<PAGE> 1
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
A. HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS FOR AERCO
AND ALPS 94-1
Independent auditors' report........................... F-5
Consolidated balance sheets............................ F-6
Consolidated statements of operations.................. F-7
Consolidated statements of cash flows.................. F-8
Statements of changes in shareholders' deficit......... F-9
Statement of accounting policies....................... F-10
Notes to the consolidated financial statements......... F-14
B. HISTORICAL FINANCIAL STATEMENTS FOR AERFI TRANSFERRED
AIRCRAFT
Independent auditors' report........................... F-39
Statements of operations............................... F-40
Statements of cash flows............................... F-41
Statements of changes in net assets.................... F-42
Statement of accounting policies....................... F-43
Notes to the financial statements...................... F-45
C. HISTORICAL FINANCIAL STATEMENTS FOR NEW AERFI
TRANSFERRING AIRCRAFT
Independent auditors' report........................... F-53
Statements of net assets............................... F-54
Statements of operations............................... F-55
Statements of cash flows............................... F-56
Statements of changes in net assets.................... F-57
Statement of accounting policies....................... F-58
Notes to the financial statements...................... F-61
D. HISTORICAL FINANCIAL STATEMENTS FOR INDIGO TRANSFERRING
AIRCRAFT
Independent auditors' report........................... F-71
Statements of net assets............................... F-72
Statements of operations............................... F-73
Statements of cash flows............................... F-74
Statements of changes in net assets.................... F-75
Statement of accounting policies....................... F-76
Notes to the financial statements...................... F-78
</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.
"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.
"INDIGO" Indigo Aviation AB, a Swedish company with its
registered office located at Sodra Forstadsgatan 4,
S-211 43, Malmo, Sweden.
F-1
<PAGE> 2
FINANCIAL STATEMENTS
A. U.K. GAAP AERCO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH
31, 2000 AND FOR THE PERIOD FROM JULY 15, 1998 TO MARCH 31, 1999 AND
COMPARATIVE ALPS 94-1 FINANCIAL INFORMATION FOR THE PERIOD FROM JULY 1,
1998 TO JULY 14, 1998 AND FOR THE YEAR ENDED JUNE 30, 1998.
The AerCo financial statements include the results of operations and
financial condition of the 25 aircraft and related leases acquired by AerCo
from ALPS 94-1 Limited and the ten aircraft and related leases acquired by
AerCo from AerFi in July 1998, and reflects the sale of one F100 aircraft
during the period from July 15, 1998 to March 31, 1999 and the sale of one
F100 aircraft during the year ended March 31, 2000.
Comparative financial information for ALPS 94-1 is presented as ALPS 94-1
is considered to be the predecessor business of AerCo. We believe this is
an appropriate presentation because:
- AerCo was formed mainly for the purpose of refinancing the aircraft
portfolio of ALPS 94-1.
- AerCo's initial portfolio of 35 aircraft included 26 of the 27 aircraft
that ALPS 94-1 originally acquired from AerFi.
- The original ALPS 94-1 aircraft represented 79% of AerCo's initial
portfolio by appraised value as at March 1, 1998.
- AerCo's ongoing aircraft leasing activities are largely the same as
those conducted by ALPS 94-1.
The financial statements 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
which 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.
B. U.K. GAAP AERFI TRANSFERRED AIRCRAFT FINANCIAL STATEMENTS FOR THE YEAR ENDED
JUNE 30, 1998 AND FOR THE PERIOD FROM JULY 1, 1998 TO JULY 14, 1998.
These financial statements include historical financial information on the
ten aircraft acquired by AerCo from AerFi in July 1998 and includes the
A300-B4-200 aircraft only from April 28, 1998, the date AerFi acquired it
from ALPS 94-1. KPMG, independent chartered accountants, audited these
financial statements. These financial statements are prepared as if the
AerFi transferred aircraft were operated separately from AerFi for the
periods presented.
C. U.K. GAAP NEW AERFI TRANSFERRING AIRCRAFT FINANCIAL STATEMENTS FOR THE THREE
YEARS ENDED MARCH 31, 1998, 1999 AND 2000.
These financial statements include historical financial information on the
two AerFi F100 and one B737-300 aircraft transferring to AerCo under the
proposed refinancing in July 2000, for the three years ended March 31, 2000
and on 26 of the Indigo transferring aircraft for the period from December
16, 1999 (date Indigo was acquired by AerFi) to March 31, 2000. KPMG,
independent chartered accountants, audited these financial statements.
These financial statements are prepared as if the New AerFi transferring
aircraft were operated separately from AerFi for the periods presented.
F-2
<PAGE> 3
D. U.S. GAAP INDIGO TRANSFERRING AIRCRAFT FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM JANUARY 1, 1999 TO DECEMBER
15, 1999.
These financial statements include historical financial information on 26
Indigo aircraft transferring to AerCo under the proposed refinancing. This
information is presented for the year ended December 31, 1998 and for the
period from January 1, 1999 to December 15, 1999 on which date Indigo was
acquired by AerFi. KPMG, independent chartered accountants, audited these
financial statements. These financial statements are prepared as if the
Indigo transferring aircraft were operated separately from Indigo for the
periods presented.
F-3
<PAGE> 4
FINANCIAL STATEMENTS
AERCO
F-4
<PAGE> 5
AERCO
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF AERCO LIMITED
We have audited the accompanying consolidated balance sheets of AerCo as of
March 31, 2000 and March 31, 1999 and the related consolidated statements of
operations, cash flows and changes in shareholders' deficit for AerCo for the
year ended March 31, 2000 and 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. These consolidated financial statements are the
responsibility of the directors of AerCo Limited and ALPS 94-1 Limited. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom which do not differ in any material respects
from auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the directors as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AerCo as at
March 31, 2000 and March 31, 1999 and the results of operations and cash flows
of AerCo for the year ended March 31, 2000 and 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 in conformity with generally accepted
accounting principles in the United Kingdom.
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 results of operations of AerCo for the
year ended March 31, 2000 and 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,
2000 and March 31, 1999 to the extent summarised in notes 26, 27 and 28 to the
consolidated financial statements.
KPMG
Chartered Accountants
Dublin, Ireland
June 14, 2000
F-5
<PAGE> 6
AERCO
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOTES MARCH 31, 2000 MARCH 31, 1999
----- -------------- --------------
U.S.$'000 U.S.$'000
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash.................................................. 1 26,413 25,618
Commercial paper...................................... 1 39,998 39,997
Accounts receivable, net.............................. 2 4,752 4,004
--------- ---------
TOTAL CURRENT ASSETS.................................. 71,163 69,619
INTANGIBLE ASSETS
Goodwill, net......................................... 3 43,100 45,456
FIXED ASSETS
Aircraft, net......................................... 5 829,194 904,253
--------- ---------
TOTAL ASSETS.......................................... 943,457 1,019,328
========= =========
LIABILITIES & SHAREHOLDERS' DEFICIT
LIABILITIES
Accrued expenses and other liabilities................ 7 89,902 70,436
Indebtedness.......................................... 9 901,198 949,217
Security deposits..................................... 10 16,304 14,783
--------- ---------
TOTAL LIABILITIES..................................... 1,007,404 1,034,436
SHAREHOLDERS' DEFICIT
Share capital......................................... 11 -- --
Accumulated deficit................................... (63,947) (15,108)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT........................... (63,947) (15,108)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT........... 943,457 1,019,328
========= =========
</TABLE>
The accompanying notes, including the statement of accounting policies, on
pages F-10 to F-13, are an integral part of the consolidated financial
statements.
F-6
<PAGE> 7
AERCO
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
AERCO ALPS 94-1
-------------------------- --------------------------------------
(UNAUDITED) PERIOD FROM
PERIOD FROM NINE MONTHS JULY 1,
YEAR ENDED JULY 15, 1998 ENDED 1998 TO YEAR ENDED
MARCH TO MARCH 31, MARCH 31, JULY 14, JUNE 30,
NOTES 31, 2000 1999 1998 1998 1998
----- ---------- ------------- ----------- ----------- ----------
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................... 12 109,146 82,826 76,098 3,635 100,682
EXPENSES
Depreciation....................... 5 (46,998) (33,821) (28,569) (1,519) (37,826)
Provision for impairment in
aircraft value................... 13 (13,079) -- (8,720) -- (8,720)
Amortization of goodwill........... 3 (2,356) (1,669) -- -- --
Net interest expense............... 14 (78,818) (54,108) (52,340) (2,757) (69,785)
Other expenses..................... 15 (15,742) (8,311) (4,278) (646) (6,599)
Exceptional item -- termination
fee........................... 13 -- -- -- -- (12,700)
--------- --------- --------- --------- ---------
Total expenses..................... (156,993) (97,909) (93,907) (4,922) (135,630)
--------- --------- --------- --------- ---------
NET LOSS FROM OPERATIONS........... (47,847) (15,083) (17,809) (1,287) (34,948)
(Loss)/profit on sale of
aircraft......................... 5 (941) 10 -- 10 2,426
--------- --------- --------- --------- ---------
NET LOSS BEFORE PROVISION FOR
TAXES............................ 16 (48,788) (15,073) (17,809) (1,277) (32,522)
Provision for taxes................ 17 (51) (35) (15) -- (33)
--------- --------- --------- --------- ---------
NET LOSS FOR THE PERIOD............ (48,839) (15,108) (17,824) (1,277) (32,555)
RETAINED LOSS BROUGHT FORWARD...... (15,108) -- (44,691) (77,246) (44,691)
--------- --------- --------- --------- ---------
RETAINED LOSS CARRIED FORWARD...... (63,947) (15,108) (62,515) (78,523) (77,246)
BASIC AND DILUTED LOSS PER ORDINARY
SHARE............................ 18 (2,442) (755.4) (1,782.4) (127.7) (3,255.5)
--------- --------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING............... 18 20 20 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-10 to F-13, are an integral part of the consolidated financial
statements.
F-7
<PAGE> 8
AERCO
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
AERCO ALPS 94-1
--------------------------------- ----------------------------------------------------
PERIOD FROM (UNAUDITED) PERIOD FROM
YEAR ENDED JULY 15, 1998 TO NINE MONTHS ENDED JULY 1, 1998 YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998 TO JULY 14, 1998 JUNE 30, 1998
-------------- ---------------- ----------------- ---------------- -------------
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................ (48,839) (15,108) (17,824) (1,277) (32,555)
ADJUSTMENTS TO RECONCILE NET LOSS FROM
OPERATIONS TO CASH
PROVIDED/(UTILISED) BY OPERATING
ACTIVITIES
Depreciation........................... 46,998 33,821 28,569 1,519 37,826
Amortization of goodwill............... 2,356 1,669 -- -- --
Amortization of debt issue costs....... 898 673 -- -- --
Provision for impairment in aircraft
value................................ 13,079 -- 8,720 -- 8,720
Changes in operating assets and
liabilities
Accounts receivable.................. (748) (1,077) 651 (252) 1,651
Exceptional item -- termination
fee................................ -- -- -- -- 12,700
Accrued expenses and other
liabilities........................ 27,888 14,080 17,372 (3,005) 21,264
Net maintenance expenditure............ (7,481) (4,675) 269 (1,062) (1,938)
Net security deposits
received/(repaid).................... 1,521 (1,422) (1,648) -- (1,947)
---------- ---------- ---------- --------- ----------
NET CASH PROVIDED/(UTILISED) BY
OPERATING ACTIVITIES................. 35,672 27,961 36,109 (4,077) 45,721
---------- ---------- ---------- --------- ----------
CAPITAL EXPENDITURE
Purchase of aircraft................... (622) -- (1,132) -- (1,132)
Sale of aircraft....................... 14,663 14,500 -- 65,677 11,518
---------- ---------- ---------- --------- ----------
14,041 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................................ (1) (39,997) 1,739 36,686 3,135
---------- ---------- ---------- --------- ----------
FINANCING ACTIVITIES
Debt issued............................ -- 986,609 -- -- --
Indebtedness repaid.................... (48,917) (38,065) (35,690) (3,719) (59,108)
---------- ---------- ---------- --------- ----------
NET CASH (OUTFLOW)/INFLOW FROM
FINANCING ACTIVITIES................. (48,917) 948,544 (35,690) (3,719) (59,108)
---------- ---------- ---------- --------- ----------
NET INCREASE IN CASH................... 795 25,618 1,026 94,567 134
CASH AT BEGINNING OF PERIOD............ 25,618 -- 51,474 51,608 51,474
---------- ---------- ---------- --------- ----------
CASH AT END OF PERIOD.................. 26,413 25,618 52,500 146,175 51,608
========== ========== ========== ========= ==========
</TABLE>
Disclosure of cash flow information is set out in Note 22.
The accompanying notes, including the statement of accounting policies on
pages F-10 to F-13, are an integral part of the consolidated financial
statements.
F-8
<PAGE> 9
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, 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)
Net loss for the year.......................... -- -- (48,839) (48,839)
-- ------- -------- --------
BALANCE AT MARCH 31, 2000...................... 20 -- (63,947) (63,947)
== ======= ======== ========
</TABLE>
The accompanying notes, including the statement of accounting policies on
pages F-10 to F-13, are an integral part of the consolidated financial
statements.
F-9
<PAGE> 10
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 10 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 25 aircraft and related leases and the purchase of 10 aircraft and
related leases from AerFi. The acquisition of the 10 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 10 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
aspects 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 cash flows for the nine months ended March 31, 1998. Interim results are not
necessarily indicative of results for the fiscal year.
F-10
<PAGE> 11
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
collectibility 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
capitalized on the balance sheet and amortized 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. 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-11
<PAGE> 12
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
and its Irish subsidiaries are subject to Irish corporation tax on qualifying
trading operations at a rate of 10% until December 31, 2005. Thereafter the
corporate tax rate is due to revert to 12 1/2% to take account of the stated
government commitment on future tax rates. Taxation is provided on the profits
of the foreign 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
10 aircraft from AerFi. The refinancing involved the purchase of aircraft at an
aggregate appraised fair market value of U.S.$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. The current estimates of residual values and useful economic
lives are generally 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 cash flows from the aircraft, discounted at a market rate of return.
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.
F-12
<PAGE> 13
AERCO
STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
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 amortization on these notes. Net receipts and
payments arising in respect of these swaps are recognized 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-13
<PAGE> 14
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 CASH AND COMMERCIAL PAPER
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Cash...................................................... 26,413 25,618
Commercial paper.......................................... 39,998 39,997
------- -------
66,411 65,615
======= =======
</TABLE>
Substantially all of the cash and commercial paper balances of AerCo at
March 31, 2000 and March 31, 1999 are held for specific purposes under the terms
of the AerCo Trust Indenture.
2 ACCOUNTS RECEIVABLE, NET
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Trade receivables, net.................................... 4,508 3,174
Non-trade receivables..................................... 244 830
------- -------
4,752 4,004
======= =======
</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, 2000 three lessees accounted for 36%, 32% and 20%
respectively of trade receivables of AerCo. Trade receivables at March 31, 2000
are shown net of a bad debt provision of U.S.$3.5m.
As at March 31, 1999 four lessees accounted for 60%, 16%, 14% and 10%
respectively of trade receivables of AerCo. Trade receivables at March 31, 1999
are shown net of a bad debt provision of U.S.$1.4m.
Activity in the allowance for doubtful accounts was as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Balance, beginning of period.............................. 1,366 819
Provision for doubtful accounts........................... 2,146 547
------- -------
Balance, end of period.................................... 3,512 1,366
======= =======
</TABLE>
Non-trade receivables comprise prepayments.
3 GOODWILL, NET
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
U.S.$'000 U.S.$'000
<S> <C> <C>
COST
At beginning and end of period............................ 47,125 47,125
------- -------
AMORTIZATION
Beginning of period....................................... (1,669) --
Amortization in period.................................... (2,356) (1,669)
------- -------
End of period............................................. (4,025) (1,669)
------- -------
NET BOOK VALUE
Beginning of period....................................... (45,456) --
======= =======
End of period............................................. 43,100 45,456
======= =======
</TABLE>
Goodwill of U.S.$47.125 million represents the difference between the fair
value of the net assets acquired and the consideration paid by AerCo Limited in
respect of its acquisition of ALPS 94-1 and the AerFi transferred aircraft.
Goodwill is amortized over a 20 year period which is the period over which the
directors of AerCo Limited estimate that the value of the underlying businesses
acquired is expected to exceed the values of its identifiable net assets.
Further information in relation to the calculation of goodwill is set out in
note 4.
F-14
<PAGE> 15
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4 ACQUISITION OF ALPS 94-1 AND THE AERFI TRANSFERRED AIRCRAFT
On July 15, 1998 AerCo Limited acquired 100% of the capital stock of ALPS
94-1 Limited and thereby a portfolio of 25 aircraft and the related leases and
purchased 10 aircraft and related leases from AerFi. The acquisition of the 10
aircraft from AerFi was achieved through the purchase of the capital stock in a
number of aircraft owning subsidiaries of AerFi. AerCo Limited financed the
acquisition of the capital stock of ALPS 94-1 Limited and the 10 aircraft from
AerFi through the issue of five classes of notes and also used the proceeds from
the issue of these notes to repay the third party indebtedness of ALPS 94-1 and
the intercompany indebtedness to AerFi of the aircraft owning companies in
respect of the 10 aircraft acquired from AerFi.
The fair value of the net assets acquired and the consideration given on
the acquisition of ALPS 94-1 and the AerFi transferred aircraft is summarized as
follows:
<TABLE>
<CAPTION>
FAIR VALUE ADJUSTMENTS
AERFI TRANSFERRED -------------------------
ALPS 94-1 AIRCRAFT VALUATION OTHER FAIR VALUE OF
BOOK VALUE BOOK VALUE ADJUSTMENTS ADJUSTMENTS ASSETS ACQUIRED
---------- ----------------- ----------- ----------- ---------------
U.S.$'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 U.S.$156
million representing the difference between the historic third party
indebtedness of AerFi in respect of the AerFi transferred aircraft and the
intercompany indebtedness to AerFi which arose on the acquisition of the
aircraft owning companies which held these aircraft at the date they were
acquired by AerCo Limited.
F-15
<PAGE> 16
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4 ACQUISITION OF ALPS 94-1 AND THE AERFI TRANSFERRED AIRCRAFT (CONTINUED)
The historical financial information for ALPS 94-1 is shown in the
consolidated statements of operations as comparatives. The summarized statement
of operations information for the AerFi transferred aircraft for the year ended
June 30, 1998 and for the 14 day period immediately prior to the acquisition by
AerCo Limited is set out below:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED
JULY 14, 1998 JUNE 30, 1998
--------------- -------------
U.S.$'000 U.S.$'000
<S> <C> <C>
REVENUES
Aircraft leasing............................................ 983 21,109
EXPENSES
Depreciation................................................ (464) (10,215)
Net interest expense........................................ (1,392) (6,612)
Other expenses.............................................. 355 (4,804)
------- -------
(1,501) (21,631)
------- -------
NET LOSS FROM OPERATIONS BEFORE TAXES....................... (518) (522)
Benefit for taxes........................................... 5 501
------- -------
NET LOSS FOR THE PERIOD..................................... (513) (21)
======= =======
</TABLE>
5 AIRCRAFT, NET
<TABLE>
<CAPTION>
AERCO AERCO ALPS 94-1 ALPS 94-1
MARCH 31, 2000 MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- -------------- ------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
COST
Beginning of period................ 937,766 -- 949,288 975,179
Additions.......................... 622 951,973 -- 1,132
Disposals.......................... (16,343) (14,207) (76,897) (27,023)
--------- --------- --------- ---------
End of period...................... 922,045 937,766 872,391 949,288
========= ========= ========= =========
DEPRECIATION
Beginning of period................ (33,513) -- (140,478) (108,583)
Charge for the period.............. (46,998) (33,821) (1,519) (37,826)
Disposal........................... 739 308 11,231 5,931
--------- --------- --------- ---------
End of period...................... (79,772) (33,513) (130,766) (140,478)
========= ========= ========= =========
IMPAIRMENT PROVISIONS
Beginning of period................ -- -- (8,720) (12,000)
Charge for the period.............. (13,079) -- -- (8,720)
Disposal........................... -- -- -- 12,000
--------- --------- --------- ---------
End of period...................... (13,079) -- (8,720) (8,720)
========= ========= ========= =========
NET BOOK VALUE
Beginning of period................ 904,253 -- 800,090 854,596
========= ========= ========= =========
End of period...................... 829,194 904,253 732,905 800,090
========= ========= ========= =========
</TABLE>
F-16
<PAGE> 17
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 March 31, 2000, the directors of AerCo have made a
provision of U.S.$13.1m to reflect an impairment in the value of one B747
aircraft in its fleet. The directors arrived at such determination based on the
financial condition of the aircraft's current lessee, the physical condition of
the aircraft and the unfavorable market conditions for this aircraft type.
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, 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 unfavorable 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 year ended March 31, 2000, AerCo disposed of one aircraft to a
third party to whom the aircraft had been on lease giving rise to a loss on
disposal of U.S.$941,000.
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.
During the year ended June 30, 1998 ALPS 94-1 Limited disposed of one
aircraft to AerFi. This disposal resulted in a profit of U.S.$2,426,000 in the
year.
F-17
<PAGE> 18
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 OPERATING LEASES
All of AerCo's aircraft are leased on operating leases to 25 lessees as at
March 31, 2000. Rentals on certain of the leases are variable in accordance with
prevailing interest rates.
The following is a schedule of contracted future rentals receivable, by
year, on operating leases as of March 31, 2000. The interest rates prevailing at
March 31, 2000 have been applied in determining rentals which are variable in
accordance with prevailing interest rates.
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, U.S.$'000
--------------------- ----------
<S> <C>
2001........................................................ 93,691
2002........................................................ 74,820
2003........................................................ 61,742
2004........................................................ 38,230
2005........................................................ 16,951
Thereafter.................................................. 14,559
-------
299,993
=======
</TABLE>
There are no contingent rentals.
The leases have charges attached to them such that they represent security
for the notes issued.
7 ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
U.S.$'000 U.S.$'000
<S> <C> <C>
ACCRUED EXPENSES AND OTHER LIABILITIES COMPRISE:
Aircraft maintenance reserves............................... 32,216 39,697
Deferred income............................................. 3,014 4,670
Interest on A to D notes.................................... 2,270 2,260
Interest on E notes......................................... 38,000 14,101
Taxation.................................................... 46 53
Other accruals.............................................. 14,356 9,655
------- -------
89,902 70,436
======= =======
</TABLE>
All accrued expenses and other liabilities fall due within one year with
the exception of the entire amount of the accrued interest on the E notes and
aircraft maintenance reserves which are split as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
U.S.$'000 U.S.$'000
<S> <C> <C>
AIRCRAFT MAINTENANCE RESERVES:
Due within one year......................................... 6,342 13,876
Due after one year.......................................... 25,874 25,821
------- -------
32,216 39,697
======= =======
</TABLE>
F-18
<PAGE> 19
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 U.S. 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 U.S.$40 million and through the application of available
collections from lessees to meet its debt and other obligations in accordance
with a predetermined priority of payments as set out in the Trust Indenture.
(I) INTEREST RATE PROFILE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The following table depicts the interest rate profile of AerCo's financial
assets and financial liabilities at March 31, 2000 after taking into account the
derivatives used by AerCo. In accordance with FRS 13 "DERIVATIVES AND OTHER
FINANCIAL INSTRUMENTS" the tables do not include interests in associate
undertakings and short term debtors and creditors.
Financial Assets
After taking account of the interest rate swaps entered into by AerCo, the
interest rate profile of AerCo's assets at March 31, 2000 was:
<TABLE>
<CAPTION>
FLOATING RATE FIXED RATE
TOTAL ASSETS ASSETS
---------- ------------- ----------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Financial Assets
Cash................................................... 26,413 26,413 --
Commercial Paper....................................... 39,998 39,998 --
------- ------- -------
66,411 66,411 --
======= ======= =======
</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.
F-19
<PAGE> 20
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
Financial Liabilities
The interest rate profile of AerCo's financial liabilities at March 31,
2000 was:
<TABLE>
<CAPTION>
FLOATING RATE FIXED RATE
FINANCIAL FINANCIAL
TOTAL LIABILITIES LIABILITIES
---------- ------------- -----------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Financial Liabilities
Indebtedness
A-1 notes.............................................. 340,000 340,000 --
A-2 notes.............................................. 212,281 212,281 --
B-1 notes.............................................. 76,293 76,293 --
C-1 notes.............................................. 84,444 84,444 --
D-1 notes.............................................. 80,000 -- 80,000
E-1 notes.............................................. 111,973 -- 111,973
Aircraft maintenance reserves due after one year....... 5,844 5,844 --
------- ------- -------
TOTAL.................................................. 910,835 718,862 191,973
======= ======= =======
</TABLE>
A-1, A-2, B-1 and C-1 note indebtedness bear interest at rates based on one
month LIBOR plus a specified margin of 0.19%, 0.32%, 0.60% and 1.35%
respectively.
Aircraft maintenance reserves bear interest at six month U.S.$ 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 11
years and 24 years respectively.
(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 which
are classified as financial liabilities is as follows:
<TABLE>
<CAPTION>
DUE: U.S.$'000
---- ---------
<S> <C>
In more than one year but not more than two years........... 2,534
In more than two years but not more than five years......... 3,310
In more than five years..................................... --
-------
5,844
=======
</TABLE>
(III) BORROWING FACILITIES
AerCo had no undrawn committed borrowing facilities at March 31, 2000.
F-20
<PAGE> 21
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
(IV) FAIR VALUES OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The book values and fair values of AerCo's financial assets and liabilities
as at March 31, 2000 by category are set out below:
<TABLE>
<CAPTION>
PRIMARY FINANCIAL INSTRUMENTS HELD OR ISSUED TO
FINANCE AERCO'S OPERATIONS BOOK VALUE FAIR VALUE
----------------------------------------------- ---------- ----------
U.S.$'000 U.S.$'000
<S> <C> <C>
Financial Assets
Cash........................................................ 26,413 26,413
Commercial paper............................................ 39,998 39,998
------- -------
Total....................................................... 66,411 66,411
======= =======
Financial Liabilities
Indebtedness
A-1 notes................................................... 340,000 339,841
A-2 notes................................................... 212,281 210,996
B-1 notes................................................... 76,293 74,591
C-1 notes................................................... 84,444 80,337
D-1 notes................................................... 80,000 67,200
E-1 notes................................................... 111,973 22,395
Aircraft maintenance reserves due after one year............ 5,844 5,844
------- -------
Total....................................................... 910,835 801,204
======= =======
Derivative financial instruments
Interest rate swaps (notional principal U.S.$565 million)... -- 11,673
======= =======
</TABLE>
The fair values of notes outstanding have been determined by reference to
prices available from the markets in which these notes are traded. The fair
value of aircraft maintenance reserves which are subject to floating rates is
their par value. All the other fair values shown have been calculated by
discounting future estimated cash flows at prevailing interest rates.
In accordance with the objectives of AerCo's hedging policies the fair
value gain arising in respect of AerCo's interest rate swaps is offset to a
significant extent by fair value losses inherent in the contracted fixed rate
leases entered into by AerCo.
F-21
<PAGE> 22
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
(V) GAINS AND LOSSES ON HEDGES
AerCo enters into interest rate swaps to manage its interest rate profile.
Changes in the fair value of instruments used as hedges are not recognized in
the financial statements. An analysis of these unrecognized gains and losses is
as follows:
<TABLE>
<CAPTION>
TOTAL NET
GAINS LOSSES GAINS
---------- ---------- ----------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Unrecognized gains and (losses) on hedges at March 31,
1999.................................................... 776 (2,869) (2,093)
(Losses) at the start of the year in a gain position at
the end of year......................................... (2,635) 2,635 --
------- ------- -------
Unrecognized (losses) at March 31, 1999................... (1,859) (234) (2,093)
Gains and (losses) arising in previous periods that were
recognized in the year to March 31, 2000................ 1,389 (118) 1,271
------- ------- -------
(Losses) arising before March 31, 1999 that were not
recognized in the year ended March 31, 2000............. (470) (352) (822)
Gains arising in the current year that were not recognized
in the year ended March 31, 2000........................ 12,173 322 12,495
------- ------- -------
Unrecognized gains and (losses) on hedges at March 31,
2000.................................................... 11,703 (30) 11,673
======= ======= =======
Of which:
Gains expected to be recognized in 2001................... 4,154 132 4,286
Gains and (losses) expected to be recognized in 2002 or
later................................................... 7,549 (162) 7,387
</TABLE>
9 INDEBTEDNESS
A) PRINCIPAL
The purchase by AerCo Limited of 100% of the capital stock of ALPS 94-1
Limited and thereby a portfolio of 25 aircraft and related lessees, the purchase
of 10 aircraft and related lessees 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.
F-22
<PAGE> 23
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9 INDEBTEDNESS (CONTINUED)
A) PRINCIPAL (CONTINUED)
<TABLE>
<CAPTION>
AERCO AERCO
MARCH 31, 2000 MARCH 31, 1999 AT ISSUE
-------------- -------------- ----------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Subclass A-1 notes................................. 340,000 340,000 340,000
Subclass A-2 notes................................. 212,281 255,436 290,000
Subclass B-1 notes................................. 76,293 81,568 85,000
Subclass C-1 notes................................. 84,444 84,931 85,000
Subclass D-1 notes................................. 80,000 80,000 80,000
Subclass E-1 notes................................. 111,973 111,973 111,973
Deferred Financing Costs........................... (3,793) (4,691) (5,364)
------- ------- -------
901,198 949,217 986,609
======= ======= =======
</TABLE>
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 each 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
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.
F-23
<PAGE> 24
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9 INDEBTEDNESS (CONTINUED)
C) DEBT MATURITY
The repayment terms of the class 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"). In the event that the A, B and C notes are not repaid or
refinanced by the Expected Final Payment Dates the interest rates applicable to
those notes may increase. The Expected Final Payment Dates, Final Maturity
Dates, Principal Amount and interest rates applicable to each class of note are
set out as below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT EXPECTED FINAL
CLASS OF NOTES INTEREST RATES MARCH 31, 2000 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% 212 December 15, 2005 July 15, 2023
Class B-1............... LIBOR + 0.60% 76 July 15, 2005 July 15, 2004
Class C-1............... LIBOR + 1.35% 85 July 15, 2013 July 15, 2005
Class D................. 8.5% 80 April 15, 2014 July 15, 2023
Class E................. 20% 112 July 15, 2023 July 15, 2023
-----
905
=====
</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>
SUBCLASS
--------------------------------------------------------------
YEAR ENDING MARCH 31 A-1 A-2 B-1 C-1 D-1 TOTAL
-------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
2001......................... 340,000 32,322 4,323 1,074 -- 377,719
2002......................... -- 30,942 4,964 1,749 -- 37,655
2003......................... -- 22,532 5,460 2,490 -- 30,482
2004......................... -- 26,924 6,732 3,285 -- 36,941
2005......................... -- 25,302 7,540 4,126 -- 36,968
Thereafter................... -- 74,259 47,274 71,720 80,000 273,253
------- ------- ------- ------- ------- -------
Total........................ 340,000 212,281 76,293 84,444 80,000 793,018
======= ======= ======= ======= ======= =======
</TABLE>
The principal of the subclass E-1 notes is not payable until the
outstanding principal balance of the class A to D notes is reduced to zero.
10 SECURITY DEPOSITS
Security deposits of U.S.$16,304,000 in AerCo as at March 31, 2000
(U.S.$14,783,000 at March 31, 1999) are held as security for obligations in
accordance with the terms of certain leases. The deposits are held as cash and
commercial paper by AerCo (See Note 1).
F-24
<PAGE> 25
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11 SHARE CAPITAL
Called up share capital comprises:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
U.S.$ U.S.$
<S> <C> <C>
AUTHORIZED
10,000 ordinary shares of U.S.$1 each..................... 10,000 10,000
======= =======
ISSUED AND FULLY PAID
20 ordinary shares of U.S.$1 each......................... 20 20
======= =======
</TABLE>
AerCo Limited issued 20 ordinary shares at U.S.$1 each on June 4, 1998.
12 REVENUES AND CONCENTRATION OF CREDIT RISK
A) DISTRIBUTION OF REVENUES BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
AERCO ALPS 94-1
AERCO PERIOD FROM PERIOD FROM ALPS 94-1
YEAR ENDED JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
---------------- ---------------- ---------------- ----------------
U.S.$'000 % U.S.$'000 % U.S.$'000 % U.S.$'000 %
--------- ---- --------- ---- --------- ---- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Europe..................... 52,956 48.5 40,456 48.8 1,508 41.5 45,624 45.3
North America.............. 9,186 8.4 7,009 8.5 144 4.0 4,328 4.3
South/Central America...... 21,366 19.6 14,318 17.3 716 19.7 21,375 21.2
Asia/Pacific............... 25,638 23.5 21,043 25.4 1,267 34.8 29,355 29.2
------- ---- ------ ---- ----- ---- --------- ----
109,146 100 82,826 100 3,635 100 100,682 100
======= ==== ====== ==== ===== ==== ========= ====
</TABLE>
All revenues are derived from aircraft leasing.
In the year ended March 31, 2000, 17% and 11% 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 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.
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.
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 had maintained Political Risk
Insurance in respect of certain lessees.
F-25
<PAGE> 26
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 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, 2000 one lessee accounted for 11% of AerCo's lease
revenues. No other lessee accounted for greater than 10% of AerCo's lease
revenues for the year ended March 31, 2000.
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 14, 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% of ALPS 94-1's lease
revenues and another accounted for 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 year
ended June 30, 1998.
13 EXCEPTIONAL ITEMS
<TABLE>
<CAPTION>
AERCO ALPS 94-1
AERCO PERIOD FROM PERIOD FROM ALPS 94-1
YEAR END JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED
MARCH 31, 2000 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> <C>
Provision for impairment in
aircraft value (note 5)......... 13,079 -- -- 8,720
Termination fee (i)............... -- -- -- 12,700
------- ------- ------- -------
13,079 -- -- 21,420
======= ======= ======= =======
</TABLE>
---------------
(i) 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 $12.7 million.
This amount was charged in the year ended June 30, 1998.
14 NET INTEREST EXPENSE
<TABLE>
<CAPTION>
AERCO ALPS 94-1
AERCO PERIOD FROM PERIOD FROM ALPS 94-1
YEAR ENDED JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ---------------- --------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
Interest payable on notes......... 80,957 56,047 2,977 73,560
Net interest income............... (2,139) (1,939) (220) (3,775)
------- ------- ------- -------
78,818 54,108 2,757 69,785
======= ======= ======= =======
</TABLE>
F-26
<PAGE> 27
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15 OTHER EXPENSES
<TABLE>
<CAPTION>
AERCO ALPS 94-1
AERCO PERIOD FROM PERIOD FROM ALPS 94-1
YEAR ENDED JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ---------------- --------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
Servicer's fees................... 4,023 2,637 108 2,894
Political risk insurance.......... 292 247 54 425
Hull war risks insurance.......... 363 329 -- --
Administration fees............... 2,102 1,561 20 412
Cash managers' fees............... 251 177 -- 76
Technical & leasing costs......... 5,021 1,521 -- 1,914
Provision for doubtful costs...... 2,146 547 174 --
Legal & professional fees......... 736 657 260 440
Directors' & Officer's
insurance....................... 352 282 12 295
Directors' fees and expenses...... 344 278 18 100
Audit and tax fees................ 112 75 -- 43
------- ------- ------- -------
15,742 8,311 646 6,599
======= ======= ======= =======
</TABLE>
16 NET LOSS BEFORE PROVISION FOR TAXES
A) NET LOSS BEFORE PROVISION FOR TAXES IS STATED AFTER CHARGING:
<TABLE>
<CAPTION>
AERCO ALPS 94-1
AERCO PERIOD FROM PERIOD FROM ALPS 94-1
YEAR ENDED JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ---------------- --------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
Directors' remuneration...... 344 278 18 100
======= ======= ======= ===
</TABLE>
B) DIRECTORS AND OFFICERS' INSURANCE
Directors' and Officers' Insurance has been implemented for AerCo and ALPS
94-1. Directors of AerCo Limited and ALPS 94-1 Limited also have the protection
of an unsecured indemnity from AerCo Limited and ALPS 94-1 Limited in respect of
claims relating to them in their capacity as directors.
17 PROVISION FOR TAXES
<TABLE>
<CAPTION>
AERCO ALPS 94-1
AERCO PERIOD FROM PERIOD FROM ALPS 94-1
YEAR ENDED JULY 15, 1998 TO JULY 1, 1998 TO YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- ---------------- --------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
Corporation tax provision.... (51) (35) -- (33)
======== ======= ======= =======
</TABLE>
Taxation provisions for AerCo and ALPS 94-1 relate to taxes levied in local
jurisdictions in respect of the activities of subsidiaries.
AerCo's income from approved activities in Ireland is taxable at a rate of
10% until December 31, 2005.
F-27
<PAGE> 28
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18 BASIC AND DILUTED LOSS PER ORDINARY SHARE
The calculation of basic and diluted loss per ordinary share for AerCo
Limited for the year ended March 31, 2000 and the period from July 15, 1998 to
March 31, 1999 has been computed by dividing the losses of U.S.$48,839,000 and
U.S.$15,108,000 respectively by the weighted average number of ordinary shares
outstanding during these periods 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 year ended June 30, 1998
has been computed by dividing the losses of U.S.$1,277,000 and U.S.$32,555,000
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 year ended June 30, 1998 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, 2000:
<TABLE>
<CAPTION>
NAME COUNTRY OF INCORPORATION BUSINESS % OF SHARES HELD
---- ------------------------ -------------------- ----------------
<S> <C> <C> <C>
AerCo Ireland Limited............. Ireland Aircraft leasing and 100%
sub-leasing
AerCo Ireland II Limited.......... Ireland Aircraft leasing and 100%
sub-leasing
AerCo USA Inc..................... USA Aircraft leasing and 100%
sub-leasing
ALPS 94-1 Limited................. Jersey Aircraft leasing and 100%
sub-leasing
Pergola Limited................... Ireland Aircraft leasing and 100%
sub-leasing
ALPS 94-1(Belgium) N.V............ Belgium Aircraft leasing and 100%
sub-leasing
AerFi (Belgium) N.V............... Belgium Aircraft leasing and 100%
sub-leasing
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.
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.$1,500
per annum out of the profits. This dividend was not declared in the year ended
June 30, 1998.
F-28
<PAGE> 29
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22 CASH FLOW STATEMENT
A) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
ALPS 94-1
AERCO AERCO PERIOD FROM ALPS 94-1
YEAR ENDED PERIOD ENDED JULY 1, 1998 TO YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 JULY 14, 1998 JUNE 30, 1998
-------------- -------------- --------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
Cash paid in respect of:
Interest -- A - C notes........... 43,585 30,694 3,872 49,191
Interest -- D - E notes........... 10,999 7,332 -- 5,624
Interest rate swaps............... 1,566 987 -- --
------- ------- ------- -------
56,150 39,013 3,872 54,815
======= ======= ======= =======
</TABLE>
B) RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT -- AERCO
<TABLE>
<CAPTION>
U.S.$'000
---------
<S> <C>
Increase in cash in the year................................ 795
Cash outflow from decrease in debt.......................... 48,917
Increase in liquid resources in year........................ 1
---------
Change in net debt resulting from cash flows................ 49,713
Amortization of issue costs................................. (898)
---------
Movement in net debt in the year............................ 48,815
Net debt at March 31, 1999.................................. (883,602)
---------
Net debt at March 31, 2000.................................. (834,787)
=========
</TABLE>
C) ANALYSIS OF NET DEBT -- AERCO
<TABLE>
<CAPTION>
OTHER NON
MARCH 31, 1999 CASH FLOW CASH CHARGES MARCH 31, 2000
-------------- --------- ------------ --------------
U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
Cash................................ 25,618 795 -- 26,413
Liquid resources.................... 39,997 1 -- 39,998
Indebtedness........................ (949,217) 48,917 (898) (901,198)
--------- --------- --------- ---------
(883,602) 49,713 (898) (834,787)
========= ========= ========= =========
</TABLE>
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>
F-29
<PAGE> 30
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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).
FOREIGN TAXATION
The international character of AerCo's operations give rise to some
uncertainties with regard to the impact of taxation in certain countries. The
position is kept under continuos review and AerCo provides for all known
liabilities.
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 changed its
accounting policy in the period ended March 31, 1999 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
was 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.
(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
F-30
<PAGE> 31
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 (CONTINUED)
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 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 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 amortized 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.
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, 2000 and 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, 1998 and
July 14, 1998 were held for specific purposes under the terms of the ALPS 94-1
Deed of Charge.
F-31
<PAGE> 32
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
25 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(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.
(H) FUTURE DEVELOPMENTS
SFAS No. 133 "Accounting for Derivative Instruments and for Hedging
Activities" was issued in June 1998. In June 1999, The Financial Accounting
Standards Board ("FASB") issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133", which defers the effective date until fiscal years beginning
after 15 June 2000. Therefore, initial application for AerCo will be on 1 April
2001 and on that date, hedging relationships shall be designated anew. The SFAS
may not be retroactively applied to financial statements of prior periods. AerCo
is currently reviewing the likely impact of this Statement.
F-32
<PAGE> 33
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
26 RECONCILIATION OF NET INCOME AS STATED IN ACCORDANCE WITH U.K. GAAP TO NET
INCOME IN ACCORDANCE WITH U.S. GAAP
<TABLE>
<CAPTION>
ALPS 94-1
(UNAUDITED) ALPS 94-1
AERCO AERCO NINE MONTHS PERIOD FROM ALPS 94-1
YEAR ENDED PERIOD ENDED ENDED JULY 1, 1998 TO YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998 JULY 14, 1998 JUNE 30, 1998
-------------- -------------- -------------- --------------- -------------
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................................ (48,839) (15,108) (17,824) (1,277) (32,555)
Goodwill amortization................. 2,356 1,669 -- -- --
Exceptional item: additional
depreciation charge................. -- -- -- -- --
Difference in depreciation of
aircraft............................ 8,644 5,759 4,315 243 5,773
Difference in provision for impairment
of aircraft value................... 6,979 -- 8,200 -- 8,200
Difference in book value of aircraft
sold................................ -- -- -- 7,007 --
Difference in book value of aircraft
sold................................ (375) (319) -- -- (2,226)
--------- --------- --------- --------- ---------
NET (LOSS)/INCOME IN ACCORDANCE WITH
U.S. GAAP BEFORE EXTRAORDINARY
ITEM................................ (31,235) (7,999) (5,309) 5,973 (20,808)
--------- --------- --------- --------- ---------
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 (LOSS)/INCOME IN ACCORDANCE WITH
U.S. GAAP........................... (31,235) 19,760 (5,309) 5,973 (20,808)
========= ========= ========= ========= =========
Weighted average number of ordinary
shares outstanding.................. 20 20 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................................ (1,561.7) (399.95) (530.9) 597.3 (2,080.8)
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............................ (1,561.7) 988 (530.9) 597.3 (2,080.8)
========= ========= ========= ========= =========
</TABLE>
F-33
<PAGE> 34
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 AERCO
AS AT AS AT
MARCH 31, MARCH 31,
2000 1999
---------- ----------
U.S.$'000 U.S.$'000
<S> <C> <C>
SHAREHOLDERS' DEFICIT IN ACCORDANCE WITH U.K. GAAP.......... (63,947) (15,108)
ITEMS HAVING THE EFFECT OF AMENDING SHAREHOLDERS' DEFICIT
Difference between the fair value of the assets acquired by
AerCo and their predecessor cost.......................... (141,873) (141,873)
Goodwill arising on acquisition............................. (47,125) (47,125)
Amortization of goodwill.................................... 4,025 1,669
Effect of extraordinary item differences between U.K. GAAP
and U.S. GAAP (see note 26)............................... 25,786 25,786
Cumulative effect of change in accounting policy for
maintenance............................................... 1,973 1,973
Cumulative effect of other differences in net income between
U.K. GAAP and U.S. GAAP (see note 26)..................... 20,688 5,440
--------- ---------
SHAREHOLDERS' DEFICIT IN ACCORDANCE WITH U.S. GAAP.......... (200,473) (169,238)
========= =========
</TABLE>
F-34
<PAGE> 35
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 AERCO AERCO AERCO
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
--------- --------- --------- ---------
U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
COST
Cost........................................ 937,766 951,973 937,766 951,973
Step up cost................................ -- -- (142,185) (141,873)
--------- --------- --------- ---------
Beginning of period......................... 937,776 -- 795,581 --
Additions................................... 622 951,973 622 810,100
Disposals................................... (16,343) (14,207) (16,686) (14,519)
--------- --------- --------- ---------
End of period............................... 922,045 937,766 779,517 795,581
========= ========= ========= =========
DEPRECIATION
Beginning of period......................... (33,513) -- (27,761) --
Charge for the period....................... (46,998) (33,821) (38,354) (28,062)
Disposal.................................... 739 308 707 301
--------- --------- --------- ---------
End of period............................... (79,772) (33,513) (65,408) (27,761)
========= ========= ========= =========
PROVISION FOR PERMANENT DIMINUTION IN VALUE
Beginning of period......................... -- -- -- --
Charge for the period....................... (13,079) -- (6,100) --
Disposal.................................... -- -- -- --
--------- --------- --------- ---------
End of period............................... (13,079) -- (6,100) --
========= ========= ========= =========
NET BOOK VALUE
Beginning of period......................... 904,253 -- 767,820 --
========= ========= ========= =========
End of period............................... 829,194 904,253 708,009 767,820
========= ========= ========= =========
</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, 2000 and 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 U.S. 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 year ended March 31, 2000 of U.S.$2,353,000 and for the period from July 15,
1998 to March 31, 1999 of U.S.$1,738,000.
F-35
<PAGE> 36
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 10 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.
(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 a fee as lease manager which amounted to U.S.$4,023,000
for the year ended March 31, 2000 and U.S.$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 a fee as lease manager which amounted to U.S.$108,000 for
the period from July 1, 1998 to July 14, 1998 (year to June 30, 1998 --
U.S.$2,894,000).
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 U.S.$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 on the
board of AerCo Limited appointed by AerFi as holder of the Class E note of AerCo
Limited. Ms. R. Hynes was also a director of ALPS 94-1 Limited until January 19,
2000. 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.$5,168,000 for the year ended March 31, 2000 (March
31, 1999: U.S.$3,588,000, July 14, 1998: U.S.$202,000, June 1998:
U.S.$5,202,000) in respect of Air 2000.
F-36
<PAGE> 37
AERCO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32 POST BALANCE SHEET EVENTS
On June 14, 2000 the directors of AerCo Limited approved a transaction to
proceed with a refinancing of AerCo Group involving inter alia:
- The refinancing of AerCo's subclass A-1 notes in the amount of $340
million and subclass D-1 notes in the amount of $80 million,
- the purchase directly and indirectly of an additional 30 aircraft and
related leases from AerFi at their appraised value of $724 million, and
- the replacement of the existing Servicer with AerFi.
New notes will be issued by AerCo and the proceeds will be used to enable
AerCo to repay the principal outstanding on the existing subclass A-1 notes and
subclass D-1 notes and to acquire the additional 30 aircraft from AerFi directly
or through the acquisition of 100% owned subsidiaries of AerFi. The transaction
is scheduled to close on July 17, 2000, although deliveries of the additional
aircraft may take some time to complete after that date.
33 YEAR 2000
AerCo is dependent on AerFi and Babcock for its information systems. AerFi
and Babcock instigated a review of the problems and issues likely to impact
AerCo in respect of the Year 2000 computing issue. This review included
surveying AerCo's suppliers, financial institutions and lessees to avoid any
adverse impact which they may have had on AerCo.
The directors of AerCo are not aware of any adverse affects or significant
issues in respect of their systems or operations arising from the Year 2000
computing issue. The directors will continue to monitor and address Year 2000
exposures but do not expect any adverse issues to arise.
F-37
<PAGE> 38
FINANCIAL STATEMENTS
AERFI TRANSFERRED AIRCRAFT
F-38
<PAGE> 39
AERFI TRANSFERRED AIRCRAFT
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF AERCO LIMITED
We have audited the accompanying 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. These financial statements are the responsibility of
the directors of AerCo Limited. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom which do not differ in any material respects
from auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the directors as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of the AerFi
transferred aircraft for the period from July 1, 1998 to July 14, 1998 and for
the year ended June 30, 1998 in conformity with generally accepted accounting
principles in the United Kingdom.
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 AerFi 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 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 to the extent summarised in note 12 to the
financial statements.
KPMG
Chartered Accountants
Dublin, Ireland
August 9, 1999
F-39
<PAGE> 40
AERFI TRANSFERRED AIRCRAFT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED) PERIOD FROM
NINE MONTHS ENDED JULY 1, 1998 TO YEAR ENDED
NOTES MARCH 31, 1998 JULY 14, 1998 JUNE 30, 1998
----- ----------------- --------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
REVENUES
Aircraft leasing.......................... 4 15,499 983 21,109
EXPENSES
Depreciation.............................. 2 (7,599) (464) (10,215)
Net interest expense...................... 5 (5,808) (1,392) (6,612)
Other expenses............................ 6 (3,766) 355 (4,804)
------- ------- -------
(17,173) (1,501) (21,631)
------- ------- -------
NET LOSS FROM OPERATIONS BEFORE PROVISION
FOR TAXES............................... (1,674) (518) (522)
Benefit for taxes......................... 7 560 5 501
------- ------- -------
NET LOSS FOR THE PERIOD................... (1,114) (513) (21)
======= ======= =======
</TABLE>
All recognized 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-43 to F-44, are an integral part of the financial statements.
F-40
<PAGE> 41
AERFI TRANSFERRED AIRCRAFT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED) PERIOD FROM
NINE MONTHS ENDED JULY 1, 1998 TO YEAR ENDED
MARCH 31, 1998 JULY 14, 1998 JUNE 30, 1998
----------------- --------------- -------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period........................ (1,114) (513) (21)
ADJUSTMENTS TO RECONCILE NET LOSS FROM
OPERATIONS TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Depreciation charge for the period............. 7,599 464 10,215
Deferred income tax............................ (560) (5) (501)
Changes in operating assets and liabilities
Accounts receivable and due from AerFi....... (24) 24,539 2,960
Accrued expenses and other liabilities....... 4,894 (970) (3,366)
Net maintenance expenditure.................. (7,326) (448) (6,477)
Net security deposits received/(repaid)...... (516) 50 (30)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES...... 2,953 23,117 2,780
------- ------- -------
CAPITAL EXPENDITURE
Purchase of aircraft........................... (65) -- (11,585)
------- ------- -------
FINANCING ACTIVITIES
Contributions from AerFi....................... 4,833 16,793 35,504
Indebtedness repaid............................ (7,721) (39,910) (26,699)
------- ------- -------
NET CASH (OUTFLOW)/INFLOW FROM FINANCING
ACTIVITIES................................... (2,888) (23,117) 8,805
------- ------- -------
NET INCREASE IN CASH........................... -- -- --
CASH AT BEGINNING OF PERIOD.................... -- -- --
------- ------- -------
CASH AT END OF PERIOD.......................... -- -- --
======= ======= =======
</TABLE>
Disclosure of cash flow information is set out in note 9.
The accompanying notes, including the statement of accounting policies on
pages F-43 to F-44, are an integral part of the financial statements.
F-41
<PAGE> 42
AERFI TRANSFERRED AIRCRAFT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
TOTAL
---------
U.S.$'000
---------
<S> <C>
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-43 to F-44, are an integral part of the financial statements.
F-42
<PAGE> 43
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 and the year ended
June 30, 1998 and the statements of net assets at July 14, 1998 and June 30,
1998 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 U.S. 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 recurring nature,
necessary to present fairly its financial position as of March 31, 1998 and its
results of operations and cash flows 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 recognized 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
recognized 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-43
<PAGE> 44
AERFI TRANSFERRED AIRCRAFT
STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED)
MAINTENANCE (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 cash flows 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-44
<PAGE> 45
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 single economic entity for
the period from July 1, 1998 to July 14, 1998, and for the year ended June 30,
1998.
(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 are 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 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.
F-45
<PAGE> 46
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 AIRCRAFT
<TABLE>
<CAPTION>
JULY 14, 1998 JUNE 30, 1998
------------- -------------
U.S.$'000 U.S.$'000
<S> <C> <C>
COST
Beginning of period......................................... 283,713 272,128
Additions during the period................................. -- 11,585
--------- ---------
End of period............................................... 283,713 283,713
========= =========
DEPRECIATION
Beginning of period......................................... (100,493) (90,278)
Charge for the period....................................... (464) (10,215)
--------- ---------
End of period............................................... (100,957) (100,493)
========= =========
Impairment provision........................................ (4,000) (4,000)
========= =========
NET BOOK VALUE
Beginning of period......................................... 179,220 177,850
========= =========
End of period............................................... 178,756 179,220
========= =========
</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 creditworthiness of particular lessees, current rental values
compared to open market and the length of remaining lease term.
F-46
<PAGE> 47
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
3 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>
4 REVENUES AND CONCENTRATION OF CREDIT RISK
A) DISTRIBUTION OF REVENUES BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED
JULY 14, 1998 JUNE 30, 1998
------------------- -------------------
U.S.$'000 % U.S.$'000 %
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Europe............................................. 543 55.3 12,950 61.36
North America...................................... 231 23.5 4,195 19.87
South/Central America.............................. 137 13.9 3,727 17.65
Asia/Pacific....................................... 72 7.3 237 1.12
--- ------ ------ ------
983 100.00 21,109 100.00
=== ====== ====== ======
</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.
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.
F-47
<PAGE> 48
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4 REVENUES AND CONCENTRATION OF CREDIT RISK (CONTINUED)
B) CONCENTRATION OF CREDIT RISK (CONTINUED)
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.
5 NET INTEREST EXPENSE
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED
JULY 14, 1998 JUNE 30, 1998
--------------- -------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Interest payable on finance lease obligations............... 1,125 2,076
Interest payable on AerFi notes............................. 55 1,596
Interest payable on indebtedness due to AerFi............... 212 4,902
Net interest income on amounts due from AerFi............... -- (1,962)
------- -------
1,392 6,612
======= =======
</TABLE>
6 OTHER EXPENSES
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED
JULY 14, 1998 JUNE 30, 1998
--------------- -------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Servicer's fees............................................. 52 1,201
Aircraft leasing costs...................................... (424) 3,348
Political risk insurance.................................... -- (145)
Administration fees......................................... 2 40
Legal and professional fees................................. 4 100
Deferred expenditure........................................ -- --
Cash manager's fees......................................... 9 210
Audit and tax fees.......................................... 2 50
------- -------
(355) 4,804
======= =======
</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 U.S.$1.5 million in 1998.
7 BENEFIT FOR TAXES
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED
JULY 14, 1998 JUNE 30, 1998
--------------- -------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Tax benefit of the AerFi transferred aircraft consists of
the following:
Deferred income tax benefit................................. 5 501
------- -------
5 501
======= =======
</TABLE>
F-48
<PAGE> 49
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
7 BENEFIT FOR TAXES (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED
JULY 14, 1998 JUNE 30, 1998
--------------- -------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Deferred tax assets and liabilities of the AerFi transferred
aircraft:
Deferred tax assets relating to losses...................... (5,515) (5,415)
Deferred tax liability relating to aircraft................. 10,663 10,568
------- -------
5,148 5,153
======= =======
</TABLE>
The entity's income from approved activities in Ireland is taxable at a
rate of 10% until December 31, 2005. U.S. 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 U.S. "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.$0.9 million). The directors of AerCo Limited believe that no
events have taken place which would cause such payments to become due.
8 STAFF COSTS AND NUMBERS
The entity has no employees.
9 CASH FLOW STATEMENT
(A) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED
JULY 14, 1998 JUNE 30, 1998
--------------- -------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Cash paid in respect of:
Interest -- Individual financings........................... 212 4,902
Interest -- AerFi notes..................................... 55 1,600
Interest -- Indebtedness to AerFi........................... 1,175 2,076
------- -------
1,442 8,578
======= =======
</TABLE>
(B) RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
U.S.$'000
----------
<S> <C>
Increase in cash in the period.............................. --
Cashflow from increase 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>
F-49
<PAGE> 50
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
9 CASH FLOW STATEMENT (CONTINUED)
C) ANALYSIS OF NET DEBT
<TABLE>
<CAPTION>
JUNE 30, 1998 CASHFLOW JULY 14, 1998
------------- --------- -------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Cash.................................................. -- -- --
Liquid resources...................................... -- -- --
Indebtedness.......................................... 88,345 (39,910) 48,435
------- ------- -------
88,345 (39,910) 48,435
======= ======= =======
</TABLE>
10 COMMITMENTS
The entity has no long-term contracts other than those with its service
providers (see note 14).
11 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 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.$2.923 million at each balance sheet
date.
12 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
The financial statements are prepared in accordance with generally accepted
accounting principles applicable in the United Kingdom ("U.K. GAAP") which
differ significantly in certain respects from those generally accepted in the
United States ("U.S. GAAP").
AerCo's accounting policy for aircraft maintenance reflects its adoption of
FRS 12 as explained in note 11. The historic U.K. GAAP financial information for
the AerFi transferred aircraft has been restated to reflect the application of
the AerCo accounting policy for all periods. For U.S. GAAP the cumulative effect
of this change in accounting policy has been reflected in the results for the
period ended July 14, 1998.
RECONCILIATION OF NET LOSS AS STATED IN ACCORDANCE WITH U.K. GAAP TO NET LOSS IN
ACCORDANCE WITH U.S. GAAP.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED
JULY 14, 1998 JUNE 30, 1998
---------------- --------------
U.S.$'000 U.S.$'000
<S> <C> <C>
NET LOSS IN ACCORDANCE WITH U.K. GAAP....................... (513) (21)
Cumulative effect of change in accounting policy for
Maintenance............................................... 2,923 --
------- -------
NET INCOME/(LOSS) IN ACCORDANCE WITH U.S. GAAP.............. 2,410 (21)
======= =======
</TABLE>
F-50
<PAGE> 51
AERFI TRANSFERRED AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
12 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
RECONCILIATION OF NET ASSETS AS STATED IN ACCORDANCE WITH U.K. GAAP TO NET
ASSETS IN ACCORDANCE WITH U.S. GAAP.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 TO YEAR ENDED
JULY 14, 1998 JUNE 30, 1998
---------------- -------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Net assets in accordance with U.K. GAAP..................... 117,033 100,753
Cumulative effect of change in accounting policy for
maintenance............................................... -- (2,923)
------- -------
Net assets in accordance with U.S. GAAP..................... 117,033 97,830
======= =======
</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 year ended June 30, 1998.
13 FOREIGN CURRENCY TRANSACTIONS
The entity's foreign currency transactions are not significant as all
revenues and most costs are denominated in U.S. dollars.
14 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) of this fee is
attributed to the entity for the period from July 1, 1998 to July 14, 1998
F-51
<PAGE> 52
FINANCIAL STATEMENTS
NEW AERFI TRANSFERRING AIRCRAFT
F-52
<PAGE> 53
NEW AERFI TRANSFERRING AIRCRAFT
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF AERCO LIMITED
We have audited the accompanying statements of net assets of the New AerFi
transferring aircraft as of March 31, 2000, March 31, 1999 and March 31, 1998
and the statements of operations, cash flows and changes in net assets for the
years ended March 31, 2000, 1999 and 1998. These financial statements are the
responsibility of the directors of AerCo Limited. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom which do not differ in any material respects
from auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the directors as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the statements of net assets of the New AerFi
transferring aircraft as of March 31, 2000, March 31, 1999 and March 31, 1998
and the statements of income, cash flows and changes in net assets for the years
ended March 31, 2000, 1999 and 1998 in conformity with generally accepted
accounting principles in the United Kingdom.
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 results of operations
for the years ended March 31, 2000, 1999 and 1998 and the statements of net
assets as of March 31, 2000, March 31, 1999 and March 31, 1998.
KPMG
Chartered Accountants
Dublin, Ireland
June 14, 2000
F-53
<PAGE> 54
NEW AERFI TRANSFERRING AIRCRAFT
STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
NOTES MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
----- -------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash, restricted......................... 16,784 -- --
Accounts receivable, net................. 2 2,349 786 1
------- ------- -------
TOTAL CURRENT ASSETS..................... 19,133 786 1
INTANGIBLE ASSETS
Goodwill, net............................ 3 6,011 -- --
FIXED ASSETS
Aircraft................................. 5 653,336 30,196 31,556
------- ------- -------
TOTAL ASSETS............................. 678,480 30,982 31,557
======= ======= =======
LIABILITIES
Accrued expenses and other liabilities... 7 32,888 692 521
Indebtedness............................. 8 483,302 20,527 23,399
Security deposits........................ 9 7,531 834 834
Deferred income tax...................... 13 899 855 866
------- ------- -------
TOTAL LIABILITIES........................ 524,620 22,908 25,620
NET ASSETS............................... 153,860 8,074 5,937
======= ======= =======
</TABLE>
The accompanying notes, including the statement of accounting policies on
pages F-58 to F-60, are an integral part of the financial statements.
F-54
<PAGE> 55
NEW AERFI TRANSFERRING AIRCRAFT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOTES MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
----- -------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
REVENUES
Aircraft leasing......................... 10 26,258 3,292 3,712
EXPENSES
Depreciation............................. 5 (10,086) (1,360) (1,360)
Amortization of goodwill................. 3 (89) -- --
Net interest expense..................... 11 (11,593) (1,578) (2,049)
Other expenses........................... 12 (2,578) (463) (542)
------- ------- -------
(24,346) (3,401) (3,951)
------- ------- -------
NET PROFIT/(LOSS) FROM OPERATIONS BEFORE
TAXES.................................. 1,912 (109) (239)
(Provision)/Benefit for taxes............ 13 (44) 11 24
------- ------- -------
NET PROFIT/(LOSS) FOR THE YEAR........... 1,868 (98) (215)
======= ======= =======
</TABLE>
All recognized gains and losses are included in the statements of
operations above.
There is no material difference between the net profit/(loss) for the year,
and its historical cost equivalent.
The results for the year are derived from continuing operations.
The accompanying notes, including the statement of accounting policies on
pages F-58 to F-60, are an integral part of the financial statements.
F-55
<PAGE> 56
NEW AERFI TRANSFERRING AIRCRAFT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit/(loss) for the year................. 1,868 (98) (215)
ADJUSTMENTS TO RECONCILE NET PROFIT/(LOSS) FROM
OPERATIONS TO NET CASH PROVIDED/(UTILISED) BY
OPERATING ACTIVITIES
Depreciation charge for the year............... 10,086 1,360 1,360
Amortization of goodwill....................... 89 -- --
Deferred income tax............................ 44 (11) (24)
Changes in operating assets and liabilities
Accounts receivable.......................... 718 (785) --
Accrued expenses and other liabilities....... (220) 171 (87)
Net maintenance expenditure.................. 3,158 -- (1,663)
Net security deposits received/(repaid)...... 144 -- (606)
--------- --------- ---------
NET CASH PROVIDED/(UTILISED) BY OPERATING
ACTIVITIES................................... 15,887 637 (1,235)
--------- --------- ---------
CAPITAL EXPENDITURE
Purchase of aircraft........................... (21,191) -- --
--------- --------- ---------
ACQUISITION
Purchase of Indigo transferring aircraft....... (102,529) -- --
Cash acquired with Indigo transferring
aircraft..................................... 14,424 -- --
--------- --------- ---------
(88,105) -- --
FINANCING ACTIVITIES
Contributions from AerFi....................... 143,918 2,235 5,710
Net indebtedness repaid........................ (33,725) (2,872) (4,475)
--------- --------- ---------
NET CASH INFLOW/(OUTFLOW) FROM FINANCING
ACTIVITIES................................... 110,193 (637) 1,235
--------- --------- ---------
NET INCREASE IN CASH........................... 16,784 -- --
CASH AT BEGINNING OF YEAR...................... -- -- --
--------- --------- ---------
CASH AT END OF YEAR............................ 16,784 -- --
========= ========= =========
</TABLE>
Supplemental disclosure of cash flow information is set out in note 15.
The accompanying notes, including the statement of accounting policies on
pages F-58 to F-60, are an integral part of the financial statements.
F-56
<PAGE> 57
NEW AERFI TRANSFERRING AIRCRAFT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
TOTAL
---------
U.S.$'000
<S> <C>
Balance at March 31, 1997................................... 442
Net contributions from AerFi................................ 5,710
NET LOSS FOR THE YEAR....................................... (215)
-------
Balance at March 31, 1998................................... 5,937
Net contribution from AerFi................................. 2,235
NET LOSS FOR THE YEAR....................................... (98)
-------
Balance at March 31, 1999................................... 8,074
Net contribution from AerFi................................. 143,918
NET PROFIT FOR THE YEAR..................................... 1,868
-------
Balance at March 31, 2000................................... 153,860
=======
</TABLE>
The accompanying notes, including the statement of accounting policies on
pages F-58 to F-60, are an integral part of the financial statements.
F-57
<PAGE> 58
NEW AERFI TRANSFERRING AIRCRAFT
STATEMENT OF ACCOUNTING POLICIES
INTRODUCTION AND BASIS OF PREPARATION
Under the proposed refinancing transaction AerCo Limited will acquire 30
aircraft (including one aircraft purchased by AerFi in April 2000) and related
leases from AerFi. On December 16, 1999 AerFi tendered for 100% of the share
capital of Indigo who at that date owned 26 of the 30 aircraft which are
proposed to be purchased from AerFi by AerCo Limited (the "INDIGO TRANSFERRING
AIRCRAFT"). At December 16, 1999 AerFi owned three aircraft which it also
proposes to transfer to AerCo as part of the refinancing transaction in July
2000. The further details of the transaction and of the basis of preparation of
these financial statements for the entity are set out in note 1.
These financial statements present the statements of operations and the
cash flows for the years ended March 31, 2000, March 31, 1999 and March 31, 1998
and the statements of net assets at March 31, 2000, March 31, 1999 and March 31,
1998 of the three AerFi owned aircraft and the Indigo transferring aircraft from
December 16, 1999 -- (date of acquisition of Indigo by AerFi) to be acquired by
AerCo Limited from AerFi pursuant to a securitisation and refinancing
transaction (together the "NEW AERFI TRANSFERRING AIRCRAFT").
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 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 U.S. dollars, which is the
principal operating currency of the entity and of the aviation industry.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the directors of AerCo 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 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 collectibility of receivables, the
recoverable amounts in respect of aircraft and the related estimated lives of
such assets.
REVENUE RECOGNITION
Revenue from aircraft on operating leases is recognized 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
recognized over the period to which they relate.
INTEREST INCOME
Interest earned during the year 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 entity
from which the lessee can draw in respect of maintenance expenditures for major
checks. Amounts held in respect of aircraft
F-58
<PAGE> 59
NEW AERFI TRANSFERRING AIRCRAFT
STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED)
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 the entity and which are not paid for
by lessees are expensed as incurred.
TAXATION
Corporation tax is provided based on the results for the year. 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 year that includes
the enactment date.
AIRCRAFT
On December 16, 1999, AerFi tendered for 100% of the share capital of
Indigo. These financial statements reflect the acquisition by the entity on
December 16, 1999 of the Indigo transferring aircraft (the "STARTING DATE OF
PERIOD OF COMMON CONTROL") transferring to AerCo as part of the refinancing in
July 2000. Aircraft are stated at cost less accumulated depreciation less
impairments in value and are depreciated at rates calculated to write off the
cost of the assets to their estimated residual value.
Depreciation is calculated on a straight-line basis over their estimated
useful economic lives. The estimates of useful economic lives and residual
values are reviewed periodically. The current estimates for residual values and
useful economic lives are generally 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 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 cash flows 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 the 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 year when it was first applied or in previous years.
F-59
<PAGE> 60
NEW AERFI TRANSFERRING AIRCRAFT
STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED)
CASH, RESTRICTED
The cash held by the entity is restricted and is held in interest bearing
accounts by certain lenders to the entity. These cash balances are held in
respect of the entity's maintenance obligations under certain of its leases and
may be applied on demand to meet these obligations. Cash restricted is
classified as cash in the statement of cash flows.
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The entity manages its interest rate exposure through the use of interest
rate swaps. Under these swap arrangements the entity will pay fixed interest and
receive floating interest on monthly basis. The objective of the entity's
interest rate risk management policy is to correlate the contracted fixed rental
payments in its portfolio to the floating interest payments on the related debt
facility, taking account of expected amortization on the debt. Net receipts and
payments arising in respect of these swaps are recognized as adjustments to
interest expense on an accruals basis.
The entity 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, the entity 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.
F-60
<PAGE> 61
NEW AERFI TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS
1 BASIS OF PREPARATION
Under a proposed refinancing and securitization transaction AerCo Limited
will acquire directly or indirectly an additional 30 aircraft and related leases
from AerFi.
On July 17, 2000, it is proposed that AerCo Limited will issue
approximately U.S.$960 million in aggregate principal amount of offered notes in
four subclasses: subclass A-3, subclass A-4, subclass B-2 and subclass C-2.
AerCo Limited will also issue two additional subclasses of notes, the subclass
D-2 notes and the subclass E-2 notes, which will initially be held by AerFi. It
is proposed that AerCo Limited will use substantially all of the proceeds of the
issuance of the offered notes, the subclass D-2 notes and subclass E-2 notes to
refinance all of AerCo's existing subclass A-1 notes and subclass D-1 notes and
to finance the acquisition of 30 aircraft from AerFi.
Due to the uncertainties in relation to the timing of obtaining lessee
consents to the transfer of the 30 aircraft from AerFi to AerCo, AerFi has
structured the acquisition of the additional aircraft as a sale to AerCo of the
capital stock of approximately 18 AerFi wholly owned subsidiaries, that are
expected to occur in a series of transactions following the completion of the
refinancing.
AerFi will pre-position the aircraft to be transferred to AerCo into
aircraft owning subsidiaries prior to the sale of the companies to AerCo.
These financial statements present, on the bases and assumptions set out
below, the results of operations, assets and liabilities relating to the entity
to be transferred to AerCo from AerFi, comprising two aircraft owned by AerFi
during the three years ended March 31, 2000, one aircraft acquired by AerFi in
December 1999 and the 26 aircraft owned by Indigo which was acquired by AerFi on
December 16, 1999. 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 entity had been organized as single a economic entity for the years ended
March 31, 2000, March 31, 1999 and March 31, 1998.
(ii) For the purposes of these financial statements, an allocation of
certain costs such as selling, general and administrative expenses of AerFi to
the entity has been made. These costs have been allocated to the entity based on
AerFi's estimate of the percentage of such costs incurred in managing the fleet
of aircraft for each year. Management believes that the basis for these
allocations are reasonable.
(iii) During the three years ended March 31, 2000 two of the aircraft were
financed by AerFi under a facility entered into between AerFi and KfW. The
liabilities under the KfW facility and related cash flows and interest costs are
reflected in these financial statements.
In the case of the one aircraft purchased in December 1999, no separate
identifiable financing was in place. This aircraft is assumed to have been
financed by intercompany indebtedness to AerFi based on the ratio of AerFi's
overall debt to aircraft net book value of 77% at March 31, 2000 and repayments
to AerFi are assumed to have been made accordingly during the period. The
interest charged on the assumed indebtedness to AerFi is based on AerFi's
average cost of debt of 7.2% for the period between December 1999 and March
2000.
(iv) During the period from acquisition to March 31, 2000 all of the Indigo
transferring aircraft were financed by debt secured on specific aircraft. For
these aircraft the specific debt obligations, related cash flows and interest
costs related to aircraft owned by the entity are reflected in these financial
statements.
(v) Cash generated from or absorbed by the activities of the entity during
the three years ended is reflected through the intercompany account as
distributions to or contributions from AerFi.
(vi) 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 and Indigo.
F-61
<PAGE> 62
NEW AERFI TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
2 ACCOUNTS RECEIVABLE, NET
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Trade receivables, net......................... 2,226 786 1
Prepayments.................................... 123 -- --
------- ------- -------
2,349 786 1
======= ======= =======
</TABLE>
Trade receivables are stated net of a bad debt provision of $0.3 million
(March 31, 1999: $ nil and March 31, 1998: $ nil) and comprise amounts in
respect of rent and maintenance payments due from lessees. As at March 31, 1999
and March 31, 1998 one lessee accounted for 100% of trade receivables. As at
March 31, 2000 four lessees accounted for 43%, 24%, 13% and 10% respectively of
trade receivables.
3 GOODWILL, NET
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
COST
Goodwill on acquisition........................ 6,100 -- --
------- ------- -------
AMORTISATION
Amortisation in year........................... (89) -- --
------- ------- -------
NET BOOK VALUE
End of year.................................... 6,011 -- --
======= ======= =======
</TABLE>
Goodwill of $6.1 million represents the difference between the fair value
of the net assets acquired and the consideration paid by the entity in respect
of its acquisition of the Indigo transferring aircraft. Goodwill is amortised
over a 20 year period which is the period over which the directors of AerFi
estimate that the value of the underlying business acquired is expected to
exceed the values of its identifiable net assets. Further information in
relation to the calculation of goodwill is set out in note 4 below.
4 ACQUISITION OF THE INDIGO TRANSFERRING AIRCRAFT
On December 16, 1999 AerFi tendered for 100% of the share capital of Indigo
whose registered office is Sodra Forstadsgatan 4, S-211 48 Malmo, Sweden. The
acquisition was achieved through a combination of a cash purchase and share
exchange agreement.
F-62
<PAGE> 63
NEW AERFI TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4 ACQUISITION OF THE INDIGO TRANSFERRING AIRCRAFT (CONTINUED)
The fair value of the net assets acquired and the consideration given on
the acquisition of the Indigo transferring aircraft is summarized as follows:
<TABLE>
<CAPTION>
FAIR VALUE ADJUSTMENTS
--------------------------------------------------------------------
INDIGO
TRANSFERRING
AIRCRAFT VALUATION OTHER FAIR VALUE OF
BOOK VALUE ADJUSTMENTS ADJUSTMENTS ASSETS ACQUIRED
------------------- ----------- ----------- ---------------
U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C> <C>
Cash, restricted................... 14,424 -- -- 14,424
Accounts receivable, net........... 2,281 -- -- 2,281
Fixed assets -- aircraft........... 587,631 24,404(i) -- 612,035
Accrued liabilities & other
liabilities...................... (29,258) -- -- (29,258)
Security deposits.................. (6,553) -- -- (6,553)
Indebtedness....................... (492,960) -- (3,040)(ii) (496,000)
Derivatives........................ -- -- (500)(iii) (500)
Deferred income tax................ (2,580) -- 2,580(iv) --
--------- --------- --------- ---------
NET ASSETS ACQUIRED................ 72,985 24,404 (960) 96,429
========= ========= =========
Consideration paid................. (102,529)
---------
GOODWILL ON ACQUISITION............ (6,100)
=========
</TABLE>
---------------
(i) The fair value adjustments in respect of the aircraft arise as a result of a
valuation of these assets to reflect AerFi's estimate of their current
market value at the date of acquisition. This valuation of the Indigo
transferring aircraft exceeded their existing book value by U.S.$24.4
million.
(ii) The fair value the adjustment to Indebtedness is based on prevailing
interest rates at the acquisition date.
(iii) The fair value the adjustment to Derivatives is based on prevailing
interest rates at the acquisition date.
(iv) The fair value adjustment in respect of deferred taxation arises as a
result of the planned change in the tax basis of the Indigo aircraft
following the acquisition of Indigo by AerFi.
The summarized statement of operations information for the Indigo
transferring aircraft for the period from January 1, 1999 to December 15, 1999
is set out below.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
DECEMBER 15, 1999
-----------------
U.S.$'000
<S> <C>
REVENUES
Aircraft leasing............................................ 65,602
EXPENSES
Depreciation................................................ (23,408)
Net interest expense........................................ (30,277)
Other expenses.............................................. (4,863)
-------
(58,548)
-------
NET PROFIT FROM OPERATIONS BEFORE PROVISION FOR TAXES....... 7,054
Provision for taxes......................................... (1,975)
-------
NET PROFIT FOR THE PERIOD................................... 5,079
=======
</TABLE>
F-63
<PAGE> 64
NEW AERFI TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5 AIRCRAFT
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
COST
Beginning of year.............................. 46,418 46,418 46,418
Additions during the year...................... 633,226 -- --
------- ------- -------
End of year.................................... 679,644 46,418 46,418
======= ======= =======
DEPRECIATION
Beginning of year.............................. (16,222) (14,862) (13,502)
Charge for the year............................ (10,086) (1,360) (1,360)
------- ------- -------
End of year.................................... (26,308) (16,222) (14,862)
======= ======= =======
NET BOOK VALUE
Beginning of year.............................. 30,196 31,556 32,916
======= ======= =======
End of year.................................... 653,336 30,196 31,556
======= ======= =======
</TABLE>
6 OPERATING LEASES
All the aircraft are held for operating lease. Rentals on certain of the
leases are variable in accordance with prevailing interest rates.
The following is a schedule of contracted future rentals receivable, by
years, on operating leases as of March 31, 2000. The interest rates prevailing
at March 31, 2000 have been applied in determining rentals that are variable in
accordance with prevailing interest rates.
<TABLE>
<CAPTION>
U.S.$'000
---------
<S> <C>
Year ended March 31, 2001................................... 77,652
Year ended March 31, 2002................................... 74,630
Year ended March 31, 2003................................... 65,656
Year ended March 31, 2004................................... 58,958
Year ended March 31, 2005................................... 37,031
Thereafter.................................................. 96,765
-------
410,692
=======
</TABLE>
7 ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Accrued expenses and other liabilities
comprise:
Aircraft maintenance reserves.................. 23,884 -- --
Deferred income................................ 5,422 249 261
Interest....................................... 2,434 -- --
Other accruals................................. 1,148 443 260
------- ------- -------
32,888 692 521
======= ======= =======
Aircraft maintenance reserves:
Due within one year............................ 1,992 -- --
Due after one year............................. 21,892 -- --
------- ------- -------
23,884 -- --
======= ======= =======
</TABLE>
F-64
<PAGE> 65
NEW AERFI TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8 INDEBTEDNESS
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
AerFi KfW debt (i)............................. 17,655 20,527 23,399
AerFi notes (ii)............................... 16,082 -- --
Indigo debt obligations (iii).................. 449,565 -- --
------- ------- -------
483,302 20,527 23,399
======= ======= =======
</TABLE>
The basis and assumptions under which indebtedness has been reflected in
these financial statements is set out in note 1.
(i) The AerFi KfW debt is secured on the two aircraft which had a net
book value of U.S.$28.8 million at March 31, 2000 (1998: US$30.2 million).
As part of the completion of the proposed transaction these amounts will be
repaid in full.
(ii) As explained in note 1 it has been assumed that the aircraft
purchased by the New AerFi transferring aircraft in December 1999 had been
financed with indebtedness due to AerFi.
(iii)The entity's Indigo debt obligations are primarily collateralized by
the underlying aircraft and assignment of the attached leases. At March 31,
2000, all of the entity's Indigo debt outstanding was at fixed interest
rates with the exception of $16.9 million with rates of 30 days Libor plus
1.2% and $125.6 million with rates of commercial paper plus 1.255%. As part
of the completion of the proposed transaction these amounts will be repaid
in full.
(iv) Repayments of principal during the year ended March 31, 2000 on the
Indigo debt obligations and the AerFi KfW debt were in accordance with
their respective contractual terms. The repayment of principal on the
aircraft which is assumed to be financed by AerFi was assumed to be made in
accordance with changes in AerFi's aircraft net book value to debt ratio
during the year ended March 31, 2000.
The indebtedness repayable analysed by year of repayment is as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31 U.S.$'000
<S> <C>
2001........................................................ 77,212
2002........................................................ 59,630
2003........................................................ 46,256
2004........................................................ 60,632
2005........................................................ 70,180
Thereafter.................................................. 169,392
-------
Total....................................................... 483,302
=======
</TABLE>
9 SECURITY DEPOSITS
Security deposits received from lessees of U.S.$7.531 million (March 31,
1999 and March 31, 1998: U.S.$0.8 million) are held as security for obligations
in accordance with the terms of certain leases.
F-65
<PAGE> 66
NEW AERFI TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
10 REVENUES AND CONCENTRATION OF CREDIT RISK
A) DISTRIBUTION OF REVENUES BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
------------------- ------------------- -------------------
U.S.$'000 % U.S.$'000 % U.S.$'000 %
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Europe......................... 12,822 48.83 -- -- -- --
North America.................. 5,572 21.22 -- -- -- --
South/Central America.......... 4,390 16.72 3,292 100.00 3,712 100.00
Asia/Pacific................... 3,474 13.23 -- -- -- --
------ ------ ----- ------ ----- ------
26,258 100.00 3,292 100.00 3,712 100.00
====== ====== ===== ====== ===== ======
</TABLE>
All revenues are derived from aircraft leasing.
In the year ended March 31, 2000, 21%, 17% and 12% of the entity's lease
revenues was derived from the United States, Brazil and the United Kingdom
respectively. No other country accounted for greater than 10% of the entity's
lease revenues.
In the year ended March 31, 1999, 100% of the entity's lease revenues was
derived from Brazil.
In the year ended March 31, 1998, 100% of the entity's lease revenues was
derived from Brazil.
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 aircraft manages its exposure to particular countries in part
through obtaining security from lessees by way of deposits, letters of credit
and guarantees.
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 March 31, 2000, two lessees accounted for 13% and 10% of the entity's
lease revenues. No other lessee accounted for greater than 10% of the entity's
lease revenues for the year ended March 31, 2000.
As at March 31, 1999, one lessee accounted for all of the entity's lease
revenues.
As at March 31, 1998, one lessee accounted for all of the entity's lease
revenues.
11 NET INTEREST EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Interest payable on specific indebtedness...... 11,426 1,578 2,049
Interest payable on AerFi notes................ 340 -- --
Net interest income............................ (173) -- --
------- ------- -------
11,593 1,578 2,049
======= ======= =======
</TABLE>
F-66
<PAGE> 67
NEW AERFI TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
12 OTHER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Servicer's fees................................ 1,717 218 218
Aircraft leasing costs......................... 671 199 278
Administration expenses........................ 50 10 10
Legal and professional fees.................... 10 10 10
Cash manager's fees............................ 80 21 21
Audit and tax fees............................. 50 5 5
------- ------- -------
2,578 463 542
======= ======= =======
</TABLE>
13 (PROVISION)/BENEFIT FOR TAXES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Tax (provision)/benefit of the New AerFi
transferring aircraft consists of the
following:
Deferred income tax (provision)/benefit........ (44) 11 24
------- ------- -------
(44) 11 24
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Deferred tax assets and liabilities of the New
AerFi transferring aircraft:
Deferred tax assets relating to losses......... 912 649 331
Deferred tax liability relating to aircraft.... (1,811) (1,504) (1,197)
------- ------- -------
(899) (855) (866)
======= ======= =======
</TABLE>
The entity's income from approved activities in Ireland is taxable at a
rate of 10% until December 31, 2005. The tax rate applicable to the entities
activities in Sweden following its acquisition of the Indigo transferring
aircraft in December 1999 is 26%.
The difference between the statutory tax rates and the tax provision for
the year ended March 31, 2000 arises as no deferred tax provision arises on
timing differences arising in Sweden in the period from December 16, 1999 to
March 31, 2000 due to the planned change in the tax basis of the Indigo aircraft
as part of the transaction.
14 STAFF COSTS AND NUMBERS
The entity has no employees.
15 CASH FLOW STATEMENT
(A) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Cash paid in respect of:
Interest ...................................... 11,521 1,578 2,049
======= ======= =======
</TABLE>
F-67
<PAGE> 68
NEW AERFI TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(B) RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
U.S.$'000
---------
<S> <C>
Increase in cash in the year................................ 16,784
Cash flow from increase in debt............................. (462,775)
--------
Change in net debt resulting from cash flows................ (445,991)
--------
Movement in net debt in the year............................ (445,991)
Net debt at March 31, 1999.................................. (20,527)
--------
Net debt at March 31, 2000.................................. (466,518)
========
</TABLE>
(C) ANALYSIS OF NET DEBT
<TABLE>
<CAPTION>
MARCH 31, 1999 CASH FLOW MARCH 31, 2000
-------------- --------- --------------
U.S.$'000 U.S.$'000 U.S.$'000
<S> <C> <C> <C>
Cash.............................................. -- 16,784 16,784
Indebtedness...................................... (20,527) (462,775) (483,302)
--------- --------- ---------
(20,527) (445,991) (466,518)
========= ========= =========
</TABLE>
16 COMMITMENTS
The entity has no long-term contracts other than those with its service
providers (see note 20).
17 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").
For U.K. GAAP purposes cash, restricted is classified as cash in the cash
flow statement. Under U.S. GAAP cash, restricted would not meet the definition
of cash equivalents. Other than the above, there were no significant differences
between U.K. GAAP and U.S. GAAP arising in respect of the entity for the years
ended March 31, 2000, March 31, 1999 and March 31, 1998.
18 FAIR VALUE OF FINANCIAL INSTRUMENTS
RECEIVABLES, PAYABLES AND CASH, RESTRICTED
The fair value of the entity's receivables, payables and cash, restricted
at March 31, 2000 approximates to the amounts at which these items are reflected
in the entity's statement of net assets due to the relatively short-term nature
of the instruments and the frequency at which they reprice.
INDEBTEDNESS
The fair value of the entity's indebtedness at March 31, 2000 was $486
million.
DERIVATIVES
The fair value of the entity's derivatives at March 31, 2000 was $1.4
million (notional amount: $77.6 million).
F-68
<PAGE> 69
NEW AERFI TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
19 FOREIGN CURRENCY TRANSACTIONS
The entity's foreign currency transactions are not significant as all
revenues and most costs are denominated in U.S. dollars.
20 RELATED PARTY TRANSACTIONS
GE CAPITAL AVIATION SERVICES LIMITED ("GECAS")
During the three years ended March 31, 2000, March 31, 1999 and March 31,
1998 GECAS acted as lease manager for the two F100 aircraft owned by the entity.
In addition to managing these two F100 aircraft GECAS also manages aircraft
owned by GE Capital and its affiliates and other third parties, including AerFi.
GECAS may from time to time have had conflicts of interest in performing its
obligations to the two F100 aircraft and other entities to which it provides
management, marketing and other services.
GECAS received an annual fee from AerFi as lease manager of the two F100
aircraft -- U.S.$ 221,131 for the year ended March 31, 2000 (March 31, 1999:
U.S.$ 217,681, March 31, 1998: U.S.$ 217,681).
F-69
<PAGE> 70
FINANCIAL STATEMENTS
INDIGO TRANSFERRING AIRCRAFT
F-70
<PAGE> 71
INDIGO TRANSFERRING AIRCRAFT
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF AERCO LIMITED
We have audited the accompanying statements of net assets of the Indigo
transferring aircraft as of December 15, 1999 and December 31, 1998 and the
related statements of operations, cash flows and changes in net assets for the
period from January 1, 1999 to December 15, 1999 and for the year ended December
31, 1998. These financial statements are the responsibility of the directors of
AerCo Limited. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the directors, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Indigo transferring
aircraft at December 15, 1999 and December 31, 1998 and the results of its
operations and cash flows for the period from January 1, 1999 to December 15,
1999 and for the year ended December 31, 1998 in conformity with U.S. generally
accepted accounting principles.
KPMG
Chartered Accountants
Dublin, Ireland
June 14, 2000
F-71
<PAGE> 72
INDIGO TRANSFERRING AIRCRAFT
STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
NOTES DECEMBER 15, 1999 DECEMBER 31, 1998
----- ------------------ ------------------
U.S.$'000 U.S.$'000
<S> <C> <C> <C>
ASSETS
Deferred financing costs............................ 3,540 2,447
CURRENT ASSETS
Cash, restricted.................................... 14,424 6,269
Deposits paid....................................... -- 2,750
Accounts receivable, net............................ 2 2,281 420
------- -------
Total current assets................................ 16,705 9,439
------- -------
FIXED ASSETS
Aircraft............................................ 3 587,631 373,831
------- -------
TOTAL ASSETS........................................ 607,876 385,717
======= =======
LIABILITIES
Accrued expenses and other liabilities.............. 5 29,258 15,169
Indebtedness........................................ 6 496,500 318,878
Security deposits................................... 7 6,553 5,581
Deferred income tax................................. 11 2,580 605
------- -------
TOTAL LIABILITIES................................... 534,891 340,233
NET ASSETS.......................................... 72,985 45,484
======= =======
</TABLE>
The accompanying notes, including the statement of accounting policies on
pages F-76 to F-77, are an integral part of the financial statements.
F-72
<PAGE> 73
INDIGO TRANSFERRING AIRCRAFT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999 TO YEAR ENDED
NOTES DECEMBER 15, 1999 DECEMBER 31, 1998
----- ------------------ -----------------
U.S.$'000 U.S.$'000
<S> <C> <C> <C>
REVENUES
Aircraft leasing..................................... 8 65,602 31,083
EXPENSES
Depreciation......................................... 3 (23,408) (10,615)
Net interest expense................................. 9 (30,277) (15,022)
Other expenses....................................... 10 (4,863) (3,285)
-------- --------
(58,548) (28,922)
-------- --------
NET PROFIT FROM OPERATIONS BEFORE PROVISION FOR
TAXES.............................................. 7,054 2,161
Provision for taxes.................................. 11 (1,975) (605)
-------- --------
NET PROFIT FOR THE PERIOD............................ 5,079 1,556
======== ========
</TABLE>
The accompanying notes, including the statement of accounting policies on
pages F-76 to F-77, are an integral part of the financial statements.
F-73
<PAGE> 74
INDIGO TRANSFERRING AIRCRAFT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999 TO YEAR ENDED
DECEMBER 15, 1999 DECEMBER 31, 1998
-------------------- --------------------
U.S.$'000 U.S.$'000
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit........................................... 5,079 1,556
ADJUSTMENTS TO RECONCILE NET PROFIT TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization........................ 24,506 11,308
Aircraft maintenance, net............................ 10,773 9,653
Deferred income tax.................................. 1,975 605
Changes in operating assets and liabilities
Cash, restricted................................... (8,155) (3,592)
Accounts receivable, net........................... (1,861) (359)
Accrued expenses and other liabilities............. 3,316 3,475
Other assets....................................... 559 (4,540)
Net security deposits received..................... 972 1,944
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 37,164 20,050
--------- ---------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Purchase of aircraft................................. (237,208) (244,448)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Contributions from Indigo............................ 22,422 26,268
Net indebtedness drawndown........................... 177,622 198,130
--------- ---------
NET CASH INFLOW FROM FINANCING ACTIVITIES............ 200,044 224,398
--------- ---------
NET INCREASE IN CASH................................. -- --
CASH AT BEGINNING OF PERIOD.......................... -- --
--------- ---------
CASH AT END OF PERIOD................................ -- --
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION;
Cash paid during period/year for:
Interest........................................... 28,065 13,044
Tax................................................ -- --
--------- ---------
</TABLE>
The accompanying notes, including the statement of accounting policies on
pages F-76 to F-77, are an integral part of the financial statements.
F-74
<PAGE> 75
INDIGO TRANSFERRING AIRCRAFT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
TOTAL
---------
U.S.$'000
<S> <C>
Balance at December 31, 1997................................ 17,660
Net contribution from Indigo................................ 26,268
NET PROFIT FOR THE YEAR..................................... 1,556
------
Balance at December 31, 1998................................ 45,484
Net contribution from Indigo................................ 22,422
NET PROFIT FOR THE PERIOD................................... 5,079
------
Balance at December 15, 1999................................ 72,985
======
</TABLE>
The accompanying notes, including the statement of accounting policies on
pages F-76 to F-77, are an integral part of the financial statements.
F-75
<PAGE> 76
INDIGO TRANSFERRING AIRCRAFT
STATEMENT OF ACCOUNTING POLICIES
INTRODUCTION AND BASIS OF PREPARATION
Under the proposed refinancing transaction AerCo Limited will acquire 30
aircraft and related leases from AerFi. On December 16, 1999 AerFi tendered for
100% of the share capital of Indigo. At that date, 26 of the 30 aircraft which
it is proposed that AerCo will purchase from AerFi were owned by Indigo. The
further details of the transaction and of the basis of preparation of these
financial statements for the entity are set out in note 1.
These financial statements present the statements of operations and the
cash flows for the period from January 1, 1999 to December 15, 1999 and the year
ended December 31, 1998 and the statements of net assets at December 15, 1999
and December 31, 1998 of the 26 aircraft (the "INDIGO TRANSFERRING AIRCRAFT")
proposed to be acquired by AerCo Limited from AerFi pursuant to a securitisation
and refinancing transaction.
The accounting policies followed in the preparation of the accompanying
financial statements conform with generally accepted accounting principles in
the United States.
The 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 the entity and of the aviation industry.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the directors of AerCo 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 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 collectibility of receivables, the
recoverable amounts in respect of aircraft and the related estimated lives of
such assets.
REVENUE RECOGNITION
Revenue from aircraft on operating leases is recognized 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
recognized 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 entity
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 the entity and which are not paid for
by lessees are expensed as incurred.
F-76
<PAGE> 77
INDIGO TRANSFERRING AIRCRAFT
STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED)
TAXATION
Corporation tax is provided based on the results for the year. 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 year 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 Indigo.
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
life is 25 years from date of manufacture respectively.
Indigo adopted FASB Statement No. 121 "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be disposed of " during 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 year when it
was first applied or in previous years.
CASH RESTRICTED
The cash held by the entity is restricted and held in interest bearing
accounts by certain lenders to the entity. These cash balances are held in
respect of the entity's maintenance obligations under certain of its leases and
may be applied on demand to meet these obligations.
DEFERRED FINANCING COSTS
Significant deferred financing costs incurred are deferred and amortised to
interest expense over the life of the related debt using the effective interest
method of amortisation.
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The entity manages its interest rate exposure through the use of interest
rate swaps. Under these swap arrangements the entity will pay fixed interest and
receive floating interest on monthly basis. The objective of the entity's
interest rate risk management policy is to correlate the contracted fixed rental
payments in its portfolio to the floating interest payments on the related debt
facility, taking account of expected amortization on the debt. Net receipts and
payments arising in respect of these swaps are recognized as adjustments to
interest expense on an accruals basis.
The entity 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, the entity 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.
F-77
<PAGE> 78
INDIGO TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS
1 BASIS OF PREPARATION
Under a proposed refinancing and securitization transaction AerCo Limited
will acquire directly or indirectly an additional 30 aircraft and related leases
from AerFi.
On July 17, 2000, it is proposed that AerCo Limited will issue
approximately U.S. $960 million in aggregate principal amount of offered notes
in four subclasses: subclass A-3, subclass A-4, subclass B-2 and subclass C-2.
AerCo Limited will also issue two additional subclasses of notes, the subclass
D-2 notes and the subclass E-2 notes, which will initially be held by AerFi. It
is proposed that AerCo Limited will use substantially all of the proceeds of the
issuance of the offered notes, the subclass D-2 notes and subclass E-2 notes to
refinance all of AerCo's existing subclass A-1 notes and subclass D-1 notes and
to finance the acquisition of 30 aircraft from AerFi.
Due to the uncertainties in relation to the timing of obtaining lessee
consents to the transfer of the 30 aircraft from AerFi to AerCo, AerFi has
structured the acquisition of the additional aircraft as a sale to AerCo of the
capital stock of approximately 18 AerFi wholly owned subsidiaries, that are
expected to occur in a series of transactions following the completion of the
refinancing.
AerFi will pre-position the aircraft to be transferred to AerCo in these
aircraft owning subsidiaries prior to the sale of the companies to AerCo.
These financial statements present, on the bases and assumptions set out
below, the results of operations, assets and liabilities relating to certain of
the aircraft to be transferred to AerCo from AerFi for the period from January
1, 1999 to December 15, 1999 and for the year ended December 31, 1998. 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 Indigo transferring aircraft had been organized as a single economic entity
for the period from January 1, 1999 to December 15, 1999 and the year ended
December 31, 1998.
(ii) For the purposes of these financial statements, an allocation of
certain costs such as selling, general and administrative expenses of Indigo to
the Indigo transferring aircraft has been made. These costs have been allocated
to the Indigo transferring aircraft based on AerFi's estimate of the percentage
of such costs incurred in managing the fleet of aircraft for each period.
Management believes that the basis for these allocations are reasonable.
(iii) During the period from January 1, 1999 to December 15, 1999 and the
year ended December 31, 1998 all of the Indigo transferring aircraft were
financed by debt secured on specific aircraft. The specific debt obligations,
deferred financing costs, related cash flows and interest costs related to
aircraft owned by the entity are reflected in these financial statements.
(iv) Cash generated from or absorbed by the activities of the Indigo
transferring aircraft during each period is reflected as distributions to, or
contributions from, Indigo.
(v) The tax provisions and deferred income tax assets and liabilities of
the Indigo transferring aircraft have been determined as if the aircraft had
been owned by taxable entities separate from Indigo.
F-78
<PAGE> 79
INDIGO TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
2 ACCOUNTS RECEIVABLE, NET
<TABLE>
<CAPTION>
DECEMBER 15, 1999 DECEMBER 31, 1998
----------------- -----------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Trade receivables, net................................... 2,127 420
Prepayments.............................................. 154 --
------- -------
2,281 420
======= =======
</TABLE>
Trade receivables are stated net of a bad debt provision of U.S.$0.3
million (December 31, 1998: U.S.$0.3 million) and comprise amounts in respect of
rent and maintenance payments due from lessees. As at December 15, 1999 and
December 31, 1998 one lessee accounted for 39% and 40% of trade receivables
respectively.
3 AIRCRAFT
<TABLE>
<CAPTION>
DECEMBER 15, 1999 DECEMBER 31, 1998
----------------- -----------------
U.S.$'000 U.S.$'000
<S> <C> <C>
COST
Beginning of period...................................... 389,635 145,187
Additions during the period.............................. 237,208 244,448
------- -------
End of period............................................ 626,843 389,635
======= =======
DEPRECIATION
Beginning of period...................................... (15,804) (5,189)
Charge for the period.................................... (23,408) (10,615)
------- -------
End of period............................................ (39,212) (15,804)
======= =======
NET BOOK VALUE
Beginning of period...................................... 373,831 139,998
======= =======
End of period............................................ 587,631 373,831
======= =======
</TABLE>
4 OPERATING LEASES
All the aircraft are held for operating lease. Rentals on certain of the
leases are variable in accordance with prevailing interest rates.
The following is a schedule of contracted future rentals receivable, by
years, on operating leases as of December 15, 1999. The interest rates
prevailing at December 15, 1999 have been applied in determining rentals that
are variable in accordance with prevailing interest rates.
<TABLE>
<CAPTION>
U.S.$'000
---------
<S> <C>
Year ended December 15, 2000................................ 72,841
Year ended December 15, 2001................................ 69,742
Year ended December 15, 2002................................ 61,445
Year ended December 15, 2003................................ 57,635
Year ended December 15, 2004................................ 39,930
Thereafter.................................................. 93,918
-------
395,511
=======
</TABLE>
F-79
<PAGE> 80
INDIGO TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5 ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 15, 1999 DECEMBER 31, 1998
----------------- -----------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Accrued expenses and other liabilities comprise:
Aircraft maintenance reserves............................ 20,726 9,953
Deferred income.......................................... 4,513 2,774
Interest................................................. 2,189 1,957
Other accruals........................................... 1,830 485
------- -------
29,258 15,169
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 15, 1999 DECEMBER 31, 1998
----------------- -----------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Aircraft maintenance reserves:
Due within one year...................................... 1,987 2,226
Due after one year....................................... 18,739 7,727
------- -------
20,726 9,953
======= =======
</TABLE>
6 INDEBTEDNESS
<TABLE>
<CAPTION>
DECEMBER 15, 1999 DECEMBER 31, 1998
----------------- -----------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Debt obligations......................................... 496,500 318,878
======= =======
</TABLE>
The basis and assumptions under which indebtedness has been reflected in
these financial statements is set out in note 1.
The entity's debt obligations are primarily collateralised by the
underlying aircraft and assignment of the attached leases. At December 15, 1999,
all of the entity's debt outstanding was at fixed interest rates with the
exception of $17.3 million with rates of 30 days Libor plus 1.2% and $127.1
million with rates of commercial paper plus 1.255%. As part of the completion of
the proposed transaction these amounts will be repaid in full.
Repayments of principal during each period on the debt obligations were in
accordance with their respective contractual terms.
The indebtedness repayable analysed by year of repayment is as follows:
<TABLE>
<CAPTION>
U.S.$'000
<S> <C>
Year ending December 15
2000........................................................ 84,055
2001........................................................ 71,767
2002........................................................ 41,045
2003........................................................ 55,343
2004........................................................ 81,554
Thereafter.................................................. 162,736
-------
Total....................................................... 496,500
=======
</TABLE>
7 SECURITY DEPOSITS
Security deposits received from lessees of U.S.$6.553 million (December 31,
1998: U.S.$5.581 million) are held as security for obligations in accordance
with the terms of certain leases.
F-80
<PAGE> 81
INDIGO TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8 REVENUES AND CONCENTRATION OF CREDIT RISK
(A) DISTRIBUTION OF REVENUES BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999 TO YEAR ENDED
DECEMBER 15, 1999 DECEMBER 31, 1998
------------------- -------------------
U.S.$'000 % U.S.$'000 %
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Europe............................................. 42,692 65.07 22,358 71.93
North America...................................... 11,006 16.77 446 1.44
South/Central America.............................. 385 0.58 -- --
Asia/Pacific....................................... 11,519 17.58 8,279 26.63
------ ------ ------ ------
65,602 100.00 31,083 100.00
====== ====== ====== ======
</TABLE>
All revenues are derived from aircraft leasing.
In the period from January 1, 1999 to December 15, 1999, 17%, 15%, 13% and
10% of the entity's lease revenues was derived from the United States, the
United Kingdom, China and Denmark respectively. No other country accounted for
greater than 10% of the entity's lease revenues.
In the year ended December 31, 1998, 22%, 19%, 16%, 10%, 10% and 10% of the
entity's lease revenues was derived from Denmark, Norway, China, Finland, South
Korea 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.
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 December 15, 1999, two lessees each accounted for 10% of the entity's
lease revenues. No other lessee accounted for greater than 10% of the entity's
lease revenues in the period from January 1, 1999 to December 15, 1999.
As at December 31, 1998, six lessees accounted for 22%, 19%, 12%, 10%, 10%
and 10% of the entity's lease revenues. No other lessee accounted for greater
than 10% of the entity's lease revenues for the year ended December 31, 1998.
9 NET INTEREST EXPENSE
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999 TO YEAR ENDED
DECEMBER 15, 1999 DECEMBER 31, 1998
-------------------- --------------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Interest payable on finance lease obligations........ 29,722 14,579
Amortization of debt issue costs..................... 1,098 693
Net interest income on cash deposits................. (543) (250)
------- -------
30,277 15,022
======= =======
</TABLE>
F-81
<PAGE> 82
INDIGO TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
10 OTHER EXPENSES
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999 TO YEAR ENDED
DECEMBER 15, 1999 DECEMBER 31, 1998
-------------------- --------------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Remuneration costs................................... 2,420 1,583
Aircraft leasing costs............................... 250 99
Insurance costs...................................... 227 133
Administration fees.................................. 1,084 819
Travel costs......................................... 668 547
Audit and tax fees................................... 214 104
------- -------
4,863 3,285
======= =======
</TABLE>
11 PROVISION FOR TAXES
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999 TO YEAR ENDED
DECEMBER 15, 1999 DECEMBER 31, 1998
-------------------- --------------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Tax provision of the Indigo transferring aircraft
consists of the following:
Deferred income tax provision........................ 1,975 605
======= =======
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999 TO YEAR ENDED
DECEMBER 15, 1999 DECEMBER 31, 1998
-------------------- --------------------
U.S.$'000 U.S.$'000
<S> <C> <C>
Deferred tax assets and liabilities of the Indigo
transferring aircraft:
Deferred tax liability relating to aircraft.......... 2,580 605
======= =======
</TABLE>
The entity's income from approved activities in Sweden is taxable at a rate
of 28%.
12 STAFF COSTS AND NUMBERS
The entity has no employees.
13 SUMMARY OF DIFFERENCES BETWEEN UNITED STATES AND UNITED KINGDOM GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
The financial statements are prepared in accordance with generally accepted
accounting principles applicable in the United States ("U.S. GAAP") which differ
significantly in certain respects from those generally accepted in the United
Kingdom ("U.K. GAAP").
Under U.K. GAAP deferred financing costs of $3.54 million and $2.447
million at December 15, 1999 and December 31, 1998 would be netted against
indebtedness on the balance sheet rather than disclosed separately on the
balance sheet.
For U.S. GAAP purposes, cash, restricted does not meet the definition of
cash equivalents and therefore is not classified as cash in the cash flow
statement. Under U.K. GAAP cash, restricted would meet the definition of cash
equivalents.
F-82
<PAGE> 83
INDIGO TRANSFERRING AIRCRAFT
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
13 SUMMARY OF DIFFERENCES BETWEEN UNITED STATES AND UNITED KINGDOM GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Other than the above, there were no significant differences between U.S.
GAAP and U.K. GAAP arising in respect of the Indigo transferring aircraft in the
period from January 1, 1999 to December 15, 1999 and the year ended December 31,
1998.
14 FAIR VALUE OF FINANCIAL INSTRUMENTS
RECEIVABLES, PAYABLES AND CASH, RESTRICTED
The fair value of the entity's receivables, payables and cash, restricted
at December 15, 1999 are approximately the amounts at which these items are
reflected in the entity's statement of net assets due to the relatively
short-term nature of the instruments and the frequency at which they reprice.
INDEBTEDNESS
The fair value of the entity's indebtedness at December 15, 1999 was $496
million.
DERIVATIVES
The fair value of the entity's derivatives at December 15, 1999 was $0.5
million (notional amount: $79.2 million).
15 FOREIGN CURRENCY TRANSACTIONS
The entity's foreign currency transactions are not significant as all
revenues and most costs are denominated in U.S. dollars.
F-83
