1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1999. REGISTRATION STATEMENT NO. 333-66973 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ Amendment No. 5 to FORM F-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ AERCO LIMITED (Exact name of Registrant as specified in its charter) JERSEY, CHANNEL ISLANDS (Jurisdiction of organization) 7359 (Primary Standard Industrial Classification Code Number) N/A (I.R.S. Employer Identification Number) AERCO LIMITED 22 GRENVILLE STREET ST. HELIER JERSEY, JE4 8PX CHANNEL ISLANDS ATTENTION: COMPANY SECRETARY (01144 1534) 609 000 (Address and telephone number of Registrant's principal executive offices) ------------------------------------ CORPORATION SERVICE COMPANY 375 HUDSON STREET NEW YORK, NY 10014-3666 (212) 463-2700 (Name, address and telephone number of agent for service) Copy to: THOMAS J. REID, ESQ. DAVIS POLK & WARDWELL 1 FREDERICK'S PLACE LONDON EC2R 8AB ENGLAND Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. ------------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PROSPECTUS (SUBJECT TO COMPLETION) ISSUED APRIL -- , 1999 $800,000,000 INITIAL PRINCIPAL AMOUNT OFFER TO EXCHANGE NOTES DUE JULY 15, 2023 FOR ANY AND ALL OUTSTANDING NOTES DUE JULY 15, 2023 OF AERCO LIMITED THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1999, UNLESS EXTENDED. ------------------------ AerCo Limited is offering to exchange four subclasses of new notes for each subclass of the issued and outstanding notes of AerCo Limited. The terms of the new notes are identical to the old notes except that the new notes will be registered under the Securities Act of 1933, as amended. ------------------------ THE OLD NOTES WERE LISTED ON THE LUXEMBOURG STOCK EXCHANGE ON JULY 15, 1998. THE NEW NOTES WILL BE LISTED ON THE LUXEMBOURG STOCK EXCHANGE WHEN THEY ARE ISSUED. ------------------------ INVESTING IN THE NEW NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 14. ------------------------ THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ April -- , 1999 3 TABLE OF CONTENTS PAGE ---- Summary................................ 3 Summary Consolidated Financial Data.... 11 Risk Factors........................... 14 The Exchange Offer..................... 23 The Parties............................ 29 The Refinancing of ALPS 94-1 and Acquisition of the AerFi Transferred Companies............................ 31 The Aircraft, Related Leases and Collateral........................... 34 Management of AerCo Group.............. 51 Selected Consolidated Financial Data... 60 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 64 Unaudited Pro-Forma Combined Financial Information.......................... 75 Description of the Notes............... 83 Reports to Noteholders................. 132 Available Information.................. 134 Book-Entry Registration, Global Clearance and Settlement............. 136 PAGE ---- Tax Considerations..................... 141 ERISA Considerations................... 147 Plan of Distribution................... 147 Legal Matters.......................... 148 Experts................................ 148 Index to Consolidated Financial Statements........................... F-1 Independent Auditors' Report........... F-2 Appendix 1. Index of Defined Terms..... A-1 Appendix 2. Aircraft Types Data........ A-2 Appendix 3. Monthly Gross Revenues Based on the Assumptions... A-3 Appendix 4. Assumed Portfolio Values for the Initial Portfolio.................. A-5 Appendix 5. Class A Class Percentages.......................... A-7 Appendix 6. Class B Class Percentages.......................... A-10 Appendix 7. Class C Target Principal Balances................... A-13 Appendix 8. Class D Target Principal Balances................... A-16 Appendix 9. Pool Factors............... A-19 Appendix 10. Extended Pool Factors..... A-22 2 4 SUMMARY You should read the following summary together with the more detailed information regarding our company and the notes and the financial statements (including the notes to the financial statements) appearing elsewhere in this prospectus. THE EXCHANGE OFFER On July 15, 1998, we issued $800 million in aggregate principal amount of the old notes in four subclasses: subclass A-1, subclass A-2, subclass B-1 and subclass C-1. Because we originally issued the old notes under an exemption from registration under the Securities Act, the old notes contain transfer restrictions. We are now offering to exchange the new notes for the old notes. The new notes will not contain these transfer restrictions and may be transferred as we describe under "-- Consequences of Exchanging the Old Notes in the Exchange Offer". Otherwise, the terms of the new notes and old notes are identical, except for registration rights and special interest provisions relating to the old notes. The exchange offer will expire at 5:00 p.m., New York City time, on , 1999, unless we extend it. At any time before the expiration date, you may withdraw any old notes that you have tendered in the exchange offer. If we or the exchange agent do not accept any old notes that you have tendered, we or the exchange agent will return the old notes to you without expense as soon as is practicable after the exchange offer has expired or has been terminated. Neither you nor our company will recognize any income, gain or loss for U.S. federal income tax purposes because you exchange your old notes. You should refer to "The Exchange Offer" below for more details about the procedures for tendering the old notes and the other terms of the exchange offer. CONSEQUENCES OF EXCHANGING OLD NOTES IN THE EXCHANGE OFFER Based upon interpretations contained in letters issued to third parties by the staff of the Commission, we believe that any holder of old notes, other than a broker-dealer or any holder who is an affiliate of AerCo within the meaning of Rule 405 under the Securities Act who exchanges its old notes for new notes in the exchange offer may offer such new notes for resale, may resell such new notes, or transfer such new notes without compliance with the registration and prospectus delivery provisions of the Securities Act if: - the holder acquires the new notes in the ordinary course of the holder's business; and - the holder has no arrangement or understanding with any person to participate in the distribution of the new notes. If you wish to accept the exchange offer, you must represent to us in the letter of transmittal that the two conditions described above have been met. If you wish to accept the exchange offer, you must also make the following representations: - If you are not a broker-dealer, you must represent that you are not participating in the distribution of the new notes and that you do not intend to participate in the distribution. - If you are a broker-dealer who will not receive new notes for your own account, you must represent that neither you nor any person for whom you receive the new notes is participating in the distribution and that neither you nor any such person intends to participate in the distribution. - If you are a broker-dealer who will receive new notes for your own account, you must represent that you acquired the old notes tendered by you in your market-making or other trading activities. You must also acknowledge that you will deliver a prospectus if you resell the new notes. By making this acknowledgement and delivering a prospectus, you will not be deemed to admit that you are an underwriter within the meaning of the Securities Act. 3 5 To comply with the securities laws of certain states or other jurisdictions, it may be necessary to qualify for sale or register the new notes prior to offering or selling such new notes. We have agreed to register or qualify the new notes held by broker-dealers for offer or sale under the securities or blue sky laws of such jurisdictions as any holder of the old notes reasonably requests in writing. Unless a holder requests registration or qualification, we do not intend to take any action to register or qualify the new notes for resale in any such jurisdictions. If you do not exchange your old notes for new notes in the exchange offer, your old notes will continue to be subject to the restrictions on transfer contained in the legend on the old notes. Please refer to "Risk Factors -- Consequences of Failure to Exchange" for a description of these restrictions. SUMMARY DESCRIPTION OF THE NOTES The following table sets forth summary information regarding the notes. SUBCLASS A-1 SUBCLASS A-2 SUBCLASS B-1 SUBCLASS C-1 NOTES NOTES NOTES NOTES ------------- ----------------- ------------- ------------- Aggregate Initial Principal Amount... $ 340,000,000 $ 290,000,000 $ 85,000,000 $ 85,000,000 Ratings: DCR................ AA AA A BBB Moody's............ Aa2 Aa2 A2 -- Standard & Poor's.. AA AA A BBB Interest Rate........ LIBOR + 0.19% LIBOR + 0.32% LIBOR + 0.60% LIBOR + 1.35% Expected Average Life (Years)............ 2.0 3.8 7.7 10.5 Expected Final Payment Date....... July 15, 2000 December 15, 2005 July 15, 2013 July 15, 2013 Final Maturity Date............... July 15, 2023 July 15, 2023 July 15, 2023 July 15, 2023 You should not view the ratings on the notes as a recommendation to buy, sell or hold the notes. The ratings only addresses the likelihood of whether we will make timely payment of interest on the notes, as well as the ultimate payment of principal and any premium. You should also note that the rating agencies have not rated our ability to pay the full principal amount of any subclass of notes on the expected final payment date for that subclass or any additional interest that we may have to pay under the indenture if the full principal amount is not repaid at that time. We have summarized the terms of the notes below. Payment Dates.............. We must pay interest monthly in arrears on the fifteenth day of each month. If the fifteenth day of a month is not a business day, the relevant payment date will be the next day which is a business day. By business day, we mean a day on which a bank may deal in U.S. dollar deposits on the London inter-bank market and commercial banks and foreign exchange markets are open in New York and London. Calculation of Interest.... For the purpose of calculating the interest rate payable on the notes, Bankers Trust Company as reference agent will determine LIBOR for the relevant monthly period two business days before the payment date on which the monthly period begins. The cash manager will calculate accrued interest on outstanding principal balances and other amounts on which we must pay interest as of the fourth business day before the monthly period begins. 4 6 Accrued and Unpaid Interest................... Any accrued interest that, as a result of the allocation of our available cash collections, we do not pay on any payment date will bear interest at the then current interest rate. Sources of Note Payments... Our only sources of payment for the notes and our other obligations will be: - the payments made by the lessees under the leases - proceeds from any sales of our assets - net payments to us under our swap agreements and other hedging instruments - interest earned on investments of our cash balances and - net cash proceeds received from the sale of refinancing notes. We will make payments on the notes only to the extent of our available cash on each payment date remaining after paying expenses and satisfying other requirements which are described under "Description of the Notes -- Payment of Principal and Interest -- Priority of Payments". Security for Our Obligations................ Neither the trustee nor the holders have any security interest, mortgage, charge or other similar interest in any of the aircraft. As security for our obligations under the notes and to the servicer, the cash manager and the administrative agent, Bankers Trust Company as security trustee has acquired a security interest in: - the capital stock of our subsidiaries - our interest in the leases - our intercompany loans to our subsidiaries - our cash balances - our investments made with cash balances. Principal Payments......... We have determined the expected principal payments on the notes based on assumptions regarding: - the timing and amount of payments under our current leases and leases we may enter into in the future - the terms of future leases - our ability to refinance the subclass A-1 notes. It is unlikely that actual experience in the future will correspond to these assumptions, therefore the timing and amount of our principal payments on each subclass of notes will likely vary from the expected principal payments. Refinancing of the Notes... We will have the ability to refinance any subclass of the notes by issuing refinancing notes. Such refinancing notes will rank equally with the subclasses of refinanced notes and will never rank higher in priority than the class A notes. Redemption................. We may redeem any subclass of notes, in whole or in part, on any payment date. The redemption price for a subclass may include a premium over the outstanding principal balance of the subclass. Whether 5 7 we must pay a premium will depend on how we obtain the funds we use to pay the redemption price. The amount of any premium will also depend on when the redemption occurs. We describe how the redemption price is determined under "Description of the Notes -- Payment of Principal and Interest -- Redemption". If we redeem any subclass in part, we will apply the redemption price to that subclass pro rata. We may also redeem each subclass of notes on any payment date, in whole but not in part, if adverse tax events affecting AerCo occur. In that case, the redemption price will equal the outstanding principal balance of the subclass being redeemed, plus accrued and unpaid interest. Operating Covenants........ We may not enter into any future lease unless, it is in compliance with geographic and other concentration limits. This restriction does not apply to renewals, extensions or restructurings of existing leases. We may enter into a future lease not meeting these requirements if the rating agencies have confirmed that such lease will not result in the lowering or withdrawal of their current ratings on any subclass of notes then outstanding. Withholding Tax............ We have no obligation to make any additional payments on the notes for any withholding or deduction from payments on the notes that must be made under applicable law. If we are required to make any withholding or deduction on the notes and we do not redeem the notes, we will reduce the net amount of interest paid on the notes by the amount of such withholding or deduction. Also, none of our subsidiaries has any obligation under any intercompany loans to make any additional payments for any withholding or deduction that they must make from payments on the intercompany loans under applicable law. Additional Aircraft........ We intend to acquire additional aircraft and any related leases. Additional aircraft may include aircraft, engines and companies with an ownership or leasehold interest in aircraft or engines. We have the option to appoint Babcock & Brown as servicer of additional aircraft on the same terms that apply to our current fleet of aircraft, however additional aircraft may have a different servicer. Cash flows from any additional aircraft will be available to pay our obligations, including the notes and any additional notes. There is no limit on the value of the additional aircraft that we may acquire. Additional Notes........... We will finance the acquisition of additional aircraft by issuing additional notes in up to five classes, A through E. Each class of additional notes will rank equally in right of payment of principal and interest with the same class of notes then outstanding. We may acquire additional aircraft and issue additional notes only if we meet various conditions in the indenture. The main condition is that we receive confirmation from Duff & Phelps Credit Rating Co., Moody's Investors Service, Inc., and Standard & Poor's Ratings Group, Inc., that the acquisition will not result in the lowering or withdrawal of their then current rating of any subclass of notes. 6 8 OVERVIEW OF PRIORITY OF PAYMENTS The following chart summarizes the order of priority of payments on the Notes, the Beneficial Interest and other obligations of MSAF Group as described in more detail in "Description of the Notes -- Priority of Payments". Collections Required Expense Amount (1) Class A Interest and Swap Payments (2) First Collection Account Top-up (3) Class A Minimum Principal (4) Class B Interest (5) Class B Minimum Principal (6) Class C Interest (7) Class C Minimum Principal (8) Class D Interest (9) Class D Minimum Principal (10) Second Collection Account Top-up (11) Class A Scheduled Principal (12) Class B Scheduled Principal (13) Class C Scheduled Principal (14) Class D Scheduled Principal (15) Modification Payments (16) Step-up Interest (17) Class A Supplemental Principal (18) Class E Primary Interest (19) Class B Supplemental Principal (20) Class A Outstanding Principal (21) Class B Outstanding Principal (22) Class C Outstanding Principal (23) Class D Outstanding Principal (24) Subordinated Swap Payments (25) Subordinated Tax-Related Disposition Payments (26) Class E Accrued and Unpaid Interest (27) Class E Outstanding Principal (28) Charitable Trust (29) 7 9 THE INITIAL AIRCRAFT AND LESSEES The following pie charts summarize MSAF Group's exposure as of August 31, 1998 to various types of Initial Aircraft, Lessees, ages of Initial Aircraft, noise restrictions applying to Initial Aircraft and the regions and countries in which Lessees are based. All percentages have been calculated by reference to the Initial Appraised Value (as of September 30, 1997) of the Initial Aircraft. EXPOSURE TO TYPE OF AIRCRAFT B737-500........................... 2.21% B747-200B.......................... 3.57% B757-200........................... 13.93% B737-400........................... 19.65% B767-300ER......................... 13.42% DC8-71F............................ 3.45% B737-300........................... 12.68% F100............................... 6.49% A300-B4-200........................ 1.30% MD83............................... 7.06% A320-200........................... 16.23% Total Number of Aircraft: 34 Narrowbody Aircraft: 30 (81.70%) Widebody Aircraft: 4 (18.30%) EXPOSURE TO REGION IN WHICH LESSEES ARE BASED North America...................... 8.57% Emerging Europe.................... 13.65% Others............................. 2.21% Latin America...................... 17.90% Emerging Asia...................... 21.79% Developed Europe................... 35.96% EXPOSURE OF AIRCRAFT TO NOISE RESTRICTIONS Stage 3 Aircraft................... 100% EXPOSURE TO YEAR OF AIRCRAFT MANUFACTURE (OR SUBSEQUENT FREIGHTER CONVERSION) 1991............................... 30.45% 1990............................... 8.04% 1989............................... 9.54% 1988............................... 2.58% 1983............................... 1.30% 1981............................... 3.57% 1992............................... 33.04% 1993............................... 11.48% Weighted average age from manufacture is approximately 7.9 years. EXPOSURE TO INDIVIDUAL LESSEES Canadian........................... 3.45% Monarch............................ 3.57% Avianca............................ 4.58% China Southwest.................... 4.65% Air 2000........................... 4.71% PAL................................ 4.78% TAM................................ 4.88% THY................................ 5.73% Asiana............................. 5.92% Lan Chile.......................... 6.68% Airtours........................... 6.68% Spanair............................ 11.35% Others............................. 29.70% Tower Air.......................... 3.33% Total Number of Lessees: 26 EXPOSURE TO COUNTRIES IN WHICH LESSEES ARE BASED United Kingdom..................... 17.43% United States...................... 5.25% France............................. 2.77% Chile.............................. 8.45% Spain.............................. 11.35% China.............................. 7.34% Philippines........................ 4.78% South Korea........................ 5.92% Turkey............................. 10.96% Colombia........................... 4.58% Canada............................. 3.33% Ireland............................ 2.80% Hungary............................ 2.61% Brazil............................. 4.88% Others............................. 7.58% Total Number of Countries: 18 8 10 OWNERSHIP STRUCTURE AerFi 100% Ownership of Class D and Class E Notes 5% Ownership of Ordinary Shares Charitable Trust 95% Ownership of Ordinary Shares AerCo 1 Aircraft 100% Equity Interest in ALPS 94-1 100% Equity Interest in AerCo Ireland 100% Equity Interest in AerCo Ireland II 100% Equity Interest in AerCo USA ALPS 94-1 and Subsidiaries AerCo Ireland and Subsidiaries AerCo Ireland II and Subsidiaries AerCo USA and Subsidiaries Aircraft Owning Company V and Subsidiaries Aircraft Owning Company VI and Subsidiaries Aircraft Ownership Aircraft Ownership Aircraft Ownership Aircraft Ownership Aircraft Ownership Aircraft Ownership 23 Aircraft 7 Aircraft 1 Aircraft 2 Aircraft Additional Aircraft Additional Aircraft We may establish or acquire additional subsidiaries for the purpose of acquiring additional aircraft. We may also establish additional subsidiaries for the purpose of leasing aircraft from other AerCo subsidiaries and sub-leasing them to operators when there are business or other reasons to do so. AerFi may dispose of all or a portion of its class D and class E notes. 9 11 PAYMENT FLOWS Noteholders Payments of Interest and Principal on Notes Charitable Trust Jersey Payment of annual fee Payment of Interest and Principal on Subclass D-1 and Subclass E-1 Notes AerFi Group AerCo (Jersey) 1 Aircraft Payment on intercompany loans ALPS 94-1 (Jersey) Lease Payments 23 Aircraft AerCo Ireland (Ireland) Lease Payments 7 Aircraft AerCo Ireland II (Ireland) Lease Payments 1 Aircraft AerCo USA (Delaware) Lease Payments 2 Aircraft This chart assumes that we do not acquire any additional aircraft. 10 12 SUMMARY CONSOLIDATED FINANCIAL DATA FINANCIAL INFORMATION PRESENTED IN THIS PROSPECTUS AerCo was formed on June 4, 1998 and did not conduct any business operations until it acquired its aircraft portfolio and issued the old notes on July 15, 1998. We have included historical financial information for AerCo elsewhere in this prospectus. We have extracted or derived the summary consolidated financial data set forth below from the audited consolidated financial statements of ALPS 94-1, the predecessor business of AerCo, for each of the fiscal years ended June 30, 1995 (as restated), 1996 (as restated), 1997 (as restated) and 1998. Arthur Andersen, independent chartered accountants, audited the financial statements for 1995 (as restated), 1996 (as restated) and 1997 (as restated). KPMG, independent chartered accountants, audited the financial statements for 1998. We have included the audited consolidated financial statements of ALPS 94-1 for 1996 (as restated), 1997 (as restated) and 1998 elsewhere in this prospectus. The summary consolidated financial data include the results of operations and financial position relating to 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 prior to the closing of the offering of the old notes and was not among the initial aircraft of AerCo. - the A300-B4-200 aircraft up to April 28, 1998. AerFi acquired this aircraft from ALPS 94-1 on that date. AerFi subsequently sold this aircraft to AerCo at the time the old notes were issued. We believe that the ALPS 94-1 summary consolidated financial data set forth below is an appropriate presentation because: - AerCo was formed mainly for the purpose of refinancing the aircraft portfolio of ALPS 94-1. - Our initial portfolio included 26 of the 27 aircraft that ALPS 94-1 originally acquired from AerFi. - The original ALPS 94-1 aircraft represented 79% of our initial portfolio by appraised value as at March 1, 1998. - Our ongoing aircraft leasing activities are largely the same as those conducted by ALPS 94-1. Such data is not indicative of, and will not be comparable with, the consolidated financial results of AerCo group, which consists of AerCo and its subsidiaries, during periods since July 15, 1998. We have included financial statements for the 10 aircraft which AerCo acquired from AerFi (including the A300-B4-200 aircraft referred to above, the "AerFi transferred aircraft") for the years ended June 30, 1997 and 1998 elsewhere in this prospectus. These financial statements include information on the A300-B4-200 aircraft only from April 28, 1998, the date AerFi acquired it. Arthur Andersen, independent chartered accountants, audited the financial statements for 1997. KPMG, independent chartered accountants, audited the financial statements for 1998. We have presented these financial statements on the basis that the AerFi transferred aircraft were operated separately from AerFi for the years presented. You should note that the companies owning the AerFi transferred aircraft did not conduct any independent business operations in the periods presented. We have also included in this prospectus unaudited pro forma combined financial information for AerCo group for the year ended June 30, 1998. Such pro forma combined financial information gives effect, among other things, to the issuance by AerCo of the Notes, the refinancing of ALPS 94-1, the sale of the Boeing 767-300ER and other transactions described in "Unaudited Pro Forma Combined Financial Information". ALPS 94-1 We have extracted or derived ALPS 94-1 summary consolidated financial data set out below from the ALPS 94-1 consolidated financial statements. ALPS 94-1 did not conduct any business operations prior to its acquisition of the original ALPS 94-1 aircraft from AerFi in 1994. Accordingly, the financial data for the fiscal year ended June 30, 1995 only includes trading data for the period from August 24, 1994 to June 30, 1995. These financial statements have been prepared in accordance with generally accepted accounting 11 13 principles in the United Kingdom, which differ in certain significant respects from generally accepted accounting principles in the United States. For a discussion of the principal differences and a reconciliation from U.K. GAAP to U.S. GAAP of shareholders' equity and net income or loss at and for the fiscal years ended June 30, 1996 (as restated), 1997 (as restated) and 1998, see Notes 22 (as restated), 23 (as restated), 24 (as restated) and 25 to the ALPS 94-1 audited consolidated financial statements. ALPS 94-1 CONSOLIDATED STATEMENT OF OPERATIONS DATA YEAR ENDED JUNE 30 ------------------------------------------------------- 1995 1996 1997 1998 ------------- ------------- ------------- ------- (AS RESTATED) (AS RESTATED) (AS RESTATED) ($ THOUSANDS) U.K. GAAP Revenues Aircraft leasing................................ 88,050 102,460 101,434 100,682 Expenses Depreciation.................................... (18,158) (17,978) (38,062) (37,826) Additional depreciation......................... -- -- (34,385) -- Provision for permanent diminution in aircraft value........................................ -- (12,000) -- (8,720) Net interest expense............................ (64,206) (73,576) (71,037) (69,785) Other expenses.................................. (3,702) (5,581) (5,053) (6,599) Exceptional item -- termination fee.......... -- -- -- (12,700) Operating profit/(loss)........................... 1,984 (6,675) (47,103) (34,948) Profit on sale of aircraft...................... -- -- -- 2,426 Reduction in indebtedness......................... -- -- 5,258 -- Profit/(loss) before taxes........................ 1,984 (6,675) (41,845) (32,522) Taxes............................................. (69) (200) 143 (33) Dividends......................................... (2) -- -- Net income/(loss)................................. 1,913 (6,875) (41,702) (32,555) U.S. GAAP Depreciation...................................... (16,442) (32,338) (32,339) (32,053) Provision for permanent diminution in aircraft value........................................... -- (12,000) -- (520) Reduction in indebtedness......................... -- -- 5,258 -- Net loss.......................................... (13,603) (21,590) (1,594) (20,808) ALPS 94-1 CONSOLIDATED BALANCE SHEET DATA JUNE 30 -------------------------------------------------------- 1995 1996 1997 1998 ------------- ------------- ------------- -------- (AS RESTATED) (AS RESTATED) (AS RESTATED) ($ THOUSANDS) U.K. GAAP Aircraft, net of accumulated depreciation and provision for permanent diminution in aircraft value.......................................... 957,021 927,043 854,596 800,090 Total assets..................................... 1,039,938 1,021,356 950,031 890,873 Indebtedness................................... (976,494) (953,376) (919,157) (877,128) Provision for maintenance...................... (29,405) (39,544) (46,247) (44,309) Total liabilities................................ (1,038,025) (1,026,318) (996,695) (970,092) Shareholders' equity/(deficit)................... 1,913 (4,962) (46,664) (79,219) U.S. GAAP Aircraft, net of accumulated depreciation and provision for permanent diminution in aircraft value.......................................... 811,149 766,811 734,472 691,713 Indebtedness..................................... (976,494) (953,376) (919,157) (877,128) Shareholders' deficit............................ (161,191) (182,781) (184,375) (205,183) 12 14 ALPS 94-1 CONSOLIDATED STATEMENT OF CASH FLOWS AND OTHER DATA YEAR ENDED JUNE 30 ------------------------------------------------------- 1995 1996 1997 1998 ------------- ------------- ------------- ------- (AS RESTATED) (AS RESTATED) (AS RESTATED) ($ THOUSANDS) U.K. GAAP Cash paid in respect of interest.............. (51,147) (64,002) (59,872) (54,815) Net cash provided by operating activities (after payment of interest)................. 66,526 45,532 45,119 45,721 Net cash (used in)/provided by investing activities.................................. (953,859) -- -- 10,386 Net cash provided by/(used in) financing activities.................................. 967,496 (36,025) (43,494) (59,108) Net movements in cash......................... 80,163 (25,803) (2,886) 134 SELECTED RATIOS YEAR ENDED JUNE 30 ----------------------------------------------------- 1995 1996 1997 1998 ------------- ------------- ------------- ----- (AS RESTATED) (AS RESTATED) (AS RESTATED) ($ THOUSANDS) U.K. GAAP Ratio of Earnings to Fixed Charges.............. 1.031 0.909 0.411 0.534 U.S. GAAP Ratio of Earnings to Fixed Charges.............. 0.789 0.709 0.976 0.702 - --------------- In relation to "Ratios of Earnings to Fixed Charges" under both U.K. GAAP and U.S. GAAP, you should note the following: -- Earnings include pretax income from continuing operations plus fixed charges. Fixed charges are the total of (1) interest, whether expensed or capitalized, (2) amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized and (3) such portion of rental expense as can be demonstrated to be representative of the interest factor in the particular case. -- A ratio of less than one indicates that earnings are inadequate to cover fixed charges. The amount by which fixed charges exceeded earnings (1) for the years ended June 30, 1996 (as restated), 1997 (as restated) and 1998 under U.K. GAAP was $6.68 million, $41.85 million and $32.52 million, and (2) for the years ended June 30, 1995 (as restated), 1996 (as restated), 1997 (as restated) and 1998 under U.S. GAAP was $13.53 million, $21.39 million, $1.74 million and $20.78 million. For a discussion of the differences between ALPS 94-1's results of operations and financial position under U.S. GAAP compared with U.K. GAAP, see Notes 22 (as restated), 23 (as restated), 24 (as restated) and 25 to the ALPS 94-1 audited consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Year Ended June 30, 1997 Compared With Year Ended June 30, 1996 -- Differences between U.K. GAAP and U.S. GAAP". 13 15 RISK FACTORS You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. If any of the following risks actually occur, we may not be able to make the required payments on the notes. THERE IS NO SECURITY INTEREST IN THE AIRCRAFT -- YOU CANNOT SELL THE AIRCRAFT TO REPAY THE NOTES IF WE DO NOT MEET OUR OBLIGATIONS UNDER THE NOTES. Neither the trustee, the security trustee nor any noteholder has any security interest, mortgage, charge or other similar interest in any aircraft. If there is an event of default, they will not be able to sell the aircraft to repay the notes or exercise similar remedies which they would have if they had a security interest in the aircraft. OUR SUBSIDIARIES MAY HAVE CONTINGENT LIABILITIES THAT ARE UNKNOWN TO US -- IF WE HAVE TO PAY SUCH LIABILITIES, WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES. There is a risk that our subsidiaries could have material contingent liabilities that are unknown to us. For example, our subsidiaries could have incurred liabilities to third parties from operating and leasing the aircraft before we acquired them. When we acquired the ALPS 94-1 capital stock, we obtained no representations, warranties or indemnities from the seller. AerFi Group indemnified us for breaches of their representations and warranties relating to the aircraft-owning companies and aircraft which they sold to us. These representations and warranties survive until July 15, 2001. Our potential recovery under them is limited to approximately $185 million. If such a contingent liability becomes known and we are called on to pay it, we may be unable to recover the amount of the liability from AerFi Group, the former shareholders of ALPS 94-1 or any other person. If we have to pay any such liability, we may be unable to make the required payments on the notes. WE RELY ON THIRD PARTIES TO MANAGE OUR BUSINESS -- OUR OPERATIONS MAY SUFFER AND WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES IF OUR SERVICE PROVIDERS DO NOT PERFORM THEIR OBLIGATIONS TO US OR IF WE HAVE TO REPLACE THEM. We have no executive management resources of our own. We therefore rely on several service providers for the leasing and re-leasing of the aircraft and all other executive and administrative responsibilities. If these service providers do not perform their contractual obligations to us, our operations may suffer and we may not be able to repay the notes. We can give no assurance that we will continue our arrangements with these service providers or that the service providers will continue their relationship with us until the notes are paid in full. If a service provider resigns or we terminate its appointment, we may be unable to find suitable replacement service providers that we can engage on suitable terms. Additionally, our appointment of replacement service providers may cause a lowering or withdrawal of the ratings on the notes. You should refer to "Management of AerCo Group -- The Servicer"; and "Management of AerCo Group - -- Corporate Management" for detailed information on the responsibilities delegated to service providers. The servicing agreement with Babcock & Brown, unless extended, expires in 2008, which is five years before the expected final payment date of the last notes to be repaid. If we cannot extend the existing servicing agreement or find a replacement servicer, we may be unable to re-lease or sell aircraft. As a result, we may be unable to make payments on the notes. BABCOCK & BROWN WILL HAVE CONFLICTS OF INTEREST FROM ITS OTHER BUSINESS ACTIVITIES -- WE MAY BE UNABLE TO RE-LEASE OR SELL AIRCRAFT IF IT CANNOT RESOLVE THESE CONFLICTS. Babcock & Brown manages a large aircraft portfolio for others, including its own affiliates, and it may face conflicts of interest in managing and marketing our aircraft for re-lease or sale. The aircraft it manages for others may compete with our aircraft when they are being marketed for re-lease or sale. Babcock & Brown 14 16 also arranges aircraft financings and lease transactions and advises many airlines. Some of these airlines are our lessees and potential lessees. If Babcock & Brown cannot resolve a conflict of interest, the conflict could have an adverse effect on our ability to manage, re-lease or sell the aircraft. In that case, we may be unable to make the required payments on the notes. For a description of Babcock & Brown's aircraft management and advisory business, you should refer to "Management of AerCo Group -- The Servicer". THE SERVICING AGREEMENT LIMITS BABCOCK & BROWN'S LIABILITY TO US -- WE MAY BE UNABLE TO RECOVER FROM BABCOCK & BROWN THE AMOUNT OF ANY LOSSES THEY CAUSE US. Our servicing agreement with Babcock & Brown contains limitations on its liability for losses caused by its services. There is a risk that we may be unable to recover from Babcock & Brown the amount of any losses they cause in performing the services. Additionally, Babcock & Brown will not be liable to you for any losses caused by its services. We describe the liability and other provisions of the servicing agreement under "Management of AerCo Group -- The Servicer". THE COMMERCIAL AIRCRAFT MARKET IS CYCLICAL -- DECREASED DEMAND OR EXCESS SUPPLY OF AIRCRAFT MAY DECREASE OUR CASH FLOWS. The market for commercial jet aircraft is very cyclical and can produce sharp increases and decreases in aircraft values and lease rates. The aircraft leasing market is currently near a peak but may decline in the near future. Decreases in aircraft values or lease rates may cause a decrease in our cash flows. Depending on market conditions, we may be unable to sell or re-lease aircraft on terms that allow us to make payments on the notes. Aircraft values and lease rates depend on various factors that are outside our control, including: - general economic conditions affecting lessee operations; - used aircraft supply; - interest rates and credit availability; - fuel and other operating costs; - manufacturer production levels and prices for new aircraft; - passenger demand; - retirement and obsolescence of aircraft models; - manufacturers merging or leaving the aircraft industry; - re-introduction into service of aircraft previously in storage; - governmental regulations; and - lack of capacity in the air traffic control system. In addition to values for aircraft generally, the value of specific aircraft may increase or decrease sharply depending on factors that are not within our control, including: - maintenance and operating history of the aircraft; - number of operators using a type of aircraft; - legal or regulatory requirements that prevent us from re-leasing or selling an aircraft in the condition that it is in; and - the discovery of manufacturing defects in an aircraft model. 15 17 The value of specific aircraft may also depend on the condition of the manufacturer. For example, since Fokker N.V. ceased operations in 1996, there have been significant reductions in values and lease rates for Fokker 100s. We expect these reductions will continue. We have four Fokker 100s, representing 6.49% of the portfolio by appraised value at January 18, 1999. Likewise, because of its merger with McDonnell Douglas Corporation, Boeing has announced that it will discontinue production of MD-83 aircraft in mid-1999. This development is likely to decrease values and rental rates for these aircraft. We have three MD-83s, representing 7.06% of the portfolio by appraised value at January 18, 1999. THE APPRAISED VALUE OF THE AIRCRAFT MAY BE SIGNIFICANTLY HIGHER THAN THE ACTUAL VALUE WE WOULD RECEIVE UPON A SALE OF THE AIRCRAFT -- IN THAT CASE, OUR ABILITY TO MAKE SCHEDULED PAYMENTS ON THE NOTES MAY SUFFER. Aircraft appraised values, also known as base values, do not necessarily reflect the market value for an aircraft at a specific time. We have determined the scheduled principal payments on the notes based on assumptions as to the appraised value of the aircraft. If we sell an aircraft to generate cash to make payments on the notes, the proceeds of the sale may be significantly less than its appraised value. We may therefore have insufficient cash to make payments on the notes. Market lease rates may also depend on current market values for aircraft. If market values are less than appraised values, we may be unable to re-lease aircraft at rental rates sufficient to repay the notes. Appraised values are based on the assumption that there is an "open unrestricted stable market environment with a reasonable balance of supply and demand. However, the aircraft market is not always stable and there may be supply and demand imbalances at any one time, especially for specific aircraft types. At the high point in the aircraft market cycle, the current market value of some aircraft may be close to their appraised value while the current market value of others, particularly older aircraft may be significantly less than their appraised values. At the low point in the aircraft market cycle, the current market value of most aircraft types is likely to be less than appraised values. As a result you should not rely on aircraft appraised values as an indication of the market value for the aircraft. IF THE APPRAISED VALUES OF OUR AIRCRAFT DECLINE AT A FASTER RATE THAN WE HAVE ASSUMED, WE MAY BE REQUIRED TO SUSPEND PRINCIPAL PAYMENTS ON CLASS B AND CLASS C NOTES. Due to various market factors, aircraft appraisers have recently reduced appraised values for aircraft, especially Fokker aircraft and older widebody aircraft. If future appraised values for our aircraft decline below a specific level, we may suspend principal payments on the class B and class C notes. Under the indenture, we must accelerate the scheduled principal payments on class A notes if the aircraft appraised values decline at a greater rate than we assumed. In that case, principal payments on the class B and class C notes may be suspended because of the increased principal amount that we must pay on the class A notes. NEW, MORE TECHNOLOGICALLY ADVANCED AIRCRAFT MAY IMPAIR OUR ABILITY TO RE-LEASE OR SELL OUR AIRCRAFT -- IF WE ARE UNABLE TO RE-LEASE OR SELL OUR AIRCRAFT ON FAVORABLE TERMS, WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES. The availability of newer, more technologically advanced aircraft or the introduction of increasingly stringent noise or emissions regulations may make it more difficult for us to re-lease or sell aircraft. This risk is particularly significant for us given our need to repay principal and interest on the notes over a relatively long period. This will require us to lease or sell many of the aircraft close to the end of their useful economic life. We expect that our ability to manage these technological risks through modifications to aircraft and sale of aircraft will be limited. OUR SERVICE PROVIDERS AND LESSEES, THE AIR TRAFFIC CONTROL SYSTEM AND OTHERS WE DEPEND ON MAY NOT BE YEAR 2000 COMPLIANT -- IF THEIR SYSTEMS MALFUNCTION, WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES. We may suffer an adverse impact on our business and results of operations if information technology relied upon by our service providers, suppliers, financial advisors, lessees, and others with which we conduct business are not Year 2000 compliant. Specifically, aircraft navigation and management systems and air 16 18 traffic control systems depend heavily on microprocessors and software technology. If any of these systems malfunction because operators, lessees or air traffic control authorities do not make them Year 2000 compliant, our lessees may be unable to operate their aircraft and generate the revenues necessary to make lease payments to us. Reductions in lease payments will impair our ability to make payments on the notes. You should refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Resources and Liquidity" for a more detailed discussion of the Year 2000 compliance issues we face. IF WE SELL AIRCRAFT-RELATED TAX BENEFITS, WE MAY BE UNABLE TO RECOVER LEGAL OWNERSHIP OF THE AIRCRAFT -- IN THAT CASE, WE MAY BE UNABLE TO RE-LEASE OR SELL THE AIRCRAFT. In addition to selling aircraft outright, we may make more limited transfers of aircraft ownership to investors who wish to acquire depreciation or other tax benefits available to aircraft owners. If we enter into tax-related dispositions, we will be exposed to the credit risk of the investor. This includes the risk that we will not be able to recover legal title to the aircraft or other aspects of ownership transferred to the investor if the investor becomes insolvent. This would harm our ability to re-lease or sell the aircraft. Because the terms of tax-related dispositions are not standardized, we cannot identify with certainty the nature and the level of the risks we would face if we entered into these transactions. RESTRICTIONS IN THE INDENTURE AND OUR GOVERNING CORPORATE DOCUMENTS MAY IMPAIR OUR ABILITY TO COMPETE IN THE AIRCRAFT LEASING MARKET. The indenture and our governing corporate documents impose restrictions on how we operate our business. These restrictions limit our ability to compete effectively in the aircraft leasing market. For example, we cannot grant privileged rental rates to airlines in return for equity investments in such airlines. There are also restrictions on persons to whom we may lease aircraft to and limits on leasing to lessees in specific geographical regions. Most competing aircraft lessors do not operate under similar restrictions. IF LESSEES EXERCISE PURCHASE OPTIONS AT PRICES BELOW FAIR MARKET VALUES, WE MAY BE UNABLE TO MAKE REQUIRED PRINCIPAL PAYMENTS ON THE NOTES. As of January 18, 1999, five lessees had options to purchase a total of six aircraft, representing 23.57% of the portfolio by appraised value at January 18, 1999. There is a risk that lessees could exercise these options in the future at prices below the pro rata portion of the unpaid principal represented by the aircraft being purchased. If that occurs, it may reduce the amount, or delay the timing, of principal payments on the notes. IF LESSEES DO NOT DISCHARGE LIENS THAT ATTACH TO THE AIRCRAFT DURING THE TERM OF THE LEASE, WE MAY BE UNABLE TO REPOSSESS, RE-LEASE OR SELL AIRCRAFT. Liens may attach to the aircraft in the course of their operation. These liens may impair our ability to repossess, re-lease or sell the aircraft. Liens which secure the payment of airport taxes, customs duties, air navigation charges, landing charges, crew wages, repairer's charges or salvage attach to the aircraft in the normal course of operation. The amounts which the liens secure may be substantial and may exceed the value of the aircraft against which the lien is asserted. In some jurisdictions, a holder of aircraft liens may have the right to detain, sell or cause the forfeiture of the aircraft. The lessees may fail to comply with their obligations under the leases to discharge liens arising during the terms of the leases. LESSEES MAY FAIL TO MAINTAIN VALID REGISTRATION OF THE AIRCRAFT -- LOSS OF AIRCRAFT REGISTRATION COULD HARM OUR ABILITY TO MAKE PAYMENTS ON THE NOTES. All of the aircraft which are or will be operated must be registered with an appropriate aviation authority. If an aircraft is operated without a valid registration, the lessee operator or, in some cases, the owner or lessor, may be subject to penalties which may result in a lien being placed on the aircraft. Loss of registration could have other adverse effects, including grounding of the aircraft and loss of insurance, which may have an adverse effect on our ability to make payments on the notes. 17 19 INCREASED REGULATION OF THE AIRCRAFT INDUSTRY MAY IMPAIR OUR ABILITY TO RE-LEASE OR SELL AIRCRAFT. The aircraft industry is heavily regulated and aviation authorities may adopt additional regulations in jurisdictions where our aircraft are registered or operated. Any additional regulations especially relating to aircraft noise and emissions, may cause us to incur significant costs, depress the value of the aircraft and impair our ability to re-lease or sell aircraft. WE MAY NOT HAVE ENOUGH CASH FLOW TO MAKE PAYMENTS ON THE NOTES IF WE ARE UNABLE TO RE-LEASE AIRCRAFT QUICKLY OR ON FAVORABLE TERMS. We may not be able to re-lease the aircraft upon expiration of the leases without incurring significant downtime. If we cannot re-lease the aircraft we may not have enough cash flow to make payments on the notes. Even if we can re-lease the aircraft we may be unable to receive favorable rental rates, especially if there is reduced demand for aircraft on operating lease. Our ability to re-lease aircraft and obtain acceptable lease payments and terms may suffer because of: - economic conditions affecting the airline industry, - the supply of competing aircraft and demand for particular types, - lessor competition, and - restrictions on our re-leasing flexibility under the indenture. The leases for 10 of the aircraft, representing approximately 30.91% of the portfolio by appraised value at January 18, 1999, are scheduled to expire before December 31, 2000. The leases for 25 of the aircraft, representing 75.98% of the portfolio by appraised value at January 18, 1999 are scheduled to expire before December 31, 2003. Re-leasing may also affect the rental rates we are able to obtain and may adversely affect our ability to make payments on the notes, especially when there is lesser demand for aircraft on operating lease. WE MAY INCUR SUBSTANTIAL COSTS IF LESSEES DO NOT PERFORM REQUIRED MAINTENANCE -- THIS WOULD REDUCE THE AMOUNTS AVAILABLE TO MAKE PAYMENTS ON THE NOTES. The standards of maintenance observed by our lessees and the condition of the aircraft at the time of sale or lease may offset future values and rental rates from our aircraft. Under the leases, the lessee has the main responsibility to maintain the aircraft and to comply with all applicable governmental requirements. Some lessees may experience periodic difficulties in meeting their maintenance obligations resulting from adverse environmental conditions or financial and labor difficulties. If a lessee fails to perform required or recommended maintenance on an aircraft during the term of such lease, the aircraft may be grounded and we may incur substantial costs to restore the aircraft to an acceptable maintenance condition before sale or re- lease. If our lessees do not perform their obligation to maintain the aircraft, we may have to fund maintenance work on the aircraft. Because our maintenance costs are expenses that rank senior to payments on the notes, we may be unable to make payments on the notes if our maintenance costs were to become sufficiently large. In some cases, we may have an obligation to reimburse the lessee or pay some or all of the cost of aircraft maintenance. Our cash resources may not be sufficient both to fund maintenance requirements and make payments on the notes, especially as the aircraft age. WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES IF AIRCRAFT INSURANCE IS NOT ADEQUATE TO COVER ANY LOSSES OR LIABILITIES WE INCUR. Our lessees have an obligation under the leases to maintain property and liability insurance covering their operation of the aircraft. We can give no assurance that this insurance will be adequate to cover any losses or liabilities that we may incur in our business. For example, the loss or liability from an aviation accident or other catastrophic event may exceed the coverage limits in the policy. Other losses may not be covered by the insurance. There is also a risk that our lessees will not perform their insurance obligations under the lease, 18 20 which may mean that insurance will not be available to us. In either case, we may be unable to make payments on the notes if insurance proceeds do not cover losses or liabilities we may incur. IF WE CANNOT OBTAIN THE REQUIRED LICENSES, CONSENTS AND APPROVALS TO RE-LEASE OR SELL AIRCRAFT, WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES. If we cannot obtain required government licenses, consents and approvals, we may be unable to re-lease or sell aircraft. In that case, our cash flows may be insufficient to make payments on the notes. Several leases require specific licenses, consents or approvals. These include licenses, consents or approvals from governmental or regulatory authorities to certain lease payments and to the import, re-export or de-registration of the aircraft. There is a significant risk that subsequent legal and administrative changes will increase such requirements or that a license, consent or approval, once given, will be withdrawn. We may be unable to receive licenses, consents or approvals needed in connection with future re-leasing or sale of an aircraft. IF WITHHOLDING TAXES ARE IMPOSED ON LEASE RENTALS, THIS WOULD REDUCE OUR CASH FLOW AVAILABLE FOR PAYMENTS ON THE NOTES. We have attempted to structure our leases in such a way that either no withholding taxes will be applicable to payments by the lessees under the leases or, if withholding taxes are applicable, the lessees may be required to pay corresponding additional amounts. If such taxes must be paid and we cannot recover these additional amounts from the lessee, that amount will be unavailable for note payments. LESSEES IN WEAK FINANCIAL CONDITION MAY FAIL TO MAKE LEASE PAYMENTS -- THIS WILL REDUCE THE CASH FLOW AVAILABLE TO MAKE PAYMENTS ON THE NOTES. There is a significant risk that the lessees in weak financial condition may default on their obligations under the leases. If lessees do not make rent and maintenance payments or are significantly in arrears, we will be unable to make payments on the notes. The ability of each lessee to perform its obligations under its lease will depend primarily on its financial condition. A lessee's financial condition may be affected by various factors beyond their control, including competition, fare levels, passenger demand, operating costs, the cost and availability of finance, and environmental and other governmental regulation of the air transportation business. The economic conditions of the regions where our lessees operate will also affect their ability to meet their lease obligations. Many of our lessees are based or operate in regions such as Asia or Latin America that are experiencing severe economic crises. You should refer to "The Aircraft, Related Leases and Collateral -- The Lessees -- Regional Concentrations" for a detailed discussion of the regional concentrations of our lessees and the economic trends of the regions that may impact the lessees financial condition. Many of our lessees are in a weak financial position. Investors should also expect this to be the case with future lessees. As a result, a large proportion of lessees may consistently be significantly in arrears in their rental payments or maintenance payments. The environment for commercial aircraft operators in most geographic regions has been extremely favorable in the past few years. Therefore, the current level of defaults and lessee arrears should not be seen as representative of future defaults and arrears as economic conditions deteriorate. We can give no assurance that defaults and amounts in arrears will not increase as the market for aircraft on operating lease experiences further cyclical downturns, particularly in regions such as Asia or Latin America which is experiencing acute economic difficulties. You should refer to "The Aircraft, Related Leases and Collateral -- The Lessees -- Payment History" for a detailed discussion of the lessees that are having financial difficulties or are in arrears on their lease obligations. OUR ABILITY TO RELEASE AIRCRAFT AND GENERATE CASH TO MAKE PAYMENTS ON THE NOTES WILL BE IMPAIRED IF WE CANNOT TERMINATE LEASES AND REPOSSESS AIRCRAFT WHEN A LESSEE DEFAULTS. We have the right to terminate the lease and repossess the aircraft if there is an event of default under a lease. However, we may be unable to terminate the lease or may incur substantial costs if we terminate a lease and repossess the aircraft. If we cannot repossess the aircraft, it will not be available for re-lease or sale. In 19 21 that event, or if we incur substantial costs in terminating a lease and repossessing an aircraft, we may be unable to make payments on the notes. Our ability to terminate the lease and repossess the aircraft may be limited by the following factors: - a lessee contesting AerCo group's right to terminate the lease and repossess the aircraft; - our inability to export, deregister and redeploy the aircraft; - legal restrictions on our ability to terminate or repossess the aircraft; and - the appointment of a trustee in bankruptcy or similar officer in the case of a bankrupt or insolvent lessee. Even if we are able to terminate the lease and repossess the aircraft, we may incur substantial costs, including: - the direct costs associated with the termination of the lease or repossession of an aircraft, including legal costs; - the cost of returning the aircraft to the appropriate jurisdiction; - the payment of debts and taxes secured by liens on the aircraft that were not paid by the lessee; - the costs of retrieving or recreating aircraft records that are required for reregistering the aircraft; - costs to obtain a certificate of airworthiness for the aircraft; and - swap breakage costs incurred under our agreements with swap providers. IF OUR ASSUMPTIONS ABOUT CASH FLOW AND OPERATING COSTS DO NOT MATCH ACTUAL EXPERIENCE, WE MAY BE UNABLE TO MAKE NOTE PAYMENTS ON TIME OR AT ALL. We have determined the expected final payment dates for the notes based on assumptions about our future cash flows and interest and operating costs and possible future economic conditions. The purpose of these assumptions is to illustrate the payment provisions of the notes. Many of these assumptions relate to future political, economic and market conditions that are outside our control and are difficult or impossible to predict. Market interest rates are an example of such an assumption. Other assumptions relate to future events that depend on the actions of lessees or others with whom we deal. Insurance recoveries and maintenance payments are examples of such assumptions. For this reason, it is unlikely that our experience in the future will be consistent with these assumptions. As a result, we may be unable to make payments on the notes at the times and in the amounts that the assumptions indicate. You should refer to "Description of the Notes -- Assumptions" for more details about the assumptions we have made. YOUR RIGHT TO RECEIVE PAYMENTS ON YOUR NOTES RANKS JUNIOR TO OUR EXPENSES, CERTAIN OTHER PAYMENTS WE MAY MAKE AND ANY MORE SENIOR SUBCLASSES OF NOTES. Our expenses and certain other payments which we must make rank senior to the notes and are payable out of our funds before any payments are made on the notes. Depending on the amount of these more senior payments, we may be unable to make the required payments on the notes. Your right to receive payments of interest, principal and any premium on your notes will rank junior to payments on more senior subclasses of notes. If an event of default occurs, then the holders of a class of notes may not exercise remedies under the indenture until all amounts we owe on more senior classes of notes and our other more senior obligations have been paid. In that case, holders of the most senior class of notes will control the exercise of these remedies. 20 22 A PUBLIC MARKET FOR THE NOTES MAY NOT DEVELOP -- IN THAT CASE, YOU MAY BE UNABLE TO SELL YOUR NOTES OR THE PRICE OF THE NOTES MAY SUFFER. An active public market for the new notes may not develop, which may harm your ability to sell the notes or the price at which you sell them. We issued the old notes to a limited number of institutional investors. There is currently no market for new notes. We intend to list the new notes only on the Luxembourg Stock Exchange. No one has an obligation to make a market in the new notes. We do not intend to seek approval for quotation through any automated quotation system. If a market for the new notes does develop, future trading prices will depend upon many factors, including general economic conditions and our financial condition, performance and prospects. WE MAY BE UNABLE TO REFINANCE THE SUBCLASS A-1 NOTES IN THE CAPITAL MARKETS -- THIS MAY DELAY THE REPAYMENT OF PRINCIPAL AND LOWER THE MARKET PRICE OF THE CLASS B AND C NOTES. The subclass A-1 notes may reach their expected final payment date before we have received sufficient cash flows to repay them. In that case, we plan to refinance the subclass A-1 notes by issuing refinancing notes. The refinancing notes will rank equally with the other class A notes but the interest rate, principal payment provisions and other terms will be different. Our ability to refinance the subclass A-1 notes will depend on many factors outside our control. These factors include general conditions in the capital markets and the markets' perception of the commercial aviation industry, the aircraft leasing business generally or our own company. If we cannot refinance the subclass A-1 notes on acceptable terms, we may not be able to repay the subclass A-1 notes by their expected final payment date. This may also delay repayment of principal on the class B and class C notes and may result in lower market prices for the notes. In the future, we may issue additional notes and refinancing notes that may also require refinancing like the subclass A-1 notes. These notes would present the same refinancing risk that we describe above. IF AERFI BECOMES BANKRUPT OR INSOLVENT, THE AIRCRAFT AND OUR OTHER ASSETS MAY NOT BE AVAILABLE TO REPAY THE NOTES AND OUR OTHER OBLIGATIONS. We have taken steps to structure our company, our acquisition of ALPS 94-1 and the acquisition of our other aircraft owning subsidiaries from AerFi to ensure that our assets are not consolidated with AerFi's assets or otherwise become available to AerFi's creditors in any bankruptcy or insolvency proceeding involving AerFi. ALPS 94-1 took similar steps for the same purpose when it originally acquired its aircraft from AerFi in 1994 and 1995. If AerFi becomes bankrupt or insolvent, there is a legal risk that a court or other authority could decide that these steps were not effective to insulate our assets from AerFi's assets or that AerFi's transfer of aircraft to us was improper. As a result, the aircraft and our other assets could become available to repay both AerFi's creditors and our creditors, including you. We could also lose all of our rights in the aircraft and our other assets. In either case, it may be impossible to repay amounts outstanding under the notes. You should refer to "The Refinancing of ALPS 94-1 and Acquisition of the AerFi Transferred Companies -- Bankruptcy Considerations" for a detailed discussion of these bankruptcy issues. IF PAYMENTS OF PRINCIPAL AND INTEREST ON THE NOTES BECOME SUBJECT TO WITHHOLDING TAX, WE WILL NOT MAKE ADDITIONAL PAYMENTS TO YOU. We will not make any additional payments to noteholders for any withholding or deduction that is required under applicable law on payments on the notes. If we are required to make a withholding or deduction, we will use reasonable efforts to avoid the application of withholding taxes. If we cannot avoid the withholding taxes, we may redeem the notes. If withholding taxes are imposed on the notes and we do not redeem them, we will reduce the amount of interest that you will receive by the amount of the withholding taxes. We have received opinions from our tax advisors that payments on the notes will not be subject to Jersey or Irish withholding tax. You should be aware, however, that these opinions represent only the best judgment of counsel and are not binding on the applicable taxing authorities or the courts. The opinions 21 23 depend upon certain factual assumptions and the existence of different facts could lead to circumstances not anticipated by counsel. Ownership of the notes entails certain risks regarding the application of the tax laws of Ireland, the United States, Jersey and the jurisdictions in which the members of AerCo group and the lessees are organized, reside or operate. You should refer to "Tax Considerations" for a more detailed discussion of the possible tax consequences of owning the notes. OUR OPERATIONS MAY BECOME SUBJECT TO INCOME TAXES, WHICH WOULD REDUCE THE CASH FLOW AVAILABLE TO MAKE PAYMENTS ON THE NOTES. Our operations may be subject to the income tax laws of Ireland, the United States, Jersey and other jurisdictions. There is also a risk that the servicer's future management of the aircraft may expose members of AerCo group to tax liabilities outside Ireland. If our income is subject to taxation, the cash flows available to make payments on the notes may be reduced. For a more detailed discussion of our potential income tax liabilities you should refer to "Tax Considerations". IF WE LOSE OUR IRISH TAX BENEFITS, THE RATING AGENCIES MAY DOWNGRADE THE NOTES AND WE MAY BE UNABLE TO MAKE REQUIRED NOTE PAYMENTS. AerCo, AerCo Ireland and AerCo Ireland II are entitled to certain corporate tax benefits for Shannon, Ireland certified companies including a preferential corporate taxation rate of 10% through December 2005. The loss of these tax benefits could lead to a downgrade in the then-current ratings on the notes and it could also affect our ability to make the required payment on the notes. If AerFi Group were liquidated or were to cease to hold its 5% shareholding in AerCo, or if AerFi Group were to reduce or relocate its operations for any reason such that it failed to maintain, among other things, certain employment levels at Shannon, Ireland, or if AerFi Administrative Services or AerFi Cash Manager II were to resign or be removed as administrative agent or cash manager, respectively, of AerCo group, then AerCo, AerCo Ireland, and AerCo Ireland II may become subject to Irish corporate taxation at general Irish statutory rates, which is currently 28%. AerFi Group has agreed to use its best efforts to maintain the Shannon corporate tax benefits for the benefit of AerCo group. You should refer to "Irish Tax Considerations -- Irish Income and Withholding Taxes on Payments on the Notes" for additional discussions of the Irish tax benefits. This prospectus also contains forward-looking statements that involve risks and uncertainties. In most cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of such terms or similar terminology. Our actual results could differ materially from those anticipated in these forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks outlined below. 22 24 THE EXCHANGE OFFER TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES Upon the terms and the conditions set forth in this prospectus and in the accompanying letter of transmittal which together constitute the exchange offer, AerCo will accept for exchange old notes which are properly tendered on or before the expiration date and not withdrawn as permitted below. The term "expiration date" means 5:00 p.m., New York City time, on 1999. If AerCo, however, in its sole discretion, extends the period for which the exchange offer is open, the expiration date means the latest time and date to which the exchange offer is extended. On or about the date set forth on the cover page of this prospectus we will first send this prospectus, together with the letter of transmittal, to all holders of old notes known to AerCo. AerCo's obligations to accept old notes for exchange is subject to certain conditions as listed under "Conditions to the Exchange Offer" below. AerCo expressly reserves the right to extend the time during which the exchange offer is open, and delay acceptance of any old notes, by giving oral or written notice of any extension to the exchange agent and the holders. During any extension, all old notes previously tendered will remain subject to the exchange offer and may be accepted for exchange by AerCo. AerCo has agreed under the registration rights agreement, to keep the exchange offer open for at least 20 business days after the date notice of the exchange offer is mailed to the holders of the old notes or longer if required by applicable law. AerCo expressly reserves the right to amend or terminate the exchange offer, and to refuse any old notes not accepted for exchange, upon the occurrence of any of the conditions of the exchange offer specified below under "Conditions to the Exchange Offer." AerCo will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the old notes as promptly as practicable. We will also issue such notice in the case of any extension by means of a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. Holders of old notes do not have any appraisal or dissenters' rights under the indenture in connection with the exchange offer. AerCo intends to conduct the exchange offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the Commission. PROCEDURES FOR TENDERING OLD NOTES The tender to AerCo of old notes by a holder as described below and the acceptance by AerCo will constitute a binding agreement between the tendering holder and AerCo upon the terms and subject to the conditions set forth in this prospectus and in the accompanying letter of transmittal. Except as set forth below, a holder including any participant in the DTC system whose name appears on a security position listing as a holder of such old notes who wishes to tender old notes for exchange under the exchange offer must transmit to the exchange agent on or before the expiration date either: - a properly completed and executed letter of transmittal or a facsimile of the letter, including all other documents required by the letter of transmittal, to the exchange agent at the address listed below under "-- Exchange Agent"; or - a computer-generated message, transmitted through the DTC's ATOP system and received by the exchange agent and forming part of a book-entry confirmation, in which the holder agrees to be bound by the terms of the letter of transmittal. To ensure timely delivery of the old notes: - the exchange agent must receive a confirmation of a book-entry transfer of the old notes into its account at The DTC before the expiration date; or - the holder of old notes must comply with the guaranteed delivery procedures described below. 23 25 THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT YOUR ELECTION AND RISK. IF THE DELIVERY IS BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, WITH RETURN RECEIPT REQUESTED. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL SHOULD BE SENT TO AERCO. Signatures on a letter of transmittal or a notice of withdrawal must be guaranteed unless the old notes surrendered for exchange are tendered by a holder of the old notes who has not completed the box entitled "Special Issuance Instructions" on the letter of transmittal or for the account of a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States. If signatures on a letter of transmittal or a notice of withdrawal are required to be guaranteed, the guarantees must be by a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company having an office or correspondent in the United States. AerCo will determine in its sole discretion all questions as to the validity, form, eligibility and acceptance of old notes tendered for exchange. AerCo's decision in this respect will be final and binding. AerCo reserves the absolute right to reject any tenders of any old notes not properly tendered or to reject any old notes acceptance of which might, in the judgment of AerCo or its counsel, be unlawful. AerCo also reserves the absolute right in its sole discretion to waive any defects or irregularities or conditions of the exchange offer as to any old notes either before or after the expiration date. AerCo's interpretation of the terms and conditions of the exchange offer or any old notes either before or after the expiration date shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with the tenders of old notes for exchange must be cured within a reasonable period of time as AerCo shall determine. Neither AerCo, the exchange agent nor any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of old notes for exchange, nor shall any of them incur any liability for failure to give such notification. If a person or persons other than the holders of old notes, sign the letter of transmittal, the letter of transmittal must be accompanied by appropriate powers of attorney, signed exactly as the name or names of the holders that appear on the security position listing maintained by DTC. If trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, sign the letter of transmittal or powers of attorney, such person should so indicate when signing and, unless waived by AerCo, offer proper evidence satisfactory to AerCo of its authority to so act must be submitted. By tendering, each holder of old notes will represent to AerCo that: - the person receiving the new notes, whether or not the person is a holder, acquires the new notes under the exchange offer in the ordinary course of business, - neither the holder of old notes nor any such other person has an arrangement or understanding with any person to participate in the distribution of the new notes, - if the holder is not a broker-dealer, or is a broker-dealer but will not receive new notes for its own account in exchange for old notes, neither the holder nor any such other person is engaged in or intends to participate in the distribution of the new notes, and - neither the holder nor any other person is an "affiliate" of AerCo within the meaning of Rule 405 under the Securities Act. By tendering each holder of old notes that is a broker-dealer, whether or not it is also an affiliate, that will receive new notes for its own account pursuant to the exchange offer will represent that old notes to be exchanged were acquired by it as a result of market-making activities or other trading activities and will acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the new notes. However, by so acknowledging and by delivering a prospectus, a broker- dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. 24 26 ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all of the conditions to the exchange offer, AerCo will accept, promptly after the expiration date, all old notes properly tendered and will issue the new notes promptly after acceptance of the old notes. For purposes of the exchange offer, AerCo shall be deemed to have accepted properly tendered old notes for exchange when, as and if AerCo has given oral or written notice thereof to the exchange agent. In all cases, issuance of new notes for old notes that are accepted for exchange under the exchange offer will be made only after timely receipt by the exchange agent of all the documents listed under "Procedures for Tendering old notes". If any tendered old notes are not accepted for any reason set forth in the terms and conditions of the exchange offer, such unaccepted or non-exchanged old notes will be credited to an account maintained with the DTC as promptly as practicable after the expiration or termination of the exchange offer. INTEREST ON THE NEW NOTES Holders of old notes that are accepted for exchange will not receive accrued interest on the old notes at the time of exchange. However, each new note will bear interest from the most recent date to which interest has been paid on the old notes or new notes, or if no interest has been paid on the old notes or new notes. BOOK-ENTRY TRANSFER The exchange agent will make a request to establish an account for the old notes at the DTC for purposes of the exchange offer promptly after the date of this prospectus. All deliveries of old notes must be made by book-entry transfer to the account maintained by the exchange agent at the DTC. Any financial institution that is a participant in the DTC's systems may make book-entry delivery of old notes by causing the DTC to transfer such old notes into the exchange agent's account in accordance with the DTC's ATOP procedures for transfer. Holders of old notes who are unable to deliver confirmation of the book-entry tender of their old notes into the exchange agent's account at the DTC or all other documents required by the letter of transmittal to the exchange agent on or prior to the expiration date, must tender their old notes according to the guaranteed delivery procedures described below. GUARANTEED DELIVERY PROCEDURES If a holder of the old notes desires to tender them and time will not permit the holder's required documents to reach the exchange agent on or before the expiration date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if: - the tender is made through a firm which is a member of a registered national securities exchange or a member of the National Association of Security Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States, - on or before the expiration date, the exchange agent receives from such firm, commercial bank or trust company either a properly completed and duly executed letter of transmittal, or facsimile thereof or a properly transmitted agent's message and notice of guaranteed delivery, substantially in the form provided by AerCo listing: -- the name and address of the holder of old notes, -- the amount of old notes tendered, -- stating that the tender is being made thereby and guaranteeing that within five New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery, a book-entry confirmation and all other documents required by the letter of transmittal will be deposited by such firm, commercial bank or trust company with the exchange agent, and 25 27 - a book-entry confirmation and all other documents required by the letter of transmittal, are received by the exchange agent within five New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery. WITHDRAWAL RIGHTS Tenders of old notes may be withdrawn at any time before the expiration date. For a withdrawal to be effective, either a written notice of withdrawal must be received by the exchange agent at one of the addresses set forth below under "Exchange Agent" or the appropriate procedures of the DTC's ATOP system must be complied with. Any notice of withdrawal must specify the name of the person that tendered the old notes to be withdrawn and identify the old notes to be withdrawn. Any notice of withdrawal must specify the name and number of the account at the DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of the DTC. All questions as to the validity, form and eligibility of such notices will be determined by AerCo, whose determination shall be final and binding on all parties. Any old notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any old notes which holders have tendered for exchange but which are not exchanged for any reason will be credited to an account maintained with the DTC for the old notes as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Holders who have properly withdrawn old notes may retender old notes by following one of the procedures described under "Procedures for Tendering old notes" above at any time on or before the expiration date. CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provisions of the exchange offer, AerCo shall not be required to accept any old notes for exchange or to issue new notes in exchange for any old notes. AerCo may terminate or amend the exchange offer, if at any time before the acceptance of such old notes for exchange or the exchange of the new notes for such old notes, such acceptance or issuance would violate applicable law or any interpretation of the staff of the Commission. The foregoing condition is for the sole benefit of AerCo and may be asserted by AerCo regardless of the circumstances giving rise to such condition or may be waived by AerCo in whole or in part at any time and from time to time in its sole discretion. The failure by AerCo at any time to exercise the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition, AerCo will not accept for exchange any old notes tendered, and no new notes will be issued in exchange for any such old notes, if at such time any stop order shall be threatened or in effect with respect to either the registration statement of which this prospectus constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939, as amended. 26 28 EXCHANGE AGENT Bankers Trust Company has been appointed as the exchange agent for the exchange offer. All executed letters of transmittal should be delivered to the exchange agent at one of the addresses set forth below. Questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for notices of guaranteed delivery should be directed to the exchange agent, addressed as follows: Delivery To: Bankers Trust Company, as Exchange Agent If by Mail, Hand or Overnight Courier: Bankers Trust Company Four Albany Street Mail Stop 5101 New York, New York 10006 Attention: Structured Finance Group or If by Facsimile: (212) 250-6439 Confirm by Telephone: (212) 250-5601 or (212) 250-6137 DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN THE ADDRESS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN TO A NUMBER SET FORTH ABOVE WILL NOT BE A VALID DELIVERY. FEES AND EXPENSES The principal solicitation is being made by mail. Additional solicitation may be made by telegraph, telephone or in person by the exchange agent, on behalf of AerCo. No additional compensation will be paid to the exchange agent who engages in soliciting tenders. AerCo will not pay brokers, dealers, or others soliciting acceptances of the exchange offer. AerCo however, will pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection with the exchange offer. The cash expenses to be incurred in connection with the exchange offer will be paid by AerCo and are estimated in the aggregate to be $500,000. TRANSFER TAXES Holders who tender their old notes for exchange will not be obligated to pay any transfer taxes. If, however, a transfer tax is imposed for any reason other than the transfer of old notes to AerCo or its order pursuant to the exchange offer, the amount of any such transfer taxes will be payable by the tendering holder. If a tendering holder does not submit satisfactory evidence of payment of or exemption from such taxes, the amount of such transfer taxes will be billed directly to such tendering holder. 27 29 CONSEQUENCES OF FAILURE TO EXCHANGE Holders of old notes who do not exchange their old notes for new notes under the exchange offer will continue to be subject to the transfer restrictions of the old notes. In general, the old notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. AerCo does not intend to register the old notes under the Securities Act. To comply with the securities laws of certain jurisdictions, it may be necessary to qualify for sale or register the new notes prior to offering or selling such new notes. We have agreed to register or qualify the new notes held by broker-dealers for offer or sale under the securities or blue sky laws of such jurisdictions as any such holder reasonably requests in writing. Unless a holder makes such a request, we do not intend to take any action to register or qualify the new notes for resale in any such jurisdictions. In addition, the tender of old notes pursuant to the exchange offer will reduce the principal amount of the old notes outstanding. This may have an adverse effect upon, and increase the volatility of, the market price of the old notes due to a reduction in liquidity. 28 30 THE PARTIES AERCO AerCo is a special purpose limited liability company formed on June 4, 1998 under the laws of Jersey. AerCo's limited purposes include: - acquiring, financing, re-financing, leasing, re-leasing, maintaining and modifying the aircraft and any additional aircraft directly or by owning the share capital of ALPS 94-1 and the other aircraft-owning subsidiaries; - selling aircraft or interests in aircraft including in certain tax-related transactions; - entering into certain hedging contracts; and - establishing and providing loans or guarantees to its subsidiaries and any entities that it may establish in the future for additional aircraft acquisitions. AerCo's direct wholly owned subsidiaries are ALPS 94-1, AerCo Ireland, AerCo Ireland II and AerCo USA. AerCo operates its business principally through its direct and indirect subsidiaries but may also directly acquire or lease aircraft. AerCo's own business therefore principally consists of, and its own revenues are derived principally from, making loans to its subsidiaries. AerCo has an authorized share capital of 10,000 ordinary shares, $1 par value per share, 20 of which are issued and outstanding. Nineteen shares of the issued capital stock are held by the Juris Limited and Lively Limited, each a Jersey limited liability company (together, the "Nominees"), for the benefit of the AerCo Holding Trust, a charitable trust established under the laws of Jersey (the "Charitable Trust"). AerFi Group holds one share of the issued capital stock. AerCo's registered and principal office is located at 22 Grenville Street, St. Helier, Jersey, JE4 8PX, Channel Islands and its telephone number is 011-44-1534-609000. AERFI AerFi Group plc holds all of AerCo's subclass D-1 and subclass E-1 Notes. AerFi's wholly owned subsidiaries provide administrative, accounting, liability management, financial consulting and cash management services to AerCo group. At January 31, 1999, AerFi employed 30 people and had 65 commercial aircraft in its portfolio, of which 62 were on lease to 32 lessees in 20 countries. On November 20, 1998, AerFi, formerly known as GPA, completed a restructuring which significantly changed its operations. As part of the restructuring, AerFi sold a portion of its aircraft portfolio to GE Capital Aviation Services Limited ("GECAS"), including one aircraft which was previously owned by ALPS 94-1, transferred its interest in Airplanes Group to GECAS and agreed to stop using the GPA name. BABCOCK & BROWN Babcock & Brown, provides various services to AerCo group under the servicing agreement. Babcock & Brown is a part of a global financial advisory group specializing in arranging and managing asset-based financial transactions, with particular expertise in the international aviation industry. The Babcock & Brown group is one of the largest independent arrangers of finance and operating leases for aircraft, providing financial advisory or management services in approximately 775 transactions to more than 140 clients in the international aviation industry. The Babcock & Brown group has been providing management services to its clients for aircraft on operating lease since 1990, and has developed a team of experienced professionals and support systems to handle the broad range of tasks involved in the management of high value assets. At March 31, 1998, the Babcock & Brown group managed a portfolio of 63 aircraft on behalf of its clients. The portfolio contained 14 widebody and 49 narrowbody aircraft. 29 31 The Babcock & Brown group's lease arrangement services include acquiring and managing aircraft on operating lease for identified investors. The Babcock & Brown group also represents owners of aircraft in the sale of aircraft from their portfolios. Since 1990, the Babcock & Brown group has completed aircraft operating lease transactions with more than 40 airlines and operating lessees, including transactions involving 130 aircraft. Between December 1994 and March 1998, the Babcock & Brown group arranged the re-lease of 37 aircraft owned by its clients. Babcock & Brown is headquartered in Dublin, Ireland and at March 31, 1998 had seven employees. The Babcock & Brown group is headquartered in San Francisco. At March 31, 1998, the Babcock & Brown group had 275 employees in 14 office locations in Brisbane, Dublin, Connecticut, Hong Kong, Johannesburg, London, Madrid, Melbourne, Milan, New York, Paris, San Francisco, Seattle and Sydney. 30 32 THE REFINANCING OF ALPS 94-1 AND ACQUISITION OF THE AERFI TRANSFERRED COMPANIES On July 15, 1998, AerCo purchased all of the outstanding capital stock of ALPS 94-1 from the trustees of the ALPS 94-1 trust for a nominal amount. This purchase price reflected the very limited economic entitlements of these trustees as shareholders of ALPS 94-1. AerFi also purchased all of the outstanding capital stock of AerCo Ireland, AerCo Ireland II and AerCo USA (together, the "AerFi transferred companies") from AerFi Group for a net purchase price equal to $0.3 million, calculated as follows: (1) the aggregate initial appraised value of the 10 AerFi transferred aircraft ($213.2 million); LESS THE SUM OF: (2) the amount of cash security deposits held in respect of the 10 AerFi transferred aircraft at July 15, 1998 (approximately $2.8 million); and (3) the amount of indebtedness of any Aerfi transferred company to AerFi at July 15, 1998 (approximately $210.1 million). On July 15, 1998, AerCo loaned ALPS 94-1 a portion of the net cash proceeds from the offering and the issuance of the subclass D-1 and subclass E-1 notes to AerFi for the purpose of immediately redeeming or repaying all of ALPS 94-1's existing financial indebtedness and paying fees and other expenses payable by ALPS 94-1 in connection with the refinancing of ALPS 94-1 and the offering. ALPS 94-1, GECAS, former servicer to ALPS 94-1 and AerFi Group, also reached an agreement to terminate the existing ALPS 94-1 servicing agreement on July 15, 1998 in exchange for a termination fee. ALPS 94-1 agreed, upon termination of the ALPS 94-1 servicing agreement to waive all claims it may have against GECAS, its affiliates and their representatives. ALPS 94-1 also agreed to indemnify GECAS, its affiliates and their representatives for any losses they may have incurred in connection with the termination of the ALPS 94-1 servicing agreement, the offering and the issuance of the AerCo Notes and the refinancing of ALPS 94-1. On July 15, 1998, AerCo loaned each AerFi transferred company a portion of the net proceeds of the offering to immediately repay its indebtedness to AerFi Group. All letters of credit, guarantees or similar arrangements securing obligations of any lessee of the AerFi transferred aircraft were transferred to, renewed, amended or reissued in the name of, an AerFi transferred company. The trustees of the ALPS 94-1 trust made no representations, warranties or indemnities in selling their shares to AerCo. AerFi Group made customary representations and warranties, in the share purchase agreement for the acquisition including representations relating to solvency, undisclosed contingent liabilities and insurance. AerFi Group indemnified us for breaches of their representations and warranties relating to the aircraft-owning companies and aircraft which they sold to us. These representations and warranties survive until July 15, 2001. Our potential recovery under them is limited to approximately $185 million. BANKRUPTCY CONSIDERATIONS We have taken steps in structuring the transactions described in this prospectus to ensure that our assets and liabilities are not consolidated with those of AerFi if AerFi becomes the subject of an application for relief under applicable bankruptcy or insolvency laws. ALPS 94-1 took similar steps in relation to its acquisition of the original ALPS 94-1 aircraft from AerFi in 1994 and 1995 for the same purpose. These steps included: - the creation of AerCo and ALPS 94-1 as separate legal entities outside Ireland, - the requirement that AerFi hold no more than the 5% of AerCo's capital stock necessary to assist us and certain of our subsidiaries in obtaining certain corporate tax benefits for Shannon, Ireland certified companies, 31 33 - the requirement that AerFi not control the composition of AerCo's board of directors, and - the inclusion in various transaction documents of provisions requiring that our business and affairs and the business and affairs of our subsidiaries are at all times identifiable and separately managed from those of AerFi. McCann FitzGerald, our Irish counsel, concluded in an opinion delivered at the time the old notes were issued that on the basis of certain assumptions and subject to certain qualifications and reservations: - in any examination of AerFi Group or any of its affiliates, an Irish examiner would not be able to contend successfully that an examiner should be appointed to any member of AerCo group on the grounds that, after the closing date, such member is a "related company" of AerFi Group or such affiliate; and - an Irish court should not treat AerFi or any of its affiliates, on the one hand, and any member of AerCo group, on the other, as a single entity in any winding up of AerFi Group or such affiliate and order -- the pooling of any of the assets and liabilities of any member of AerCo group with those of AerFi; or -- the contribution of any of the assets of any member of AerCo group to the repayment of the debts of AerFi. In the context of liquidation, examination or receivership of AerFi Group or any of its affiliates, a liquidator, receiver, examiner, creditor or shareholder of AerFi Group or any of its affiliates could take the position that the disposal of the shares of any of the AerFi transferred companies pursuant to the share purchase agreements constituted improper transfers or fraudulent conveyances and could therefore seek the invalidation of such sales and the return to AerFi of such shares or proceeds of subsequent sales of the shares. With respect to these issues, we have received an opinion of Irish counsel, McCann FitzGerald, concluding that, on the basis of certain assumptions, including as to the adequacy of consideration and subject to certain qualifications and reservations set forth in such opinion, an Irish court would not regard the completed sale of the shares of the AerFi transferred companies pursuant to the share purchase agreements as improper transfers or fraudulent conveyances and order any such assets to be returned to AerFi on such grounds. AerFi and AerCo have taken appropriate steps to transfer the shares of the AerFi transferred companies to AerCo. A liquidator, receiver, examiner, creditor or shareholder of AerFi Group, any such seller or any relevant affiliate, however, could seek to recharacterize the transfer of the shares of the AerFi transferred companies as a pledge of collateral as security for a financing of AerFi. A successful recharacterization of the share transfers as a pledge or granting of security could: - in certain circumstances result in the complete forfeiture of the rights of AerCo group in the transferred aircraft or the shares of the AerFi transferred companies, possibly resulting in AerCo group being considered a general unsecured creditor of AerFi Group or the applicable seller with a claim in an amount equal to the purchase price paid for such aircraft or such shares, or - in other circumstances result in AerCo group being a secured creditor of AerFi Group or the applicable seller or of the relevant affiliate. AerCo group, however, has received an opinion of McCann FitzGerald concluding that, notwithstanding the uncertainty resulting from the lack of substantive Irish case law on the issue of recharacterization, and subject to the qualifications and reservations, including as to difference of treatment of the sales for accounting purposes, and based on the assumptions set forth in the opinion. The assumptions to the opinion include, in addition to the assumption as to the adequacy of consideration, the assumption that both AerFi and AerCo group will, so far as permissible in accordance with current accounting standards, act in a manner consistent with the shares having been sold, the sales of the shares of AerFi transferred companies once completed would not be recharacterized as a pledge of such assets to secure a loan from AerCo group to AerFi. 32 34 We can give you no assurance, however, that the circumstances and assumptions upon which counsel have based their opinion will not change, that a court of competent jurisdiction would not decide differently from the views expressed in such counsel's opinions or that such opinions will prove to be correct. Such opinions represent only the best judgment of counsel and are not binding on the courts. In particular, such opinions depend on certain factual assumptions and the occurrence of different facts could lead a court to reach a different conclusion. AerCo group will also take appropriate steps to structure the acquisition of additional aircraft or shares in additional aircraft-owning subsidiaries of any sellers, which may include AerFi, to minimize the risk of recharacterization described above. The nature and magnitude of such risk will depend largely on the financial condition of the relevant seller and the bankruptcy and insolvency laws of the jurisdiction or jurisdictions applicable to it and its assets. There can be no assurance that a liquidator, receiver, examiner, creditor or shareholder of the relevant seller could not seek to recharacterize the acquisition of additional aircraft as described above or could not otherwise seek to challenge the rights of AerCo group in the additional aircraft or the shares of the companies owning them. 33 35 THE AIRCRAFT, RELATED LEASES AND COLLATERAL APPRAISERS' REPORTS AerCo group recently obtained appraisals of the aircraft as of January 18, 1999. On the basis of these appraisals, the average appraised base value of the 34 aircraft was approximately $896 million compared with $938 million at March 1, 1998, the date of the initial base value appraisals. The appraised value is equal to the average of the opinions of the appraisers as to the base value of each aircraft without taking into account the value of the leases, maintenance reserves or security deposits. The decrease in the appraisals since March 1, 1998 was approximately $22.6 million more than the expected decrease assumed by the aircraft depreciation schedules that form part of the terms of the notes. The average decline in the appraised base value of the fleet of 4.5% is based on an effective 11 months depreciation, from March 1, 1998 to January 18, 1999. The decline of 2.1% assumed in this prospectus is calculated on the basis of a six month period from July 15, 1998, using the assumed depreciation rate of 4.1% per annum described in "Description of the Notes -- Payment of Principal and Interest -- Principal Amortization". The valuation of our fleet included in the offering memorandum for the old notes was not depreciated for the period between March 1, 1998, the date of the initial base values and July 15, 1998, the closing date of the AerCo transaction. This factor accounts for a substantial portion of the difference between the appraisals as of January 18, 1999 and the value decline assumption in the offering memorandum. In addition, the appraisals reflected decreases in the values of Fokker 100s that are greater than we assumed, primarily as a result of Fokker exiting the industry. We also experienced greater than assumed decreases with respect to the values of A320-200s and B737-300/400/500s due primarily to continued price discounting by Boeing and Airbus and with respect to AerCo's A300B4-200 due to increased over supply of this aircraft type. The appraisers have provided appraisals of the value of each of the aircraft at normal utilization rates in an open, unrestricted and stable market as of January 18, 1999, adjusted to account for the reported maintenance standard of the aircraft. The appraisals were not based on physical inspection of the aircraft. The appraisals explain the methodology used to determine the values for the aircraft. Based on the appraisals, the aggregate base values calculated by each of the three appraisers for the aircraft are $913.3 million in the case of BK Associates, Inc., $919.5 million in the case of Aircraft Information Services, Inc. and $855.0 million in the case of Airclaims Limited. You should not rely on the appraised value as a measure of the realizable value of any aircraft. 34 36 PORTFOLIO INFORMATION THE AIRCRAFT All of the aircraft hold or are capable of holding a noise certificate issued under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago Convention or have been shown to comply with the Stage 3 noise levels set out in Section 36.5 of Appendix C of Part 36 of the United States Federal Aviation Regulations. The following table lists the aircraft by type of aircraft both by reference to the number of aircraft at January 18, 1999 and to the percentage of appraised value at January 18, 1999. NUMBER OF ENGINE % OF AIRCRAFT BY MANUFACTURER TYPE OF AIRCRAFT AIRCRAFT BODY TYPE STAGE APPRAISED VALUE - ------------ ---------------- --------- ---------- ------ ---------------- Boeing (65.47%)........................ B737-400 7 Narrowbody 3 19.65% B757-200 3 Narrowbody 3 13.93 B767-300ER 2 Widebody 3 13.42 B737-300 5 Narrowbody 3 12.68 B747-200B 1 Widebody 3 3.57 B737-500 1 Narrowbody 3 2.21 Airbus (17.53%)........................ A320-200 5 Narrowbody 3 16.23 A300-B4-200 1 Widebody 3 1.30 McDonnell Douglas Corporation (10.51%)............................. MD83 3 Narrowbody 3 7.06 DC8-71F 2 Narrowbody 3 3.45 Fokker N.V. (6.49%).................... F100 4 Narrowbody 3 6.49 ----- ------ 34 100.00% ===== ====== 35 37 The following table lists the aircraft by lessee at January 18, 1999 both by reference to the number of aircraft and to the percentage of the appraised value at January 18, 1999. NUMBER OF % OF AIRCRAFT BY LESSEE(1) AIRCRAFT APPRAISED VALUE - --------- --------- ---------------- Spanair S.A................................................. 3 11.35% Airtours International Airways Limited...................... 2 6.68 Linea Aerea Nacional Chile S.A.............................. 1 6.68 Asiana Airlines, Inc........................................ 2 5.92 Turk Hava Yollari A.O....................................... 2 5.73 Transportes Aereos Regionais S.A............................ 3 4.88 Philippine Airlines, Inc.................................... 2 4.78 Air 2000 Limited............................................ 1 4.71 China Southwest Airlines.................................... 1 4.65 Aerovias Nacionales de Colombia S.A. Avianca................ 1 4.58 Tower Air, Inc.............................................. 1 3.57 Monarch Airlines Limited.................................... 1 3.45 Canadian Airlines International Limited..................... 1 3.33 Aer Lingus Limited.......................................... 1 2.80 Compagnie Nationale Air France.............................. 1 2.77 China Aviation Supplies Corporation and Civil Aviation Administration of China -- Yunnan Administration.......... 1 2.69 Pegasus Hava Tasimaciligi A.S............................... 1 2.62 Malev RT.................................................... 1 2.61 Gunes Ekspres Havacilik A.S................................. 1 2.60 British Midland Airways Limited............................. 1 2.58 Far Eastern Transport Corporation........................... 1 2.45 Air Pacific Limited......................................... 1 2.21 Aircraft International Leasing Limited...................... 1 1.77 BAX Global, Inc............................................. 1 1.68 Portugalia-Companhia Portuguesa de Transportes Aereos, S.A....................................................... 1 1.62 Indian Airlines Limited..................................... 1 1.30 ----- ------ 34 100.00% ===== ====== - --------------- (1) Total number of lessees = 26 36 38 The following table lists the aircraft by country at January 18, 1999 according to the number of aircraft and to the percentage of the appraised value at January 18, 1999. % OF NUMBER OF AIRCRAFT BY COUNTRY(1) AIRCRAFT APPRAISED VALUE - ---------- --------- --------------- United Kingdom.............................................. 5 17.43% Spain....................................................... 3 11.35 Turkey...................................................... 4 10.96 Chile....................................................... 2 8.45 China....................................................... 2 7.34 South Korea................................................. 2 5.92 United States............................................... 2 5.25 Brazil...................................................... 3 4.88 Philippines................................................. 2 4.78 Colombia.................................................... 1 4.58 Canada...................................................... 1 3.33 Ireland..................................................... 1 2.80 France...................................................... 1 2.77 Hungary..................................................... 1 2.61 Taiwan...................................................... 1 2.45 Fiji........................................................ 1 2.21 Portugal.................................................... 1 1.62 India....................................................... 1 1.30 ----- ------ 34 100.00% ===== ====== - --------------- (1) Total number of countries = 18 The following table lists the aircraft by region at January 18, 1999 according to the number of aircraft and to the percentage of the appraised value at January 18, 1999. % OF NUMBER OF AIRCRAFT BY REGION AIRCRAFT APPRAISED VALUE - ------ --------- --------------- Developed Markets Europe.................................................... 11 35.96% North America............................................. 3 8.57 Emerging Asia...................................................... 8 21.79 Latin America............................................. 6 17.90 Europe and the Middle East................................ 5 13.56 Others...................................................... 1 2.21 ----- ------ 34 100.00% ===== ====== 37 39 The following table lists the aircraft by year of aircraft manufacture or conversion to freighter at January 18, 1999 calculated by reference to the number of aircraft and to the percentage of the appraised value at January 18, 1999. % OF NUMBER OF AIRCRAFT BY YEAR OF MANUFACTURE AIRCRAFT APPRAISED VALUE - ------------------- --------- --------------- 1981........................................................ 1 3.57% 1983........................................................ 1 1.30 1988........................................................ 1 2.58 1989........................................................ 4 9.54 1990........................................................ 3 8.04 1991........................................................ 10 30.45 1992........................................................ 11 33.04 1993........................................................ 3 11.48 ----- ------ 34 100.00% ===== ====== The following table lists the exposure of the aircraft by seat category at January 18, 1999 calculated by reference to the number of aircraft and to the percentage of the appraised value at January 18, 1999. % OF NUMBER OF AIRCRAFT BY SEAT CATEGORY AIRCRAFT TYPE AIRCRAFT APPRAISED VALUE - ------------- ------------- --------- --------------- 91-120 B737-500, F-100............................ 5 8.70% 121-170 A320-200, B737-300, B737-400, MD83......... 20 55.62 171-240 B757-200................................... 3 13.93 241-350 A300-B4-200, B767-300ER.................... 3 14.72 351 and above B747-200B.................................. 1 3.57 Freighter DC8-71F.................................... 2 3.45 ----- ------ 34 100.00% ===== ====== 38 40 AERCO PORTFOLIO ANALYSIS DATE OF AIRCRAFT ENGINE SERIAL MANUFACTURE/ REGION COUNTRY LESSEE TYPE CONFIGURATION NUMBER CONVERSION - ------ ------- ------ -------- ------------- ------ ------------ Asia..................... China China Southwest B757-200 RB211-535E4 26153 Aug-92 (Emerging) China Yunnan B737-300 CFM56-3C1 26068 Jun-92 India Indian Airlines A300-B4-200 CF6-50C2 240 May-83 Philippines PAL B737-300 CFM56-3B1 24465 Aug-89 Philippines PAL B737-300 CFM56-3B1 24677 Mar-90 South Korea Asiana Airlines B737-400 CFM56-3C1 25764 Jul-92 South Korea Asiana Airlines B737-400 CFM56-3C1 25765 Jul-92 Taiwan FEAT MD83 JT8D-219 49952 Dec-91 Europe................... France Air France A320-200 CFM56-5A1 85 Feb-90 (Developed) Ireland Aer Lingus B737-400 CFM56-3C1 24685 May-90 Portugal Portugalia F100 TAY650-15 11342 Aug-91 Spain Spanair B767-300ER PW4060 24999 Feb-91 Spain Spanair MD83 JT8D-219 49627 Apr-89 Spain Spanair MD83 JT8D-219 49790 Oct-89 United Kingdom Air 2000 B757-200 RB211-535E4 26158 Feb-93 United Kingdom Airtours A320-200 CFM56-5A3 299 Apr-92 United Kingdom Airtours A320-200 V2500-A1 362 Nov-92 United Kingdom British Midland B737-400 CFM56-3C1 23868 Oct-88 United Kingdom Monarch A320-200 CFM56-5A3 391 Feb-93 Europe................... Hungary Malev B737-300 CFM56-3C1 24909 Apr-91 (Emerging) Turkey Pegasus B737-400 CFM56-3C1 23979 Jan-89 Turkey Sun Express B737-300 CFM56-3C1 24908 Mar-91 Turkey THY B737-400 CFM56-3C1 24904 Feb-91 Turkey THY B737-400 CFM56-3C1 26066 Jun-92 Latin America............ Brazil TAM F100 TAY650-15 11341 Aug-91 (Emerging) Brazil TAM F100 TAY650-15 11350 Apr-92 Brazil TAM F100 TAY650-15 11351 Sep-91 Chile Lan Chile B767-300ER PW4060 24947 Mar-91 Chile Aircraft International DC8-71F CFM56-2C1 46040 Mar-91 Leasing Limited(1) Columbia Avianca B757-200 RB211-535E4 26152 Aug-92 North America............ Canada Canadian A320-200 CFM56-5A1 403 Dec-93 (Developed) United States BAX Global DC8-71F CFM56-2C1 46064 Mar-92 United States Tower Air B747-200B JT9D-7Q 22496 Oct-81 Other.................... Fiji Air Pacific B737-500 CFM56-3C1 26067 Jun-92 APPRAISED VALUE AT JANUARY 18 REGION 1999 - ------ ------------- (U.S.$'000'S) Asia..................... 41,633 (Emerging) 24,099 11,648 20,736 22,103 26,720 26,285 21,983 Europe................... 24,800 (Developed) 25,091 14,496 60,437 20,493 20,780 42,170 29,537 30,347 23,132 30,937 Europe................... 23,366 (Emerging) 23,466 23,308 24,912 26,467 Latin America............ 14,160 (Emerging) 15,096 14,431 59,841 15,858 41,012 North America............ 29,791 (Developed) 15,040 31,996 Other.................... 19,785 -------- 895,956 ======== - --------------- (1) Aircraft International Leasing Limited is an indirect 100% subsidiary of Lan Chile. ACQUISITION OF ADDITIONAL AIRCRAFT AerCo group may acquire additional commercial passenger or freight aircraft from various sellers, including AerFi. Cash flows from any additional aircraft and any additional leases will be available to satisfy AerCo's payment obligations, on the notes and any additional notes. Any acquisition of additional aircraft and issuance of additional notes will be subject to certain conditions under the indenture. You should refer to "Description of the Notes -- Payment of Principal and Interest -- Indenture Covenants -- Limitation on Indebtedness" and "-- Limitations on Aircraft Acquisitions" for additional information on restrictions on the acquisition of additional aircraft. 39 41 THE LEASES GENERAL All leases are managed by Babcock & Brown under the servicing agreement. The following description relates only to the leases. Any additional leases acquired in connection with the acquisition of additional aircraft and any future leases entered into in connection with the re-lease of any aircraft may differ from the description of the leases set forth below. However, any additional leases or future leases must comply with the operating covenants contained in the indenture. The leases are all operating leases under which AerCo generally will retain the benefit, and bear the risk, of the residual value of the aircraft at the end of the lease. The lessees have agreed to lease the aircraft for a fixed term. However, AerCo has granted purchase, extension or early termination options on certain aircraft to the lessee or an affiliate of the lessee. Although the lease documentation is fairly standardized in many respects, significant variations do exist as a result of lessee negotiation. LEASE PAYMENTS AND SECURITY Each lease requires the lessee to pay periodic rentals during the lease term. Certain of the leases require the lessee to pay periodic amounts as maintenance reserves or to provide maintenance letters of credit or guarantees. The lessees must make payments to the lessor without set-off or counterclaim, and must gross-up payments under the lease where payments are subject to certain withholding and other taxes. However, in certain cases, such amount will be limited to the amount that would have been payable if the lease had never been transferred from AerFi to AerCo. The leases also contain indemnification of the lessor for certain taxation liabilities and, in all but one case, taxation of indemnity payments. Indemnification for taxation liabilities typically includes value added and stamp duty taxes, but excludes income taxes or their equivalent. The lessees must also pay default interest on any overdue amounts. The lessees are liable through various operational indemnities for operating expenses accrued or payable during the term of the lease. These expenses include maintenance, operating, overhaul, airport and navigation charges, certain taxes, licenses, consents and approvals, aircraft registration and hull all risks and public liability insurance premiums. The lessees must remove liens on the aircraft other than liens permitted under the leases. Under all of the leases, the lessee provided security deposits for its obligations. The lessee has provided cash security deposits in the case of 17 leases or, 52.61% of the leases by appraised value at January 18, 1999. The lessee has provided letters of credit in the case of 10 leases representing 24.71% of the leases by appraised value at January 18, 1999. The lessee provided a combination of cash security deposits and letters of credit in the case of the remaining 7 leases or 22.68% of the leases by appraised value at January 18, 1999. Under 10 of the leases, the lessor received general guarantees from third parties for the lessee's payment obligations under the lease. In some cases, the lessor also received guarantees of the lessee's performance obligations under the lease. In the case of seven of the leases, these guarantees were issued by the lessee's shareholder or affiliate. In the case of the leases to China Southwest and Yunnan, a guarantee for each lessee's payment obligations was issued by the Bank of China. In each case, the guarantee was subject to a stipulated maximum amount. In the case of one lease, letters of comfort were issued to the lessor by two of the lessee's shareholders. RENTALS Rentals under 32 of the leases -- 92.66% of the leases by appraised value at January 18, 1999 -- are payable monthly in advance. Rentals under the remaining two leases are payable quarterly in advance. Rental payments on the leases are calculated either on a fixed or floating rate basis. The rental payment of a lease, which is calculated on a floating rate basis generally has a rental floor that is payable even if 40 42 LIBOR is 0% per annum plus an amount which varies with LIBOR or varies itself. The rental floor varies from lease to lease. OPERATION OF THE AIRCRAFT The lessees must operate the aircraft in compliance with all applicable laws and regulations. The aircraft generally must remain in the possession of the lessees, and the lessor must approve any subleases of the aircraft. The lessees may enter into charter or "wet lease" arrangements with the aircraft under most of the leases, as long as lessees do not relinquish possession or operational control of the aircraft. A wet lease is a lease with crew and services provided by the lessee. Under certain leases, the lessees may enter into subleases to specified operators without the lessor's consent, if certain conditions are met. Two of the lessees currently sublease their aircraft, BAX Global to Air Transport International and Aer Lingus to Futura. The lessees may subject the engines and other equipment or components to removal or replacement and to pooling arrangements with permitted entities without the lessor's consent but subject to conditions and criteria in the relevant lease. The lessees may deliver possession of the aircraft, engines and other equipment or components to the manufacturer for testing or similar purposes, or to a third party for service, maintenance, repair or other work required or permitted under the lease. MAINTENANCE AND MAINTENANCE RESERVES The leases contain detailed provisions specifying maintenance standards and aircraft redelivery conditions. Lessees must provide monthly maintenance reserves under approximately half of the leases. Under the balance of the leases, the lessee or the lessor may be required to make certain adjustment payments to each other if the aircraft or specified items at redelivery do not meet the standards. During the term of each lease, the lessee must ensure that the aircraft is maintained in accordance with an agreed maintenance program designed to ensure that the aircraft meets applicable airworthiness and other regulatory requirements. Generally, the lessee performs the agreed maintenance program. If the lessee has paid maintenance reserves, the payments are used to reimburse the lessee for significant maintenance charges, including major airframe and engine overhauls. If the leases do not provide for maintenance reserves payments, the lessor must rely on the lessee's credit and its ability to perform scheduled maintenance throughout the lease term, return the aircraft in the condition required by the lease, or make any payments required upon termination of the lease. Because many of our aircraft are roughly the same age and have similar usage patterns, a large portion of the portfolio will come due for major airframe and engine overhauls during 1999 and 2000. Depending on the level of AerCo's maintenance receipts, the timing of the overhauls and the amount of maintenance already done by the lessee, completing these overhauls could result in significant cash outflows during the next two years. LESSEES' OPTIONS Purchase options for six of the aircraft or 23.57% of the aircraft by appraised value at January 18, 1999 have been granted to lessees under the lease or a separate purchase option agreement. All of the purchase options are currently exercisable. The duration of some purchase options depends on whether the lessee exercises a separate option to extend the lease. There are no purchase options which are exercisable at prices below the assumed note target prices. Five of the leases -- 16.03% of the leases by appraised value at January 18, 1999 -- include options for the lessee to extend the lease term. One of the leases, includes an option for the lessor to extend the lease term. The rent payable during the extension period varies from lease to lease. Four of the leases or 8.12% of the leases by appraised value at January 18, 1999, contain provisions allowing early termination of the lease. 41 43 COMPLIANCE WITH GOVERNMENTAL AND TECHNICAL REGULATION. In addition to general requirements regarding maintenance of aircraft, aviation authorities issue airworthiness directives ("ADS") requiring the operators of aircraft to take particular maintenance actions or make particular modifications to a number of aircraft of designated types. ADs normally specify a period in which to carry out the required action or modification and generally enough time is allowed to permit the implementation of the AD in connection with scheduled maintenance of the aircraft or engines. The lessees usually bear the cost of compliance with ADs issued by applicable aviation authorities and, relevant manufacturers' recommendations. AerCo group may be required to contribute a portion of such costs over a specified threshold. However, if a lessee fails to perform ADs required on an aircraft, AerCo group would bear the cost of compliance necessary for the aircraft to maintain its certificate of airworthiness. In such circumstances, funds in the collection account and lessee funded account will be available to mitigate the costs of compliance, although such use would reduce the availability of such amounts to cover the cost of scheduled maintenance. There can be no assurance that such funds will be available at the time needed or that any funds available will be sufficient for such purposes. Other governmental regulations may apply to the aircraft, including requirements relating to noise and emissions levels. Such regulations may be imposed not only by the jurisdictions in which the aircraft are registered, but also in jurisdictions where the aircraft operate. Chapters 2 and 3 of Chicago Convention establish two progressively restrictive noise level standard that correspond to the requirements for Stage 2 and Stage 3 aircraft. A number of jurisdictions have adopted, or are in the process of adopting, noise regulations which will require all aircraft to comply with the most restrictive of these standards. Such regulations restrict the future operation of aircraft that are not Stage 3 aircraft and will prohibit the operation of such aircraft in the relevant jurisdictions early in the next century, 1999 in the case of the United States. Since AerCo group has the ability to acquire Stage 2 aircraft, these regulations may affect AerCo adversely. In addition, local municipalities may have more stringent noise regulations than those applicable to Stage 3 aircraft. Volume 2 of Annex 16 of the Chicago Convention also contains standards and recommendations regarding limitations on vented fuel and smoke and gaseous emissions for aircraft. While a number of countries have adopted regulations implementing these recommendations, such regulations generally have been prospective in nature, requiring only that newly manufactured engines meet particular standards after a particular date. To the extent that these regulations require modifications to the engines owned by AerCo group, they would be treated similar to ADs under the leases. Aviation authorities in Europe and North America have recently adopted regulations requiring the installation of traffic collision avoidance systems, automatic emergency locator transmitters and certain other systems. Depending on whether the costs of complying with these regulations are borne by AerCo or the lessees, installation of these systems could result in significant cash capital expenditures by AerCo in 1999 and 2000. INDEMNIFICATION AND INSURANCE OF THE AIRCRAFT GENERAL The lessees will bear responsibility through an operational indemnity and carry insurance for any liabilities arising out of the operation of the aircraft. The indemnity includes liabilities for death or injury to persons and damage to property that ordinarily would attach to the operator of the aircraft. In addition, the lessees are required to carry additional insurance that are customary in the air transportation industry. Babcock & Brown monitors the lessee's compliance with the insurance provisions of the leases. AerCo also have its own contingent liability coverage. This will cover a liability that is in excess of the coverage provided by a lessee's policy and where a lessee's policy lapses. AerCo's contingent third party liability insurance will cover all of the aircraft and its contingent hull and hull war risks insurance covers certain of the aircraft. The amount of the contingent liability policies may not be the same as required under the lease. The amount of third party contingent liability insurance is subject to certain limitations imposed by the air transportation insurance industry. 42 44 If any of the existing insurance policies are canceled or terminated and in the case of the re-lease of an aircraft, AerCo or Babcock & Brown may engage insurance experts to advise and recommend the appropriate amount of insurance coverage AerCo should procure. All insurance certificates contain a breach of warranty endorsement so that the additional insured parties remain protected even if the lessee violates any of the terms, conditions or warranties of the insurance policies, provided that the additional insured party has not caused, contributed to or knowingly condoned the breach. LIABILITY INSURANCE The lessees are required to have third party liability insurance for a combined single limit in minimum amounts ranging between $350 million and $850 million for each aircraft. In general, liability coverage on each aircraft includes third party legal liability, property damage legal liability, passenger legal liability, baggage legal liability, cargo legal liability, mail and aviation general third party legal liability. In some jurisdictions, liabilities for risks that the lessees insure may attach to AerCo group as owner of the aircraft regardless of whether AerCo is in any way responsible for the loss for which liability is asserted. In addition, claimants may assert claims against AerCo group on the basis of alleged responsibility for a loss, even if the claim is not sustained. Under the leases, the lessees are obligated to indemnify the lessor against claims. Covered claims include the costs of defending against claims by third parties against them for liabilities while the aircraft are owned by AerCo group and under lease to the lessees. The indemnified losses include both operating costs relating to the actual operation of the aircraft as well as losses to persons and property resulting from the operation of the aircraft. The latter types of losses are generally covered by the lessee's liability insurances. AIRCRAFT PROPERTY INSURANCE The lessees must carry other types of insurance that are customary in the air transportation industry, including all risks aircraft hull and hull war risks insurance and aircraft spares insurance. The value of the aircraft hull and hull war risk insurance is usually stipulated in the lease. Aircraft spares insurance is usually on a replacement cost basis. Both types of insurance are subject to customary deductibles. In addition to the stipulated lease value coverage obtained by the lessees, AerCo group purchases declining "total loss only" coverage with respect to certain aircraft. As of January 18, 1999, the sum of the stipulated loss value and the additional coverage for the aircraft in place for all risks aircraft hull and hull war risks insurances was at least 107% of the appraised value of each aircraft. On average, the sum of such coverages in place for each aircraft was approximately 129% of the appraised value of each aircraft. In many cases, the lessor can increase the insured value above the stipulated lease value consistent with industry practice with the lessee paying any increased premium. Permitted deductibles range from $250,000 to $1,000,000; however, the deductible generally applies only in the case of a partial loss. In the case of a total loss of an aircraft no deductible would be applied against the insurance proceeds received. The leases include provisions defining an event of loss or a casualty occurrence so that where a total loss of the airframe occurs, with or without loss of the engines installed on the airframe, the agreed value is payable by the lessee. This payment is generally funded with insurance proceeds. However, the air transportation insurance industry practice is to treat only a loss of greater than 75% of the value of the aircraft, including the engines, as a total loss. Where insurance proceeds do cover a total loss, most leases require the lessor to pay to the lessee the balance of the insurance proceeds received under the hull all risks or war risks policy after deduction of all amounts payable by the lessee to the lessor under the lease. POLITICAL RISK REPOSSESSION INSURANCE Under certain leases, the lessor may arrange separate political risk repossession insurance for its own benefit, covering confiscation, nationalization and requisition of title of any aircraft by the government of the country of registry and denegation and deprivation of legal title and rights. The political risk repossession 43 45 insurance also covers the failure of the authorities in that country to allow de-registration and export of the aircraft, subject to the conditions of the policies. Only 9.29% of the leases by appraised value of the aircraft concerned at January 18, 1999 require the lessee to reimburse the lessor for any political risk repossession insurance premiums. THE LESSEES As of January 31, 1999, there were 26 lessees in 18 countries. REGIONAL CONCENTRATIONS ASIA PACIFIC CONCENTRATION. At January 18, 1999, 21.79% of the aircraft by appraised value at January 18, 1999 were leased by operators in "emerging" markets in the Asia Pacific region, including China, the Philippines, South Korea and India. One lessee, Asiana, leased 5.92% of the aircraft by appraised value at January 18, 1999. Trading conditions in Asia's civil aviation industry have been adversely affected by the severe economic and financial difficulties experienced recently in the region. The economies of the region have experienced acute difficulties resulting in many business failures, significant depreciation of local currencies against the dollar, downgrading of sovereign and corporate credit ratings and internationally organized financial stability measures. One Asian lessee recently filed for bankruptcy protection. Several airlines in the region, including one lessee, recently announced their intention to reschedule their aircraft purchase obligations, eliminate certain routes and reduce employees. This downturn in the region's economies may undermine business confidence, reduce demand for air travel and adversely affect the Asian lessees' operations and their ability to meet their obligations. LATIN AMERICAN CONCENTRATION. At January 18, 1999, 17.90% of the aircraft by appraised value at January 18, 1999 were leased by operators in "emerging markets" in Latin America, principally Brazil, Chile and Colombia. One lessee, Lan Chile, leased 6.68% of the current portfolio by appraised value at January 18, 1999. The financial prospects for lessees in Latin America depends on the level of political stability and economic activity and policies in the region. Developments in other "emerging markets" may also affect the economies of Latin American countries and the entire region. Most significantly, Brazil has experienced significant downturns in its economy and financial markets, with large decreases in financial asset prices. Since it devalued its currency on January 13, 1999, Brazil has seen dramatic decreases in the value of its currency. One of the lessees representing 4.88% of the aircraft by appraised value at January 18, 1999 operates three of the aircraft in Brazil. Continued weakness in the value of the Brazilian real, as well as general deterioration in the Brazilian economy, means that this lessee may be unable to generate sufficient revenues in Brazilian currency to pay the dollar-denominated rental payments under the lease. More importantly, financial and economic problems in Brazil could spread throughout Latin America and other "emerging" economies, having a similar effect on many of our other lessees. Similarly, the Chilean economy has recently suffered adverse effects as a result of the continuing economic difficulties in Asia and lower market prices for certain of Chile's exported commodities, especially copper, woodpulp and fishmeal. In the past, Asia has accounted for a significant portion of Chile's exports. Copper is Chile's principal export product. Copper prices have declined dramatically over the past year, primarily as a result of Asia's economic difficulties as discussed above. Such economic developments, especially if they continue or worsen, could lead to lower levels of economic activity in Chile which could, in turn, adversely affect the operations of AerCo group's Chilean lessee. EUROPEAN CONCENTRATION. At January 18, 1999, 49.52% of the aircraft by appraised value at January 18, 1999 were leased by operators based in Europe. Of this amount, lessees of 35.96% of the aircraft are based in "developed" European markets, principally the United Kingdom and Spain. Lessees of the remaining 13.56% of the aircraft were based in "emerging" European markets, principally Turkey. One lessee, Spanair, leased 11.35% of the aircraft by appraised value at January 18, 1999. As of January 18, 1999, 46.72% of the 44 46 aircraft by appraised value at January 18, 1999 were leased to charter operators in the tourism industry, principally in the United Kingdom (17.43% of the aircraft by appraised value at January 18, 1999). The commercial aviation industry in Europe is very sensitive to general economic conditions. Since air travel is largely discretionary, the industry tends to suffer severe financial difficulties during slow economic periods. As a result, the financial prospects for European lessees will depend on the level of economic activity in Europe and in the specific countries where they operate. A recession or other worsening of economic conditions in any European country may adversely affect the European lessees' ability to meet their financial and other obligations. For example, the Russian economy has recently experienced severe difficulties, including significant devaluation of the rouble against the dollar. The downturn in Russia's economy may undermine business confidence and reduce demand for air travel in other emerging market countries. Competitive pressures from continuing deregulation of the airline industry by the EU may also adversely affect European lessees' operations and their ability to meet their obligations under the leases. NORTH AMERICAN CONCENTRATION. At January 18, 1999, 8.58% of the aircraft by appraised value at January 18, 1999 were leased by operators in North America. As in Europe, the commercial aviation industry in North America is highly sensitive to general economic conditions. Since airline travel is largely discretionary, the industry has suffered severe financial difficulties during economic downturns. Over the last several years, nearly half of the major North American passenger airlines have filed Chapter 11 bankruptcy proceedings and several major U.S. airlines have ceased operations. PAYMENT HISTORY Weakly capitalized airlines are more likely than well capitalized airlines to seek operating leases. Therefore, many of the lessees are in a relatively weak financial position and several of them have faced and continue to face severe economic difficulties. As of January 31, 1999, amounts outstanding for more than 30 days for rental payments, maintenance reserves and other amounts due under the leases equalled $3.66 million for 4 lessees who had a total of 5 aircraft on lease. The outstanding amounts are net of agreed deferrals or other restructurings, default interest and cash in transit. As of January 31, 1999, a Brazilian lessee representing 4.88% of the portfolio by appraised value at January 18, 1999 owed $0.50 million. Babcock & Brown is in negotiations with the lessee regarding payment of its arrearages. The outcome of these negotiations could include a substantial restructuring of the leases, including changes in the lease rate and term. PAL, the lessee of two B737-300 aircraft representing 4.78% of the portfolio by appraised value at January 18, 1999, has recently suffered severe financial difficulties. On June 19, 1998, PAL filed a petition for Approval of a Rehabilitation Plan with the Philippine SEC and subsequently the Philippine SEC appointed an Interim Receiver. PAL was instructed by the Philippine SEC to submit a rehabilitation plan within thirty days. Following a number of applications for extension of this time limit, PAL filed a rehabilitation plan with the Philippine SEC on December 7, 1998 for approval. A revised plan was filed on March 15, 1999. It is unclear whether PAL will receive support for its proposed rehabilitation plan from its creditors or whether it will be approved by the Philippine SEC. At January 31, 1999, $3.33 million was outstanding from PAL, with $3.30 million in arrears for more than 30 days. Babcock & Brown is in negotiations with PAL regarding repayment of its arrearages. There can be no assurance, however, that PAL will ultimately repay its arrearages or be able to pay future lease rentals. AerCo group may encounter delays or difficulties in recovering possession of the aircraft, which are currently operated within the Philippines, or terminating such leases. If the aircraft are recovered, the technical costs required to ensure the aircraft are in suitable condition for re-leasing may be significant. As of January 31, 1999, a North American lessee, representing 3.57% of the portfolio by appraised value at January 18, 1999, owed $0.79 million in rent, of which $0.33 million was in arrears for more than 30 days. 45 47 As ALPS 94-1 has done in the past, AerCo expects to respond to the needs of lessees in financial difficulty including, restructuring the applicable leases or agreeing lease deferrals. The restructurings will typically involve the rescheduling of rental payments for a specified period. In addition, certain restructurings may involve the voluntary early termination of a lease, the replacement of aircraft with less expensive aircraft and the arrangement of sub-leases from the lessee to another aircraft operator. In certain cases, it may be necessary to repossess aircraft from defaulting lessees and re-lease the aircraft to other lessees. The early termination of leases may lead AerCo to incur swap breakage costs under its agreements with swap providers which could be substantial. You should refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Interest Rate Management" for additional information on swap breakage costs. Since 1995, ALPS 94-1 has entered into deferral and other restructuring transactions with two of the lessees and one former lessee involving a total of three aircraft. These restructurings are described below. The Airbus A320-200 aircraft on lease to Airtours was, until November 1995, leased to a U.K. charter operator. During 1994 and 1995, this lessee incurred substantial losses. In July 1995 when approximately $0.70 million was due under the lease, ALPS 94-1 agreed with the lessee and its parent company to terminate the lease in November 1995. The lessee agreed to a termination fee of $500,000, payable from the security deposit held by ALPS 94-1. In December 1995, the parties entered into a restructuring agreement, which provided for the payment of a L200,000 fee to settle all of ALPS 94-1's outstanding claims under the first restructuring agreement. The amounts were payable in monthly installments through October 1997. All installments have been paid under a bank letter of credit. Upon termination of this lease, the A320-200 aircraft was immediately released to Airtours as part of a larger aircraft swap transaction, under which Airtours terminated its lease of the MD83 aircraft owned by ALPS 94-1 and entered into a seven-year lease for the A320-200 aircraft. ALPS 94-1 shortly thereafter re-leased the MD83 aircraft to FEAT for three years. Although the transfer of the two aircraft was achieved without either aircraft being off-lease for any significant period, ALPS 94-1 incurred maintenance and other expenses of approximately $0.20 million and $0.50 million in connection with the redelivery of the A320-200 aircraft and the MD83 aircraft. Lost cash flow attributable to the restructuring described above, including the subsequent transfer of aircraft during the year ended June 30, 1996 was $0.60 million. In December 1996, Canadian, lessee of an A320-200 aircraft approached ALPS 94-1 with proposals to reschedule its obligations as part of a general plan designed to address its financial difficulties. After extensive negotiations, ALPS 94-1 and Canadian entered into an agreement in May 1997 providing for the deferral of operating lease rentals from December 1996 to February 1997. The deferred payments have all been repaid together with interest. In addition, Canadian has extended its lease for a further 61 months. The restructuring agreement resulted in a loss of cash flow to ALPS 94-1 of approximately $0.90 million during the year ended June 30, 1997. In early 1996, a Latin American airline which operates a Boeing B757-200 aircraft experienced significant periodic cash shortages as a result of a seasonal drop in revenues. In April 1996, ALPS 94-1 agreed to the deferral of approximately $0.90 million in rental and maintenance payments for January and February 1996 to August 1996. The amounts deferred, together with default interest and a deferral fee, were subsequently paid. In addition, in December 1997, this lessee prepaid 12 months' rental payments under the relevant lease. Since January 1, 1999 this lessee has incurred significant short term arrearages. Babcock & Brown is actively monitoring the situation. Certain lessees have experienced periodic difficulties in meeting their maintenance obligations under the leases. Such difficulties are caused by the failure of the lessee to have in place a well established maintenance program, adverse climate and other environmental conditions in the locations where the aircraft are operated or financial and labor difficulties experienced by the relevant lessee. 46 48 DOWNTIME As of January 31, 1999, none of the aircraft was off-lease. There can be no assurance that ALPS 94-1 and AerFi's experience will be indicative of AerCo group's and Babcock & Brown's ability to keep the aircraft and any additional aircraft on-lease in the future. AerCo group and Babcock & Brown may be unable to re-lease aircraft upon the expiration of leases as a result of a deterioration in industry conditions, decreased demand for specific types of aircraft or other factors. The table below lists the leases that are scheduled to expire through 2003, and also shows the number and type of aircraft that we must re-lease through December 31, 2003. The table assumes that no lease will terminate early and that there are no sales of aircraft or purchases of additional aircraft. More aircraft may need to be re-leased if aircraft become available through early lease terminations. AERCO GROUP LEASE PLACEMENT REQUIREMENT AT JANUARY 18, 1999 TO DECEMBER 31, ----------------------------------------- AIRCRAFT TYPE 1999 2000 2001 2002 2003 ------------- ----- ----- ----- ----- ----- A300............................................. -- -- 1 -- -- A320............................................. 1 1 -- 1 1 B737............................................. 5 2 3 2 -- B747............................................. -- -- -- -- -- B757............................................. -- -- -- 1 1 B767............................................. -- 1 1 -- -- DC8.............................................. -- -- -- -- 2 F100............................................. -- -- -- 1 -- MD83............................................. -- -- -- 1 -- DESCRIPTION OF THE LESSEES The table below lists certain available information on the country of domicile, government, airline or principal shareholders, fleet size and composition and the first year of operation of each lessee. You should refer to "-- Portfolio Information" above for additional tables detailing the exposure of the portfolio as a percentage of appraised value at January 18, 1999 to each lessee and the countries and geographic regions in which the lessees are domiciled. BEGAN GOVERNMENT/COMMERCIAL LESSEE DOMICILE OPERATION AIRLINE/PRINCIPAL SHAREHOLDERS FLEET(1) - ------ -------- --------- ------------------------------ -------- Aer Lingus.............. Republic of Ireland 1936 Government of Ireland (100%) 6 B737-400 8 B737-500 5 A330-300 1 L-1011-100 Airtours................ United Kingdom 1990 Airtours Plc (100%) 10 A320-200 4 B757-200 4 B767-300ER Air 2000................ United Kingdom 1986 First Choice Holidays Plc (100%) 4A320-200 9 B757-200 47 49 BEGAN GOVERNMENT/COMMERCIAL LESSEE DOMICILE OPERATION AIRLINE/PRINCIPAL SHAREHOLDERS FLEET(1) - ------ -------- --------- ------------------------------ -------- Air France.............. France 1933 Government of France (95%) 5 F100 7 B737-300 16 B737-500 17 B737-200A 4 B747-100 2 B747-200B 10 B747-200BC 10 B747-200F 2 B747-200SF 2 B747-300C 7 B747-400 6 B747-400C 5 B767-300ER 2 A300-B4-200 6 A310-200 4 A310-300 9 A319-100 13 A320-100 43 A320-200 6 A321-100 4 A321-200 3 A340-200 11 A340-300 6 Concorde 9 F.27-5000 Air Pacific............. Fiji 1951 Government of Fiji (72%) 1 B737-300 Qantas (17.5%) 1 B737-500 Air New Zealand (2%) 1 B747-200B 1 B767-300ER Asiana.................. Republic of Korea 1988 Kumho Group (62%) 19 B737-400 Korean Development Bank (12.6%) 3 B737-500 Korean Long Team Credit Bank (6.4%) 12 B747-400 Swiss Bank Corp (19%) 8 B767-300 8 B767-300ER 1 A321-100 Avianca................. Colombia 1919 Private 3 B727 200 4 B757 200 3 B767 200ER 1 B767 300ER 10 F50 11 MD83 British Midland......... United Kingdom 1938 BBW Partnership (60%) 4 F100 SAS (40%) 9 Saab340 3 F70 8 B737-300 5 B737-400 13 B737-500 1 Jetstream 41 BAX Global.............. United States 1972 Bax Global Northern Air Freight 3 B727-200A 1997 (100%) 11 DC8-60 1979 11 DC8-70 Canadian................ Canada 1987 AMR (33%) 12 A320-200 41 B737-200 4 B747-400 9 B767-300ER 4 DC10-30 5 DC10-30ER 48 50 BEGAN GOVERNMENT/COMMERCIAL LESSEE DOMICILE OPERATION AIRLINE/PRINCIPAL SHAREHOLDERS FLEET(1) - ------ -------- --------- ------------------------------ -------- China Southwest......... People's Republic 1987 People's Republic of China (100%) 1 B707-300 of China 16 B737-300 11 B757-200 3 AN-24 5 TU-154 4 Y-12 FEAT.................... Taiwan 1957 China Development (controlled by the 2 B737 200A KMT, Taiwan's ruling party) (14%) 3 B757-200 China Airlines (10%) 7 MD82 3 MD83 Indian Airlines......... India 1953 Government of India (100%) 1 Fairchild 228-200 7 B737-200A 1 B737-200AC 8 A300-B2-100 2 A300-B4-200 30 A320-200 Lan Chile............... Chile 1929 Grupo Guato (38.5%) 18 B737-200A Grupo Pifiera (33.1%) 11 B767-300ER Grupo Humas (19%) 1 B757-200QC Grupo Ebler (8.4%) Malev................... Hungary 1946 Government of Hungary (63.9%) 6 B737-200A Alitalia (30%) 2 B737-400 2 B767-200ER 5 F70 4 B737-300 3 Tu-134 5 Tu-154 Monarch................. United Kingdom 1967 Cosmos Guide Holding International 4 A300-600ER NV (100%) 5 A320-200 6 B757-200 1 DC10-30 1 A321-200 1 L-1011-1 Pegasus................. Turkey 1990 Yapi Kredit Bank (49%) 3 B737-400 Alper Elchin (21%) Silkar and Net Holdings (30%) PAL..................... Philippines 1941 Lucio Tan (34%) 11 A300-B4-200 Government (33%) 11 B737 300 10 F50 1 MD11ER 8 A330-300 4 A340-200 5 A340-300 4 A320-200 5 A340-300 3 B747-200B 4 B747-400 Portugalia.............. Portugal 1987 Groupo Espirito Saneto (61%) 6 F100 5 RJ145 1 RJ70 49 51 BEGAN GOVERNMENT/COMMERCIAL LESSEE DOMICILE OPERATION AIRLINE/PRINCIPAL SHAREHOLDERS FLEET(1) - ------ -------- --------- ------------------------------ -------- Spanair................. Spain 1987 SAS (49%) 2 B767-300ER 15 MD-83 1 MD-82 2 MD-87 1 MD-81 2 B757-200 Sun Express............. Turkey 1990 THY (60%) 3 B737-300 Condor (Lufthansa subsidiary) (40%) 2 B737-400 TAM..................... Brazil 1976 VASP (3.35%) 29 F100 Rolim Amao (66.6%) 9 F50 6 F27 6 Citation Tower Air............... United States 1982 Tower Travel (75%) 5 B747-100 1 B747-100F 9 B747-200B 1 B747-200SF THY..................... Turkey 1933 Republic of Turkey (98.7%) 7 A310-200 7 A310-300 5 A340-300 3 B727-200A 28 B737-400 2 B737-500 4 RJ70 9 RJ100 Yunnan.................. People's Republic 1992 China Southwest (50%) 14 B737-300 of China City of Kunming (Yunnan Province) 3 B767-300ER (50%) - --------------- (1) Source: Airclaims Limited CASE Database, February 15, 1998. 50 52 MANAGEMENT OF AERCO GROUP Except as described in this prospectus, particularly upon an event of default, neither you nor the trustee has a right to participate in AerCo's management or affairs. Neither you nor the trustee can supervise the functions relating to the leases and the re-lease of the aircraft, which are delegated to Babcock & Brown under the servicing agreement. DIRECTORS AerCo's board of directors will have no more than five members. The holder or holders of a majority in aggregate principal amount of AerCo's class E notes have the right to appoint two directors while the class E notes are outstanding. The remaining directors must be independent directors. The initial independent directors are Mr. Frederick W. Bradley, Jr., Chairman of AerCo, Mr. Kenneth N. Peters and Mr. G. Adrian Robinson. The succeeding independent directors will be appointed by a majority of the then standing directors. If no independent directors are serving on the board at any time, three new independent directors will be appointed in accordance with AerCo's Articles of Association. Mr. Edward Hansom and Ms. Rose Hynes were appointed directors by AerFi as holder of the majority of the subclass E-1 notes. Any resolution of the board of directors will require the affirmative vote of a majority of the independent directors. Transactions and proceedings that relate to certain insolvency proceedings, amendments to AerCo's Memorandum or Articles of Association, acquisition of additional aircraft, mergers or the sale of all or substantially all of AerCo's assets may only be approved by a unanimous vote of all directors. The directors, their ages and principal activities are as follows: NAME AGE OFFICES HELD WITH THE REGISTRANT - ---- --- -------------------------------- Frederick W. Bradley, Jr.................. 71 Director and Chairman Kenneth N. Peters......................... 63 Director G. Adrian Robinson........................ 49 Director Edward Hansom............................. 40 Director Rose Hynes................................ 40 Director Frederick W. Bradley, Jr. -- From 1969 until 1992, Mr. Bradley was a Senior Vice President of Citibank N.A., in charge of the bank's global airline and aerospace business, having joined Citibank in 1958. Mr. Bradley has served as a director and Chairman of ALPS 94-1 since 1994. Mr. Bradley also serves as a director and Chairman of Aircraft Lease Portfolio Securitisation 92-1 Limited. Mr. Bradley is also a director of America West Airlines, Inc., First Citicorp Life Insurance Co., and the Institute of Air Transport, Paris, France and is president of the International Air Transport Association's (IATA) International Airline Training Fund of the United States. Kenneth N. Peters -- Mr. Peters was Assistant Treasurer of The Boeing Company from 1985 to 1995 and was Vice President, Customer Financing at The Boeing Company from 1995 until his retirement from The Boeing Company in 1997. From 1960 to 1985, Mr. Peters held various positions with The Boeing Company including the positions of Manager and Director of Customer Financing within the Corporate Treasurer's Organization. G. Adrian Robinson -- Mr. Robinson has been an Aerospace Consultant since 1992. From 1990 to 1992 Mr. Robinson was a Deputy General Manager of The Nippon Credit Bank. Until 1989, he was a Managing Director, Special Finance Group of Chemical Bank, which he joined in 1986. Mr. Robinson also serves as a director of ALPS 94-1 and its subsidiaries and Aircraft Lease Portfolio Securitisation 92-1 Limited and its subsidiaries. Mr. Robinson also provides consulting services from time to time to Air 2000, one of the lessees. Edward Hansom -- Mr. Hansom is Chief Financial Officer of AerFi. He joined AerFi in 1988 from the treasury division of Schroders. Prior to taking up his current position in May 1997, Mr. Hansom was General Manager, Treasury of AerFi Group. 51 53 Rose Hynes -- Ms. Hynes is General Counsel of AerFi. She joined AerFi Group in 1988, having previously been a partner in an Irish law firm. Prior to taking up her current position with AerFi in May 1997, she was Vice President, Corporate Finance of AerFi. Ms. Hynes also serves as a director of Aer Lingus, one of the lessees, and certain of its subsidiaries. AerCo's directors are non-executive and AerCo does not and will not have any employees or executive officers. Accordingly, the board of directors relies upon Babcock & Brown, the administrative agent, the cash manager and the other service providers for all asset servicing, executive and administrative functions under the service provider agreements. Certain individuals other than the directors listed above serve as directors of various subsidiaries of AerCo. All directors are compensated for travel and other expenses incurred by them in the performance of their duties. AerCo pays each independent director an aggregate fee of $75,000 per annum for their services. The directors appointed by the holder of a majority in aggregate principal amount of the class E notes do not and will not receive remuneration from AerCo for their services. Mr. Bradley, Mr. Peters and Mr. Robinson also act as directors of certain AerCo group subsidiaries. Mr. Bradley, Mr. Peters and Mr. Robinson each receive $1,000 for each day, or portion of a day, which they are required to devote to the activities of those subsidiaries and AerCo, excluding board meetings. AerCo knows of no arrangement, the exercise of which could result in a change in control of AerCo. BENEFICIAL OWNERSHIP OF AERCO NUMBER OF PERCENT TITLE OF CLASS NAME AND ADDRESS SHARES OF CLASS - -------------- ---------------- --------- -------- Common Stock Mourant & Co. Trustees Limited,................... 19 Shares 95% as trustee of AerCo Holding Trust 22 Grenville Street St. Helier Jersey, Channel Islands AerFi Group plc................................... 1 Share 5% Aviation House Shannon, Ireland Under the shareholders undertaking entered into on July 15, 1998 by Mourant & Co. Trustees Limited as trustee of the charitable trust, the nominees, AerFi, AerCo and the trustee, the charitable trust trustee and AerFi agreed that, as long as the AerCo notes are outstanding, they will not, without the prior written approval of the trustee and all the directors, transfer any part of the capital stock held by them or any interest therein unless the transferee: (1) in the case of the capital stock held by the nominees for the charitable trust trustee, is a trustee of a trust formed for charitable purposes substantially identical to those for which the Charitable Trust is established; and (2) enters into an agreement substantially identical to the shareholders undertaking in favor of the trustee. In consideration for the undertakings given by the charitable trust trustee in the shareholders undertaking, the charitable trust trustee is entitled to receive from AerCo an undertaking fee equal to $1,500 per annum. Under the instrument of trust establishing the charitable trust, a certificate given by the directors to the charitable trust trustee that its voting of the capital stock in a specified manner is in the best commercial interests of AerCo shall, for the purposes of the exercise of the charitable trust trustee's discretion, be conclusive that any such action is in AerCo's best commercial interests. 52 54 THE SERVICER Babcock & Brown and its affiliates cannot be held responsible for any liabilities of AerCo or its affiliates, including any payments due to you on the Notes. OPERATING GUIDELINES Babcock & Brown provides services to AerCo group under the servicing agreement. Babcock & Brown does not have any fiduciary or other implied duties to you or AerCo, and its obligations are limited to the express terms of the servicing agreement. Babcock & Brown will act in accordance with applicable law and with AerCo's directions and may exercise such authority as is necessary to give it a practicable and working autonomy in performing the services. Babcock & Brown must also comply with the following two contractual standards in performing its services: (1) It must perform its services with reasonable care and diligence as if it were the owner of the aircraft consistent with the customary commercial practice of a prudent international aircraft lessor in the management, servicing and marketing of commercial jet aircraft and related assets. We refer to this as the Babcock & Brown services standard. (2) If a conflict of interest arises regarding Babcock & Brown's management, servicing or marketing of: (a) any two aircraft or (b) any aircraft and any other assets owned, managed, serviced or marketed by the Babcock & Brown group, Babcock & Brown is required to notify AerCo and perform the services in good faith. If the two aircraft and other assets owned, managed, serviced or market by Babcock & Brown are substantially similar in terms of objectively identifiable characteristics that are relevant for the particular services to be performed, Babcock & Brown will not discriminate among the aircraft or between any of the aircraft and any other aircraft then owned, managed, serviced or marketed by Babcock & Brown on an unreasonable basis. We refer to this as the Babcock & Brown conflicts standard. All transactions to be entered into by Babcock & Brown on behalf of AerCo group, other than with other persons within AerCo group, must be at arm's length and on fair market value terms unless otherwise agreed or directed by AerCo. The following transactions or matters with respect to the aircraft require AerCo's specific written approval including: - sales of or agreements to sell aircraft or any engine forming part of the aircraft unless required by the lease; - entering into new leases that do not comply with the operating covenants; - entering into amendments, renewals or extensions of existing leases that do not comply with the operating covenants; - terminating any lease for any aircraft having an aggregate depreciated net book value over $100 million; - entering into any contract for modification or maintenance of the aircraft not provided for in the AerCo budget if: -- the cost to AerCo is more than, the estimated cost of a heavy maintenance check for the airframe and the engines and the available maintenance reserves or other collateral under the related lease, whichever is greater, or -- the modification or maintenance is outside the ordinary course of AerCo group's business. - entering into any capital commitment or confirming any order or commitment to acquire aircraft or engines; 53 55 - issuing any guarantee on behalf of any person within AerCo group other than guarantees: -- by one AerCo group member of the lease obligations of another, or -- for trade payables incurred in the ordinary course of AerCo group's business; - entering into any agreements for services costing more than $50,000 to be provided by third parties at AerCo group's cost, unless this is an expense provided for in the budget; and - entering into or amending or granting a waiver in any transaction with Babcock & Brown or any of its affiliates on behalf of any person within AerCo group. LIMITATION ON LIABILITY Babcock & Brown is not liable to any person, other than AerCo group to the limited extent described below, for any losses relating to - the sale, lease or purchase of our aircraft on less favorable terms than might have been achieved at any time, so long as the transactions were entered into on the basis of a commercial decision or recommendation of Babcock & Brown in accordance with the Babcock & Brown services standard; - Babcock & Brown's obligation to apply the Babcock & Brown conflicts standard in performing its services, except, where the losses are finally adjudicated to have been caused directly by their negligence, recklessness, wilful misconduct or fraud; - the ownership, operation, maintenance, acquisition, leasing, financing, refinancing or sale of any of our aircraft, or any action, or failure to act on the part of any person at any time, prior to the effective date of the servicing agreement; - any action that AerCo, the cash manager or the administrative agent, instructs Babcock & Brown to take, limit or terminate despite Babcock & Brown's contrary recommendation; - AerCo group's refusal to take any action that Babcock & Brown recommends; - circumstances where any person within AerCo group has received amounts sufficient to cover such losses; or - the gross negligence, recklessness, fraud or wilful misconduct of any person within AerCo group. INDEMNIFICATION AerCo group will indemnify Babcock & Brown and its affiliates and representatives on an after-tax basis for any losses that may be asserted against them relating to: - Babcock & Brown's performance under the servicing agreement; - errors in judgment or omissions by Babcock & Brown or any action taken, limited or terminated in accordance with AerCo's, the cash manager's or the administrative agent's instructions, except where the losses are finally adjudicated to have been caused by Babcock & Brown's negligence, recklessness, fraud or wilful misconduct in performing its obligations; or - any of the circumstances under which Babcock & Brown would not be liable to AerCo as described above. Babcock & Brown will indemnify AerCo group on an after-tax basis for losses arising from the performance of its services, where the losses are finally adjudicated to have: - been caused directly by the negligence, recklessness, fraud or wilful misconduct of Babcock & Brown or any of its affiliates or delegates in respect of its obligations to apply the Babcock & Brown services standard or the Babcock & Brown conflicts standard in connection with the performance of its services; or - directly resulted from a breach by Babcock & Brown of the express terms and conditions of the servicing agreement. Babcock & Brown's obligation to indemnify AerCo excludes circumstances where any person within AerCo group has already received an amount sufficient to cover such losses and is limited to a maximum 54 56 amount of $21 million in the aggregate with respect to any and all losses, except for losses arising from fraud on the part of Babcock & Brown, for which Babcock & Brown will have unlimited liability. AIRCRAFT SERVICES Babcock & Brown provides a wide range of services to AerCo group, including: - lease marketing, such as remarketing, lease drafting, negotiation and execution; - initial aircraft asset management, such as rent collection, aircraft maintenance, insurance, contract compliance and enforcement against current lessees, and accepting delivery and redelivery of aircraft; - current aircraft sales; - arranging valuations and monitoring and advising AerCo on regulatory developments; - assisting AerCo to stay in compliance with certain covenants under the indenture; - providing AerCo with data and information relating to the our aircraft and the commercial aviation industry; - assistance with any public or private offerings and sale of refinancing notes or additional notes; - assistance with permitted tax-related dispositions or other permissible tax-based financings; - legal and other professional services relating to the lease, sale or financing of the our aircraft, amendment modification or enforcement of our aircraft lease; and - periodic reporting of operational, financial and other information on our aircraft and leases. Babcock & Brown has agreed to: - engage and maintain the necessary staff and supporting resources required to perform its services; - grant AerCo group and its agents, access to its information, programs, records and personnel to enable AerCo group to monitor its compliance with the servicing agreement and for general AerCo group business; and - separate its own funds from the funds of any person within AerCo group. BUDGETS AerCo will adopt an annual and a three-year budget each year for all aircraft. Babcock & Brown has agreed to use reasonable commercial efforts to achieve the annual budget. MANAGEMENT FEES Babcock & Brown is paid an annual retainer fee of approximately 0.10% of the initial appraised value of each aircraft in our fleet. The retainer fee is payable monthly in arrears in equal installments and subject to pro-rata reduction for any month in which we do not own all the aircraft currently in our fleet. In calculating the retainer fee, the initial appraised value may not be reduced below $250 million until all of the aircraft are sold. Babcock & Brown also receives a monthly fee, equal to 1% of the aggregate rent paid for that month or portion of a month that AerCo group owns the related aircraft which are subject to Babcock & Brown servicing. Babcock & Brown will also receive three incentive fees: - a results-based incentive fee, based on a formula to be agreed upon by Babcock & Brown and AerCo. If no agreement is reached, the fee will equal 12.50% of any excess of (1) actual revenues available to repay holders of AerCo's publicly and privately issued debt securities for any year over (2) 95% of the target amount contained in the applicable annual budget; - a sales based fee of 1.25% multiplied by 90% of the initial appraised value of any aircraft that is sold, net of transaction expenses; and 55 57 - a sales-based incentive fee equal to 10% of the excess of the net proceeds of an aircraft sale over the target sales price for the aircraft agreed by AerCo and Babcock & Brown. Babcock & Brown will be reimbursed for various out of pocket expenses incurred in connection with the performance of the services. Babcock & Brown also will be reimbursed for certain expenses incurred in connection with its performance of the services which in the aggregate may constitute a significant additional component of AerCo's total overhead costs. TERM AND TERMINATION The servicing agreement is for an initial term of 10 years expiring on July 15, 2008. AerCo may extend the term of the servicing agreement to July 15, 2023 upon at least six months written notice to Babcock & Brown and subject to an increase in the rental fee percentage. Babcock & Brown may terminate the servicing agreement if: - AerCo does not pay: -- any servicing fees within five business days of a written delinquency notice, or -- any other amount payable by any person within AerCo group within 10 business days of a delinquency notice; - any person within AerCo group violates any material term, covenant, condition or agreement under the servicing agreement; - an involuntary proceeding under applicable bankruptcy, insolvency, receivership or similar law against AerCo, any of its subsidiaries or a substantial part of the property or assets of any person within AerCo group, continues undismissed for 100 days or an order or decree approving any of the foregoing shall be entered or any such person goes into liquidation, suffer a receiver or mortgagee to take possession of all or substantially all of its assets or have an examiner appointed over it, or a petition or proceeding is presented for any of the foregoing and not discharged within 100 days; - a voluntary proceeding is commenced under bankruptcy, insolvency, receivership or similar law against AerCo or any of its subsidiaries, AerCo or any of its subsidiaries consents to the institution of, or fails to contest the filing of, any petition described above, or files an answer admitting the material allegations of any such petition, or makes a general assignment for the benefit of its creditors; - Babcock & Brown or its affiliates become liable for taxes, except income taxes, arising from its performing services to AerCo, if: -- Babcock & Brown cannot avoid the taxes using reasonable commercial efforts, and -- AerCo does not indemnify Babcock & Brown or its affiliates for the taxes; - directions given by AerCo or any of its subsidiaries are, or if carried out would be, unlawful under applicable law. AerCo may terminate the servicing agreement if: - Babcock & Brown breaches any of its obligations under the servicing agreement and fails to cure the breach after written notice from AerCo; - Babcock & Brown ceases or gives notice that it will cease to be actively involved in the aircraft advisory and management business; - AerCo repays, refinances or defeases all of its public or private debt securities in full; - Babcock & Brown undergoes a change of control; 56 58 - an involuntary proceeding under bankruptcy, insolvency, receivership or similar law, against Babcock & Brown or a substantial part of its property or assets, continues undismissed for 120 days or an order or decree approving any of the foregoing shall be entered or Babcock & Brown goes into liquidation, suffer a receiver or mortgagee to take possession of all or substantially all of its assets or have an examiner appointed over it, or a petition or proceeding for any of the foregoing being presented and not discharged within 120 days; - a voluntary proceeding is commenced against Babcock & Brown under bankruptcy, insolvency, receivership or similar law upon consent by Babcock & Brown to the institution of, or failure by Babcock & Brown to contest the filing of, any petition described above, or filing of an answer admitting the material allegations of any such petition, or the making of a general assignment for the benefit of its creditors; - upon six months' written notice; and - upon less than six months written notice, if Babcock & Brown is paid: -- a retainer fee, -- a rental fee based on rent budgeted to be received during the period -- an incentive fee based on the achievement of an approved budget target for a six-month period after written notice of termination is received, and -- payment of the termination fee set out below. The termination fee shall be the following percentage of initial appraised value as of the date of termination: On or after March 31, 1998 but prior to March 31, 2001...... 0.20% On or after March 31, 2001 but prior to March 31, 2003...... 0.15% On or after March 31, 2003 but prior to March 31, 2005...... 0.10% Thereafter.................................................. Nil However, AerCo may terminate the servicing agreement upon less than six months written notice and pay only 50% of the termination fee described above, if: - Babcock & Brown or any of its affiliates is retained to service a fleet of commercial jet aircraft on or available for lease having an aggregate appraised value exceeding the lesser of; -- $3.50 billion in appraised value, or -- 50% or more, based on appraised value of all commercial jet aircraft then serviced by Babcock & Brown and its affiliates or; - Babcock & Brown or any of its affiliates acquires or makes an equity investment in any aircraft portfolio, securitization vehicle or other entity that owns or leases commercial jet aircraft on or available for lease where such investment represents more than 20% of the total equity of such entity and the appraised value of the portfolio exceeds the lesser of; -- $2.50 billion in appraised value, and -- the amount which represents 35% of all commercial jet aircraft --, based on appraised value -- then serviced by Babcock & Brown and its affiliates. AerCo may terminate the servicing agreement for any aircraft to which any of the following conditions apply: - in the case of marketing for re-lease of an aircraft, such aircraft has been off-lease and is reasonably available for re-lease for more than 180 days after expiry of the agreed lease marketing period; or 57 59 - Babcock & Brown fails, within a reasonable period of time not to exceed 180 days, to submit to AerCo a bona fide third party offer to purchase an aircraft after written direction from AerCo to arrange such a sale; or - Babcock & Brown recommends a course of action for an aircraft or lease to AerCo which AerCo does not approve and, after negotiation in good faith, Babcock & Brown refuses to amend, withdraw or replace such recommendation with one that is consistent with its obligations. ASSIGNMENT OF SERVICING AGREEMENT Babcock & Brown and AerCo may not assign their rights and obligations under the servicing agreement without each other's prior consent. PRIORITY OF PAYMENT OF SERVICING FEES AND REIMBURSABLE EXPENDITURES Babcock & Brown's fees and expenses rank senior in priority of payment to all payments on the notes. ADDITIONAL SERVICERS AerCo may appoint Babcock & Brown to service additional aircraft on the terms of the servicing agreement. AerCo may also appoint a third party to service additional aircraft with confirmation by the rating agencies that this will not result in the lowering or withdrawals of any ratings assigned to the Notes. You should refer to "Description of the Notes -- Payment of Principal and Interest -- Operating Covenants" for additional information on limitations on AerCo's ability to appoint additional servicers for additional aircraft. CORPORATE MANAGEMENT ADMINISTRATIVE AGENT The administrative agent provides administrative and accounting services to the board of directors including: - monitoring and reporting on the performance of AerCo group's service providers to the board of directors on a quarterly basis; - acting as liaison with the rating agencies; - establishing and maintaining AerCo group's accounting ledgers; - providing quarterly and annual draft accounts for AerCo group and individual companies within AerCo group; - preparing annual and three year budgets; - authorizing payment of certain expenses; - coordinating any amendments to the transaction agreements, other than the leases; - procuring, supervising and coordinating AerCo group's outside legal counsel, accounting, tax and other professional advisors; - preparing and coordinating reports to investors and the Commission; - assisting AerCo group's tax advisors with the preparation and filing of all required tax returns; - assisting AerCo in developing and implementing its interest rate management policy and developing financial models, cash flow projections and forecasts and in making aircraft lease, sale and capital investment decisions; - advising AerCo on the appropriate levels of the liquidity reserve amount; and - assisting AerCo with the public or private offerings of refinancing notes. 58 60 AerCo's board of directors may ask the administrative agent to provide additional administrative services. However, the administrative agent is not obligated to perform any additional services that could reasonably result in the business of AerCo or any of its subsidiaries ceasing to be separate and readily identifiable from, and independent of, the administrative agent, AerFi Group or any of their respective affiliates. The administrative agent receives a monthly administrative fee equal to 2% of the rental payments for each month. The administrative fee must be at least a minimum of $200,000 per year and will be adjusted for inflation. The administrative agent will receive an additional fee for services provided in connection with the public or private offering of securities by AerCo equal to 0.025% of the net proceeds of the offering. The administrative agent is reimbursed for certain expenses incurred in performing its services under the administrative agency agreement. The administrative agent may resign on 60 days' written notice and AerCo may remove the administrative agent on 120 days' written notice. However, the administrative agent may not resign or be removed unless AerCo or a court of competent jurisdiction has appointed a successor administrative agent. CASH MANAGER The cash manager provides cash management and related services to AerCo group. The cash manager's duties include informing Babcock & Brown and the administrative agent of the aggregate deposits in the accounts and any other information that is required about the accounts. The cash manager is authorized to invest funds held by AerCo group in the accounts other than the tax defeasance account in certain prescribed investments on permitted terms. The cash manager also calculates certain monthly payments and makes all other calculations as required under the cash management agreement based on data provided by the servicer on the aircraft and the leases. The cash manager also provides information required by the trustee to provide reports to the noteholders. The cash manager receives a fee of $250,000 per year for its services to AerCo group. The fee is subject to adjustment for inflation. The cash manager will not be liable to AerCo group for any losses or taxes payable by AerCo group unless the losses or taxes arise from the cash manager's own gross negligence, simple negligence in the handling of funds, willful misconduct, deceit or fraud or that of its officers, agents or employees. The cash manager will be indemnified by the members of AerCo group for any loss, liability or tax incurred by the cash manager, its officers, directors, agents and employees as a result of the performance of services under the cash management agreement. AerCo group will not indemnify the cash manager for losses caused by its own deceit, fraud, willful default or negligence or that of its officers, directors, agents and employees. The cash manager may resign on 60 days' written notice and the security trustee or AerCo group may remove the cash manager upon 120 days' written notice. However, the cash manager may not resign or be removed unless AerCo or a court of competent jurisdiction has appointed a successor cash manager. COMPANY SECRETARY The company secretary maintains company books and records, including minute books and stock transfer records. It makes available telephone, telecopy, telex and post office box facilities and will maintain a registered office in the relevant jurisdictions. Mourant & Co. Secretaries Limited acts as company secretary for members of the AerCo group that are incorporated in Jersey. 59 61 SELECTED CONSOLIDATED FINANCIAL DATA FINANCIAL INFORMATION PRESENTED IN THIS PROSPECTUS AerCo was formed on June 4, 1998 and did not conduct any business operations until it acquired its aircraft portfolio and issued the old notes on July 15, 1998. We have included historical financial information for AerCo elsewhere in this prospectus. We have extracted or derived the selected consolidated financial data set forth below from the audited consolidated financial statements of ALPS 94-1, the predecessor business of AerCo, for each of the fiscal years ended June 30, 1995 (as restated), 1996 (as restated), 1997 (as restated) and 1998. Arthur Andersen, independent chartered accountants, audited the financial statements for 1995 (as restated), 1996 (as restated) and 1997 (as restated). KPMG, independent chartered accountants, audited the financial statements for 1998. We have included the audited consolidated financial statements of ALPS 94-1 for 1996 (as restated), 1997 (as restated) and 1998 elsewhere in this prospectus. The selected consolidated financial data include the results of operations and financial position relating to 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 prior to the closing of the offering of the old notes and was not among the initial aircraft of AerCo. - the A300-B4-200 aircraft up to April 28, 1998. AerFi acquired this aircraft from ALPS 94-1 on that date. AerFi subsequently sold this aircraft to AerCo at the time the old notes were issued. We believe that the ALPS 94-1 selected consolidated financial data set forth below is an appropriate presentation because: - AerCo was formed mainly for the purpose of refinancing the aircraft portfolio of ALPS 94-1 - Our initial portfolio included 26 of the 27 aircraft that ALPS 94-1 originally acquired from AerFi - The original ALPS 94-1 aircraft represented 79% of our initial portfolio by appraised value as at March 1, 1998 - Our ongoing aircraft leasing activities are largely the same as those conducted by ALPS 94-1. Such data is not indicative of, and will not be comparable with, the consolidated financial results of AerCo group during periods since July 15, 1998. We have included financial statements for the AerFi transferred aircraft for the years ended June 30, 1997 and 1998 elsewhere in this prospectus. These financial statements include information on the A300-B4-200 aircraft only from April 28, 1998, the date AerFi acquired it. Arthur Andersen, independent chartered accountants, audited the financial statements for 1997. KPMG, independent chartered accountants, audited the financial statements for 1998. We have presented these financial statements on the basis that the AerFi transferred aircraft were operated separately from AerFi for the years presented. You should note that the companies owning the AerFi transferred aircraft did not conduct any independent business operations in the years presented. We have also included in this prospectus unaudited pro forma combined financial information for AerCo group for the year ended June 30, 1998. Such pro forma combined financial information gives effect, among other things, to the issuance by AerCo of the notes, the refinancing of ALPS 94-1, the sale of the Boeing 767-300ER and other transactions described in "Unaudited Pro Forma Combined Financial Information". ALPS 94-1 We have extracted or derived the ALPS 94-1 selected consolidated financial data set out below from the ALPS 94-1 consolidated financial statements. ALPS 94-1 did not conduct any business operations prior to its acquisition of the original ALPS 94-1 aircraft from AerFi in 1994. Accordingly, the financial data for the 60 62 fiscal year ended June 30, 1995 only includes trading data for the period from August 24, 1994 to June 30, 1995. These financial statements have been prepared in accordance with U.K. GAAP which differ in certain significant respects from U.S. GAAP. For a discussion of the principal differences and a reconciliation from U.K. GAAP to U.S. GAAP of shareholders' equity and net income or loss at and for the fiscal years ended June 30, 1996 (as restated), 1997 (as restated) and 1998, see Notes 22 (as restated), 23 (as restated), 24 (as restated), 25 to the ALPS 94-1 audited consolidated financial statements. ALPS 94-1 CONSOLIDATED STATEMENT OF OPERATIONS DATA YEAR ENDED JUNE 30 ------------------------------------------------------------- 1995 1996 1997 1998 ------------- ------------- ------------- ------------- (AS RESTATED) (AS RESTATED) (AS RESTATED) ($ THOUSANDS) U.K. GAAP Revenues Aircraft leasing.............................. 88,050 102,460 101,434 100,682 Expenses Depreciation.................................. (18,158) (17,978) (38,062) (37,826) Additional depreciation....................... -- -- (34,385) -- Provision for permanent diminution in aircraft value...................................... -- (12,000) -- (8,720) Net interest expense.......................... (64,206) (73,576) (71,037) (69,785) Other expenses................................ (3,702) (5,581) (5,053) (6,599) Exceptional item -- termination fee........ -- -- -- (12,700) Operating profit/(loss)......................... 1,984 (6,675) (47,103) (34,948) Profit on sale of aircraft.................... -- -- -- 2,426 Reduction in indebtedness....................... -- -- 5,258 -- Profit/(loss) before taxes...................... 1,984 (6,675) (41,845) (32,522) Taxes........................................... (69) (200) 143 (33) Dividends....................................... (2) -- -- -- Net income/(loss)............................... 1,913 (6,875) (41,702) (32,555) U.S. GAAP Depreciation.................................... (16,442) (32,338) (32,339) (32,053) Provision for permanent diminution in aircraft value......................................... -- (12,000) -- (520) Reduction in indebtedness....................... -- -- 5,258 -- Net loss........................................ (13,603) (21,590) (1,594) (20,808) 61 63 ALPS 94-1 CONSOLIDATED BALANCE SHEET DATA JUNE 30 -------------------------------------------------------- 1995 1996 1997 1998 ------------- ------------- ------------- -------- (AS RESTATED) (AS RESTATED) (AS RESTATED) ($ THOUSANDS) U.K. GAAP Aircraft, net of accumulated depreciation and provision for permanent diminution in aircraft value.......................................... 957,021 927,043 854,596 800,090 Total assets..................................... 1,039,938 1,021,356 950,031 890,873 Indebtedness................................... (976,494) (953,376) (919,157) (877,128) Provision for maintenance...................... (29,405) (39,544) (46,247) (44,309) Total liabilities................................ (1,038,025) (1,026,318) (996,695) (970,092) Shareholders' equity/(deficit)................... 1,913 (4,962) (46,664) (79,219) U.S. GAAP Aircraft, net of accumulated depreciation and provision for permanent diminution in aircraft value.......................................... 811,149 766,811 734,472 691,713 Indebtedness..................................... (976,494) (953,376) (919,157) (877,128) Shareholders' deficit............................ (161,191) (182,781) (184,375) (205,183) ALPS 94-1 CONSOLIDATED STATEMENT OF CASH FLOWS AND OTHER DATA YEAR ENDED JUNE 30 ------------------------------------------------------- 1995 1996 1997 1998 ------------- ------------- ------------- ------- (AS RESTATED) (AS RESTATED) (AS RESTATED) ($ THOUSANDS) U.K. GAAP Cash paid in respect of interest.............. (51,147) (64,002) (59,872) (54,815) Net cash provided by operating activities (after payment of interest)................. 66,526 45,532 45,119 45,721 Net cash (used in)/provided by investing activities.................................. (953,859) -- -- 10,386 Net cash provided by/(used in) financing activities.................................. 967,496 (36,025) (43,494) (59,108) Net movements in cash......................... 80,163 (25,803) (2,886) 134 ALPS 94-1 SELECTED RATIOS YEAR ENDED JUNE 30 ----------------------------------------------------- 1995 1996 1997 1998 ------------- ------------- ------------- ----- (AS RESTATED) (AS RESTATED) (AS RESTATED) ($ THOUSANDS) U.K. GAAP Ratio of Earnings to Fixed Charges.............. 1.031 0.909 0.411 0.534 U.S. GAAP Ratio of Earnings to Fixed Charges.............. 0.789 0.709 0.976 0.702 - --------------- In relation to "Ratios of Earnings to Fixed Charges" under both U.K. GAAP and U.S. GAAP, you should note the following: -- Earnings include pretax income from continuing operations plus fixed charges. Fixed charges are the total of (1) interest, whether expensed or capitalized, (2) amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized and (3) such portion of rental expense as can be demonstrated to be representative of the interest factor in the particular case. -- A ratio of less than one indicates that earnings are inadequate to cover fixed charges. The amount by which fixed charges exceeded earnings (1) for the years ended June 30, 1996 (as restated), 1997 (as 62 64 restated) and 1998 under U.K. GAAP was $6.68 million, $41.85 million and $32.52 million, and (2) for the years ended June 30, 1995 (as restated), 1996 (as restated), 1997 (as restated) and 1998 under U.S. GAAP was $13.53 million, $21.39 million, $1.74 million and $20.78 million. For a discussion of the differences between ALPS 94-1's results of operations and financial position under U.S. GAAP compared with U.K. GAAP, see Notes 22 (as restated), 23 (as restated), 24 (as restated) and 25 to the ALPS 94-1 audited consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Year Ended June 30, 1997 Compared With Year Ended June 30, 1996 -- Differences between U.K. GAAP and U.S. GAAP". 63 65 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Management's Discussion and Analysis of Financial Condition and Results of Operations set forth below (except the discussion under "-- Financial Resources and Liquidity") is based on the ALPS 94-1 selected consolidated financial data and therefore is limited to a discussion of historical financial data with respect to the original ALPS 94-1 aircraft and the related leases. Investors should note, however, that because the following discussion does not cover historical data with respect to the AerFi transferred aircraft, it will not necessarily be indicative of an analysis of the consolidated financial results of AerCo. Since ALPS 94-1 contracted to acquire the original ALPS 94-1 aircraft from AerFi in August 1994, the market for aircraft on operating lease has experienced generally favorable conditions. Consequently, leasing revenues and operating cash flows have not been materially adversely affected by lessee defaults, bad debt provisions or significant amounts of downtime. Operating cash flows in the period 1995-98 did suffer, however, as a result of certain lessee rental deferral and restructuring arrangements. For a description of these arrangements, see "The Aircraft, Related Leases and Collateral -- The Lessees". In addition, over the same period and despite the generally favorable industry conditions, several of the lessees have been in arrears on their rental payments. Notwithstanding any continuation of favorable industry conditions, like ALPS 94-1, AerCo group will likely need to address the problems of lessees in financial difficulty with lease reschedulings, rent deferrals and other restructuring arrangements. Further, as and when the market for aircraft on operating lease deteriorates cyclically, lease rentals and operating cash flows can be expected to suffer as a result of increased lessee defaults, payment deferrals, lease restructurings and aircraft repossessions and downtime. In such circumstances, AerCo's ability to pay interest on, and repay principal of, the Notes may be materially adversely affected. The following discussion is based on the ALPS 94-1 consolidated financial statements which were prepared under U.K. GAAP. U.K. GAAP differs significantly in certain respects from U.S. GAAP. See Notes 22 (as restated), 23 (as restated), 24 (as restated) and 25 to the ALPS 94-1 audited consolidated financial statements and "-- Differences between U.K. GAAP and U.S. GAAP" below. RESULTS OF OPERATIONS -- YEAR ENDED JUNE 30, 1998 COMPARED WITH YEAR ENDED JUNE 30, 1997 (AS RESTATED). REVENUES Revenue for the year ended June 30, 1998 was $100.7 million compared with revenue for the year ended June 30, 1997 of $101.4 million. Rentals from European and Asia Pacific carriers represented 45.3% and 29.2%, respectively, of ALPS 94-1's leasing revenues in the year ended June 30, 1998, with two lessees accounting for more than 10% of ALPS 94-1's leasing revenues (Lan Chile: 14% and Spanair: 12%) compared with two lessees in the year ended June 30, 1997, (Lan Chile: 14% and Spanair: 12%). At June 30, 1998, ALPS 94-1 had no aircraft off-lease. Rental rates on the seven new leases written by ALPS 94-1 since August 1994 have reflected the general trend in the commercial aviation market for operating lease rentals, which increased slightly during 1995 and 1996 and have remained relatively stable in 1997 and 1998. In 1996, 1997 and 1998, ALPS 94-1 entered into new leases with respect to two aircraft (an MD83 and an A320-200), three aircraft (one B767-300ER, one B737-400 and one F100), and one aircraft (an A320-200), respectively. In 1996, the new lease terms written were 36 months and 84 months, respectively, and the lease rates with respect to these aircraft were, overall, 2% higher than the previous lease rates. The new lease terms for leases written in 1997 were for 84, 29 and 59 months, respectively, and the lease rates with respect to these aircraft were, overall, in line with the previous lease rates. The new lease term written in 1998 was for 6 months. SALES One aircraft, an A300-B4-200, was sold to AerFi on April 28, 1998, realising a profit of $2.4 million. This aircraft was subsequently sold to AerCo at the time the old notes were issued. 64 66 DEPRECIATION AND PROVISION FOR PERMANENT DIMINUTION IN AIRCRAFT VALUES The depreciation charge in the year ended June 30, 1998 amounted to approximately $37.8 million compared to approximately $72.4 million for the same period in 1997. Beginning on July 1, 1996, ALPS 94-1 has depreciated each aircraft on a straight-line basis over 25 years from the date of manufacture to a residual value of 15% of ALPS 94-1's historic cost. Prior to July 1, 1996, ALPS 94-1 depreciated the carrying value of each aircraft at 2% per annum increasing to 7% per annum beginning 15 years after the date of manufacture of the aircraft to a nil residual value. The changes in these estimates were considered necessary because of developments in the industry at that time, including the bankruptcy of one major manufacturer, the expected acquisition of McDonnell Douglas by Boeing, significant manufacturer discounting of new aircraft and the announcement of a new generation of Boeing aircraft. As a result of these developments, the directors considered that (1) the allocation of cost should be revised to a straight line basis (rather than the previous lower allocations in earlier years) and (2) additional depreciation of $34.4 million in 1997, reflecting the impact of adopting the revised estimates, should be charged reflecting the permanent impairment in value of the aircraft because of the effect of industry circumstances referred to above on the company's fleet. See "Statement of Accounting Policies: Aircraft" in the ALPS 94-1 consolidated financial statements for more information about this change in estimate. In respect of the year ended June 30, 1998, the directors of ALPS 94-1 determined to make a provision of $8.7 million in respect of a permanent diminution in the book value of ALPS 94-1's three F100 aircraft. The directors arrived at such determination based on the bankruptcy of Fokker N.V. and the discontinuation of its aircraft manufacturing operations, resulting in significant reductions of values and lease rates for Fokker aircraft. The net book value of these aircraft, net of the $8.7 million provision, at June 30, 1998 was $48.5 million. NET INTEREST EXPENSE Net interest expense amounted to $69.8 million in the year ended June 30, 1998 compared to $71.0 million in the same period ended June 30, 1997. The decrease in net interest expense was primarily due to lower average debt in the year ended June 30, 1998, including, in particular, a significant reduction in the principal balances of the ALPS 94-1 subclass A-1 notes, subclass A-2 notes and class D note. This reduction was partially offset by a marginally higher interest rate accrued during the year to June 30, 1998, in addition to step-up interest being charged on the ALPS 94-1 subclass A-2 notes and additional interest being accrued on the ALPS 94-1 class E note. The average indebtedness outstanding during the year ended June 30, 1998 and 1997 was $902.1 million and $936.3 million. Under the terms of the ALPS 94-1 class E note, interest accrues at a rate of 10% per annum but only a portion of such interest ($3.1 million) has been payable in cash in each of the periods under review. However, approximately $15.4 million and $14.5 million in respect of accrued and unpaid interest of the ALPS 94-1 class E note was capitalized during the years ended June 30, 1998 and 1997, respectively. Cash paid in respect of interest amounted to $54.8 million in the year ended June 30, 1998 and $59.9 million in the year ended June 30, 1997, compared with net interest expense, which amounted to $69.8 million in the year ended June 30, 1998 and $71.0 million in the year ended June 30, 1997, and principally reflected class E note interest accrued but not paid. In addition, since November 1997, under the terms of the ALPS 94-1 subclass A-2 notes, step-up interest accrued at the rate of 2% per annum in addition to the fixed coupon of 7.15% per annum on the subclass A-2 notes. This step-up interest amount was not paid until the ALPS 94-1 notes were redeemed on July 15, 1998. Net interest expense is stated after deducting interest income earned during the relevant period. In the year ended June 30, 1998, ALPS 94-1 earned interest income of $3.8 million compared with $2.9 million in the year ended June 30, 1997. In each of the periods under review, ALPS 94-1 has not been party to any interest rate or other derivative agreements. 65 67 The new notes bear interest at floating rates while the subclass D-1 and subclass E-1 notes which are held by AerFi bear a fixed rate of interest. The aggregate principal amount of the subclass A-1, subclass A-2, subclass B-1 and subclass C-1 Notes represents approximately 81% of AerCo's total indebtedness. Accordingly, AerCo's exposure to movements in LIBOR is relatively greater than for ALPS 94-1 and AerCo has adopted a hedging strategy to manage its exposure to movements in LIBOR rates. See "-- Financial Resources and Liquidity -- Interest Rate Management". A large proportion of AerCo's indebtedness is represented by the notes and the subclass D-1 notes which are issued on terms and conditions prevailing in the market. To the extent that the weighted average interest cost on AerCo's indebtedness is higher or lower than the cost of the ALPS 94-1 indebtedness being refinanced, AerCo's net interest expense and cash paid in respect of interest will be higher or lower, respectively, than that experienced by ALPS 94-1 historically. OTHER EXPENSES Other expenses consist of GECAS' servicer fees, insurance premiums (political risk and directors' liability insurance), administrative agent fees, other service provider costs and miscellaneous expenditure items. Other expenses amounted to approximately $6.6 million in the year ended June 30, 1998 compared with $5.1 million in the year ended June 30, 1997. In each of the years ended June 30, 1998 and 1997, servicer fees payable to GECAS were approximately $2.9 million. Substantially all of these amounts represent asset based fees calculated as an annual percentage of agreed values of aircraft under management. Since July 15, 1998, Babcock & Brown is servicer of the AerCo aircraft as described in "Management of AerCo Group -- The Servicer". EXCEPTIONAL ITEMS In the year ended June 30, 1998, the directors approved the refinancing of ALPS 94-1 through the issuance of the notes by AerCo. The refinancing included the early termination of the GECAS servicing agreement in respect of the management of the company's assets in consideration for a termination fee of $12.7 million. This amount was charged in the year ended June 30, 1998 and was paid subsequent to the year end. OPERATING LOSS In the year ended June 30, 1998, ALPS 94-1 recorded an operating loss of approximately $34.9 million compared with a loss of $47.1 million (as restated) in the same period in 1997. REDUCTION IN INDEBTEDNESS Under the terms of the ALPS 94-1 class E note, if the directors of ALPS 94-1 recognized a permanent diminution in the value of aircraft, the recognition resulted in a legal reduction in the principal balance of the class E note. The amount of this reduction was equal to (1) the outstanding principal balance and accrued and unpaid interest on the ALPS 94-1 class A-E notes less (2) the total book value of the aircraft reflecting the permanent diminution in value. In 1998, there was no recognition of a permanent diminution in aircraft values requiring a reduction in class E note indebtedness. In 1997 (as restated), there was a reduction of $5.3 million reflecting a $12 million permanent diminution in the value of ALPS 94-1's A300 aircraft. See "-- Results of Operations -- Year Ended June 30, 1997 Compared with Year Ended June 30, 1996 -- Depreciation and Provision for Permanent Diminution in Aircraft Value" and "-- Reduction in Indebtedness" (as restated). TAXES ALPS 94-1 had a tax charge of approximately $0.03 million in the year ended June 30, 1998, compared with a tax credit of $0.14 million in the year ended June 30, 1997. 66 68 NET LOSS As a result of the above factors, ALPS 94-1 had a net loss of $32.6 million in 1998 compared with a net loss of $41.7 million (as restated) in 1997. RESULTS OF OPERATIONS -- YEAR ENDED JUNE 30, 1997 (AS RESTATED) COMPARED WITH YEAR ENDED JUNE 30, 1996 (AS RESTATED) REVENUES Revenue for the year ended June 30, 1997 was $101.4 million compared with revenue for the year ended June 30, 1996 of $102.5 million. As with 1996, rentals from European and Asia Pacific carriers continued to represent more than three-quarters of ALPS 94-1's leasing revenues in 1997. In 1997, two lessees accounted for more than 10% of ALPS 94-1's leasing revenues (Spanair: 12%; and Lan Chile: 14%). In 1996, one lessee accounted for more than 10% of leasing revenues (Spanair: 12%). In the previously issued financial statements of ALPS 94-1, lease revenue was recognised as income as it accrued over the period of the lease. When future rental increases were contracted under the terms of the lease, ALPS 94-1 accrued income on the basis of the current rental rate rather than on a basis that averaged the lease rentals over the total lease term. The previously issued 1995, 1996 and 1997 financial statements of ALPS 94-1 have been restated to recognise income from operating leases on a straight line basis over the period of the lease. The impact of the restatement is to decrease lease revenue and increase net loss in 1997 by $687,000 and increase lease revenue and reduce net loss in 1996 and 1995 by $438,000 and $1,247,000 respectively. Since it acquired the ALPS 94-1 aircraft beginning in August 1994, ALPS 94-1's operations have been conducted in relatively favorable industry conditions that have resulted in no requirements for bad debt provisions and only minimal levels of downtime with no material adverse impact on leasing revenues. There have been, however, certain significant deferral and other restructuring transactions which, although having no material adverse impact on revenues, adversely affected operating cash flows. These restructurings are described below. The combined effect of these restructurings was to reduce cash collections by $0.20 million and increase cash collections by $1.50 million in the year ended June 30, 1997 and 1996, respectively. See "The Aircraft, Related Leases and Collateral -- The Lessees -- Payment History". In December 1995, ALPS 94-1 agreed with one former lessee, a U.K. charter operator, and its parent company to the early termination of the lease of an A320-200 aircraft. Upon termination of the lease, the A320-200 was immediately re-leased to Airtours as part of a swap transaction pursuant to which Airtours terminated its lease of an MD83 aircraft, which was immediately re-leased to FEAT. In the year ended June 30, 1996, these transactions resulted in a loss of cash flows to ALPS 94-1 of $0.60 million. Partially offsetting this loss, ALPS 94-1 received cash amounts of $0.20 million from the former lessee in the year ended June 30, 1997. In early 1996, ALPS 94-1 agreed with one Latin American lessee to the deferral of two months' rental and one month's maintenance payments in the amount of $0.90 million. These amounts together with late payment interest and a deferral fee were received in August 1996. In December 1996, ALPS 94-1 agreed to restructuring of the lease to Canadian Airlines which resulted in a loss of cash flow to ALPS 94-1 of $0.90 million. These deferred amounts have since been repaid. DEPRECIATION AND PROVISION FOR PERMANENT DIMINUTION IN AIRCRAFT VALUE Depreciation expense in 1997 totaled approximately $72.4 million compared with approximately $18 million in 1996. The increase in depreciation expense reflects the increased depreciation rate for 1997 as a result of the adoption by ALPS 94-1 of new depreciation estimates. See "Results of Operations -- Year Ended June 30, 1998 Compared With Year Ended June 30, 1997 -- Depreciation and Provision for Permanent Diminution in Aircraft Values" for more information about this change in estimate. 67 69 In 1996, the $12 million provision for permanent diminution in aircraft values related to a particular aircraft type (A300-B4-200). No provision for permanent diminution in aircraft values was required in 1997. The appraised value of this A300-B4-200 aircraft at June 30, 1997 was $13.7 million compared to the net book value at that date of $9.3 million. NET INTEREST EXPENSE Net interest expense amounted to approximately $71.0 million in 1997 compared with $73.6 million in 1996. Net interest expense reflects interest payable on ALPS 94-1's class A-E notes net of amounts earned on permitted investments of ALPS 94-1's cash balances. The decrease in net interest payable in 1997 largely reflects a decrease in average indebtedness outstanding. Approximately 50% of ALPS 94-1's class A-D notes by principal amount outstanding at June 30, 1997 bears interest at a floating rate determined by reference to one month LIBOR. The weighted average interest cost on ALPS 94-1's indebtedness in 1997 was 7.40% compared with 7.50% in 1996. Average indebtedness outstanding in 1997 was approximately $936.3 million compared with approximately $965.8 million in 1996 reflecting a combination of principal amortization on ALPS 94-1's class A-D notes, a $5.3 million reduction in the principal amount of the class E note in accordance with its terms and a compounding of $36.4 million and $21.9 million of accrued but unpaid interest on the class E note in 1997 and 1996, respectively. Under the terms of the ALPS 94-1 class E note, interest accrues at the rate of 10% per annum but only a portion of such interest ($3.1 million) has been payable in cash in each of the years under review. Interest accrued, but not paid in cash, is added to the principal amount of the ALPS 94-1 class E note. Accordingly, approximately $14.5 million and $12.9 million in respect of accrued and unpaid interest on the ALPS 94-1 class E note was capitalized during 1997 and 1996, respectively. The reduction in cash paid in respect of interest, which amounted to $59.9 million in 1997 and $64 million in 1996, relative to net interest expense, which amounted to $71.0 million in 1997 and $73.6 million in 1996, principally reflected ALPS 94-1 class E note interest accrued but not paid. In each of the periods under review, ALPS 94-1 has not been party to any interest rate derivative agreements. OTHER EXPENSES Other expenses consist of GECAS's servicer fees, insurance premiums (political risk and directors' liability insurance), administrative agent fees, other service provider costs and miscellaneous expenditure items. Other expenses amounted to approximately $5.1 million in 1997 compared with $5.6 million in 1996. For a breakdown of other expenses by type, see Note 13 to the ALPS 94-1 audited consolidated financial statements. The decrease in 1997 was largely attributable to the negotiation of a lower political risk insurance premium in 1997 and the one-time payment in 1996 to Airtours in connection with the termination of its lease of an MD83 aircraft and the immediate re-lease of the A320-200 formerly on lease to a U.K. operator. See "The Aircraft, Related Leases and Collateral -- The Lessees -- Payment History". In each of 1997 and 1996, servicer fees payable to GECAS were approximately $2.9 million. Substantially all of these amounts represent asset based fees calculated as an annual percentage of agreed values of aircraft under management. OPERATING LOSS In 1997 and 1996, ALPS 94-1 recorded an operating loss as a result of the above factors. The operating loss of approximately $6.7 million in 1996 (as restated) increased to approximately $47.1 million (as restated) in 1997, largely as a result of the increased depreciation charges described above. 68 70 REDUCTION OF INDEBTEDNESS (AS RESTATED) Reduction of indebtedness of $5.3 million in 1997 (as restated) reflected the legal reduction in the principal amount of the ALPS 94-1 class E note. This writedown was the result of the recognition by the ALPS 94-1 directors at the end of 1996 of a $12 million permanent diminution in the value of ALPS 94-1's A300 aircraft. Under the terms of the class E notes, this reduction was equal to (1) the outstanding principal balance and accrued and unpaid interest on the ALPS 94-1 class A-E note less (2) the total book value of the aircraft reflecting the permanent diminution in value. Although the directors recognized the $12 million permanent diminution in value at the end of 1996, the resulting $5.3 million reduction in class E note principal was not effective under the terms of the class E note until 1997. In 1996 (as restated), there was no legal reduction in class E note indebtedness. TAXES ALPS 94-1's tax credit of $0.14 million in 1997, compared to a charge of approximately $0.20 million in 1996, reflected the approval by the Irish authorities of the application of a lower tax rate for ALPS 94-1's Irish subsidiary in respect of prior periods. NET LOSS As a result of the above factors, ALPS 94-1 had a net loss of $41.7 million (as restated) in 1997 compared with a net loss of $6.9 million (as restated) in 1996. DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP (AS RESTATED) The principal differences between U.S. GAAP and U.K. GAAP that have affected the results of operations and financial position of ALPS 94-1, relate to the accounting treatment of aircraft cost and depreciation accounting. Aircraft are stated at purchase cost under U.K. GAAP. Under U.S. GAAP aircraft are stated at AerFi's amortized cost at the date of delivery to, and acquisition by, ALPS 94-1. The difference between the purchase cost and AerFi's amortized cost is treated as a distribution to AerFi. The impact is to reduce the net book value of aircraft and shareholders' equity under U.S. GAAP compared with U.K. GAAP. For the years ended June 30, 1995 and 1996, ALPS 94-1 has provided for depreciation of its aircraft under U.K. GAAP at rates calculated to write off the cost of the assets to ALPS 94-1 over 25 years from the date of closing of the ALPS 94-1 initial debt offering. The rate of depreciation in the first 15 years of an aircraft's life was 2% per annum and thereafter was 7% per annum. Under U.S. GAAP during the years 1995 and 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 from the date of delivery to ALPS 94-1 to a residual value of 15%. Given the aircraft are all significantly less than 15 years old, depreciation charges under U.S. GAAP were significantly higher for fiscal year 1996 than under U.K. GAAP, thereby decreasing net income and shareholders' equity reported under U.S. GAAP. As discussed above, however, under "Results of Operations -- Year Ended June 30, 1998 Compared With Year Ended June 30, 1997 -- Depreciation and Provision for Permanent Diminution in Aircraft Value", ALPS 94-1 has adopted, with effect from and including the fiscal year ending June 30, 1997, a revised depreciation estimate under U.K. GAAP (which will also be adopted by AerCo for periods after the closing date). This estimate is intended to write off the cost of the aircraft over 25 years from the date of manufacture on a straight line basis to a residual value of 15% of historic cost. Under U.S. GAAP, for all periods, aircraft are now also depreciated on a straight line basis at a rate designed to write off the cost of the assets to a residual value of 15% over a period of 25 years from the date of manufacture. For a discussion of these and other differences between U.K. GAAP and U.S. GAAP, including certain income recognition and depreciation differences relating to ALPS 94-1's initial acquisition of the aircraft from AerFi, see notes 22, 23, 24 and 25 to the ALPS 94-1 audited consolidated financial statements. 69 71 In the previously issued financial statements of ALPS 94-1, the directors adopted the true and fair override principle in respect of Financial Reporting Standard 4 (FRS4), such that certain losses which would be borne by the class E Noteholder, were released from the carrying value of the debt and credited to the statement of operations under U.K. GAAP. Under U.S. GAAP the liability for the principal amount remains until such time as the obligation is extinguished. The restatement of previously issued financial statements of ALPS 94-1 for 1997 and 1996 under U.K. GAAP has eliminated any differences between U.K. GAAP and U.S. GAAP concerning the accounting for indebtedness. FINANCIAL RESOURCES AND LIQUIDITY LIQUIDITY Like ALPS 94-1, AerCo's primary source of liquidity is and will be rental payments made by lessees under the lease agreements. The principal uses of cash rental payments are and will continue to be, expenses related to the aircraft and the servicing thereof, corporate expenses and the payment of interest on and principal of indebtedness. Such indebtedness consists of the notes and the subclass D-1 and subclass E-1 notes which are held by AerFi. The cash balances (including short term investments in commercial paper) at June 30, 1998 amounted to $88.3 million compared to $91.3 million at June 30, 1997. Under the terms of its indebtedness, ALPS 94-1 was required to maintain cash balances in an amount equal to (1) the amount of lessee security deposits ($13.3 million at June 30, 1998; $15.2 million at June 30, 1997), (2) balance sheet provisions for maintenance ($44.3 million at June 30, 1998; $46.2 million at June 30, 1997) and (3) a contingency reserve amount ($18 million at June 30, 1998 and 1997). The terms of ALPS 94-1's indebtedness restricted the use of such cash so that it was generally not available to service debt. Following the purchase of its share capital by AerCo, ALPS 94-1 maintains no significant cash balances of its own. AerCo group maintains cash balances in an amount equal to the liquidity reserve amount, which was initially $40 million plus security deposits of $15.5 million at December 31, 1998. The liquidity reserve amount has been determined largely based on an analysis of historical experience, assumptions regarding AerCo group's future experience and the frequency and cost of certain contingencies in respect of the initial aircraft, and is intended to provide liquidity for meeting the cost of maintenance obligations and non-maintenance, aircraft-related contingencies such as removing regulatory liens, complying with ADs, repossessing and re-leasing aircraft. In analyzing the future impact of these costs, assumptions have been made regarding their frequency and amount based upon historical experience. There can be no assurance, however, that historical experience will prove to be relevant or that actual cash received by AerCo group will not be significantly less than that assumed. Any significant variation may materially adversely affect AerCo's ability to make payments of interest and principal on the notes. See "Description of the Notes -- The Accounts" for more information about the liquidity reserve amount. During the next two years, AerCo may have to incur unusually high cash expenditures for the purpose of airframe and engine overhauls and complying with new regulatory requirements for aircraft operating in Europe and North America. These payments could adversely effect AerCo's ability to make certain principal payments on the notes, depending on their level and timing. For a description of these maintenance and regulatory requirements, you should refer to "The Aircraft, Related Leases and Collateral -- The Leases -- Maintenance and Maintenance Reserves" and "-- Compliance with Governmental and Technical Regulation. OPERATING ACTIVITIES Net cash provided by ALPS 94-1's operating activities in the year ended June 30, 1998 amounted to $45.7 million compared with $45.1 million in the year ended June 30, 1997. In the year to June 30, 1998 there was a prepayment of one year's rentals in the amount of $5 million by one Latin American lessee which was offset by a decrease of approximately $5.1 million in the amount of cash paid in respect of interest of $54.8 million compared with $59.9 million in the year to June 30, 1997. In 1999 and 2000, AerCo's net cash 70 72 provided by operating activities may be lower than that indicated by the historical levels at ALPS 94-1 as a result of the potential maintenance and regulatory compliance expenditures described above. Net cash provided by ALPS 94-1's operating activities in 1997 of $45.1 million was comparable with $45.5 million provided in 1996. There was however a reduction in cash paid in respect of interest of $4.1 million in 1997 to $59.9 million compared with $64 million in 1996. This reduction was offset by a decrease in net cash inflows from maintenance payments and disbursements. In 1996, ALPS 94-1 received maintenance payments of $10 million more than it disbursed to lessees, compared with only $6.7 million in 1997. In addition, cashflows in 1997 were $0.4 million lower than in 1996 as a result of an outflow of security deposits. Also included within cash flow from operations in the years ended June 30, 1998 and 1997 was cash generated by permitted investments of ALPS 94-1's cash balances. These cash balances have been significantly reduced since July 15, 1998 which has resulted in a corresponding reduction in cash flow generated to AerCo. In the years ended June 30, 1998 and 1997, cash flow from permitted investments amounted to approximately $4.7 million and $4.5 million, respectively. INVESTING AND FINANCING ACTIVITIES Cash flows used in financing activities in the year ended June 30, 1998 reflect the repayment of $59.1 million of principal on the ALPS 94-1 subclass A-1 and A-2 and class D notes by ALPS 94-1 compared with $43.5 million of principal repaid on the ALPS 94-1 subclass A-1 and A-2 and class D notes by ALPS 94-1 in the year ended June 30, 1997. ALPS 94-1 used approximately $36 million in 1996 for the same purpose. The net increase in the repayment of the ALPS 94-1 notes during 1998 is primarily as a result of the proceeds received from the sale of the A300-B4-200 aircraft in April 1998. ALPS 94-1 has recorded no cash flows used in investing activities since its purchase of aircraft in 1995, other than $1.1 million in respect of maintenance work carried out on the A300-B4-200 aircraft during the year ended June 30, 1998. INDEBTEDNESS Upon the closing of the offering of the old notes, all of ALPS 94-1's existing financial indebtedness was repaid. Following the offering, AerCo's indebtedness consists of the notes, the subclass D-1 and subclass E-1 notes. In order to repay the outstanding principal balance of the subclass A-1 notes (initially $340 million) on or before their expected final payment date on July 15, 2000, AerCo will have to refinance such notes through the sale of refinancing notes at such time. There can be no assurance that AerCo will be able to sell refinancing notes in the amount and at the time required. YEAR 2000 Many existing computer systems use only two digits to identify a year in the date field. These systems were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. AerCo group has recently begun a process of assessing the potential impact of the Year 2000 issue on its operations. Since all of its operational functions have been delegated to the servicer, administrative agent and cash manager, AerCo group has no information systems of its own. It may, however, suffer a material adverse impact on its business and results of operations if information technology upon which the servicer, administrative agent and cash manager rely is not Year 2000 compliant. Babcock & Brown has assessed, and continues to assess, its computer and information systems to determine the extent of its exposure to Year 2000 risks. Babcock & Brown believes that its computer and information systems are Year 2000 compliant. Babcock & Brown expects to complete all material Year 2000 modifications and replacements in early 1999. However, the potential interruptions or costs incurred to upgrade or replace certain of Babcock & Brown's computer and information systems may have a material adverse effect on its ability to perform its services under the servicing agreement. Babcock & Brown is also contacting the third parties with which it deals on our behalf to determine the extent of their exposure to 71 73 Year 2000 risks and the status of their Year 2000 compliance efforts. The administrative agent and cash manager are reviewing their Year 2000 exposure and identifying the steps that will need to be taken to ensure that their systems are Year 2000 compliant. Aircraft and air traffic control systems also depend heavily on microprocessors and software technology. If the systems employed by the aircraft are not Year 2000 compliant, it could have an adverse effect on our business and results of operations. Major manufacturers, including Boeing and Airbus, have begun a Year 2000 review of the systems employed on their aircraft and are expected to advise owners, operators and service providers of the steps to be taken to address any Year 2000 problems that are identified. Among the aircraft systems that have been identified as being susceptible to Year 2000 problems are certain on-board aircraft management and navigation systems. The nature and the extent of the risks posed by potential failure of aircraft and aircraft control systems because of Year 2000 problems has not been fully determined because the Year 2000 review efforts are still at an early stage. It is not clear whether or to what extent manufacturers, owners or lessees will be responsible for the costs necessary to bring aircraft systems into Year 2000 compliance. AerCo group may also suffer an adverse impact on its business and results of operations if its lessees, suppliers, financial institutions, technical advisers and others with which it conducts business are not Year 2000 compliant. Babcock & Brown circulated a survey to aircraft and engine manufacturers and the lessees with which it deals on behalf of AerCo group to determine the extent of such parties' exposure to Year 2000 risks and the status of their Year 2000 compliance efforts. The administrative agent has also circulated a survey to those third parties with which it deals on behalf of AerCo Group to determine the extent of such third parties' exposure to Year 2000 risks and the status of their Year 2000 compliance efforts. AerCo is currently not able to make any estimate of the amount, if any, it may be required to spend to remediate Year 2000 problems. Such expenditures could, however, have a material adverse impact on the ability of AerCo to make payments on the notes. Any losses that we may incur because of Year 2000 losses may not be covered under existing insurance, because some insurers have taken the position that Year 2000 losses may be denied under existing policies. In addition, the international insurance markets have recently adopted recommendations to exclude Year 2000 losses from future aviation policies, unless a specific endorsement is purchased. Various insurers have stated that they will provide Year 2000 endorsements to those airlines which the insurers have identified as adequately addressing the Year 2000 issues affecting that airline. Babcock & Brown is currently in contact with AerCo group's lessees to see if they have obtained Year 2000 endorsements. INTEREST RATE RISK AND MANAGEMENT The leasing revenues of AerCo will be generated primarily from rental payments which are either fixed or floating. In some cases, leases carry fixed and floating rental payments for different rental periods. In the case of floating rate leases, an element of the rental varies in line with changes in LIBOR, generally six-month LIBOR. See "The Aircraft, Related Leases and Collateral -- The Leases" for more information regarding the terms of our leases. As of January 18, 1999, leases with respect to approximately 62.50% of the aircraft by appraised value at January 18, 1999 provided for fixed rate rental payments and approximately 37.50% provided for floating rate payments. In general, an exposure to interest rate risk relating to the notes when AerCo's floating interest obligations under the notes do not correlate to the mix of fixed and floating rate lease rental payments for different rental periods. This interest rate exposure can be managed through the use of interest rate swaps and other derivative instruments. The subclass A-1, subclass A-2, subclass B-1 and subclass C-1 notes will bear floating rates of interest. The mix of fixed and floating rental payments contains a higher percentage of fixed rate payments than the percentage of fixed rate interest payments on the AerCo notes. The effect of this gap is compounded by the fact that the reset periods on floating rental payments are generally longer than the monthly reset periods on the floating rate notes. AerCo group enters into interest rate swaps in order to 72 74 correlate the contracted fixed and floating rental payments to the fixed and floating interest payment on the notes. Under the swaps, AerCo group pays fixed amounts and receives floating amounts on a monthly basis. The swaps amortize on the basis of the expected paydown schedule of the class A, B and C notes, the expiry dates of the leases under which lessees are contracted to make fixed rate rental payments and the LIBOR reset dates under the floating rate leases. At least every three months, and in practice more frequently, the administrative agent seeks to enter into additional swaps or sell at market value or unwind part or all of the swaps and any future swaps in order to rebalance the fixed and floating mix of interest obligations and the fixed and floating mix of rental payments. At January 31, 1999, AerCo group had unamortized swaps with an aggregate notional principal balance of $730 million. Additional interest rate exposure will arise to the extent that lessees owing fixed rate rental payments default and interest rates have declined between the contract date of the lease and the date of default. This exposure can be managed through the purchase of options on interest rate swaps. However, because of the credit quality of the lessees and the current interest rate environment, AerCo does not currently intend to acquire any interest rate swap options. If the credit quality of the lessees changes materially, or if the interest rate environment warrants it, AerCo may decide to purchase interest rate swap options, or enter into other derivative transactions such as credit derivatives as a means of managing such risk. Through the use of interest rate swap and other interest rate hedging instruments, it is AerCo's policy not to be adversely exposed to material movements in interest rates. We cannot assure you, however, that AerCo's interest rate risk management strategies will be effective in this regard. Any change to AerCo's policy with regard to its dealing in interest rate hedging products is subject to periodic review by the rating agencies. The directors of AerCo are responsible for reviewing and approving the overall interest rate management policies and transaction authority limits. As described below, the administrative agent, acting within the overall policies and limits, approves specific hedging instruments. Counterparty risk is monitored on an ongoing basis. Counterparties are subject to the prior approval of the directors of AerCo. AerCo's counterparties consist primarily of the affiliates of major U.S. and European financial institutions (which may include special purpose derivative vehicles) whose credit ratings are consistent with maintaining the ratings of the most senior class of AerCo notes then outstanding. In implementing its interest rate management policy described above, AerCo seeks to manage its exposure to adverse changes in interest rates based on regular reviews of its interest rate risk. Before each payment date, the administrative agent, on behalf of AerCo, estimates future principal payments on the notes based on a model of its cash flows for the purpose of estimating required future interest obligations. Future fixed and floating rate lease revenues are then estimated based on the current lease portfolio. The administrative agent reviews this estimate whenever lease rates (whether fixed or floating rate) are reset under the terms of the leases. This analysis invariably indicates that AerCo is "short" floating rate revenues and thus is adversely exposed to increases in LIBOR the benchmark interest rate for the notes and the floating rate leases. After taking into account its available cash balance, AerCo then enters into interest rate swaps to hedge against the estimated amount of this shortfall. This interest rate swap portfolio is reviewed regularly on the basis described above. As an example, at December 31, 1998, the aggregate outstanding principal balance of the notes was $781.6 million. As a result of the analysis described above, the aggregate notional amount of our interest rate swap agreements (under which we pay fixed rate amounts and receive floating rate amounts) was $735 million. AerCo also had at that date $40 million in short-term debt instruments (that is, the liquidity reserve amount excluding $16 million in lessee security deposits that AerCo holds). On this basis, if LIBOR increased by 10% from the rate at that date, AerCo's monthly cash flows would have been reduced by $55,000. This loss would be the same for every month that this increase in rates persisted. You should note, however, that this analysis of our interest rate risk does not take into account either lessee or swap counterparty credit risk. Thus, our cash flow losses could be higher to the extent lessees or swap counterparties do not meet their payment obligations to us. 73 75 The quantitative disclosure and other statements in this section are forward-looking statements that involve risks and uncertainties. Although our policy is to limit our exposure to changes in interest rates, we could suffer higher cash flow losses than described above as a result of actual future changes in interest rates. You should also note that our future exposure to interest rate movements will change as the composition of our lease portfolio changes or if we issue new subclasses of additional notes or refinancing notes with different interest rate provisions from the notes. You should also refer to "Risk Factors" for more information, about risks, especially lessee credit risk, that could intensify our exposure to changes in interest rates. 74 76 UNAUDITED PRO-FORMA COMBINED FINANCIAL INFORMATION The unaudited pro-forma combined financial information set forth below reflects pro-forma adjustments made to the ALPS 94-1 consolidated financial statements and the financial statements for the AerFi transferred aircraft (on a combined basis) for the year ended June 30, 1998 included elsewhere in this prospectus that are intended to give effect to: (1) the issuance of the AerCo notes, (2) the refinancing of the existing financial indebtedness of ALPS 94-1, (3) the sale by ALPS 94-1 of the Boeing 767-300ER aircraft to AerFi, and (4) the other transactions described in "The Refinancing of ALPS 94-1 and Acquisition of the AerFi Transferred Companies". We refer to these transactions collectively as the "transaction". As described below, such adjustments relate to, among other things, historical indebtedness, net interest expense, selling, general and administrative expenses and tax amounts. The unaudited pro-forma combined financial information is presented on the basis that the initial aircraft have been operated separately from ALPS 94-1 and AerFi for the year ended June 30, 1998. AerCo, which acquired ALPS 94-1 and the AerFi transferred aircraft on July 15, 1998 was incorporated on June 4, 1998 with US$10,000 of authorized share capital, and had no trading or other activities prior to that date. Accordingly, separate data for AerCo is not presented in the pro-forma information below. The unaudited pro-forma combined financial information has been prepared in accordance with U.K. GAAP. U.K. GAAP differs in certain respects from U.S. GAAP. A reconciliation from U.K. GAAP to U.S. GAAP of net assets/(liabilities) and net loss for the year ended June 30, 1998 is presented below. This unaudited pro-forma combined financial information should be read in conjunction with and is qualified in its entirety by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of ALPS 94-1 and the AerFi transferred aircraft, in each case included elsewhere in this prospectus. The unaudited pro-forma combined financial information is provided for illustrative purposes in conformity with the requirements of the Securities and Exchange Commission and does not demonstrate what AerCo's results of operations or financial position would have been had the transaction been completed on July 1, 1997 or predict results of operations or net assets for any future period or at any future date. 75 77 The unaudited pro-forma combined statement of operations for the year ended June 30, 1998 set forth below gives pro-forma effect to the transaction as if the transaction had occurred on July 1, 1997. AERCO GROUP UNAUDITED PRO-FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 AUDITED HISTORICAL RESULTS --------------------------- AERFI PRO- TRANSFERRED FORMA ALPS 94-1 AIRCRAFT PRO-FORMA NOTE 1 COMBINED 30-JUN-98 30-JUN-98 ADJUSTMENTS(1) REFERENCE 30-JUN-98 --------- ----------- -------------- --------- --------- $M $M $M $M Revenues Aircraft leasing................... 101 21 (8) (i) 114 Expenses Depreciation....................... (38) (10) 6 (i)(ii) (42) Provision for permanent diminution in aircraft value............... (9) -- 9 (ii) -- Net interest expense............... (70) (7) (4) (iii) (81) Exceptional item................... (13) -- -- (13) Other expenses..................... (6) (5) (2) (iv) (13) ----- ----- ----- ----- Total expenses....................... (136) (22) 9 (149) ----- ----- ----- ----- Net loss before tax.................. (35) (1) 1 (35) Profit on sale..................... 2 -- (2) -- Benefit for taxes.................. -- 1 1 (v) 2 ----- ----- ----- ----- Net loss for the year................ (33) -- -- (33) ===== ===== ===== ===== - --------------- (1) Represents the adjustments to the combined historical statements of operations of ALPS 94-1 and the AerFi transferred aircraft to account for the transaction as if it had occurred on July 1, 1997, including: (i) Leasing revenue and depreciation have been adjusted to reflect the sale of one B767-300ER owned by ALPS 94-1 (in the period between pricing and closing of the offering) as if the sale had occurred on July 1, 1997. The resulting reductions to the aircraft leasing revenue was $8 million and to the depreciation charge was $3 million. (ii) The unaudited pro-forma combined statement of operations reflects depreciation and provision for permanent diminution in the value of the initial aircraft as if the transaction had occurred on July 1, 1997 at a cost equivalent to the appraised value at March 1, 1998 of the initial aircraft ($952 million). The resulting adjustments to the depreciation charge was a reduction of $3 million and with respect to the provision for permanent diminution in the value of the initial aircraft, a reduction of $9 million. (iii) The unaudited pro-forma combined statement of operations reflects net interest expense (including interest on the subclass E-1 notes) which would have been incurred had the transaction occurred on July 1, 1997 and had the AerCo notes been issued on that date bearing interest at the assumed rates set forth in "Description of the Notes -- Assumptions -- Interest, Expense and Operating Cost Assumptions". Deferred transaction costs of $2 million are also charged in net interest expense. (iv) As part of the transaction, AerCo entered into the servicing agreement with Babcock & Brown, the cash management agreement and the administrative agency agreement with AerFi. The unaudited pro-forma combined statement of operations reflects the assumed fees payable under those agreements as calculated in accordance with the relevant assumption set forth in "Description of the Notes -- Assumptions -- Interest, Expense and Operating Cost Assumptions". (v) The unaudited pro-forma combined statement of operations reflects the taxation effect of the above pro-forma adjustments. 76 78 The unaudited pro-forma combined statement of net assets set forth below gives pro-forma effect to the transaction as if the transaction had occurred on June 30, 1998. AERCO GROUP UNAUDITED PRO-FORMA COMBINED BALANCE SHEET AT JUNE 30, 1998 AERFI TRANSFERRED PRO-FORMA ALPS 94-1 AIRCRAFT PRO-FORMA NOTE 2 COMBINED 30-JUN-98 30-JUN-98 ADJUSTMENTS(2) REFERENCE 30-JUN-98 --------- ------------ -------------- --------- --------- $M $M $M $M Current assets Cash...................................... 88 -- (27) (ii) 61 Due from AerFi............................ -- 24 (24) (iii) -- Accounts receivable....................... 3 1 (1) (iv) 3 ----- ----- ----- ----- Total current assets........................ 91 25 (52) 64 Intangible assets Goodwill.................................. -- -- 56 (vi) 56 Fixed assets Aircraft.................................. 800 179 (27) (i) 952 ----- ----- ----- ----- Total assets................................ 891 204 (23) 1,072 ===== ===== ===== ===== Liabilities Accrued expenses & other liabilities...... 36 9 (26) (iv) 19 Indebtedness.............................. 684 40 71 (v) 795 Indebtedness to AerFi..................... 193 48 (49) (v) 192 Provision for maintenance................. 44 6 -- 50 Security deposits......................... 13 3 -- 16 ----- ----- ----- ----- Total liabilities........................... 970 106 (4) 1,072 Shareholders' equity and net liabilities.... (79) 98 (19) (vi) -- ----- ----- ----- ----- 891 204 (23) 1,072 ===== ===== ===== ===== - --------------- (2) Represents the adjustments to the unaudited pro-forma combined balance sheet and statement of net assets of ALPS 94-1 and the AerFi transferred aircraft to account for the transaction and as if it had occurred on June 30, 1998. (i) Aircraft has been adjusted by $27 million to reflect (a) the reduction in the fleet of $66 million to reflect the sale of the B767-300ER owned by ALPS 94-1 (in the period between the pricing and the closing of the offering) as if the sale had occurred on July 1, 1997 and (b) an increase of $39 million to reflect the inclusion of all remaining aircraft at the initial appraised value of $952 million. (ii) The expected cash balances to be held by AerCo group on completion of the transaction are $61 million equal to the initial liquidity reserve amount of $40 million, accrued expenses of $5 million and security deposits of $16 million (as of June 30, 1998). The reduction in the cash balance reflects the net cash outflow as a result of the refinancing transaction and reflects the use of the ALPS 94-1 cash to repay existing noteholders of ALPS 94-1. (iii) The receivable due from AerFi of $24 million corresponds to a portion of the indebtedness of the relevant AerFi transferred aircraft that was repaid to AerFi on completion of the transaction. (iv) Accounts receivable and accrued expenses and other liabilities reflect only the assets and liabilities related to the initial aircraft on completion of the transaction. (v) Adjustments have been made to reflect the settlement of the existing indebtedness and the issuance of the AerCo notes. The resulting pro-forma indebtedness of $795 million at June 30, 1998 reflects the new debt profile of the notes net of capitalized funding costs of $5 million. Indebtedness to AerFi of $192 million reflects subclass D-1 and subclass E-1 notes. 77 79 The application of the proceeds from the issuance of the AerCo notes on a pro forma basis may be summarized: $M $M ---- ---- PROCEEDS ON ISSUE OF NOTES A - C notes (net)........................................... 795 D & E notes................................................. 192 ---- 987 SETTLEMENT OF INDEBTEDNESS Indebtedness to AerFi....................................... (241) Indebtedness................................................ (724) ---- (965) REPAYMENT OF THE ADDITIONAL NET INDEBTEDNESS TO AERFI WHICH AROSE ON THE COMPLETION OF AERCO'S ACQUISITION OF ALPS 94-1 AND THE AERFI TRANSFERRED AIRCRAFT................... (119) OTHER MOVEMENTS Receipt of amounts due from AerFi........................... 24 Disposal of aircraft to AerFi............................... 66 Settlement of accounts receivable/payable................... (20) 70 ---- (27) ---- NET MOVEMENT IN CASH Opening cash ALPS 94-1...................................... 88 Closing cash AerCo combined................................. (61) ---- Pro forma decrease in cash.................................. 27 ---- As part of the refinancing transaction, the ALPS 94-1 class E notes, together with accrued interest, in the amounts of $192 million was refinanced by AerCo class D notes of $80 million and AerCo class E notes of $112 million. (vi) The transaction whereby AerCo acquired ALPS 94-1 and the AerFi transferred aircraft was a transaction between entities under the common control of AerFi. The proceeds from the issue of the Notes issued by AerCo were applied to repay the ALPS 94-1 A to E notes and to acquire the stock in ALPS 94-1 and the AerFi transferred aircraft. Any cash surplus arising on the transaction was paid to AerFi. The acquisition by AerCo of the AerFi transferred aircraft from AerFi was achieved through the sale of these aircraft by AerFi to three aircraft owning subsidiary companies subsequent to June 30, 1998, (and prior to the transaction closing date) at their fair value and the stock of these companies was then acquired by AerCo for a nominal consideration. The indebtedness of these companies to AerFi of $210 million on the date on which they were acquired, was assumed by AerCo. The $146 million difference between the indebtedness to AerFi assumed by AerCo on its acquisition of these companies of $210 million and the $64 million included in the balance sheet of the AerFi transferred aircraft at June 30, 1998 has been included as an adjustment to the net assets acquired in respect of the AerFi transferred aircraft. The goodwill of $9 million representing the difference between the fair value of the net assets acquired and the nominal consideration paid to acquire the stock of the three aircraft owning companies has been capitalised in the unaudited pro-forma combined balance sheet. In respect of the acquisition by AerCo of ALPS 94-1, AerFi in effect, contributed an amount of $27 million to AerCo to enable ALPS 94-1 to repay its A-E Note indebtedness in full. This effective elimination of the indebtedness of ALPS 94-1 by AerFi has been included as an adjustment to the net assets acquired in respect of ALPS 94-1. The goodwill of $47 million representing the difference between the fair value of the net assets acquired in respect of ALPS 94-1 and the nominal purchase consideration for the capital stock has been capitalised in the unaudited pro-forma combined balance sheet. The pre-acquisition equity of ALPS 94-1 and the 78 80 AerFi transferred aircraft of $19 million has also been eliminated as a pro-forma adjustment in arriving at the unaudited pro-forma combined balance sheet. The calculation of goodwill arising on the acquisition by AerCo of ALPS 94-1 and the AerFi transferred aircraft for the purposes of the pro-forma financial information under U.K. GAAP is as follows AERFI TRANSFERRED ALPS 94-1 AIRCRAFT TOTAL 30-JUN-98 30-JUN-98 30-JUN-98 --------- ----------- --------- $M $M $M SHAREHOLDER'S DEFICIT AND NET ASSETS...................... (79) 98 19 Adjustment in respect of AerFi indebtedness which arose on the completion of AerCo's acquisition of ALPS 94-1 and the AerFi transferred aircraft.......................... 27 (146) (119) FAIR VALUE ADJUSTMENTS Difference between initial appraisal value and the UK. GAAP carrying value of the aircraft acquired......... 5 34 39 Adjustment to deferred tax liability on AerFi transferred aircraft................................. -- 5 5 ------ ------ ------ FAIR VALUE OF NET ASSETS ACQUIRED......................... (47) (9) (56) Purchase consideration.................................... -- -- -- ------ ------ ------ GOODWILL ON ACQUISITION................................... (47) (9) (56) ====== ====== ====== RECONCILIATION OF PRO-FORMA COMBINED FINANCIAL INFORMATION AS STATED IN ACCORDANCE WITH U.K. GAAP TO PRO-FORMA COMBINED FINANCIAL INFORMATION IN ACCORDANCE WITH U.S. GAAP The unaudited pro-forma combined financial information is prepared in accordance with U.K. GAAP which differs in certain significant respects from U.S. GAAP. The principal differences are set out below: AERCO GROUP UNAUDITED PRO-FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 U.K. GAAP U.S. GAAP PRO-FORMA PRO-FORMA COMBINED U.S. GAAP NOTE 3 COMBINED JUNE 30, 1998 ADJUSTMENT(3) REFERENCE JUNE 30, 1998 ------------- ------------- --------- ------------- $M $M $M Revenues Aircraft leasing.................... 114 -- 114 Expenses Depreciation........................ (42) 2 (i) (40) Net interest expense................ (81) -- (81) Exceptional item.................... (13) -- (13) Other expenses...................... (13) -- (13) ----- ----- ----- Total expenses........................ (149) 2 (147) ===== ===== ===== Net loss before tax................... (35) 2 (33) Benefit for taxes................... 2 -- 2 ----- ----- ----- Net loss for the year................. (33) 2 (31) ===== ===== ===== 79 81 AERCO GROUP UNAUDITED PRO-FORMA COMBINED BALANCE SHEET AT JUNE 30, 1998 U.K. GAAP U.S. GAAP PRO-FORMA PRO-FORMA COMBINED U.S. GAAP NOTE 3 COMBINED JUNE 30, 1998 ADJUSTMENT(3) REFERENCE JUNE 30, 1998 ------------- ------------- --------- ------------- $M $M $M Current assets Cash................................... 61 -- 61 Accounts receivable.................... 3 -- 3 Deferred financing costs............... -- 5 (ii) 5 ----- ----- ----- Total current assets..................... 64 5 69 Intangible assets Goodwill............................... 56 (56) (iii) Fixed assets Aircraft............................... 952 (141) (i) 811 ----- ----- ----- Total assets............................. 1,072 (192) 880 ===== ===== ===== Liabilities Accrued expenses and other liabilities......................... 19 -- 19 Indebtedness........................... 795 5 (ii) 800 Indebtedness to AerFi.................. 192 -- 192 Provision for maintenance.............. 50 -- 50 Security deposits...................... 16 -- 16 ----- ----- ----- Total liabilities........................ 1,072 5 1,077 SHAREHOLDERS' DEFICIT Ordinary shares........................ -- -- -- Accumulated deficit.................... -- (197) (iv) (197) ----- ----- ----- 1,072 (192) 880 ===== ===== ===== 80 82 - --------------- (3) The U.S. GAAP pro-forma combined statement of operations gives pro-forma effect to the transaction as if it had occurred on July 1, 1997. The U.S. GAAP pro-forma combined balance sheet gives pro-forma effect to the transaction as if it had occurred on June 30, 1998. The U.S. GAAP adjustments reflect adjustments to the fair value of the net assets of ALPS 94-1 and the AerFi transferred aircraft in order to reflect the assets and liabilities of these entities at their predecessor cost under U.S. GAAP. The U.S. GAAP adjustments in the unaudited pro-forma combined financial information relate primarily to the accounting treatment of the following: (i) Under U.K. GAAP, the initial aircraft are included at their fair (i.e., appraisal) value at July 1, 1998 and depreciated from that date. For U.S. GAAP purposes, transfer of assets and liabilities between ALPS 94-1, AerCo and AerFi have been accounted for on a historical cost basis because all such transfers of assets and liabilities are among entities within a single consolidated group. The U.S. GAAP adjustment of $141 million to aircraft relates to the difference between the fair value of the aircraft and their predecessor cost. (ii) Under U.K. GAAP, the capitalized funding costs of completing the transaction are disclosed as a reduction against the class A-C note indebtedness. Under U.S. GAAP the capitalized funding costs are disclosed separately as deferred financing costs. (iii) Under U.K. GAAP, the difference between the fair value of the net assets of ALPS 94-1 and the AerFi transferred aircraft, the additional net indebtedness to AerFi which arose on the completion of AerCo's acquisition of ALPS 94-1 and the AerFi transferred aircraft and the nominal purchase consideration paid by AerCo to acquire these entities gives rise to goodwill of $56 million which is capitalised on the unaudited pro-forma combined balance sheet. No goodwill arises under U.S. GAAP as the transaction is accounted for on an historical cost basis as a transaction between entities under common control. (iv) The U.S. GAAP adjustment to the shareholders' accumulated deficit of $197 million represents (a) the difference between the fair value of the aircraft acquired and their predecessor cost of $141 million, and (b) the difference of $56 million, between the additional net indebtedness to AerFi which arose on the completion of AerCo's acquisition of ALPS 94-1 and the AerFi transferred aircraft of $119 million and the fair value of the net assets of those entities of $63 million. 81 83 SELECTED RATIOS(1)(2) YEAR ENDED JUNE 30, 1998 ------------- (UNAUDITED) U.K. GAAP Pro-forma combined Ratio of earnings to fixed charges(3).... 0.568 U.S. GAAP Pro-forma combined Ratio of earnings to fixed charges(3).... 0.593 - --------------- (1) For a discussion of the differences between U.S. GAAP and U.K. GAAP in respect of the unaudited pro-forma combined financial information, see reconciliation of income as stated in accordance with U.K. GAAP to income in accordance with U.S. GAAP set forth above. (2) Earnings include pretax income from continuing operations plus fixed charges. Fixed charges are the total of (a) interest, whether expensed or capitalized, (b) amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized and (c) such portion of rental expense as can be demonstrated to be representative of the interest factor in the particular expense. (3) A ratio of less than one indicates that earnings are inadequate to cover fixed charges. The amount by which fixed charges exceeded earnings for the year ended June 30, 1998 was $35 million under U.K. GAAP and $33 million under U.S. GAAP. 82 84 DESCRIPTION OF THE NOTES The following description is a summary of the provisions of the notes, the indenture, the security trust agreement, the cash management agreement and other agreements. It does not restate these agreements in their entirety. We urge you to read the indenture and the security trust agreement because these agreements define your rights as holders of the notes. We have filed these agreements and the servicing agreement, the administrative agency agreement and the cash management agreement as exhibits to the registration statement which includes this prospectus. The following discussion uses terms that have specific definitions in the indenture and other transaction agreements. You should refer to Appendix 1 for an index showing the definitions of these terms as they appear in this prospectus. GENERAL We will issue the new notes under the indenture. The indenture will be qualified under the Trust Indenture Act of 1939, as amended, upon effectiveness of the registration statement. Bankers Trust Company is the trustee under the indenture. The terms of the new notes will be identical to the old notes, except for transfer restrictions, registration rights and increased interest rate provisions that appear only in the old notes. The notes are solely obligations of AerCo and are not secured by the aircraft. The notes do not represent obligations of any lessee, AerFi, the trustee or Babcock & Brown. RATINGS Each subclass of notes is rated as of the date of this prospectus as follows: RATING AGENCIES ----------------------------------- MOODY'S STANDARD & POOR'S DCR ------- ----------------- --- Subclass A-1 notes....................................... Aa2 AA AA Subclass A-2 notes....................................... Aa2 AA AA Subclass B-1 notes....................................... A2 A A Subclass C-1 notes....................................... -- BBB BBB The ratings of the notes address the likelihood of the timely payment of interest and the ultimate payment of principal and premium, if any, on the notes. The rating agencies have not rated our ability to pay step-up interest or principal in full on any subclass of the notes on the expected final payment date (or on any other date prior to the final maturity date). The ratings do not address the imposition of any withholding tax on any payments under the leases, the notes or otherwise. A rating is not a recommendation to buy, sell or hold notes because the ratings do not comment as to market price or suitability for a particular investor and may be subject to revision or withdrawal at any time by the assigning rating agency. If a rating agency lowers, suspends or withdraws its rating of any subclass of notes, no person or other entity has an obligation to support AerCo's obligations under the notes in any way. FORM GLOBAL NOTES The new notes will be represented by global notes, each of which will be issued in bearer form only. The global notes will be deposited with the book-entry depositary. The book-entry depositary will issue to DTC or its nominee certificateless depositary interests for each subclass of the new notes, representing the principal amount of the global note for the subclass. Interests in the new notes will therefore be shown only on, and transfers of book-entry interests will be effected only through, records maintained in book-entry form by DTC or its nominee and its participants (including Euroclear and Cedel). You should refer to "Book-Entry Registration, Global Clearance and Settlement" for a description of book-entry interests in the new notes may be held and transferred and new payments on them will be distributed. 83 85 DEFINITIVE NOTES You will receive definitive notes in registered form without interest coupons in exchange for your book-entry interests only if: - DTC notifies the book-entry depositary that it is not willing or able to act as depositary for the book-entry interests and the book-entry depositary does not appoint a successor at AerCo's request within 90 days of DTC's notice - AerCo notifies the trustee that the book-entry depositary is no longer willing or able to act as book-entry depositary and AerCo and the trustee do not appoint a qualified successor within 90 days of AerCo's notice or - after an event of default has occurred with respect to any class of notes, holders representing 51% or more of the outstanding principal balance of any subclass within that class notify AerCo, the trustee, the book-entry depositary and DTC that continuing a book-entry system through DTC is no longer in their interest. If any of these events occurs, the trustee will notify the relevant holders and will arrange for definitive notes to be issued in exchange for the holders' book-entry interests. You should be aware that, under current Irish tax law, the holder of a definitive note may become subject to Irish income tax of currently 24% which will be withheld on any payments of interest on the definitive notes as set forth under "Tax Considerations -- Irish Tax Considerations". If definitive notes are issued, AerCo will have no obligation to pay to any holder any additional amounts for any Irish or other tax. The trustee or a paying agent will make distributions of interest, principal and any premium on any definitive notes directly to holders of definitive notes in whose names the definitive notes were registered at the close of business on the record date. Such distributions will be made by check mailed to the address of such holder as it appears on the register maintained by the trustee. A noteholder holding definitive notes representing at least $1,000,000 of the principal balance of any subclass may apply to have distributions paid by wire transfer to its account at a financial institution in New York, New York. The final payment on any such definitive notes, however, will be made only upon presentation and surrender of such definitive notes at the office or agency, specified in the notice of final distribution to noteholders. Definitive notes will be freely transferable and exchangeable for definitive notes of the same subclass at the office of the trustee or the offices of the co-transfer agent and the co-registrar in Luxembourg. No service charge will be imposed for any registration of transfer or exchange, but payment of a sum sufficient to cover any tax or other governmental charge may be required. You may exchange or replace a note that is mutilated, destroyed, lost or stolen, at the offices of the trustee or of the co-transfer agent and the co-registrar in Luxembourg upon presentation of the note or satisfactory evidence of destruction, loss or theft. An indemnity satisfactory to the trustee or the co-transfer agent and co-registrar may be required at the expense of the noteholder before a replacement note will be issued. The noteholder will have to pay any tax or other governmental charge imposed in connection with such exchange or replacement and any other expenses (including the fees and expenses of the trustee and the co-transfer agent and co-registrar) connected therewith. PAYMENTS AND DISTRIBUTIONS On each payment date, the trustee will pay (or will instruct a paying agent appointed in Luxembourg to pay) to the noteholders all payments of interest, principal and any premium on the notes of each subclass, so long as the trustee or paying agent confirms that it has received the payment by 1:00 p.m. (New York time) on the payment date. If the trustee or the paying agent confirms receipt of the payment after that time on the payment date, then it will make the payment to the noteholders on the next business day after the business day it received the payment. The trustee or paying agent to the noteholders will make each payment on any payment date other than the final payment date with respect to any subclass of notes will be made as of the record date immediately preceding such payment date. The final distribution with respect to any note, 84 86 however, will be made only upon presentation and surrender of such note by the noteholder or its agent (including any holder in street name) at the office or agency of the trustee or paying agent. So long as the Notes are listed on the Luxembourg Stock Exchange, AerCo must appoint and maintain a paying agent in Luxembourg. The following table sets forth the expected weighted average life, the expected final payment date and the final maturity date for each subclass of notes. EXPECTED WEIGHTED AVERAGE LIFE, EXPECTED FINAL PAYMENT DATES AND FINAL MATURITY DATES OF THE NOTES EXPECTED WEIGHTED AVERAGE LIFE EXPECTED FINAL SUBCLASS OF NOTES IN YEARS PAYMENT DATE FINAL MATURITY DATE - ----------------- ------------ ----------------- ------------------- Subclass A-1............................ 2.0 July 15, 2000 July 15, 2023 Subclass A-2............................ 3.8 December 15, 2005 July 15, 2023 Subclass B-1............................ 7.7 July 15, 2013 July 15, 2023 Subclass C-1............................ 10.5 July 15, 2013 July 15, 2023 The "expected final payment date" for each subclass of notes means the date on which the final payment of principal of and interest on such subclass of notes is expected to be made based on the assumptions we describe below under "-- Assumptions". The final maturity date for each subclass of notes means the date on which all principal not previously paid is due and payable. The actual final payment date for each subclass of notes is likely to occur earlier or later than the expected final payment date as a result of numerous factors, including that the assumptions are unlikely to correspond to actual experience. AerCo may also redeem or refinance the notes before their expected final payment date. ASSUMPTIONS The assumptions and tables set forth below represent possible revenue scenarios designed to illustrate the payment characteristics of the notes. They are not projections, estimates, forecasts or forward-looking statements. We developed the tables by fixing certain of the assumptions and by varying other assumptions and other factors which affect AerCo's revenues and costs and expenses. The assumptions do not represent a complete list of factors which may affect the revenues and costs and expenses of AerCo, but rather indicate those factors which are likely to have a material effect on AerCo's performance in future years. More severe stresses than we have included in the table may lead to payments of principal on the notes being delayed or decreased or, in certain cases, an event of default. You should understand that the following tables are only an illustration of some of the payment sensitivities of the notes to market and economic stresses. We prepared these tables for inclusion in the offering memorandum for the old notes based on information as of May 15, 1998. We have not updated or revised the information presented to reflect changes occurring after May 15, 1998. For example, we have sold one of the aircraft (an F100) since that date and LIBOR rates have also changed since that time. We are not aware of any other changes since that date that would cause the following data to be an unreliable illustration of how the payment provisions of the notes operate. It is highly likely that actual experience in the future will vary from the assumptions and the possible revenue scenarios reflected in the tables. The principal factors that could cause AerCo group's actual revenues to differ materially from such scenarios are the stresses we describe below and the risks we describe under "Risk Factors". 85 87 REVENUE ASSUMPTIONS We used assumptions (1) to (12) below to determine the assumed gross monthly revenue of AerCo group before interest payments, principal payments, swap payments, selling, general and administrative expenses and before lost rental payments and expenditures required due to aircraft downtime, lessee defaults, aircraft repossession costs, bad debts and operating costs incurred in the ordinary course of the operating lease business. See Appendix 3 to this prospectus for further data regarding assumed gross revenue. (1) One month LIBOR remains constant at 5.75% per annum and the U.S. Treasury rate used for premium calculations is 5.5%. (2) Six month LIBOR (the most common reference rate for the floating rate leases) remains constant at 5.75% per annum. (3) Funds on deposit in the collection account and any other cash balances held by AerCo group earn interest at a rate of one month LIBOR. (4) - Aircraft coming off-lease in the future are re-leased at a monthly rate that is a function of the current contracted monthly lease rate as of May 15, 1998 for such aircraft of that age. - Lease rates are assumed to remain constant at the monthly lease rate for the first 60% of an aircraft's expected useful life, then declining on a straight-line basis to 40% of such lease rate over the remainder of its expected useful life. - Any aircraft currently subject to a letter of intent is assumed to be leased on the basis of the letter of intent. - All types of aircraft in the portfolio are assumed to have an expected useful life of 25 years, except that each of the two DC8-71F aircraft are assumed to have an expected useful life of 15 years from the date of its conversion to freighter service. (5) Aircraft have no scrap value at the end of their expected useful life. (6) AerCo group receives all contracted and assumed future payments in respect of the leases on the due date. (7) Future lease terms are five years. (8) AerCo group grants no new purchase options to lessees and no existing purchase options are exercised. (9) AerCo group grants no new lease termination or extension options to lessees and no existing termination or extension options are exercised. (10) AerCo group sells no aircraft. (11) AerCo group acquires no additional aircraft. (12) AerCo group does not enter into any tax-related dispositions. 86 88 Interest, Expense and Operating Cost Assumptions: (13) AerCo issues notes in amounts and interest rates as set forth in the following table and makes payments according to the order of priorities set forth under "Description of the Notes -- Payment of Principal and Interest -- Priority of Payments". SUBCLASS AMOUNT ASSUMED INTEREST RATE - -------- ----------- --------------------- ($MILLIONS) Subclass A-1......................................... 340.000 1 Month LIBOR + 0.19% Subclass A-2......................................... 290.000 1 Month LIBOR + 0.32% Subclass B-1......................................... 85.000 1 Month LIBOR + 0.60% Subclass C-1......................................... 85.000 1 Month LIBOR + 1.35% Subclass D-1......................................... 80.000 8.50% Subclass E-1......................................... 111.973 * ------- 991.973 ======= - --------------- * The class E note primary interest amount is 15%. (14) Refinancing notes are issued and sold on the expected final payment date of the subclass A-1 notes (and on expected final payment dates of any refinancing notes) with the same priority, interest rate, issuance expenses and redemption as the notes being refinanced and with maturities and amortization schedules paid with the application of the Minimum, Scheduled and Supplemental Principal Payment Amounts. Issuance expenses are 0.02% per month of the outstanding principal balance. (15) AerCo group realizes no actual liabilities in respect of contingent liabilities of ALPS 94-1 or its subsidiaries or any of the AerFi transferred companies. (16) The servicer's fees are as described in "Management of AerCo group -- The Servicer". The servicer's incentive fees are assumed to be 1% of aggregate lease rentals. The administrative agent's fee is as described in "Management of AerCo group -- Corporate Management". Other selling, general and administrative expenses, including fees of the cash manager, in the amount of $2 million per annum are deducted from gross revenue. (17) Gross revenues are reduced each year by 2% to account for operating costs incurred in the ordinary course of the operating lease business including insurance expenses, aircraft-related costs and leasing transaction expenses. (18) Security deposits, modification payments and subordinated swap payments are zero. Assumed Case Stress Scenario: (19) Gross revenues are reduced by 6% per annum for the following stresses: lost rental payments and expenditures required because of aircraft downtime -- known in the industry as "aircraft on ground" -- lessee defaults, aircraft repossession costs and bad debts. The following stresses are presented for illustrative purposes and only represent an example of a combination of stresses which result in approximately a 6% reduction in gross revenues. Other stress combinations could result in gross revenue reductions which exceed 6%. A: Weighted Average Portfolio Turnover: .......... 20% per annum (see Assumption (7)) B: Average Re-marketing Time: .................... 6 weeks (.115 years) C: Weighted Average Default Rate: ................ 4% per annum D: Average Repossession Time: .................... 18 weeks (.346 years) E: Average Repossession Cost: .................... $650,000 per Aircraft F: Weighted Average Bad Debt Expense: ............ 1% per annum 87 89 AOG = (A X B) + (C X (B + D)) Annual Repossession Expense = C X(E/Average Annual Gross Revenue per Aircraft)) Aircraft on Ground = (20% X .115 yrs) + (4% X (.115 yrs + .346 yrs)).................................................. 4.2% Annual Repossession Expense = (4% X 21%).................... 0.8 Bad Debt Expense............................................ +1.0 ----- Stress Related Gross Revenue Reduction...................... 6.0% Operating costs (see Assumption (17))....................... +2.0 ----- Gross Revenue Reduction in the Assumed Case................. 8.0% ===== Increasing the above stresses would result in a greater reduction in annual gross revenues. The following table shows the effect upon gross revenues of doubling the severity of each stress (other than average repossession cost) outlined in the above example (in each case holding other stresses unchanged). GROSS REVENUE STRESS SEVERITY REDUCTION - ------ -------- ------------- Portfolio Turnover...................................... 40% per annum 10.3% Re-marketing Time....................................... 12 weeks 10.8% Default Rate............................................ 8% per annum 10.7% Repossession Time....................................... 36 weeks 9.4% Bad Debt Expense........................................ 2% per annum 9.0% Actual experience will likely differ from the assumptions and the stresses. Because of this, principal payments on certain notes will likely occur earlier or later than assumed. These timing differences may be significant. 88 90 PRINCIPAL REPAYMENTS UNDER THE ASSUMED CASE The table below shows, for each payment date presented, the percentage of the initial outstanding principal balance of the aggregate class A notes (including refinancing notes) and the subclass A-1, subclass A-2, subclass B-1, subclass C-1 and subclass D-1 notes expected to be outstanding on the payment date based on the assumptions. It is highly unlikely that the assumptions will correspond to actual experience. Therefore, principal payments on the notes may occur earlier or later than as set forth in the table. AerCo may fail to pay principal of any subclass of its notes prior to the final maturity date of such subclass because it does not have the funds to make the payment according to the priorities described under "-- Priority of Payments". Such a failure will not, by itself, be an event of default. PERCENT OF INITIAL OUTSTANDING PRINCIPAL BALANCE OF THE NOTES BASED ON THE ASSUMED CASE AGGREGATE CLASS A NOTES, INCLUDING PAYMENT DATE OCCURRING IN JULY A-1 A-2 REFINANCING NOTES B-1 C-1 - ------------------------------ ---- ---- ----------------- ---- ---- 1998 (July 15)................................ 100% 100% 100% 100% 100% 1999.......................................... 100% 87% 94% 96% 100% 2000.......................................... 0% 74% 88% 91% 99% 2001.......................................... 0% 62% 82% 85% 97% 2002.......................................... 0% 48% 76% 79% 95% 2003.......................................... 0% 34% 70% 72% 92% 2004.......................................... 0% 20% 63% 64% 88% 2005.......................................... 0% 6% 57% 56% 83% 2006.......................................... 0% 0% 50% 48% 76% 2007.......................................... 0% 0% 42% 39% 69% 2008.......................................... 0% 0% 34% 31% 60% 2009.......................................... 0% 0% 27% 24% 51% 2010.......................................... 0% 0% 20% 16% 40% 2011.......................................... 0% 0% 14% 10% 28% 2012.......................................... 0% 0% 8% 4% 15% 2013.......................................... 0% 0% 4% 0% 0% 2014.......................................... 0% 0% 0% 0% 0% Weighted Average Life......................... 2.0 3.8 7.8 7.7 10.5 - --------------- The weighted average life of a note equals: P/I, where P = the sum of the following amounts calculated for each payment date: (A)-(Y), where A = principal amount that is assumed to be paid on the payment date Y = number of years from the date the note was issued to the payment date I = the initial principal balance of the note. 89 91 DECLINING BALANCES OF THE NOTES AND ASSUMED PORTFOLIO VALUE BASED ON THE ASSUMED CASE LOGO In each of the following tables, "assumed maturity" means the period (expressed in years) from July 15, 1998 through the expected final payment date of the relevant notes. EFFECT OF INABILITY TO REFINANCE SUBCLASS A-1 NOTES The table below is based on the assumptions, except that we have assumed that no refinancing notes are issued. If no refinancings occur, the assumed maturities (Exp) and weighted average lives (Avg) of the notes would be as set forth below. ASSUMED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES ASSUMED MATURITY/ WEIGHTED AVERAGE LIFE ---------------------------------- ASSUMED CASE NO REFINANCINGS -------------- ---------------- EXP AVG EXP AVG ----- ----- ------ ------ Subclass A-1.............................................. 2.0 2.0 15.8 11.3 Subclass A-2.............................................. 7.4 3.8 7.4 3.8 Subclass B-1.............................................. 15.0 7.7 15.0 7.7 Subclass C-1.............................................. 15.0 10.5 15.0 10.5 MINIMUM REVENUE PERCENTAGE REQUIRED TO REPAY NOTES The table below shows the minimum percentage of gross revenue that will be necessary to repay all interest and principal on each subclass of notes by their respective final maturity dates. If AerCo group received actual revenues below the percentages of gross revenue indicated below and all of the other assumptions occurred, AerCo would be unable to make the required payments on the notes, which would constitute an event of default. 90 92 PERCENTAGE OF GROSS REVENUE NECESSARY TO REPAY THE NOTES BY THE APPLICABLE FINAL MATURITY DATE ASSUMING ACTUAL EXPERIENCE CORRESPONDS TO THE ASSUMED CASE UNTIL THE BEGINNING OF THE YEAR STATED JULY 15, 1998 YEAR 3 YEAR 6 YEAR 10 ------------- ------ ------ ------- Aggregate Class A Notes............................ 58.4% 57.4% 54.6% 48.7% Subclass B-1 Notes................................. 65.8% 64.4% 60.8% 53.1% Subclass C-1 Notes................................. 74.3% 72.9% 70.3% 61.2% EFFECT OF A PERMANENT CHANGE IN GROSS REVENUE We have prepared the tables below based on the assumptions, except that we have varied the revenue received by AerCo group from gross revenue by the indicated percentages, beginning in years 3 and 6. If AerCo group received actual revenues as indicated below and all of the other assumptions occurred, then the assumed maturities and weighted average lives of the relevant subclasses of notes would be as set forth below. ASSUMED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES ASSUMING A PERMANENT CHANGE IN GROSS REVENUE, BEGINNING IN YEAR 3 PERMANENT CHANGE IN GROSS REVENUE +10% 0% -8%* -15% -20% ----------- ----------- ----------- ----------- ----------- EXP AVG EXP AVG EXP AVG EXP AVG EXP AVG ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Subclass A-1......................... 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Subclass A-2......................... 6.3 3.4 7.4 3.8 7.4 3.8 8.5 3.9 8.5 4.3 Subclass B-1......................... 12.0 6.6 14.8 7.7 15.0 7.7 15.0 7.7 18.5 7.9 Subclass C-1......................... 12.9 10.1 15.0 10.5 15.0 10.5 15.0 10.5 19.8 13.6 - --------------- * Assumed case ASSUMED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES ASSUMING A PERMANENT CHANGE IN GROSS REVENUE, BEGINNING IN YEAR 6 PERMANENT CHANGE IN GROSS REVENUE +10% 0% -8%* -15% -20% ----------- ----------- ----------- ----------- ----------- EXP AVG EXP AVG EXP AVG EXP AVG EXP AVG ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Subclass A-1......................... 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Subclass A-2......................... 7.1 3.8 7.4 3.8 7.4 3.8 8.2 3.8 8.5 3.9 Subclass B-1......................... 12.0 6.7 14.8 7.7 15.0 7.7 15.0 7.7 15.0 7.7 Subclass C-1......................... 14.0 10.4 15.0 10.5 15.0 10.5 15.0 10.5 16.0 11.0 - --------------- * Assumed case 91 93 EFFECT OF PERMANENT DECLINE IN PORTFOLIO VALUE If the value of the portfolio, as adjusted for our appraisals, becomes significantly less than the value of the portfolio based on the assumptions, the Scheduled Principal Payment Amount payable to holders of the class A notes may be increased. You should refer to "-- Principal Amortization" for a description of how these amounts are determined. Payment of this increased amount may shorten the weighted average lives of the class A notes and lengthen the weighted average lives of the subclasses of notes that rank behind the class A notes in priority of payment. The following tables show the assumed maturity and weighted average life of each subclass of notes if the adjusted portfolio value permanently declined to a given percentage of the assumed portfolio value, beginning in years 1 and 5. ASSUMED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES ASSUMING A PERMANENT CHANGE IN PORTFOLIO VALUE, BEGINNING IN YEAR 1 ADJUSTED PORTFOLIO VALUE AS PERCENTAGE OF EXPECTED PORTFOLIO VALUE BEGINNING IN YEAR 1 ----------------------------------------------------- 100%* 90% 80% 70% ----------- ----------- ----------- ----------- EXP AVG EXP AVG EXP AVG EXP AVG ---- ---- ---- ---- ---- ---- ---- ---- Subclass A-1.................................... 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Subclass A-2.................................... 7.4 3.8 7.4 3.8 6.8 3.3 6.0 3.2 Subclass B-1.................................... 15.0 7.7 15.0 7.7 15.0 7.7 15.0 7.3 Subclass C-1.................................... 15.0 10.5 15.0 10.5 15.0 10.6 15.0 10.8 - --------------- * Assumed Case ASSUMED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES ASSUMING A PERMANENT CHANGE IN PORTFOLIO VALUE, BEGINNING IN YEAR 5 ADJUSTED PORTFOLIO VALUE AS PERCENTAGE OF EXPECTED PORTFOLIO VALUE BEGINNING IN YEAR 5 ----------------------------------------------------- 100%* 90% 80% 70% ----------- ----------- ----------- ----------- EXP AVG EXP AVG EXP AVG EXP AVG ---- ---- ---- ---- ---- ---- ---- ---- Subclass A-1.................................... 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Subclass A-2.................................... 7.4 3.8 7.4 3.8 6.8 3.6 6.6 3.6 Subclass B-1.................................... 15.0 7.7 15.0 7.7 15.0 7.8 15.0 7.8 Subclass C-1.................................... 15.0 10.5 15.0 10.5 15.0 10.6 15.0 10.9 - --------------- * Assumed Case EFFECT OF CYCLICAL VARIATIONS IN GROSS REVENUE AND PORTFOLIO VALUE -- "RECESSION SCENARIOS" Historically, the aviation industry has experienced cyclical swings in the supply and demand for aircraft. Operating lease companies, such as members of AerCo group, would be negatively affected by a decline in the demand for aircraft. We have assumed that such a decline in demand or "recession" (as used in this discussion) will result in a decline in aircraft values and an increase in defaults and downtime, and a decline in operating lease rates. In that case, gross revenues would decline. We have prepared the following tables to show the effect on assumed maturities and weighted average lives of the subclass B-1 and subclass C-1 notes if recessions of different lengths were to occur in the future. In preparing the following tables, we have assumed that a recession would have the following effect on the operations of AerCo group: - Aircraft values would fall on the first day of the recession to a given percentage of the assumed portfolio value. This decrease would trigger an increase in scheduled principal payment amounts being paid if amounts are available. 92 94 - After a period of two years following the first day of the recession, gross revenues fall by a given percentage as aircraft are re-leased or lessees default. This would result in less cash flow being available to make payments of interest and principal on the notes. - The recession lasts a given period of time. Afterwards, the adjusted portfolio value returns to the assumed portfolio value on the first day after the recession. Two years following the end of the recession, gross revenues return to the assumed case. - Actual experience will likely differ from the assumptions we have used in preparing the following tables. Specifically, we can give no assurance that periods of weak traffic growth and lower demand for aircraft will be followed by periods of strong growth and high demand for aircraft nor can it be assured that following a recession aircraft values and gross revenues will return to assumed case levels. Because actual experience will likely differ from these assumptions, the actual maturities and weighted average lives of the notes will likely differ from what is shown in the tables below. ASSUMED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS B-1 NOTES ASSUMING A RECESSION LASTING THREE YEARS Decline in Gross Revenues..................... 0% 8%* 10% 20% Adjusted Portfolio Value as a Percentage of Assumed Portfolio Value..................... 100% 100%* 90% 80% EXP AVG EXP AVG EXP AVG EXP AVG ---- ---- ---- ---- ---- ---- ---- ---- Recession begins at start of Year........................... 1 (July 15, 1998) 15.0 7.7 15.0 7.7 15.0 7.7 15.0 7.7 3 15.0 7.7 15.0 7.7 15.0 7.7 15.0 7.7 5 15.0 7.7 15.0 7.7 15.0 7.7 15.0 7.8 10 15.0 7.7 15.0 7.7 15.0 7.7 15.0 7.7 - --------------- * Assumed case ASSUMED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS B-1 NOTES ASSUMING A RECESSION LASTING FIVE YEARS Decline in Gross Revenues..................... 0% 8%* 10% 20% Adjusted Portfolio Value as a Percentage of Assumed Portfolio Value..................... 100% 100%* 90% 80% EXP AVG EXP AVG EXP AVG EXP AVG ---- ---- ---- ---- ---- ---- ---- ---- Recession begins at start of Year........................... 1 (July 15, 1998) 15.0 7.7 15.0 7.7 15.0 7.7 15.0 7.8 3 15.0 7.7 15.0 7.7 15.0 7.7 15.0 7.9 5 15.0 7.7 15.0 7.7 15.0 7.7 15.0 7.9 10 14.8 7.7 15.0 7.7 15.0 7.7 15.0 7.7 - --------------- * Assumed case ASSUMED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS C-1 NOTES ASSUMING A RECESSION LASTING THREE YEARS Decline in Gross Revenues..................... 0% 8%* 10% 20% Adjusted Portfolio Value as a Percentage of Assumed Portfolio Value..................... 100% 100%* 90% 80% 93 95 EXP AVG EXP AVG EXP AVG EXP AVG ---- ---- ---- ---- ---- ---- ---- ---- Recession begins at start of Year........................... 1 (July 15, 1998) 15.0 10.5 15.0 10.5 15.0 10.5 15.0 10.5 3 15.0 10.5 15.0 10.5 15.0 10.5 15.0 10.6 5 15.0 10.5 15.0 10.5 15.0 10.5 15.0 10.7 10 15.0 10.5 15.0 10.5 15.0 10.5 15.0 10.5 - --------------- * Assumed case ASSUMED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS C-1 NOTES ASSUMING A RECESSION LASTING FIVE YEARS Decline in Gross Revenues..................... 0% 8%* 10% 20% Adjusted Portfolio Value as a Percentage of Assumed Portfolio Value..................... 100% 100%* 90% 80% EXP AVG EXP AVG EXP AVG EXP AVG ---- ---- ---- ---- ---- ---- ---- ---- Recession begins at start of Year........................... 1 (July 15, 1998) 15.0 10.5 15.0 10.5 15.0 10.5 15.0 10.6 3 15.0 10.5 15.0 10.5 15.0 10.5 15.0 10.8 5 15.0 10.5 15.0 10.5 15.0 10.5 15.0 10.9 10 15.0 10.5 15.0 10.5 15.0 10.5 15.0 10.5 - --------------- * Assumed case EFFECT OF PRINCIPAL ALLOCATION ACCORDING TO THE EXTENDED POOL FACTOR ONLY FOR THE SUBCLASS A-2, SUBCLASS B-1, AND SUBCLASS C-1 NOTES If available collections on a payment date are not sufficient to pay the principal amount that is to be paid on a class of notes on that payment date according to the order of priorities, then the available collections will be allocated to the subclasses in that class of notes as we describe under "-- Principal Amortization -- Allocation of Principal Among Subclasses". We have prepared this table to show the effect of this allocation on the assumed maturities and the weighted average lives of subclass A-2, subclass B-1 and subclass C-1 notes if: - we issue additional notes to finance the acquisition of additional aircraft BUT - AerCo group's gross revenues are sufficient only to pay down the principal of these subclasses according to paragraph (1) under "Payment of Principal and Interest -- Allocation of Principal Among Subclasses of Notes". SUBCLASSES OF NOTES EXP. AVG. - ------------------- ---- ---- Subclass A-2................................................ 8.5 4.7 Subclass B-1................................................ 16.0 8.7 Subclass C-1................................................ 17.0 12.5 PAYMENT OF PRINCIPAL AND INTEREST GENERAL The notes are direct obligations of AerCo and are not secured by the aircraft. AerCo's only sources of payment for the notes and its other obligations are: - the payments made by the lessees under the leases; - proceeds from any sales or other dispositions of its assets; 94 96 - net payments to AerCo received under AerCo's swap agreements (and any other hedging instruments we may enter into); - interest earned on the investment of cash balances; and - net cash proceeds received from the sale of refinancing notes. The notes are subordinated to expenses and other obligations of AerCo group according to the order of priorities we described under "-- Priority of Payments". Each class and subclass of the notes has the priority given to it according to the priority of payments in the indenture. AerCo may make no payment of principal, interest or any premium on any class of notes unless it has made the required payments on the relevant payment date on each class of notes that ranks prior to that class. The subordination provisions of the indenture may not be amended or modified unless each swap provider, each holder of a class of notes that is affected by the amendment or modification and each holder of any class of notes that ranks senior to an affected class. The priority of the expenses and payments under swap agreements may not be amended or modified under any circumstances. If an event of default occurs, then the holders of a class of notes (except the class A notes) may not give a default notice or exercise any other remedy until all amounts owed by AerCo under the more senior classes of notes have been paid. Under the leases, the lessee must make rental and other payments and related collateral payments directly to the rental account held in the name of the security trustee. This amount will then be transferred, within one business day of receipt, to the collection account, except for certain limited amounts that must be left on deposit for local legal reasons. Any amounts received by AerCo group which are required to be segregated will be transferred to the lessee funded account. Unsegregated amounts received by AerCo group will be transferred directly to the collection account. On the basis of the assumptions, we expect these amounts will be sufficient to pay the principal, interest and any premium, on the notes and all other amounts payable by AerCo group to the trustee, the swap providers, the service providers and the holders of the class D and class E notes, in each case when and as due. INTEREST Each note bears interest on the outstanding principal balance, payable monthly in arrears on each payment date. An interest accrual period is the period from and including a payment date and to but excluding the next payment date. The final interest accrual period for each subclass of notes will end on but exclude the final maturity date or the date upon which all principal, interest and any premium on such subclass of is paid in full. Each subclass of notes will bear interest for each interest accrual period at the rate per annum set forth on the cover page of this prospectus. Interest on any subclass of notes is calculated on the basis of a 360-day year and the actual number of days elapsed in an interest accrual period. If AerCo does not repay the subclass A-1 notes in full on or before their expected final payment date, additional interest will accrue on the subclass A-1 notes at the rate of 0.50% per annum. We refer to this additional interest as step-up interest. AerCo may also issue additional notes or refinancing notes that will accrue step-up interest after their expected final payment date. Step-up interest will be subordinated to other amounts payable on the class A, B, C and D notes, including accrued and unpaid interest, the Minimum Principal Payment Amount and the Scheduled Principal Payment Amount. The rating agencies did not rate AerCo's ability to pay step-up interest. So long as the notes are listed on the Luxembourg Stock Exchange, AerCo will publish the amount of step-up interest that is payable in the manner required by the indenture and the Luxembourg Stock Exchange. REFERENCE AGENCY AGREEMENT For the purpose of calculating the rate of interest payable on the notes, AerCo has entered into a reference agency agreement with the trustee, Bankers Trust Company as reference agent and the cash 95 97 manager. The reference agent determines LIBOR for each interest accrual period following the initial interest accrual period, on a reference date (the date that is two business days before the payment date on which the interest accrual period begins). Under the reference agency agreement, the reference agent determines LIBOR as follows: On each reference date, the reference agent will determine LIBOR as the per annum offered rate for deposits in U.S. dollars for a period of one month that appears on the display designated as page "3750" on the Telerate Monitor (or such other page or service as may replace it for the purpose of displaying LIBOR of major banks for U.S. dollar deposits) at approximately 11:00 a.m. (London time). If this offered rate is replaced by the corresponding rates of more than one bank, then the determination of LIBOR shall be made on the basis of the average of the rates (being at least two) that appear. If these rates do not appear or the Telerate page is unavailable, the reference agent will request that each of the banks or a substitute reference bank in London provide the reference agent with its offered quotation to prime banks for dollar deposits in London for the next interest accrual period as at 11:00 a.m. (London time) on the reference date. In this case, the floating rate of interest for each subclass of notes will be the average of the quotations received (at least two) plus the applicable interest spread over LIBOR (and step-up interest, if payable). If one or no reference bank provides a quotation, the reference agent will select New York City banks who provide quotations for their U.S. dollar lending rate to leading European banks on the reference date for the next interest accrual period. In this case, the interest for the next interest accrual period will be the average of these quotations plus the applicable interest spread over LIBOR (and step-up interest, if payable). If the banks selected do not provide these quotations, the interest rate will be the rate that applied to the last interest accrual period. Once it determines the interest rate, the reference agent will calculate the interest amount for the interest accrual period as: (I)(P) X N/360, where I = interest rate for the interest accrual period P = outstanding principal balance of the subclass at the beginning of the interest accrual period, as estimated by the reference agent N = number of days in the interest accrual period. The reference agent's determination of LIBOR, the interest rate and the interest amount for each such subclass of notes (in the absence of negligence, wilful default, bad faith or manifest error) will be conclusive and binding upon all parties. The reference agent will give notice of applicable LIBOR, the payment date, the interest rate for each subclass of notes for the relevant interest accrual period and the amount of interest on each subclass of notes to AerCo, the listing agent for the Luxembourg Stock Exchange and the cash manager. Noteholders may obtain such information at the offices of the listing agent or paying agent in Luxembourg or otherwise in the cash reports provided to noteholders by the trustee on the second business day before each payment date and any other date for distribution of any payments with respect to the notes. If the reference agent does not or is unable to determine the interest rate and amount for an interest accrual period as described above, the cash manager will determine such rate of interest or calculate such interest amount in accordance with the provisions described above. AerCo reserves the right to terminate the appointment of the reference agent at any time on 30 days' notice and to appoint a replacement reference agent in its place. Notice of any such termination will be given to the holders of the notes. The reference agent may not be removed or resign its duties unless a successor has been appointed. 96 98 PRINCIPAL AMORTIZATION For each class of notes, only to the extent that there are sufficient funds in the collection account, principal will be distributed on each payment date equal to the sum of the following amounts: - the Minimum Principal Payment Amount - the Scheduled Principal Payment Amount - the Supplement Principal Payment Amount (only applicable to the class A and class B notes) - redeemed principal as described below in paragraphs (21) through (24) under "-- Priority of Payments". If AerCo issues any additional notes or refinancing notes, each issuance will be a new subclass of the relevant class of notes. MINIMUM PRINCIPAL PAYMENT AMOUNT. For each class of notes and the class D notes, the "Minimum Principal Payment Amount" will equal the difference, if positive, between the outstanding principal balance of such class and the Minimum Target Principal Balance for such class on the payment date. On each payment date, the "Minimum Target Principal Balance" for the class A and class B notes will equal: (MCP) X (APV), where MCP = the "Minimum Class Percentage" as set forth in Appendices 5 and 6 to this prospectus APV = the "Assumed Portfolio Value" for the payment date as described below. In the case of the class A note only, IF the outstanding principal balance of the class A notes (including any additional notes and refinancing notes) is greater than the Adjusted Portfolio Value (as described below), THEN the Minimum Target Principal Balance of the class A notes will be equal to the Scheduled Target Principal Balance of the class A notes (as described below). If on any payment date the outstanding principal balance of the class A notes (including refinancing notes and additional notes) is greater than the Adjusted Portfolio Value in respect of such payment date, then the Minimum Target Principal Balance of the class A notes shall be equal to the Scheduled Target Principal Balance of the class A notes. For each payment date, the Minimum Target Principal Balance for the class C and class D notes is set out in Appendices 7 and 8 to this prospectus. For each payment date, the "Assumed Portfolio Value" for the initial aircraft will equal the sum of the following products: (IAV) X (DF1)/(DF2), where IAV = the initial appraised value of each aircraft on the relevant calculation date DF1 = the depreciation factor for that aircraft on the calculation date DF2 = the depreciation factor for that aircraft on July 15, 1998. "Initial Appraised Value" means the average of the base values of each of the aircraft, determined, in the case of the initial aircraft as of March 1, 1998 and, in the case of any additional aircraft, as of a date not more than six months prior to the closing date for the issue of the relevant additional notes. 97 99 The depreciation factor equals: (1 - (kn)) X (1 + g)(n) but not less than zero Where, with respect to the initial aircraft: n = age of the aircraft expressed in years 1 k = ----------------------------------------- expected useful life g = 0.02 The depreciation factors produce a "depreciation curve" that assumes that the value of an initial aircraft will decline at an accelerating rate as the aircraft ages. We have used the depreciation factors described above solely for the purpose of determining repayments of principal of the notes. They are not intended to predict or conform to actual declines in aircraft values over any period. Furthermore, variables used to calculate the depreciation factor will change as the composition of the portfolio changes through acquisitions and sales of additional aircraft and initial aircraft. Finally, AerCo group may in the future apply different depreciation factors or alternative methodologies to express the assumed decline in values of additional aircraft. In addition, the Minimum Class Percentages, the Scheduled Class Percentages and the Supplemental Class Percentages for the class A and class B notes and Minimum Target Principal Balances and Scheduled Target Principal Balances for the class C and class D notes will change as additional aircraft are acquired. The Pool Factors and the Extended Pool Factors for each subclass that are described below will not change as the composition of the portfolio changes. Scheduled Principal Payment Amount. For each class of notes and the class D notes, the "Scheduled Principal Payment Amount" on any payment date will equal the difference, if positive, between the outstanding principal balance of such class (after giving effect to any payment of the Minimum Principal Payment amount for such class) and the Scheduled Target Principal Balance for such class. On each payment date, the "Scheduled Target Principal Balance" for the class A notes will equal: (SCP) X (APV*), where SCP = the "Scheduled Class Percentage" on the payment date (as set forth in Appendix 5 to this prospectus) APV* = EITHER the Assumed Portfolio Value on the payment date OR 105% of the Adjusted Portfolio Value on the payment date, WHICHEVER IS LESS. For each payment date the Scheduled Target Principal Balance for the class B notes will equal: (SCP) X (APV), where SCP = the Scheduled Class Percentage on the payment date (as set forth in Appendix 5) APV = the Assumed Portfolio Value on the payment date. For each payment date, the Scheduled Target Principal Balance of the class C and class D notes is set out in Appendices 7 and 8 to this prospectus. For each payment date, the "Adjusted Portfolio Value" will equal the sum of the following amounts for each aircraft in the portfolio: (Avg. BV) X (DF1)/(DF2), where Avg. BV = the average base value of the aircraft as determined in the most recent appraisal DF1 = the depreciation factor for the aircraft on the calculation date DF2 = the depreciation factor for the aircraft on the date of the most recent appraisal. Supplemental Principal Payment Amount. For the class A and class B notes, the "Supplemental Principal Payment Amount" on any payment date will equal the difference, if positive, between the outstanding principal balance of such class (after giving effect to the payment of any Minimum Principal Payment Amount and Scheduled Principal Payment Amount) and the Supplemental Target Principal Balance for such class. 98 100 On each payment date, the "Supplemental Target Principal Balance" for the class A and class B notes will equal: (Supp. CP) X (APV), where Supp. CP = the "Supplemental Class Percentage" on the payment date (as set forth in Appendices 5 and 6) APV = the Assumed Portfolio Value on the payment date. ALLOCATION OF PRINCIPAL AMONG SUBCLASSES OF NOTES On the expected final payment date of the subclass A-1 notes, AerCo intends to refinance 100% of the outstanding principal balance of the subclass A-1 notes by issuing refinancing notes and selling such refinancing notes in the capital markets. Failure to repay any subclass A-1 note in full at its expected final payment date will not result in an event of default. AerCo may also refinance any other subclass of notes, at any time, at the redemption price that would be payable if AerCo were to have redeemed such notes instead. See "-- Refinancing" and "-- Indenture Covenants -- Limitation on Indebtedness" for a description of the redemption price. The terms of the subclass A-2, subclass B-1, subclass C-1 and subclass D-1 notes will require amortization of their outstanding principal balance before their expected final payment dates, if there are funds available in accordance with the order of priorities set forth under "-- Priority of Payments". IF on a payment date, we must pay a principal amount on a class of notes according to the order of priorities but the amount of our available collections is not sufficient to pay the amount payable to all subclasses of that class, THEN the available amount will be allocated as follows: (1) First, to each subclass in order of the subclass that was issued first, the difference, if positive, between the outstanding principal balance of each subclass and the following amount: (EPF) X (IPB), where EPF = the "Extended Pool Factor" for the subclass as set forth in Appendix 10 IPB = the initial principal balance for the subclass at the time it was issued. If two or more subclasses were issued on the same date, available collections will be applied to each of those subclasses pro rata according to the result of the above calculation for the subclass. (2) Second, to each subclass, pro rata according to the amount of but not more than the difference, if positive, between the outstanding principal balance of each subclass (after giving effect to any payment under clause (1) above) and the following amount: (PF) X (IPB), where PF = the "Pool Factor" for the subclass as set forth in Appendix 9 IPB = the initial principal balance of the subclass at the time it was issued. (3) Third, to each subclass with an expected final payment date on or before the payment date, in order of the earliest issued subclass. If there are two or more subclasses that were issued on the same date, available collections will be applied to them in order of the subclass with the earliest expected final payment date. If two or more of those subclasses have the same expected final payment date, then available collections will be applied pro rata according to the outstanding principal balances of the subclasses on the payment date after any payments under clauses (1) and (2) above. (4) Fourth, to each subclass with an Excess Amortization Date on or before such payment date, pro rata according to the outstanding principal balance of each such subclass after giving effect to any payment under clauses (1), (2) and (3) above on the payment date. (5) Fifth, to each subclass in order of the earliest expected final payment date. If two or more subclasses have the same expected final payment date, then available collections will be applied 99 101 pro rata to those subclasses according to the outstanding principal balance of the subclass on the payment date (after any payments under clauses (1), (2) and (3) above). The "Excess Amortization Date" for each subclass of the notes and the subclass D-1 notes is as set out below: SUBCLASS OF NOTES EXCESS AMORTIZATION DATE - ----------------- ------------------------ Subclass A-1................................................ July 15, 2000 Subclass A-2................................................ August 17, 1998 Subclass B-1................................................ August 17, 1998 Subclass C-1................................................ August 17, 1998 Subclass D-1................................................ July 15, 2010 REFINANCING AerCo may repay any subclass of the notes or the class D notes, in whole but not in part, on any date with the proceeds of the issuance of any refinancing note issued in accordance with the "Limitation on Indebtedness" covenant under the indenture. The amount we will repay in connection with the refinancing of any subclass of notes or the class D notes will be equal to the redemption price for such subclass on the refinancing date plus accrued and unpaid interest. At least five days but not more than 30 days before the proposed refinancing date, the trustee will give notice of the refinancing to each holder of such subclass of notes or the class D notes in accordance with the notice provisions contained in the indenture. In connection with any refinancing, AerCo will deposit, in the refinancing account an amount equal to the redemption price, plus an amount sufficient to pay or provide for all accrued and unpaid interest as of the refinancing date. Each notice of refinancing will state. - the applicable refinancing date; - the redemption price of the notes or the class D notes to be repaid and the amount of accrued but unpaid interest payable; - that notes or the class D notes of the subclass to be repaid must be surrendered; and - that, unless AerCo defaults in the payment of the redemption price and any accrued and unpaid interest, interest on the subclass of notes or the class D notes to be refinanced will cease to accrue on and after the refinancing date. Once a notice of refinancing is published, each subclass of notes or the class D notes to which it applies will become due and payable on the refinancing date at their redemption price, together with accrued and unpaid interest. REDEMPTION AerCo may redeem any subclass of the notes or the class D notes out of available amounts, if any, on any payment date, in whole or in part, at the redemption price plus accrued but unpaid interest. In addition, AerCo must on each payment date redeem Notes or the class D notes to the extent of any available collections in the manner described in "Principal Amortization" above and "Priority of Payments" below at the redemption price plus accrued but unpaid interest. Within each class or subclass of notes or the class D notes being redeemed in part, the amount of the outstanding principal balance being prepaid will be applied in each case pro rata among all notes or the class D notes of such subclass. The redemption price on the subclass A-1, subclass A-2, subclass B-1 and subclass C-1 notes will be: - IF THE REDEMPTION IS MADE WITH PROCEEDS FROM REFINANCING NOTES OR FROM THIRD PARTIES OR OTHER THAN FROM AVAILABLE COLLECTIONS, the outstanding principal balance of the subclass being redeemed multiplied by the redemption premium set out in the table below. - IF THE REDEMPTION IS MADE WITH AVAILABLE COLLECTIONS, the outstanding principal balance of the subclass being redeemed. 100 102 The redemption price of the subclass D-1 notes will equal: If AerCo redeems the subclass D-1 notes before July 15, 2003, the redemption price will be EITHER: - the discounted present value of the Scheduled Principal Payments and interest from the redemption date to July 15, 2003 PLUS the following amount: (RP) X (OPB), where RP = the applicable redemption premium OPB = the assumed outstanding principal balance for July 15, 2003, discounted to the redemption date at the applicable Treasury yield plus 1.00% OR - the outstanding principal balance on the redemption date, WHICHEVER IS HIGHER. If AerCo redeems the subclass D-1 notes on or after July 15, 2003, the redemption price will be the applicable redemption premium multiplied by the outstanding principal balance on the redemption date. REDEMPTION DATE REDEMPTION PREMIUM - --------------- ------------------------------------------------------------- SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS A-1 NOTES A-2 NOTES B-1 NOTES C-1 NOTES D-1 NOTES --------- --------- --------- --------- --------- After July 15, 1998................... 100.50% 101.00% 101.50% 102.50% -- On or after July 15, 1999............. 100.25% 100.75% 101.25% 102.25% -- On or after July 15, 2000............. 100.00% 100.50% 101.00% 102.00% -- On or after July 15, 2001............. 100.25% 100.75% 101.75% -- On or after July 15, 2002............. -- 100.25% 100.50% 101.50% -- On or after July 15, 2003............. -- 100.25% 100.25% 101.25% 105.25% On or after July 15, 2004............. -- 100.25% 100.25% 101.00% 104.50% On or after July 15, 2005............. -- 100.00% 100.25% 100.75% 103.75% On or after July 15, 2006............. -- -- 100.25% 100.50% 103.00% On or after July 15, 2007............. -- -- 100.25% 100.25% 102.25% On or after July 15, 2008............. -- -- 100.25% 100.25% 101.50% On or after July 15, 2009............. -- -- 100.00% 100.25% 100.75% On or after July 15, 2010............. -- -- -- 100.25% 100.00% On or after July 15, 2011............. -- -- -- 100.00% -- "Treasury yield" means a per annum rate (expressed as a monthly equivalent yield) determined to be the per annum rate equal to the semiannual yield to maturity of the 5 3/4% United States Treasury Note maturing on August 15, 2003, as published in the most recent H.15 (519). H.15 (519) means the weekly statistical release with that number or any successor publication, published by the Board of Governors of the Federal Reserve System. REDEMPTION FOR TAXATION PURPOSES. All payments of principal, interest and premium, if any, made by AerCo in respect of the notes or the class D notes or any inter-company payments supporting the obligations under the notes or the class D notes will be made without withholding or deduction for or on account of any present or future taxes or duties of whatever nature unless required by law. Should such withholding or deduction be required by law, AerCo will not be obliged to pay any additional amounts in respect of such withholding or deduction. 101 103 IF at any time: (a) AerCo is, or on the next payment date will be, required to make any withholding or deduction under the laws or regulations of any applicable tax authority with respect to any payment in respect of any subclass of notes or the class D notes; or (b) AerCo is or will be subject to any circumstance (whether by reason of any law, regulation, regulatory requirement or double-taxation convention, or the interpretation or application thereof, or otherwise) leading to the imposition of a tax (whether by direct assessment or by withholding at source) or other similar imposition by any jurisdiction which would: (1) materially increase the cost to AerCo of making payments in respect of any subclass of notes or the class D notes or of complying with its obligations under or in connection with the notes or the class D notes; (2) materially increase the operating or administrative expenses of AerCo or the charitable trust which holds the ordinary share capital of AerCo; or (3) otherwise obligate AerCo or any of its subsidiaries to make any material payment on, or calculated by reference to, the amount of any sum received or receivable by AerCo, or by the cash manager on behalf of AerCo as contemplated by the cash management agreement; THEN AerCo will inform the trustee at such time of any such requirement or imposition and shall use its or their best efforts to avoid the effect of the same. AerCo shall take no action to avoid such effects unless each rating agency has confirmed that such action will not result in the lowering or withdrawal by it of its current rating of any subclass of AerCo notes then outstanding. IF, after using its best efforts to avoid the adverse effect described above, AerCo or any of its subsidiaries has not avoided such effects, THEN AerCo may, at its election, redeem the notes or the class D notes of any or all subclasses to which such withholding or deduction applies in whole with accrued and unpaid interest but without premium on any payment date. However, any such redemptions may not occur more than 30 days prior to such time as the requirement or imposition described in (a) or (b) above is to become effective. METHOD OF REDEMPTION. If AerCo proposes to redeem any subclass of notes with funds other than available collections, at least 20 days but not more than 60 days before the redemption date, the trustee will give notice of such redemption to each holder of the subclass. If a redemption is of less than all of the notes of any subclass, notes of such subclass to be redeemed will be repaid principal pro rata, to the extent funds are available in the case of any redemption in whole, other than a redemption resulting from taxation reasons, AerCo will deposit in the defeasance/redemption account the redemption price, together with an amount sufficient to pay or provide for all of the accrued and unpaid interest as of the redemption date. If AerCo redeems all or any part of a subclass of notes with available collections as required by the priority of payments, AerCo will send no notice of redemption. Each notice of redemption will state - the applicable redemption date, - the trustee's arrangements for making payments due, - the redemption price of the notes to be redeemed, - in the case of redemptions in whole, that notes of the subclass to be redeemed must be surrendered (which action may be taken by any holder of the notes or its authorized agent) to the trustee to collect the redemption price and accrued and unpaid interest on such notes, and - in the case of redemptions in whole, that, unless AerCo defaults in the payment of the redemption price and any accrued and unpaid interest thereon, interest on the subclass of notes called for redemption will cease to accrue on and after the redemption date. Once a notice of redemption for a redemption in whole is mailed, each subclass of notes to which it applies will become due and 102 104 payable on the redemption date at their redemption price, together with accrued and unpaid interest thereon. DEFEASANCE AerCo at any time may terminate all of its obligations under the notes and the indenture -- this is known as legal defeasance. Legal defeasance will not apply to (1) relating to the defeasance trust and (2) obligations to register the transfer or exchange of the AerCo notes, to replace mutilated, destroyed, lost or stolen AerCo notes and to maintain a register for the AerCo notes. Also, AerCo at any time may terminate its obligations under the covenants described under "Indenture Covenants" and "Operating Covenants" and the events of default described under "Events of Default and Remedies", other than clauses (1), (2), (3), (4) and (5) (solely with respect to AerCo) set forth under "-- Events of Default and Remedies". This is known as covenant defeasance. AerCo may exercise its legal defeasance options even if it has already exercised the covenant defeasance option. If AerCo exercises its legal defeasance options, payment of the AerCo notes may not be accelerated because of an event of default. If AerCo exercises its covenant defeasance options, payment of the AerCo notes may not be accelerated because of the events of default described under "Events of Default and Remedies", other than clauses (1),(2),(3),(4) and (5) (solely with respect to AerCo) set forth under "-- Events of Default and Remedies". In order to exercise either defeasance option, AerCo must irrevocably deposit in trust with the trustee any combination of cash or obligations of the U.S. government, as will be sufficient for the payment of principal, premium (if any), and interest on the AerCo notes to redemption or maturity. AerCo must also comply with other conditions, including delivering to the trustee an opinion of counsel to the effect that holders of the AerCo notes (1) will not recognize income, gain or loss for United States federal income tax purposes as a result of the deposit and defeasance and (2) will be subject to United States federal income tax on the same amount and in the same manner and at the same times as would have been the case if the deposit and defeasance had not occurred. In the case of legal defeasance only, the opinion of counsel must be based on a ruling of the Internal Revenue Service or other change in applicable United States federal income tax law. PRIORITY OF PAYMENTS On each payment date, the cash manager will withdraw all amounts on deposit in the collection account and will distribute them according to the order of priority set forth below. Any amount below will be paid only if all amounts ranking senior to that amount are paid in full on the payment date. (1) First, to the expense account or directly to the relevant expense payees, an amount equal to the required expense amount; (2) Second, the following amounts pro rata: (A) to the holders of each subclass of class A notes, all accrued and unpaid interest excluding step-up interest, if applicable, on such subclass of class A notes pro rata according to the amount of accrued and unpaid interest on such subclass of class A notes; and (B) pro rata, to any swap provider, an amount equal to any payment, other than subordinated swap payments due from AerCo under any swap agreement; (3) Third, (1) first, to any persons providing primary eligible credit facilities, any amounts then payable to such persons under the terms of their respective eligible credit facilities, and THEN, (2) retain in the collection account an amount, if positive, equal to (A) the minimum liquidity reserve amount, less (B) amounts available for drawing under any primary eligible credit facilities; 103 105 (4) Fourth, to the holders of class A notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the Minimum Principal Payment Amount with respect to the class A notes; (5) Fifth, to the holders of each subclass of class B notes, all accrued and unpaid interest, excluding step-up interest, if applicable, on such subclass of class B notes pro rata according to the amount of accrued and unpaid interest on such subclass of class B notes; (6) Sixth, to the holders of class B notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the Minimum Principal Payment Amount with respect to the class B notes; (7) Seventh, to the holders of each subclass of class C notes, all accrued and unpaid interest, excluding step-up Interest, if applicable, on such subclass of class C notes pro rata according to the amount of such accrued and unpaid interest on such subclass of class C notes; (8) Eighth, to the holders of class C notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the Minimum Principal Payment Amount with respect to the class C notes; (9) Ninth, to the holders of each subclass of class D notes, all accrued and unpaid interest, excluding step-up Interest, if applicable, on such subclass of class D notes pro rata according to the amount of such accrued and unpaid interest on such subclass of class D notes; (10) Tenth, to the holders of class D notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the Minimum Principal Payment Amount with respect to the Class D Notes; (11) Eleventh, (1) first, to any persons providing any credit facilities that are not primary eligible credit facilities, any amounts then payable under the terms of their credit facilities and THEN, 2 retain in the collection account an amount, if positive, equal to (A) the liquidity reserve amount less (B) the sum of the amount of cash reserved under (3) above plus the amounts available for drawing under any eligible credit facilities; (12) Twelfth, to the holders of class A notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the Scheduled Principal Payment Amount with respect to the class A notes; (13) Thirteenth, to the holders of class B notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the Scheduled Principal Payment Amount with respect to the class B notes; (14) Fourteenth, to the holders of class C notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the Scheduled Principal Payment Amount with respect to the Class C Notes; (15) Fifteenth, to the holders of class D notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the Scheduled Principal Payment Amount with respect to the class D notes; (16) Sixteenth, to the permitted accruals balance in the expense account, an amount equal to permitted accruals in respect of any modification payments; (17) Seventeenth, to the holders of each subclass of notes entitled thereto, an amount equal to all accrued and unpaid step-up interest on such subclass, if any, pro rata according to the amount of such accrued and unpaid step-up interest; (18) Eighteenth, to the holders of class A notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the Supplemental Principal Payment Amount with respect to the class A notes; 104 106 (19) Nineteenth, to the holders of each subclass of the class E notes, the class E note primary interest amount, pro rata according to the amount due on each subclass of AerCo group class E notes; (20) Twentieth, to the holders of class B notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the Supplemental Principal Payment Amount with respect to the class B notes; (21) Twenty-first, to the holders of class A notes, in the order of priority by subclass set forth under "Allocation of Principal Among Subclasses of Notes" an amount equal to the redemption price of the outstanding principal balance, if any, of the class A notes; (22) Twenty-second, to the holders of class B notes, in the order of priority by subclass set forth under "Allocation of Principal Among Subclasses of Notes" an amount equal to the redemption price of the outstanding principal balance, if any, of the class B notes; (23) Twenty-third, to the holders of class C notes, in the order of priority by subclass set forth under "Allocation of Principal Among Subclasses of Notes" an amount equal to the redemption price of the outstanding principal balance, if any, of the class C notes; (24) Twenty-fourth, to the holders of class D notes, in the order of priority by subclass set forth under "Allocation of Principal Among Subclasses of Notes" an amount equal to the redemption price of the outstanding principal balance, if any, of the class D notes; (25) Twenty-fifth, pro rata, to swap providers in an amount equal to any amounts then payable under the relevant swap agreements which are subordinated in accordance with their terms; (26) Twenty-sixth, to investors or other persons for obligations incurred in connection with permitted tax-related dispositions, if any, that are subordinated in accordance with the terms of the relevant permitted tax-related dispositions an amount equal to the amount of such subordinated tax-related disposition payments then payable; (27) Twenty-seventh, to the holders of the class E notes, an amount equal to all accrued and unpaid interest on the class E notes and an amount equal to the cash portion of the Liquidity Reserve Amount then on deposit in the collection account, pro rata according to the amount due on each subclass of AerCo group class E notes; (28) Twenty-eighth, to the holders of the class E notes, in the order of priority by subclass set forth under "-- Allocation of Principal Among Subclasses of Notes", an amount equal to the outstanding principal balance of the class E notes; and (29) Twenty-ninth, to the charitable trust trustee, all remaining amounts. PRIORITY OF PAYMENTS FOLLOWING A DEFAULT NOTICE If a default notice is delivered to AerCo or the cash manager or an event of default described in clause (5) or (6) under "-- Events of Default and Remedies" occurs and continues, the priority of payments described above will not apply. Instead, amounts on deposit in the collection account and the expense account will be applied in the following order of priority. (1) First, to the expense account or directly to the relevant expense payees, an amount equal to the required expense amount; (2) Second, pro rata, to the providers of any primary eligible credit facilities, such amounts as are required to make any payments due to such providers under their primary eligible credit facilities; (3) Third, the following amounts. (A) pro rata to the holders of each subclass of class A notes, all accrued and unpaid interest (including step-up interest, if any) on, and all outstanding principal of, such subclass and (B) pro rata to any swap provider, such amounts as are required to make any payments (other than subordinated swap payments) due to such swap provider under any swap agreement; 105 107 (4) Fourth, pro rata to the holders of each subclass of class B notes, all accrued and unpaid interest (including step-up interest, if any) on and all outstanding principal of such subclass of class B notes; (5) Fifth, pro rata to the holders of each subclass of class C notes, all accrued and unpaid interest (including step-up interest, if any) on and all outstanding principal of such subclass of class C notes; (6) Sixth, pro rata to the holders of each subclass of class D notes, all accrued and unpaid interest (including step-up interest, if any) on and all outstanding principal of such subclass of class D notes; (7) Seventh, pro rata to the providers of any credit or liquidity enhancement facilities in favor of AerCo other than primary eligible credit facilities, such amounts as are required to make any payment due under their facilities; (8) Eighth, pro rata to any swap provider, such amounts as are required to make any subordinated swap payments due to such swap provider under any swap agreement; (9) Ninth, pro rata to any investor or other person in respect of any obligation incurred in connection with any permitted tax-related disposition, such amounts as are required to make any subordinated tax-related disposition payments due; (10) Tenth, pro rata to the holders of each subclass of the class E notes all accrued and unpaid interest on and all outstanding principal of such subclass of class E notes; and (11) Eleventh, to the charitable trust trustee, all remaining amounts. INDENTURE COVENANTS NO RELEASE OF OBLIGATIONS. AerCo will not take, or knowingly permit any subsidiary to take, any action which would amend, terminate, other than any termination in connection with the replacement of such agreement with an agreement on terms substantially no less favorable to AerCo and its subsidiaries than the agreement being terminated, or discharge or prejudice the validity or effectiveness of the indenture, other than as permitted therein, the security trust agreement, the intercompany loans, the cash management agreement, the administrative agency agreement, the deposit agreement or any servicing agreement or permit any party to any such document to be released from such obligations, except, in each case, as permitted or contemplated by the terms of such document, except: AerCo may take or permit such actions and may permit such releases if it shall have first obtained an authorizing resolution of the directors of AerCo determining that such action, permitted action or release does not materially adversely affect the interests of the noteholders and having given notice to the rating agencies. Despite the preceding paragraph, in any case: (1) AerCo will not take any action which would result in any amendment or modification to the conflicts standard or duty of care in such agreements; and (2) there must be at all times an administrative agent, a cash manager and, unless a servicer resigns prior to the appointment of a replacement servicer as a result of any failure to pay amounts due and owing to it and notice of such resignation is given to the rating agencies, one or more servicers with respect to all aircraft in the portfolio. LIMITATION ON ENCUMBRANCES. AerCo will not, and will not permit any subsidiary to, create, incur, assume or suffer to exist any mortgage, pledge, lien, encumbrance, charge or security interest, including, without limitation, any conditional sale, or any sale with recourse against the seller or any affiliate of the seller or any agreement to give any security interest over or with respect to any of AerCo's or subsidiary's assets, excluding segregated funds, including, without limitation, all shares of capital stock, all beneficial interests in 106 108 trusts, all ordinary shares and preferred shares, any options, warrants and other rights to acquire such shares or interests and any indebtedness of any subsidiary held by AerCo or a subsidiary). However, AerCo may create, incur, assume or suffer to exist: (1) any permitted encumbrance; (2) any security interest created or required to be created under the security trust agreement; (3) encumbrances over rights in or derived from leases, upon confirmation from the rating agencies in advance that such action or event will not result in the lowering or withdrawal of any rating assigned by any rating agency to any of the AerCo notes then outstanding, so long as any transaction or series of transactions resulting in such encumbrance, taken as a whole, does not materially adversely affect the amount of collections that would have been received by AerCo from such lease had such encumbrance not been created; (4) encumbrances over any aircraft, leases or funds on deposit in the tax defeasance account or investments held in that account created in connection with any permitted tax-related disposition; or (5) any other encumbrance the validity or applicability of which is being contested in good faith in appropriate proceedings by AerCo or any of its subsidiaries. "Affiliate" means, with respect to any person, any other person that, directly or indirectly, controls, is controlled by or is under common control with, such person or is a director or officer of such person. "Control" of a person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting Stock, by contract or otherwise. "Permitted encumbrance" means: (1) any lien for taxes, assessments and governmental charges or levies not yet due and payable or which are being contested in good faith by appropriate proceedings; (2) in respect of any aircraft, any liens of a repairer, carrier or hanger keeper arising in the ordinary course of business by operation of law or any engine or parts-pooling arrangements or other similar lien; (3) any permitted lien or encumbrance on any aircraft, engines or parts as defined under any lease (other than liens or encumbrances created by the relevant lessor); (4) any liens created by or through or arising from debt or liabilities or any act or omission of any lessee in each case either in contravention of the relevant lease (whether or not such lease has been terminated) or without the consent of the relevant lessor (so long as that if such lessor becomes aware of any such lien, such lessor shall use commercially reasonable efforts to have any such liens lifted); (5) any head lease, lease, conditional sale agreement or purchase option existing on July 15, 1998, with respect to the initial aircraft, or, in the case of any additional aircraft, on the date such aircraft is acquired, or any aircraft agreement meeting the requirements of clauses (3), (5) or (6) of the second paragraph under the "Limitation on Aircraft Sales" covenant: (6) any lien for air navigation authority, airport tending, gate or handling (or similar) charges or levies; (7) any lien created in favor of AerCo, or any of its subsidiaries or the security trustee; and (8) any lien not referred to in (1) through (7) above which would not adversely affect the owner's rights and does not exceed the greater of 1% of the aggregate initial appraised value of the portfolio and $250,000 per aircraft. 107 109 LIMITATION ON RESTRICTED PAYMENTS. AerCo will not, and will not permit any of its subsidiaries, to: (1) declare or pay any dividend or make any distribution on its stock held by persons other than AerCo or any of its subsidiaries; (2) purchase, redeem, retire or otherwise acquire for value any shares of stock of AerCo or any of its subsidiaries held by and on behalf of persons other than AerCo, any of its subsidiaries or other persons permitted under the requirements of (2)(b) under the "Limitation on the Issuance, Delivery and Sale of Stock" covenant; (3) make any interest, principal or premium payment, if any, on the AerCo notes or make any voluntary or optional repurchase, defeasance or other acquisition or retirement for value of indebtedness of AerCo or any of its subsidiaries that is not owed to AerCo or any of its subsidiaries other than in accordance with, "-- Payment of Principal and Interest"; or (4) make an investments other than permitted account investments, investments permitted under the "Limitation on Engaging in Business Activities" covenant, allowed restructurings and investments in any subsidiaries that own or lease aircraft so long as written notification of the organization or acquisition of each such subsidiary shall have been given to each rating agency. The term "investment" for purposes of the above covenant means any loan or advance to a person or entity, any purchase or other acquisition of any capital stock, warrants, rights, options, obligations or other securities of such person or entity, any capital contribution to such person or entity or any other investment in such person or entity. The term "investment" shall not include any obligation of a purchaser of an aircraft to make deferred or installment payments pursuant to any aircraft agreement specified in clauses (3), (5) or (6) of the second paragraph under "Limitations on Aircraft Sales" below so long as AerCo group retains a security interest in the relevant aircraft until all such obligations are discharged. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS. AerCo will not, and will not permit any of its subsidiaries to, create or otherwise suffer to exist any consensual encumbrance or restriction of any kind on the ability of any subsidiary to: (1) declare or pay dividends or make any other distributions permitted by applicable law, or purchase, redeem or otherwise acquire for value, the stock of AerCo or such subsidiary, as the case may be; (2) pay any indebtedness owed to AerCo or such subsidiary; (3) make loans or advances to AerCo or such subsidiary; or (4) transfer any of its property or assets to AerCo or any other subsidiary thereof. The foregoing restrictions shall not apply to any consensual encumbrances or other restrictions: (1) existing on July 15, 1998, in the case of the initial aircraft, or, in the case of any additional aircraft, on the date such aircraft is acquired, under any related document, including any amendments, extensions, refinancings, renewals or replacements of such documents, so long as the consensual encumbrances and restrictions in any such amendments, extensions, refinancings, renewals or replacements are no less favorable in any material respect to the holders of the AerCo Notes than those previously in effect; or (2) in the case of clause (4) above; (a) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset; or (b) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or consensual encumbrance on, any property or assets of AerCo or any subsidiary not otherwise prohibited by the indenture. This covenant shall not prevent AerCo or any subsidiary from creating, incurring, assuming or suffering to exist any encumbrances that are not otherwise prohibited under the indenture. 108 110 LIMITATION ON ENGAGING IN BUSINESS ACTIVITIES. AerCo will not, and will not permit any subsidiary to, engage in any business or activity other than: (1) purchasing or otherwise acquiring aircraft assets both directly and indirectly through the acquisition of aircraft-owning entities (subject to the limitations set forth in the "Limitation on Aircraft Acquisitions" covenant); (2) owning (including, subject to the limitations set forth in the "Limitation on Aircraft Acquisitions" covenant, acquiring additional aircraft), holding, converting, maintaining, modifying, managing, operating, leasing, re-leasing and, subject to the limitations set forth in the "Limitations on Aircraft Sales" covenant, selling or otherwise disposing of the aircraft (including permitted tax-related dispositions); (3) entering into all contracts and engaging in all related activities incidental thereto, including from time to time accepting, exchanging, holding or permitting any of its subsidiaries to accept, exchange or hold promissory notes, contingent payment obligations or equity interests, of Lessees or their affiliates issued in connection with the bankruptcy, reorganization or other similar process, or in settlement of delinquent obligations or obligations anticipated to be delinquent, of such lessees or their respective affiliates in the ordinary course of business; (4) providing loans to, and guaranteeing or otherwise supporting the obligations and liabilities of, any AerCo group member or any future AerCo entity, in each case on such terms and in such manner as the directors see fit and (whether or not AerCo, any member of the AerCo group or any future AerCo entity derives a benefit therefrom) so long as such loans, guarantees or other supports are provided in connection with the purposes set forth in clauses (1) through (3) of this covenant; (5) financing or refinancing the business activities described in clauses (1) through (3) of this covenant through the offer, sale and issuance of any securities of AerCo, upon such terms and conditions as the directors see fit, for cash or in payment or in partial payment for any property purchased or otherwise acquired by AerCo group or any future AerCo entity; (6) engaging in currency and interest rate exchange transactions for the purposes of avoiding, reducing, minimizing, hedging against or otherwise managing the risk of any loss, cost, expense or liability arising, or which may arise, directly or indirectly, from any change or changes in any interest rate or currency exchange rate or in the price or value of any of the property or assets of AerCo or any of its subsidiaries within limits determined by the directors from time to time and submitted to the rating agencies, (including but not limited to dealings, whether involving purchases, sales or otherwise, in foreign currency, spot and forward interest rate exchange contracts, forward interest rate agreements, caps, floors and collars, futures, options, swaps, and any other currency, interest rate and other similar hedging arrangements and other similar instruments). However, AerCo shall not and shall not permit any of its subsidiaries to, enter into any such hedging arrangements or other instruments (a) that are primarily entered into for speculative purposes, or (b) that are not U.S. dollar-denominated interest rate swaps, swaptions, caps or floors; without confirmation by the rating agencies that they will not lower or withdraw any rating assigned by them to any AerCo notes outstanding; (7) establishing, promoting and aiding in promoting, constituting, forming or organizing companies, syndicates or partnerships of all kinds in any part of the world for the purposes set forth in clauses (1) through (3) above; so long as that written notification shall have been given to each rating agency that such company, trust, syndicate or partnership was set up in compliance with the indenture, (8) acquiring, holding and disposing of shares, securities and other interests in any such company, syndicate or partnership; and 109 111 (9) disposing of shares, securities and other interests in, or causing the dissolution of, any existing subsidiary so long as any disposition which results in the disposition of an Aircraft meets the requirements set forth under the "Limitation on Aircraft Sales" covenant; and (10) taking out, acquiring, surrendering and assigning policies of insurance and assurances with any insurance company or companies which AerCo or any of its subsidiaries may think fit and paying the premiums thereon. LIMITATION ON INDEBTEDNESS. AerCo will not, and will not permit any of its subsidiaries to, incur, create, issue, assume, guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, whether present or future, indebtedness, except as described below. For the purposes of the indenture, "indebtedness" means, with respect to any person at any date of determination without duplication: (1) all indebtedness of such person for borrowed money; (2) all obligations of such person evidenced by bonds, debentures, notes or other similar instruments; (3) all obligations of such person in respect of letters of credit or other similar instruments including reimbursement obligations with respect thereto; (4) all obligations of such person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of purchasing such property or service or taking delivery and title thereto or the completion of such services, and payment deferrals arranged primarily as a method of raising finance or financing the acquisition of such property or service; (5) all obligations of such person under a lease of or other agreement conveying the right to use any property, whether real, personal or mixed, that is required to be classified and accounted for as a capital lease obligation under U.S. GAAP; (6) all indebtedness as defined in clauses (1) through (5) of this paragraph of other persons secured by a lien on any asset of such person, whether or not such Indebtedness is assumed by such person; and (7) all indebtedness as defined in clauses (1) through (5) of this paragraph of other persons guaranteed by such person. However, the above restriction does not apply to: (1) indebtedness under the notes, the subclass D-1 and subclass E-1 notes. (2) indebtedness under any refinancing notes or other indebtedness issued in connection with the repurchase, acquisition, defeasance or retirement for value of AerCo notes other than the class E notes so long as: (a) such refinancing notes or other indebtedness receive ratings from the rating agencies at the close of such refinancing or issuance equal to or higher than those of the subclass being refinanced or repurchased, acquired, defeased or retired (determined at the date of incurrence); (b) taking into account such refinancing or repurchase, acquisition, defeasance or retirement for value, AerCo receives prior confirmation from the rating agencies that such transaction will not result in the lowering or withdrawal of any rating assigned by any rating agency to any AerCo notes outstanding at such time; and (c) the net proceeds of any such refinancing or issuance shall be used only to repay the outstanding principal balance of the subclass of the AerCo notes being so refinanced or repurchased, acquired, defeased or retired plus any redemption premium and transaction expenses relating thereto. 110 112 (3) indebtedness under guarantees by AerCo or any subsidiary of any other member of AerCo group other than guarantees described in clause (5) so long as no such indebtedness in respect of any member of AerCo group, other than AerCo or any subsidiary of AerCo, may be incurred if it would materially adversely affect the AerCo noteholders. (4) indebtedness in respect of any additional notes incurred in connection with a permitted additional aircraft acquisition so long as: (a) taking into account the incurrence of such indebtedness, AerCo receives prior confirmation prior that the incurrence of such indebtedness will not result in the lowering or withdrawal of any rating assigned by any rating agency to any subclass of the AerCo notes outstanding at such time and (b) the net proceeds of such indebtedness shall be used only to finance the permitted additional aircraft acquisition and (c) such additional notes will be cross-collateralized with all AerCo notes outstanding by the collateral under the security trust agreement. (5) indebtedness in respect of guarantees by AerCo or any subsidiary of indebtedness incurred by any future AerCo entity other than a subsidiary of AerCo in connection with a permitted additional aircraft acquisition so long as: (a) the future AerCo entity shall have guaranteed the AerCo notes; (b) the indebtedness being guaranteed would be permitted pursuant to clause (2) or (4) above if such indebtedness were incurred directly by AerCo or any subsidiary in connection with such permitted additional aircraft acquisition; and (c) the indebtedness being guaranteed was issued by such future AerCo entity under an indenture, the terms of which, including the covenants and other obligations of such future AerCo entity are substantially similar to those of the indenture. (6) indebtedness to aircraft sellers under aircraft acquisition or similar agreements. (7) indebtedness under intercompany loans or any agreement between AerCo or any of its subsidiaries and any other members of AerCo group. Any indebtedness owed by any member of AerCo group to AerCo must be evidenced by promissory notes that are pledged to the security trustee and written notification must be given to each rating agency of the incurrence of such Indebtedness. (8) indebtedness of AerCo group under any credit or liquidity enhancement facility provided in favor of AerCo group. Before entering into a primary eligible credit facility, AerCo must receive confirmation from the rating agencies that they will not lower or withdraw any rating assigned by them to any subclass of AerCo notes outstanding. (9) obligations to each investor or other person in respect of the cash proceeds in the tax defeasance account and any subordinated tax-related payments under to the related permitted tax-related disposition and any related assignment and assumption agreements and documents related thereto. As used in this prospectus, "guarantee" means any obligation, contingent or otherwise, of any person directly or indirectly guaranteeing any indebtedness or other obligation of any other person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such person: (1) to purchase or pay or advance or supply funds for the purchase or payment of such indebtedness or other obligation of such other person; or (2) entered into for purposes of assuring in any other manner the obligee of such indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof in whole or in part. 111 113 The term "guarantee" does not include endorsements for collection or deposit in the ordinary course of business. The term "guarantee" when used as a verb has a corresponding meaning. LIMITATION ON AIRCRAFT SALES. AerCo will not, and will not permit any of its subsidiaries to, sell, transfer or otherwise dispose of any aircraft or any interest therein, except as described below. However, AerCo and any of its subsidiaries will be permitted to sell, transfer or otherwise dispose of, directly or indirectly; (1) any engines owned on July 15, 1998 or, in the case of any additional aircraft, owned on the date such aircraft is acquired, or any replacements or parts installed in or attached to any aircraft other than engines; or (2) one or more aircraft or an interest in aircraft: (a) under a purchase option or other similar agreements existing on July 15, 1998, in the case of the initial aircraft, or, in the case of additional aircraft, on the date such aircraft is acquired; (b) within or among AerCo and its subsidiaries without limitation, and among AerCo or any of its subsidiaries and any other member of AerCo group if such sale, transfer or disposition, as the case may be, would not materially adversely affect the AerCo noteholders, so long as that written notification shall have been given to each rating agency of such sale, transfer or disposition; (c) under any aircraft agreement as long as such sale does not result in a concentration default, and the net present value of the cash net sale proceeds is not less than the note target price; (d) in order to receive insurance proceeds in connection with an event of loss; (e) under an aircraft agreement that is designed to allow a person unrelated to AerCo or any other member of the AerCo group to realize tax benefits associated with the aircraft or other assets being sold; such a permitted tax-related disposition will be permissible so long as AerCo receives confirmation prior to entering into such agreement that the performance of such agreement will not result in the lowering or withdrawal of any rating assigned by any rating agency to each subclass of AerCo notes outstanding at such time and all obligations of AerCo or any other member of AerCo group other than the obligation to pay the tax defeasance amount under such agreement or to any person providing credit support for such obligations are payable only under subordinated tax-related disposition payments as set forth under "-- Priority of Payments"; or (f) pursuant to an aircraft agreement and, in any one calendar year, not exceeding 10% of the adjusted portfolio value, so long as: (1) the directors unanimously confirm that each such sale does not materially adversely affect AerCo and the AerCo noteholders and (2) such sale does not result in a concentration default. For the purpose of this covenant, the net present value of the cash net sale proceeds of any sale, transfer or other disposition of any aircraft shall mean the present value of all payments received or to be received by AerCo group in respect of such aircraft from the date of execution or option granting date, as the case may be, of the relevant aircraft agreement through and including the date of transfer of title to such aircraft, discounted back to the date of execution or option granting date, as the case may be, of such agreement at the weighted average cost of funds of AerCo group based on the cost of funds on the preceding payment date (excluding for such purpose any interest paid or accrued on the class E notes other than the class E notes interest amount, but taking into account any swap agreements). The "note target price" of an aircraft means 103% of the aggregate outstanding principal balance of class A, class B, class C and class D notes, together with any accrued but unpaid interest and any related swap breakage costs, allocable to such aircraft on the date of the sale agreement or purchase option date, as the 112 114 case may be. On any date, the outstanding principal balance of class A, class B, class C and class D notes allocable to an aircraft will equal: (ABV)/(APV) X (OPB), where ABV = the adjusted base value of the aircraft APV = the Adjusted Portfolio Value OPB = the outstanding principal balance of the class A, B, C and D notes on the most recent payment date. "Aircraft agreement" means any lease, sub-lease, conditional sale agreement, finance lease, hire purchase agreement or other agreement (other than an agreement relating to maintenance, modification or repairs) or any purchase option granted to a person other than AerCo or its subsidiaries or any other member of AerCo group to purchase an aircraft under a purchase option agreement, in each case where a person acquires or is entitled to acquire legal title, or the economic benefits of ownership of, such aircraft. "Net sales proceeds" means the aggregate amount of cash received or to be received from time to time (whether as initial or deferred consideration) by or on behalf of the seller in connection with the transaction after deducting: (1) reasonable and customary brokers' commissions and other similar fees and commissions including fees received by the servicer under the servicing agreement; and (2) the amount of taxes payable in connection with or as a result of such transaction, in each case to the extent, but only to the extent, that the amounts so deducted are, at the time of receipt of such cash, actually paid to a person that is not an affiliate of the seller and are properly attributable to such transaction or to the asset that is the subject thereof. "Concentration default" means an event of default under "Operating Covenants -- Concentration Limits", as such covenant may be adjusted from time to time upon approval of the rating agencies, which would arise if effect were given to any sale, transfer or other disposition or any purchase or other acquisition as of the date of the binding sale or purchase agreement (even if the sale, transfer or other disposition or purchase or other acquisition is scheduled or expected to occur after the date of the binding agreement). LIMITATION ON AIRCRAFT ACQUISITIONS. AerCo will not, and will not permit any of its subsidiaries, to purchase or otherwise acquire any aircraft other than the initial aircraft or any interest therein except as described below. AerCo and any of its subsidiaries will be permitted to: (1) purchase or otherwise acquire, directly or indirectly, additional aircraft; so long as (a) no event of default shall have occurred and be continuing; (b) all Scheduled Principal Payment Amounts on the AerCo notes have been paid; (c) the acquisition does not result in a concentration default; and (d) after giving effect to such acquisition: - no more than 90% of the portfolio by appraised base value consists of Stage 3 narrowbody aircraft and regional jets, - no more than 50% of the portfolio consists of Stage 3 widebody aircraft and - no more than 15% of the portfolio consists of Stage 2 aircraft; and turboprop aircraft, unless the directors of AerCo obtain advance confirmation that such action will not result in the lowering or withdrawal of any rating assigned by any rating agency to any of the AerCo notes outstanding; or 113 115 (2) act as sponsor of a future AerCo entity other than a subsidiary of AerCo that would fund an acquisition of aircraft assets with indebtedness guaranteed by AerCo pursuant to the "Limitation on Indebtedness" covenant as described above; so long as that, if such acquisition of aircraft assets had been consummated directly by AerCo, such acquisition would have been permitted pursuant to the foregoing clause (1). A "permitted additional aircraft acquisition" means a transaction described in clause (1) or (2) above. LIMITATION ON MODIFICATION PAYMENTS AND CAPITAL EXPENDITURES. AerCo will not, and will not permit any of its subsidiaries to, make any capital expenditures for the purpose of effecting any optional improvement or modification of any aircraft, or for the optional conversion of any aircraft from a passenger aircraft to a freighter or mixed-use aircraft, for the purpose of purchasing or otherwise acquiring any engines or parts outside of the ordinary course of business except as described below. AerCo may, and may permit any of its subsidiaries to, make modification payments if: (1) each modification payment, together with all other modification payments made after July 15, 1998 to any single aircraft, do not exceed the aggregate amount of funds that would be necessary to perform one incidence of heavy maintenance as described in the applicable servicing agreement on such aircraft, including the airframe and the engines; (2) such modification payment is included in the annual operating budget of AerCo group and approved by the directors; (3) the amount of funds necessary to make such modification payment shall have been accrued in advance as a permitted accrual in the expense account through transfers into the expense account according to the indenture or is otherwise allowed to be paid as permitted indebtedness; and (4) the aggregate amount of all modification payments made by members of AerCo group, taken as a whole, pursuant to this covenant after July 15, 1998, including the modification payment in question, shall not exceed 5% of the aggregate initial appraised value of all aircraft acquired by AerCo group. LIMITATION ON CONSOLIDATION, MERGER AND TRANSFER OF ASSETS. AerCo will not, and will not permit any subsidiary to, consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of its property and assets (as an entirety or substantially an entirety in one transaction or in a series of related transactions) to, any other person, or permit any other person to merge with or into AerCo or any subsidiary, unless: (1) the resulting entity is a special purpose corporation, the charter of which is substantially similar to the memorandum and articles of association of AerCo or the equivalent charter document of such subsidiary, as the case may be, and, after such consolidation, merger, sale, conveyance, transfer, lease or other disposition, payments from such resulting entity to the holders of the AerCo notes do not give rise to any withholding tax payments less favorable to the holders of the AerCo notes than the amount of any withholding tax payments which would have been required had such event not occurred; (2) in the case of consolidation, merger or transfer by AerCo, the surviving successor or transferee entity shall expressly assume all of the obligations of AerCo in the indenture, the AerCo notes and each other related document; (3) the directors shall have obtained confirmation in advance that such action or event will not result in the lowering or withdrawal of any rating assigned by any rating agency to any of the AerCo notes; (4) immediately after giving effect to such transaction, no event of default shall have occurred and be continuing; and (5) AerCo delivers to the trustee an officers' certificate and an opinion of counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture comply with the 114 116 above criteria and, if applicable, the "Limitation on Aircraft Sales" covenant and that all conditions precedent provided for in the Indenture relating to such transaction have been complied with. This covenant shall not apply to any such consolidation, merger, sale, conveyance, transfer, lease or disposition: (1) within and among AerCo and any of its subsidiaries and among AerCo group if such consolidation, merger, sale, conveyance, transfer, lease or disposition, as the case may be, would not materially adversely affect the holders of the AerCo notes; (2) complying with the terms of the "Limitation on Aircraft Sales" covenant; or (3) effected as part of a single transaction providing for the redemption or defeasance of the AerCo notes in accordance with the terms thereof as described under "-- Redemption" or "--Defeasance", respectively. LIMITATION ON TRANSACTIONS WITH AFFILIATES. AerCo will not, and will not permit any subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with AerFi or any affiliate of AerCo or any subsidiary, except upon fair and reasonable terms no less favorable to AerCo or such subsidiary than could be obtained, at the time of such transaction or at the time of the execution of the relevant agreement, in a comparable arm's-length transaction with a person that is not such an affiliate. The foregoing limitation shall not apply to: (1) any transaction pursuant to the terms of the related documents; (2) any transaction within and among AerCo or any of its subsidiaries and any other member of the AerCo group, except that no such transaction, other than between AerCo and any of its subsidiaries, shall be consummated if it would materially adversely affect the holders of the AerCo notes; (3) the payment of reasonable and customary regular fees to, and the provision of reasonable and customary liability insurance in respect of, directors; (4) any permitted additional aircraft acquisition or any transaction complying with the "Limitation on Aircraft Sales" covenant; (5) any payments of the types referred to in clauses (1) or (2) of the "Limitation on Restricted Payments" covenant and not prohibited thereunder; and (6) entering into any transaction effected as part of a single transaction providing for the redemption or defeasance of the AerCo notes according to their terms as described under "-- Redemption" or "-- Defeasance", respectively. LIMITATION ON THE ISSUANCE, DELIVERY AND SALE OF STOCK. AerCo will not: (1) issue, deliver or sell any shares, interests, participations or other equivalents (however designated, whether voting or non-voting, other than such shares, interests, participations or other equivalents existing on July 15, 1998) in equity, including without limitation, all ordinary shares of AerCo; or (2) sell, or permit any subsidiary, directly or indirectly, to issue, deliver or sell, any shares, interests, participations or other equivalents (however designated, whether voting or non-voting, other than such shares, interests, participations or other equivalents existing on July 15, 1998) in equity except: (a) to the charitable trust trustee (or its nominees); (b) issuances or sales of shares of stock of foreign subsidiaries of AerCo to nationals in the jurisdiction of incorporation or organization of such subsidiary, as the case may be, to the 115 117 extent required by applicable law or necessary in the determination of the Directors to avoid an adverse tax consequence in any such jurisdiction; (c) the pledge of shares in AerCo's subsidiaries pursuant to the security trust agreement; (d) the sale, delivery or transfer of any stock of any member of AerCo group in connection with the redemption or defeasance of the AerCo Notes, in accordance with the terms set forth under "-- Redemption" or "-- Defeasance", respectively; (e) the sale of any stock in connection with any sale of aircraft in compliance with the terms of the "Limitation on Aircraft Sales" covenant; and (f) the sale, delivery, transfer or pledge of any stock of any AerCo group member to or for the benefit of any other AerCo group member; so long as notification is given to the rating agencies. In addition, under the terms of the shareholders undertaking, the charitable trust trustee and AerFi Group have agreed that while the AerCo notes are outstanding they will not, without prior written approval of the trustee and all of the directors, take any action in their capacity as shareholders of AerCo to alter the share capital or issue any additional shares of AerCo. BANKRUPTCY AND INSOLVENCY. AerCo: (1) will promptly provide the trustee and the rating agencies with notice of the institution of any proceeding by or against AerCo or any of its subsidiaries, as the case may be, seeking to adjudicate any of them a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of their debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking entry of an order for relief or the appointment of a receiver, trustee or other similar official for either or for any substantial part of their property; and (2) will not, without an affirmative unanimous written resolution of the directors take any action to waive, repeal, amend, vary, supplement or otherwise modify its charter documents. In addition, under the terms of the shareholders undertaking, the charitable trust trustee and AerFi Group have agreed that while the AerCo notes are outstanding they will not, without prior written approval of the trustee and all of the directors, take any action in their capacity as shareholders of AerCo: (1) to cause AerCo to institute any proceeding seeking liquidation or insolvency or similar proceeding; (2) in the case of any such proceeding instituted against AerCo, to authorize or consent to such proceedings; (3) to terminate AerCo's corporate existence; (4) to waive or amend the memorandum and articles of association of AerCo; or (5) to transfer any part of the capital stock of AerCo or any interest therein, unless the transferee: (a) in the case of the capital stock held by the nominees for the charitable trust trustee, is a trustee of a trust formed for charitable purposes substantially identical to those for which the charitable trust is established; and (b) enters into an agreement substantially identical to the shareholders undertaking in favor of the trustee. OPERATING COVENANTS CONCENTRATION LIMITS. Unless the directors obtain prior written confirmation from each of the rating agencies that no lowering or withdrawal of the then current rating of any subclass of AerCo notes will result, 116 118 AerCo will not permit any of its subsidiaries to lease or re-lease any aircraft if entering into such proposed lease would cause the portfolio, For purposes of this restriction, the portfolio: - excludes any aircraft that is to be disposed of within one year from the effective date of the lease under a binding aircraft agreement (other than any aircraft that AerCo has a binding agreement to acquire and that the directors reasonably expect will be acquired within 180 days from the effective date of the agreement), - but includes any aircraft in which a member of AerCo group retains an interest in, including a right to lease rentals, finance lease payments, installment purchase payments or other payments, to exceed any of the concentration limits set forth below. The indenture permits breaches of these concentration limits upon any renewal, extension or restructuring of any lease. LESSEE CONCENTRATION LIMITS PERCENTAGE OF MOST RECENT APPRAISED VALUE OF PORTFOLIO(2) --------------------- Single Lessees rated BBB/Baa2 (or the equivalent) or better................................................ 15% Other Single Lessees................................... 10% Five largest Lessees................................... 35% COUNTRY CONCENTRATION LIMITS PERCENTAGE OF MOST RECENT APPRAISED VALUE OF PORTFOLIO(2) --------------------- United States.......................................... 25% Countries rated BBB/Baa2 (or the equivalent) or better(1)............................................. 20% Other.................................................. 15% REGION CONCENTRATION LIMITS PERCENTAGE OF MOST RECENT APPRAISED VALUE OF PORTFOLIO(2) --------------------- Developed Market Region(3)............................. 50% Emerging Market Region(3).............................. 25% Other(3)............................................... 20%(4) Asia/Pacific(3)........................................ 55% -------------------- (1) Based on the sovereign foreign currency debt rating assigned by the rating agencies to the country in which a lessee is habitually based at the time the relevant lease is executed. (2) Percentage to be obtained by dividing the aggregate most recent appraised values of all aircraft operating or to be operated by lessees habitually based in the applicable country or region by the aggregate most recent appraised values of all aircraft then owned by AerCo group. (3) The designations of Emerging Markets and Developed Markets are as determined and published by Capital International Perspective S.A. from time to time based on, among other things, gross domestic product levels, regulation of foreign ownership of assets, applicable regulatory environment, exchange controls and perceived investment risk. The current designations are as set out below: REGION COUNTRY ------ ------- Developed Markets Europe....................... EU (except Greece and Luxembourg), Norway and Switzerland North America................ Canada and United States Pacific...................... Australia, Hong Kong, Japan, New Zealand and Singapore 117 119 REGION COUNTRY ------ ------- Emerging Markets Asia......................... China, India, Indonesia, South Korea, Malaysia, Pakistan, Philippines, Sri Lanka, Taiwan and Thailand Europe and Middle East............... Czech Republic, Greece, Hungary, Israel, Jordan, Poland, Russia and Turkey Latin America................ Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela Other.......................... All other countries (generally those that have small or underdeveloped capital markets, including Fiji) (4) In addition, within the "Other" designation, no more than 10% of the most recent appraised value of the portfolio shall be leased to lessees habitually based in "Other" countries rated below BBB/Baa2 (or the equivalent) and no more than 5% of the most recent appraised value of the portfolio shall be leased to lessees habitually based in "Other" countries in Africa. In addition, the indenture will not permit AerCo or any subsidiary to lease aircraft operated or to be operated by lessees domiciled in certain countries without procuring political risk insurance. The list of prohibited countries and countries for which political risk insurance is required may be modified from time to time upon the approval of the rating agencies. The indenture contains no limitations on the country or region where any sublessees of aircraft operated or to be operated are domiciled if: (1) such sublease is permitted under the relevant lease (including by reason of consent or waiver, if applicable) or renewed lease (including by reason of consent or waiver, if applicable); and (2) the relevant lessee is either a signatory to a lease or a renewed lease. COMPLIANCE WITH LAW, MAINTENANCE OF PERMITS. AerCo will: (1) comply, and cause each of its subsidiaries to comply, in all material respects with all applicable laws; (2) obtain, and cause each of its subsidiaries to obtain, all material governmental including regulatory registrations, certificates, licenses, permits and authorizations required for such person's use and operation of the aircraft, including, without limitation, a current certificate of airworthiness for each aircraft (issued by the applicable aviation authority and in the appropriate category for the nature of operations of such aircraft), except that: (a) no certificate of airworthiness shall be required for any aircraft: - during any period when such aircraft is undergoing maintenance, modification or repair; - following the withdrawal or suspension by such applicable aviation authority of certificates of airworthiness in respect of all aircraft of the same model or period of manufacture as such aircraft; in that case, AerCo shall comply, and cause each of its subsidiaries to comply, with all directions of such applicable aviation authority in connection with such withdrawal or suspension; (b) no registration, certificates, licenses, permits or authorizations required for the use or operation of any aircraft need be obtained with respect to any period when such aircraft is not being operated; and (c) no such registrations, certificates, licenses, permits or authorizations shall be required to be maintained for any aircraft that is not the subject of a lease, except to the extent required under applicable laws; 118 120 (3) not cause or knowingly permit, directly or indirectly, through any of its subsidiaries, any lessee to operate any aircraft under any lease in any material respect contrary to any applicable law; and (4) not knowingly permit, directly or indirectly, through any of its subsidiaries, any lessee not to obtain all material governmental (including regulatory) registrations, certificates, licenses, permits and authorizations required for such lessee's use and operation of any aircraft under any operating lease except in the cases provided in clauses (2)(a) and (2)(b) above. This covenant shall not be breached by virtue of any act or omission of a lessee or sub-lessee, or of any person which has possession of the aircraft or any engine for the purpose of repairs, maintenance, notification or storage, or by virtue of any requisition, seizure, or confiscation of the aircraft, other than seizure or confiscation arising from a breach by AerCo or a subsidiary of such covenant; so long as: (1) no member of AerCo group consents or has consented to such third party event; and (2) the member of AerCo group which is the lessor or owner of such aircraft promptly and diligently takes such commercially reasonable actions as a leading international aircraft operating lessor or owner would reasonably take in respect of the third party event, including (taking into account, among other things, the laws of the jurisdictions in which the Aircraft are located) seeking to compel such lessee or other relevant person to remedy such third party event or seeking to repossess the relevant aircraft or engine. APPRAISAL OF PORTFOLIO. AerCo will, no earlier than 90 nor later than 30 days prior to March 31 of each year, deliver to the trustee and each rating agency appraisals of the base value of each of the aircraft, from at least three independent appraisers that are members of the International Society of Transport Aircraft Trading or any similar organization. Each appraisal to be dated within 30 days prior to its delivery to the trustee. MAINTENANCE OF ASSETS. AerCo will: (1) in the case of each aircraft and engine that is subject to a lease, cause directly or indirectly, through any of its subsidiaries, such aircraft and engine to be maintained in a state of repair and condition consistent with the requirements of reasonable commercial practice of leading international aircraft operating lessors with respect to similar aircraft under lease, taking into consideration, among other things, the identity of the relevant lessee, including the credit standing and operating experience thereof, the age and condition of the aircraft and the jurisdiction in which such aircraft will be operated or registered under such lease; and (2) in the case of each aircraft that is not subject to a lease, maintain, and cause each of its subsidiaries to maintain, such aircraft in a state of repair and condition consistent with the reasonable commercial practice of leading international aircraft operating lessors with respect to aircraft not under lease. A third party event will not cause a breach of this covenant so long as: (1) no member of AerCo group consents or has consented to the third party event; and (2) the member of AerCo group which is the lessor or owner of such aircraft promptly and diligently takes such commercially reasonable actions as a leading international aircraft operating lessor would reasonably take in respect of the third party event, including seeking to compel such lessee or other relevant person to remedy the third party event or seeking to repossess the relevant aircraft or engine. NOTIFICATION OF TRUSTEE, CASH MANAGER AND ADMINISTRATIVE AGENT. AerCo will notify the trustee, cash manager and administrative agent as soon as AerCo or any of its subsidiaries becomes aware of any loss, theft, damage or destruction to any aircraft or engine if the potential cost of repair or replacement of such asset, without regard to any insurance claim related thereto, may exceed $2,000,000 and AerCo will notify the trustee of any breach of the share purchase agreement by AerFi Group. 119 121 LEASES. AerCo shall adopt and will agree to cause the servicer to use, and will adopt and will agree to cause any additional servicer, including any servicer appointed for any additional aircraft or to replace the servicer of the initial aircraft, to use the pro forma lease agreement or agreements then used by the servicer or such additional servicer, as the case may be, in connection with its aircraft operating leasing services business generally, as such pro forma lease agreement or agreements may be revised from time to time by the servicer or such additional servicer as a starting point in the negotiation of future leases with persons who are not members of AerCo group. In the case of any future lease entered into in connection with: (1) the renewal or extension of a lease; (2) the leasing of an aircraft to a person that is or was a lessee under a pre-existing lease; or (3) the leasing of an aircraft to a person that is or was a lessee under an operating lease of an aircraft that is being managed or serviced by the servicer or such additional servicer, as the case may be. a form of lease substantially similar to the pre-existing lease or operating lease, may, in lieu of the servicer's pro forma lease, be used by the servicer or such additional servicer, as a starting point in the negotiation of such future lease with persons who are not members of AerCo group or a future AerCo entity. The following provisions apply to changes to the servicer's pro forma lease: - If the directors determine, in an annual review of the servicer's pro forma lease that any revision to the servicer's pro forma lease made from time to time since the preceding review by the directors is substantially inconsistent with the core lease provisions set forth in the indenture so as to have a material adverse effect on the noteholders, then the directors shall direct the servicer not to include such revision in the servicer's pro forma lease. - In making this determination, the directors may take into account the revision and the risk that the aircraft might not be able to be leased on the basis of the servicer's pro forma lease. - If the directors determine that any such revision to the servicer's pro forma lease will not have a material adverse effect on the noteholders, then the directors shall amend the core lease provisions. - The directors will then notify the rating agencies of any future lease entered into the terms of which are materially less favorable from the point of view of the lessor than any of the leases to lessees with similar credit ratings then in effect, including without limitation, such changes to the core lease provisions. AerCo shall not enter into, and shall not permit any AerCo group member to enter into, any future lease the rental payments under which are denominated in a currency other than U.S. dollars without obtaining confirmation by the rating agencies that they will not lower or withdraw any rating assigned by them to any class of AerCo notes outstanding. OPINIONS. AerCo will not enter into, and will not permit any of its subsidiaries to enter into, any future lease with any person that is not a member of AerCo group or change the jurisdiction of registration of any aircraft that is subject to a lease, UNLESS, upon entering into such future lease or changing the jurisdiction of registration of such aircraft, or within a commercially reasonable period thereafter, the servicer or additional servicer, obtains such legal opinions, if any, with regard to compliance with the registration requirements of the relevant jurisdiction, enforceability of the future lease and such other matters customary for such transactions if receiving such legal opinions is consistent with the reasonable commercial practice of leading international aircraft operating lessors. 120 122 INSURANCE. AerCo will maintain or cause, directly or indirectly through its subsidiaries, to be maintained with reputable and responsible insurers or with insurers that maintain relevant reinsurance with reputable and responsible reinsurers: (1) airline hull insurance for each aircraft in an amount at least equal to the note target price for such aircraft, or the equivalent thereof from time to time if such insurance is denominated in a currency other than U.S. dollars; (2) airline liability insurance for each aircraft and occurrence in an amount at least equal to the relevant amounts set forth in the indenture for each model of aircraft, as amended from time to time with the approval of the rating agencies; and (3) airline political risk insurance for each aircraft subject to a lease and habitually based in a jurisdiction determined in accordance with the political risk insurance guidelines, as set forth in the indenture and as amended from time to time by the directors with the approval of the rating agencies in an amount at least equal to the note target price, or the equivalent thereof from time to time if such insurance is denominated in a currency other than U.S. dollars, for such aircraft. For a period commencing 60 days after July 15, 1998 to one year from July 15, 1998, any period may be extended for up to one year if so requested in writing by any rating agency, AerCo shall, upon request from any rating agency, obtain political risk insurance with respect to aircraft leased to lessees habitually based in countries other than developed markets that are specified by each such rating agency. Such insurance may be subject to commercially reasonable deductibles and self-insurance arrangements (taking into account, among other things, the creditworthiness and experience of the lessee, if any, the type of aircraft and market practices in the aircraft insurance industry generally). The coverage and terms (including endorsements) of any insurance maintained for any aircraft not subject to a lease shall be substantially consistent with the commercial practices of leading international aircraft operating lessors regarding similar aircraft. In determining the amount of insurance required to be maintained, AerCo may take into account any indemnification from, or insurance provided by, any governmental, supranational or inter-governmental authority or agency other than, with respect to political risk insurance, any governmental authority or agency of any jurisdiction for which political risk insurance must be obtained, the sovereign foreign currency debt rating of which is rated AA or the equivalent, by at least one of the rating agencies, against any risk with respect to an aircraft. The amount of such indemnification or insurance when added to the amount of insurance against such risk maintained by AerCo, or which AerCo has caused to be maintained, shall be at least equal to the amount of insurance against such risk otherwise required by the covenant taking into account self-insurance permitted by the covenant. Any such indemnification or insurance provided by such government shall provide substantially similar protection as the insurance required by the covenant. AerCo will not be required to maintain, or to cause to be maintained, any insurance otherwise required hereunder to the extent that such insurance is not generally available in the relevant insurance market from time to time. INDEMNITY. AerCo will, and will cause each of its subsidiaries to include in each lease between a member of the AerCo group and a person who is not a member of the AerCo group an indemnity in respect of the lease in respect of any losses or liabilities arising from the use or operation of the aircraft during the term of such lease, subject to such exceptions, limitations and qualifications as are consistent with the reasonable commercial practices of leading international aircraft operating lessors. 121 123 EVENTS OF DEFAULT AND REMEDIES Each of the following events will be an event of default with respect to any class of AerCo notes, except as specified below: (1) failure to pay interest on the AerCo notes of such class or any subclass thereof, other than step-up interest, in each case when such amount becomes due, and such default continues for a period of five or more business days; (2) failure to pay principal on any AerCo notes of such class or any subclass thereof either on or prior to the applicable final maturity date; (3) failure to pay any amount other than interest when due and payable in connection with any AerCo note of such class or any subclass thereof, to the extent that there are at such time available collections therefor, and such default continues for a period of five or more business days; (4) failure by AerCo to comply with any of the covenants, obligations, conditions or provisions binding on it under the indenture or the AerCo notes (other than a payment default for which provision is made in clause (1), (2) or (3) above) if such failure or such breach materially adversely affects the holders of such class of AerCo notes and continues for a period of 30 days or more after written notice has been given to AerCo by the cash manager, the administrative agent, the servicer or additional servicer or by holders of at least 25% of the aggregate outstanding principal balance of the AerCo notes of the senior class of AerCo notes outstanding; (5) a court having jurisdiction in the premises enters a decree or order for: (a) relief in respect of AerCo, or any subsidiary which owns or leases aircraft having an aggregate base value of more than 2% of the adjusted portfolio value at that time under any applicable law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization, examination, relief of debtors or other similar law now or hereafter in effect; (b) appointment of a receiver, liquidator, examiner, assignee, custodian, trustee, sequestrator or similar official of AerCo, or any subsidiary that is significant as described in paragraph (a) above; or (c) the winding up or liquidation of the affairs of AerCo, or any significant subsidiary and, in each case, such decree or order shall remain unstayed or such writ or other process shall not have been stayed or dismissed within 90 days from entry thereof; (6) AerCo or any significant subsidiary: (a) commences a voluntary case under any applicable law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization, examination, relief of debtors or other similar law now or hereafter in effect, or consents to the entry of an order for relief in any voluntary case under any such law; (b) consents to the appointment of or taking possession by a receiver, liquidator, examiner, assignee, custodian, trustee, sequestrator or similar official of AerCo, or any significant subsidiary or for all or substantially all of the property and assets of AerCo, or any significant subsidiary; or (c) effects any general assignment for the benefit of creditors; (7) any judgment or order for the payment of money in excess of 5% of the aggregate adjusted portfolio value shall be rendered against AerCo or any subsidiary or any other member of AerCo group and either: (a) enforcement proceedings shall have been commenced by any creditor upon such judgment or order; or 122 124 (b) there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect. However, any such judgment or order shall not be an event of default under the indenture; if and for so long as: - the amount of such judgment or order is covered by a valid and binding policy of insurance between the defendant and the insurer covering payment thereof; and - such insurer, which shall be rated at least A by A.M. Best Company or any similar successor entity, has been notified of, and has not disputed the claim made for payment of, the amount of such judgment or order; (8) the constitutional documents of AerCo cease to be in full force and effect without replacement documents having the same terms being in full force and effect. If an event of default other than an event of default under (5) or (6) above with respect to the senior class of AerCo notes then outstanding shall have occurred and be continuing, the trustee for the senior class may, and, when instructed by the holders of 25% of the aggregate outstanding principal balance of the senior class of AerCo notes, shall, give a default notice to AerCo and the cash manager declaring the outstanding principal balance of the AerCo notes and all accrued and unpaid interest thereon to be due and payable. At any time after the senior trustee has declared the outstanding principal balance of the AerCo notes to be due and payable and before the exercise of any other remedies under the indenture, holders of a majority of the outstanding principal balance of the senior class of AerCo notes, by written notice to AerCo, the senior trustee and the cash manager, may rescind and annul such the declaration referred to above if: (1) there has been paid to or deposited with the senior trustee an amount sufficient to pay all overdue installments of interest on the AerCo notes, and the principal of and premium, if any, on the AerCo notes that would have become due otherwise than by such declaration of acceleration; (2) the rescission would not conflict with any judgment or decree; and (3) all other defaults and events of default, other than nonpayment of interest and principal on the AerCo notes that have become due solely because of such acceleration, have been cured or waived. If an event of default under clause (5) or (6) above occurs, the outstanding principal balance of the AerCo notes and all accrued and unpaid interest thereon shall automatically become due and payable without any further action by any party. After the occurrence and during the continuation of an event of default: (1) the class B noteholders will not be permitted to give or direct the giving of a default notice or to exercise any remedy in respect of such event of default until all interest and principal on the class A notes have been paid in full; (2) the class C noteholders will not be permitted to give a default notice or to exercise any remedy in respect of such event of default until all interest and principal on the class A notes and the class B notes have been paid in full; (3) the class D noteholders will not be permitted to give a default notice or to exercise any remedy in respect of such event of default until all interest and principal on the class A notes, the class B notes and the class C notes have been paid in full; and (4) the class E noteholders will not be permitted to give a default notice or to exercise any remedy in respect of such event of default until all interest and principal on the class A notes, the class B notes, the class C notes and the class D notes have been paid in full. The trustee shall provide each rating agency with a copy of any default notice it receives. The indenture contains a provision entitling the trustee, subject to its duty during a default to act with the required standard of care, to be indemnified by the holders of any class of the notes before proceeding to 123 125 exercise any right or power under the indenture or the cash management agreement at the request or direction of such holders. Except in limited circumstances, no holder of the notes will have the right, other than through the senior trustee acting in accordance with the indenture, to sue for recovery or take any other actions to enforce the obligations of AerCo to pay any and all amounts due and payable under the notes, and no holder of the notes will have the right to take any steps to cause the filing for bankruptcy of AerCo. The senior trustee is entitled to exercise any and all remedies available under the indenture. The term "default" means the occurrence of any event which is, or after notice or lapse of time, or both, would constitute an event of default. INTERCREDITOR RIGHTS The senior trustee will have sole discretion as to whether to direct the cash manager to exercise and enforce any and all remedies with respect to the notes. The senior trustee may take various actions in respect of the notes, without regard to the interests of any other creditors. MODIFICATION AND WAIVER If the trustee receives a request for its consent to an amendment, modification or waiver under the indenture, the AerCo notes or any related document relating to the AerCo notes, the trustee shall mail a notice of such proposed amendment, modification or waiver to each noteholder requesting direction from the noteholders as to whether or not to consent to such amendment, modification or waiver. The Indenture provides that, with the consent of the holders of a majority of the outstanding principal balance of the AerCo notes (acting as a single class), modifications may be made to the AerCo notes or the Indenture except that any modification of the provisions: - setting forth the frequency or the currency of payment of, the maturity of, or the method of calculation of the amount of any interest, principal and premium, if any, payable in respect of any subclass of AerCo notes, or - reducing the percentage of the aggregate outstanding principal balance of any subclass of AerCo notes required to approve any such amendment or waiver, or - altering the manner or priority of payment of such subclass of AerCo notes, is not permitted without the consent of any swap provider and the holder of each outstanding AerCo note affected. The senior trustee may also waive any event of default. Any such modification approved by the required holders of any subclass of AerCo notes will be binding on the holders of the relevant subclass of AerCo notes and each party to the indenture. This provision shall not prevent AerCo or any subsidiary from amending any lease if such amendment is otherwise permitted by the indenture. The subordination provisions contained in the indenture may not be amended or modified without the consent of each swap provider, each holder of the class of AerCo notes affected and each holder of any class of notes ranking senior to such AerCo notes. Without the consent of each noteholder, no amendment or modification of the indenture or the cash management agreement may, among other things: (1) modify the provisions of the indenture or the cash management agreement with respect to account payment instructions and the payment thereunder by the cash manager, or (2) result in the sale of AerCo's assets other than pursuant to the provisions of "Indenture Covenants". In no event shall the provisions relating to the priority of the expenses, swap payments or swap breakage costs in the indenture be amended or modified. 124 126 NOTICES TO NOTEHOLDERS Except as provided below, any notice to the noteholders (in the case of definitive notes or global notes) will be valid if given: (1) by publication in the Luxemburger Wort or, if such newspaper shall cease to be published in such English language newspaper or newspapers as the trustee shall approve having a general circulation in Europe, (2) by either of (a) the information contained in such notice appearing on the relevant page of the Reuters screen or such other medium for the electronic display of data as may be approved by the trustee and notified to noteholders or (b) publication in the Financial Times and The Wall Street Journal (National Edition) or, if such newspaper shall cease to be published or timely publication is not practicable, in such English language newspaper or newspapers as the trustee shall approve having a general circulation in Europe and the United States, and (3) until such time as any definitive notes are issued and, so \long as book-entry interests are held by Euroclear and/or Cedel Bank, delivery of the relevant notice to DTC, Euroclear and/or Cedel Bank for communication by them to noteholders. The trustee may approve some other method of giving notice to the noteholders if, in its opinion: (1) the method is reasonable, having regard to the number and identity of the noteholders and/or to market practice then prevailing, (2) is in the best interests of the noteholders, and (3) will comply with the rules of the Luxembourg Stock Exchange or such other stock exchange (if any) on which the notes are then listed. Any such notice shall be deemed to have been given on such date as the trustee may approve so long as notice of such method is given to the noteholders in such manner as the trustee shall require. Notice specifying the interest rate and the amount of any repayment of principal on any notes pursuant to any optional redemption shall, for so long as the notes are listed on the Luxembourg Stock Exchange and so long as the rules of the Luxembourg Stock Exchange so require, be given to the Luxembourg Stock Exchange. Any such notice shall be deemed to have been given on the first day on which requirements for such notification shall have been met. GOVERNING LAW AND JURISDICTION The indenture and the cash management agreement are governed by and construed in accordance with the laws of the State of New York. In the indenture and the cash management agreement, AerCo has submitted to the jurisdiction of the United States federal and New York state courts located in The City of New York for all purposes in connection with the notes and cash management agreement and have each designated a person in The City of New York to accept service of any process on its behalf. THE SUBCLASS D-1 NOTES The subclass D-1 notes are direct obligations of AerCo under the indenture. They were issued in an aggregate principal amount of $80 million in fully certificated form. The subclass D-1 notes will accrue interest for each interest accrual period at a rate of 8.50% per annum, payable monthly in arrears on each payment date. The subclass D-1 notes have been rated BB or the equivalent by one or more nationally recognized statistical rating agencies. All of the subclass D-1 notes were initially issued to AerFi Group in a transaction exempt from the registration requirements of the Securities Act. AerCo has granted to AerFi Group registration rights with respect to the subclass D-1 notes owned by it. Under the registration rights agreement, AerFi Group has the right to require AerCo to file a registration statement with the Commission to register the resale of the 125 127 subclass D-1 notes under the Securities Act. If AerCo issues any additional notes, AerCo also expects to issue at the same time one or more additional subclasses of class D notes, which may be initially issued to AerFi Group or its subsidiaries on the basis described above or to other purchasers in transactions that are either registered under the Securities Act or exempt from the registration requirements. Holders of the class D notes will not be permitted to give a default notice with or to exercise any remedy if any such event of default occurs until all amounts owing under each other class of the notes have been paid in full. THE SUBCLASS E-1 NOTES The subclass E-1 notes are direct obligations of AerCo under the indenture. They were issued in an aggregate principal amount of approximately $112 million. The subclass E-1 notes were initially issued to AerFi Group in a transaction exempt from the registration requirements of the Securities Act. If AerCo issues any additional notes, AerCo also expects to issue at the same time one or more additional subclasses of class E notes. Under the subordination provisions of the indenture and the subclass E-1 notes, payments on the subclass E-1 notes, other than the class E note primary interest amount are subordinated to all payments of interest and principal on the notes and the class D notes (as set forth in "-- Priority of Payments"). Holders of the subclass E-1 notes will not be permitted to give a default notice or to exercise any remedy if an event of default occurs until all amounts owing under each other class of the AerCo notes have been paid in full. The subclass E-1 notes will accrue interest for each interest accrual period at a rate of 20% per annum, payable monthly in arrears on each payment date. The stated interest rate on the subclass E-1 notes is adjusted by reference to the U.S. Consumer Price Index. Except for the class E note primary interest amount as described below, no interest is payable on the subclass E-1 notes until all of the interest, principal and premium, if any, on the AerCo notes have been repaid in full. The class E note primary interest amount will be paid at the rate of 15% per annum on the initial principal balance of the subclass E-1 notes. It will be paid on each payment date only to the extent that AerCo group has available collections sufficient to make such payment after paying or providing for each of the items ranking prior to such payment in the order of priority described under "-- Priority of Payments". To the extent that available collections are insufficient to pay the class E note primary interest amount on any payment date, the unpaid portion of the class E note primary interest amount will not be payable as part of the class E note primary interest amount on any later payment date. The class E note accrued interest amount will accrue interest at the rate described above and will be payable in the order of priority described under "-- Priority of Payments" at the twenty-seventh priority level. Principal of the subclass E-1 notes will not be payable until the outstanding principal balance of the AerCo notes and the class D notes is reduced to zero. The terms of the subclass E-1 notes require, among other things, that the subclass E-1 noteholders pay over to the cash manager any money (including principal or interest) paid to them in the event that the cash manager, acting in good faith, determines subsequently that such monies were not paid in accordance with the priority of payment obligations described above under "-- Priority of Payments" or as a result of any other mistake of fact or law on the part of the cash manager in making such payment. Under AerCo's articles of association, the holder or holders of a majority in aggregate principal amount of the class E notes have the right to appoint two of AerCo's directors while the class E notes are outstanding. AerFi Group, as holder of a majority of the initial aggregate principal amount of the class E notes, appointed Edward Hansom and Rose Hynes as directors. THE CASH MANAGEMENT AGREEMENT The following is a summary description of the cash management agreement it is not complete. We urge you to read the cash management agreement, which we have filed as an exhibit to the registration statement. 126 128 Each payment of cash in respect of any subclass of notes and all other payments to be received by AerCo or made by AerCo pursuant to the indenture will be directed by the cash management agreement. The cash management agreement appoints the cash manager (1) to establish and administer the accounts described below (2) to prepare reports with respect to such performance and (3) to perform certain other specified administrative tasks on behalf of AerCo. The cash manager shall ensure that the proceeds of the AerCo assets are deposited in the collection account. THE ACCOUNTS The cash manager, acting on behalf of the security trustee, has established the following accounts: (1) the collection account; (2) the lessee funded account; (3) the initial rental accounts; (4) the expense account; (5) the aircraft purchase account; (6) the refinancing account; and (7) the defeasance/redemption account. Each of the collection account, the rental accounts, the expense account, the lessee funded account and the aircraft purchase account has been established at a bank having: (1) a long-term unsecured debt rating of not less than AA, or the equivalent, by the rating agencies; or (2) a certificate of deposit rating of A-1+ by Standard & Poor's and P-1 by Moody's and that is acceptable to the other rating agency. Where required by the terms of the relevant leases, rental accounts may be established at banks having ratings of less than AA, or the equivalent, by the rating agencies, or a certificate of deposit rating of less than A-1+ by Standard & Poor's and P-1 by Moody's. Except where local legal or regulatory reasons do not permit, all of such accounts will be held in the name of the security trustee, who will have sole dominion and control over the accounts, including, among other things, the sole power to direct withdrawals from or transfers among such accounts. Subject to limited conditions set forth in the cash management agreement, the security trustee will delegate such authority over the accounts to the cash manager. The security trustee will not be responsible for the acts or omissions of the cash manager. For as long as any AerCo notes remain outstanding, funds on deposit in the accounts (other than the tax defeasance account) will be invested and reinvested by the cash manager at AerCo's written direction (or, following delivery to AerCo or the cash manager of a default notice or if any event of default described in clause (5) or (6) under "-- Events of Default and Remedies" shall have occurred and be continuing, at the security trustee's written direction. These investments must be permitted account investments maturing, in the case of the collection account and expense account, such that sufficient funds shall be available to make required payments on the first succeeding scheduled payment date after such Permitted Account Investments are made. Investment and reinvestment of funds in the lessee funded account must be made in a manner and with maturities that conform to the requirements of the related leases or aircraft agreements. Investment earnings on funds deposited in any account, net of losses and investment expenses, will, if permitted by the terms of the related leases or aircraft agreements in the case of such funds in the lessee funded account, be deposited in the collection account and treated as collections. RENTAL ACCOUNTS The lessees will make all payments under the leases directly into the applicable rental accounts. The cash manager will transfer all funds deposited into the rental accounts into the collection account as collections 127 129 within one business day of receipt thereof, other than certain limited amounts, if any, required to be left on deposit for local legal or regulatory reasons. THE COLLECTION ACCOUNT Collections include all amounts received by AerCo group, including: (1) rental payments; (2) payments under any letter of credit, letter of comfort, letter of guarantee or other assurance in respect of a lessee's obligations under a lease; (3) the liquidity reserve amount as described below deposited into the collection account on July 15, 1998 and on the closing date of any acquisition of additional aircraft; (4) amounts received in respect of claims for damages or in respect of any breach of contract for nonpayment of any of the foregoing, including any amounts received from any AerCo subsidiary, whether by way of distribution, dividend, repayment of a loan or otherwise and any proceeds received in connection with any allowed restructuring; (5) net proceeds of any aircraft sale or amounts received under any aircraft agreement; (6) proceeds of any insurance payments in respect of any aircraft or any indemnification proceeds; (7) certain amounts transferred from the lessee funded account to the collection account; (8) net payments to AerCo under any swap agreement; (9) investment income, if any, on all amounts on deposit in the accounts (in each case to the extent consistent with the terms of applicable related leases); (10) the portion of the purchase price or other net proceeds from any permitted tax-related disposition that is not required to be retained in the tax defeasance account; and (11) any other amounts received by any member of the AerCo group other than segregated funds, certain funds to be applied in connection with a redemption, certain funds received in connection with a refinancing and other amounts required to be paid over to any third-party pursuant to any related document. Collections on deposit in the collection account will be calculated by the cash manager on the calculation date. The portion of the required expense amount that has not been paid directly by the cash manager to expense payees will be transferred into the expense account on each payment date and the cash manager may, from time to time, transfer other amounts into the expense account in respect of unanticipated expenses falling due and payable within such interest accrual period. If funds are available on any payment date, the cash manager will also transfer amounts in respect of expenses and costs that are not regular, monthly recurring expenses anticipated to become due and payable in any future interest accrual period. Amounts received for segregated security deposits and maintenance reserves (as described below) will be transferred directly into the lessee funded account. LIQUIDITY RESERVE AMOUNT All collections received by AerCo will either be transferred to another account as described above and below, paid to the appropriate third party on behalf of AerCo or held in the collection account as a part of the cash portion of the liquidity reserve amount. The liquidity reserve amount is the minimum balance AerCo must maintain in the collection account under the indenture. The liquidity reserve amount is intended to provide liquidity for AerCo group to meet its aircraft maintenance obligations and its lessee security deposit repayment obligations and to provide for certain other contingencies that may arise in the course of AerCo group's activities. The liquidity reserve amount may be funded with cash in the collection account and with letters of credit, guarantees or other credit support instruments provided by, or supported with credit support 128 130 instruments provided by, a person whose short-term unsecured debt is rated P-1 by Moody's, A-1+ by Standard & Poor's and D-1+ by DCR. There are currently no eligible credit facilities in place. The initial liquidity reserve amount is equal to $40 million plus the amount of security deposits AerCo and its subsidiaries holds of currently $16 million. The liquidity reserve amount may be increased or decreased from time to time for any reason including upon acquisitions of additional aircraft by an action of the board in light of significant changes in, the condition of the aircraft, the terms and conditions of future leases, the financial condition of the lessees or prevailing industry conditions. AerCo must obtain confirmation in advance in writing from the rating agencies that any proposed reduction in the liquidity reserve amount will not result in a lowering or withdrawal by the rating agencies of their respective ratings of any subclass of AerCo notes. If the balance of cash on deposit in the collection account, together with the amount available for drawing under any eligible credit facilities, should fall below the liquidity reserve amount at any time, AerCo may continue to make all payments, and any credit or liquidity enhancement facilities may be drawn to fund such payments, including required payments on the notes, which rank prior to or equally with, payments of accrued and unpaid interest on the class D notes under "-- Priority of Payments" and any permitted accruals other than those for modification payments. Except as described below, the balance of funds in the collection account, together with the amount available for drawing under any eligible credit facilities, does not fall below the minimum liquidity reserve amount at its then current level. The balance of funds in the collection account, together with the amount available for drawing under any eligible credit facilities, may fall below the minimum liquidity reserve amount at its then current level and AerCo may continue to make payments of all accrued and unpaid interest on any subclass of the most senior class of notes then outstanding to avoid an event of default, and, on the final maturity date of any subclass, principal of such subclass of the most senior class of notes then outstanding to avoid an event of default. Amounts drawn under any eligible credit facility will either be repayable at the third level in the priority of payments, as set forth in "Description of the Notes -- Priority of Payments", or at the eleventh level in the priority of payments, as set forth in "Description of the Notes -- Payment of Principal and Interest -- Priority of Payments". We refer to the eligible credit facilities payable at the third level in the order of priorities as "primary eligible credit facilities". Those repayable at the eleventh level we refer to as "secondary eligible credit facilities". At such time as the aggregate outstanding principal balance of the notes is less than or equal to the liquidity reserve amount, the balance of funds, if any, in the collection account will be distributed in accordance with the priority of payments. THE LESSEE FUNDED ACCOUNT Under the terms of the leases, certain lessee security deposits and supplemental rent payments to provide for maintenance reserves may be required to be segregated from other AerCo funds. Amounts we receive from lessees in respect of such security deposits and maintenance obligations will be held in the lessee funded account. Amounts on deposit in the lessee funded account will be accounted for, and, if required by any lease, segregated, on a per lease basis. Funds on deposit in the lessee funded account will be used to make certain maintenance and security deposit repayment related payments, such other payments as may be required or permitted under the terms of the relevant leases or may be applied against maintenance-related payments otherwise required to be made by the lessee during the term of the related lease. These funds will not be used to make payments in respect of the notes at any time, including after the delivery of a default notice. In circumstances where lessees relinquish their rights to receive certain maintenance and security deposit payments upon the expiration of a lease, surplus funds may be credited from the lessee funded account to the collection account. 129 131 THE EXPENSE ACCOUNT On each payment date, the cash manager will withdraw from the funds deposited in the collection account, in the priority of payments established for the notes, an amount equal to the required expense amount. We will then use this amount to pay the expenses. If the required expense amount has not been paid directly by the cash manager to expense payees, the required expense amount will be deposited into the expense account. In addition, in the period between payment dates, the cash manager may make further withdrawals of cash from the collection account in order to satisfy expenses due and payable prior to the next payment date that were not previously anticipated to become so due and payable on the previous payment date. If funds on deposit in the collection account are less than the required expense amount on any payment date, AerCo group will be unable to pay the required expense amount in full on such date, which may lead to a default under one or more of the related documents or AerCo's various service agreements. All available collections remaining in the collection account will be used by the cash manager to make payments on the AerCo notes, in accordance with the priority of payments established therefor under "-- Priority of Payments". THE TAX DEFEASANCE ACCOUNT If AerCo enters into any permitted tax-related disposition, one or more tax defeasance accounts may be established. The tax defeasance account will be established at either: (1) the bank where the collection account, the lessee funded account and the expense account are held, or (2) a bank whose credit rating is equal to or greater than the credit rating of the most senior class of AerCo notes outstanding. The purchase price for, or other proceeds from, any permitted tax-related disposition will be deposited in the tax defeasance account. On each payment date, the cash manager will withdraw from the funds deposited in the tax defeasance account an amount equal to the excess, if any, of (1) such purchase price or other proceeds over (2) the amount necessary to meet the obligations of AerCo under the head lease or other relevant aircraft agreement such that the ability of AerCo and the lessee of such aircraft to perform their respective obligations and receive their respective benefits under the relevant lease is not impaired. We will deposit this amount in the collection account. THE TRUSTEE AerCo will pay the fees and expenses of the trustee. AerCo will also indemnify and hold the trustee harmless against, any loss, liability or expenses incurred by the trustee other than through its own wilful misconduct, bad faith or negligence or by reason of a breach of any of the trustee's representations or warranties in the indenture. The trustee may resign for any subclass of AerCo notes at any time upon at least 90 days' prior written notice. If the trustee resigns, AerCo must appoint a successor trustee for the subclass of AerCo notes. Noteholders of each subclass may have divergent or conflicting interests from the noteholders of other subclasses. Therefore, the trustee may be forced to resign if a conflict of interest arises on the part of the trustee in respect of one or more subclass of notes. If the trustee ceases to be eligible to continue as trustee with respect to any subclass of AerCo notes, becomes incapable of acting as trustee or becomes insolvent, AerCo may remove the trustee. In addition, in that case, any AerCo noteholder of the applicable subclass who has been a AerCo noteholder in good faith for at least six months may, on behalf of itself and all other AerCo noteholders of the same subclass, petition any court of competent jurisdiction for the removal of such trustee and the appointment of a successor trustee. Holders evidencing not less than a majority in aggregate outstanding principal balance of any subclass of AerCo notes may also at any time remove the trustee with respect to the subclass without cause by delivering written notice of such removal in writing to AerCo, the cash manager and the trustee. Any resignation or removal of the trustee and appointment of a successor trustee will not become effective until acceptance of 130 132 the appointment by the successor trustee. As a result of these provisions, it is possible that a different trustee could be appointed to act as the successor trustee with respect to each subclass of AerCo notes. All references in this prospectus to the trustee should be read to include the trustee and any successor trustee appointed in the event of such a resignation or removal. 131 133 REPORTS TO NOTEHOLDERS On each payment date and any other date for distribution of any payments on each subclass of outstanding notes the trustee will include a monthly report, with the following information: (1) For each payment date: (a) the balances on deposit on the calculation date immediately preceding the prior payment date, (b) the aggregate amounts of deposits and withdrawals between such calculation date and the calculation date immediately preceding the payment date, and (c) the balances on deposit in the expense account, collection account, the aircraft purchase account, and lessee funded account on the calculation date immediately preceding such payment date. (2) Analysis of expense account activity: (a) Balance on preceding calculation date, (b) Net transfer to the expense account between the prior calculation date and the current calculation date, (c) Payments between prior calculation date and the current calculation date: (-) Payments on prior payment date (-) Other payments, (d) Balance on relevant calculation date. (3) Analysis of collection account activity (a) Balance on preceding calculation date: - Required expense amount, including on preceding payment date - Net transfer to lessee funded accounts during period - Collections during period - Transfer from the aircraft purchase account - Transfer from the tax defeasance account - Drawings under credit or liquidity enhancement facilities - Aggregate note payments - Swap payments/receipts - Repayments of drawings under credit or liquidity enhancement facilities, (b) Balance on relevant calculation date separately stating the components of the liquidity reserve amount, (c) Analysis of current payment date distributions. (4) Payments on the Notes: (a) Floating rate notes, by subclass: - Applicable LIBOR for the current interest accrual period - Applicable margin for the current interest accrual period - Applicable interest rate for the current interest accrual period - Interest amount payable - Step-up interest - Opening outstanding principal balance - Minimum Principal Payment Amount - Scheduled Principal Payment Amount - Supplemental Principal Payment Amount - Redemption amount -- amount allocable to principal -- amount allocable to premium - Closing outstanding principal balance, 132 134 (b) Fixed rate notes, by class and, if applicable, subclass: - Applicable interest rate, - Interest amount payable. (5) Floating rate note information for next interest accrual period, by subclass: (a) Applicable LIBOR, (b) Applicable margin, (c) Applicable interest rate. (6) Payments per $100,000 initial outstanding principal balance of notes by subclass: (a) Opening outstanding principal balance, (b) Total principal payments, (c) Closing outstanding principal balance, (d) Total interest, (e) Total premium. Following effectiveness of the registration statement, we will furnish any monthly reports and quarterly reports to the Commission in a report on Form 6-K. We expect to furnish the quarterly reports within 45 days of the end of each of our fiscal quarters. After the end of each calendar year, the trustee will furnish to each person who was a holder of any subclass of notes during the year, a statement containing the sum of the amounts determined under clause (6) above for the subclass for the calendar year or the applicable portion of the calendar year. The trustee will also include any additional information that you may request as being necessary for the preparation of your U.S. federal income tax returns, if the information is available to the trustee. So long as the notes of any class or subclass are registered in the name of DTC or its nominee, the report and any other items will be prepared on the basis of information supplied to the trustee by DTC and the DTC participants, and will be delivered by the trustee to the DTC participants to be available for forwarding by the DTC participants to you as described above. The trustee will publish following each payment date and other date specified above in a daily newspaper in Luxembourg a notice that the monthly and quarterly reports and the other information described above will be available for review at the main office of the listing agent for the notes in Luxembourg, Banque Internationale a Luxembourg S.A., 69 route d'Esch, L-1470 Luxembourg. The daily newspaper is expected to be the Luxemburger Wort. The Luxembourg Stock Exchange will receive notice promptly following each payment date. In addition, the trustee will provide the information to Bloomberg Financial Markets promptly following each payment date for publication on the BLOOMBERG. If the notes are ever issued as definitive notes, the trustee will prepare and deliver the information described above to each holder of record of a definitive note. 133 135 AVAILABLE INFORMATION AerCo has filed with the Securities and Exchange Commission a registration statement on Form F-4 including all amendments, exhibits and schedules, for the new notes. This prospectus is part of the registration statement. When the registration statement becomes effective, AerCo will become subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended as applicable to "foreign private issuers". As a foreign private issuer, AerCo will be exempt from provisions of the Exchange Act which prescribe the furnishing and content of proxy statements to shareholders and which relate to short swing profits reporting and liability. AerCo will also make certain monthly and quarterly reports available to holders of the notes. You should refer to "Reports to noteholders" for a listing of what will be contained in the report. Any reports and other information filed by AerCo with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and at Northwestern Atrium Center, 500 West Madison Street Suite 1400, Chicago, Illinois 60661 at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains reports and other information, including the registration statement filed by AerCo. This prospectus does not contain all the information in the registration statement and the related exhibits and schedules, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. If you need additional information with respect to AerCo and the securities offered by this prospectus, please refer to the registration statement and the exhibits filed or incorporated as a part of the registration statement, which are on file at the offices of the Commission and may be obtained upon payment of the fee prescribed by the Commission, or may be examined without charge at the offices of the Commission. Statements contained in this prospectus as to the contents of any documents referred to are not necessarily complete, and, in each such instance, are qualified in all respects by reference to the applicable documents filed with the Commission. This prospectus contains forward-looking statements that involve risks and uncertainties. The actual results of AerCo group could differ materially from those discussed. Factors that could cause or contribute to such differences include those discussed under "Risk Factors" and elsewhere in this prospectus. The old notes were listed on the Luxembourg Stock Exchange on July 15, 1998, and the new notes will be listed upon issuance, subject only to notice of issuance. The constitutive documents of AerCo and the legal notice relating to the issuance of the notes have been deposited with the Registrar of the District Court in Luxembourg where such documents will be available for inspection and where such documents will be obtainable upon request. Copies of the prospectus, the annual report of independent public accountants and the reports to noteholders referred to under "Reports to Noteholders" are available at the office of the listing agent in Luxembourg: Banque Internationale a Luxembourg, 69, route d'Esch, L-1470 Luxembourg. Financial information regarding AerCo will be included in AerCo's Quarterly Reports on Form 6-K and Annual Reports on Form 20-F and will be available at the office of the Listing Agent in Luxembourg after the respective reports are filed with the Commission. Unless otherwise stated, all monetary amounts are expressed herein in United States dollars. Various percentages set out in this prospectus have been rounded and accordingly may not total exactly. Until , 1999, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. No person has been authorized to give any information or to make any representations other than as contained herein, and, if given or made, such information or representation must not be relied upon as having been authorized by AerCo. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy by any person in any jurisdiction in which it is unlawful for such person to make such an offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall under any 134 136 circumstances create any implication that the information contained herein is correct as of any time subsequent to its date. The consent of the Jersey Financial Services Commission under the Control of Borrowing (Jersey) Order 1958, as amended has been obtained to the issue of the old notes and new notes by AerCo. When this document is circulated there will have been delivered a copy thereof to the Registrar of Companies in Jersey in accordance with Article 6 of the Companies (General Provisions) (Jersey) Order 1992 and the consent of the Registrar of Companies to its circulation will have been given and not withdrawn. It must be distinctly understood that, in giving these consents, neither the Registrar of Companies nor the Jersey Financial Services Commission takes any responsibility for the financial soundness of AerCo or for the correctness of any statements made, or opinions expressed, with regard to it. AerCo has taken all reasonable care to confirm that the information contained in this prospectus is true and accurate in all material respects and that there are no material facts the omission of which would make misleading any statement herein, whether of fact or opinion. AerCo is aware that the foregoing paragraph has no effect on its responsibilities and obligations under the U.S. Securities Act. 135 137 BOOK-ENTRY REGISTRATION, GLOBAL CLEARANCE AND SETTLEMENT BOOK-ENTRY REGISTRATION; DEPOSIT AGREEMENT We will deposit the global notes with Bankers Trust Company, as book-entry depositary under the deposit agreement. The book-entry depositary will issue certificateless depositary interests for each subclass of new notes to DTC or its nominee, representing the aggregate principal amount of the global note for that subclass. Until book-entry interests are exchanged for definitive notes, the certificateless depositary interests held by DTC may not be transferred except as a whole by DTC to its nominee or by a nominee of DTC to DTC or another of its nominees or by DTC or any such nominee to a successor of DTC or a nominee of such successor. Book-entry interests will be shown only on, and transfers of book-entry interests will be effected only through, records maintained in book-entry form by DTC or its nominee and its participants, including Euroclear and Cedel. So long as the book-entry depositary is the holder of the global notes, the book-entry depositary will be considered the sole holder of the global notes for all purposes under the indenture. Until book-entry interests are exchanged for definitive notes, all references in this prospectus to actions by noteholders will refer to actions taken by the book-entry depositary upon instructions of DTC or its nominee, acting in accordance with the procedures of DTC. All references in this prospectus to distributions, notices, reports and statements to noteholders will refer to distributions, notices, reports and statements to the book-entry depositary for further distribution to DTC and DTC participants, including Euroclear and Cedel, in accordance with the deposit agreement and the procedures of DTC and DTC participants. Holders of book-entry interests will be entitled to receive definitive notes in exchange for book-entry interests only in the limited circumstances described in "Description of the Notes -- Form -- Definitive Notes". Accordingly, each person owning a book-entry interest must rely on the procedures of the book-entry depositary and DTC and, if such person is not a participant in DTC, on the procedures of the participant through which such person owns its interest, to exercise any rights and obligations of a holder under the Indenture. ACTION BY OWNERS OF BOOK-ENTRY INTERESTS Not later than 10 days after receipt by the book-entry depositary of notice of any solicitation of consents or request for a waiver or other action by the book-entry depositary as noteholder, the book-entry depositary will mail to DTC a notice containing: - the information as is contained in the notice, - a statement that at the close of business on a specified record date DTC will be entitled to instruct the book-entry depositary as to the consent, waiver or other action, if any, pertaining to the certificateless depositary interests or the global notes, and - a statement as to the manner in which such instructions may be given. Upon the written request of DTC, which shall have solicited instructions from the registered owners of book-entry interests in accordance with its rules and procedures, the book-entry depositary shall take such action regarding the requested consent, waiver or other action on the global notes in accordance with any instruction set forth in such request. The book-entry depositary will not exercise any discretion in the granting of consents or waivers or the taking of any other action on the certificateless depositary interests or the global notes. REPORTS The book-entry depositary will immediately, and no later than 10 days from receipt, send to DTC a copy of any notices, reports and other communications received relating to AerCo or the notes. 136 138 ACTION BY BOOK-ENTRY DEPOSITARY Subject to certain limitations, upon the occurrence of a default with respect to the notes, or in connection with any other right of a holder of notes under the indenture or the deposit agreement, if requested in writing by DTC, the book-entry depositary will take any such action as shall be requested in such notice. CHARGES OF BOOK-ENTRY DEPOSITARY AerCo has agreed to pay all charges of the book-entry depositary under the deposit agreement. AerCo has also agreed to indemnify the book-entry depositary against certain liabilities incurred by it under the deposit agreement. AMENDMENT AND TERMINATION The deposit agreement may be amended by agreement between AerCo and the book-entry depositary. The consent of DTC will not be required for any amendment to the deposit agreement: - to cure any inconsistency, omission, defect or ambiguity in such agreement; - to add to the covenants and agreements of the book-entry depositary or AerCo; - to evidence succession of another person to AerCo in accordance with the indenture; - to effectuate the assignment of the book-entry depositary's rights and duties to a qualified successor; - to comply with the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, or the Trust Indenture Act of 1939, as amended; or - to modify, alter, amend or supplement the deposit agreement in any other manner that is not adverse to DTC or the owners of book-entry interests. Except as listed above, no amendment that adversely affects DTC or the owners of book-entry interests may be made to the deposit agreement or the book-entry interests without the consent of DTC or the owners of book-entry interests corresponding to a majority in principal amount at maturity of the notes. Upon the issuance of definitive notes in exchange for all of the global notes and satisfaction of certain other conditions, the deposit agreement will terminate. The provisions of the deposit agreement may be terminated upon the resignation of the book-entry depositary if no successor has been appointed within 90 days as described under "-- Resignation or Removal of Book-Entry Depositary" below. RESIGNATION OR REMOVAL OF BOOK-ENTRY DEPOSITARY The book-entry depositary may resign at any time by written notice to AerCo and the trustee, any resignation to take effect when AerCo appoints a successor book-entry depositary and the successor book-entry depositary's acceptance of the appointment. If at the end of 90 days after delivery of the notice, AerCo has not appointed a successor book-entry depositary and the successor book-entry depositary has not accepted the appointment, the book-entry depositary may terminate the deposit agreement. OBLIGATIONS OF BOOK-ENTRY DEPOSITARY The book-entry depositary will assume no obligation or liability under the deposit agreement other than to use good faith and reasonable care in the performance of its duties. GLOBAL CLEARANCE AND SETTLEMENT DTC Transfers of book-entry interests between DTC participants will occur in accordance with DTC rules. Transfers between participating organizations whose securities are held by Cedel Bank and participants in 137 139 Euroclear will occur in accordance with the applicable rules and operating procedures of Cedel and Euroclear. Cedel Bank and Euroclear will hold omnibus positions of book-entry interests on behalf of their participants through customers' securities accounts in Cedel Bank's and Morgan Guaranty's names on the books of their depositaries which, in turn, will hold such positions in customers' securities accounts in the depositaries' names on the books of DTC. Citibank, N.A. will act as depositary for Cedel Bank and Morgan Guaranty Trust Company of New York will act as depositary for Euroclear. Cross-market transfers between persons holding through DTC participants and through Cedel participants will be effected by DTC in accordance with DTC rules on behalf of Cedel or Euroclear by its depositary. Cross-market transactions between persons holding through DTC participants and Euroclear participants will be effected in accordance with DTC rules on behalf of Euroclear by its depositary. However, any cross-market transactions will require delivery of instructions to Cedel or Euroclear by the counterparty in accordance with its rules and procedures and within its established deadlines. If the transaction meets its settlement requirements, Cedel Bank or Euroclear will deliver instructions to its depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Cedel participants and Euroclear participants may not deliver instructions directly to the Depositaries. Because of time-zone differences, credits of book-entry interests received in Cedel Bank or Euroclear as a result of a transaction with a DTC participant will be made during the securities settlement processing day dated the business day following the DTC settlement date. Such credits or any transactions in such book-entry interests settled during such processing will be reported to the relevant Cedel participant or Euroclear participant on such business day. Cash received in Cedel Bank or Euroclear as a result of sales of book-entry interests by or through a Cedel participant or Euroclear participant to a DTC participant will be received with value on the DTC settlement date but will be available in the relevant Cedel or Euroclear cash account only as of the business day following settlement in DTC. DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered under the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for DTC participants and to facilitate the clearance and settlement of securities transactions between DTC participants through electronic book-entry changes in accounts of DTC participants, eliminating the need for physical movement of certificates. DTC participants include securities brokers and dealers, banks, trust companies and clearing corporations and may in the future include certain other organizations. Indirect access to the DTC system also is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC participant either directly or indirectly. Owners of book-entry interests who are not DTC participants but desire to purchase, sell or otherwise transfer ownership of, or other interests in, the book-entry interests may do so only through DTC participants. Indirect participants are required to effect transfers through a DTC participant. Payments on the book-entry interests will be made to DTC and are the responsibility of AerCo. Owners of book-entry interests will receive all distributions on the book-entry interests from the trustee or other paying agent through DTC participants and indirect participants. Disbursement of any payments to DTC participants will be the responsibility of DTC and disbursement of any payments to the owners of book-entry interests will be the responsibility of DTC participants and indirect participants. DTC's practice is to credit DTC participants' accounts on the payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payment on such payment date. Payments by DTC participants to owners of book-entry interests will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such DTC participant. Unless definitive notes are exchanged for book-entry interests, owners of book-entry interests, noteholders will be permitted to exercise the rights of holders under the indenture only indirectly through DTC and DTC participants. 138 140 Under the rules, regulations and procedures governing DTC and its operations, DTC is required to make book-entry transfers of book-entry interests among the DTC participants on whose behalf it acts with respect to book-entry interests and to receive and transmit distributions on the book-entry interests. DTC participants and indirect participants with which holders have accounts for the book-entry interests similarly are required to make book-entry transfers and receive and transmit any payments on behalf of their book-entry interests. The DTC rules provide a mechanism by which holders will receive payments and will be able to transfer their interests. DTC has advised AerCo that it will take any action permitted to be taken by a holder on each subclass of book-entry interests under the Indenture only at the direction of one or more DTC participants to whose accounts that class or subclass of book-entry interests is credited. Additionally, DTC has advised AerCo that it will take such actions with respect to any percentage of the outstanding principal amount of any subclass of book-entry interests only at the direction of and on behalf of the DTC participants whose holders own such outstanding principal amount. DTC may take conflicting actions with respect to different classes or subclasses of Notes to the extent that such actions are taken on behalf of DTC participants whose holdings include such different subclasses of book-entry interests. DTC'S YEAR 2000 EFFORTS. DTC management is aware that some computer applications, systems, and the like for processing data that are dependent upon calendar dates, including dates before, on and after January 1, 2000, may encounter Year 2000 problems. DTC has informed its participants and other members of the financial community that it has developed and is implementing a program so that its systems, as they relate to the timely payment of distributions to securityholders, book-entry deliveries, and settlement of trades within DTC, continue to function appropriately. This program includes a technical assessment and a remediation plan, each of which is complete. Additionally, DTC's plan includes a testing phase, which is expected to be completed within appropriate time frames. However, DTC's ability to perform its services properly is also dependent upon other parties, including issuers and their agents, as well as third party vendors from whom DTC licenses software and hardware, and third party vendors on whom DTC relies for information or the provision of services, including telecommunication and electrical utility service providers. DTC has informed its participants and members of the financial community that it is contacting third party vendors from whom DTC acquires services to emphasize the importance of their services being Year 2000 compliant and determine the extent of their efforts for Year 2000 remediation of their services. In addition, DTC is developing any contingency plans as it deems appropriate. According to DTC, the information above has been provided to its participants and members of the financial community for informational purposes only and is not intended to serve as a representation, warranty, or contract modification of any kind. CEDEL Distributions on book-entry interests held through Cedel will be credited to cash accounts of Cedel participants in accordance with Cedel's rules and procedures, to the extent received by its depositary. Cedel will take any other action permitted to be taken by a noteholder under the indenture on behalf of a Cedel participant only in accordance with its rules and procedures and subject to its depositary's ability to effect such actions on its behalf through DTC. EUROCLEAR Securities clearance accounts and cash accounts with the Euroclear operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System and applicable Belgian law. The Euroclear terms and conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear and receipts of payments with respect to securities in Euroclear. All securities of a particular class or subclass in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear operator 139 141 acts under the Euroclear terms and conditions only on behalf of Euroclear participants, and has no record of or relationship with persons holding through Euroclear participants. Distributions on book-entry interests held through Euroclear will be credited to the cash accounts of Euroclear participants in accordance with the Euroclear terms and conditions, to the extent received by its depositary. The Euroclear Operator will take any other action permitted to be taken by a noteholder under the Indenture on behalf of a Euroclear participant only in accordance with the Euroclear terms and conditions and subject to its depositary's ability to effect such actions on its behalf through DTC. Although DTC, Cedel and Euroclear have agreed to the procedures described above in order to facilitate transfers of book-entry interests among participants of DTC, Cedel and Euroclear, they are under no obligation to perform or continue to perform those procedures and may be discontinue them at any time. CUSIP, ISIN AND COMMON CODE NUMBERS The book-entry interests in the new notes have been accepted for clearance through Euroclear and Cedel. The CUSIP numbers, International Securities Identification Numbers and the Common Code Numbers are set forth in the table below. SUBCLASS CUSIP ISIN CCN - -------- --------- ------------ --------- Subclass A-1....................................... 00764PAE0 US00764PAE07 9629319 Subclass A-2....................................... 00764PAF7 US00764PAF71 9629327 Subclass B-1....................................... 00764PAG5 US00764PAG54 9629335 Subclass C-1....................................... 00764PAH3 US00764PAH38 9629343 140 142 TAX CONSIDERATIONS IRISH TAX CONSIDERATIONS The following summary is based on an opinion of McCann FitzGerald on principles of Irish taxation law. These principles depend on interpretation of current law, regulations, rulings and decisions and Irish Revenue practice, and reliance on Irish Revenue confirmations obtained prior to the issue of, and in connection with the old notes, all of which are subject to change. Any such change may be applied retroactively and may adversely affect the principles of Irish tax on which the opinion is based. This summary does not address all Irish tax principles that may apply to all categories of potential investors, some of which may be subject to special rules. IRISH INCOME AND WITHHOLDING TAXES ON PAYMENTS ON THE NOTES In the opinion of McCann FitzGerald, there will be no withholding or deduction for Irish taxes on principal and interest paid by AerCo on the global notes or any payment of the principal and interest on the book-entry interests. The foregoing opinion, insofar as it relates to interest, is based on certain assumptions, including that the notes, including the global notes are listed on the Luxembourg Stock Exchange or on another stock exchange which is recognized for relevant purpose of Irish law and that interest on the global and book-entry notes is paid by a paying agent outside of Ireland. The issuance of definitive notes may cause interest payments to be subject to Irish withholding tax at the standard income tax rate currently 24%. If any Irish withholding tax is imposed, noteholders and holders of book-entry interests should note that AerCo will not make any additional payments for any withholding tax. In this regard, Ireland has tax treaties with a number of jurisdictions which, under certain circumstances, reduce the rate of Irish withholding tax on payments of interest to persons resident in those jurisdictions. A holder of a definitive note who is entitled to the benefit of Article 11 of the income tax treaty between the United States and Ireland (the "Treaty") (such a holder a "U.S. Holder") will normally be eligible to recover in full any Irish tax withheld from payments of interest to which such U.S. Holder is beneficially entitled by making a claim under the Treaty on the appropriate form. Alternatively, a claim may be made by a U.S. Holder in advance of a payment of interest. If the claim is accepted by the Irish Revenue, it will normally authorize subsequent payments to that U.S. Holder to be made without withholding for Irish tax. Noteholders who are not ordinarily resident in Ireland will not be subject to Irish income tax on interest paid by AerCo on the notes so long as the interest payments are made by AerCo in the course of carrying on relevant trading operations under its Shannon certificate. For additional information on these Shannon certified operations and their termination in 2005 and factors which might lead to their earlier termination, see "Irish Taxation of the AerCo group" below. After December 2005 or on earlier termination of AerCo Shannon certified operations, the exemption from Irish tax described above currently enjoyed by noteholders who are not ordinarily resident in Ireland will terminate, absent a change in law in the intervening period. Interest payments made by AerCo have an Irish source and whether or not paid gross are, under existing Irish tax law, chargeable to Irish income tax by self-assessment, subject, however, to such relief as may be afforded by the provisions of any applicable double tax treaty. However, as a matter of practice, the Irish tax authorities do not pursue collection of any such liability for Irish tax for persons who are not resident in Ireland except where such persons: - receive payments of interest through a person (including a trustee) or in the name of an agent or branch in Ireland having the management and control of the interest; or - seek to claim relief and/or repayment of tax deducted at source in respect of taxed income from Irish sources; or - are chargeable to Irish corporation tax on the income of an Irish branch or agency or to income tax on the profits of a trade carried on in Ireland to which the interest is attributable. The termination of the legislative provisions dealing with Shannon certified operations on December 31, 2005 will not affect the exemption from Irish withholding tax described above. 141 143 TAXATION OF CAPITAL GAINS Capital gains tax is chargeable at the rate of 20% on taxable capital gains with allowance being made for inflation adjusted acquisition costs and enhancement expenditure. The notes are chargeable assets for Irish capital gains tax purposes. However, non-resident holders are only liable for capital gains tax on the disposal of the notes where the notes are unquoted and derive their value or the greater part of their value from land and buildings or mineral rights situated in Ireland. IRISH CAPITAL ACQUISITION TAX Irish capital acquisitions tax (CAT) on individuals applies to gifts and inheritances where the donor is domiciled in Ireland at the date of the gift or inheritance or to the extent that the property of which the gift or inheritance consists is situated in Ireland at the date of the gift or inheritance. The donee is primarily liable to pay the CAT. Persons who are secondarily liable include the donor, his personal representative and an agent, trustee or other person in whose care the property constituting the gift or inheritance or the income from the property is placed. All taxable gifts and inheritances received by an individual since June 2, 1982 [December 1, 1988] are aggregated and only the excess over a certain tax-free threshold is taxed. The tax-free threshold depends on the relationship between the donor and donee and the aggregation of all previous gifts and inheritances. The current tax-free threshold amounts are: - IRL12,860 for gift and inheritances between persons who are not related to one another, - IRL25,720 for gifts and inheritances received from a brother, sister or from a brother or sister of a parent or from a grandparent, and - IRL192,900 for gifts and inheritances received from a parent. Gifts and inheritances between spouses are exempt from CAT. CAT is charged at progressive rates ranging from 15% to 30% for gifts and from 20% to 40% for inheritances. The Notes may constitute property situated in Ireland for CAT purposes. There is no gift and inheritance tax convention between the United States and Ireland. Although an estate tax convention between the two countries was ratified in 1951, estate duty was abolished in Ireland in 1975, and it is not clear whether the estate tax convention is applicable to Irish gift and inheritance taxes that replaced the former estate duty. PROBATE TAX A 2% Irish probate tax is payable on the value of any notes passing under the will or intestacy of an individual. No probate tax is payable on inheritances from spouses. Since probate tax was only introduced in 1993, it is not clear whether credit relief would be available under the estate tax convention discussed above. IRISH STAMP DUTY No stamp duty, stamp duty reserve tax or issue, documentary, registration or other similar tax imposed by any government department or other taxing authority of or in Ireland (collectively "Irish stamp duty") will be payable by noteholders on the creation, initial issue or delivery of Notes. Since the global notes are bearer securities, they will not be charged with Irish stamp duty, if transferred by delivery. The global notes will be exempt from Irish stamp duty under section 106 of the Finance Act, 1993 if the issue price is not less than ninety percent of their nominal value and if transferred by a written instrument. If that exemption was not applicable and in the absence of any other applicable exemption such instrument in writing would be chargeable with Irish stamp duty if either the instrument was executed in Ireland or, wherever executed, related to any property situated in Ireland (which would include notes physically located in Ireland) or any matter or thing done or to be done in Ireland. Transfers of book-entry interests in the notes which are not effected by written instrument will not be chargeable with Irish stamp duty. Any Irish stamp duty charged on such an instrument would be at the rate of one per cent on the amount of the consideration for the transfer or, if greater, the market value of the notes. 142 144 IRISH TAXATION OF THE AERCO GROUP The following discussion of the Irish taxation of the AerCo group is based on the advice of KPMG, AerCo's tax advisor. AerCo, AerCo Ireland and AerCo Ireland II will be entitled to certain corporate tax benefits for Shannon, Ireland certified companies including a preferential corporate taxation rate of 10% through December 2005. AerCo, AerCo Ireland, and AerCo Ireland II may become subject to Irish corporate taxation at general Irish statutory rates currently 28% if: - AerFi Group were to be liquidated or were to cease to hold its 5% shareholding in AerCo; - AerFi Group or GECAS were to reduce or relocate their respective operations for any reason such that either party failed to maintain, among other things, certain employment levels at Shannon, Ireland; or - AerFi Administrative Services Limited or AerFi Cash Manager II Limited were to resign or be terminated as administrative agent or cash manager of AerCo group. Upon the scheduled termination of the Irish preferential 10% tax rate on December 31, 2005, AerCo and the other Irish tax-resident members of the AerCo group will become subject to Irish corporate tax on their net trading income at a 12.50% rate as announced by the Minister for Finance of Ireland on December 3, 1997. According to the announcement non-trading income will be taxed at 25%. There can be no assurance that the announced rates will be adopted as law in Ireland or that, if adopted, such rates will not thereafter be changed. A company will not be subject to Irish income tax provided that it is not Irish tax resident, has no branch or agency in Ireland and has no Irish-source income. ALPS 94-1 and AerCo USA have adopted certain operational provisions in their organizational documents regarding the management and operation of their businesses designed to minimize the likelihood of Irish taxation of their income. In the opinion of KPMG, Irish tax advisor to AerCo, neither ALPS 94-1 nor AerCo USA will be subject to Irish income tax on their non-Irish source income. However, there can be no assurance that ALPS 94-1 or AerCo USA will not be subject to Irish tax on some or all of their income. IRISH VALUE-ADDED TAX Ireland generally imposes Value Added Tax (VAT) on the supply of goods and services. Any Irish VAT that may become payable by an AerCo group company in connection with any management services performed by Babcock & Brown will be eligible to be reclaimed by that company on the assumption that invoices addressed to any AerCo group company relate to costs attributable to a business activity of that company which is considered to be a supply of goods or services by that company, regardless of whether such supply of goods or services has an Irish place of supply for VAT purposes and that business activity is not one which would be considered VAT exempt under Irish VAT law. Some or all of the services provided to AerCo group by the cash manager may be exempt from Irish VAT. To the extent that any Irish VAT is payable on services provided to an AerCo group company by the cash manager or by the administrative agent such VAT will be eligible to be reclaimed by that company on the same assumption as set out in the preceding paragraph. Payments by the lessees to AerCo and its Irish-resident subsidiary companies will not be subject to Irish VAT in any case where the aircraft are used or to be used by a transport undertaking operating for reward chiefly on international routes. CERTAIN JERSEY TAX CONSIDERATIONS The following summary is based upon the opinion of Mourant du Feu & Jeune, AerCo's Jersey tax counsel, on the tax treatment under Jersey law of AerCo and ALPS 94-1 and the tax treatment under Jersey law for the purchase, ownership and disposition of the notes. The discussion is based on an interpretation of 143 145 laws, regulations, rulings and decisions, including certain letters from the Comptroller of Income Tax in Jersey and the Director of the Jersey Financial Services Department, the functions of which were taken over by the Jersey Financial Services Commission with effect from July 1, 1998, all of which are currently in effect and are subject to change. Any such change may be applied retroactively and may adversely affect the Jersey tax consequences described herein. Unless otherwise noted, the term "note" refers to both the actual global notes and the interest in the global notes held indirectly through DTC, Cedel or Euroclear. INCOME TAXES AerCo will qualify as an "exempt company" under Article 123A of the Income Tax (Jersey) Law 1961 as amended as long as it makes the returns of information and pays the fees, currently L600 per annum as required by that Article and, subject to the concession referred to below, as long as no Jersey resident has a beneficial interest (for purposes of the 1961 Law) in AerCo. As an exempt company, AerCo will be treated for purposes of the 1961 Law as not resident in Jersey and will pay no Jersey income tax other than on income arising in Jersey (but, by long standing concession, excluding bank deposit interest arising in Jersey) and on profits of its trade (if any) carried on through an established place of business in Jersey. For purposes of the 1961 Law the Comptroller of Income Tax in Jersey, among other things, has: - granted a concession that the holders of AerCo Notes will not be regarded as having a beneficial interest (for the purposes of Article 123A of the 1961 Law) in AerCo; - confirmed that the holding of the shares in the capital of AerCo by or on behalf of the charitable trust trustee and AerFi Group will not prejudice the exempt company status of AerCo; - confirmed that the income generated by the activities undertaken by AerCo as described herein will not be treated as income arising in Jersey; and - confirmed that the administration in and from Jersey of the business undertaken by AerCo as described herein will not constitute the carrying on of a trade through an established place of business in Jersey. Accordingly in the opinion of our Jersey tax counsel, AerCo will not be subject to Jersey income tax. WITHHOLDING TAXES In general, Jersey imposes a withholding tax at the rate of 20% on interest and other amounts paid to non-residents of Jersey on a debt obligation of a company resident in Jersey. However, no such withholding tax is imposed with respect to an exempt company (as defined above). Accordingly, based upon AerCo's qualification as an exempt company, in the opinion of our Jersey tax counsel, no withholding tax will be deducted from interest and other amounts paid on the notes on account of Jersey taxes. In the event that any Jersey withholding tax is imposed, noteholders should note that there is no income tax treaty between the United States and Jersey that would apply to reduce or eliminate such withholding. Noteholders should note further that AerCo will not be obligated under the terms of the notes to make any additional payments in respect of any such withholding tax. Accordingly, in the event that withholding were to be required on account of Jersey taxes, distributions to noteholders may be less than those which would be made on the notes in the absence of any such withholding tax. OTHER TAXES There is no taxation of capital gains (other than with respect to certain tax avoidance transactions) in Jersey. As a result, the capital gains of AerCo on its investments and the capital gains of noteholders on a sale or transfer of their notes will not be subject to taxation in Jersey. There is no value added tax or other relevant taxation in Jersey. No stamp duty, stamp duty reserve tax or issue, documentary, registration or other similar tax imposed by any governmental department or other taxing authority of or in Jersey is payable in connection with the creation, initial issue, delivery or transfer inter vivos of the notes. 144 146 In the event that on the death of a sole individual holder of notes who is a non-resident of Jersey, such notes are situated in Jersey (by virtue of their being held on a register in Jersey or in bearer form and held in Jersey at the date of death or otherwise deemed to be situated under applicable rules of private international law), a grant of probate or letters of administration would have to be obtained in Jersey and a duty of up to 1% of the value of the assets of the deceased situated in Jersey would be payable. ALPS 94-1 ALPS 94-1 will qualify as an exempt company under the 1961 Law as long as AerCo also qualifies as an exempt company and as long as ALPS 94-1 makes the returns of information and pays the fees as required by Article 123A of the 1961 Law (as described above). As an exempt company, ALPS 94-1 will be treated for the purposes of the 1961 Law in the same way as AerCo. Accordingly, in the opinion of our Jersey tax counsel, no withholding tax will be deducted from any amounts paid by ALPS 94-1 to AerCo as described herein on account of Jersey taxes. UNITED STATES TAXATION In the opinion of Davis, Polk & Wardwell, the following discussion sets forth the material U.S. federal income tax consequences of the purchase, ownership and disposition of notes. This discussion deals only with notes held as capital assets by United States holders as defined below who purchased notes in the offering at their "issue" price (which will be the price at which a substantial amount of the notes was sold to persons other than bond houses, brokers or similar persons acting in the capacity of underwriters, placement agents or wholesalers), and not with special classes of holders, including without limitation, dealers in securities or currencies, banks, tax-exempt organisations, life insurance companies, financial institutions, broker-dealers, persons that hold securities that are a hedge or that are hedged against currency or interest rate risks or that are part of a straddle or conversion transaction, certain U.S. expatriates, persons that are not United States holders or persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar. United States holders who purchased notes at a price other than the issue price should consult their tax advisors as to the possible applicability to them of the amortizable bond premium or market discount rules. Further, this discussion does not address the effect of any U.S. state or local tax laws on a United States holder of notes. The discussion is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions, all as currently in effect and all subject to change at any time, possibly with retroactive effect. Purchasers of the notes should consult their own tax advisors concerning the consequences, in their particular circumstances, under the U.S. federal income tax laws and the laws of any relevant state, local or other foreign taxing jurisdiction, of ownership of the notes. For purposes of this discussion, a "United States Holder" means a beneficial owner of notes that is for U.S. federal income tax purposes a citizen or resident of the United States, a U.S. corporation, or an estate or trust the income of which is subject to U.S. federal income tax regardless of its source. PAYMENTS OF INTEREST The gross amount of interest paid on a note will be includible in the gross income of a U.S. holder as ordinary interest income at the time it is received or accrued, depending on the holder's method of accounting for U.S. federal income tax purposes. Interest paid by AerCo on the notes will be income from sources outside the United States, and, with certain exceptions, will be treated separately, together with other items of "passive" income or, in certain cases, "financial services" income, for purposes of computing the foreign tax credit allowable under U.S. federal income tax laws. SALE, RETIREMENT AND OTHER DISPOSITION OF THE NOTES Except as noted below, upon the sale, exchange or retirement of a note, a United States holder will generally recognise taxable gain or loss equal to the difference between the amount realised (not including any amounts received that are attributable to accrued and unpaid interest not taken into income, which will be 145 147 taxable as ordinary interest income in accordance with the United States holder's method of accounting as described above) and the United States holder's tax basis in the note. A United States holder's tax basis in a note generally will be its cost. Such gain or loss recognized on the sale or retirement of a note will be capital gain or loss. Prospective investors should consult their tax advisors regarding the treatment of capital gains (which may be taxed at lower rates than ordinary income for certain taxpayers who are individuals) and losses (the deductibility of which is subject to limitations). An exchange of old notes for new notes will not be treated as a taxable exchange for U.S. federal income tax purposes. Accordingly, United States Holders who exchange their old notes for new notes will not recognize income, gain or loss for United States federal income tax purposes. A United States holder's tax basis in the new notes will be equal to its adjusted basis in the old notes and its holding period will include the period during which it held the notes. INFORMATION REPORTING AND BACKUP WITHHOLDING Payments of principal and interest on the notes held by certain non-corporate holders and the proceeds of a disposition of such notes may be subject to U.S. information reporting requirements. Such payments also may be subject to U.S. backup withholding at a rate of 31% if the holder does not provide a taxpayer identification number or otherwise establish an exemption. The holder may credit the amounts withheld against its U.S. federal income tax liability and claim a refund for amounts withheld in excess of its tax liability. Recently finalized regulations which are applicable to payments made after December 31, 1999 will change the requirements for establishing an exemption from information reporting and backup withholding. UNITED STATES TAXATION OF THE AERCO GROUP AerCo, ALPS 94-1, AerCo Ireland and AerCo Ireland II do not expect to have any material U.S. federal income tax liability. However, this conclusion may depend, in part, on: - the nature of such companies' income and operations, and - in the case of AerCo Ireland and AerCo Ireland II, qualification for the benefits of the income tax treaty between the United States and Ireland. AerFi and certain of its affiliates, with the support of the Irish authorities, have sought a ruling from the United States authorities under the treaty, to the effect that certain subsidiaries and affiliates of AerFi Group would be deemed to meet certain requirements necessary for eligibility for treaty benefits. AerFi is in the process of updating the ruling request to take account of certain restructuring transactions undertaken in 1998. However, there can be no assurance that a ruling will be obtained, that AerCo, AerCo Ireland or AerCo Ireland II would be covered by the ruling or that such companies or ALPS 94-1 would not be subject to United States federal income tax on some or all of their income with the result that the cash flow available for payments on the notes would be reduced. 146 148 ERISA CONSIDERATIONS Any Plan that proposes to purchase Notes should consult with its counsel about the potential consequences of such investment under the fiduciary responsibility provisions of ERISA and the prohibited transaction provisions of ERISA and the Code. ERISA and the Code impose certain requirements on employee benefit plans and certain other retirement plans and arrangements, including individual retirement accounts and annuities, that are subject to ERISA and/or the Code (all of which are hereinafter referred to as "plans") and or persons who are fiduciaries with respect to such plans. A person who exercises discretionary authority or control with respect to the management or assets of a plan will be considered a fiduciary of the plan under ERISA. In accordance with ERISA's general fiduciary standards, before investing in a note, a plan fiduciary should determine whether such an investment is permitted under the governing plan instruments and is appropriate for the plan in view of its overall investment policy and the composition and diversification of its portfolio, taking into account the limited liquidity of the notes. Other provisions of ERISA and the Code prohibit certain transactions involving the assets of a plan and persons who have certain specified relationships to the plan ("parties in interest" within the meaning of ERISA or "disqualified persons" within the meaning of the Code). Thus, a plan fiduciary considering an investment in notes should also consider whether such an investment might constitute or give rise to a prohibited transaction under ERISA or the Code and whether an administrative exemption might be applicable to such investment. Any prohibited transaction could be treated as exempt under ERISA and the Code if the notes were acquired pursuant to and in accordance with one or more "class exemptions" issued by the DOL, such as Prohibited Transaction Class Exemption ("PTCE") 75-1 (an exemption for certain transactions involving employee benefit plans and broker dealers (such as an underwriter), reporting dealers and banks), PTCE 84-14 (an exemption for certain transactions determined by an independent qualified professional asset manager), PTCE 91-38 (an exemption for certain transactions involving bank collective investment funds), PTCE 90-1 (an exemption for certain transactions involving insurance company pooled separate accounts), PTCE 95-60 (an exemption for certain transactions involving insurance company general accounts) or PTCE 96-23 (an exemption for certain transactions determined by in-house asset managers). ERISA also prohibits a fiduciary of a plan from maintaining the indicia of ownership of any assets of the plan outside the jurisdiction of the district courts of the United States except under certain circumstances. Before investing in a note, a plan fiduciary should consider whether its acquisition and holding of a note would satisfy such indicia of ownership rules. A PLAN FIDUCIARY CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT ITS TAX AND/OR LEGAL ADVISORS REGARDING UNDER WHAT CIRCUMSTANCES THE ASSETS OF AERCO WOULD BE CONSIDERED PLAN ASSETS, THE AVAILABILITY, IF ANY, OF EXEMPTIVE RELIEF FROM ANY POTENTIAL PROHIBITED TRANSACTION AND OTHER FIDUCIARY ISSUES AND THEIR POTENTIAL CONSEQUENCES. PLAN OF DISTRIBUTION Each broker-dealer that receives new notes for its own account under the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in resales of new notes received in exchange for old notes where the old notes were acquired as a result of market-making activities or other trading activities. AerCo has agreed that, starting on the expiration date and ending on the close of business on the 180th day following the expiration date, it will make this prospectus, as amended or supplemented, available to any broker-dealer for use with any resale of new notes. AerCo will not receive any proceeds from any sale of new notes by broker-dealers. New notes received by broker-dealers for their own account under the exchange offer may be sold in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the new notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or 147 149 through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such new notes. Any broker-dealer that resells new notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such new notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of new notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the expiration date, AerCo will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the letter of transmittal. AerCo has agreed to pay all expenses incident to the exchange offer including the expenses of one counsel for the holders of the old notes, other than commissions or concessions of any brokers or dealers and will indemnify the holders of the old notes including any broker-dealers against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters relating to the new notes offered in this prospectus will be passed upon for AerCo by Davis Polk & Wardwell, New York, New York, special United States counsel for AerCo, and Mourant du Feu & Jeune, special Jersey counsel to AerCo. In accordance with the rules of the Luxembourg Stock Exchange, AerCo states that there has been no material adverse change in its financial position since the date of its formation. AerCo is not a party to any material legal proceedings. EXPERTS On September 9, 1998 AerCo appointed KPMG, Chartered Accountants, 5 George's Dock, IFSC Dublin 1, Ireland, as new independent auditors for the fiscal year ending June 30, 1998 and subsequent periods. The financial statements of ALPS 94-1 included in this prospectus at and for the year ended June 30, 1998, the financial statements of the AerFi transferred aircraft included in this prospectus at and for the year ended June 30, 1998 and the balance sheet of AerCo at June 30, 1998 have been audited by KPMG as indicated in their report thereon included herein in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of ALPS 94-1 as of June 30, 1997 and for each of the years in the two year period ended June 30, 1997 and the financial statements of the AerFi transferred aircraft for the year ended June 30, 1997 included in this prospectus have been audited by Arthur Andersen -- Forum House, Grenville Street, St. Helier, Jersey, Channel Islands, independent public accountants as indicated in their report thereon included herein in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. With respect to certain matters, AerCo and AerFi are not represented by separate counsel and are not expected to be unless it is agreed that separate representation is required to satisfy the professional responsibilities of counsel. Also, certain professionals, appraisers and experts who perform services for AerCo have performed services for Babcock & Brown and AerFi and certain of their respective affiliates in the past and may do so again in the future. Valuations of the aircraft have been made by three expert aircraft appraisers: Aircraft Information Services, Inc., BK Associates, Inc. and Airclaims Limited. These valuations are discussed in detail elsewhere in this prospectus and are included herein in reliance upon the authority of such firms as experts in giving such appraisals. 148 150 AERCO GROUP INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- A. HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS FOR ALPS 94-1 (AS RESTATED) Independent auditors' reports.......................... F-2 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' reports.......................... F-29 Statements of net assets............................... F-31 Statements of operations............................... F-32 Statements of cash flows............................... F-33 Statements of changes in net assets.................... F-34 Statements of accounting policies...................... F-35 Notes to the financial statements...................... F-38 C. HISTORICAL FINANCIAL STATEMENTS FOR AERCO Independent auditors' report........................... F-45 Balance sheet and notes to financial statement......... F-46 COMPANY DEFINITIONS "AerCo" 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. "ALPS 94-1" 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. "AerFi" AerFi Group plc and its subsidiary undertakings. F-1 151 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED ("ALPS 94-1") We have audited the accompanying consolidated balance sheet of ALPS 94-1 as of June 30, 1998 and the related consolidated statement of operations, cash flows and changes in shareholders' deficit for the year then ended. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The directors of ALPS 94-1 are required to prepare consolidated financial statements for each financial year which give a true and fair view of the state of affairs of ALPS 94-1 and its consolidated subsidiaries and of the results of ALPS 94-1 and its consolidated subsidiaries for that year. In preparing those consolidated financial statements, the directors are required to select suitable accounting policies and apply them consistently, make judgements and estimates that are prudent and reasonable and to prepare the consolidated financial statements on the going concern basis unless it is not appropriate to assume that ALPS 94-1 and its consolidated subsidiaries will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of ALPS 94-1 and its consolidated subsidiaries and which enable them to ensure that the annual statutory financial statements comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of ALPS 94-1 and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion to you. The consolidated financial statements of ALPS 94-1 and subsidiaries as of June 30, 1997 and 1996 were audited by other auditors whose report dated December 2, 1997 expressed an unqualified opinion on those statements. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the U.K. Auditing Practices Board which do not differ significantly from U.S. generally accepted auditing standards. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the consolidated financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the consolidated financial statements and of whether the accounting policies are appropriate to the circumstances of ALPS 94-1 and its consolidated subsidiaries, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the consolidated financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the consolidated financial statements. OPINION In our opinion the 1998 consolidated financial statements referred to above give a true and fair view of the state of affairs of ALPS 94-1 and its consolidated subsidiaries as at June 30, 1998 and of the income, cash flows and changes in shareholders' deficit for the year ended June 30, 1998 and have been properly prepared in accordance with U.K. generally accepted accounting principles. F-2 152 INDEPENDENT AUDITORS' REPORT -- (CONTINUED) Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected the result of operations for the year ended June 30, 1998 and the shareholders' equity as of June 30, 1998 to the extent summarized in Notes 23, 24 and 25 of the consolidated financial statements. KPMG CHARTERED ACCOUNTANTS 5 George's Dock IFSC Dublin 1 Ireland November 23, 1998 F-3 153 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED ("ALPS 94-1") We have audited the accompanying consolidated balance sheet of ALPS 94-1 as of June 30, 1997 and the related consolidated statement of operations, cash flows and changes in shareholders' deficit for the years ended June 30, 1996 and June 30, 1997 (as restated). The 1996 and 1997 financial statements have been restated from the previously issued financial statements of ALPS 94-1. In the previously issued financial statements of ALPS 94-1, the directors adopted the true and fair override principle in respect of Financial Reporting Standard 4 (FRS 4), such that certain losses which would be borne by the class E Noteholder, were released from the carrying value of the debt and credited to the statement of operations. This accounting treatment will not be adopted by AerCo and previously issued 1996 and 1997 financial statements of ALPS 94-1 have been restated to reflect AerCo's accounting policy, to account for the class E Note in accordance with FRS4. The impact of the restatement is to increase the loss for the years and to increase indebtedness in 1996 and 1997. As the restatement eliminates the previous difference between U.K. GAAP and U.S. GAAP concerning the accounting for indebtedness, the restatement has also resulted in a restatement of the reconciliation of the income and shareholders' equity under both U.K. GAAP and U.S. GAAP disclosed in Note 23 and 24 of the consolidated financial statements for the years ended June 30, 1996 and 1997. In addition, in previously issued financial statements of ALPS 94-1, lease revenue was recognised as income as it accrued over the period of the lease. When future rental increases were contracted under the terms of the lease, ALPS 94-1 accrued income on the basis of the current rental rate rather than on a basis that averaged the lease rentals over the total lease term. The previously issued 1995, 1996 and 1997 financial statements of ALPS 94-1 have been restated to recognise income from operating leases on a straight line basis over the period of the lease. The impact of the restatement is to decrease lease revenue and increase net loss in 1997 and increase lease revenue and reduce net loss in 1996 and 1995. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The directors of ALPS 94-1 are required to prepare consolidated financial statements for each financial year which give a true and fair view of the state of affairs of ALPS 94-1 and its consolidated subsidiaries and of the results of ALPS 94-1 and its consolidated subsidiaries for that year. In preparing those consolidated financial statements, the directors are required to select suitable accounting policies and apply them consistently, make judgements and estimates that are prudent and reasonable and to prepare the consolidated financial statements on the going concern basis unless it is not appropriate to assume that ALPS 94-1 and its consolidated subsidiaries will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of ALPS 94-1 and its consolidated subsidiaries and which enable them to ensure that the annual statutory financial statements comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of ALPS 94-1 and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion to you. F-4 154 INDEPENDENT AUDITORS' REPORT -- (CONTINUED) BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the U.K. Auditing Practices Board which do not differ significantly from U.S. generally accepted auditing standards. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the consolidated financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the consolidated financial statements and of whether the accounting policies are appropriate to the circumstances of ALPS 94-1 and its consolidated subsidiaries, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the consolidated financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the consolidated financial statements. OPINION In our opinion the consolidated financial statements give a true and fair view of the state of affairs of ALPS 94-1 and its consolidated subsidiaries as at June 30, 1997 and of the income, cash flow and changes in shareholders' deficit for the years ended June 30, 1996 and June 30, 1997 and have been properly prepared in accordance with U.K. generally accepted accounting principles (as restated, see indebtedness and revenue recognition accounting policies and Notes 6 and 10). Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected the result of operations for the years ended June 30, 1997 and 1996 and the shareholders' equity and aircraft values as of June 30, 1997 to the extent summarized in Notes 23, 24 and 25 of the consolidated financial statements (as restated, see indebtedness and revenue recognition accounting policies and Notes 6 and 10). ARTHUR ANDERSEN CHARTERED ACCOUNTANTS Forum House Grenville Street St. Helier Jersey J2E 4UF Channel Islands December 2, 1997 (except with respect to matters described in Notes 6 and 10, as to which the date is March 8, 1999) F-5 155 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, NOTES JUNE 30, 1998 1997 ----- ------------- ------------- U.S.$'000 U.S.$'000 (AS RESTATED) ASSETS CURRENT ASSETS Cash........................................................ 1 51,608 51,474 Commercial paper............................................ 1 36,686 39,821 Accounts receivable......................................... 2 2,489 4,140 ------- --------- TOTAL CURRENT ASSETS........................................ 90,783 95,435 FIXED ASSETS Aircraft, net............................................... 3 800,090 854,596 ------- --------- TOTAL ASSETS................................................ 890,873 950,031 ======= ========= LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Accrued expenses and other liabilities...................... 5 35,400 16,089 Indebtedness................................................ 6 877,128 919,157 Provision for maintenance................................... 7 44,309 46,247 Security deposits........................................... 8 13,255 15,202 ------- --------- TOTAL LIABILITIES........................................... 970,092 996,695 Share capital............................................... 9 -- -- Accumulated deficit......................................... (79,219) (46,664) ------- --------- Shareholders' deficit....................................... (79,219) (46,664) ------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. 890,873 950,031 ======= ========= The accompanying notes, including the statement of accounting policies on pages F-10 to F-13, are an integral part of the consolidated financial statements. F-6 156 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED YEAR ENDED YEAR ENDED NOTES JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ----- ------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 (AS RESTATED) (AS RESTATED) REVENUES Aircraft leasing................................. 10 100,682 101,434 102,460 EXPENSES Depreciation..................................... 3 (37,826) (38,062) (17,978) Exceptional item -- additional depreciation.... 3 -- (34,385) -- Provision for permanent diminution in value of aircraft....................................... 11 (8,720) -- (12,000) Net interest expense............................. 12 (69,785) (71,037) (73,576) Other expenses................................... 13 (6,599) (5,053) (5,581) Exceptional item -- termination fee............ 11 (12,700) -- -- -------- -------- -------- Total expenses................................... (135,630) (148,537) (109,135) -------- -------- -------- NET LOSS FROM OPERATIONS......................... (34,948) (47,103) (6,675) Profit on sale of aircraft....................... 3 2,426 -- -- Reduction in indebtedness........................ 6 -- 5,258 -- -------- -------- -------- NET LOSS BEFORE PROVISION FOR TAXES.............. 14 (32,522) (41,845) (6,675) (Provision)/benefit for taxes.................... 15 (33) 143 (200) -------- -------- -------- NET LOSS FOR THE YEAR............................ (32,555) (41,702) (6,875) Dividends........................................ -- -- -- -------- -------- -------- LOSS FOR THE YEAR................................ (32,555) (41,702) (6,875) RETAINED (LOSS)/INCOME BROUGHT FORWARD........... (46,664) (4,962) 1,913 -------- -------- -------- RETAINED LOSS CARRIED FORWARD.................... (79,219) (46,664) (4,962) BASIC LOSS PER ORDINARY SHARE.................... 16 (3,255.5) (4,170.2) (687.5) -------- -------- -------- WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES OUTSTANDING.................................... 16 10 10 10 ======== ======== ======== All recognised gains and losses are included in the consolidated statement of operations above. There is no material difference between the net income for the year or prior years, and the 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-10 to F-13, are an integral part of the consolidated financial statements. F-7 157 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 (AS RESTATED) (AS RESTATED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the year.............................. (32,555) (41,702) (6,875) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES Depreciation charge for the year................. 37,826 38,062 17,978 Exceptional item: additional depreciation charge........................................ -- 34,385 -- Provision for permanent diminution in value of aircraft...................................... 8,720 -- 12,000 Changes in operating assets and liabilities Accounts receivable........................... 1,651 503 (1,889) Accrued interest on E Note.................... 17,079 14,532 12,907 Exceptional item -- termination fee........... 12,700 -- -- Accrued expenses and other liabilities........ 4,185 1,369 2,383 Reduction in indebtedness..................... -- (5,258) -- Net maintenance (expenditure)/receipts............. (1,938) 6,703 9,694 Net security deposits repaid....................... (1,947) (3,475) (666) -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 45,721 45,119 45,532 -------- -------- -------- INVESTING ACTIVITIES Purchase of aircraft............................... (1,132) -- -- Sale of aircraft................................... 11,518 -- -- -------- -------- -------- MANAGEMENT OF LIQUID RESOURCES Net sale/(purchase) of commercial paper............ 3,135 (4,511) (35,310) -------- -------- -------- FINANCING ACTIVITIES Indebtedness repaid................................ (59,108) (43,494) (36,025) NET CASH OUTFLOW FROM FINANCING ACTIVITIES......... (59,108) (43,494) (36,025) -------- -------- -------- NET INCREASE/(DECREASE) IN CASH.................... 134 (2,886) (25,803) CASH AT BEGINNING OF YEAR.......................... 51,474 54,360 80,163 -------- -------- -------- CASH AT END OF YEAR................................ 51,608 51,474 54,360 ======== ======== ======== Supplemental disclosure of cash flow information is set out in Note 20. 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-8 158 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT ISSUE OF SHARES RETAINED PROFIT TOTAL --------------- --------------- --------- U.S.$'000 U.S.$'000 U.S.$'000 Balance at June 30, 1995 (as restated)....... 10 -- 1,913 1,913 NET LOSS FOR THE YEAR (AS RESTATED).......... -- -- (6,875) (6,875) --- ---- ------- ------- Balance at June 30, 1996 (as restated)....... 10 -- (4,962) (4,962) NET LOSS FOR THE YEAR (AS RESTATED).......... -- -- (41,702) (41,702) --- ---- ------- ------- Balance at June 30, 1997 (as restated)....... 10 -- (46,664) (46,664) NET LOSS FOR THE YEAR........................ -- -- (32,555) (32,555) --- ---- ------- ------- Balance at June 30, 1998..................... 10 -- (79,219) (79,219) === ==== ======= ======= 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-9 159 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES STATEMENT OF ACCOUNTING POLICIES Incorporation ALPS 94-1 was incorporated in Jersey, Channel Islands on 2 June 1994. The initial accounting period was from 2 June 1994 to June 30, 1995. 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 23 (as restated), 24 (as restated) and 25. 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 ALPS 94-1 and of the aviation industry. Basis of consolidation The consolidated financial statements include the results of ALPS 94-1 and all subsidiaries. All intercompany profits, transactions and account balances have been eliminated. Revenue recognition Revenue from aircraft on operating leases is recognised as income on a straight line basis over the period of the leases. Where rentals are adjusted to reflect increases or decreases in prevailing interest rates such adjustments are accounted for as they arise. This includes rental income earned on aircraft for the period prior to delivery (see Accounting policies -- Aircraft). Lease rentals received in advance are deferred and recognized over the period to which they relate. In the previously issued financial statements of ALPS 94-1, lease revenue was recognised as income as it accrued over the period of the lease. When future rental increases were contracted under the terms of the lease, ALPS 94-1 accrued income on the basis of the current rental rate rather than on a basis that averaged the lease rentals over the total lease term. The previously issued 1995, 1996 and 1997 financial statements of ALPS 94-1 have been restated to recognise income from operating leases on a straight line basis over the period of the lease. The impact of the restatement is to decrease lease revenue and increase net loss in 1997 by $687,000 and increase lease revenue and reduce net loss in 1996 and 1995 by $438,000 and $1,247,000 respectively. Interest income Interest earned during the year has been credited to the statement of operations. Provision for maintenance The leases in respect of the aircraft owned by ALPS 94-1 contain detailed terms specifying maintenance standards and aircraft redelivery conditions. The terms of the leases are such that ALPS 94-1 seeks to pass the responsibility for major airframe and engine overhauls to its lessees. This is achieved through a number of mechanisms, including specifying F-10 160 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED) Provision for maintenance -- (continued) -- the maintenance standards and the maintenance program to be adopted throughout the lease term and the redelivery conditions at the end of the lease -- monthly maintenance reserves to be paid by lessees in certain instances -- adjustment payments to be made by lessees in the event that the aircraft do not meet the redelivery conditions at the end of the lease term. Where the lessee makes a full or partial prepayment, calculated at an hourly rate, into a fund which is held by ALPS 94-1, these funds are included in provisions for maintenance and the costs in respect of major airframe and engine overhauls are disbursed from these funds. Where the leases do not provide for maintenance reserve payments and ALPS 94-1 relies on the lessee's credit and its ability to perform scheduled maintenance throughout the lease term, to return the aircraft in the condition required by the lease or make payments upon the termination of the lease, no maintenance provision is made throughout the period of the lease and any payments made by the lessee on the termination of the lease are included in provision for maintenance when received. Aircraft leasing costs incurred in relation to the repair and return to releasable condition of aircraft following return from lessees, either at the end of the lease term or following a lessee default, are expensed as incurred. Taxation ALPS 94-1 has been granted exempt company status by the Jersey taxation authorities. It pays an exempt company fee of STGL600 per annum. Taxation is provided on the profits of the subsidiaries at the current rates. Aircraft In the period ended June 30, 1995 ALPS 94-1 committed to purchase and AerFi Group plc and its subsidiaries ('AerFi') committed to sell, subject to certain conditions, 27 aircraft on operating leases. ALPS 94-1 agreed to purchase the aircraft on August 24, 1994 (the Closing Date) for a price equal to the Initial Appraised Value of the aircraft. It was agreed that the aircraft would be delivered to ALPS 94-1 at agreed dates (the Delivery Dates) at which time the purchase price was paid. In the period from the Closing Date to the Delivery Date ALPS 94-1 received full credit for the rental income receivable under each operating lease and AerFi received full credit for the investment earnings on the purchase price of the aircraft. The amounts were settled through an adjustment in the funds paid by ALPS 94-1 to AerFi at the time of aircraft delivery. The net effect is that at the time the aircraft were delivered both ALPS 94-1 and AerFi were in the same financial position as they would have been had the aircraft been delivered on the Closing Date. The purchase of the aircraft was deemed to occur at the Closing Date rather than on the Delivery Date when the change in legal ownership took place reflecting the commercial substance of this transaction outlined above. Under U.S. GAAP the purchase of the aircraft is deemed to occur on Delivery Date when the change in legal ownership takes place (see Notes 22 to 25 for the reconciliation between U.K. and U.S. GAAP). Aircraft are stated at cost less accumulated depreciation less permanent diminutions in value. Cost comprises the net purchase price of the aircraft acquired by ALPS 94-1. F-11 161 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED) Under U.S. GAAP, transfers of assets and liabilities between ALPS 94-1 and AerFi have all been accounted for on a historical cost basis, because all such transfers of assets and liabilities are among entities within a single consolidated group. Accordingly the aircraft are recorded at AerFi's amortised cost at the Delivery Date (Amortised Cost). The difference between the Initial Appraised Value and Amortised Cost is considered to be a distribution to AerFi. In the year ended June 30, 1997 the company changed its estimates of depreciation rates to more accurately reflect the allocation of the cost of the asset purchases over the estimated useful economic life of these assets. In prior periods, aircraft were depreciated at rates calculated to write-off the cost of the assets to the company to a Nil residual value over their estimated economic useful lives of 25 years from the Closing Date. Depreciation rates for aircraft of 2% for the first 15 years and 7% thereafter were applied. The revised method of calculating depreciation is to depreciate aircraft at rates calculated to write off the cost of the assets to ALPS 94-1 to a residual value of 15%, on a straight line basis, over their estimated economic useful lives of 25 years from the date of manufacture. The changes in these estimates were considered necessary because of developments in the industry at that time, including the bankruptcy of one major manufacturer, the expected acquisition of MDC by Boeing, significant manufacturer discounting of new aircraft and the announcement of a new generation of Boeing aircraft. As a result of these developments the directors considered that (i) the allocation of cost should be revised to a straight line basis (rather than the previous lower allocations in earlier years) and (ii) additional depreciation reflecting the impact of adopting the revised estimates, should be charged reflecting the permanent impairment in value of the aircraft because of the effect of industry circumstances referred to above on ALPS 94-1's fleet. Under U.S. GAAP, for all periods, aircraft are depreciated on a straight line basis so as to write-off the cost of the assets to a residual value of 15% over a period of 25 years from the date of manufacture. Where purchase option agreements exist to the benefit of the lessee, aircraft are depreciated to the purchase option price on a straight-line basis provided that this would result in a higher depreciation charge than that arrived at by applying the standard method. Additional charges are made to reduce the book value of specific assets to fair market value where a permanent diminution in value is considered to have occurred. Where fair market value is greater than book value no adjustment is made. Fair market value is assessed by the directors, consistent with the going concern basis of preparation of the financial statements, and reflects the underlying economic value of aircraft and engines in normal market conditions (where supply and demand are in reasonable equilibrium) and assumes adequate time for a sale and a willing buyer and seller. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity to dispose of a significant number of aircraft simultaneously or to dispose of aircraft quickly. In forming their assessment of fair market value the directors have taken into consideration independent valuations of aircraft in the portfolio, together with the directors' assessment of aircrafts' current maintenance status and maintenance reserves. For US 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. 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 F-12 162 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED) amount of the asset, an impairment loss is recognised. This statement did not materially change the carrying value of ALPS 94-1's assets in the period when it was first applied. Prior to the adoption of FASB Statement No. 121, the company 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. Cash and liquid resources Substantially all of ALPS 94-1's cash and commercial paper balances are held for specific purposes under the terms of the Deed of Charge. 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 held by ALPS 94-1 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 amounts of the Class E Note and accrued interest thereon are dependent upon funds being available to meet such liabilities as they fall 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 may in certain circumstances result in a legal reduction in the principal balance on the Class E Note. In previously issued financial statements of ALPS 94-1 the directors adopted the true and fair override principles in respect of Financial Reporting Standard 4 (FRS 4), such that certain losses which would be borne by the E Noteholder, were released from the carrying value of the debt and credited to the statement of operations under UK GAAP. This accounting treatment will not be adopted by AerCo and previously issued financial statements of ALPS 94-1 have been restated to reflect AerCo's accounting policy, to account for the E Note in accordance with FRS 4. The impact of the restatement is to increase the net loss and indebtedness for 1997, 1996 and 1995 by $41,015,000, $6,647,000 and $0. New Accounting Standards not yet effective The company will be required to adopt the provisions of Financial Reporting Standard No. 12 "Provisions, Contingent Liabilities and Contingent Assets" for all financial periods ending on or after March 23, 1999. Management are currently assessing the impact, if any, that this Standard will have on its adoption by the company. F-13 163 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 CASH AND COMMERCIAL PAPER 30 JUNE, 1998 30 JUNE, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Cash........................................................ 51,608 51,474 Commercial paper............................................ 36,686 39,821 ------ ------ 88,294 91,295 ====== ====== Substantially all of the cash and commercial paper balances at June 30, 1997 and 1998 are held for specific purposes under the terms of the Deed of Charge. 2 ACCOUNTS RECEIVABLE 30 JUNE, 1998 30 JUNE, 1997 ------------- ------------- U.S.$'000 U.S.$'000 (AS RESTATED) Trade receivables........................................... 2,207 3,403 Non-trade receivables....................................... 282 737 ----- ----- 2,489 4,140 ===== ===== Trade receivables comprise amounts in respect of rent and maintenance payments due from lessees. As at June 30, 1998 two lessees accounted for 67% (1997: 27% (as restated)) and 30% (1997: 8% (as restated)) respectively of trade receivables. No other lessee accounted for greater than 10% of trade receivables at June 30, 1998 and June 30, 1997 (as restated). Non-trade receivables comprise prepayments. F-14 164 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3 AIRCRAFT JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 COST Beginning of year........................................... 975,179 975,179 Additions................................................... 1,132 -- Disposals................................................... (27,023) -- -------- -------- End of year................................................. 949,288 975,179 -------- -------- DEPRECIATION Beginning of year........................................... (108,583) (36,136) Charge for the year......................................... (37,826) (38,062) Additional charge in year................................... -- (34,385) Disposal.................................................... 5,931 -- -------- -------- End of year................................................. (140,478) (108,583) -------- -------- PROVISION FOR PERMANENT DIMINUTION IN VALUE Beginning of year........................................... (12,000) (12,000) Charge for the year......................................... (8,720) -- Disposal.................................................... 12,000 -- -------- -------- End of year................................................. (8,720) (12,000) -------- -------- NET BOOK VALUE Beginning of year........................................... 854,596 927,043 -------- -------- End of year................................................. 800,090 854,596 ======== ======== Cost represents the purchase price of aircraft acquired by ALPS 94-1 which was based on the independent appraisal values of the portfolio of 27 aircraft at August 24, 1994. The directors of ALPS 94-1 determine on an annual basis whether a permanent diminution in value of ALPS 94-1's aircraft has occurred. Where a permanent diminution 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 ALPS 94-1, the creditworthiness of particular lessees, current rental values compared to open market and the length of remaining lease term. In the year ended June 30, 1998, the directors made a provision of U.S.$8.72 million to reflect a permanent diminution in value against three F100 aircraft. The directors arrived at such determination based on the bankruptcy of Fokker N.V. and the discontinuation of its aircraft manufacturing operations, resulting in significant reductions of values and lease rates for Fokker aircraft. In the year ended June 30, 1997, additional depreciation was charged of U.S.$34.4 million as explained in "Statement of Accounting Policies: Aircraft". In the year ended June 30, 1996, the directors made a provision of U.S.$12 million to reflect a permanent diminution in value against one A300 aircraft in its fleet. The directors arrived at such determination based upon the current unfavourable market conditions for this aircraft type, which also caused the appraisal firms to reduce their appraisal values for this aircraft type. This aircraft was disposed of to AerFi during the year and this provision was included in determining the profit on the disposal of this aircraft of U.S.$2.4 million. ALPS 94-1's aircraft, along with ALPS 94-1's other assets, have charges attached to them such that they represent security for the Notes issued (see Note 6). F-15 165 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4 OPERATING LEASES All the aircraft are leased on operating leases to 19 lessees as at June 30, 1998 (1997: 19). Rentals on certain of the leases are variable in accordance with prevailing interest rates. The following is a schedule of contracted future rentals, by years, on operating leases as of June 30, 1998. The interest rates prevailing at June 30, 1998 have been applied in determining rentals that are variable in accordance with prevailing interest rates. YEAR ENDING JUNE 30 U.S.$'000 ------------------- --------- 1999........................................................ 83,622 2000........................................................ 51,021 2001........................................................ 28,467 2002........................................................ 20,858 2003........................................................ 10,013 ------- 193,981 ======= There are no contingent rentals. The leases have charges attached to them such that they represent security for the Notes issued. Contracted future rentals for the year ended 30 June 1998 was $97,590,000. Actual revenue earned was $100,682,000. The principal reason for the difference is due to new leases executed during the year and changes in the interest rates. 5 ACCRUED EXPENSES AND OTHER LIABILITIES JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Accrued expenses and other liabilities comprise: Deferred income............................................. 7,791 5,382 Interest on Notes........................................... 7,241 5,574 Exceptional item -- termination fee (Note 11)............... 12,700 -- Taxation.................................................... (17) (50) Other accruals.............................................. 7,685 5,183 ------ ------ 35,400 16,089 ====== ====== F-16 166 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6 INDEBTEDNESS (AS RESTATED) a) Principal The purchase of the aircraft was funded by the sale of Trust Notes and the sale of Subordinated Notes (together the 'Notes'). The Notes are secured by a first priority security interest in ALPS 94-1's assets, which consist of the aircraft, the leases and amounts on deposit in certain accounts. JUNE 30, 1998 JUNE 30, 1997 AT ISSUE ------------- ------------- --------- U.S.$'000 U.S.$'000 U.S.$'000 (AS RESTATED) TRUST NOTES Class A-1 Notes..................................... 98,349 121,944 172,000 Class A-2 Notes..................................... 73,108 101,372 139,404 Class A-3 Notes..................................... 156,167 156,167 156,167 Class A-4 Notes..................................... 140,122 140,122 140,122 Class B-1 Notes..................................... 43,770 43,770 44,106 Class B-2 Notes..................................... 43,994 43,994 44,106 Class C Notes....................................... 86,171 86,171 86,610 SUBORDINATED NOTES Class D Note........................................ 42,739 49,988 71,185 Class E Note and capitalised E note interest........ 197,966 180,887 144,451 Less: extinguished by a permanent loss.............. (5,258) (5,258) -- ------- ------- ------- Net Class E Note Principal and capitalised interest......................................... 192,708 175,629 144,451 ------- ------- ------- 877,128 919,157 998,151 ======= ======= ======= Repayments of principal on the Trust Notes and Class D Note principal are made monthly and commenced in October 1994. As a consequence of the ALPS 94-1 refinancing which was completed on July 15, 1998 the Notes are classified as repayable within one year (see Note 30). The repayment of principal on the Trust Notes and the Class D Note is dependent upon the cash available at the monthly payment date and is governed by the Deed of Charge of Assignment and Priorities entered into by ALPS 94-1 on the Closing Date (the 'Deed of Charge"). The repayment of Class E Note principal is not due until the Trust Notes and Class D Note have been fully repaid. Repayment of the principal amounts of the Class E Note and accrued interest thereon are dependent upon funds being available to meet such liabilities as they fall 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 may in certain circumstances result in a legal reduction in the principal balance on the Class E Note. During the year ended June 30, 1997 there was a legal reduction in the principal balance on the Class E Note of U.S.$5.258 million. In previously issued financial statements of ALPS 94-1, the directors adopted the true and fair override principles in respect of Financial Reporting Standard 4 (FRS4), such that certain losses which would be borne by the E Noteholder, were released from the carrying value of the debt and credited to the statement of operations under UK GAAP. This accounting treatment will not be adopted by AerCo and previously issued financial statements of ALPS 94-1 have been restated to reflect AerCo's accounting policy, to account for the E Note in accordance with FRS4. F-17 167 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6 INDEBTEDNESS (AS RESTATED) (CONTINUED) The impact of the restatement is to increase the net loss and indebtedness for 1997, 1996 and 1995 by $41,015,000, $6,647,000 and $nil. b) Interest Class A-1 Notes bear interest at LIBOR plus 0.48%, payable monthly in arrears. Class A-2 Notes bear interest at 7.15%, payable monthly in arrears, increased to 9.15% from November 1997 onwards. Class A-3 Notes bear interest at LIBOR plus 0.45%, payable monthly in arrears. Class A-4 Notes bear interest at 7.80%, payable monthly in arrears. Class B-1 Notes bear interest at LIBOR plus 1.15%, payable monthly in arrears. Class B-2 Notes bear interest at 8.20%, payable monthly in arrears. Class C Notes bear interest at 9.35%, payable monthly in arrears. The Class D Note bears interest at LIBOR plus 5.50%. Interest is payable monthly in arrears and commenced in October 1994, subject to available cash. Interest accrued but not paid will be added to the principal outstanding and will accrue interest until paid. The Class E Note bears interest at 10.00%. The interest accrues monthly in arrears. With the exception of certain circumstances the Class E permitted interest amount will not be paid until the payment date following the fourth anniversary of the Closing Date. c) Debt maturity Upon the Final Maturity Date, the cash available will be applied to principal in the following order: 1. Class A Notes principal 2. Class B Notes principal 3. Class C Notes principal 4. Class D Note principal 5. Class E Note principal 7 PROVISION FOR MAINTENANCE JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Opening balance............................................. 46,247 39,544 Receivable during year...................................... 8,021 12,558 Repaid during year.......................................... (9,959) (5,855) ------ ------ Closing balance............................................. 44,309 46,247 ------ ------ Due within one year......................................... 6,512 1,604 Due after one year.......................................... 37,797 44,643 ------ ------ 44,309 46,247 ====== ====== F-18 168 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8 SECURITY DEPOSITS Security deposits of U.S.$13,255,000 (1997: U.S.$15,202,000) are held as security for obligations in accordance with the terms of certain leases. The deposits are held as cash or commercial paper and are included within the cash and commercial paper balances (see Note 1). 9 SHARE CAPITAL Called up share capital comprises: JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$ U.S.$ AUTHORISED 15,000 ordinary shares of U.S.$1 each....................... 15,000 15,000 ------ ------ ISSUED AND FULLY PAID 10 ordinary shares of U.S.$1 each........................... 10 10 ------ ------ ALPS 94-1 issued 10 ordinary shares at $1 each on June 3, 1994. 10 REVENUES AND CONCENTRATION OF CREDIT RISK a) Distribution of revenues by geographic area YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ----------------- --------------------- --------------------- U.S.$'000 % U.S.$'000 % U.S.$'000 % (AS RESTATED) (AS RESTATED) Europe........................... 45,624 45.3 44,903 44.3 46,194 45.1 North America.................... 4,328 4.3 3,693 3.6 3,673 3.6 South/Central America............ 21,375 21.2 18,751 18.5 14,715 14.3 Asia/Pacific..................... 29,355 29.2 34,087 33.6 37,878 37.0 ------- ---- ------- ---- ------- ---- 100,682 100 101,434 100 102,460 100 ======= ==== ======= ==== ======= ==== All revenues are derived from aircraft leasing. In the previously issued financial statements of ALPS 94-1, lease revenue was recognised as income as it accrued over the period of the lease. When future rental increases were contracted under the terms of the lease, ALPS 94-1 accrued income on the basis of the current rental rate rather than on a basis that averaged the lease rentals over the total lease term. The previously issued 1995, 1996 and 1997 financial statements of ALPS 94-1 have been restated to recognise income from operating leases on a straight line basis over the period of the lease. The impact of the restatement is to decrease lease revenue and increase net loss in 1997 by $687,000 and increase lease revenue and reduce net loss in 1996 and 1995 by $438,000 and $1,247,000 respectively. b) Concentration of credit risk Credit risk with respect to trade accounts receivable is generally mitigated due to the number of lessees and their dispersal across different geographic areas. F-19 169 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10 REVENUES AND CONCENTRATION OF CREDIT RISK (CONTINUED) ALPS 94-1 manages its exposure to particular countries in part through obtaining security from lessees by way of deposits, letters of credit and guarantees. In addition ALPS 94-1 maintains Political Risk Insurance in respect of certain lessees. ALPS 94-1 continually evaluates the financial position of lessees and, based on this evaluation, the amounts outstanding and the available security, makes an appropriate provision for doubtful debts. As at June 30, 1998, one lessee accounted for 14% (1997: 14% (as restated)) of ALPS 94-1's lease revenues and another accounted for 12% (1997: 12% (as restated); 1996: 12% (as restated)) of lease revenues. No other lessee accounted for greater than 10% of ALPS 94-1's revenues for the years ended June 30, 1998, 1997 (as restated) and 1996 (as restated). 11 EXCEPTIONAL ITEMS YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 Additional depreciation(i)......................... -- 34,385 -- Provision for permanent diminution in value of aircraft (Note 3)................................ 8,720 -- 12,000 Termination fee(ii)................................ 12,700 -- -- ------ ------ ------ 21,420 34,385 12,000 ====== ====== ====== - --------------- (i) The additional depreciation charge in the year ended June 30, 1997 related to a change in calculating depreciation estimates as explained in "Statement of Accounting Policies: Aircraft". (ii) Prior to the year end the directors approved a transaction involving the sale of the capital stock of ALPS 94-1 (see Note 29). During 1998, ALPS 94-1 entered into a contract with the servicer whereby it agreed to terminate the servicing agreement in respect of the management of the company's assets in consideration for a termination fee of $12.7 million. This amount was charged in the year ended June 30, 1998 and was paid subsequent to the year end. 12 NET INTEREST EXPENSE YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 Interest expense on Notes.......................... 73,560 73,975 76,587 Net interest income................................ (3,775) (2,938) (3,011) ------ ------ ------ 69,785 71,037 73,576 ====== ====== ====== The interest rate payable on the Class A-2 Notes increased to 9.15% from November 15, 1997, the expected final payment date for such Class. F-20 170 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13 OTHER EXPENSES YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 Servicer's fees.................................... 2,894 2,899 2,893 Political Risk Insurance........................... 425 737 1,210 Administration fees................................ 412 441 503 Aircraft leasing costs............................. 1,914 -- -- Legal and professional fees........................ 440 402 323 Directors' and Officers' Insurance................. 295 350 391 Directors' fees and expenses....................... 100 122 150 Cash manager's fees................................ 76 66 41 Audit and tax fees................................. 43 36 70 ------ ------ ------ 6,599 5,053 5,581 ====== ====== ====== 14 NET LOSS BEFORE PROVISION FOR TAXES a) Net loss before provision for taxes is stated after charging: YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 Directors' remuneration............................ 100 100 100 ------ ------ ------ 100 100 100 ====== ====== ====== b) Directors and Officers' Insurance As approved at an Extraordinary General Meeting of ALPS 94-1, Directors' and Officers' Insurance has been implemented. Directors also have the protection of an unsecured indemnity from ALPS 94-1 in respect of claims relating to them in their capacity as directors. 15 (PROVISION)/BENEFIT FOR TAXES YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 Corporation tax -- (provision)/benefit............. (33) 143 (200) === === ==== Taxation provisions shown relate to the activities of subsidiaries, levied by local jurisdictions. The tax benefit in the year ended June 30, 1997 relates to a subsequent approval of a lower prior period tax charge levied by one jurisdiction. 16 BASIC LOSS PER ORDINARY SHARE (AS RESTATED) The calculation of basic loss per ordinary share has been computed by dividing the loss for the year of U.S.$32,555,000 (1997: loss of U.S.$41,702,000 (as restated); 1996: loss of U.S.$6,875,000 (as restated)) by the weighted average number of ordinary shares outstanding during the year of 10 shares for all periods. 17 STAFF COSTS AND NUMBERS ALPS 94-1 has no employees. F-21 171 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18 SUBSIDIARY COMPANIES ALPS 94-1 has the following subsidiary companies: COUNTRY OF % OF SHARES NAME INCORPORATION BUSINESS HELD - ---- ------------- -------- ----------- Pergola Limited................ Ireland Aircraft leasing and sub-leasing 100% ALPS 94-1 (Belgium) N.V........ Belgium Aircraft leasing and sub-leasing 100% ALPS 94-1 (France) S.A.R.L. ... France Dormant 100% 19 DIVIDENDS Under the Articles of Association, the shareholders are entitled to receive a fixed cumulative preferential dividend of U.S.$1,500 per annum out of the profits of ALPS 94-1. This dividend has not been declared in the current year. 20 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 Cash paid in respect of: Interest -- Trust Notes............................ 49,191 50,574 53,558 Interest -- Subordinated Notes..................... 5,624 9,298 10,444 Income taxes....................................... -- -- 174 ------ ------ ------ 54,815 59,872 64,176 ====== ====== ====== 21 COMMITMENTS ALPS 94-1 has no long-term contracts other than those with its service providers (see Note 28) and lessees (see Note 4). 22 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (AS RESTATED) 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 acquired ALPS 94-1 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. However, because of the restricted nature of the ALPS 94-1 and AerCo vehicles and in particular the restrictions on the assets and cash flows of these vehicles, the U.S. GAAP historical financial information for ALPS 94-1 and the AerFi transferred aircraft have not been retroactively restated using the "as-if pooling-of-interest method". Accordingly, the U.S. GAAP reconciliation has not been restated to show the retroactive combination. F-22 172 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 22 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) b) Aircraft The consolidated financial statements are prepared applying Financial Reporting Standard No. 5 'Reporting the Substance of Transactions'. This accounting standard defines assets as the right or other access to future economic benefits controlled by an entity arising as a result of transactions or events. ALPS 94-1 has rights to access future economic benefits arising from the aircraft at the Closing Date even though it does not become the legal owner of the aircraft until they are delivered. Therefore the aircraft are included at their initial valuation or purchase price at the Closing Date and depreciated from that date. Similarly, rental income has been recognised as receivable from the Closing Date. The accounting treatment under U.S. GAAP (as explained under Statement of Accounting Policies: Aircraft) would be to record the cost of the aircraft at AerFi's Amortised Cost at the Delivery Date and to depreciate the aircraft and recognize rental income from the Delivery Date. Effective from 1 July 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 1997, the aircraft are depreciated on a straight-line basis so as to write-off the cost of the assets over a period of 25 years. Under U.K. GAAP, a provision for additional depreciation was made in 1997 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. The differences between income recorded under U.K. GAAP and U.S. GAAP therefore relate to: 1. Depreciation from the Closing Date to Delivery Date. 2. Rental income from the Closing Date to Delivery Date. 3. Investment income earned from the Closing Date to Delivery Date. 4. Difference in depreciation of Amortised Cost of aircraft under U.S. GAAP and initial appraised value under U.K. GAAP. 5. Difference in depreciation under U.S. GAAP and U.K. GAAP. 6. Difference in additional depreciation resulting from the change in the depreciation method under U.K. GAAP. 7. Difference in cost of aircraft disposed under U.S. GAAP and U.K. GAAP. c) Cash flows In accordance with U.K. GAAP, ALPS 94-1 complies 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, ALPS 94-1 presents its cash flows for: (a) operating activities; (b) return on investments and servicing of finance; (c) taxation; (d) capital expenditure and financial investment; (e) acquisitions and disposals; (f) management of liquid resources and (g) financing activities. SFAS No. 95 requires only three categories of cash flow activity; (a) operating; (b) investing; and (c) financing. Cash flows arising from taxation and returns on investments and servicing of finance under FRS1 are included as operating activities under SFAS No. 95. Cash flows arising from capital expenditure under FRS1 are included as investing activities under SFAS No. 95. F-23 173 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 22 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) For the purposes of cash flows under U.S. GAAP, ALPS 94-1 considers all highly liquid deposits with 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 ALPS 94-1 at June 30, 1996, 1997, and 1998 are held for specific purposes under the terms of the ALPS 94-1 deed of charge. d) Shareholders' deficit The differences between shareholders' deficit under U.K. GAAP and U.S. GAAP relate to the recording of the aircraft at Amortised Cost. Under U.K. GAAP, the assets of ALPS 94-1 are recorded at their fair value on the date of acquisition from AerFi less accumulated depreciation. For U.S. GAAP purposes, these assets are recorded at their predecessor cost less accumulated depreciation. The shareholders' deficit for U.S. GAAP is also adjusted to reflect this difference in the carrying value of the aircraft. e) Indebtedness In the previously issued financial statements of ALPS 94-1, the directors adopted the true and fair override principle in respect of Financial Reporting Standard 4 (FRS 4), such that certain losses which would be borne by the E Noteholder, were released from the carrying value of the debt and credited to the statement of operations under U.K. GAAP. Under U.S. GAAP the liability for the principal amount remains until such time as the obligation is extinguished. The restatement of previously issued financial statements of ALPS 94-1 for 1997 and 1996 under U.K. GAAP has eliminated any differences between U.K. GAAP and U.S. GAAP concerning the accounting for indebtedness. F-24 174 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 23 RECONCILIATION OF INCOME AS STATED IN ACCORDANCE WITH U.K. GAAP TO NET INCOME IN ACCORDANCE WITH U.S. GAAP YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 (AS RESTATED) (AS RESTATED) Retained loss in accordance with U.K. GAAP......... (32,555) (41,702) (6,875) ITEMS HAVING THE EFFECT OF INCREASING REPORTED INCOME........................................... Depreciation from the Closing Date to the Delivery Date................................. -- -- 141 Investment income earned from the Closing Date to Delivery Date................................. -- -- 374 Exceptional item: additional depreciation charge........................................ -- 34,385 -- Difference in depreciation of amortised cost of aircraft...................................... 5,773 5,723 (14,501) Difference in permanent diminution in value of aircraft...................................... 8,200 -- -- ITEMS HAVING THE EFFECT OF DECREASING REPORTED INCOME Difference in book value of aircraft sold........ (2,226) -- -- Rental from the Closing Date to the Delivery Date.......................................... -- -- (729) --------- -------- -------- Net loss in accordance with U.S. GAAP.............. (20,808) (1,594) (21,590) Accumulated deficit at beginning of year........... (36,787) (35,193) (13,603) --------- -------- -------- Accumulated deficit at end of year................. (57,595) (36,787) (35,193) Loss per ordinary share for the year as so adjusted......................................... (2,080.8) (159.4) (2,159.0) --------- -------- -------- Weighted average number of ordinary shares outstanding...................................... 10 10 10 --------- -------- -------- 24 RECONCILIATION OF SHAREHOLDERS' DEFICIT AS STATED IN ACCORDANCE WITH U.K. GAAP TO SHAREHOLDERS' DEFICIT IN ACCORDANCE WITH U.S. GAAP YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 -------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 (AS RESTATED) (AS RESTATED) Shareholders' deficit in accordance with U.K. GAAP............................................ (79,219) (46,664) (4,962) ITEMS HAVING THE EFFECT OF AMENDING SHAREHOLDERS' EQUITY Distribution to AerFi at Closing Date........... (147,588) (147,588) (147,588) Cumulative difference in net income between U.K. GAAP and U.S. GAAP (see Note 23)............. 21,624 9,877 (30,231) -------- -------- -------- Shareholders' deficit in accordance with U.S. GAAP............................................ (205,183) (184,375) (182,781) -------- -------- -------- F-25 175 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 25 RECONCILIATION OF AIRCRAFT STATED IN ACCORDANCE WITH U.K. GAAP TO AIRCRAFT STATED IN ACCORDANCE WITH U.S. GAAP U.S. GAAP U.K. GAAP ------------------------------ ------------------------------ JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- ------------- ------------- U.S.$'000 U.S.$'000 U.S.$'000 U.S.$'000 COST Cost.................................... 975,179 975,179 975,179 975,179 Step up cost............................ (147,588) (147,588) -- -- -------- -------- -------- -------- Beginning of year....................... 827,591 827,591 975,179 975,179 Additions............................... 1,132 -- 1,132 -- Disposal................................ (29,086) -- (27,023) -- -------- -------- -------- -------- End of year............................. 799,637 827,591 949,288 975,179 -------- -------- -------- -------- DEPRECIATION Beginning of year....................... (81,119) (48,780) (108,583) (36,136) Provision in year....................... (32,053) (32,339) (37,826) (38,062) Additional charge in year............... -- -- -- (34,385) Disposal................................ 5,768 -- 5,931 -- -------- -------- -------- -------- End of year............................. (107,404) (81,119) (140,478) (108,583) -------- -------- -------- -------- PROVISION FOR PERMANENT DIMINUTION IN VALUE Beginning of year....................... (12,000) (12,000) (12,000) (12,000) Provision in year....................... (520) -- (8,720) -- Disposal................................ 12,000 -- 12,000 -- -------- -------- -------- -------- End of year............................. (520) (12,000) (8,720) (12,000) -------- -------- -------- -------- NET BOOK VALUE Beginning of year....................... 734,472 766,811 854,596 927,043 -------- -------- -------- -------- End of year............................. 691,713 734,472 800,090 854,596 -------- -------- -------- -------- 26 FAIR VALUE OF FINANCIAL INSTRUMENTS ALPS 94-1 estimates that the fair value of its cash and cash equivalents and other receivables and payables at June 30, 1998 approximate to the amounts at which these items are reflected in ALPS 94-1's balance sheet. This is due to the relatively short-term nature of the instruments and the frequency at which they reprice. The fair value of the A, B and C Notes issued by ALPS 94-1 outstanding at June 30, 1997 and 1998 was U.S.$694 million and U.S.$642 million respectively. Although no public market existed for the D and E Notes, the directors estimate their fair value at June 30, 1997 and 1998, at U.S.$50 million and U.S.$43 million for the D Notes and U.S.$35 million and U.S.$38 million for the E Notes. At June 30, 1998 and 1997 the D Notes were held by the servicer and the E Notes, which are based on the appraised value of the aircraft at the Closing Date, represent the holders' residual interest in the aircraft owned by ALPS 94-1. The fair value estimates of the Class D and E Notes involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. The directors estimate the fair value of the Class D Note as being its book value at June 30, 1997 and 1998 as it bears interest at a variable rate and there F-26 176 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 26 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) has been no change in the credit risk associated with this Note between the date on which it was issued and June 30, 1997 and 1998. The Class E Note represents a residual interest in a pool of 27 aircraft and the value inherent in these Notes can only be realized following the repayment of the Class A-D Notes. The fair value of the Class E Note is determined by considering the strategic value inherent in holding a residual interest in a pool of aircraft of the quality of those held by ALPS 94-1 and consideration of indicative valuation for notes with similar characteristics in vehicles similar to ALPS 94-1. 27 FOREIGN CURRENCY TRANSACTIONS ALPS 94-1's foreign currency transactions are not significant as all revenues and most costs are denominated in U.S. dollars. 28 RELATED PARTY TRANSACTIONS a) GE Capital Aviation Services Limited (GECAS) GECAS acts as lease manager to ALPS 94-1. In addition to managing ALPS 94-1's aircraft GECAS also manages 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 conflicts of interest in performing its obligations to ALPS 94-1 and other entities to which it provides management, marketing and other services. GECAS receives an annual fee as lease manager which amounted to U.S.$2,894,000 (1997: U.S.$2,899,000); for the year ended June 30, 1998. GECAS is an affiliate of GE Capital which holds the Class D Note and has a right to appoint a representative to the board. GE Capital has not yet indicated any intention to make such an appointment. As explained in Note 1, the GECAS servicing agreement was terminated and a termination fee of $12,700,000 was paid to GECAS subsequent to the year end. b) On July 15, 1998 AerFi was appointed as Administrative Agent and Cash Manager to ALPS 94-1. c) Mr. E.J. Hansom (Director) Mr. E.J. Hansom is the Chief Financial Officer of AerFi and is one of the representatives on the board appointed by AerFi, as holder of the Class E Note. ALPS 94-1 purchased its aircraft from AerFi. d) Mr. G.A. Robinson (Director) Mr. G.A. Robinson performs consulting services from time to time for Air 2000, one of the lessees. Included in aircraft leasing revenue is an amount of U.S.$5,202,000 (1997: U.S.$5,097,000) in respect of this lessee. 29 SUBSEQUENT EVENTS Prior to the year end the directors approved a transaction involving the sale of the capital stock of ALPS 94-1 to a new company, AerCo Limited, and the early redemption of the existing Notes issued by ALPS 94-1. On June 23, 1998, AerCo Limited issued an Offering Memorandum in connection with this transaction and on July 15, 1998, AerCo Limited issued U.S.$800 million of Notes in four classes and used F-27 177 AIRCRAFT LEASE PORTFOLIO SECURITIZATION 94-1 LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 29 SUBSEQUENT EVENTS (CONTINUED) part of the proceeds to acquire the capital stock of ALPS 94-1. As part of this transaction all of the existing indebtedness of ALPS 94-1 was repaid including the Class E Note. Makewhole premium attaching to the early redemption of the existing notes amounting to U.S.$11.6 million was paid on the refinancing date. F-28 178 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF AERCO GROUP We have audited the accompanying statement of net assets of the entity as of June 30, 1998 and the related statement of operations, cash flows and changes in net assets for the year then ended. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The directors of AerCo group are required to prepare financial statements for each financial year to give a true and fair view of the statement of net assets of the entity and of the income, cash flows and changes in net assets of the entity for that year. In preparing the financial statements, the directors are required to select suitable accounting policies and apply them consistently, make judgements and estimates that are prudent and reasonable and to prepare the financial statements on the going concern basis unless it is not appropriate to assume that the entity will continue in business. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion to you. The financial statements of the entity as of June 30, 1997 were audited by other auditors whose report dated June 23, 1998 expressed an unqualified opinion on those financial statements. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the U.K. Auditing Practices Board which do not differ significantly from U.S. generally accepted auditing standards. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the circumstances of the entity, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion the financial statements present fairly the statement of net assets of the entity as at June 30, 1998 and of the income, cash flows and changes in net assets for the year ended June 30, 1998 of the entity and have been properly prepared in accordance with U.K. generally accepted accounting principles. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have no significant effect on the statement of operations for the year ended June 30, 1998 and the statement of net assets as at June 30, 1998. KPMG CHARTERED ACCOUNTANTS 5 George's Dock IFSC Dublin 1 Ireland November 23, 1998 F-29 179 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF AERCO GROUP We have audited the accompanying statement of net assets of the entity as of June 30, 1997 and the related statement of operations, cash flows and changes in net assets for the year then ended. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The directors of AerCo group are required to prepare financial statements for each financial year to give a true and fair view of the statement of net assets of the entity and of the income, cash flows and changes in net assets of the entity for that year. In preparing the financial statements, the directors are required to select suitable accounting policies and apply them consistently, make judgements and estimates that are prudent and reasonable and to prepare the financial statements on the going concern basis unless it is not appropriate to assume that the entity will continue in business. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the U.K. Auditing Practices Board which do not differ significantly from U.S. generally accepted auditing standards. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the circumstances of the entity, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion the financial statements present fairly the statement of net assets of the entity as at June 30, 1997 and of the income, cash flows and changes in net assets for the year ended June 30, 1997 of the entity and have been properly prepared in accordance with U.K. generally accepted accounting principles. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have no significant effect on the statement of operations for the year ended June 30, 1997 and the statement of net assets as at June 30, 1997. ARTHUR ANDERSEN CHARTERED ACCOUNTANTS Forum House Grenville Street St. Helier Jersey JE2 4UF Channel Islands June 23, 1998 F-30 180 AERFI TRANSFERRED AIRCRAFT STATEMENTS OF NET ASSETS NOTES JUNE 30, 1998 JUNE 30, 1997 ----- ------------- ------------- U.S.$'000 U.S.$'000 ASSETS CURRENT ASSETS Due from AerFi............................................. 24,376 27,294 Accounts receivable........................................ 2 772 814 ------- ------- TOTAL CURRENT ASSETS....................................... 25,148 28,108 FIXED ASSETS Aircraft................................................... 3 179,220 177,850 ------- ------- TOTAL ASSETS............................................... 204,368 205,958 ======= ======= LIABILITIES Accrued expenses and other liabilities..................... 5 3,671 7,037 Indebtedness............................................... 6 88,345 115,044 Provision for maintenance.................................. 7 6,469 12,946 Security deposits.......................................... 8 2,900 2,930 Deferred income tax........................................ 12 5,153 5,654 ------- ------- TOTAL LIABILITIES.......................................... 106,538 143,611 NET ASSETS................................................. 97,830 62,347 ======= ======= The accompanying notes, including the statement of accounting policies on pages F-34 to F-35, are an integral part of the financial statements. F-31 181 AERFI TRANSFERRED AIRCRAFT STATEMENTS OF OPERATIONS YEAR ENDED YEAR ENDED NOTES JUNE 30, 1998 JUNE 30, 1997 ----- ------------- ------------- U.S.$'000 U.S.$'000 REVENUES Aircraft leasing........................................... 9 21,109 22,216 EXPENSES Depreciation............................................... 3 (10,215) (9,261) Provision for permanent diminution in value of aircraft.... 3 -- (4,000) Net interest expense....................................... 10 (6,612) (10,144) Other expenses............................................. 11 (4,804) (9,032) ------- ------- (21,631) (32,437) ------- ------- NET LOSS FROM OPERATIONS BEFORE PROVISION FOR TAXES........ (522) (10,221) Benefit for taxes.......................................... 12 501 1,176 NET LOSS FOR THE YEAR...................................... (21) (9,045) ======= ======= All recognised gains and losses are included in the statement of operations above. There is no material difference between the net loss for the year, and its historical cost equivalent. The results for the year are derived from continuing operations. The accompanying notes, including the statement of accounting policies on pages F-34 to F-35, are an integral part of the financial statements. F-32 182 AERFI TRANSFERRED AIRCRAFT STATEMENTS OF CASH FLOWS YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the year....................................... (21) (9,045) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES Depreciation charge for the year............................ 10,215 9,261 Provision for permanent diminution in value of aircraft..... -- 4,000 Amortisation................................................ -- 603 Deferred income tax......................................... (501) (1,176) Changes in operating assets and liabilities Accounts receivable and due from AerFi.................... 2,960 2,115 Accrued expenses and other liabilities.................... (3,366) 5,288 Net maintenance expenditure............................... (6,477) (2,702) Net security deposits (repaid)/received................... (30) 1,080 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES................... 2,780 9,424 ------- ------- INVESTING ACTIVITIES Purchase of aircraft........................................ (11,585) (203) ------- ------- FINANCING ACTIVITIES Contributions from AerFi.................................... 35,504 28,456 Reduction in Indebtedness................................... (26,699) (37,677) ------- ------- NET CASH INFLOW/(OUTFLOW) FROM FINANCING ACTIVITIES......... 8,805 (9,221) ------- ------- NET INCREASE IN CASH........................................ -- -- CASH AT BEGINNING OF YEAR................................... -- -- ------- ------- CASH AT END OF YEAR......................................... -- -- ======= ======= Supplemental disclosure of cash flow information is set out in Note 14. The accompanying notes, including the statement of accounting policies on pages F-34 to F-35, are an integral part of the financial statements. F-33 183 AERFI TRANSFERRED AIRCRAFT STATEMENTS OF CHANGES IN NET ASSETS TOTAL --------- U.S.$'000 Balance at June 30, 1996.................................... 42,936 Net contributions from AerFi................................ 28,456 NET LOSS FOR THE YEAR....................................... (9,045) ------ Balance at June 30, 1997.................................... 62,347 Net contribution from AerFi................................. 35,504 NET LOSS FOR THE YEAR....................................... (21) ------ Balance at June 30, 1998.................................... 97,830 ====== The accompanying notes, including the statement of accounting policies on pages F-34 to F-35, are an integral part of the financial statements. F-34 184 AERFI TRANSFERRED AIRCRAFT STATEMENT OF ACCOUNTING POLICIES Introduction and basis of preparation These financial statements present the statement of operations and the cash flows for the year ended June 30, 1998 and June 30, 1997 and the statement of net assets at June 30, 1998 and June 30, 1997 of the aircraft (the "AERFI TRANSFERRED AIRCRAFT") acquired by AerCo from AerFi pursuant to a secured financing transaction on July 15, 1998. Under the transaction AerCo acquired all of the capital stock of ALPS 94-1, a company which owns 25 aircraft and related leases, and also acquired 10 aircraft and related leases from AerFi. The further details of the Transaction and of the basis of preparation of these financial statements for the AerFi transferred aircraft are set out in Note 1. The accounting policies followed in the preparation of the accompanying financial statements conform with generally accepted accounting principles in the United Kingdom and comply with financial reporting standards of the Accounting Standards Board in the United Kingdom as promulgated by the Institute of Chartered Accountants in England and Wales. The financial statements are prepared on the going concern basis and under the historic cost convention and are stated in US dollars, which is the principal operating currency of the entity and of the aviation industry. Revenue recognition Revenue from aircraft on operating leases is recognised as income on a straight line basis over the period of the leases. Where rentals are adjusted to reflect increases or decreases in prevailing interest rates such adjustments are accounted for as they arise. Lease rentals received in advance are deferred and recognised over the period to which they relate. Interest income Interest earned during the year has been credited to the statement of operations. Provision for maintenance The leases in respect of the aircraft owned by the entity contain detailed terms specifying maintenance standards and aircraft redelivery conditions. The terms of the leases are such that the entity seeks to pass the responsibility for major airframe and engine overhauls to its lessees. This is achieved through a number of mechanisms, including specifying -- the maintenance standards and the maintenance program to be adopted throughout the lease term and the redelivery conditions at the end of the lease -- monthly maintenance reserves to be paid by lessees in certain instances -- adjustment payments to be made by lessees in the event that the aircraft do not meet the redelivery conditions at the end of the lease term. Where the lessee makes a full or partial prepayment, calculated at an hourly rate, into a fund which is held by the entity, these funds are included in provisions for maintenance and the costs in respect of major airframe and engine overhauls are disbursed from these funds. Where the leases do not provide for maintenance reserve payments and the entity relies on the lessee's credit and its ability to perform scheduled maintenance throughout the lease term, to return the aircraft in the F-35 185 AERFI TRANSFERRED AIRCRAFT STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED) Provision for maintenance -- (Continued) condition required by the lease or make payments upon the termination of the lease, no maintenance provision is made throughout the period of the lease and any payments made by the lessee on the termination of the lease are included in provision for maintenance when received. Aircraft leasing costs incurred in relation to the repair and return to releasable condition of aircraft following return from lessees, either at the end of the lease term or following a lessee default, 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 period that includes the enactment date. Aircraft Aircraft are stated at cost less accumulated depreciation less permanent diminutions 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 lives and residual values are reviewed periodically. The current estimates for residual values are generally 15% of cost and for useful lives are as follows: YEARS FROM ----- ---- Refurbished and upgraded aircraft -- converted to freighters................................................ 20 Conversion Date All other aircraft.......................................... 25 Manufacture Date Where purchase option agreements exist to the benefit of the lessee, aircraft are depreciated to the purchase option price on a straight-line basis provided that this would result in a higher depreciation charge than that arrived at by applying the standard method. Additional charges are made to reduce the book value of specific assets to fair market value where a permanent diminution in value is considered to have occurred. Where fair market value is greater than book value no adjustment is made. Fair market value is assessed by the directors, consistent with the going concern basis of preparation of the financial statements, and reflects the underlying economic value of aircraft and engines in normal market conditions (where supply and demand are in reasonable equilibrium) and assumes adequate time for a sale and a willing buyer and seller. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of aircraft simultaneously or to dispose of aircraft quickly. In forming their assessment of fair market value the directors have taken into consideration independent valuations of aircraft in the portfolio, together with the directors' assessment of aircrafts' current maintenance status and maintenance reserves. 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 F-36 186 AERFI TRANSFERRED AIRCRAFT STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED) Aircraft -- (Continued) 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. New Accounting Standards not yet effective The entity will be required to adopt the provisions of Financial Reporting Standard No. 12 "Provisions, Contingent Liabilities and Contingent Assets" for all financial periods ending on or after March 23, 1999. Management are currently assessing the impact, if any, that this Standard will have on its adoption by the entity. F-37 187 AERFI TRANSFERRED AIRCRAFT NOTES TO THE FINANCIAL STATEMENTS 1 BASIS OF PREPARATION Under a refinancing transaction of July 15, 1998, AerCo acquired 100% of the capital stock of ALPS 94-1 and thereby acquired 25 aircraft and related leases and acquired directly or indirectly 10 aircraft and related leases from AerFi (collectively the "AerFi transferred aircraft"). The Transaction was effected by transferring ALPS 94-1 and subsidiaries and the existing AerFi subsidiaries that own the AerFi transferred aircraft to AerCo. Simultaneously with such transfers, AerCo 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 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. AerCo 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 by the Transferring Companies of the Transferring 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 to be 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 the A300-B4-200 aircraft by AerFi from ALPS 94-1. The financial statements have been prepared by AerFi Administrative Services Limited on behalf of the directors of AerCo. (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 year ended June 30, 1998 and June 30, 1997. (ii) The Transaction is approved as planned and is completed such that AerCo is 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 year 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. In the case of the remaining aircraft, no separate identifiable financing was in place. These aircraft are assumed to have been financed by intercompany indebtedness to AerFi at levels based on the ratio of AerFi's overall net debt to aircraft net book value of 74.9% at July 1, 1996, 51.87% at June 30, 1997 and 42.06% at June 30, 1998 and repayments to AerFi are assumed to have been made accordingly during the year. (v) The interest charged on the assumed indebtedness to AerFi is based on AerFi's average cost of debt of 9.59% for the year ended June 30, 1998 and 10.06% for the year ended June 30, 1997. (vi) Cash generated from or absorbed by the activities of the AerFi transferred aircraft during the year is reflected through the intercompany account as distributions to or transfers from AerFi. This includes F-38 188 AERFI TRANSFERRED AIRCRAFT NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 1 BASIS OF PREPARATION (CONTINUED) restricted cash held by AerFi with respect to AerFi transferred aircraft. No separate cash balances existed for the AerFi transferred aircraft. (vii) The tax provisions and deferred income tax assets and liabilities of the AerFi transferred aircraft have been determined as if the aircraft had been owned by taxable entities separate from AerFi. 2 ACCOUNTS RECEIVABLE JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Trade receivables........................................... 366 401 Non-trade receivables....................................... 406 413 --- --- 772 814 === === Trade receivables are stated net of bad debt provision of $0.6 million (1997: $0.2 million) and comprise amounts in respect of rent and maintenance payments due from lessees. As at June 30, 1998 one lessee accounted for 99% of trade receivables. As at June 30, 1997 two lessees each accounted for 53% and 43% respectively of trade receivables. Non-trade receivables comprise prepayments of French VAT. 3 AIRCRAFT JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 COST Beginning of year........................................... 272,128 271,925 Additions during the year................................... 11,585 203 -------- ------- End of year................................................. 283,713 272,128 -------- ------- DEPRECIATION Beginning of year........................................... (90,278) (81,017) Charge for the year......................................... (10,215) (9,261) -------- ------- End of year................................................. (100,493) (90,278) -------- ------- Provision for permanent diminution in value................. (4,000) 4,000 -------- ------- NET BOOK VALUE Beginning of year........................................... 177,850 190,908 -------- ------- End of year................................................. 179,220 177,850 -------- ------- Cost represents the net purchase price of the aircraft when originally acquired by AerFi. The directors of AerCo determine on an annual basis whether a permanent diminution in value of the AerFi transferred aircraft has occurred. Where a permanent diminution 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-39 189 AERFI TRANSFERRED AIRCRAFT NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 3 AIRCRAFT (CONTINUED) In the year ended June 30, 1997, the directors made a provision of U.S.$4 million to reflect a permanent diminution in value against two F100 aircraft. The directors arrived at such determination based on significant reductions of values and lease rates for Fokker aircraft. 4 OPERATING LEASES All the aircraft are held for operating lease. Rentals on certain of the leases are variable in accordance with prevailing interest rates. The following is a schedule of contracted future rentals, by years, on operating leases as of June 30, 1998. The interest rates prevailing at June 30, 1998 have been applied in determining rentals that are variable in accordance with prevailing interest rates. YEAR ENDING JUNE 30 U.S.$'000 - ------------------- --------- 1999........................................................ 22,729 2000........................................................ 26,233 2001........................................................ 17,644 2002........................................................ 13,315 2003........................................................ 15,399 Thereafter.................................................. 9,704 ------- 105,024 ======= 5 ACCRUED EXPENSES AND OTHER LIABILITIES JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Accrued expenses and other liabilities comprise: Deferred income.......................................... 839 925 Interest................................................. 50 54 Other accruals........................................... 2,782 6,058 ----- ----- 3,671 7,037 ----- ----- ----- ----- 6 INDEBTEDNESS JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Finance lease obligations(i)............................. 18,774 34,822 AerFi Notes(i)........................................... 20,993 22,577 Due to AerFi(ii)......................................... 48,578 57,645 ------ -------- 88,345 115,044 ------ -------- ------ -------- The basis and assumptions under which indebtedness has been reflected in these financial statements is set out in Note 1. (i) The finance lease obligations and the AerFi Notes issued comprise the amounts raised by AerFi to finance three of the AerFi transferred aircraft. As part of the completion of the Transaction these amounts will be repaid in full (and accordingly no future maturity analysis is presented). The AerFi Notes are secured on one of the aircraft which has a net book value of U.S.$25.1 million F-40 190 AERFI TRANSFERRED AIRCRAFT NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 6 INDEBTEDNESS (CONTINUED) (1997: U.S.$26.2 million) and the Notes carried interest at a rate of 7.21% (1997: 7.21%) during the financial year. (ii) As explained in Note 1 it has been assumed that the remaining aircraft had been financed with indebtedness due to AerFi. (iii) Repayments of principal during the year on the finance lease obligations and the AerFi Notes were in accordance with their respective contractual terms. The repayments of principal on the aircraft which were assumed to be financed by AerFi were assumed to be made in accordance with changes in AerFi's aircraft net book value to net debt ratio during the financial year. 7 PROVISION FOR MAINTENANCE JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Opening balance............................................. 12,946 15,647 Receivable during year...................................... 2,654 3,694 Expenditure................................................. (9,131) (6,395) ------ ------ Closing Balance............................................. 6,469 12,946 ====== ====== Due within one year......................................... 743 6,575 Due after one year.......................................... 5,726 6,371 ------ ------ 6,469 12,946 ====== ====== 8 SECURITY DEPOSITS Security deposits received from lessees of U.S.$2.9 million (1997: U.S.$2.9 million) are held as security for obligations in accordance with the terms of certain leases. 9 REVENUES AND CONCENTRATION OF CREDIT RISK a) Distribution of revenues by geographic area YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 ------------------- ------------------- U.S.$'000 % U.S.$'000 % --------- ------ --------- ------ Europe............................................. 12,950 61.36 13,845 62.32 North America...................................... 4,195 19.87 4,449 20.03 South/Central America.............................. 3,727 17.65 2,042 9.19 Asia/Pacific....................................... 237 1.12 1,880 8.46 ------ ------ ------ ------ 21,109 100.00 22,216 100.00 ====== ====== ====== ====== All revenues are derived from aircraft leasing. b) Concentration of credit risk Credit risk with respect to trade accounts receivable is generally mitigated due to the number of lessees and their dispersal across different geographic areas. F-41 191 AERFI TRANSFERRED AIRCRAFT NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 9 REVENUES AND CONCENTRATION OF CREDIT RISK (CONTINUED) The entity manages its exposure to particular countries in part through obtaining security from lessees by way of deposits, letters of credit and guarantees. In addition the entity maintains Political Risk Insurance in respect of certain lessees. The entity continually evaluates the financial position of lessees and, based on this evaluation, the amounts outstanding and the available security, makes an appropriate provision for doubtful debts. As at June 30, 1998, five lessees accounted for 18%, 16%, 15%, 15% and 14% of the entity's lease revenues. No other lessee accounted for greater than 10% of the entity's lease revenues for the year ended June 30, 1998. As at June 30, 1997, four lessees accounted for 16%, 15%, 14% and 11% of the entity's lease revenues. No other lessee accounted for greater than 10% of the entity's lease revenues for the year ended June 30, 1997. 10 NET INTEREST EXPENSE YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Interest payable on finance lease obligations............... 2,076 2,149 Interest payable on AerFi Notes............................. 1,596 1,665 Interest payable on indebtedness due to AerFi............... 4,902 7,461 Net interest income on amounts due from AerFi............... (1,962) (1,131) ------ ------ 6,612 10,144 ====== ====== 11 OTHER EXPENSES YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Servicer's fees............................................. 1,201 1,175 Aircraft leasing costs...................................... 3,348 6,723 Political risk insurance.................................... (145) 130 Administration fees......................................... 40 40 Legal and professional fees................................. 100 100 Deferred expenditure........................................ -- 604 Cash manager's fees......................................... 210 210 Audit and tax fees.......................................... 50 50 ------ ------ 4,804 9,032 ====== ====== 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.$4.6 million and U.S.$1.5 million in 1997 and 1998 respectively. F-42 192 AERFI TRANSFERRED AIRCRAFT NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 12 BENEFIT FOR TAXES YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Tax benefit of the AerFi transferred aircraft consists of the following: Deferred income tax benefit................................. 501 1,176 ------ ------ 501 1,176 ====== ====== YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- U.S.$'000 U.S.$'000 Deferred tax assets and liabilities of the AerFi transferred aircraft: Deferred tax assets relating to losses...................... (5,415) (2,665) Deferred tax liability relating to aircraft................. 10,568 8,319 ------ ------ 5,153 5,654 ====== ====== The AerFi transferred aircraft's income from approved activities in Ireland is taxable at a rate of 10% until December 31, 2005. US Federal and State tax is provided at a rate of 35%. Two aircraft, for tax purposes, are treated as being leased from third parties under US "safe harbour lease" tax rules. Under existing laws, certain events could reverse the cumulative effect of this tax treatment, in which case the entity would be required to make payments to third parties under the tax indemnification clauses included in the lease agreements. As of June 30, 1998 the maximum potential exposure under this provision is U.S.$0.9 million (1997: U.S.$1.4M). The directors of AerCo believe that no events have taken place which would cause such payments to become due. 13 STAFF COSTS AND NUMBERS The entity has no employees. 14 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION YEAR ENDED YEAR ENDED JUNE 30, JUNE 30, 1998 1997 ------------ ------------ U.S.$'000 U.S.$'000 Cash paid in respect of: Interest -- Individual financings........................... 4,902 7,461 Interest -- AerFi Notes..................................... 1,600 1,667 Interest -- Indebtedness to AerFi........................... 2,076 2,310 ------------ ------------ 8,578 11,438 ============ ============ 15 COMMITMENTS The entity has no long-term contracts other than those with its service providers (see Note 19). F-43 193 AERFI TRANSFERRED AIRCRAFT NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 16 SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The financial statements are prepared in accordance with generally accepted accounting principles applicable in the United Kingdom ('U.K. GAAP') which differ significantly in certain respects from those generally accepted in the United States ('U.S. GAAP'). There were no significant differences arising in respect of the AerFi transferred aircraft for the year to June 30, 1998 and June 30, 1997. 17 FAIR VALUE OF FINANCIAL INSTRUMENTS The entity estimates that the fair value of its cash and other receivables and payables at June 30, 1998 and June 30, 1997 approximate to the amounts at which these items are reflected in the entity's statement of net assets. This is due to the relatively short-term nature of the instruments and the frequency at which they reprice. 18 FOREIGN CURRENCY TRANSACTIONS The entity's foreign currency transactions are not significant as all revenues and most costs are denominated in U.S. dollars. 19 RELATED PARTY TRANSACTIONS GE Capital Aviation Services Limited (GECAS) During the year GECAS acted as lease manager for AerFi transferred aircraft. 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 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.$1,201,000 (1997: U.S.$1,175,000) of this fee is attributed to these aircraft for the year ended June 30, 1998. F-44 194 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AERCO LIMITED ("AERCO") We have audited the accompanying balance sheet of AerCo as at June 30, 1998 which has been prepared under the historical cost convention and the basis of accounting set out on page F-44. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The directors of AerCo are required to prepare financial statements for each financial period which give a true and fair view of the state of affairs of AerCo and of the results of AerCo for that period. In preparing those financial statements, the directors are required to select suitable accounting policies and then apply them consistently, make judgements and estimates that are prudent and reasonable and to prepare the financial statements on the going concern basis unless it is not appropriate to assume that AerCo will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of AerCo and which enable them to ensure that the statutory financial statements comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of AerCo and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the U.K. Auditing Practices Board which do not differ significantly from U.S. generally accepted auditing standards. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the circumstances of AerCo, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion the financial statements give a true and fair view of the state of affairs of AerCo as at June 30, 1998 and have been properly prepared in accordance with generally accepted accounting principles in the United Kingdom and the United States. KPMG CHARTERED ACCOUNTANTS 5 George's Dock IFSC Dublin 1 Ireland March 8, 1999 F-45 195 AERCO LIMITED BALANCE SHEET AS AT NOTES JUNE 30, 1998 ----- ------------- US$ CURRENT ASSETS Share capital receivable.................................... 20 ------ CAPITAL RESERVES Called up share capital..................................... 2 20 ------ NOTES TO FINANCIAL STATEMENTS 1. BASIS OF ACCOUNTING The company was incorporated on June 4, 1998 and had not conducted business or entered into contracts at June 30, 1998 and accordingly no profit or loss account or cash flow statement has been prepared. The financial statements have been prepared under the historical cost convention and in accordance with generally accepted accounting principles in the United Kingdom and the United States. 2. SHARE CAPITAL US$ AUTHORISED 10,000 ordinary shares of US$1 each........................... 10,000 ISSUED AND OUTSTANDING 20 ordinary shares of US$1 each............................... 20 -- ------ 3. BENEFICIAL OWNERSHIP The ultimate beneficial owner is AerCo Holding Trust, a Jersey charitable trust as to 95% of the issued share capital and AerFi Group as to 5% of the issued share capital. F-46 196 APPENDIX 1 INDEX OF DEFINED TERMS PAGE ------- Adjusted Portfolio Value........... 96 AerFi transferred aircraft......... 11 AerFi transferred companies........ 31 Assumed Portfolio Value............ 95 Charitable Trust................... 29 Excess Amortization Date........... 98 Extended Pool Factor............... 97 GECAS.............................. 29 Initial Appraised Value............ 95 Minimum Class Percentage........... 95 Minimum Principal Payment Amount... 95 Minimum Target Principal Balance... 95 Nominees........................... 29 PAGE ------- Plans.............................. 145 Pool Factor........................ 97 PTCE............................... 145 Scheduled Class Percentage......... 96 Scheduled Principal Payment Amount........................... 96 Scheduled Target Principal Balance.......................... 96 Supplemental Class Percentage...... 97 Supplemental Principal Payment Amount........................... 97 Supplemental Target Principal Balance.......................... 97 U.S. Holder........................ 139 United States Holder............... 143 A-1 197 APPENDIX 2 AIRCRAFT TYPES DATA(1) NO. & STAGE 3 NARROW/ MFR. OF NOISE CURRENT ON NO. OF TYPE & VARIANT WIDEBODY TYPICAL SEATS ENGINES COMPLIANCE PROD. YEARS FLEET ORDER OPERATORS - -------------- -------- ------------- ------------ ---------- ----------- ------- ----- ---------- Airbus A300-B4................. Wide 250 2 X GE/PW Yes 1975-88 129 0 30 Airbus A320-200................ Narrow 150 2 X CFM/IAE Yes 1988- 553 166 60 Boeing 737-300................. Narrow 130 2 X CFM Yes 1984- 971 54 89 Boeing 737-400................. Narrow 150 2 X CFM Yes 1988- 421 28 53 Boeing 737-500................. Narrow 110 2 X CFM Yes 1990- 330 37 36 Boeing 747-200................. Wide 370 4 X GE/PW/RR Yes 1970-89 397 0 69 Boeing 757-200................. Narrow 180 2 X RR/PW Yes 1982- 758 91 68 Boeing 767-300ER............... Wide 250 2 X GE/PW/RR Yes 1988- 340 61 51 MDC MD83(2).................... Narrow 150 2 X PW Yes 1984- 246 0 31 MDC DC8-70F.................... Narrow -- 4 X CFM Yes Conversions 101 0 12 Fokker 100..................... Narrow 100 2 X RR Yes 1988-96 258 0 26 - --------------- (1) Data is at April 30, 1998. (2) Boeing has announced that production of these aircraft types is expected to end in 1999. A-2 198 APPENDIX 3 MONTHLY GROSS REVENUES BASED ON THE ASSUMPTIONS GROSS MONTH REVENUES - ------------------------- ---------- ($) August 1998.............. 8,266,830 September 1998........... 9,570,151 October 1998............. 10,352,892 November 1998............ 9,571,995 December 1998............ 9,560,995 January 1999............. 10,217,795 February 1999............ 9,452,240 March 1999............... 10,295,540 April 1999............... 10,218,280 May 1999................. 9,484,193 June 1999................ 9,534,193 July 1999................ 10,299,993 August 1999.............. 9,534,068 September 1999........... 9,553,596 October 1999............. 10,319,638 November 1999............ 9,531,369 December 1999............ 9,531,369 January 2000............. 9,788,333 February 2000............ 9,788,333 March 2000............... 9,788,333 April 2000............... 9,788,036 May 2000................. 9,789,642 June 2000................ 9,779,642 July 2000................ 9,779,642 August 2000.............. 9,779,642 September 2000........... 9,779,642 October 2000............. 9,779,642 November 2000............ 9,781,245 December 2000............ 9,781,245 January 2001............. 9,780,252 February 2001............ 9,780,252 March 2001............... 9,780,252 April 2001............... 9,780,252 May 2001................. 9,781,854 June 2001................ 9,767,665 July 2001................ 9,767,665 August 2001.............. 9,767,665 September 2001........... 9,767,665 October 2001............. 9,767,665 November 2001............ 9,769,272 December 2001............ 9,769,272 January 2002............. 9,769,272 February 2002............ 9,769,272 March 2002............... 9,769,272 April 2002............... 9,769,272 May 2002................. 9,770,875 June 2002................ 9,770,875 July 2002................ 9,770,875 August 2002.............. 9,770,875 September 2002........... 9,765,060 October 2002............. 9,765,060 November 2002............ 9,766,662 December 2002............ 9,766,662 January 2003............. 9,766,662 February 2003............ 9,766,662 GROSS MONTH REVENUES - ------------------------- ---------- ($) March 2003............... 9,766,662 April 2003............... 9,759,239 May 2003................. 9,759,239 June 2003................ 9,759,239 July 2003................ 9,759,239 August 2003.............. 9,669,650 September 2003........... 9,669,650 October 2003............. 9,669,650 November 2003............ 9,669,650 December 2003............ 9,669,650 January 2004............. 9,669,650 February 2004............ 9,669,650 March 2004............... 9,669,650 April 2004............... 9,553,544 May 2004................. 9,552,272 June 2004................ 9,552,272 July 2004................ 9,552,272 August 2004.............. 9,551,836 September 2004........... 9,551,836 October 2004............. 9,551,836 November 2004............ 9,550,505 December 2004............ 9,550,505 January 2005............. 9,550,505 February 2005............ 9,550,505 March 2005............... 9,550,505 April 2005............... 9,548,787 May 2005................. 9,548,787 June 2005................ 9,548,787 July 2005................ 9,548,787 August 2005.............. 9,548,787 September 2005........... 9,548,787 October 2005............. 9,548,787 November 2005............ 9,548,787 December 2005............ 9,548,787 January 2006............. 9,536,623 February 2006............ 9,536,623 March 2006............... 9,534,823 April 2006............... 9,527,527 May 2006................. 9,489,093 June 2006................ 9,448,220 July 2006................ 9,448,220 August 2006.............. 9,448,220 September 2006........... 9,448,220 October 2006............. 9,448,220 November 2006............ 9,448,220 December 2006............ 9,448,220 January 2007............. 9,448,220 February 2007............ 9,448,220 March 2007............... 9,448,220 April 2007............... 9,448,220 May 2007................. 9,448,220 June 2007................ 9,440,120 July 2007................ 9,438,444 August 2007.............. 9,438,444 September 2007........... 9,435,575 GROSS MONTH REVENUES - ------------------------- ---------- ($) October 2007............. 9,435,575 November 2007............ 9,364,232 December 2007............ 9,347,271 January 2008............. 9,334,624 February 2008............ 9,334,624 March 2008............... 9,334,624 April 2008............... 9,329,576 May 2008................. 9,329,576 June 2008................ 9,308,134 July 2008................ 9,308,134 August 2008.............. 9,022,681 September 2008........... 8,996,014 October 2008............. 8,980,884 November 2008............ 8,980,884 December 2008............ 8,980,884 January 2009............. 8,953,777 February 2009............ 8,950,139 March 2009............... 8,950,139 April 2009............... 8,646,352 May 2009................. 8,589,123 June 2009................ 8,589,123 July 2009................ 8,549,622 August 2009.............. 8,471,080 September 2009........... 8,391,928 October 2009............. 8,391,928 November 2009............ 8,259,471 December 2009............ 8,259,471 January 2010............. 8,219,213 February 2010............ 8,219,213 March 2010............... 8,219,213 April 2010............... 7,912,796 May 2010................. 7,873,573 June 2010................ 7,873,573 July 2010................ 7,873,573 August 2010.............. 7,873,573 September 2010........... 7,873,573 October 2010............. 7,873,573 November 2010............ 7,873,573 December 2010............ 7,873,573 January 2011............. 7,818,835 February 2011............ 7,818,835 March 2011............... 7,737,835 April 2011............... 7,550,213 May 2011................. 7,468,824 June 2011................ 7,398,886 July 2011................ 7,398,886 August 2011.............. 7,398,886 September 2011........... 7,398,886 October 2011............. 7,398,886 November 2011............ 7,398,886 December 2011............ 7,398,886 January 2012............. 7,398,886 February 2012............ 7,398,886 March 2012............... 7,398,886 April 2012............... 7,398,886 A-3 199 MONTHLY GROSS REVENUES BASED ON THE ASSUMPTIONS -- (CONTINUED) GROSS MONTH REVENUES - ------------------------- ---------- ($) May 2012................. 7,398,886 June 2012................ 7,346,814 July 2012................ 7,271,394 August 2012.............. 7,271,394 September 2012........... 7,142,264 October 2012............. 7,142,264 November 2012............ 7,055,496 December 2012............ 6,972,980 January 2013............. 6,891,680 February 2013............ 6,891,680 March 2013............... 6,891,680 April 2013............... 6,761,879 May 2013................. 6,761,879 June 2013................ 6,704,272 July 2013................ 6,704,272 August 2013.............. 6,704,272 September 2013........... 6,584,272 October 2013............. 6,504,172 November 2013............ 6,504,172 December 2013............ 6,504,172 January 2014............. 6,439,972 February 2014............ 6,346,426 March 2014............... 6,346,426 April 2014............... 6,181,480 May 2014................. 6,049,220 June 2014................ 6,049,220 July 2014................ 5,951,818 August 2014.............. 5,768,990 September 2014........... 5,591,769 October 2014............. 5,591,769 November 2014............ 5,373,241 December 2014............ 5,373,241 January 2015............. 5,296,152 February 2015............ 5,296,152 March 2015............... 5,296,152 April 2015............... 4,838,833 May 2015................. 4,752,733 June 2015................ 4,752,733 July 2015................ 4,752,733 August 2015.............. 4,752,733 September 2015........... 4,752,733 October 2015............. 4,752,733 November 2015............ 4,752,733 December 2015............ 4,752,733 January 2016............. 4,637,175 GROSS MONTH REVENUES - ------------------------- ---------- ($) February 2016............ 4,637,175 March 2016............... 4,449,975 April 2016............... 4,019,487 May 2016................. 3,868,014 June 2016................ 3,868,014 July 2016................ 3,868,014 August 2016.............. 3,868,014 September 2016........... 3,868,014 October 2016............. 3,868,014 November 2016............ 3,868,014 December 2016............ 3,868,014 January 2017............. 3,868,014 February 2017............ 3,868,014 March 2017............... 3,868,014 April 2017............... 3,868,014 May 2017................. 3,868,014 June 2017................ 3,754,612 July 2017................ 3,580,308 August 2017.............. 3,580,308 September 2017........... 3,281,874 October 2017............. 3,281,874 November 2017............ 3,150,758 December 2017............ 2,975,183 January 2018............. 2,798,130 February 2018............ 2,798,130 March 2018............... 2,798,130 April 2018............... 2,500,307 May 2018................. 2,500,307 June 2018................ 2,387,333 July 2018................ 2,387,333 August 2018.............. 2,387,333 September 2018........... 2,134,000 October 2018............. 1,962,230 November 2018............ 1,962,230 December 2018............ 1,962,230 January 2019............. 1,839,537 February 2019............ 1,624,901 March 2019............... 1,624,901 April 2019............... 1,358,922 May 2019................. 1,358,922 June 2019................ 1,358,922 July 2019................ 1,171,153 August 2019.............. 1,171,153 September 2019........... 836,791 October 2019............. 836,791 GROSS MONTH REVENUES - ------------------------- ---------- ($) November 2019............ 722,349 December 2019............ 722,349 January 2020............. 582,732 February 2020............ 582,732 March 2020............... 582,732 April 2020............... 161,677 May 2020................. 0 June 2020................ 0 July 2020................ 0 August 2020.............. 0 September 2020........... 0 October 2020............. 0 November 2020............ 0 December 2020............ 0 January 2021............. 0 February 2021............ 0 March 2021............... 0 April 2021............... 0 May 2021................. 0 June 2021................ 0 July 2021................ 0 August 2021.............. 0 September 2021........... 0 October 2021............. 0 November 2021............ 0 December 2021............ 0 January 2022............. 0 February 2022............ 0 March 2022............... 0 April 2022............... 0 May 2022................. 0 June 2022................ 0 July 2022................ 0 August 2022.............. 0 September 2022........... 0 October 2022............. 0 November 2022............ 0 December 2022............ 0 January 2023............. 0 February 2023............ 0 March 2023............... 0 April 2023............... 0 May 2023................. 0 June 2023................ 0 July 2023................ 0 A-4 200 APPENDIX 4 ASSUMED PORTFOLIO VALUES FOR THE INITIAL PORTFOLIO EXPECTED MONTH PORTFOLIO VALUE - ---------------------- --------------- ($ MILLIONS) Closing............... 951.97 August 1998........... 949.16 September 1998........ 945.90 October 1998.......... 942.63 November 1998......... 939.35 December 1998......... 936.05 January 1999.......... 932.74 February 1999......... 929.41 March 1999............ 926.07 April 1999............ 922.72 May 1999.............. 919.35 June 1999............. 915.97 July 1999............. 912.58 August 1999........... 909.17 September 1999........ 905.75 October 1999.......... 902.32 November 1999......... 898.87 December 1999......... 895.41 January 2000.......... 891.93 February 2000......... 888.44 March 2000............ 884.94 April 2000............ 881.42 May 2000.............. 877.89 June 2000............. 874.34 July 2000............. 870.78 August 2000........... 867.21 September 2000........ 863.62 October 2000.......... 860.02 November 2000......... 856.40 December 2000......... 852.77 January 2001.......... 849.13 February 2001......... 845.47 March 2001............ 841.79 April 2001............ 838.10 May 2001.............. 834.40 June 2001............. 830.68 July 2001............. 826.95 August 2001........... 823.20 September 2001........ 819.44 October 2001.......... 815.67 November 2001......... 811.87 December 2001......... 808.07 January 2002.......... 804.25 February 2002......... 800.41 March 2002............ 796.56 April 2002............ 792.70 May 2002.............. 788.82 June 2002............. 784.92 July 2002............. 781.01 August 2002........... 777.09 September 2002........ 773.15 October 2002.......... 769.19 November 2002......... 765.22 December 2002......... 761.24 January 2003.......... 757.24 EXPECTED MONTH PORTFOLIO VALUE - ---------------------- --------------- ($ MILLIONS) February 2003......... 753.22 March 2003............ 749.19 April 2003............ 745.14 May 2003.............. 741.08 June 2003............. 737.00 July 2003............. 732.91 August 2003........... 728.80 September 2003........ 724.68 October 2003.......... 720.54 November 2003......... 716.38 December 2003......... 712.21 January 2004.......... 708.02 February 2004......... 703.82 March 2004............ 699.60 April 2004............ 695.37 May 2004.............. 691.12 June 2004............. 686.85 July 2004............. 682.57 August 2004........... 678.27 September 2004........ 673.96 October 2004.......... 669.63 November 2004......... 665.28 December 2004......... 660.92 January 2005.......... 656.54 February 2005......... 652.14 March 2005............ 647.73 April 2005............ 643.30 May 2005.............. 638.86 June 2005............. 634.40 July 2005............. 629.92 August 2005........... 625.43 September 2005........ 620.92 October 2005.......... 616.39 November 2005......... 611.85 December 2005......... 607.29 January 2006.......... 602.71 February 2006......... 598.12 March 2006............ 593.57 April 2006............ 589.15 May 2006.............. 584.71 June 2006............. 580.25 July 2006............. 575.78 August 2006........... 571.29 September 2006........ 566.79 October 2006.......... 562.39 November 2006......... 558.23 December 2006......... 554.05 January 2007.......... 549.85 February 2007......... 545.64 March 2007............ 541.42 April 2007............ 537.18 May 2007.............. 532.92 June 2007............. 528.65 July 2007............. 524.36 August 2007........... 520.06 EXPECTED MONTH PORTFOLIO VALUE - ---------------------- --------------- ($ MILLIONS) September 2007........ 515.74 October 2007.......... 511.41 November 2007......... 507.06 December 2007......... 502.69 January 2008.......... 498.31 February 2008......... 493.92 March 2008............ 489.50 April 2008............ 485.13 May 2008.............. 480.90 June 2008............. 476.74 July 2008............. 472.57 August 2008........... 468.39 September 2008........ 464.19 October 2008.......... 459.97 November 2008......... 455.74 December 2008......... 451.49 January 2009.......... 447.23 February 2009......... 442.96 March 2009............ 438.66 April 2009............ 434.36 May 2009.............. 430.03 June 2009............. 425.69 July 2009............. 421.34 August 2009........... 416.97 September 2009........ 412.59 October 2009.......... 408.19 November 2009......... 403.77 December 2009......... 399.34 January 2010.......... 394.89 February 2010......... 390.43 March 2010............ 385.95 April 2010............ 381.45 May 2010.............. 376.94 June 2010............. 372.41 July 2010............. 367.87 August 2010........... 363.31 September 2010........ 358.74 October 2010.......... 354.15 November 2010......... 349.54 December 2010......... 344.92 January 2011.......... 340.28 February 2011......... 335.62 March 2011............ 330.95 April 2011............ 326.26 May 2011.............. 321.55 June 2011............. 316.83 July 2011............. 312.10 August 2011........... 307.34 September 2011........ 302.57 October 2011.......... 297.78 November 2011......... 292.98 December 2011......... 288.16 January 2012.......... 283.32 February 2012......... 278.47 March 2012............ 273.59 A-5 201 ASSUMED PORTFOLIO VALUES FOR THE INITIAL PORTFOLIO -- (CONTINUED) EXPECTED MONTH PORTFOLIO VALUE - ---------------------- --------------- ($ MILLIONS) April 2012............ 268.71 May 2012.............. 263.80 June 2012............. 258.88 July 2012............. 253.94 August 2012........... 248.99 September 2012........ 244.01 October 2012.......... 239.02 November 2012......... 234.02 December 2012......... 228.99 January 2013.......... 223.95 February 2013......... 218.89 March 2013............ 213.81 April 2013............ 208.72 May 2013.............. 203.61 June 2013............. 198.48 July 2013............. 193.34 August 2013........... 188.17 September 2013........ 182.99 October 2013.......... 177.85 November 2013......... 172.82 December 2013......... 167.76 January 2014.......... 162.75 February 2014......... 157.84 March 2014............ 152.92 April 2014............ 148.03 May 2014.............. 143.23 June 2014............. 138.41 July 2014............. 133.58 August 2014........... 128.78 September 2014........ 124.07 October 2014.......... 119.39 November 2014......... 114.79 December 2014......... 110.22 January 2015.......... 105.69 February 2015......... 101.21 March 2015............ 96.90 April 2015............ 92.67 May 2015.............. 88.48 June 2015............. 84.40 July 2015............. 80.31 August 2015........... 76.20 September 2015........ 72.08 October 2015.......... 67.94 November 2015......... 63.80 December 2015......... 59.63 January 2016.......... 55.46 EXPECTED MONTH PORTFOLIO VALUE - ---------------------- --------------- ($ MILLIONS) February 2016......... 51.47 March 2016............ 48.06 April 2016............ 45.08 May 2016.............. 42.21 June 2016............. 39.32 July 2016............. 36.42 August 2016........... 33.59 September 2016........ 30.92 October 2016.......... 28.32 November 2016......... 25.71 December 2016......... 23.14 January 2017.......... 20.66 February 2017......... 18.17 March 2017............ 15.68 April 2017............ 13.28 May 2017.............. 11.08 June 2017............. 9.03 July 2017............. 7.41 August 2017........... 6.21 September 2017........ 5.35 October 2017.......... 4.50 November 2017......... 3.70 December 2017......... 3.04 January 2018.......... 2.38 February 2018......... 1.87 March 2018............ 1.68 April 2018............ 1.49 May 2018.............. 1.30 June 2018............. 1.10 July 2018............. 0.91 August 2018........... 0.72 September 2018........ 0.52 October 2018.......... 0.33 November 2018......... 0.13 December 2018......... 0.00 January 2019.......... 0.00 February 2019......... 0.00 March 2019............ 0.00 April 2019............ 0.00 May 2019.............. 0.00 June 2019............. 0.00 July 2019............. 0.00 August 2019........... 0.00 September 2019........ 0.00 October 2019.......... 0.00 EXPECTED MONTH PORTFOLIO VALUE - ---------------------- --------------- ($ MILLIONS) November 2019......... 0.00 December 2019......... 0.00 January 2020.......... 0.00 February 2020......... 0.00 March 2020............ 0.00 April 2020............ 0.00 May 2020.............. 0.00 June 2020............. 0.00 July 2020............. 0.00 August 2020........... 0.00 September 2020........ 0.00 October 2020.......... 0.00 November 2020......... 0.00 December 2020......... 0.00 January 2021.......... 0.00 February 2021......... 0.00 March 2021............ 0.00 April 2021............ 0.00 May 2021.............. 0.00 June 2021............. 0.00 July 2021............. 0.00 August 2021........... 0.00 September 2021........ 0.00 October 2021.......... 0.00 November 2021......... 0.00 December 2021......... 0.00 January 2022.......... 0.00 February 2022......... 0.00 March 2022............ 0.00 April 2022............ 0.00 May 2022.............. 0.00 June 2022............. 0.00 July 2022............. 0.00 August 2022........... 0.00 September 2022........ 0.00 October 2022.......... 0.00 November 2022......... 0.00 December 2022......... 0.00 January 2023.......... 0.00 February 2023......... 0.00 March 2023............ 0.00 April 2023............ 0.00 May 2023.............. 0.00 June 2023............. 0.00 July 2023............. 0.00 A-6 202 APPENDIX 5 CLASS A CLASS PERCENTAGES CLASS A CLASS A CLASS A MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ Closing.............. 66.31% 66.31% 66.31% August 1998.......... 66.31% 66.31% 65.69% September 1998....... 66.31% 66.31% 65.64% October 1998......... 66.31% 66.31% 65.50% November 1998........ 66.31% 66.31% 65.45% December 1998........ 66.31% 66.31% 65.39% January 1999......... 66.31% 66.31% 65.27% February 1999........ 66.31% 66.31% 65.22% March 1999........... 66.30% 66.30% 65.05% April 1999........... 66.30% 66.30% 64.93% May 1999............. 66.30% 66.30% 64.96% June 1999............ 66.30% 66.30% 64.90% July 1999............ 66.30% 66.29% 64.76% August 1999.......... 66.29% 66.29% 64.70% September 1999....... 66.29% 66.29% 64.64% October 1999......... 66.28% 66.28% 64.49% November 1999........ 66.28% 66.28% 64.44% December 1999........ 66.27% 66.27% 64.36% January 2000......... 66.27% 66.27% 64.28% February 2000........ 66.26% 66.26% 64.19% March 2000........... 66.26% 66.25% 64.07% April 2000........... 66.25% 66.24% 63.99% May 2000............. 66.24% 66.23% 64.01% June 2000............ 66.23% 66.22% 63.92% July 2000............ 66.22% 66.21% 63.82% August 2000.......... 66.21% 66.20% 63.72% September 2000....... 66.20% 66.19% 63.63% October 2000......... 66.19% 66.18% 63.53% November 2000........ 66.18% 66.16% 63.44% December 2000........ 66.16% 66.15% 63.33% January 2001......... 66.15% 66.13% 63.23% February 2001........ 66.13% 66.11% 63.14% March 2001........... 66.12% 66.09% 63.00% April 2001........... 66.10% 66.07% 62.90% May 2001............. 66.08% 66.05% 62.92% June 2001............ 66.06% 66.03% 62.82% July 2001............ 66.04% 66.01% 62.72% August 2001.......... 66.02% 65.99% 62.62% September 2001....... 66.00% 65.96% 62.52% October 2001......... 65.98% 65.93% 62.40% November 2001........ 65.95% 65.90% 62.30% December 2001........ 65.93% 65.88% 62.18% January 2002......... 65.90% 65.84% 62.08% February 2002........ 65.87% 65.81% 61.97% March 2002........... 65.85% 65.78% 61.82% April 2002........... 65.82% 65.74% 61.70% May 2002............. 65.78% 65.71% 61.71% June 2002............ 65.75% 65.67% 61.60% July 2002............ 65.72% 65.63% 61.46% August 2002.......... 65.68% 65.59% 61.35% September 2002....... 65.65% 65.55% 61.23% October 2002......... 65.61% 65.50% 61.10% November 2002........ 65.57% 65.46% 60.98% December 2002........ 65.53% 65.41% 60.84% CLASS A CLASS A CLASS A MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ January 2003......... 65.49% 65.36% 60.72% February 2003........ 65.45% 65.31% 60.59% March 2003........... 65.41% 65.26% 60.42% April 2003........... 65.36% 65.20% 60.30% May 2003............. 65.31% 65.15% 60.30% June 2003............ 65.27% 65.09% 60.17% July 2003............ 65.22% 65.03% 60.03% August 2003.......... 65.16% 64.97% 59.90% September 2003....... 65.11% 64.90% 59.78% October 2003......... 65.06% 64.84% 59.64% November 2003........ 65.00% 64.77% 59.50% December 2003........ 64.94% 64.70% 59.36% January 2004......... 64.89% 64.63% 59.23% February 2004........ 64.82% 64.56% 59.09% March 2004........... 64.76% 64.48% 58.92% April 2004........... 64.70% 64.40% 58.79% May 2004............. 64.63% 64.32% 58.80% June 2004............ 64.57% 64.24% 58.67% July 2004............ 64.50% 64.16% 58.52% August 2004.......... 64.43% 64.07% 58.38% September 2004....... 64.35% 63.98% 58.25% October 2004......... 64.28% 63.89% 58.09% November 2004........ 64.20% 63.80% 57.94% December 2004........ 64.13% 63.70% 57.79% January 2005......... 64.05% 63.61% 57.64% February 2005........ 63.97% 63.51% 57.49% March 2005........... 63.88% 63.41% 57.30% April 2005........... 63.80% 63.30% 57.14% May 2005............. 63.71% 63.19% 57.12% June 2005............ 63.62% 63.08% 56.96% July 2005............ 63.53% 62.97% 56.78% August 2005.......... 63.44% 62.86% 56.61% September 2005....... 63.35% 62.74% 56.44% October 2005......... 63.25% 62.62% 56.24% November 2005........ 63.15% 62.50% 56.05% December 2005........ 63.05% 62.38% 55.84% January 2006......... 62.95% 62.25% 55.65% February 2006........ 62.84% 62.12% 55.45% March 2006........... 62.74% 61.99% 55.21% April 2006........... 62.63% 61.85% 54.98% May 2006............. 62.52% 61.71% 54.91% June 2006............ 62.40% 61.57% 54.69% July 2006............ 62.29% 61.43% 54.45% August 2006.......... 62.17% 61.28% 54.21% September 2006....... 62.05% 61.13% 53.97% October 2006......... 61.93% 60.98% 53.70% November 2006........ 61.81% 60.83% 53.40% December 2006........ 61.68% 60.67% 50.87% January 2007......... 61.55% 60.51% 50.55% February 2007........ 61.42% 60.35% 50.22% March 2007........... 61.29% 60.18% 49.89% April 2007........... 61.16% 60.01% 49.56% May 2007............. 61.02% 59.84% 49.22% June 2007............ 60.88% 59.66% 48.88% A-7 203 CLASS A CLASS PERCENTAGES -- (CONTINUED) CLASS A CLASS A CLASS A MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ July 2007............ 60.74% 59.48% 48.54% August 2007.......... 60.59% 59.30% 48.19% September 2007....... 60.45% 59.12% 47.83% October 2007......... 60.30% 58.93% 47.48% November 2007........ 60.15% 58.74% 47.12% December 2007........ 59.99% 58.55% 46.75% January 2008......... 59.84% 58.35% 46.39% February 2008........ 59.68% 58.15% 46.02% March 2008........... 59.52% 57.94% 45.64% April 2008........... 59.36% 57.74% 45.26% May 2008............. 59.19% 57.53% 44.88% June 2008............ 59.02% 57.31% 44.49% July 2008............ 58.85% 57.10% 44.10% August 2008.......... 58.68% 56.88% 43.71% September 2008....... 58.50% 56.65% 43.31% October 2008......... 58.32% 56.43% 42.91% November 2008........ 58.14% 56.20% 42.50% December 2008........ 57.96% 55.96% 42.09% January 2009......... 57.77% 55.72% 41.68% February 2009........ 57.58% 55.48% 41.26% March 2009........... 57.39% 55.24% 40.84% April 2009........... 57.19% 54.99% 40.41% May 2009............. 57.00% 54.74% 39.98% June 2009............ 56.80% 54.48% 39.55% July 2009............ 56.60% 54.22% 39.11% August 2009.......... 56.39% 53.96% 38.67% September 2009....... 56.18% 53.70% 38.23% October 2009......... 55.97% 53.43% 37.78% November 2009........ 55.76% 53.15% 37.32% December 2009........ 55.54% 52.88% 36.87% January 2010......... 55.32% 52.59% 36.41% February 2010........ 55.10% 52.31% 35.94% March 2010........... 54.88% 52.02% 35.48% April 2010........... 54.65% 51.73% 35.00% May 2010............. 54.42% 51.43% 34.53% June 2010............ 54.18% 51.13% 34.05% July 2010............ 53.95% 50.83% 33.56% August 2010.......... 53.71% 50.52% 33.07% September 2010....... 53.47% 50.21% 32.58% October 2010......... 53.22% 49.89% 32.09% November 2010........ 52.97% 49.57% 31.59% December 2010........ 52.72% 49.25% 31.08% January 2011......... 52.47% 48.92% 30.57% February 2011........ 52.21% 48.59% 30.06% March 2011........... 51.95% 48.25% 29.55% April 2011........... 51.69% 47.91% 29.03% May 2011............. 51.42% 47.57% 28.50% June 2011............ 51.15% 47.22% 27.97% July 2011............ 50.88% 46.86% 27.44% August 2011.......... 50.60% 46.51% 26.91% September 2011....... 50.32% 46.15% 26.37% October 2011......... 50.04% 45.78% 25.82% November 2011........ 49.76% 45.41% 25.27% December 2011........ 49.47% 45.04% 24.72% January 2012......... 49.18% 44.66% 24.17% February 2012........ 48.88% 44.27% 23.61% March 2012........... 48.58% 43.89% 23.04% CLASS A CLASS A CLASS A MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ April 2012........... 48.28% 43.50% 22.47% May 2012............. 47.98% 43.10% 21.90% June 2012............ 47.67% 42.70% 21.32% July 2012............ 47.36% 42.30% 20.74% August 2012.......... 47.04% 41.89% 20.16% September 2012....... 46.73% 41.47% 19.57% October 2012......... 46.41% 41.05% 18.98% November 2012........ 46.08% 40.63% 18.38% December 2012........ 45.75% 40.20% 17.78% January 2013......... 45.42% 39.77% 17.18% February 2013........ 45.09% 39.33% 16.57% March 2013........... 44.75% 38.89% 15.95% April 2013........... 44.41% 38.45% 15.34% May 2013............. 44.07% 38.00% 14.71% June 2013............ 43.72% 37.54% 14.09% July 2013............ 43.37% 37.08% 13.46% August 2013.......... 43.01% 36.62% 12.83% September 2013....... 42.65% 36.15% 12.19% October 2013......... 42.29% 35.67% 11.25% November 2013........ 41.93% 35.19% 9.85% December 2013........ 41.56% 34.71% 8.37% January 2014......... 41.18% 34.22% 6.81% February 2014........ 40.81% 33.73% 5.18% March 2014........... 40.43% 33.23% 3.43% April 2014........... 40.05% 32.73% 1.65% May 2014............. 39.66% 32.22% 0.00% June 2014............ 39.27% 31.70% 0.00% July 2014............ 38.87% 31.19% 0.00% August 2014.......... 38.48% 30.66% 0.00% September 2014....... 38.07% 30.13% 0.00% October 2014......... 37.67% 29.60% 0.00% November 2014........ 37.26% 29.06% 0.00% December 2014........ 36.85% 28.52% 0.00% January 2015......... 36.43% 27.97% 0.00% February 2015........ 36.01% 27.41% 0.00% March 2015........... 35.59% 26.86% 0.00% April 2015........... 35.16% 26.29% 0.00% May 2015............. 34.73% 25.72% 0.00% June 2015............ 34.29% 25.15% 0.00% July 2015............ 33.85% 24.57% 0.00% August 2015.......... 33.41% 23.98% 0.00% September 2015....... 32.97% 23.39% 0.00% October 2015......... 32.51% 22.79% 0.00% November 2015........ 32.06% 22.19% 0.00% December 2015........ 31.60% 21.59% 0.00% January 2016......... 31.14% 20.97% 0.00% February 2016........ 30.67% 20.36% 0.00% March 2016........... 30.20% 19.73% 0.00% April 2016........... 29.73% 19.11% 0.00% May 2016............. 29.25% 18.47% 0.00% June 2016............ 28.77% 17.83% 0.00% July 2016............ 28.28% 17.19% 0.00% August 2016.......... 27.79% 16.54% 0.00% September 2016....... 27.30% 15.88% 0.00% October 2016......... 26.80% 15.22% 0.00% November 2016........ 26.30% 14.55% 0.00% December 2016........ 25.80% 13.88% 0.00% A-8 204 CLASS A CLASS PERCENTAGES -- (CONTINUED) CLASS A CLASS A CLASS A MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ January 2017......... 25.29% 13.20% 0.00% February 2017........ 24.77% 12.52% 0.00% March 2017........... 24.25% 11.83% 0.00% April 2017........... 23.73% 11.13% 0.00% May 2017............. 23.20% 10.43% 0.00% June 2017............ 22.67% 9.72% 0.00% July 2017............ 22.14% 9.01% 0.00% August 2017.......... 21.60% 8.29% 0.00% September 2017....... 21.06% 7.57% 0.00% October 2017......... 20.51% 6.84% 0.00% November 2017........ 19.96% 6.10% 0.00% December 2017........ 19.40% 5.36% 0.00% January 2018......... 18.84% 4.61% 0.00% February 2018........ 18.28% 3.86% 0.00% March 2018........... 17.71% 3.10% 0.00% April 2018........... 17.14% 2.33% 0.00% May 2018............. 16.56% 1.56% 0.00% June 2018............ 15.98% 0.78% 0.00% July 2018............ 15.39% 0.00% 0.00% August 2018.......... 14.80% 0.00% 0.00% September 2018....... 14.21% 0.00% 0.00% October 2018......... 13.61% 0.00% 0.00% November 2018........ 13.01% 0.00% 0.00% December 2018........ 12.40% 0.00% 0.00% January 2019......... 11.79% 0.00% 0.00% February 2019........ 11.17% 0.00% 0.00% March 2019........... 10.55% 0.00% 0.00% April 2019........... 9.92% 0.00% 0.00% May 2019............. 9.29% 0.00% 0.00% June 2019............ 8.66% 0.00% 0.00% July 2019............ 8.02% 0.00% 0.00% August 2019.......... 7.38% 0.00% 0.00% September 2019....... 6.73% 0.00% 0.00% October 2019......... 6.08% 0.00% 0.00% November 2019........ 5.42% 0.00% 0.00% December 2019........ 4.76% 0.00% 0.00% January 2020......... 4.09% 0.00% 0.00% February 2020........ 3.42% 0.00% 0.00% March 2020........... 2.75% 0.00% 0.00% April 2020........... 2.07% 0.00% 0.00% CLASS A CLASS A CLASS A MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ May 2020............. 1.38% 0.00% 0.00% June 2020............ 0.69% 0.00% 0.00% July 2020............ 0.00% 0.00% 0.00% August 2020.......... 0.00% 0.00% 0.00% September 2020....... 0.00% 0.00% 0.00% October 2020......... 0.00% 0.00% 0.00% November 2020........ 0.00% 0.00% 0.00% December 2020........ 0.00% 0.00% 0.00% January 2021......... 0.00% 0.00% 0.00% February 2021........ 0.00% 0.00% 0.00% March 2021........... 0.00% 0.00% 0.00% April 2021........... 0.00% 0.00% 0.00% May 2021............. 0.00% 0.00% 0.00% June 2021............ 0.00% 0.00% 0.00% July 2021............ 0.00% 0.00% 0.00% August 2021.......... 0.00% 0.00% 0.00% September 2021....... 0.00% 0.00% 0.00% October 2021......... 0.00% 0.00% 0.00% November 2021........ 0.00% 0.00% 0.00% December 2021........ 0.00% 0.00% 0.00% January 2022......... 0.00% 0.00% 0.00% February 2022........ 0.00% 0.00% 0.00% March 2022........... 0.00% 0.00% 0.00% April 2022........... 0.00% 0.00% 0.00% May 2022............. 0.00% 0.00% 0.00% June 2022............ 0.00% 0.00% 0.00% July 2022............ 0.00% 0.00% 0.00% August 2022.......... 0.00% 0.00% 0.00% September 2022....... 0.00% 0.00% 0.00% October 2022......... 0.00% 0.00% 0.00% November 2022........ 0.00% 0.00% 0.00% December 2022........ 0.00% 0.00% 0.00% January 2023......... 0.00% 0.00% 0.00% February 2023........ 0.00% 0.00% 0.00% March 2023........... 0.00% 0.00% 0.00% April 2023........... 0.00% 0.00% 0.00% May 2023............. 0.00% 0.00% 0.00% June 2023............ 0.00% 0.00% 0.00% July 2023............ 0.00% 0.00% 0.00% A-9 205 APPENDIX 6 CLASS B CLASS PERCENTAGES CLASS B CLASS B CLASS B MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ Closing.............. 8.95% 8.95% 8.95% August 1998.......... 8.95% 8.95% 8.95% September 1998....... 8.95% 8.95% 8.95% October 1998......... 8.95% 8.95% 8.94% November 1998........ 8.95% 8.95% 8.94% December 1998........ 8.95% 8.94% 8.94% January 1999......... 8.95% 8.94% 8.94% February 1999........ 8.95% 8.94% 8.94% March 1999........... 8.95% 8.94% 8.93% April 1999........... 8.95% 8.94% 8.93% May 1999............. 8.95% 8.94% 8.92% June 1999............ 8.95% 8.94% 8.92% July 1999............ 8.95% 8.93% 8.91% August 1999.......... 8.95% 8.93% 8.91% September 1999....... 8.95% 8.93% 8.90% October 1999......... 8.95% 8.93% 8.89% November 1999........ 8.95% 8.92% 8.88% December 1999........ 8.95% 8.92% 8.87% January 2000......... 8.94% 8.91% 8.86% February 2000........ 8.94% 8.91% 8.85% March 2000........... 8.94% 8.91% 8.84% April 2000........... 8.94% 8.90% 8.83% May 2000............. 8.94% 8.89% 8.82% June 2000............ 8.94% 8.89% 8.80% July 2000............ 8.94% 8.88% 8.79% August 2000.......... 8.94% 8.88% 8.78% September 2000....... 8.94% 8.87% 8.76% October 2000......... 8.94% 8.86% 8.74% November 2000........ 8.94% 8.85% 8.73% December 2000........ 8.94% 8.84% 8.71% January 2001......... 8.94% 8.84% 8.69% February 2001........ 8.94% 8.83% 8.67% March 2001........... 8.94% 8.82% 8.65% April 2001........... 8.93% 8.81% 8.63% May 2001............. 8.93% 8.80% 8.60% June 2001............ 8.93% 8.79% 8.58% July 2001............ 8.93% 8.77% 8.56% August 2001.......... 8.93% 8.76% 8.53% September 2001....... 8.93% 8.75% 8.51% October 2001......... 8.93% 8.74% 8.48% November 2001........ 8.92% 8.72% 8.45% December 2001........ 8.92% 8.71% 8.42% January 2002......... 8.92% 8.69% 8.39% February 2002........ 8.92% 8.68% 8.36% March 2002........... 8.91% 8.66% 8.33% April 2002........... 8.91% 8.65% 8.30% May 2002............. 8.91% 8.63% 8.27% June 2002............ 8.91% 8.61% 8.23% July 2002............ 8.90% 8.60% 8.20% August 2002.......... 8.90% 8.58% 8.16% September 2002....... 8.90% 8.56% 8.13% October 2002......... 8.89% 8.54% 8.09% November 2002........ 8.89% 8.52% 8.05% December 2002........ 8.89% 8.50% 8.01% January 2003......... 8.88% 8.48% 7.97% February 2003........ 8.88% 8.46% 7.93% March 2003........... 8.87% 8.44% 7.89% CLASS B CLASS B CLASS B MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ April 2003........... 8.87% 8.41% 7.84% May 2003............. 8.86% 8.39% 7.80% June 2003............ 8.86% 8.37% 7.76% July 2003............ 8.85% 8.34% 7.71% August 2003.......... 8.85% 8.32% 7.66% September 2003....... 8.84% 8.29% 7.61% October 2003......... 8.84% 8.26% 7.56% November 2003........ 8.83% 8.24% 7.51% December 2003........ 8.82% 8.21% 7.46% January 2004......... 8.82% 8.18% 7.41% February 2004........ 8.81% 8.15% 7.36% March 2004........... 8.80% 8.12% 7.30% April 2004........... 8.79% 8.09% 7.25% May 2004............. 8.79% 8.06% 7.19% June 2004............ 8.78% 8.03% 7.14% July 2004............ 8.77% 8.00% 7.08% August 2004.......... 8.76% 7.97% 7.02% September 2004....... 8.75% 7.93% 6.96% October 2004......... 8.74% 7.90% 6.90% November 2004........ 8.73% 7.87% 6.84% December 2004........ 8.72% 7.83% 6.77% January 2005......... 8.71% 7.80% 6.71% February 2005........ 8.70% 7.76% 6.64% March 2005........... 8.69% 7.72% 6.58% April 2005........... 8.68% 7.68% 6.51% May 2005............. 8.67% 7.65% 6.44% June 2005............ 8.66% 7.61% 6.37% July 2005............ 8.65% 7.57% 6.30% August 2005.......... 8.63% 7.53% 6.23% September 2005....... 8.62% 7.48% 6.16% October 2005......... 8.61% 7.44% 6.08% November 2005........ 8.59% 7.40% 6.01% December 2005........ 8.58% 7.36% 5.93% January 2006......... 8.56% 7.31% 5.85% February 2006........ 8.55% 7.27% 5.78% March 2006........... 8.53% 7.22% 5.70% April 2006........... 8.52% 7.17% 5.62% May 2006............. 8.50% 7.13% 5.53% June 2006............ 8.48% 7.08% 5.45% July 2006............ 8.47% 7.03% 5.37% August 2006.......... 8.45% 6.98% 5.28% September 2006....... 8.43% 6.93% 5.20% October 2006......... 8.41% 6.88% 5.11% November 2006........ 8.39% 6.83% 5.02% December 2006........ 8.37% 6.78% 4.93% January 2007......... 8.35% 6.72% 4.84% February 2007........ 8.33% 6.67% 4.75% March 2007........... 8.31% 6.62% 4.66% April 2007........... 8.29% 6.56% 4.56% May 2007............. 8.27% 6.50% 4.47% June 2007............ 8.25% 6.45% 4.37% July 2007............ 8.22% 6.39% 4.28% August 2007.......... 8.20% 6.33% 4.18% September 2007....... 8.18% 6.27% 4.08% October 2007......... 8.15% 6.21% 3.98% November 2007........ 8.13% 6.15% 3.88% December 2007........ 8.10% 6.09% 3.77% A-10 206 CLASS B CLASS PERCENTAGES -- (CONTINUED) CLASS B CLASS B CLASS B MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ January 2008......... 8.07% 6.03% 3.67% February 2008........ 8.05% 5.96% 3.56% March 2008........... 8.02% 5.90% 3.46% April 2008........... 7.99% 5.84% 3.35% May 2008............. 7.96% 5.77% 3.24% June 2008............ 7.93% 5.70% 3.13% July 2008............ 7.90% 5.64% 3.02% August 2008.......... 7.87% 5.57% 2.91% September 2008....... 7.84% 5.50% 2.80% October 2008......... 7.81% 5.43% 2.68% November 2008........ 7.77% 5.36% 2.57% December 2008........ 7.74% 5.29% 2.45% January 2009......... 7.71% 5.22% 2.33% February 2009........ 7.67% 5.14% 2.21% March 2009........... 7.64% 5.07% 2.09% April 2009........... 7.60% 4.99% 1.97% May 2009............. 7.56% 4.92% 1.85% June 2009............ 7.53% 4.84% 1.72% July 2009............ 7.49% 4.76% 1.60% August 2009.......... 7.45% 4.69% 1.47% September 2009....... 7.41% 4.61% 1.34% October 2009......... 7.37% 4.53% 1.21% November 2009........ 7.33% 4.45% 1.08% December 2009........ 7.29% 4.37% 0.95% January 2010......... 7.24% 4.28% 0.82% February 2010........ 7.20% 4.20% 0.69% March 2010........... 7.16% 4.12% 0.55% April 2010........... 7.11% 4.03% 0.42% May 2010............. 7.07% 3.94% 0.28% June 2010............ 7.02% 3.86% 0.14% July 2010............ 6.97% 3.77% 0.00% August 2010.......... 6.92% 3.68% 0.00% September 2010....... 6.87% 3.59% 0.00% October 2010......... 6.82% 3.50% 0.00% November 2010........ 6.77% 3.41% 0.00% December 2010........ 6.72% 3.32% 0.00% January 2011......... 6.67% 3.23% 0.00% February 2011........ 6.62% 3.13% 0.00% March 2011........... 6.56% 3.04% 0.00% April 2011........... 6.51% 2.94% 0.00% May 2011............. 6.45% 2.84% 0.00% June 2011............ 6.39% 2.75% 0.00% July 2011............ 6.34% 2.65% 0.00% August 2011.......... 6.28% 2.55% 0.00% September 2011....... 6.22% 2.45% 0.00% October 2011......... 6.16% 2.35% 0.00% November 2011........ 6.09% 2.24% 0.00% December 2011........ 6.03% 2.14% 0.00% January 2012......... 5.97% 2.04% 0.00% February 2012........ 5.90% 1.93% 0.00% March 2012........... 5.84% 1.83% 0.00% April 2012........... 5.77% 1.72% 0.00% May 2012............. 5.70% 1.61% 0.00% June 2012............ 5.63% 1.50% 0.00% July 2012............ 5.56% 1.39% 0.00% August 2012.......... 5.49% 1.28% 0.00% September 2012....... 5.42% 1.17% 0.00% October 2012......... 5.35% 1.06% 0.00% November 2012........ 5.28% 0.94% 0.00% December 2012........ 5.20% 0.83% 0.00% CLASS B CLASS B CLASS B MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ January 2013......... 5.12% 0.71% 0.00% February 2013........ 5.05% 0.60% 0.00% March 2013........... 4.97% 0.48% 0.00% April 2013........... 4.89% 0.36% 0.00% May 2013............. 4.81% 0.24% 0.00% June 2013............ 4.73% 0.12% 0.00% July 2013............ 4.64% 0.00% 0.00% August 2013.......... 4.56% 0.00% 0.00% September 2013....... 4.47% 0.00% 0.00% October 2013......... 4.39% 0.00% 0.00% November 2013........ 4.30% 0.00% 0.00% December 2013........ 4.21% 0.00% 0.00% January 2014......... 4.12% 0.00% 0.00% February 2014........ 4.03% 0.00% 0.00% March 2014........... 3.94% 0.00% 0.00% April 2014........... 3.85% 0.00% 0.00% May 2014............. 3.75% 0.00% 0.00% June 2014............ 3.65% 0.00% 0.00% July 2014............ 3.56% 0.00% 0.00% August 2014.......... 3.46% 0.00% 0.00% September 2014....... 3.36% 0.00% 0.00% October 2014......... 3.26% 0.00% 0.00% November 2014........ 3.15% 0.00% 0.00% December 2014........ 3.05% 0.00% 0.00% January 2015......... 2.95% 0.00% 0.00% February 2015........ 2.84% 0.00% 0.00% March 2015........... 2.73% 0.00% 0.00% April 2015........... 2.62% 0.00% 0.00% May 2015............. 2.51% 0.00% 0.00% June 2015............ 2.40% 0.00% 0.00% July 2015............ 2.29% 0.00% 0.00% August 2015.......... 2.17% 0.00% 0.00% September 2015....... 2.06% 0.00% 0.00% October 2015......... 1.94% 0.00% 0.00% November 2015........ 1.82% 0.00% 0.00% December 2015........ 1.70% 0.00% 0.00% January 2016......... 1.58% 0.00% 0.00% February 2016........ 1.45% 0.00% 0.00% March 2016........... 1.33% 0.00% 0.00% April 2016........... 1.20% 0.00% 0.00% May 2016............. 1.08% 0.00% 0.00% June 2016............ 0.95% 0.00% 0.00% July 2016............ 0.82% 0.00% 0.00% August 2016.......... 0.68% 0.00% 0.00% September 2016....... 0.55% 0.00% 0.00% October 2016......... 0.41% 0.00% 0.00% November 2016........ 0.28% 0.00% 0.00% December 2016........ 0.14% 0.00% 0.00% January 2017......... 0.00% 0.00% 0.00% February 2017........ 0.00% 0.00% 0.00% March 2017........... 0.00% 0.00% 0.00% April 2017........... 0.00% 0.00% 0.00% May 2017............. 0.00% 0.00% 0.00% June 2017............ 0.00% 0.00% 0.00% July 2017............ 0.00% 0.00% 0.00% August 2017.......... 0.00% 0.00% 0.00% September 2017....... 0.00% 0.00% 0.00% October 2017......... 0.00% 0.00% 0.00% November 2017........ 0.00% 0.00% 0.00% December 2017........ 0.00% 0.00% 0.00% A-11 207 CLASS B CLASS PERCENTAGES -- (CONTINUED) CLASS B CLASS B CLASS B MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ January 2018......... 0.00% 0.00% 0.00% February 2018........ 0.00% 0.00% 0.00% March 2018........... 0.00% 0.00% 0.00% April 2018........... 0.00% 0.00% 0.00% CLASS B CLASS B CLASS B MINIMUM SCHEDULED SUPPLEMENTAL PAYMENT DATE CLASS CLASS CLASS OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE ------------ ---------- ---------- ------------ May 2018............. 0.00% 0.00% 0.00% June 2018............ 0.00% 0.00% 0.00% July 2018............ 0.00% 0.00% 0.00% A-12 208 APPENDIX 7 CLASS C TARGET PRINCIPAL BALANCES CLASS C CLASS C MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- Closing.......................... 85,000,000 85,000,000 August 1998...................... 84,999,964 84,999,416 September 1998................... 84,999,771 84,997,144 October 1998..................... 84,999,323 84,992,775 November 1998.................... 84,998,536 84,986,041 December 1998.................... 84,997,339 84,976,736 January 1999..................... 84,995,662 84,964,685 February 1999.................... 84,993,444 84,949,741 March 1999....................... 84,990,625 84,931,771 April 1999....................... 84,987,146 84,910,655 May 1999......................... 84,982,954 84,886,285 June 1999........................ 84,977,996 84,858,559 July 1999........................ 84,972,219 84,827,383 August 1999...................... 84,965,574 84,792,671 September 1999................... 84,958,013 84,754,338 October 1999..................... 84,949,488 84,712,306 November 1999.................... 84,939,954 84,666,501 December 1999.................... 84,929,364 84,616,851 January 2000..................... 84,917,675 84,563,288 February 2000.................... 84,904,843 84,505,748 March 2000....................... 84,890,826 84,444,168 April 2000....................... 84,875,580 84,378,486 May 2000......................... 84,859,065 84,308,645 June 2000........................ 84,841,240 84,234,589 July 2000........................ 84,822,065 84,156,262 August 2000...................... 84,801,501 84,073,613 September 2000................... 84,779,508 83,986,589 October 2000..................... 84,756,047 83,895,140 November 2000.................... 84,731,081 83,799,219 December 2000.................... 84,704,572 83,698,778 January 2001..................... 84,676,483 83,593,770 February 2001.................... 84,646,776 83,484,152 March 2001....................... 84,615,416 83,369,877 April 2001....................... 84,582,367 83,250,905 May 2001......................... 84,547,592 83,127,193 June 2001........................ 84,511,057 82,998,699 July 2001........................ 84,472,726 82,865,384 August 2001...................... 84,432,564 82,727,207 September 2001................... 84,390,539 82,584,131 October 2001..................... 84,346,614 82,436,118 November 2001.................... 84,300,757 82,283,129 December 2001.................... 84,252,934 82,125,129 January 2002..................... 84,203,111 81,962,082 February 2002.................... 84,151,257 81,793,952 March 2002....................... 84,097,337 81,620,705 April 2002....................... 84,041,319 81,442,306 May 2002......................... 83,983,172 81,258,722 June 2002........................ 83,922,863 81,069,920 July 2002........................ 83,860,361 80,875,867 August 2002...................... 83,795,633 80,676,532 September 2002................... 83,728,649 80,471,882 October 2002..................... 83,659,377 80,261,886 November 2002.................... 83,587,786 80,046,514 December 2002.................... 83,513,846 79,825,736 January 2003..................... 83,437,525 79,599,522 February 2003.................... 83,358,794 79,367,841 CLASS C CLASS C MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- March 2003....................... 83,277,622 79,130,666 April 2003....................... 83,193,980 78,887,966 May 2003......................... 83,107,836 78,639,715 June 2003........................ 83,019,163 78,385,884 July 2003........................ 82,927,929 78,126,445 August 2003...................... 82,834,106 77,861,372 September 2003................... 82,737,664 77,590,636 October 2003..................... 82,638,575 77,314,211 November 2003.................... 82,536,809 77,032,072 December 2003.................... 82,432,338 76,744,191 January 2004..................... 82,325,133 76,450,543 February 2004.................... 82,215,165 76,151,103 March 2004....................... 82,102,407 75,845,845 April 2004....................... 81,986,829 75,534,744 May 2004......................... 81,868,404 75,217,776 June 2004........................ 81,747,104 74,894,916 July 2004........................ 81,622,901 74,566,140 August 2004...................... 81,495,768 74,231,423 September 2004................... 81,365,676 73,890,743 October 2004..................... 81,232,598 73,544,076 November 2004.................... 81,096,508 73,191,397 December 2004.................... 80,957,377 72,832,685 January 2005..................... 80,815,178 72,467,917 February 2005.................... 80,669,886 72,097,069 March 2005....................... 80,521,472 71,720,119 April 2005....................... 80,369,909 71,337,046 May 2005......................... 80,215,173 70,947,826 June 2005........................ 80,057,234 70,552,439 July 2005........................ 79,896,069 70,150,862 August 2005...................... 79,731,649 69,743,075 September 2005................... 79,563,948 69,329,055 October 2005..................... 79,392,941 68,908,782 November 2005.................... 79,218,601 68,482,234 December 2005.................... 79,040,903 68,049,391 January 2006..................... 78,859,821 67,610,233 February 2006.................... 78,675,328 67,164,738 March 2006....................... 78,487,399 66,712,887 April 2006....................... 78,296,008 66,254,660 May 2006......................... 78,101,131 65,790,036 June 2006........................ 77,902,741 65,318,996 July 2006........................ 77,700,813 64,841,519 August 2006...................... 77,495,323 64,357,587 September 2006................... 77,286,244 63,867,181 October 2006..................... 77,073,552 63,370,280 November 2006.................... 76,857,221 62,866,866 December 2006.................... 76,637,227 62,356,919 January 2007..................... 76,413,546 61,840,422 February 2007.................... 76,186,151 61,317,355 March 2007....................... 75,955,019 60,787,699 April 2007....................... 75,720,125 60,251,437 May 2007......................... 75,481,444 59,708,550 June 2007........................ 75,238,952 59,159,020 July 2007........................ 74,992,625 58,602,829 August 2007...................... 74,742,437 58,039,958 September 2007................... 74,488,366 57,470,390 October 2007..................... 74,230,387 56,894,107 A-13 209 CLASS C TARGET PRINCIPAL BALANCES -- (CONTINUED) CLASS C CLASS C MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- November 2007.................... 73,968,475 56,311,092 December 2007.................... 73,702,607 55,721,328 January 2008..................... 73,432,759 55,124,795 February 2008.................... 73,158,907 54,521,479 March 2008....................... 72,881,027 53,911,361 April 2008....................... 72,599,095 53,294,424 May 2008......................... 72,313,087 52,670,651 June 2008........................ 72,022,981 52,040,026 July 2008........................ 71,728,752 51,402,532 August 2008...................... 71,430,377 50,758,152 September 2008................... 71,127,832 50,106,869 October 2008..................... 70,821,094 49,448,668 November 2008.................... 70,510,141 48,783,531 December 2008.................... 70,194,947 48,111,443 January 2009..................... 69,875,491 47,432,387 February 2009.................... 69,551,750 46,746,347 March 2009....................... 69,223,699 46,053,307 April 2009....................... 68,891,317 45,353,252 May 2009......................... 68,554,580 44,646,166 June 2009........................ 68,213,465 43,932,032 July 2009........................ 67,867,949 43,210,836 August 2009...................... 67,518,010 42,482,561 September 2009................... 67,163,626 41,747,192 October 2009..................... 66,804,772 41,004,714 November 2009.................... 66,441,427 40,255,112 December 2009.................... 66,073,568 39,498,370 January 2010..................... 65,701,172 38,734,473 February 2010.................... 65,324,218 37,963,406 March 2010....................... 64,942,682 37,185,154 April 2010....................... 64,556,543 36,399,702 May 2010......................... 64,165,777 35,607,036 June 2010........................ 63,770,364 34,807,140 July 2010........................ 63,370,280 34,000,000 August 2010...................... 62,965,503 33,185,601 September 2010................... 62,556,011 32,363,929 October 2010..................... 62,141,783 31,534,970 November 2010.................... 61,722,796 30,698,708 December 2010.................... 61,299,028 29,855,129 January 2011..................... 60,870,458 29,004,220 February 2011.................... 60,437,063 28,145,966 March 2011....................... 59,998,821 27,280,353 April 2011....................... 59,555,712 26,407,366 May 2011......................... 59,107,712 25,526,993 June 2011........................ 58,654,801 24,639,218 July 2011........................ 58,196,957 23,744,029 August 2011...................... 57,734,158 22,841,410 September 2011................... 57,266,383 21,931,349 October 2011..................... 56,793,609 21,013,832 November 2011.................... 56,315,817 20,088,846 December 2011.................... 55,832,984 19,156,376 January 2012..................... 55,345,088 18,216,409 February 2012.................... 54,852,110 17,268,931 March 2012....................... 54,354,026 16,313,931 April 2012....................... 53,850,817 15,351,393 May 2012......................... 53,342,460 14,381,305 June 2012........................ 52,828,936 13,403,653 July 2012........................ 52,310,221 12,418,425 August 2012...................... 51,786,296 11,425,607 September 2012................... 51,257,140 10,425,186 CLASS C CLASS C MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- October 2012..................... 50,722,731 9,417,150 November 2012.................... 50,183,048 8,401,485 December 2012.................... 49,638,071 7,378,179 January 2013..................... 49,087,778 6,347,218 February 2013.................... 48,532,150 5,308,590 March 2013....................... 47,971,164 4,262,282 April 2013....................... 47,404,800 3,208,282 May 2013......................... 46,833,038 2,146,576 June 2013........................ 46,255,857 1,077,153 July 2013........................ 45,673,236 0 August 2013...................... 45,085,154 0 September 2013................... 44,491,591 0 October 2013..................... 43,892,527 0 November 2013.................... 43,287,940 0 December 2013.................... 42,677,811 0 January 2014..................... 42,062,119 0 February 2014.................... 41,440,843 0 March 2014....................... 40,813,963 0 April 2014....................... 40,181,459 0 May 2014......................... 39,543,311 0 June 2014........................ 38,899,498 0 July 2014........................ 38,250,000 0 August 2014...................... 37,594,797 0 September 2014................... 36,933,868 0 October 2014..................... 36,267,194 0 November 2014.................... 35,594,755 0 December 2014.................... 34,916,529 0 January 2015..................... 34,232,499 0 February 2015.................... 33,542,642 0 March 2015....................... 32,846,940 0 April 2015....................... 32,145,372 0 May 2015......................... 31,437,919 0 June 2015........................ 30,724,560 0 July 2015........................ 30,005,277 0 August 2015...................... 29,280,048 0 September 2015................... 28,548,854 0 October 2015..................... 27,811,676 0 November 2015.................... 27,068,494 0 December 2015.................... 26,319,288 0 January 2016..................... 25,564,038 0 February 2016.................... 24,802,726 0 March 2016....................... 24,035,330 0 April 2016....................... 23,261,832 0 May 2016......................... 22,482,212 0 June 2016........................ 21,696,451 0 July 2016........................ 20,904,529 0 August 2016...................... 20,106,427 0 September 2016................... 19,302,124 0 October 2016..................... 18,491,603 0 November 2016.................... 17,674,843 0 December 2016.................... 16,851,826 0 January 2017..................... 16,022,531 0 February 2017.................... 15,186,940 0 March 2017....................... 14,345,034 0 April 2017....................... 13,496,792 0 May 2017......................... 12,642,197 0 June 2017........................ 11,781,228 0 July 2017........................ 10,913,867 0 August 2017...................... 10,040,094 0 A-14 210 CLASS C TARGET PRINCIPAL BALANCES -- (CONTINUED) CLASS C CLASS C MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- September 2017................... 9,159,891 0 October 2017..................... 8,273,238 0 November 2017.................... 7,380,117 0 December 2017.................... 6,480,508 0 January 2018..................... 5,574,392 0 February 2018.................... 4,661,751 0 CLASS C CLASS C MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- March 2018....................... 3,742,566 0 April 2018....................... 2,816,816 0 May 2018......................... 1,884,485 0 June 2018........................ 945,552 0 July 2018........................ 0 0 A-15 211 APPENDIX 8 CLASS D TARGET PRINCIPAL BALANCES CLASS D CLASS D MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- $ $ Closing.......................... 80,000,000 80,000,000 August 1998...................... 80,000,000 80,000,000 September 1998................... 80,000,000 80,000,000 October 1998..................... 80,000,000 80,000,000 November 1998.................... 80,000,000 80,000,000 December 1998.................... 80,000,000 80,000,000 January 1999..................... 80,000,000 80,000,000 February 1999.................... 80,000,000 80,000,000 March 1999....................... 80,000,000 80,000,000 April 1999....................... 80,000,000 80,000,000 May 1999......................... 80,000,000 80,000,000 June 1999........................ 80,000,000 80,000,000 July 1999........................ 80,000,000 80,000,000 August 1999...................... 80,000,000 80,000,000 September 1999................... 80,000,000 80,000,000 October 1999..................... 80,000,000 80,000,000 November 1999.................... 80,000,000 80,000,000 December 1999.................... 80,000,000 80,000,000 January 2000..................... 80,000,000 80,000,000 February 2000.................... 80,000,000 80,000,000 March 2000....................... 80,000,000 80,000,000 April 2000....................... 80,000,000 80,000,000 May 2000......................... 80,000,000 80,000,000 June 2000........................ 80,000,000 80,000,000 July 2000........................ 80,000,000 80,000,000 August 2000...................... 80,000,000 80,000,000 September 2000................... 80,000,000 80,000,000 October 2000..................... 80,000,000 80,000,000 November 2000.................... 80,000,000 80,000,000 December 2000.................... 80,000,000 80,000,000 January 2001..................... 80,000,000 80,000,000 February 2001.................... 80,000,000 80,000,000 March 2001....................... 80,000,000 80,000,000 April 2001....................... 80,000,000 80,000,000 May 2001......................... 80,000,000 80,000,000 June 2001........................ 80,000,000 80,000,000 July 2001........................ 80,000,000 80,000,000 August 2001...................... 80,000,000 80,000,000 September 2001................... 80,000,000 80,000,000 October 2001..................... 80,000,000 80,000,000 November 2001.................... 80,000,000 80,000,000 December 2001.................... 80,000,000 80,000,000 January 2002..................... 80,000,000 80,000,000 February 2002.................... 80,000,000 80,000,000 March 2002....................... 80,000,000 80,000,000 April 2002....................... 80,000,000 80,000,000 May 2002......................... 80,000,000 80,000,000 June 2002........................ 80,000,000 80,000,000 July 2002........................ 80,000,000 80,000,000 August 2002...................... 80,000,000 80,000,000 September 2002................... 80,000,000 80,000,000 October 2002..................... 80,000,000 80,000,000 November 2002.................... 80,000,000 80,000,000 December 2002.................... 80,000,000 80,000,000 January 2003..................... 80,000,000 80,000,000 $ $ CLASS D CLASS D MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- February 2003.................... 80,000,000 80,000,000 March 2003....................... 80,000,000 80,000,000 April 2003....................... 80,000,000 80,000,000 May 2003......................... 80,000,000 80,000,000 June 2003........................ 80,000,000 80,000,000 July 2003........................ 80,000,000 80,000,000 August 2003...................... 80,000,000 80,000,000 September 2003................... 80,000,000 80,000,000 October 2003..................... 80,000,000 80,000,000 November 2003.................... 80,000,000 80,000,000 December 2003.................... 80,000,000 80,000,000 January 2004..................... 80,000,000 80,000,000 February 2004.................... 80,000,000 80,000,000 March 2004....................... 80,000,000 80,000,000 April 2004....................... 80,000,000 80,000,000 May 2004......................... 80,000,000 80,000,000 June 2004........................ 80,000,000 80,000,000 July 2004........................ 80,000,000 80,000,000 August 2004...................... 80,000,000 80,000,000 September 2004................... 80,000,000 80,000,000 October 2004..................... 80,000,000 80,000,000 November 2004.................... 80,000,000 80,000,000 December 2004.................... 80,000,000 80,000,000 January 2005..................... 80,000,000 80,000,000 February 2005.................... 80,000,000 80,000,000 March 2005....................... 80,000,000 80,000,000 April 2005....................... 80,000,000 80,000,000 May 2005......................... 80,000,000 80,000,000 June 2005........................ 80,000,000 80,000,000 July 2005........................ 80,000,000 80,000,000 August 2005...................... 80,000,000 80,000,000 September 2005................... 80,000,000 80,000,000 October 2005..................... 80,000,000 80,000,000 November 2005.................... 80,000,000 80,000,000 December 2005.................... 80,000,000 80,000,000 January 2006..................... 80,000,000 80,000,000 February 2006.................... 80,000,000 80,000,000 March 2006....................... 80,000,000 80,000,000 April 2006....................... 80,000,000 80,000,000 May 2006......................... 80,000,000 80,000,000 June 2006........................ 80,000,000 80,000,000 July 2006........................ 80,000,000 80,000,000 August 2006...................... 80,000,000 80,000,000 September 2006................... 80,000,000 80,000,000 October 2006..................... 80,000,000 80,000,000 November 2006.................... 80,000,000 80,000,000 December 2006.................... 80,000,000 80,000,000 January 2007..................... 80,000,000 79,774,880 February 2007.................... 80,000,000 79,328,760 March 2007....................... 80,000,000 78,873,970 April 2007....................... 80,000,000 78,410,461 May 2007......................... 80,000,000 77,938,186 June 2007........................ 80,000,000 77,457,096 July 2007........................ 80,000,000 76,967,146 August 2007...................... 80,000,000 76,468,290 A-16 212 CLASS D TARGET PRINCIPAL BALANCES -- (CONTINUED) CLASS D CLASS D MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- $ $ September 2007................... 80,000,000 75,960,480 October 2007..................... 80,000,000 75,443,671 November 2007.................... 80,000,000 74,917,819 December 2007.................... 80,000,000 74,382,876 January 2008..................... 80,000,000 73,838,800 February 2008.................... 80,000,000 73,285,546 March 2008....................... 80,000,000 72,723,068 April 2008....................... 80,000,000 72,151,325 May 2008......................... 80,000,000 71,570,271 June 2008........................ 80,000,000 70,979,864 July 2008........................ 80,000,000 70,380,061 August 2008...................... 80,000,000 69,770,819 September 2008................... 80,000,000 69,152,097 October 2008..................... 80,000,000 68,523,851 November 2008.................... 80,000,000 67,886,040 December 2008.................... 80,000,000 67,238,622 January 2009..................... 80,000,000 66,581,557 February 2009.................... 80,000,000 65,914,803 March 2009....................... 80,000,000 65,238,319 April 2009....................... 80,000,000 64,552,065 May 2009......................... 80,000,000 63,856,000 June 2009........................ 80,000,000 63,150,085 July 2009........................ 80,000,000 62,434,280 August 2009...................... 80,000,000 61,708,545 September 2009................... 80,000,000 60,972,841 October 2009..................... 80,000,000 60,227,129 November 2009.................... 80,000,000 59,471,369 December 2009.................... 80,000,000 58,705,524 January 2010..................... 80,000,000 57,929,554 February 2010.................... 80,000,000 57,143,422 March 2010....................... 80,000,000 56,347,089 April 2010....................... 80,000,000 55,540,518 May 2010......................... 80,000,000 54,723,670 June 2010........................ 80,000,000 53,896,510 July 2010........................ 80,000,000 53,058,998 August 2010...................... 80,000,000 52,211,100 September 2010................... 80,000,000 51,352,776 October 2010..................... 80,000,000 50,483,992 November 2010.................... 80,000,000 49,604,710 December 2010.................... 80,000,000 48,714,894 January 2011..................... 80,000,000 47,814,508 February 2011.................... 80,000,000 46,903,516 March 2011....................... 80,000,000 45,981,883 April 2011....................... 80,000,000 45,049,573 May 2011......................... 80,000,000 44,106,550 June 2011........................ 79,765,353 43,152,779 July 2011........................ 79,419,181 42,188,226 August 2011...................... 79,067,271 41,212,855 September 2011................... 78,709,580 40,226,632 October 2011..................... 78,346,069 39,229,522 November 2011.................... 77,976,695 38,221,491 December 2011.................... 77,601,419 37,202,504 January 2012..................... 77,220,200 36,172,528 February 2012.................... 76,832,996 35,131,528 March 2012....................... 76,439,767 34,079,471 April 2012....................... 76,040,472 33,016,323 May 2012......................... 75,635,072 31,942,051 June 2012........................ 75,223,524 30,856,621 $ $ CLASS D CLASS D MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- July 2012........................ 74,805,790 29,760,000 August 2012...................... 74,381,829 28,652,155 September 2012................... 73,951,600 27,533,054 October 2012..................... 73,515,063 26,402,663 November 2012.................... 73,072,179 25,260,950 December 2012.................... 72,622,907 24,107,883 January 2013..................... 72,167,207 22,943,429 February 2013.................... 71,705,040 21,767,555 March 2013....................... 71,236,366 20,580,230 April 2013....................... 70,761,145 19,381,423 May 2013......................... 70,279,337 18,171,100 June 2013........................ 69,790,903 16,949,231 July 2013........................ 69,295,804 15,715,783 August 2013...................... 68,793,999 14,470,726 September 2013................... 68,285,450 13,214,028 October 2013..................... 67,770,118 11,945,658 November 2013.................... 67,247,962 10,000,000 December 2013.................... 66,718,944 8,000,000 January 2014..................... 66,183,025 6,000,000 February 2014.................... 65,640,166 4,000,000 March 2014....................... 65,090,327 2,000,000 April 2014....................... 64,533,470 0 May 2014......................... 63,969,557 0 June 2014........................ 63,398,547 0 July 2014........................ 62,820,403 0 August 2014...................... 62,235,085 0 September 2014................... 61,642,556 0 October 2014..................... 61,042,777 0 November 2014.................... 60,435,708 0 December 2014.................... 59,821,312 0 January 2015..................... 59,199,551 0 February 2015.................... 58,570,385 0 March 2015....................... 57,933,778 0 April 2015....................... 57,289,689 0 May 2015......................... 56,638,083 0 June 2015........................ 55,978,919 0 July 2015........................ 55,312,161 0 August 2015...................... 54,637,770 0 September 2015................... 53,955,709 0 October 2015..................... 53,265,939 0 November 2015.................... 52,568,422 0 December 2015.................... 51,863,122 0 January 2016..................... 51,150,000 0 February 2016.................... 50,429,018 0 March 2016....................... 49,700,140 0 April 2016....................... 48,963,327 0 May 2016......................... 48,218,541 0 June 2016........................ 47,465,747 0 July 2016........................ 46,704,905 0 August 2016...................... 45,935,979 0 September 2016................... 45,158,931 0 October 2016..................... 44,373,724 0 November 2016.................... 43,580,322 0 December 2016.................... 42,778,686 0 January 2017..................... 41,968,780 0 February 2017.................... 41,150,566 0 March 2017....................... 40,324,009 0 April 2017....................... 39,489,069 0 A-17 213 CLASS D TARGET PRINCIPAL BALANCES -- (CONTINUED) CLASS D CLASS D MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- $ $ May 2017......................... 38,645,712 0 June 2017........................ 37,793,899 0 July 2017........................ 36,933,595 0 August 2017...................... 36,064,762 0 September 2017................... 35,187,363 0 October 2017..................... 34,301,362 0 November 2017.................... 33,406,723 0 December 2017.................... 32,503,408 0 January 2018..................... 31,591,381 0 February 2018.................... 30,670,606 0 March 2018....................... 29,741,046 0 April 2018....................... 28,802,664 0 May 2018......................... 27,855,425 0 June 2018........................ 26,899,292 0 July 2018........................ 25,934,229 0 August 2018...................... 24,960,199 0 September 2018................... 23,977,166 0 October 2018..................... 22,985,094 0 November 2018.................... 21,983,948 0 December 2018.................... 20,973,690 0 January 2019..................... 19,954,285 0 February 2019.................... 18,925,698 0 March 2019....................... 17,887,891 0 April 2019....................... 16,840,829 0 May 2019......................... 15,784,476 0 June 2019........................ 14,718,796 0 July 2019........................ 13,643,754 0 August 2019...................... 12,559,314 0 September 2019................... 11,465,440 0 October 2019..................... 10,362,096 0 November 2019.................... 9,249,247 0 December 2019.................... 8,126,857 0 January 2020..................... 6,994,890 0 February 2020.................... 5,853,312 0 March 2020....................... 4,702,086 0 April 2020....................... 3,541,177 0 May 2020......................... 2,370,550 0 June 2020........................ 1,190,170 0 $ $ CLASS D CLASS D MINIMUM SCHEDULED TARGET TARGET PAYMENT DATE PRINCIPAL PRINCIPAL OCCURRING IN BALANCE BALANCE ------------ ---------- ---------- July 2020........................ 0 0 August 2020...................... 0 0 September 2020................... 0 0 October 2020..................... 0 0 November 2020.................... 0 0 December 2020.................... 0 0 January 2021..................... 0 0 February 2021.................... 0 0 March 2021....................... 0 0 April 2021....................... 0 0 May 2021......................... 0 0 June 2021........................ 0 0 July 2021........................ 0 0 August 2021...................... 0 0 September 2021................... 0 0 October 2021..................... 0 0 November 2021.................... 0 0 December 2021.................... 0 0 January 2022..................... 0 0 February 2022.................... 0 0 March 2022....................... 0 0 April 2022....................... 0 0 May 2022......................... 0 0 June 2022........................ 0 0 July 2022........................ 0 0 August 2022...................... 0 0 September 2022................... 0 0 October 2022..................... 0 0 November 2022.................... 0 0 December 2022.................... 0 0 January 2023..................... 0 0 February 2023.................... 0 0 March 2023....................... 0 0 April 2023....................... 0 0 May 2023......................... 0 0 June 2023........................ 0 0 July 2023........................ 0 0 A-18 214 APPENDIX 9 POOL FACTORS PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- Closing.............. 100.00% 100.00% 100.00% 100.00% 100.00% August 1998.......... 100.00% 99.21% 99.94% 100.00% 100.00% September 1998....... 100.00% 98.10% 99.60% 100.00% 100.00% October 1998......... 100.00% 96.70% 99.25% 99.99% 100.00% November 1998........ 100.00% 95.58% 98.91% 99.98% 100.00% December 1998........ 100.00% 94.44% 98.45% 99.97% 100.00% January 1999......... 100.00% 93.11% 98.10% 99.96% 100.00% February 1999........ 100.00% 92.00% 97.75% 99.94% 100.00% March 1999........... 100.00% 90.50% 97.40% 99.92% 100.00% April 1999........... 100.00% 89.35% 97.05% 99.89% 100.00% May 1999............. 100.00% 88.69% 96.69% 99.87% 100.00% June 1999............ 100.00% 87.75% 96.34% 99.83% 100.00% July 1999............ 100.00% 86.55% 95.87% 99.80% 100.00% August 1999.......... 100.00% 85.60% 95.52% 99.76% 100.00% September 1999....... 100.00% 84.65% 95.16% 99.71% 100.00% October 1999......... 100.00% 83.42% 94.80% 99.66% 100.00% November 1999........ 100.00% 82.49% 94.33% 99.61% 100.00% December 1999........ 100.00% 81.48% 93.97% 99.55% 100.00% January 2000......... 100.00% 80.46% 93.50% 99.49% 100.00% February 2000........ 100.00% 79.41% 93.13% 99.42% 100.00% March 2000........... 100.00% 78.27% 92.76% 99.35% 100.00% April 2000........... 100.00% 77.25% 92.29% 99.27% 100.00% May 2000............. 100.00% 76.53% 91.82% 99.19% 100.00% June 2000............ 100.00% 75.48% 91.45% 99.10% 100.00% July 2000............ 100.00% 74.39% 90.97% 99.01% 100.00% August 2000.......... 100.00% 73.31% 90.60% 98.91% 100.00% September 2000....... 100.00% 72.25% 90.12% 98.81% 100.00% October 2000......... 100.00% 71.16% 89.64% 98.70% 100.00% November 2000........ 100.00% 70.10% 89.17% 98.59% 100.00% December 2000........ 100.00% 68.99% 88.69% 98.47% 100.00% January 2001......... 100.00% 67.90% 88.31% 98.35% 100.00% February 2001........ 100.00% 66.84% 87.83% 98.22% 100.00% March 2001........... 100.00% 65.63% 87.35% 98.08% 100.00% April 2001........... 100.00% 64.54% 86.87% 97.94% 100.00% May 2001............. 100.00% 63.79% 86.38% 97.80% 100.00% June 2001............ 100.00% 62.70% 85.90% 97.65% 100.00% July 2001............ 100.00% 61.61% 85.32% 97.49% 100.00% August 2001.......... 100.00% 60.51% 84.84% 97.33% 100.00% September 2001....... 100.00% 59.42% 84.35% 97.16% 100.00% October 2001......... 100.00% 58.27% 83.87% 96.98% 100.00% November 2001........ 100.00% 57.17% 83.29% 96.80% 100.00% December 2001........ 100.00% 56.02% 82.80% 96.62% 100.00% January 2002......... 100.00% 54.92% 82.22% 96.43% 100.00% February 2002........ 100.00% 53.80% 81.74% 96.23% 100.00% March 2002........... 100.00% 52.56% 81.16% 96.02% 100.00% April 2002........... 100.00% 51.41% 80.67% 95.81% 100.00% May 2002............. 100.00% 50.61% 80.09% 95.60% 100.00% June 2002............ 100.00% 49.49% 79.51% 95.38% 100.00% July 2002............ 100.00% 48.28% 79.02% 95.15% 100.00% August 2002.......... 100.00% 47.15% 78.44% 94.91% 100.00% September 2002....... 100.00% 46.00% 77.86% 94.67% 100.00% October 2002......... 100.00% 44.82% 77.28% 94.43% 100.00% November 2002........ 100.00% 43.67% 76.70% 94.17% 100.00% December 2002........ 100.00% 42.46% 76.12% 93.91% 100.00% January 2003......... 100.00% 41.31% 75.55% 93.65% 100.00% February 2003........ 100.00% 40.13% 74.97% 93.37% 100.00% PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- March 2003........... 100.00% 38.85% 74.39% 93.09% 100.00% April 2003........... 100.00% 37.70% 73.73% 92.81% 100.00% May 2003............. 100.00% 36.85% 73.15% 92.52% 100.00% June 2003............ 100.00% 35.67% 72.57% 92.22% 100.00% July 2003............ 100.00% 34.47% 71.91% 91.91% 100.00% August 2003.......... 100.00% 33.29% 71.34% 91.60% 100.00% September 2003....... 100.00% 32.14% 70.68% 91.28% 100.00% October 2003......... 100.00% 30.94% 70.02% 90.96% 100.00% November 2003........ 100.00% 29.74% 69.45% 90.63% 100.00% December 2003........ 100.00% 28.54% 68.79% 90.29% 100.00% January 2004......... 100.00% 27.37% 68.14% 89.94% 100.00% February 2004........ 100.00% 26.17% 67.48% 89.59% 100.00% March 2004........... 100.00% 24.90% 66.83% 89.23% 100.00% April 2004........... 100.00% 23.73% 66.18% 88.86% 100.00% May 2004............. 100.00% 22.89% 65.53% 88.49% 100.00% June 2004............ 100.00% 21.72% 64.89% 88.11% 100.00% July 2004............ 100.00% 20.50% 64.24% 87.72% 100.00% August 2004.......... 100.00% 19.30% 63.60% 87.33% 100.00% September 2004....... 100.00% 18.13% 62.88% 86.93% 100.00% October 2004......... 100.00% 16.89% 62.24% 86.52% 100.00% November 2004........ 100.00% 15.68% 61.60% 86.11% 100.00% December 2004........ 100.00% 14.46% 60.88% 85.69% 100.00% January 2005......... 100.00% 13.25% 60.25% 85.26% 100.00% February 2005........ 100.00% 12.04% 59.54% 84.82% 100.00% March 2005........... 100.00% 10.74% 58.83% 84.38% 100.00% April 2005........... 100.00% 9.51% 58.12% 83.93% 100.00% May 2005............. 100.00% 8.59% 57.50% 83.47% 100.00% June 2005............ 100.00% 7.36% 56.80% 83.00% 100.00% July 2005............ 100.00% 6.09% 56.10% 82.53% 100.00% August 2005.......... 100.00% 4.85% 55.41% 82.05% 100.00% September 2005....... 100.00% 3.60% 54.64% 81.56% 100.00% October 2005......... 100.00% 2.30% 53.95% 81.07% 100.00% November 2005........ 100.00% 1.01% 53.27% 80.57% 100.00% December 2005........ 99.74% 0.00% 52.58% 80.06% 100.00% January 2006......... 98.65% 0.00% 51.83% 79.54% 100.00% February 2006........ 97.55% 0.00% 51.16% 79.02% 100.00% March 2006........... 96.39% 0.00% 50.42% 78.49% 100.00% April 2006........... 95.27% 0.00% 49.70% 77.95% 100.00% May 2006............. 94.43% 0.00% 49.05% 77.40% 100.00% June 2006............ 93.34% 0.00% 48.33% 76.85% 100.00% July 2006............ 92.21% 0.00% 47.62% 76.28% 100.00% August 2006.......... 91.09% 0.00% 46.91% 75.71% 100.00% September 2006....... 89.97% 0.00% 46.21% 75.14% 100.00% October 2006......... 88.82% 0.00% 45.52% 74.55% 100.00% November 2006........ 87.67% 0.00% 44.86% 73.96% 100.00% December 2006........ 86.32% 0.00% 44.19% 73.36% 100.00% January 2007......... 85.07% 0.00% 43.47% 72.75% 99.72% February 2007........ 83.85% 0.00% 42.82% 72.14% 99.16% March 2007........... 82.57% 0.00% 42.17% 71.51% 98.59% April 2007........... 81.36% 0.00% 41.46% 70.88% 98.01% May 2007............. 80.43% 0.00% 40.75% 70.25% 97.42% June 2007............ 79.20% 0.00% 40.12% 69.60% 96.82% July 2007............ 77.95% 0.00% 39.42% 68.94% 96.21% August 2007.......... 76.72% 0.00% 38.73% 68.28% 95.59% September 2007....... 75.48% 0.00% 38.04% 67.61% 94.95% October 2007......... 74.22% 0.00% 37.36% 66.93% 94.30% A-19 215 POOL FACTORS -- (CONTINUED) PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- November 2007........ 72.99% 0.00% 36.69% 66.25% 93.65% December 2007........ 71.74% 0.00% 36.02% 65.55% 92.98% January 2008......... 70.50% 0.00% 35.35% 64.85% 92.30% February 2008........ 69.27% 0.00% 34.63% 64.14% 91.61% March 2008........... 67.99% 0.00% 33.98% 63.43% 90.90% April 2008........... 66.73% 0.00% 33.33% 62.70% 90.19% May 2008............. 65.77% 0.00% 32.64% 61.97% 89.46% June 2008............ 64.52% 0.00% 31.97% 61.22% 88.72% July 2008............ 63.23% 0.00% 31.36% 60.47% 87.98% August 2008.......... 62.04% 0.00% 30.69% 59.72% 87.21% September 2008....... 60.85% 0.00% 30.04% 58.95% 86.44% October 2008......... 59.64% 0.00% 29.38% 58.17% 85.65% November 2008........ 58.44% 0.00% 28.74% 57.39% 84.86% December 2008........ 57.22% 0.00% 28.10% 56.60% 84.05% January 2009......... 56.01% 0.00% 27.47% 55.80% 83.23% February 2009........ 54.82% 0.00% 26.79% 55.00% 82.39% March 2009........... 53.56% 0.00% 26.16% 54.18% 81.55% April 2009........... 52.43% 0.00% 25.50% 53.36% 80.69% May 2009............. 51.57% 0.00% 24.89% 52.52% 79.82% June 2009............ 50.44% 0.00% 24.24% 51.68% 78.94% July 2009............ 49.30% 0.00% 23.60% 50.84% 78.04% August 2009.......... 48.18% 0.00% 23.01% 49.98% 77.14% September 2009....... 47.08% 0.00% 22.38% 49.11% 76.22% October 2009......... 45.97% 0.00% 21.75% 48.24% 75.28% November 2009........ 44.89% 0.00% 21.14% 47.36% 74.34% December 2009........ 43.80% 0.00% 20.53% 46.47% 73.38% January 2010......... 42.73% 0.00% 19.88% 45.57% 72.41% February 2010........ 41.65% 0.00% 19.29% 44.66% 71.43% March 2010........... 40.53% 0.00% 18.71% 43.75% 70.43% April 2010........... 39.52% 0.00% 18.09% 42.82% 69.43% May 2010............. 38.78% 0.00% 17.47% 41.89% 68.40% June 2010............ 37.76% 0.00% 16.91% 40.95% 67.37% July 2010............ 36.74% 0.00% 16.32% 40.00% 66.32% August 2010.......... 35.72% 0.00% 15.73% 39.04% 65.26% September 2010....... 34.69% 0.00% 15.15% 38.08% 64.19% October 2010......... 33.65% 0.00% 14.58% 37.10% 63.10% November 2010........ 32.61% 0.00% 14.02% 36.12% 62.01% December 2010........ 31.56% 0.00% 13.47% 35.12% 60.89% January 2011......... 30.59% 0.00% 12.93% 34.12% 59.77% February 2011........ 29.67% 0.00% 12.36% 33.11% 58.63% March 2011........... 28.76% 0.00% 11.84% 32.09% 57.48% April 2011........... 27.86% 0.00% 11.28% 31.07% 56.31% May 2011............. 27.14% 0.00% 10.74% 30.03% 55.13% June 2011............ 26.18% 0.00% 10.25% 28.99% 53.94% July 2011............ 25.22% 0.00% 9.73% 27.93% 52.74% August 2011.......... 24.33% 0.00% 9.22% 26.87% 51.52% September 2011....... 23.47% 0.00% 8.72% 25.80% 50.28% October 2011......... 22.61% 0.00% 8.23% 24.72% 49.04% November 2011........ 21.78% 0.00% 7.72% 23.63% 47.78% December 2011........ 20.95% 0.00% 7.25% 22.54% 46.50% January 2012......... 20.14% 0.00% 6.80% 21.43% 45.22% February 2012........ 19.34% 0.00% 6.32% 20.32% 43.91% March 2012........... 18.54% 0.00% 5.89% 19.19% 42.60% April 2012........... 17.76% 0.00% 5.44% 18.06% 41.27% May 2012............. 16.99% 0.00% 5.00% 16.92% 39.93% June 2012............ 16.23% 0.00% 4.57% 15.77% 38.57% July 2012............ 15.49% 0.00% 4.15% 14.61% 37.20% August 2012.......... 14.76% 0.00% 3.75% 13.44% 35.82% PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- September 2012....... 14.05% 0.00% 3.36% 12.26% 34.42% October 2012......... 13.34% 0.00% 2.98% 11.08% 33.00% November 2012........ 12.65% 0.00% 2.59% 9.88% 31.58% December 2012........ 11.97% 0.00% 2.24% 8.68% 30.13% January 2013......... 11.32% 0.00% 1.87% 7.47% 28.68% February 2013........ 10.67% 0.00% 1.55% 6.25% 27.21% March 2013........... 10.03% 0.00% 1.21% 5.01% 25.73% April 2013........... 9.42% 0.00% 0.88% 3.77% 24.23% May 2013............. 8.81% 0.00% 0.57% 2.53% 22.71% June 2013............ 8.23% 0.00% 0.28% 1.27% 21.19% July 2013............ 7.65% 0.00% 0.00% 0.00% 19.64% August 2013.......... 6.76% 0.00% 0.00% 0.00% 18.09% September 2013....... 5.90% 0.00% 0.00% 0.00% 16.52% October 2013......... 5.05% 0.00% 0.00% 0.00% 14.93% November 2013........ 4.39% 0.00% 0.00% 0.00% 12.50% December 2013........ 3.74% 0.00% 0.00% 0.00% 10.00% January 2014......... 3.11% 0.00% 0.00% 0.00% 7.50% February 2014........ 2.40% 0.00% 0.00% 0.00% 5.00% March 2014........... 1.54% 0.00% 0.00% 0.00% 2.50% April 2014........... 0.72% 0.00% 0.00% 0.00% 0.00% May 2014............. 0.00% 0.00% 0.00% 0.00% 0.00% June 2014............ 0.00% 0.00% 0.00% 0.00% 0.00% July 2014............ 0.00% 0.00% 0.00% 0.00% 0.00% August 2014.......... 0.00% 0.00% 0.00% 0.00% 0.00% September 2014....... 0.00% 0.00% 0.00% 0.00% 0.00% October 2014......... 0.00% 0.00% 0.00% 0.00% 0.00% November 2014........ 0.00% 0.00% 0.00% 0.00% 0.00% December 2014........ 0.00% 0.00% 0.00% 0.00% 0.00% January 2015......... 0.00% 0.00% 0.00% 0.00% 0.00% February 2015........ 0.00% 0.00% 0.00% 0.00% 0.00% March 2015........... 0.00% 0.00% 0.00% 0.00% 0.00% April 2015........... 0.00% 0.00% 0.00% 0.00% 0.00% May 2015............. 0.00% 0.00% 0.00% 0.00% 0.00% June 2015............ 0.00% 0.00% 0.00% 0.00% 0.00% July 2015............ 0.00% 0.00% 0.00% 0.00% 0.00% August 2015.......... 0.00% 0.00% 0.00% 0.00% 0.00% September 2015....... 0.00% 0.00% 0.00% 0.00% 0.00% October 2015......... 0.00% 0.00% 0.00% 0.00% 0.00% November 2015........ 0.00% 0.00% 0.00% 0.00% 0.00% December 2015........ 0.00% 0.00% 0.00% 0.00% 0.00% January 2016......... 0.00% 0.00% 0.00% 0.00% 0.00% February 2016........ 0.00% 0.00% 0.00% 0.00% 0.00% March 2016........... 0.00% 0.00% 0.00% 0.00% 0.00% April 2016........... 0.00% 0.00% 0.00% 0.00% 0.00% May 2016............. 0.00% 0.00% 0.00% 0.00% 0.00% June 2016............ 0.00% 0.00% 0.00% 0.00% 0.00% July 2016............ 0.00% 0.00% 0.00% 0.00% 0.00% August 2016.......... 0.00% 0.00% 0.00% 0.00% 0.00% September 2016....... 0.00% 0.00% 0.00% 0.00% 0.00% October 2016......... 0.00% 0.00% 0.00% 0.00% 0.00% November 2016........ 0.00% 0.00% 0.00% 0.00% 0.00% December 2016........ 0.00% 0.00% 0.00% 0.00% 0.00% January 2017......... 0.00% 0.00% 0.00% 0.00% 0.00% February 2017........ 0.00% 0.00% 0.00% 0.00% 0.00% March 2017........... 0.00% 0.00% 0.00% 0.00% 0.00% April 2017........... 0.00% 0.00% 0.00% 0.00% 0.00% May 2017............. 0.00% 0.00% 0.00% 0.00% 0.00% June 2017............ 0.00% 0.00% 0.00% 0.00% 0.00% A-20 216 POOL FACTORS -- (CONTINUED) PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- July 2017............ 0.00% 0.00% 0.00% 0.00% 0.00% August 2017.......... 0.00% 0.00% 0.00% 0.00% 0.00% September 2017....... 0.00% 0.00% 0.00% 0.00% 0.00% October 2017......... 0.00% 0.00% 0.00% 0.00% 0.00% November 2017........ 0.00% 0.00% 0.00% 0.00% 0.00% December 2017........ 0.00% 0.00% 0.00% 0.00% 0.00% January 2018......... 0.00% 0.00% 0.00% 0.00% 0.00% PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- February 2018........ 0.00% 0.00% 0.00% 0.00% 0.00% March 2018........... 0.00% 0.00% 0.00% 0.00% 0.00% April 2018........... 0.00% 0.00% 0.00% 0.00% 0.00% May 2018............. 0.00% 0.00% 0.00% 0.00% 0.00% June 2018............ 0.00% 0.00% 0.00% 0.00% 0.00% July 2018............ 0.00% 0.00% 0.00% 0.00% 0.00% A-21 217 APPENDIX 10 EXTENDED POOL FACTORS PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- Closing.............. 100.00% 100.43% 100.00% 100.00% 100.00% August 1998.......... 100.00% 99.79% 100.00% 100.00% 100.00% September 1998....... 100.00% 99.04% 100.00% 100.00% 100.00% October 1998......... 100.00% 98.30% 100.00% 100.00% 100.00% November 1998........ 100.00% 97.54% 100.00% 100.00% 100.00% December 1998........ 100.00% 96.79% 100.00% 100.00% 100.00% January 1999......... 100.00% 96.03% 100.00% 100.00% 100.00% February 1999........ 100.00% 95.27% 100.00% 100.00% 100.00% March 1999........... 100.00% 94.48% 100.00% 100.00% 100.00% April 1999........... 100.00% 93.71% 100.00% 100.00% 100.00% May 1999............. 100.00% 92.94% 100.00% 100.00% 100.00% June 1999............ 100.00% 92.17% 100.00% 100.00% 100.00% July 1999............ 100.00% 91.39% 100.00% 100.00% 100.00% August 1999.......... 100.00% 90.58% 99.94% 100.00% 100.00% September 1999....... 100.00% 89.80% 99.60% 100.00% 100.00% October 1999......... 100.00% 88.99% 99.25% 100.00% 100.00% November 1999........ 100.00% 88.20% 98.91% 100.00% 100.00% December 1999........ 100.00% 87.38% 98.45% 100.00% 100.00% January 2000......... 100.00% 86.58% 98.10% 100.00% 100.00% February 2000........ 100.00% 85.75% 97.75% 100.00% 100.00% March 2000........... 100.00% 84.95% 97.40% 100.00% 100.00% April 2000........... 100.00% 84.12% 97.05% 100.00% 100.00% May 2000............. 100.00% 83.28% 96.69% 100.00% 100.00% June 2000............ 100.00% 82.44% 96.34% 100.00% 100.00% July 2000............ 100.00% 81.60% 95.87% 100.00% 100.00% August 2000.......... 100.00% 80.75% 95.52% 100.00% 100.00% September 2000....... 100.00% 79.90% 95.16% 100.00% 100.00% October 2000......... 100.00% 79.05% 94.80% 99.99% 100.00% November 2000........ 100.00% 78.20% 94.33% 99.98% 100.00% December 2000........ 100.00% 77.31% 93.97% 99.97% 100.00% January 2001......... 100.00% 76.45% 93.50% 99.96% 100.00% February 2001........ 100.00% 75.55% 93.13% 99.94% 100.00% March 2001........... 100.00% 74.69% 92.76% 99.92% 100.00% April 2001........... 100.00% 73.79% 92.29% 99.89% 100.00% May 2001............. 100.00% 72.89% 91.82% 99.87% 100.00% June 2001............ 100.00% 71.98% 91.45% 99.83% 100.00% July 2001............ 100.00% 71.07% 90.97% 99.80% 100.00% August 2001.......... 100.00% 70.16% 90.60% 99.76% 100.00% September 2001....... 100.00% 69.25% 90.12% 99.71% 100.00% October 2001......... 100.00% 68.34% 89.64% 99.66% 100.00% November 2001........ 100.00% 67.39% 89.17% 99.61% 100.00% December 2001........ 100.00% 66.47% 88.69% 99.55% 100.00% January 2002......... 100.00% 65.52% 88.31% 99.49% 100.00% February 2002........ 100.00% 64.56% 87.83% 99.42% 100.00% March 2002........... 100.00% 63.63% 87.35% 99.35% 100.00% April 2002........... 100.00% 62.67% 86.87% 99.27% 100.00% May 2002............. 100.00% 61.68% 86.38% 99.19% 100.00% June 2002............ 100.00% 60.72% 85.90% 99.10% 100.00% July 2002............ 100.00% 59.75% 85.32% 99.01% 100.00% August 2002.......... 100.00% 58.76% 84.84% 98.91% 100.00% September 2002....... 100.00% 57.78% 84.35% 98.81% 100.00% October 2002......... 100.00% 56.78% 83.87% 98.70% 100.00% November 2002........ 100.00% 55.78% 83.29% 98.59% 100.00% December 2002........ 100.00% 54.77% 82.80% 98.47% 100.00% January 2003......... 100.00% 53.76% 82.22% 98.35% 100.00% February 2003........ 100.00% 52.75% 81.74% 98.22% 100.00% PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- March 2003........... 100.00% 51.74% 81.16% 98.08% 100.00% April 2003........... 100.00% 50.70% 80.67% 97.94% 100.00% May 2003............. 100.00% 49.65% 80.09% 97.80% 100.00% June 2003............ 100.00% 48.63% 79.51% 97.65% 100.00% July 2003............ 100.00% 47.59% 79.02% 97.49% 100.00% August 2003.......... 100.00% 46.51% 78.44% 97.33% 100.00% September 2003....... 100.00% 45.46% 77.86% 97.16% 100.00% October 2003......... 100.00% 44.41% 77.28% 96.98% 100.00% November 2003........ 100.00% 43.33% 76.70% 96.80% 100.00% December 2003........ 100.00% 42.24% 76.12% 96.62% 100.00% January 2004......... 100.00% 41.18% 75.55% 96.43% 100.00% February 2004........ 100.00% 40.07% 74.97% 96.23% 100.00% March 2004........... 100.00% 38.99% 74.39% 96.02% 100.00% April 2004........... 100.00% 37.90% 73.73% 95.81% 100.00% May 2004............. 100.00% 36.78% 73.15% 95.60% 100.00% June 2004............ 100.00% 35.69% 72.57% 95.38% 100.00% July 2004............ 100.00% 34.57% 71.91% 95.15% 100.00% August 2004.......... 100.00% 33.45% 71.34% 94.91% 100.00% September 2004....... 100.00% 32.31% 70.68% 94.67% 100.00% October 2004......... 100.00% 31.18% 70.02% 94.43% 100.00% November 2004........ 100.00% 30.04% 69.45% 94.17% 100.00% December 2004........ 100.00% 28.91% 68.79% 93.91% 100.00% January 2005......... 100.00% 27.76% 68.14% 93.65% 100.00% February 2005........ 100.00% 26.61% 67.48% 93.37% 100.00% March 2005........... 100.00% 25.44% 66.83% 93.09% 100.00% April 2005........... 100.00% 24.29% 66.18% 92.81% 100.00% May 2005............. 100.00% 23.11% 65.53% 92.52% 100.00% June 2005............ 100.00% 21.93% 64.89% 92.22% 100.00% July 2005............ 100.00% 20.75% 64.24% 91.91% 100.00% August 2005.......... 100.00% 19.58% 63.60% 91.60% 100.00% September 2005....... 100.00% 18.40% 62.88% 91.28% 100.00% October 2005......... 100.00% 17.20% 62.24% 90.96% 100.00% November 2005........ 100.00% 15.99% 61.60% 90.63% 100.00% December 2005........ 100.00% 14.79% 60.88% 90.29% 100.00% January 2006......... 100.00% 13.59% 60.25% 89.94% 100.00% February 2006........ 100.00% 12.36% 59.54% 89.59% 100.00% March 2006........... 100.00% 11.18% 58.83% 89.23% 100.00% April 2006........... 100.00% 9.99% 58.12% 88.86% 100.00% May 2006............. 100.00% 8.81% 57.50% 88.49% 100.00% June 2006............ 100.00% 7.61% 56.80% 88.11% 100.00% July 2006............ 100.00% 6.43% 56.10% 87.72% 100.00% August 2006.......... 100.00% 5.23% 55.41% 87.33% 100.00% September 2006....... 100.00% 4.03% 54.64% 86.93% 100.00% October 2006......... 100.00% 2.86% 53.95% 86.52% 100.00% November 2006........ 100.00% 1.74% 53.27% 86.11% 100.00% December 2006........ 100.00% 0.60% 52.58% 85.69% 100.00% January 2007......... 99.54% 0.00% 51.83% 85.26% 100.00% February 2007........ 98.57% 0.00% 51.16% 84.82% 100.00% March 2007........... 97.60% 0.00% 50.42% 84.38% 100.00% April 2007........... 96.63% 0.00% 49.70% 83.93% 100.00% May 2007............. 95.64% 0.00% 49.05% 83.47% 100.00% June 2007............ 94.66% 0.00% 48.33% 83.00% 100.00% July 2007............ 93.68% 0.00% 47.62% 82.53% 100.00% August 2007.......... 92.68% 0.00% 46.91% 82.05% 100.00% September 2007....... 91.70% 0.00% 46.21% 81.56% 100.00% October 2007......... 90.70% 0.00% 45.52% 81.07% 100.00% A-22 218 EXTENDED POOL FACTORS -- (CONTINUED) PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- November 2007........ 89.70% 0.00% 44.86% 80.57% 100.00% December 2007........ 88.70% 0.00% 44.19% 80.06% 100.00% January 2008......... 87.70% 0.00% 43.47% 79.54% 100.00% February 2008........ 86.70% 0.00% 42.82% 79.02% 100.00% March 2008........... 85.69% 0.00% 42.17% 78.49% 100.00% April 2008........... 84.70% 0.00% 41.46% 77.95% 100.00% May 2008............. 83.72% 0.00% 40.75% 77.40% 100.00% June 2008............ 82.76% 0.00% 40.12% 76.85% 100.00% July 2008............ 81.80% 0.00% 39.42% 76.28% 100.00% August 2008.......... 80.84% 0.00% 38.73% 75.71% 100.00% September 2008....... 79.87% 0.00% 38.04% 75.14% 100.00% October 2008......... 78.90% 0.00% 37.36% 74.55% 100.00% November 2008........ 77.93% 0.00% 36.69% 73.96% 100.00% December 2008........ 76.97% 0.00% 36.02% 73.36% 100.00% January 2009......... 75.99% 0.00% 35.35% 72.75% 99.72% February 2009........ 75.02% 0.00% 34.63% 72.14% 99.16% March 2009........... 74.04% 0.00% 33.98% 71.51% 98.59% April 2009........... 73.06% 0.00% 33.33% 70.88% 98.01% May 2009............. 72.09% 0.00% 32.64% 70.25% 97.42% June 2009............ 71.12% 0.00% 31.97% 69.60% 96.82% July 2009............ 70.14% 0.00% 31.36% 68.94% 96.21% August 2009.......... 69.16% 0.00% 30.69% 68.28% 95.59% September 2009....... 68.17% 0.00% 30.04% 67.61% 94.95% October 2009......... 67.19% 0.00% 29.38% 66.93% 94.30% November 2009........ 66.22% 0.00% 28.74% 66.25% 93.65% December 2009........ 65.23% 0.00% 28.10% 65.55% 92.98% January 2010......... 64.25% 0.00% 27.47% 64.85% 92.30% February 2010........ 63.27% 0.00% 26.79% 64.14% 91.61% March 2010........... 62.30% 0.00% 26.16% 63.43% 90.90% April 2010........... 61.31% 0.00% 25.50% 62.70% 90.19% May 2010............. 60.33% 0.00% 24.89% 61.97% 89.46% June 2010............ 59.35% 0.00% 24.24% 61.22% 88.72% July 2010............ 58.37% 0.00% 23.60% 60.47% 87.98% August 2010.......... 57.39% 0.00% 23.01% 59.72% 87.21% September 2010....... 56.42% 0.00% 22.38% 58.95% 86.44% October 2010......... 55.43% 0.00% 21.75% 58.17% 85.65% November 2010........ 54.46% 0.00% 21.14% 57.39% 84.86% December 2010........ 53.48% 0.00% 20.53% 56.60% 84.05% January 2011......... 52.51% 0.00% 19.88% 55.80% 83.23% February 2011........ 51.54% 0.00% 19.29% 55.00% 82.39% March 2011........... 50.57% 0.00% 18.71% 54.18% 81.55% April 2011........... 49.60% 0.00% 18.09% 53.36% 80.69% May 2011............. 48.63% 0.00% 17.47% 52.52% 79.82% June 2011............ 47.66% 0.00% 16.91% 51.68% 78.94% July 2011............ 46.70% 0.00% 16.32% 50.84% 78.04% August 2011.......... 45.74% 0.00% 15.73% 49.98% 77.14% September 2011....... 44.78% 0.00% 15.15% 49.11% 76.22% October 2011......... 43.83% 0.00% 14.58% 48.24% 75.28% November 2011........ 42.88% 0.00% 14.02% 47.36% 74.34% December 2011........ 41.93% 0.00% 13.47% 46.47% 73.38% January 2012......... 40.98% 0.00% 12.93% 45.57% 72.41% February 2012........ 40.03% 0.00% 12.36% 44.66% 71.43% March 2012........... 39.09% 0.00% 11.84% 43.75% 70.43% April 2012........... 38.16% 0.00% 11.28% 42.82% 69.43% May 2012............. 37.23% 0.00% 10.74% 41.89% 68.40% June 2012............ 36.30% 0.00% 10.25% 40.95% 67.37% July 2012............ 35.37% 0.00% 9.73% 40.00% 66.32% August 2012.......... 34.45% 0.00% 9.22% 39.04% 65.26% PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- September 2012....... 33.54% 0.00% 8.72% 38.08% 64.19% October 2012......... 32.63% 0.00% 8.23% 37.10% 63.10% November 2012........ 31.72% 0.00% 7.72% 36.12% 62.01% December 2012........ 30.81% 0.00% 7.25% 35.12% 60.89% January 2013......... 29.92% 0.00% 6.80% 34.12% 59.77% February 2013........ 29.03% 0.00% 6.32% 33.11% 58.63% March 2013........... 28.14% 0.00% 5.89% 32.09% 57.48% April 2013........... 27.26% 0.00% 5.44% 31.07% 56.31% May 2013............. 26.39% 0.00% 5.00% 30.03% 55.13% June 2013............ 25.52% 0.00% 4.57% 28.99% 53.94% July 2013............ 24.66% 0.00% 4.15% 27.93% 52.74% August 2013.......... 23.80% 0.00% 3.75% 26.87% 51.52% September 2013....... 22.95% 0.00% 3.36% 25.80% 50.28% October 2013......... 22.12% 0.00% 2.98% 24.72% 49.04% November 2013........ 21.31% 0.00% 2.59% 23.63% 47.78% December 2013........ 20.51% 0.00% 2.24% 22.54% 46.50% January 2014......... 19.71% 0.00% 1.87% 21.43% 45.22% February 2014........ 18.95% 0.00% 1.55% 20.32% 43.91% March 2014........... 18.18% 0.00% 1.21% 19.19% 42.60% April 2014........... 17.44% 0.00% 0.88% 18.06% 41.27% May 2014............. 16.71% 0.00% 0.57% 16.92% 39.93% June 2014............ 15.99% 0.00% 0.28% 15.77% 38.57% July 2014............ 15.27% 0.00% 0.00% 14.61% 37.20% August 2014.......... 14.57% 0.00% 0.00% 13.44% 35.82% September 2014....... 13.89% 0.00% 0.00% 12.26% 34.42% October 2014......... 13.23% 0.00% 0.00% 11.08% 33.00% November 2014........ 12.58% 0.00% 0.00% 9.88% 31.58% December 2014........ 11.95% 0.00% 0.00% 8.68% 30.13% January 2015......... 11.32% 0.00% 0.00% 7.47% 28.68% February 2015........ 10.72% 0.00% 0.00% 6.25% 27.21% March 2015........... 10.14% 0.00% 0.00% 5.01% 25.73% April 2015........... 9.58% 0.00% 0.00% 3.77% 24.23% May 2015............. 9.04% 0.00% 0.00% 2.53% 22.71% June 2015............ 8.51% 0.00% 0.00% 1.27% 21.19% July 2015............ 8.00% 0.00% 0.00% 0.00% 19.64% August 2015.......... 7.49% 0.00% 0.00% 0.00% 18.09% September 2015....... 6.99% 0.00% 0.00% 0.00% 16.52% October 2015......... 6.50% 0.00% 0.00% 0.00% 14.93% November 2015........ 6.02% 0.00% 0.00% 0.00% 12.50% December 2015........ 5.54% 0.00% 0.00% 0.00% 10.00% January 2016......... 5.08% 0.00% 0.00% 0.00% 7.50% February 2016........ 4.64% 0.00% 0.00% 0.00% 5.00% March 2016........... 4.27% 0.00% 0.00% 0.00% 2.50% April 2016........... 3.94% 0.00% 0.00% 0.00% 0.00% May 2016............. 3.63% 0.00% 0.00% 0.00% 0.00% June 2016............ 3.33% 0.00% 0.00% 0.00% 0.00% July 2016............ 3.03% 0.00% 0.00% 0.00% 0.00% August 2016.......... 2.75% 0.00% 0.00% 0.00% 0.00% September 2016....... 2.48% 0.00% 0.00% 0.00% 0.00% October 2016......... 2.23% 0.00% 0.00% 0.00% 0.00% November 2016........ 1.99% 0.00% 0.00% 0.00% 0.00% December 2016........ 1.76% 0.00% 0.00% 0.00% 0.00% January 2017......... 1.54% 0.00% 0.00% 0.00% 0.00% February 2017........ 1.32% 0.00% 0.00% 0.00% 0.00% March 2017........... 1.12% 0.00% 0.00% 0.00% 0.00% April 2017........... 0.93% 0.00% 0.00% 0.00% 0.00% May 2017............. 0.76% 0.00% 0.00% 0.00% 0.00% June 2017............ 0.60% 0.00% 0.00% 0.00% 0.00% A-23 219 EXTENDED POOL FACTORS -- (CONTINUED) PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- July 2017............ 0.48% 0.00% 0.00% 0.00% 0.00% August 2017.......... 0.39% 0.00% 0.00% 0.00% 0.00% September 2017....... 0.33% 0.00% 0.00% 0.00% 0.00% October 2017......... 0.27% 0.00% 0.00% 0.00% 0.00% November 2017........ 0.22% 0.00% 0.00% 0.00% 0.00% December 2017........ 0.17% 0.00% 0.00% 0.00% 0.00% January 2018......... 0.13% 0.00% 0.00% 0.00% 0.00% February 2018........ 0.10% 0.00% 0.00% 0.00% 0.00% March 2018........... 0.09% 0.00% 0.00% 0.00% 0.00% April 2018........... 0.07% 0.00% 0.00% 0.00% 0.00% May 2018............. 0.06% 0.00% 0.00% 0.00% 0.00% June 2018............ 0.05% 0.00% 0.00% 0.00% 0.00% July 2018............ 0.04% 0.00% 0.00% 0.00% 0.00% August 2018.......... 0.03% 0.00% 0.00% 0.00% 0.00% September 2018....... 0.02% 0.00% 0.00% 0.00% 0.00% October 2018......... 0.01% 0.00% 0.00% 0.00% 0.00% November 2018........ 0.01% 0.00% 0.00% 0.00% 0.00% December 2018........ 0.00% 0.00% 0.00% 0.00% 0.00% January 2019......... 0.00% 0.00% 0.00% 0.00% 0.00% February 2019........ 0.00% 0.00% 0.00% 0.00% 0.00% March 2019........... 0.00% 0.00% 0.00% 0.00% 0.00% April 2019........... 0.00% 0.00% 0.00% 0.00% 0.00% May 2019............. 0.00% 0.00% 0.00% 0.00% 0.00% June 2019............ 0.00% 0.00% 0.00% 0.00% 0.00% July 2019............ 0.00% 0.00% 0.00% 0.00% 0.00% August 2019.......... 0.00% 0.00% 0.00% 0.00% 0.00% September 2019....... 0.00% 0.00% 0.00% 0.00% 0.00% October 2019......... 0.00% 0.00% 0.00% 0.00% 0.00% November 2019........ 0.00% 0.00% 0.00% 0.00% 0.00% December 2019........ 0.00% 0.00% 0.00% 0.00% 0.00% January 2020......... 0.00% 0.00% 0.00% 0.00% 0.00% February 2020........ 0.00% 0.00% 0.00% 0.00% 0.00% March 2020........... 0.00% 0.00% 0.00% 0.00% 0.00% April 2020........... 0.00% 0.00% 0.00% 0.00% 0.00% May 2020............. 0.00% 0.00% 0.00% 0.00% 0.00% June 2020............ 0.00% 0.00% 0.00% 0.00% 0.00% July 2020............ 0.00% 0.00% 0.00% 0.00% 0.00% PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS OCCURRING IN A-1 A-2 B-1 C-1 D-1 ------------ -------- -------- -------- -------- -------- August 2020.......... 0.00% 0.00% 0.00% 0.00% 0.00% September 2020....... 0.00% 0.00% 0.00% 0.00% 0.00% October 2020......... 0.00% 0.00% 0.00% 0.00% 0.00% November 2020........ 0.00% 0.00% 0.00% 0.00% 0.00% December 2020........ 0.00% 0.00% 0.00% 0.00% 0.00% January 2021......... 0.00% 0.00% 0.00% 0.00% 0.00% February 2021........ 0.00% 0.00% 0.00% 0.00% 0.00% March 2021........... 0.00% 0.00% 0.00% 0.00% 0.00% April 2021........... 0.00% 0.00% 0.00% 0.00% 0.00% May 2021............. 0.00% 0.00% 0.00% 0.00% 0.00% June 2021............ 0.00% 0.00% 0.00% 0.00% 0.00% July 2021............ 0.00% 0.00% 0.00% 0.00% 0.00% August 2021.......... 0.00% 0.00% 0.00% 0.00% 0.00% September 2021....... 0.00% 0.00% 0.00% 0.00% 0.00% October 2021......... 0.00% 0.00% 0.00% 0.00% 0.00% November 2021........ 0.00% 0.00% 0.00% 0.00% 0.00% December 2021........ 0.00% 0.00% 0.00% 0.00% 0.00% January 2022......... 0.00% 0.00% 0.00% 0.00% 0.00% February 2022........ 0.00% 0.00% 0.00% 0.00% 0.00% March 2022........... 0.00% 0.00% 0.00% 0.00% 0.00% April 2022........... 0.00% 0.00% 0.00% 0.00% 0.00% May 2022............. 0.00% 0.00% 0.00% 0.00% 0.00% June 2022............ 0.00% 0.00% 0.00% 0.00% 0.00% July 2022............ 0.00% 0.00% 0.00% 0.00% 0.00% August 2022.......... 0.00% 0.00% 0.00% 0.00% 0.00% September 2022....... 0.00% 0.00% 0.00% 0.00% 0.00% October 2022......... 0.00% 0.00% 0.00% 0.00% 0.00% November 2022........ 0.00% 0.00% 0.00% 0.00% 0.00% December 2022........ 0.00% 0.00% 0.00% 0.00% 0.00% January 2023......... 0.00% 0.00% 0.00% 0.00% 0.00% February 2023........ 0.00% 0.00% 0.00% 0.00% 0.00% March 2023........... 0.00% 0.00% 0.00% 0.00% 0.00% April 2023........... 0.00% 0.00% 0.00% 0.00% 0.00% May 2023............. 0.00% 0.00% 0.00% 0.00% 0.00% June 2023............ 0.00% 0.00% 0.00% 0.00% 0.00% July 2023............ 0.00% 0.00% 0.00% 0.00% 0.00% A-24 220 AERCO LIMITED c/o AerFi Administrative Services Limited Aviation House Shannon Ireland and 22 Grenville Street St. Helier Jersey JE4 8PX Channel Islands BOOK-ENTRY DEPOSITARY, TRUSTEE, SECURITY TRUSTEE, CASH MANAGER REFERENCE AND EXCHANGE AGENT PAYING AGENT AND REGISTRAR BANKERS TRUST COMPANY BANKERS TRUST COMPANY Four Albany Street Mail Stop 5091 Four Albany Street New York, New York 10006 Mail Stop 5091 USA New York, New York 10006 USA ADMINISTRATIVE AGENT SERVICER AERFI ADMINISTRATIVE BABCOCK & BROWN LIMITED SERVICES LIMITED Oracle House Aviation House Herbert Street Shannon Dublin 2 Ireland Ireland LUXEMBOURG PAYING AGENT AND CO-REGISTRAR BANQUE INTERNATIONALE A LUXEMBOURG S.A. 69, route d'Esch L-1470 Luxembourg LEGAL ADVISORS To AerCo group as to To AerCo group as to United States law Jersey law DAVIS POLK & WARDWELL MOURANT DU FEU & JEUNE 1 Frederick's Place 22 Grenville Street London EC2R 8AB St. Helier England Jersey JE4 8PX Channel Islands To AerCo group as to Irish law MCCANN FITZGERALD 2 Harbourmaster Place Custom House Dock Dublin 1 Ireland LISTING AGENT BANQUE INTERNATIONALE A LUXEMBOURG S.A. 69, route d'Esch L-1470 Luxembourg 221 (LOGO) Printed in London X39423 222 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Except as hereinafter set forth, there is no provision of AerCo Limited's Memorandum and Articles of Association, or of any contract, arrangement or statute under which any director, trustee or officer of AerCo Limited is insured or indemnified in any manner against any liability that he may incur in his capacity as such. AerCo Limited's Articles of Association provide that AerCo Limited shall indemnify every present and former director of AerCo Limited against any loss or liability incurred by reason of being or having been a director of AerCo Limited to the fullest extent permitted by Jersey law. Article 77 of the Companies (Jersey) Law 1991 ("Article 77") permits a Jersey company to indemnify each director of that company against, among others, any liabilities incurred in defending any proceedings whether civil or criminal (i) in which judgment is given in his favor or he is acquitted, or (ii) which are discontinued otherwise than for some benefit conferred by him or on his behalf or for some detriment suffered by him, or (iii) which are settled on terms which include such benefit or detriment and, in the opinion of a majority of the directors of the company excluding any director who conferred such benefit or on whose behalf such benefit was conferred or who suffered such detriment, the director was substantially successful on the merits in his resistance to the proceedings. AerCo Limited may purchase and maintain, in the name of and at the expense of AerCo Limited, insurance for the benefit of any person who is or was a director or officer of AerCo Limited or is or was serving at the request of AerCo Limited as a director or officer in another corporation, partnership, joint venture, trust or other enterprise against any liability incurred by him or her in any such capacity, or arising out of such person's status as such, whether or not AerCo Limited would have the power to indemnify him or her against such liability under Article 77. ITEM 21. EXHIBITS (a) Exhibits The following is a list of exhibits to this Registration Statement: 3.1 Memorandum and Articles of Association of AerCo* 4.1 Indenture dated as of July 15, 1998 by and among AerCo and Bankers Trust Company, as trustee with respect to the Notes* 4.2 Form of Global Note (included in Exhibit 4.1)* 4.3 Registration Rights Agreement dated July 15, 1998 by and between AerCo and Morgan Stanley & Co. International Limited* 5.1 Opinion of Davis Polk & Wardwell as to the legality of the securities being registered hereby* 5.2 Opinion of Mourant du Feu & Jeune as to the legality of the securities being registered hereby* 8.1 Opinion of Davis Polk & Wardwell as to certain U.S. Federal income tax matters (included in Exhibit 5.1)* 8.2 Opinion of KPMG as to certain Irish tax matters* 8.3 Opinion of McCann FitzGerald as to certain Irish tax matters* 8.4 Opinion of Mourant du Feu & Jeune as to certain Jersey tax matters* 9.1 Trust Instrument constituting AerCo Holding Trust* 9.2 Shareholders Undertaking between Mourant & Co. Trustees Limited as trustee of AerCo Holding Trust the Nominees, GPA Group, AerCo and the trustee* II-1 223 10.1 Administrative Agency Agreement dated as of July 15, 1998 among AerCo, AerFi Administrative Services Limited, as Administrative Agent, Bankers Trust Company, as security trustee GPA Group, as Guarantor and each subsidiary of AerCo* 10.2 Cash Management Agreement dated as of July 15, 1998 among AerCo, Bankers Trust Company, as security trustee, GPA Cash Manager II Limited, as Cash Manager GPA, as Guarantor and each subsidiary of AerCo* 10.3 Security Trust Agreement dated as of July 15, 1998 among AerCo, Bankers Trust Company, as Security trustee and as trustee, GPA Cash Manager II Limited, as Cash Manager, AerFi Administrative Services Limited, as Administrative Agent, Lively Limited, GPA Group, Babcock & Brown Limited, Mourant & Co. Secretaries Limited and each subsidiary of AerCo* 10.4 Reference Agency Agreement dated as of July 15, 1998 among AerCo, Bankers Trust Company, as reference agent and as trustee and GPA Administrative Services Limited, as Administrative Agent* 10.5 Servicing Agreement dated as of July 15, 1998 among AerCo, Babcock & Brown Limited as Administrative Agent and each subsidiary of AerCo* 10.6 Share Purchase Agreement dated July 15, 1998 between AerCo, GPA Group and Skyscape Limited* 10.7 Deposit Agreement dated as of July 15, 1998 between AerCo and Bankers Trust Company, as book-entry depositary* 21.1 Subsidiaries of AerCo* 23.1 Consent of Davis Polk & Wardwell (included in Exhibit 5.1)* 23.2 Consent of Aircraft Information Services, Inc.* 23.3 Consent of BK Associates, Inc.* 23.4 Consent of Airclaims Limited* 23.5 Consent of Arthur Andersen, Chartered Accountants 23.6 Consent of KPMG (included in Exhibit 8.2)* 23.7 Consent of McCann FitzGerald (included in Exhibit 8.3)* 23.8 Consent of Mourant du Feu & Jeune (included in Exhibit 8.4) 23.9 Consent of KPMG, Chartered Accountants 24.1 Directors' Power of Attorney (included in signature pages)* 25.1 Statement of Eligibility of Bankers Trust Company, as trustee, under the Indenture to be qualified under the Trust Indenture Act of 1939* 99.1 Form of Letter of Transmittal* 99.2 Form of Notice of Guaranteed Delivery* 99.3 Form of Letters to DTC Participants* 99.4 Form of Letter to Clients and Form of Instruction to Book-Entry Transfer Participant* 99.5 Appraisal of Aircraft Information Services, Inc. relating to the Aircraft* 99.6 Appraisal of BK Associates, Inc. relating to the Aircraft* 99.7 Appraisal of Airclaims Limited relating to the Aircraft* 99.8 Appraisal of Aircraft Information Services, Inc. relating to the Aircraft dated January 18, 1999* 99.9 Appraisal of BK Associates, Inc. relating to the Aircraft dated January 18, 1999* 99.10 Appraisal of Airclaims Limited relating to the Aircraft dated January 18, 1999* * Previously filed. II-2 224 ITEM 22. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (c) The undersigned registrant hereby undertakes as follows: (1) That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (2) That every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offerings thereof. (d) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other that the payment by the registrant of expenses incurred or paid by a director, officer of controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 225 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant, AerCo Limited, has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Shannon, Ireland, on March 8, 1999. AERCO LIMITED By: /s/ FREDERICK W. BRADLEY, JR. ------------------------------------ Independent Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Frederick W. Bradley, Jr., Kenneth N. Peters, G. Adrian Robinson, Edward Hansom and Rose Hynes his/her true and lawful attorneys-in-fact and agent, each acting alone, with full powers of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, including post-effective amendments, as well as any related registration statement (or amendment thereto) and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all his/her said attorneys-in-fact and agents or any of them or his/her substitute or substitutes may lawfully do or cause to be done by virtue thereof. The Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the following capacities on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ FREDERICK W. BRADLEY, JR. Independent Director April 07, 1999 - ----------------------------------------------------- (principal executive officer) Frederick W. Bradley, Jr. /s/ KENNETH N. PETERS Independent Director April 07, 1999 - ----------------------------------------------------- (principal accounting Kenneth N. Peters officer) /s/ G. ADRIAN ROBINSON Independent Director April 07, 1999 - ----------------------------------------------------- (principal financial officer) G. Adrian Robinson /s/ EDWARD HANSOM Director April 07, 1999 - ----------------------------------------------------- Edward Hansom /s/ ROSE HYNES Director April 07, 1999 - ----------------------------------------------------- Rose Hynes Authorized Representative in the United States /s/ FREDERICK W. BRADLEY, JR. - ----------------------------------------------------- Name: Frederick W. Bradley, Jr. II-4 226 INDEPENDENT AUDITORS' REPORT ON SCHEDULE TO THE BOARD OF DIRECTORS OF AERCO LIMITED ("AERCO") We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Aircraft Lease Portfolio Securitization 94-1 Limited (ALPS 94-1) and the financial statements appearing under the heading "AerFi transferred aircraft" for the year ended June 30, 1998 included in this registration statement and have issued our reports thereon dated November 23, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule included within the registration statement on S-2 is the responsibility of AerCo's management and is presented for the purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. KPMG Chartered Accountants 5 George's Dock IFSC Dublin 1 Ireland /s/ KPMG January 26, 1999 S-1 227 INDEPENDENT AUDITORS' REPORT ON SCHEDULE TO THE BOARD OF DIRECTORS OF AERCO LIMITED (THE "AERCO") We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Aircraft Lease Portfolio Securitization 94-1 Limited (ALPS 94-1) and the financial statements appearing under the heading "AerFi transferred aircraft" for the years ended June 30, 1996 and June 30, 1997 included in this registration statement and have issued our reports thereon dated December 2, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule included within the registration statement on S-2 is the responsibility of the AerCo's management and is presented for the purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN Chartered Accountants St Helier, Jersey /s/ ARTHUR ANDERSEN January 26, 1999 S-2 228 ALPS 94-1 LIMITED/AERFI TRANSFERRED AIRCRAFT VALUATION AND QUALIFYING ACCOUNTS ACCOUNTS RECEIVABLE SCHEDULE II ALPS 94-1 LIMITED BALANCE AT CHARGED/(RELEASED) DEDUCTIONS BALANCE AT BEGINNING TO COSTS AND (WRITE-OFFS/ END OF YEAR/PERIOD EXPENSES TRANSFERS) OF YEAR/PERIOD -------------- ------------------ ------------ -------------- ($'000) Year ended June 30, 1996........................ 0 0 0 0 1997........................ 0 0 0 0 1998........................ 0 0 0 0 AERFI TRANSFERRED AIRCRAFT BALANCE AT CHARGED/(RELEASED) DEDUCTIONS BALANCE AT BEGINNING TO COSTS AND (WRITE-OFFS/ END OF YEAR/PERIOD EXPENSES TRANSFERS) OF YEAR/PERIOD -------------- ------------------ ------------ -------------- ($'000) Year ended June 30, 1998........................ 212 413 0 625 S-3 229 INDEX TO EXHIBITS 3.1 Memorandum and Articles of Association of AerCo* 4.1 Indenture dated as of July 15, 1998 by and among AerCo and Bankers Trust Company, as trustee with respect to the Notes* 4.2 Form of Global Note (included in Exhibit 4.1)* 4.3 Registration Rights Agreement dated July 15, 1998 by and between AerCo and Morgan Stanley & Co. International Limited* 5.1 Opinion of Davis Polk & Wardwell as to the legality of the securities being registered hereby* 5.2 Opinion of Mourant du Feu & Jeune as to the legality of the securities being registered hereby* 8.1 Opinion of Davis Polk & Wardwell as to certain U.S. Federal income tax matters (included in Exhibit 5.1)* 8.2 Opinion of KPMG as to certain Irish tax matters* 8.3 Opinion of McCann FitzGerald as to certain Irish tax matters* 8.4 Opinion of Mourant du Feu & Jeune as to certain Jersey tax matters* 9.1 Trust Instrument constituting AerCo Holding Trust* 9.2 Shareholders Undertaking between Mourant & Co. Trustees Limited as trustee of AerCo Holding Trust the Nominees, GPA Group, AerCo and the trustee* 10.1 Administrative Agency Agreement dated as of July 15, 1998 among AerCo, AerFi Administrative Services Limited, as Administrative Agent, Bankers Trust Company, as security trustee GPA Group, as Guarantor and each subsidiary of AerCo* 10.2 Cash Management Agreement dated as of July 15, 1998 among AerCo, Bankers Trust Company, as security trustee, GPA Cash Manager II Limited, as Cash Manager GPA, as Guarantor and each subsidiary of AerCo* 10.3 Security Trust Agreement dated as of July 15, 1998 among AerCo, Bankers Trust Company, as Security trustee and as trustee, GPA Cash Manager II Limited, as Cash Manager, AerFi Administrative Services Limited, as Administrative Agent, Lively Limited, GPA Group, Babcock & Brown Limited, Mourant & Co. Secretaries Limited and each subsidiary of AerCo* 10.4 Reference Agency Agreement dated as of July 15, 1998 among AerCo, Bankers Trust Company, as reference agent and as trustee and GPA Administrative Services Limited, as Administrative Agent* 10.5 Servicing Agreement dated as of July 15, 1998 among AerCo, Babcock & Brown Limited as Administrative Agent and each subsidiary of AerCo* 10.6 Share Purchase Agreement dated July 15, 1998 between AerCo, GPA Group and Skyscape Limited* 10.7 Deposit Agreement dated as of July 15, 1998 between AerCo and Bankers Trust Company, as book-entry depositary* 21.1 Subsidiaries of AerCo* 23.1 Consent of Davis Polk & Wardwell (included in Exhibit 5.1)* 23.2 Consent of Aircraft Information Services, Inc.* 23.3 Consent of BK Associates, Inc.* 23.4 Consent of Airclaims Limited* 23.5 Consent of Arthur Andersen, Chartered Accountants* 23.6 Consent of KPMG (included in Exhibit 8.2)* 23.7 Consent of McCann FitzGerald (included in Exhibit 8.3)* 230 23.8 Consent of Mourant du Feu & Jeune (included in Exhibit 8.4)* 23.9 Consent of KPMG, Chartered Accountants 24.1 Directors' Power of Attorney (included in signature pages)* 25.1 Statement of Eligibility of Bankers Trust Company, as trustee, under the Indenture to be qualified under the Trust Indenture Act of 1939* 99.1 Form of Letter of Transmittal* 99.2 Form of Notice of Guaranteed Delivery* 99.3 Form of Letters to DTC Participants* 99.4 Form of Letter to Clients and Form of Instruction to Book-Entry Transfer Participant* 99.5 Appraisal of Aircraft Information Services, Inc. relating to the Aircraft* 99.6 Appraisal of BK Associates, Inc. relating to the Aircraft* 99.7 Appraisal of Airclaims Limited relating to the Aircraft* 99.8 Appraisal of Aircraft Information Services, Inc. relating to the Aircraft dated January 18, 1999* 99.9 Appraisal of BK Associates, Inc. relating to the Aircraft dated January 18, 1999* 99.10 Appraisal of Airclaims Limited relating to the Aircraft dated January 18, 1999* * Previously filed.