SERVICE PROVIDERS DO NOT
PERFORM THEIR OBLIGATIONS TO US OR IF WE HAVE TO REPLACE THEM.
We have no executive management resources of our own. We, therefore, rely
on several service providers for the leasing and re-leasing of the Aircraft and
all other executive and administrative responsibilities. If these service
providers do not perform their contractual obligations to us, our operations may
suffer and we may not
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be able to repay the Notes. We can give no assurance that we will continue our
arrangements with these service providers, or that the service providers will
continue their relationship with us, until the Notes are paid in full. If a
service provider resigns or we terminate its appointment, we may be unable to
find suitable replacement service providers that we can engage on suitable
terms. Additionally, our appointment of replacement service providers may cause
a lowering or withdrawal of the ratings on the Notes. See "Item 10 -- Directors
and Officers of Registrant" for detailed information on the responsibilities
delegated to service providers.
The servicing agreement with Babcock & Brown, unless extended, expires in
2008, which is five years before the expected final payment date of the last
Notes to be repaid. If we cannot extend the existing servicing agreement or find
a replacement servicer, we may be unable to re-lease or sell Aircraft. As a
result, we may be unable to make payments on the Notes.
BABCOCK & BROWN MAY HAVE CONFLICTS OF INTEREST FROM ITS OTHER BUSINESS
ACTIVITIES -- WE MAY BE UNABLE TO RE-LEASE OR SELL AIRCRAFT IF IT CANNOT RESOLVE
THESE CONFLICTS.
Babcock & Brown manages a large aircraft portfolio for others, including
its own affiliates, and it may face conflicts of interest in managing and
marketing our Aircraft for re-lease or sale. The aircraft it manages for others
may compete with our Aircraft when they are being marketed for re-lease or sale.
Babcock & Brown also arranges aircraft financings and lease transactions and
advises many airlines. Some of these airlines are our lessees and potential
lessees. If Babcock & Brown cannot resolve a conflict of interest, the conflict
could have an adverse effect on our ability to manage, re-lease or sell the
Aircraft. In that case, we may be unable to make the required payments on the
Notes.
See "Item 10 -- Directors and Officers of Registrant" for a description of
Babcock & Brown's aircraft management and advisory business.
THE SERVICING AGREEMENT LIMITS BABCOCK & BROWN'S LIABILITY TO US -- WE MAY BE
UNABLE TO RECOVER FROM BABCOCK & BROWN THE AMOUNT OF ANY LOSSES THEY CAUSE US.
Our servicing agreement with Babcock & Brown contains limitations on its
liability for losses caused by its services. There is a risk that we may be
unable to recover from Babcock & Brown the amount of any losses they cause in
performing the services. Additionally, Babcock & Brown will not be liable to you
for any losses caused by its services.
We describe the liability and other provisions of the servicing agreement
under "Item 10 -- Directors and Officers of Registrant".
THE COMMERCIAL AIRCRAFT MARKET IS CYCLICAL -- DECREASED DEMAND OR EXCESS SUPPLY
OF AIRCRAFT MAY DECREASE OUR CASH FLOWS.
The market for commercial jet aircraft is very cyclical and can produce
sharp increases and decreases in aircraft values and lease rates. The aircraft
leasing market has been relatively strong since 1996 but may decline in the near
future. Decreases in aircraft values or lease rates may cause a decrease in our
cash flows. Depending on market conditions, we may be unable to sell or re-lease
Aircraft on terms that allow us to make payments on the Notes.
Aircraft values and lease rates depend on various factors that are outside
our control, including:
- general economic conditions affecting lessee operations;
- used aircraft supply;
- interest rates and credit availability;
- fuel and other operating costs;
- manufacturer production levels and prices for new aircraft;
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- passenger demand;
- retirement and obsolescence of aircraft models;
- manufacturers merging or leaving the aircraft industry;
- re-introduction into service of aircraft previously in storage;
- governmental regulations; and
- lack of capacity in the air traffic control system.
In addition to values for Aircraft generally, the value of specific
Aircraft may increase or decrease sharply depending on factors that are not
within our control, including:
- maintenance and operating history of the Aircraft;
- number of operators using a type of aircraft;
- legal or regulatory requirements that prevent us from re-leasing or
selling an Aircraft in the condition that it is in; and
- the discovery of manufacturing defects in an aircraft model.
The value of specific Aircraft may also depend on the commercial and
financial health of the manufacturer. For example, since Fokker N.V. ceased
operations in 1996, there have been significant reductions in values and lease
rates for Fokker 100s. We expect these reductions will continue. At June 30,
1999, we owned four Fokker 100s, representing 6.49% of the portfolio by
appraised value at January 18, 1999. (Subsequent to June 30, 1999, one Fokker
100 was sold. At July 1, 1999 the remaining three Fokker 100s represented 4.87%
of the portfolio by appraised value at January 18, 1999.) Likewise, because of
its merger with McDonnell Douglas Corporation, Boeing has announced that it will
discontinue production of MD-83 aircraft in mid-1999. This development is likely
to decrease values and rental rates for these aircraft. At June 30, 1999, we
owned three MD-83s, representing 7.06% of the portfolio by appraised value at
January 18, 1999. The demand-supply situation for the near term would appear to
favor the lessee mainly due to the significant level of deliveries of new
aircraft combined with the slowdown in economic growth in Asia. This may give
rise to a softening of future lease rates and of the placement prospects for
Aircraft coming off lease in the near term.
THE APPRAISED VALUE OF THE AIRCRAFT MAY BE SIGNIFICANTLY HIGHER THAN THE ACTUAL
VALUE WE WOULD RECEIVE UPON A SALE OF THE AIRCRAFT -- IN THAT CASE, OUR ABILITY
TO MAKE SCHEDULED PAYMENTS ON THE NOTES MAY SUFFER.
Aircraft appraised values, also known as base values, do not necessarily
reflect the market value for an aircraft at a specific time. We have determined
the scheduled principal payments on the Notes based on assumptions as to the
appraised value of the Aircraft. If we sell an Aircraft to generate cash to make
payments on the Notes, the proceeds of the sale may be significantly less than
its appraised value. We may therefore have insufficient cash to make payments on
the Notes. Market lease rates may also depend on current market values for
aircraft. If market values are less than appraised values, we may be unable to
re-lease Aircraft at rental rates sufficient to repay the Notes.
Appraised values are based on the assumption that there is an "open,
unrestricted, stable market environment with a reasonable balance of supply and
demand". However, the aircraft market is not always stable and there may be
supply and demand imbalances at any one time, especially for specific aircraft
types. At various points in the aircraft market cycle, the current market value
of some aircraft may be close to their appraised value while the current market
value of others, particularly older aircraft and certain types of aircraft such
as the B747-200B (of which there is one in the portfolio), may be significantly
less than their appraised values. At the low point in the aircraft market cycle,
the current market value of most aircraft types is likely to be less than
appraised values. As a result you should not rely on Aircraft appraised values
as an indication of the market value for the Aircraft.
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IF THE APPRAISED VALUES OF OUR AIRCRAFT DECLINE AT A FASTER RATE THAN WE HAVE
ASSUMED, WE MAY BE REQUIRED TO SUSPEND PRINCIPAL PAYMENTS ON CLASS B AND CLASS C
NOTES.
Due to various market factors, aircraft appraisers have recently reduced
appraised values for aircraft, especially Fokker aircraft and older widebody
aircraft. If future appraised values for our Aircraft decline below a specific
level, we may suspend principal payments on the class B and class C Notes. Under
the indenture, we must accelerate the scheduled principal payments on class A
Notes if the Aircraft appraised values decline at a greater rate than we
assumed. In that case, principal payments on the class B and class C Notes may
be suspended because of the increased principal amount that we must pay on the
class A Notes.
NEW, MORE TECHNOLOGICALLY ADVANCED AIRCRAFT MAY IMPAIR OUR ABILITY TO RE-LEASE
OR SELL OUR AIRCRAFT -- IF WE ARE UNABLE TO RE-LEASE OR SELL OUR AIRCRAFT ON
FAVORABLE TERMS, WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES.
The availability of newer, more technologically advanced Aircraft or the
introduction of increasingly stringent noise or emissions regulations may make
it more difficult for us to re-lease or sell Aircraft. This risk is particularly
significant for us given our need to repay principal and interest on the Notes
over a relatively long period. This will require us to lease or sell many of the
Aircraft close to the end of their useful economic life. We expect that our
ability to manage these technological risks through modifications to Aircraft
and sale of Aircraft will be limited.
OUR SERVICE PROVIDERS AND LESSEES, THE AIR TRAFFIC CONTROL SYSTEM AND OTHERS WE
DEPEND ON MAY NOT BE YEAR 2000 COMPLIANT -- IF THEIR SYSTEMS MALFUNCTION, WE MAY
BE UNABLE TO MAKE PAYMENTS ON THE NOTES.
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. AerCo 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, AerCo group has no information systems of its
own. AerCo group may, however, suffer a material adverse impact on its business
and results of operations if information technology upon which the Servicer,
Administrative Agent and Cash Manager rely is not Year 2000 compliant. The
Servicer, Administrative Agent and Cash Manager have reviewed their Year 2000
exposure and are taking steps necessary to ensure that their systems are Year
2000 compliant. The Servicer, Administrative Agent and Cash Manager do not
believe that occurrences of Year 2000 failures will have a material adverse
effect on their ability to meet their obligations to AerCo group.
AerCo 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 AerCo group to determine the extent of such third parties'
exposure to Year 2000 risks and the status of their Year 2000 compliance
efforts. The Servicer and Administrative Agent are reviewing the responses of
those third parties received to date and have contacted all third parties whose
responses are outstanding.
The Servicer is also conducting a survey of all of AerCo group's 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. As of June
30, 1999 the Servicer had received responses from 22 of AerCo group's 26
lessees. Based on these responses 22 lessees have confirmed they are
implementing a Year 2000 plan and 19 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. Despite these responses, there can be no assurance that these lessees will
not suffer any business interruptions or have no problems meeting their
obligations to us. The Servicer has contacted all lessees where responses are
outstanding.
Noncompliance by a lessee could result in lost revenue for the lessee and
an inability to make lease payments to AerCo group. Noncompliance by the
lessee's financial institutions could also adversely effect the ability to
process lease payments.
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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 AerCo group. AerCo 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 AerCo group's
business or financial position.
If a lessee cannot operate its Aircraft and cannot make contractual lease
payments, AerCo group's contingency plans include the Servicer repossessing
Aircraft from lessees in default and attempting to re-lease such Aircraft to a
Year 2000 compliant lessee. AerCo group cannot give any assurance that the
Servicer would be able to re-lease such Aircraft at favorable 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 favorable terms or at all, it may have a
material adverse effect on AerCo group's business.
Aircraft and air traffic control systems also depend heavily on
microprocessors and software technology. If systems employed by the Aircraft are
not Year 2000 compliant, AerCo 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. According to Boeings' most
recent public disclosure, Boeing believes that its systems will be 100%
compliant by July 31, 1999. 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 nature and extent of the risks posed by
potential failure of aircraft and aircraft control systems because of Year 2000
problems has not been fully determined. AerCo 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. It is not clear whether or to
what extent manufacturers, owners or lessees will be responsible for the costs
necessary to make aircraft systems Year 2000 compliant. Accordingly, AerCo group
is currently not able to make any estimate of the amount, if any, it may be
required to spend to remediate Year 2000 problems associated with the Aircraft.
Such expenditures could, however, have a material adverse impact on the ability
of AerCo 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 write back 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 any 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 endorsements is to provide that losses
(including consequential losses) arising from a Year 2000 failure will only be
paid where they result from an accident involving an aircraft or an injury to a
third party. Insurers will provide Year 2000 endorsements to those airlines
which satisfy insurers that they have identified and are adequately addressing
the Year 2000 issues affecting the airline. AerCo group, in conjunction with the
Servicer and its insurance brokers, is currently assessing the Year 2000 status
of all of its lessees' aviation insurance. At June 30, 1999, 23 of AerCo group's
26 lessees had obtained Year 2000 endorsements. The Servicer is in contact with
all lessees which do not as yet have Year 2000 endorsements.
The Year 2000 endorsements are currently available to AerCo group in
respect of any off-lease Aircraft. In addition, AerCo 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,
AerCo group's contingent insurances are not available if the operator's policy
does not contain Year 2000 endorsements.
IF WE SELL AIRCRAFT-RELATED TAX BENEFITS, WE MAY BE UNABLE TO RECOVER LEGAL
OWNERSHIP OF THE AIRCRAFT -- IN THAT CASE, WE MAY BE UNABLE TO RE-LEASE OR SELL
THE AIRCRAFT.
In addition to selling Aircraft outright, we may make more limited
transfers of Aircraft ownership to investors who wish to acquire depreciation or
other tax benefits available to aircraft owners. If we enter into
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tax-related dispositions, we will be exposed to the credit risk of the investor.
This includes the risk that we will not be able to recover legal title to the
Aircraft or other aspects of ownership transferred to the investor if the
investor becomes insolvent. This would harm our ability to re-lease or sell the
Aircraft. Because the terms of tax-related dispositions are not standardized, we
cannot identify with certainty the nature and the level of the risks we would
face if we entered into these transactions.
RESTRICTIONS IN THE INDENTURE AND OUR GOVERNING CORPORATE DOCUMENTS MAY IMPAIR
OUR ABILITY TO COMPETE IN THE AIRCRAFT LEASING MARKET.
The indenture and our governing corporate documents impose restrictions on
how we operate our business. These restrictions limit our ability to compete
effectively in the aircraft leasing market. For example, we cannot grant
privileged rental rates to airlines in return for equity investments in such
airlines. There are also restrictions on persons to whom we may lease Aircraft
and limits on leasing to lessees in specific geographical regions. Most
competing aircraft lessors do not operate under similar restrictions.
IF LESSEES EXERCISE PURCHASE OPTIONS AT PRICES BELOW FAIR MARKET VALUES, WE MAY
BE UNABLE TO MAKE REQUIRED PRINCIPAL PAYMENTS ON THE NOTES.
As of June 30, 1999, five lessees had options to purchase a total of six
Aircraft, representing 23.57% of the portfolio by appraised value at January 18,
1999. There is a risk that lessees could exercise these options in the future at
prices below the pro rata portion of the unpaid principal represented by the
Aircraft being purchased. If that occurs, it may reduce the amount, or delay the
timing, of principal payments on the Notes.
IF LESSEES DO NOT DISCHARGE LIENS THAT ATTACH TO THE AIRCRAFT DURING THE TERM OF
THE LEASE, WE MAY BE UNABLE TO REPOSSESS, RE-LEASE OR SELL AIRCRAFT.
Liens may attach to the Aircraft in the course of their operation. These
liens may impair our ability to repossess, re-lease or sell the Aircraft. Liens
which secure the payment of airport taxes, customs duties, air navigation
charges, landing charges, crew wages, repairer's charges or salvage attach to
the Aircraft in the normal course of operation. The amounts which the liens
secure may be substantial and may exceed the value of the Aircraft against which
the lien is asserted. In some jurisdictions, a holder of aircraft liens may have
the right to detain, sell or cause the forfeiture of the aircraft. The lessees
may fail to comply with their obligations under the leases to discharge liens
arising during the terms of the leases.
LESSEES MAY FAIL TO MAINTAIN VALID REGISTRATION OF THE AIRCRAFT -- LOSS OF
AIRCRAFT REGISTRATION COULD HARM OUR ABILITY TO MAKE PAYMENTS ON THE NOTES.
All of the Aircraft which are or will be operated must be registered with
an appropriate aviation authority. If an Aircraft is operated without a valid
registration, the lessee operator or, in some cases, the owner or lessor, may be
subject to penalties which may result in a lien being placed on the Aircraft.
Loss of registration could have other adverse effects, including grounding of
the Aircraft and loss of insurance, which may have an adverse effect on our
ability to make payments on the Notes.
INCREASED REGULATION OF THE AIRCRAFT INDUSTRY MAY IMPAIR OUR ABILITY TO RE-LEASE
OR SELL AIRCRAFT.
The aircraft industry is heavily regulated and aviation authorities may
adopt additional regulations in jurisdictions where our Aircraft are registered
or operated. Any additional regulations especially relating to aircraft noise
and emissions, may cause us to incur significant costs, depress the value of the
Aircraft and impair our ability to re-lease or sell Aircraft.
WE MAY NOT HAVE ENOUGH CASH FLOW TO MAKE PAYMENTS ON THE NOTES IF WE ARE UNABLE
TO RE-LEASE AIRCRAFT QUICKLY OR ON FAVORABLE TERMS.
We may not be able to re-lease the Aircraft upon expiration of the leases
without incurring significant downtime. If we cannot re-lease the Aircraft we
may not have enough cash flow to make payments on the Notes. Even if we can
re-lease the Aircraft we may be unable to receive favorable rental rates,
especially if
7
<PAGE> 10
there is reduced demand for aircraft on operating lease. Our ability to re-lease
Aircraft and obtain acceptable lease payments and terms may suffer because of:
- economic conditions affecting the airline industry,
- the supply of competing aircraft and demand for particular types,
- lessor competition, and
- restrictions on our re-leasing flexibility under the indenture.
The leases for eight of the Aircraft at June 30, 1999, representing
approximately 24.53% of the portfolio by appraised value at January 18, 1999,
are scheduled to expire before March 31, 2000. The leases for four of the
Aircraft at June 30, 1999, representing approximately 15.56% of the portfolio by
appraised value at January 18, 1999, are scheduled to expire in the period from
April 1, 2000 to March 31, 2001. The leases for the remaining 22 aircraft at
June 30, 1999, representing 59.91% of the portfolio by appraised value at
January 18, 1999, are scheduled to expire before March 31, 2008. Re-leasing may
also affect the rental rates we are able to obtain and may adversely affect our
ability to make payments on the Notes, especially if there is less demand for
aircraft on operating lease.
WE MAY INCUR SUBSTANTIAL COSTS IF LESSEES DO NOT PERFORM REQUIRED MAINTENANCE --
THIS WOULD REDUCE THE AMOUNTS AVAILABLE TO MAKE PAYMENTS ON THE NOTES.
The standards of maintenance observed by our lessees and the condition of
the Aircraft at the time of sale or lease may offset future values and rental
rates from our Aircraft. Under the leases, the lessee has the primary
responsibility to maintain the Aircraft and to comply with all applicable
governmental requirements. Some lessees may experience periodic difficulties in
meeting their maintenance obligations resulting from adverse environmental
conditions or financial and labor difficulties. If a lessee fails to perform
required or recommended maintenance on an Aircraft during the term of such
lease, the Aircraft may be grounded and we may incur substantial costs to
restore the Aircraft to an acceptable maintenance condition before sale or
re-lease. If our lessees do not perform their obligation to maintain the
Aircraft, we may have to fund maintenance work on the Aircraft. Because our
maintenance costs are expenses that rank senior to payments on the Notes, we may
be unable to make payments on the Notes if our maintenance costs were to become
sufficiently large. In some cases, we may have an obligation to reimburse the
lessee or pay some or all of the cost of Aircraft maintenance. Our cash
resources may not be sufficient both to fund maintenance requirements and make
payments on the Notes, especially as the Aircraft age.
WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES IF AIRCRAFT INSURANCE IS NOT
ADEQUATE TO COVER ANY LOSSES OR LIABILITIES WE INCUR.
Our lessees have an obligation under the leases to maintain property and
liability insurance covering their operation of the Aircraft. We can give no
assurance that this insurance will be adequate to cover any losses or
liabilities that we may incur in our business. For example, the loss or
liability from an aviation accident or other catastrophic event may exceed the
coverage limits in the policy. Other losses may not be covered by the insurance.
There is also a risk that our lessees will not perform their insurance
obligations under the lease, which may mean that insurance will not be available
to us. In either case, we may be unable to make payments on the Notes if
insurance proceeds do not cover losses or liabilities we may incur.
IF WE CANNOT OBTAIN THE REQUIRED LICENSES, CONSENTS AND APPROVALS TO RE-LEASE OR
SELL AIRCRAFT, WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES.
If we cannot obtain required government licenses, consents and approvals,
we may be unable to re-lease or sell Aircraft. In that case, our cash flows may
be insufficient to make payments on the Notes. Several leases require specific
licenses, consents or approvals. These include licenses, consents or approvals
from governmental or regulatory authorities to certain lease payments and to the
import, re-export or de-registration of the Aircraft. There is a significant
risk that subsequent legal and administrative changes will increase such
8
<PAGE> 11
requirements or that a license, consent or approval, once given, will be
withdrawn. We may be unable to receive licenses, consents or approvals needed in
connection with future re-leasing or sale of an Aircraft.
IF WITHHOLDING TAXES ARE IMPOSED ON LEASE RENTALS, THIS WOULD REDUCE OUR CASH
FLOW AVAILABLE FOR PAYMENTS ON THE NOTES.
We have attempted to structure our leases in such a way that either no
withholding taxes will be applicable to payments by the lessees under the leases
or, if withholding taxes are applicable, the lessees will be required to pay
corresponding additional amounts. If such taxes must be paid and we cannot
recover these additional amounts from the lessee, that amount will be
unavailable for Note payments.
LESSEES IN WEAK FINANCIAL CONDITION MAY FAIL TO MAKE LEASE PAYMENTS -- THIS WILL
REDUCE THE CASH FLOW AVAILABLE TO MAKE PAYMENTS ON THE NOTES.
There is a significant risk that the lessees in weak financial condition
may default on their obligations under the leases. If lessees do not make rent
and maintenance payments or are significantly in arrears, we will be unable to
make payments on the Notes. The ability of each lessee to perform its
obligations under its lease will depend primarily on its financial condition. A
lessee's financial condition may be affected by various factors beyond their
control, including competition, fare levels, passenger demand, operating costs,
the cost and availability of finance, and environmental and other governmental
regulation of the air transportation business. The economic conditions of the
regions where our lessees operate will also affect their ability to meet their
lease obligations. Many of our lessees are based or operate in regions such as
Asia or Latin America that are experiencing severe economic crises. You should
refer to "The Aircraft, Related Leases and Collateral -- The Lessees -- Regional
Concentrations" for a detailed discussion of the regional concentrations of our
lessees and the economic trends of the regions that may impact the lessees'
financial condition.
One lessee of two Aircraft is operating subject to a reorganisation plan
and several of our lessees are in a weak financial position. Investors should
also expect this to be the case with future lessees. As a result, a large
proportion of lessees may consistently be significantly in arrears in their
rental payments or maintenance payments. The environment for commercial aircraft
operators in most geographic regions has been extremely favorable in the past
few years. Therefore, the current level of defaults and lessee arrears should
not be seen as representative of future defaults and arrears as economic
conditions deteriorate. We can give no assurance that defaults and amounts in
arrears will not increase as the market for aircraft on operating lease
experiences further cyclical downturns, particularly in regions such as Asia or
Latin America which are currently experiencing acute economic difficulties. You
should refer to "The Aircraft, Related Leases and Collateral -- The Lessees --
Payment History" for a detailed discussion of the lessees that are having
financial difficulties or are in arrears on their lease obligations.
OUR ABILITY TO RE-LEASE AIRCRAFT AND GENERATE CASH TO MAKE PAYMENTS ON THE NOTES
WILL BE IMPAIRED IF WE CANNOT TERMINATE LEASES AND DE-REGISTER AND REPOSSESS
AIRCRAFT WHEN A LESSEE DEFAULTS.
We have the right to terminate the lease and repossess an Aircraft if there
is an event of default under the relevant lease. However, we may be unable to
terminate the lease or may incur substantial costs if we terminate a lease and
de-register and repossess the Aircraft. If we cannot repossess the Aircraft, it
will not be available for re-lease or sale. In that event, or if we incur
substantial costs in terminating a lease and repossessing an Aircraft, we may be
unable to make payments on the Notes.
Our ability to terminate the lease and repossess an Aircraft may be limited
by the following factors:
- a lessee contesting AerCo group's right to terminate the lease and
repossess the Aircraft;
- our inability to export, deregister and redeploy the Aircraft;
- legal restrictions on our ability to terminate or repossess the
Aircraft; and
- the appointment of a trustee in bankruptcy or similar officer in the
case of a bankrupt or insolvent lessee.
9
<PAGE> 12
Even if we are able to terminate the lease and de-register and repossess
the Aircraft, we may incur substantial costs, including:
- the direct costs associated with the termination of the lease or
de-registration or repossession of an Aircraft, including legal costs;
- the cost of returning the Aircraft to the appropriate jurisdiction;
- the payment of debts and taxes secured by liens on the Aircraft that
were not paid by the lessee;
- the costs of retrieving or recreating Aircraft records that are required
for re-registering the Aircraft;
- costs to obtain a certificate of airworthiness for the Aircraft; and
- swap breakage costs incurred under our agreements with swap providers.
IF OUR ASSUMPTIONS ABOUT CASH FLOW AND OPERATING COSTS DO NOT MATCH ACTUAL
EXPERIENCE, WE MAY BE UNABLE TO MAKE NOTE PAYMENTS ON TIME OR AT ALL.
We have determined the expected final payment dates for the Notes based on
assumptions about our future cash flows and interest and operating costs and
possible future economic conditions. The purpose of these assumptions is to
illustrate the payment provisions of the Notes. Many of these assumptions relate
to future political, economic and market conditions that are outside our control
and are difficult or impossible to predict. Market interest rates are an example
of such an assumption. Other assumptions relate to future events that depend on
the actions of lessees or others with whom we deal. Insurance recoveries and
maintenance payments are examples of such assumptions. For this reason, it is
unlikely that our experience in the future will be consistent with these
assumptions. As a result, we may be unable to make payments on the Notes at the
times and in the amounts that the assumptions indicate.
YOUR RIGHT TO RECEIVE PAYMENTS ON YOUR NOTES RANKS JUNIOR TO OUR EXPENSES,
CERTAIN OTHER PAYMENTS WE MAY MAKE AND ANY MORE SENIOR SUBCLASSES OF NOTES.
Our expenses and certain other payments which we must make rank senior to
the Notes and are payable out of our funds before any payments are made on the
Notes. Depending on the amount of these more senior payments, we may be unable
to make the required payments on the Notes.
Your right to receive payments of interest, principal and any premium on
your Notes will rank junior to payments on more senior subclasses of Notes. If
an event of default occurs, then the holders of a class of Notes may not
exercise remedies under the indenture until all amounts we owe on more senior
classes of Notes and our other more senior obligations have been paid. In that
case, holders of the most senior class of Notes will control the exercise of
these remedies.
THE NOTES HAVE A LIMITED TRADING MARKET -- AS A RESULT, YOU MAY BE UNABLE TO
SELL YOUR NOTES OR THE PRICE OF THE NOTES MAY SUFFER.
The Notes have a limited trading market, which may harm your ability to
sell the Notes or the price at which you sell them. We issued the Notes to a
limited number of institutional investors. The Notes are listed only on the
Luxembourg Stock Exchange. No one has an obligation to make a market in the
Notes. We do not intend to seek approval for quotation through any automated
quotation system. Future trading prices for the Notes will depend upon many
factors, including general economic conditions and our financial condition,
performance and prospects.
10
<PAGE> 13
WE MAY BE UNABLE TO REFINANCE THE SUBCLASS A-1 NOTES IN THE CAPITAL MARKETS --
THIS MAY DELAY THE REPAYMENT OF PRINCIPAL AND LOWER THE MARKET PRICE OF THE
CLASS B AND C NOTES.
The subclass A-1 Notes may reach their expected final payment date before
we have received sufficient cash flows to repay them. In that case, we plan to
refinance the subclass A-1 Notes by issuing refinancing notes. The refinancing
notes will rank equally with the other class A Notes but the interest rate,
principal payment provisions and other terms will be different. Our ability to
refinance the subclass A-1 Notes will depend on many factors outside our
control. These factors include general conditions in the capital markets and the
markets' perception of the commercial aviation industry, the aircraft leasing
business generally or our own company. If we cannot refinance the subclass A-1
Notes on acceptable terms, we may not be able to repay the subclass A-1 Notes by
their expected final payment date. This may also delay repayment of principal on
the class B and class C Notes and may result in lower market prices for the
Notes.
In the future, we may issue additional notes and refinancing notes that may
also require refinancing like the subclass A-1 Notes. These notes would present
the same refinancing risk that we describe above.
IF AERFI BECOMES BANKRUPT OR INSOLVENT, THE AIRCRAFT AND OUR OTHER ASSETS MAY
NOT BE AVAILABLE TO REPAY THE NOTES AND OUR OTHER OBLIGATIONS.
We have taken steps to structure our company, our acquisition of ALPS 94-1
and the acquisition of our other Aircraft owning subsidiaries from AerFi to
ensure that our assets are not consolidated with AerFi's assets or otherwise
become available to AerFi's creditors in any bankruptcy or insolvency proceeding
involving AerFi. ALPS 94-1 took similar steps for the same purpose when it
originally acquired its aircraft from AerFi in 1994 and 1995.
If AerFi becomes bankrupt or insolvent, there is a legal risk that a court
or other authority could decide that these steps were not effective to insulate
our assets from AerFi's assets or that AerFi's transfer of Aircraft or companies
to us was improper or was a charge rather than a true sale. As a result, the
Aircraft and our other assets could become available to repay both AerFi's
creditors and our creditors, including you. We could also lose all of our rights
in the Aircraft and our other assets. In either case, it may be impossible to
repay amounts outstanding under the Notes.
IF PAYMENTS OF PRINCIPAL AND INTEREST ON THE NOTES BECOME SUBJECT TO WITHHOLDING
TAX, WE WILL NOT MAKE ADDITIONAL PAYMENTS TO YOU.
We will not make any additional payments to noteholders for any withholding
or deduction that is required under applicable law on payments on the Notes. If
we are required to make a withholding or deduction, we will use reasonable
efforts to avoid the application of withholding taxes. If we cannot avoid the
withholding taxes, we may redeem the Notes. If withholding taxes are imposed on
the Notes and we do not redeem them, we will reduce the amount of interest that
you will receive by the amount of the withholding taxes. We have received
opinions from our tax advisors that payments on the Notes will not be subject to
Jersey or Irish withholding tax. You should be aware, however, that these
opinions represent only the best judgment of counsel and are not binding on the
applicable taxing authorities or the courts. The opinions depend upon certain
factual assumptions and the existence of different facts could lead to
circumstances not anticipated by counsel.
Ownership of the Notes entails certain risks regarding the application of
the tax laws of Ireland, the United States, Jersey and the jurisdictions in
which the members of AerCo group and the lessees are organized, reside or
operate. You should refer to "Item 7 -- Taxation" for a more detailed discussion
of the possible tax consequences of owning the Notes.
OUR OPERATIONS MAY BECOME SUBJECT TO INCOME TAXES, WHICH WOULD REDUCE THE CASH
FLOW AVAILABLE TO MAKE PAYMENTS ON THE NOTES.
Our operations may be subject to the income tax laws of Ireland, the United
States, Jersey and other jurisdictions. There is also a risk that the Servicer's
future management of the Aircraft may expose members
11
<PAGE> 14
of AerCo group to tax liabilities outside Ireland. If our income is subject to
taxation, the cash flows available to make payments on the Notes may be reduced.
For a more detailed discussion of our potential income tax liabilities you
should refer to "Item 7 -- Taxation".
IF WE LOSE OUR IRISH TAX BENEFITS, THE RATING AGENCIES MAY DOWNGRADE THE NOTES
AND WE MAY BE UNABLE TO MAKE REQUIRED NOTE PAYMENTS.
AerCo, AerCo Ireland Limited and AerCo Ireland II Limited are entitled to
certain corporate tax benefits for Shannon, Ireland certified companies,
including a preferential corporate taxation rate of 10% through December 2005.
The loss of these tax benefits could lead to a downgrade in the then-current
ratings on the Notes and it could also affect our ability to make the required
payments on the Notes.
If AerFi Group were liquidated or were to cease to hold its 5% shareholding
in AerCo, or if AerFi Group were to reduce or relocate its operations for any
reason such that it failed to maintain, among other things, certain employment
levels at Shannon, Ireland, or if AerFi Administrative Services or AerFi Cash
Manager II were to resign or be removed as administrative agent or cash manager,
respectively, of AerCo group, then AerCo, AerCo Ireland Limited, and AerCo
Ireland II Limited may become subject to Irish corporate taxation at general
Irish statutory rates, which is currently 28%. AerFi has agreed to use its best
efforts to maintain the Shannon corporate tax benefits for the benefit of AerCo
group.
You should refer to "Item 7 -- Taxation -- Irish Tax Considerations --
Irish Income and Withholding Taxes on Payments on the Notes" for additional
discussion of these Irish tax benefits.
This Form 20-F also contains forward-looking statements that involve risks
and uncertainties. In most cases, you can identify forward-looking statements by
terminology such as "may", "should", "expects", "plans", "anticipates",
"believes", "estimates", "predicts", "potential" or "continue" or the negative
of such terms or similar terminology. Our actual results could differ materially
from those anticipated in these forward-looking statements. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined above.
THE AIRCRAFT, RELATED LEASES AND COLLATERAL
APPRAISERS' REPORTS
AerCo group obtained appraisals of the Aircraft as of January 18, 1999. On
the basis of these appraisals, the average appraised base value of the 34
Aircraft then owned by AerCo group was approximately $896 million compared with
$938 million at March 1, 1998, the date of the initial base value appraisals.
The appraised value is equal to the average of the opinions of the appraisers as
to the base value of each Aircraft without taking into account the value of the
leases, maintenance reserves or security deposits.
The decrease in the appraisals since March 1, 1998 was approximately $22.6
million more than the expected decrease assumed by the Aircraft depreciation
schedules that form part of the terms of the Notes. The average decline in the
appraised base value of the fleet of 4.5% is based on an effective 11 months
depreciation, from March 1, 1998 to January 18, 1999. The decline of 2.1%
assumed in the prospectus issued by AerCo on April 15, 1999 is calculated on the
basis of a six month period from July 15, 1998, using the assumed depreciation
rate of 4.1% per annum described in that prospectus.
The valuation of our fleet included in the offering memorandum issued by
AerCo on June 23, 1998 was not depreciated for the period between March 1, 1998,
the date of the initial base values and July 15, 1998, the closing date of the
AerCo transaction. This factor accounts for a substantial portion of the
difference between the appraisals as of January 18, 1999 and the value decline
assumption in that offering memorandum. In addition, the appraisals reflected
decreases in the values of Fokker 100s that are greater than we assumed,
primarily as a result of Fokker exiting the industry. We also experienced
greater than assumed decreases with respect to the values of A320-200s and
B737-300/400/500s due primarily to continued price discounting by Boeing and
Airbus and with respect to AerCo's A300B4-200 due to increased over supply of
this aircraft type.
12
<PAGE> 15
The appraisers have provided appraisals of the value of each of the
Aircraft at normal utilization rates in an open, unrestricted and stable market
as of January 18, 1999, adjusted to account for the reported maintenance
standard of the Aircraft. The appraisals were not based on physical inspection
of the Aircraft. The appraisals explain the methodology used to determine the
values for the Aircraft. Based on the appraisals, the aggregate base values
calculated by each of the three appraisers for the Aircraft are $913.3 million
in the case of BK Associates, Inc., $919.5 million in the case of Aircraft
Information Services, Inc. and $855.0 million in the case of Airclaims Limited.
You should not rely on the appraised value as a measure of the realizable value
of any Aircraft. See "Risk Factors -- The appraised value of the Aircraft may be
significantly higher than the actual value we would receive upon a sale of the
Aircraft -- In that case, our ability to make scheduled payments on the Notes
may suffer".
PORTFOLIO INFORMATION
THE AIRCRAFT
All of the Aircraft hold or are capable of holding a noise certificate
issued under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago
Convention or have been shown to comply with the Stage 3 noise levels set out in
Section 36.5 of Appendix C of Part 36 of the United States Federal Aviation
Regulations.
The following table lists the Aircraft by type of aircraft both by
reference to the number of Aircraft at June 30, 1999 and to the percentage of
appraised value at January 18, 1999.
<TABLE>
<CAPTION>
% OF AIRCRAFT BY
NUMBER OF ENGINE APPRAISED
MANUFACTURER TYPE OF AIRCRAFT AIRCRAFT(1) BODY TYPE STAGE VALUE
- ------------ ---------------- ----------- ---------- ------ ----------------
<S> <C> <C> <C> <C> <C>
Boeing (65.47%)................. B737-400 7 Narrowbody 3 19.65%
B757-200 3 Narrowbody 3 13.93
B767-300ER 2 Widebody 3 13.42
B737-300 5 Narrowbody 3 12.68
B747-200B 1 Widebody 3 3.57
B737-500 1 Narrowbody 3 2.21
Airbus (17.53%)................. A320-200 5 Narrowbody 3 16.23
A300-B4-200 1 Widebody 3 1.30
McDonnell Douglas Corporation
(10.51%)...................... MD83 3 Narrowbody 3 7.06
DC8-71F 2 Narrowbody 3 3.45
Fokker N.V. (6.49%)............. F100 4 Narrowbody 3 6.49
-- ------
34 100.00%
== ======
</TABLE>
- ---------------
(1) Subsequent to June 30, 1999, one Fokker 100 Aircraft on lease to Portugalia
was sold.
13
<PAGE> 16
The following table lists the Aircraft by lessee at June 30, 1999 both by
reference to the number of Aircraft and to the percentage of the appraised value
at January 18, 1999.
<TABLE>
<CAPTION>
NUMBER OF % OF AIRCRAFT BY
LESSEE(1) AIRCRAFT(2) APPRAISED VALUE
- --------- ----------- ----------------
<S> <C> <C>
Spanair S.A................................................. 3 11.35%
Airtours International Airways Limited...................... 2 6.68
Linea Aerea Nacional Chile S.A.............................. 1 6.68
Asiana Airlines, Inc........................................ 2 5.92
Turk Hava Yollari A.O....................................... 2 5.73
Transportes Aereos Regionais S.A............................ 3 4.88
Philippine Airlines, Inc.................................... 2 4.78
Air 2000 Limited............................................ 1 4.71
China Southwest Airlines.................................... 1 4.65
Aerovias Nacionales de Colombia S.A. Avianca................ 1 4.58
Tower Air, Inc.............................................. 1 3.57
Monarch Airlines Limited.................................... 1 3.45
Canadian Airlines International Limited..................... 1 3.33
Aer Lingus Limited.......................................... 1 2.80
Air Europe SpA.............................................. 1 2.77
China Aviation Supplies Corporation and Civil Aviation
Administration of China -- Yunnan Administration.......... 1 2.69
Pegasus Hava Tasimaciligi A.S............................... 1 2.62
Malev RT.................................................... 1 2.61
Gunes Ekspres Havacilik A.S................................. 1 2.60
British Midland Airways Limited............................. 1 2.58
Far Eastern Transport Corporation........................... 1 2.45
Air Pacific Limited......................................... 1 2.21
Aircraft International Leasing Limited...................... 1 1.77
BAX Global, Inc............................................. 1 1.68
Portugalia-Companhia Portuguesa de Transportes Aereos,
S.A....................................................... 1 1.62
Indian Airlines Limited..................................... 1 1.30
--- ------
34 100.00%
=== ======
</TABLE>
- ---------------
(1) Total number of lessees = 26
(2) Subsequent to June 30, 1999, one Fokker 100 Aircraft on lease to Portugalia,
a Portugese lessee, was sold.
14
<PAGE> 17
The following table lists the Aircraft by country at June 30, 1999
according to the number of Aircraft and to the percentage of the appraised value
at January 18, 1999.
<TABLE>
<CAPTION>
NUMBER OF % OF AIRCRAFT BY
COUNTRY(1) AIRCRAFT(2) APPRAISED VALUE
- ---------- ----------- ----------------
<S> <C> <C>
United Kingdom.............................................. 5 17.43%
Spain....................................................... 3 11.35
Turkey...................................................... 4 10.96
Chile....................................................... 2 8.45
China....................................................... 2 7.34
South Korea................................................. 2 5.92
United States............................................... 2 5.25
Brazil...................................................... 3 4.88
Philippines................................................. 2 4.78
Colombia.................................................... 1 4.58
Canada...................................................... 1 3.33
Ireland..................................................... 1 2.80
Italy....................................................... 1 2.77
Hungary..................................................... 1 2.61
Taiwan...................................................... 1 2.45
Fiji........................................................ 1 2.21
Portugal.................................................... 1 1.62
India....................................................... 1 1.30
--- ------
34 100.00%
=== ======
</TABLE>
- ---------------
(1) Total number of countries = 18
(2) Subsequent to June 30, 1999, one Fokker 100 Aircraft on lease to Portugalia,
a Portugese lessee, was sold.
The following table lists the Aircraft by region at June 30, 1999 according
to the number of Aircraft and to the percentage of the appraised value at
January 18, 1999.
<TABLE>
<CAPTION>
NUMBER OF % OF AIRCRAFT BY
REGION AIRCRAFT(1) APPRAISED VALUE
- ------ ----------- ----------------
<S> <C> <C>
Developed Markets
Europe.................................................... 11 35.96%
North America............................................. 3 8.57
Emerging
Asia...................................................... 8 21.79
Latin America............................................. 6 17.90
Europe and the Middle East................................ 5 13.56
Others...................................................... 1 2.21
--- ------
34 100.00%
=== ======
</TABLE>
- ---------------
(1) Subsequent to June 30, 1999, one Fokker 100 Aircraft on lease to Portugalia,
a Portugese lessee, was sold.
15
<PAGE> 18
The following table lists the Aircraft by year of aircraft manufacture or
conversion to freighter at June 30, 1999 calculated by reference to the number
of Aircraft and to the percentage of the appraised value at January 18, 1999.
<TABLE>
<CAPTION>
NUMBER OF % OF AIRCRAFT BY
YEAR OF MANUFACTURE AIRCRAFT(1) APPRAISED VALUE
- ------------------- ----------- ----------------
<S> <C> <C>
1981........................................................ 1 3.57%
1983........................................................ 1 1.30
1988........................................................ 1 2.58
1989........................................................ 4 9.54
1990........................................................ 3 8.04
1991........................................................ 10 30.45
1992........................................................ 11 33.04
1993........................................................ 3 11.48
--- ------
34 100.00%
=== ======
</TABLE>
(1) Subsequent to June 30, 1999, one Fokker 100 Aircraft on lease to Portugalia
was sold.
The following table lists the exposure of the Aircraft by seat category at
June 30, 1999 calculated by reference to the number of Aircraft and to the
percentage of the appraised value at January 18, 1999.
<TABLE>
<CAPTION>
NUMBER OF % OF AIRCRAFT BY
SEAT CATEGORY AIRCRAFT TYPE AIRCRAFT(1) APPRAISED VALUE
- ------------- ------------- ----------- ----------------
<C> <S> <C> <C>
91-120....... B737-500, F-100 5 8.70%
121-170...... A320-200, B737-300, B737-400, MD83 20 55.62
171-240...... B757-200 3 13.93
241-350...... A300-B4-200, B767-300ER 3 14.72
351 and B747-200B
above...... 1 3.57
Freighter.... DC8-71F 2 3.45
--- ------
34 100.00%
=== ======
</TABLE>
(1) Subsequent to June 30, 1999, one Fokker 100 Aircraft on lease to Portugalia
was sold.
16
<PAGE> 19
AERCO GROUP PORTFOLIO ANALYSIS
Further particulars of AerCo group's portfolio as of June 30, 1999 (except
for appraised values which are as of January 18, 1999) are contained in the
table below.
<TABLE>
<CAPTION>
APPRAISED
DATE OF VALUE AT
AIRCRAFT ENGINE SERIAL MANUFACTURE/ JANUARY 18,
REGION COUNTRY LESSEE TYPE CONFIGURATION NUMBER CONVERSION 1999
- ------ -------------- ---------------------- ----------- ------------- ------ ------------ -------------
(U.S.$'000'S)
<S> <C> <C> <C> <C> <C> <C> <C>
Asia................. China China Southwest B757-200 RB211-535E4 26153 Aug-92 41,633
(Emerging) China Yunnan B737-300 CFM56-3C1 26068 Jun-92 24,099
India Indian Airlines A300-B4-200 CF6-50C2 240 May-83 11,648
Philippines PAL B737-300 CFM56-3B1 24465 Aug-89 20,736
Philippines PAL B737-300 CFM56-3B1 24677 Mar-90 22,103
South Korea Asiana Airlines B737-400 CFM56-3C1 25764 Jul-92 26,720
South Korea Asiana Airlines B737-400 CFM56-3C1 25765 Jul-92 26,285
Taiwan FEAT MD83 JT8D-219 49952 Dec-91 21,983
Europe............... Ireland Aer Lingus B737-400 CFM56-3C1 24685 May-90 25,091
(Developed) Italy Air Europe A320-200 CFM56-5A1 85 Feb-90 24,800
Portugal Portugalia(2) F100 TAY650-15 11342 Aug-91 14,496
Spain Spanair B767-300ER PW4060 24999 Feb-91 60,437
Spain Spanair MD83 JT8D-219 49627 Apr-89 20,493
Spain Spanair MD83 JT8D-219 49790 Oct-89 20,780
United Kingdom Air 2000 B757-200 RB211-535E4 26158 Feb-93 42,170
United Kingdom Airtours A320-200 CFM56-5A3 299 Apr-92 29,537
United Kingdom Airtours A320-200 V2500-A1 362 Nov-92 30,347
United Kingdom British Midland B737-400 CFM56-3C1 23868 Oct-88 23,132
United Kingdom Monarch A320-200 CFM56-5A3 391 Feb-93 30,937
Europe............... Hungary Malev B737-300 CFM56-3C1 24909 Apr-91 23,366
(Emerging) Turkey Pegasus B737-400 CFM56-3C1 23979 Jan-89 23,466
Turkey Sun Express B737-300 CFM56-3C1 24908 Mar-91 23,308
Turkey THY B737-400 CFM56-3C1 24904 Feb-91 24,912
Turkey THY B737-400 CFM56-3C1 26066 Jun-92 26,467
Latin America........ Brazil TAM F100 TAY650-15 11341 Aug-91 14,160
(Emerging) Brazil TAM F100 TAY650-15 11350 Apr-92 15,096
Brazil TAM F100 TAY650-15 11351 Sep-91 14,431
Chile Lan Chile B767-300ER PW4060 24947 Mar-91 59,841
Chile Aircraft International DC8-71F CFM56-2C1 46040 Mar-91 15,858
Leasing Limited(1)
Columbia Avianca B757-200 RB211-535E4 26152 Aug-92 41,012
North America........ Canada Canadian A320-200 CFM56-5A1 403 Dec-93 29,791
(Developed) United States BAX Global DC8-71F CFM56-2C1 46064 Mar-92 15,040
United States Tower Air B747-200B JT9D-7Q 22496 Oct-81 31,996
Other................ Fiji Air Pacific B737-500 CFM56-3C1 26067 Jun-92 19,785
-------
895,956
=======
</TABLE>
- ---------------
(1) Aircraft International Leasing Limited is an indirect 100% subsidiary of Lan
Chile.
(2) The Fokker 100 Aircraft on lease to Portugalia was sold subsequent to June
30, 1999.
ACQUISITION OF ADDITIONAL AIRCRAFT
AerCo group may acquire additional commercial passenger or freight aircraft
from various sellers, including AerFi. Cash flows from any additional aircraft
and any additional leases will be available to satisfy AerCo's payment
obligations, on the Notes and any additional notes. Any acquisition of
additional aircraft and issuance of additional notes will be subject to certain
conditions under the indenture.
17
<PAGE> 20
THE LEASES
GENERAL
All leases are managed by Babcock & Brown under the servicing agreement.
The following description relates only to AerCo group's existing leases.
Any additional leases acquired in connection with the acquisition of additional
aircraft and any future leases entered into in connection with the re-lease of
any Aircraft may differ from the description of the leases set forth below.
However, any additional leases or future leases must comply with the operating
covenants contained in the indenture.
The leases are all operating leases under which AerCo generally will retain
the benefit, and bear the risk, of the residual value of the Aircraft at the end
of the lease. The lessees have agreed to lease the Aircraft for a fixed term.
However, AerCo has granted purchase, extension or early termination options on
certain Aircraft to the lessee or an affiliate of the lessee. Although the lease
documentation is fairly standardized in many respects, significant variations do
exist as a result of lessee negotiation.
LEASE PAYMENTS AND SECURITY
Each lease requires the lessee to pay periodic rentals during the lease
term. Certain of the leases require the lessee to pay periodic amounts as
maintenance reserves or to provide maintenance letters of credit or guarantees.
The lessees must make payments to the lessor without set-off or
counterclaim, and must gross-up payments under the lease where payments are
subject to certain withholding and other taxes. However, in certain cases, such
amount will be limited to the amount that would have been payable if the lease
had never been transferred from AerFi to AerCo. The leases also contain
indemnification of the lessor for certain taxation liabilities and, in all but
one case, taxation of indemnity payments. Indemnification for taxation
liabilities typically includes value added and stamp duty taxes, but excludes
income taxes or their equivalent. The lessees must also pay default interest on
any overdue amounts.
The lessees are liable through various operational indemnities for
operating expenses accrued or payable during the term of the lease. These
expenses include maintenance, operating, overhaul, airport and navigation
charges, certain taxes, licenses, consents and approvals, aircraft registration
and hull all risks and public liability insurance premiums. The lessees must
remove liens on the Aircraft other than liens permitted under the leases.
Under all of the leases, the lessee provided security deposits for its
obligations. At June 30, 1999 the lessees have provided cash security deposits
in the case of 16 leases representing 49.85% of the leases by appraised value at
January 18, 1999. The lessees have provided letters of credit in the case of
eleven leases representing 27.47% of the leases by appraised value at January
18, 1999. The lessees have provided a combination of cash security deposits and
letters of credit in the case of the remaining seven leases or 22.68% of the
leases by appraised value at January 18, 1999.
Under ten of the leases, the lessor received general guarantees from third
parties for the lessee's payment obligations under the lease. In some cases, the
lessor also received guarantees of the lessee's performance obligations under
the lease. In the case of seven of the leases, these guarantees were issued by
the lessee's shareholder or affiliate. In the case of the leases to China
Southwest and Yunnan, a guarantee for each lessee's payment obligations was
issued by the Bank of China. In each case, the guarantee was subject to a
stipulated maximum amount. In the case of one lease, letters of comfort were
issued to the lessor by two of the lessee's shareholders.
RENTALS
Rentals under 32 of the leases at June 30, 1999 -- 92.66% of the leases by
appraised value at January 18, 1999 -- are payable monthly in advance. Rentals
under the remaining two leases are payable quarterly in advance.
18
<PAGE> 21
Rental payments on the leases are calculated either on a fixed or floating
rate basis. The rental payment of a lease, which is calculated on a floating
rate basis generally has a rental floor that is payable even if LIBOR is 0% per
annum plus an amount which varies with LIBOR or varies itself. The rental floor
varies from lease to lease.
OPERATION OF THE AIRCRAFT
The lessees must operate the Aircraft in compliance with all applicable
laws and regulations. The Aircraft generally must remain in the possession of
the lessees, and the lessor must approve any subleases of the Aircraft. The
lessees may enter into charter or "wet lease" arrangements with the Aircraft
under most of the leases, as long as lessees do not relinquish possession or
operational control of the Aircraft. A wet lease is a lease with crew and
services provided by the lessee. Under certain leases, the lessees may enter
into subleases to specified operators without the lessor's consent, if certain
conditions are met. Four of the lessees currently sublease their Aircraft: BAX
Global to Air Transport International, Aer Lingus to Futura, China Southwest to
China Xinjiang Airlines and AILL to Fast Air.
The lessees may subject the engines and other equipment or components to
removal or replacement and to pooling arrangements with permitted entities
without the lessor's consent but subject to conditions and criteria in the
relevant lease. The lessees may deliver possession of the Aircraft, engines and
other equipment or components to the manufacturer for testing or similar
purposes, or to a third party for service, maintenance, repair or other work
required or permitted under the lease.
MAINTENANCE AND MAINTENANCE RESERVES
The leases contain detailed provisions specifying maintenance standards and
aircraft redelivery conditions. Lessees must provide monthly maintenance
reserves under approximately half of the leases. Under the balance of the
leases, the lessee or the lessor may be required to make certain adjustment
payments to each other if the Aircraft or specified items at redelivery do not
meet the standards. During the term of each lease, the lessee must ensure that
the Aircraft is maintained in accordance with an agreed maintenance program
designed to ensure that the Aircraft meets applicable airworthiness and other
regulatory requirements. Generally, the lessee performs the agreed maintenance
program. If the lessee has paid maintenance reserves, the payments are used to
reimburse the lessee for significant maintenance charges, including major
airframe and engine overhauls.
If the leases do not provide for maintenance reserves payments, the lessor
must rely on the lessee's credit and its ability to perform scheduled
maintenance throughout the lease term, return the Aircraft in the condition
required by the lease, or make any payments required upon termination of the
lease.
Because many of our Aircraft are roughly the same age and have similar
usage patterns, a large portion of the portfolio will come due for major
airframe and engine overhauls during 2000 and 2001. Depending on the level of
AerCo's maintenance receipts, the timing of the overhauls and the amount of
maintenance already done by the lessee, completing these overhauls could result
in significant cash outflows during the next two years.
LESSEES' OPTIONS
At June 30, 1999 purchase options for six of the Aircraft representing
23.57% of the Aircraft by appraised value have been granted to lessees under the
lease or a separate purchase option agreement.
All of the purchase options are currently exercisable. The duration of some
purchase options depends on whether the lessee exercises a separate option to
extend the lease. There are no purchase options which are exercisable at prices
below the assumed note target prices.
Five of the leases -- 12.12% of the leases by appraised value at January
18, 1999 -- include options for the lessee to extend the lease term. The rent
payable during the extension period varies from lease to lease. Three of the
leases or 7.69% of the leases by appraised value at January 18, 1999, contain
provisions allowing early termination of the lease by the lessee.
19
<PAGE> 22
COMPLIANCE WITH GOVERNMENTAL AND TECHNICAL REGULATION.
In addition to general requirements regarding maintenance of Aircraft,
aviation authorities issue airworthiness directives ("ADs") requiring the
operators of aircraft to take particular maintenance actions or make particular
modifications to a number of aircraft of designated types. ADs normally specify
a period in which to carry out the required action or modification and generally
enough time is allowed to permit the implementation of the AD in connection with
scheduled maintenance of the aircraft or engines. The lessees usually bear the
cost of compliance with ADs issued by applicable aviation authorities and,
relevant manufacturers' recommendations. AerCo group may be required to
contribute a portion of such costs over a specified threshold. However, if a
lessee fails to perform ADs required on an Aircraft, AerCo group would bear the
cost of compliance necessary for the Aircraft to maintain its certificate of
airworthiness. In such circumstances, funds in the collection account and lessee
funded account will be available to mitigate the costs of compliance, although
such use would reduce the availability of such amounts to cover the cost of
scheduled maintenance. There can be no assurance that such funds will be
available at the time needed or that any funds available will be sufficient for
such purposes.
Other governmental regulations may apply to the Aircraft, including
requirements relating to noise and emissions levels. Such regulations may be
imposed not only by the jurisdictions in which the Aircraft are registered, but
also in jurisdictions where the Aircraft operate. Chapters 2 and 3 of Chicago
Convention establish two progressively restrictive noise level standards that
correspond to the requirements for Stage 2 and Stage 3 aircraft. A number of
jurisdictions have adopted, or are in the process of adopting, noise regulations
which will require all aircraft to comply with the most restrictive of these
standards. Such regulations restrict the future operation of aircraft that are
not Stage 3 aircraft and will prohibit the operation of such aircraft in the
relevant jurisdictions early in the next century -- 1999 in the case of the
United States. Since AerCo group has the ability to acquire Stage 2 aircraft,
these regulations may affect AerCo adversely. In addition, local municipalities
may have more stringent noise regulations than those applicable to Stage 3
aircraft.
Volume 2 of Annex 16 of the Chicago Convention also contains standards and
recommendations regarding limitations on vented fuel and smoke and gaseous
emissions for aircraft. While a number of countries have adopted regulations
implementing these recommendations, such regulations generally have been
prospective in nature, requiring only that newly manufactured engines meet
particular standards after a particular date. To the extent that these
regulations require modifications to the engines owned by AerCo group, they
would be treated similar to ADs under the leases.
Aviation authorities in Europe and North America have recently adopted
regulations requiring the installation of traffic collision avoidance systems,
automatic emergency locator transmitters and certain other systems. Depending on
whether the costs of complying with these regulations are borne by AerCo or the
lessees, installation of these systems could result in significant cash capital
expenditures by AerCo in 2000 and 2001.
The U.S. Federal Aviation Administration (the "FAA") has indicated that it
will develop shortly 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, AerCo could incur significant costs in ensuring
the Aircraft comply with these standards which could impact adversely on AerCo
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.
20
<PAGE> 23
INDEMNIFICATION AND INSURANCE OF THE AIRCRAFT
GENERAL
The lessees bear responsibility through an operational indemnity and carry
insurance for any liabilities arising out of the operation of the Aircraft. The
indemnity includes liabilities for death or injury to persons and damage to
property that ordinarily would attach to the operator of the Aircraft. In
addition, the lessees are required to carry additional insurance that is
customary in the air transportation industry. Babcock & Brown monitors the
lessee's compliance with the insurance provisions of the leases. AerCo also has
its own contingent liability coverage. This will cover a liability that is in
excess of the coverage provided by a lessee's policy and where a lessee's policy
lapses. AerCo's contingent third party liability insurance will cover all of the
Aircraft and its contingent hull and hull war risks insurance covers certain of
the Aircraft. The amount of the contingent liability policies may not be the
same as required under the lease. The amount of third party contingent liability
insurance is subject to certain limitations imposed by the air transportation
insurance industry.
If any of the existing insurance policies are canceled or terminated and in
the case of the re-lease of an Aircraft, AerCo or Babcock & Brown may engage
insurance experts to advise and recommend the appropriate amount of insurance
coverage AerCo should procure.
All insurance certificates contain a breach of warranty endorsement so that
the additional insured parties remain protected even if the lessee violates any
of the terms, conditions or warranties of the insurance policies, provided that
the additional insured party has not caused, contributed to or knowingly
condoned the breach.
LIABILITY INSURANCE
The lessees are required to have third party liability insurance for a
combined single limit in minimum amounts ranging between $350 million and $850
million for each Aircraft. In general, liability coverage on each Aircraft
includes third party legal liability, property damage legal liability, passenger
legal liability, baggage legal liability, cargo legal liability, mail and
aviation general third party legal liability.
In some jurisdictions, liabilities for risks that the lessees insure may
attach to AerCo group as owner of the Aircraft regardless of whether AerCo is in
any way responsible for the loss for which liability is asserted. In addition,
claimants may assert claims against AerCo group on the basis of alleged
responsibility for a loss, even if the claim is not sustained. Under the leases,
the lessees are obligated to indemnify the lessor against claims. Covered claims
include the costs of defending against claims by third parties against them for
liabilities while the Aircraft are owned by AerCo group and under lease to the
lessees.
The indemnified losses include both operating costs relating to the actual
operation of the Aircraft as well as losses to persons and property resulting
from the operation of the Aircraft. The latter types of losses are generally
covered by the lessee's liability insurances.
AIRCRAFT PROPERTY INSURANCE
The lessees must carry other types of insurance that are customary in the
air transportation industry, including all risks aircraft hull and hull war
risks insurance and aircraft spares insurance. The value of the Aircraft hull
and hull war risk insurance is usually stipulated in the lease. Aircraft spares
insurance is usually on a replacement cost basis. Both types of insurance are
subject to customary deductibles. In addition to the stipulated lease value
coverage obtained by the lessees, AerCo group purchases declining "total loss
only" coverage with respect to certain Aircraft. As of June 30, 1999, the sum of
the stipulated loss value and the additional coverage for the Aircraft in place
for all risks aircraft hull and hull war risks insurances was at least 107% of
the appraised value of each Aircraft. On average, the sum of such coverages in
place for each Aircraft was approximately 129% of the appraised value of each
Aircraft. In many cases, the lessor can increase the insured value above the
stipulated lease value consistent with industry practice with the lessee paying
any increased premium. Permitted deductibles range from $250,000 to $1,000,000;
however, the deductible generally applies only in the case of a partial loss. In
the case of a total loss of an Aircraft no deductible would be applied against
the insurance proceeds received.
21
<PAGE> 24
The leases include provisions defining an event of loss or a casualty
occurrence so that where a total loss of the airframe occurs, with or without
loss of the engines installed on the airframe, the agreed value is payable by
the lessee. This payment is generally funded with insurance proceeds. However,
the air transportation insurance industry practice is to treat only a loss of
greater than 75% of the value of the aircraft, including the engines, as a total
loss. Where insurance proceeds do cover a total loss, most leases require the
lessor to pay to the lessee the balance of the insurance proceeds received under
the hull all risks or war risks policy after deduction of all amounts payable by
the lessee to the lessor under the lease.
POLITICAL RISK REPOSSESSION INSURANCE
The lessor may arrange separate political risk repossession insurance for
its own benefit, covering confiscation, nationalization and requisition of title
of any Aircraft by the government of the country of registry and denegation and
deprivation of legal title and rights. The political risk repossession insurance
also covers the failure of the authorities in that country to allow
de-registration and export of the Aircraft, subject to the conditions of the
policies. At June 30, 1999, only 9.29% of the leases by appraised value of the
aircraft concerned at January 18, 1999 require the lessee to reimburse the
lessor for any political risk repossession insurance premiums.
THE LESSEES
As of June 30, 1999, AerCo group leased the Aircraft to 26 lessees in 18
countries.
REGIONAL CONCENTRATIONS
Asia Pacific Concentration. At June 30, 1999, 21.79% of the Aircraft by
appraised value at January 18, 1999 were leased by operators in "emerging"
markets in the Asia Pacific region, including China, the Philippines, South
Korea, Taiwan and India. One lessee, Asiana, leased 5.92% of the Aircraft by
appraised value at January 18, 1999.
Trading conditions in Asia's civil aviation industry have been adversely
affected by the severe economic and financial difficulties experienced recently
in the region. The economies of the region 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), downgrading of sovereign and corporate credit ratings and
internationally organized financial stability measures. PAL a lessee of 4.78% of
the Aircraft by appraised value at January 18, 1999, filed for bankruptcy
protection approximately one year ago. Several airlines in the region, including
one lessee, recently announced their intention to reschedule their aircraft
purchase obligations, reduce headcount and eliminate certain routes. This
downturn in the region's economies may undermine business confidence, reduce
demand for air travel and adversely affect the Asian lessees' operations and
their ability to meet their obligations.
Latin American Concentration. At June 30, 1999, 17.90% of the Aircraft by
appraised value at January 18, 1999 were leased by operators in "emerging
markets" in Latin America, principally Brazil, Chile and Colombia. The financial
prospects for lessees in Latin America can be expected to be in part dependent
on the general level of political stability and economic activity and policies
in the region. Future developments in the political systems or economies of this
region or the implementation of future governmental policies in the region may
have a material effect on lessee operations in the region. Developments in other
"emerging markets" may also affect the economies of Latin American countries and
the entire region.
Most significantly, 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. One of the lessees operates three of the Aircraft in
Brazil representing 4.88% of the Aircraft by appraised value at January 18,
1999. Continued weakness in the value of the Brazilian real, as well as general
deterioration in the Brazilian economy, will mean that this lessee 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 American economies and economies in other emerging markets.
22
<PAGE> 25
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. One of the lessees which operates one of the Aircraft representing
4.58% of the Aircraft by appraised value at January 18, 1999 is a Colombian
airline. Continued weakness in the value of the Colombian Peso, as well as
general deterioration in the Colombian economy, will mean that this lessee may
be unable to generate sufficient revenues in Colombian currency to pay the
dollar denominated rental payments under the lease.
Similarly, the Chilean economy has recently suffered adverse effects as a
result of the continuing economic difficulties in Asia and lower market prices
for certain of Chile's exported commodities, especially copper, woodpulp and
fishmeal. In the past, Asia has accounted for a significant portion of Chile's
exports. Copper is Chile's principal export product. Copper prices have declined
dramatically over the past eighteen months, primarily as a result of Asia's
economic difficulties as discussed above. Such economic developments, especially
if they continue or worsen, could lead to lower levels of economic activity in
Chile which could, in turn, adversely affect the operations of AerCo group's
Chilean lessee. One lessee, Lan Chile, leased 6.68% of the Aircraft by appraised
value at January 18, 1999.
European Concentration. At June 30, 1999, 49.52% of the Aircraft by
appraised value at January 18, 1999 were leased by operators based in Europe. Of
this amount, lessees of 35.96% of the Aircraft are based in "developed" European
markets, principally the United Kingdom and Spain. Lessees of the remaining
13.56% of the Aircraft were based in "emerging" European markets, principally
Turkey and Hungary. One lessee, Spanair, leased 11.35% of the Aircraft by
appraised value at January 18, 1999. As of June 30, 1999, 46.73% of the Aircraft
by appraised value at January 18, 1999 were leased to charter operators in the
tourism industry including 17.43% in the United Kingdom.
The commercial aviation industry in Europe, as in the rest of the world
generally, is highly sensitive to general economic conditions. Because a
substantial portion of airline travel (business and especially leisure) is
discretionary, the industry has tended to suffer severe financial difficulties
during economic downturns. Accordingly, the financial prospects for European
lessees can be expected to depend largely on the level of economic activity in
Europe generally and in the specific countries in which such lessees operate. A
recession or other worsening of economic conditions in any European country may
adversely affect the European lessees' ability to meet their financial and other
obligations under the leases. For example, the Russian economy has recently
experienced severe difficulties, including significant devaluation of the rouble
against the dollar. The downturn in Russia's economy may undermine business
confidence and reduce demand for air travel in other emerging market countries.
In addition, commercial airlines in Europe face, and can be expected to continue
to face, increased competitive pressures from continuing deregulation of the
airline industry by the EU. There can be no assurances that competitive
pressures resulting from such deregulation will not have a material adverse
impact on the operations of such lessees.
North American Concentration. At June 30, 1999, 8.57% of the Aircraft by
appraised value at January 18, 1999 were leased by operators in North America.
As in Europe, the commercial aviation industry in North America is highly
sensitive to general economic conditions. Since a substantial portion of airline
travel is largely discretionary, the industry has suffered severe financial
difficulties during economic downturns. Over the last several years, nearly half
of the major North American passenger airlines have filed Chapter 11 bankruptcy
proceedings and several major U.S. airlines have ceased operations.
PAYMENT HISTORY
Weakly capitalized airlines are more likely than well capitalized airlines
to seek operating leases. Therefore, many of the lessees are in a relatively
weak financial position and several of them have faced and continue to face
severe economic difficulties.
As of June 30, 1999, amounts outstanding for more than 30 days for rental
payments, maintenance reserves and other amounts due under the leases equaled
$5.6 million for 5 lessees who had a total of 6 Aircraft on lease. Amounts
outstanding for between 30 to 90 days equaled $2.6 million and amounts
outstanding for more than 90 days equaled $3 million. The outstanding amounts
are net of agreed deferrals or other restructurings, default interest and cash
in transit.
23
<PAGE> 26
As of June 30, 1999, a Latin American lessee representing 4.58% of the
portfolio by appraised value owed $1.4 million, with $0.8 million in arrears for
between 30 to 90 days and $0.2 million in arrears for more than 90 days. Babcock
& Brown is in discussions with the lessee regarding the payment of this amount
and future lease rentals.
PAL, the lessee of two B737-300 Aircraft representing 4.78% of the
portfolio by appraised value at January 18, 1999, has been adversely affected by
the ongoing Asian economic crisis. On June 19, 1998, PAL filed a petition for
approval of a rehabilitation plan with 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 thirty days. Following a
number of applications for extension of this time limit, PAL filed a
rehabilitation plan with the Philippine SEC on December 7, 1998. A revised plan
was filed on March 15, 1999. It is unclear whether PAL will receive support for
its proposed Rehabilitation Plan from its creditors. At June 30, 1999, $2.9
million was outstanding from PAL, with $0.3 million in arrears for between 30 to
90 days and $2.3 million in arrears for more than 90 days. Babcock & Brown is in
negotiations with PAL regarding repayment of its arrearages. There can be no
assurance, however, that PAL will ultimately repay its arrearages or be able to
pay future lease rentals. AerCo group may encounter delays or difficulties in
recovering possession of the Aircraft, which are currently operated within the
Philippines, or terminating such leases. If the Aircraft are recovered, the
technical costs required to ensure the Aircraft are in suitable condition for
re-leasing may be significant.
As of June 30, 1999, another Asian lessee representing 4.65% of the
portfolio by appraised value at January 18, 1999 owed $1.2 million in rent which
was outstanding for between 30 to 90 days.
As of June 30, 1999, a North American lessee, representing 3.57% of the
portfolio by appraised value at January 18, 1999, owed $0.90 million, with $0.3
million in arrears for between 30 to 90 days and $0.5 million in arrears for
more than 90 days. Babcock & Brown is in discussions with the lessee regarding
the payment of this amount and future lease rentals.
As ALPS 94-1 has done in the past, AerCo expects to respond to the needs of
lessees in financial difficulty including, restructuring the applicable leases
or agreeing lease payment deferrals. The restructurings will typically involve
the rescheduling of rental payments for a specified period. In addition, certain
restructurings may involve the voluntary early termination of a lease, the
replacement of Aircraft with less expensive Aircraft and the arrangement of
sub-leases from the lessee to another aircraft operator. In certain cases, it
may be necessary to repossess Aircraft from defaulting lessees and re-lease the
Aircraft to other lessees. The early termination of leases may lead AerCo to
incur swap breakage costs under its agreements with swap providers which could
be substantial. You should refer to "Item 9A -- Quantitative and Qualitative
Disclosures about Market Risk" for additional information on swap breakage
costs.
In addition, certain lessees have experienced periodic difficulties in
meeting their maintenance obligations under the related leases. Such
difficulties have arisen from, inter alia, the failure of the applicable lessee
to have in place a sufficiently well established maintenance program, adverse
climate and other environmental conditions in the locations where such related
Aircraft are operated or financial and labor difficulties experienced by the
relevant lessee. A continuous failure by a lessee to meet its maintenance
obligations under the relevant lease: (a) could result in a grounding of the
Aircraft; (b) in the event of a re-lease of such Aircraft would likely cause
AerCo group to incur costs, which may be substantial, in restoring such Aircraft
to an acceptable condition; and (c) would be likely adversely to affect the
value of the Aircraft.
DOWNTIME
As of June 30, 1999, none of the Aircraft was off-lease. There can be no
assurance that ALPS 94-1 and AerFi's experience will be indicative of AerCo
group's and Babcock & Brown's ability to keep the Aircraft and any additional
aircraft on-lease in the future. AerCo group and Babcock & Brown may be unable
to re-lease Aircraft upon the expiration of leases as a result of a
deterioration in industry conditions, decreased demand for specific types of
aircraft or other factors.
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<PAGE> 27
The table below lists the leases that are scheduled to expire through 2004,
and also shows the number and type of Aircraft that we must re-lease through
June 30, 2004. The table assumes that no lease will terminate early and that
there are no sales of Aircraft or purchases of additional aircraft. More
Aircraft may need to be re-leased if Aircraft become available through early
lease terminations.
AERCO GROUP LEASE PLACEMENT REQUIREMENT AT JUNE 30, 1999
<TABLE>
<CAPTION>
TO JUNE 30,
--------------------------------
AIRCRAFT TYPE 2000 2001 2002 2003 2004
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
A300........................................................ -- 1 -- -- --
A320........................................................ 2 -- -- 2 1
B737........................................................ 6 4 1 -- 2
B747........................................................ -- -- -- -- 1
B757........................................................ -- -- -- 2 --
B767........................................................ 1 1 -- -- --
DC8......................................................... -- -- -- 1 1
F100........................................................ -- -- -- -- --
MD83........................................................ -- -- 1 -- 2
</TABLE>
DESCRIPTION OF THE LESSEES
The table below lists certain available information on the country of
domicile, government, airline or principal shareholders, fleet size and
composition and the first year of operation of each lessee. You should refer to
"-- Portfolio Information" above for additional tables detailing at June 30,
1999 the exposure of the portfolio as a percentage of appraised value at January
18, 1999 to each lessee and the countries and geographic regions in which the
lessees are domiciled.
<TABLE>
<CAPTION>
BEGAN GOVERNMENT/COMMERCIAL
LESSEE DOMICILE OPERATION AIRLINE/PRINCIPAL SHAREHOLDERS FLEET(1)
- ------ -------- --------- ----------------------------------------- -------------------
<S> <C> <C> <C> <C>
Aer Lingus....... Republic of Ireland 1936 Government of Ireland (100%) 6 B737-400
7 B737-500
5 A330-300
5 A321-200
1 A330-200
1 MD11
Airtours......... United Kingdom 1990 Airtours Plc (100%) 10 A320-200
2 A321-200
2 A330-200
1 A330-300
6 B757-200
3 B767-300ER
1 B737-800
1 DC10-30
Air 2000......... United Kingdom 1986 First Choice Holidays Plc (100%) 4 A320-200
13 B757-200
3 B767-300ER
5 A321-200
Air Europe....... Italy 1989 Airline Management (50.1%) 7 B767-300ER
SAir Group (49.9%) 1 A320-200
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
BEGAN GOVERNMENT/COMMERCIAL
LESSEE DOMICILE OPERATION AIRLINE/PRINCIPAL SHAREHOLDERS FLEET(1)
- ------ -------- --------- ----------------------------------------- -------------------
<S> <C> <C> <C> <C>
Air Pacific...... Fiji 1951 Government of Fiji (51%) 1 B737-700
Qantas (46%) 1 B737-500
Air New Zealand (2%) 1 B737-800
2 B747-200B
1 B767-300ER
Asiana........... Republic of Korea 1988 Kumho Group (54%) 18 B737-400
Korean Development Bank 3 B737-500
Korean Long Team Credit Bank 46% 11 B747-400
Swiss Bank Corp 8 B767-300
Pacific Investment Capital of Switzerland 2 B767-300ER
2 A321-100
Avianca.......... Colombia 1919 Government (100%) 3 B727-200A
4 B757-200
3 B767-200ER
1 B767-300ER
10 F50
14 MD83
British Midland.. United Kingdom 1938 BBW Partnership (60%) 6 F100
SAS (40%) 3 F70
2 A320-200
6 A321-200
7 B737-300
4 B737-400
12 B737-500
1 ERJ-145
BAX Global....... United States 1972 Bax Global Northern Air Freight (100%) 5 B727-200
2 B727-200A
13 DC8-60
10 DC8-70
Canadian Airlines
Int. .......... Canada 1987 Canadian Airlines Corp. (75%) 13 A320-200
AMR (25%) 44 B737-200A
4 B747-400
12 B767-300ER
5 DC10-30
3 DC10-30ER
China Southwest.. People's Republic 1987 People's Republic of China (100%) 15 B737-300
of China 12 B757-200
3 AN-24
3 A340-300
4 TU-154
4 Y-12
FEAT............. Taiwan 1957 China Development (controlled by the KMT, 2 B737 200A
Taiwan's ruling party) (14%) 5 B757-200
China Airlines (10%) 3 MD82
Taiwan Aerospace Corporation (5%) 5 MD83
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
BEGAN GOVERNMENT/COMMERCIAL
LESSEE DOMICILE OPERATION AIRLINE/PRINCIPAL SHAREHOLDERS FLEET(1)
- ------ -------- --------- ----------------------------------------- -------------------
<S> <C> <C> <C> <C>
Indian India 1953 Government of India (100%) 4 Fairchild 228-200
Airlines....... 1 B737-200AC
8 A300-B2-100
4 A300-B4-200
30 A320-200
Lan Chile........ Chile 1929 Grupo Cueto (38.5%) 16 B737-200A
Grupo Pifiera (33.1%) 14 B767-300ER
Grupo Hirmas (19%) 2 DC8-71F
Grupo Elben (8.4%)
Malev............ Hungary 1946 Government of Hungary (61.8%) 3 B737-200A
Air Invest Ltd. (35%) 2 B737-400
2 B737-500
2 B767-200ER
6 F70
3 B737-300
6 Tu-154
Monarch.......... United Kingdom 1967 Cosmos Guide Holding 4 A300-600ER
International NV (100%) 5 A320-200
2 A330-200
2 MD11
7 B757-200
10 DC10-30
3 A321-200
1 L-1011-1
Pegasus.......... Turkey 1990 Yapi Kredit Bank (49%) 8 B737-400
Alper Elichin (21%) 1 B737-800
Silkar and Net Holdings (30%)
PAL.............. Philippines 1941 Lucio Tan (53.7%) 2 A300-B4-200
Government (4.3%) 7 B737 300
8 A330-300
2 A340-300
3 A320-200
5 B747-400
Portugalia....... Portugal(2) 1987 Groupo Espirito Saneto (80%) 6 F100
6 RJ145
Spanair.......... Spain 1987 SAS (49%) 2 B767-300ER
Vaujes Mersans (51%) 18 MD-83
4 MD-82
2 MD-87
Sun Express...... Turkey 1990 THY (50%) 3 B737-300
(Lufthansa) (40%) 2 B737-400
TAM.............. Brazil 1986 VASP (3.3%) 40 F100
Cpt. Rolim Amao (President) (66.6%) 9 F50
5 F27
5 Citation
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
BEGAN GOVERNMENT/COMMERCIAL
LESSEE DOMICILE OPERATION AIRLINE/PRINCIPAL SHAREHOLDERS FLEET(1)
- ------ -------- --------- ----------------------------------------- -------------------
<S> <C> <C> <C> <C>
Tower Air........ United States 1982 Tower Travel (75%) 5 B747-100
1 B747-100F
9 B747-200B
1 B747-200SF
THY.............. Turkey 1933 Republic of Turkey (98.2%) 7 A310-200
7 A310-300
6 A340-300
4 B727-200A
26 B737-400
2 B737-500
4 RJ70
9 RJ100
Yunnan........... People's Republic 1992 CAAC (100%) 14 B737-300
Civil Aviation Administration of 3 B767-300ER
China 2 B737-700
</TABLE>
- ---------------
(1) Source: Airclaims Limited CASE Database, June 17, 1999.
(2) The Fokker 100 Aircraft on lease to Portugalia was sold subsequent to June
30, 1999.
ITEM 2 -- DESCRIPTION OF PROPERTY
AerCo group has no ownership or leasehold interest in any real property.
AerCo's registered and principal office is located at 22 Grenville Street, St.
Helier, Jersey JE4 8PX, Channel Islands and its telephone number is
011-44-1534-609000. For a description of AerCo group's interest in other
property, see "Item 1. -- Description of Business -- The Aircraft, Related
Leases and Collateral".
ITEM 3 -- LEGAL PROCEEDINGS
AerCo group is not a party to any material legal proceedings.
ITEM 4 -- CONTROL OF REGISTRANT
The capital stock of AerCo is not listed on any national exchange or traded
in any established market. The beneficial ownership of the capital stock as of
the date of this report on Form 20-F is presented below.
BENEFICIAL OWNERSHIP OF AERCO
<TABLE>
<CAPTION>
NUMBER OF PERCENT
TITLE OF CLASS NAME & ADDRESS SHARES OF CLASS
- -------------- -------------- --------- --------
<S> <C> <C> <C>
Common Stock Mourant & Co. Trustees Limited.................... 19 Shares 95%
as trustees of AerCo Holding Trust
22 Grenville Street, St. Helier
Jersey, Channel Islands
AerFi Group plc................................... 1 Share 5%
Aviation House
Shannon,
Ireland
</TABLE>
Under the shareholders' undertaking entered into on July 15, 1998 by
Mourant & Co. Trustees Limited as trustee of the Charitable Trust, the Nominees,
AerFi, AerCo and the trustee, the charitable trust trustee
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<PAGE> 31
and AerFi agreed that, as long as the Notes are outstanding, they will not,
without the prior written approval of the trustee and all the directors,
transfer any part of the capital stock held by them or any interest therein
unless the transferee:
(1) in the case of the capital stock held by the nominees for the
charitable trust trustee, is a trustee of a trust formed for charitable
purposes substantially identical to those for which the Charitable Trust
is established; and
(2) enters into an agreement substantially identical to the shareholders
undertaking in favor of the trustee.
In consideration for the undertakings given by the charitable trust trustee
in the shareholders' undertaking, the charitable trust trustee is entitled to
receive from AerCo an undertaking fee equal to $1,500 per annum. Under the
instrument of trust establishing the Charitable Trust, a certificate given by
the directors to the charitable trust trustee that its voting of the capital
stock in a specified manner is in the best commercial interest of AerCo shall,
for the purposes of the exercise of the charitable trust trustee's discretion,
be conclusive that any such action is in AerCo's best commercial interests.
ITEM 5 -- NATURE OF TRADING MARKET
The capital stock of AerCo is not listed on any national exchange or traded
in any established market. The Notes are listed on the Luxembourg Stock Exchange
which is not a trading market.
ITEM 6 -- EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITY HOLDERS
There are currently no Jersey foreign exchange control restrictions on the
payment of interest or principal on the Notes.
There are no restrictions under Jersey law or under the Company's Articles
of Association that limit the right of non-resident or foreign owners to hold or
vote the Notes.
ITEM 7 -- TAXATION
IRISH TAX CONSIDERATIONS
The following summary is based on the advice of McCann FitzGerald, Irish
lawyers to AerCo group, on principles of Irish taxation law. These principles
depend on interpretation of current law, regulations, rulings and decisions and
Irish Revenue practice, and reliance on Irish Revenue confirmations obtained
prior to the issue of, and in connection with the old Notes, all of which are
subject to change. Any such change may be applied retroactively and may
adversely affect the principles of Irish tax on which the advice is based. This
summary does not address all Irish tax principles that may apply to all
categories of potential investors, some of which may be subject to special
rules.
IRISH INCOME AND WITHHOLDING TAXES ON PAYMENTS ON THE NOTES
Based on the advice of AerCo's Irish lawyers, there is no withholding or
deduction for Irish taxes on principal and interest paid by AerCo on the global
notes or any payment of the principal and interest on the book-entry interests.
The foregoing advice, insofar as it relates to interest, is based on certain
assumptions, including that the Notes, including the global notes are listed on
the Luxembourg Stock Exchange or on another stock exchange which is recognized
for relevant purpose of Irish law and that interest on the global and book-entry
Notes is paid by a paying agent outside of Ireland.
The issuance of definitive notes may cause interest payments to be subject
to Irish withholding tax at the standard income tax rate currently 24%. If any
Irish withholding tax is imposed, noteholders and holders of book-entry
interests should note that AerCo will not make any additional payments for any
withholding tax. In this regard, Ireland has tax treaties with a number of
jurisdictions which, under certain circumstances, reduce the rate of Irish
withholding tax on payments of interest to persons resident in those
jurisdictions. A holder of a
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<PAGE> 32
definitive note who is entitled to the benefit of Article 11 of the income tax
treaty between the United States and Ireland (the "Treaty") (such a holder a
"U.S. Holder") will normally be eligible to recover in full any Irish tax
withheld from payments of interest to which such U.S Holder is beneficially
entitled by making a claim under the Treaty on the appropriate form.
Alternatively, a claim may be made by a U.S. Holder in advance of a payment of
interest. If the claim is accepted by the Irish Revenue, it will normally
authorize subsequent payments to that U.S. Holder to be made without withholding
for Irish tax.
Noteholders who are not ordinarily resident in Ireland will not be subject
to Irish income tax on interest paid by AerCo on the Notes so long as the
interest payments are made by AerCo in the course of carrying on relevant
trading operations under its Shannon certificate. For additional information on
these Shannon certified operations and their termination in 2005 and factors
which might lead to their earlier termination, see "Irish Taxation of the AerCo
Group" below. After December 2005 or on earlier termination of AerCo Shannon
certified operations, the exemption from Irish tax described above currently
enjoyed by noteholders who are not ordinarily resident in Ireland will
terminate, absent a change in law in the intervening period.
Interest payments made by AerCo have an Irish source and whether or not
paid gross are, under existing Irish tax law, chargeable to Irish income tax by
self-assessment, subject, however, to such relief as may be afforded by the
provisions of any applicable double tax treaty. However, as a matter of
practice, the Irish tax authorities do not pursue collection of any such
liability for Irish tax for persons who are not resident in Ireland except where
such persons:
- receive payments of interest through a person (including a trustee) or
in the name of an agent or branch in Ireland having the management and
control of the interest; or
- seek to claim relief and/or repayment of tax deducted at source in
respect of taxed income from Irish sources; or
- are chargeable to Irish corporation tax on the income of an Irish branch
or agency or to income tax on the profits of a trade carried on in
Ireland to which the interest is attributable.
The termination of the legislative provisions dealing with Shannon
certified operations on December 31, 2005 will not affect the exemption from
Irish withholding tax described above.
TAXATION OF CAPITAL GAINS
Capital gains tax is chargeable at the rate of 20% on taxable capital gains
with allowance being made for inflation adjusted acquisition costs and
enhancement expenditure. The Notes are chargeable assets for Irish capital gains
tax purposes. However, non-resident holders are only liable for capital gains
tax on the disposal of the Notes where the Notes are unquoted and derive their
value or the greater part of their value from land and buildings or mineral
rights situated in Ireland.
IRISH CAPITAL ACQUISITION TAX
Irish capital acquisitions tax (CAT) on individuals applies to gifts and
inheritances where the donor is domiciled in Ireland at the date of the gift or
inheritance or to the extent that the property of which the gift or inheritance
consists is situated in Ireland at the date of the gift or inheritance. The
donee is primarily liable to pay the CAT. Persons who are secondarily liable
include the donor, his personal representative and an agent, trustee or other
person in whose care the property constituting the gift or inheritance or the
income from the property is placed. All taxable gifts and inheritances received
by an individual since December 1, 1988 are aggregated and only the excess over
a certain tax-free threshold is taxed. The tax-free threshold depends on the
relationship between the donor and donee and the aggregation of all previous
gifts and inheritances. The current tax-free threshold amounts are:
- IRL12,860 for gift and inheritances between persons who are not related
to one another,
- IRL25,720 for gifts and inheritances received from a brother, sister or
from a brother or sister of a parent or from a grandparent, and
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<PAGE> 33
- IRL192,900 for gifts and inheritances received from a parent.
Gifts and inheritances between spouses are exempt from CAT. CAT is charged
at progressive rates ranging from 15% to 30% for gifts and from 20% to 40% for
inheritances. The Notes may constitute property situated in Ireland for CAT
purposes. There is no gift and inheritance tax convention between the United
States and Ireland. Although an estate tax convention between the two countries
was ratified in 1951, estate duty was abolished in Ireland in 1975, and it is
not clear whether the estate tax convention is applicable to Irish gift and
inheritance taxes that replaced the former estate duty.
PROBATE TAX
A 2% Irish probate tax is payable on the value of any Notes passing under
the will or intestacy of an individual. No probate tax is payable on
inheritances from spouses. Since probate tax was only introduced in 1993, it is
not clear whether credit relief would be available under the estate tax
convention discussed above.
IRISH STAMP DUTY
No stamp duty, stamp duty reserve tax or issue, documentary, registration
or other similar tax imposed by any government department or other taxing
authority of or in Ireland (collectively "Irish stamp duty") will be payable by
noteholders on the creation, initial issue or delivery of Notes.
Since the global notes are bearer securities, they will not be charged with
Irish stamp duty, if transferred by delivery. The global notes will be exempt
from Irish stamp duty under section 106 of the Finance Act, 1993 if the issue
price is not less than ninety percent of their nominal value and if transferred
by a written instrument. If that exemption was not applicable and in the absence
of any other applicable exemption such instrument in writing would be chargeable
with Irish stamp duty if either the instrument was executed in Ireland or,
wherever executed, related to any property situated in Ireland (which would
include Notes physically located in Ireland) or any matter or thing done or to
be done in Ireland. Transfers of book-entry interests in the Notes which are not
effected by written instrument will not be chargeable with Irish stamp duty. Any
Irish stamp duty charged on such an instrument would be at the rate of one per
cent on the amount of the consideration for the transfer or, if greater, the
market value of the Notes.
IRISH TAXATION OF THE AERCO GROUP
The following discussion of the Irish taxation of the AerCo Group is based
on the advice of KPMG, AerCo's tax advisor.
AerCo, AerCo Ireland and AerCo Ireland II are entitled to certain corporate
tax benefits for Shannon, Ireland certified companies including a preferential
corporate taxation rate of 10% through December 2005. AerCo, AerCo Ireland, and
AerCo Ireland II may become subject to Irish corporate taxation at the general
Irish statutory rate which is currently 28% if:
- AerFi Group were to be liquidated or were to cease to hold its 5%
shareholding in AerCo;
- AerFi Group were to reduce or relocate its operations for any reason
such that it failed to maintain, among other things, certain employment
levels at Shannon, Ireland; or
- AerFi Administrative Services Limited or AerFi Cash Manager II Limited
were to resign or be terminated as administrative agent or cash manager
of AerCo group.
Upon the scheduled termination of the Irish preferential 10% tax rate on
December 31, 2005, AerCo and the other Irish tax-resident members of the AerCo
group will become subject to Irish corporate tax on their net trading income at
a 12.50% rate as provided for in the Irish Finance Act of 1999. This legislation
provides for non-trading income to be taxed at 25%. There can be no assurance
that these tax rates will not be changed in future.
A company will not be subject to Irish income tax provided that it is not
Irish tax resident, has no branch or agency in Ireland and has no Irish-source
income. ALPS 94-1 and AerCo USA have adopted certain
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<PAGE> 34
operational provisions in their organizational documents regarding the
management and operation of their businesses designed to minimize the likelihood
of Irish taxation of their income. Based on the advice of KPMG, Irish tax
advisor to AerCo, neither ALPS 94-1 nor AerCo USA will be subject to Irish
income tax on their non-Irish source income. However, there can be no assurance
that ALPS 94-1 or AerCo USA will not be subject to Irish tax on some or all of
their income.
IRISH VALUE-ADDED TAX
Ireland generally imposes Value Added Tax (VAT) on the supply of goods and
services. Any Irish VAT that may become payable by an AerCo group company in
connection with any management services performed by Babcock & Brown will be
eligible to be reclaimed by that company on the assumption that invoices
addressed to any AerCo group company relate to costs attributable to a business
activity of that company which is considered to be a supply of goods or services
by that company, regardless of whether such supply of goods or services has an
Irish place of supply for VAT purposes and that business activity is not one
which would be considered VAT exempt under Irish VAT law.
Some or all of the services provided to AerCo group by the Cash Manager may
be exempt from Irish VAT. To the extent that any Irish VAT is payable on
services provided to an AerCo group company by the Cash Manager or by the
Administrative Agent such VAT will be eligible to be reclaimed by that company
on the same assumption as set out in the preceding paragraph.
Payments by the lessees to AerCo and its Irish-resident subsidiary
companies will not be subject to Irish VAT in any case where the Aircraft are
used or to be used by a transport undertaking operating for reward chiefly on
international routes.
CERTAIN JERSEY TAX CONSIDERATIONS
The following summary is based upon the advice of Mourant du Feu & Jeune,
AerCo's Jersey tax counsel, on the tax treatment under Jersey law of AerCo and
ALPS 94-1 and the tax treatment under Jersey law for the purchase, ownership and
disposition of the Notes. The discussion is based on an interpretation of laws,
regulations, rulings and decisions, including certain letters from the
Comptroller of Income Tax in Jersey and the Director of the Jersey Financial
Services Department, the functions of which were taken over by the Jersey
Financial Services Commission with effect from July 1, 1998, all of which are
currently in effect and are subject to change. Any such change may be applied
retroactively and may adversely affect the Jersey tax consequences described
herein. Unless otherwise noted, the term "Note" refers to both the actual global
notes and the interest in the global notes held indirectly through DTC, Cedel or
Euroclear.
INCOME TAXES
AerCo will qualify as an "exempt company" under Article 123A of the Income
Tax (Jersey) Law 1961 as amended as long as it makes the returns of information
and pays the fees, currently L600 per annum, as required by that Article and,
subject to the concession referred to below, as long as no Jersey resident has a
beneficial interest (for purposes of the 1961 Law) in AerCo. As an exempt
company, AerCo will be treated for purposes of the 1961 Law as not resident in
Jersey and will pay no Jersey income tax other than on income arising in Jersey
(but, by long standing concession, excluding bank deposit interest arising in
Jersey) and on profits of its trade (if any) carried on through an established
place of business in Jersey. For purposes of the 1961 Law the Comptroller of
Income Tax in Jersey, among other things, has:
- granted a concession that the holders of AerCo Notes will not be
regarded as having a beneficial interest (for the purposes of Article
123A of the 1961 Law) in AerCo;
- confirmed that the holding of the shares in the capital of AerCo by or
on behalf of the charitable trust trustee and AerFi Group will not
prejudice the exempt company status of AerCo;
- confirmed that the income generated by the activities undertaken by
AerCo as described herein will not be treated as income arising in
Jersey; and
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<PAGE> 35
- confirmed that the administration in and from Jersey of the business
undertaken by AerCo as described herein will not constitute the carrying
on of a trade through an established place of business in Jersey.
Accordingly based on the advice of our Jersey tax counsel, AerCo will not
be subject to Jersey income tax.
WITHHOLDING TAXES
In general, Jersey imposes a withholding tax at the rate of 20% on interest
and other amounts paid to non-residents of Jersey on a debt obligation of a
company resident in Jersey. However, no such withholding tax is imposed with
respect to an exempt company (as defined above). Accordingly, based upon AerCo's
qualification as an exempt company, according to the advice of our Jersey tax
counsel, no withholding tax will be deducted from interest and other amounts
paid on the Notes on account of Jersey taxes.
In the event that any Jersey withholding tax is imposed, noteholders should
note that there is no income tax treaty between the United States and Jersey
that would apply to reduce or eliminate such withholding. Noteholders should
note further that AerCo will not be obligated under the terms of the Notes to
make any additional payments in respect of any such withholding tax.
Accordingly, in the event that withholding were to be required on account of
Jersey taxes, distributions to noteholders may be less than those which would be
made on the Notes in the absence of any such withholding tax.
OTHER TAXES
There is no taxation of capital gains (other than with respect to certain
tax avoidance transactions) in Jersey. As a result, the capital gains of AerCo
on its investments and the capital gains of noteholders on a sale or transfer of
their Notes will not be subject to taxation in Jersey. There is no value added
tax or other relevant taxation in Jersey. No stamp duty, stamp duty reserve tax
or issue, documentary, registration or other similar tax imposed by any
governmental department or other taxing authority of or in Jersey is payable in
connection with the creation, initial issue, delivery or transfer inter vivos of
the Notes.
In the event that on the death of a sole individual holder of Notes who is
a non-resident of Jersey, such Notes are situated in Jersey (by virtue of their
being held on a register in Jersey or in bearer form and held in Jersey at the
date of death or otherwise deemed to be situated under applicable rules of
private international law), a grant of probate or letters of administration
would have to be obtained in Jersey and a duty of up to 1% of the value of the
assets of the deceased situated in Jersey would be payable.
ALPS 94-1
ALPS 94-1 will qualify as an exempt company under the 1961 Law as long as
AerCo also qualifies as an exempt company and as long as ALPS 94-1 makes the
returns of information and pays the fees as required by Article 123A of the 1961
Law (as described above). As an exempt company, ALPS 94-1 will be treated for
the purposes of the 1961 Law in the same way as AerCo. Accordingly, based on the
advice of our Jersey tax counsel, no withholding tax will be deducted from any
amounts paid by ALPS 94-1 to AerCo as described herein on account of Jersey
taxes.
UNITED STATES TAXATION OF THE AERCO GROUP
AerCo, ALPS 94-1, AerCo Ireland and AerCo Ireland II do not expect to have
any material U.S. federal income tax liability. However, this conclusion may
depend, in part, on:
- the nature of such companies' income and operations, and
- in the case of AerCo Ireland and AerCo Ireland II, qualification for the
benefits of the income tax treaty between the United States and Ireland.
AerFi and certain of its affiliates, with the support of the Irish
authorities, have sought a ruling from the United States authorities under the
treaty, to the effect that certain subsidiaries and affiliates of AerFi would be
deemed to meet certain requirements necessary for eligibility for treaty
benefits. AerFi is awaiting a tax
33
<PAGE> 36
ruling on certain restructuring transactions undertaken in 1998. However, there
can be no assurance that a ruling will be obtained, that AerCo, AerCo Ireland or
AerCo Ireland II would be covered by the ruling or that such companies or ALPS
94-1 would not be subject to United States federal income tax on some or all of
their income with the result that the cash flow available for payments on the
Notes would be reduced.
ITEM 8 -- SELECTED FINANCIAL DATA
AerCo was incorporated on June 4, 1998. However, it did not conduct any
business operations until it acquired its Aircraft portfolio and issued the old
Notes on July 15, 1998. On that date, AerCo purchased all of the outstanding
capital stock of ALPS 94-1 and also purchased all of the capital stock of the
AerFi transferred companies. The AerFi transferred companies owned ten Aircraft
at July 15, 1998.
On April 16, 1999, AerCo commenced an exchange offer under which the old
Notes were exchanged for the Notes which are registered with the Securities and
Exchange Commission. The registration statement filed by AerCo in connection
with the exchange offer was declared effective on April 15, 1999. In connection
with the terms of the old Notes, additional incremental interest at a rate of
0.5% per annum ("Step-up Interest") accrued on the old Notes from April 13, 1999
until the Notes were issued in exchange for the old Notes on May 14, 1999.
The selected consolidated financial data set forth below has been extracted
from the audited consolidated financial statements of ALPS 94-1, for each of the
fiscal years ended June 30, 1995, 1996, 1997 and 1998, and the period from July
1, 1998 to July 14, 1998 and of AerCo, for the period from July 15, 1998 to
March 31, 1999.
Arthur Andersen, independent chartered accountants, audited the financial
statements of ALPS 94-1 for the years ended June 30, 1995, 1996 and 1997. KPMG,
independent chartered accountants, audited the financial statements of ALPS 94-1
for the year ended June 30, 1998 and the period from July 1, 1998 to July 14,
1998. KPMG, independent chartered accountants, audited the financial statements
of AerCo for the period from July 15, 1998 to March 31, 1999.
The selected financial data of ALPS 94-1 include the results of operations
and financial condition of the 27 Aircraft originally acquired by ALPS 94-1 from
AerFi in August 1994, including:
- the Boeing 767-300ER aircraft that was purchased by AerFi from ALPS 94-1
immediately prior to the closing of the offering of the old Notes and
was not one of the Aircraft acquired on July 15, 1998.
- the A300-B4-200 aircraft up to April 28, 1998 when AerFi acquired this
aircraft from ALPS 94-1. AerFi subsequently sold this aircraft to AerCo
as part of the AerFi transferred aircraft.
Comparative financial information for ALPS 94-1 is presented as ALPS 94-1
is considered to be the predecessor business of AerCo and we believe that the
ALPS 94-1 selected financial data set forth below is an appropriate presentation
because:
- AerCo was formed mainly for the purpose of refinancing the aircraft
portfolio of ALPS 94-1
- Our initial portfolio included 26 of the 27 aircraft that ALPS 94-1
originally acquired from AerFi
- The original ALPS 94-1 aircraft represented 79% of our initial portfolio
by appraised value as at March 1, 1998
- Our ongoing aircraft leasing activities are largely the same as those
conducted by ALPS 94-1.
Such data, however, is not indicative of the financial results of AerCo
group in the period from July 15, 1998 to March 31, 1999.
ALPS 94-1 did not conduct any business operations prior to its acquisition
of the original ALPS 94-1 aircraft from AerFi in 1994. Accordingly, the
financial data for the fiscal year ended June 30, 1995 only includes trading
data for the period from August 24, 1994 to June 30, 1995.
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<PAGE> 37
The selected financial data of AerCo includes the results of operations and
financial position relating to the 35 Aircraft acquired by AerCo in July 1998,
through its acquisition of the capital stock of ALPS 94-1 and the capital stock
of the AerFi transferred companies.
We have also included in this Form 20-F unaudited pro forma combined
financial information for AerCo group for the nine months ended March 31, 1998
(see "Item 9 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations"). Such pro forma financial information gives effect,
among other things, to the issuance by AerCo of the Notes, the refinancing of
ALPS 94-1 and AerCo's acquisition of ALPS 94-1 and the AerFi transferred
companies.
We have included audited financial statements for the AerFi transferred
aircraft for the years ended June 30, 1997 and 1998 and the period from July 1,
1998 to July 14, 1998 elsewhere in this Form 20-F. These financial statements
include information on the A300-B4-200 aircraft only from April 28, 1998, the
date AerFi acquired it. Arthur Andersen, independent chartered accountants,
audited the financial statements for the year ended June 30, 1997. KPMG,
independent chartered accountants, audited the financial statements for the year
ended June 30, 1998 and the period from July 1, 1998 to July 14, 1998. We have
presented these financial statements on the basis that the AerFi transferred
aircraft were operated separately from AerFi for the periods presented. You
should note that the companies owning the AerFi transferred aircraft did not
conduct any independent business operations in the years presented.
The consolidated financial statements of ALPS 94-1 and AerCo have been
prepared in accordance with U.K. GAAP, which differ in certain significant
respects from U.S. GAAP. For a discussion of the principal differences and a
reconciliation from U.K. GAAP to U.S. GAAP of shareholders' deficit and net
income or loss at and for the fiscal years ended June 30, 1997 and 1998 and the
period from July 1, 1998 to July 14, 1998 for ALPS 94-1 and the period from July
15, 1998 to March 31, 1999 for AerCo, see Notes 25, 26, 27 and 28 to the AerCo
audited consolidated financial statements and "Item 9 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- ALPS 94-1
Results of Operations -- Year Ended June 30, 1998 Compared With Year Ended June
30, 1997 -- Differences between U.K. GAAP and U.S. GAAP".
35
<PAGE> 38
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
ALPS 94-1 AERCO
---------------------------------------------------------------- -----------
PERIOD FROM PERIOD FROM PERIOD FROM
JUNE 2, JULY 1, JULY 15,
1994 TO YEAR ENDED YEAR ENDED YEAR ENDED 1998 TO 1998 TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JULY 14, MARCH 31,
1995 1996 1997 1998 1998 1999
----------- ---------- ---------- ---------- ----------- -----------
($ THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.K. GAAP
Revenues
Aircraft leasing............... 88,050 102,460 101,434 100,682 3,635 82,826
Expenses
Depreciation................... (18,158) (17,978) (38,062) (37,826) (1,519) (33,821)
Exceptional item --
additional depreciation..... -- -- (34,385) -- -- --
Provision for impairment in
aircraft value.............. -- (12,000) -- (8,720) -- --
Amortisation of goodwill....... -- -- -- -- -- (1,669)
Net interest expense........... (64,206) (73,576) (71,037) (69,785) (2,757) (54,108)
Other expenses................. (3,702) (5,581) (5,053) (6,599) (646) (8,311)
Exceptional item --
termination fee........... -- -- -- (12,700) -- --
Income/(loss) from operations.... 1,984 (6,675) (47,103) (34,948) (1,287) (15,083)
Profit on sale of aircraft....... -- -- -- 2,426 10 10
Reduction in indebtedness........ -- -- 5,258 -- -- --
Income/(loss) before provision
for taxes...................... 1,984 (6,675) (41,845) (32,522) (1,277) (15,073)
Taxes............................ (69) (200) 143 (33) -- (35)
Dividends........................ (2) -- -- -- -- --
Net income/(loss)................ 1,913 (6,875) (41,702) (32,555) (1,277) (15,108)
U.S. GAAP
Depreciation..................... (16,442) (32,338) (32,339) (32,053) (1,276) (28,062)
Provision for permanent
diminution in aircraft value... -- (12,000) -- (520) -- --
Reduction in indebtedness........ -- -- 5,258 -- -- --
Net (loss)/income................ (13,603) (21,590) (1,594) (20,808) 5,973 19,760
</TABLE>
36
<PAGE> 39
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
ALPS 94-1 AERCO
-------------------------------------------------------- -----------
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JULY 14, MARCH 31,
1995 1996 1997 1998 1998 1999
---------- ---------- -------- -------- -------- -----------
($ THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.K. GAAP
Aircraft, net of accumulated
depreciation and provision for
permanent diminution in aircraft
value........................... 957,021 927,043 854,596 800,090 732,905 904,253
Total assets...................... 1,039,938 1,021,356 950,031 890,873 881,804 1,019,328
Indebtedness.................... (976,494) (953,376) (919,157) (877,128) (875,015) (949,217)
Provision for maintenance....... (27,432) (37,571) (44,274) (42,336) (41,274) (39,697)
Total liabilities................. (1,036,052) (1,024,345) (994,722) (968,119) (960,327) (1,034,436)
Shareholders' equity/(deficit).... 3,886 (2,989) (44,691) (77,246) (78,523) (15,108)
U.S. GAAP
Aircraft, net of accumulated
depreciation and provision for
permanent diminution in aircraft
value........................... 811,149 766,811 734,472 691,713 631,778 767,820
Indebtedness...................... (976,494) (953,376) (919,157) (877,128) (875,015) (953,908)
Shareholders' deficit............. (161,191) (182,781) (184,375) (203,210) (197,237) (169,238)
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS AND OTHER DATA
<TABLE>
<CAPTION>
ALPS 94-1 AERCO
---------------------------------------------------------------- -----------
PERIOD FROM PERIOD FROM PERIOD FROM
JUNE 2, JULY 1, JULY 15,
1994 TO YEAR ENDED YEAR ENDED YEAR ENDED 1998 TO 1998 TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JULY 14, MARCH 31,
1995 1996 1997 1998 1998 1999
----------- ---------- ---------- ---------- ----------- -----------
($ THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.K. GAAP
Cash paid in respect of
interest....................... (51,147) (64,002) (59,872) (54,815) (3,872) (39,013)
Net cash provided/(utilised) by
operating activities (after
payment of interest)........... 66,526 45,532 45,119 45,721 (4,077) 27,961
Net cash (used in)/provided by
investing activities........... (953,859) -- -- 10,386 65,677 14,500
Net cash provided by/(used in)
financing activities........... 967,496 (36,025) (43,494) (59,108) (3,719) 948,544
Net movements in cash............ 80,163 (25,803) (2,886) 134 94,567 25,618
U.K. GAAP(1)
Ratio of Earnings to Fixed
Charges........................ 1.031 0.909 0.411 0.534 0.537 0.721
U.S. GAAP(2)(3)
Ratio of Earnings to Fixed
Charges........................ 0.789 0.709 0.976 0.702 3.166 1.366
</TABLE>
In relation to "Ratios of Earnings to Fixed Charges" under both U.K. GAAP
and U.S. GAAP, you should note the following:
(1) Earnings include pretax income from continuing operations plus fixed
charges. Fixed charges are the total of (i) interest, whether expensed
or capitalized, (ii) amortization of debt expense and discount or
premium relating to any indebtedness, whether expensed or capitalized
and (iii) such portion of rental expense as can be demonstrated to be
representative of the interest factor in the particular case.
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<PAGE> 40
(2) A ratio of less than one indicates that earnings are inadequate to
cover fixed charges. The amount by which fixed charges exceeded
earnings for ALPS 94-1 (i) for the years ended June 30, 1996, 1997 and
1998 and for the period July 1, 1998 to July 14, 1998 under U.K. GAAP
was $6.68 million, $41.85 million, $32.52 million and $1.3 million and
(ii) for the years ended June 30, 1995, 1996, 1997 and 1998 under U.S.
GAAP was $13.53 million, $21.39 million, $1.74 million and $20.78
million. The amount by which fixed charges exceeded earnings for AerCo
for the period from July 1, 1998 to March 31, 1999 under U.K. GAAP was
$15.1 million.
(3) For a discussion of the differences between AerCo's and ALPS 94-1's
results of operations and financial position under U.S. GAAP compared
with U.K. GAAP, see Notes 25, 26, 27 and 28 to the AerCo audited
consolidated financial statements and "Item 9 -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- ALPS 94-1 Results of Operations -- Year Ended June 30,
1998 Compared With Year Ended June 30, 1997 -- Differences between U.K.
GAAP and U.S. GAAP".
ITEM 9 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
AerCo was incorporated on June 4, 1998. However, it did not conduct any
business operations until it acquired its Aircraft portfolio and issued the old
Notes on July 15, 1998. On that date AerCo purchased all of the outstanding
capital stock of ALPS 94-1 and also purchased all of the capital stock of the
AerFi transferred companies. The AerFi transferred companies owned ten Aircraft
at July 15, 1998.
ALPS 94-1 is considered to be the predecessor business of AerCo. ALPS 94-1
had a year end of June 30 each year, while AerCo has a year end of March 31.
The following discussion of AerCo's results of operations for 1999 compared
to 1998 is based on the audited results of AerCo for the eight and a half month
period from July 15, 1998 to March 31, 1999 compared with the unaudited proforma
combined statement of operations data for ALPS 94-1 and the AerFi transferred
aircraft for the nine month period ended March 31, 1998. The proforma statement
of operations data which is set out in the table below for illustrative purposes
has been prepared on the assumption that AerCo issued the old Notes and acquired
ALPS 94-1 and the AerFi transferred aircraft on July 1, 1997. The unaudited
proforma statement of operations data is not necessarily indicative of the
results that would have arisen had ALPS 94-1 and the AerFi transferred aircraft
been acquired by AerCo on July 1, 1997 and been included in AerCo group since
that date.
The unaudited statement of operations data for ALPS 94-1 for the nine month
period to March 31, 1998 and the AerCo proforma combined statement of operations
data for the nine month period ended March 31, 1998 (prepared on the bases set
out above) are presented below in order to provide comparative results for AerCo
for 1998.
The discussion of AerCo's results of operations for 1998 compared to 1997
is based on the audited results of ALPS 94-1 for the year ended June 30, 1998
compared with the year ended June 30, 1997 as ALPS 94-1 is considered to be the
predecessor business of AerCo.
38
<PAGE> 41
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
AERCO
PROFORMA COMBINED AERCO
ALPS 94-1 FINANCIAL INFORMATION PERIOD FROM
NINE MONTHS ENDED NINE MONTHS ENDED JULY 15, 1998 TO
MARCH 31, 1998 MARCH 31, 1998 MARCH 31, 1999
----------------- --------------------- ----------------
($ THOUSANDS) ($ THOUSANDS) ($ THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues
Aircraft leasing....................... 76,098 85,830 82,826
Expenses
Depreciation........................... (28,569) (33,805) (33,821)
Provision for permanent diminution in
aircraft value......................... (8,720) -- --
Net interest expense................... (52,340) (58,881) (54,108)
Other expenses......................... (4,278) (8,842) (8,311)
Amortisation of goodwill............... -- (1,764) (1,669)
Operating loss........................... (17,809) (17,462) (15,083)
Profit on sale of aircraft............... -- -- 10
Loss before taxes........................ (17,809) (17,462) (15,073)
Taxes.................................... (15) 1,454 (35)
Net loss................................. (17,824) (16,008) (15,108)
</TABLE>
The following discussion is based on the AerCo and ALPS 94-1 financial
information provided above and the AerCo consolidated financial statements which
were prepared under U.K. GAAP. U.K. GAAP differs significantly in certain
respects from U.S. GAAP. See Notes 25, 26, 27 and 28 to the AerCo audited
consolidated financial statements and " -- Differences between U.K. GAAP and
U.S. GAAP" below.
RESULTS OF OPERATIONS -- 1999 COMPARED TO 1998
OVERVIEW
AerCo group's results for the period from July 15, 1998 to March 31, 1999
reflected a continuation of reasonably favorable industry conditions for the
period, despite the ongoing restructuring discussions with PAL, a lessee of two
B737-300 Aircraft, which have not yet been finalised, and the delays experienced
by one North American lessee in meeting its contracted lease payments. In the
latter part of the period in particular, as a result of the Brazilian currency
devaluation, one Brazilian lessee experienced difficult trading conditions,
while a Colombian lessee also began to experience difficulties in meeting its
contracted rental and other payments. See "Item 1 Business -- The Aircraft,
Related Leases and Collateral -- The Lessees -- Latin American Concentration".
The demand-supply situation for the near term would appear to favour the lessee
mainly due to the significant level of deliveries of new aircraft combined with
the slowdown in economic growth in Asia. This may give rise to a softening of
future lease rates and more limited placement prospects for Aircraft coming off
lease in the near term. Further slowdown in economic growth may result in AerCo
group increasingly having to address the problems of lessees in financial
difficulty with lease reschedulings, rent deferrals and other restructuring
arrangements. In such circumstances, AerCo's ability to pay interest on, and
repay principal of, the Notes may be adversely affected.
REVENUES
Revenues for AerCo in the period from July 15, 1998 to March 31, 1999 were
$82.8 million compared with ALPS 94-1 revenues for the nine months ended March
31, 1998 of $76.1 million. AerCo proforma revenues for the nine months ended
March 31, 1998 were $85.8 million. Rentals from European and Asia Pacific
carriers represented 48.8% (1998 - 50.9%) and 25.4% (1998 - 26.4%),
respectively, of AerCo's leasing revenues in the period from July 15, 1998 to
March 31, 1999: one lessee accounted for more than 10% of AerCo's leasing
revenues (Spanair: 10.5%) compared with the same lessee accounting for more than
10%
39
<PAGE> 42
of AerCo's leasing revenues in the nine months ended March 31, 1998, (Spanair:
10.7%). At March 31, 1999, AerCo had no Aircraft off-lease.
Rental rates on four of the ten new leases written by AerCo since July
1998, representing 11.42% of the portfolio by appraised value at January 18,
1999, reflect the current softening in lease rates in the commercial aviation
market for operating lease rentals, and were on average 10% below the previous
lease rates for these Aircraft. Rental rates on the remaining six leases,
representing 16.14% of the portfolio by appraised value at January 18, 1999,
written by AerCo in the period were on average 9% above previous lease rates for
these Aircraft. AerCo entered into new leases with respect to one B757-200 (72
months), three MD83's (60 months, 60 months and 40 months), one B737-300 (24
months), two A320-200's (60 months and 11 months), one F100 (35 months), one
B737-400 (57 months) and one B737-500 (2 months).
PROFIT ON SALE OF AIRCRAFT
Sales proceeds of $14.5 million in respect of the sale of one Aircraft, an
F100 sold to an affiliate of Portugalia, were received by AerCo in the period
from July 15, 1998 to March 31, 1999. The net book value of this Aircraft at the
date of sale was $13.9 million and other sales costs were $0.6 million. There
were no Aircraft sales in the nine months ended March 31, 1998.
DEPRECIATION
The depreciation charge for AerCo in the period from July 15, 1998 to March
31, 1999 amounted to $33.8 million compared to $28.6 million for ALPS 94-1 in
the nine months ended March 31, 1998. The proforma depreciation charge for AerCo
in the nine months ended March 31, 1998 amounted to $33.8 million. AerCo has
depreciated each Aircraft at a rate calculated to write off the cost of the
Aircraft to its estimated residual value of 15% of its initial appraised value,
on a straight line basis, over its estimated useful economic life. In the
financial statements of AerCo for the period from July 15, 1998 to March 31,
1999 each Aircraft is depreciated from July 15, 1998 on a straight-line basis
over 25 years from the date of manufacture to a residual value of 15% of the
Aircraft's initial appraised value. In the nine months ended March 31, 1998,
AerCo has depreciated each aircraft from July 1, 1997 on a straight-line basis
over 25 years from the date of manufacture to a residual value of 15% of the
Aircraft's initial appraised value.
NET INTEREST EXPENSE
Net interest expense for AerCo amounted to $54.1 million in the period from
July 15, 1998 to March 31, 1999 compared to $52.3 million for ALPS 94-1 in the
nine months ended March 31, 1998. Proforma net interest expense for AerCo
amounted to $58.9 million for the nine months ended March 31, 1998. The decrease
in net interest expense for AerCo of $4.8 million in 1999 was primarily due to a
combination of a lower interest rate environment in the period from July 15,
1998 to March 31, 1999 compared to the interest rate environment in the nine
months ended March 31, 1998 and the shorter accounting period. The average
indebtedness outstanding for AerCo during the period from July 15, 1998 to March
31, 1999 was $973.8 million.
Under the terms of the AerCo subclass E-1 Note, interest accrues at a rate
of 20% per annum payable monthly in arrears. Except for the Class E-1 Note
Primary Interest Amount, which is payable at the rate of 15% per annum
multiplied by the initial Outstanding Principal Balance of the subclass E-1 Note
on the Closing date, no interest is payable on the subclass E-1 Note until all
of the interest, principal and premium, if any, on the AerCo Notes have been
repaid in full. The Class E-1 Note Primary Interest Amount is paid on each
Payment Date only to the extent that AerCo has Available Collections sufficient
to make such payment after paying or providing for each of the items ranking
prior to such payment in the order of priority. However, approximately $14.1
million in respect of accrued and unpaid interest of the subclass E-1 Note was
accrued during the period from July 15, 1998 to March 31, 1999. Cash paid in
respect of interest amounted to $39 million in the period from July 15, 1998 to
March 31, 1999 compared with net interest expense of $54.1 million, principally
reflecting subclass E-1 Note interest accrued but not paid.
40
<PAGE> 43
Net interest expense is stated after deducting interest income earned
during the relevant period. In the period from July 15, 1998 to March 31, 1999,
AerCo earned interest income of $1.9 million compared with $1.7 million in the
nine months ended March 31, 1998.
In the period from July 15, 1998 to March 31, 1999, AerCo group entered
into interest rate swaps in order to correlate its contracted fixed and floating
rental payments to the fixed and floating interest payments on the Notes,
resulting in a charge of $1.2 million in the period.
The Notes bear interest at floating rates while the subclass D-1 and
subclass E-1 Notes which are held by AerFi bear a fixed rate of interest. The
aggregate principal amount of the subclass A-1, subclass A-2 and subclass C-1
Notes represents approximately 80% of AerCo's total indebtedness at March 31,
1999. Accordingly, AerCo has adopted a hedging strategy to manage its exposure
to movements in LIBOR rates. See "Item 9A -- Quantitative and Qualitative
Disclosures about Market Risk".
OTHER EXPENSES
Other expenses consist of Servicer fees, Administrative Agency fees, Cash
Manager fees, insurance premiums (political risk and directors' liability
insurance), other service provider costs and miscellaneous expenditure items.
Other expenses for AerCo amounted to $8.3 million in the period from July 15,
1998 to March 31, 1999 compared with $4.3 million for ALPS 94-1 for the nine
months ended March 31, 1998. Proforma other expenses for AerCo amounted to $8.8
million for the nine months ended March 31, 1998.
In the period from July 15, 1998 to March 31, 1999, Servicer,
Administrative Agency and Cash Manager fees payable by AerCo to Babcock & Brown
and AerFi totalled $4.4 million compared with $4.3 million for the nine months
ended March 31, 1998. Substantially all of the AerCo fees represent revenue
based fees calculated as a monthly percentage of lease rentals received on
Aircraft under management. Since July 15, 1998, Babcock & Brown is Servicer of
the Aircraft as described in "Item 10 -- Directors & Officers of Registrant --
The Servicer".
AerCo group's practice is to provide specifically for any bad debt 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 small number of AerCo group's lessees failed to meet their
contractual obligations in the period from July 15, 1998 to March 31, 1999,
resulting in the requirement for additional provisions in respect of bad and
doubtful debts in respect of these lessees. Overall, there was a net provision
of $0.55 million required in respect of bad and doubtful debts in the period
from July 15, 1998 to March 31, 1999 primarily in respect of PAL, compared with
a net release of $0.2 million in the nine months ended March 31, 1998.
GOODWILL
On July 15, 1998, AerCo acquired 100% of the capital stock of ALPS 94-1 and
thereby a portfolio of twenty five Aircraft and the related leases and purchased
the AerFi transferred companies which owned ten Aircraft and related leases. The
difference between the fair value of the net assets acquired and the
consideration paid by AerCo in respect of its acquisition of ALPS 94-1 and the
AerFi transferred aircraft of $47.1 million represents purchased goodwill, which
is capitalised on the balance sheet of AerCo and amortised over its estimated
economic life. In the results of AerCo in the period from July 15, 1998 to March
31, 1999, goodwill of $1.7 million was amortised and in the nine months ended
March 31, 1998, $1.8 million was amortised.
OPERATING LOSS
In the period from July 15, 1998 to March 31, 1999, AerCo recorded an
operating loss of $15.1 million compared with a loss of $17.8 million for ALPS
94-1 in the nine months ended March 31, 1998. AerCo recorded a proforma
operating loss of $17.5 million for the nine months ended March 31, 1998.
41
<PAGE> 44
TAXES
AerCo had a tax charge of approximately $0.03 million in the period from
July 15, 1998 to March 31, 1999, compared with a tax charge for ALPS 94-1 of
$0.01 million in the nine months ended March 31, 1998. AerCo had a proforma tax
credit of $1.4 million in the nine months ended March 31, 1998.
NET LOSS
As a result of the above factors, AerCo had a net loss of $15.1 million in
the period from July 15, 1998 to March 31, 1999, compared with a net loss of
$17.8 million for ALPS 94-1 in the nine months ended March 31, 1998. AerCo had a
proforma net loss of $16.1 million for the nine months ended March 31, 1998.
ALPS 94-1 RESULTS OF OPERATIONS -- YEAR ENDED JUNE 30, 1998
COMPARED WITH YEAR ENDED JUNE 30, 1997.
REVENUES
Revenue for the year ended June 30, 1998 was $100.7 million compared with
revenue for the year ended June 30, 1997 of $101.4 million. Rentals from
European and Asia Pacific carriers represented 45.3% and 29.2%, respectively, of
ALPS 94-1's leasing revenues in the year ended June 30, 1998, with two lessees
accounting for more than 10% of ALPS 94-1's leasing revenues (Lan Chile: 14% and
Spanair: 12%) compared with two lessees in the year ended June 30, 1997, (Lan
Chile: 14% and Spanair: 12%). At June 30, 1998, ALPS 94-1 had no aircraft
off-lease.
Rental rates on the seven new leases written by ALPS 94-1 since August 1994
have reflected the general trend in the commercial aviation market for operating
lease rentals, which increased slightly during 1995 and 1996 and have remained
relatively stable in 1997 and 1998. In 1996, 1997 and 1998, ALPS 94-1 entered
into new leases with respect to two aircraft (an MD83 and an A320-200), three
aircraft (one B767-300ER, one B737-400 and one F100), and one aircraft (an
A320-200), respectively. In 1996, the new lease terms written were 36 months and
84 months, respectively, and the lease rates with respect to these aircraft
were, overall, 2% higher than the previous lease rates. The new lease terms for
leases written in 1997 were for 84, 29 and 59 months, respectively, and the
lease rates with respect to these aircraft were, overall, in line with the
previous lease rates. The new lease term written in 1998 was for 6 months.
PROFIT ON SALE OF AIRCRAFT
One Aircraft, an A300-B4-200, was sold to AerFi on April 28, 1998,
realising a profit of $2.4 million. This aircraft was subsequently sold to AerCo
at the time the old Notes were issued.
DEPRECIATION AND PROVISION FOR PERMANENT DIMINUTION IN AIRCRAFT VALUES
The depreciation charge in the year ended June 30, 1998 amounted to
approximately $37.8 million compared to approximately $72.4 million for the same
period in 1997. Beginning on July 1, 1996, ALPS 94-1 has depreciated each
aircraft on a straight-line basis over 25 years from the date of manufacture to
a residual value of 15% of ALPS 94-1's historic cost. Prior to July 1, 1996,
ALPS 94-1 depreciated the carrying value of each aircraft at 2% per annum
increasing to 7% per annum beginning 15 years after the date of manufacture of
the aircraft to a nil residual value.
The changes in these estimates were considered necessary because of
developments in the industry at that time, including the bankruptcy of one major
manufacturer, the expected acquisition of McDonnell Douglas by Boeing,
significant manufacturer discounting of new aircraft and the announcement of a
new generation of Boeing aircraft. As a result of these developments, the
directors considered that (1) the allocation of cost should be revised to a
straight line basis (rather than the previous lower allocations in earlier
years) and (2) additional depreciation of $34.4 million in 1997, reflecting the
impact of adopting the revised estimates, should be charged reflecting the
permanent impairment in value of the aircraft because of the effect of industry
circumstances referred to above on the company's fleet. See "Statement of
Accounting Policies: Aircraft" in the AerCo consolidated financial statements
for more information about this change in estimate.
42
<PAGE> 45
In respect of the year ended June 30, 1998, the directors of ALPS 94-1
determined to make a provision of $8.7 million in respect of a permanent
diminution in the book value of ALPS 94-1's three F100 aircraft. The directors
arrived at such determination based on the bankruptcy of Fokker N.V. and the
discontinuation of its aircraft manufacturing operations, resulting in
significant reductions of values and lease rates for Fokker aircraft. The net
book value of these aircraft, net of the $8.7 million provision, at June 30,
1998 was $48.5 million.
NET INTEREST EXPENSE
Net interest expense amounted to $69.8 million in the year ended June 30,
1998 compared to $71.0 million in the same period ended June 30, 1997. The
decrease in net interest expense was primarily due to lower average debt in the
year ended June 30, 1998, including, in particular, a significant reduction in
the principal balances of the ALPS 94-1 subclass A-1 notes, subclass A-2 notes
and class D note. This reduction was partially offset by a marginally higher
interest rate accrued during the year to June 30, 1998, in addition to step-up
interest being charged on the ALPS 94-1 subclass A-2 notes and additional
interest being accrued on the ALPS 94-1 class E note. The average indebtedness
outstanding during the year ended June 30, 1998 and 1997 was $902.1 million and
$936.3 million.
Under the terms of the ALPS 94-1 class E note, interest accrues at a rate
of 10% per annum but only a portion of such interest ($3.1 million) has been
payable in cash in each of the periods under review. However, approximately
$15.4 million and $14.5 million in respect of accrued and unpaid interest of the
ALPS 94-1 class E note was capitalized during the years ended June 30, 1998 and
1997, respectively. Cash paid in respect of interest amounted to $54.8 million
in the year ended June 30, 1998 and $59.9 million in the year ended June 30,
1997, compared with net interest expense, which amounted to $69.8 million in the
year ended June 30, 1998 and $71.0 million in the year ended June 30, 1997, and
principally reflected class E note interest accrued but not paid. In addition,
since November 1997, under the terms of the ALPS 94-1 subclass A-2 notes,
step-up interest accrued at the rate of 2% per annum in addition to the fixed
coupon of 7.15% per annum on the subclass A-2 notes. This step-up interest
amount was not paid until the ALPS 94-1 notes were redeemed on July 15, 1998.
Net interest expense is stated after deducting interest income earned
during the relevant period. In the year ended June 30, 1998, ALPS 94-1 earned
interest income of $3.8 million compared with $2.9 million in the year ended
June 30, 1997.
In each of the periods under review, ALPS 94-1 has not been party to any
interest rate or other derivative agreements.
The AerCo notes bear interest at floating rates while the subclass D-1 and
subclass E-1 notes which are held by AerFi bear a fixed rate of interest. The
aggregate principal amount of the subclass A-1, subclass A-2, subclass B-1 and
subclass C-1 Notes represents approximately 81% of AerCo's total indebtedness.
Accordingly, AerCo's exposure to movements in LIBOR is relatively greater than
for ALPS 94-1 and AerCo has adopted a hedging strategy to manage its exposure to
movements in LIBOR rates. See "-- Financial Resources and Liquidity -- Interest
Rate Management".
A large proportion of AerCo's indebtedness is represented by the notes and
the subclass D-1 notes which are issued on terms and conditions prevailing in
the market. To the extent that the weighted average interest cost on AerCo's
indebtedness is higher or lower than the cost of the ALPS 94-1 indebtedness
being refinanced, AerCo's net interest expense and cash paid in respect of
interest will be higher or lower, respectively, than that experienced by ALPS
94-1 historically.
OTHER EXPENSES
Other expenses consist of GECAS' servicer fees, insurance premiums
(political risk and directors' liability insurance), administrative agent fees,
other service provider costs and miscellaneous expenditure items. Other expenses
amounted to approximately $6.6 million in the year ended June 30, 1998 compared
with $5.1 million in the year ended June 30, 1997.
43
<PAGE> 46
In each of the years ended June 30, 1998 and 1997, servicer fees payable to
GECAS were approximately $2.9 million. Substantially all of these amounts
represent asset based fees calculated as an annual percentage of agreed values
of aircraft under management. Since July 15, 1998, Babcock & Brown is servicer
of the AerCo aircraft as described in "Management of AerCo Group -- The
Servicer".
EXCEPTIONAL ITEMS
In the year ended June 30, 1998, the directors approved the refinancing of
ALPS 94-1 through the issuance of the notes by AerCo. The refinancing included
the early termination of the GECAS servicing agreement in respect of the
management of the company's assets in consideration for a termination fee of
$12.7 million. This amount was charged in the year ended June 30, 1998 and was
paid subsequent to the year end.
OPERATING LOSS
In the year ended June 30, 1998, ALPS 94-1 recorded an operating loss of
approximately $34.9 million compared with a loss of $47.1 million in the same
period in 1997.
REDUCTION IN INDEBTEDNESS
Under the terms of the ALPS 94-1 class E note, if the directors of ALPS
94-1 recognized a permanent diminution in the value of aircraft, the recognition
resulted in a legal reduction in the principal balance of the class E note. The
amount of this reduction was equal to (1) the outstanding principal balance and
accrued and unpaid interest on the ALPS 94-1 class A-E notes less (2) the total
book value of the aircraft reflecting the permanent diminution in value. In
1998, there was no legal reduction in class E note indebtedness. In 1997, there
was a legal reduction of $5.3 million reflecting a $12 million permanent
diminution in the value of ALPS 94-1's A300 aircraft. See the AerCo prospectus
issued April 15, 1999 "-- Results of Operations -- Year Ended June 30, 1997
Compared with Year Ended June 30, 1996 -- Depreciation and Provision for
Permanent Diminution in Aircraft Value" and "-- Reduction in Indebtedness".
TAXES
ALPS 94-1 had a tax charge of approximately $0.03 million in the year ended
June 30, 1998, compared with a tax credit of $0.14 million in the year ended
June 30, 1997.
NET LOSS
As a result of the above factors, ALPS 94-1 had a net loss of $32.6 million
in 1998 compared with a net loss of $41.7 million in 1997.
DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP
The principal differences between U.S. GAAP and U.K. GAAP that have
affected the results of operations and financial position of AerCo and ALPS
94-1, relate to the accounting treatment of aircraft cost and depreciation,
goodwill and issue costs.
Aircraft are stated at initial appraised value under U.K. GAAP. Under U.S.
GAAP aircraft are stated at AerFi's amortized cost at the date of delivery to,
and acquisition by, AerCo and ALPS 94-1 respectively. The difference between the
purchase cost and AerFi's amortized cost is treated as a distribution to AerFi.
The impact is to reduce the net book value of aircraft and shareholders' equity
under U.S. GAAP compared with U.K. GAAP.
As discussed above, however, under "Results of Operations -- 1999 Compared
with 1998 -- Depreciation", under U.K. GAAP AerCo has depreciated each Aircraft
at a rate calculated to write off the cost of the Aircraft to its estimated
residual value of 15% of its initial appraised value from July 15, 1998, on a
straight line basis, over its estimated useful economic life. Under U.S. GAAP,
Aircraft are depreciated on a straight
44
<PAGE> 47
line basis at a rate designed to write off AerFi's amortised cost at the date of
delivery to AerCo to a residual value of 15% of AerFi's original cost over a
period of 25 years from the date of manufacture.
Under U.K. GAAP the difference between the fair value of the net assets of
ALPS 94-1 and the AerFi transferred aircraft, and the purchase consideration
paid by AerCo to acquire these entities gives rise to goodwill of $47 million
which is capitalised and amortised over a period of 20 years. No goodwill arises
under U.S. GAAP as the transaction is accounted for on a historical cost basis
as a transaction between entities under common control.
Under U.K. GAAP the costs of issuance arising on the completion of a
refinancing transaction are disclosed as a reduction of the related
indebtedness. Under U.S. GAAP the costs of issuance are disclosed separately as
deferred financing costs.
For a discussion of these and other differences between U.K. GAAP and U.S.
GAAP, including certain income recognition and depreciation differences relating
to AerCo's acquisition of the capital stock of ALPS 94-1 and the AerFi
transferred aircraft and ALPS 94-1's initial acquisition of the aircraft from
AerFi, see notes 25, 26, 27 and 28 to the AerCo audited consolidated financial
statements.
FINANCIAL RESOURCES AND LIQUIDITY
LIQUIDITY
AerCo's primary source of liquidity is rental payments made by lessees
under the lease agreements. The principal uses of cash rental payments are
expenses related to the Aircraft and the servicing thereof, corporate expenses
and the payment of interest on and principal of indebtedness. Such indebtedness
consists of the Notes and the subclass D-1 and subclass E-1 Notes which are held
by AerFi.
The cash balances (including short term investments in commercial paper) at
March 31, 1999 amounted to $65.6 million compared to $61.2 million at July 15,
1998. Under the terms of its indebtedness, AerCo is required to maintain cash
balances in an amount equal to (1) the amount of lessee security deposits ($14.8
million at March 31, 1999), and (2) the "liquidity reserve amount" ($40 million
at March 31, 1999). The terms of AerCo's indebtedness restricts the use of such
cash so that it is generally not available to service debt. The liquidity
reserve amount has been determined largely based on an analysis of historical
experience, assumptions regarding AerCo group's future experience and the
frequency and cost of certain contingencies in respect of the Aircraft, and is
intended to provide liquidity for meeting the cost of maintenance obligations
and non-maintenance, aircraft-related contingencies such as removing regulatory
liens, complying with ADs, repossessing and re-leasing Aircraft. In analyzing
the future impact of these costs, assumptions have been made regarding their
frequency and amount based upon historical experience. There can be no
assurance, however, that historical experience will prove to be relevant or that
actual cash received by AerCo group will not be significantly less than that
assumed. Any significant variation may materially adversely affect AerCo's
ability to make payments of interest and principal on the Notes.
During the next two years, AerCo may have to incur unusually high cash
expenditures for the purpose of airframe and engine overhauls and complying with
new regulatory requirements for aircraft operating in Europe and North America.
These payments could adversely effect AerCo's ability to make certain principal
payments on the Notes, depending on their level and timing. For a description of
these maintenance and regulatory requirements, you should refer to "Item 1 --
Description of Business -- The Aircraft, Related Leases and Collateral -- The
Leases -- Maintenance and Maintenance Reserves" and "-- Compliance with
Governmental and Technical Regulation".
OPERATING ACTIVITIES
Net cash provided by AerCo's operating activities in the period from July
15, 1998 to March 31, 1999 amounted to $28 million. These amounts are stated
after cash paid in respect of interest of $39 million, net maintenance cash
outflows of $4.7 million and security deposits refunded of $1.4 million. In 2000
and 2001, AerCo's net cash provided by operating activities may be lower than
that achieved in 1999 as a result of the potential maintenance and regulatory
compliance expenditures described above.
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<PAGE> 48
INVESTING AND FINANCING ACTIVITIES
Cash flows used in financing activities in the period from July 15, 1998 to
March 31, 1999 reflect the issue by AerCo of its subclass A-E Notes on July 15,
1998 of $992 million less discount costs of $5.4 million and the repayment of
$38.1 million of principal on the AerCo subclass A-2 and B-1 notes in the
period.
INDEBTEDNESS
As of March 31, 1999, the outstanding indebtedness of AerCo consisted of
the interest and principal due in respect of the Notes. Interest in respect of
the Notes is payable monthly in arrears and accrues at the following per annum
rates:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
INITIAL AGGREGATE OUTSTANDING AS EXPECTED
NOTES PRINCIPAL BALANCE OF MARCH 31, 1999 MATURITY DATE INTEREST RATE
- ----- ----------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Subclass A-1.......... $340,000,000 $340,000,000 July 15, 2000 One month U.S. Dollar
LIBOR plus 0.19%
Subclass A-2.......... $290,000,000 $255,436,000 December 15, 2005 One month U.S. Dollar
LIBOR plus 0.32%
Subclass B-1.......... $ 85,000,000 $ 81,568,000 July 15, 2013 One month U.S. Dollar
LIBOR plus 0.60%
Subclass C-1.......... $ 85,000,000 $ 84,931,000 July 15, 2013 One month U.S. Dollar
LIBOR plus 1.35%
Subclass D-1.......... $ 80,000,000 $ 80,000,000 July 15, 2023 8.5% Fixed
Subclass E-1.......... $111,973,000 $111,973,000 July 15, 2023 20% Fixed
</TABLE>
Interest on any subclass of floating rate Notes is calculated on the basis
of a 360-day year and the actual number of days elapsed in the interest accrual
period. Interest on any subclass of fixed rate Notes is calculated on the basis
of a 360-day year consisting of twelve 30-day months.
Upon the closing of the offering of the old Notes, all of ALPS 94-1's
existing financial indebtedness was repaid. Following the offering, AerCo's
indebtedness consists of the Notes, the subclass D-1 and subclass E-1 Notes. In
order to repay the outstanding principal balance of the subclass A-1 Notes
(initially $340 million) on or before their expected final payment date on July
15, 2000, AerCo will have to refinance such Notes through the sale of
refinancing notes at such time. There can be no assurance that AerCo will be
able to sell refinancing notes in the amount and at the time required.
YEAR 2000
AerCo group is in the process of assessing the potential impact of Year
2000 issues on its operations. For a discussion of these Year 2000 issues, see
"Item 1: Risk Factors" -- Our service providers, lessees, the air traffic
control system and others we depend on may not be Year 2000 compliant -- If
their systems malfunction, we may be unable to make payments on the Notes.
ITEM 9A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
AerCo group's principal market risk exposure is to changes in interest
rates. This exposure arises from its Notes and the derivative instruments used
by AerCo group to manage interest rate risk.
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<PAGE> 49
The basic terms of each subclass of Notes, including the outstanding
principal amount and estimated fair value as of March 31, 1999, are as follows:
<TABLE>
<CAPTION>
ANNUAL PRINCIPAL ESTIMATED
INTEREST RATE AMOUNT EXCEPTED FINAL FINAL FAIR VALUE AT
SUBCLASS OF NOTES (PAYABLE MONTHLY) AT YEAR END PAYMENT DATE MATURITY DATE MARCH 31, 1999
- ----------------- ----------------- ----------- ----------------- ------------- --------------
$MILLION $MILLION
<S> <C> <C> <C> <C> <C>
Subclass A-1......... (LIBOR + 0.19%) 340 July 15, 2000 July 15, 2023 338
Subclass A-2......... (LIBOR + 0.32%) 255 December 15, 2005 July 15, 2023 254
Subclass B-1......... (LIBOR + 0.60%) 82 July 15, 2013 July 15, 2023 78
Subclass C-1......... (LIBOR + 1.35%) 85 July 15, 2013 July 15, 2023 81
Subclass D-1......... (8.5% -- Fixed) 80 July 15, 2023 July 15, 2023 63
Subclass E-1......... (20% -- Fixed) 112 July 15, 2023 July 15, 2023 22
--- -----
954 836
=== =====
</TABLE>
INTEREST RATE RISK AND MANAGEMENT
The leasing revenues of AerCo are generated primarily from lease rental
payments which are either fixed or floating. In some cases, leases carry fixed
and floating rental payments for different rental periods. In the case of
floating rate leases, an element of the rental varies in line with changes in
LIBOR, generally six-month LIBOR. See "Item 1: Description of Business -- The
Aircraft, Related Leases and Collateral -- The Leases" for more information
regarding the terms of our leases. As of March 31, 1999, leases with respect to
approximately 65.82% of the Aircraft by appraised value at January 18, 1999
provided for fixed rate rental payments and approximately 34.18% provided for
floating rate rental payments.
In general, an exposure to interest rate risk relating to the Notes arises
when AerCo's floating interest obligations under the Notes do not correlate to
the mix of fixed and floating rate lease rental payments for different rental
periods. This interest rate exposure can be managed through the use of interest
rate swaps and other derivative instruments. The subclass A-1, subclass A-2,
subclass B-1 and subclass C-1 Notes bear floating 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. The
effect of this gap is compounded by the fact that the reset periods on floating
rental payments are generally longer than the monthly reset periods on the
floating rate Notes. AerCo enters into interest rate swaps ("the Swaps") in
order to correlate the contracted fixed and floating rental payments to the
fixed and floating interest payment on the Notes.
Under the Swaps, AerCo pays fixed amounts and receives floating amounts on
a monthly basis. The swaps amortize on the basis of the expected paydown
schedule of the class A, B and C Notes, the expiry dates of the leases under
which lessees are contracted to make fixed rate rental payments and the LIBOR
reset dates under the floating rate leases. At least every three months, and in
practice more frequently, 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. None of the Swaps
has a maturity date extending beyond September 2004. The fair value of the Swaps
at March 31, 1999 was a negative $2.1 million. AerCo is a party to eleven
interest rate swaps which are listed below:
47
<PAGE> 50
AERCO SWAP BOOK AT MARCH 31, 1999
<TABLE>
<CAPTION>
NOTIONAL ESTIMATED FAIR
SWAP AMOUNT(I) FINAL FIXED RATE MARKET VALUE AS
NO. ($MILLION) EFFECTIVE DATE MATURITY DATE PAYABLE(II) AT MARCH 31, 1999 ($)
- ---- ---------- -------------- ------------- ------------ ---------------------
<S> <C> <C> <C> <C> <C>
1................... 225 15/7/98 15/5/01 5.6690% (1,104,310)
2................... 65 17/8/98 15/8/04 5.8240% (475,910)
3................... 60 23/10/98 15/4/99 4.8850% 2,774
4................... 30 20/11/98 15/4/99 5.0475% (2,806)
5................... 15 15/1/99 15/4/04 5.2140% 263,108
6................... 45 21/8/98 15/9/99 5.5875% (6,257)
7................... 125 15/7/98 15/9/04 5.7530% (1,054,411)
8................... 20 28/9/98 15/1/04 5.0810% 427,924
9................... 30 23/2/99 15/3/04 5.3675% 72,305
10................... 45 18/3/99 15/3/03 5.1000% (225,222)
11................... 60 25/1/99 15/3/03 4.9150% 9,367
----------
(2,093,438)
==========
</TABLE>
- ---------------
(i) While some of the above have a fixed notional amount many amortise over the
period to the final maturity date.
(ii) Each of the Swaps is calculated on a monthly fixed actual/360 adjusted
basis.
(iii) Under all Swaps AerCo group receives floating at one month LIBOR, reset
monthly
Additional interest rate exposure will arise to the extent that lessees
owing fixed rate rental payments default and interest rates have declined
between the contract date of the lease and the date of default. This exposure
can be managed through the purchase of options on interest rate swaps. However,
because of the credit quality of the lessees and the current interest rate
environment, AerCo does not currently intend to acquire any interest rate swap
options. If the credit quality of the lessees changes materially, or if the
interest rate environment warrants it, AerCo may decide to purchase interest
rate swap options, or enter into other derivative transactions such as credit
derivatives as a means of managing such risk.
Through the use of interest rate swap and other interest rate hedging
instruments, it is AerCo's policy not to be adversely exposed to material
movements in interest rates. We cannot assure you, however, that AerCo's
interest rate risk management strategies will be effective in this regard. Any
change to AerCo's policy with regard to its dealing in interest rate hedging
products is subject to periodic review by the rating agencies.
The directors of AerCo are responsible for reviewing and approving the
overall interest rate management policies and transaction authority limits. As
described below, the Administrative Agent, acting within the overall policies
and limits, approves specific hedging instruments. Counterparty risk is
monitored on an ongoing basis. Counterparties are subject to the prior approval
of the directors of AerCo. AerCo's counterparties consist primarily of the
affiliates of major U.S. and European financial institutions (which may include
special purpose derivative vehicles) whose credit ratings are consistent with
maintaining the ratings of the most senior class of Notes then outstanding.
In implementing its interest rate management policy described above, AerCo
seeks to manage its exposure to adverse changes in interest rates based on
regular reviews of its interest rate risk. Before each payment date, the
Administrative Agent, on behalf of AerCo, estimates future principal payments on
the Notes based on a model of its cash flows for the purpose of estimating
required future interest obligations. Future fixed and floating rate lease
revenues are then estimated based on the current lease portfolio. The
Administrative Agent reviews this estimate whenever lease rates (whether fixed
or floating rate) are reset under the terms of the leases. This analysis
invariably indicates that AerCo is "short" floating rate revenues and thus is
adversely exposed to increases in LIBOR the benchmark interest rate for the
Notes and the floating rate leases. After taking into account its available cash
balance, AerCo then enters into interest rate swaps to hedge against the
estimated amount of this shortfall. This interest rate swap portfolio is
reviewed regularly on the basis described above.
48
<PAGE> 51
At March 31, 1999, the aggregate outstanding principal balance of the Notes
was $761.9 million. As a result of the analysis described above, the aggregate
notional amount of our interest rate swap agreements (under which we pay fixed
rate amounts and receive floating rate amounts) was $720 million. AerCo also had
at that date $40 million in short-term debt instruments (that is, the liquidity
reserve amount excluding $15 million in lessee security deposits that AerCo
holds).
The quantitative disclosure and other statements in this section are
forward-looking statements that involve risks and uncertainties. Although our
policy is to limit our exposure to changes in interest rates, we could suffer
higher cash flow losses than described above as a result of actual future
changes in interest rates. You should also note that our future exposure to
interest rate movements will change as the composition of our lease portfolio
changes or if we issue new subclasses of additional notes or refinancing notes
with different interest rate provisions from the notes. You should also refer to
"Item 1 -- Description of Business -- Risk Factors" for more information about
risks, especially lessee credit risk, that could intensify our exposure to
changes in interest rates.
ITEM 10 -- DIRECTORS AND OFFICERS OF REGISTRANT
DIRECTORS
AerCo's board of directors will have no more than five members. The holder
or holders of a majority in aggregate principal amount of AerCo's class E Notes
have the right to appoint two directors while the class E Notes are outstanding.
The remaining directors must be independent directors. The independent directors
are Mr. Frederick W. Bradley, Jr., Chairman of AerCo, Mr. Kenneth N. Peters and
Mr. G. Adrian Robinson. Any succeeding independent directors will be appointed
by a majority of the then standing directors. If no independent directors are
serving on the board at any time, three new independent directors will be
appointed in accordance with AerCo's Articles of Association. Mr. Edward Hansom
and Ms. Rose Hynes were appointed directors by AerFi as holder of the majority
of the subclass E-1 Notes. Any resolution of the board of directors will require
the affirmative vote of a majority of the independent directors. Transactions
and proceedings that relate to certain insolvency proceedings, amendments to
AerCo's Memorandum or Articles of Association, acquisition of additional
aircraft, mergers or the sale of all or substantially all of AerCo's assets may
only be approved by a unanimous vote of all directors.
The directors, their ages and principal activities are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICES HELD WITH THE REGISTRANT
- ---- --- --------------------------------
<S> <C> <C>
Frederick W. Bradley, Jr.... 72 Director and Chairman
Kenneth N. Peters........... 64 Director
G. Adrian Robinson.......... 49 Director
Edward Hansom............... 41 Director
Rose Hynes.................. 41 Director
</TABLE>
Frederick W. Bradley, Jr. -- From 1969 until 1992, Mr. Bradley was a Senior Vice
President of Citibank N.A., in charge of the bank's global airline and
aerospace business, having joined Citibank in 1958. Mr. Bradley has served as
a director and Chairman of ALPS 94-1 since 1994. Mr. Bradley also serves as a
director and Chairman of Aircraft Lease Portfolio Securitisation 92-1 Limited.
Mr. Bradley is also a director of First Citicorp Life Insurance Co., and the
Institute of Air Transport, Paris, France and is president of the
International Air Transport Association's (IATA) International Airline
Training Fund of the United States. Mr. Bradley is a former director of
America West Airlines, Inc.
Kenneth N. Peters -- Mr. Peters was Assistant Treasurer of The Boeing Company
from 1985 to 1995 and was Vice President, Customer Financing at The Boeing
Company from 1995 until his retirement from The Boeing Company in 1997. From
1960 to 1985, Mr. Peters held various positions with The Boeing Company
including the positions of Manager and Director of Customer Financing within
the Corporate Treasurer's Organization.
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<PAGE> 52
G. Adrian Robinson -- Mr. Robinson has been an Aerospace Consultant since 1992.
From 1990 to 1992 Mr. Robinson was a Deputy General Manager of The Nippon
Credit Bank. Until 1989, he was a Managing Director, Special Finance Group of
Chemical Bank, which he joined in 1986. Mr. Robinson also serves as a director
of ALPS 94-1 and its subsidiaries and Aircraft Lease Portfolio Securitisation
92-1 Limited and its subsidiaries. Mr. Robinson also provides consulting
services from time to time to Air 2000, one of the lessees.
Edward Hansom -- Mr. Hansom is Chief Financial Officer of AerFi. He joined AerFi
in 1988 from the treasury division of Schroders. Prior to taking up his
current position within AerFi in May 1997, Mr. Hansom was General Manager,
Treasury of AerFi.
Rose Hynes -- Ms. Hynes is General Counsel of AerFi. She joined AerFi in 1988,
having previously been a partner in an Irish law firm. Prior to taking up her
current position within AerFi in May 1997, Ms. Hynes was Vice President,
Corporate Finance of AerFi. Ms. Hynes also serves as a director of Aer Lingus,
one of the lessees, and certain of its subsidiaries.
AerCo's directors are non-executive and AerCo does not and will not have
any employees or executive officers. Accordingly, the board of directors relies
upon the servicer, the administrative agent, the cash manager and the other
service providers for all asset servicing, executive and administrative
functions under the service provider agreements. Certain individuals other than
the directors listed above serve as directors of various subsidiaries of AerCo.
AerCo knows of no arrangement, the exercise of which could result in a
change in control of AerCo.
THE SERVICER
Babcock & Brown, provides various services to AerCo group under the
servicing agreement. Babcock & Brown is a part of a global financial advisory
group specializing in arranging and managing asset-based financial transactions,
with particular expertise in the international aviation industry. The Babcock &
Brown group is one of the largest independent arrangers of finance and operating
leases for aircraft, providing financial advisory or management services in
approximately 775 transactions to more than 140 clients in the international
aviation industry.
The Babcock & Brown group has been providing management services to its
clients for aircraft on operating lease since 1990, and has developed a team of
experienced professionals and support systems to handle the broad range of tasks
involved in the management of high value assets. At March 31, 1999, the Babcock
& Brown group managed a portfolio of 95 aircraft on behalf of its clients. The
portfolio contained 16 widebody and 79 narrowbody aircraft.
The Babcock & Brown group's lease arrangement services include acquiring
and managing aircraft on operating lease for identified investors. The Babcock &
Brown group also represents owners of aircraft in the sale of aircraft from
their portfolios. Since 1990, the Babcock & Brown group has completed aircraft
operating lease transactions with more than 75 airlines and operating lessees,
including transactions involving 130 aircraft. Between December 1994 and March
1999, the Babcock & Brown group arranged the re-lease of 63 aircraft owned by
its clients.
Babcock & Brown is headquartered in Dublin, Ireland and at March 31, 1999
had eleven employees. The Babcock & Brown group is headquartered in San
Francisco. At March 31, 1999, the Babcock & Brown group had 290 employees in 16
office locations in Brisbane, Dublin, Connecticut, Denver, Hong Kong,
Johannesburg, London, Madrid, Melbourne, Milan, New York, Paris, San Francisco,
Seattle, Sydney and Tokyo.
OPERATING GUIDELINES
Babcock & Brown and its affiliates cannot be held responsible for any
liabilities of AerCo or its affiliates, including any payments due to you on the
Notes.
Babcock & Brown provides services to AerCo group under the servicing
agreement. Babcock & Brown does not have any fiduciary or other implied duties
to you or AerCo, and its obligations are limited to the
50
<PAGE> 53
express terms of the servicing agreement. Babcock & Brown will act in accordance
with applicable law and with AerCo's directions and may exercise such authority
as is necessary to give it a practicable and working autonomy in performing the
services.
Babcock & Brown must also comply with the following two contractual
standards in performing its services:
(1) It must perform its services with reasonable care and diligence as if
it were the owner of the Aircraft consistent with the customary
commercial practice of a prudent international aircraft lessor in the
management, servicing and marketing of commercial jet aircraft and
related assets. We refer to this as the Babcock & Brown services
standard.
(2) If a conflict of interest arises regarding Babcock & Brown's
management, servicing or marketing of: (a) any two aircraft or (b) any
aircraft and any other assets owned, managed, serviced or marketed by
the Babcock & Brown group, Babcock & Brown is required to notify AerCo
and perform the services in good faith. If the two aircraft and other
assets owned, managed, serviced or marketed by Babcock & Brown are
substantially similar in terms of objectively identifiable
characteristics that are relevant for the particular services to be
performed, Babcock & Brown will not discriminate among the aircraft or
between any of the aircraft and any other aircraft then owned, managed,
serviced or marketed by Babcock & Brown on an unreasonable basis. We
refer to this as the Babcock & Brown conflicts standard.
All transactions to be entered into by Babcock & Brown on behalf of AerCo
group, other than with other persons within AerCo group, must be at arm's length
and on fair market value terms unless otherwise agreed or directed by AerCo. The
following transactions or matters with respect to the Aircraft require AerCo's
specific written approval including:
- sales of or agreements to sell Aircraft or any engine forming part of
the Aircraft assets unless required by the lease;
- entering into new leases that do not comply with the operating
covenants;
- entering into amendments, renewals or extensions of existing leases that
do not comply with the operating covenants;
- terminating any lease for any Aircraft having an aggregate depreciated
net book value over $100 million;
- entering into any contract for modification or maintenance of the
Aircraft not provided for in the AerCo budget if:
-- the cost to AerCo is more than the estimated cost of a heavy
maintenance check for the airframe and the engines and the available
maintenance reserves or other collateral under the related lease,
whichever is greater, or
-- the modification or maintenance is outside the ordinary course of
AerCo group's business;
- entering into any capital commitment or confirming any order or
commitment to acquire aircraft or engines;
- issuing any guarantee on behalf of any person within AerCo group other
than guarantees:
-- by one AerCo group member of the lease obligations of another, or
-- for trade payables incurred in the ordinary course of AerCo group's
business;
- entering into any agreements for services costing more than $50,000 to
be provided by third parties at AerCo group's cost, unless this is an
expense provided for in the budget; and
- entering into or amending or granting a waiver in any transaction with
Babcock & Brown or any of its affiliates on behalf of any person within
AerCo group.
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<PAGE> 54
LIMITATION ON LIABILITY
Babcock & Brown is not liable to any person, other than AerCo group to the
limited extent described below, for any losses relating to
- the sale, lease or purchase of our Aircraft on less favorable terms than
might have been achieved at any time, so long as the transactions were
entered into on the basis of a commercial decision or recommendation of
Babcock & Brown in accordance with the Babcock & Brown services
standard;
- Babcock & Brown's obligation to apply the Babcock & Brown conflicts
standard in performing its services, except, where the losses are
finally adjudicated to have been caused directly by their negligence,
recklessness, wilful misconduct or fraud;
- the ownership, operation, maintenance, acquisition, leasing, financing,
refinancing or sale of any of our Aircraft, or any action, or failure to
act on the part of any person at any time, prior to the effective date
of the servicing agreement;
- any action that AerCo, the Cash Manager or the Administrative Agent,
instructs Babcock & Brown to take, limit or terminate;
- AerCo group's refusal to take any action that Babcock & Brown
recommends;
- circumstances where any person within AerCo group has received amounts
sufficient to cover such losses; or
- the gross negligence, recklessness, fraud or wilful misconduct of any
person within AerCo group.
INDEMNIFICATION
AerCo group will indemnify Babcock & Brown and its affiliates and
representatives on an after-tax basis for any losses that may be asserted
against them relating to:
- Babcock & Brown's performance under the servicing agreement;
- errors in judgment or omissions by Babcock & Brown or any action taken,
limited or terminated in accordance with AerCo's, the cash manager's or
the administrative agent's instructions, except where the losses are
finally adjudicated to have been caused by Babcock & Brown's negligence,
recklessness, fraud or wilful misconduct in performing its obligations;
or
- any of the circumstances under which Babcock & Brown would not be liable
to AerCo as described above.
Babcock & Brown will indemnify AerCo group on an after-tax basis for losses
arising from the performance of its services, where the losses are finally
adjudicated to have:
- been caused directly by the negligence, recklessness, fraud or wilful
misconduct of Babcock & Brown or any of its affiliates or delegates in
respect of its obligations to apply the Babcock & Brown services
standard or the Babcock & Brown conflicts standard in connection with
the performance of its services; or
- directly resulted from a breach by Babcock & Brown of the express terms
and conditions of the servicing agreement.
Babcock & Brown's obligation to indemnify AerCo excludes circumstances
where any person within AerCo group has already received an amount sufficient to
cover such losses and is limited to a maximum amount of $21 million in the
aggregate with respect to any and all losses, except for losses arising from
fraud on the part of Babcock & Brown, for which Babcock & Brown will have
unlimited liability.
AIRCRAFT SERVICES
Babcock & Brown provides a wide range of services to AerCo group,
including:
52
<PAGE> 55
- lease marketing, such as remarketing, lease drafting, negotiation and
execution;
- initial Aircraft asset management, such as rent collection, aircraft
maintenance, insurance, contract compliance and enforcement against
current lessees, and accepting delivery and redelivery of Aircraft;
- current Aircraft sales;
- arranging valuations and monitoring and advising AerCo on regulatory
developments;
- assisting AerCo to stay in compliance with certain covenants under the
indenture;
- providing AerCo with data and information relating to our Aircraft and
the commercial aviation industry;
- assistance with any public or private offerings and sale of refinancing
notes or additional notes;
- assistance with permitted tax-related dispositions or other permissible
tax-based financings;
- legal and other professional services relating to the lease, sale or
financing of our Aircraft, amendment modification or enforcement of our
aircraft lease; and
- periodic reporting of operational, financial and other information on
our Aircraft and leases.
Babcock & Brown has agreed to:
- engage and maintain the necessary staff and supporting resources
required to perform its services;
- grant AerCo group and its agents, access to its information, programs,
records and personnel to enable AerCo group to monitor its compliance
with the servicing agreement and for general AerCo group business; and
- separate its own funds from the funds of any person within AerCo group.
BUDGETS
AerCo will adopt an annual and a three-year budget each year for all
Aircraft. Babcock & Brown has agreed to use reasonable commercial efforts to
achieve the annual budget.
MANAGEMENT FEES
Babcock & Brown is paid an annual retainer fee of approximately 0.10% of
the initial appraised value of each Aircraft in our fleet. The retainer fee is
payable monthly in arrears in equal installments and subject to pro-rata
reduction for any month in which we do not own all the Aircraft currently in our
fleet. In calculating the retainer fee, the initial appraised value may not be
reduced below $250 million until all of the Aircraft are sold. Babcock & Brown
also receives a monthly fee, equal to 1% of the aggregate rent paid for that
month or portion of a month that AerCo group owns the related Aircraft which are
subject to Babcock & Brown servicing. Babcock & Brown will also receive three
incentive fees:
- a results-based incentive fee, based on a formula to be agreed upon by
Babcock & Brown and AerCo. If no agreement is reached, the fee will
equal 12.50% of any excess of (1) actual revenues available to repay
holders of AerCo's publicly and privately issued debt securities for any
year over (2) 95% of the target amount contained in the applicable
annual budget;
- a sales based fee of 1.25% multiplied by 90% of the initial appraised
value of any Aircraft that is sold, net of transaction expenses; and
- a sales-based incentive fee equal to 10% of the excess of the net
proceeds of an Aircraft sale over the target sales price for the
Aircraft agreed by AerCo and Babcock & Brown. Babcock & Brown will be
reimbursed for various out of pocket expenses incurred in connection
with the performance of the services.
53
<PAGE> 56
Babcock & Brown also will be reimbursed for certain expenses incurred in
connection with its performance of the services which in the aggregate may
constitute a significant additional component of AerCo's total overhead costs.
TERM AND TERMINATION
The servicing agreement is for an initial term of 10 years expiring on July
15, 2008. AerCo may extend the term of the servicing agreement to July 15, 2023
upon at least six months written notice to Babcock & Brown and subject to an
increase in the rental fee percentage.
Babcock & Brown may terminate the servicing agreement if:
- AerCo does not pay:
-- any servicing fees within five business days of a written delinquency
notice, or
-- any other amount payable by any person within AerCo group within 10
business days of a delinquency notice;
- any person within AerCo group violates any material term, covenant,
condition or agreement under the servicing agreement;
- an involuntary proceeding under applicable bankruptcy, insolvency,
receivership or similar law against AerCo, any of its subsidiaries or a
substantial part of the property or assets of any person within AerCo
group, continues undismissed for 100 days or an order or decree
approving any of the foregoing shall be entered or any such person goes
into liquidation, suffer a receiver or mortgagee to take possession of
all or substantially all of its assets or have an examiner appointed
over it, or a petition or proceeding is presented for any of the
foregoing and not discharged within 100 days;
- a voluntary proceeding is commenced under bankruptcy, insolvency,
receivership or similar law against AerCo or any of its subsidiaries,
AerCo or any of its subsidiaries consents to the institution of, or
fails to contest the filing of, any petition described above, or files
an answer admitting the material allegations of any such petition, or
makes a general assignment for the benefit of its creditors;
- Babcock & Brown or its affiliates become liable for taxes, except income
taxes, arising from its performing services to AerCo, if:
-- Babcock & Brown cannot avoid the taxes using reasonable commercial
efforts, and
-- AerCo does not indemnify Babcock & Brown or its affiliates for the
taxes;
- directions given by AerCo or any of its subsidiaries are, or if carried
out would be, unlawful under applicable law.
AerCo may terminate the servicing agreement if:
- Babcock & Brown breaches any of its obligations under the servicing
agreement and fails to cure the breach after written notice from AerCo;
- Babcock & Brown ceases or gives notice that it will cease to be actively
involved in the aircraft advisory and management business;
- AerCo repays, refinances or defeases all of its public or private debt
securities in full;
- Babcock & Brown undergoes a change of control;
- an involuntary proceeding under bankruptcy, insolvency, receivership or
similar law, against Babcock & Brown or a substantial part of its
property or assets, continues undismissed for 100 days or an order or
decree approving any of the foregoing shall be entered or Babcock &
Brown goes into liquidation, suffer a receiver or mortgagee to take
possession of all or substantially all of its assets or have an examiner
appointed over it, or a petition or proceeding for any of the foregoing
being presented and not discharged within 100 days;
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<PAGE> 57
- a voluntary proceeding is commenced against Babcock & Brown under
bankruptcy, insolvency, receivership or similar law upon consent by
Babcock & Brown to the institution of, or failure by Babcock & Brown to
contest the filing of, any petition described above, or filing of an
answer admitting the material allegations of any such petition, or the
making of a general assignment for the benefit of its creditors;
- upon six months' written notice; and
- upon less than six months written notice, if Babcock & Brown is paid:
-- a retainer fee,
-- a rental fee based on rent budgeted to be received during the period;
-- an incentive fee based on the achievement of an approved budget target
for a six-month period after written notice of termination is
received, and
-- payment of the termination fee set out below.
The termination fee shall be the following percentage of initial appraised
value as of the date of termination:
<TABLE>
<S> <C>
On or after March 31, 1998 but prior to March 31, 2001...... 0.20%
On or after March 31, 2001 but prior to March 31, 2003...... 0.15%
On or after March 31, 2003 but prior to March 31, 2005...... 0.10%
Thereafter.................................................. Nil
</TABLE>
However, AerCo may terminate the servicing agreement upon less than six
months written notice and pay only 50% of the termination fee described above,
if:
- Babcock & Brown or any of its affiliates is retained to service a fleet
of commercial jet aircraft on or available for lease having an aggregate
appraised value exceeding the lesser of:
-- $3.50 billion in appraised value, or
-- 50% or more, based on appraised value, of all commercial jet aircraft
then serviced by Babcock & Brown and its affiliates or;
- Babcock & Brown or any of its affiliates acquires or makes an equity
investment in any aircraft portfolio, securitization vehicle or other
entity that owns or leases commercial jet aircraft on or available for
lease where such investment represents more than 20% of the total equity
of such entity and the appraised value of the portfolio exceeds the
lesser of:
-- $2.50 billion in appraised value, and
-- the amount which represents 35% or more, based on appraised value, of
all commercial jet aircraft, then serviced by Babcock & Brown and its
affiliates.
AerCo may terminate the servicing agreement for any Aircraft to which any
of the following conditions apply:
- in the case of marketing for re-lease of an Aircraft, such Aircraft has
been off-lease and is reasonably available for re-lease for more than
180 days after expiry of the agreed lease marketing period; or
- Babcock & Brown fails, within a reasonable period of time, not to exceed
180 days, to submit to AerCo a bona fide third party offer to purchase
an Aircraft after written direction from AerCo to arrange such a sale;
or
- Babcock & Brown recommends a course of action for an Aircraft or lease
to AerCo which AerCo does not approve and, after negotiation in good
faith, Babcock & Brown refuses to amend, withdraw or replace such
recommendation with one that is consistent with its obligations.
55
<PAGE> 58
ASSIGNMENT OF SERVICING AGREEMENT
Babcock & Brown and AerCo may not assign their rights and obligations under
the servicing agreement without each other's prior consent.
PRIORITY OF PAYMENT OF SERVICING FEES AND REIMBURSABLE EXPENDITURES
Babcock & Brown's fees and expenses rank senior in priority of payment to
all payments on the Notes.
ADDITIONAL SERVICERS
AerCo may appoint Babcock & Brown to service additional aircraft on the
terms of the servicing agreement. AerCo may also appoint a third party to
service additional aircraft with confirmation by the rating agencies that this
will not result in the lowering or withdrawals of any ratings assigned to the
Notes. You should refer to "Description of the Notes -- Payment of Principal and
Interest -- Operating Covenants" for additional information on limitations on
AerCo's ability to appoint additional servicers for additional aircraft.
CORPORATE MANAGEMENT
AERFI
AerFi holds all of the subclass D-1 and subclass E-1 Notes. AerFi's wholly
owned subsidiaries provide administrative, accounting, liability management,
financial consulting and cash management services to AerCo group.
At June 30, 1999, AerFi employed 32 people and had 61 commercial aircraft
in its portfolio, of which 58 were on lease to 27 lessees in 17 countries.
On November 20, 1998, AerFi concluded a restructuring which significantly
changed its operations. As part of the restructuring, AerFi sold a portion of
its aircraft portfolio to GE Capital Aviation Services, Limited ("GECAS"),
including one aircraft which was previously owned by ALPS 94-1 and transferred
its interest in Airplanes Group to GECAS. In addition, GE Capital Corporation
agreed to replace its then option to acquire 100% of AerFi with a new option,
exercisable at any time until October 29, 2001, to acquire a passive investment
of up to 24.9% in AerFi (after exercise) at an option price of $0.60 per share
(equivalent to the per share price under the previous option). On November 20,
1998, pursuant to an investment agreement dated September 30, 1998 (the
"Investment Agreement") between AerFi, Texas Pacific Group ("TPG") and certain
other AerFi shareholders (the "current shareholders") TPG purchased 61,595,497
ordinary shares in AerFi and 3,734,500 ordinary shares in AerFi were purchased
by the current shareholders, in each case by tender offer. TPG also subscribed
for 12,820,513 new ordinary shares in AerFi. Under the terms of the Investment
Agreement, TPG has certain other rights, including the right to:
- appoint three members to the Board of AerFi
- veto significant corporate actions of AerFi
- exercise a substantial measure of influence over the nature and timing
of any future flotation of shares of AerFi
ADMINISTRATIVE AGENT
The administrative agent provides administrative and accounting services to
the board of directors including:
- monitoring and reporting on the performance of AerCo group's service
providers to the board of directors on a quarterly basis;
- acting as liaison with the rating agencies;
- establishing and maintaining AerCo group's accounting ledgers;
56
<PAGE> 59
- providing quarterly and annual draft accounts for AerCo group and
individual companies within AerCo group;
- preparing annual and three year budgets;
- authorizing payment of certain expenses;
- coordinating any amendments to the transaction agreements, other than
the leases;
- procuring, supervising and coordinating AerCo group's outside legal
counsel, accounting, tax and other professional advisors;
- preparing and coordinating reports to investors and the Commission;
- assisting AerCo group's tax advisors with the preparation and filing of
all required tax returns;
- assisting AerCo in developing and implementing its interest rate
management policy and developing financial models, cash flow projections
and forecasts and in making aircraft lease, sale and capital investment
decisions;
- advising AerCo on the appropriate levels of the liquidity reserve
amount; and
- assisting AerCo with the public or private offerings of refinancing
notes.
AerCo's board of directors may ask the administrative agent to provide
additional administrative services. However, the administrative agent is not
obligated to perform any additional services that could reasonably result in the
business of AerCo or any of its subsidiaries ceasing to be separate and readily
identifiable from, and independent of, the administrative agent, AerFi Group or
any of their respective affiliates.
The administrative agent receives a monthly administrative fee equal to 2%
of the rental payments for each month. The administrative fee must be at least a
minimum of $200,000 per year and will be adjusted for inflation. The
administrative agent will receive an additional fee for services provided in
connection with the public or private offering of securities by AerCo equal to
0.025% of the net proceeds of the offering. The administrative agent is
reimbursed for certain expenses incurred in performing its services under the
administrative agency agreement.
The administrative agent may resign on 60 days' written notice and AerCo
may remove the administrative agent on 120 days' written notice. However, the
administrative agent may not resign or be removed unless AerCo or a court of
competent jurisdiction has appointed a successor administrative agent.
CASH MANAGER
The cash manager provides cash management and related services to AerCo
group. The cash manager's duties include informing Babcock & Brown and the
administrative agent of the aggregate deposits in the accounts and any other
information that is required about the accounts. The cash manager is authorized
to invest funds held by AerCo group in the accounts other than the tax
defeasance account in certain prescribed investments on permitted terms.
The cash manager also calculates certain monthly payments and makes all
other calculations as required under the cash management agreement based on data
provided by the servicer on the aircraft and the leases. The cash manager also
provides information required by the trustee to provide reports to the
noteholders.
The cash manager receives a fee of $250,000 per year for its services to
AerCo group. The fee is subject to adjustment for inflation. The cash manager
will not be liable to AerCo group for any losses or taxes payable by AerCo group
unless the losses or taxes arise from the cash manager's own gross negligence,
simple negligence in the handling of funds, willful misconduct, deceit or fraud
or that of its officers, agents or employees. The cash manager will be
indemnified by the members of AerCo group for any loss, liability or tax
incurred by the cash manager, its officers, directors, agents and employees as a
result of the performance of services under the cash management agreement. AerCo
group will not indemnify the cash manager for losses caused by its own deceit,
fraud, willful default or negligence or that of its officers, directors, agents
and employees.
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<PAGE> 60
The cash manager may resign on 60 days' written notice and the security
trustee or AerCo group may remove the cash manager upon 120 days' written
notice. However, the cash manager may not resign or be removed unless AerCo or a
court of competent jurisdiction has appointed a successor cash manager.
COMPANY SECRETARY
The company secretary maintains company books and records, including minute
books and stock transfer records. It makes available telephone, telecopy, telex
and post office box facilities and will maintain a registered office in the
relevant jurisdictions.
Mourant & Co. Secretaries Limited acts as company secretary for members of
the AerCo group that are incorporated in Jersey.
ITEM 11 -- COMPENSATION OF DIRECTORS AND OFFICERS
All directors are compensated for travel and other expenses incurred by
them in the performance of their duties. AerCo pays each independent director an
aggregate fee of $75,000 per annum for their services. The directors appointed
by the holder of a majority in aggregate principal amount of the class E notes
do not and will not receive remuneration from AerCo for their services.
Mr. Bradley, Mr. Peters and Mr. Robinson also act as directors of certain
AerCo group subsidiaries. Mr. Bradley, Mr. Peters and Mr. Robinson each receive
$1,000 for each day, or portion of a day, which they are required to devote to
the activities of those subsidiaries and AerCo, excluding board meetings.
ITEM 12 -- OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
None
ITEM 13 -- INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
AerCo group has had and currently maintains various relationships with
AerFi. First, AerFi acted as promoter in establishing the entities that comprise
AerCo group. Second, AerCo group purchased substantially all of its assets from
AerFi and ALPS 94-1. See "Item 1. -- Description of Business". Third, AerFi is a
holder of 5% of the ordinary share capital of AerCo. Fourth, subsidiaries of
AerFi act as the Administrative Agent and Cash Manager for AerCo group. See
"Item 10. -- Directors and Executive Officers of the Registrant -- Corporate
Management". Fifth, Mr. Hansom and Ms. Hynes, employees of AerFi, are Directors
of AerCo and ALPS 94-1. Sixth, AerFi holds all of the AerCo subclass D-1 and E-1
Notes.
PART II
ITEM 14 -- DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable
PART III
ITEM 15 -- DEFAULTS UPON SENIOR SECURITIES
None
ITEM 16 -- CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES
None
58
<PAGE> 61
PART IV
ITEM 17 -- FINANCIAL STATEMENTS
Not applicable
ITEM 18 & 19 -- FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
A. HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS FOR AERCO
AND ALPS 94-1
Independent auditors' reports............................... F-1
Consolidated balance sheets................................. F-5
Consolidated statements of operations....................... F-6
Consolidated statements of cash flows....................... F-7
Statements of changes in shareholders' deficit.............. F-8
Statement of accounting policies............................ F-9
Notes to the consolidated financial statements.............. F-13
B. HISTORICAL FINANCIAL STATEMENTS FOR AERFI TRANSFERRED
AIRCRAFT
Independent auditors' reports............................... F-38
Statements of net assets.................................... F-41
Statements of operations.................................... F-42
Statements of cash flows.................................... F-43
Statements of changes in net assets......................... F-44
Statement of accounting policies............................ F-45
Notes to the financial statements........................... F-47
</TABLE>
COMPANY DEFINITIONS
"AerCo Limited" AerCo Limited, a special purpose limited liability
company incorporated under the laws of Jersey with
its registered office located at 22 Grenville
Street, St. Helier, Jersey, JE4 8PX, Channel
Islands.
"AerCo" AerCo Limited and its consolidated subsidiaries,
including ALPS 94-1.
"ALPS 94-1 Limited" Aircraft Lease Portfolio Securitization 94-1
Limited, a special purpose limited liability
company incorporated under the laws of Jersey in
1994 to purchase 27 aircraft from AerFi.
"ALPS 94-1" ALPS 94-1 Limited and its consolidated
subsidiaries.
"AerFi" AerFi Group plc and its subsidiary undertakings.
(B) EXHIBITS
None
59
<PAGE> 62
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By: /s/ Frederick W. Bradley, Jr.
Name: Frederick W. Bradley, Jr.
Title: Director and Chairman
Dated: August 11, 1999
60
<PAGE> 63
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
AERCO LIMITED
We have audited the accompanying balance sheets of AerCo as of March 31,
1999 and ALPS 94-1 as of July 14, 1998 and June 30, 1998 and the related
consolidated statement of operations, cashflows and changes in shareholders'
deficit for AerCo for the period from July 15, 1998 to March 31, 1999 and for
ALPS 94-1 for the period from July 1, 1998 to July 14, 1998 and for the year
ended June 30, 1998.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors of AerCo Limited and ALPS 94-1 Limited are required to
prepare consolidated financial statements for each financial period which give a
true and fair view of the state of affairs of AerCo Limited and ALPS 94-1
Limited and their consolidated subsidiaries and of the results of AerCo Limited
and ALPS 94-1 Limited and their consolidated subsidiaries for that period. In
preparing those consolidated financial statements, the directors are required to
select suitable accounting policies and apply them consistently, make judgments
and estimates that are prudent and reasonable and to prepare the consolidated
financial statements on the going concern basis unless it is not appropriate to
assume that AerCo Limited and ALPS 94-1 Limited and their consolidated
subsidiaries will continue in business. The directors are responsible for
keeping proper accounting records which disclose with reasonable accuracy at any
time the financial position of AerCo Limited and ALPS 94-1 Limited and their
consolidated subsidiaries and which enable them to ensure that the annual
statutory financial statements comply with the Companies (Jersey) Law 1991. They
are also responsible for safeguarding the assets of AerCo and ALPS 94-1 and
hence for taking reasonable steps for the prevention and detection of fraud and
other irregularities. It is our responsibility to form an independent opinion,
based on our audit, on those financial statements and to report our opinion to
you.
BASIS OF OPINION
We conducted our audit in accordance with auditing standards issued by the
U.K. Auditing Practices Board which do not differ significantly from United
States generally accepted auditing standards.
An audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the consolidated financial statements. It also
includes an assessment of the significant estimates and judgments made by the
directors in the preparation of the consolidated financial statements and of
whether the accounting policies are appropriate to the circumstances of AerCo
Limited and ALPS 94-1 Limited and their consolidated subsidiaries, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the consolidated financial
statements are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the consolidated financial
statements.
OPINION
In our opinion, the consolidated financial statements referred to above,
which have been drawn up in accordance with generally accepted accounting
principles in the United Kingdom give a true and fair view of the state of
affairs of AerCo as at March 31, 1999 and of ALPS 94-1 as at July 14, 1998 and
June 30, 1998 and of the results of operations, cashflows and changes in
shareholders' deficit of AerCo for the period from July 15, 1998 to March 31,
1999 and ALPS 94-1 for the period from July 1, 1998 to July 14, 1998 and the
year ended June 30, 1998 and have been properly prepared in accordance with
Companies (Jersey) Law 1991.
F-1
<PAGE> 64
INDEPENDENT AUDITORS' REPORT -- (CONTINUED)
As discussed in Note 24 to the consolidated financial statements, AerCo has
adopted the provisions of Financial Reporting Standard 12, "Provisions,
Contingent Liabilities and Contingent Assets". As a result, ALPS 94-1 has
changed its accounting policy for maintenance to reflect the adoption of the
AerCo accounting policy.
Generally accepted accounting principles in the United Kingdom vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected the result of operations of AerCo for the
period from July 15, 1998 to March 31, 1999 and of ALPS 94-1 for the period from
July 1, 1998 to July 14, 1998 and for the year ended June 30, 1998 and the
shareholders' deficit of AerCo as of March 31, 1999 and of ALPS 94-1 as at July
14, 1998 and June 30, 1998 to the extent summarized in Notes 26, 27 and 28 of
the consolidated financial statements.
KPMG
CHARTERED ACCOUNTANTS
5 George's Dock
IFSC
Dublin 1
Ireland
August 9, 1999
F-2
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED
We have audited the accompanying consolidated statement of operations, cash
flows and changes in shareholders' deficit of ALPS 94-1 for the year ended June
30, 1997.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors of ALPS 94-1 Limited are required to prepare consolidated
financial statements for each financial year which give a true and fair view of
the state of affairs of ALPS 94-1 Limited and its consolidated subsidiaries and
of the results of ALPS 94-1 Limited and its consolidated subsidiaries for that
year. In preparing those consolidated financial statements, the directors are
required to select suitable accounting policies and apply them consistently,
make judgements and estimates that are prudent and reasonable and to prepare the
consolidated financial statements on the going concern basis unless it is not
appropriate to assume that ALPS 94-1 Limited and its consolidated subsidiaries
will continue in business. The directors are responsible for keeping proper
accounting records which disclose with reasonable accuracy at any time the
financial position of ALPS 94-1 Limited and its consolidated subsidiaries and
which enable them to ensure that the annual statutory financial statements
comply with the Companies (Jersey) Law 1991. They are also responsible for
safeguarding the assets of ALPS 94-1 and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
It is our responsibility to form an independent opinion, based on our
audit, on those financial statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
U.K. Auditing Practices Board which do not differ significantly from United
States generally accepted auditing standards.
An audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the consolidated financial statements. It also
includes an assessment of the significant estimates and judgements made by the
directors in the preparation of the consolidated financial statements and of
whether the accounting policies are appropriate to the circumstances of ALPS
94-1 Limited and its consolidated subsidiaries, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the consolidated financial
statements are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the consolidated financial
statements.
OPINION
In our opinion the consolidated financial statements give a true and fair
view of the income, cash flow and changes in shareholders' deficit of ALPS 94-1
Limited and its consolidated subsidiaries for the year ended June 30, 1997 and
have been properly prepared in accordance with U.K. generally accepted
accounting principles.
F-3
<PAGE> 66
INDEPENDENT AUDITORS' REPORT -- (CONTINUED)
Generally accepted accounting principles in the United Kingdom vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected the result of operations for the year
ended June 30, 1997 to the extent summarized in Notes 26 and 28 of the
consolidated financial statements.
ARTHUR ANDERSEN
CHARTERED ACCOUNTANTS
Forum House
Grenville Street
St. Helier
Jersey J2E 4UF
Channel Islands
March 8, 1999
F-4
<PAGE> 67
AERCO
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AERCO ALPS 94-1 ALPS 94-1
NOTES MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
----- -------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash.......................................... 1 25,618 146,175 51,608
Commercial paper.............................. 1 39,997 -- 36,686
Accounts receivable, net...................... 2 4,004 2,724 2,489
--------- --------- ---------
TOTAL CURRENT ASSETS.......................... 69,619 148,899 90,783
INTANGIBLE ASSETS
Goodwill, net................................. 3 45,456 -- --
FIXED ASSETS
Aircraft, net................................. 5 904,253 732,905 800,090
--------- --------- ---------
TOTAL ASSETS.................................. 1,019,328 881,804 890,873
========= ========= =========
LIABILITIES & SHAREHOLDERS' DEFICIT
LIABILITIES
Accrued expenses and other liabilities........ 7 70,436 72,057 77,736
Indebtedness.................................. 9 949,217 875,015 877,128
Security deposits............................. 10 14,783 13,255 13,255
--------- --------- ---------
TOTAL LIABILITIES............................. 1,034,436 960,327 968,119
SHAREHOLDERS' DEFICIT
Share capital................................. 11 -- -- --
Accumulated deficit........................... (15,108) (78,523) (77,246)
--------- --------- ---------
TOTAL SHAREHOLDERS' DEFICIT................... (15,108) (78,523) (77,246)
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT... 1,019,328 881,804 890,873
========= ========= =========
</TABLE>
The accompanying notes, including the statement of accounting policies, on pages
F-9 to F-12, are an integral part of the consolidated financial statements.
F-5
<PAGE> 68
AERCO
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
AERCO ALPS 94-1
-------------- ------------------------------------------------------------------
PERIOD FROM (UNAUDITED)
JULY 15, 1998 NINE MONTHS PERIOD FROM
TO ENDED JULY 1, 1998 TO YEAR ENDED YEAR ENDED
NOTES MARCH 31, 1999 MARCH 31, 1998 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
----- -------------- ---------------- --------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Aircraft leasing.............. 12 82,826 76,098 3,635 100,682 101,434
EXPENSES
Depreciation.................. 5 (33,821) (28,569) (1,519) (37,826) (38,062)
Exceptional item --
additional
depreciation............. 13 -- -- -- -- (34,385)
Provision for impairment in
aircraft value.............. 13 -- (8,720) -- (8,720) --
Amortisation of goodwill...... 3 (1,669) -- -- -- --
Net interest expense.......... 14 (54,108) (52,340) (2,757) (69,785) (71,037)
Other expenses................ 15 (8,311) (4,278) (646) (6,599) (5,053)
Exceptional item --
termination fee.......... 13 -- -- -- (12,700) --
-------- -------- ------- -------- --------
Total expenses................ (97,909) (93,907) (4,922) (135,630) (148,537)
-------- -------- ------- -------- --------
NET LOSS FROM OPERATIONS...... (15,083) (17,809) (1,287) (34,948) (47,103)
Profit on sale of aircraft.... 5 10 -- 10 2,426 --
Reduction in indebtedness..... 9 -- -- -- -- 5,258
-------- -------- ------- -------- --------
NET LOSS BEFORE PROVISION FOR
TAXES....................... 16 (15,073) (17,809) (1,277) (32,522) (41,845)
(Provision)/benefit for
taxes....................... 17 (35) (15) -- (33) 143
-------- -------- ------- -------- --------
NET LOSS FOR THE PERIOD....... (15,108) (17,824) (1,277) (32,555) (41,702)
RETAINED LOSS BROUGHT
FORWARD..................... -- (44,691) (77,246) (44,691) (2,989)
-------- -------- ------- -------- --------
RETAINED LOSS CARRIED
FORWARD..................... (15,108) (62,515) (78,523) (77,246) (44,691)
BASIC AND DILUTED LOSS PER
ORDINARY SHARE.............. 18 (755.4) (1,782.4) (127.7) (3,255.5) (4,170.2)
-------- -------- ------- -------- --------
WEIGHTED AVERAGE NUMBER OF
ORDINARY SHARES
OUTSTANDING................. 18 20 10 10 10 10
======== ======== ======= ======== ========
</TABLE>
All recognized gains and losses are included in the consolidated statements of
operations above.
There is no material difference between the net income for AerCo or ALPS 94-1
for any of the periods set out above, and the historical cost equivalent.
The results for all periods are derived from continuing operations.
The accompanying notes, including the statement of accounting policies on pages
F-9 to F-12, are an integral part of the consolidated financial statements.
F-6
<PAGE> 69
AERCO
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
AERCO ALPS 94-1
---------------- ----------------------------------------------------------------
(UNAUDITED)
PERIOD FROM NINE MONTHS PERIOD FROM
JULY 15, 1998 TO ENDED JULY 1, 1998 TO YEAR ENDED YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
---------------- -------------- --------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000 U.S.$'000
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss for the period........... (15,108) (17,824) (1,277) (32,555) (41,702)
ADJUSTMENTS TO RECONCILE NET LOSS
FROM OPERATIONS TO NET CASH
PROVIDED/ (UTILISED) BY
OPERATING ACTIVITIES
Depreciation...................... 33,821 28,569 1,519 37,826 38,062
Exceptional item -- additional
depreciation charge.......... -- -- -- -- 34,385
Amortisation of goodwill.......... 1,669 -- -- -- --
Amortisation of issue costs....... 673 -- -- --
Provision for permanent diminution
in value of aircraft............ -- 8,720 -- 8,720 --
Changes in operating assets and
liabilities
Accounts receivable............. (1,077) 651 (252) 1,651 503
Accrued interest on E Note...... -- 12,340 1,606 17,079 14,532
Exceptional item -- termination
fee.......................... -- -- -- 12,700 --
Accrued expenses and other
liabilities.................. 14,080 5,032 (4,611) 4,185 1,369
Reduction in indebtedness....... -- -- -- -- (5,258)
Net maintenance
(expenditure)/receipts.......... (4,675) 269 (1,062) (1,938) 6,703
Net security deposits repaid...... (1,422) (1,648) -- (1,947) (3,475)
---------- ------- ------- ------- -------
NET CASH PROVIDED/(UTILISED) BY
OPERATING ACTIVITIES............ 27,961 36,109 (4,077) 45,721 45,119
---------- ------- ------- ------- -------
CAPITAL EXPENDITURE
Purchase of aircraft.............. -- (1,132) -- (1,132) --
Sale of aircraft.................. 14,500 -- 65,677 11,518 --
---------- ------- ------- ------- -------
14,500 (1,132) 65,677 10,386 --
ACQUISITIONS
Purchase of subsidiary
undertakings.................... (1,071,565) -- -- -- --
Cash acquired with subsidiaries... 146,175 -- -- -- --
---------- ------- ------- ------- -------
(925,390) -- -- -- --
MANAGEMENT OF LIQUID RESOURCES
Net (purchase)/sale of commercial
paper........................... (39,997) 1,739 36,686 3,135 (4,511)
---------- ------- ------- ------- -------
FINANCING ACTIVITIES
Debt issued....................... 986,609 -- -- -- --
Indebtedness repaid............... (38,065) (35,690) (3,719) (59,108) (43,494)
---------- ------- ------- ------- -------
NET CASH INFLOW/(OUTFLOW) FROM
FINANCING ACTIVITIES............ 948,544 (35,690) (3,719) (59,108) (43,494)
---------- ------- ------- ------- -------
NET INCREASE/(DECREASE) IN CASH... 25,618 1,026 94,567 134 (2,886)
CASH AT BEGINNING OF PERIOD....... -- 51,474 51,608 51,474 54,360
---------- ------- ------- ------- -------
CASH AT END OF PERIOD............. 25,618 52,500 146,175 51,608 51,474
========== ======= ======= ======= =======
</TABLE>
Disclosure of cash flow information is set out in Note 22.
The accompanying notes, including the statement of accounting policies on pages
F-9 to F-12, are an integral part of the consolidated financial statements.
F-7
<PAGE> 70
AERCO
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
NUMBER RETAINED SHAREHOLDERS'
OF SHARES SHARE CAPITAL LOSS DEFICIT
--------- ------------- ---------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C>
ALPS 94-1:
Balance at June 30, 1996....................... 10 -- (2,989) (2,989)
Net loss for the year.......................... -- -- (41,702) (41,702)
--- --- ------- -------
Balance at June 30, 1997....................... 10 -- (44,691) (44,691)
Net loss for the year.......................... -- -- (32,555) (32,555)
--- --- ------- -------
Balance at June 30, 1998....................... 10 -- (77,246) (77,246)
Net loss for the period........................ -- -- (1,277) (1,277)
--- --- ------- -------
BALANCE AT JULY 14, 1998....................... 10 -- (78,523) (78,523)
=== === ======= =======
- --------------------------------------------------------------------------------------------------------
AERCO:
Balance at July 15, 1998....................... 20 -- -- --
Net loss for the period........................ -- -- (15,108) (15,108)
--- --- ------- -------
BALANCE AT MARCH 31, 1999...................... 20 -- (15,108) (15,108)
=== === ======= =======
</TABLE>
The accompanying notes, including the statement of accounting policies on pages
F-9 to F-12, are an integral part of the consolidated financial statements.
F-8
<PAGE> 71
AERCO
STATEMENT OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
AerCo Limited was incorporated in Jersey, Channel Islands on June 4, 1998
for the purpose of refinancing ALPS 94-1 and the acquisition of ten aircraft
from AerFi. AerCo did not conduct any business prior to July 15, 1998.
This transaction, which occurred on July 15, 1998, involved the purchase by
AerCo Limited of 100% of the capital stock of ALPS 94-1 Limited and thereby a
portfolio of twenty five aircraft and related leases and the purchase by AerCo
Limited of ten aircraft and related leases from AerFi. The acquisition of the
ten aircraft from AerFi was achieved through the purchase of the capital stock
in a number of aircraft owning subsidiaries of AerFi. AerCo Limited financed the
acquisition of the capital stock of ALPS 94-1 Limited and the ten aircraft from
AerFi through the issue of five classes of notes. All of the three most senior
classes of notes (the "A to C Notes") were sold in a U.S.$800 million
underwritten global public offering. AerFi subscribed for all of the fourth and
fifth classes of notes (the "D and E Notes").
On the refinancing, AerCo Limited advanced ALPS 94-1 Limited a portion of
net cash proceeds from the offering which enabled ALPS 94-1 Limited to
immediately redeem or repay its existing financial indebtedness.
Comparative financial information for ALPS 94-1 is presented in these
financial statements as ALPS 94-1 is considered to be the predecessor business
of AerCo.
The activities of AerCo and ALPS 94-1 include the sale, procurement and
leasing of aircraft together with associated support services.
BASIS OF PREPARATION
The accounting policies followed in the preparation of the accompanying
consolidated financial statements conform with generally accepted accounting
principles in the United Kingdom and comply with Financial Reporting Standards
of the Accounting Standards Board in the United Kingdom as promulgated by The
Institute of Chartered Accountants in England and Wales. Generally accepted
accounting principles in the United Kingdom differ in certain significant
respects from generally accepted accounting principles in the United States. A
summary of these differences are set out in Notes 25, 26, 27 and 28.
The consolidated financial statements are prepared on the going concern
basis and under the historic cost convention and are stated in U.S. dollars,
which is the principal operating currency of AerCo, ALPS 94-1 and of the
aviation industry.
The unaudited consolidated financial statements included herein have been
prepared by AerCo without audit and conform with generally accepted accounting
principles in the United Kingdom and comply with Financial Reporting Standards
of the Accounting Standards Board in the United Kingdom as promulgated by the
institute of Chartered Accountants in England and Wales. Generally accepted
accounting principles in the United Kingdom differ in certain significant
respects from generally accepted accounting principles in the United States. A
summary of the differences are set out in Notes 25 through 28.
In the opinion of AerCo's management, the accompanying unaudited
consolidated financial statements have been prepared on a basis substantially
consistent with the audited consolidated financial statements and contain
adjustments, all of which are of a normal recurring nature necessary to present
fairly its financial position as of March 31, 1998 and its results of operations
and cashflows for the nine months ended March 31, 1998. Interim results are not
necessarily indicative of results for the fiscal year.
F-9
<PAGE> 72
AERCO
STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the directors of AerCo Limited and ALPS
94-1 Limited to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. While the directors of AerCo Limited and
ALPS 94-1 Limited believe that the estimates and related assumptions used in the
preparation of these financial statements are appropriate, actual results could
differ from those estimates. Estimates are made in the assessment of
collectability of receivables, the recoverable amounts in respect of aircraft
and goodwill and the related estimated lives of such assets.
BASIS OF CONSOLIDATION
The consolidated financial statements include the results of AerCo Limited
and all its subsidiaries (including ALPS 94-1). All intercompany profits,
transactions and account balances have been eliminated.
GOODWILL
Purchased goodwill arising on the acquisition of a business represents the
excess of acquisition cost over the fair value of the identifiable net assets
when they were acquired. Purchased goodwill arising on acquisitions is
capitalised on the balance sheet and amortised on a straight line basis over the
estimated economic life of the goodwill.
In accordance with Financial Reporting Standard No. 10 "Goodwill and
Intangible Assets", goodwill is subject to a mandatory impairment test at the
end of the first full financial year following the acquisition. Thereafter
goodwill is reviewed for impairment in any other period where events or changes
in circumstances indicate that the carrying value may not be recoverable.
REVENUE RECOGNITION
Revenue from aircraft on operating leases is recognised as income on a
straight line basis over the period of the leases. Where rentals are adjusted to
reflect increases or decreases in prevailing interest rates such adjustments are
accounted for as they arise. This includes rental income earned on aircraft for
the period prior to delivery (see Accounting policies -- Aircraft). Lease
rentals received in advance are deferred and recognized over the period to which
they relate.
INTEREST INCOME
Interest is credited to the statement of operations as it is earned.
MAINTENANCE
In most lease contracts the lessee has the obligation to pay for
maintenance costs on airframes and engines which arise during the term of the
lease and in many lease contracts the lessee makes a full or partial prepayment,
calculated at an hourly rate, into a maintenance reserve fund paid to AerCo and
ALPS 94-1 from which the lessee can draw in respect of maintenance expenditures
for major checks. Amounts held in respect of aircraft maintenance are recorded
as accrued expenses and other liabilities. Any surplus amounts held in the fund
on termination of a lease, to which the next lessee has no access, are recorded
as income at that time.
Maintenance costs borne directly by AerCo and ALPS 94-1 and which are not
paid for by lessees are expensed as incurred.
F-10
<PAGE> 73
AERCO
STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED)
TAXATION
AerCo Limited has been granted exempt company status by the Jersey taxation
authorities. It pays an exempt company fee of STG L600 per annum. AerCo Limited
is subject to Irish corporation tax on qualifying trading operations at a rate
of 10% until December 31, 2005. Taxation is provided on the profits of the
subsidiaries at the current rates.
ALPS 94-1 Limited has been granted exempt company status by the Jersey
taxation authorities. It pays an exempt company fee of STG L600 per annum.
Taxation is provided on the profits of its subsidiaries at the current rates.
AIRCRAFT
In the period ended June 30, 1995 ALPS 94-1 agreed to purchase 27 aircraft
on operating leases from AerFi.
On July 15, 1998 AerCo completed the AerCo Group transaction resulting in a
refinancing and restructuring of ALPS 94-1 and the acquisition of an additional
ten aircraft from AerFi. The refinancing involved the purchase of aircraft at an
aggregate appraised fair market value of US$951.97 million.
Aircraft are stated at cost less accumulated depreciation and are
depreciated at rates calculated to write off the cost of the assets to their
estimated residual value on a straight line basis, over their estimated useful
economic lives. Cost comprises the net purchase price of the aircraft acquired
by AerCo or ALPS 94-1. The current estimates of residual values and useful
economic lives are 15% of cost and 25 years from date of manufacture
respectively.
Additional charges are made to reduce the book value of specific assets to
the recoverable amount where an impairment in value is considered to have
occurred in accordance with Financial Reporting Standard No. 11 "Impairment of
Tangible Fixed Assets and Goodwill". An impairment review is carried out when
there has been an indication of impairment, usually on the basis of independent
market appraisals and indications of market demand. An impairment is measured by
comparing the carrying value of the aircraft and engines with the recoverable
amount. Recoverable amount is the higher of the net realisable value and the
value in use on an after tax basis. Value in use is based on the anticipated
future cashflows from the aircraft, discounted at a market rate of return.
In the year ended June 30, 1997 ALPS 94-1 changed its estimates of
depreciation rates to more accurately reflect the allocation of the cost of the
asset purchases over the estimated useful economic life of these assets. In
prior periods, aircraft were depreciated at rates calculated to write-off the
cost of the assets to the company to a Nil residual value over their estimated
useful economic lives of 25 years. Depreciation rates for aircraft of 2% for the
first 15 years and 7% thereafter were applied. The revised method of calculating
depreciation is to depreciate aircraft at rates calculated to write off the cost
of the assets to ALPS 94-1 to a residual value of 15% of cost, on a straight
line basis, over their estimated useful economic lives of 25 years from the date
of manufacture.
The changes in these estimates were considered necessary because of
developments in the industry at that time, including the bankruptcy of one major
manufacturer, the expected acquisition of MDC by Boeing, significant
manufacturer discounting of new aircraft and the announcement of a new
generation of Boeing aircraft. As a result of these developments the directors
considered that (i) the allocation of cost should be revised to a straight line
basis (rather than the previous lower allocations in earlier years) and (ii)
additional depreciation reflecting the impact of adopting the revised estimates,
should be charged reflecting the permanent impairment in value of the aircraft
because of the effect of industry circumstances referred to above on ALPS 94-1's
fleet.
F-11
<PAGE> 74
AERCO
STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED)
CASH AND LIQUID RESOURCES
Substantially all of the cash and commercial paper balances are held for
specific purposes under the terms of the Trust Indenture. For the purposes of
the cash flow statements cash represents amounts available on demand and liquid
resources comprise other cash and commercial paper. While the cash balances are
held for specific purposes they may be applied for these purposes on demand and
are classified as cash in the cash flow statement.
INDEBTEDNESS
Repayment of the principal amount of the Class E Note in AerCo and accrued
interest thereon is dependent upon funds being available to meet such
liabilities as they fall due. Repayment of the principal amount of the Class E
Note in ALPS 94-1 and accrued interest thereon was dependent upon funds being
available to meet such liabilities as they fell due. Under the terms of the ALPS
94-1 Class E Note, the recognition by the directors of a permanent diminution in
the value of aircraft resulted in certain circumstances in a legal reduction in
the principal balance on the Class E Note.
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
AerCo manages its interest rate exposure through the use of interest rate
swaps. Under these swap arrangements AerCo will pay fixed interest and receive
floating interest on a monthly basis. The objective of AerCo's interest rate
risk management policy is to correlate the contracted fixed and floating rental
payments in its portfolio to the floating interest payments on the A, B and C
Notes, taking account of expected amortisation on these notes. Net receipts and
payments arising in respect of these swaps are recognised as adjustments to
interest expense on an accruals basis.
AerCo is also exposed to losses in the event of non-performance by
counterparties on interest rate swaps or in the event of defaults by lessees
where income streams have been hedged. However, AerCo does not anticipate
non-performance by the counterparties and losses or gains related to hedging
instruments which result from lessee defaults are accounted for as they are
incurred.
ALPS 94-1 did not use any interest rate swaps to manage its interest rate
exposure for any period for which the financial statements are presented.
F-12
<PAGE> 75
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 CASH AND COMMERCIAL PAPER
<TABLE>
<CAPTION>
AERCO ALPS 94-1 ALPS 94-1
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Cash................................................. 25,618 146,175 51,608
Commercial paper..................................... 39,997 -- 36,686
------- ------- -------
65,615 146,175 88,294
======= ======= =======
</TABLE>
Substantially all of the cash and commercial paper balances of AerCo at
March 31, 1999 are held for specific purposes under the terms of the AerCo Trust
Indenture.
Substantially all of the cash and commercial paper balances of ALPS 94-1 at
July 14, 1998 and June 30, 1998 were held for specific purposes under the ALPS
94-1 Deed of Charge.
2 ACCOUNTS RECEIVABLE, NET
<TABLE>
<CAPTION>
AERCO ALPS 94-1 ALPS 94-1
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Trade receivables, net............................... 3,174 2,491 2,207
Non-trade receivables................................ 830 233 282
------- ------- -------
4,004 2,724 2,489
======= ======= =======
</TABLE>
Trade receivables comprise amounts in respect of rent and maintenance
payments due from lessees and are stated net of provisions for doubtful debt.
As at March 31, 1999 four lessees accounted for 60%, 16%, 14% and 10%
respectively of net trade receivables of AerCo. Trade receivables at March 31,
1999 are shown net of a bad debt provision of $1.4m.
As at July 14, 1998 two lessees accounted for 53% and 27% respectively of
net trade receivables of ALPS 94-1. No other lessee accounted for greater than
10% of trade receivables. Trade receivables at July 14, 1998 are shown net of a
bad debt provision of $0.2m.
As at June 30, 1998 two lessees accounted for 67% and 30% respectively of
net trade receivables of ALPS 94-1. No bad debt provision was held by ALPS 94-1
as at June 30, 1998.
Non-trade receivables comprise prepayments.
3 GOODWILL, NET
<TABLE>
<CAPTION>
AERCO ALPS 94-1 ALPS 94-1
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
COST
At beginning and end of period....................... 47,125 -- --
------- ------- -------
AMORTISATION
Amortisation in period............................... (1,669) -- --
------- ------- -------
NET BOOK VALUE
End of period........................................ 45,456 -- --
======= ======= =======
</TABLE>
F-13
<PAGE> 76
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3 GOODWILL, NET (CONTINUED)
Goodwill of U.S. $47.125 million represents the difference between the fair
value of the net assets acquired and the consideration paid by AerCo Limited in
respect of its acquisition of ALPS 94-1 and the AerFi transferred aircraft.
Goodwill is amortised over a 20 year period which is the period over which the
directors of AerCo Limited estimate that the value of the underlying businesses
acquired is expected to exceed the values of its identifiable net assets.
Further information in relation to the calculation of goodwill is set out in
Note 4 below.
4 ACQUISITION OF ALPS 94-1 AND THE AERFI TRANSFERRED AIRCRAFT
On July 15, 1998 AerCo Limited acquired 100% of the capital stock of ALPS
94-1 Limited and thereby a portfolio of twenty five aircraft and the related
leases and purchased ten aircraft and related leases from AerFi. The acquisition
of the ten aircraft from AerFi was achieved through the purchase of the capital
stock in a number of aircraft owning subsidiaries of AerFi. AerCo Limited
financed the acquisition of the capital stock of ALPS 94-1 Limited and the ten
aircraft from AerFi through the issue of five classes of notes and also used the
proceeds from the issue of these notes to repay the third party indebtedness of
ALPS 94-1 and the intercompany indebtedness to AerFi of the aircraft owning
companies in respect of the ten aircraft acquired from AerFi.
The fair value of the net assets acquired and the consideration given on
the acquisition of ALPS 94-1 and the AerFi transferred aircraft is summarised as
follows:
<TABLE>
<CAPTION>
FAIR VALUE ADJUSTMENTS
AERFI TRANSFERRED -------------------------
ALPS 94-1 AIRCRAFT VALUATION OTHER FAIR VALUE OF
BOOK VALUE BOOK VALUE ADJUSTMENTS ADJUSTMENTS ASSETS ACQUIRED
---------- ----------------- ----------- ----------- ---------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C> <C>
Current assets......................... 148,899 609 -- (406) 149,102
Fixed assets -- aircraft............... 732,905 178,756 40,312 -- 951,973
Accrued liabilities & other
liabilities.......................... (72,057) (5,799) -- (11,603) (89,459)
Security deposits...................... (13,255) (2,950) -- -- (16,205)
Indebtedness (A to D Notes)............ (680,701) -- -- -- (680,701)
Indebtedness to AerFi.................. (194,314) (48,435) -- (118,776) (361,525)
Deferred income tax.................... -- (5,148) 5,148 -- --
-------- ------- ------ -------- --------
NET ASSETS ACQUIRED.................... (78,523) 117,033 45,460 (130,785) (46,815)
======== ======= ====== ========
Consideration paid..................... (310)
--------
GOODWILL ON ACQUISITION................ (47,125)
========
</TABLE>
The fair value adjustments in respect of the aircraft arise as a result of
a valuation of these assets to reflect the directors' estimate of their current
market value at the date of acquisition. This valuation of the ALPS 94-1
aircraft and the AerFi transferred aircraft exceeded the book values in these
entities by $6 million and $34 million respectively. The fair value adjustment
in respect of deferred taxation arises on the AerFi transferred aircraft as a
result of the change in the tax basis of these aircraft on their acquisition by
AerCo Limited
The other adjustments in respect of current assets and accrued liabilities
and other expenses relate to current assets of the AerFi transferred aircraft
not acquired by AerCo Limited and the liability in respect of the makewhole
premium payable by ALPS 94-1 on the refinancing of its A to D Note indebtedness.
The adjustment to indebtedness is comprised of (i) an amount of $37 million
in respect of indebtedness in the acquired entities which was forgiven as part
of the transaction whereby AerCo Limited acquired ALPS 94-1 and the AerFi
transferred aircraft and (ii) additional indebtedness to AerFi of US$156 million
F-14
<PAGE> 77
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4 ACQUISITION OF ALPS 94-1 AND THE AERFI TRANSFERRED AIRCRAFT (CONTINUED)
representing the difference between the historic third party indebtedness of
AerFi in respect of the AerFi transferred aircraft and the intercompany
indebtedness to AerFi which arose on the acquisition of the aircraft owning
companies which held these aircraft at the date they were acquired by AerCo
Limited.
The historical financial information for ALPS 94-1 is shown in the
consolidated statements of operations and consolidated balance sheets as
comparatives. The summarised statement of operations information for the AerFi
transferred aircraft for the year ended June 30, 1998 and for the 14 day period
immediately prior to the acquisition by AerCo Limited is set out below:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED
JULY 14, 1998 JUNE 30, 1998
--------------- -------------
U.S.$'000 $'000
<S> <C> <C>
REVENUES
Aircraft leasing............................................ 983 21,109
EXPENSES
Depreciation................................................ (464) (10,215)
Net interest expense........................................ (1,392) (6,612)
Other expenses.............................................. 355 (4,804)
------ -------
(1,501) (21,631)
------ -------
NET LOSS FROM OPERATIONS BEFORE TAXES....................... (518) (522)
Benefit for taxes........................................... 5 501
------ -------
NET LOSS FOR THE PERIOD..................................... (513) (21)
====== =======
</TABLE>
5 AIRCRAFT, NET
<TABLE>
<CAPTION>
AERCO ALPS 94-1 ALPS 94-1
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
COST
Beginning of period.................................. -- 949,288 975,179
Additions............................................ 951,973 -- 1,132
Disposals............................................ (14,207) (76,897) (27,023)
------- -------- --------
End of period........................................ 937,766 872,391 949,288
======= ======== ========
DEPRECIATION
Beginning of period.................................. -- (140,478) (108,583)
Charge for the period................................ (33,821) (1,519) (37,826)
Disposal............................................. 308 11,231 5,931
------- -------- --------
End of period........................................ (33,513) (130,766) (140,478)
======= ======== ========
IMPAIRMENT PROVISIONS
Beginning of period.................................. -- (8,720) (12,000)
Charge for the period................................ -- -- (8,720)
Disposal............................................. -- -- 12,000
------- -------- --------
End of period........................................ -- (8,720) (8,720)
======= ======== ========
NET BOOK VALUE
Beginning of period.................................. -- 800,090 854,596
======= ======== ========
End of period........................................ 904,253 732,905 800,090
======= ======== ========
</TABLE>
F-15
<PAGE> 78
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5 AIRCRAFT, NET (CONTINUED)
Cost for AerCo represents the fair value of aircraft acquired by AerCo as
part of the AerCo transaction at July 15, 1998 which was based on the
independent appraised values of the portfolio. Cost for ALPS 94-1 represents the
purchase price of aircraft acquired by ALPS 94-1 which was based on the
independent appraised values of the portfolio of aircraft at August 24, 1994.
In the year ended June 30, 1998, the directors of ALPS 94-1 Limited made a
provision of U.S.$8.72 million to reflect an impairment in the value of the
three F100 aircraft then owned by ALPS 94-1 Limited. The directors arrived at
such determination based on the bankruptcy of Fokker N.V. and the
discontinuation of its aircraft manufacturing operations, resulting in
significant reductions of values and lease rates for Fokker aircraft.
In the year ended June 30, 1997, additional depreciation was charged in
ALPS 94-1 of U.S.$34.4 million for reasons set out in "Statement of Accounting
Policies: Aircraft".
In the year ended June 30, 1996, the directors of ALPS 94-1 Limited made a
provision of U.S.$12 million to reflect an impairment in the value of one A300
aircraft in its fleet. The directors arrived at such determination based upon
the then unfavourable market conditions for this aircraft type, which also
caused the appraisal firms to reduce their appraisal values for this aircraft
type. This aircraft was disposed of to AerFi during the year ended June 30, 1998
and this provision was included in determining the profit on the disposal of
this aircraft of U.S.$2.4 million.
The aircraft and other assets held by ALPS 94-1 had charges attached to
them such that they represented security for the Notes issued (see Note 9(d)).
During the period from July 15, 1998 to March 31, 1999 AerCo disposed of
one aircraft to a third party to whom the aircraft had been on lease giving rise
to a profit on disposal of U.S.$10,000.
During the period from July 1, 1998 to July 14, 1998 ALPS 94-1 Limited
disposed of one aircraft to AerFi. This disposal resulted in a profit of
U.S.$10,000 in the period.
6 OPERATING LEASES
All of AerCo's aircraft are leased on operating leases to 26 lessees as at
March 31, 1999. Rentals on certain of the leases are variable in accordance with
prevailing interest rates.
The following is a schedule of contracted future rentals, by year, on
operating leases as of March 31, 1999. The interest rates prevailing at March
31, 1999 have been applied in determining rentals which are variable in
accordance with prevailing interest rates.
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31
- -------------------- U.S. $'000
<S> <C>
2000........................................................ 104,386
2001........................................................ 76,402
2002........................................................ 58,944
2003........................................................ 48,008
2004........................................................ 28,971
Thereafter.................................................. 27,013
-------
343,724
=======
</TABLE>
There are no contingent rentals.
The leases have charges attached to them such that they represent security
for the Notes issued.
F-16
<PAGE> 79
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7 ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
AERCO ALPS 94-1 ALPS 94-1
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Accrued expenses and other liabilities comprise:
Aircraft maintenance reserves........................ 39,697 41,274 42,336
Deferred income...................................... 4,670 6,576 7,791
Interest on A to D Notes............................. 2,260 3,932 5,629
Interest on E Notes.................................. 14,101 794 1,612
Exceptional item (Note 13)........................... -- 12,700 12,700
Taxation............................................. 53 (17) (17)
Other accruals....................................... 9,655 6,798 7,685
------ ------ ------
70,436 72,057 77,736
====== ====== ======
</TABLE>
All accrued expenses and other liabilities fall due within one year with
the exception of aircraft maintenance reserves which are split as follows:
<TABLE>
<CAPTION>
AERCO ALPS 94-1 ALPS 94-1
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Aircraft maintenance reserves:
Due within one year.................................. 13,876 5,333 5,247
Due after one year................................... 25,821 35,941 37,089
------ ------ ------
39,697 41,274 42,336
====== ====== ======
</TABLE>
8 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
AerCo's financial instruments comprise its A through E note indebtedness,
cash and liquid resources and interest rate swaps. These financial instruments
are denominated in US dollars and are used in connection with AerCo's leasing
operations. These financial instruments comprise a mixture of fixed and floating
items and AerCo has also contracted both fixed and floating rental streams with
its lessees.
AerCo manages its interest rate exposure through the use of interest rate
swaps under which it will pay fixed and receive floating on a monthly basis. The
objective of AerCo's interest rate risk management policy is to correlate the
contracted fixed and floating rental payments on its aircraft to the interest
payments on the A, B and C Notes taking into account the interest received on
its cash deposits. Thus, all of AerCo's interest rate swaps are for hedging
purposes.
AerCo seeks to manage its liquidity risk through maintaining a liquidity
reserve amount of $40 million and through the application of available
collections from lessees to meet its debt and other obligations in accordance
with a predetermined priority of payments as set out in the Trust Indenture.
(i) Interest Rate Profile of Financial Assets and Financial Liabilities
The following table depicts the interest rate profile of AerCo's financial
assets and financial liabilities at March 31, 1999 after taking into account the
derivatives used by AerCo. In accordance with FRS 13 "Derivatives and Other
Financial Instruments" the tables do not include interests in associate
undertakings and short term debtors and creditors.
F-17
<PAGE> 80
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
(i) Interest Rate Profile of Financial Assets and Financial Liabilities
(continued)
Financial Assets
After taking account of the interest rate swaps entered into by AerCo, the
interest rate profile of AerCo's assets at March 31, 1999 was:
<TABLE>
<CAPTION>
FLOATING RATE FIXED RATE
TOTAL ASSETS ASSETS
---------- ------------- ----------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Financial Assets
Cash................................................... 25,618 25,618 --
Commercial Paper....................................... 39,997 39,997 --
------ ------ ------
65,615 65,615 --
====== ====== ======
</TABLE>
The cash bears interest at rates based on daily U.S.$ LIBOR. The commercial
paper bears interest based on rates available for A1+/P1 U.S. commercial paper.
Financial Liabilities
The interest rate profile of AerCo's financial liabilities at March 31,
1999 was:
<TABLE>
<CAPTION>
FLOATING RATE FIXED RATE
TOTAL FINANCIAL LIABILITIES FINANCIAL LIABILITIES
---------- --------------------- ---------------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Financial Liabilities
Indebtedness
A-1 Notes....................................... 340,000 340,000 --
A-2 Notes....................................... 255,436 255,436 --
B-1 Notes....................................... 81,568 81,568 --
C-1 Notes....................................... 84,931 84,931 --
D-1 Notes....................................... 80,000 -- 80,000
E-1 Notes....................................... 111,973 -- 111,973
Aircraft maintenance reserves due after one
year.......................................... 9,185 9,185 --
Security deposits due after one year............ 1,314 1,314 --
------- ------- -------
TOTAL........................................... 964,407 772,434 191,973
======= ======= =======
</TABLE>
A-1, A-2, B-1 and C-1 Note indebtedness bear interest at rates based on one
month LIBOR plus a specified margin of 0.19%, 0.32%, 0.60% and 1.35%
respectively.
Aircraft maintenance reserves and security deposits bear interest at six
month US$ LIBOR rates.
The interest rate on the D-1 and E-1 Notes is 8.5% and 20% respectively.
The weighted average period for which the D-1 and E-1 Notes are fixed is 12
years and 25 years respectively.
F-18
<PAGE> 81
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
(ii) Maturity of Financial Liabilities
Information relating to the maturity profile of indebtedness is set out in
Note 9. The estimated maturity profile of aircraft maintenance reserves and
security deposits which are classified as financial liabilities is as follows:
<TABLE>
<CAPTION>
DUE:
- ---- U.S.$'000
<S> <C>
In more than one year but not more than two years........... 4,385
In more than two years but not more than five years......... 2,785
In more than five years..................................... 3,329
------
10,499
======
</TABLE>
(iii) Borrowing Facilities
AerCo had no undrawn committed borrowing facilities at March 31, 1999.
(iv) Fair Values of Financial Assets and Financial Liabilities
The book values and fair values of AerCo's financial assets and liabilities
as at March 31, 1999 by category are set out below:
<TABLE>
<CAPTION>
BOOK VALUE FAIR VALUE
---------- ----------
U.S. $'000 U.S. $'000
<S> <C> <C>
PRIMARY FINANCIAL INSTRUMENTS HELD OR ISSUED TO FINANCE
AERCO'S OPERATIONS
Financial Assets
Cash........................................................ 25,618 25,618
Commercial paper............................................ 39,997 39,997
------- -------
TOTAL....................................................... 65,615 65,615
======= =======
Financial Liabilities
Indebtedness
A-1 Notes................................................... 340,000 338,436
A-2 Notes................................................... 255,436 253,597
B-1 Notes................................................... 81,568 78,199
C-1 Notes................................................... 84,931 81,161
D-1 Notes................................................... 80,000 63,200
E-1 Notes................................................... 111,973 22,395
Aircraft maintenance reserves due after one year............ 9,185 9,185
Security deposits due after one year........................ 1,314 1,314
------- -------
TOTAL....................................................... 964,407 847,487
======= =======
DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps (notional principal U.S.$720 million)... -- (2,093)
======= =======
</TABLE>
The fair values of Notes outstanding have been determined by reference to
prices available from the markets in which these Notes are traded. The fair
value of aircraft maintenance reserves and security deposits which are subject
to floating rates is their par value. All the other fair values shown have been
calculated by discounting future estimated cashflows at prevailing interest
rates.
F-19
<PAGE> 82
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
(iv) Fair Values of Financial Assets and Financial Liabilities (continued)
In accordance with the objectives of AerCo's hedging policies the fair
value loss arising in respect of AerCo's interest rate swaps is offset to a
significant extent by fair value gains inherent in the contracted fixed rate
leases entered into by AerCo.
(v) Gains and Losses on Hedges
AerCo enters into interest rate swaps to manage its interest rate profile.
Changes in the fair value of instruments used as hedges are not recognised in
the financial statements. An analysis of these unrecognised gains and losses is
as follows:
<TABLE>
<CAPTION>
TOTAL NET
GAINS LOSSES LOSSES
---------- ---------- ----------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Unrecognised gains and losses on hedges at start of
period.................................................... -- -- --
Unrecognised gains and losses on hedges at March 31, 1999... 776 (2,869) (2,093)
=== ====== ======
Of which:
Gains and losses expected to be recognised in 2000.......... 256 (1,269) (1,013)
Gains and losses expected to be recognised in 2001 or
later..................................................... 520 (1,600) (1,080)
</TABLE>
9 INDEBTEDNESS
(a) Principal -- AerCo
The purchase by AerCo Limited of 100% of the capital stock of ALPS 94-1
Limited and thereby a portfolio of twenty five aircraft and related leases, the
purchase of ten aircraft and related leases from AerFi and the refinancing of
the ALPS 94-1 indebtedness was funded by the issue of Notes by AerCo Limited.
The Notes constitute direct obligations of AerCo Limited. None of the
Security Trustee (as defined below) or the Noteholders have any security
interest, mortgage, charge or similar interest in any of the aircraft.
Pursuant to the Security Trust Agreement, Bankers Trust Company (the
"Security Trustee") has been granted an interest in the capital stock of certain
of the direct and indirect subsidiaries of AerCo Limited. The Security Trustee
has been granted a security interest, directly or indirectly, in the respective
interests of each AerCo group member in the leases and leases within AerCo group
relating to the aircraft, in any loans extended by AerCo Limited to its
subsidiaries and certain cash deposits.
<TABLE>
<CAPTION>
AERCO
MARCH 31, 1999 AT ISSUE
-------------- ----------
U.S. $'000 U.S. $'000
<S> <C> <C>
Subclass A-1 Notes.......................................... 340,000 340,000
Subclass A-2 Notes.......................................... 255,436 290,000
Subclass B-1 Notes.......................................... 81,568 85,000
Subclass C-1 Notes.......................................... 84,931 85,000
Subclass D-1 Notes.......................................... 80,000 80,000
Subclass E-1 Notes.......................................... 111,973 111,973
Deferred Financing Costs.................................... (4,691) (5,364)
------- -------
949,217 986,609
======= =======
</TABLE>
F-20
<PAGE> 83
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9 INDEBTEDNESS (CONTINUED)
(a) Principal -- AerCo (continued)
Repayments of principal on the A, B, C and D Notes are made monthly and
commenced in August 1998. The repayment of principal on the A to D Notes is
dependent upon the cash available at the monthly payment date and is governed by
the Priority of Payments set out in the Trust Indenture entered into by AerCo
Limited, on July 15, 1998 (the "Closing Date").
The repayment of Class E Note principal is not due until the Class A to D
Notes have been fully repaid. Repayment of the principal amount of the Class E
Notes and accrued interest thereon are dependent upon funds being available to
meet such liabilities as they fall due.
(b) Interest -- AerCo
Subclass A-1 Notes bear interest at LIBOR plus 0.19%, payable monthly in
arrears.
Subclass A-2 Notes bear interest at LIBOR plus 0.32%, payable monthly in
arrears.
Subclass B-1 Notes bear interest at LIBOR plus 0.60%, payable monthly in
arrears.
Subclass C-1 Notes bear interest at LIBOR plus 1.35%, payable monthly in
arrears.
The Subclass D-1 Notes bear interest at 8.50%. Interest is payable monthly
in arrears and commenced in August 1998, subject to available cash. Interest
accrued but not paid will be added to the principal outstanding and will accrue
interest until paid.
The Subclass E-1 Notes bear interest at 20% per annum accruing monthly in
arrears. Except for the Class E Note Primary Interest Amount which will be paid
at a rate of 15.0% per annum multiplied by the Initial Outstanding Principal
Balance of the Subclass E-1 Notes on the Closing Date, no interest is payable on
Subclass E-1 Notes until all of the interest, principal and premium, if any, on
the other Notes have been repaid in full. The Class E Note Primary Interest
Amount will be paid on each Payment Date only to the extent that AerCo has
available collections sufficient to make such payment after paying or providing
for each of the items ranking prior to such payment in order of priority under
the Trust Indenture.
(c) Debt maturity -- AerCo
The repayment terms of the A, B, C and D Notes are such that certain
principal amounts are expected to be repaid on certain dates based on certain
assumptions (the "Expected Final Payment Dates") or refinanced through the issue
of new Notes by specified Expected Final Payment Dates but in any event are
ultimately due for repayment on specified final maturity dates (the "Final
Maturity Dates"). The Expected Final Payment Dates, Final Maturity Dates,
Principal Amount and interest rates applicable to each Class of Note are set out
below:
F-21
<PAGE> 84
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9 INDEBTEDNESS (CONTINUED)
(c) Debt maturity -- AerCo (continued)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT EXPECTED FINAL
CLASS OF NOTES INTEREST RATES MARCH 31, 1999 PAYMENT DATE FINAL MATURITY DATE
- -------------- -------------- ---------------- ----------------- -------------------
U.S.$ MILLION
<S> <C> <C> <C> <C>
Class A-1................. LIBOR + 0.19% 340 July 15, 2000 July 15, 2023
Class A-2................. LIBOR + 0.32% 255 December 15, 2005 July 15, 2023
Class B-1................. LIBOR + 0.60% 82 July 15, 2005 July 15, 2004
Class C-1................. LIBOR + 1.35% 85 July 15, 2013 July 15, 2005
Class D-1................. 8.5% 80 April 15, 2014 July 15, 2023
Class E-1................. 20% 112 July 15, 2023 July 15, 2023
---
954
===
</TABLE>
The repayment dates and amounts of the Notes shown in the table below are
not fixed contractual obligations but are the amounts AerCo will pay if cash
flows are in accordance with targets. To the extent that cash flows exceed, or
do not meet, the targets then these amounts will vary in accordance with the
Trust Indenture. The targets assume that the minimum future rentals as
summarised in Note 6 are received after making adjustments for the anticipated
performance of the lessees.
The target principal balances repayable analysed by year of repayment are
as follows (all amounts are in U.S.$'000):
<TABLE>
<CAPTION>
SUB-CLASS
-----------------------------------------------
YEAR ENDING MARCH 31 A-1 A-2 B-1 C-1 D-1
- -------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
2000......................................... -- 34,115 5,294 485 --
2001......................................... -- 40,524 4,454 1,079 --
2002......................................... -- 35,408 5,094 1,751 --
2003......................................... -- 38,198 5,554 2,491 --
2004......................................... -- 33,660 6,237 3,281 --
Thereafter................................... 340,000 73,531 54,935 75,844 80,000
------- ------- ------- ------- -------
Total........................................ 340,000 255,436 81,568 84,931 80,000
======= ======= ======= ======= =======
</TABLE>
The principal of the Subclass E-1 Notes is not payable until the
outstanding principal balance of the A to D Notes is reduced to zero.
F-22
<PAGE> 85
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9 INDEBTEDNESS (CONTINUED)
(d) Principal -- ALPS 94-1
The purchase of aircraft by ALPS 94-1 Limited was funded by the sale of
Trust Notes and the sale of Subordinated Notes (together the "ALPS 94-1 Notes").
The ALPS 94-1 Notes were secured by a first priority security interest in ALPS
94-1's assets, which consisted of the aircraft, the leases and amounts on
deposits in certain accounts.
<TABLE>
<CAPTION>
ALPS 94-1 ALPS 94-1
JULY 14, 1998 JUNE 30, 1998 AT ISSUE
------------- ------------- ----------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
TRUST NOTES
Class A-1 Notes........................................... 98,160 98,349 172,000
Class A-2 Notes........................................... 69,578 73,108 139,404
Class A-3 Notes........................................... 156,167 156,167 156,167
Class A-4 Notes........................................... 140,122 140,122 140,122
Class B-1 Notes........................................... 43,770 43,770 44,106
Class B-2 Notes........................................... 43,994 43,994 44,106
Class C Notes............................................. 86,171 86,171 86,610
SUBORDINATED NOTES
Class D Note.............................................. 42,739 42,739 71,185
Class E Note and capitalised E Note Interest.............. 199,572 197,966 144,451
Less: extinguished by a permanent loss.................... (5,258) (5,258) --
------- ------- -------
Net Class E Note Principal and capitalised interest....... 194,314 192,708 144,451
------- ------- -------
875,015 877,128 998,151
======= ======= =======
</TABLE>
Repayments of principal on the Trust Notes and Class D Note principal were
made monthly and commenced in October 1994. As a consequence of the ALPS 94-1
refinancing which was completed on July 15, 1998 the ALPS 94-1 Notes were
classified as repayable within one year at June 30, 1998.
The repayment of principal on the Trust Notes and the Class D Note was
dependent upon the cash available at the monthly payment dates and was governed
by the Deed of Charge, Assignment and Priorities entered into by ALPS 94-1 on
August 24, 1994 (the "Deed of Charge").
The repayment of Class E Note principal was not due until the Trust Notes
and Class D Note were fully repaid.
Repayment of the principal amounts of the Class E Note and accrued interest
thereon were dependent upon funds being available to meet such liabilities as
they fell due. Under the terms of the ALPS 94-1 Class E Note, the recognition by
the directors of a permanent diminution in the value of aircraft resulted in
certain circumstances in a legal reduction in the principal balance on the Class
E Note. During the year ended June 30, 1997 there was a legal reduction in the
principal balance on the Class E Note of U.S.$5.258 million.
(e) Interest -- ALPS 94-1
Class A-1 Notes bore interest at LIBOR plus 0.48%, payable monthly in
arrears.
Class A-2 Notes bore interest at 7.15%, payable monthly in arrears,
increased to 9.15% from November 1997 onwards.
Class A-3 Notes bore interest at LIBOR plus 0.45%, payable monthly in
arrears.
F-23
<PAGE> 86
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9 INDEBTEDNESS (CONTINUED)
(e) Interest -- ALPS 94-1 (continued)
Class A-4 Notes bore interest at 7.80%, payable monthly in arrears.
Class B-1 Notes bore interest at LIBOR plus 1.15%, payable monthly in
arrears.
Class B-2 Notes bore interest at 8.20%, payable monthly in arrears.
Class C Notes bore interest at 9.35%, payable monthly in arrears.
The Class D Note bore interest at LIBOR plus 5.50%. Interest was payable
monthly in arrears and commenced in October 1994, subject to available cash.
Interest accrued but not paid was added to the principal outstanding and accrued
interest until paid.
The Class E Note bore interest at 10.00%. The interest accrued monthly in
arrears. With the exception of certain circumstances the Class E permitted
interest amount was not to be paid until the payment date following the fourth
anniversary of August 24, 1994.
10 SECURITY DEPOSITS
Security deposits of U.S.$14,783,000 in AerCo as at March 31, 1999
(U.S.$13,255,000 at July 14, 1998 and June 30, 1998 for ALPS 94-1) are held as
security for obligations in accordance with the terms of certain leases. The
deposits are held as cash and commercial paper by AerCo and were held as cash
and commercial paper by ALPS 94-1 (See Note 1).
11 SHARE CAPITAL
AERCO
Called up share capital comprises:
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
U.S. $
<S> <C>
AUTHORIZED
10,000 ordinary shares of US$1 each......................... 10,000
======
ISSUED AND FULLY PAID
20 ordinary shares of US$1 each............................. 20
======
</TABLE>
AerCo Limited issued 20 ordinary shares at $1 each on June 4, 1998.
F-24
<PAGE> 87
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11 SHARE CAPITAL (CONTINUED)
ALPS 94-1
Called up share capital comprises:
<TABLE>
<CAPTION>
JULY 14, 1998 JUNE 30, 1998
------------- -------------
U.S. $ U.S. $
<S> <C> <C>
AUTHORIZED
15,000 ordinary shares of US$1 each......................... 15,000 15,000
====== ======
ISSUED AND FULLY PAID
10 ordinary shares of US$1 each............................. 10 10
====== ======
</TABLE>
ALPS 94-1 Limited issued 10 ordinary shares at $1 each on June 3, 1994.
12 REVENUES AND CONCENTRATION OF CREDIT RISK
(a) Distribution of revenues by geographic area
<TABLE>
<CAPTION>
AERCO ALPS 94-1
PERIOD FROM PERIOD FROM ALPS 94-1 ALPS 94-1
JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED YEAR ENDED
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
----------------- ----------------- ----------------- -----------------
U.S. $'000 % U.S. $'000 % U.S. $'000 % U.S. $'000 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Europe................... 40,456 48.8 1,508 41.5 45,624 45.3 44,903 44.3
North America............ 7,009 8.5 144 4.0 4,328 4.3 3,693 3.6
South/Central America.... 14,318 17.3 716 19.7 21,375 21.2 18,751 18.5
Asia/Pacific............. 21,043 25.4 1,267 34.8 29,355 29.2 34,087 33.6
------- ---- ------- ---- ------- ---- ------- ----
82,826 100 3,635 100 100,682 100 101,434 100
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
All revenues are derived from aircraft leasing.
In the period from July 15, 1998 to March 31, 1999, 18% and 10% of AerCo's
lease revenues was derived from the United Kingdom and Spain respectively. No
other country accounted for greater than 10% of AerCo's lease revenues.
In the period from July 1, 1998 to July 14, 1998, 15%, 15%, 14% and 10% of
ALPS 94-1's lease revenues was derived from Chile, Hungary, Spain and the United
Kingdom respectively. No other country accounted for greater than 10% of ALPS
94-1's lease revenues.
In the year ended June 30, 1998, 15%, 14% and 12% of ALPS 94-1's lease
revenues was derived from the United Kingdom, Chile and Spain respectively. No
other country accounted for greater than 10% of ALPS 94-1's lease revenues.
In the year ended June 30, 1997, 15% and 12% of ALPS 94-1's lease revenues
was derived from the United Kingdom and Spain respectively. No other country
accounted for greater than 10% of ALPS 94-1's lease revenues.
(b) Concentration of credit risk
Credit risk with respect to trade accounts receivable is generally
mitigated due to the number of lessees and their dispersal across different
geographic areas.
F-25
<PAGE> 88
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12 REVENUES AND CONCENTRATION OF CREDIT RISK (CONTINUED)
(b) Concentration of credit risk (continued)
AerCo and ALPS 94-1 manage their exposures to particular countries through
obtaining security from lessees by way of deposits, letters of credit and
guarantees. In addition AerCo and ALPS 94-1 maintain Political Risk Insurance in
respect of certain lessees.
AerCo and ALPS 94-1 continually evaluate the financial position of lessees
and, based on this evaluation, the amounts outstanding and the available
security, make an appropriate provision for doubtful debts.
As at March 31, 1999, one lessee accounted for 10% of AerCo's lease
revenues. No other lessee accounted for greater than 10% of AerCo's lease
revenues for the period from July 15, 1998 to March 31, 1999.
At July 15, 1998 no lessee accounted for greater than 10% of ALPS 94-1's
lease revenues.
As at June 30, 1998, one lessee accounted for 14% (1997: 14%) of ALPS
94-1's lease revenues and another accounted for 12% (1997: 12%) of ALPS 94-1's
lease revenues. No other lessee accounted for greater than 10% of ALPS 94-1's
lease revenues for the years ended June 30, 1998 and 1997.
13 EXCEPTIONAL ITEMS
<TABLE>
<CAPTION>
AERCO ALPS 94-1
PERIOD FROM PERIOD FROM ALPS 94-1 ALPS 94-1
JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED YEAR ENDED
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
---------------- --------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C>
Additional depreciation(i)............. -- -- -- 34,385
Provision for impairment in aircraft
value (Note 5)....................... -- -- 8,720 --
Termination fee(ii).................... -- -- 12,700 --
------ ------ ------ ------
-- -- 21,420 34,385
====== ====== ====== ======
</TABLE>
- ---------------
(i) The additional depreciation charge in the year ended June 30, 1997 related
to a change in calculating depreciation estimates as explained in "Statement
of Accounting Policies: Aircraft".
(ii) In the year ended June 30, 1998 the directors of ALPS 94-1 Limited approved
the transaction involving the sale of the capital stock of ALPS 94-1
Limited to AerCo Limited. ALPS 94-1 Limited entered into a contract with
its servicer, GE Capital Aviation Services Limited ("GECAS") whereby it
agreed to terminate the GECAS servicing agreement in respect of the
management of ALPS 94-1's assets in consideration for a termination fee of
$12.7 million. This amount was charged in the year ended June 30, 1998.
F-26
<PAGE> 89
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14 NET INTEREST EXPENSE
<TABLE>
<CAPTION>
AERCO ALPS 94-1
PERIOD FROM PERIOD FROM ALPS 94-1 ALPS 94-1
JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED YEAR ENDED
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
---------------- --------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C>
Interest payable on Notes.............. 56,047 2,977 73,560 73,975
Net interest income.................... (1,939) (220) (3,775) (2,938)
------ ----- ------ ------
54,108 2,757 69,785 71,037
====== ===== ====== ======
</TABLE>
15 OTHER EXPENSES
<TABLE>
<CAPTION>
AERCO ALPS 94-1
PERIOD FROM PERIOD FROM ALPS 94-1 ALPS 94-1
JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED YEAR ENDED
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
---------------- --------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C>
Servicer's fees........................ 2,637 108 2,894 2,899
Political risk insurance............... 247 54 425 737
Hull war risks insurance............... 329 -- -- --
Administration fees.................... 1,561 20 412 441
Cash managers' fees.................... 177 -- 76 66
Aircraft leasing costs................. 2,068 174 1,914 --
Legal & professional fees.............. 657 260 440 402
Directors' & Officer's insurance....... 282 12 295 350
Directors' fees and expenses........... 278 18 100 122
Audit and tax fees..................... 75 -- 43 36
----- --- ----- -----
8,311 646 6,599 5,053
===== === ===== =====
</TABLE>
16 NET LOSS BEFORE PROVISION FOR TAXES
(a) Net loss before provision for taxes is stated after charging:
<TABLE>
<CAPTION>
AERCO ALPS 94-1
PERIOD FROM PERIOD FROM ALPS 94-1 ALPS 94-1
JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED YEAR ENDED
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
---------------- --------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C>
Directors' remuneration................ 278 18 100 100
=== === === ===
</TABLE>
(b) Directors and Officers' Insurance
Directors' and Officers' Insurance has been implemented for AerCo and ALPS
94-1. Directors of AerCo Limited and ALPS 94-1 Limited also have the protection
of an unsecured indemnity from AerCo Limited and ALPS 94-1 Limited in respect of
claims relating to them in their capacity as directors.
F-27
<PAGE> 90
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17 (PROVISION)/BENEFIT FOR TAXES
<TABLE>
<CAPTION>
AERCO ALPS 94-1
PERIOD FROM PERIOD FROM ALPS 94-1 ALPS 94-1
JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED YEAR ENDED
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
---------------- --------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C>
Corporation tax --
(provision)/benefit.................. (35) -- (33) 143
=== === === ===
</TABLE>
Taxation provisions for AerCo and ALPS 94-1 relate to taxes levied in local
jurisdictions in respect of the activities of subsidiaries. The tax benefit for
ALPS 94-1 in the year ended June 30, 1997 relates to a subsequent approval of a
lower prior period tax charge levied by one jurisdiction.
AerCo's income from approved activities in Ireland is taxable at a rate of
10% until December 31, 2005.
18 BASIC AND DILUTED LOSS PER ORDINARY SHARE
The calculation of basic and diluted loss per ordinary share for AerCo
Limited has been computed by dividing the loss for the period of U.S.
$15,108,000 by the weighted average number of ordinary shares outstanding during
the period of 20 shares.
The calculation of basic and diluted loss per ordinary share for ALPS 94-1
Limited from July 1, 1998 to July 14, 1998 and for the years ended June 30, 1998
and 1997 has been computed by dividing the losses of U.S.$1,277,000,
U.S.$32,555,000 and U.S.$41,702,000 respectively by the weighted average number
of ordinary shares outstanding during these periods of 10 shares.
No adjustments have been made to the basic or diluted loss per ordinary
share for ALPS 94-1 Limited for the period from July 1, 1998 to July 15, 1998
and for the years ended June 30, 1998 and 1997 as a result of the change in
capital structure and the fair value adjustments arising out of the refinancing
and acquisition of ALPS 94-1 and the AerFi transferred aircraft and therefore,
the earnings per share figures for AerCo Limited and ALPS 94-1 Limited are not
directly comparable.
19 STAFF COSTS AND NUMBERS
AerCo and ALPS 94-1 have no employees.
20 SUBSIDIARY COMPANIES
AerCo Limited has the following subsidiary companies as at March 31, 1999:
<TABLE>
<CAPTION>
COUNTRY OF % OF
NAME INCORPORATION BUSINESS SHARES HELD
- ---- ------------- -------------------------------- -----------
<S> <C> <C> <C>
AerCo Ireland Limited.................. Ireland Aircraft leasing and sub-leasing 100%
AerCo Ireland II Limited............... Ireland Aircraft leasing and sub-leasing 100%
AerCo USA Inc.......................... USA Aircraft leasing and sub-leasing 100%
ALPS 94-1 Limited...................... Jersey Aircraft leasing and sub-leasing 100%
Pergola Limited........................ Ireland Aircraft leasing and sub-leasing 100%
ALPS 94-1(Belgium) N.V................. Belgium Aircraft leasing and sub-leasing 100%
AerFi (Belgium) N.V.................... Belgium Aircraft leasing and sub-leasing 100%
ALPS 94-1 (France) S.A.R.L............. France Dormant 100%
</TABLE>
As at July 14, 1998 and all previous periods, ALPS 94-1 was comprised of
ALPS 94-1 Limited and its 100% owned subsidiaries, Pergola Limited, ALPS 94-1
(Belgium) N.V. and ALPS 94-1 (France) S.A.R.L.
F-28
<PAGE> 91
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21 DIVIDENDS
Under the Articles of Association, the shareholders of ALPS 94-1 Limited
were entitled to receive a fixed cumulative preferential dividend of U.S.$1,500
per annum out of the profits. This dividend was not declared in the year ended
June 30, 1998.
22 CASH FLOW STATEMENT
(a) Supplemental disclosure of cash flow information
<TABLE>
<CAPTION>
ALPS 94-1
AERCO PERIOD FROM ALPS 94-1 ALPS 94-1
PERIOD ENDED JULY 1, 1998 TO YEAR ENDED YEAR ENDED
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
-------------- --------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C>
Cash paid in respect of:
Interest -- A-D Notes.................. 30,694 3,872 49,191 50,574
Interest -- E Notes.................... 7,332 -- 5,624 9,298
Interest rate swaps.................... 987 -- -- --
------ ----- ------ ------
39,013 3,872 54,815 59,872
====== ===== ====== ======
</TABLE>
(b) Reconciliation of net cash flow to movement in net debt -- AerCo
<TABLE>
<CAPTION>
U.S. $'000
<S> <C>
Increase in cash in the period.............................. 25,618
Cashflow from increase in debt.............................. (948,544)
Increase in liquid resources in period...................... 39,997
--------
Change in net debt resulting from cashflows................. (882,929)
Amortisation of issue costs................................. (673)
--------
Movement in net debt in the period.......................... (883,602)
Net debt at July 15, 1998................................... --
--------
Net debt at March 31, 1999.................................. (883,602)
========
</TABLE>
(c) Analysis of net debt -- AerCo
<TABLE>
<CAPTION>
OTHER NON
JULY 15, 1998 CASHFLOW CASH CHARGES MARCH 31, 1999
------------- ---------- ------------ --------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C>
Cash....................................... -- 25,618 -- 25,618
Liquid resources........................... -- 39,997 -- 39,997
Indebtedness............................... -- (948,544) (673) (949,217)
---- -------- ---- --------
-- (882,929) (673) (883,602)
==== ======== ==== ========
</TABLE>
F-29
<PAGE> 92
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22 CASH FLOW STATEMENT (CONTINUED)
(d) Purchase of subsidiary undertakings
<TABLE>
<CAPTION>
U.S. $'000
<S> <C>
NET ASSETS ACQUIRED
Aircraft.................................................... 951,973
Accounts receivable......................................... 2,927
Cash........................................................ 146,175
Accrued expenses and other liabilities...................... (60,430)
Security deposits........................................... (16,205)
--------
1,024,440
Goodwill.................................................... 47,125
--------
1,071,565
========
Satisfied by cash........................................... 1,071,565
========
</TABLE>
23 COMMITMENTS
AerCo Limited and its consolidated subsidiaries have no long-term contracts
other than those with their service providers (see Note 31) and lessees (see
Note 6).
24 NEW ACCOUNTING STANDARDS IMPLEMENTED
FRS 12 "Provisions, Contingent Liabilities and Contingent Assets" ("FRS
12") was effective for AerCo for its first trading accounting period ended March
31, 1999.
Under the accounting policy previously adopted by ALPS 94-1 all aircraft
maintenance reserves collected from lessees in respect of major aircraft and
engine overhauls were held as provisions. Under FRS 12 the pre-accrual of
maintenance costs is not permitted and accordingly ALPS 94-1 has changed its
accounting policy to reflect the adoption of the AerCo accounting policy for
maintenance. The effect of this change in accounting policy is that maintenance
reserves collected from lessees which cannot be drawn down by current lessees
are no longer provided. Such reserves only arose prior to June 30, 1996 and the
adjustment therefore has no effect on reported results. The balance sheet effect
of this change in accounting policy is to reduce both maintenance provisions and
the accumulated deficit of ALPS 94-1 by U.S.$1.973 million at each balance sheet
date.
25 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements are prepared in accordance with U.K.
GAAP which differ significantly in certain respects from U.S. GAAP. These
significant differences are described below:
(a) Basis of accounting for transactions between AerCo, ALPS 94-1 and AerFi.
Under U.K. GAAP the transaction whereby AerCo Limited acquired ALPS 94-1
Limited and the AerFi transferred aircraft is accounted for using acquisition
accounting. Under U.S. GAAP the transactions between, AerCo, ALPS 94-1 and AerFi
are transactions between entities under common control as these entities are all
part of a single consolidated group. The U.S. GAAP historical financial
information is presented for ALPS 94-1 and has not been retroactively restated
using the "as-if-pooling-of interest-method" in respect of the AerFi transferred
aircraft because of the restricted nature of the vehicles.
F-30
<PAGE> 93
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
25 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY
ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
(b) Aircraft
Under U.K. GAAP the aircraft acquired by ALPS 94-1 from AerFi and those
acquired by AerCo as part of the transaction whereby AerCo acquired ALPS 94-1
and the AerFi transferred aircraft, are recorded at their fair value on the
acquisition date. Under U.S. GAAP transfers of assets between AerCo, ALPS 94-1
and AerFi are accounted for on a historical cost basis as transactions between
entities under the common control of AerFi.
Effective from July 1, 1996 the method of depreciation is the same for both
U.K. and U.S. GAAP. Prior to that date under U.K. GAAP, depreciation was
provided at 2% for the first 15 years and 7% thereafter whereas under U.S. GAAP
prior to July 1, 1996, the aircraft were depreciated on a straight-line basis so
as to write-off the cost of the assets over a period of 25 years. Under U.K.
GAAP, a provision for additional depreciation was made on July 1, 1996 to
reflect the impact of adopting the revised estimates of accumulated depreciation
in respect of prior periods. Under U.S. GAAP, no such additional depreciation
charge arises.
For U.S. GAAP purposes, ALPS 94-1 adopted FASB Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed of" as of July 1, 1996. AerCo has also adopted FASB Statement No.
121. FASB Statement No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the directors estimate the future cashflows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cashflows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognised. This
statement did not materially change the carrying value of ALPS 94-1's assets in
the period when it was first applied. Prior to the adoption of the FASB
Statement No. 121, ALPS 94-1 recorded additional charges to reduce the book
value of specific assets to fair value where a permanent diminution in value was
considered to have occurred.
The differences between income recorded for U.K. GAAP and U.S. GAAP
therefore relate to (i) the difference between the amortised cost of the
aircraft under U.S. GAAP and the initial appraised value under U.K. GAAP, (ii)
the difference in depreciation under U.S. GAAP and U.K. GAAP, (iii) the
difference in additional depreciation resulting from the change in depreciation
method under U.K. GAAP, (iv) the difference in the cost of aircraft disposed
under U.S. GAAP and U.K. GAAP, (v) different impairment provisions because of
the different cost base for the aircraft.
(c) Cash flows
In accordance with U.K. GAAP AerCo and ALPS 94-1 comply with Financial
Reporting Standard No. 1 (Revised) -- "Cash flow Statements" ("FRS 1"). Its
objective and principles are similar to those set out in SFAS No. 95 "Statement
of Cash Flows". The principal difference between the standards is in respect of
classification. Under FRS1, AerCo and ALPS 94-1 present their cash flows for:
(a) operating activities; (b) return on investments and servicing of finance;
(c) taxation; (d) capital expenditure and financial investment; (e) acquisitions
and disposals; (f) management of liquid resources and (g) financing activities.
SFAS No. 95 requires only three categories of cash flow activity; (a) operating;
(b) investing; and (c) financing.
Cash flows arising from taxation and returns on investments and servicing
of finance under FRS1 are included as operating activities under SFAS No. 95.
Cash flows arising from capital expenditure under FRS1 are included as investing
activities under SFAS No. 95.
F-31
<PAGE> 94
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
25 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY
ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
(c) Cash flows (continued)
For the purposes of cash flows under U.S. GAAP, AerCo and ALPS 94-1
consider all highly liquid deposits with a maturity of three months or less to
be cash equivalents. Under U.K. GAAP, cash represents amounts available on
demand and liquid resources comprise other cash and commercial paper.
Substantially all of the cash balances of AerCo at March 31, 1999 are held
for specific purposes under the terms of the AerCo Trust Indenture.
Substantially all of the cash balances of ALPS 94-1 at June 30, 1997 and
1998 and July 14, 1998 were held for specific purposes under the terms of the
ALPS 94-1 Deed of Charge.
(d) Goodwill
Under U.K. GAAP the difference between the fair value of the net assets of
ALPS 94-1 and the AerFi transferred aircraft, and the purchase consideration
paid by AerCo Limited to acquire these entities gives rise to goodwill of $47
million which is capitalised and amortised over a period of 20 years. No
goodwill arises under U.S. GAAP as the transaction is accounted for on a
historical cost basis as a transaction between entities under common control.
(e) Issue Costs
Under U.K. GAAP issue costs arising on the completion of the refinancing
transaction are disclosed as a reduction of the related indebtedness. Under U.S.
GAAP issue costs are disclosed separately as deferred financing costs.
(f) Maintenance
AerCo's accounting policy for aircraft maintenance reflects its adoption of
FRS 12 as explained in Note 24. The historic U.K. GAAP financial information for
ALPS 94-1 has been restated to reflect the application of the AerCo accounting
policy for all periods. For U.S. GAAP the cumulative effect of this change in
accounting policy has been reflected in the results for the period ended March
31, 1999.
(g) Gain on extinguishment of debt
Under U.K. GAAP the makewhole premium payable by ALPS 94-1 on the
settlement of its A to D note indebtedness and the indebtedness to AerFi which
was forgiven as part of the AerCo transaction are fair value adjustments to the
net assets of ALPS 94-1 and the AerFi transferred aircraft acquired by AerCo
(see Note 4). Under U.S. GAAP the makewhole premium and the indebtedness
forgiven by AerFi are accounted for as an extraordinary gain on the
extinguishment of indebtedness.
F-32
<PAGE> 95
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
26 RECONCILIATION OF NET LOSS AS STATED IN ACCORDANCE WITH U.K. GAAP TO NET
INCOME/(LOSS) IN ACCORDANCE WITH U.S. GAAP
<TABLE>
<CAPTION>
AERCO ALPS 94-1
---------------- ----------------------------------------------------------------
(UNAUDITED)
PERIOD FROM NINE MONTHS PERIOD FROM
JULY 15, 1998 TO ENDED JULY 1, 1998 TO YEAR ENDED YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
---------------- -------------- --------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C> <C>
Retained loss in accordance with
U.K. GAAP........................ (15,108) (17,824) (1,277) (32,555) (41,702)
Goodwill amortisation.............. 1,669 -- -- -- --
Exceptional item: additional
depreciation charge.............. -- -- -- -- 34,385
Difference in depreciation of
aircraft......................... 5,759 4,315 243 5,773 5,723
Difference in impairment of
aircraft value................... -- 8,200 -- 8,200 --
Difference in book value of
aircraft sold.................... -- -- 7,007 -- --
Difference in book value of
aircraft sold.................... (319) -- -- (2,226) --
-------- -------- -------- -------- --------
NET (LOSS)/INCOME IN ACCORDANCE
WITH U.S. GAAP BEFORE
EXTRAORDINARY ITEM............... (7,999) (5,309) 5,973 (20,808) (1,594)
-------- -------- -------- -------- --------
Cumulative effect of change in
accounting policy for
maintenance...................... 1,973 -- -- -- --
EXTRAORDINARY ITEM -- NET GAIN ON
EXTINGUISHMENT OF DEBT;
Gain on forgiveness of
indebtedness to AerFi arising
as part of the refinancing
transaction................... 37,389 -- -- -- --
Makewhole premium arising on
refinancing................... (11,603) -- -- -- --
-------- -------- -------- -------- --------
25,786 -- -- -- --
-------- -------- -------- -------- --------
NET INCOME/(LOSS) IN ACCORDANCE
WITH U.S. GAAP................... 19,760 (5,309) 5,973 (20,808) (1,594)
======== ======== ======== ======== ========
Weighted average number of ordinary
shares outstanding............... 20 10 10 10 10
BASIC AND DILUTED (LOSS)/PROFIT PER
ORDINARY SHARE FOR THE PERIOD AS
SO ADJUSTED, BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
POLICY FOR MAINTENANCE AND
EXTRAORDINARY ITEM............... (399.95) (530.9) 597.3 (2,080.8) (159.4)
Cumulative effect of change in
accounting policy for
maintenance...................... 98.65 -- -- -- --
Extraordinary item................. 1,289.3 -- -- -- --
-------- -------- -------- -------- --------
BASIC AND DILUTED PROFIT/(LOSS) PER
ORDINARY SHARE FOR THE PERIOD AS
SO ADJUSTED...................... 988 (530.9) 597.3 (2,080.8) (159.4)
======== ======== ======== ======== ========
</TABLE>
F-33
<PAGE> 96
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
27 RECONCILIATION OF SHAREHOLDERS' DEFICIT AS STATED IN ACCORDANCE WITH U.K.
GAAP TO SHAREHOLDERS' DEFICIT IN ACCORDANCE WITH U.S. GAAP
<TABLE>
<CAPTION>
AERCO ALPS 94-1 ALPS 94-1
AS AT AS AT AS AT
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ------------- -------------
U.S. $'000
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
SHAREHOLDERS' DEFICIT IN ACCORDANCE WITH U.K. GAAP... (15,108) (78,523) (77,246)
ITEMS HAVING THE EFFECT OF AMENDING SHAREHOLDERS'
DEFICIT
Distribution to AerFi re ALPS 94-1 transaction....... -- (147,588) (147,588)
Difference between the fair value of the assets
acquired by AerCo and their predecessor cost....... (141,873) -- --
Goodwill arising on acquisition...................... (47,125) -- --
Amortisation of goodwill............................. 1,669 -- --
Effect of extraordinary item differences between U.K.
GAAP and U.S. GAAP (see Note 26)................... 25,786 -- --
Cumulative effect of change in accounting policy for
maintenance........................................ 1,973 -- --
Cumulative effect of other differences in net income
between U.K. GAAP and U.S. GAAP (see Note 26)...... 5,440 28,874 21,624
-------- -------- --------
SHAREHOLDERS' DEFICIT IN ACCORDANCE WITH U.S. GAAP... (169,238) (197,237) (203,210)
======== ======== ========
</TABLE>
F-34
<PAGE> 97
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
28 RECONCILIATION OF AIRCRAFT AS STATED IN ACCORDANCE WITH U.K. GAAP TO
AIRCRAFT AS STATED IN ACCORDANCE WITH U.S. GAAP
<TABLE>
<CAPTION>
U.K. GAAP U.S. GAAP
---------------------------------------------- ----------------------------------------------
AERCO ALPS 94-1 ALPS 94-1 AERCO ALPS 94-1 ALPS 94-1
MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998 MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ------------- ------------- -------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C> <C> <C>
COST
Cost.................. 951,973 949,288 975,179 951,973 949,288 975,179
Step up cost.......... -- -- -- (141,873) (149,651) (147,588)
------- -------- -------- -------- -------- --------
Beginning of period... -- 949,288 975,179 -- 799,637 827,591
Additions............. 951,973 -- 1,132 810,100 -- 1,132
Disposals............. (14,207) (76,897) (27,023) (14,519) (67,773) (29,086)
------- -------- -------- -------- -------- --------
End of period......... 937,766 872,391 949,288 795,581 731,864 799,637
======= ======== ======== ======== ======== ========
DEPRECIATION
Beginning of period... -- (140,478) (108,583) -- (107,404) (81,119)
Charge for the
period.............. (33,821) (1,519) (37,826) (28,062) (1,276) (32,053)
Disposal.............. 308 11,231 5,931 301 9,114 5,768
------- -------- -------- -------- -------- --------
End of period......... (33,513) (130,766) (140,478) (27,761) (99,566) (107,404)
======= ======== ======== ======== ======== ========
PROVISION FOR
PERMANENT DIMINUTION
IN VALUE
Beginning of period... -- (8,720) (12,000) -- (520) (12,000)
Charge for the
period.............. -- -- (8,720) -- -- (520)
Disposal.............. -- -- 12,000 -- -- 12,000
------- -------- -------- -------- -------- --------
End of period......... -- (8,720) (8,720) -- (520) (520)
======= ======== ======== ======== ======== ========
NET BOOK VALUE
Beginning of period... -- 800,090 854,596 -- 691,713 734,472
======= ======== ======== ======== ======== ========
End of period......... 904,253 732,905 800,090 767,820 631,778 691,713
======= ======== ======== ======== ======== ========
</TABLE>
29 FAIR VALUE OF FINANCIAL INSTRUMENTS
AerCo Limited estimates that the fair value of its cash and cash
equivalents and other receivables and payables at March 31, 1999 approximate to
the amounts at which these items are reflected in AerCo's balance sheet. This is
due to the relatively short-term nature of the instruments and the frequency at
which they reprice.
30 FOREIGN CURRENCY TRANSACTIONS
AerCo's and ALPS 94-1's foreign currency transactions are not significant
as all revenues and most costs are denominated in US dollars.
31 RELATED PARTY TRANSACTIONS
(a) AerFi acts as cash manager and administrative agent to AerCo from July 15,
1998
AerFi received a fee as cash manager and administrative agent to AerCo for
the period from July 15, 1998 to March 31, 1999 of U.S. $1,738,000.
F-35
<PAGE> 98
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
31 RELATED PARTY TRANSACTIONS (CONTINUED)
(a) AerFi acts as cash manager and administrative agent to AerCo from July 15,
1998 (continued)
On July 15, 1998 AerCo Limited acquired a portfolio of ten aircraft and
related leases from AerFi and the capital stock of ALPS 94-1 Limited, a vehicle
in which AerFi was the E Note holder, as explained in "Statement of Accounting
Policies: Description of Business".
(b) Babcock & Brown Limited ("Babcock")
Babcock has acted as lease manager to AerCo from July 15, 1998. In addition
to managing AerCo's aircraft, Babcock also manages aircraft owned by its
affiliates and other third parties. Babcock may from time to time have conflicts
of interest in performing its obligations to AerCo and other entities to which
it provides management, marketing and other services.
Babcock received an annual fee as lease manager which amounted to
US$2,637,000 for the period from July 15, 1998 to March 31, 1999.
(c) GE Capital Aviation Services, Limited ("GECAS")
GECAS acted as lease manager to ALPS 94-1 until July 14, 1998. In addition
to managing the ALPS 94-1 aircraft GECAS also managed aircraft owned by GE
Capital and its affiliates and other third parties, including AerFi from whom
ALPS 94-1's aircraft were purchased. GECAS may from time to time have had
conflicts of interest in performing its obligations to ALPS 94-1 and other
entities to which it provides management, marketing and other services.
GECAS received an annual fee as lease manager which amounted to US$108,000
for the period from July 1, 1998 to July 14, 1998 (year to June 30, 1998 --
US$2,894,000: year to June 30, 1997 -- US$2,899,000).
GECAS is an affiliate of GE Capital which held the Class D Note of ALPS
94-1 and had the right to appoint a representative to the board of ALPS 94-1.
During the year ended June 30, 1998 the GECAS servicing agreement was terminated
and a termination fee of $12,700,000 was paid to GECAS (Note 13).
(d) Mr. E.J. Hansom (Director)
Mr. E.J. Hansom is the Chief Financial Officer of AerFi and is a
representative on the board of AerCo Limited appointed by AerFi, as holder of
the Class E Note of AerCo Limited. Mr. E.J. Hansom is also a director of ALPS
94-1 Limited. ALPS 94-1 Limited purchased its aircraft from AerFi and AerCo
Limited purchased the AerFi transferred aircraft from AerFi.
(e) Ms. R. Hynes (Director)
Ms. R. Hynes is General Counsel of AerFi and is a representative of the
board of AerCo Limited appointed by AerFi as holder of the Class E Note of AerCo
Limited. Ms. R. Hynes is also a director of ALPS 94-1 Limited. ALPS 94-1 Limited
purchased its aircraft from AerFi and AerCo Limited purchased the AerFi
transferred aircraft from AerFi.
(f) Mr. G.A. Robinson (Director)
Mr. G.A. Robinson performs consulting services from time to time for Air
2000, one of the lessees of AerCo and ALPS 94-1. Included in aircraft leasing
revenue is an amount of U.S. $3,588,000 for the period from June 15, 1998 to
March 31, 1999 (July 14, 1998: U.S. $202,000, June 1998: U.S. $5,202,000) in
respect of this lessee.
F-36
<PAGE> 99
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
32 YEAR 2000
AerCo is currently reliant on AerFi and Babcock for its information
systems. AerFi and Babcock are currently in the process of reviewing AerCo's
Year 2000 information system exposures and are taking steps to ensure that these
systems are Year 2000 compliant. AerCo does not believe that the costs it will
incur to remedy its Year 2000 information system exposures will be significant.
AerCo is also concerned to avoid any adverse impact on its business and
results of operations, if its suppliers, financial institutions or lessees are
not Year 2000 compliant. Surveys of such third parties are currently being
undertaken by both AerFi and Babcock. A survey is also being conducted by
Babcock in respect of aircraft, aircraft spare parts and aircraft manufacturers
to determine the extent to which their products are Year 2000 compliant.
In the event that AerCo's lessees, or its aircraft were not Year 2000
compliant, this could have a material adverse effect on AerCo's financial
condition or results of operations.
F-37
<PAGE> 100
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF AERCO LIMITED
We have audited the accompanying statements of net assets of the AerFi
transferred aircraft as of July 14, 1998 and June 30, 1998 and the related
statements of operations, cash flows and changes in net assets for the period
from July 1, 1998 to July 14, 1998 and the year ended June 30, 1998.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors of AerCo Limited are required to prepare financial statements
for each financial period to give a true and fair view of the statement of net
assets of the AerFi transferred aircraft and of the income, cash flows and
changes in net assets of the AerFi transferred aircraft for that period. In
preparing the financial statements, the directors are required to select
suitable accounting policies and apply them consistently, make judgements and
estimates that are prudent and reasonable and to prepare the financial
statements on the going concern basis unless it is not appropriate to assume
that the AerFi transferred aircraft will continue in business.
It is our responsibility to form an independent opinion, based on our
audit, on those financial statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
U.K. Auditing Practices Board which do not differ significantly from United
States generally accepted auditing standards.
An audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the financial statements. It also includes an
assessment of the significant estimates and judgements made by the directors in
the preparation of the financial statements and of whether the accounting
policies are appropriate to the circumstances of the AerFi transferred aircraft,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion, the financial statements present fairly the statements of
net assets of the AerFi transferred aircraft as at July 14, 1998 and June 30,
1998 and of the income, cash flows and changes in net assets for the period from
July 1, 1998 to July 14, 1998 and for the year ended June 30, 1998 of the AerFi
transferred aircraft and have been properly prepared in accordance with U.K.
generally accepted accounting principles.
F-38
<PAGE> 101
INDEPENDENT AUDITORS' REPORT -- (CONTINUED)
As discussed in Note 15 to the financial statements, AerCo has adopted the
provisions of Financial Reporting Standard 12, "Provisions, Contingent
Liabilities and Contingent Assets". As a result, the accounting policy used to
record maintenance for the AirFi transferred aircraft has been amended to
reflect the adoption of the AerCo accounting policy.
Generally accepted accounting principles in the United Kingdom vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected the results of operations of the AerFi
transferred aircraft for the period from July 1, 1998 to July 14, 1998 and for
the year ended June 30, 1998 and the statements of net assets as at July 14,
1998 and June 30, 1998 to the extent summarised in Note 16 of the financial
statements.
KPMG
CHARTERED ACCOUNTANTS
5 George's Dock
IFSC
Dublin 1
Ireland
August 9, 1999
F-39
<PAGE> 102
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF AERCO LIMITED
We have audited the accompanying statement of net assets of the AerFi
transferred aircraft as of June 30, 1997 and the related statement of
operations, cash flows and changes in net assets for the year then ended.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors of AerCo Limited are required to prepare financial statements
for each financial year to give a true and fair view of the statement of net
assets of the AerFi transferred aircraft and of the income, cash flows and
changes in net assets of the AerFi transferred aircraft for that year. In
preparing the financial statements, the directors are required to select
suitable accounting policies and apply them consistently, make judgements and
estimates that are prudent and reasonable and to prepare the financial
statements on the going concern basis unless it is not appropriate to assume
that the AerFi transferred aircraft will continue in business.
It is our responsibility to form an independent opinion, based on our
audit, on those financial statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
U.K. Auditing Practices Board which do not differ significantly from U.S.
generally accepted auditing standards.
An audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the financial statements. It also includes an
assessment of the significant estimates and judgements made by the directors in
the preparation of the financial statements and of whether the accounting
policies are appropriate to the circumstances of the AerFi transferred aircraft,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements present fairly the statement of net
assets of the AerFi transferred aircraft as at June 30, 1997 and of the income,
cash flows and changes in net assets for the year ended June 30, 1997 of the
AerFi transferred aircraft and have been properly prepared in accordance with
U.K. generally accepted accounting principles.
Generally accepted accounting principles in the United Kingdom vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have no significant effect on the statement of
operations for the year ended June 30, 1997 and the statement of net assets as
at June 30, 1997.
ARTHUR ANDERSEN
CHARTERED ACCOUNTANTS
Forum House
Grenville Street
St. Helier
Jersey JE2 4UF
Channel Islands
June 23, 1998
F-40
<PAGE> 103
AERFI TRANSFERRED AIRCRAFT
STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
NOTES JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
----- ------------- ------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Due from AerFi................................... -- 24,376 27,294
Accounts receivable, net......................... 2 609 772 814
------- ------- -------
TOTAL CURRENT ASSETS............................. 609 25,148 28,108
FIXED ASSETS
Aircraft......................................... 3 178,756 179,220 177,850
------- ------- -------
TOTAL ASSETS..................................... 179,365 204,368 205,958
======= ======= =======
LIABILITIES
Accrued expenses and other liabilities........... 5 5,799 7,217 17,060
Indebtedness..................................... 6 48,435 88,345 115,044
Security deposits................................ 7 2,950 2,900 2,930
Deferred income tax.............................. 11 5,148 5,153 5,654
------- ------- -------
TOTAL LIABILITIES................................ 62,332 103,615 140,688
NET ASSETS....................................... 117,033 100,753 65,270
======= ======= =======
</TABLE>
The accompanying notes, including the statement of accounting policies on pages
F-45 to F-46, are an integral part of the financial statements.
F-41
<PAGE> 104
AERFI TRANSFERRED AIRCRAFT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS PERIOD FROM
ENDED JULY 1, 1998 TO YEAR ENDED YEAR ENDED
NOTES MARCH 31, 1998 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
----- -------------- --------------- ------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C> <C>
REVENUES
Aircraft leasing................ 8 15,499 983 21,109 22,216
EXPENSES
Depreciation.................... 3 (7,599) (464) (10,215) (9,261)
Provision for impairment in
aircraft value................ 3 -- -- -- (4,000)
Net interest expense............ 9 (5,808) (1,392) (6,612) (10,144)
Other expenses.................. 10 (3,766) 355 (4,804) (9,032)
------- ------- ------- -------
(17,173) (1,501) (21,631) (32,437)
------- ------- ------- -------
NET LOSS FROM OPERATIONS BEFORE
PROVISION FOR TAXES........... (1,674) (518) (522) (10,221)
Benefit for taxes............... 11 560 5 501 1,176
------- ------- ------- -------
NET LOSS FOR THE PERIOD......... (1,114) (513) (21) (9,045)
======= ======= ======= =======
</TABLE>
All recognised gains and losses are included in the statements of operations
above.
There is no material difference between the net loss for the period, and its
historical cost equivalent.
The results for the period are derived from continuing operations.
The accompanying notes, including the statement of accounting policies on pages
F-45 to F-46, are an integral part of the financial statements.
F-42
<PAGE> 105
AERFI TRANSFERRED AIRCRAFT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS PERIOD FROM
ENDED JULY 1, 1998 TO YEAR ENDED YEAR ENDED
MARCH 31, 1998 JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
-------------- --------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period................ (1,114) (513) (21) (9,045)
ADJUSTMENTS TO RECONCILE NET LOSS FROM
OPERATIONS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Depreciation charge for the period..... 7,599 464 10,215 9,261
Provision for permanent diminution in
value of aircraft.................... -- -- -- 4,000
Amortisation........................... -- -- -- 603
Deferred income tax.................... (560) (5) (501) (1,176)
Changes in operating assets and
liabilities
Accounts receivable and due from
AerFi............................. (24) 24,539 2,960 2,115
Accrued expenses and other
liabilities....................... 4,894 (970) (3,366) 5,288
Net maintenance expenditure.......... (7,326) (448) (6,477) (2,702)
Net security deposits
received/(repaid)................. (516) 50 (30) 1,080
------- ------- ------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES........................... 2,953 23,117 2,780 9,424
------- ------- ------- -------
CAPITAL EXPENDITURE
Purchase of aircraft................... (65) -- (11,585) (203)
------- ------- ------- -------
FINANCING ACTIVITIES
Contributions from AerFi............... 4,833 16,793 35,504 28,456
Indebtedness repaid.................... (7,721) (39,910) (26,699) (37,677)
------- ------- ------- -------
NET CASH (OUTFLOW)/INFLOW FROM
FINANCING ACTIVITIES................. (2,888) (23,117) 8,805 (9,221)
------- ------- ------- -------
NET INCREASE IN CASH................... -- -- -- --
CASH AT BEGINNING OF PERIOD............ -- -- -- --
------- ------- ------- -------
CASH AT END OF PERIOD.................. -- -- -- --
======= ======= ======= =======
</TABLE>
Disclosure of cash flow information is set out in Note 13.
The accompanying notes, including the statement of accounting policies on pages
F-45 to F-46, are an integral part of the financial statements.
F-43
<PAGE> 106
AERFI TRANSFERRED AIRCRAFT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
TOTAL
---------
U.S.$'000
<S> <C>
Balance at June 30, 1996.................................... 45,859
Net contributions from AerFi................................ 28,456
NET LOSS FOR THE YEAR....................................... (9,045)
-------
Balance at June 30, 1997.................................... 65,270
Net contribution from AerFi................................. 35,504
NET LOSS FOR THE YEAR....................................... (21)
-------
Balance at June 30, 1998.................................... 100,753
Net contribution from AerFi................................. 16,793
NET LOSS FOR THE PERIOD..................................... (513)
-------
Balance at July 14, 1998.................................... 117,033
=======
</TABLE>
The accompanying notes, including the statement of accounting policies on pages
F-45 to F-46, are an integral part of the financial statements.
F-44
<PAGE> 107
AERFI TRANSFERRED AIRCRAFT
STATEMENT OF ACCOUNTING POLICIES
Introduction and basis of preparation
These financial statements present the statements of operations and the
cash flows for the period from July 1, 1998 to July 14, 1998, the years ended
June 30, 1998 and June 30, 1997 and the statements of net assets at July 14,
1998, June 30, 1998 and June 30, 1997 of the aircraft (the "AERFI TRANSFERRED
AIRCRAFT") acquired by AerCo Limited from AerFi pursuant to a secured financing
transaction on July 15, 1998.
Under the transaction AerCo Limited acquired all of the capital stock of
ALPS 94-1 Limited, a company which owned 25 aircraft and related leases, and
also acquired 10 aircraft and related leases from AerFi. The further details of
the transaction and of the basis of preparation of these financial statements
for the AerFi transferred aircraft are set out in Note 1.
The accounting policies followed in the preparation of the accompanying
financial statements conform with generally accepted accounting principles in
the United Kingdom and comply with financial reporting standards of the
Accounting Standards Board in the United Kingdom as promulgated by The Institute
of Chartered Accountants in England and Wales.
The financial statements are prepared on the going concern basis and under
the historic cost convention and are stated in US dollars, which is the
principal operating currency of the entity and of the aviation industry.
The unaudited financial statements included herein have been prepared
without audit and conform with generally accepted accounting principles in the
United Kingdom and comply with Financial Reporting Standards of the Accounting
Standards Board in the United Kingdom as promulgated by the Institute of
Chartered Accountants in England and Wales.
In the opinion of AerCo's management, the accompanying unaudited financial
statements have been prepared on a basis consistent with the audited financial
statements and contain adjustments, all of which are of a normal recurring
nature, necessary to present fairly its financial position as of March 31, 1998
and its results of operations and cashflows for the nine months ended March 31,
1998. Interim results are not necessarily indicative of results for the fiscal
year.
Revenue recognition
Revenue from aircraft on operating leases is recognised as income on a
straight line basis over the period of the leases. Where rentals are adjusted to
reflect increases or decreases in prevailing interest rates such adjustments are
accounted for as they arise. Lease rentals received in advance are deferred and
recognised over the period to which they relate.
Interest income
Interest earned during the period has been credited to the statement of
operations.
Maintenance
In most lease contracts the lessee has the obligation to pay for
maintenance costs on airframes and engines which arise during the term of the
lease and in many lease contracts the lessee makes a full or partial prepayment,
calculated at an hourly rate, into a maintenance reserve fund paid to the AerFi
transferred aircraft from which the lessee can draw in respect of maintenance
expenditures for major checks. Amounts held in respect of aircraft maintenance
are recorded as accrued expenses and other liabilities. Any surplus amounts held
in the fund on termination of a lease, to which the next lessee has no access,
are recorded as income at that time.
F-45
<PAGE> 108
AERFI TRANSFERRED AIRCRAFT
STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED)
Maintenance costs borne directly by the AerFi transferred aircraft and
which are not paid for by lessees are expensed as incurred.
Taxation
Corporation tax is provided based on the results for the period. Deferred
income tax assets and liabilities recognize the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred income
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
Aircraft
Aircraft are stated at cost less accumulated depreciation less impairments
in value. Cost comprises the net purchase price of the aircraft when originally
acquired by AerFi.
Cost comprises the invoiced cost net of manufacturer's discounts.
Depreciation is calculated on a straight line basis. The estimates of useful
economic lives and residual values are reviewed periodically. The current
estimates for residual values are generally 15% of cost and for useful economic
lives are as follows:
<TABLE>
<CAPTION>
YEARS FROM
----- ----------------
<S> <C> <C>
Refurbished and upgraded aircraft -- converted to
freighters................................................ 20 Conversion Date
All other aircraft.......................................... 25 Manufacture Date
</TABLE>
Additional charges are made to reduce the book value of specific assets to
the recoverable amount where an impairment in value is considered to have
occurred in accordance with Financial Reporting Standard No. 11 "Impairment of
Tangible Fixed Assets and Goodwill". An impairment review is only required where
there has been an indication of impairment, usually on the basis of independent
market appraisals and indications of market demand. An impairment is measured by
comparing the carrying value of the aircraft and engines with the recoverable
amount. Recoverable amount is the higher of the net realisable value and the
value in use on an after tax basis. Value in use is based on the anticipated
future cashflows from the aircraft, discounted by a market rate of return.
AerFi adopted FASB Statement No. 121 "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be disposed of " as of July 1,
1996. FASB Statement No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the directors' estimated the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized. This
statement did not materially change the carrying value of the entity's assets in
the period when it was first applied or in previous periods.
F-46
<PAGE> 109
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS
1 BASIS OF PREPARATION
Under a refinancing transaction of July 15, 1998, AerCo Limited acquired
100% of the capital stock of ALPS 94-1 Limited and thereby acquired 25 aircraft
and related leases and acquired directly or indirectly 10 aircraft and related
leases from AerFi. The transaction was effected by transferring ALPS 94-1
Limited and subsidiaries and the existing AerFi subsidiaries that own the AerFi
transferred aircraft to AerCo Limited.
Simultaneously with such transfers, AerCo Limited issued approximately
U.S.$800 million in aggregate principal amount of Notes in four subclasses:
subclass A-1, subclass A-2, subclass B-1 and subclass C-1 ("NOTES"). AerCo
Limited also issued two additional subclasses of notes, the subclass D-1 Notes
and the subclass E-1 Notes, which are initially held by AerFi. In addition, as
part of the transaction a subsidiary of AerFi surrendered its holding of its
existing Class E Note of ALPS 94-1 Limited. AerCo Limited used the proceeds of
the issuance of the Notes, the subclass D-1 Notes and subclass E-1 Notes to
finance the repayment of all of ALPS 94-1's existing financial indebtedness and
to acquire or to finance the acquisition of the AerFi transferred aircraft from
AerFi.
These financial statements present, on the bases and assumptions set out
below, the results of operations, assets and liabilities relating to the
aircraft transferred to AerCo from AerFi, reflecting the nine aircraft owned by
AerFi during the year ended June 30, 1998 and the acquisition in April 1998 of
an A300-B4-200 aircraft by AerFi from ALPS 94-1 Limited. The financial
statements have been prepared by AerFi Administrative Services Limited on behalf
of the directors of AerCo Limited.
(i) The financial statements are presented on a historical cost basis as
if the AerFi transferred aircraft had been organized as a single
economic entity for the period from July 1, 1998 to July 14, 1998, and
for the years ended June 30, 1998 and June 30, 1997.
(ii) The transaction was approved as planned and was completed such that
AerCo was a going concern with adequate capital and finance in place.
(iii) For the purposes of these financial statements, an allocation of
certain costs such as selling, general and administrative expenses of
AerFi to the AerFi transferred aircraft has been made. The most
significant element of these costs relate to aircraft management fees,
substantially all of which are asset based fees calculated as an annual
percentage of a reference net book value of aircraft under management.
The balance of such costs have been calculated based on AerFi's estimate
of the other overhead costs incurred in managing the fleet of aircraft
for the year. Management believes that the basis for these allocations
is reasonable.
(iv) During the period from July 1, 1998 to July 14, 1998 two of the
aircraft were financed by finance leases to AerFi and one aircraft was
financed by notes issued by AerFi. For these aircraft the financial
lease obligations, the liabilities under the Notes and related cash
flows and interest costs are reflected in these financial statements.
During the period from July 1, 1998 to July 14, 1998 the financial lease
obligations and the liabilities under the Notes were repaid.
In the case of the remaining aircraft, no separate identifiable
financing was in place. These aircraft are assumed to have been financed
by intercompany indebtedness to AerFi at levels based on the ratio of
AerFi's overall net debt to aircraft net book value of 74.9% at July 1,
1996, 51.87% at June 30, 1997, 42.06% at June 30, 1998 and 42.06% at
July 14, 1998 and repayments to AerFi are assumed to have been made
accordingly during the period.
(v) The interest charged on the assumed indebtedness to AerFi is based on
AerFi's average cost of debt of 9.59% for the period from July 1, 1998
to July 14, 1998 and for the year ended June 30, 1998 and 10.06% for the
year ended June 30, 1997.
F-47
<PAGE> 110
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
1 BASIS OF PREPARATION (CONTINUED)
(vi) Cash generated from or absorbed by the activities of the entity during
the period is reflected through the intercompany account as
distributions to or transfers from AerFi. This includes restricted cash
held by AerFi with respect to the entity. No separate cash balances
existed for the entity.
(vii) The tax provisions and deferred income tax assets and liabilities of
the entity have been determined as if the aircraft had been owned by
taxable entities separate from AerFi.
2 ACCOUNTS RECEIVABLE, NET
<TABLE>
<CAPTION>
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Trade receivables, net................................ 203 366 401
Non-trade receivables................................. 406 406 413
--- --- ---
609 772 814
=== === ===
</TABLE>
Trade receivables are stated net of bad debt provision of $0.6 million
(June 30, 1998: $0.6 million and June 30, 1997: $0.2 million) and comprise
amounts in respect of rent and maintenance payments due from lessees. As at July
14, 1998 and June 30, 1998 one lessee accounted for 99% of trade receivables. As
at June 30, 1997 two lessees accounted for 53% and 43% respectively of trade
receivables.
Non-trade receivables comprise prepayments of French VAT.
3 AIRCRAFT
<TABLE>
<CAPTION>
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
COST
Beginning of period................................... 283,713 272,128 271,925
Additions during the period........................... -- 11,585 203
-------- -------- -------
End of period......................................... 283,713 283,713 272,128
======== ======== =======
DEPRECIATION
Beginning of period................................... (100,493) (90,278) (81,017)
Charge for the period................................. (464) (10,215) (9,261)
-------- -------- -------
End of period......................................... (100,957) (100,493) (90,278)
======== ======== =======
Impairment provision.................................. (4,000) (4,000) (4,000)
======== ======== =======
NET BOOK VALUE
Beginning of period................................... 179,220 177,850 190,908
======== ======== =======
End of period......................................... 178,756 179,220 177,850
======== ======== =======
</TABLE>
Cost represents the net purchase price of the aircraft when originally
acquired by AerFi.
The directors of AerCo Limited determine on an annual basis whether an
impairment in value of the AerFi transferred aircraft has occurred. Where an
impairment in value is considered to have occurred provision is made based upon
market appraisals of the individual aircraft prepared by three professional
appraisal firms, together with other factors such as maintenance reserves held
by the entity, the credit-
F-48
<PAGE> 111
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
3 AIRCRAFT (CONTINUED)
worthiness of particular lessees, current rental values compared to open market
and the length of remaining lease term.
In the year ended June 30, 1997, a provision of U.S.$4 million was made to
reflect an impairment in aircraft value against two F100 aircraft. This
determination was arrived at based on significant reductions of values and lease
rates for Fokker aircraft.
4 OPERATING LEASES
All the aircraft are held for operating lease. Rentals on certain of the
leases are variable in accordance with prevailing interest rates.
The following is a schedule of contracted future rentals, by years, on
operating leases as of July 14, 1998. The interest rates prevailing at July 14,
1998 have been applied in determining rentals that are variable in accordance
with prevailing interest rates.
<TABLE>
<CAPTION>
U.S. $'000
<S> <C>
Period July 15, 1998 to June 30, 1999....................... 22,595
Year ended June 30, 2000.................................... 26,153
Year ended June 30, 2001.................................... 17,439
Year ended June 30, 2002.................................... 13,191
Year ended June 30, 2003.................................... 15,181
Thereafter.................................................. 9,458
-------
104,017
=======
</TABLE>
5 ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Accrued expenses and other liabilities comprise:
Aircraft maintenance reserves...................... 3,098 3,546 10,023
Deferred income.................................... 873 839 925
Interest........................................... -- 50 54
Other accruals..................................... 1,828 2,782 6,058
------ ------ -------
5,799 7,217 17,060
====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Aircraft maintenance reserves:
Due within one year................................ 647 -- 3,652
Due after one year................................. 2,451 3,546 6,371
------ ------ -------
3,098 3,546 10,023
====== ====== =======
</TABLE>
F-49
<PAGE> 112
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
6 INDEBTEDNESS
<TABLE>
<CAPTION>
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- -------------
U.S. $'000 U.S. $'000 U.S. $'000
<S> <C> <C> <C>
Finance lease obligations(i)....................... -- 18,774 34,822
AerFi Notes(i)..................................... -- 20,993 22,577
Due to AerFi(ii)................................... 48,435 48,578 57,645
------ ------ -------
48,435 88,345 115,044
====== ====== =======
</TABLE>
- ---------------
The basis and assumptions under which indebtedness has been reflected in these
financial statements is set out in Note 1.
(i) The finance lease obligations and the AerFi notes issued comprise the
amounts raised by AerFi to finance three of the AerFi transferred aircraft.
These amounts were repaid in full by July 14, 1998. The AerFi notes were
secured on one of the aircraft which had a net book value of U.S.$25.1
million at June 30, 1998 (1997: US$26.2 million) and the notes carried
interest at a rate of 7.21% (1997: 7.21%).
(ii) As explained in Note 1 it has been assumed that the remaining aircraft had
been financed with indebtedness due to AerFi.
(iii) Repayments of principal during the period on the finance lease obligations
and the AerFi notes were in accordance with their respective contractual
terms. The repayments of principal on the aircraft which were assumed to be
financed by AerFi were assumed to be made in accordance with changes in
AerFi's aircraft net book value to net debt ratio during the financial
period.
7 SECURITY DEPOSITS
Security deposits received from lessees of U.S.$2.9 million (June 30, 1998
and June 30, 1997: U.S.$2.9 million) are held as security for obligations in
accordance with the terms of certain leases.
8 REVENUES AND CONCENTRATION OF CREDIT RISK
(a) Distribution of revenues by geographic area
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED YEAR ENDED
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
------------------ ------------------ ------------------
U.S.$'000 % U.S.$'000 % U.S.$'000 %
<S> <C> <C> <C> <C> <C> <C>
Europe............................... 543 55.3 12,950 61.36 13,845 62.32
North America........................ 231 23.5 4,195 19.87 4,449 20.03
South/Central America................ 137 13.9 3,727 17.65 2,042 9.19
Asia/Pacific......................... 72 7.3 237 1.12 1,880 8.46
--- ------ ------ ------ ------ ------
983 100.00 21,109 100.00 22,216 100.00
=== ====== ====== ====== ====== ======
</TABLE>
All revenues are derived from aircraft leasing.
In the period from July 1, 1998 to July 14, 1998, 27%, 24%, 15%, 14% and
14% of the entity's lease revenues was derived from Turkey, the United States,
the United Kingdom, Brazil and France respectively.
In the year ended June 30, 1998, 30%, 20%, 18%, 16% and 15% of the entity's
lease revenues was derived from Turkey, the United States, Brazil, the United
Kingdom and France respectively.
F-50
<PAGE> 113
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8 REVENUES AND CONCENTRATION OF CREDIT RISK (CONTINUED)
(a) Distribution of revenues by geographic area (continued)
In the year ended June 30, 1997, 20%, 16%, 16% and 15% of the entity's
lease revenues was derived from the United States, Turkey, the United Kingdom
and France respectively. No other country accounted for greater than 10% of the
entity's lease revenues.
(b) Concentration of credit risk
Credit risk with respect to trade accounts receivable is generally
mitigated due to the number of lessees and their dispersal across different
geographic areas.
The entity manages its exposure to particular countries in part through
obtaining security from lessees by way of deposits, letters of credit and
guarantees. In addition the entity maintains Political Risk Insurance in respect
of certain lessees.
The entity continually evaluates the financial position of lessees and,
based on this evaluation, the amounts outstanding and the available security,
makes an appropriate provision for doubtful debts.
As at July 14, 1998, five lessees accounted for 15%, 15%, 14%, 14% and 13%
of the entity's lease revenues. No other lessee accounted for greater than 10%
of the entity's lease revenues for the period from July 1, 1998 to July 14,
1998.
As at June 30, 1998, five lessees accounted for 18%, 16%, 15%, 15% and 14%
of the entity's lease revenues. No other lessee accounted for greater than 10%
of the entity's lease revenues for the year ended June 30, 1998.
As at June 30, 1997, four lessees accounted for 16%, 15%, 14% and 11% of
the entity's lease revenues. No other lessee accounted for greater than 10% of
the entity's lease revenues for the year ended June 30, 1997.
9 NET INTEREST EXPENSE
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED YEAR ENDED
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
--------------- --------------- ---------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Interest payable on finance lease obligations....... 1,125 2,076 2,149
Interest payable on AerFi Notes..................... 55 1,596 1,665
Interest payable on indebtedness due to AerFi....... 212 4,902 7,461
Net interest income on amounts due from AerFi....... -- (1,962) (1,131)
------ ------ ------
1,392 6,612 10,144
====== ====== ======
</TABLE>
F-51
<PAGE> 114
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
10 OTHER EXPENSES
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED YEAR ENDED
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
--------------- --------------- ---------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Servicer's fees..................................... 52 1,201 1,175
Aircraft leasing costs.............................. (424) 3,348 6,723
Political risk insurance............................ -- (145) 130
Administration fees................................. 2 40 40
Legal and professional fees......................... 4 100 100
Deferred expenditure................................ -- -- 604
Cash manager's fees................................. 9 210 210
Audit and tax fees.................................. 2 50 50
----- ----- -----
(355) 4,804 9,032
===== ===== =====
</TABLE>
Aircraft leasing costs include costs relating to the repair and return to
releasable condition of aircraft following return from lessees. Such costs
amounted to US$4.6 million and U.S.$1.5 million in 1997 and 1998 respectively.
11 BENEFIT FOR TAXES
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED YEAR ENDED
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
--------------- --------------- ---------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Tax benefit of the AerFi transferred aircraft
consists of the following:
Deferred income tax benefit......................... 5 501 1,176
------ ------ ------
5 501 1,176
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED YEAR ENDED
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
--------------- --------------- ---------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Deferred tax assets and liabilities of the AerFi
transferred aircraft:
Deferred tax assets relating to losses.............. (5,515) (5,415) (2,665)
Deferred tax liability relating to aircraft......... 10,663 10,568 8,319
------ ------ ------
5,148 5,153 5,654
====== ====== ======
</TABLE>
The entity's income from approved activities in Ireland is taxable at a
rate of 10% until December 31, 2005. US Federal and State tax is provided at a
rate of 35%.
Two aircraft, for tax purposes, are treated as being leased from third
parties under US "safe harbour lease" tax rules. Under existing laws, certain
events could reverse the cumulative effect of this tax treatment, in which case
the entity would be required to make payments to third parties under the tax
indemnification clauses included in the lease agreements. As of July 14, 1998
the maximum potential exposure under this provision is U.S.$0.9 million (June
30, 1998: U.S.$0.9 million, June 30, 1997: U.S.$1.4 million). The directors of
AerCo Limited believe that no events have taken place which would cause such
payments to become due.
F-52
<PAGE> 115
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
12 STAFF COSTS AND NUMBERS
The entity has no employees.
13 CASH FLOW STATEMENT
(a) Supplemental disclosure of cash flow information
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED YEAR ENDED
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
--------------- --------------- ---------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Cash paid in respect of:
Interest -- Individual financings................... 212 4,902 7,461
Interest -- AerFi Notes............................. 55 1,600 1,667
Interest -- Indebtedness to AerFi................... 1,175 2,076 2,310
------ ------ ------
1,442 8,578 11,438
====== ====== ======
</TABLE>
(b) Reconciliation of net cash flow to movement in net debt
<TABLE>
<CAPTION>
U.S.$'000
<S> <C>
Increase in cash in the period.................. --
Cashflow from decrease in debt.................. (39,910)
Increase in liquid resources in period.......... --
-------
Change in net debt resulting from cashflows..... (39,910)
-------
Movement in net debt in the period.............. (39,910)
Net debt at June 30, 1998....................... 88,345
-------
Net debt at July 14, 1998....................... 48,435
=======
</TABLE>
(c) Analysis of net debt
<TABLE>
<CAPTION>
JUNE 30, 1998 CASHFLOW JULY 14, 1998
--------------- --------------- ---------------
U.S. $'000 U.S. $'000 U.S. $'0000
<S> <C> <C> <C>
Cash................................................ -- -- --
Liquid resources.................................... -- -- --
Indebtedness........................................ 88,345 (39,910) 48,435
------- ------- -------
88,345 (39,910) 48,435
======= ======= =======
</TABLE>
14 COMMITMENTS
The entity has no long-term contracts other than those with its service
providers (see Note 19).
15 NEW ACCOUNTING STANDARDS IMPLEMENTED
FRS 12 "Provisions, Contingent Liabilities and Contingent Assets" was
effective for AerCo for its first trading accounting period ended March 31,
1999.
Under the accounting policy previously adopted by the entity all aircraft
maintenance reserves collected from lessees in respect of major aircraft and
engine overhauls were held as provisions. Under FRS 12 the pre-accrual of
maintenance costs is not permitted and accordingly the entity has changed its
accounting policy
F-53
<PAGE> 116
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
15 NEW ACCOUNTING STANDARDS IMPLEMENTED (CONTINUED)
to reflect the adoption of the AerCo accounting policy for maintenance. The
effect of this change in accounting policy is that maintenance reserves
collected from lessees which cannot be drawn down by current lessees are no
longer provided. Such reserves only arose prior to June 30, 1996 and the
adjustment therefore has no effect on reported results. The balance sheet effect
of this change in accounting policy is to reduce maintenance provisions and to
increase net assets of the entity by U.S.$2.923 million at each balance sheet
date.
16 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
The financial statements are prepared in accordance with generally accepted
accounting principles applicable in the United Kingdom ("U.K. GAAP") which
differ significantly in certain respects from those generally accepted in the
United States ("U.S. GAAP").
AerCo's accounting policy for aircraft maintenance reflects its adoption of
FRS 12 as explained in Note 15. The historic U.K. GAAP financial information for
the AerFi transferred aircraft has been restated to reflect the application of
the AerCo accounting policy for all periods. For U.S. GAAP the cumulative effect
of this change in accounting policy has been reflected in the results for the
period ended July 14, 1998.
Reconciliation of net loss as stated in accordance with U.K. GAAP to net
income/(loss) in accordance with U.S. GAAP.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED YEAR ENDED
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
--------------- --------------- ---------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
NET LOSS IN ACCORDANCE WITH U.K. GAAP............... (513) (21) (9,045)
Cumulative effect of change in accounting policy for
Maintenance....................................... 2,923 -- --
------ ------ ------
NET INCOME/(LOSS) IN ACCORDANCE WITH U.S. GAAP...... 2,410 (21) (9,045)
====== ====== ======
</TABLE>
Reconciliation of net assets as stated in accordance with U.K. GAAP to net
assets in accordance with U.S. GAAP.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED YEAR ENDED
JULY 14, 1998 JUNE 30, 1998 JUNE 30, 1997
---------------- ------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
NET ASSETS IN ACCORDANCE WITH U.K. GAAP.............. 117,033 100,753 65,270
Cumulative effect of change in accounting policy for
maintenance........................................ -- (2,923) (2,923)
------- ------- -------
NET ASSETS IN ACCORDANCE WITH U.S. GAAP.............. 117,033 97,830 62,347
======= ======= =======
</TABLE>
There were no other significant differences between U.K. GAAP and U.S. GAAP
arising in respect of the entity for the period from July 1, 1998 to July 14,
1998 and the years ended June 30, 1998 and June 30, 1997.
F-54
<PAGE> 117
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
17 FAIR VALUE OF FINANCIAL INSTRUMENTS
The entity estimates that the fair value of its cash and other receivables
and payables at July 14, 1998, June 30, 1998 and June 30, 1997 approximate to
the amounts at which these items are reflected in the entity's statement of net
assets. This is due to the relatively short-term nature of the instruments and
the frequency at which they reprice.
18 FOREIGN CURRENCY TRANSACTIONS
The entity's foreign currency transactions are not significant as all
revenues and most costs are denominated in U.S. dollars.
19 RELATED PARTY TRANSACTIONS
GE Capital Aviation Services, Limited ("GECAS")
During the period from July 1, 1998 to July 14, 1998 GECAS acted as lease
manager for the entity. In addition to managing the entity's aircraft GECAS also
manages aircraft owned by GE Capital and its affiliates and other third parties,
including AerFi. GECAS may from time to time have had conflicts of interest in
performing its obligations to the entity and other entities to which it provides
management, marketing and other services.
GECAS receives an annual fee from AerFi as lease manager of certain of its
aircraft -- U.S.$52,075 (June 30, 1998: U.S.$1,201,000, June 30, 1997:
U.S.$1,175,000) of this fee is attributed to the entity for the period from July
1, 1998 to July 14, 1998.
F-55
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ----------------------- ------------
<S> <C> <C>
</TABLE> None
F-56
