UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______ TO _______.
Commission File Number 33-96884
VANGUARD AIRLINES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1149290
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
533 Mexico City Avenue
Kansas City International Airport
Kansas City, Missouri 64153
(913) 789-1388
(Address of principal executive offices, including zip code;
Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 1, 1999, there were 85,382,389 shares of Common Stock
outstanding, of which 76,436,807 shares were owned by affiliates.
The aggregate market value of the outstanding Common Stock of the
Registrant held by non-affiliates, based on the average of bid and
asked prices of such stock on March 1, 1999 of $1.00, was
$8,945,582.
Documents incorporated by reference: Portions of the
Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Vanguard Airlines, Inc. ("Vanguard" or the "Company") was
incorporated in Delaware on April 25, 1994. The Company's
principal offices are located at 533 Mexico City Avenue, Kansas
City International Airport, Kansas City, Missouri 64153, and its
telephone number is (913) 789-1388.
Vanguard is a low-fare airline offering convenient, non-stop
and connecting scheduled jet service to destinations in established
markets for both business and leisure travelers. The Company
currently operates ten leased Boeing 737-200 jet aircraft. The
Company accepted delivery of its eleventh aircraft on March 13,
1999, which is anticipated to enter revenue service on April 15,
1999. The Company's schedule provides an average of 59 daily
weekday flights serving Kansas City, Atlanta, Chicago-Midway,
Dallas/Fort Worth, Denver, Minneapolis/St. Paul, Myrtle Beach and
Pittsburgh. The Company will commence service to Cincinnati from
Chicago-Midway on April 15, 1999 when it will offer 69 daily
weekday flights. In January 1999, the Company signed a letter of
intent to lease three Boeing 737-200 jet aircraft with deliveries
anticipated throughout 1999. These three additional Boeing 737-200
aircraft will replace three older Stage II aircraft in the
Company's fleet that are scheduled to be returned to its lessors in
1999. The Company also provides limited charter services. The
Company has experienced significant growth since the commencement
of operations in December 1994, and has achieved operating revenues
of approximately $36.2 million for the year ended December 31,
1995, $68.6 million for the year ended December 31, 1996, $81.4
million for the year ended December 31, 1997 and $104.3 million for
the year ended December 31, 1998.
COMPANY'S LOW-FARE SERVICE
The Company's low-fare service is designed to meet the needs
of, and stimulate demand among, price-sensitive business and
leisure travelers. To compete favorably, low-fare airlines must
offer services that are price competitive with other airlines in
its markets and, particularly with respect to short-haul markets,
are competitive with ground transportation alternatives. The
Company typically offers its airline services at fares that are
substantially lower than fares offered prior to its entry into its
markets, especially with respect to reservations made within seven
days of departure. The Company's fares, however, are typically
matched by the incumbent carriers, especially with respect to
reservations made more than seven days prior to departure. The
Company believes its low-fare strategy will continue in light of
the Company's cost structure; however, the Company has marginally
increased fares in most of its markets.
The Company operates a revenue management system that monitors
its fares and inventory in each of its markets. The primary price
categories are: (i) promotional; (ii) 14-day advance; (iii) seven-
day advance; (iv) one-day advance and (v) walk-up. Within each
primary category, there are smaller fare price increments that are
tailored to specific conditions and historical operating data. The
purpose of the revenue management system is to achieve and maintain
acceptable load factor and yield levels in each market, thereby
maximizing revenue per available seat mile.
Most of the Company's fares are sold on a nonrefundable basis
and do not require a minimum or a Saturday night stay. Customers
who change their itinerary on a nonrefundable ticket, or who fail
to use a purchased flight reservation when scheduled and provide
advance notice to the Company, may apply the funds toward the
purchase of another Vanguard flight for use within 180 days of the
scheduled flight date, subject to a $50 service charge. As a
result of its primarily non-refundable fare structure, the
Company's passengers typically take their designated flights, and
the Company believes its "no-show" rate is approximately 6%. The
Company also offers refundable fares.
<PAGE>
The Company's low-fare service is intended to satisfy most of
the basic air transportation needs of the Company's targeted
customers while establishing the Company's reputation as a small
yet reliable airline where customers receive more than they expect
from typical low-fare airlines. The Company offers advance seat
assignments and more legroom than typical low-fare airlines. The
Company believes that the basic air transportation needs of its
targeted customers can be satisfied by providing a limited number
of flights per day on most routes, low-fares, a frequent flyer
program, in-flight beverages and advance seat assignments. The
Company, however, does not offer airport clubs, city ticket offices
(except for the city ticket office in Mission, Kansas) or certain
other amenities offered by many of its competitors. In addition,
the Company does not interline with other domestic jet airlines,
which affects, but does not prevent, the Company's ability to
reaccommodate its passengers in the event of flight cancellations
or delays. While many business travelers select traditional
airlines based on the availability of these amenities, the Company
believes that there is substantial demand for its low-fare service
both from the cost-conscious business travelers and leisure
travelers.
ROUTE SYSTEM AND SCHEDULING
The Company serves primarily short- to medium-haul, high-
volume markets with three to six round-trip flights per day. On
March 1, 1999, the average stage length of the Company's flights
was approximately 464 miles. Average stage length represents the
scheduled service aircraft miles flown divided by the total number
of departures. The Company has implemented various modifications to
its route structure since beginning operations in 1994. The
Company's original 1994 route structure was based on a point to
point strategy that focused on short- to medium-haul markets within
the Midwestern and Rocky Mountain regions of the United States.
In December 1996, the Company launched a hub and spoke
strategy based in Kansas City. During the first quarter of 1997,
the Company operated approximately 60 flights per day primarily
from its hub in Kansas City and during this period provided service
to the most non-stop destinations from Kansas City. This schedule
included three "red-eye" flights from the West Coast (Las Vegas,
Los Angeles and San Francisco) as part of its strategy to offer
more destinations with the same number of aircraft, thereby
increasing aircraft utilization and available seat miles ("ASMs").
Due to poor reliability and financial performance of the hub and
spoke schedule implemented in December 1996, the Company revised
its schedule and reduced the number of destinations offered in
September 1997.
The Company increased frequency on selected routes, eliminated
its West Coast flying from Kansas City and increased times between
arrivals and departures in order to increase its reliability and
on-time performance. The revised schedule reduced ASMs and daily
average aircraft utilization. Unit cost increases as a result of
reducing ASMs are expected to be offset by cost reduction
strategies, improved reliability and higher fares and passenger
loads in denser markets. In December 1997, the Company initiated
service between Chicago-Midway and Pittsburgh and Pittsburgh and
New York City-JFK, with two flights per day. In June 1998, the
Company terminated service between Pittsburgh and New York City-
JFK.
The Company's strategy allows it to pursue measured growth by
expanding in existing markets as well as entering new markets where
its low cost structure, current operating efficiencies and quality
of operations can be preserved. As of March 1, 1999, the Company
operated non-stop service in the following markets: (i) Atlanta
and Kansas City; (ii) Chicago-Midway and Kansas City; (iii)
Chicago-Midway and Minneapolis/St. Paul; (iv) Chicago-Midway and
Pittsburgh; (v) Dallas/Ft. Worth and Kansas City; (vi) Denver and
Kansas City; (vii) Minneapolis/St. Paul and Kansas City; and (viii)
Atlanta and Myrtle Beach. The Company is scheduled to commence
non-stop service between Chicago-Midway and Cincinnati on April 15,
1999 and limited seasonal service between Pittsburgh and Myrtle
Beach on April 4, 1999. The Company's flights are also timed to
provide connecting opportunities to and from other combinations of
these city pairs primarily at its Kansas City and Chicago gateways.
In addition, the Company's schedule provides for convenient direct
service between certain high passenger volume markets such as (i)
Dallas/Ft. Worth and Chicago-Midway and (ii) Denver and Atlanta.
<PAGE>
RESERVATION AND INFORMATION SYSTEMS
The Company's new reservation system (purchased in the third
quarter of 1997) continues the Company's simplified ticketless
service and is an important component of the Company's attempt to
maintain its low cost structure. The Company's integrated
reservation, marketing and revenue accounting system is designed to
capture information at its source and eliminate paper records when
possible. The Company's system provides immediate access to
detailed market by market data, as well as customer and financial
information obtained throughout the reservation and boarding
process. This system also collects, organizes and stores data on
customers in support of the Company's frequent flyer program and a
number of other direct marketing efforts. Management believes that
the ease of immediate access to timely, detailed information
through its reservation system enhances management functions. In
connection with its new reservation software, the Company
anticipates the ability to sell tickets over the internet through
its home page on the internet, www.flyvanguard.com, in 1999.
While a number of traditional airlines now offer ticketless
service in certain circumstances, these airlines continue to
maintain their ticketed service and the expenses associated with
the supporting accounting functions. The Company's reservation
system and processes are entirely ticketless. At the time a
reservation or sale is made, the Company provides its customers
with a confirmation number. At the airport, this information is
available to the gate agent facilitating customer check-in,
effectively eliminating slow moving customer check-in lines. The
Company's ticketless service also eliminates traditional revenue
accounting functions and the direct and indirect costs of handling
tickets.
The Company's new reservation software permits the Company to
participate in the SABRE and WORLDSPAN Computer Reservation Systems
(CRSs). The Company began participating in the SABRE CRS and
WORLDSPAN CRS in August 1997 and April 1998, respectively. Travel
agents utilizing the SABRE and WORLDSPAN CRSs may book seats on the
Company's flights, without the need to call the Company's
reservation center. The Company's reservation software and level of
CRS participation allows travel agents to send automated requests
to the Company's reservation system to verify availability of seats
and prices; upon verification from Vanguard's reservation system,
the travel agent utilizes a credit card to complete the automated
sale. The Company intends to continue to be a totally ticketless
operation. The Company previously only displayed its flight
schedule in the WORLDSPAN and GALILEO CRSs and the Company did not
display its schedule in the much larger SABRE CRS. The Company
will continue to display its flights in the GALILEO CRS, but travel
agents utilizing the GALILEO CRS currently must call the Company's
reservation center to book a flight.
The Company currently does not intend to participate in the
Airline Reporting Corporation ("ARC"), the airline industry
collection agent for travel agency sales. At the time a travel
agency reservation or sale is made, the Company identifies the
travel agency making the booking by taking credit card information.
As of April 1, 1998, the Company required most travel agencies to
pay by credit card thereby reducing collection costs and bad debt
expenses. Although travel agencies are most accustomed to doing
business through ARC, the Company believes that the cost savings
realized by avoiding the fees, ticket handling and revenue
accounting costs inherent in the ARC system justify the Company's
decision not to participate in ARC. The Company's participation in
the SABRE and WORLDSPAN CRSs will require the travel agent to
utilize a credit card to guarantee the completion of the sale. The
Company refers to this guaranteed credit card process as
"guaranteed ticketing." Under guaranteed ticketing, the Company
collects cash from the travel agency bookings directly from the
credit card processor. Further, the importance of collecting
outstanding travel agency bookings is eliminated because the
Company does not participate in ARC or maintain its own internal
billing and collection functions.
In the future, the Company may encounter problems with
features added to its computer system, with new computer hardware
provided by third parties or with a greater volume of reservations.
If the Company experiences a system failure, revenues may be lost
or significant expenses incurred in repairing, modifying or
replacing the system. With its ticketless service, the Company is
dependent on its computerized reservation system for information
<PAGE>
regarding confirmed passengers and flight schedule. The Company
is considering outsourcing its computer reservation system to a
large third party provider in the second quarter of 1999.
MARKETING AND PROMOTION
A majority of the Company's customers call its reservation
center directly to make their reservations. As a result, the
Company advertises directly to potential customers using primarily
newspapers, television and radio. The Company's advertisements
feature the Company's destinations, lowest available fares and the
Company's toll free phone number, 1-800-VANGUARD. Currently, the
marketing efforts of the Company are concentrated on price and
destination advertisements. The Company recently introduced
numerous initiatives designed to capture a larger share of the
cost-conscious business traveler market. In November 1997, the
Company launched its Road Warrior SM Program to attract more
business travelers. The Company's Road Warrior SM Program offers
among other amenities, guaranteed timely arrivals, guaranteed seats
on every flight, preferred seating, pre-assigned seating,
refundable tickets, no change fees and a business class hotline, 1-
800-UFLY-EXEC. In addition to its Road Warrior SM Program, the
Company now aggressively pursues group and bulk ticket sales to
price sensitive business travelers. The Company intends to
continue to build brand awareness around the Road Warrior SM
Program.
Approximately 40% of the Company's customers use travel agents
to make their reservations. The Company has implemented marketing
strategies and programs to build on its relationships with travel
agencies throughout its route system. The Company pays an 8%
commission to travel agents. The Company also communicates
regularly with travel agents through personal visits, parties,
direct mail and telemarketing. The Company anticipates a moderate
increase in travel agent bookings due to its participation in the
SABRE CRS and WORLDSPAN CRS and guaranteed ticketing participation
in the GALILEO CRS. See "-Reservation and Information Systems."
The Company's frequent-flyer program awards free round-trip
tickets on Vanguard to customers who complete 16 Vanguard flights,
or eight round trips, within any 12 month period. In addition to
its standard frequent flyer program, the Company on occasion
accelerates rewards on its frequent flyer program. The Company is
currently working on further enhancements and partnerships to its
frequent flyer program in order to establish more active
communication with frequent flyers and partners.
MOTIVATED AND TRAINED WORKFORCE
The Company believes that the success of an airline is
dependent in large part on the attitudes of its people. The
Company has developed a corporate culture that provides an
environment of relaxed, casual professionalism for its employees.
The Company attempts to provide a working environment conducive to
personal responsibility, creativity, accountability and commitment.
The Company has created an informal atmosphere and employed a
horizontal management structure to facilitate communication
throughout the organization. To keep all employees informed about
the Company's status and developments, the Company hosts a
quarterly question and answer session with the Company's Chairman
of the Board, Chief Executive Officer and President, Robert J.
Spane, and other executive officers of the Company. In addition,
the Company established various information lines and a daily
Company newsletter to improve the flow of information and
communications throughout the Company.
The Company seeks to select, train and maintain a highly
productive workforce of skilled, enthusiastic and energetic
employees and reward them for performance by allowing them to share
in the Company's success. Management believes that its base wage
and benefit levels are generally at market rates of other similar
airlines. The Company expects to maintain a motivated workforce
through its selection process and a casual and friendly working
environment. In addition, the Company as of January 1, 1999 has
implemented a matching component to its 401(K) plan and also offers
an employee stock purchase plan and a profit sharing plan. In
December 1998, due to the Company's improved financial performance,
<PAGE>
the Company paid a bonus to all employees who had been with the
Company for one year. The Company expects that the aforementioned
programs will further align the interests of its employees, the
Company and its customers.
The airline business is highly regulated. Regulations
promulgated by the Federal Aviation Administration ("FAA") require
pilots to be licensed as commercial pilots, with specific ratings
for aircraft to be flown and to be medically certified as
physically fit. Licenses and medical certification requirements
are subject to periodic continuation requirements including
recurrent training and recent flying experience. Both pilot
training and mechanic training for the Boeing 737-200 jet aircraft
are generally provided by independent contractors, including other
airlines. Currently, the average age and flight time of the
Company's pilots is 42 years and 4,300 hours, respectively.
Mechanics, quality control inspectors and flight dispatchers must
be licensed and qualified for the Company's aircraft. Flight
attendants must have initial and periodic training and
certification. All of these employees are subject to pre-
employment and subsequent random drug and alcohol testing.
Training programs are subject to approval and monitoring by the
FAA. Management personnel directly involved in the supervision of
flight operations, training, maintenance and aircraft inspection
must meet experience standards prescribed by the FAA regulations.
Many airlines are unionized. Management has attempted to
create an environment that is informal and that facilitates the
free flow of communication, which may reduce employees' desires to
be represented by unions. On March 9, 1999, the National Mediation
Board recognized the Vanguard Airlines Pilots Association ("VAPA")
as the bargaining unit for the Company's pilots. The Company is in
the very beginning stages of contract negotiations with VAPA. The
Company believes that its low-cost structure is derived from its
simplified procedures and not simply from its employee compensation
structure, however, the Company is unable to predict the affect the
unionization of its pilots will have on the financial performance
of the Company.
AIRPORT OPERATIONS
The Company currently serves eight airports. The Company has
leases with the airport authorities at certain airports and
sublease or handling arrangements directly with signatory airlines
at other airports. In May 1998 and February 1999, the Company
entered into leases for gates with the appropriate airport
authorities in Kansas City, Missouri and Minneapolis, Minnesota,
respectively. The Company began providing its own ground handling
services in both of these cities shortly after signing the
respective lease agreements. Most of the sublease or handling
arrangements, as discussed below, can be terminated by the other
airlines or the Company upon 30 to 60 days notice. If such a
termination were to occur, the Company would have to make
alternative arrangements or cease operations at the affected
airport. There can be no assurance that alternative arrangements
would be available at all or at a reasonable cost. See "-
Government Regulation."
Ground handling services typically involve (i) public contact
services, such as meeting, greeting and serving the Company's
customers at the check-in counter, gate and baggage claim areas and
(ii) underwing ground handling services such as marshaling the
aircraft into and out of the gate, baggage loading and unloading,
as well as lavatory and water servicing, deicing and certain
services provided to the aircraft overnight. Public contact
services at the Company's various airports are mainly conducted by
the Company's full- and part-time employees. Except as indicated
above, underwing ground handling services are primarily provided by
other airlines and/or fixed based operators. The Company performs
its own underwing ground handling services at Chicago-Midway,
Kansas City and Minneapolis/St. Paul Airports.
AIRCRAFT
The Company's aircraft fleet consists of eleven leased Boeing
737-200 jet aircraft. The Company has signed letters of intent to
lease three additional Boeing 737-200 aircraft, which will replace
the three Stage II aircraft in the Company's fleet. The Company
intends to return one aircraft in July 1999 and two aircraft in
December 1999 to their lessors in connection with the expiration of
their leases. Eight of the Company's jet aircraft were
<PAGE>
manufactured between 1968 and 1970. Three were manufactured between
1979 and 1982. The three replacement aircraft scheduled for
delivery in 1999 were manufactured in 1981. The remaining eight
aircraft have varying lease termination dates: three of its Boeing
737-200 jet aircraft has been leased for a term through 2000; two
of its aircraft have been leased for a term through 2002; and three
for a term through 2004. See "Factors That May Affect Future
Results of Operations - Limited Number of Aircraft; Aircraft
Acquisitions."
All expenses relating to the maintenance and operation of the
aircraft are the Company's responsibility. While the Company
anticipates a higher maintenance cost for older aircraft, including
costs to comply with FAA Airworthiness Directives ("ADs") and
regulations for aging aircraft, the Company believes that the total
costs of operating the Boeing 737-200 jet aircraft is competitive
with newer aircraft types because the Company's aircraft have
significantly lower acquisition or lease costs. Lower acquisition
or lease costs result in lower fixed costs, which the Company
believes will allow greater flexibility to adjust capacity to
demand.
The Company's aircraft must be brought into 100% compliance
with Federal Stage III noise level requirements by December 31,
1999. Currently, the Company's fleet meets the Stage III noise
compliance requirements of 75%. The Company's plans to return its
three remaining Stage II aircraft in 1999 and projects 100% Stage
III Compliance by December 31, 1999. The Company's aircraft to be
delivered in 1999 will meet Stage III requirements.
Because the Company's aircraft fleet consists of eleven
aircraft, if one or more of its aircraft was not in service, the
Company would experience a proportionally greater loss of capacity
than would be the case with a larger airline. Any interruption of
aircraft service as a result of scheduled or unscheduled
maintenance, however, could materially and adversely affect the
Company's service, reputation and financial performance. In the
event the Company seeks to lease additional aircraft in order to
expand its service and/or route system, there can be no assurance
that the Company will be able to lease additional aircraft on
satisfactory terms or at the times needed.
MAINTENANCE AND REPAIRS
All maintenance and repairs are accomplished in accordance
with the Company's maintenance program approved by the FAA. Older
aircraft, in general, incur greater maintenance expense than newer
aircraft. The Company believes that its aircraft are mechanically
reliable and that the ongoing cost of maintenance on such aircraft
is, and will continue to be, within industry norms. The Company
must comply with existing ADs and regulations for aging aircraft
issued by the FAA. In addition, the Company may be required to
comply with future ADs or regulations regarding maintenance and
repairs. There can be no assurance that the Company's costs of
maintenance in the future (including costs to comply with ADs and
regulations) will fall within industry norms or that the Company's
aircraft will be reliable over time.
Aircraft maintenance consists of routine and daily maintenance
and major overhauls. Routine or daily maintenance is generally
performed by the Company's mechanics in Kansas City, Chicago-
Midway, Pittsburgh and Minneapolis/St. Paul or in various other
cities, as needed, by independent contractors. The Company employs
approximately 100 mechanics and related personnel. The Company has
contracted with various independent FAA certified maintenance
operations to perform its major scheduled maintenance.
The Company continues to increase its inventory of spare
parts. In addition, the Company has contracted with an independent
contractor to make spare parts available. For this service, the
Company pays a monthly lease fee based on the value of the parts in
stock, in addition to the repair costs on "off" units when, and if,
the inventoried parts are installed on the Company's aircraft.
<PAGE>
FUEL
The cost of jet fuel is one of the Company's largest operating
expenses (approximately 13.4% of operating expenses when including
taxes and the cost of delivering fuel into the aircraft for the
year ended December 31, 1998). Fuel costs have declined
significantly over the past 12 months. For the first two months of
1999, the Company purchased fuel for approximately $0.49 per gallon
(including taxes and the cost of delivering fuel into the
aircraft), which is significantly less than the 1998, 1997 and 1996
average cost of $0.58, $0.74 and $0.79 per gallon, respectively.
Significant changes in jet fuel prices have materially affected the
Company's operating results in the past. Jet fuel prices are
susceptible to international events. The Company cannot predict
the effect of events on the future availability and cost of jet
fuel. The Company's 737-200 jet aircraft are relatively fuel
inefficient compared to newer aircraft. Accordingly, a significant
increase in the price of jet fuel will result in a
disproportionately higher increase in the Company's fuel expenses
as compared with many of its competitors, whose average aircraft is
newer and thus more fuel-efficient.
The Company has not entered into any agreements that fix the
price of jet fuel over any period of time. Therefore, an increase
in the cost of jet fuel is immediately passed through to the
Company by suppliers. As a result, the Company has experienced
reduced margins due to its inability to increase fares sufficiently
to compensate for higher fuel costs and taxes. Even if it is able
to raise selected fares, the Company will experience reduced
margins on sales prior to such fare increases. In addition to
increases in fuel prices, a shortage of supply could also have a
material adverse effect on the Company's business, financial
condition and results of operations. See "Factors That May Affect
Future Results of Operations -- Fuel Costs."
COMPETITION
Under the Airline Deregulation Act of 1978 (the "Deregulation
Act"), domestic certificated airlines are free to enter and exit
domestic routes and to set fares without regulatory approval, and
all city pair domestic airline markets are generally open to any
domestic certificated airline. As a consequence, the airline
industry is intensely competitive and susceptible to price
discounting. Airlines compete primarily with respect to fares,
scheduling (frequency and flight time), destinations, frequent-
flyer programs and type (jet or propeller) and size of aircraft.
The Company competes with numerous other airlines on its routes and
expects to compete with other airlines on any future routes. Most
of the Company's competitors are larger and have greater name
recognition and greater financial resources than the Company. In
response to the Company's commencement of service in a particular
market, competing airlines have, at times, added flights and
capacity in the market and lowered their fares, making it more
difficult for the Company to achieve or maintain profitable
operations or even maintain operations in that market. In the
future, other airlines may set their prices at or below the
Company's fares, introduce new non-stop service between cities
served by the Company or add additional capacity in markets served
by the Company in an attempt to prevent the Company from achieving
or continuing profitable operations. The Company may also face
competition from existing airlines that may begin serving markets
the Company serves, from new low-cost airlines that may be formed
to compete in the low-fare market (including any airlines that may
be formed by major airlines) and from ground transportation
alternatives. See "Factors that may Affect Future Results of
Operations-Intense Competition and Competitive Reaction."
GOVERNMENT REGULATION
All interstate air carriers are subject to regulation by the
DOT and the FAA under the Federal Aviation Act (the "Aviation
Act"). The DOT's jurisdiction extends primarily to the economic
aspects of air transportation, while the FAA's regulatory authority
relates primarily to air safety, including aircraft certification
and operations, crew licensing and training and maintenance
standards. In general, the amount of economic regulation over
interstate air carriers in terms of market entry, exit, pricing,
and inter-carrier acquisitions and agreements has been greatly
reduced subsequent to enactment of the Deregulation Act.
<PAGE>
Presently, four airports, Chicago-O'Hare, New York City-
LaGuardia, New York City-JFK and Washington, D.C.-National, are
regulated by means of "slot" allocations, which represent
governmental authorizations to take off or land at a particular
airport within a specified time period. The DOT regulations
currently permit the buying, selling, trading or leasing of slots.
Slot values depend on several factors, including the airport, time
of day covered, the availability of slots and the class of the
aircraft. FAA regulations require the use of each slot at least
80% of the time and provide for forfeiture of slots in certain
circumstances without compensation. The DOT may require forfeiture
of slots without compensation if it determines slots are needed to
meet operational needs of international or essential air
transportation. The Company currently does not serve any airports
that require slot allocations. The Company filed an application
for slot exemption to allow the Company to offer non-stop service
between Kansas City and New York City-JFK and between Pittsburgh
and New York City-JFK. The slot restrictions at New York City-JFK
cover a five-hour period between 3:00 p.m. and 7:59 p.m.
Vanguard began flight operations in December 1994. Since
then, Vanguard has had no reportable incidents to the DOT that have
involved serious bodily injury or significant damage to any of the
Company's aircraft.
The Company's flight personnel, flight and emergency
procedures and aircraft and maintenance facilities are subject to
periodic inspections and tests by the FAA. The Company believes
that the FAA often applies strict scrutiny to the operations of
small or new entrant airlines to ensure proper compliance with FAA
regulations. FAA examiners have flown on numerous Company flights
and have subjected its flight and ground personnel to periodic
announced and unannounced reviews and inspections. The Company
believes that its operations and compliance with FAA regulations
are within industry standards.
The DOT and FAA also have authority under the Aviation Safety
and Noise Abatement Act of 1979, as amended, under the Airport
Noise and Capacity Act of 1990 ("ANCA") and, along with the
Environmental Protection Agency, under the Clean Air Act, as
amended, to monitor and regulate aircraft engine noise and exhaust
emissions. The Company believes its aircraft comply with all
applicable FAA noise control regulations and with current emissions
standards. See "Aircraft and Maintenance and Repairs."
INSURANCE
The Company carries the types and amounts of insurance
required by the DOT, which the Company believes are customary for
airlines similar to the Company, including coverage for public
liability, property damage, aircraft loss or damage, baggage and
cargo liability and workers' compensation. While the Company
believes such insurance will be adequate as to amounts and risks
covered, there can be no assurance that such coverage will continue
to be available or that it will fully protect the Company against
all losses that it might sustain.
EMPLOYEES
As of March 1, 1999 the Company employed approximately 769
full-time and 152 part-time employees consisting of 96 pilots, 122
flight attendants, 34 line mechanics, 214 station agents, 216
reservation agents and 239 management and staff personnel.
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Vanguard's business operations and financial results are
subject to various uncertainties and future developments that
cannot be predicted. Certain of the principal risks and
uncertainties that may affect Vanguard's operations and financial
results are identified below.
LIMITED OPERATING HISTORY; HISTORY OF SIGNIFICANT LOSSES. The
Company has a limited history of operations, beginning flight
operations on December 4, 1994. Since the Company's inception on
April 25, 1994 and until 1997, the Company incurred significant
losses from operations. In 1998, the Company recorded income from
operations of $1.5 million and generated positive cash flow from
operations of $6.0 million. As of December 31, 1998 the Company
had an accumulated deficit of $71.2 million and a working capital
deficit of $7.9 million. As of December 31, 1998, the Company had
positive stockholders' equity of $5.8 million. The Company's
limited operating history makes the prediction of future operating
results difficult. There can be no assurance that the Company will
be able to sustain profitable operations in the future.
AVAILABILITY OF WORKING CAPITAL AND FUTURE FINANCING
RESOURCES. The airline business is extremely capital intensive,
including, but not limited to, lease payment obligations and
related maintenance requirements for existing or additional
aircraft. Historically, the Company's continued operations have
been dependent upon equity and debt financings from its principal
stockholders. There can be no assurance that the Company's
principal stockholders will provide working capital for the
Company's operations if the Company is unable to continue to
generate positive cash flow from its operations. Any inability to
obtain additional financing when needed could require the Company
to cease or significantly curtail operations and would have a
material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources."
INTENSE COMPETITION AND COMPETITIVE REACTION. The Company is
subject to intense competition on all of its routes. Under the
Deregulation Act, domestic certificated airlines may enter and exit
domestic markets and set fares without regulatory approval. All
city-pair domestic airline markets, except for those that are slot-
controlled, are generally open to any domestic certificated
airline. Airlines compete primarily with respect to fares,
schedules (frequency and flight times), destinations, frequent
flyer programs and type (jet or propeller) and size of aircraft.
The Company competes with various other airlines on its routes and
expects to compete with other airlines on any future routes. Most
of the Company's competitors are larger and have greater name
recognition and financial resources than the Company. In response
to the Company's commencement of service in a particular market,
competing airlines have, at times, added flights and capacity and
lowered their fares in the market, making it more difficult for the
Company to achieve profitable operations in such markets. In the
future, other airlines may set their prices at or below the
Company's fares or introduce new non-stop service between cities
served by the Company in attempts to prevent the Company from
achieving or maintaining profitable operations in that market.
CONSUMER CONCERN ABOUT OPERATING SAFETY AT NEW-ENTRANT
CARRIERS OR TYPE OF AIRCRAFT. Aircraft accidents or other safety-
related issues involving any carrier, may have an adverse effect on
airline passengers' perceptions regarding the safety of new-
entrant, low-fare carriers. As a result, any such future event
could have a material adverse effect on the Company's business,
financial condition and results of operations, even if such events
do not include the Company's operations or personnel. Similarly,
publicized accounts of mechanical problems or accidents involving
Boeing 737s or other aging aircraft could have a material adverse
effect on the Company's business, financial condition and results
of operations, even though the Company itself may not experience
any such problems with its jet aircraft.
SEASONALITY AND CYCLICALITY. The Company's operations are
dependent upon passenger travel demand. Airlines typically
experience reduced demand at various times during the fall and
winter and increased demand for service during the spring and
summer. Within these periods, the Company experiences variations
in passenger demand based on its particular routes and passenger
<PAGE>
demographics. The Company has experienced reduced demand during
the fall and winter with adverse effects on revenues, operating
results and cash flow. In addition, passenger travel in the airline
industry, particularly leisure travel, is highly sensitive to
adverse changes in general economic conditions. A worsening of
current economic conditions, or an extended period of recession
nationally or in the regions served by the Company, would have a
material adverse effect of the Company's business, financial
condition and results of operations.
FUEL COSTS. The cost of jet fuel is one of the largest
operating expenses for an airline and particularly for the Company
due to the relative fuel inefficiency of its aircraft. Jet fuel
costs, including taxes and the cost of delivering fuel into the
aircraft, accounted for approximately 13.4% of the Company's
operating expenses for the year ended December 31, 1998. The
Company's average cost per gallon for the past three years have
been $0.79 per gallon in the year ended December 31, 1996, $0.74
per gallon in the year ended December 31, 1997 and $0.58 per gallon
in the year ended December 31, 1998. Jet fuel costs are subject to
wide fluctuations as a result of sudden disruptions in supply. The
Company cannot predict the effect on the future availability and
cost of jet fuel. The Boeing 737-200 jet aircraft is relatively
fuel inefficient compared to newer aircraft. Accordingly, a
significant increase in the price of jet fuel will result in a
disproportionately higher increase in the Company's fuel expenses
as compared with many of its competitors who have, on average,
newer and thus more fuel-efficient aircraft. The Company has not
entered into any agreements that fix the price of jet fuel over any
period of time. Therefore, an increase in the cost of jet fuel
will be immediately passed through to the Company by suppliers.
The Company has experienced reduced margins at times when the
Company has been unable to increase fares to compensate for such
higher fuel costs. Even at times when the Company is able to raise
selected fares, the Company has experienced reduced margins on
sales prior to such fare increases. In addition to increases in
fuel prices, a shortage of supply will also have a material adverse
effect on the Company's business, financial condition and results
of operations.
LIMITED NUMBER OF AIRCRAFT; AIRCRAFT ACQUISITIONS. The
Company's fleet consists of eleven aircraft and if one or more of
its aircraft were not in service, the Company would experience a
proportionally greater loss of capacity than would be the case for
an airline utilizing a larger fleet. Any interruption of aircraft
service as a result of scheduled or unscheduled maintenance could
materially and adversely affect the Company's service, reputation
and financial performance. The market for leased aircraft
fluctuates based on certain worldwide macroeconomic factors. There
can be no assurance that the Company will be able to lease
additional aircraft on satisfactory terms or at the times needed.
See "Business - Aircraft."
GOVERNMENT REGULATION. The Company is subject to the Aviation
Act, under which the DOT and the FAA exercise regulatory authority
over airlines. This regulatory authority includes, but is not
limited to: (i) the initial determination and continuing review of
the fitness of air carriers (including financial, managerial,
compliance-disposition and citizenship fitness); (ii) the
certification and regulation of aircraft and other flight
equipment; (iii) the certification and approval of personnel who
engage in flight, maintenance and operations activities; and (iv)
the establishment and enforcement of safety standards and
requirements with respect to the operation and maintenance of
aircraft, all as set forth in the Aviation Act and the Federal
Aviation Regulations. The FAA has promulgated a number of
maintenance regulations and directives relating to, among other
things, retirement of aging aircraft, increased inspections and
maintenance procedures to be conducted on aging aircraft, collision
avoidance systems, aircraft corrosion, airborne windshear avoidance
systems and noise abatement. As a result of recent incidents
involving airlines, the FAA has increased its review of commercial
airlines generally and particularly with respect to small and new-
entrant airlines, such as the Company. The Company's operations
are subject to constant review by the FAA.
Additional rules and regulations have been proposed from time
to time in the last several years and that, if enacted, could
significantly increase the cost of airline operations by imposing
substantial additional requirements or restrictions on airline
operations. There can be no assurances that any of these rules or
<PAGE>
regulations would not have a material adverse effect on the
Company's business, financial condition and results of operations.
The DOT and FAA also enforce federal law with respect to
aircraft noise compliance requirements. The Company's current
fleet meets the current, Stage III noise compliance requirements
(75% of its fleet Stage III compliance). By the end of 1999, the
Company's aircraft fleet is required be 100% Stage III compliant.
The Company plans to return its three remaining Stage II aircraft
this year upon the expiration of their leases. See "Business -
Aircraft."
The Company has obtained the necessary authority to perform
airline operations, including a Certificate of Public Convenience
and Necessity issued by the DOT pursuant to 49 U.S.C. Section 41102
and an air carrier operating certificate issued by the FAA under
Part 121 of the Federal Aviation Regulations. The continuation of
such authority is subject to continued compliance with applicable
rules, regulations and laws pertaining to or affecting the airline
industry, including any rules and regulations that may be adopted
by the DOT and FAA in the future. No assurance can be given that
the Company will be able to continue to comply with all present or
future rules, regulations and laws or that such rules, regulations
and laws would not materially and adversely affect the Company's
business, financial condition and results of operations.
ITEM 2. PROPERTIES
The Company leases approximately 20,500 square feet of office
space near Kansas City International Airport ("KCI") for corporate,
training, operation and maintenance functions pursuant to a month-
to-month lease. The Company leases approximately 17,000 square
feet of office space in Mission, Kansas for corporate offices and
reservation's center, under a lease that expires in September 1999.
The Company is in discussions to renew a portion of the Mission,
Kansas lease for its reservation center. The Company also leases
approximately 7,250 square feet in Lawrence, Kansas, which was used
as one of its two reservations facilities. The Company closed its
Lawrence, Kansas reservation center in September 1997. The Company
has subleased this call center to a third party since September
1997 and is in current discussions to sublease or assign the
remaining two years of its lease to the current subtenant.
The check-in counters, gates and airport office facilities at
each of the airports the Company serves are leased from the
appropriate airport authority or other airlines pursuant to
subleases or other arrangements. Such arrangements may include
baggage handling, station operations, cleaning and other services.
If such facilities at current or new cities served by the Company
are not available to the Company at acceptable rates, or if such
facilities become no longer available to the Company at acceptable
rates, the Company may choose not to service such markets.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material litigation or
legal proceedings at this time and is not aware of any material
litigation or legal proceedings threatened against it.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the
Company during the fourth quarter of the fiscal year ended December
31, 1998.
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and positions
of the Company's executive officers and directors as of March 1,
1999:
NAME AGE POSITION
Robert J. Spane 58 Chairman of the Board, Chief Executive
Officer and President
James E. Eckart 55 Vice President - Ground Operations
William A. Garrett 33 Vice President - Finance and Chief
Financial Officer
Brian S. Gillman 29 Vice President, General Counsel and
Secretary
Alan R. Gorthy, Jr. 53 Vice President - Maintenance
James B. Miller 60 Vice President - Engineering and
Quality Assurance
William F. McKinney 59 Vice President - Operations
Russell Winter 32 Vice President - Marketing and
Planning
Lee M. Gammill, Jr. 64 Director
Denis T. Rice 66 Director
Leighton W. Smith 59 Director
Set forth below is a description of the business experience of
each executive officer and director of the Company.
ROBERT J. SPANE was elected a director of the Company in May 1996
and elected Chairman of the Board, Chief Executive Officer and
President of the Company in June 1997. Mr. Spane served in the
U.S. Navy for 35 years where his last position was Commander,
Naval Air Force Pacific, which he held from
October 1993 to February 1996. Mr. Spane, as Commander,
Naval Air Force Pacific, was responsible for all finances, training,
logistics and the material condition of all aircraft carriers,
aircraft and naval air stations in the Pacific. Mr. Spane
retired from the U.S. Navy in February 1996 as a Vice Admiral.
Mr. Spane is a 1962 graduate of the U.S. Naval Academy.
JAMES E. ECKART joined the Company in July 1997 as a customer
service consultant and was appointed Vice President of Ground
Operations in August 1997. For over 30 years Mr. Eckart was
involved in aviation-related activities as a United States Naval
Aviator, where he served most recently as a Captain. While in the
Navy, Mr. Eckart commanded aviation squadrons and major aviation
shore stations, was also involved in aviation training and served as
liaison between the U.S. Navy and the FAA. Mr. Eckart holds a
commercial pilot license and a degree in Human Resources Management.
WILLIAM A. GARRETT joined the Company in June 1996 as Corporate
Controller and was appointed Vice President - Finance and Chief
Financial Officer in July 1996. From December 1993 to June 1996, he
served as a Senior Manager with Ernst & Young LLP. From 1987 to
1993, he served on the staff of and as manager for Coopers and
Lybrand LLP. Mr. Garrett is a certified public accountant and a
member of the American Institute of Public Accountants. Mr. Garrett
obtained a B. S. Degree in Business Administration and Accounting
from Washington & Lee University.
BRIAN S. GILLMAN joined the Company in July 1996 as Vice
President, General Counsel and Secretary. From September 1994 to
July 1996, Mr. Gillman was an associate in the law firm of Stinson,
Mag & Fizzell, P.C., Kansas City, Missouri, where he served as a
corporate counsel for the Company. Mr. Gillman received his Juris
Doctorate and B. B. A. in Accounting from the University of Iowa in
1994 and 1991, respectively.
ALAN R. GORTHY, JR. joined the Company in November 1997 as the
Station Manager in Kansas City. He was promoted to Director of
Stations in May 1998 and was appointed as Vice President -
Maintenance in August 1998. Prior to joining the Company, Mr.
<PAGE>
Gorthy was employed with United Sports of America, an international
sports promotion and entertainment company from March 1995 to
October 1997. Mr. Gorthy retired in November 1994 as a Captain in
the U. S. Navy. During his twenty-five years of service, which
began in February 1969, Mr. Gorthy commanded aviation squadrons and
major aviation shore stations.
JAMES B. MILLER joined the Company in April 1996 as Manager of
Maintenance Programs and Planning, was appointed to Director of
Quality Assurance in July 1997, Vice President - Maintenance in
March 1998 and Vice President - Engineering and Quality Assurance in
August 1998. Prior to joining the Company, Mr. Miller was employed
with Trans World Airlines for 28 years. Mr. Miller served most
recently as a Staff Vice-President, Engineering and Quality
Assurance for Trans World Airlines.
WILLIAM F. MCKINNEY joined the Company in March 1996 as Chief
Pilot and was appointed Vice President - Operations in April 1996.
Prior to joining the Company, Captain McKinney served as a pilot for
Trans World Airlines for 29 years, where he served most recently as
General Manager of Flying (Chief Pilot) for the Western Region of
the United States.
RUSSELL WINTER joined the Company in August 1997 as Vice
President - Marketing and Planning. From January 1995 to August
1997, Mr. Winter was a Vice President at Hambrecht & Quist, a
wholly-owned subsidiary of Hambrecht & Quist Group. Hambrecht &
Quist is an investment banking firm based in San Francisco,
California. Mr. Winter serves as a member of Hambrecht & Quist TSP
Investment Management Co., L.L.C. and Hambrecht & Quist TSP II
Investment Management, L.L.C., one of the general partners of
Hambrecht & Quist TSP Investors, L.P. and Hambrecht & Quist TSP II
Investors, L.P., respectively. From August 1992 to January 1995,
Mr. Winter was a Business Analyst with the Airbus Division of
British Aerospace.
LEE M. GAMMILL, JR. was elected a director of the Company in
September 1997. Mr. Gammill is the retired Vice Chairman of the
Board of New York Life Insurance Company. From 1989 until he retired
in May 1997, Mr. Gammill served as the Executive Vice President -
Individual Insurance Operations at New York Life. Mr. Gammill joined
New York Life in 1957 as a sales agent and held various management
and executive positions throughout his 40-year career with New York
Life.
DENIS T. RICE was elected a director of the Company in April
1997. Mr. Rice is a director in the law firm of Howard, Rice,
Nemerovski, Canady, Falk & Rabkin, P.C., San Francisco, California,
a firm he has been associated with since 1961.
ADMIRAL LEIGHTON W. SMITH, JR. USN (RET.) was elected a director
of the Company in August 1998. Admiral Smith was appointed the honor
of a four star rank in April 1994, became Commander in Chief of the
Allied Forces Southern Europe and concurrently assumed the command of
the NATO-led Implementation Force (IFOR) in Bosnia in December 1995.
Admiral Smith retired from the U.S. Navy after 34 years of service
in October 1996. Currently, he serves as a Senior Fellow at the
Center for Naval Analysis, is Chairman of the Board of Trustees of
the U. S. Naval Academy Alumni Association. Admiral Smith also
serves on the Executive Boards of the Naval Aviation Museum and the
Association of Naval Aviation and is on the National Advisory Council
to the Navy League.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The Common Stock began trading publicly on the Nasdaq SmallCap
Market under the symbol "VNGD" on November 3, 1995. Prior to that
date, there was no public market for the Common Stock. The
<PAGE>
following table sets forth, for the periods indicated, the high and
low sales prices of the Common Stock as reported on the Nasdaq
SmallCap Market. The Common Stock was delisted from the Nasdaq
SmallCap Market on December 16, 1996. The Common Stock currently
trades on the OTC Bulletin Board.
High Low
1997
First Quarter $3 1/8 $1 3/4
Second Quarter $2 3/16 $1 3/8
Third Quarter $2 $1 1/8
Fourth Quarter $1 1/8 $ 4/10
1998
First Quarter $ 3/4 $ 1/2
Second Quarter $1 5/8 $ 9/16
Third Quarter $1 7/8 $ 15/16
Fourth Quarter $1 1/8 $ 7/8
1999
January $1 1/8 $1
February $1 1/8 $ 15/16
The above OTC Bulletin Board quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. As of March 1, 1999,
there were approximately 353 holders of record of Common Stock.
DIVIDEND POLICY
The Company has not declared or paid dividends on its Common
Stock. The Company currently intends to retain any future earnings
to fund operations and to continue the development of its business
and, thus, does not expect to pay any cash dividends on its common
stock in the foreseeable future.
RECENT SALE OF UNREGISTERED SECURITIES
On January 17, 1999, two of the Company's principal
stockholders agreed to establish a two-year $4.0 million letter of
credit in favor of the Company's credit card processor on behalf of
the Company. In consideration for the establishment of this letter
of credit, the Company issued up to 4,000,000 warrants to purchase
shares of Common Stock with an exercise price of $1.00 per share.
Upon execution of the letter of credit, 400,000 warrants immediately
vested. The remaining 3,600,000 vest quarterly according to the
amount of exposure under such letter of credit. Each warrant
expires on January 17, 2004. This transaction was made under an
exemption from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data and
other operating data of the Company for the years ended December 31,
1995, 1996, 1997 and 1998 and for the period from inception
(April 25, 1994) to December 31, 1994. The selected financial
data in the table have been derived from the audited
financial statements of the Company, which are included
elsewhere herein. The data should be read in
conjunction with the Financial Statements of the Company and the
related Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere
herein.
<TABLE>
<CAPTION>
Period from Inception
(April 25, 1994) to Year Ended Year Ended Year Ended Year Ended
December 31, 1994 (4) December 31, 1995 December 31, 1996 December 31, 1997 December 31, 1998
--------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Total operating
revenues $ 760,985 $ 36,159,018 $ 68,589,101 $ 81,384,138 $ 104,268,542
Total operating
expenses 4,274,275 48,225,313 92,503,417 106,758,900 102,814,267
--------------------- ----------------- ----------------- ----------------- -----------------
Operating income
(loss) $ (3,513,290) (12,066,295) (23,914,316) (25,374,762) 1,454,275
Total other
expense, net 70,833 (129,235) (1,893,754) (2,871,241) (2,933,212)
--------------------- ----------------- ----------------- ----------------- -----------------
Net loss $ (3,442,457) $ (12,195,530) $ (25,808,070) $ (28,246,003) $ (1,478,937)
===================== ================= ================= ================= =================
Net loss per
share (1) $ (0.70) $ (1.65) $ (2.85) $ (1.85) $ (0.02)
===================== ================= ================= ================= =================
Weighted average
common shares
outstanding (1) 4,907,377 7,395,921 9,056,888 15,232,901 65,767,641
===================== ================= ================= ================= =================
OPERATING DATA: (2)
Revenue passenger
miles(RPMs) 6,515,183 290,030,187 667,845,140 767,239,664 702,003,589
Available seat
miles (ASMs) 15,251,200 562,340,660 1,090,058,358 1,295,760,836 1,042,688,790
Load factor 42.72% 51.58% 61.27% 59.21% 67.33%
Break-even load
factor (3) - 69.95% 83.87% 79.62% 66.55%
Passenger yield
per RPM - $ 0.1172 $ 0.0973 $ 0.0998 $ 0.1393
Total revenue
per ASM - $ 0.0643 $ 0.0629 $ 0.0628 $ 0.1000
Operating cost
per ASM - $ 0.0858 $ 0.0849 $ 0.0824 $ 0.0986
Block hours flown 441 14,781 24,721 29,859 28,122
Average flight
length (miles) 464 372 530 585 466
Operating cost per
block hour - $ 3,263 $ 3,742 $ 3,575 $ 3,656
Aircraft in service
(end of period) 2 7 8 9 9
Airports served
(end of period) 3 9 15 9 8
BALANCE SHEET DATA:
Cash and cash
equivalents $ 1,126,809 $ 3,491,640 $ 402,083 $ 1,082,712 $ 7,417,048
Working capital
deficiency $ (1,297,439) (4,172,305) (16,296,881) (22,352,910) (7,915,882)
Property and
equipment
net $ 2,588,892 4,550,818 5,049,658 5,484,684 8,131,453
Total assets $ 6,191,439 16,425,698 20,318,247 24,763,884 33,646,583
Long-term debt - - 5,000,000 1,900,000 -
Total stockholders'
equity
(deficit) $ 2,576,023 3,544,633 (13,238,017) (11,944,434) 5,783,872
</TABLE>
(1) See Note 1 of Notes to Financial Statements.
(2) "REVENUE PASSENGER MILES" or "RPMs" represents the aggregate
amount of miles flown by revenue passengers. "AVAILABLE SEAT
MILES" or "ASMs" represents the number of seats available for
passengers multiplied by the number of miles those seats are
flown. "BREAK-EVEN LOAD FACTOR" represents the percentage of
ASMs that must be flown for the airline to break-even after
operating and interest expenses assuming non-passenger
operations, primarily mail, operate at break-even. Break-even
load factor is calculated by taking total expenses (see
footnote (3)), minus non-passenger revenue, divided by ASMs,
divided by passenger yield per RPM. "PASSENGER YIELD PER RPM"
represents the total passenger revenue divided by RPMs. "TOTAL
REVENUE PER ASM" represents total revenues divided by total
ASMs. "OPERATING COST PER ASM" represents total operating
expenses divided by total ASMs. "BLOCK HOURS FLOWN" represents
the time between aircraft gate departure and aircraft gate
arrival. "AVERAGE FLIGHT LENGTH" represents aircraft miles
flown divided by the number of departures.
(3) Excludes $2,629,785, $1,858,767, $1,850,000 and $71,000 of
noncash deferred debt issuance cost amortization for the years
ended December 31, 1998, 1997, 1996 and 1995, respectively.
(4) The Company's flight operations commenced December 4, 1994.
Prior to that time, the Company was in the development stage.
As a result, statistical comparisons of the years
1998,1997,1996 and 1995 with the 1994 period would not be
meaningful. Therefore, Operating Data for the Period from
Inception (April 25, 1994) to December 31, 1994 has not been
presented for the following statistics: Break-even load
factor, Passenger yield per RPM, Total revenue per ASM,
Operating cost per ASM and Operating cost per block hour.
<PAGE>
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT
OF FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES AND INFORMATION THAT IS BASED ON MANAGEMENT'S
BELIEFS AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY
AVAILABLE TO MANAGEMENT. WHEN USED IN THIS DOCUMENT, THE WORDS
"ESTIMATE," "ANTICIPATE," "PROJECT" AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
CURRENTLY ANTICIPATED. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, AVAILABILITY OF
WORKING CAPITAL AND FUTURE FINANCING RESOURCES, GENERAL ECONOMIC
CONDITIONS, THE COST OF JET FUEL, THE OCCURRENCE OF EVENTS
INVOLVING OTHER LOW-FARE CARRIERS, THE CURRENT LIMITED SUPPLY OF
BOEING 737 JET AIRCRAFT AND THE HIGHER LEASE COSTS ASSOCIATED WITH
SUCH AIRCRAFT, POTENTIAL CHANGES IN GOVERNMENT REGULATION OF
AIRLINES OR AIRCRAFT AND ACTIONS TAKEN BY OTHER AIRLINES
PARTICULARLY WITH RESPECT TO SCHEDULING AND PRICE IN THE COMPANY'S
CURRENT OR FUTURE ROUTES AND UNANTICIPATED YEAR 2000 COMPLIANCE
COSTS AND EXPENSES. FOR ADDITIONAL DISCUSSION OF SUCH RISKS, SEE
"FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS."
COMPANY
The Company was incorporated on April 25, 1994 and operates as
a low-fare, short- to medium-haul passenger airline that provides
convenient scheduled jet service to destinations in established
markets in the United States. The Company's flight operations
began on December 4, 1994 with two Boeing 737-200 jet aircraft
operating two daily flights each way between Kansas City and Denver
and two daily flights each way between Denver and Salt Lake City.
The Company currently operates ten leased Boeing 737-200 jet
aircraft. The Company leased its eleventh aircraft in March 1999
and will begin flying revenue service with this aircraft on April
15, 1999. In addition, in January 1999 the Company signed letters
of intent to lease and delivery of three additional Boeing 737-200
Stage III aircraft during 1999. These three additional aircraft
will replace three older Boeing 737-200 Stage II aircraft in the
Company's fleet whose leases expire in July and December 1999. The
Company's current schedule provides an average of 59 daily weekday
flights serving Kansas City, Atlanta, Chicago-Midway, Dallas/Fort
Worth, Denver, Minneapolis/St. Paul, Pittsburgh and Myrtle Beach.
Beginning April 15, 1999 the Company will commence flights between
Chicago-Midway and Cincinnati four times daily. The Company
continues to review its financing alternatives in order to purchase
or lease additional aircraft under suitable terms. There can be no
assurance that the Company will be able to secure adequate
financing arrangements for the lease or purchase of additional
aircraft. The Company also provides limited charter services.
The Company has experienced significant growth since the
commencement of operations in December 1994, and has achieved
operating revenues of $36.2 million for the year ended December 31,
1995, $68.6 million for the year ended December 31, 1996, $81.4
million for the year ended December 31, 1997, and $104.3 for the
year ended December 31, 1998.
The Company's operating revenues are derived principally from
the sale of airline services to passengers and are recognized when
transportation is provided. Total operating revenues are primarily
a function of fare levels and the number of seats sold per flight.
The Company's business is characterized, as is true for the
airline industry generally, by high fixed costs relative to
operating revenues and low profit margins. The Company's principal
business strategy is to provide airline services in established,
high passenger-volume markets that are not served by other low-fare
airlines.
<PAGE>
The primary factors expected to affect the Company's future
operating revenues are the Company's ability to offer and maintain
competitive fares, the reaction of existing competitors to the
continuation or commencement of operations by the Company in a
particular market (including changes in their fare structure,
aircraft type and schedule), the possible entry of other low-fare
airlines into the Company's current and future markets, the
effectiveness of the Company's marketing efforts, the occurrence of
events involving other low-fare carriers, passengers' perceptions
regarding the safety of low-fare carriers, general economic
conditions and seasonality factors. The Company's costs are
affected by fluctuations in the price of jet fuel, scheduled and
unscheduled aircraft maintenance expenses, labor costs, the level
of government regulation, fees charged by independent contractors
for services provided, rent for gates and other facilities, and
marketing and advertising expenses. The Company has a limited
history of operations and, from its inception in 1994 through the
first quarter of 1998, has experienced significant losses. As of
December 31, 1998, the Company had an accumulated deficit of $71.2
million. The Company had a net loss of $1.5 million, however, net
cash flows provided by operating activities totaled $6.0 million
for the year ended December 31, 1998. At December 31, 1998,
current liabilities exceeded current assets by $7.9 million. As a
result of its limited operating history, together with the
uncertainty in the airline industry generally, management is unable
to accurately predict the future operating results of the Company.
The Company has generated positive cash flow from operations from
March 1998 through December 1998 and anticipates generating positive
cash flows from operations for the year ending December 31, 1999.
The Company received proceeds of approximately $5.2 million in August
1998 from the exercise of warrants. Management believes that cash to
be generated from operations together with the cash received in
August 1998 from the warrant exercise will provide the necessary
working capital for operations through December 1999. The Company is
exploring options to raise additional capital to fund anticipated
expansion of operations. There can be no assurance the Company will
be successful in expanding operations or raising additional capital
that may be needed for this purpose.
OVERVIEW
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1997
OPERATING REVENUES
Total operating revenues increased 28% from $81.4 million for
the year ended December 31, 1997 to $104.3 million for the year
ended December 31, 1998. This increase was primarily attributable
to increases in the number of passengers, passenger yield and load
factor in the year ended December 31, 1998 as compared to 1997.
The number of passengers increased 15% from 1.3 million in the year
ended December 31, 1997 to 1.5 million in the year ended December
31, 1998. Passenger yield increased 40% from 10.0 cents in the year
ended December 31, 1997 to 13.9 cents in the year ended December
31, 1998. The increases were realized despite decreases in both
ASMs and RPMs in the year ended December 31, 1998 compared to
December 31, 1997. The Company began flying a new route structure
on December 21, 1996, which included the initiation of services
from Kansas City to Atlanta, Ft. Myers, Las Vegas, Miami, Orlando
and Tampa/St. Petersburg as well as non-stop service between
Chicago-Midway and Kansas City. This route restructuring refocused
the Company's strategy by creating a hub in Kansas City. The
increases in ASMs for the year ended December 31, 1997 that
resulted from the December 1996 schedule change were not present in
the year ended December 31, 1998 as another schedule change in
September 1997 reduced or eliminated service in a number of these
cities. The Company discontinued round trip service from Kansas
City to Des Moines, Las Vegas, Los Angeles, Orlando and Tampa/St.
Petersburg, while adding round trip service from Kansas City to New
York-JFK in September 1997 and round trip service from Chicago-
Midway and New York City-JFK to Pittsburgh in December 1997. As a
result, ASMs decreased 20% from 1,296 million during the year ended
December 31, 1997 to 1,043 million during the year ended December
31, 1998; RPMs decreased 9% from 767 million during the year ended
December 31, 1997 to 702 million during the year ended December 31,
1998. The decrease was primarily attributable to the elimination
of destinations with greater flight lengths and the reduction of
<PAGE>
available seats on flights from 128 to 122. In September 1997, the
Company terminated service to a number of long-haul markets in
conjunction with the Company's September 1997 schedule change and
terminated service from Kansas City to San Francisco in January
1998 and service from Kansas City to New York City-JFK in May 1998.
As a result, the average stage length decreased from 585 miles
during the year ended December 31, 1997 to 466 miles during the
year ended December 31, 1998. Conversely, load factor increased
from 59% for the year ended December 31, 1997 to 67% for the year
ended December 31, 1998. This increase was primarily the result of
a 20% decrease in capacity but only a 9% decrease in the RPMs in
the year ended December 31, 1998 as compared to the year ended
December 31, 1997.
Passenger yield per RPM increased 40% from 10.0 cents in the
year ended December 31, 1997 to 13.9 cents in the year ended
December 31, 1998. In order to increase fares and passenger yield
effectively, the Company initiated strategic product improvements
beginning in September 1997. The Company's strategic plan includes
the delivery of a reliable product with a number of amenities found
on larger, better-known airlines that specifically cater to price-
sensitive business travelers. Those amenities include assigned
seating, refundable tickets, greater legroom, fixed ticket pricing
under the Road Warrior sm Class and greater frequencies between
city pairs. The Company believes it has improved its brand
awareness in each of its markets through its direct advertising
program that was modified in August 1997. The Company's
implementation of its strategic plan showed positive results in the
year ended December 31,1998 with the increases in passenger yield
and load factor. In addition, in late August and early September,
the Company benefited from the pilot strike at one of its
competitors through increased ticket sales. The Company's load
factor, passenger revenue and related yield, operating costs and
cost per ASM increased as a result of the strike. The Company
anticipates the passenger yield and load factor in 1999 will remain
consistent with 1998. The Company, however, cannot predict future
fare and related yield levels, which depend to a substantial extent
on actions of competitors, general economic conditions and the
Company's ability to deliver a reliable product. The Company's
strategic niche as a low-fare provider makes its pricing strategy
sensitive to competitor's fare reductions. In 1999, the Company
will enter at least one new market and will discount fares to
stimulate travel. The Company believes that the negative impact of
entering new markets will be minimized as the Company increases its
overall revenue base and customer awareness and continues to
improve its service and reliability.
Certain passengers who do not complete their travel as
scheduled are entitled to a credit for the value of the unused
reservation less a $50 service charge, as described below, subject
to certain restrictions. This credit may be redeemed for a period
of 180 days (90 days prior to March 24, 1997) for future travel.
The value of unused reservations that are not entitled to a credit
as well as the value of expired credits are recognized in passenger
revenue. These revenues totaled $3.5 million (approximately 4% of
total operating revenues) and $8.6 million (approximately 8% of
total operating revenues) for the years ended December 31, 1997 and
1998, respectively. This increase is attributable to a change in
policy implemented in the first quarter of 1998 whereby passengers
who purchase tickets in discounted fare classes and fail to
complete their travel as scheduled are not entitled to a credit and
the value of the unused reservation is immediately recognized in
passenger revenue. The increase is also attributable to an
increase in the number of passengers booking reservations, an
increase in the number of promotions offering discounted fares, and
an increase in the average fare per passenger during the year ended
December 31, 1998 as compared to the year ended December 31, 1997.
As described previously, the Company's strategic plan implemented
in September 1997 refocused the Company's effort to cater to the
business traveler by offering greater frequencies of flights
between city pairs and more amenities. With increased flight
frequencies between city pairs, an increase in the business
traveler market segment, and an increase in the number of
promotions, the Company experienced a significant increase in
passengers who did not complete their originally scheduled travel
as well as an increase in passengers who forfeited future travel
credits.
The Company also generates operating revenues as a result of
service charges from passengers who change flight reservations.
The Company charges a $50 service charge for these passengers.
These service charges were $3.6 million (approximately 4% of total
operating revenues) and $5.0 million (approximately 5% of operating
revenues) in the years ended December 31, 1997 and 1998,
<PAGE>
respectively. The increase is attributable to the increase in
passengers subject to the service charge and the enforcement of the
Company's policy to charge a service fee, when applicable.
OPERATING EXPENSES
The following table sets forth the percentage of total
operating revenues represented by these expense categories:
YEAR ENDED DECEMBER 31,
1997 1998
PERCENT OF CENTS PERCENT OF CENTS
REVENUES PER ASM REVENUES PER ASM
Total operating
revenues 100.0% 6.28 cents 100.0% 10.00 cents
======= ======== ======= ========
Operating expenses:
Flying operations 21.0% 1.32 cents 17.3% 1.73 cents
Aircraft fuel 22.8 1.43 13.2 1.32
Maintenance 23.8 1.49 21.0 2.10
Passenger service 9.0 0.57 6.4 0.64
Aircraft and
traffic servicing 20.6 1.29 16.2 1.62
Promotion and sales 25.5 1.60 17.9 1.79
General and
administrative 6.0 0.38 3.9 0.39
Depreciation and
amortization 2.5 0.16 2.7 0.27
------- -------- ------- --------
Total operating
expenses 131.2 8.24 98.6 9.86
Total other
expense, net (3.5) (0.22) (2.8) (0.28)
------- -------- ------- --------
Net loss (34.7)% (2.18) cents (1.4)% (0.14) cents
======= ======== ======= ========
Flying operations expenses increased 5% from $17.1 million
(approximately 21% of operating revenues) for the year ended
December 31, 1997 to $18.0 million (approximately 17% of operating
revenues) for the year ended December 31, 1998. The increase in
flying operations expenses was primarily the result of the increase
in the average number of aircraft in the fleet from 7.7 to 9.0 and
the associated gross aircraft rent. Additional increases were
noted in pilot training and overnight hotel and food costs. These
increases were offset by a decrease in the Company's hull insurance
premium rates. Finally, despite a 6% decrease in block hours
flown, pilot pay increased as a result of wage per hour increases
in 1998. As a result of the September 1997 schedule change, block
hours decreased from 29,859 hours in the year ended December 31,
1997 to 28,122 in the year ended December 31, 1998. Flying
operations expense increased on a cents per ASM basis from 1.32
cents for the year ended December 31, 1997 to 1.73 cents for the
year ended December 31, 1998. The Company's base rent increased
due to additional aircraft and this coupled with 20% fewer ASMs
resulted in an increased cost per ASM.
Aircraft fuel expenses decreased 26% from $18.6 million
(approximately 23% of operating revenues) for the year ended
December 31, 1997 to $13.7 million (approximately 13% of operating
revenues) for the year ended December 31, 1998. Lower fuel expense
is directly related to the decrease in block hours flown by the
Company as well as a decrease in cost per gallon in the year ended
December 31, 1998 versus 1997. Fuel cost per block hour decreased
$134 or 22% from $622 in the year ended December 31, 1997 to $488
in the year ended December 31, 1998 primarily due to a decrease in
average fuel price per gallon. Specifically, the average price
decreased from $0.74 per gallon (including taxes and into-plane
costs) in the year ended December 31, 1997 to $0.58 per gallon
(including taxes and into-plane costs) in the year ended December
31, 1998, a 22% decrease. The Company will seek to pass on any
significant fuel cost increases to the Company's customers through
fare increases as permitted by then current market conditions;
however, there can be no assurance that the Company will be
successful in passing on increased fuel costs.
<PAGE>
Maintenance expenses include all maintenance-related labor,
parts, supplies and other expenses related to the upkeep of
aircraft. Maintenance expenses increased 13% from $19.3 million
(approximately 24% of operating revenues) for the year ended
December 31, 1997 to $21.9 million (approximately 21% of operating
revenues) for the year ended December 31, 1998. This increase was
primarily the result of an increase in the average number of
aircraft in the Company's fleet from 7.7 to 9.0, accelerating
aircraft input dates for certain scheduled required major
maintenance and providing for the under accrual of actual engine
maintenance costs. During the third and fourth quarters of 1998,
the Company expensed approximately $800,000 to provide for actual
engine maintenance costs incurred in excess of accrued amounts.
The Company attributed the underaccrual to the continued increase
in engine overhaul costs. In addition, the Company expensed
approximately $400,000 to provide for the expected increase in
engine overhaul costs in 1999, 2000 and 2001. The Company also
expensed approximately $433,000 in the fourth quarter of 1998 to
provide an obsolescence reserve for rotable and expendable
inventory. The increase in maintenance expense is further
attributable to the Company having three aircraft in scheduled
major airframe maintenance during the year ended December 31, 1998
for which certain airworthiness directives were performed and
expensed as incurred in accordance with Company policy. The
Company did not have an aircraft in scheduled major airframe
maintenance during the year ended December 31, 1997 involving
airworthiness directives. The increase in the average aircraft
fleet combined with the three aircraft incurring major scheduled
airframe maintenance during 1998 also resulted in significant
increases in repair and overhaul expenses and parts purchases
during the year ended December 31, 1998. Lastly, the Company has
also made a concerted effort to improve its line maintenance
capabilities in Pittsburgh, Chicago and Minneapolis, in addition to
its warehousing capabilities in Kansas City. As a result, the
Company has added approximately thirty additional maintenance
employees to support these efforts. These increases were offset by
decreases in the major maintenance accruals for landing gear and
auxiliary power units ("APUs") correlating to the 6% decrease in
block hours flown. The Company deposits supplemental rents with
its aircraft lessors to cover a portion of or all of the cost of
its future major scheduled maintenance for airframes, engines,
landing gears and APUs. These supplemental rents are variable
based on flight hours flown. The costs of routine aircraft and
engine maintenance are charged to maintenance expense as incurred.
Maintenance expenses increased on a cents per ASM basis from 1.49
cents for the year ended December 31, 1997 to 2.10 cents for the
year ended December 31, 1998. This increase in cents per ASM
mainly resulted because of the increases in maintenance expense as
described above as well as the fixed costs of the Company's
maintenance efforts being spread over 20% fewer ASMs.
Passenger service expenses decreased 9% from $7.3 million
(approximately 9% of operating revenues) for the year ended
December 31, 1997 to $6.7 million (approximately 6% of operating
revenues) for the year ended December 31, 1998. The Company
significantly reduced its inconvenienced passenger costs as a
result of the Company's strategy to increase frequencies between
city pairs and to deliver a more reliable product to its customers.
In addition, this decrease was attributable to cost savings from
the reduction in the Company's passenger liability insurance rates.
This decrease was offset by increases in flight attendant overnight
hotel and food costs. It was also offset by increases in in-flight
food and beverage costs resulting from the 15% increase in the
number of passengers for the year ended December 31, 1998 compared
to 1997. Finally, despite a 6% decrease in block hours flown,
flight attendant pay increased as a result of wage per hour
increases in 1998.
Aircraft and traffic servicing expenses increased 1% from
$16.7 million (approximately 21% of operating revenues) for the
year ended December 31, 1997 to $16.9 million (approximately 16% of
operating revenues) for the year ended December 31, 1998. The
Company experienced increases in station rent, employee salaries
and benefits related to the Company's dispatch, scheduling, station
management and system control departments in the year ended
December 31, 1998 as compared to the year ended December 31, 1997.
These increases were offset, however, by decreases in station
ground handling expenses and station salaries that correspond to
the decrease in the number of cities served. Furthermore, in July
1998, the Company took its station ground handling operations in
house at its Kansas City station. This resulted in an additional
cost saving of approximately $600,000. The Company decreased its
average cost per departure from $920 for the year ended December
31, 1997 to $897 for the year ended December 31, 1998 as a result
of these decreases. Aircraft and traffic servicing expenses
<PAGE>
increased on a cents per ASM basis from 1.29 cents for the year
ended December 31, 1997 to 1.62 cents for the year ended December
31, 1998 as a result of the fixed costs of the Company's aircraft
and traffic servicing functions being spread over 20% fewer ASMs.
Promotion and sales expenses decreased 10% from $20.7 million
(approximately 25% of operating revenues) in the year ended
December 31, 1997 to $18.7 million (approximately 18% of operating
revenues) in the year ended December 31, 1998. This decrease was
primarily the result of the decrease in the number of cities
served, the dollars spent on direct advertising, and the reduction
in costs associated with its reservation center in the year ended
December 31, 1998 as compared to the year ended December 31, 1997.
During the year ended December 31, 1998, the Company incurred
direct advertising costs of $5.4 million versus $7.7 million in the
year ended December 31, 1997. Furthermore, the Company took the
reservation center in-house in April 1998 versus contracting out to
a third party, which effectively reduced reservation center costs
by approximately $1.6 million. Increases in travel agency
commissions, CRS fees, and credit card processing fees in the year
ended December 31, 1998 as compared to 1997 offset this decrease.
These increases can be attributed to the 28% increase in operating
revenues in the year ended December 31, 1998 as compared to the
year ended December 31, 1997. The average promotion and sales cost
per passenger decreased $3.39 or 22% from $15.79 in the year ended
December 31, 1997 to $12.40 in the year ended December 31, 1998.
Promotion and sales expenses increased on a cents per ASM basis
from 1.60 cents for the year ended December 31, 1997 to 1.79 cents
for the year ended December 31, 1998. This increase in cents per
ASM resulted because the fixed costs of the Company's promotion and
sales functions were spread over 20% fewer ASMs.
General and administrative decreased 17% from $4.9 million
(approximately 6% of operating revenues) in the year ended December
31, 1997 to $4.1 million (approximately 4% of operating revenues)
in the year ended December 31, 1998. The decrease in general and
administrative expenses in the year ended December 31, 1998 as
compared to 1997 is the result of decreases in general liability
insurance, property tax, accounting staff salaries and office rent.
Depreciation and amortization expenses increased 35% from $2.1
million (approximately 3% of operating revenues) in the year ended
December 31, 1997 to $2.8 million (approximately 3% of operating
revenues) in the year ended December 31, 1998. This increase was
primarily due to an increase in rotable aircraft parts inventory of
approximately $3.3 million, the acquisition of two spare aircraft
engines and various capitalized aircraft improvements in the year
ended December 31, 1998.
Other expense, net consists primarily of debt issuance cost
amortization, interest income and interest expense. In connection
with the guarantees and the letters of credit issued on behalf of
its credit card processor and the bank line of credit agreements,
each executed in 1997, the Company issued certain stockholders
warrants to purchase shares of Common Stock at exercise prices of
$l.00 and $1.94 per share. Warrants vest quarterly in amounts
dependent on the Company's exposure under the letter and line of
credit, as defined in the respective agreements. Accordingly, the
estimated fair value of the warrants issued related to
the agreements totaling $490,000 during the year ended December 31,
1998 was recorded as deferred debt issuance costs and is
being amortized to expense over the terms of the related
guarantees. Interest expense decreased during the year ended
December 31, 1998 as a result of the payoff of the line of credit
in August 1998 as well as the conversion of demand notes payable to
related parties to preferred stock and common stock in March 1998
and May 1998, respectively.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996
OPERATING REVENUES
Total operating revenues increased approximately 19% from
approximately $68.6 million for the year ended December 31, 1996 to
approximately $81.4 million for the year ended December 31, 1997.
This increase was primarily attributable to an increase in the
number of daily flights and the number of passengers on those
flights. During the year ended December 31, 1996, the Company
<PAGE>
averaged 45 flights per day that increased to 50 flights per day
during the year ended December 31, 1997. The Company began flying a
new route structure on December 21, 1996, which included the
initiation of services from Kansas City to Atlanta, Ft. Myers, Las
Vegas, Miami, Orlando and Tampa/St. Petersburg as well as non-stop
service between Chicago-Midway and Kansas City. This route
restructuring refocused the Company's strategy by creating a hub in
Kansas City. ASMs increased approximately 19%, from approximately
1,090 million during the year ended December 31, 1996 to
approximately 1,296 million during the year ended December 31, 1997.
RPMs increased approximately 15%, from approximately 668 million
during the year ended December 31, 1996 to approximately 767 million
during the year ended December 31, 1997. The increase in ASMs was
primarily attributable to an increase in the number of daily flights
and the addition of destinations with greater flight lengths. The
increase in RPMs was primarily attributable to an increase in the
number of daily flights, the number of passengers on those
additional flights and the addition of destinations with greater
flight lengths. These increases in ASMs and RPMs that resulted from
the December 1996 schedule change were offset by a schedule change
in September 1997 that reduced or eliminated service in a number of
these cities. The Company discontinued round trip service from
Kansas City to Des Moines, Las Vegas, Los Angeles, Orlando and
Tampa/St. Petersburg while adding round trip service from Kansas
City to New York-JFK in September 1997 and round trip service from
Chicago-Midway and New York City-JFK to Pittsburgh in December 1997.
Load factor decreased from approximately 61% for the year ended
December 31, 1996 to approximately 59% for the year ended December
31, 1997. This decrease was primarily the result of a 19% increase
in capacity and the addition of destinations with greater flight
lengths while experiencing only a 15% increase in RPMs.
Passenger yield per RPM increased approximately 3% from
approximately 9.7 cents for the year ended December 31, 1996 to
approximately 10.0 cents for the year ended December 31, 1997. The
Company initially discounted fares to stimulate travel in a number
of the new markets that were introduced in conjunction with the
Company's major route restructuring in December 1996. The Company
attempted on a number of occasions to increase fares in most of its
markets in the second and third quarters of 1997. This strategy
reduced passenger demand and, often, was not followed by the
Company's competitors in the respective markets and, thus, limited
the Company's ability to increase fares. In addition, with the
initiation of the December 1996 route structure, the Company's
average stage length increased to 587 miles from 530 miles during
the nine months ended September 30, 1997 as compared to the year
ended December 31, 1996. In September, the Company terminated
service to a number of long-haul markets in conjunction with the
Company's September 1997 schedule change, its average stage length
then decreased to 554 miles in the fourth quarter of 1997. As a
result of the Company's inability to increase fares in its markets,
the Company was required to stimulate travel by continuing to offer
discounted fares on the majority of the city pairs it served
throughout the year ended December 31, 1997. In order to increase
fares and passenger yield effectively, the Company focused on
improving its product beginning in September 1997. The Company's
implementation of its strategic plan showed positive results in the
fourth quarter of 1997 with passenger yield increasing to 11.1
cents.
The Company also generated operating revenues as a result of
service charges from passengers who changed flight reservations.
For a period of 180 days (90 days prior to March 24, 1997) after the
flight date, the customer may use the value of the unused
reservation, subject to certain restrictions, for transportation,
less a $50 ($25 through October 1996) service charge. These
operating revenues were approximately $2.1 million (approximately 3%
of total operating revenues) and approximately $3.6 million
(approximately 4% of operating revenues) in the years ended December
31, 1996 and 1997, respectively.
OPERATING EXPENSES
Expenses are generally categorized as related to flying operations,
aircraft fuel, maintenance, passenger service, aircraft and traffic
servicing, promotion and sales, general and administrative,
depreciation and amortization and other expense, including interest
expense and amortization of deferred debt
<PAGE>
issuance costs. The following table sets forth the percentage of
total operating revenues represented by these expense categories as
well as certain other selected financial data.
YEAR ENDED DECEMBER 31,
1996 1997
PERCENT OF CENTS PERCENT OF CENTS
REVENUES PER ASM REVENUES PER ASM
Total operating
revenues 100.0% 6.29 cents 100.0% 6.28 cents
===== ==== ===== ====
Operating expenses:
Flying operations 25.2% 1.59 cents 21.0% 1.32 cents
Aircraft fuel 23.3 1.47 22.8 1.43
Maintenance 23.4 1.48 23.8 1.49
Passenger service 9.1 0.57 9.0 0.57
Aircraft and
traffic servicing 22.2 1.39 20.6 1.29
Promotion and sales 22.9 1.44 25.5 1.60
General and
administration 6.4 0.40 6.0 0.38
Depreciation and
amortization 2.3 0.15 2.5 0.16
====== ===== ===== ====
Total operating
expenses 134.8 8.49 131.2 8.24
Total other income
(expense), net (2.8) (0.17) (3.5) (0.22)
------ ----- ----- ----
Net loss (37.6%) (2.37 cents) (34.7%) (2.18 cents)
====== ====== ====== ======
Flying operations expenses include aircraft lease expenses,
compensation of pilots, expenses related to flight dispatch and
flight operations administration, hull insurance and all other
expenses related directly to the operation of the aircraft other
than aircraft fuel and maintenance expenses. Flying operations
expenses decreased approximately 1% from approximately $17.3 million
(approximately 25% of operating revenues) for the year ended
December 31, 1996 to approximately $17.1 million (approximately 21%
of operating revenues) for the year ended December 31, 1997. In
late 1995 and early 1996, the Company leased two Boeing 737-300 jet
aircraft that were newer, more advanced aircraft and have a larger
capacity and substantially higher lease and insurance costs. The
decrease in flying operation expenses in 1997 was primarily the
result of the return of these two Boeing 737-300 jet aircraft to the
lessor in May and July 1997. In addition, the Company was
successful in negotiating more favorable hull insurance rates on its
fleet in 1997 as compared to 1996. These decreases were offset by
increases in pilot compensation directly related to the increase in
block hours. Block hours increased to 29,859 in 1997 from 24,721 in
1996. Flying operations expenses decreased as a percentage of
operating revenue as a result of the increase in flying and revenue
generated from the Company's fleet, especially the 737-300 and long-
range 737-200 jet aircraft, during the first eight months of 1997
versus the same period in 1996.
Aircraft fuel expenses include the direct cost of fuel, taxes
and the costs of delivering fuel into the aircraft. Aircraft fuel
expenses increased approximately 16% from approximately
$16.0 million (approximately 23% of operating revenues) for the year
ended December 31, 1996 to approximately $18.6 million
(approximately 23% of operating revenues) for the year ended
December 31, 1997. Higher fuel expense is directly related to the
increase in ASMs flown by the Company offset by a decrease in cost
per gallon in the year ended December 31, 1997 versus 1996. Fuel
cost per ASM decreased 0.04 cents or 3% from 1.47 cents in the year
ended December 31, 1996 to 1.43 cents in the year ended December 31,
1997 primarily due to a decrease in average fuel price per gallon.
Specifically, the average price decreased from $0.79 per gallon
(including taxes and into-plane costs) in the year ended December
31, 1996 to $0.74 per gallon in the year ended December 31, 1997, a
6% decrease.
Maintenance expenses include all maintenance-related labor,
parts, supplies and other expenses related to the upkeep of
<PAGE>
aircraft. Maintenance expenses increased approximately 20% from
approximately $16.1 million (approximately 23% of operating
revenues) for the year ended December 31, 1996 to approximately
$19.3 million (approximately 24% of operating revenues) for the year
ended December 31, 1997. This increase was primarily due to the
increase in block hours and cycles flown. In addition, during the
later part of 1996 and 1997, the Company incurred charges related to
certain Boeing 737-200 jet aircraft that were in excess of what
traditionally had been accrued by the Company for major scheduled
airframe, engine and landing gear maintenance checks. The Company
attributed the increase in costs associated with major scheduled
airframe, engine and landing gear maintenance checks to the
following: a change in the vendors providing the major scheduled
overhaul services; the lack of available overhauled/used engine and
landing gear replacement parts; and the funding of nonroutine
airframe repairs not normally experienced during major scheduled
airframe overhauls. As a result, in the fourth quarter of 1996 and
again in the second quarter of 1997, the Company increased the
monthly maintenance provisions for major scheduled maintenance
checks. In the second quarter of 1997, the Company also provided
for the underaccrual of completed major air frame maintenance
checks. The Company deposits funds with its aircraft lessors to
cover a portion of or all of the cost of its future major scheduled
maintenance for airframes, engines, landing gears and APUs. The
costs of routine aircraft and engine maintenance are charged to
maintenance expense as incurred. Additionally, the Company
significantly increased the capacity of its in-house maintenance
department subsequent to January 1, 1997. The Company's maintenance
administration function expanded by eight employees to insure
compliance with all FAA and DOT regulations and requirements. The
Company also increased line maintenance personnel by twelve
employees including the introduction of maintenance operations at
the Chicago-Midway and Minneapolis/St. Paul airports.
Passenger service expenses include flight attendant wages and
benefits, in-flight service, flight attendant training, uniforms and
overnight expenses, inconvenienced passenger charges and passenger
liability insurance. Passenger service expenses increased
approximately 18% from approximately $6.2 million (approximately 9%
of operating revenues) for the year ended December 31, 1996 to
approximately $7.3 million (approximately 9% of operating revenues)
for the year ended December 31, 1997. This increase was primarily
due to the 19% increase in ASMs and the 15% increase in RPMs that
directly resulted in an increase in flight attendant wages and
inconvenienced passenger charges. These increases were offset by
cost savings from the reduction in the Company's passenger liability
insurance rates. Passenger service expenses per ASM remained
consistent at approximately 0.57 cents for the year ended December
31, 1996 and 1997.
Aircraft and traffic servicing expenses include all expenses
incurred at the airports for handling aircraft, passengers and mail,
landing fees, facilities rent, station labor and ground handling
expenses. Aircraft and traffic servicing expenses increased
approximately 10% from approximately $15.2 million (approximately
22% of operating revenues) in the year ended December 31, 1996 to
approximately $16.7 million (approximately 21% of operating
revenues) in the year ended December 31, 1997. This increase was
primarily due to an increase in the number of cities served during
the first nine months of 1997 and an increase in the number of
departures. Departures increased approximately 11% from 16,383
during the year ended December 31, 1996 to 18,195 during the year
ended December 31, 1997. The decrease in aircraft and traffic
servicing as a percentage of operating revenues was primarily
attributable to station personnel cost, landing fees and other
traffic servicing costs not rising in proportion to the increases in
the number of passengers and RPMs between the year ended December
31, 1997 and the year ended December 31, 1996. The decrease of .10
cents per ASM was primarily due to the 10% increase in average stage
length from 530 miles in 1996 to 585 miles in 1997.
Promotion and sales expenses include the costs of the reservations
functions, including all wages and benefits for reservations, rent,
electricity, telecommunication charges, credit card fees, travel
agency commissions, advertising expenses and wages and benefits for
the marketing department. Promotion and sales expenses increased
approximately 32% from approximately $15.7 million (approximately
23% of operating revenues) in the year ended December 31, 1996 to
approximately $20.7 million (approximately 26% of operating
revenues) in the year ended December 31, 1997. This increase was
primarily the result of an increase in cities served, reflecting
the Company's practice to increase advertising when new cities are
introduced in order to create brand awareness in addition to the
Company's strategy to increase spending
<PAGE>
on advertising programs in existing cities. The Company incurred
significant increases in late 1996 and early 1997 promoting its
major route restructuring, which created a hub in Kansas City. The
Company continues relied on its direct advertising methods to
attract its passengers and therefore continued to incur significant
advertising expenses in each month and with each of its schedule
changes. The average promotion and sales cost per passenger
increased $3.31 or 27% from $12.47 in the year ended December 31,
1996 to $15.79 in the year ended December 31, 1997.
General and administrative expenses include the wages and
benefits for the Company's corporate employees and various other
administrative personnel, the costs for office supplies, office
rent, legal, accounting, insurance, and other miscellaneous
expenses. General and administrative expenses increased
approximately 12% from approximately $4.4 million (approximately 6%
of operating revenues) in the year ended December 31, 1996 to
approximately $4.9 million (approximately 6% of operating revenues)
in the year ended December 31, 1997. The increase in general and
administrative expenses in 1997 was primarily attributable to the
increase in administrative personnel in the Company's accounting,
MIS and legal departments as well as initiation of directors' and
officers' insurance coverage in February 1997.
Depreciation and amortization expenses include depreciation and
amortization of aircraft modifications, ground equipment and
leasehold improvements, but does not include any amortization of
start-up and route development costs as all of these costs are
expensed as incurred. Depreciation and amortization expense
increased approximately 31% from approximately $1.6 million
(approximately 2% of operating revenues) in the year ended December
31, 1996 to approximately $2.1 million (approximately 3% of
operating revenues) in the year ended December 31, 1997. This
increase was primarily the result of improvements to new and
existing aircraft and gate space at the Kansas City Airport and
those costs associated with modifications to the Company's
reservation system. In addition, the Company incurred a full year
of depreciation and amortization charged in the year ended December
31, 1997 on property and equipment added in the year ended December
31, 1996.
Other income (expense), net consists primarily of debt issuance
cost amortization, interest income and interest expense. In
connection with the guarantees of the letter of credit issued on
behalf of its credit card processor and the bank line of credit
agreements, each executed in 1997, the Company issued certain
stockholders warrants to purchase shares of common stock at an
exercise price of $1.00 and $1.94 per share. Accordingly, the
estimated fair value of the warrants issued related to the
agreements totaling $4,082,000 during the year ended December
31,1997 was recorded as deferred debt issuance costs and is being
amortized to expense over the terms of the related guarantees.
Interest expense increased during the year ended December 31, 1997,
as a result of borrowings against the line of credit and the
addition of demand notes payable to related parties during the year
ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and
met its capital expenditure requirements primarily with proceeds
from private sales of equity securities, proceeds from its initial
public offering of Common Stock, proceeds from its public rights
offering and the issuance of debt primarily to its principal
stockholders. As of March 12, 1999, the Company has received net
proceeds from the sale of its equity securities aggregating
approximately $70.2 million.
In January 1998, the Company established a $1.9 million line
of credit with INTRUST Bank, NA (Wichita, Kansas). In August 1998,
the Company repaid its $1.9 million line of credit with a portion
of the $5.2 million proceeds received from the exercise of warrants
by principal stockholders. The line of credit was guaranteed by
certain stockholders and expired on January 30, 1999. The Company
is currently evaluating its options with financial institutions to
secure a line of credit for working capital. There can be no
assurance that the Company will be able to obtain a line of credit
on acceptable terms or at all.
<PAGE>
On March 20, 1998, the Company entered into a Note Exchange
Agreement whereby the principal stockholders holding demand notes
of $9.5 million agreed to exchange the demand notes and all unpaid
interest for Convertible Notes. On May 20, 1998, the Company
converted the Convertible Notes plus accrued interest totaling
approximately $10.6 million to Common Stock at a rate of $0.50 per
share.
In the quarter ended March 31, 1998, the Company issued $3.0
million of unsecured 9% convertible promissory notes to certain
principal stockholders of the Company. The Company converted the
unsecured promissory notes, plus accrued interest, in aggregate
amount of approximately $3.0 million to units of Series A Preferred
Stock and Common Stock purchase warrants. Each unit cost $10 and
consisted of one share of Series A Preferred Stock and a Common
Stock purchase warrant. Each share of Series A Preferred Stock is
convertible into 20 shares of Common Stock. Each warrant in the
unit entitles the holder to purchase 40 shares of Common Stock at
an exercise price of $0.55 per share of Common Stock. On August 6,
1998 and August 12, 1998, the warrant holders net exercised
warrants representing rights to purchase 6,000,000 and 6,094,480,
respectively, shares of Common Stock that were sold in the Series A
Preferred Stock unit offering. Because the warrant holders elected
to exercise the warrants on a net basis, as defined by the
agreement, the Company issued an aggregate 8,110,936 shares of
Common Stock in connection with the aforementioned exercises. The
Company received no cash due to the warrant holder's election to
exercise on a net basis.
On July 2, 1998, the Company notified certain principal
stockholders of its intention to redeem 10,300,000 outstanding
warrants that were issued in conjunction with the Company's April
1997 private unit offering. Each warrant issued in connection with
the private offering entitled the holder to purchase one share of the
Company's Common Stock for $0.50 per share. All of the holders
elected to exercise these warrants and the Company issued 10,300,000
shares of Common Stock and received proceeds of $5,150,000 in August
1998.
In January and February 1998, the Company did not generate
sufficient passenger ticket sales to provide for its operational
cash needs. The Company funded its cash flow deficit through the
issuance of demand notes to its principal stockholders, as
discussed above. During the second through fourth quarters of
1998, the Company generated approximately $8.6 million of positive
cash flows from operations. As of December 31, 1998, the Company
had a working capital deficit of $7.9 million.
During the year ended December 31, 1998, the Company has
experienced a significant increase in advanced ticket sales that
has resulted in an increase to its air traffic liability. In
January 1999, the principal stockholders of the Company agreed to
renew the two-year $4.0 million letter of credit facility and in
May 1999, the Company anticipates the principal stockholders to
renew a $2.0 million stockholder guarantee in order to secure the
Company's credit card processor. The letters of credit and
stockholder guarantee expire in January 2001 and May 1999,
respectively. If the Company is not able to extend the term of the
guarantee, the Company would be obligated to fund its credit card
processor with $2.0 million in May 1999. There can be no assurance
that the principal stockholders will agree to such extension on
acceptable terms, if at all, or that the Company's credit card
processor would agree to a reduction in collateral. The Company
does believe that cash on hand will be adequate to fund the
collateral requirements requested by its credit card processor, if
needed.
In addition, in May 1998, the Company began depositing cash
into a restricted cash account to provide for the Company's credit
card exposure in excess of $6.0 million. At December 31, 1998, the
credit card exposure was less than $6.0 million and, consequently,
the Company did not have any additional cash placed in this
restricted cash account. To the extent that exposure exceeds $6.0
million, the Company must deposit cash from ticket sales as
collateral to secure the Company credit card processor. As of
March 12, 1999 due to increased ticket sales, the Company's credit
card exposure was approximately $8.9 million. The Company funded
the credit card exposure in excess of $6.0 million with $2.9
million in available cash on hand. The Company estimates that its
credit card exposure will range between $8.0 to $10.0 million
through the end of the third quarter when the balance should reduce
due to expected seasonality. The Company plans to renegotiate its
collateral requirements during the later part of 1999. There can
<PAGE>
be no assurance that the Company will be successful with these
negotiations or that the Company will be able to reduce its
collateral requirements. Any cash utilized as collateral is
refunded by the credit card processor, on a daily basis, when the
Company's exposure falls below the previously calculated exposure
or $6.0 million, whichever is greater.
The Company estimates that scheduled heavy maintenance of its
existing aircraft fleet through December 1999 will cost $6.2
million, of which $2.7 million will be funded from existing
supplemental rent payments recoverable from aircraft lessors. In
addition, the Company expects to expend $4.6 million on various
capital expenditures in the next year, which are primarily related
to improvements for existing aircraft, increased aircraft parts
inventory levels and improvements to its in-house computer systems.
The Company continues to review its financing alternatives in
order to purchase or lease additional aircraft under suitable
terms. In January 1999, the Company signed leases for two
additional Boeing 737-200 jet aircraft and accepted delivery of
these aircraft in February and March, respectively. The Company
began flying revenue service in March with one of these aircraft
and anticipates flying revenue service in April 1999 with the
second. In connection with these leases, the Company has
established letters of credit in favor of the lessor to secure said
aircraft. The Company has also signed letters of intent for three
additional aircraft to replace its three remaining Stage II
compliant aircraft. The Company must deposit with the lessor or
establish a letter of credit in the aggregate amount of $690,000
for these three aircraft. As of March 12, 1999, the Company had
placed deposits totaling $345,000 with the lessor. In addition,
the Company is currently in discussion with various aircraft
lessors regarding the addition of two more aircraft in the second
quarter of 1999. The Company's cash balance as of March 12, 1999
is sufficient to provide for the necessary estimated lease deposit
requirements for up to two additional aircraft. Historically, the
Company has been required to deposit between $140,000 and $400,000
per aircraft depending on the specific terms negotiated in the
lease.
The Company has been generating positive cash flows from
operations since March 1998 and expects to continue to generate
sufficient cash to support its operations through the year ending
December 31, 1999. The Company plans to continue to implement
certain actions designed to achieve long-term profitability and
improve its capital resources. Management's plans to achieve long-
term profitability include increased focus on the price-sensitive
business traveler and pricing strategies designed to maximize
passenger revenue and continued focus on cost savings programs.
There can be no assurance that its efforts will be successful.
Whether or not the Company's strategic plans to achieve long-
term profitability are successful, any expansion beyond that
discussed above would be dependent upon the Company raising
additional capital. The Company is evaluating options on raising
additional capital or issuing debt during 1999. The Company's
success in implementing actions designed to achieve long-term
profitability and its ability to operate at profitable levels will
determine if the Company will be able to raise additional capital.
There can be no assurance that the Company's necessary working
capital requirements to expand operations will be available on
acceptable terms, or at all.
OTHER MATTERS
YEAR 2000 COMPLIANCE
Older computers were programmed to use a two-digit code for the
date entry rather than a four-digit code. For example, the date
November 17, 1970 would be entered as "11/17/70" rather than
"11/17/1970." The decision to use two digits instead of four was
based largely on cost-reduction considerations and the belief that
the code would no longer be used at the millennium. Nevertheless,
coding conventions have not changed, and on January 1, 2000,
computers may read the digits "00" as denoting the year 1900 rather
than 2000. At the least, this could result in massive quantities of
incorrect data. At worst, it could result in the total or partial
failure of time sensitive computer systems and software.
<PAGE>
THE COMPANY'S YEAR 2000 ISSUES. The Company began operations
in December 1994, and its operations depend predominantly on third
party computer systems. Because of the Company's limited resources
during its start-up, the most cost effective way to establish its
computer systems was to outsource or to use manual systems.
Internal systems developed and any software acquired are limited and
were designed or purchased with the Year 2000 taken into
consideration.
Management has neared the completion of the modification of the
Company's information technology to recognize the Year 2000 and the
conversion or purchase of critical data process systems. The
Company's new reservations software was installed in the third
quarter of 1997 is Year 2000 compliant. In addition, the Company
purchased a new revenue management system in February 1998 that is
Year 2000 compliant. The Company's financial reporting software is
currently not Year 2000 compliant. The Company can upgrade its
financial reporting software for less than $10,000 if it elects not
to purchase and install a new financial reporting system. The
Company is currently reviewing proposals from various financial
software vendors and expects to begin the financial software
conversion process prior to June 30, 1999. The cost of a new
financial software system is estimated to be between $200,000 and
$400,000. The Company believes these three systems are critical
data processing systems.
Secondary systems that the Company has completed its Year 2000
assessment on include, but are not limited to, the Company's
telephone switch software and equipment at its Reservations Center,
intranet network systems, flight operations and tracking software
and maintenance inventory tracking system. Management has completed
the modification on these systems and all are Year 2000 compliant
except for the Company's Reservation Center telephone switch
software and equipment. The Company plans to enter into a lease for
a new Year 2000 compliant telephone switch software and equipment
during the second quarter of 1999. The lease for the telephone
switch software and equipment is expected to cost less than $10,000
per month.
The Company relies on third parties that provide goods and
services that are imperative to the Company's operations including,
but not limited to, the FAA, the DOT, local airport authorities,
utilities, communication providers, credit card processor and fuel
suppliers. The Company continues to monitor each of these entities,
and has initiated formal communications with these third party
service providers to determine their Year 2000 readiness. There can
be no assurance that the systems of such third parties on which the
Company's business relies (including those of the FAA) will be
modified on a timely basis. The Company's business, financial
condition and results of operations could be materially affected by
the failure of its equipment or systems or those operated by other
parties to operate properly beyond 1999.
While the Company believes it is taking all appropriate steps
to assure Year 2000 compliance, it is dependent on key third party
business and governmental partners' compliance to some extent. The
Year 2000 problem is pervasive and complex as virtually every
computer operation will be affected in some way. Consequently, no
assurance can be given that Year 2000 compliance can be achieved
without a material cost by these outside parties. The Company has
utilized existing resources and has not incurred any significant
costs to implement its Year 2000 project to date and the total
remaining cost of the Year 2000 project is expected to be immaterial
and will be funded through cash from operations. The costs and the
dates on which the Company anticipates it will complete the Year
2000 project are based on management's best estimates and estimates
received in writing from applicable third parties. There can be no
guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated.
<PAGE>
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive
position is the potential loss arising from an adverse change in the
price of fuel as described below. The sensitivity analysis
presented does not consider either the effects that such an adverse
change may have on overall economic activity or additional actions
management may take to mitigate its exposure to such a change.
At the present time, management does not utilize fuel price hedging
instruments to reduce the Company's exposure to fluctuations in
fuel prices. Actual results may differ.
The Company's earnings are affected by changes in the price and
availability of aircraft fuel. Market risk is estimated as a
hypothetical 10 percent increase in the average 1998 cost per gallon
of fuel. Based on 1998 actual fuel usage, such an increase would
have resulted in an increase to aircraft fuel expense of
approximately $1.4 million in 1998. Comparatively, based on
projected 1999 fuel usage, such an increase would result in an
increase to aircraft fuel expense of approximately $1.7 million in
1999. The increase in exposure to fuel price fluctuations in 1999
is due to the Company's plan to increase its average aircraft fleet
size and related gallons purchased.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements and schedule and
Report of Independent Auditors included later in this report under
Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant's Proxy Statement to be used in connection with
the Annual Meeting of Stockholders to be held on May 18, 1999
contains under the caption "Election of Directors" certain
information required by Item 10 of Form 10-K and such information is
incorporated herein by this reference. The information required by
Item 10 of Form 10-K as to executive officers is set forth in Item
4A of Part I hereof.
The Registrant's Proxy Statement to be used in connection with
the Annual Meeting of Stockholders to be held on May 18, 1999
contains under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" certain information required by
Item 10 of Form 10-K and such information is incorporated herein by
this reference.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant's Proxy Statement to be used in connection with
the Annual Meeting of Stockholders to be held on May 18, 1999
contains under the caption "Executive Compensation" the information
required by Item 11 of Form 10-K and such information is
incorporated herein by this reference (except that the information
set forth under the following subcaptions is expressly excluded from
such incorporation: "Executive Compensation and Stock Option
Committee Report" and "Company Performance").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Registrant's Proxy Statement to be used in connection with
the Annual Meeting of Stockholders to be held on May 18, 1999
contains under the caption "Voting Securities and Principal Holders
Thereof" the information required by Item 12 of Form 10-K and such
information is incorporated herein by this reference.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Registrant's Proxy Statement to be used in connection with
the Annual Meeting of Stockholders to be held on May 18, 1999
contains under the caption "Certain Transactions" the information
required by Item 13 of Form 10-K and such information is
incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE, AND REPORTS
ON FORM 8-K
(a) Financial Statements.
(1) Audited Financial Statements:
Report of Independent Auditors 32
Balance Sheets -
December 31, 1998 and December 31, 1997 33
Statements of Operations for the
years ended December 31, 1998,
1997 and 1996 35
Statements of Stockholders' Equity
(Deficit) for the years ended
December 31, 1998, 1997 and 1996 36
Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 37
Notes to Financial Statements 39
(2) The following financial statement schedule
is included herein:
Schedule II - Valuation and
Qualifying Accounts 53
All other schedule are omitted, as the required
information is inapplicable or the information is
presented in the financial statements or related notes.
(3) The exhibits required to be filed by this item are
set forth in paragraph (c) below:
(b) Reports on Form 8-K.
None.
(c) Exhibits.
3.1 Restated Certificate of Incorporation, as amended
of Registrant (filed as Exhibit 3.1 to the
Registrant's Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).
3.2 Certificate of Designation of Series A Preferred
Stock of Registrant, as filed with Delaware
Secretary of State on March 18, 1998 (filed as
Exhibit 3.2 to the Registrant's Form 10-K for the
year ended December 31, 1997 and incorporated
herein by reference).
<PAGE>
3.3 By laws of Registrant, as amended to date
(filed as Exhibit 3.2 to Amendment No. 2 to the
Registrant's Registration Statement No. 33-
96884 and incorporated herein by reference).
10.1 Registrant's 1994 Stock Option Plan, as amended
to date (filed as Exhibit 10.1 to the
Registrant's Registration Statement No. 33-
96884 and incorporated herein by reference).
10.2 Form of Incentive Stock Option Agreement (filed
as Exhibit 10.2 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference).
10.3 Form of Nonstatutory Stock Option Agreement
(filed as Exhibit 10.3 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference).
10.4 Form of Employee Stock Purchase Plan (filed as
Exhibit 10.4 to the Registrant's Registration
Statement No. 33-96884 and incorporated herein
by reference).
10.5 Registrant's 401(k) Plan (filed as Exhibit 10.4
to the Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.6 Form of Registrant's Profit Sharing Plan (filed
as Exhibit 10.6 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference).
10.7 Aircraft Lease Agreement, dated as of December
8, 1994, between US Air, Inc. and Registrant,
along with Lease Supplements Nos. 1, 2, 3 and 4
(filed as Exhibit 10.7 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference).
10.8 Supplementary Lease Agreement, dated as of
October 28, 1997, between US Air, Inc.
and Registrant (filed as Exhibit 10.8 to the
Registrant's Registration Statement No. 33-
96884 and incorporated herein by reference).
10.9 Modification to Aircraft Lease Agreement, dated
September 1, 1995, between U.S. Air, Inc. and
Registrant (filed as Exhibit 10.9 to the
Registrant's Registration Statement No. 33-
96884 and incorporated herein by reference).
10.10 Acknowledgment and Consent of the Registrant
regarding assignment of Aircraft Lease
Agreement between US Air, Inc. and Registrant
(filed as Exhibit 10.10 to the Registrant's
Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.11 Amendment No. 1 to Lease Agreement, by and
between Registrant and First Security Bank as
owner, trustee and successor-in-interest to
U.S. Airways, Inc. (f/k/a U.S. Air, Inc.)
(filed as Exhibit 10. 1 to Registrants Form
10-Q for the Quarterly Period Ended June 30,
1997).
10.12 Amendment No. 2 to Lease Agreement, by and
between Registrant and First Security Bank as
owner, trustee and successor-in-interest to
U.S. Airways, Inc. (f/k/a U.S. Air, Inc.).
<PAGE>
10.13 Aircraft Lease Agreement, dated as of December
6, 1994, between EA 727, Inc. and Registrant
(filed as Exhibit 10.10 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference).
10.14 Aircraft Lease Agreement, dated December 11,
1995, between the Registrant and Mimi Leasing
Corporation (filed as Exhibit 10.30 to the
Registrant's Form 10-K for the year ended
December 31, 1995).
10.15 Aircraft Lease Agreement, dated as of May 30,
1997, between Interlease Aviation Investors III
(TACA), L.L.C. and the Registrant (filed as
Exhibit 10.14 to the Registrant's Form 10-Q for
the Quarterly Period Ended June 30, 1997 and
incorporated herein by reference).
10.16 Aircraft Lease Agreement, dated September 18,
1997, between Interlease Aviation Investors II
(Aloha), L.L.C. and the Registrant (filed as
Exhibit 10.1 to the Registrant's Form 10-Q for
the quarterly period ended September 30, 1997
and incorporated herein by reference).
10.17 Aircraft Lease Agreement, dated November 18,
1997 between Mimi Leasing Corporation and the
Registrant (filed as Exhibit 10.16 to the
Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by
reference).
10.18 Aircraft Lease Agreement (MSN 22979), dated
as of January 5, 1999 between AeroUSA, Inc.
and the Registrant.
10.19 Aircraft Lease Agreement (MSN 21735), dated
as of January 5, 1999 between AeroUSA, Inc.
and the Registrant.
10.20 Employment Agreement, dated November 3, 1997
between the Registrant and Robert J. Spane
(filed as Exhibit 10.17 to the Registrant's
Form 10-K for the year ended December 31, 1997
and incorporated herein by reference).
10.21 Registration Rights Agreement, dated as of
March 20, 1998 (filed as Exhibit 10.18 to the
Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by
reference).
10.22 Unit Purchase Agreement, dated as of March 20,
1998, between the Registrant and J. F. Shea
Co., Inc. and The Hambrecht 1980 Revocable
Trust (filed as Exhibit 10.19 to the
Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by
reference).
10.23 Note Exchange Agreement, dated as of March 20,
1998, between the Registrant and the Holders
(filed as Exhibit 10.20 to the Registrant's
Form 10-K for the year ended December 31, 1997
and incorporated herein by reference).
10.24 Computer Software Nonexclusive License
Agreement, dated as of September 14, 1994,
between Morris Air Corporation and the
Registrant (filed as Exhibit 10.11 to the
Registrant's Registration Statement No. 33-
96884 and incorporated herein by reference).
10.25 Lease, dated September 27, 1994, between the
Gerson Company and Registrant, as amended to
date (Mission, KS Corporate / Reservations
<PAGE>
Office) (filed as Exhibit 10.13 to the
Registrant's Registration Statement No. 33-
96884 and incorporated herein by reference).
10.26 Shopping Center Lease, dated February 28, 1996,
between the Registrant and Southern Hills
Center, L.L.C. (Lawrence, KS Office) (filed as
Exhibit 10.31 to the Registrant's Form 10-K for
the year ended December 31, 1995).
10.27 Second Amendment and Restated Warrant Purchase
Agreement among Registrant and certain of its
stockholders (filed as Exhibit 10.18 to the
Registrant's Registration Statement No. 33-
96884 and incorporated herein by reference).
10.28 Form of Amended and Restated Warrant for the
Purchase of Shares of Series B Preferred Stock
(Amended Warrant) (filed as Exhibit 10.19 to
the Registrant's Registration Statement No. 33-
96884 and incorporated herein by reference).
10.29 Reimbursement Agreement, dated as of December
31, 1996, by and among Registrant and Hambrecht
& Quist California, a wholly owned subsidiary
of Hambrecht & Quist Group (filed as Exhibit
10.21 to the Registrants Form 10-K for the year
ended December 31, 1996 and incorporated herein
by reference).
10.30 Security Agreement, dated as of December 31,
1996, by Registrant in favor of Hambrecht &
Quist California (filed as Exhibit 10.22 to the
Registrants Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).
10.31 Merchant Agreement, dated as of February 27,
1997, by and between Registrant and Michigan
National Bank (filed as Exhibit 10.25 to the
Registrants Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).
10.32 Amendment to Merchant Agreement, dated as of
February 6, 1997, by and between Registrant
(filed as Exhibit 10.26 to the Registrants Form
10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10.33 Service Contract for Aeronautical Maintenance,
dated as of February 26, 1999, between The
Self-Managed Cooperative of Aero Industrial
Services R.L. ("COOPESA") and the Registrant.
21.1 List of Subsidiaries of Registrant (filed as
Exhibit 21.1 to the Registrant's Registration
Statement No. 33-96884 and incorporated herein
by reference).
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on the signature
page of this Form 10-K).
27 Financial Data Schedule.
(d) Financial Statement Schedule.
The response to this portion of Item 14 is submitted as a
separate section of this report.
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Vanguard Airlines, Inc.
We have audited the accompanying balance sheets of Vanguard Airlines,
Inc. (the Company) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31,
1998. Our audits also included the financial statement schedule
listed on the Index at 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Vanguard
Airlines, Inc. as of December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
February 22, 1999
<PAGE>
Vanguard Airlines, Inc.
Balance Sheets
DECEMBER 31
1998 1997
---------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,417,048 $ 1,082,712
Accounts receivable, less
allowance for doubtful
accounts of $303,000
in 1998 ($354,000 in 1997) 2,030,309 2,312,439
Inventories 1,168,054 842,620
Prepaid expenses and
other current assets 1,022,953 1,011,417
Current portion of
supplemental maintenance
deposits 4,490,281 4,546,824
----------------------------
Total current assets 16,128,645 9,796,012
Property and equipment, at cost:
Aircraft improvements and
leasehold costs 4,854,683 4,611,528
Aircraft engines and
rotable inventory 6,243,693 1,638,389
Reservation system and
communication equipment 1,867,954 1,844,981
Other property and equipment 2,624,579 2,057,554
---------------------------
15,590,909 10,152,452
Less accumulated depreciation
and amortization (7,459,456) (4,667,768)
---------------------------
8,131,453 5,484,684
Other assets:
Supplemental maintenance
deposits, less current portion 5,121,050 3,221,875
Deferred debt issuance costs 83,448 2,223,233
Leased aircraft deposits 2,299,000 2,258,500
Fuel and security deposits 883,610 1,240,284
Other 999,377 539,296
---------------------------
9,386,485 9,483,188
---------------------------
Total assets $33,646,583 $24,763,884
===========================
<PAGE>
DECEMBER 31
1998 1997
---------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Notes payable to related
parties $ - $ 9,467,741
Accounts payable 5,848,635 6,095,903
Accrued expenses 3,062,823 4,007,363
Accrued maintenance 6,902,847 6,588,830
Air traffic liability 8,230,222 5,989,085
---------------------------
Total current liabilities 24,044,527 32,148,922
Line of credit - 1,900,000
Accrued maintenance,
less current portion 3,818,184 2,659,396
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.001 par value:
Authorized shares - 2,000,000
in 1998 (1,000,000 in 1997)
Issued and outstanding shares -
302,362 in 1998 (-0- in 1997) 302 -
Liquidation preference -
$3,023,620 in 1998
Common stock, $.001 par value:
Authorized shares - 200,000,000
in 1998 (50,000,000 in 1997)
Issued and outstanding shares -
85,372,309 in 1998
(45,695,908 in 1997) 85,372 45,696
Additional paid-in capital 76,886,373 57,753,488
Accumulated deficit (71,170,997) (69,692,060)
---------------------------
5,801,050 (11,892,876)
Deferred stock compensation (17,178) (51,558)
---------------------------
Total stockholders'
equity (deficit) 5,783,872 (11,944,434)
---------------------------
Total liabilities and
stockholders' equity (deficit) $33,646,583 $24,763,884
===========================
SEE ACCOMPANYING NOTES.
<PAGE>
Vanguard Airlines, Inc.
Statements of Operations
YEAR ENDED DECEMBER 31
1998 1997 1996
Operating revenues:
Passenger revenue $ 97,810,522 $ 76,560,373 $ 64,977,645
Other 6,458,020 4,823,765 3,611,456
------------- ------------ ------------
Total operating
revenues 104,268,542 81,384,138 68,589,101
Operating expenses:
Flying operations 17,997,741 17,080,316 17,306,500
Aircraft fuel 13,725,011 18,571,472 16,005,041
Maintenance 21,928,784 19,334,251 16,074,921
Passenger service 6,677,818 7,342,237 6,245,678
Aircraft and traffic
servicing 16,941,063 16,746,727 15,193,426
Promotion and sales 18,680,369 20,701,511 15,722,822
General and
administrative 4,065,266 4,914,469 4,371,150
Depreciation and
amortization 2,798,215 2,067,917 1,583,879
----------- ----------- -----------
Total operating
expenses 102,814,267 106,758,900 92,503,417
----------- ----------- -----------
Operating income (loss) 1,454,275 (25,374,762) (23,914,316)
Other income (expense):
Deferred debt issuance
cost amortization (2,629,785) (1,858,767) (1,833,335)
Interest expense (516,626) (1,110,465) (195,728)
Interest income 213,199 97,991 135,309
----------- ----------- -----------
Total other expense,
net (2,933,212) (2,871,241) (1,893,754)
----------- ----------- -----------
Net loss $(1,478,937) $(28,246,003) $(25,808,070)
=========== =========== ===========
Net loss per share $ (0.02) $ (1.85) $ (2.85)
=========== =========== ===========
Weighted-average
common shares
outstanding 65,767,641 15,232,901 9,056,888
=========== =========== ===========
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
Vanguard Airlines, Inc.
Statements of Stockholders' Equity (Deficit)
<CAPTION>
CONVERTIBLE TOTAL
PREFERRED STOCK ADDITIONAL DEFERRED STOCKHOLDERS'
SERIES A COMMON STOCK PAID-IN ACCUMULATED STOCK EQUITY
---------------- ---------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION (DEFICIT)
---------------- -------------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 - $ - 8,524,376 $ 8,524 $19,301,937 $(15,637,987) $(127,841) $ 3,544,633
Issuance of warrants - - - - 1,850,000 - - 1,850,000
Amortization of
deferred stock
compensation - - - - - - 41,903 41,903
Issuance of common
stock in a private
placement - - 1,319,774 1,320 7,114,188 - - 7,115,508
Exercise of stock
options - - 138,302 138 17,871 - - 18,009
Net loss - - - - - (25,808,070) - (25,808,070)
---------------- -------------------- ----------- ----------- --------- ---------
Balance at
December 31, 1996 - - 9,982,452 9,982 28,283,996 (41,446,057) (85,938) (13,238,017)
Issuance of warrants - - - - 4,082,000 - - 4,082,000
Amortization of
deferred stock
compensation - - - - - - 34,380 34,380
Issuance of
common stock in
a private placement - - 5,150,000 5,150 10,229,850 - - 10,235,000
Issuance of common
stock in a rights
offering - - 30,455,714 30,456 15,144,544 - - 15,175,000
Exercise of
stock options - - 107,742 108 13,098 - - 13,206
Net loss - - - - - (28,246,003) - (28,246,003)
---------------- -------------------- ----------- ----------- --------- ---------
Balance at
December 31, 1997 - - 45,695,908 45,696 57,753,488 (69,692,060) (51,558) (11,944,434)
Issuance of warrants - - - - 490,000 - - 490,000
Amortization of
deferred stock
compensation - - - - - - 34,380 34,380
Issuance of
preferred stock
and warrants to
purchase common
stock through
conversion of
related-party
notes payable 302,362 302 - - 2,921,445 - - 2,921,747
Issuance of
common stock
through
conversion of
related-party
notes payable - - 21,129,770 21,130 10,543,757 - - 10,564,887
Issuance of common
stock through
exercise of warrants - - 10,300,000 10,300 5,139,700 - - 5,150,000
Issuance of common
stock through
cashless exercise
of warrants - - 8,110,936 8,111 (8,111) - - -
Exercise of
stock options - - 135,695 135 46,094 - - 46,229
Net loss - - - - - (1,478,937) - (1,478,937)
-------------- --------------------- ----------- ----------- --------- ---------
Balance at
December 31,1998 302,362 $302 85,372,309 $85,372 $76,886,373 $(71,170,997) $ (17,178) $ 5,783,872
============== ===================== =========== =========== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Vanguard Airlines, Inc.
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES
Net loss $(1,478,937) $ (28,246,003) $(25,808,070)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation 1,519,808 848,948 681,982
Amortization 1,278,407 1,218,969 901,897
Loss on sale and
disposal of property
and equipment - 11,400 117,954
Deferred debt issuance
cost amortization 2,629,785 1,858,767 1,850,000
Compensation related
to stock options 34,380 34,380 41,903
Provision for
uncollectible accounts 10,895 253,276 32,719
Provision for expendable
and rotable inventory
obsolescence 433,000 - -
Changes in operating
assets and liabilities:
Restricted cash - 1,822,998 (1,822,998)
Accounts receivable 271,235 888,703 (2,215,892)
Inventories (358,434) (169,282) (335,219)
Prepaid expenses
and other current
assets (11,536) (144,313) 635,008
Supplemental maintenance
deposits (1,842,632) (3,045,441) (1,793,220)
Accounts payable (247,268) (2,308,293) 5,937,339
Accrued expenses 176,226 355,201 1,348,785
Accrued maintenance 1,472,805 1,563,588 2,503,081
Air traffic liability 2,241,137 (620,524) 4,348,888
Deposits and other (143,907) (712,690) (983,664)
--------- --------- ---------
Net cash provided by
(used in) operating
activities 5,984,964 (26,390,316) (14,559,507)
INVESTING ACTIVITIES
Purchases of property
and equipment (5,844,984) (2,061,343) (2,958,406)
FINANCING ACTIVITIES
Proceeds from issuance
of notes payable to
related parties 3,000,000 29,148,816 3,900,000
Proceeds from line
of credit borrowings 1,900,000 2,275,000 9,700,000
Principal payments
on line of credit (3,800,000) (5,375,000) (4,700,000)
Proceeds from issuance
of notes payable 275,000 - -
Principal payments on
notes payable to
related parties - - (1,400,000)
Proceeds from sale of
common stock and the
exercise of stock
options and warrants,
net of offering costs 5,196,229 3,242,131 7,133,517
Offering costs incurred
on issuance of preferred
stock through conversion
of related-party
notes payable (101,873) - -
Principal payments on
notes payable and
capital lease
obligations (275,000) (158,659) (205,161)
--------- --------- ---------
Net cash provided
by financing activities 6,194,356 29,132,288 14,428,356
--------- --------- ---------
<PAGE>
Vanguard Airlines, Inc.
Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents $6,334,336 $ 680,629 $(3,089,557)
Cash and cash equivalents
at beginning of year 1,082,712 402,083 3,491,640
--------- --------- ----------
Cash and cash equivalents
at end of year $7,417,048 $ 1,082,712 $ 402,083
========= ========= ==========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
Cash paid during the year
for interest $ 190,935 $ 377,122 $ 159,541
========= ========= ==========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Conversion of related-
party notes payable
and accrued interest
to preferred stock $3,023,620 $ - $ -
========= ========= ==========
Conversion of related-
party notes payable
and accrued interest
to common stock $10,564,887 $22,181,075 $ -
========== ========== ==========
Deferred debt issuance
costs recorded in
conjunction with
warrants issued $ 490,000 $ 4,082,000 $ 1,850,000
========= ========= ==========
Aircraft leasehold costs
associated with accrued
maintenance at inception
of lease $ - $ 453,000 $ -
========= ========= ==========
Property and equipment
accrued through issuance
of capital lease
obligations $ - $ - $ 134,031
========= ========= ==========
Aircraft improvements
financed through the
issuance of notes
payable $ - $ - $1,000,000
========= ========= ==========
Retirement of notes
payable through sale of
property and equipment $ - $ - $ 958,333
========= ========= ==========
Reduction of accounts
payable through sale of
property and equipment $ - $ - $ 933,431
========= ========= ==========
SEE ACCOMPANYING NOTES.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Vanguard Airlines, Inc. (the Company) was incorporated in Delaware
in April 1994. The Company offers low-fare, convenient, short- to
medium-haul passenger air transportation service primarily in the
midwestern, Rocky Mountain, northeastern and southeastern regions
of the United States and commenced flight operations on December 4,
1994.
The airline industry is highly competitive primarily due to the
effects of the Airline Deregulation Act of 1978, which has
substantially eliminated government authority to regulate domestic
routes and fares and has increased the ability of airlines to
compete with respect to flight frequencies and fares.
The airline industry is significantly affected by general economic
conditions. Because a substantial portion of business and personal
airline travel is discretionary, the industry has experienced
adverse financial results during general economic downturns and
positive financial results during economic upturns. The Company's
business is also seasonal, which can affect the Company's results
of operations from quarter to quarter. A prolonged economic
downturn could have a material adverse effect on the Company's
operations and profitability.
Fuel is a major component of operating expenses for all airlines.
Both the cost and availability of fuel are subject to many economic
and political factors and events occurring throughout the world.
The future cost and availability of fuel to the Company cannot be
predicted, and substantial sustained price increases or the
inability to obtain adequate fuel supplies could have a material
adverse effect on the Company's operations and profitability.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
RESTRICTED CASH
Restricted cash includes cash equivalents that secure the risk of
loss exposure estimated by the Company's credit card processors.
During the year, the risk of loss exposure for the Company's
largest credit card processor is calculated daily. If the risk of
loss exposure exceeds $6,000,000 (the amount secured by letters of
credit and a guarantee discussed in NOTE 7), the Company is
required to maintain a restricted cash balance in an amount equal
to the additional exposure. At December 31, 1998 and 1997, no
restricted cash balance related to this credit card processor was
required as the risk of loss exposure calculated on those dates did
not exceed $6,000,000. Another credit card processor requires the
Company to maintain a deposit as security for its risk of loss
exposure. The risk of loss exposure for this credit card processor
is reviewed annually. At December 31, 1998 and 1997, the restricted
cash balance related to this credit card processor totaling
$227,183 and $217,396, respectively, is considered noncurrent and
is included as a component of other assets on the accompanying
balance sheets.
ACCOUNTS RECEIVABLE
Accounts receivable are primarily due from major credit card
processors and travel agents. These receivables are unsecured. The
Company provides an allowance for doubtful accounts equal to the
estimated losses expected to be incurred in the collection of
accounts receivable.
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Although the Company does not expect losses associated with
supplemental payments recoverable from aircraft lessors, which are
described in NOTE 9, recoverability of these payments is dependent
on the continued financial stability of its three lessors and on
the Company's ability to initially fund aircraft maintenance
required for a return of such supplemental payments.
INVENTORIES
Inventories of flight equipment, expendable parts, materials,
tools, food, beverages and promotional items are carried at cost
less an estimated obsolescence reserve. These items are charged to
expense when issued for use under the first-in, first-out method.
In 1996, the Company entered into an agreement with a supplier for
consigned parts and supplies for its Boeing 737-200 aircraft. The
Company is required to pay a monthly consignment fee, based on the
value of the consigned parts, and to replenish any such parts when
used with a like part. At December 31, 1998 and 1997, the Company
held consigned parts and supplies of approximately $1,628,000 and
$2,088,000, respectively, which are not included in the
accompanying balance sheets.
PROPERTY AND EQUIPMENT
Depreciation and amortization of aircraft improvements and
leasehold costs are recorded using the straight-line method over
their estimated useful lives or remaining lease terms of the
related aircraft, whichever is shorter, ranging from five to seven
years. Reservation system and communication equipment and other
property and equipment are depreciated on a straight-line basis
over the shorter of their estimated useful lives or remaining lease
terms ranging from five to seven years. Aircraft rotable inventory
items are depreciated over their estimated useful lives or
remaining aircraft lease terms, whichever is shorter, ranging from
five to seven years. At December 31, 1998, aircraft rotable
inventory is recorded net of a $400,000 obsolescence reserve.
Aircraft engines are depreciated on a straight-line basis over 10
years.
AIRCRAFT AND ENGINE MAINTENANCE
The Company accounts for aircraft overhaul and major engine
maintenance costs using the accrual method. The Company accrues the
estimated cost of the next aircraft overhaul based on aircraft
utilization. The actual cost of an aircraft overhaul is charged to
the accrual, with any deficiency or excess charged or credited to
expense. The Company accrues major engine maintenance based on the
greater of engine cycles or flight hours multiplied by the
estimated long-term cost per flight hour or cycle. The actual cost
of engine maintenance is charged to the accrual. The estimated
long-term cost per flight hour or cycle is adjusted to provide for
the Company's estimated cost of the next overhaul. The cost of
routine maintenance is charged to expense as incurred.
ADVERTISING COSTS
Advertising costs are charged to expense in the period the costs
are incurred. Advertising expense was approximately $5,458,000,
$7,792,000 and $4,316,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PASSENGER REVENUE RECOGNITION
Passenger ticket sales are initially recorded as a component of air
traffic liability. Revenue derived from ticket sales is recognized
at the time transportation is provided. However, due to various
factors, including a multitier ticket pricing structure, certain
amounts are recognized in revenue using estimates regarding both
the timing of the revenue recognition and the amount of revenue to
be recognized. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principals Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations in accounting for its employee stock
options, because, as discussed in NOTE 4, the alternative fair
value accounting provided for under the Financial Accounting
Standards Board's Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," requires
the use of option valuation models that were not developed for use
in valuing employee stock options.
Pro forma information regarding net loss and loss per share is
required by SFAS No. 123 and has been determined as if the Company
had accounted for its stock options under the fair value method of
that statement. This pro forma information is included in NOTE 3.
LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share."
Under SFAS No. 128, the Company is required to calculate basic
earnings per share based on the weighted-average common shares
outstanding by excluding the effect of dilutive stock options. In
all years presented herein, the computation of net loss per share
is based on the weighted-average number of common shares
outstanding, as outstanding convertible preferred stock, stock
options and warrants were antidilutive.
INCOME TAXES
The Company utilizes the liability method in accounting for income
taxes, whereby deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of
assets and liabilities utilizing enacted rates and laws that will
be in effect when the differences are expected to reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, restricted cash
and supplemental maintenance deposits reported in the balance sheet
approximate fair value. Based on the guarantee of the line of
credit by certain stockholders of the Company, management believes
the carrying amount of such borrowings reported in the balance
sheet at December 31, 1997 approximates fair value. The carrying
amount of the notes payable to related parties at December 31, 1997
approximates fair value. These notes payable were converted to
common stock in 1998 at $0.50 per share as discussed in NOTE 2. The
fair values of warrants issued in 1998, 1997 and 1996, as described
in NOTES 5 AND 7, were estimated using the discounted Black-Scholes
pricing model.
RECLASSIFICATION
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
<PAGE>
2. STOCKHOLDERS' EQUITY
On March 20, 1998, the Company completed a private sale of 302,362
units of securities at $10 per unit, each unit consisting of one
share of Series A Convertible Preferred Stock, par value $0.001 per
share (the Series A Preferred Stock), and a common stock purchase
warrant. In conjunction therewith, the Company converted $3,023,620
of outstanding principal and interest on the demand notes payable,
described in NOTE 6, to Series A Preferred Stock under the terms of
the agreement. Offering costs of $101,873 were incurred in
connection with the issuance of the Series A Preferred Stock. Each
warrant in the unit entitled the holder to purchase 40 shares of
common stock at an exercise price of $0.55 per share and expired on
March 20, 2005. On August 6, 1998 and August 12, 1998, the warrant
holders exercised, in accordance with the cashless exercise
provision of the warrant agreement, warrants representing rights to
purchase 6,000,000 and 6,094,480, respectively, shares of common
stock that were sold in the Series A Preferred Stock unit offering.
Because the warrant holders elected to exercise the warrants on a
net basis, as defined by the related warrant agreement, the Company
issued an aggregate 8,110,936 shares of common stock in connection
with such exercises.
The Series A Preferred Stock is not redeemable and pays dividends
at an annual rate of $0.80 per share only when, and if, declared by
the Company's Board of Directors. The Board of Directors, as of
December 31, 1998, has declared no dividends. The liquidation
preference of each share of Series A Preferred Stock is $10 plus
any accrued and unpaid dividends. Each share of Series A Preferred
Stock is convertible into 20 shares of common stock (subject to
certain antidilution adjustments) at any time commencing on
September 20, 1998, and holders of the Series A Preferred Stock are
entitled to voting rights determined on an as-converted basis.
On May 15, 1998, the Company held its annual meeting of
stockholders whereby the stockholders approved an amendment to the
Company's Restated Certificate of Incorporation to increase the
number of authorized shares of the Company's common stock from
50,000,000 to 200,000,000 shares and preferred stock from 1,000,000
to 2,000,000 shares. Effective with the increase in the authorized
capital stock, the Convertible Notes, described in NOTE 6, were
converted, at $0.50 per share, to an equivalent number of shares of
common stock. The Company issued 21,129,770 shares of common stock
on May 20, 1998 in connection with this transaction.
On July 2, 1998, the Company notified certain principal
stockholders of its intention to redeem 10,300,000 outstanding
warrants that were issued in conjunction with the Company's April
1997 private unit offering. Each warrant issued in connection with
the private unit offering entitled the holder to purchase one share
of the Company's common stock for $0.50 per share. In lieu of
redemption, the warrant holders exercised the warrants and the
Company received proceeds of $5,150,000 in August 1998 upon
issuance of 10,300,000 shares of common stock.
The Company also issued redeemable stock purchase warrants in
conjunction with certain other debt and equity agreements entered
into during the year. During 1998, the Company issued 107,261
redeemable stock purchase warrants related to such agreements. The
warrants entitle the holders to purchase, at any time over a 10-
year period from the date of issuance, one share of common stock at
an exercise price of $0.50.
In December 1997, the Company completed a sale of 30,455,714 shares
of common stock through a Rights Offering. Under the Rights
Offering, the Company distributed nontransferable rights, at no
cost, to stockholders of record. Each record holder received two
rights, with each right entitling the holder to purchase one share
of common stock for a price of $0.50 per share. Certain principal
stockholders exercised all of their rights pursuant to the basic
subscription and the over subscription privileges of the Rights
Offering. In lieu of paying the subscription price in cash, they
relieved and discharged the Company of $12,181,075 in notes payable
to related parties. The cash proceeds to the Company from the sale
of the common stock upon the exercise of the rights offered totaled
approximately $2,994,000, after deducting approximately $53,000 in
offering expenses.
<PAGE>
2. STOCKHOLDERS' EQUITY (CONTINUED)
In April 1997, the Company completed a private sale of units of
securities, each unit consisting of one share of common stock and
two redeemable common stock purchase warrants. In connection with
the sale, the Company issued 5,150,000 shares of common stock for
aggregate proceeds of approximately $10,235,000, net of offering
costs of approximately $65,000. Included in this private sale were
5,000,000 shares of common stock issued to certain principal
stockholders in lieu of repayment of $10,000,000 in notes payable
to related parties. Each redeemable warrant originally entitled the
holder to purchase, at any time over a five-year period commencing
with the closing of this private offering, one share of common
stock at an exercise price of $2.50. The redeemable warrant
exercise price was subject to adjustment in the event the Company
issued equity securities raising net proceeds in an aggregate
amount of $1,000,000 at a price below $2.00 per share. In
conjunction with the Company's Rights Offering discussed above, the
redeemable warrants were repriced to $0.50, the offering price of
the common stock in the Rights Offering. The Company had the right
to redeem the warrants at a redemption price of $0.05 per warrant
on 45 days' prior notice if the average closing bid price of the
Company's common stock equals or exceeds $1.00 for any 20 days
within a period of 30 consecutive trading days, as defined by the
warrant agreement. The Company notified the stockholders of its
intention to redeem the warrants on July 2, 1998 as discussed
above.
In September 1996, the Company completed a private sale of units of
securities, each unit consisting of one share of common stock and
one redeemable common stock purchase warrant. In connection with
the sale, the Company issued 1,319,774 shares of common stock for
aggregate proceeds of approximately $7,116,000, net of offering
costs of approximately $184,000. Each redeemable warrant entitles
the holder to purchase, at any time over a five-year period
commencing with the closing of this private offering, one share of
common stock at an exercise price of $6.64. The redeemable warrant
exercise price is subject to adjustment under certain circumstances
as defined in the warrant agreement. The Company has the right to
redeem the warrants at a redemption price of $0.05 per warrant on
45 days' prior notice if the average closing bid price of the
Company's common stock equals or exceeds $13.28 for any 20 days
within a period of 30 consecutive trading days, as defined by the
warrant agreement.
On November 3, 1995, the Company completed the issuance of
2,400,000 shares of common stock at a price of $6.00 per share
through an initial public offering, resulting in net proceeds,
after underwriting commissions and offering expenses, of
approximately $12,956,000. In connection with the Rights Offering,
the Company issued the underwriter warrants to purchase 240,000
shares of common stock at an exercise price of $7.20. The warrants
are exercisable at any time from November 1, 1996 to November 1,
2000.
The Company has reserved 33,404,138 shares of common stock for
issuances related to the conversion of preferred stock, the
exercise of outstanding or available stock options and outstanding
stock purchase warrants (including the warrants granted in January
1999) and for shares available under the employee stock purchase
plan as follows:
NUMBER
OF SHARES
RESERVED
--------
Stock options (NOTE 3) 12,855,241
Stock purchase warrants
(NOTES 2, 5 AND 7) 13,501,657
Series A Preferred Stock (NOTE 2) 6,047,240
Employee stock purchase plan (NOTE 4) 1,000,000
----------
33,404,138
==========
<PAGE>
3. STOCK OPTIONS
The Company established the Vanguard Airlines, Inc. 1994 Stock
Option Plan (the 1994 Plan) whereby options for up to 1,700,000
(increased to 10,000,000 in 1998) shares may be granted to
officers, directors, key employees and consultants to purchase
shares of common stock. Vesting and term of these options are
determined by the Board of Directors and may vary by optionee;
however, the term may be no longer than 10 years from the date of
issuance.
During 1997, the Company repriced certain options under the 1994
Plan due to a significant decline in the market price of the stock
from the grant date. The first option repricing occurred on
February 6, 1997 whereby options to purchase up to 76,000 shares of
common stock were repriced to the then current market price of
$1.81. The repricing resulted in an adjusted vesting start date for
all repriced options equal to a three-month extension. A second
option repricing occurred on November 3, 1997 whereby options
repriced on February 6, 1997 and options granted in 1997 to
purchase up to 1,037,500 shares of common stock were repriced to
the then current market price of $0.50. This repricing also
resulted in an adjusted vesting start date for all repriced options
equal to another three-month extension.
A summary of stock option activity related to the 1994 Plan is as
follows:
1998 1997 1996
----------------- ---------------- ---------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------------- ----------------- --------------
Outstanding at
beginning of
year 1,265,265 $0.64 473,227 $2.40 587,000 $0.17
Granted 4,436,933 0.97 2,252,500 1.16 133,500 8.66
Transferred
from 1997
Program 3,586,982 0.53 - - - -
Repriced - - (1,113,500) 2.28 - -
Exercised (135,695) 0.34 (107,742) 0.12 (138,302) 0.13
Forfeited (1,232,934) 0.69 (239,220) 1.68 (108,971) 0.93
---------- ----- -------- ---- -------- ----
Outstanding at
end of year 7,920,551 0.77 1,265,265 0.64 473,227 2.40
========== ===== ========= ==== ======== ====
Exercisable at
end of year 2,223,077 0.76 235,033 1.35 202,821 2.55
Weighted-average
fair value of
options granted
during the year 0.48 0.56 4.08
Exercise prices for options outstanding under the 1994 Plan as of
December 31, 1998 for incentive stock options granted to employees
range from $0.11 to $1.16. The exercise prices for certain
nonstatutory options granted range from $0.69 to $2.13 for 875,000
options and equals $9.25 for an additional 25,000 options
outstanding under the Plan. The weighted-average remaining
contractual life at December 31, 1998 of all outstanding options
under the 1994 Plan is 9.05 years.
Under a separate stock option program (the 1997 Program), the
Company granted options to purchase 6,973,962 shares of common
stock to certain directors and officers of the Company. Options
totaling 3,586,982 issued to certain directors and officers under
the 1997 Program were transferred to the 1994 Plan in 1998 when the
shares reserved for issuance under the 1994 Plan were increased to
10,000,000. The remaining 3,386,980 options under the 1997 Program
have an exercise price of $0.50, vest over a period of two years
and have a contractual term of five
<PAGE>
3. STOCK OPTIONS (CONTINUED)
years from the date of issuance. None of these options were
exercised or forfeited during the years ended December 31, 1998 or
1997. At December 31, 1998, there are 2,540,235 options exercisable
under the 1997 Program, and the weighted-average remaining
contractual life of all outstanding options is 3.45 years. The
weighted-average fair value of all options originally granted under
the 1997 Program is $0.21.
The fair values of options granted in 1998, 1997 and 1996 were
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk free interest rates of 5.37%,
5.78% and 6.32%; volatility factors of the expected market price of
the Company's common stock of .57, .55 and .61; and a weighted-
average expected life of the option of 3.90, 2.96 and 3.21 years.
The Company assumed a 0% dividend yield over the expected life of
the options.
The Black-Scholes model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, the option valuation model
requires the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those of
traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily
provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting
period. The effects of applying SFAS No. 123 for pro forma
disclosures are not likely to be representative of the effects on
reported net income or losses for future years. The Company's pro
forma information follows:
1998 1997 1996
--------- ------------ ------------
Pro forma net loss $(2,192,258) $(28,701,314) $(25,948,409)
Pro forma net loss
per share (0.03) (1.88) (2.87)
4. EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1996, the Company adopted the Vanguard
Airlines, Inc. Employee Stock Purchase Plan (the Purchase Plan).
Under the Purchase Plan, the Company registered 1,000,000 shares of
common stock for issuance to participating eligible employees. The
Company withholds a specified amount (at least $20.00 per month and
not to exceed 15% of compensation for that particular month) from
the paychecks of participating eligible employees. The custodian of
the Purchase Plan purchases common stock within five business days
of the allocation of the participating employee's contribution. Any
employee who has completed ninety (90) days of employment with the
Company is eligible to participate in the Purchase Plan. Common
stock is purchased by the employees from the Company at 85% of the
fair market value of the common stock as determined on the last
market trading day prior to the purchase date. Common stock
purchased on the open market is paid 85% by the participating
employee and 15% by the Company.
5. LINES OF CREDIT
On January 30, 1997, the Company entered into a bank line of credit
(the Agreement) that permitted borrowings up to $2,275,000 with
interest payable monthly at the prime rate published in THE WALL
STREET JOURNAL. As of December 31, 1997, the Company had borrowed
$1,900,000 under the Agreement. The prime rate was 8.50% at
December 31, 1997. The Agreement matured on January 30, 1998 and
was subsequently paid off. The Agreement was guaranteed by certain
stockholders of the Company (the Guarantors) for a period of up to
two years.
<PAGE>
5. LINES OF CREDIT (CONTINUED)
On January 30, 1998, the Company entered into another bank line of
credit agreement (the New Agreement) that permitted borrowings up
to $1,900,000 with interest payable monthly at the prime rate
published in THE WALL STREET JOURNAL. On January 30, 1998, the
Company borrowed $1,900,000 under the terms of the New Agreement to
repay amounts outstanding under the Agreement. The New Agreement
was paid off in August 1998 with proceeds from the exercise of
warrants discussed in NOTE 2. The New Agreement matured on January
30, 1999 and was not renewed. The New Agreement was also
guaranteed by certain stockholders of the Company.
In connection with the execution of the Agreement and a related
two-year guarantee, the Company agreed to issue the Guarantors
warrants to purchase an aggregate of up to 2,275,000 shares of
common stock at an exercise price of $1.00. Upon execution of the
Agreement, the Company issued 910,000 warrants that vested
immediately. Accordingly, effective January 30, 1997, the estimated
fair value of the warrants issued of $1,100,000 was recorded as
deferred debt issuance costs in the accompanying balance sheet and
is being charged to expense over the term of the guarantee. The
remaining warrants vested quarterly through July 1998 with the
number dependent on the amount of borrowings against the line, as
defined in the warrant agreement. In 1997 and 1998, the Company
issued an additional 682,500 and 570,000 warrants, respectively.
Accordingly, the estimated fair value of the additional warrants
issued in 1997 and 1998, totaling $323,000 and $138,000,
respectively, was recorded as deferred debt issuance costs and is
being charged to expense over the remaining term of the guarantee.
Accumulated amortization related to the warrants totaled $1,477,552
and $613,348 at December 31, 1998 and 1997, respectively. Each
warrant expires 10 years from the date of issuance. Warrants for
purchase of 262,500 shares were terminated and warrants for
purchase of 112,500 shares were forfeited in December 1997 as a
result of the release of one of the stockholder's guarantee.
At December 31, 1998, in connection with guarantees of lines of
credit that expired in 1995 and 1996, the Company had issued
warrants to purchase an aggregate of up to 1,190,341 shares of
common stock at a weighted-average exercise price of $4.46 per
share. These warrants are fully vested and expire in varying
amounts in 2005 and 2006.
6. NOTES PAYABLE TO RELATED PARTIES
During January and March 1998, the Company issued a total of
$3,000,000 of unsecured 9.0% convertible demand notes payable to
certain principal stockholders of the Company. The Company
converted the unsecured demand notes plus accrued interest totaling
$3,023,620 to Series A Convertible Preferred Stock, as described in
NOTE 2. In addition, on March 20, 1998, the Company entered into a
note exchange agreement whereby the principal stockholders holding
notes payable totaling $9,467,741 exchanged their existing
unsecured demand notes payable, and all accrued unpaid interest,
for new unsecured convertible demand notes payable (the Convertible
Notes). The remaining terms of the Convertible Notes were
unchanged. In May 1998, the Company converted the Convertible Notes
plus accrued interest totaling $10,564,887 to common stock at a
rate of $0.50 per share, as described in NOTE 2.
In 1997 and 1996, the Company entered into unsecured demand notes
payable with certain major stockholders of the Company with
interest payable on demand at a rate of 8.0%. As of December 31,
1997, unsecured demand notes payable of $9,467,741 were
outstanding.
The Company had no short-term borrowings outstanding as of
December 31, 1998. The weighted-average stated interest rate on
short-term borrowings outstanding (excluding deferred debt issuance
costs amortization) as of December 31, 1997 equaled 8.0%. The
Company recorded related-party interest expense (excluding deferred
debt issuance costs amortization) during 1998, 1997 and 1996 of
approximately $332,000, $762,000 and $11,000, respectively. There
were no interest payments made to related parties in 1998, 1997 and
1996.
<PAGE>
7. FINANCIAL INSTRUMENTS
In January 1999, major stockholders of the Company agreed to renew
the two-year $4,000,000 letter of credit facility in favor of the
Company's credit card processor. As consideration for renewing the
letter of credit, the Company agreed to issue up to 4,000,000
warrants to the major stockholder to purchase shares of the
Company's common stock at an exercise price of $1.00. Upon
execution of the letter of credit, the Company issued 800,000
warrants that vested immediately. Accordingly, in January 1999, the
estimates fair value of the warrants issued of $238,000 was
recorded in other assets and is being charged to expense over the
term of the facility. The remaining warrants vest quarterly
according to the amount of exposure under such letter of credit, as
defined in the agreement.
In January 1997, a major stockholder of the Company agreed to
establish a two-year $4,000,000 letter of credit facility in favor
of the Company's credit card processor. As consideration for
establishing the letter of credit, the Company agreed to issue up
to 4,000,000 warrants to the major stockholder to purchase shares
of the Company's common stock at an exercise price of $1.00. Upon
execution of the letter of credit, the Company issued 1,600,000
warrants that vested immediately. Accordingly, in January 1997, the
estimated fair value of the warrants issued of $1,900,000 was
recorded in other assets and is being charged to expense over the
term of the facility. The remaining warrants vested quarterly
through October 1998 according to the amount of exposure under such
letter of credit, as defined in the agreement. In 1997 and 1998,
the Company issued an additional 814,457 and 1,298,896 warrants,
respectively. Accordingly, the estimated fair value of the
additional warrants issued in 1997 and 1998, totaling $592,000 and
$332,000, respectively, was recorded as deferred debt issuance
costs and is being charged to expense over the remaining term of
the guarantee. The warrants were fully amortized at December 31,
1998. Accumulated amortization related to the warrants totaled
$1,180,419 at December 31, 1997. Each warrant expires 10 years
from the date of issuance. In addition, the Company granted the
major stockholder a security interest in all credit card
receivables processed by the Company's credit card processor.
Warrants for purchase of 286,647 shares were forfeited in 1998 as a
result of the credit card exposure being less than the amount of
the letter of credit during certain vesting periods.
In May 1997, the Company completed an additional $2,000,000
guarantee facility in favor of the Company's credit card processor.
This guarantee facility expires in May 1999 and was established by
the same major stockholder of the Company. As consideration for
establishing the guarantee, the Company agreed to issue up to
1,030,928 warrants to the major stockholder to purchase shares of
the Company's common stock at an exercise price of $1.94. Upon
execution of the guarantee, the Company issued 412,371 warrants
that vested immediately. Accordingly, in May 1997, the estimated
fair value of the warrants issued of $150,000 was recorded in other
assets and is being charged to expense over the term of the
facility. The remaining warrants vested quarterly through November
1998 according to the amount of exposure under such letter of
credit, as defined in the agreement. In 1997 and 1998, the Company
issued an additional 206,186 and 412,371 warrants, respectively.
Accordingly, the estimated fair value of the additional warrants
issued in 1997 and the warrants issued in 1998 totaling $17,000 and
$20,000, respectively, was recorded as deferred debt issuance
costs. The warrants were fully amortized at December 31, 1998.
Accumulated amortization related to the warrants totaled $65,000 at
December 31, 1997. Each warrant expires 10 years from the date of
issuance.
<PAGE>
8. INCOME TAXES
A reconciliation of the income tax benefit at the federal statutory
rate to the provision (benefit) for income taxes is as follows:
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- ----------- -----------
Benefit at statutory rate $ (502,839) $(9,603,640) $(8,774,744)
State benefit, net of
federal benefit (68,327) (1,304,965) (1,192,333)
Amortization of deferred
debt issuance costs 1,025,616 724,919 715,001
Meals and entertainment 103,329 72,944 72,884
Other (5,620) (112,530) (60,440)
Change in valuation
allowance (552,159) 10,223,272 9,239,632
---------- ---------- ----------
$ - $ - $ -
========== ========== ==========
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities as of December 31 are as follows:
1998 1997
------------ -----------
Deferred tax assets:
Net operating loss carryforwards $23,433,318 $24,264,808
Accrued overhaul maintenance 4,181,202 3,606,808
Amortization of aircraft
leasehold costs 616,186 451,306
Accrued vacation 189,778 172,076
Inventory reserve 168,870 -
Other 243,320 262,757
------------ ----------
Total deferred tax assets 28,832,674 28,757,755
Valuation allowance (24,984,110) (25,536,269)
------------ ----------
3,848,564 3,221,486
1998 1997
------------ ----------
Deferred tax liabilities:
Prepaid overhaul maintenance $ 3,748,419 $ 3,029,793
Prepaid insurance 25,478 109,687
Other 74,667 82,006
------------ -----------
Total deferred tax liabilities 3,848,564 3,221,486
------------ -----------
$ - $ -
============ ===========
The Company has provided a valuation reserve of $24,984,110 and
$25,536,269 as of December 31, 1998 and 1997, respectively, to
fully reserve for net deferred tax assets in the same amounts due
to the uncertainty of their future realization.
As of December 31, 1998, net operating loss carryforwards of
approximately $60,085,432 are available to reduce income taxes of
future years and will begin to expire in 2009, if unused. The
Company made no income tax payments during the years ended
December 31, 1998, 1997 and 1996.
<PAGE>
9. LEASES
AIRCRAFT
From the date of inception through December 31, 1998, the Company
has entered into operating lease agreements (collectively, the
Lease Agreements) for nine Boeing 737-200 and two Boeing 737-300
Series aircraft requiring fixed monthly rental payments. The two
Boeing 737-300 Series aircraft were returned upon expiration of
their respective lease terms in 1997. The Company recorded rent
expense for aircraft of approximately $10,236,000, $9,261,000 and
$10,404,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
In addition, the Company is required to make supplemental payments
to the aircraft lessors based on the number of cycles/flight hours,
as defined by the Lease Agreements. Certain supplemental payments
are recoverable from the lessor upon the performance of required
engine, airframe, landing gear and auxiliary power unit overhauls.
At December 31, 1998 and 1997, the Company has recorded
approximately $9,611,000 and $7,769,000, respectively, in
supplemental maintenance deposits recoverable from aircraft
lessors.
The Lease Agreements require the Company to pay the entire cost of
the initial overhauls, even though a portion of the cycles or
flight hours were incurred prior to initiation of the Lease
Agreements. Accordingly, at the inception of the lease, the Company
accrued (as accrued maintenance) the portion of the estimated cost
of the initial overhaul pertaining to cycles or flight hours
incurred prior to inception of the lease. The amounts capitalized
as aircraft leasehold costs totaled approximately $453,000 for the
year ended December 31, 1997. There was no overhaul component
capitalized for the years ended December 31, 1998 and 1996. The
capitalized component is being amortized on the straight-line
method over five to seven years, the estimated lease terms.
Amortization totaled approximately $423,000, $405,000 and $422,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
The Lease Agreements have lease terms ranging from three to seven
years with the option to extend the lease term for certain aircraft
for two to four additional years. The Company exercised its option
to extend the lease term on four Boeing 737-200 aircraft for two
additional years effective December 1997. In December 1998, a lease
extension agreement was modified to extend the lease term on one
Boeing 737-200 aircraft through December 2000. Three other Boeing
737-200 aircraft will be returned to the lessor in 1999 upon the
expiration of their respective lease terms. Certain Boeing 737-200
Lease Agreements each have an option to purchase the aircraft at a
value defined by the respective agreement.
During 1998, the Company entered into additional lease agreements
for the delivery of two additional aircraft in February and March
1999. The lease terms are five years from the date of delivery and,
like the other aircraft leases, require the Company to make
supplemental payments to the aircraft lessor based on the number of
cycles/flight hours, as defined by the agreements. The supplemental
payments are recoverable from the lessor upon the performance of
required engine, airframe, landing gear and auxiliary power unit
overhauls. At December 31, 1998, the Company had deposits on these
aircraft totaling $263,000 and is required to make additional
deposits totaling $526,000 prior to aircraft delivery. In addition,
in 1999 the Company has signed letters of intent for the lease and
delivery of three additional aircraft during 1999.
OTHER
The Company leases facilities as well as office space for its
corporate headquarters from local airport authorities. These
operating leases have terms ranging from one month to five years.
In addition, the Company leases aircraft engines, auxiliary power
units, certain equipment and other office space. These operating
leases have terms ranging from one to three years. Total rental
expense for operating leases other than aircraft charged to
operations for the years ended December 31, 1998, 1997 and 1996 was
approximately $3,306,000, $2,982,000 and $2,764,000, respectively.
<PAGE>
9. LEASES (CONTINUED)
Future minimum lease payments under noncancelable operating leases
(excluding supplemental payments but including the lease agreements
related to aircraft deliveries in February and March 1999) at
December 31, 1998 were as follows:
1999 $14,300,599
2000 11,773,867
2001 8,739,734
2002 7,254,398
2003 3,490,223
Thereafter 394,500
-----------
Total minimum lease payments $45,953,321
===========
10. CONTINGENCIES
The Company is party to various legal proceedings and claims which
arise during the ordinary course of business. In the opinion of
management, the ultimate outcome of these matters will not have a
material adverse effect on the Company's financial position or
results of operations.
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
VANGUARD AIRLINES, INC.
Balance at Charged to
Beginning Charged to Other Deductions Balance at
of Costs and Accounts-- -- End of
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- --------------- ------ -------- --------- -------- ------
YEAR ENDED DECEMBER 31, 1998:
Reserves and
allowances
deducted from
asset accounts:
Valuation
reserve for
deferred tax
assets: $25,536,269 $ - $ - $552,159(1) $24,984,110
YEAR ENDED DECEMBER 31, 1997:
Reserves and
allowances
deducted from
asset accounts:
Valuation
reserve for
deferred tax
assets: $15,312,997 $10,223,272 $ - $ - $25,536,269
YEAR ENDED DECEMBER 31, 1996:
Reserves and
allowances
deducted from
asset accounts:
Valuation
reserve for
deferred tax
assets: $ 6,073,365 $ 9,239,632 $ - $ - $15,312,997
(1) reduction in valuation allowance due to utilization of net
operating loss carryforward.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VANGUARD AIRLINES, INC.
Dated: March 27, 1999 By: /S/ ROBERT J. SPANE
Robert J. Spane
Chairman of the Board, Chief
Executive Officer
and President
We, the undersigned, directors and officers of Vanguard
Airlines, Inc. (the "Company"), do hereby severally constitute and
appoint Robert J. Spane and William A. Garrett and each or any of
them, our true and lawful attorneys and agents, with full power of
substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and
all amendments to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, and to file the same with all
exhibits thereto, and all other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys and agents, and each or any of them, full power and
authority to do and perform each and every act and thing requisite
and necessary to be done, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming
all that said attorneys and agents, and each of them, or his
substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities indicated and on the
dates indicated.
SIGNATURE AND TITLE DATE
/S/ ROBERT J. SPANE March 27, 1999
Robert J. Spane, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
/S/ WILLIAM A. GARRETT March 27, 1999
William A. Garrett, Vice President-Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
/S/ LEE M. GAMMILL, JR. March 27, 1999
Lee M. Gammill, Jr. Director
/S/ DENIS T. RICE March 27, 1999
Denis T. Rice, Director
/S/ LEIGHTON W. SMITH March 27, 1999
Leighton W. Smith, Director
AMENDMENT NO. 2 TO
LEASE AGREEMENT
THIS AMENDMENT NO. 2 TO LEASE AGREEMENT (this
"Agreement") is entered into as of November 1, 1998, by and
between First Security Bank, National Association, a
national banking association, not in its individual
capacity but solely as Owner Trustee under that certain
Trust Agreement, dated as of December 20, 1996 (as
successor-in-interest to US Airways, Inc., formerly known
as USAir, Inc. ("USAir")) ("Lessor"), and Vanguard
Airlines, Inc., a Delaware corporation ("Lessee").
R E C I T A L S:
A. USAir and Lessee entered into that certain Lease
Agreement, dated as of December 8, 1994 (the "Lease
Agreement"), which was assigned to Lessor pursuant to four
Assignment and Assumption Agreements by and between USAir
and Lessor (more fully described below) (the Lease
Agreement as amended, modified, supplemented, and assigned
to the date hereof and hereby, the "Lease"). Capitalized
terms used herein and not otherwise defined shall have the
meanings set forth or incorporated by reference in the
Lease.
B. The Boeing Model 737-222 aircraft bearing
manufacturer's serial no. 19547 was leased under the Lease
Agreement pursuant to Lease Supplement No. 1, dated
December 8, 1994 ("Lease Supplement No. 1"). The said
aircraft, the Lease Agreement and Lease Supplement No. 1
were, among other things, assigned to Lessor pursuant to an
Assignment and Assumption Agreement dated as of March 14,
1997 ("Assignment (MSN 19547)").
C. The Boeing Model 737-281 aircraft bearing
manufacturer's serial no. 20414 was leased under the Lease
Agreement pursuant to Lease Supplement No. 2, dated
December 8, 1994 ("Lease Supplement No. 2"). The said
aircraft, the Lease Agreement and Lease Supplement No. 1
were, among other things, assigned to Lessor pursuant to an
Assignment and Assumption Agreement dated as of March 17,
1997 ("Assignment (MSN 20414)").
D. The Boeing Model 737-247 aircraft bearing
manufacturer's serial no. 19603 was leased under the Lease
Agreement pursuant to Lease Supplement No. 3, dated
December 8, 1994 ("Lease Supplement No. 3"). The said
aircraft, the Lease Agreement and Lease Supplement No. 1
were, among other things, assigned to Lessor pursuant to an
Assignment and Assumption Agreement dated as of March 14,
1997 ("Assignment (MSN 19603)").
E. The Boeing Model 737-222 aircraft bearing
manufacturer's serial no. 19548 (together with the aircraft
described in paragraphs (B) through (D), the "Aircraft")
was leased under the Lease Agreement pursuant to Lease
Supplement No. 4, dated January 2, 1995 ("Lease Supplement
No. 4"). The said aircraft, the Lease Agreement and Lease
Supplement No. 1 were, among other things, assigned to
Lessor pursuant to an Assignment and Assumption Agreement
dated as of March 17, 1997 ("Assignment (MSN 19548)").
F. The Lease Agreement, together with Lease
Supplement No. 1, Lease Supplement No. 2 and Lease
Supplement No. 3, was recorded by the Federal Aviation
Administration on January 6, 1995 and assigned Conveyance
No. Y40259. Lease Supplement No. 4, together with the
Assignment (MSN 19548), was recorded by the Federal
Aviation Administration as one document on May 14, 1997 and
assigned Conveyance No. H90401.
G. Assignment (MSN 19547) was recorded by the
Federal Aviation Administration on May 14, 1997 and
assigned Conveyance No. H90392. Assignment (MSN 20414) was
recorded by the Federal Aviation Administration on May 14,
1997 and assigned Conveyance No. H90387, Assignment (MSN
19603) was recorded by the Federal Aviation Administration
on May 14, 1997 and assigned Conveyance No. 90394.
H. Amendment No. 1 to Lease Agreement was recorded
by the Federal Aviation Administration on September 23,
1998 and assigned Conveyance No. S105388.
I. Lessor and Lessee desire to amend the terms of
the Lease as hereinafter provided.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing
premises and of the mutual agreement herein contained, and
for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Lessor and
Lessee agree as follows:
1. The Expiration Date of the Term for each of the
Aircraft described below shall be changed as follows:
Manufacturer's Expiration
SERIAL NUMBER DATE
19548 December 31, 2000
19603 July 31, 1999
2. Effective December 31, 1998, Basic Rent payable
under the Lease for the Aircraft bearing manufacturer's
serial number 19548 shall be changed to [intentionally
omitted] per month.
3. Lessor shall furnish to Lessee, at no cost to
Lessee, a Nordam Stage III Hush Kit ("Hush Kit") for
installation on each of the Aircraft bearing manufacturer's
serial numbers 19548 and 19603 and Lessee shall install or
cause to be installed each such Hush Kit at the time of the
next scheduled heavy maintenance action for each such
Aircraft in December, 1999 and July, 1999, respectively.
Lessor shall reimburse Lessee up to $70,000 of the actual
documented costs of installing such Hush Kit on the
Aircraft bearing manufacturer's serial number 19548.
Lessee shall pay any excess of such installation costs, as
well as all costs of installing such Hush Kit on the
Aircraft bearing manufacturer's serial number 19603.
4. Lessor shall use its reasonable efforts,
commencing April 30, 1999, to remarket the Aircraft bearing
manufacturer's serial number 19548 for lease to a third
party. In addition, Lessor shall have the right, upon not
less than one hundred twenty (120) days' prior written
notice to Lessee, or upon such shorter notice to which
Lessee may agree, to terminate the Lease with respect to
such Aircraft. Lessor and Lessee will cooperate with
respect to the actions to be taken in connection with any
such early termination and return of such Aircraft in
accordance with the provisions of the Lease.
5. Except as amended hereby, the Lease shall remain
unmodified and in full force and effect.
6. Lessee hereby represents and warrants that this
Amendment has been duly authorized by all necessary action
and, assuming due authorization, execution and delivery
thereof by Lessor, constitutes Lessee's valid and binding
obligation.
7. THIS AMENDMENT, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, SHALL IN ALL
RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
8. This Amendment may be executed by the parties
hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same
instrument.
[This space intentionally left blank.]
IN WITNESS WHEREOF, the parties hereto have caused
this Amendment to be duly executed as of the day and year
first written above.
FIRST SECURITY BANK, NATIONAL
ASSOCIATION, not in its
individual capacity but
solely as Owner Trustee,
as Lessor
/s/ Nancy Dahl
By: Nancy Dahl
Its: Vice President
VANGUARD AIRLINES, INC.,
as Lessee
/s/ William A. Garrett III
By: William A. Garrett III
Its: Vice President -
Finance & Chief
Financial Officer
AIRCRAFT LEASE AGREEMENT
THIS AGREEMENT is made as of the 5th day of January, 1999
between:
(1) AeroUSA, Inc., a company organized under the laws of the
State of Connecticut with its principal place of business
at Lee Farm Corporate Park, 83 Wooster Heights Road,
Danbury, CT 06810 ("Lessor"); and
(2) Vanguard Airlines, Inc., a corporation organized under the
laws of the State of Delaware with its principal place of
business at 533 Mexico City Avenue, Kansas City, Missouri
64153 ("Lessee").
WHEREAS: Lessor wishes to lease to Lessee and Lessee is
willing to lease from Lessor the Aircraft on the terms of
this Agreement.
IT IS AGREED as follows:
1. INTERPRETATION
1.1 DEFINITIONS:
In this Agreement capitalized words and expressions have
the respective meanings set forth in Schedules 1 and 10.
1.2 CONSTRUCTION:
(a) In this Agreement, unless the contrary intention is stated,
a reference to:
(i) each of "Lessor" or "Lessee" or any other Person
includes, without prejudice to the provisions of this
Agreement restricting transfer or assignment, any
successor and any assignee;
(ii) words importing the plural shall include the singular
and vice versa;
(iii) any document shall include that document as
amended, novated, assigned or supplemented;
(iv) a Clause or a Schedule is a reference to a clause of
or a schedule to this Agreement;
<PAGE>
(v) any Law, or to any provision of any Law, is a
reference to such Law or provision as amended,
substituted or re-enacted; and
(b) headings are to be ignored in construing this Agreement.
2. REPRESENTATIONS AND WARRANTIES
2.1 LESSEE'S REPRESENTATIONS AND WARRANTIES: The
representations and warranties set forth in Clauses 1.1 and
1.2 of Schedule 2 are hereby made by Lessee to Lessor.
2.2 REPETITION: The representations and warranties in Clauses
1.1 and 1.2 of Schedule 2 will survive the execution of
this Agreement and will be deemed to be repeated by Lessee
on the Delivery Date with reference to the facts and
circumstances then existing. The representations and
warranties contained in Clause 1.1 of Schedule 2 will be
deemed to be repeated by Lessee on each Rent Date as if
made with reference to the facts and circumstances then
existing (and for this purpose, the representation and
warranty contained in Clause 1.1 (g) shall be construed by
reference to the accounts most recently provided prior to
such Rent Date).
2.3 LESSOR'S REPRESENTATIONS AND WARRANTIES: The
representations and warranties set forth in Clause 1.3 of
Schedule 2 are hereby made by Lessor to Lessee and will be
deemed to be repeated by Lessor on the Delivery Date with
reference to the facts and circumstances then existing.
3. CONDITIONS PRECEDENT
3.1 LESSEE CONDITIONS PRECEDENT: Lessor's obligation to
deliver and commence the leasing of the Aircraft under this
Agreement is subject to satisfaction of each of the Lessee
Conditions Precedent specified in Schedule 3.
3.2 WAIVER: Lessee Conditions Precedent are for the sole
benefit of Lessor and may be waived or deferred in whole or
in part and with or without conditions by Lessor. If any
of Lessee Conditions Precedent are not satisfied on the
Delivery Date and Lessor (in its absolute discretion)
nonetheless agrees to deliver the Aircraft to Lessee and to
commence the leasing of the Aircraft hereunder, Lessee will
ensure that such Lessee Conditions Precedent are fulfilled
within 15 days after the Delivery Date (unless waived or
<PAGE>
deferred in Lessor's absolute discretion), and Lessor may
treat as an Event of Default the failure of Lessee to do
so.
3.3 LESSOR CONDITIONS PRECEDENT: Lessee's obligation to accept
delivery and commence the leasing of the Aircraft under
this Agreement is subject to satisfaction of each of the
Lessor Conditions Precedent specified in Schedule 3.
3.4 WAIVER: Lessor Conditions Precedent are for the sole
benefit of Lessee and may be waived or deferred in whole or
part and with or without conditions by Lessee.
4. COMMENCEMENT
4.1 LEASING:
(a) On the Delivery Date, Lessor will lease the Aircraft to
Lessee and Lessee will take delivery of the Aircraft on
lease in accordance with this Agreement for the duration of
the Term. Subject to Clause 4.3, Lessor will deliver and
Lessee will accept the Aircraft on the Scheduled Delivery
Date or such other day as may be agreed in writing by the
parties at which time the leasing of the Aircraft pursuant
to the terms of this Agreement shall commence.
(b) If (i) Lessee is unwilling or unable to accept delivery of
the Aircraft on the Rent Commencement Date, or Lessee fails
to fulfill any Lessee Condition Precedent on or before such
date, and (ii) the Aircraft meets the Delivery Condition
Requirements, then Lessee's obligation to pay Rent
hereunder shall commence on the Rent Commencement Date
notwithstanding that Lessee has not accepted possession of
the Aircraft and the leasing of the Aircraft has not
commenced.
(c) After Delivery, the Aircraft, the Engines and every Part
will be in every respect at the sole risk of Lessee, who
will bear all risk of loss, theft, damage or destruction to
the Aircraft, any Engine or any Part from any cause
whatsoever.
4.2 DELIVERY: Subject to Clause 4.5, the Aircraft will be
delivered to and accepted by Lessee at the Delivery
Location or such other location as may be agreed in an "as
<PAGE>
is, where is" condition. Lessee will accept delivery of the
Aircraft at the Delivery Location or such other location as
may be agreed subject to the Aircraft meeting the Delivery
Condition Requirements. Without prejudice to Clauses 3.1,
4.1 and 4.5, Lessee will effect acceptance of the condition
of the Aircraft by execution and delivery to Lessor of the
Certificate of Technical Acceptance and possession of the
Aircraft shall pass from Lessor to Lessee upon execution
and delivery by Lessor of the Lease Supplement. Lessee's
acceptance of the Aircraft shall be regarded for all
purposes as absolute, unconditional and irrevocable;
provided , however, discrepancies specifically referred to
in the Certificate of Technical Acceptance shall be
corrected as agreed by Lessor and Lessee as set forth
therein.
4.3 DELAYED DELIVERY: If owing to:
(a) the existing lessee of the Aircraft delaying in the
delivery of, or failing to deliver, the Aircraft to Lessor
for any reason (other than because of any default of Lessor
in the performance of its obligations under an agreement
with that lessee unless the default arises from any act or
omission of Lessee) whether or not in circumstances
entitling that lessee to terminate that agreement;
(b) any Excusable Delay; or
(c) notification of any defect or non-conformity pursuant to
Clause 4.5;
Lessor delays in the delivery of, or fails to deliver, the
Aircraft under this Agreement, then in any such case:
(i) Lessor will not be responsible for any losses,
including loss of profit, costs or expenses arising
from or in connection with the delay or failure
suffered or incurred by Lessee;
(ii) subject to Clause 4.5, Lessee will not be entitled to
terminate this Agreement or to reject the Aircraft
when tendered for delivery by Lessor, on the grounds
of any such delay except as provided below; and
<PAGE>
(iii) upon any such termination or termination pursuant
to Clause 4.5 neither Lessor nor Lessee will have any
further obligation to the other under this Agreement
other than as expressly set out in this Agreement,
except that Lessor will repay to Lessee the Deposit,
including any interest earned thereon.
In the event that Lessor fails to deliver the Aircraft in
accordance with this Agreement on or before June 30, 1999,
Lessee will be entitled to terminate this Agreement on the
grounds of such delay and the provisions of clause (iii)
above shall apply.
4.4 LICENSES: Lessee will at its expense obtain all licenses,
permits and approvals which may be necessary to export
and/or transport the Aircraft from the Delivery Location.
Lessor will furnish such data and information as may be
reasonably requested by Lessee in connection with obtaining
any such license, permit or approval.
4.5 INSPECTION: Prior to the Delivery Date, subject to any
applicable purchase or lease agreement, Lessor will give
Lessee a reasonable opportunity:
(a) to inspect the Aircraft at the Delivery Location (or at
another location agreed to by Lessor and Lessee); and
(b) to assign up to two representatives to participate as
observers in a two-hour demonstration flight. If Lessee
notifies Lessor promptly prior to the Delivery Date of any
defect or non-conformity with the Delivery Condition
Requirements observed during the inspection or
demonstration flight, Lessor, at its sole cost and expense,
will correct or procure the correction of the defect or
non-conformity as promptly as practicable (except to the
extent otherwise agreed or to the extent in the reasonable
opinion of Lessor it is impracticable or prohibitively
expensive to do so). Subject to Clause 4.3, Lessor may, by
notice to Lessee, postpone the Delivery Date in such a case
to the date on which Lessor notifies Lessee that the defect
or non-conformity has been rectified (the "Extended
Delivery Date"). Lessor shall notify Lessee of the Extended
Delivery Date as soon as possible following notification by
Lessee of the defect or nonconformity with the Delivery
Condition Requirements and the Extended Delivery Date shall
be a date not later than June 30, 1999. Upon receipt of
such notice by Lessee, the Extended Delivery Date shall be
the Scheduled Delivery Date for all purposes hereunder.
<PAGE>
Lessor or Lessee will be entitled to terminate this
Agreement if Lessor notifies Lessee that Lessor does not
intend to correct the defect or non-conformity. If this
Agreement is not terminated and Lessor corrects or procures
the correction of any such defect or non-conformity, Lessor
shall make the Aircraft available for reinspection by
Lessee and will conduct such further inspection flight as
may be necessary to verify compliance with the Delivery
Condition Requirements. Upon completion of such inspection
or reinspection, Lessor shall tender the Aircraft for
Delivery and, provided that the Delivery Condition
Requirements are then satisfied, Lessee shall effect
acceptance of the Aircraft in the manner and with the
effect specified in Clause 4.2.
4.6 INDEMNITY: Lessee will indemnify and hold harmless each
Indemnitee on an After-Tax Basis from and against all
Losses arising from death or injury to any observer or any
employee of Lessee in connection with any demonstration
flight or inspection of the Aircraft by Lessee.
5. PAYMENTS
5.1 DEPOSIT: Lessee shall pay to Lessor a Deposit in the amount
set forth in Clause 2 of Schedule 10 in accordance with the
schedule set forth in that Clause. Such deposit shall be
maintained by Lessor in a separate, interest bearing
account.
5.2 RENTAL PERIODS: The first Rental Period will commence on
the Rent Commencement Date and each subsequent Rental
Period will commence on the date succeeding the last day of
the previous Rental Period. Each Rental Period will end on
the date immediately preceding the numerically
corresponding day in the next month, except that:
(a) if there is no such numerically corresponding day in that
month, it will end on the last day of that month; and
(b) if a Rental Period would otherwise overrun the Expiry Date,
it will end on the Expiry Date.
5.3 RENT: Lessee will pay to Lessor or its order on each Rent
Date Rent in advance in the amount specified as "Rent" in
Clause 2 of Schedule 10; provided, that Lessor hereby
<PAGE>
agrees to waive Lessee's payment of Rent for (i) the first
Rental Period which would otherwise be due and payable on
the Rent Commencement Date, plus (ii) the first eight days
of Rent for the second Rental Period, provided further,
that Lessee will pay Rent for the second Rental Period on
the day that is eight days after the Rent Date for such
period. Payment must be initiated adequately in advance of
the Rent Date to ensure that Lessor receives credit for the
payment on the Rent Date. If a Rental Period begins on a
day which is not a Business Day, the Rent payable in
respect of that Rental Period shall be paid on the Business
Day immediately following such day. In the event that any
Rent is due for a period which is less than a whole Rental
Period, the Rent paid will be prorated on the basis of a
per diem amount determined by dividing the amount of the
Rent by 30 days.
5.4 SUPPLEMENTAL RENT:
(a) AMOUNT: Lessee will further pay to Lessor Supplemental Rent
in relation to each calendar month (or part thereof)
(including without limitation the last calendar month, or
part thereof, of the Term) on the fourteenth day following
the end of such calendar month, in the amounts specified in
Clause 4 of Schedule 10, except that the last payment of
Supplemental Rent during the Term shall be paid on the
Expiry Date.
(b) ADJUSTMENT: The amount of Supplemental Rent shall be
adjusted after the Delivery Date not more frequently than
annually (with any such adjustment having retrospective
application as appropriate to reflect (ii) below) based on
the following:
(i) by application of the Escalation Adjustment set forth
in Clause 2 of Schedule 10; and
(ii) by reference to Clause 3 of Schedule 10 in respect of
any change in the hour to cycle ratio of the operation
of the Aircraft and/or any material revision of the
Lessee's Maintenance Program.
5.5 PAYMENTS: All payments by Lessee to Lessor under this
Agreement will be made for value on the due date in Dollars
and in immediately available funds settled through the New
<PAGE>
York Clearing House System or such other funds as may for
the time being be customary for the settlement in New York
City of payments in Dollars by wire transfer to Bankers
Trust Company, 4 Albany Street, New York, New York 10006,
ABA No.: 021-001-033, for the account of BTCo. as Trustee
for Airplanes Pass-Through Trust-Rental 1, account number
00325067 or to such other account as Lessor may advise
Lessee in writing.
5.6 WITHHOLDING:
(a) All payments by Lessee pursuant to this Agreement shall be
free of all withholdings of any nature whatsoever except to
the extent otherwise required by Law, and if any such
withholding is so required, Lessee shall pay an additional
amount such that after the deduction of all amounts
required to be withheld, the net amount actually received
by Lessor will equal the amount that Lessor would have
received if such withholding had not been required;
provided, however, that nothing in this Section 5.6(a)
shall obligate Lessee to pay any such additional amount to
compensate for the withholding of any Lessor Tax or any
other Tax for which Lessee is not obligated to indemnify
Lessor pursuant to Schedule 11 hereof.
(b) If any payment is made by Lessee under Clause 5.6(a) and
Lessor in good faith determines that it has actually
received a credit or deduction against, or relief or
remission for, or repayment of, any Tax paid or payable by
Lessor in respect of or calculated with reference to the
deduction or withholding giving rise to such payment,
Lessor shall, to the extent that it can do so without
prejudice to the retention of the amount of such credit,
deduction, relief, remission or repayment and without
leaving Lessor in any worse position than that in which it
would have been had such deduction or withholding not been
required to be made, pay to Lessee such amount as Lessor
shall in good faith have determined to be attributable to
the relevant deduction or withholding.
Nothing in this Clause 5.6(b) shall:
(i) interfere with the right of Lessor to arrange its tax
affairs in whatever manner it thinks fit and, in
particular, but without limitation, Lessor shall not
<PAGE>
be under any obligation to claim credit, relief,
remission or repayment from or against its corporate
profits or similar Tax liability in respect of the
amount of any such deduction or withholding in
priority to any other claims, reliefs, credits or
deductions available to Lessor; or
(ii) oblige Lessor to disclose any information relating to
its Tax affairs or any computations in respect
thereof.
5.7 TAXES AND OTHER OUTGOINGS: Lessee will promptly pay:
(a) all license and registration fees, Taxes (other than Lessor
Taxes) and other amounts of any nature imposed by any
Government Entity with respect to the Aircraft and/or this
Agreement, including without limitation the ownership,
delivery, leasing, possession, use, operation, return, sale
or other disposition of the Aircraft; and
(b) all rent, fees, charges, Taxes (other than Lessor Taxes)
and other amounts in respect of any premises where the
Aircraft, any Engine or any Part is located from time to
time;
except to the extent that, in the reasonable opinion of
Lessor, such payment is being contested in good faith by
appropriate proceedings, in respect of which adequate
reserves have been provided by Lessee and non-payment of
which does not give rise to any material likelihood of the
Aircraft or any interest therein being sold, forfeited or
otherwise lost or of criminal liability on the part of
Lessor or Owner.
5.8 TAX INDEMNITY:
Lessee will pay and indemnify each Tax Indemnitee against
all Taxes (other than Lessor Taxes) as specified in
Schedule 11.
5.9 LESSOR OBLIGATIONS FOLLOWING EXPIRY DATE: Within five
Business Days after:
(a) redelivery of the Aircraft to Lessor in accordance with and
in the condition required by this Agreement; or
<PAGE>
(b) payment to Lessor of the Agreed Value following an Event of
Loss after the Delivery Date;
or in each case such later time as Lessor is satisfied that
Lessee has irrevocably paid to Lessor all amounts which may
then be outstanding or become payable under this Agreement
and the Other Agreements, Lessor will pay to Lessee:
(i) the balance of the Deposit, including any interest
earned thereon; and
(ii) the amount of any Rent received in respect of any
period falling after the date of redelivery of the
Aircraft or payment of the Agreed Value, as the case
may be.
5.10 NET LEASE: This Agreement is a net lease. Lessee's
obligations under this Agreement are absolute and
unconditional irrespective of any circumstance or
contingency whatsoever and shall not be reduced by any
circumstance or contingency whatsoever, including (but not
limited to):
(a) any right of set-off, counterclaim, recoupment, defense or
other right which either party to this Agreement may have
against the other (including any right of reimbursement) or
which Lessee may have against the Manufacturer, any
manufacturer or seller of or any Person providing services
with respect to the Aircraft, any Engine or any Part or any
other Person, for any reason whatsoever;
(b) any unavailability of the Aircraft for any reason,
including, but not limited to, a requisition of the
Aircraft or any prohibition or interruption of or
interference with or other restriction against Lessee's
use, operation or possession of the Aircraft (whether or
not the same would, but for this provision, result in the
termination of this Agreement by operation of law);
(c) any lack or invalidity of title or any other defect in
title, airworthiness, merchantability, fitness for any
purpose, condition, design, or operation of any kind or
nature of the Aircraft for any particular use or trade, or
for registration or documentation under the Laws of any
relevant jurisdiction, or any Event of Loss in respect of
or any damage to the Aircraft;
<PAGE>
(d) any insolvency, bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar
proceedings by or against Lessor, Lessee or any other
Person;
(e) any invalidity or unenforceability or lack of due
authorization of, or other defect in, this Agreement;
(f) any Security Interests or Taxes; and/or
(g) any other cause or circumstance which but for this
provision would or might otherwise have the effect of
terminating or in any way affecting any obligation of
Lessee under this Agreement.
Lessee hereby waives, to the extent permitted by applicable
Law, any and all rights which it may now have or which at
any time hereafter may be conferred upon it, by Law or
otherwise, to terminate, cancel, quit or surrender this
Agreement or any obligation imposed upon Lessee hereunder
or in relation hereto except as expressly provided in this
Agreement.
Nothing in this Clause 5.10 will be construed to limit
Lessee's rights and remedies in the event of Lessor's
breach of Clause 7.1 or to limit Lessee's rights and
remedies to pursue in a court of law any claim it may have
against Lessor or any other Person.
5.11 FURTHER PROVISIONS REGARDING DEPOSIT:
(a) Lessee agrees that Lessor will not hold any such funds as
agent or on trust for Lessee or in any similar fiduciary
capacity.
(b) If Lessee fails to comply with any provision of this
Agreement or the Other Agreements, or any Default shall
have occurred and be continuing, in addition to all rights
and remedies accorded to Lessor elsewhere in this Agreement
or under Law in respect of the Deposit, Lessor may
immediately or at any time thereafter, without prior notice
to Lessee, apply all or part of the Deposit in or towards
the payment or discharge of any matured obligation owed by
Lessee or any affiliate of Lessee under this Agreement or
<PAGE>
the Other Agreements, in such order as Lessor sees fit,
and/or exercise any of the rights of set-off described in
Clause 5.18 against all or part of the Deposit.
(c) If Lessor exercises the rights described in sub-clause (b)
above, Lessee shall, following a demand in writing from
Lessor, immediately restore the Deposit to the level at
which they stood immediately prior to such exercise.
5.12 LETTER OF CREDIT:
(a) In lieu of paying the Deposit in accordance with Clause
5.1, at the time such the Deposit (or part thereof) is
required to be paid under this Agreement, at any time or
from time to time, as the case may be, Lessee will provide
Lessor with an irrevocable and unconditional Letter of
Credit in the amount of the LC Amount, issued and payable
by a bank acceptable to Lessor and in form and substance
acceptable to Lessor and, if Lessor requests, confirmed by
the London or New York branch of a major international bank
acceptable to Lessor from time to time, as security for all
payment obligations of Lessee to Lessor under this
Agreement (including damages), which shall remain in full
force and effect and may be drawn down by Lessor upon
demand at any time or times until the Required LC Expiry
Date. Upon receipt of the Letter of Credit in accordance
with this Clause 5.12(a), Lessor will refund the Deposit
and any interest thereon to Lessee.
(b) With the prior written consent of Lessor, the Letter of
Credit may have a validity period or periods ending prior
to the Required LC Expiry Date, provided that (i) the
Letter of Credit shall, in each case, be renewed and
delivered to Lessor not later than 30 Business Days prior
to its expiry; and (ii) a Letter of Credit shall remain in
force at all times up to the Required LC Expiry Date.
(c) If at any time during the Term Lessor determines that the
current issuing or confirming bank for the Letter of Credit
is no longer an acceptable issuing or confirming bank
(whether by virtue of a material adverse change in its
financial condition or for any other reason) Lessee shall
promptly procure that the Letter of Credit is replaced by a
Letter of Credit issued by another bank acceptable to
Lessor and (if appropriate) that such replacement Letter of
Credit is confirmed by another bank acceptable to Lessor.
<PAGE>
(d) If Lessor makes a drawing under the Letter of Credit,
Lessee shall, following a demand in writing by Lessor,
immediately procure that the maximum amount available for
drawing under the Letter of Credit is restored to the level
at which it stood immediately prior to such drawing.
5.13 RESERVED
5.14 LATE PAYMENT INTEREST: If Lessee fails to pay any amount
payable under this Agreement within 2 days after the date
due, Lessee will pay on demand from time to time to Lessor
interest (both before and after judgment) on that amount,
from the due date to the date of payment in full by Lessee
to Lessor, at the Interest Rate. All such interest will be
compounded monthly and calculated on the basis of the
actual number of days elapsed in the month, assuming a 30
day month and a 365 day year.
5.15 CURRENCY: Lessee acknowledges that the specification of
Dollars in this Agreement is of the essence and that
Dollars shall be the currency of account in any and all
events. Lessee waives any right it may have in any
jurisdiction to pay any amount under this Agreement in a
currency other than Dollars.
5.16 CERTIFICATES: Save where expressly provided in this
Agreement, any certificate or determination by Lessor as to
any rate of interest or as to any other amount payable
under this Agreement will, in the absence of manifest
error, be presumed prima facie to be correct.
5.17 APPROPRIATION: If any sum paid or recovered by Lessor in
respect of the liabilities of Lessee under this Agreement
is less than the amount then due, Lessor may apply that sum
to amounts due under this Agreement in such proportions and
order and generally in such manner as Lessor may determine
at its sole discretion.
5.18 SET-OFF: If a Default has occurred and is continuing,
Lessor may set off any matured obligation owed by Lessee or
any affiliate of Lessee (to the extent beneficially owned
by Lessor) under this Agreement or the Other Agreements
against any obligation (whether or not matured) owed by
Lessor to Lessee, regardless of the place of payment or
currency. If the obligations are in different currencies,
Lessor may convert either obligation at the market rate of
exchange available in New York or at its option London for
<PAGE>
the purpose of the set-off. If an obligation is
unascertained or unliquidated, Lessor may in good faith
estimate that obligation and set off in respect of the
estimated amount, in which case when the obligation is
ascertained or liquidated Lessor or Lessee shall make a
payment to the other (as appropriate) in respect of any
amount by which the ascertained or liquidated amount
differs from the estimated amount. Lessor will not be
obliged to pay any amounts to Lessee under this Agreement
so long as any sums which are then due from Lessee or any
affiliate of Lessee under this Agreement or the Other
Agreements remain unpaid, and any such amounts which would
otherwise be due will fall due only if and when Lessee has
paid all such sums, except to the extent Lessor otherwise
agrees or sets off such amounts against such payment
pursuant to the foregoing provisions. Lessor shall provide
Lessee with prompt written notice of the exercise of its
right of set-off under this Clause 5.18.
5.19 EXPENSES: Whether or not the Aircraft is delivered to
Lessee pursuant to this Agreement, Lessee will pay to
Lessor on an After-Tax Basis on demand:
(a) all fees, costs and expenses (including legal,
professional, and out-of-pocket expenses) payable or
incurred by Lessor in connection with any amendment to or
extension of or other documentation in connection with, or
the granting of any waiver or consent under, this Agreement
or the monitoring of compliance by Lessee with this
Agreement (but excluding any fees, costs and expenses
incurred by Lessor in connection with any change in the
ownership or financing of the Aircraft);
(b) all fees, costs and expenses (including legal, professional
and out-of-pocket expenses) associated with perfecting this
Agreement in the State of Registration, the State of
Incorporation and the Habitual Base (and any other state or
country as appropriate having regard to the operation of
the Aircraft), including (but not limited to) legal
opinions, tax advice, registrations and the payment of
documentary Taxes and any other Taxes and fees, whether
required by Lessor or Lessee; and
<PAGE>
(c) all fees, costs and expenses (including legal, professional
and out-of-pocket expenses) payable or incurred by Lessor
in contemplation of, or otherwise in connection with, the
enforcement of or preservation of any of Lessor's rights
under this Agreement, or in respect of the repossession of
the Aircraft.
All amounts payable pursuant to this Clause 5.19 will be
paid in the currency in which they are incurred by Lessor.
Lessor and Lessee shall each be responsible for their own
legal costs associated with the negotiation and
documentation of this transaction.
6. MANUFACTURER'S WARRANTIES
6.1 ASSIGNMENT:
(a) With effect from Delivery, Lessor assigns to Lessee, and
authorizes Lessee to exercise, such rights as Lessor may
have under any warranty with respect to the Aircraft, any
Engine or any Part (including, without limitation, any
warranty with respect to Year 2000 Compliance) made by any
manufacturer, vendor, sub-contractor or supplier, to the
extent that the same may be assigned or otherwise made
available to Lessee.
(b) Lessee shall give Lessor prompt written notice of any
warranty claim which is settled with Lessee on the basis of
a total or partial cash payment. Any cash payments to
Lessee in respect of warranty claims which are not applied
to the repair or remedy of defects in the Aircraft or to
the reimbursement of the out-of-pocket expenses actually
incurred by Lessee in the collection of such cash payments,
and which are not in respect of compensation for loss of
use of the Aircraft, an Engine or Part during the Term due
to a defect covered by such warranty, shall be for Lessor's
account and shall be paid by Lessee to Lessor.
(c) Upon occurrence of an Event of Default or termination or
expiry of the leasing of the Aircraft under this Agreement
(each a "Termination Event"), whichever occurs earlier, all
rights under such warranties will immediately revert to
Lessor, including all claims thereunder (whether or not
perfected); and Lessee will immediately take all steps and
execute all documents required by Lessor to perfect such
reversion.
<PAGE>
6.2 PROCEEDS: Lessee agrees to apply any proceeds of any
claims assigned to Lessee by Lessor under Clause 6.1 to
remedy the defect, if any, in the Aircraft, any Engine or
any Part giving rise to such claim. So long as no
Termination Event has occurred and is continuing, Lessor
agrees (subject to Clause 6.1(b)) to cooperate with Lessee
to cause any proceeds from any rights assigned by Lessor to
Lessee under Clause 6.1 to be paid directly to Lessee, and,
if any such proceeds are nonetheless paid to Lessor, Lessor
agrees to remit promptly such proceeds to Lessee. However,
upon a Termination Event, Lessor may immediately:
(a) retain for its own account any such proceeds previously
paid to Lessor which would have been remitted to Lessee
under this Clause 6.2 in the absence of such Termination
Event;
(b) cause any proceeds of any pending claims to be paid to
Lessor, rather than to Lessee; and
(c) recover from Lessee the proceeds of any such claims
previously paid to Lessee to the extent that such claims
relate to any defect in the Aircraft, any Engine or any
Part not fully and completely rectified by Lessee before
such Termination Event.
6.3 PARTS: Except to the extent Lessor otherwise agrees in a
particular case, Lessee will procure that all engines,
components, furnishings or equipment provided by the
manufacturer, vendor, subcontractor or supplier in
replacement of a defective Engine or Part pursuant to the
terms of any warranty will be installed promptly by Lessee
and that title thereto (free of Security Interests other
than Permitted Liens) vests in Lessor. On installation
each such part will be deemed to be a Part. In the case of
a Replacement Engine, Lessee will satisfy and perform each
of the conditions and covenants set forth in Clause
11.1(d).
6.4 AGREEMENT: To the extent any warranties relating to the
Aircraft are made available under an agreement between any
manufacturer, vendor, subcontractor or supplier and Lessee,
Lessee will:
(a) apply the proceeds of any claim under such agreement in
accordance with Clause 6.2 and (pending such application)
will hold the claim and the proceeds in trust for Lessor;
and
<PAGE>
(b) take all such steps as are necessary at the end of the Term
to ensure that the benefit of any of those warranties which
have not expired is vested in Lessor.
7. LESSOR'S COVENANTS
7.1 QUIET ENJOYMENT: Provided no Default has occurred and is
continuing, Lessor will not interfere with the quiet use,
possession and enjoyment of the Aircraft by Lessee during
the Term; but the proper exercise by Lessor of its rights
under or in connection with this Agreement will not
constitute such an interference. THE FOREGOING COVENANT IS
IN LIEU OF ANY RIGHT OF LESSEE UNDER SECTION 2A-211(1) OF
THE NEW YORK UNIFORM COMMERCIAL CODE OR ANY SIMILAR LAW,
WHICH RIGHT LESSEE HEREBY WAIVES, RELEASES AND RENOUNCES
AND LESSOR EXPRESSLY DISCLAIMS.
7.2 LESSOR LIENS: Lessor will promptly, at its own expense,
take such action as may be necessary to discharge or
satisfy (by bonding or otherwise) any Lessor Lien. Nothing
in this Clause 7 will be construed to limit Lessee's right
to institute separate legal proceedings against Lessor in
the event of Lessor's breach of this Agreement or to limit
Lessee's rights and remedies against any other Person.
7.3 MAINTENANCE CONTRIBUTIONS: Provided that no Default has
occurred and is continuing, Lessor will pay to Lessee, by
way of contribution to the cost of maintenance of the
Aircraft, the amounts provided for, and on terms and
conditions specified in Clause 5 of Schedule 10.
7.4 PAYMENT FOR CERTAIN COMPONENTS:
(a) Lessee will carry out modifications to the fuel indication
system and procure any flight manual, and weight and
balance manual changes, for which changes, following
receipt by Lessor of an invoice for and evidence in form
and substance reasonably acceptable to Lessor, and
providing no Default has occurred and is continuing, Lessor
will pay to Lessee the lesser of (i) the amount of the
invoice and (ii) $60,000.00; provided that to the extent
that Lessor pays to Lessee an amount less than $60,000
pursuant to this Clause 7.4(a), the Modification Amount (as
defined on Schedule 10) shall be reduced in accordance with
Clause 7 of Schedule 10 only by the amount actually paid by
Lessor to Lessee hereunder.
<PAGE>
(b) Lessor will provide for installation on the Aircraft by
Lessee or its designee, Nordam LGW Hush Kits, TCAS II
computer control head and antennas, and a Windshear systems
GPWS computer.
Lessee will provide any engineering and applicable modification
kits required for the installation of the TCAS II, Windshear,
and fuel indication system modifications.
8. LESSEE'S COVENANTS
8.1 DURATION:
(a) Lessee shall perform and comply with its undertakings and
covenants in this Agreement at all times during the Term.
All such undertakings and covenants shall, except where
expressly otherwise stated, be performed at the expense of
Lessee.
(b) Lessee will procure that no Person (other than Lessor) will
act in any manner inconsistent with Lessee's obligations
under this Agreement.
8.2 INFORMATION: Lessee will:
(a) notify Lessor forthwith of the occurrence of any Default or
any other event which might adversely affect Lessee's
ability to perform any of its obligations under this
Agreement;
(b) furnish to Lessor:
(i) upon request, as soon as available but not, in any
event, sooner than 45 days after the last day of each
financial quarter of Lessee, the consolidated
management accounts of Lessee (in Dollars and
comprising a balance sheet and profit and loss
statement) prepared for the most recent previous
financial quarter certified by a qualified financial
officer of Lessee as being true and correct;
<PAGE>
(ii) as soon as available but not in any event later than
120 days after the last day of each financial year of
Lessee, its audited consolidated balance sheet as of
such day and its audited consolidated profit and loss
statement for the year ending on such day (each in
Dollars);
(iii) a copy of each notice or circular issued to
Lessee's shareholders or creditors as a group at the
time so issued; and
(iv) such other information and documents regarding Lessee
and its business and affairs as Lessor may reasonably
request from time to time, including without
limitation any information or documents necessary to
enable Lessor to comply with its tax filing, audit and
litigation obligations;
(c) promptly furnish to Lessor all information Lessor from time
to time reasonably requests regarding the Aircraft, each
Engine, any engine installed on the Airframe, and any Part,
and the use, location and condition of the Aircraft,
including, without limitation, the hours remaining on the
Aircraft and any Engine until the next scheduled check,
inspection, overhaul or shop visit, as the case may be;
(d) on request, within 10 days after the end of any Rental
Period, furnish to Lessor evidence satisfactory to Lessor
of payment of all Taxes due during that or any previous
Rental Period that could reasonably be expected to effect
Lessor's interest in this Agreement or the Aircraft;
(e) on request, furnish to Lessor evidence satisfactory to
Lessor that all Taxes, charges and other outgoings incurred
by Lessee with respect to the Aircraft, including without
limitation all payments due to the relevant air traffic
control authorities, have been paid and discharged in full;
(f) provide to Lessor within 10 days after the end of each
calendar month a monthly report on the Aircraft and each
Engine in the form required by Lessor;
(g) give Lessor not less than 45 days' written notice as to the
time and location of all Major Checks; and
(h) promptly notify Lessor of:
<PAGE>
(i) any loss, theft, damage or destruction to the
Aircraft, any Engine or any Part, or any modification
to the Aircraft if the potential cost may exceed the
Damage Notification Threshold; and
(ii) any claim or other occurrence likely to give rise to a
claim under the Insurances (but in the case of hull
claims, only for any claim in excess of the Damage
Notification Threshold) and details of any
negotiations with the insurance brokers over any such
claim.
8.3 LAWFUL AND SAFE OPERATION: Lessee will:
(a) not take, or fail to take, any action, in respect of the
operation and maintenance of the Aircraft, if the effect of
such conduct by Lessee would be to cause Lessor, Owner,
GECAS or Lessee to be in violation of any Law in force in
any country or jurisdiction which may then be applicable
(including, without limitation, Laws mandating insurance
coverage);
(b) not use the Aircraft in any manner contrary to (i) any
recommendation of the manufacturers of the Aircraft, any
Engine or any Part or (ii) any recommendation or regulation
of the Air Authority or for any purpose for which the
Aircraft is not designed or reasonably suitable;
(c) ensure that the crew and engineers employed by it in
connection with the operation and maintenance of the
Aircraft have the qualifications and hold the licenses
required by the Air Authority and applicable Law;
(d) use the Aircraft solely in commercial or other operations
for which Lessee is duly authorized by the Air Authority
and under applicable Law;
(e) not use the Aircraft for the carriage of any goods,
materials, livestock or items of cargo which could
reasonably be expected to cause damage to the Aircraft or
which would not be adequately covered by the Insurances, or
any item or substance whose possession or carriage is
illegal under any applicable Law; and comply with any
carriage regulations or restrictions from time to time
issued by IATA;
<PAGE>
(f) not utilize the Aircraft for purposes of training,
qualifying or re-confirming the status of cockpit personnel
except for the benefit of Lessee's cockpit personnel, and
then only if the use of the Aircraft for such purpose is
not disproportionate to the use for such purpose of other
aircraft of the same type operated by Lessee;
(g) not cause or permit the Aircraft to proceed to, or remain
at, any location that is prohibited or not permitted
under:
(i) any Law or government regulation applicable to the
Aircraft or to Lessee; or
(ii) any requirement of a Government Entity of the State of
Registration or the Habitual Base; or
(iii) any requirement of a Government Entity of the
country in which such location is situated.
(h) obtain and maintain in full force all certificates,
licenses, permits and authorizations from time to time
required for the use and operation of the Aircraft, and for
the making of payments required by, and the compliance by
Lessee with its other obligations under, this Agreement;
and
(i) not use, operate, or locate the Aircraft or suffer or
permit the Aircraft to be used, operated or located during
the Term in any manner not covered by the Insurances or in
any area excluded from coverage by the Insurances or in any
manner which would prejudice the interests of the
Indemnitees in the Insurances, the Aircraft, any Engine or
any Part.
8.4 SUBLEASING: LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR, SUBLEASE, WET-LEASE OR OTHERWISE PART
WITH POSSESSION OF THE AIRCRAFT, THE ENGINES OR ANY PART,
SUCH CONSENT NOT TO BE UNREASONABLY WITHHELD, EXCEPT THAT
LESSEE MAY PART WITH POSSESSION (A) WITH RESPECT TO THE
AIRCRAFT, THE ENGINES OR ANY PART TO THE RELEVANT
MANUFACTURERS FOR TESTING OR SIMILAR PURPOSES OR TO THE
<PAGE>
AGREED MAINTENANCE PERFORMER FOR SERVICE, REPAIR,
MAINTENANCE OR OVERHAUL WORK, OR ALTERATIONS, MODIFICATIONS
OR ADDITIONS TO THE EXTENT REQUIRED OR PERMITTED BY THIS
AGREEMENT, AND (B) WITH RESPECT TO AN ENGINE OR PART, AS
EXPRESSLY PERMITTED BY THIS AGREEMENT.
8.5 INSPECTION:
(a) Lessor and any person designated by Lessor may at any time
visit, inspect and survey the Aircraft, any Engine, any
Part or the Aircraft Documents and for such purpose may,
subject to any applicable Air Authority regulation, travel
on the flight deck as observer.
(b) Such visits, inspections or surveys shall be at the sole
cost and expense of Lessor, provided, however, Lessee will
pay to Lessor on an After-Tax Basis on demand all
reasonable out-of-pocket expenses incurred by Lessor in
connection with any such visit, inspection or survey
conducted after the occurrence of a Default.
(c) Lessor will:
(i) have no duty to make, and no liability arising out of
making or failing to make, any such visit, inspection
or survey;
(ii) so long as no Default has occurred and is continuing,
not exercise such right other than on reasonable
notice and so as not to disrupt unreasonably the
commercial operations of Lessee, provided, however,
Lessee will take such action as may be reasonably
required to facilitate Lessor's inspection; and
(iii) indemnify and hold harmless Lessee from and
against all Losses arising from death or injury to any
such observer or any employee of Lessor in connection
with any such visit, inspection or survey except to
the extent such Losses arise from the gross negligence
or willful misconduct of Lessee or its agents or
employees.
8.6 OWNERSHIP; PROPERTY INTERESTS; RELATED MATTERS: Lessee
will:
(a) not do or knowingly permit to be done or omit or knowingly
permit to be omitted to be done any act or thing which
might reasonably be expected to jeopardize the rights of
Owner or Lessor as owner or lessor respectively of the
Aircraft or as an additional insured or loss payee under
the Insurances;
<PAGE>
(b) on all occasions when the ownership of the Aircraft, any
Engine or any Part is relevant, make clear to third parties
that title is held by Owner;
(c) not at any time (i) represent or hold out Lessor or Owner
as carrying goods or passengers on the Aircraft or as being
in any way connected or associated with any operation or
carriage (whether for hire or reward or gratuitously) which
may be undertaken by Lessee; or (ii) pledge the credit of
Lessor or Owner;
(d) ensure that there is always affixed, and not removed or in
any way obscured, a fireproof plate (having dimensions of
not less than 10 cm. x 7 cm.) in a reasonably prominent
position in the cockpit of the Aircraft adjacent to the
certificate of airworthiness and on each Engine stating:
"This Aircraft/Engine is owned by Emerald Aviation
Investments Limited and is leased to AeroUSA, Inc. and is
subleased to Vanguard Airlines, Inc. and may not be or
remain in the possession of, or be operated by any other
person without the prior written consent of AeroUSA, Inc.";
(e) not create or permit to exist any Security Interest (other
than Permitted Liens) upon the Aircraft, any Engine or any
Part;
(f) not do or permit to be done anything which may reasonably
be expected to expose the Aircraft, any Engine or any Part
to penalty, forfeiture, impounding, detention,
appropriation, damage or destruction and without prejudice
to the foregoing, if any such penalty, forfeiture,
impounding, detention or appropriation, damage or
destruction occurs, give Lessor immediate notice thereof
and procure the immediate release of the Aircraft, any
Engine or the Part, as the case may be;
(g) not abandon the Aircraft, any Engine or any Part;
(h) pay and discharge, or cause to be paid and discharged, when
due and payable or make adequate provision by way of
security or otherwise for all debts, damages, claims and
liabilities which have given or might give rise to a
Security Interest (other than Permitted Liens) over or
affecting the Aircraft, any Engine or any Part; and
<PAGE>
(i) not attempt, or hold itself out as having any power, to
sell, lease or otherwise dispose of the Aircraft, any
Engine or any Part.
8.7 GENERAL: Lessee will:
(a) will preserve its corporate existence (other than in
connection with a solvent reorganization on terms which
shall have previously been approved in writing by Lessor),
and will conduct its business in an orderly and efficient
manner and will maintain all rights, privileges, licenses
and franchises material thereto or material to performing
its obligations under this Agreement;
(b) ensure that the Habitual Base remains the habitual base of
the Aircraft unless Lessor gives its prior written consent
to a change therein;
(c) not operate, maintain, insure or deal with the Aircraft or
any Engine or Part in a manner which materially
discriminates against the Aircraft or such Engine or Part,
when compared with the manner in which Lessee operates,
maintains, insures or deals with similar aircraft, engines
or parts in Lessee's fleet;
(d) not, without giving Lessor 10 days prior notice (in
accordance with this Agreement), change its chief executive
office (as such term is defined in Article 9 of the Uniform
Commercial Code as in effect in the State of Kansas) from
533 Mexico City Avenue, Kansas City, Missouri 64153;
(e) remain a Certificated Air Carrier and maintain, without
limitation, its status so as to fall within the purview of
Section 1110 of Title 11 of the United States Code or any
analogous statute; and
(f) remain a "citizen of the United States" as defined in
Section 40102 of Title 49 of the United States Code.
8.8 RECORDS: Lessee will:
(a) cause accurate, complete and current records as required by
FAR 91.417 to be kept of all flights made by, and all
maintenance carried out on, the Aircraft (including in
relation to each Engine and Part subsequently installed,
before the installation); keep the records in such manner
as the Air Authority may from time to time require, and
<PAGE>
ensure that they comply with the mandatory recommendations
of any manufacturers of the Aircraft, any Engine or any
Part. At redelivery the records required by FAR 91.417
must be in English. The records will form part of the
Aircraft Documents; and
(b) maintain in English with appropriate revision service, all
Aircraft Documents, records, logs, and other materials
required by applicable Laws or the Air Authority in respect
of the Aircraft.
8.9 PROTECTION: Lessee will:
(a) maintain the registration of the Aircraft with the Air
Authority in the name of Owner and not do or suffer to be
done anything which might adversely affect that
registration; and
(b) do all acts and things (including, without limitation,
making any filing or registration with the Air Authority or
any other Government Entity or as required to comply with
the Geneva Convention where applicable) and execute and
deliver, notarize, file, register and record all documents
(including, without limitation, any amendment of this
Agreement) as may be required by Lessor:
(i) upon or following any change or proposed change in the
ownership or financing of the Aircraft (and Lessor
shall reimburse Lessee for the reasonable out-of-
pocket expenses, including legal fees, incurred by
Lessee at the time of such change in complying with
Lessor's requirements under this paragraph (i)); or
(ii) following any modification of the Aircraft, any Engine
or any Part or the permanent replacement of any
Engine, or Part in accordance with this Agreement, so
as to ensure that the rights of Owner as owner of the
Aircraft and under this Agreement apply with the same
effect as before; or
(iii) to establish, maintain, preserve, perfect and
protect the rights of Lessor under this Agreement and
the interests of Owner as owner of the Aircraft.
<PAGE>
8.10 MAINTENANCE AND REPAIR: Lessee will:
(a) keep the Aircraft airworthy in all respects and in good
repair and condition;
(b) not change, subsequent to the date on which this Agreement
is signed by Lessee, the Lessee's Maintenance Program or
the Maintenance Performer without providing prior written
notice of such change to Lessor; provided, however, that
Lessee may make changes to Lessee's Maintenance Program
without notice insofar as, and only insofar as such changes
effect procedures for line maintenance and/or Minor Checks.
(c) maintain the Aircraft in accordance with the Lessee's
Maintenance Program through the Maintenance Performer;
(d) maintain the Aircraft in accordance with the standard of
maintenance required by FAR Part 121, Subpart L and any
other rules and regulations of the FAA and in at least the
same manner and with at least the same care, including,
without limitation, maintenance scheduling, modification
status and technical condition, as is the case with respect
to similar aircraft owned or otherwise operated by Lessee
and as if Lessee were to retain and continue operating the
Aircraft in its fleet after the Expiry Date, including,
without limitation, all maintenance to the Airframe, any
Engine or any Part required to maintain all warranties,
performance guaranties or service life policies in full
force and effect;
(e) comply with all Air Authority mandatory inspection and
mandatory modification requirements, and Airworthiness
Directives applicable to the Aircraft, any Engine or Part
having a compliance date during the Term;
(f) comply with all applicable Laws and the regulations of the
Air Authority and other aviation authorities with
jurisdiction over Lessee or the Aircraft, any Engine or
Part (regardless of upon whom such requirements are
imposed) and which relate to the maintenance, condition,
use or operation of the Aircraft or require any
modification or alteration to the Aircraft, any Engine or
Part;
(g) maintain in good standing a current certificate of
airworthiness (in the appropriate category for the nature
of the operations of the Aircraft) for the Aircraft issued
<PAGE>
by the Air Authority except where the Aircraft is
undergoing maintenance, modification or repair required or
permitted by this Agreement, and Lessee will provide on
request from time to time to Lessor a copy of such
certificate; and
(h) if required by the Air Authority, maintain a current
certification as to maintenance issued by or on behalf of
the Air Authority in respect of the Aircraft and will from
time to time provide to Lessor a copy on request.
8.11 REMOVAL/INTERCHANGE OF ENGINES: Lessee will:
(a) ensure that no Engine is removed from the Airframe unless
it is promptly replaced by an engine of the same model as,
or an improved or advanced version of or any Engine that
meets the requirements of the flight manual limitations,
such Engine and is in good operating condition;
(b) ensure that any Engine which is not installed on the
Aircraft (or an aircraft permitted by paragraph (d) below)
is, except as expressly permitted by this Agreement,
properly and safely stored and insured, and kept free from
Security Interests (other than Permitted Liens);
(c) from time to time, on request by Lessor, procure that any
person to whom possession of an Engine is given
acknowledges in writing to Lessor, in form and substance
satisfactory to Lessor, that it will respect the interests
of Owner and Lessor as owner and lessor respectively of
such Engine and will not seek to exercise any rights
whatsoever in relation to such Engine; and
(d) be permitted, if no Default has occurred and is continuing,
to install any Engine on an aircraft operated by Lessee,
provided that neither (i) the provisions of any applicable
Law nor (ii) the terms of any lease or other agreement or
Security Interest to which such aircraft or engine is
subject, prohibit such installation or will have the effect
at any time of divesting or impairing the title and
interests of Owner and Lessor as owner and lessor
respectively of such Engine.
<PAGE>
8.12 REMOVAL/INTERCHANGE OF PARTS: Lessee will:
(a) ensure that no Part is at any time removed from the
Aircraft unless it is promptly replaced by a part complying
with the following:
(i) it is in as good operating condition, has
substantially similar hours available until the next
scheduled check, inspection, overhaul and shop visit,
is of the same or a more advanced make and model and
is of the same interchangeable modification status,
and of equivalent value and utility to, as the
replaced Part;
(ii) it has become and remains the property of Owner free
from Security Interests (other than Permitted Liens)
and on installation on the Aircraft will without
further act be subject to this Agreement; and
(iii) Lessee has full details as to such part's source
and maintenance records;
(b) ensure that any Part which is not installed on the Aircraft
(or any other aircraft as expressly permitted by this
Agreement) is properly and safely stored and insured, and
kept free from Security Interests (other than Permitted
Liens);
(c) be permitted, if no Default has occurred and is continuing,
to install any Part on an aircraft operated by Lessee,
provided that Clause 8.11(d) would be complied with in
respect of such Part if it were an Engine; and
(d) promptly procure the replacement of any Part which has
become time-, cycle- or calendar-expired, lost, stolen,
seized, confiscated, destroyed, damaged beyond repair,
unserviceable or permanently rendered unfit for use, with a
part complying with paragraph (a) above.
8.13 POOLING OF ENGINES AND PARTS: Lessee will not enter into
nor permit any pooling agreement or arrangement in respect
of any Engine or Part without the prior written consent of
Lessor.
<PAGE>
8.14 EQUIPMENT CHANGES:
(a) Lessee will not make any modification or addition to the
Aircraft (each an "Equipment Change"), except for an
Equipment Change which:
(i) is expressly permitted by this Agreement;
(ii) has the prior written approval of Lessor and does not
diminish or impair the value, utility, condition, or
airworthiness of the Aircraft; or
(iii) represents an addition to, and does not diminish
the value, utility, condition or airworthiness of, the
Aircraft, can be removed without causing damage to or
diminishing the condition, airworthiness or value and
utility of the Aircraft and will be so removed at
Lessor's request on redelivery.
In addition to the foregoing, Lessee will not make any
Equipment Change that may adversely affect its ability to
comply with Year 2000 Compliance (as defined in Section
17.1(c) hereof) in relation to the Aircraft or any Part.
(b) So long as no Default has occurred and is continuing,
Lessee may remove any Equipment Change if it can be removed
from the Aircraft without diminishing or impairing the
value, utility, condition or airworthiness of the Aircraft.
8.15 TITLE ON AN EQUIPMENT CHANGE:
(a) Title to all Parts installed on the Aircraft (whether by
way of replacement, as the result of an Equipment Change or
otherwise) will on installation, without further act, vest
in Owner subject to this Agreement, free and clear of all
Security Interests (other than Permitted Liens). Lessee
will at its own expense take all such steps and execute,
and procure the execution of, all such instruments as
Lessor may require and which are necessary to ensure that
title so passes to Owner according to all applicable Laws.
At any time when requested by Lessor, Lessee will provide
evidence to Lessor's satisfaction (including the provision,
if required, to Lessor of bills of sale and one or more
legal opinions) that title has so passed to Owner.
(b) Lessor may require Lessee to remove any Equipment Change on
the Expiry Date and to restore the Aircraft to its
condition prior to that Equipment Change.
<PAGE>
(c) Any Engine or Part at any time removed from the Aircraft
will remain the property of Owner until a replacement has
been effected in accordance with this Agreement and until
title in that replacement has passed, according to
applicable Laws, to Owner subject to this Agreement, free
of all Security Interests (other than Permitted Liens),
whereupon title to the replaced Engine or Part, will,
provided no Default has occurred and is continuing, pass to
Lessee.
9. INSURANCE
9.1 INSURANCES: Lessee will maintain the Insurances in full
force during the Term, and thereafter as expressly required
in this Agreement, through such brokers and with such
insurers and having such deductibles and subject to such
exclusions as may be approved by Lessor from time to time.
Insurances shall in any event meet the requirements set
forth in Schedule 7, which may be amended from time to time
by Lessor so that the scope and level of cover is
maintained in line with best industry practice and the
interests of Lessor and each Indemnitee are prudently
protected.
9.2 CHANGE: If at any time Lessor wishes to revoke its approval
of any insurer, reinsurer, insurance or reinsurance, Lessor
and/or its brokers will consult with Lessee and Lessee's
brokers (as for the time being approved by Lessor)
regarding whether that approval should be revoked to
protect the interests of the parties insured. If, following
such consultation, Lessor considers that any change should
be made (and provides a reasonable written explanation to
Lessee for such change), Lessee will then arrange or
procure the arrangement of alternative cover satisfactory
to Lessor.
9.3 INSURANCE UNDERTAKINGS AND INFORMATION: Lessee will:
(a) comply with the terms and conditions of each policy of the
Insurances and not do, consent or agree to any act or
omission which:
(i) invalidates or may invalidate the Insurances; or
(ii) renders or may render void or voidable the whole or
any part of any of the Insurances; or
<PAGE>
(iii) brings any particular liability within the scope
of an exclusion or exception to the Insurances;
(b) not take out without the prior written approval of Lessor
any insurance or reinsurance in respect of the Aircraft
other than those required under this Agreement unless
relating solely to hull total loss, business interruption,
profit commission and deductible risk;
(c) commence renewal procedures at least 30 days prior to
expiry of any of the Insurances and provide to Lessor:
(i) if requested by Lessor, a written status report of
renewal negotiation 14 days prior to each expiry date;
(ii) telecopy confirmation of completion of renewal prior
to each expiry date;
(iii) certificates of insurance (and where appropriate
certificates of reinsurance), and broker's (and any
reinsurance brokers') letter of undertaking in a form
acceptable to Lessor in English, detailing the
coverage and confirming the insurers' (and any
reinsurers') agreement to the specified insurance
requirements of this Agreement within 7 days after
each renewal date;
(d) on request, provide copies to Lessor of documents or other
information evidencing the Insurances; and
(e) provide any other insurance and reinsurance related
information, or assistance, in respect of the Insurances as
Lessor may reasonably require.
9.4 FAILURE TO INSURE: If Lessee fails to maintain the
Insurances in compliance with this Agreement, each of the
Indemnitees will be entitled but not bound (without
prejudice to any other rights of Lessor under this
Agreement):
(a) to pay the premiums due or to effect and maintain
insurances satisfactory to it or otherwise remedy Lessee's
failure in such manner (including, without limitation to
effect and maintain an "owner's interest" policy) as it
<PAGE>
considers appropriate. Any sums so expended by it will
become immediately due and payable by Lessee to Lessor on
an After-Tax Basis together with interest thereon at the
Interest Rate, from the date of expenditure by it up to the
date of reimbursement by Lessee; and
(b) at any time while such failure is continuing to require the
Aircraft to remain at any airport or to proceed to and
remain at any airport designated by it until the failure is
remedied to its satisfaction.
9.5 CONTINUING INDEMNITY: Lessee shall effect and maintain
insurance after the Expiry Date with respect to its
liability under the indemnity in Clause 10 for 2 years, and
such insurance shall name each Indemnitee as an additional
insured.
10. INDEMNITY
10.1 GENERAL: Lessee agrees to defend, indemnify and hold
harmless the Indemnitees on demand from and against any and
all Losses (regardless of when the same are made or
incurred):
(a) which may at any time be suffered or incurred directly or
indirectly as a result of or connected with the possession,
delivery, performance, management, ownership, registration,
control, maintenance, condition, service, repair, overhaul,
leasing, use, operation or redelivery of the Aircraft, any
Engine or Part (either in the air or on the ground), or the
occurrence of any Default, whether or not the Losses may be
attributable to any defect in the Aircraft, any Engine or
any Part or to its design, testing or use or otherwise, and
regardless of when the same arise or whether they arise out
of or are attributable to any act or omission of any
Indemnitee; or
(b) which arise out of any act or omission which invalidates or
which renders voidable any of the Insurances; or
(c) which may at any time be suffered or incurred as a
consequence of any design, article or material in the
Aircraft, any Engine or any Part or its operation or use
constituting an infringement of patent, copyright,
trademark, design or other proprietary right, or a breach
of any obligation of confidentiality owed to any person in
respect of any of the matters referred to in this paragraph
(c);
<PAGE>
but excluding any Losses in relation to a particular
Indemnitee to the extent that such Losses (i) are covered
pursuant to another indemnity provision of this Agreement
or (ii) arise solely as a result of the gross negligence or
wilful misconduct of that Indemnitee or (iii) arise solely
as a result of Lessor Taxes or a Lessor Lien or (iv) arise
from events occurring after re-delivery of the Aircraft in
accordance with the provisions hereof unless such Losses
result from or arise out of an act or omission by Lessee,
or (v) arise solely as a result of a breach by Lessor of
its representations and warranties contained in Schedule 2,
Clause 13 or as a result of the failure by Lessor to
perform any warranties contained in Schedule 2, Clause 13
or as a result of the failure by Lessor to perform any of
its obligations under this Agreement (but excluding any
such failure which results from any Default), or (vi) have
been expressly agreed for payment by an Indemnitee, or
(vii) relate to any Taxes (without prejudice to Lessor's
rights under any other indemnity provisions of this
Agreement), or (viii) arise solely as a result of any sale,
assignment, transfer or other disposition (whether
voluntary or involuntary) by such Indemnitee of the
Aircraft or any interest therein, unless such sale,
transfer or other disposition has resulted from or occurred
following an Event of Default. For purposes of the
foregoing provision, "gross negligence" means, in relation
to an Indemnitee, any intentional or conscious action or
decision of such Indemnitee which is taken with reckless
disregard for the consequences of such action or decision.
10.2 DURATION: The indemnities contained in this Agreement will
continue in full force following the Expiry Date
notwithstanding any breach or repudiation by Lessor or
Lessee of this Agreement or any termination of the leasing
of the Aircraft hereunder.
10.3 SUBROGATION: Upon payment in full to an Indemnitee of any
demand for indemnification under Clause 10.1, Lessee shall
be subrogated to all rights and remedies capable of
subrogation which any Indemnitee may have against the
Manufacturer of the Aircraft, its subcontractors and any
other Person as to any Losses in respect of which payment
has been made, to the extent, in each case, that such
<PAGE>
Indemnitee shall not have exhausted or divested itself of
such rights and remedies, and without warranty as to the
enforceability of such rights and subject to the following
provisions:
(a) such Indemnitee shall assist Lessee, at Lessee's sole
cost and expense, in any manner reasonably requested
by Lessee for the purpose of enforcing and obtaining
the rights and benefits intended to be conferred by
this Clause 10.3 upon Lessee;
(b) Lessee shall notify Lessor in writing of its intention
to institute or file any claim or proceeding (a
"Subrogated Claim") not less than five (5) Business
Days prior to the proposed date of instituting or
filing such Subrogated Claim;
(c) Lessee shall keep Lessor fully informed of any
Subrogated Claim by Lessee, shall consult with Lessor
regarding the conduct of such Subrogated Claim;
(d) Lessor shall be entitled to prohibit conduct of a
Subrogated Claim by Lessee if the nature of the
Subrogated Claim (or any related circumstances) is
such that Lessor or any Indemnitee reasonably
considers that its reputation may be damaged by such
Subrogated Claim or be Lessee conducting such
Subrogated Claim, or (on any other reasonable grounds)
Lessor or such Indemnitee determines that it is
prudent for such Subrogated Claim to be conducted by
Lessor or such Indemnitee itself;
(e) Lessor shall be entitled, upon consultation with and
prior written notice to Lessee, to terminate Lessor's
conduct of Subrogated Claim where an act, delay or
omission of Lessee indicates that the interests of any
Indemnitee may be materially adversely prejudiced by
Lessee's continued conduct thereof;
(f) the assertion of all such Subrogated Claims herein
shall comply in all respects with the terms and
provisions of the Insurances.
<PAGE>
11. EVENTS OF LOSS
11.1 EVENTS OF LOSS:
(a) If an Event of Loss occurs prior to Delivery, this
Agreement will immediately terminate and except as
expressly stated in this Agreement neither party will have
any further obligation or liability under this Agreement
other than pursuant to Clause 5.19 except that Lessor will
return the Deposit to Lessee, including any interest earned
thereon and will return to Lessee or cancel the Letter of
Credit.
(b) If an Event of Loss occurs after Delivery, Lessee will pay
the Agreed Value to Lessor on or prior to the earlier of
(i) 45 days after the Event of Loss and (ii) the date of
receipt of insurance proceeds in respect of that Event of
Loss.
(c) Subject to the rights of any insurers and reinsurers or
other third party, upon irrevocable payment in full to
Lessor of the Agreed Value and all other amounts which may
be or become payable to Lessor under this Agreement, Lessor
will without recourse or warranty (except as to freedom
from Lessor's Liens) procure that Owner transfers to Lessee
all of Owner's rights to the Aircraft and to any Engines
and Parts not installed when the Event of Loss occurs but
which are covered under the Agreed Value, on an as-is
where-is basis, and procure that Owner will at Lessee's
expense, execute and deliver such bills of sale and other
documents and instruments as Lessee may reasonably request
to evidence (on the public record or otherwise) such
transfer, free and clear of all rights of Lessor and Owner
and Lessor Liens. Lessee shall indemnify on an After-Tax
Basis Lessor and Owner for all fees, expenses and Taxes
incurred by Lessor or Owner in connection with any such
transfer.
(d) Upon the occurrence of an Engine Event of Loss in respect
of an Engine, Lessee shall give Lessor prompt written
notice thereof and shall, within 60 days after such
occurrence, convey to Lessor, as replacement for such
Engine, title to a Replacement Engine. Each Replacement
Engine shall be free of all Security Interests (except
Permitted Liens) and shall be in as good operating
condition as the Engine being replaced (assuming that the
<PAGE>
Engine being replaced was in the condition and repair
required by this Agreement immediately prior to the Engine
Event of Loss). Lessee shall have full details of such
Replacement Engine's source and maintenance records. Upon
full compliance by Lessee with the terms of this Clause
11.1(d), Lessor will transfer to Lessee title to the Engine
which suffered the Engine Event of Loss. Prior to or at
the time of any such conveyance, Lessee, at its own
expense, will promptly:
(i) furnish Lessor with a full warranty bill of sale, in
form and substance reasonably satisfactory to Lessor,
with respect to such Replacement Engine;
(ii) duly execute a lease supplement (in form and substance
satisfactory to Lessor) subjecting such Replacement
Engine to this Agreement, and cause it to be recorded
pursuant to applicable Law;
(iii) furnish Lessor with such evidence of title to
such Replacement Engine as Lessor may reasonably
request;
(iv) furnish Lessor with an opinion of Lessee's counsel to
the effect that title to such Replacement Engine has
been duly conveyed to Lessor, free and clear of all
Security Interests, and that such Replacement Engine
is duly leased hereunder;
(v) furnish a certificate signed by a duly authorized
financial officer or executive of Lessee certifying
that, upon consummation of such replacement, no Event
of Default will have occurred or be continuing;
(vi) furnish Lessor with such documents as Lessor may
reasonably request in connection with the consummation
of the transactions contemplated by this Clause
11.1(d), in each case in form and substance
satisfactory to Lessor; and
(vii) furnish such financing statements incorporating
the Replacement Engine as may be reasonably requested
by Lessor.
11.2 REQUISITION: During any requisition for use or hire of the
Aircraft, any Engine or Part which does not constitute an
Event of Loss:
<PAGE>
(a) the Rent and other charges payable under this Agreement
will not be suspended or abated either in whole or in part,
and Lessee will not be released from any of its other
obligations under the Agreement (other than operational
obligations with which Lessee is unable to comply solely by
virtue of the requisition); and
(b) so long as no Default has occurred and is continuing,
Lessee will be entitled to any hire paid by the
requisitioning authority in respect of the Term. Lessee
will, as soon as practicable after the end of any such
requisition, cause the Aircraft to be put into the
condition required by this Agreement. Lessor will be
entitled to all compensation payable by the requisitioning
authority in respect of any change in the structure, state
or condition of the Aircraft arising during the period of
requisition, and Lessor will apply such compensation in
reimbursing Lessee for the cost of complying with its
obligations under this Agreement in respect of any such
change, but, if any Default has occurred and is continuing,
Lessor may apply the compensation or hire in or towards
settlement of any amounts owing by Lessee under this
Agreement.
12. RETURN OF AIRCRAFT
12.1 RETURN: On the Expiry Date or redelivery of the Aircraft
pursuant to Clause 13.2 or termination of the leasing of
the Aircraft under this Agreement, Lessee will, unless (i)
the Aircraft is not then in possession of Lessee as a
result of a breach by Lessor of its obligations under
Clause 7.1 of this Agreement (provided however that Lessee
shall not be excused in such event from (x) complying with
the conditions set forth in Schedule 6 and (y) ensuring
that the Aircraft is in a condition qualifying for
immediate certification of airworthiness by the FAA) or
(ii) an Event of Loss has occurred, redeliver the Aircraft
and Aircraft Documents at Lessee's expense to Lessor at the
Redelivery Location, in accordance with the procedures and
in compliance with the conditions set forth in Schedule 6,
free and clear of all Security Interests (other than Lessor
Liens) and in a condition qualifying for immediate
certification of airworthiness by the FAA or as otherwise
agreed by Lessor and Lessee. If requested by Lessor,
Lessee shall thereupon cause the Aircraft to be
deregistered by the Air Authority.
<PAGE>
12.2 NON-COMPLIANCE: Unless Lessor and Lessee otherwise mutually
agree, if at the time of Final Inspection Lessee has not
fully complied with any of its obligations under this
Agreement (including without limitation the Return
Conditions), or Lessee fails to make the Aircraft available
to Lessor on a timely basis for inspection and redelivery
pursuant to Clause 12.1 and Schedule 6 (whether such
failure is due to any act or omission of Lessee or any
other circumstance whatsoever), the Term shall be extended
until the time when the Aircraft has been redelivered to
Lessor in full compliance with this Agreement, for the sole
purpose of enabling such non-compliance or failure to be
promptly rectified, and during such extension period:
(a) Lessee shall not use the Aircraft in flight operations;
(b) all Lessee's obligations and covenants under this Agreement
will remain in full force until Lessee so redelivers the
Aircraft, and
(c) Lessee shall pay Rent to Lessor at a rate per month equal
to the monthly Rent specified in Clause 5.3 plus 50 per
cent, calculated on per diem basis.
Any such extension shall not prejudice Lessor's right to
treat such non-compliance or failure as an Event of Default
at any time, and to enforce such rights and remedies as may
be available to Lessor in respect thereof under the terms
of this Agreement or applicable Law. Without limiting the
generality of the foregoing, Lessee's Rent obligation under
paragraph (c) above shall be without prejudice to Lessor's
rights to cancel the letting of the Aircraft and to recover
damages for the breach of this Agreement pursuant to Clause
13.2.
Lessor may elect (either on first tender of the Aircraft by
Lessee or at any time during the said extension period) to
accept redelivery of the Aircraft notwithstanding non-
compliance with Clause 12.1 or the Return Conditions, in
which case Lessee will indemnify Lessor, and provide cash
to Lessor (in an amount reasonably satisfactory to Lessor)
as security for that indemnity, in respect of the cost to
Lessor of putting the Aircraft into the condition required
by this Agreement.
<PAGE>
12.3 REDELIVERY: Upon redelivery Lessee will provide to Lessor,
upon Lessor's request, all documents necessary to export
the Aircraft from the Habitual Base (including, without
limitation, a valid and subsisting export license for the
Aircraft) and required in relation to the deregistration of
the Aircraft with the Air Authority.
12.4 ACKNOWLEDGMENT: Provided Lessee has complied with its
obligations under Clause 12 and Schedule 6 of this
Agreement, following redelivery of the Aircraft by Lessee
to Lessor at the Redelivery Location, Lessor will deliver
to Lessee an acknowledgment confirming that Lessee has
redelivered the Aircraft to Lessor in accordance with this
Agreement, which acknowledgement shall be without prejudice
to Lessor's accrued and continuing rights under this
Agreement.
13. DEFAULT
13.1 EVENTS: The occurrence of the Events of Default will
constitute a repudiation (but not a termination) of this
Agreement by Lessee (whether any such event or condition is
voluntary or involuntary or occurs by operation of law or
pursuant to or in compliance with any judgment, decree or
order of any court or any order, rule or regulation of any
Government Entity). Lessee acknowledges that the
occurrence of any Event of Default would represent a
material default in the performance of its obligations
under this Agreement.
13.2 RIGHTS AND REMEDIES: If an Event of Default occurs and is
continuing, Lessor may at its option (and without prejudice
to any of its other rights under this Agreement), at any
time thereafter (without notice to Lessee except as
required under applicable Law):
(a) by notice to Lessee and with immediate effect on dispatch
of such notice cancel the letting of the Aircraft (but
without prejudice to the continuing obligations of Lessee
under this Agreement), whereupon all rights of Lessee under
this Agreement shall cease; and/or
(b) proceed by appropriate court action or actions to enforce
performance of this Agreement, including, without
limitation, the payment of all Rent and all other amounts
payable to Lessor or any Indemnitee pursuant to the terms
hereof; and/or
<PAGE>
(c) proceed by appropriate court action or actions to recover
damages for the breach of this Agreement which shall
include, without limitation:
(i) all Rent and other amounts which are or become due and
payable hereunder prior to the earlier to occur of the
date Lessor sells or re-leases the Aircraft or
receives payment of the amount calculated pursuant to
clause (ii) below;
(ii) an amount equaling the aggregate Rent for the
remainder of the Term (determined without reference to
any right of Lessor to cancel the leasing of the
Aircraft, whether or not such right is exercised),
discounted periodically (equal to installment
frequency) to present worth at the Discount Rate to
the date of payment by Lessee to Lessor, less the
amount, if any, of the Mitigation Credit (calculated
as provided below in Clause 13.4);
(iii) all costs and other incidental damages associated
with Lessor's exercise of its remedies hereunder or
otherwise incurred by Lessor as a result of an Event
of Default, including, but not limited to,
repossession costs, legal fees, Aircraft storage,
maintenance and insurance costs, Aircraft re-lease or
sale costs (including, in the case of a re-lease, any
costs incurred to transition the Aircraft to the next
operator's maintenance program) and Lessor's internal
costs and expenses (including the cost of personnel
time calculated based upon the compensation paid to
the individuals involved on an annual basis and a
general Lessor overhead allocation), all such costs
and incidental damages being referred to herein
collectively as "Enforcement and Remarketing Costs";
(iv) any loss, premium, penalty or expense which may be
incurred in repaying funds raised to finance the
Aircraft or in unwinding any financial instrument
relating in whole or in part to Lessor's financing of
the Aircraft, all such amounts being referred to
herein collectively as "Unwind Expenses";
<PAGE>
(v) any loss, cost, expense or liability, or damage to
Lessor's residual interest in the Aircraft, sustained
by Lessor due to Lessee's failure to maintain the
Aircraft in accordance with the terms of this
Agreement or Lessee's failure to redeliver the
Aircraft in the condition required by this Agreement,
all such amounts being referred to herein collectively
as "Aircraft Condition Damages"; and
(vi) such additional amount, if any, as may be necessary to
place Lessor in the same economic position, on an
After-Tax Basis, as Lessor would have been in if
Lessee had timely performed each of its obligations
under this Agreement; and/or
(d) either:
(i) enter upon the premises where all or any part of the
Aircraft is located and take immediate possession of
and, at Lessor's sole option, remove the same (and/or
any engine which is not an Engine but which is
installed on the Airframe, subject to the rights of
the owner, lessor or secured party thereof), all
without liability accruing to Lessor for or by reason
of such entry or taking of possession whether for the
restoration of damage to property, conversion or
otherwise, caused by such entry or taking, except
damages caused by gross negligence or willful
misconduct; or
(ii) by delivering notice to Lessee, require Lessee to
redeliver the Aircraft to Lessor at Shannon
International Airport, Ireland (or such other location
as Lessor may require) on the date specified in such
notice and in all respects in the condition required
by this Agreement upon the Return Occasion (it being
understood that Lessee shall not delay any such return
for the purpose of placing the Aircraft in such
condition, but shall nevertheless be liable to Lessor
for the failure of the Aircraft to be in such
condition); and/or
(e) sell at private or public sale, as Lessor may determine, or
hold, use, operate or lease to others the Aircraft as
Lessor in its sole discretion may determine, all free and
clear of any rights of Lessee; and/or
<PAGE>
(f) by written notice to Lessee specifying a payment date
(which shall be a date not earlier than five (5) Business
Days following the date of such notice), Lessor may demand
that Lessee pay to Lessor, and Lessee shall pay to Lessor
on the payment date specified in such notice (in lieu of
the Rent due for the period commencing after the date
specified for payment in such notice) the sum of the
following amounts:
(i) all Rent and other amounts which are or are expected
to become due and payable hereunder prior to the
payment date specified by Lessor;
(ii) an amount equaling the aggregate Rent for the
remainder of the Term (determined without reference to
any right of Lessor to cancel the leasing of the
Aircraft, whether or not such right is exercised),
discounted periodically (equal to installment
frequency) to present worth at the Discount Rate to
the payment date specified by Lessee to Lessor, less
the amount, if any, of the Mitigation Credit
(calculated as provided in Clause 13.4 below);
(iii) an amount equaling Lessor's reasonably
anticipated Enforcement and Remarketing Costs, Unwind
Expenses and Aircraft Condition Damages; and
(iv) such additional amount, if any, as may be necessary to
place Lessor in the same economic position, on an
After-Tax Basis, as Lessor would have been in if
Lessee had timely performed each of its obligations
under this Agreement;
it being understood that, to the extent that any of the
foregoing amounts represents an estimate by Lessor of
losses, damages, costs or expenses which Lessor expects to
incur, (a) Lessor shall adjust the amount thereof as needed
to reflect the actual amount of such losses, damages, costs
or expenses incurred by Lessor when substantially all of
such amounts become known to Lessor, but Lessee shall
nevertheless be obligated to pay the amount demanded by
Lessor (subject to such subsequent adjustment), and (b)
notwithstanding the amount specified in such demand, Lessor
shall be entitled to claim such other (and greater) amount
in any action against Lessee hereunder; and/or
<PAGE>
(g) by written notice to Lessee specifying a payment date
(which shall be a date not earlier than five (5) Business
Days following the date of such notice), Lessor may demand
that Lessee pay to Lessor, and Lessee shall pay to Lessor
on the payment date specified in such notice (in lieu of
the Rent due for the period commencing after the date
specified for payment in such notice), any unpaid Rent for
the Aircraft and other amounts payable under this Agreement
(prorated in the case of Rent on a daily basis) to and
including the payment date specified in such notice, plus
an amount equaling the aggregate Rent for the remainder of
the Term, discounted periodically (equal to installment
frequency) to present worth at the Discount Rate, it being
understood that upon payment of such amount, Lessee shall
be deemed to have cured the then pending Event of Default,
and in the absence of a further Event of Default, Lessee
shall be entitled to retain possession of the Aircraft for
the remainder of the Term; and/or;
(h) draw upon the Security Deposit and apply such amounts to
amounts owing to Lessor hereunder.
In addition to the foregoing, Lessor shall be entitled to
exercise such other rights and remedies as may be available
under applicable Law and Lessee shall be liable on an
After-Tax Basis for, and shall pay Lessor on demand: (i)
interest on all unpaid amounts at the Interest Rate, from
the due date until the date of payment in full; (ii) all
reasonable legal fees and other reasonable costs and
expenses incurred by Lessor by reason of the occurrence of
any Event of Default or the exercise of Lessor's remedies
with respect thereto; and (iii) all reasonable expenses,
disbursements, costs and fees incurred in (A) repossessing,
storing, preserving, shipping, maintaining, repairing and
refurbishing the Aircraft, the Airframe, any Engine or Part
to the condition required by Clause 12 hereof and
(B) preparing the Aircraft, the Airframe, an Engine or Part
for sale or lease, advertising the sale or lease of the
Aircraft, the Airframe, an Engine or Part and selling or
releasing the Aircraft, the Airframe, an Engine or Part.
Lessor is hereby authorized and instructed, but shall have
no obligation, to make any expenditures which Lessor, in
its sole discretion, considers advisable to repair and
restore the Aircraft, the Airframe, an Engine or Part to
the condition required by Clause 12 hereof (it being
understood that Lessee shall be liable for all such
expenditures).
<PAGE>
Lessee hereby agrees that, in the event of the return to or
repossession by Lessor of the Aircraft, the Airframe, an
Engine or Part, any rights in any warranty (express or
implied) previously assigned to Lessee or otherwise held by
Lessee shall without further act, notice or writing be
assigned or reassigned to Lessor, if assignable.
No remedy referred to in this Clause 13 is intended to be
exclusive, but, to the extent permissible hereunder or
under applicable Law, each shall be cumulative and in
addition to any other remedy referred to above or otherwise
available to Lessor at Law or in equity; and the exercise
or beginning of exercise by Lessor of any one or more of
such remedies shall not preclude the simultaneous or later
exercise by Lessor of any or all of such other remedies;
provided, however, that nothing in this Clause 13 shall be
construed to permit Lessor to obtain a duplicate recovery
of any element of damages to which Lessor is entitled. No
express or implied waiver by Lessor of any Default or Event
of Default shall in any way be, or be construed to be, a
waiver of any future or subsequent Default or Event of
Default.
13.3 POWER OF ATTORNEY: Lessee hereby appoints Lessor as the
attorney-in-fact of Lessee, with full authority in the
place and stead of Lessee and in the name of Lessee or
otherwise, for the purpose of carrying out the provisions
of this Agreement and taking any action and executing any
instrument that Lessor may deem necessary or advisable to
accomplish the purposes hereof; provided, however, that
Lessor may only take action or execute instruments under
this Clause 13 after an Event of Default has occurred and
is continuing. Lessee hereby declares that the foregoing
powers are granted for valuable consideration, constitute
powers granted as security for the performance of the
obligations of Lessee hereunder and are coupled with an
interest and shall be irrevocable. Without limiting the
generality of the foregoing or any other rights of Lessor
under this Agreement, upon the occurrence and during the
continuation of an Event of Default, Lessor shall have the
sole and exclusive right and power to (i) settle,
compromise, compound, adjust or defend any actions, suits
or proceedings relating to or pertaining to the Aircraft,
Airframe or any Engine, or this Agreement and (ii) make
<PAGE>
proof of loss, appear in and prosecute any action arising
from any policy or policies of insurance maintained
pursuant to this Agreement, and settle, adjust or
compromise any claims for loss, damage or destruction
under, or take any other action in respect of, any such
policy or policies.
13.4 MITIGATION CREDIT: Lessee shall be entitled to have a
Mitigation Credit deducted from any recovery by Lessor from
Lessee of Rent for the unexpired portion of the Term. Such
Mitigation Credit shall be in one of the following amounts,
with Lessor to select the amount which in its reasonable
judgment will place Lessor in the same economic position,
on an After-Tax Basis, as Lessor would have been in if
Lessee had timely performed each of its obligations under
this Agreement:
(a) in the event that Lessor has re-let the Aircraft on terms
(other than rental payment terms) which, taken as a whole,
Lessor regards as being substantially similar to the terms
of this Agreement, an amount equaling the aggregate basic
rental payments to become due for the period coinciding
with the remainder of the Term (determined without
reference to any right of Lessor to cancel the leasing of
the Aircraft, whether or not such right is exercised),
discounted periodically (equal to installment frequency) to
present worth at the Discount Rate to the date of payment
by Lessee; or
(b) in the event that Lessor has not re-let the Aircraft or has
re-let the Aircraft on terms (other than rental payment
terms) which, taken as a whole, Lessor does not regard as
being substantially similar to the terms of this Agreement,
an amount equaling the fair market rental value (determined
pursuant to the Appraisal Procedure) of the Aircraft for
the period commencing with the date that Lessor reasonably
anticipates that the Aircraft could be re-let at such
rental rate and ending with the date that the Term was
scheduled to expire (determined without reference to any
right of Lessor to cancel the leasing of the Aircraft,
whether or not such right is exercised), discounted
periodically (equal to installment frequency) to present
worth at the Discount Rate to the date of payment by
Lessee; or
<PAGE>
(c) in the event that Lessor has not recovered possession of
the Aircraft, or Lessor has recovered possession of the
Aircraft but Lessee's breach of this Agreement has resulted
in a reduction in the volume of Lessor's business, the
amount of expense, if any, avoided by Lessor as a result of
being relieved of its obligations to Lessee under this
Agreement prior to the date that the Term was scheduled to
expire (determined without reference to any right of Lessor
to cancel the leasing of the Aircraft, whether or not such
right is exercised).
14. ASSIGNMENT
14.1 LESSEE: LESSEE WILL NOT ASSIGN, TRANSFER (VOLUNTARILY OR
INVOLUNTARILY, BY OPERATION OF LAW OR OTHERWISE) OR CREATE
OR PERMIT TO EXIST ANY SECURITY INTEREST OVER, ANY OF ITS
RIGHTS UNDER THIS AGREEMENT WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR, SUCH CONSENT NOT TO BE UNREASONABLY
WITHHELD IN THE CASE OF ASSIGNMENTS OR TRANSFERS BY MERGER.
14.2 ASSIGNMENT BY LESSOR: Lessee agrees that Lessor may at any
time during the Term assign its rights under this
Agreement. Notwithstanding any such assignment, Lessor
will remain entitled to the benefit of each indemnity and
the liability insurances effected under this Agreement. At
Lessor's sole cost and expense, Lessee will promptly
execute all documents reasonably requested by Lessor to
effect, perfect, record or implement any such assignment,
and will promptly comply with any other reasonable requests
of Lessor, its successors and assigns in respect of any
such assignment.
14.3 TRANSFER BY LESSOR: Lessee agrees that Lessor may at any
time during the Term transfer by way of novation its rights
and obligations under this Agreement, and upon completion
of any such novation (including the assumption by the
transferee of all of Lessor's remaining obligations under
this Agreement) Lessor will be released from and will have
no further obligation under this Agreement. At Lessor's
sole cost and expense, Lessee will promptly execute all
documents reasonably requested by Lessor to effect,
perfect, record or implement any such novation, and will
promptly comply with any other reasonable requests of
Lessor, its successors and assigns in respect of any such
novation. Lessor shall pay all costs and expenses of Lessee
(including reasonable legal fees and expenses) in
<PAGE>
connection with any sale, assignment or transfer by Lessor,
other than a sale, assignment or transfer to Lessee or
unless such sale, assignment or transfer has resulted from
or occurs following an Event of Default.
14.4 CONDITIONS OF RIGHTS OF ASSIGNMENT AND TRANSFER: Lessor's
rights of assignment, transfer, sale, encumbrance or other
disposition as set forth in this Clause 14 above are
subject to compliance with the following conditions:
(a) prior to such assignment, transfer, sale, encumbrance or
other disposition becoming effective, Lessor will procure
that the assignee (including any security assignee) or
transferee or any new owner of the Aircraft (save where
such new owner is also the "Lessor" hereunder) or any new
holder of a mortgage over the Aircraft or (where lessor as
transferor is not the original Lessor hereunder or an
affiliate thereof) any holder of any interest in the
Aircraft (by way of security or otherwise), as the case may
be, shall execute and deliver to Lessee a letter of quiet
enjoyment in respect to Lessee's use and possession of the
Aircraft substantially in the form set forth in Schedule 14
hereto;
(b) Lessee shall, immediately after such assignment, transfer,
sale, encumbrance or other disposition not be liable to pay
any Person, including any new owner of the Aircraft, for
any greater amount hereunder than that which it would have
been obliged to pay under this Agreement if no such
assignment, transfer, sale, encumbrance or other
disposition had taken place;
(c) such assignment, transfer, sale, encumbrance or other
disposition shall not alter the terms and conditions of
this Agreement as they define Lessee's rights and
obligations without the prior consent of Lessee; provided,
however, that such consent shall not be withheld or
required where Lessee's obligations are not increased as a
result thereof;
(d) in connection with any proposed assignment, transfer, sale,
encumbrance or other disposition, Lessor will provide to
Lessee such financial and other relevant information
available to it and not subject to any agreement with
respect to confidentiality in respect of the proposed
transferee (and, as appropriate, the entity which supports
<PAGE>
the proposed transferee) within a reasonable period prior
to the effectiveness of such transfer as Lessee may
reasonably request; and
(e) Lessor shall not effect such assignment, transfer, sale,
encumbrance or other disposition to any proposed transferee
which is or shares common owners with a certified air
carrier which operates a commercial airline business.
15. ILLEGALITY
If it is or becomes unlawful in any jurisdiction for Lessor
to give effect to any of its obligations as contemplated by
this Agreement or to continue this Agreement, the parties
hereto shall use their best efforts to modify or amend this
Agreement so as to render it valid, legal and enforceable.
In the event that it is not reasonably possible to so
modify or amend this Agreement within a reasonable time
period, Lessor may by notice in writing to Lessee terminate
the leasing of the Aircraft under this Agreement, such
termination to take effect on the latest date (the
"Effective Date") on which Lessor may continue such leasing
and such obligations without being in breach of applicable
laws or regulations, and Lessee will forthwith redeliver
the Aircraft to Lessor in accordance with Clause 12.
Without prejudice to the foregoing, Lessor will consult in
good faith with Lessee up to the Effective Date as to any
steps which may be taken (at no cost to Lessor) to
restructure the transaction to avoid such unlawfulness, but
will be under no obligation to take any such steps.
16. MISCELLANEOUS
16.1 WAIVERS, REMEDIES CUMULATIVE: The rights of Lessor under
this Agreement may be exercised as often as necessary, are
cumulative and not exclusive of its rights under any Law;
and may be waived only in writing and specifically. Delay
by Lessor in exercising, or non-exercise of, any such right
will not constitute a waiver of that right.
16.2 DELEGATION: Lessor may delegate to any Person all or any of
the rights, powers or discretions vested in it by this
Agreement and any such delegation may be made upon such
terms and conditions and subject to such regulations
(including power to sub-delegate) as Lessor in its absolute
discretion thinks fit.
<PAGE>
16.3 SEVERABILITY: Without prejudice to Clause 15 and paragraph
(k) of Schedule 9, if a provision of this Agreement is or
becomes illegal, invalid or unenforceable in any
jurisdiction, that will not affect:
(a) the legality, validity or enforceability in that
jurisdiction of any other provision of this Agreement; or
(b) the legality, validity or enforceability in any other
jurisdiction of that or any other provision of this
Agreement.
16.4 REMEDY: If Lessee fails to comply with any provision of
this Agreement, Lessor may, without being in any way
obliged to do so or responsible for so doing and without
prejudice to the ability of Lessor to treat such non-
compliance as a Default, effect compliance on behalf of
Lessee, whereupon Lessee shall become liable to reimburse
Lessor on an After-Tax Basis immediately any sums expended
by Lessor together with all costs and expenses (including
legal costs) in connection therewith.
16.5 TIME OF ESSENCE: The time stipulated in this Agreement for
all payments payable by Lessee to Lessor and the prompt,
punctual performance of Lessee's other obligations under
this Agreement are of the essence of this Agreement.
16.6 NOTICES: All notices under, or in connection with, this
Agreement will, unless otherwise stated, be given in
writing by letter, or facsimile. Any such notice is deemed
effectively to be given as follows:
(i) if by letter, on the earlier of the date when
delivered and the 7th day after dispatch; and
(ii) if by facsimile, when transmitted and full
transmission has been separately notified by telephone
by the transmitting party.
The addresses and facsimile and telephone numbers of Lessee
and Lessor are as follows:
<PAGE>
Lessee:
Address: 7000 Squibb Road, 3rd Floor
Mission, Kansas 66202
Attn: Vice President Finance and CFO
Facsimile: (913) 789-1351
Telephone: (913) 789-1769
with a copy to:
Address: 7000 Squibb Road, 3rd Floor
Mission, Kansas 66202
Attn: Vice President and General Counsel
Facsimile: (913) 789-1351
Telephone: (913) 789-1713
Lessor:
Address: Lee Farm Corporate Park
83 Wooster Heights Road
Danbury, CT 06810
Attn: Contracts
Facsimile: (203) 830-4764
Telephone: (203) 830-4760
With a copy to: GE Capital Aviation Services, Inc.
201 High Ridge Road
Stamford, CT 06927-4900
Attn: Senior Vice President - Portfolio
and Risk Management
Facsimile: (203) 357-4585
Telephone: (203) 357-3776
<PAGE>
16.7 GOVERNING LAW AND JURISDICTION:
(a) THIS AGREEMENT IN ALL RESPECTS SHALL BE GOVERNED AND
CONSTRUED IN ACCORDANCE WITH THE GOVERNING LAW (INCLUDING
WITHOUT LIMITATION MATTERS OF FORMATION, CONSTRUCTION,
VALIDITY AND PERFORMANCE BUT EXCLUDING CONFLICTS OF LAW
PRINCIPLES).
(b) For the benefit of Lessor, Lessee agrees that the courts of
the United States District Court for the Southern District
of New York and any New York state court sitting in the
City of New York, New York are to have nonexclusive
jurisdiction to settle any disputes arising out of or
relating to this Agreement and submits itself and its
property to the nonexclusive jurisdiction of the foregoing
courts with respect to such disputes.
(c) Without prejudice to any other mode of service, Lessee:
(i) appoints Corporation Services Company, 80 State
Street, Albany, New York 12207-2543 as its agent for
service of process relating to any proceedings before
the New York courts in connection with this Agreement
and agrees to maintain the process agent in New York
notified to Lessor;
(ii) agrees that failure by a process agent to notify
Lessee of the process shall not invalidate the
proceedings concerned; and
(iii) consents to the service of process relating to
any such proceedings by prepaid mailing of a copy of
the process to Lessee's agent at the address
identified in paragraph (i) or by prepaid mailing by
air mail, certified or registered mail of a copy of
the process to Lessee at the address set forth in
Clause 16.7.
(d) Lessee:
(i) waives to the fullest extent permitted by Law any
objection which Lessee may now or hereafter have to
the courts referred to in Clause 16.7(b) above on
grounds of inconvenient forum or otherwise as regards
proceedings in connection with this Agreement;
<PAGE>
(ii) waives to the fullest extent permitted by Law any
objection which Lessee may now or hereafter have to
the laying of venue of any suit, action or proceeding
arising out of or relating to this Agreement brought
in the courts referred to in Clause 16.7(b); and
(iii) agrees that a judgment or order of any court
referred to in Clause 16.7(b) in connection with this
Agreement is conclusive and binding on it and may be
enforced against it in the courts of any other
jurisdiction.
(e) Nothing in this Clause 16.7 limits the right of Lessor to
bring proceedings against Lessee in connection with this
Agreement:
(i) in any other court of competent jurisdiction; or
(ii) concurrently in more than one jurisdiction.
(f) Lessee irrevocably and unconditionally:
(i) agrees that if Lessor brings legal proceedings against
it or its assets in relation to this Agreement no
immunity from such legal proceedings (which will be
deemed to include without limitation, suit, attachment
prior to judgment, other attachment, the obtaining of
judgment, execution or other enforcement) will be
claimed by or on behalf of itself or with respect to
its assets;
(ii) waives any such right of immunity which it or its
assets now has or may in the future acquire; and
(iii) consents generally in respect of any such
proceedings to the giving of any relief or the issue
of any process in connection with such proceedings
including, without limitation, the making, enforcement
or execution against any property whatsoever
(irrespective of its use or intended use) of any order
or judgment which may be made or given in such
proceedings.
16.8 SOLE AND ENTIRE AGREEMENT: This Agreement is the sole and
entire agreement between Lessor and Lessee in relation to
the leasing of the Aircraft, and supersedes all previous
agreements in relation to that leasing.
<PAGE>
16.9 INDEMNITEES: All rights expressed to be granted to each
Indemnitee (other than Lessor) under this Agreement are
given to Lessor on behalf of that Indemnitee.
16.10 COUNTERPARTS: This Agreement may be executed two or
more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one
and the same instrument. To the extent, if any, that this
Agreement constitutes chattel paper (as such term is
defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction) no security interest in this
Agreement may be created through the transfer or possession
of any counterpart other than the counterpart that has been
marked "Counterpart No. 1" on the cover page thereof.
16.11 LANGUAGE: All notices to be given under this Agreement
will be in English. All documents delivered to Lessor
pursuant to this Agreement (including without limitation
any documents to be delivered pursuant to the Conditions
Precedent) will be in English, or if not in English, will
be accompanied by a certified English translation. If
there is any inconsistency between the English version of
this Agreement and any version in any other language, the
English version will prevail.
17. DISCLAIMERS AND WAIVERS:
LESSOR AND LESSEE AGREE THAT THE DISCLAIMERS, WAIVERS AND
CONFIRMATIONS SET FORTH IN CLAUSES 17.1 TO 17.4 BELOW SHALL
APPLY AT ALL TIMES DURING THE TERM. LESSEE'S ACCEPTANCE OF
THE AIRCRAFT IN ACCORDANCE WITH CLAUSE 4.2 SHALL BE
CONCLUSIVE EVIDENCE THAT LESSEE HAS FULLY INSPECTED THE
AIRCRAFT AND EVERY PART THEREOF AND THAT THE AIRCRAFT, THE
ENGINES, THE PARTS AND THE AIRCRAFT DOCUMENTS ARE
TECHNICALLY ACCEPTABLE TO LESSEE AND SATISFY THE DELIVERY
CONDITION REQUIREMENTS AND ARE IN SUITABLE CONDITION FOR
DELIVERY TO AND ACCEPTANCE BY LESSEE.
17.1 EXCLUSION: THE AIRCRAFT IS TO BE LEASED AND DELIVERED
HEREUNDER "AS IS, WHERE IS", AND LESSEE AGREES AND
ACKNOWLEDGES THAT, SAVE AS EXPRESSLY STATED IN THIS
AGREEMENT:
<PAGE>
(a) LESSOR WILL HAVE NO LIABILITY IN RELATION TO, AND LESSOR
HAS NOT AND WILL NOT BE DEEMED TO HAVE MADE OR GIVEN
(WHETHER BY VIRTUE OF HAVING DONE OR FAILED TO DO ANY ACT,
OR HAVING ACQUIRED OR FAILED TO ACQUIRE ANY STATUS UNDER OR
IN RELATION TO THIS AGREEMENT OR OTHERWISE), ANY WARRANTIES
OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO,
THE AIRCRAFT OR ANY ENGINE OR PART, INCLUDING (BUT NOT
LIMITED TO) THE DESCRIPTION, AIRWORTHINESS, COMPLIANCE WITH
SPECIFICATIONS, OPERATION, MERCHANTABILITY, FREEDOM FROM
INFRINGEMENT OF PATENT OR OTHER PROPRIETARY RIGHTS, FITNESS
FOR ANY PARTICULAR USE OR PURPOSE, VALUE, DURABILITY,
CONDITION, OR DESIGN, OR AS TO THE QUALITY OF THE MATERIAL
OR WORKMANSHIP, THE ABSENCE OF LATENT OR OTHER DEFECTS,
WHETHER OR NOT DISCOVERABLE, OR AS TO ANY OTHER MATTER
WHATSOEVER, EXPRESS OR IMPLIED (INCLUDING ANY IMPLIED
WARRANTY ARISING FROM A COURSE OF PERFORMANCE OR DEALING OR
USAGE OF TRADE) WITH RESPECT TO THE AIRCRAFT, ANY ENGINE OR
ANY PART; AND
(b) LESSOR SHALL NOT HAVE ANY OBLIGATION OR LIABILITY
WHATSOEVER TO LESSEE (WHETHER ARISING IN CONTRACT OR IN
TORT, AND WHETHER ARISING BY REFERENCE TO NEGLIGENCE OR
STRICT LIABILITY OF LESSOR OR OTHERWISE) FOR:
(i) ANY LIABILITY, LOSS OR DAMAGE CAUSED OR ALLEGED TO BE
CAUSED DIRECTLY OR INDIRECTLY BY THE AIRCRAFT OR ANY
ENGINE OR BY ANY INADEQUACY THEREOF OR DEFICIENCY OR
DEFECT THEREIN OR BY ANY OTHER CIRCUMSTANCE IN
CONNECTION THEREWITH;
(ii) THE USE, OPERATION OR PERFORMANCE OF THE AIRCRAFT OR
ANY RISKS RELATING THERETO;
(iii) ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR
ANTICIPATED PROFITS OR ANY OTHER DIRECT, INDIRECT OR
CONSEQUENTIAL LOSS OR DAMAGE; OR
(iv) THE DELIVERY, OPERATION, SERVICING, MAINTENANCE,
REPAIR, IMPROVEMENT OR REPLACEMENT OF THE AIRCRAFT,
ANY ENGINE OR ANY PART.
<PAGE>
(c) LESSOR WILL HAVE NO LIABILITY OR OBLIGATION WHATSOEVER IN
CONNECTION WITH, THE YEAR 2000 COMPLIANCE (AS HEREINAFTER
DEFINED) OF THE AIRCRAFT OR ANY PART THEREOF. FOR PURPOSES
OF THIS AGREEMENT, THE TERM "YEAR 2000 COMPLIANCE" SHALL
MEAN AND INCLUDE THE ABILITY OF THE AIRCRAFT AND EACH PART
THEREOF TO ACCURATELY PROCESS, PROVIDE AND/OR RECEIVE
DATE/TIME DATA (INCLUDING WITHOUT LIMITATION CALCULATING,
COMPARING, OUTPUTTING AND SEQUENCING), WITHIN, FROM, INTO,
AND BETWEEN THE TWENTIETH CENTURY AND THE TWENTY-FIRST
CENTURY, INCLUDING LEAP YEAR CALCULATIONS SUCH THAT NEITHER
THE AIRCRAFT NOR ANY PART THEREOF OR SERVICE RELATED
THERETO WILL BE AFFECTED BY DATES/TIMES PRIOR TO, ON, AFTER
OR SPANNING JANUARY 1, 2000.
17.2 WAIVER: LESSEE HEREBY WAIVES, AS BETWEEN ITSELF AND THE
LESSOR, ALL ITS RIGHTS IN RESPECT OF ANY WARRANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, ON THE PART OF LESSOR
AND ALL CLAIMS AGAINST LESSOR HOWSOEVER AND WHENEVER
ARISING AT ANY TIME IN RESPECT OF OR OUT OF ANY OF THE
MATTERS REFERRED TO IN CLAUSE 17.1.
17.3 DISCLAIMER OF CONSEQUENTIAL DAMAGES: EACH OF LESSOR AND
LESSEE AGREES THAT IT SHALL NOT BE ENTITLED TO RECOVER, AND
HEREBY DISCLAIMS AND WAIVES ANY RIGHT THAT IT MAY OTHERWISE
HAVE TO RECOVER, LOST PROFITS OR REVENUES OR CONSEQUENTIAL
DAMAGES AS SUCH TERM IS DEFINED IN SECTION 2-A-520 OF THE
NEW YORK UNIFORM COMMERCIAL CODE AS A RESULT OF ANY BREACH
OR ALLEGED BREACH BY LESSOR OF ANY OF THE AGREEMENTS,
REPRESENTATIONS OR WARRANTIES OF LESSOR CONTAINED IN THIS
AGREEMENT OR THE OTHER OPERATIVE DOCUMENTS.
17.4 CONFIRMATION: LESSEE CONFIRMS THAT IT IS FULLY AWARE OF THE
PROVISIONS OF THIS CLAUSE 17 AND ACKNOWLEDGES THAT RENT AND
OTHER AMOUNTS HAVE BEEN CALCULATED BASED ON ITS PROVISIONS
18. BROKERS AND OTHER THIRD PARTIES.
18.1 NO BROKERS: Each of the parties hereby represents and
warrants to the other that it has not paid, agreed to pay
or caused to be paid directly or indirectly in any form,
any commission, percentage, contingent fee, brokerage or
other similar payments of any kind, in connection with the
establishment or operation of this Agreement, to any Person
(other than fees payable to Lessee's legal advisors or
IAMG).
<PAGE>
18.2 INDEMNITY: Each party agrees to indemnify and hold the
other harmless from and against any and all claims, suits,
damages, costs and expenses (including, but not limited to
reasonable attorneys' fees) asserted by any agent, broker
or other third party for any commission or compensation of
any nature whatsoever based upon this Agreement or the
Aircraft, if such claim, suit, damage, cost or expense
arises out of breach by the indemnifying party, its
employees or agents of Clause 18.1.
19. SECTION 1110
(a) Lessee acknowledges that Lessor would not have entered into
this Agreement unless it had available to it the benefits
of a lessor under Section 1110 of Title 11 of the United
States Code. Lessee covenants and agrees with Lessor that
to better ensure the availability of such benefits, Lessee
shall support any motion, petition or application filed by
Lessor with any bankruptcy court having jurisdiction over
Lessee, whereby Lessor seeks recovery of possession of the
Aircraft under said Section 1110 and shall not in any way
oppose such action by Lessor unless Lessee shall have
complied with the requirements of said Section 1110 to be
fulfilled in order to entitle Lessee to continued use and
possession of the Aircraft hereunder. In the event said
Section 1110 is amended, or if it is repealed and another
statute is enacted in lieu thereof, Lessor and Lessee agree
to amend this Agreement and take such other action not
inconsistent with this Agreement as Lessor reasonably deems
necessary so as to afford to Lessor the rights and benefits
as such amended or substituted statute confers upon owners
and lessors of aircraft similarly situated to Lessor.
(b) Lessor and Lessee mutually agree and acknowledge that this
Agreement is to be treated as a lease for United States
federal income tax purposes.
20. USURY LAWS: The parties intend to contract in strict
compliance with the usury Laws of the State of New York
and, to the extent applicable, the United States of
America. Notwithstanding anything to the contrary in the
Operative Documents, Lessee will not be obligated to pay
any interest in excess of the maximum non-usurious interest
<PAGE>
rate, as in effect from time to time, which may by
applicable Law be charged, contracted for, reserved,
received or collected by Lessor in connection with the
Operative Documents. During any period of time in which
the then-applicable highest lawful rate is lower than the
rate specified in Clauses 5.11 or 13.2, interest will
accrue and be payable at such highest lawful rate; however,
if at later times such highest lawful rate is greater than
the rate specified in Clauses 5.11 or 13.2, then Lessee
will pay interest at the highest lawful rate until the
aggregate amount of interest paid by Lessee equals the
amount of interest that would have been payable in
accordance with the interest rate specified in Clauses 5.11
or 13.2.
<PAGE>
21. MODIFICATION OR REVISION:
Neither this Agreement nor any term of this Agreement may be
modified, rescinded, changed waived, discharged or
terminated except by a writing signed by the party to be
charged. Lessor and Lessee acknowledge their agreement to
the provision of this Clause 21 by their initials below:
LESSOR: __________ LESSEE: ____________
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date shown at the beginning of this
Agreement.
LESSOR: SIGNED on behalf of AEROUSA, INC.
By: ___________________________
Name: ___________________________
Title: ___________________________
LESSEE: SIGNED on behalf of VANGUARD AIRLINES, INC.
By: ___________________________
Name: ___________________________
Title: ___________________________
<PAGE>
SCHEDULE 1
DEFINITIONS
The following words and expressions have the respective meanings
set forth below:
"A" CHECK means an "A" check in accordance with the
Manufacturer's Maintenance Planning Document as in effect on the
Delivery Date.
AFTER-TAX BASIS means in the case of any amount payable on an
"After-Tax Basis" to or for the benefit of any Person (including
any amount payable pursuant to this definition), after deduction
of the net amount of all Taxes required to be paid by such
Person with respect to the receipt or accrual by it of such
amount (and assuming that such Person is subject to (i) United
States Federal income tax at the highest marginal statutory rate
imposed on corporations for the relevant period, (ii) United
States state and local income taxes at the composite of the
highest marginal statutory rates imposed on such Person for the
relevant period, as such composite rate shall be certified by a
financial officer of such Person, and (iii) income taxes (if
any) imposed by countries outside the United States at the
actual rates imposed on such Person).
AGREEMENT means this Agreement, each Lease Supplement, any
schedules or documents executed pursuant to the Schedules
hereto, and any and all amendments, revisions, supplements and
modifications thereto.
AIR AUTHORITY means the FAA.
AIRCRAFT means the aircraft described in Part 1 of Schedule 4,
(which term includes where the context admits a separate
reference to all Engines, Parts and Aircraft Documents).
AIRCRAFT CONDITION DAMAGES has the meaning given in Clause
13.2(c)(v).
AIRCRAFT DOCUMENTS means the documents, data and records
identified in the list attached to the Certificate of Technical
Acceptance and any other documents and records referred to in
Clause 8.8, and all additions, renewals, revisions and
replacements from time to time made in accordance with this
Agreement.
<PAGE>
AIRFRAME means the Aircraft, excluding the Engines and Aircraft
Documents.
APPRAISAL PROCEDURE means the following procedure for
determining the "fair market rental value" of the Aircraft: (a)
Lessor shall select an independent aircraft appraiser who shall
make a determination of "fair market rental value" of the
Aircraft; and (b) the fees and expenses of the appraiser shall
be paid by Lessee. "Fair market rental value" shall mean the
value determined by an appraisal completed on an "as-is" and
"where-is" basis.
APU means the auxiliary power unit installed on the Aircraft on
the Delivery Date and any replacement auxiliary power unit
installed on the Aircraft and title to which is transferred to
Owner in accordance with this Agreement.
"B" CHECK means a "B" check in accordance with the
Manufacturer's Maintenance Planning Document as in effect on the
Delivery Date.
BOEING means The Boeing Company, a Delaware corporation with
its principal office in Seattle, State of Washington, U.S.A.
BUSINESS DAY means any day other than a Saturday, Sunday or
other day on which banking institutions in New York, New York
are authorized or required by Law to be closed.
"C" CHECK means a "C" check in accordance with the
Manufacturer's Maintenance Planning Document as in effect on the
Delivery Date.
CERTIFICATED AIR CARRIER means any Person (except the United
States Government) that is a citizen of the United States of
America (as defined in Section 40102 of Title 49 of the United
States Code) and holding a Certificate of Public Convenience and
Necessity issued under Section 41102 of Title 49 of the United
States Code by the Department of Transportation or any
predecessor or successor agency thereto, or, in the event such
certificates shall no longer be issued, any Person (except the
United States Government) that is a citizen of the United States
of America (as defined in Section 40102 of Title 49 of the
United States Code) and legally engaged in the business of
transporting for hire passengers or cargo by air predominantly
to, from or between points within the United States of America,
and, in either event, operating commercial jet aircraft capable
of carrying ten or more individuals or 6,000 pounds or more of
cargo, which also is certificated so as to entitle Lessor, as a
lessor, to the benefits of Section 1110 of Title 11 of the
United States Code with respect to the Aircraft.
<PAGE>
COLD SECTION REFURBISHMENT means, with respect to any Engine,
the completion of the following: complete unstacking of both
high and low compressors and complete visual inspection; de-
blading discs as necessary; visual inspections of all discs;
verification that all snap diameters on discs are within limits;
inspection of all blades for proper chord dimensions and
cracking; repair or replacement of blades below minimums;
inspection and repair of stators as necessary; blade-up of discs
using new lock plates; assembly of rotors in the compressor;
balance of all rotors; and installation of rotors in the Engine.
CYCLE means one take-off and landing of the Aircraft.
DAMAGE NOTIFICATION THRESHOLD means $100,000.
"D" CHECK means a "D" check in accordance with the
Manufacturer's Maintenance Planning Document as in effect on the
Delivery Date.
DEFAULT means any Event of Default or any event or circumstance
which, with the giving of notice and/or lapse of time and/or
determination of materiality and/or fulfillment of a condition
would constitute an Event of Default.
DELIVERY means delivery of the Aircraft by Lessor to Lessee
under this Agreement.
DELIVERY CONDITION REQUIREMENTS means the requirements specified
in Part 2 of Schedule 4.
DELIVERY DATE means the date on which Delivery occurs.
DELIVERY LOCATION means Budapest International Airport,
Budapest, Hungary.
DEPOSIT means all amounts payable pursuant to Clause 5.1.
DOLLARS AND $ means the lawful currency of the United States of
America.
<PAGE>
ERISA means the Employee Retirement Income Security Act of 1974,
as amended.
ENFORCEMENT AND REMARKETING COSTS has the meaning given in
Clause 13.2(c)(iii).
ENGINE means, whether or not installed on the Aircraft:
(a) each engine of the manufacture and model specified in Part
1 of Schedule 4 (each of which has 750 or more rated
takeoff horsepower or the equivalent of such horsepower)
which Lessor elects to tender to Lessee with the Airframe
on the Delivery Date, such engines being described as to
serial numbers on the Certificate of Technical Acceptance
to be executed by Lessee on or prior to delivery of the
Aircraft and in Schedule 1 to Lease Supplement No. 1 to be
executed by Lessee and Lessor upon delivery of the
Aircraft;
(b) any Replacement Engine, with effect from the time when
title has passed to Owner in accordance with this
Agreement;
and in each case includes all modules and Parts from time to
time belonging to or installed in that engine but excludes any
properly replaced engine, title to which should have passed to
Lessee pursuant to this Agreement.
ENGINE CYCLE means operation of an engine on an aircraft from
and including a take-off to and including the landing of that
aircraft.
ENGINE EVENT OF LOSS means the occurrence with respect to an
Engine only, whether or not installed on the Airframe, of any of
those events described in the definition of Event of Loss.
ENGINE FLIGHT HOUR means each hour or part thereof an Engine is
operated, elapsing from the moment the wheels of an aircraft on
which such Engine is installed leave the ground until the wheels
of such aircraft next touch the ground.
ENGINE REFURBISHMENT means all scheduled and unscheduled off-
the-wing Engine maintenance and repair accomplished for each
module in accordance with the performance restoration or full
overhaul sections of the Manufacturer's workscope planning
guide.
EQUIPMENT CHANGE has the meaning given in Clause 8.14(a).
<PAGE>
EVENT OF DEFAULT means any event or condition specified Schedule
9.
EVENT OF LOSS means with respect to the Aircraft (including for
the purposes of this definition the Airframe):
(a) the actual or constructive total loss of the Aircraft
(including any damage to the Aircraft which results in an
insurance settlement on the basis of a total loss, or
requisition for use or hire which results in an insurance
settlement on the basis of a total loss); or
(b) the Aircraft being destroyed, damaged beyond economic
repair or permanently rendered unfit for normal use for any
reason whatsoever; or
(c) the requisition of title, or other compulsory acquisition
of title for any reason of the Aircraft by the government
of the State of Registration or any other authority
(whether de jure or de facto); or
(d) the hijacking, theft, disappearance, condemnation,
confiscation, seizure, detention or requisition for use or
hire of the Aircraft which deprives any Person permitted by
this Agreement to have possession and/or use of the
Aircraft of its possession and/or use for (i) more than 15
days (or 30 days in the case of requisition for use or hire
by the government of the State of Registration) or (ii) if
earlier, a period ending on the Expiry Date.
EXCUSABLE DELAY means, with respect to delivery of the Aircraft,
delay or non-performance due to or arising out of acts of God or
public enemy, civil war, insurrection or riot, fire, flood,
explosion, earthquake, accident, epidemic, quarantine
restriction, any act of government, governmental priority,
allocation, regulation or order affecting directly or
indirectly, the Aircraft, any manufacturer, Lessor or any
materials or facilities, strike or labor dispute causing
cessation, slowdown or interruption of work, inability after due
and timely diligence to procure equipment, data or materials
from manufacturers, suppliers, any existing owner, seller or
lessee in a timely manner, damage, destruction or loss, or any
other cause to the extent that such cause is beyond the control
of Lessor, whether above mentioned or not and whether or not
similar to the foregoing.
<PAGE>
EXPIRY DATE means the date falling 60 months after the Rent
Commencement Date, as such day is specified in Lease Supplement
No. 1, or, if earlier, (i) the date when Lessor, acting in
accordance with the provisions of this Agreement, terminates the
leasing of the Aircraft to Lessee under this Agreement, or (ii)
subject to the provisions of Clauses 11.1(a) and 11.2, the date
Lessor receives the Agreed Value together with any other amounts
then due and unpaid under this Agreement and the Other
Agreements following an Event of Loss; provided that if the Term
is extended pursuant to Clause 12.2, the Expiry Date shall be
extended to the date when the Aircraft has been redelivered to
Lessor in full compliance with this Agreement.
FAA means the Federal Aviation Administration of the United
States of America and any successor thereof.
FAR means the Federal Aviation Regulations set forth in Title 14
of the United States Code of Federal Regulations, as amended and
modified from time to time.
FINAL INSPECTION has the meaning given in Clause 1.1 of Schedule
6.
FINANCIAL INDEBTEDNESS means any indebtedness in respect of:
(a) moneys borrowed or raised;
(b) any liability under any debenture, bond, note, loan stock,
acceptance, documentary credit or other security;
(c) the acquisition cost of any asset to the extent payable
before or after the time of acquisition or possession; or
(d) any guarantee, indemnity or similar assurance against
financial loss of any person in respect of the above.
FINANCING PARTIES means the Person or Persons from time to time
notified by Lessor to Lessee as providing financing to Lessor
and/or Owner in respect of its acquisition, ownership or leasing
of the Aircraft, whether by way of superior lease, loan or
otherwise.
FINANCING STATEMENTS means Uniform Commercial Code Financing
Statements in respect of the Aircraft and Engines leased
hereunder prepared in a form acceptable for filing with the
applicable Government Entities in the Habitual Base, is subject
or in whose activities any of the above is a participant.
<PAGE>
FLIGHT HOUR means each hour or part thereof elapsing from the
moment the wheels of the Aircraft leave the ground on take off
until the wheels of the Aircraft next touch the ground.
GAAP means generally accepted accounting principles in the
United States.
GECAS means either or both of GE Capital Aviation Services, Inc.
and GE Capital Aviation Services, Limited.
GENEVA CONVENTION means the Convention for the International
Recognition of Rights in Aircraft, signed (ad referendum) at
Geneva, Switzerland, on June 19, 1948, and amended from time to
time, but excluding the terms of any adhesion thereto or
ratification thereof containing reservations to which the United
States of America does not accede.
GOVERNING LAW means the Laws of New York, excluding, however,
the provisions of Section 7-101 of the New York General
Obligations Law, which the parties have agreed, for avoidance of
doubt, are inapplicable to this transaction.
GOVERNMENT ENTITY means:
(a) any national government, political subdivision thereof, or
local jurisdiction therein;
(b) any instrumentality, board, commission, court, or agency of
any of the above, however constituted; and
(c) any association, organization, or institution of which any
of the above is a member or to whose jurisdiction any
thereof is subject or in whose activities any of the above
is a participant.
HABITUAL BASE means the United States.
HOT SECTION REFURBISHMENT means, with respect to any Engine, the
complete visual inspection and repair as necessary of the
combustion section of an Engine in an engine repair/overhaul
station, including (without limitation) complete unstacking of
the high pressure turbine; complete visual inspection; de-
blading of discs as required; visual inspections of all discs;
verification that all snap diameters on discs are within limits;
inspection of all blades for proper chord dimensions and
cracking; repair or replacement of all blades below minimums;
inspection and repair of stators as necessary; blade-up of discs
using new lock plates; assembly of rotors in the turbine;
balance of all rotors; and installation of rotors in the Engine.
INDEMNITEE means each of Lessor, Owner, GECAS, the Financing
Parties, Bankers Trust Company, GPA Group plc, Airplanes Limited
and each of their respective successors and assigns,
shareholders, subsidiaries, affiliates, partners, contractors,
directors, officers, servants, agents and employees.
<PAGE>
INSURANCES means insurances in respect of the Aircraft in
form and substance satisfactory to Lessor, and includes (without
limitation) any insurances and reinsurances required by Schedule
7.
LANDING GEAR means the landing gear assembly and the life
limited parts, as defined by the relevant Boeing service letter,
of the Aircraft excluding any rotable components.
LAW means and includes (a) any statute, decree, constitution,
regulation, order judgment or other directive of any Government
Entity; (b) any treaty, pact, compact or other agreement to
which any Government Entity is a signatory or party; (c) any
judicial or administrative interpretation or application of any
Law described in (a) or (b) above; and (d) any amendment or
revision of any Law described in (a), (b) or (c) above.
LEASE SUPPLEMENT means a Lease Supplement, substantially in the
form of Schedule 13 hereto, entered into between Lessor and
Lessee.
LESSEE AFFILIATE means any Subsidiary for the time being of
Lessee.
LESSEE CONDITIONS PRECEDENT means the Lessee conditions
specified in Schedule 3.
LESSEE'S MAINTENANCE PROGRAM means the Maintenance Program
specifically approved by the Air Authority for Lessee's
maintenance of the Aircraft.
LESSOR CONDITIONS PRECEDENT means the Lessor conditions
specified in Schedule 3.
LESSOR LIEN means:
(a) any Security Interest whatsoever from time to time created
by Lessor or Owner in connection with the financing of the
Aircraft;
<PAGE>
(b) any other Security Interest in respect of the Aircraft
which results from acts of or claims against Lessor or
Owner not related to the transactions contemplated by or
permitted under this Agreement; and
(c) any Security Interest in respect of the Aircraft for Lessor
Taxes.
LESSOR TAX means any Tax that is:
(a) imposed solely as the result of activities of Lessor or
Owner in the jurisdiction imposing the Tax that is
unrelated to Lessor's dealings with Lessee or the
transactions contemplated by this Agreement or the
operation of the Aircraft by Lessee; or
(b) imposed on or measured by the net income, profits or gains
of Lessor or Owner including, without limitation, minimum
taxes and taxes on tax preference items and taxes which are
capital, doing business, franchise, excess profits, or net
worth taxes and interest, additions to tax, penalties or
other charges in respect thereof by any Government Entity
in the United State of America; or
(c) imposed solely as the result of an event that occurs prior
to the Delivery Date or subsequent to the Return Occasion
and that is unrelated to Lessor's dealings with Lessee or
to the transactions contemplated by this Agreement; or
(d) imposed on or with respect to a Tax Indemnitee resulting
from a Tax Indemnitee's gross negligence, willful
misconduct, breach of this Lease, or misrepresentation; or
(e) any taxes resulting from or attributable to a Lessor Lien;
or
(f) any Taxes in the nature of a withholding tax imposed as a
result of a Tax Indemnitees not being a United States
person within the meaning of Internal Revenue Code Section
7701(a)(30); or
(g) any interest, penalties, or additions to tax imposed on a
Tax Indemnitee attributable to the failure of a Tax
Indemnitee to properly and timely file any return unless
such failure was due to (1) the failure of the Lessee to
notify the Tax Indemnity of any tax filing or reporting
requirement that was due to the place of use or operation
of the Aircraft or the location of Lessee, or (2) the
failure of the Lessee to provide to the Tax Indemnitee any
information required for the filing of such return.
LETTER OF CREDIT means the letter of credit issued pursuant to
Clause 5.12 and any replacement or renewal of that letter of
credit.
<PAGE>
LOSSES means any claims, proceedings, losses, liabilities,
damages (whether direct, indirect, special, incidental or
consequential) , suits, judgments, costs, expenses, fees,
penalties or fines (whether civil or criminal) of every nature
and kind, including any of the foregoing arising or imposed with
or without any Indemnitee's fault or negligence, whether passive
or active or under the doctrine of strict liability.
MAINTENANCE PERFORMER means such Person as is approved by the
FAA to perform maintenance and/or modification services on
commercial aircraft and/or commercial aircraft engines, which
Person shall be agreed by Lessee and Lessor to have recognized
standing and experience, suitable facilities, and suitable
equipment to perform such services on aircraft and/or engines of
the same or improved model as the Aircraft or, in the case of
engines, the Engines.
MAINTENANCE PROGRAM means an Air Authority approved maintenance
program for the Aircraft in accordance with the Manufacturer's
specifications, service bulletins, planning documents,
maintenance manuals and documents and encompassing scheduled
maintenance (including block maintenance), condition monitored
maintenance, and/or on-condition maintenance of Airframe,
Engines and Parts, including but not limited to, servicing,
testing, preventive maintenance, repairs, structural
inspections, system checks, overhauls, approved modifications,
service bulletins, engineering orders, airworthiness directives,
corrosion control, inspections and treatments.
MAJOR CHECKS means any C-Check, multiple C-Check, D-Check, Q-
Check or annual heavy maintenance visit or segment thereof
suggested by its manufacturer and approved by the FAA for
commercial aircraft of the same model as the Aircraft (however
denominated) as set out in the Agreed Maintenance Program.
MANUFACTURER means Boeing.
MANUFACTURER'S MAINTENANCE PLANNING DOCUMENT means the
recommended maintenance program for the Aircraft issued by the
Manufacturer.
MINOR CHECKS means any A-Check or B-Check.
MITIGATION CREDIT has the meaning given in Clause 13.4.
OWNER means Emerald Aviation Investments Limited.
PART means, whether or not installed on the Aircraft:
<PAGE>
(a) any component, furnishing or equipment (other than a
complete Engine) furnished with the Aircraft on the
Delivery Date; and
(b) any other component, furnishing or equipment (other than a
complete Engine), with effect from the time when title
thereto has passed to Owner pursuant to this Agreement;
but excludes any such items title to which should have passed to
Lessee pursuant to this Agreement.
PART 36 OR FAR PART 36 means Part 36 of the FAR, as amended or
modified from time to time.
PART 121 OR FAR PART 121 means Part 121 of the FAR, as amended
or modified from time to time.
PERMITTED LIEN means:
(a) any lien for Taxes not assessed or, if assessed, not yet
due and payable, or being contested in good faith by
appropriate proceedings;
(b) any lien of a repairer, mechanic, carrier, hangarkeeper or
other similar lien arising in the ordinary course of
business by operation of Law in respect of obligations
which are not overdue or are being contested in good faith
by appropriate proceedings;
but only if (in the case of both (a) and (b)) (i) adequate
reserves have been provided by Lessee for the payment of
the Taxes or obligations; and (ii) such proceedings, or the
continued existence of the lien, do not give rise to any
likelihood of the sale, forfeiture or other loss of the
Aircraft or any interest therein or of criminal liability
on Lessor or Owner; and
(c) any Lessor Lien.
PERSON means any individual person, corporation, partnership,
firm, joint stock company, joint venture, trust, estate,
unincorporated organization, association, Government Entity, or
organization or association of which any of the above is a
member or a participant.
"Q" CHECK means a "Q" Check in accordance with Lessee's
Maintenance Program as in effect on the Delivery Date.
<PAGE>
REDELIVERY LOCATION means a location within 3,500 nautical miles
of Kansas City, Missouri or such other airport as may be agreed
in writing by Lessor and Lessee.
RENT means all amounts payable pursuant to Clause 5.3.
RENTAL PERIOD means each period ascertained in accordance with
Clause 5.2.
RENT COMMENCEMENT DATE means the date on which Lessor validly
tenders the Aircraft for Delivery to Lessee under Clause 4.1.
RENT DATE means the first day of each Rental Period.
REPLACEMENT ENGINE means an engine of the same manufacturer and
model, and having equivalent value, utility, modification
status, time elapsed since Hot Section Refurbishment and Cold
Section Refurbishment and remaining warranty status as the
Engine it is intended to replace under Clause 11.1(d), or, at
Lessee's option, an engine of the same manufacturer as such
Engine but of an improved model, and otherwise of an equivalent
value and utility and suitable for installation and use on the
Airframe without impairing the value or utility of the Airframe
and compatible with the remaining installed Engine.
REQUIRED LC EXPIRY DATE means the date being 90 days after the
Expiry Date.
RETURN OCCASION means the date on which the Aircraft is
redelivered to Lessor in accordance with Clause 12.
SALES TAXES has the meaning given in Schedule 11, Paragraph 2.
SCHEDULED DELIVERY DATE means January 31, 1999.
SECURITY INTEREST means any mortgage, charge, pledge, lien,
encumbrance, assignment, hypothecation, right of set-off, right
of detention or any other agreement or arrangement having the
effect of conferring security.
STATE OF INCORPORATION means Delaware.
STATE OF REGISTRATION means the United States of America.
<PAGE>
SUBSIDIARY means:
(a) in relation to any reference to accounts, any company whose
accounts are consolidated with the accounts of Lessee in
accordance with GAAP; or
(b) for any other purpose, an entity from time to time
(i) of which another has direct or indirect control or
owns directly or indirectly more than 50 percent of
the voting share capital; or
(ii) which is a direct or indirect subsidiary of
another under the Laws of the jurisdiction of its
incorporation.
SUPPLEMENTAL RENT means all amounts payable by Lessee pursuant
to Clause 5.4 and under Clause 4 of Schedule 10.
TAXES means any and all present and future taxes, duties,
withholdings, levies, assessments, imposts, fees and other
governmental charges of all kinds together with any penalties,
fines, surcharges and interest thereon and any additions
thereto.
TAX INDEMNITEES means Owner, Lessor and each Financing Party.
TERM means the period commencing on the Delivery Date and ending
on the Expiry Date.
U.S.C. means the United States Code.
UNWIND EXPENSES has the meaning given in Clause 13.2(c)(iv).
YEAR 2000 COMPLIANCE has the meaning given in Clause 17.1(c).
The definitions of certain words and expressions which pertain
to confidential and proprietary provisions of the Agreement have
the respective meanings set forth in Clause 2 of Schedule 10.
<PAGE>
SCHEDULE 2
REPRESENTATIONS AND WARRANTIES
1.1 Lessee's Representations and Warranties
Lessee's representations and warranties to Lessor are as
follows:
(a) STATUS: Lessee is a corporation duly incorporated and
validly existing in good standing under the Laws of the
State of Incorporation and has the corporate power to own
its assets and carry on its business as it is being
conducted and is the holder of all necessary air
transportation licenses required in connection therewith
and with the use and operation of the Aircraft;
(b) POWER AND AUTHORITY: Lessee has the corporate power to
enter into and perform, and has taken all necessary
corporate action to authorize the entry into, performance
and delivery of, this Agreement and the transactions
contemplated by this Agreement;
(c) LEGAL VALIDITY: this Agreement has been duly authorized,
executed and delivered by Lessee, and constitutes a legal,
valid and binding obligation of Lessee, enforceable in
accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization,
moratorium or other similar Laws affecting the enforcement
of creditors' rights generally, and, by such principles of
equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law) as a court
having jurisdiction may impose and by Laws which may affect
some of such remedies but which do not make the available
remedies inadequate for the substantial realization of the
benefits provided herein;
(d) NON-CONFLICT: the entry into and performance by Lessee of,
and the transactions contemplated by, this Agreement do not
and will not:
(i) conflict with any Laws binding on Lessee; or
(ii) conflict with the constitutional documents of Lessee;
or
<PAGE>
(iii) conflict with or result in default under any
agreement or instrument which is binding upon Lessee
or any of its assets nor result in the creation of any
Security Interest over any of its assets;
(e) AUTHORIZATION: so far as concerns the obligations of
Lessee, all authorizations, consents, registrations and
notifications required in connection with the entry into,
performance, validity and enforceability of, this Agreement
and the transactions contemplated by this Agreement, have
been (or will on or before the Delivery Date have been)
obtained or effected (as appropriate) and are (or will on
their being obtained or effected be) in full force and
effect;
(f) INTENTIONALLY LEFT BLANK
(g) MATERIAL ADVERSE CHANGE: there has been no material
adverse change in the consolidated financial condition of
Lessee and the Lessee Affiliates or the financial condition
of Lessee and the Lessee Affiliates since the date to which
the accounts most recently provided to Lessor on or prior
to the Delivery Date were drawn up;
(h) LITIGATION: no litigation, arbitration or administrative
proceedings are pending or to Lessee's knowledge threatened
against Lessee or any Lessee Affiliate which, if adversely
determined, would have a material adverse effect upon
Lessee's financial condition or business or Lessee's
ability to perform its obligations under this Agreement;
(i) PARI PASSU: the obligations of Lessee under this Agreement
rank at least pari passu with all other present and future
unsecured and unsubordinated obligations (including
contingent obligations) of Lessee, with the exception of
such obligations as are mandatorily preferred by Law and
not by virtue of any contract;
(j) CHIEF EXECUTIVE OFFICE: Lessee's chief executive office
(as that term is defined in Article 9 of the Uniform
Commercial Code as in effect in the State of Kansas) is
located at 533 Mexico City Avenue, Kansas City, Missouri
64153 and the records of the Lessee concerning the Aircraft
are maintained at such chief executive office;
(k) CERTIFICATED AIR CARRIER: Lessee is a Certificated Air
Carrier and Lessee will not take a position adversely
effecting Lessor, as lessor of the Aircraft to Lessee,
under Section 1110 of Title 11 of the United States Code
with respect to the Aircraft; and
<PAGE>
(l) CITIZEN OF THE UNITED STATES: Lessee is a "citizen of the
United States" as defined in Section 40102 of Title 49 of
the United States Code.
1.2 Lessee's Further Representations and Warranties
Lessee's further representations and warranties to Lessor
are as follows:
(a) ACCOUNTS: the audited consolidated accounts of Lessee and
the Lessee Affiliates most recently delivered to Lessor,
including the balance sheets and statements of income and
retained earnings:
(i) have been prepared in accordance with GAAP; and
(ii) fairly represent the consolidated financial condition
and operations of Lessee and the Lessee Affiliates as
at the date to which they were drawn up;
(iii) NO DEFAULT: No Default has occurred and is
continuing or might result from the entry into or
performance of this Agreement;
(b) REGISTRATION:
(i) except for the filing for recordation of this
Agreement and a Lease Supplement with the FAA, and the
filing of any Uniform Commercial Code financing
statements required (and continuation statements at
periodic intervals), no further filing or recording of
this Agreement or of any other document (including any
financing statement under Article 9 of the Uniform
Commercial Code) and no further action, is or will be
necessary under the Laws of the United States of
America, the State of Incorporation, the State of
Registration, and the Habitual Base or any other
states in order to (A) fully establish, perfect and
protect Owner's title to, and the interests of Lessor
and Owner in, the Aircraft or any Engine or Part as
against Lessee or any third party, or (B) ensure the
validity, effectiveness and enforceability of this
Agreement or any other Operative Document to which the
Lessee is a party; and
<PAGE>
(ii) under the Laws of the State of Incorporation, the
State of Registration and the Habitual Base the
property rights of Lessor and Owner in the Aircraft
have been fully established, perfected and protected;
(c) TAXES: Lessee has delivered all necessary returns and
payments due to the tax authorities in the State of
Incorporation, the State of Registration and the Habitual
Base and all other jurisdictions in which Lessee is
required to pay Taxes and/or file tax returns or reports
and Lessee is not required by Law to deduct any Taxes from
any payments under this Agreement;
(d) FULL DISCLOSURE: each of this Agreement and any other
document, certificate or statement (excluding any
forecasts, plans and projections) furnished to Lessor by or
on behalf of Lessee in connection with the transactions
contemplated hereby (including without limitation financial
information) does not contain any untrue statement of a
material fact or omit to state a material fact necessary in
order to make the statements contained herein and therein
not misleading; all forecasts and opinions contained
therein were honestly made on reasonable grounds after due
and careful inquiry by Lessee;
(e) ERISA: Lessee is not engaged in any transaction in
connection with which it could be subjected to either a
civil penalty assessed pursuant to Section 502 of ERISA or
any tax imposed by Section 4975 of the Internal Revenue
Code; no material liability to the Pension Benefit Guaranty
Corporation has been or is expected by Lessee to be
incurred with respect to any employee pension benefit plan
(as defined in Section 3 of ERISA) maintained by Lessee or
by any trade or business (whether or not incorporated)
which together with Lessee would be treated as a single
employer under Section 4001 of ERISA and Section 414 of the
Internal Revenue Code; there has been no reportable event
(as defined in Section 4043(b) of ERISA) with respect to
any such employee pension benefit plan; no notice of intent
to terminate any such employee pension benefit plan has
been filed or is expected to be filed, nor has any such
employee pension benefit been terminated; no circumstance
exists or is anticipated that constitutes or would
constitute grounds under Section 4042 of ERISA for the
Pension Benefit Guaranty Corporation to institute
proceedings to terminate, or to appoint a trustee to manage
the administration of, such an employee pension benefit
plan; and no accumulated funding deficiency (as defined in
Section 302 of ERISA or Section 412 of the Internal Revenue
Code), whether or not waived, exists with respect to any
such employee pension benefit plan.
<PAGE>
1.3 Lessor's Representations and Warranties:
Lessor's representations and warranties to Lessee are as
follows:
(a) STATUS: Lessor is a corporation duly incorporated, validly
existing and in good standing under the Laws of Connecticut
and has the corporate power to own its assets and carry on
its business as it is now being conducted;
(b) POWER AND AUTHORITY: Lessor has the corporate power to
enter into and perform, and has taken all necessary
corporate action to authorize the entry into, performance
and delivery of, this Agreement and the transactions
contemplated by this Agreement;
(c) LEGAL VALIDITY: this Agreement has been duly authorized,
executed and delivered by Lessor and constitutes Lessor's
legal, valid and binding obligation enforceable in
accordance with its terms except as may be limited by
applicable bankruptcy, insolvency, reorganization,
moratorium or other similar Laws affecting the enforcement
of creditors' rights generally, and, by such principles of
equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law) as a court
having jurisdiction may impose and by Laws which may affect
some of such remedies but which do not make the available
remedies inadequate for the substantial realization of the
benefits provided herein;
<PAGE>
(d) NON-CONFLICT: the entry into and performance by Lessor of,
and the transactions contemplated by, this Agreement do not
and will not:
(i) conflict with any Laws binding on Lessor; or
(ii) conflict with the constitutional documents of Lessor;
or
(iii) conflict with or result in default under any
agreement or instrument which is binding upon Lessor
or any of its assets nor result in the creation of any
Security Interest over any of its assets (other than
this Agreement);
(e) AUTHORIZATION: so far as concerns the obligations of
Lessor, all authorizations, consents, registrations and
notifications required under the Governing Law or the laws
of Lessor's state of incorporation in connection with the
entry into, performance, validity and enforceability of,
and the transactions contemplated by, this Agreement by
Lessor have been (or will on or before the Delivery Date
have been) obtained or effected (as appropriate) and are
(or will on their being obtained or effected be) in full
force and effect;
(f) RIGHT TO LEASE: on the Delivery Date, Lessor shall have
the right to lease the Aircraft to Lessee in accordance
with the terms hereof;
(g) CITIZENSHIP: Lessor is a "citizen of the United States" as
defined in Section 40102 of Title 49 of the United States
Code.
<PAGE>
SCHEDULE 3
CONDITIONS PRECEDENT
1. LESSEE CONDITIONS PRECEDENT
The conditions precedent to Lessor's obligation to deliver and
to commence the leasing of the Aircraft are as follows.
1.1 PRELIMINARY CONDITIONS
Lessor will receive from Lessee not later than two Business Days
prior to the Scheduled Delivery Date each of the following in
form and substance satisfactory to Lessor:
(a) OPINION: evidence that an opinion in the form of Schedule
8 will be issued on the Delivery Date by independent legal
counsel acceptable to Lessor in the State of Registration,
the Habitual Base and the State of Incorporation;
(b) FAA OPINION: evidence that there will be issued an opinion
of Daugherty, Fowler, Peregrin & Haught in a form
acceptable to Lessor as to the due filing for recordation
of this Agreement;
(c) APPROVALS: evidence of the issue of each approval, license
and consent which may be required in relation to, or in
connection with the performance by Lessee of any of its
obligations hereunder;
(d) IMPORT: evidence that any required import license, and all
customs formalities, relating to the import of the Aircraft
into the Habitual Base have been obtained or complied with,
and that the import of the Aircraft into the Habitual Base
is exempt from Taxes;
(e) LICENSES: copies of Lessee's air transport license, air
operator's certificates and all other licenses,
certificates and permits required by Lessee in relation to,
or in connection with, the operation of the Aircraft;
(f) PROCESS AGENT: a letter from the process agent appointed
by Lessee in this Agreement accepting that appointment;
(g) CERTIFICATE OF LEASE TERMINATION: a certificate of lease
termination executed by a duly authorized officer of
Lessee, substantially in the form of Schedule 12 to this
Agreement, acknowledging that this Agreement is no longer
in effect with respect to the Aircraft and Engines, which
certificate Lessor will hold in escrow to be filed at the
FAA upon the expiration or other termination of this
Agreement; and
<PAGE>
(h) GENERAL: such other documents as Lessor may reasonably
request;
1.2 FINAL CONDITIONS
(a) FINAL DOCUMENTS: Lessor shall receive on or before the
Delivery Date each of the following:
(i) CERTIFICATE OF TECHNICAL ACCEPTANCE: the Certificate
of Technical Acceptance, dated and fully completed,
and executed by Lessor and Lessee, certifying that
Lessee has completed its inspection of the Aircraft in
accordance with Clause 4.5 and that the Aircraft
conforms to the provisions set forth all therein and
is in all respects acceptable to Lessee, or if not so
acceptable, then setting forth discrepancies and
corrective action to be taken;
(ii) LEASE SUPPLEMENT: in the form of Schedule 13 hereto,
to be dated the Delivery Date, fully completed and
executed by Lessor and Lessee, and filed for recording
at the FAA;
(iii) OPINIONS: a signed original of each of the
opinions referred to in 1.1(a) and 1.1(b) above, which
shall be dated the Delivery Date;
(iv) PAYMENTS: all sums due to Lessor under this Agreement
on or before the Delivery Date;
(v) INSURANCES: certificates of insurance, an opinion and
undertaking from Lessee's insurance broker and other
evidence satisfactory to Lessor that Lessee is taking
the required steps to ensure due compliance with the
provisions of this Agreement as to Insurances with
effect on and after the Delivery Date;
(vi) ACCOUNTS: the latest available accounts of Lessee as
described in Clause 8.2(b)(i) and (ii);
(vii) LESSEE'S MAINTENANCE PROGRAM: such information
and documents relating to Lessee's Maintenance Program
as Lessor may require;
<PAGE>
(viii) FILINGS: evidence on the Delivery Date that the
Financing Statements have been duly filed and that all
filings, registrations, recordings and other actions
have been or will be taken which are necessary or
advisable to ensure the validity, effectiveness and
enforceability of this Agreement and to protect the
property rights of Lessor and Owner in the Aircraft,
any Engine or any Part; and
(ix) GENERAL: such other documents as Lessor may reasonably
request;
(b) REPRESENTATIONS/WARRANTIES: the representations and
warranties of Lessee in Schedule 2 shall be correct, and
would be correct if repeated on Delivery; and
(c) NO DEFAULT: no Default shall have occurred and be
continuing on Delivery or might result from the leasing of
the Aircraft to Lessee under this Agreement.
2. LESSOR CONDITIONS PRECEDENT
The conditions precedent to Lessee's obligation to accept
delivery and commence the leasing of the Aircraft are as
follows:
2.1 REPRESENTATIONS/WARRANTIES: the representations and
warranties of Lessor in Schedule 2 shall be correct, and
would be correct if repeated on Delivery; and
2.2 DELIVERY CONDITIONS REQUIREMENTS: the Delivery Condition
Requirements in Part 2 of Schedule 4 shall be satisfied on
Delivery.
<PAGE>
SCHEDULE 4
PART 1
DESCRIPTION OF AIRCRAFT
AIRCRAFT
Manufacturer: Boeing
Model: 737-200A
Serial Number: 22979
FAA Registration Number: __________________
ENGINES
Engine Type: Pratt & Whitney JT8D-15
Serial Nos: 708303 and 702951
<PAGE>
PART 2
DELIVERY CONDITION REQUIREMENTS
1.1 GENERAL CONDITION
The Aircraft will:
(a) be in good operating condition and be clean by scheduled
airline standards, and all structural damage shall have
been repaired to a permanent standard and a coach class
configuration with 110 seats;
(b) have installed the full complement of equipment, parts,
accessories, furnishings and loose equipment as normally
installed in the Aircraft for continued regular service,
and be in a condition suitable for immediate operations;
(c) have in existence a valid certificate of airworthiness (or
if required, a valid export certificate of airworthiness)
with respect to the Aircraft issued by the Hungarian Air
Authority;
(d) comply with the manufacturer's original specifications as
at the Delivery Date;
(e) have undergone, immediately prior to Delivery, a "C" Check
in block format so that all Airframe inspections falling
due within the next following 3,000 Flight Hours and 1 year
of operation in accordance with the Manufacturer's
Maintenance Planning Document, have been accomplished;
(f) have had accomplished all outstanding Airworthiness
Directives affecting that model of Aircraft issued by the
FAA which, if the Aircraft were registered with the FAA,
would have to be complied with during the Term or within 90
days after the Delivery Date; for this purpose, compliance
shall be by terminating action if:
(i) Lessee has complied by terminating action for other
aircraft of the same model and series then operated by
Lessee; or
(ii) the latest date permitted by such Airworthiness
Directive for compliance by terminating action falls
within 90 days after the Delivery Date;
<PAGE>
(g) have installed all applicable vendor's and manufacturer's
service bulletin kits received free of charge by Lessor
that are appropriate for the Aircraft and to the extent not
installed, those kits will be furnished free of charge to
Lessor;
(h) be in Lessee's livery;
(i) have all signs and decals clean, secure and legible; and
(j) have no open, deferred, continued, carry over or placarded
log book items.
1.2 COMPONENTS
(a) Each Flight Hour and Cycle controlled Hard Time Component
(other than the APU) shall have not less than 3,000 Flight
Hours of life remaining to the next scheduled removal in
accordance with the prior lessee's Maintenance Program and
shall be supported by appropriate certification
documentation indicating TSN, CSN, TSO and CSO such as JAR
form 1 or FAA form 8130-1; for this purpose "Hard Time
Component" means any component which has a limited on-wing
life in accordance with the prior lessee's Maintenance
Program and which can have life fully restored through
appropriate maintenance;
(b) Each calendar-limited component including safety equipment
will have not less than 12 months life remaining to the
next scheduled removal in accordance with the prior
lessee's Maintenance Program;
(c) Each "on-condition" and "condition-monitored" component
will be serviceable;
(d) The installed components as a group will have an average of
total flight time since new of not more than that of the
Airframe;
(e) Each Airframe Life-Limited Component will have not less
than 3,000 Flight Hours remaining to the next scheduled
removal and will be supported by certification
documentation necessary to demonstrate back-to-birth
traceability; for this purpose "Airframe-Life Limited
Component" means a component with an ultimate life which
cannot be restored through appropriate maintenance.
<PAGE>
1.3 ENGINES
Each Engine will be installed on the Aircraft and comply
with the following:
(a) Each Engine will have not less than 3,500 Flight Hours
expected life remaining to the next scheduled removal. The
expected life remaining will be determined by the
inspection and checks accomplished by Lessor in accordance
with this Agreement;
(b) Each Engine shall have just completed at the Delivery
Location for Lessee's acceptance a hot (including
combustion chamber) and cold section video borescope
inspection, which inspection shall be performed at Lessee's
expense, and a power assurance run performed at Lessor's
expense in accordance with the Manufacturer's maintenance
manual and any defects discovered in such inspections which
exceed the Engine manufacturer's in-service limits shall be
corrected at Lessor's expense. Lessor shall cause such
borescope inspections to be performed and to be recorded on
videotape by an agency selected by Lessee and shall provide
Lessee with a copy of such videotape on the Delivery Date.
No Engine shall be on "watch" for any reason requiring any
special or out of sequence inspection. Each such Engine
shall comply with the operations specification of Lessee
without waiver or exceptions. All items beyond the Engine
manufacturer's in-service limits shall be repaired; and
(c) Each Engine will have no defect which places less than
3,500 Flight Hours of remaining life pursuant to
Manufacturer's or airworthiness requirements until removal.
1.4 FUSELAGE, WINDOWS AND DOORS
(a) The fuselage will be free of major dents and abrasions,
loose or pulled or missing rivets, and all structural
repairs shall be permanent repairs and in accordance with
FAA approved data;
(b) Windows will be free of delamination, blemishes, crazing
and will be properly sealed and within the Manufacturer's
specifications; and
(c) Doors will be free moving, correctly rigged and be fitted
with serviceable seals.
<PAGE>
1.5 WINGS AND EMPENNAGE
(a) Leading edges will be free from damage; and
(b) Unpainted surfaces will be polished.
1.6 INTERIOR AND COCKPIT
Carpets and seat covers will be in good condition, clean
and free of stains and meet FAR fire resistance
regulations.
1.7 LANDING GEAR; WHEELS AND BRAKES
(a) The Landing Gear and wheel wells will be clean, free of
leaks and repaired as necessary.
(b) Each installed Landing Gear shall have no more Cycles
accumulated than the Airframe and shall have not less than
5,000 Flight Hours/3,000 Cycles and 18 months life
remaining to the next scheduled removal in accordance with
the Manufacturer's Maintenance Planning Document.
(c) The wheels and brakes will have not less than half of their
useful life remaining.
1.8 RETURN OF AUXILIARY POWER UNIT (APU)
The APU shall have just completed a borescope inspection
and shall meet all air outputs and temperature limitations
under load in accordance with the Manufacturer's
maintenance manual, and any defects discovered in such
inspection, which exceed the APU manufacturer's in service
limits, shall be corrected at Lessor's expense. The number
of Flight Hours of APU operation to the next hot section
inspection shall be no greater than 2,000 Flight Hours.
1.9 CORROSION
(a) The Aircraft shall be in compliance with the Manufacturer's
corrosion prevention and control program (CPCP)
requirements. All CPCP inspections which would normally be
accomplished while access is provided during structural
inspection in accordance with the prior lessee's
Maintenance Program during the Term shall have been
accomplished;
<PAGE>
(b) The entire fuselage will be substantially free from
corrosion and will be adequately treated and a corrosion
prevention program approved by the Manufacturer will be in
operation; and
Fuel tanks will be free from contamination and corrosion and a
tank treatment program will be in operation.
<PAGE>
SCHEDULE 5
CERTIFICATE OF TECHNICAL ACCEPTANCE
This Certificate of Technical Acceptance (this "Certificate") is
delivered, on the date set out below by Vanguard Airlines, Inc.
("Lessee"), to AeroUSA, Inc. ("Lessor"), pursuant to the
Aircraft Lease Agreement dated as of January 5, 1999 between
Lessor and Lessee (the "Agreement"). The capitalized terms used
in this Certificate shall have the meaning given to such terms
in the Agreement.
1. DETAILS OF ACCEPTANCE
Lessee hereby confirms to Lessor that Lessee has at [ ]
o'clock on this [ ] day of [ ], 1999, at [ ], technically
accepted the following, in accordance with the provisions of the
Agreement:
(a) Boeing Model 737-200A airframe, Manufacturer's Serial No.
22979;
(b) Pratt & Whitney JT8D-15 Engines:
Engine Manufacturer's Serial No.
1) 708303;
2) 702951;
(Each of which shall have more than 750 rated takeoff
horsepower or the equivalent of such horsepower);
(c) Fuel on Board as of the date of this
Certificate:____________________;
(d) Loose Equipment Check List: as set forth below or as per
list signed by Lessor and Lessee and attached hereto; and
(e) Aircraft Documents: as per list signed by Lessor and
Lessee and attached hereto.
2. HOURS AND CYCLES DATA (as of Delivery Date)
(a) Airframe:
Number of Hours since last phase "D" Check (Heaviest Check):
______ hours
<PAGE>
"C" Check (or Equivalent):
Interval: ___________________________
Time Since: _______________________
(b) LANDING GEAR OVERHAUL:
Number of Cycles Since Last Overhaul:
Left Gear __________________________ cycles/hours
Right Gear _________________________ cycles/hours
Nose Gear _________________________ cycles/hours
Center Gear ________________________ cycles/hours
Interval: Left Gear _________________________
Right Gear _________________________
Nose Gear _________________________
Center Gear ________________________
(c) ENGINES:
Number of Hours Since Last Heavy Shop Visit:
S/N :______ hours
S/N :______ hours
Number of Hours Since Last Hot Section Refurbishment:
S/N :______ hours
S/N :______ hours
Number of Hours Since Last Cold Section Refurbishment:
S/N :______ hours
S/N :______ hours
Hot Section Inspection:
Interval: ___________________________
<PAGE>
Time Since (S/N ):
__________________________
Time Since (S/N ):
__________________________
Time Remaining to First Restriction:
Engine S/N: 708303
Hours: __________ Restriction: __________
Cycles: __________ Restriction: __________
Engine S/N: 702951
Hours: __________ Restriction: __________
Cycles: __________ Restriction: __________
Average Cycles in Life Limited Parts (see attached
Schedule):
Engine S/N: 708303 _________
Engine S/N: 702951 _________
(d) AUXILIARY POWER UNIT:
Number of APU Hours Since Last Heavy Shop Visit:
__________ hours Date accomplished __________
Hot Section Inspection:
Interval: ________________________
Time Since: ________________________
(e) TIME CONTROLLED COMPONENTS: [See attached DUJX Report]
(f) INTERIOR EQUIPMENT:
Number of Passenger Seats and Configuration:_______________
____________________
Number of Galleys and Location: _________ __________
Number of Lavatories and Location: _________ _________
<PAGE>
LOPA - Attached __________ __________
List of Loose Equipment on Board:
______________________________________ _________________
______________________________________ _________________
______________________________________ _________________
______________________________________ _________________
______________________________________ _________________
______________________________________ _________________
(g) AVIONICS:
DESCRIPTION MODEL PART
NO.
______________________________________ _________
___________
______________________________________ _________
___________
______________________________________ _________
___________
______________________________________ _________
___________
______________________________________ _________
___________
______________________________________ _________
___________
(h) [ VIDEO SYSTEM:
Projector _________________________________________
Tape Reproducer_______________________________________
System Control Unit____________________________________
System Monitor________________________________________]
<PAGE>
3. ACCEPTANCE:
Lessee hereby confirms that the Aircraft, Engines, Parts
and Aircraft Documents are technically acceptable to it,
satisfy all of the Delivery Condition Requirements and are
in the condition for delivery and acceptance as required
under the Agreement.
IN WITNESS WHEREOF, Lessee and Lessor have, by their duly
authorized representative, executed this Certificate on the date
in paragraph 1 above.
LESSEE: VANGUARD AIRLINES, INC.
By: _________________________
Title: _________________________
LESSOR: AEROUSA, INC.
By: _________________________
Title: _________________________
<PAGE>
SCHEDULE 6
PROCEDURES AND OPERATING CONDITION AT REDELIVERY
On the Return Occasion the Aircraft, subject to fair ordinary
wear and tear of a kind and to an extent consistent with similar
aircraft engaged in commercial airline operations, will be
redelivered to Lessor by Lessee in accordance with the
procedures and in any event in the condition set out below.
1.1 FINAL INSPECTION
Immediately prior to the Return Occasion, Lessee will make the
Aircraft available to Lessor for inspection ("Final Inspection")
in order to verify that the condition of the Aircraft complies
with this Agreement. The Final Inspection will permit, and be
long enough for, Lessor to:
(a) inspect the Aircraft Documents;
(b) inspect the Aircraft and uninstalled Parts;
(c) inspect the Engines, including without limitation (i) a
complete video borescope inspection, to be completed at
Lessor's sole cost and expense, of (A) the low pressure and
high pressure compressors and (B) turbine area and (ii)
engine condition runs; and
(d) observe a 2 hour demonstration flight at Lessee's cost
(with Lessor's representatives as on-board observers).
Lessor will indemnify and hold harmless Lessee on an After-
Tax Basis from and against all Losses arising from death or
injury to any observer or any employee of Lessor in
connection with any such demonstration flight of the
Aircraft by Lessor.
1.2 GENERAL CONDITION
The Aircraft will:
(a) be in good operating condition and be clean by scheduled
airline standards, and all structural damage shall have
been repaired to a permanent standard and in the
configuration as modified at the FAA approved maintenance
facility indicated in the notice delivered pursuant to
Clause 7.4, or as otherwise agreed upon by Lessor and
Lessee;
<PAGE>
(b) have installed the full complement of equipment, parts,
accessories, furnishings and loose equipment as when
originally delivered to Lessee and as normally installed in
the Aircraft for continued regular service, and be in a
condition suitable for immediate operations under FAR Part
121 as then in effect without waiver or restriction; and if
any of the engines tendered for redelivery with the
Aircraft is not one of the Engines referred to in the
Acceptance Certificate or a Replacement Engine installed
pursuant to Clause 11.1(d) following an Engine Event of
Loss, Lessor shall have no obligation to accept such engine
unless Lessee furnishes to Lessor all the documents and
evidence in respect of such engine specified in Clause
11.1(d), as if such engine were a Replacement Engine;
(c) have in existence a valid certificate of airworthiness (or
if required by Lessor, a valid export certificate of
airworthiness) with respect to the Aircraft issued by the
Air Authority;
(d) comply with the manufacturer's original specifications as
at the Delivery Date;
(e) have undergone, immediately prior to redelivery, a "C"
Check in block format so that all Airframe inspections
falling due within the next following 3,000 Flight Hours
and 1 year of operation in accordance with the
Manufacturer's Maintenance Planning Document, have been
accomplished;
(f) have had accomplished all outstanding Airworthiness
Directives affecting that model of Aircraft issued by the
FAA which, if the Aircraft were registered with the FAA,
would have to be complied with during the Term or within 90
days after the Expiry Date; for this purpose, compliance
shall be by terminating action if:
(i) Lessee has complied by terminating action for other
aircraft of the same model and series then operated by
Lessee; or
(ii) the latest date permitted by such Airworthiness
Directive for compliance by terminating action falls
within 90 days after the Expiry Date;
<PAGE>
(g) have installed all applicable vendor's and manufacturer's
service bulletin kits received free of charge by Lessee
that are appropriate for the Aircraft and to the extent not
installed, those kits will be furnished free of charge to
Lessor;
(h) be in such external livery as advised by Lessor or at
Lessor's option in Lessee's livery with a cash adjustment
equivalent to the cost of Lessee's livery based on third
party rates;
(i) have all signs and decals clean, secure and legible;
(j) meet the requirements of FAR Part 36, Appendix C, Stage 3
noise compliance as then in effect without waiver or
restriction; and
(k) have no open, deferred, continued, carry over or placarded
log book items.
1.3 COMPONENTS
(a) Each Flight Hour and Cycle controlled Hard Time Component
(other than the APU) shall have not less than 3,000 Flight
Hours of life remaining to the next scheduled removal in
accordance with the Lessee's Maintenance Program and shall
be supported by appropriate certification documentation
indicating TSN, CSN, TSO and CSO such as JAR form 1 or FAA
form 8130-1; for this purpose "Hard Time Component" means
any component which has a limited on-wing life in
accordance with the Lessee's Maintenance Program and which
can have life fully restored through appropriate
maintenance;
(b) Each calendar-limited component including safety equipment
will have not less than 12 months life remaining to the
next scheduled removal in accordance with the Lessee's
Maintenance Program;
(c) Each "on-condition" and "condition-monitored" component
will be serviceable;
(d) The installed components as a group will have an average of
total flight time since new of not more than that of the
Airframe;
(e) Each Airframe Life-Limited Component will have not less
than 3,000 Flight Hours remaining to the next scheduled
removal and will be supported by certification
documentation necessary to demonstrate back-to-birth
traceability; for this purpose "Airframe-Life Limited
Component" means a component with an ultimate life which
cannot be restored through appropriate maintenance.
<PAGE>
1.4 ENGINES
(a) Each Engine will be installed on the Aircraft and comply
with the following:
(b) Each Engine will have not less than 3,500 Cycles expected
life remaining to the next scheduled removal. The expected
life remaining will be determined by the inspection and
checks accomplished by Lessor in accordance with this
Agreement;
(c) Each Engine shall have just completed at the location for
Lessor's acceptance on the Return Occasion a hot (including
combustion chamber) and cold section video borescope
inspection, which inspection shall be performed at Lessor's
expense, and a power assurance run performed at Lessee's
expense in accordance with the Lessee's Maintenance Program
or Manufacturer's maintenance manual and any defects
discovered in such inspections which exceed the Engine
manufacturer's in-service limits shall be corrected at
Lessee's expense. Lessee shall cause such borescope
inspections to be performed and to be recorded on videotape
by an agency selected by Lessor and shall provide Lessor
with a copy of such videotape on the Return Occasion. No
Engine shall be on "watch" for any reason requiring any
special or out of sequence inspection. Each such Engine
shall comply with the operations specification of Lessee
without waiver or exceptions. All items beyond the Engine
manufacturer's in-service limits shall be repaired; and
(d) Each Engine will have no defect which places less than
3,500 Cycles of remaining life pursuant to Manufacturer's
or airworthiness requirements until removal.
1.5 FUSELAGE, WINDOWS AND DOORS
(a) The fuselage will be free of major dents and abrasions,
loose or pulled or missing rivets, and all structural
repairs shall be permanent repairs;
(b) Windows will be free of delamination, blemishes, crazing
and will be properly sealed; and
(c) Doors will be free moving, correctly rigged and be fitted
with serviceable seals.
<PAGE>
1.6 WINGS AND EMPENNAGE
(a) Leading edges will be free from damage; and
(b) Unpainted surfaces will be polished.
1.7 INTERIOR AND COCKPIT
Carpets and seat covers will be in good condition, clean
and free of stains and meet FAR fire resistance
regulations.
1.8 LANDING GEAR; WHEELS AND BRAKES
(a) The Landing Gear and wheel wells will be clean, free of
leaks and repaired as necessary.
(b) Each installed Landing Gear shall have no more Cycles
accumulated than the Airframe and shall have not less than
5,000 Flight Hours/3,000 Cycles and 18 months life
remaining to the next scheduled removal in accordance with
the Manufacturer's Maintenance Planning Document.
(c) The wheels and brakes will have not less than half of their
useful life remaining.
1.9 RETURN OF AUXILIARY POWER UNIT (APU)
(a) The APU shall have just completed a borescope inspection
and shall meet all air outputs and temperature limitations
under load in accordance with the Lessee's Maintenance
Program and the Manufacturer's maintenance manual, and any
defects discovered in such inspection, which exceed the APU
manufacturer's in service limits, shall be corrected at
Lessee's expense. The number of Flight Hours of APU
operation to the next hot section inspection shall be no
greater than 2,000 Flight Hours.
1.10 CORROSION
(a) The Aircraft shall be in compliance with the Manufacturer's
corrosion prevention and control program (CPCP)
requirements. All CPCP inspections which would normally be
accomplished while access is provided during structural
inspection in accordance with the Lessee's Maintenance
Program during the Term shall have been accomplished;
(b) The entire fuselage will be substantially free from
corrosion and will be adequately treated and a corrosion
prevention program approved by Lessor will be in operation;
and
<PAGE>
(c) Fuel tanks will be free from contamination and corrosion
and a tank treatment program will be in operation.
1.11 FUEL
(a) At redelivery, Lessor will pay to Lessee or Lessee will pay
to Lessor (as the case may require) a cash adjustment in
respect of the difference in fuel on board at Delivery
versus redelivery, at the then prevailing cost of fuel at
the Redelivery Location.
1.12 MAINTENANCE PROGRAM
(a) Prior to the Return Occasion and upon Lessor's request,
Lessee will provide Lessor or its agent reasonable access
to Lessee's Maintenance Program and the Aircraft Documents
in order to facilitate the Aircraft's integration into any
subsequent operator's fleet;
(b) Lessee will, if requested by Lessor to do so, upon return
of the Aircraft deliver to Lessor a certified true current
and complete copy of the Lessee's Maintenance Program.
Lessor agrees that it will not disclose the contents of the
Lessee's Maintenance Program to any person or entity except
to the extent necessary to monitor Lessee's compliance with
this Agreement and/or to bridge the maintenance program for
the Aircraft from the Lessee's Maintenance Program to
another program after the Return Occasion.
<PAGE>
SCHEDULE 7
INSURANCE REQUIREMENTS
1.13 TYPES OF INSURANCE. The Insurances required to be
maintained are as follows:
(a) HULL ALL RISKS of loss or damage whilst flying and on the
ground with respect to the Aircraft on an agreed value
basis for the Agreed Value and with a deductible not
exceeding $750,000, or such other amount agreed by Lessor
from time to time;
(b) HULL WAR AND ALLIED PERILS, being such risks excluded from
the Hull All Risks Policy to the fullest extent available
from the leading international insurance markets, including
confiscation and requisition by the State of Registration
for the Agreed Value;
(c) ALL RISKS (INCLUDING WAR AND ALLIED RISK) except when on
the ground or in transit other than by air) property
insurance on all Engines and Parts when not installed on
the Aircraft on an "agreed value" basis for their full
replacement value and including engine test and running
risks;
(d) AIRCRAFT THIRD PARTY, PROPERTY DAMAGE, PASSENGER, BAGGAGE,
CARGO AND MAIL AND AIRLINE GENERAL THIRD PARTY (INCLUDING
PRODUCTS) LEGAL LIABILITY for a combined single limit
(bodily injury/property damage) of an amount not less than
the Minimum Liability Coverage for the time being for any
one occurrence (but in respect of products and personal
injury liability, this limit may be an aggregate limit for
any and all losses occurring during the currency of the
policy). War and Allied Risks are also to be covered under
the policy to the fullest extent available from the leading
international insurance markets;
1.14 Terms of Hull and Spares Insurance
All required hull and spares insurance, so far as it relates to
the Aircraft, will:
(a) ADDITIONAL ASSUREDS: name Lessor and Owner and their
respective successors and assigns as additional assureds
for their respective rights and interests;
<PAGE>
(b) SETTLEMENT OF LOSSES: provide that any loss will be
settled jointly with Owner and Lessee, and will be payable
in Dollars to Owner, for the account of all interests,
except where the loss does not exceed the Damage
Notification Threshold, and Lessor has not notified the
insurers to the contrary, in which case the loss will be
settled with and paid to Lessee;
(c) 50/50 PROVISION: if separate Hull "all risks" and "war
risks" insurances are arranged, include a 50/50 provision
in accordance with market practice (AVS. 103 is the current
market language);
(d) NO OPTION TO REPLACE: confirm that the insurers are not
entitled to replace the Aircraft in the event of an insured
Event of Loss; and
(e) NO DISCHARGE BY BROKER: confirm that the insurers will not
obtain a valid discharge of the obligations under the
Insurances by payment to the broker, notwithstanding market
practice to the contrary;
1.15 TERMS OF LIABILITY INSURANCE
All required liability insurances will:
(a) ADDITIONAL ASSUREDS: include Lessor and each of the other
Indemnitees, and their respective successors and assigns
and their respective shareholders, subsidiaries, directors,
officers, agents, employees and indemnitees, as additional
insureds for their respective rights and interests,
warranted, each as to itself only, no operational interest;
(b) SEVERABILITY: include a severability of interests clause
which provides that the insurance, except for the limit of
liability, will operate to give each assured the same
protection as if there was a separate policy issued to each
assured; and
(c) PRIMARY POLICY: contain a provision confirming that the
policy is primary without right of contribution and the
liability of the insurers will not be affected by any other
insurance of which Lessor , Owner or Lessee have the
benefit so as to reduce the amount payable to the
additional insureds under such policies;
<PAGE>
1.16 TERMS OF ALL INSURANCES
All Insurances will:
(a) PRUDENT INDUSTRY PRACTICE: be in accordance with prudent
industry practice of persons operating similar aircraft in
similar circumstances;
(b) DOLLARS: provide cover denominated in Dollars and any
other currencies which Lessor may reasonably require in
relation to liability insurance;
(c) WORLDWIDE: operate on a worldwide basis subject to such
limitations and exclusions as Lessor may agree;
(d) ACKNOWLEDGMENT: acknowledge the insurer is aware (and has
seen a copy) of this Agreement and that the Aircraft is
owned by Owner;
(e) BREACH OF WARRANTY: provide that, in relation to the
interests of each of the additional assureds, the
Insurances will not be invalidated by any act or omission
by Lessee, or any other person other than the respective
additional assureds seeking protection and shall insure the
interests of each of the additional assureds regardless of
any breach or violation by Lessee, or any other person
other than the respective additional assured seeking
protection of any warranty, declaration or condition,
contained in such Insurances;
(f) SUBROGATION: provide that the insurers will hold harmless
and waive any rights of recourse against the additional
assureds or to be subrogated to any rights of Lessor or
Lessee;
(g) PREMIUMS: provide that the additional assureds will have
no obligation or responsibility for the payment of any
premiums due (but reserve the right to pay the same should
any of them elect so to do) and that the insurers will not
exercise any right of set-off or counter-claim in respect
of any premium due against the respective interests of the
additional assureds other than outstanding premiums
relating to the Aircraft, any Engine or Part the subject of
the relevant claim;
<PAGE>
(h) CANCELLATION/CHANGE: provide that the Insurances will
continue unaltered for the benefit of the additional
assureds for at least 30 days after written notice by
registered mail or telex of any cancellation, change, event
of non-payment of premium or installment thereof has been
sent to Lessor, except in the case of war risks for which 7
days (or such lesser period as is or may be customarily
available in respect of war risks or allied perils) will be
given, or in the case of war between the 5 great powers or
nuclear peril for which termination is automatic;
(i) REINSURANCE: if reinsurance is a requirement of this
Agreement such reinsurance will:
(aa) be on the same terms as the original insurances and
will include the provisions of this Schedule;
(bb) provide that notwithstanding any bankruptcy,
insolvency, liquidation, dissolution or similar
proceedings of or affecting the reinsured that the
reinsurers' liability will be to make such payments as
would have fallen due under the relevant policy of
reinsurance if the reinsured had (immediately before
such bankruptcy, insolvency, liquidation, dissolution
or similar proceedings) discharged its obligations in
full under the original insurance policies in respect
of which the then relevant policy of reinsurance has
been effected; and
(cc) contain a "cut-through" clause in the following form
(or otherwise satisfactory to Lessor): "The Reinsurers
and the Reinsured hereby mutually agree that in the
event of any claim arising under the reinsurances in
respect of a total loss or other claim where as
provided by this Agreement dated as of January 5, 1999
and made between AeroUSA, Inc. and Vanguard Airlines,
Inc. such claim is to be paid to the person named as
sole loss payee under the primary insurances, the
Reinsurers will in lieu of payment to the Reinsured,
its successors in interest and assigns pay to the
person named as sole loss payee under the primary
insurances effected by the Reinsured that portion of
any loss due for which the Reinsurers would otherwise
be liable to pay the Reinsured (subject to proof of
loss), it being understood and agreed that any such
payment by the Reinsurers will (to the extent of such
payment) fully discharge and release the Reinsurers
from any and all further liability in connection
therewith"; subject to such provisions not
contravening any Law of the State of Incorporation;
<PAGE>
(j) INDEMNITIES: accept and insure the indemnity provisions of
this Agreement, to the extent of the risks covered by the
policies.
1.17 DEDUCTIBLES
Lessee shall be responsible for any and all deductibles under
the Insurances.
1.18 APPLICATION OF INSURANCE PROCEEDS
The Insurances will be endorsed to provide for payment of
proceeds as follows:
(a) EVENT OF LOSS: all insurance payments received as the
result of an Event of Loss occurring during the Term will
be paid to Owner and Lessor will pay the balance of those
amounts to Lessee after deduction of all amounts which may
be or become payable by Lessee to Lessor under this
Agreement and the Other Agreements (including under Clause
11.1(b));
(b) EXCEEDING DAMAGE NOTIFICATION THRESHOLD: all insurance
proceeds of any property, damage or loss to the Aircraft,
any Engine or any Part occurring during the Term not
constituting an Event of Loss and in excess of the Damage
Notification Threshold will be paid to Owner and applied in
payment (or to reimburse Lessee) for repairs or replacement
property upon Lessor being satisfied that the repairs or
replacement have been effected in accordance with this
Agreement. Any balance remaining may be retained by Owner;
(c) BELOW DAMAGE NOTIFICATION THRESHOLD: insurance proceeds in
amounts below the Damage Notification Threshold may be paid
by the insurer directly to Lessee; and
(d) DEFAULT: notwithstanding the foregoing paragraphs, if at
the time of the payment of any such insurance proceeds a
Default has occurred and is continuing, all such proceeds
will be paid to or retained by Owner to be applied toward
payment of any amounts which may be or become payable by
Lessee in such order as Lessor may elect.
To the extent that insurance proceeds are paid to Lessee, Lessee
agrees to comply with the foregoing provisions and apply or pay
over such proceeds as so required.
<PAGE>
SCHEDULE 8
FORM OF LEGAL OPINION
To: AeroUSA, Inc.
Lee Farm Corporate Park
83 Wooster Heights Road
Danbury, CT 06810
GE Capital Aviation Services, Inc.
201 High Ridge Road
Stamford, CT 06927-4900
Attn: Senior Vice President-Marketing
[Date]
Dear Sirs,
1. You have asked us to render an opinion in connection with
the transaction governed by or subject to, inter alia, the
under mentioned documents.
1.1 the Agreement as defined in subparagraph 1.3;
1.2 the Articles of Incorporation and Bylaws of Lessee; and
1.3 all other documents, approvals and consents of whatever
nature and wherever kept which it was, in our judgment and
to our knowledge, necessary or appropriate to examine to
enable us to give the opinion expressed below.
Words and expressions used and not otherwise defined herein
will bear the same meanings as defined in an Aircraft Lease
Agreement dated as of January 5, 1999 between AeroUSA, Inc.
("Lessor") and Vanguard Airlines, Inc. ("Lessee") in
respect of one Boeing 737-200A aircraft with manufacturer's
serial number 22979 together with the two installed Pratt &
Whitney JT8D-15 engines (the "Aircraft"). As used herein
the term "Agreement" means and includes the Aircraft Lease
Agreement as defined in the Aircraft Lease Agreement.
2. Having considered the documents listed in paragraph 1
above, and having regard to the relevant laws of the State
of New York and the United States of America we are pleased
to advise that in our opinion:
<PAGE>
(a) Lessee is a corporation duly organized and validly existing
under the laws of [ ], is qualified to do business as a
foreign corporation in each jurisdiction where failure to
so qualify would have a materially adverse effect on
Lessee's business or its ability to perform its obligations
under the Agreement, and is subject to suit in its own
name, and, to the best of our knowledge, no steps have
been, or are being, taken to appoint a receiver,
liquidator, trustee or similar officer over, or to wind up,
Lessee;
(b) Lessee has the corporate power to enter into and perform,
and has taken all necessary corporate action to authorize
the entry into, execution, delivery and performance by it
of, the Agreement and the transactions contemplated by the
Agreement;
(c) the entry into and performance by Lessee of, and the
transactions contemplated by, the Agreement do not and will
not:
(i) conflict with any laws binding on Lessee; or
(ii) conflict with the Certificate of Incorporation or
Bylaws of Lessee; or
(iii) conflict with or result in default under any
agreement or instrument which is binding upon Lessee
or any of its assets or result in the creation of any
Security Interest over any of its assets;
(d) no authorizations, consents, licenses, approvals and
registrations (other than those which have been obtained
and of which copies are attached hereto) are necessary or
desirable to be obtained from any governmental or other
regulatory authorities in [Missouri] having jurisdiction
over Lessee or its properties to enable Lessee:
(i) to enter into and perform the transactions
contemplated by the Agreement;
(ii) to import the Aircraft into the United States for the
duration of the Term;
(iii) to operate the Aircraft to, from or within in the
United States for the transport of fare-paying
passengers; or
<PAGE>
(iv) to make the payments provided for in the Agreement;
(e) except for the filing and recordation of the Agreement with
the FAA and the filing of the Financial Statements with [
] (which filings have been duly made on or before
this date) it is not necessary or desirable, to ensure the
priority, validity and enforceability of all the
obligations of Lessee under the Agreement that the
Agreement be filed, registered, recorded or notarized in
any public office or elsewhere or that any other instrument
relating thereto be signed, delivered, filed, registered or
recorded, that any tax or duty be paid or that any other
action whatsoever be taken;
(f) the interests of Lessor in the Aircraft are registered on
the public register of aircraft of the Air Authority and no
other steps are necessary or desirable to record or perfect
Lessor's interest in the Aircraft in the United States or
[];
(g) on termination of the Agreement (whether on expiry or
otherwise) as contemplated in the Agreement, Lessor would
be entitled:
(v) to repossess the Aircraft;
(vi) to deregister the Aircraft from the register of the
Air Authority;
(vii) to export the Aircraft from [ ];
without requiring any further consents, approvals or
licenses from any governmental or regulatory authority in
the United States or [ ];
(h) the Agreement has been properly signed and delivered on
behalf of Lessee and the obligations on the part of Lessee
contained therein are valid and legally binding on and
enforceable against Lessee under the laws of New York;
(i) the events described in Schedule 9 paragraphs (g), (h) and
(i) of the Agreement comprise an accurate and complete
statement of all events and situations provided for by the
laws of [] which may lead to the cessation of activities,
winding up or dissolution of Lessee;
<PAGE>
(j) Lessee is a Certificated Air Carrier;
(k) Lessee is a "citizen of the United States" as defined in
Section 40102 of Title 49 of the United States Code;
(l) Lessor is entitled, with respect to the Aircraft and the
Agreement, to the benefits of a lessor under Section 1110
of Title 11 of the United States Code;
(m) Lessee's chief executive office (as defined in the Uniform
Commercial in effect in Kansas) is located at 7000 Squibb
Road, 3rd Floor, Mission, Kansas 66202;
(n) the obligations of Lessee under the Agreement rank at least
pari passu with all other present and future unsecured and
unsubordinated (including contingent obligations) of
Lessee;
(o) there is no withholding tax or other Tax to be deducted
from any payment whatsoever which may be made by Lessee
pursuant to the Agreement; with respect to any
withholdings, the provisions of Clauses 5.6, and Schedule
11 of the Agreement are fully effective; and the
arrangements contemplated by the Agreement do not give rise
to any charge whatsoever to Taxes in [];
(p) there is no applicable usury or interest limitation law in
[] which may restrict the recovery of payments in
accordance with the Agreement;
(q) there are no registration, stamp or other taxes or duties
of any kind payable in [] in connection with the signature,
performance or enforcement by legal proceedings of the
Agreement;
(r) Lessor will not violate any law or regulation in [] nor
become liable to tax in [] by reason of entering into the
Agreement with Lessee, or performing its obligations
thereunder;
(s) it is not necessary to establish a place of business in []
in order to enforce any provisions of the Agreement;
(t) the choice of the Governing Law to govern the Agreement
will be upheld as a valid choice of law in any action in
the courts of [];
(u) the consent to the jurisdiction by Lessee contained in the
Agreement is valid and binding on Lessee and not subject to
revocation;
<PAGE>
(v) any judgment for a definite sum given by the courts of [
] against Lessee would be recognized and accepted by
the courts of [] without re-trial or examination of the
merits of the case;
(w) Lessee is subject to civil commercial law with respect
to its obligations under the Agreement; and
(ii) neither Lessee nor any of its assets is entitled to
any right of immunity and the entry into and
performance of the Agreement by Lessee constitute
private and commercial acts; and
(x) there are no laws or other rules in [ ] (including,
without limitation, emergency powers laws) pursuant to
which Lessee may be deprived of the Aircraft by any
Government Entity or any other person, other than Lessor or
any assignee of Lessor.
Yours faithfully,
<PAGE>
SCHEDULE 9
EVENTS OF DEFAULT
Each of the following events or conditions constitutes an Event
of Default:
(a) NON-PAYMENt: Lessee fails to make any payment under this
Agreement on the due date; or
(b) INSURANCE: Lessee fails to comply with any provision of
Clause 9 or Schedule 7, or any insurance required to be
maintained under this Agreement is cancelled or terminated,
or a notice of cancellation is given in respect of any such
insurance; or
(c) BREACH: Lessee fails to comply with any other provision of
this Agreement and, if such failure is in the opinion of
Lessor capable of remedy, the failure continues for 10 days
after notice from Lessor to Lessee; or
(d) REPRESENTATION: any representation or warranty made (or
deemed to be repeated) by Lessee in or pursuant to this
Agreement or in any document or certificate or statement is
or proves to have been incorrect in any material respect
when made or deemed to be repeated; or
(e) Cross-Default:
(i) any Financial Indebtedness of Lessee or any Lessee
Affiliate in excess of $250,000 is not paid when due;
or
(ii) any such Financial Indebtedness in excess of $250,000
becomes due or capable of being declared due prior to
the date when it would otherwise have become due; or
(iii) the security for any such Financial Indebtedness
becomes enforceable; or
(iv) any event of default or termination event, howsoever
described, occurs under any Other Agreement or any
lease, hire purchase, conditional sale or credit sale
agreement of Lessee or any Lessee Affiliate; or
<PAGE>
(f) APPROVALS: any consent, authorization, license,
certificate or approval of or registration with or
declaration to any Government Entity in connection with
this Agreement, including, without limitation:
(i) any authorization required by Lessee to authorize, or
in connection with, the execution, delivery, validity,
enforceability or admissibility in evidence of this
Agreement or the performance by Lessee of its
obligations under this Agreement; or
(ii) the registration of the Aircraft or the Aircraft's
certificate of airworthiness; or
(iii) any airline license or air transport license
required of Lessee including, without limitation,
authority to operate the Aircraft under FAR Part 121
and a Certificate of Public Convenience and Necessity
issued under Section 4102 of Title 49 of the United
States Code;
is modified in a manner unacceptable to Lessor or is
withheld, or is revoked, suspended, canceled, withdrawn,
terminated or not renewed, or otherwise ceases to be in
full force; or
(g) INSOLVENCY:
(i) Lessee or any Lessee Affiliate is, or is deemed for
the purposes of any relevant law to be, unable to pay
its debts as they fall due or to be insolvent, or
admits inability to pay its debts as they fall due; or
(ii) Lessee or any Lessee Affiliate suspends making
payments on all or any class of its debts or announces
an intention to do so, or a moratorium is declared in
respect of any of its indebtedness; or
(h) BANKRUPTCY, ETC.:
(i) Lessee or any Lessee Affiliate consents to the
appointment of a custodian, receiver, trustee or
liquidator of itself or all or any material part of
Lessee's property or Lessee's consolidated property,
or Lessee or any Lessee Affiliate admits in writing
its inability to, or is unable to, or does not, pay
its debts generally as they come due, or makes a
general assignment for the benefit of creditors, or
Lessee or any Lessee Affiliate files a voluntary
petition in bankruptcy or a voluntary petition seeking
reorganization in a proceeding under any bankruptcy or
insolvency Laws (as now or hereafter in effect) or any
answer admitting the material allegations of a
petition filed against Lessee or any Lessee Affiliate
in any such proceeding, or Lessee or any Lessee
Affiliate by voluntary petition, answer or consent
seeks relief under the provisions of any other
bankruptcy, insolvency or other similar Law providing
for the reorganization or winding-up of corporations,
or provides for an agreement, composition, extension
or adjustment with its creditors, or any corporate
action (including, without limitation, any board of
directors or shareholder action) is taken by Lessee or
any Lessee Affiliate in furtherance of any of the
foregoing, whether or not the same is fully effected
or accomplished; or
<PAGE>
(ii) an order, judgment or decree is entered by any court
appointing, without the consent of Lessee or any
Lessee Affiliate, a custodian, receiver, trustee or
liquidator of Lessee or any Lessee Affiliate, or of
all or any material part of Lessee's property or
Lessee's consolidated property is sequestered, and any
such order, judgment or decree of appointment or
sequestration remains in effect, undismissed, unstayed
or unvacated for a period of 30 days after the date of
entry thereof of at any time an order for relief is
granted; or
(iii) an involuntary petition against Lessee or any
Lessee Affiliate in a proceeding under the United
States Federal Bankruptcy Laws or other insolvency
Laws (as now or hereafter in effect) is filed and is
not withdrawn or dismissed within 30 days thereafter
or at any time an order for relief is granted in such
proceeding, or if, under the provisions of any Law
providing for reorganization or winding-up of
corporations which may apply to Lessee or any Lessee
Affiliate, any court of competent jurisdiction
assumes jurisdiction over, or custody or control of,
Lessee or any Lessee Affiliate or of all or any
material part of Lessee's property, or Lessee's
consolidated property and such jurisdiction, custody
or control remains in effect, unrelinquished, unstayed
or unterminated for a period of 30 days or at any time
an order for relief is granted in such proceeding; or
<PAGE>
(i) OTHER JURISDICTION: there occurs in relation to Lessee or
any Lessee Affiliate any event anywhere which, in the
reasonable opinion of Lessor, corresponds with any of those
mentioned in paragraphs (g) or (h) above; or
(j) UNLAWFUL: it is or becomes unlawful for Lessee to perform
any of its obligations under this Agreement, or this
Agreement is or becomes wholly or partly invalid or
unenforceable; or
(k) SUSPENSION OF BUSINESS: Lessee or any Lessee Affiliate
suspends or ceases or threatens to suspend or cease to
carry on all or a substantial part of its business; or
(l) DISPOSAL: Lessee or any Lessee Affiliate disposes, conveys
or transfers or threatens to dispose, convey or transfer of
all or a material part of its assets, liquidates or
dissolves or consolidates or merges with any other Person
(whether by one or a series of transactions, related or
not), other than for the purpose of a reorganization the
terms of which have received the prior written approval of
Lessor; or
(m) RIGHTS AND REMEDIES: Lessee or any other Person claiming
by or through Lessee challenges the existence, validity,
enforceability or priority of the rights of Lessor as owner
or as lessor or of Owner as owner in respect of the
Aircraft; or
(n) CHANGE OF CONTROL: any single person, or group of persons
acquire control of Lessee without the previous consent in
writing of Lessor not unreasonably withheld; or
(o) DELIVERY: Lessee fails to comply with its obligation under
Clause 4 to accept delivery of the Aircraft; or
(p) LETTER OF CREDIT:
(i) the issuer of the Letter of Credit fails to make any
payment under the Letter of Credit when due; or
(ii) the Letter of Credit is not in full force or, for any
reason ceases to constitute the legal, valid and
binding obligation of the issuer; or
(iii) any of the events listed in paragraph (f)(i)
above, with respect to the performance by the issuer
of its obligations under the Letter of Credit, or
paragraphs (g), (h) or (i) above apply to the issuer
(references in those sub-paragraphs to Lessee being
deemed to be to the issuer); or the issuer ceases or
suspends its business operations; or
<PAGE>
(iv) where applicable, the Letter of Credit is not renewed
within the time required by Clause 5.12;
and each reference in this paragraph (p) to "the issuer"
shall include a reference to any confirming bank for the
Letter of Credit; or
(q) OWNERSHIP, LIENS AND RELATED MATTERS: Lessee fails to
timely comply with its obligations under Clause 8.6; or
(r) TRANSFER: Lessee makes or permits any assignment or
transfer of this Agreement, or any interest herein, or of
the right to possession of the Aircraft, the Airframe, or
any Engine except as expressly permitted by this Agreement;
or
(s) REDELIVERY: Lessee fails to return the Aircraft to Lessor
on the Expiry Date in accordance with Clause 12; or
(t) LITIGATION: a judgment of a court or tribunal for the
payment of money not covered by insurance in excess of
US$500,000 shall be rendered against Lessee and the same
shall remain undischarged for a period of 90 days, unless
during such period execution of such judgment shall have
been effectively stayed by agreement of the parties
involved or by court order or such judgment shall have been
adequately bonded.
<PAGE>
SCHEDULE 10
INTENTIONALLY OMITTED FROM THE VERSION OF THIS DOCUMENT FILED
WITH THE FAA AS CONTAINING CONFIDENTIAL AND PROPRIETARY
INFORMATION
<PAGE>
SCHEDULE 11
TAX INDEMNITY
1. TAX INDEMNITY:
(a) GENERAL:
(i) Lessee will on demand pay and indemnify each Tax
Indemnitee against all Taxes (other than Lessor Taxes)
levied or imposed against or upon or payable by such
Tax Indemnitee or Lessee and arising from, with
respect to or in connection with the transactions
pursuant to the Operative Documents, including (but
not limited to) all Taxes relating or attributable to
Lessee, any Operative Document or the Aircraft
directly or indirectly in connection with the
importation, exportation, registration, ownership,
leasing, sub-leasing, purchase, delivery, possession,
use, operation, repair, maintenance, overhaul,
transportation, landing, storage, presence or
redelivery of the Aircraft or any part thereof or any
rent, receipts, insurance proceeds, income,
indemnification payment or other amounts arising
therefrom, or the making of any Equipment Change or
the permanent replacement of any Engine.
(ii) All Taxes indemnified pursuant to this Clause 1 shall
be paid by Lessee directly to the appropriate taxing
authority (to the extent permitted by applicable Law)
at or before the time prescribed by applicable Law.
After any payment by Lessee of any Tax directly to a
taxing authority, Lessee shall furnish to Lessor, on
written request, a certified copy of a receipt for
Lessee's payment of such Tax or such other evidence of
payment of such Tax as is reasonably obtainable by
Lessee and reasonably acceptable to Lessor.
(iii) Any amount payable by Lessee to an Tax Indemnitee
pursuant to Clause 1 shall be paid within ten days
after receipt of a written demand therefor from the
relevant Tax Indemnitee accompanied by a written
statement describing in reasonable detail the basis
for such indemnity and the computation of the amount
so payable and copies of all notices, invoices,
assessments and correspondence relating to such
<PAGE>
indemnified Tax, provided that if an amount of any
indemnified Tax is being contested in accordance with
Clause 7 and Lessee shall have duly performed (and
shall continue to perform) all its obligations under
Clause 1 with respect to such contest, then payment of
the indemnity with respect to such Tax under Clause 1
shall , at Lessee's election, be deferred until the
date the contest has been completed.
(b) If any payment is made by Lessee under Clause 1(a) of
Schedule 11 and the Tax Indemnitee receiving such payment
in good faith determines that it has actually received a
credit or deduction against, or relief or remission for, or
payment of, any Tax paid or payable by the Tax Indemnitee
in respect of or calculated with reference to the Tax
giving rise to such payment, the Tax Indemnitee shall, to
the extent that it can do so without prejudice to the
retention of the amount of such credit, deduction, relief,
remission or repayment and without leaving the Tax
Indemnitee in any worse position than that in which it
would have been had such payment of Tax not been required
to be made, pay to Lessee such amount as the Tax Indemnitee
shall in good faith have determined to be attributable to
the relevant Tax.
2. Sales and Use Taxes:
(a) Lessee shall pay to Lessor (or, if permitted by applicable
Law and at Lessee's option, Lessee shall pay to the
relevant tax authority for the account of Lessor), in
addition to the amounts specified as "Rent" in Schedule 10:
(i) all sales, use, rental, value added, goods and
services and similar taxes ("Sales Taxes") required to
be paid to the tax authority of the jurisdiction in
which the Delivery Location is situated or to the
jurisdiction in which the Aircraft is habitually based
with respect to the lease of the Aircraft to Lessee
pursuant to the Operative Documents unless Lessee
delivers to Lessor on or prior to the Delivery Date
such exemption certificate or other document as may be
required by applicable Law to evidence Lessee's
entitlement to exemption from all Sales Taxes imposed
by such jurisdiction with respect to the lease of the
Aircraft pursuant to the Operative Documents; and
<PAGE>
(ii) all Sales Taxes required to be paid to the tax
authority of any jurisdiction in which the Aircraft
may be used, operated or otherwise located from time
to time unless Lessee delivers to Lessor such
exemption certificates or other documents as may be
required by applicable Law to evidence Lessee's
entitlement to exemption from all Sales Taxes imposed
by each such jurisdiction with respect to the lease of
the Aircraft pursuant to the Operative Documents.
(b) Lessee will cooperate with Lessor in connection with the
preparation and filing of any exemption application or
similar document that is reasonably necessary or desirable
under applicable Law to avoid the imposition of any Sales
Taxes with respect to the transactions contemplated by the
Operative Documents.
(c) The specific obligations with respect to sales and use
taxes set forth in this Clause 2 are in addition to, and
are not in substitution for, the Lessee's obligation to
indemnify for sales and use taxes pursuant to Clause 1.
3. Value Added Tax:
(a) For the purposes of this Clause 3:
(i) "VAT" means value added tax and any goods and
services, sales or turnover tax, imposition or levy of
a like nature (other than Lessor Taxes);
(ii) "supply" includes anything on or in respect of which
VAT is chargeable.
(b) Lessee will pay to Lessor or the relevant taxing authority,
as the case may be, the amount of any VAT chargeable in
respect of any supply for VAT purposes under any of the
Operative Documents.
(c) Each amount stated as payable by Lessee under any of the
Operative Documents is exclusive of VAT (if any); if VAT is
payable in respect of any amount as aforesaid, Lessee shall
pay all such VAT and indemnify Lessor against any claims
for the same (and where appropriate, Lessee shall increase
the payments which would otherwise be required to be made
hereunder so that Lessor is left in the same position as
Lessor would have been in had no VAT been payable) and
Lessee shall provide evidence to Lessor, if available, in
respect of payment of any such VAT.
<PAGE>
4. Information:
(a) If Lessee is required by any applicable Law, or by any
third party, to deliver any report or return in connection
with any Taxes for which Lessee would be obligated to
indemnify Lessor or any Indemnitee under the Operative
Documents, Lessee will complete the same and, on request,
supply a copy of the report or return to Lessor.
(b) If any report, return or statement is required to be made
by Lessor or any Indemnitee with respect to any Tax for
which there is an indemnity obligation of Lessee under this
Schedule 11 or otherwise under the Operative Documents,
Lessee will promptly notify Lessor of the requirement and:
(i) if permitted by applicable Law, make and timely file
such report, return or statement (except for any
report, return or statement that Lessor has notified
Lessee that Lessor or any Indemnitee intends to
prepare and file), prepare such return in such manner
as will show Lessor as lessor of the Aircraft and the
ownership of the Aircraft in Lessor if required or
appropriate, and provide Lessor upon request a copy of
each such report, return or statement filed by Lessee,
or
(ii) if Lessee is not permitted by applicable Law to file
any such report, return or statement, Lessee will
prepare and deliver to Lessor a proposed form of such
report, return or statement within a reasonable time
prior to the time such report, return or statement is
to be filed.
Lessee will provide such information and documents as
Lessor may reasonably request to enable Lessor to comply
with its tax filing, audit and litigation obligations.
5. Indemnity Payments to be Made on an After-Tax Basis:
Lessee agrees that, with respect to any payment or indemnity
pursuant to Clause 1 (Tax Indemnity), Clause 2 (Sales and Use
Taxes), or Clause 3 (Value Added Tax) of this Schedule 11 or
Clause 10 (Indemnity) of the Agreement to or for the benefit of
any Indemnitee, Lessee's indemnity obligations shall include
such amount as may be necessary to hold such Tax Indemnitee
<PAGE>
harmless on an After-Tax Basis from all Taxes required to be
paid by such Tax Indemnitee with respect to such payment or
indemnity (including any payments pursuant to this Clause 5,
determined based on the assumption that at the time each such
payment or indemnity is accrued by the relevant Indemnitee, such
payment or indemnity will be subject to (i) United States
Federal income tax at the highest marginal statutory tax rate
applicable to corporations, (ii) United States state and local
income taxes at the composite of the highest marginal statutory
tax rates applicable to the Tax Indemnitee and (iii) income
taxes (if any) imposed by countries outside the United States at
the actual rates imposed on the relevant Indemnitee.
6. Late Payment Interest:
If Lessee fails to pay any amount payable under this Agreement
on the due date, Lessee will pay on demand from time to time to
Lessor interest (both before and after judgment) on that amount,
from the due date to the date of payment in full by Lessee to
Lessor, at the Interest Rate; provided, however, that in no
event shall such rate exceed the maximum permitted by Law. All
such interest will be compounded monthly and calculated on the
basis of the actual number of days elapsed in the month assuming
a 30 day month and a 360 day year.
7. Contest:
(a) If Lessor receives a written claim for any Tax for which
Lessee would be required to pay an indemnity pursuant to
Clause 1, Clause 2 or Clause 3 of this Schedule 11, Lessor
shall notify Lessee promptly of such claim, provided that
any failure to provide such notice will not relieve Lessee
of any indemnification obligation pursuant to Clause 1,
Clause 2 or Clause 3 except to the extent that Lessee's
ability to defend such claim has been materially adversely
affected by such failure. If requested by Lessee in
writing promptly after receipt of Lessor's notice, Lessor
shall, upon receipt of indemnity satisfactory to it and at
the expense of Lessee (including, without limitation, all
costs, expenses, legal and accountants' fees and
disbursements, and penalties, interest and additions to tax
incurred in contesting such claim) in good faith contest or
(if permitted by applicable Law) permit Lessee to contest
such claim by (i) resisting payment thereof if practicable
and appropriate, (ii) not paying the same except under
protest if protest is necessary and proper, or (iii) if
payment is made, using reasonable efforts to obtain a
refund of such Taxes in appropriate administrative and
<PAGE>
judicial proceedings. Lessor shall determine the method of
any contest conducted by Lessor and (in good faith
consultation with Lessee) control the conduct thereof.
Lessee shall determine the method of any contest conducted
by Lessee and (in good faith consultation with Lessor)
control the conduct thereof. Lessee shall pay in full all
payments of Rent and other amounts payable pursuant to the
Operative Documents, without reduction for or on account of
any Tax, while such contest is continuing. Lessor shall
not be required to contest, or to continue to contest, a
claim for Taxes under this Clause 7 if (x) such contest
would result in a risk of criminal penalties or of a sale,
forfeiture or loss of, or the imposition of a Lien (other
than a Permitted Lien) on (except to the extent covered by
a bond reasonably acceptable to Lessor), or (y) Lessee
shall not have furnished an opinion of independent tax
counsel selected by Lessor and reasonably satisfactory to
Lessee, that a reasonable basis exists for such contest, or
(z) a Default or an Event of Default shall be continuing
(unless Lessee shall have provided security reasonably
satisfactory to Lessor securing Lessee's performance of its
obligations under this Schedule 11). If Lessor contests
any claim for Taxes by making a payment and seeking a
refund thereof, then Lessee shall advance to Lessor, on an
interest-free basis, an amount equal to the Taxes to be
paid by Lessor in connection with the contest and shall
indemnify Lessor on an After-Tax Basis for any adverse tax
consequences to Lessor of such interest-free advance. Upon
the final determination of any contest pursuant to this
Clause 7 in respect of any Taxes for which Lessee shall
have made an advance to Lessor in accordance with the
immediately preceding sentence, the amount of Lessee's
obligation shall be determined as if such advance had not
been made; any indemnity obligation of Lessee to Lessor
under this Schedule 11 and Lessor's obligation to repay the
advance will be satisfied first by setoff against each
other, and any difference owing by either party shall be
paid within ten days after such final determination.
(b) If Lessor obtains a refund of all or any part of any Taxes
for which a full indemnity was paid by Lessee, Lessor shall
pay Lessee the amount of such refund, reduced by any Taxes
imposed on Lessor on receipt or accrual of such refund and
increased by any Taxes saved by Lessor by reason of the
deductibility of such payment by Lessor. If, in addition
to such refund, Lessor receives an amount of interest on
such refund, Lessor shall pay to Lessee the portion of such
interest which is fairly attributable to such refund,
<PAGE>
reduced by any Taxes imposed by Lessor on receipt or
accrual of such interest and increased by any Taxes saved
by reason of the deductibility of such payment by Lessor.
Lessor shall not be required to make any payment to Lessee
pursuant to this Clause 7 if, and for so long as, an Event
of Default shall have occurred and be continuing.
(c) Lessor in its sole discretion (by written notice to Lessee)
may waive its rights to indemnification pursuant to Clause
1 with respect to any claim for any Tax and may refrain
from contesting or continuing the contest of such claim, in
which event Lessee shall have no obligation to indemnify
Lessor for the Taxes that are the subject of such claim.
If Lessor agrees to a settlement of any contest conducted
pursuant to this Clause 7 without the prior written consent
of Lessee, which consent shall not be unreasonably
withheld, then Lessor shall be deemed to have waived its
rights to the indemnification provided for in Clause 7 with
respect to the Tax liability accepted in such settlement.
<PAGE>
SCHEDULE 12
FORM OF LEASE TERMINATION CERTIFICATE
The undersigned hereby certify that the Aircraft Lease Agreement
dated as of January 5, 1999 between the undersigned Lessor and
undersigned Lessee, and as further described in the Appendix
attached hereto, has terminated and the aircraft and aircraft
engines covered thereby are no longer subject to the terms
thereof. This certificate may be executed in one or more
counterparts each of which when taken together shall constitute
one and the same instrument.
DATED this __________ day of ____________________,
__________
LESSOR LESSEE
AEROUSA, INC. VANGUARD AIRLINES, INC.
By:__________________________ By:________________________
Title:________________________ Title:___________________
<PAGE>
APPENDIX
FAA RECORDING DATE FAA CONVEYANCE NO.
<PAGE>
SCHEDULE 13
LEASE SUPPLEMENT NO. 1
LEASE SUPPLEMENT NO. 1, dated ___________, ______, between
AeroUSA, Inc., a corporation organized under the laws of
______________ ("Lessor"), and Vanguard Airlines, Inc., a
corporation organized under the laws of the
____________________("Lessee").
Lessor and Lessee have previously entered into that certain
Aircraft Lease Agreement dated as of January 5, 1999 (herein
referred to as the "Agreement" and the defined terms therein
being hereinafter used with the same meaning). The Agreement
provides for the execution and delivery from time to time of a
Lease Supplement substantially in the form hereof for the
purpose of leasing the aircraft described below under the
Agreement as and when delivered by Lessor to Lessee in
accordance with the terms thereof.
The Agreement and this Lease Supplement relate to the Aircraft,
Engines and Parts as more precisely described below and in the
Certificate of Technical Acceptance. A counterpart of the
Agreement is attached hereto and this Lease Supplement and the
Agreement shall form one document.
In consideration of the premises and other good and sufficient
consideration, Lessor and Lessee hereby agree as follows:
1. Lessor hereby delivers and leases to Lessee under the
Agreement and Lessee hereby accepts, acknowledges receipt of
possession and leases from Lessor under the Agreement, that
certain Boeing 737-200A commercial jet Aircraft, and the two (2)
Pratt & Whitney JT8D-15 Engines (each of which Engines has 750
or more rated takeoff horsepower or the equivalent of such
horsepower) described in Schedule 1 hereto, together with the
Aircraft Documents described in the Agreement (the "Delivered
Aircraft").
2. The Delivery Date of the Delivered Aircraft is the date of
this Lease Supplement set forth in the opening paragraph hereof.
3. The Term for the Delivered Aircraft shall commence on the
Delivery Date and shall end on the Expiry Date.
4. The amount of Rent for the Delivered Aircraft is set forth
in Schedule 10 to the Agreement.
<PAGE>
5. Lessee hereby confirms to Lessor that (i) the Delivered
Aircraft and each delivered Engine have been duly marked in
accordance with the terms of Clause 8.6(d) of the Agreement,
(ii) the Aircraft is insured as required by the Agreement,
(iii) the representations and warranties of Lessee referred to
in Clause 2 of the Agreement are hereby repeated with effect as
of the date first above written, (iv) having inspected the
Delivered Aircraft, Lessee acknowledges that the Delivered
Aircraft satisfies all conditions required for Lessee's
acceptance of delivery as set forth in the Agreement, and (v)
the execution and delivery of this Lease Supplement signifies
absolute and irrevocable acceptance by Lessee of the Delivered
Aircraft for all purposes hereof and of the Agreement.
6. All of the terms and provisions of the Agreement are hereby
incorporated by reference in this Lease Supplement to the same
extent as if fully set forth herein.
7. This Lease Supplement may be executed in any number of
counterparts; each of such counterparts, shall for all purposes
be deemed to be an original; and all such counterparts shall
together constitute but one and the same Lease Supplement.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease
Supplement No. 1 to be duly executed as of the day and year
first above written.
LESSOR, LESSEE,
AEROUSA, INC. VANGUARD AIRLINES, INC.
By:_______________________ By:________________________
Name:_____________________ Name:_____________________
Title:_______________________ Title:_______________________
<PAGE>
SCHEDULE 1
TO
LEASE SUPPLEMENT NO. ___
ONE USED
BOEING 737-200A
1. Airframe
(a) Registration Mark: ______________________________
(b) Manufacturer's Serial No.: 22979
2. Installed Engines
(a) Model No.: JT8D-15
Serial Nos.: 708303 and 702951
Each of the above-described Aircraft Engines is 750 or more
rated takeoff horsepower or its equivalent.
<PAGE>
SCHEDULE 14
QUIET ENJOYMENT LETTER
From: __________ ("Owner")
To: Vanguard Airlines, Inc. ("Lessee")
Dated ________________,___
Ladies and Gentlemen:
AIRCRAFT LEASE AGREEMENT DATED AS OF JANUARY 5, 1999 BETWEEN
_______________ ("LESSOR") AND LESSEE (THE "LEASE") RELATING TO
ONE BOEING 737-200A AIRCRAFT BEARING MANUFACTURER'S SERIAL
NUMBER 22979 (THE "AIRCRAFT")
Capitalized words and expressions defined in the Lease, shall
unless the context otherwise requires, bear the same meanings
herein.
1. We confirm to you that we will not interfere with the quiet
possession and use of the Aircraft by Lessee throughout the
Term, so long as Lessor has not issued a termination notice
pursuant to Clause 13 of the Lease in respect of an Event
of Default.
2. The foregoing undertaking is not to be construed as
restricting our rights to dispose of the Aircraft to such
persons and on such terms as we consider appropriate.
However, if we exercise such rights during the Term, and
provided that the condition referred to in paragraph 1
above continues to be fulfilled at the time of such
disposal, we will (subject to any requirements or
restrictions imposed by applicable law) dispose of the
Aircraft expressly subject to the Lease and on terms that
require the purchaser to issue an undertaking to Lessee
that it will not interfere with the quiet possession and
use of the Aircraft by Lessee throughout the remaining
portion of the Term, so long as the condition referred to
in paragraph 1 above continues to be fulfilled.
3. The rights conferred by this letter are granted only to
Lessee and do not extend to any assignee, successor or
sub-lessee of Lessee.
<PAGE>
Please countersign this letter in order to confirm your
agreement to the arrangements contained herein.
Yours faithfully,
[OWNER]
____________________________
Agreed and accepted:
[LESSEE]
____________________________
<PAGE>
INDEX
CLAUSE PAGE
1. INTERPRETATION 1
1.1 Definitions 1
1.2 Construction 1
2. REPRESENTATIONS AND WARRANTIES 2
2.1 Lessee's Representations and Warranties 2
2.2 Repetition 2
2.3 Lessor's Representations and Warranties 2
3. CONDITIONS PRECEDENT 2
3.1 Lessee Conditions Precedent 2
3.2 Waiver 2
3.3 Lessor Conditions Precedent 2
3.4 Waiver 2
4. COMMENCEMENT 2
4.1 Leasing 2
4.2 Delivery 3
4.3 Delayed Delivery 3
4.4 Licenses 4
4.5 Inspection 4
4.6 Indemnity 5
5. PAYMENTS 5
5.1 Deposit 5
5.2 Rental Periods 5
5.3 Rent 5
5.4 Supplemental Rent 5
5.5 Payments 6
5.6 Withholding 6
5.7 Taxes and Other Outgoings 7
5.8 Tax Indemnity 7
5.9 Lessor Obligations Following Expiry Date 7
5.10 Net Lease 7
<PAGE>
5.11 Further Provisions regarding Deposit: 8
5.12 Letter of Credit: 9
5.13 Reserved 9
5.14 Late Payment Interest 9
5.15 Currency 10
5.16 Certificates 10
5.17 Appropriation 10
5.18 Set-off 10
5.19 Expenses 10
6. MANUFACTURER'S WARRANTIES 11
6.1 Assignment 11
6.2 Proceeds 11
6.3 Parts 12
6.4 Agreement 12
7. LESSOR'S COVENANTS 12
7.1 Quiet Enjoyment 12
7.2 Lessor Liens 12
7.3 Maintenance Contributions 12
7.4 Payment for Certain Components: 13
8. LESSEE'S COVENANTS 13
8.1 Duration 13
8.2 Information 13
8.3 Lawful and Safe Operation 14
8.4 Subleasing 15
8.5 Inspection 16
8.6 Ownership; Property Interests; Related Matters 16
8.7 General 17
8.8 Records 18
8.9 Protection 18
8.10 Maintenance and Repair 19
8.11 Removal/Interchange of Engines 19
8.12 Removal/Interchange of Parts 20
8.13 Pooling of Engines and Parts 21
<PAGE>
8.14 Equipment Changes 21
8.15 Title on an Equipment Change 21
9. INSURANCE 22
9.1 Insurances 22
9.2 Change 22
9.3 Insurance Undertakings and Information 22
9.4 Failure to Insure 23
9.5 Continuing Indemnity 23
10. INDEMNITY 23
10.1 General 23
10.2 Duration 24
10.3 Subrogation 24
11. EVENTS OF LOSS 25
11.1 Events of Loss 25
11.2 Requisition 26
12. RETURN OF AIRCRAFT 27
12.1 Return 27
12.2 Non-Compliance 27
12.3 Redelivery 28
12.4 Acknowledgment 28
13. DEFAULT 28
13.1 Events 28
13.2 Rights and Remedies 28
13.3 Power of Attorney 32
13.4 Mitigation Credit 32
14. ASSIGNMENT 33
14.1 Lessee 33
14.2 Assignment by Lessor 33
14.3 Transfer by Lessor 33
14.4 Conditions of Rights of Assignment and Transfer 33
15. ILLEGALITY 34
16. MISCELLANEOUS 35
16.1 Waivers, Remedies Cumulative 35
<PAGE>
16.2 Delegation 35
16.3 Severability 35
16.4 Remedy 35
16.5 Time of Essence 35
16.6 Notices 35
16.7 Governing Law and Jurisdiction 36
16.8 Sole and Entire Agreement 38
16.9 Indemnitees 38
16.10 Counterparts 38
16.11 Language 38
17. DISCLAIMERS AND WAIVERS 38
17.1 Exclusion 38
17.2 Waiver 40
17.3 Disclaimer Of Consequential Damages 40
17.4 Confirmation 40
18. BROKERS AND OTHER THIRD PARTIES. 40
18.1 No Brokers 40
18.2 Indemnity 40
19. SECTION 1110 40
20. USURY LAWS 41
21. MODIFICATION OR REVISION 1
SCHEDULE 1 DEFINITIONS 1
SCHEDULE 2 REPRESENTATIONS AND WARRANTIES 1
SCHEDULE 3 CONDITIONS PRECEDENT 1
SCHEDULE 4 PART 1 DESCRIPTION OF AIRCRAFT 1
PART 2 DELIVERY CONDITION REQUIREMENTS 2
SCHEDULE 5 CERTIFICATE OF TECHNICAL ACCEPTANCE 1
SCHEDULE 6 PROCEDURES AND OPERATING CONDITION AT
REDELIVERY 1
SCHEDULE 7 INSURANCE REQUIREMENTS 1
SCHEDULE 8 FORM OF LEGAL OPINION 1
SCHEDULE 9 EVENTS OF DEFAULT 1
SCHEDULE 10 CERTAIN FINANCIAL TERMS 1
<PAGE>
SCHEDULE 11 TAX INDEMNITY 1
SCHEDULE 12 FORM OF LEASE TERMINATION CERTIFICATE 1
SCHEDULE 13 LEASE SUPPLEMENT NO. 1 1
SCHEDULE 14 QUIET ENJOYMENT LETTER 1
<PAGE>
AIRCRAFT LEASE AGREEMENT
Dated as of January 5, 1999
between
AEROUSA, INC.
as Lessor
and
VANGUARD AIRLINES, INC.
as Lessee
IN RESPECT OF AIRCRAFT: One Boeing 737-200A
SERIAL NO: 22979
FAA REGISTRATION NO.:
NOTE: THIS AIRCRAFT LEASE AGREEMENT HAS BEEN EXECUTED IN
SEVERAL COUNTERPARTS OF WHICH THIS IS COUNTERPART NO. ____.
SEE CLAUSE 16.10 HEREOF FOR INFORMATION CONCERNING THE
DISTINCTION BETWEEN VARIOUS COUNTERPARTS.
<PAGE>
AIRCRAFT LEASE AGREEMENT
THIS AGREEMENT is made as of the 5th day of January, 1999
between:
(1) AeroUSA, Inc., a company organized under the laws of the
State of Connecticut with its principal place of business
at Lee Farm Corporate Park, 83 Wooster Heights Road,
Danbury, CT 06810 ("Lessor"); and
(2) Vanguard Airlines, Inc., a corporation organized under the
laws of the State of Delaware with its principal place of
business at 533 Mexico City Avenue, Kansas City, Missouri
64153 ("Lessee").
WHEREAS: Lessor wishes to lease to Lessee and Lessee is
willing to lease from Lessor the Aircraft on the terms of
this Agreement.
IT IS AGREED as follows:
1. INTERPRETATION
1.1 DEFINITIONS:
In this Agreement capitalized words and expressions have
the respective meanings set forth in Schedules 1 and 10.
1.2 CONSTRUCTION:
(a) In this Agreement, unless the contrary intention is stated,
a reference to:
(i) each of "Lessor" or "Lessee" or any other Person
includes, without prejudice to the provisions of this
Agreement restricting transfer or assignment, any
successor and any assignee;
(ii) words importing the plural shall include the singular
and vice versa;
(iii) any document shall include that document as
amended, novated, assigned or supplemented;
(iv) a Clause or a Schedule is a reference to a clause of
or a schedule to this Agreement;
<PAGE>
(v) any Law, or to any provision of any Law, is a
reference to such Law or provision as amended,
substituted or re-enacted; and
(b) headings are to be ignored in construing this Agreement.
2. REPRESENTATIONS AND WARRANTIES
2.1 LESSEE'S REPRESENTATIONS AND WARRANTIES: The
representations and warranties set forth in Clauses 1.1 and
1.2 of Schedule 2 are hereby made by Lessee to Lessor.
2.2 REPETITION: The representations and warranties in Clauses
1.1 and 1.2 of Schedule 2 will survive the execution of
this Agreement and will be deemed to be repeated by Lessee
on the Delivery Date with reference to the facts and
circumstances then existing. The representations and
warranties contained in Clause 1.1 of Schedule 2 will be
deemed to be repeated by Lessee on each Rent Date as if
made with reference to the facts and circumstances then
existing (and for this purpose, the representation and
warranty contained in Clause 1.1 (g) shall be construed by
reference to the accounts most recently provided prior to
such Rent Date).
2.3 LESSOR'S REPRESENTATIONS AND WARRANTIES: The
representations and warranties set forth in Clause 1.3 of
Schedule 2 are hereby made by Lessor to Lessee and will be
deemed to be repeated by Lessor on the Delivery Date with
reference to the facts and circumstances then existing.
3. CONDITIONS PRECEDENT
3.1 LESSEE CONDITIONS PRECEDENT: Lessor's obligation to
deliver and commence the leasing of the Aircraft under this
Agreement is subject to satisfaction of each of the Lessee
Conditions Precedent specified in Schedule 3.
3.2 WAIVER: Lessee Conditions Precedent are for the sole
benefit of Lessor and may be waived or deferred in whole or
in part and with or without conditions by Lessor. If any
of Lessee Conditions Precedent are not satisfied on the
Delivery Date and Lessor (in its absolute discretion)
nonetheless agrees to deliver the Aircraft to Lessee and to
commence the leasing of the Aircraft hereunder, Lessee will
ensure that such Lessee Conditions Precedent are fulfilled
within 15 days after the Delivery Date (unless waived or
<PAGE>
deferred in Lessor's absolute discretion), and Lessor may
treat as an Event of Default the failure of Lessee to do
so.
3.3 LESSOR CONDITIONS PRECEDENT: Lessee's obligation to accept
delivery and commence the leasing of the Aircraft under
this Agreement is subject to satisfaction of each of the
Lessor Conditions Precedent specified in Schedule 3.
3.4 WAIVER: Lessor Conditions Precedent are for the sole
benefit of Lessee and may be waived or deferred in whole or
part and with or without conditions by Lessee.
4. COMMENCEMENT
4.1 LEASING:
(a) On the Delivery Date, Lessor will lease the Aircraft to
Lessee and Lessee will take delivery of the Aircraft on
lease in accordance with this Agreement for the duration of
the Term. Subject to Clause 4.3, Lessor will deliver and
Lessee will accept the Aircraft on the Scheduled Delivery
Date or such other day as may be agreed in writing by the
parties at which time the leasing of the Aircraft pursuant
to the terms of this Agreement shall commence.
(b) If (i) Lessee is unwilling or unable to accept delivery of
the Aircraft on the Rent Commencement Date, or Lessee fails
to fulfill any Lessee Condition Precedent on or before such
date, and (ii) the Aircraft meets the Delivery Condition
Requirements, then Lessee's obligation to pay Rent
hereunder shall commence on the Rent Commencement Date
notwithstanding that Lessee has not accepted possession of
the Aircraft and the leasing of the Aircraft has not
commenced.
(c) After Delivery, the Aircraft, the Engines and every Part
will be in every respect at the sole risk of Lessee, who
will bear all risk of loss, theft, damage or destruction to
the Aircraft, any Engine or any Part from any cause
whatsoever.
4.2 DELIVERY: Subject to Clause 4.5, the Aircraft will be
delivered to and accepted by Lessee at the Delivery
Location or such other location as may be agreed in an "as
is, where is" condition. Lessee will accept delivery of the
Aircraft at the Delivery Location or such other location as
may be agreed subject to the Aircraft meeting the Delivery
<PAGE>
Condition Requirements. Without prejudice to Clauses 3.1,
4.1 and 4.5, Lessee will effect acceptance of the condition
of the Aircraft by execution and delivery to Lessor of the
Certificate of Technical Acceptance and possession of the
Aircraft shall pass from Lessor to Lessee upon execution
and delivery by Lessor of the Lease Supplement. Lessee's
acceptance of the Aircraft shall be regarded for all
purposes as absolute, unconditional and irrevocable;
provided , however, discrepancies specifically referred to
in the Certificate of Technical Acceptance shall be
corrected as agreed by Lessor and Lessee as set forth
therein.
4.3 DELAYED DELIVERY: If owing to:
(a) the existing lessee of the Aircraft delaying in the
delivery of, or failing to deliver, the Aircraft to Lessor
for any reason (other than because of any default of Lessor
in the performance of its obligations under an agreement
with that lessee unless the default arises from any act or
omission of Lessee) whether or not in circumstances
entitling that lessee to terminate that agreement;
(b) any Excusable Delay; or
(c) notification of any defect or non-conformity pursuant to
Clause 4.5;
Lessor delays in the delivery of, or fails to deliver, the
Aircraft under this Agreement, then in any such case:
(i) Lessor will not be responsible for any losses,
including loss of profit, costs or expenses arising
from or in connection with the delay or failure
suffered or incurred by Lessee;
(ii) subject to Clause 4.5, Lessee will not be entitled to
terminate this Agreement or to reject the Aircraft
when tendered for delivery by Lessor, on the grounds
of any such delay except as provided below; and
(iii) upon any such termination or termination pursuant
to Clause 4.5 neither Lessor nor Lessee will have any
further obligation to the other under this Agreement
other than as expressly set out in this Agreement,
except that Lessor will repay to Lessee the Deposit,
including any interest earned thereon.
<PAGE>
In the event that Lessor fails to deliver the Aircraft in
accordance with this Agreement on or before June 30, 1999,
Lessee will be entitled to terminate this Agreement on the
grounds of such delay and the provisions of clause (iii)
above shall apply.
4.4 LICENSES: Lessee will at its expense obtain all licenses,
permits and approvals which may be necessary to export
and/or transport the Aircraft from the Delivery Location.
Lessor will furnish such data and information as may be
reasonably requested by Lessee in connection with obtaining
any such license, permit or approval.
4.5 INSPECTION: Prior to the Delivery Date, subject to any
applicable purchase or lease agreement, Lessor will give
Lessee a reasonable opportunity:
(a) to inspect the Aircraft at the Delivery Location (or at
another location agreed to by Lessor and Lessee); and
(b) to assign up to two representatives to participate as
observers in a two-hour demonstration flight. If Lessee
notifies Lessor promptly prior to the Delivery Date of any
defect or non-conformity with the Delivery Condition
Requirements observed during the inspection or
demonstration flight, Lessor, at its sole cost and expense,
will correct or procure the correction of the defect or
non-conformity as promptly as practicable (except to the
extent otherwise agreed or to the extent in the reasonable
opinion of Lessor it is impracticable or prohibitively
expensive to do so). Subject to Clause 4.3, Lessor may, by
notice to Lessee, postpone the Delivery Date in such a case
to the date on which Lessor notifies Lessee that the defect
or non-conformity has been rectified (the "Extended
Delivery Date"). Lessor shall notify Lessee of the Extended
Delivery Date as soon as possible following notification by
Lessee of the defect or nonconformity with the Delivery
Condition Requirements and the Extended Delivery Date shall
be a date not later than June 30, 1999. Upon receipt of
such notice by Lessee, the Extended Delivery Date shall be
the Scheduled Delivery Date for all purposes hereunder.
Lessor or Lessee will be entitled to terminate this
Agreement if Lessor notifies Lessee that Lessor does not
intend to correct the defect or non-conformity. If this
Agreement is not terminated and Lessor corrects or procures
the correction of any such defect or non-conformity, Lessor
shall make the Aircraft available for reinspection by
<PAGE>
Lessee and will conduct such further inspection flight as
may be necessary to verify compliance with the Delivery
Condition Requirements. Upon completion of such inspection
or reinspection, Lessor shall tender the Aircraft for
Delivery and, provided that the Delivery Condition
Requirements are then satisfied, Lessee shall effect
acceptance of the Aircraft in the manner and with the
effect specified in Clause 4.2.
4.6 INDEMNITY: Lessee will indemnify and hold harmless each
Indemnitee on an After-Tax Basis from and against all
Losses arising from death or injury to any observer or any
employee of Lessee in connection with any demonstration
flight or inspection of the Aircraft by Lessee.
5. PAYMENTS
5.1 DEPOSIT: Lessee shall pay to Lessor a Deposit in the amount
set forth in Clause 2 of Schedule 10 in accordance with the
schedule set forth in that Clause. Such deposit shall be
maintained by Lessor in a separate, interest bearing
account.
5.2 RENTAL PERIODS: The first Rental Period will commence on
the Rent Commencement Date and each subsequent Rental
Period will commence on the date succeeding the last day of
the previous Rental Period. Each Rental Period will end on
the date immediately preceding the numerically
corresponding day in the next month, except that:
(a) if there is no such numerically corresponding day in that
month, it will end on the last day of that month; and
(b) if a Rental Period would otherwise overrun the Expiry Date,
it will end on the Expiry Date.
5.3 RENT: Lessee will pay to Lessor or its order on each Rent
Date Rent in advance in the amount specified as "Rent" in
Clause 2 of Schedule 10; provided, that Lessor hereby
agrees to waive Lessee's payment of Rent for (i) the first
Rental Period which would otherwise be due and payable on
the Rent Commencement Date, plus (ii) the first eight days
of Rent for the second Rental Period, provided further,
that Lessee will pay Rent for the second Rental Period on
the day that is eight days after the Rent Date for such
period. Payment must be initiated adequately in advance of
the Rent Date to ensure that Lessor receives credit for the
payment on the Rent Date. If a Rental Period begins on a
<PAGE>
day which is not a Business Day, the Rent payable in
respect of that Rental Period shall be paid on the Business
Day immediately following such day. In the event that any
Rent is due for a period which is less than a whole Rental
Period, the Rent paid will be prorated on the basis of a
per diem amount determined by dividing the amount of the
Rent by 30 days.
5.4 SUPPLEMENTAL RENT:
(a) AMOUNT: Lessee will further pay to Lessor Supplemental Rent
in relation to each calendar month (or part thereof)
(including without limitation the last calendar month, or
part thereof, of the Term) on the fourteenth day following
the end of such calendar month, in the amounts specified in
Clause 4 of Schedule 10, except that the last payment of
Supplemental Rent during the Term shall be paid on the
Expiry Date.
(b) ADJUSTMENT: The amount of Supplemental Rent shall be
adjusted after the Delivery Date not more frequently than
annually (with any such adjustment having retrospective
application as appropriate to reflect (ii) below) based on
the following:
(i) by application of the Escalation Adjustment set forth
in Clause 2 of Schedule 10; and
(ii) by reference to Clause 3 of Schedule 10 in respect of
any change in the hour to cycle ratio of the operation
of the Aircraft and/or any material revision of the
Lessee's Maintenance Program.
5.5 PAYMENTS: All payments by Lessee to Lessor under this
Agreement will be made for value on the due date in Dollars
and in immediately available funds settled through the New
York Clearing House System or such other funds as may for
the time being be customary for the settlement in New York
City of payments in Dollars by wire transfer to Bankers
Trust Company, 4 Albany Street, New York, New York 10006,
ABA No.: 021-001-033, for the account of BTCo. as Trustee
for Airplanes Pass-Through Trust-Rental 1, account number
00325067 or to such other account as Lessor may advise
Lessee in writing.
5.6 WITHHOLDING:
(a) All payments by Lessee pursuant to this Agreement shall be
<PAGE>
free of all withholdings of any nature whatsoever except to
the extent otherwise required by Law, and if any such
withholding is so required, Lessee shall pay an additional
amount such that after the deduction of all amounts
required to be withheld, the net amount actually received
by Lessor will equal the amount that Lessor would have
received if such withholding had not been required;
provided, however, that nothing in this Section 5.6(a)
shall obligate Lessee to pay any such additional amount to
compensate for the withholding of any Lessor Tax or any
other Tax for which Lessee is not obligated to indemnify
Lessor pursuant to Schedule 11 hereof.
(b) If any payment is made by Lessee under Clause 5.6(a) and
Lessor in good faith determines that it has actually
received a credit or deduction against, or relief or
remission for, or repayment of, any Tax paid or payable by
Lessor in respect of or calculated with reference to the
deduction or withholding giving rise to such payment,
Lessor shall, to the extent that it can do so without
prejudice to the retention of the amount of such credit,
deduction, relief, remission or repayment and without
leaving Lessor in any worse position than that in which it
would have been had such deduction or withholding not been
required to be made, pay to Lessee such amount as Lessor
shall in good faith have determined to be attributable to
the relevant deduction or withholding.
Nothing in this Clause 5.6(b) shall:
(i) interfere with the right of Lessor to arrange its tax
affairs in whatever manner it thinks fit and, in
particular, but without limitation, Lessor shall not
be under any obligation to claim credit, relief,
remission or repayment from or against its corporate
profits or similar Tax liability in respect of the
amount of any such deduction or withholding in
priority to any other claims, reliefs, credits or
deductions available to Lessor; or
(ii) oblige Lessor to disclose any information relating to
its Tax affairs or any computations in respect
thereof.
5.7 TAXES AND OTHER OUTGOINGS: Lessee will promptly pay:
(a) all license and registration fees, Taxes (other than Lessor
Taxes) and other amounts of any nature imposed by any
<PAGE>
Government Entity with respect to the Aircraft and/or this
Agreement, including without limitation the ownership,
delivery, leasing, possession, use, operation, return, sale
or other disposition of the Aircraft; and
(b) all rent, fees, charges, Taxes (other than Lessor Taxes)
and other amounts in respect of any premises where the
Aircraft, any Engine or any Part is located from time to
time;
except to the extent that, in the reasonable opinion of
Lessor, such payment is being contested in good faith by
appropriate proceedings, in respect of which adequate
reserves have been provided by Lessee and non-payment of
which does not give rise to any material likelihood of the
Aircraft or any interest therein being sold, forfeited or
otherwise lost or of criminal liability on the part of
Lessor or Owner.
5.8 TAX INDEMNITY:
Lessee will pay and indemnify each Tax Indemnitee against
all Taxes (other than Lessor Taxes) as specified in
Schedule 11.
5.9 LESSOR OBLIGATIONS FOLLOWING EXPIRY DATE: Within five
Business Days after:
(a) redelivery of the Aircraft to Lessor in accordance with and
in the condition required by this Agreement; or
(b) payment to Lessor of the Agreed Value following an Event of
Loss after the Delivery Date;
or in each case such later time as Lessor is satisfied that
Lessee has irrevocably paid to Lessor all amounts which may
then be outstanding or become payable under this Agreement
and the Other Agreements, Lessor will pay to Lessee:
(i) the balance of the Deposit, including any interest
earned thereon; and
<PAGE>
(ii) the amount of any Rent received in respect of any
period falling after the date of redelivery of the
Aircraft or payment of the Agreed Value, as the case
may be.
5.10 NET LEASE: This Agreement is a net lease. Lessee's
obligations under this Agreement are absolute and
unconditional irrespective of any circumstance or
contingency whatsoever and shall not be reduced by any
circumstance or contingency whatsoever, including (but not
limited to):
(a) any right of set-off, counterclaim, recoupment, defense or
other right which either party to this Agreement may have
against the other (including any right of reimbursement) or
which Lessee may have against the Manufacturer, any
manufacturer or seller of or any Person providing services
with respect to the Aircraft, any Engine or any Part or any
other Person, for any reason whatsoever;
(b) any unavailability of the Aircraft for any reason,
including, but not limited to, a requisition of the
Aircraft or any prohibition or interruption of or
interference with or other restriction against Lessee's
use, operation or possession of the Aircraft (whether or
not the same would, but for this provision, result in the
termination of this Agreement by operation of law);
(c) any lack or invalidity of title or any other defect in
title, airworthiness, merchantability, fitness for any
purpose, condition, design, or operation of any kind or
nature of the Aircraft for any particular use or trade, or
for registration or documentation under the Laws of any
relevant jurisdiction, or any Event of Loss in respect of
or any damage to the Aircraft;
(d) any insolvency, bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar
proceedings by or against Lessor, Lessee or any other
Person;
(e) any invalidity or unenforceability or lack of due
authorization of, or other defect in, this Agreement;
(f) any Security Interests or Taxes; and/or
(g) any other cause or circumstance which but for this
provision would or might otherwise have the effect of
terminating or in any way affecting any obligation of
Lessee under this Agreement.
Lessee hereby waives, to the extent permitted by applicable
Law, any and all rights which it may now have or which at
any time hereafter may be conferred upon it, by Law or
<PAGE>
otherwise, to terminate, cancel, quit or surrender this
Agreement or any obligation imposed upon Lessee hereunder
or in relation hereto except as expressly provided in this
Agreement.
Nothing in this Clause 5.10 will be construed to limit
Lessee's rights and remedies in the event of Lessor's
breach of Clause 7.1 or to limit Lessee's rights and
remedies to pursue in a court of law any claim it may have
against Lessor or any other Person.
5.11 FURTHER PROVISIONS REGARDING DEPOSIT:
(a) Lessee agrees that Lessor will not hold any such funds as
agent or on trust for Lessee or in any similar fiduciary
capacity.
(b) If Lessee fails to comply with any provision of this
Agreement or the Other Agreements, or any Default shall
have occurred and be continuing, in addition to all rights
and remedies accorded to Lessor elsewhere in this Agreement
or under Law in respect of the Deposit, Lessor may
immediately or at any time thereafter, without prior notice
to Lessee, apply all or part of the Deposit in or towards
the payment or discharge of any matured obligation owed by
Lessee or any affiliate of Lessee under this Agreement or
the Other Agreements, in such order as Lessor sees fit,
and/or exercise any of the rights of set-off described in
Clause 5.18 against all or part of the Deposit.
(c) If Lessor exercises the rights described in sub-clause (b)
above, Lessee shall, following a demand in writing from
Lessor, immediately restore the Deposit to the level at
which they stood immediately prior to such exercise.
5.12 LETTER OF CREDIT:
(a) In lieu of paying the Deposit in accordance with Clause
5.1, at the time such the Deposit (or part thereof) is
required to be paid under this Agreement, at any time or
from time to time, as the case may be, Lessee will provide
Lessor with an irrevocable and unconditional Letter of
Credit in the amount of the LC Amount, issued and payable
by a bank acceptable to Lessor and in form and substance
acceptable to Lessor and, if Lessor requests, confirmed by
the London or New York branch of a major international bank
acceptable to Lessor from time to time, as security for all
payment obligations of Lessee to Lessor under this
<PAGE>
Agreement (including damages), which shall remain in full
force and effect and may be drawn down by Lessor upon
demand at any time or times until the Required LC Expiry
Date. Upon receipt of the Letter of Credit in accordance
with this Clause 5.12(a), Lessor will refund the Deposit
and any interest thereon to Lessee.
(b) With the prior written consent of Lessor, the Letter of
Credit may have a validity period or periods ending prior
to the Required LC Expiry Date, provided that (i) the
Letter of Credit shall, in each case, be renewed and
delivered to Lessor not later than 30 Business Days prior
to its expiry; and (ii) a Letter of Credit shall remain in
force at all times up to the Required LC Expiry Date.
(c) If at any time during the Term Lessor determines that the
current issuing or confirming bank for the Letter of Credit
is no longer an acceptable issuing or confirming bank
(whether by virtue of a material adverse change in its
financial condition or for any other reason) Lessee shall
promptly procure that the Letter of Credit is replaced by a
Letter of Credit issued by another bank acceptable to
Lessor and (if appropriate) that such replacement Letter of
Credit is confirmed by another bank acceptable to Lessor.
(d) If Lessor makes a drawing under the Letter of Credit,
Lessee shall, following a demand in writing by Lessor,
immediately procure that the maximum amount available for
drawing under the Letter of Credit is restored to the level
at which it stood immediately prior to such drawing.
5.13 RESERVED
5.14 LATE PAYMENT INTEREST: If Lessee fails to pay any amount
payable under this Agreement within 2 days after the date
due, Lessee will pay on demand from time to time to Lessor
interest (both before and after judgment) on that amount,
from the due date to the date of payment in full by Lessee
to Lessor, at the Interest Rate. All such interest will be
compounded monthly and calculated on the basis of the
actual number of days elapsed in the month, assuming a 30
day month and a 365 day year.
<PAGE>
5.15 CURRENCY: Lessee acknowledges that the specification of
Dollars in this Agreement is of the essence and that
Dollars shall be the currency of account in any and all
events. Lessee waives any right it may have in any
jurisdiction to pay any amount under this Agreement in a
currency other than Dollars.
5.16 CERTIFICATES: Save where expressly provided in this
Agreement, any certificate or determination by Lessor as to
any rate of interest or as to any other amount payable
under this Agreement will, in the absence of manifest
error, be presumed prima facie to be correct.
5.17 APPROPRIATION: If any sum paid or recovered by Lessor in
respect of the liabilities of Lessee under this Agreement
is less than the amount then due, Lessor may apply that sum
to amounts due under this Agreement in such proportions and
order and generally in such manner as Lessor may determine
at its sole discretion.
5.18 SET-OFF: If a Default has occurred and is continuing,
Lessor may set off any matured obligation owed by Lessee or
any affiliate of Lessee (to the extent beneficially owned
by Lessor) under this Agreement or the Other Agreements
against any obligation (whether or not matured) owed by
Lessor to Lessee, regardless of the place of payment or
currency. If the obligations are in different currencies,
Lessor may convert either obligation at the market rate of
exchange available in New York or at its option London for
the purpose of the set-off. If an obligation is
unascertained or unliquidated, Lessor may in good faith
estimate that obligation and set off in respect of the
estimated amount, in which case when the obligation is
ascertained or liquidated Lessor or Lessee shall make a
payment to the other (as appropriate) in respect of any
amount by which the ascertained or liquidated amount
differs from the estimated amount. Lessor will not be
obliged to pay any amounts to Lessee under this Agreement
so long as any sums which are then due from Lessee or any
affiliate of Lessee under this Agreement or the Other
Agreements remain unpaid, and any such amounts which would
otherwise be due will fall due only if and when Lessee has
paid all such sums, except to the extent Lessor otherwise
agrees or sets off such amounts against such payment
pursuant to the foregoing provisions. Lessor shall provide
Lessee with prompt written notice of the exercise of its
right of set-off under this Clause 5.18.
<PAGE>
5.19 EXPENSES: Whether or not the Aircraft is delivered to
Lessee pursuant to this Agreement, Lessee will pay to
Lessor on an After-Tax Basis on demand:
(a) all fees, costs and expenses (including legal,
professional, and out-of-pocket expenses) payable or
incurred by Lessor in connection with any amendment to or
extension of or other documentation in connection with, or
the granting of any waiver or consent under, this Agreement
or the monitoring of compliance by Lessee with this
Agreement (but excluding any fees, costs and expenses
incurred by Lessor in connection with any change in the
ownership or financing of the Aircraft);
(b) all fees, costs and expenses (including legal, professional
and out-of-pocket expenses) associated with perfecting this
Agreement in the State of Registration, the State of
Incorporation and the Habitual Base (and any other state or
country as appropriate having regard to the operation of
the Aircraft), including (but not limited to) legal
opinions, tax advice, registrations and the payment of
documentary Taxes and any other Taxes and fees, whether
required by Lessor or Lessee; and
(c) all fees, costs and expenses (including legal, professional
and out-of-pocket expenses) payable or incurred by Lessor
in contemplation of, or otherwise in connection with, the
enforcement of or preservation of any of Lessor's rights
under this Agreement, or in respect of the repossession of
the Aircraft.
All amounts payable pursuant to this Clause 5.19 will be
paid in the currency in which they are incurred by Lessor.
Lessor and Lessee shall each be responsible for their own
legal costs associated with the negotiation and
documentation of this transaction.
6. MANUFACTURER'S WARRANTIES
6.1 ASSIGNMENT:
(a) With effect from Delivery, Lessor assigns to Lessee, and
authorizes Lessee to exercise, such rights as Lessor may
have under any warranty with respect to the Aircraft, any
Engine or any Part (including, without limitation, any
warranty with respect to Year 2000 Compliance) made by any
<PAGE>
manufacturer, vendor, sub-contractor or supplier, to the
extent that the same may be assigned or otherwise made
available to Lessee.
(b) Lessee shall give Lessor prompt written notice of any
warranty claim which is settled with Lessee on the basis of
a total or partial cash payment. Any cash payments to
Lessee in respect of warranty claims which are not applied
to the repair or remedy of defects in the Aircraft or to
the reimbursement of the out-of-pocket expenses actually
incurred by Lessee in the collection of such cash payments,
and which are not in respect of compensation for loss of
use of the Aircraft, an Engine or Part during the Term due
to a defect covered by such warranty, shall be for Lessor's
account and shall be paid by Lessee to Lessor.
(c) Upon occurrence of an Event of Default or termination or
expiry of the leasing of the Aircraft under this Agreement
(each a "Termination Event"), whichever occurs earlier, all
rights under such warranties will immediately revert to
Lessor, including all claims thereunder (whether or not
perfected); and Lessee will immediately take all steps and
execute all documents required by Lessor to perfect such
reversion.
6.2 PROCEEDS: Lessee agrees to apply any proceeds of any
claims assigned to Lessee by Lessor under Clause 6.1 to
remedy the defect, if any, in the Aircraft, any Engine or
any Part giving rise to such claim. So long as no
Termination Event has occurred and is continuing, Lessor
agrees (subject to Clause 6.1(b)) to cooperate with Lessee
to cause any proceeds from any rights assigned by Lessor to
Lessee under Clause 6.1 to be paid directly to Lessee, and,
if any such proceeds are nonetheless paid to Lessor, Lessor
agrees to remit promptly such proceeds to Lessee. However,
upon a Termination Event, Lessor may immediately:
(a) retain for its own account any such proceeds previously
paid to Lessor which would have been remitted to Lessee
under this Clause 6.2 in the absence of such Termination
Event;
(b) cause any proceeds of any pending claims to be paid to
Lessor, rather than to Lessee; and
(c) recover from Lessee the proceeds of any such claims
previously paid to Lessee to the extent that such claims
<PAGE>
relate to any defect in the Aircraft, any Engine or any
Part not fully and completely rectified by Lessee before
such Termination Event.
6.3 PARTS: Except to the extent Lessor otherwise agrees in a
particular case, Lessee will procure that all engines,
components, furnishings or equipment provided by the
manufacturer, vendor, subcontractor or supplier in
replacement of a defective Engine or Part pursuant to the
terms of any warranty will be installed promptly by Lessee
and that title thereto (free of Security Interests other
than Permitted Liens) vests in Lessor. On installation
each such part will be deemed to be a Part. In the case of
a Replacement Engine, Lessee will satisfy and perform each
of the conditions and covenants set forth in Clause
11.1(d).
6.4 AGREEMENT: To the extent any warranties relating to the
Aircraft are made available under an agreement between any
manufacturer, vendor, subcontractor or supplier and Lessee,
Lessee will:
(a) apply the proceeds of any claim under such agreement in
accordance with Clause 6.2 and (pending such application)
will hold the claim and the proceeds in trust for Lessor;
and
(b) take all such steps as are necessary at the end of the Term
to ensure that the benefit of any of those warranties which
have not expired is vested in Lessor.
7. LESSOR'S COVENANTS
7.1 QUIET ENJOYMENT: Provided no Default has occurred and is
continuing, Lessor will not interfere with the quiet use,
possession and enjoyment of the Aircraft by Lessee during
the Term; but the proper exercise by Lessor of its rights
under or in connection with this Agreement will not
constitute such an interference. THE FOREGOING COVENANT IS
IN LIEU OF ANY RIGHT OF LESSEE UNDER SECTION 2A-211(1) OF
THE NEW YORK UNIFORM COMMERCIAL CODE OR ANY SIMILAR LAW,
WHICH RIGHT LESSEE HEREBY WAIVES, RELEASES AND RENOUNCES
AND LESSOR EXPRESSLY DISCLAIMS.
<PAGE>
7.2 LESSOR LIENS: Lessor will promptly, at its own expense,
take such action as may be necessary to discharge or
satisfy (by bonding or otherwise) any Lessor Lien. Nothing
in this Clause 7 will be construed to limit Lessee's right
to institute separate legal proceedings against Lessor in
the event of Lessor's breach of this Agreement or to limit
Lessee's rights and remedies against any other Person.
7.3 MAINTENANCE CONTRIBUTIONS: Provided that no Default has
occurred and is continuing, Lessor will pay to Lessee, by
way of contribution to the cost of maintenance of the
Aircraft, the amounts provided for, and on terms and
conditions specified in Clause 5 of Schedule 10.
7.4 PAYMENT FOR CERTAIN COMPONENTS:
(a) Lessee will carry out modifications to the fuel indication
system and procure any flight manual, and weight and
balance manual changes, for which changes, following
receipt by Lessor of an invoice for and evidence in form
and substance reasonably acceptable to Lessor and providing
no Default has occurred and is continuing, Lessor will pay
to Lessee the lesser of (i) the amount of the invoice and
(ii) $60,000.00; provided that to the extent that Lessor
pays to Lessee an amount less than $60,000 pursuant to this
Clause 7.4(a), the Modification Amount (as defined on
Schedule 10) shall be reduced in accordance with Clause 7
of Schedule 10 only by the amount actually paid by Lessor
to Lessee hereunder.
(b) Lessor will provide for installation on the Aircraft by
Lessee or its designee, Nordam LGW Hush Kits, TCAS II
computer control head and antennas, and a Windshear systems
GPWS computer.
Lessee will provide any engineering and applicable modification
kits required for the installation of the TCAS II, Windshear,
and fuel indication system modifications.
8. LESSEE'S COVENANTS
8.1 DURATION:
(a) Lessee shall perform and comply with its undertakings and
covenants in this Agreement at all times during the Term.
All such undertakings and covenants shall, except where
expressly otherwise stated, be performed at the expense of
Lessee.
(b) Lessee will procure that no Person (other than Lessor) will
act in any manner inconsistent with Lessee's obligations
under this Agreement.
<PAGE>
8.2 INFORMATION: Lessee will:
(a) notify Lessor forthwith of the occurrence of any Default or
any other event which might adversely affect Lessee's
ability to perform any of its obligations under this
Agreement;
(b) furnish to Lessor:
(i) upon request, as soon as available but not, in any
event, sooner than 45 days after the last day of each
financial quarter of Lessee, the consolidated
management accounts of Lessee (in Dollars and
comprising a balance sheet and profit and loss
statement) prepared for the most recent previous
financial quarter certified by a qualified financial
officer of Lessee as being true and correct;
(ii) as soon as available but not in any event later than
120 days after the last day of each financial year of
Lessee, its audited consolidated balance sheet as of
such day and its audited consolidated profit and loss
statement for the year ending on such day (each in
Dollars);
(iii) a copy of each notice or circular issued to
Lessee's shareholders or creditors as a group at the
time so issued; and
(iv) such other information and documents regarding Lessee
and its business and affairs as Lessor may reasonably
request from time to time, including without
limitation any information or documents necessary to
enable Lessor to comply with its tax filing, audit and
litigation obligations;
(c) promptly furnish to Lessor all information Lessor from time
to time reasonably requests regarding the Aircraft, each
Engine, any engine installed on the Airframe, and any Part,
and the use, location and condition of the Aircraft,
including, without limitation, the hours remaining on the
Aircraft and any Engine until the next scheduled check,
inspection, overhaul or shop visit, as the case may be;
(d) on request, within 10 days after the end of any Rental
Period, furnish to Lessor evidence satisfactory to Lessor
<PAGE>
of payment of all Taxes due during that or any previous
Rental Period that could reasonably be expected to effect
Lessor's interest in this Agreement or the Aircraft;
(e) on request, furnish to Lessor evidence satisfactory to
Lessor that all Taxes, charges and other outgoings incurred
by Lessee with respect to the Aircraft, including without
limitation all payments due to the relevant air traffic
control authorities, have been paid and discharged in full;
(f) provide to Lessor within 10 days after the end of each
calendar month a monthly report on the Aircraft and each
Engine in the form required by Lessor;
(g) give Lessor not less than 45 days' written notice as to the
time and location of all Major Checks; and
(h) promptly notify Lessor of:
(i) any loss, theft, damage or destruction to the
Aircraft, any Engine or any Part, or any modification
to the Aircraft if the potential cost may exceed the
Damage Notification Threshold; and
(ii) any claim or other occurrence likely to give rise to a
claim under the Insurances (but in the case of hull
claims, only for any claim in excess of the Damage
Notification Threshold) and details of any
negotiations with the insurance brokers over any such
claim.
8.3 LAWFUL AND SAFE OPERATION: Lessee will:
(a) not take, or fail to take, any action, in respect of the
operation and maintenance of the Aircraft, if the effect of
such conduct by Lessee would be to cause Lessor, Owner,
GECAS or Lessee to be in violation of any Law in force in
any country or jurisdiction which may then be applicable
(including, without limitation, Laws mandating insurance
coverage);
(b) not use the Aircraft in any manner contrary to (i) any
recommendation of the manufacturers of the Aircraft, any
Engine or any Part or (ii) any recommendation or regulation
of the Air Authority or for any purpose for which the
Aircraft is not designed or reasonably suitable;
(c) ensure that the crew and engineers employed by it in
connection with the operation and maintenance of the
<PAGE>
Aircraft have the qualifications and hold the licenses
required by the Air Authority and applicable Law;
(d) use the Aircraft solely in commercial or other operations
for which Lessee is duly authorized by the Air Authority
and under applicable Law;
(e) not use the Aircraft for the carriage of any goods,
materials, livestock or items of cargo which could
reasonably be expected to cause damage to the Aircraft or
which would not be adequately covered by the Insurances, or
any item or substance whose possession or carriage is
illegal under any applicable Law; and comply with any
carriage regulations or restrictions from time to time
issued by IATA;
(f) not utilize the Aircraft for purposes of training,
qualifying or re-confirming the status of cockpit personnel
except for the benefit of Lessee's cockpit personnel, and
then only if the use of the Aircraft for such purpose is
not disproportionate to the use for such purpose of other
aircraft of the same type operated by Lessee;
(g) not cause or permit the Aircraft to proceed to, or remain
at, any location that is prohibited or not permitted
under:
(i) any Law or government regulation applicable to the
Aircraft or to Lessee; or
(ii) any requirement of a Government Entity of the State of
Registration or the Habitual Base; or
(iii) any requirement of a Government Entity of the
country in which such location is situated.
(h) obtain and maintain in full force all certificates,
licenses, permits and authorizations from time to time
required for the use and operation of the Aircraft, and for
the making of payments required by, and the compliance by
Lessee with its other obligations under, this Agreement;
and
(i) not use, operate, or locate the Aircraft or suffer or
permit the Aircraft to be used, operated or located during
the Term in any manner not covered by the Insurances or in
any area excluded from coverage by the Insurances or in any
<PAGE>
manner which would prejudice the interests of the
Indemnitees in the Insurances, the Aircraft, any Engine or
any Part.
8.4 SUBLEASING: LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR, SUBLEASE, WET-LEASE OR OTHERWISE PART
WITH POSSESSION OF THE AIRCRAFT, THE ENGINES OR ANY PART,
SUCH CONSENT NOT TO BE UNREASONABLY WITHHELD, EXCEPT THAT
LESSEE MAY PART WITH POSSESSION (A) WITH RESPECT TO THE
AIRCRAFT, THE ENGINES OR ANY PART TO THE RELEVANT
MANUFACTURERS FOR TESTING OR SIMILAR PURPOSES OR TO THE
AGREED MAINTENANCE PERFORMER FOR SERVICE, REPAIR,
MAINTENANCE OR OVERHAUL WORK, OR ALTERATIONS, MODIFICATIONS
OR ADDITIONS TO THE EXTENT REQUIRED OR PERMITTED BY THIS
AGREEMENT, AND (B) WITH RESPECT TO AN ENGINE OR PART, AS
EXPRESSLY PERMITTED BY THIS AGREEMENT.
8.5 INSPECTION:
(a) Lessor and any person designated by Lessor may at any time
visit, inspect and survey the Aircraft, any Engine, any
Part or the Aircraft Documents and for such purpose may,
subject to any applicable Air Authority regulation, travel
on the flight deck as observer.
(b) Such visits, inspections or surveys shall be at the sole
cost and expense of Lessor, provided, however, Lessee will
pay to Lessor on an After-Tax Basis on demand all
reasonable out-of-pocket expenses incurred by Lessor in
connection with any such visit, inspection or survey
conducted after the occurrence of a Default.
(c) Lessor will:
(i) have no duty to make, and no liability arising out of
making or failing to make, any such visit, inspection
or survey;
(ii) so long as no Default has occurred and is continuing,
not exercise such right other than on reasonable
notice and so as not to disrupt unreasonably the
commercial operations of Lessee, provided, however,
Lessee will take such action as may be reasonably
required to facilitate Lessor's inspection; and
(iii) indemnify and hold harmless Lessee from and
against all Losses arising from death or injury to any
such observer or any employee of Lessor in connection
<PAGE>
with any such visit, inspection or survey except to
the extent such Losses arise from the gross negligence
or willful misconduct of Lessee or its agents or
employees.
8.6 OWNERSHIP; PROPERTY INTERESTS; RELATED MATTERS: Lessee
will:
(a) not do or knowingly permit to be done or omit or knowingly
permit to be omitted to be done any act or thing which
might reasonably be expected to jeopardize the rights of
Owner or Lessor as owner or lessor respectively of the
Aircraft or as an additional insured or loss payee under
the Insurances;
(b) on all occasions when the ownership of the Aircraft, any
Engine or any Part is relevant, make clear to third parties
that title is held by Owner;
(c) not at any time (i) represent or hold out Lessor or Owner
as carrying goods or passengers on the Aircraft or as being
in any way connected or associated with any operation or
carriage (whether for hire or reward or gratuitously) which
may be undertaken by Lessee; or (ii) pledge the credit of
Lessor or Owner;
(d) ensure that there is always affixed, and not removed or in
any way obscured, a fireproof plate (having dimensions of
not less than 10 cm. x 7 cm.) in a reasonably prominent
position in the cockpit of the Aircraft adjacent to the
certificate of airworthiness and on each Engine stating:
"This Aircraft/Engine is owned by Emerald Aviation
Investments Limited and is leased to AeroUSA, Inc. and is
subleased to Vanguard Airlines, Inc. and may not be or
remain in the possession of, or be operated by any other
person without the prior written consent of AeroUSA, Inc.";
(e) not create or permit to exist any Security Interest (other
than Permitted Liens) upon the Aircraft, any Engine or any
Part;
(f) not do or permit to be done anything which may reasonably
be expected to expose the Aircraft, any Engine or any Part
to penalty, forfeiture, impounding, detention,
appropriation, damage or destruction and without prejudice
to the foregoing, if any such penalty, forfeiture,
impounding, detention or appropriation, damage or
<PAGE>
destruction occurs, give Lessor immediate notice thereof
and procure the immediate release of the Aircraft, any
Engine or the Part, as the case may be;
(g) not abandon the Aircraft, any Engine or any Part;
(h) pay and discharge, or cause to be paid and discharged, when
due and payable or make adequate provision by way of
security or otherwise for all debts, damages, claims and
liabilities which have given or might give rise to a
Security Interest (other than Permitted Liens) over or
affecting the Aircraft, any Engine or any Part; and
(i) not attempt, or hold itself out as having any power, to
sell, lease or otherwise dispose of the Aircraft, any
Engine or any Part.
8.7 GENERAL: Lessee will:
(a) will preserve its corporate existence (other than in
connection with a solvent reorganization on terms which
shall have previously been approved in writing by Lessor),
and will conduct its business in an orderly and efficient
manner and will maintain all rights, privileges, licenses
and franchises material thereto or material to performing
its obligations under this Agreement;
(b) ensure that the Habitual Base remains the habitual base of
the Aircraft unless Lessor gives its prior written consent
to a change therein;
(c) not operate, maintain, insure or deal with the Aircraft or
any Engine or Part in a manner which materially
discriminates against the Aircraft or such Engine or Part,
when compared with the manner in which Lessee operates,
maintains, insures or deals with similar aircraft, engines
or parts in Lessee's fleet;
(d) not, without giving Lessor 10 days prior notice (in
accordance with this Agreement), change its chief executive
office (as such term is defined in Article 9 of the Uniform
Commercial Code as in effect in the State of Kansas) from
533 Mexico City Avenue, Kansas City, Missouri 64153;
(e) remain a Certificated Air Carrier and maintain, without
limitation, its status so as to fall within the purview of
Section 1110 of Title 11 of the United States Code or any
analogous statute; and
<PAGE>
(f) remain a "citizen of the United States" as defined in
Section 40102 of Title 49 of the United States Code.
8.8 RECORDS: Lessee will:
(a) cause accurate, complete and current records as required by
FAR 91.417 to be kept of all flights made by, and all
maintenance carried out on, the Aircraft (including in
relation to each Engine and Part subsequently installed,
before the installation); keep the records in such manner
as the Air Authority may from time to time require, and
ensure that they comply with the mandatory recommendations
of any manufacturers of the Aircraft, any Engine or any
Part. At redelivery the records required by FAR 91.417
must be in English. The records will form part of the
Aircraft Documents; and
(b) maintain in English with appropriate revision service, all
Aircraft Documents, records, logs, and other materials
required by applicable Laws or the Air Authority in respect
of the Aircraft.
8.9 PROTECTION: Lessee will:
(a) maintain the registration of the Aircraft with the Air
Authority in the name of Owner and not do or suffer to be
done anything which might adversely affect that
registration; and
(b) do all acts and things (including, without limitation,
making any filing or registration with the Air Authority or
any other Government Entity or as required to comply with
the Geneva Convention where applicable) and execute and
deliver, notarize, file, register and record all documents
(including, without limitation, any amendment of this
Agreement) as may be required by Lessor:
(i) upon or following any change or proposed change in the
ownership or financing of the Aircraft (and Lessor
shall reimburse Lessee for the reasonable out-of-
pocket expenses, including legal fees, incurred by
Lessee at the time of such change in complying with
Lessor's requirements under this paragraph (i)); or
(ii) following any modification of the Aircraft, any Engine
or any Part or the permanent replacement of any
Engine, or Part in accordance with this Agreement, so
<PAGE>
as to ensure that the rights of Owner as owner of the
Aircraft and under this Agreement apply with the same
effect as before; or
(iii) to establish, maintain, preserve, perfect and
protect the rights of Lessor under this Agreement and
the interests of Owner as owner of the Aircraft.
8.10 MAINTENANCE AND REPAIR: Lessee will:
(a) keep the Aircraft airworthy in all respects and in good
repair and condition;
(b) not change, subsequent to the date on which this Agreement
is signed by Lessee, the Lessee's Maintenance Program or
the Maintenance Performer without providing prior written
notice of such change to Lessor; provided, however, that
Lessee may make changes to Lessee's Maintenance Program
without notice insofar as, and only insofar as such changes
effect procedures for line maintenance and/or Minor Checks.
(c) maintain the Aircraft in accordance with the Lessee's
Maintenance Program through the Maintenance Performer;
(d) maintain the Aircraft in accordance with the standard of
maintenance required by FAR Part 121, Subpart L and any
other rules and regulations of the FAA and in at least the
same manner and with at least the same care, including,
without limitation, maintenance scheduling, modification
status and technical condition, as is the case with respect
to similar aircraft owned or otherwise operated by Lessee
and as if Lessee were to retain and continue operating the
Aircraft in its fleet after the Expiry Date, including,
without limitation, all maintenance to the Airframe, any
Engine or any Part required to maintain all warranties,
performance guaranties or service life policies in full
force and effect;
(e) comply with all Air Authority mandatory inspection and
mandatory modification requirements, and Airworthiness
Directives applicable to the Aircraft, any Engine or Part
having a compliance date during the Term;
(f) comply with all applicable Laws and the regulations of the
Air Authority and other aviation authorities with
jurisdiction over Lessee or the Aircraft, any Engine or
Part (regardless of upon whom such requirements are
imposed) and which relate to the maintenance, condition,
use or operation of the Aircraft or require any
modification or alteration to the Aircraft, any Engine or
Part;
<PAGE>
(g) maintain in good standing a current certificate of
airworthiness (in the appropriate category for the nature
of the operations of the Aircraft) for the Aircraft issued
by the Air Authority except where the Aircraft is
undergoing maintenance, modification or repair required or
permitted by this Agreement, and Lessee will provide on
request from time to time to Lessor a copy of such
certificate; and
(h) if required by the Air Authority, maintain a current
certification as to maintenance issued by or on behalf of
the Air Authority in respect of the Aircraft and will from
time to time provide to Lessor a copy on request.
8.11 REMOVAL/INTERCHANGE OF ENGINES: Lessee will:
(a) ensure that no Engine is removed from the Airframe unless
it is promptly replaced by an engine of the same model as,
or an improved or advanced version of or any Engine that
meets the requirements of the flight manual limitations,
such Engine and is in good operating condition;
(b) ensure that any Engine which is not installed on the
Aircraft (or an aircraft permitted by paragraph (d) below)
is, except as expressly permitted by this Agreement,
properly and safely stored and insured, and kept free from
Security Interests (other than Permitted Liens);
(c) from time to time, on request by Lessor, procure that any
person to whom possession of an Engine is given
acknowledges in writing to Lessor, in form and substance
satisfactory to Lessor, that it will respect the interests
of Owner and Lessor as owner and lessor respectively of
such Engine and will not seek to exercise any rights
whatsoever in relation to such Engine; and
(d) be permitted, if no Default has occurred and is continuing,
to install any Engine on an aircraft operated by Lessee,
provided that neither (i) the provisions of any applicable
Law nor (ii) the terms of any lease or other agreement or
Security Interest to which such aircraft or engine is
subject, prohibit such installation or will have the effect
at any time of divesting or impairing the title and
interests of Owner and Lessor as owner and lessor
respectively of such Engine.
<PAGE>
8.12 REMOVAL/INTERCHANGE OF PARTS: Lessee will:
(a) ensure that no Part is at any time removed from the
Aircraft unless it is promptly replaced by a part complying
with the following:
(i) it is in as good operating condition, has
substantially similar hours available until the next
scheduled check, inspection, overhaul and shop visit,
is of the same or a more advanced make and model and
is of the same interchangeable modification status,
and of equivalent value and utility to, as the
replaced Part;
(ii) it has become and remains the property of Owner free
from Security Interests (other than Permitted Liens)
and on installation on the Aircraft will without
further act be subject to this Agreement; and
(iii) Lessee has full details as to such part's source
and maintenance records;
(b) ensure that any Part which is not installed on the Aircraft
(or any other aircraft as expressly permitted by this
Agreement) is properly and safely stored and insured, and
kept free from Security Interests (other than Permitted
Liens);
(c) be permitted, if no Default has occurred and is continuing,
to install any Part on an aircraft operated by Lessee,
provided that Clause 8.11(d) would be complied with in
respect of such Part if it were an Engine; and
(d) promptly procure the replacement of any Part which has
become time-, cycle- or calendar-expired, lost, stolen,
seized, confiscated, destroyed, damaged beyond repair,
unserviceable or permanently rendered unfit for use, with a
part complying with paragraph (a) above.
8.13 POOLING OF ENGINES AND PARTS: Lessee will not enter into
nor permit any pooling agreement or arrangement in respect
of any Engine or Part without the prior written consent of
Lessor.
<PAGE>
8.14 EQUIPMENT CHANGES:
(a) Lessee will not make any modification or addition to the
Aircraft (each an "Equipment Change"), except for an
Equipment Change which:
(i) is expressly permitted by this Agreement;
(ii) has the prior written approval of Lessor and does not
diminish or impair the value, utility, condition, or
airworthiness of the Aircraft; or
(iii) represents an addition to, and does not diminish
the value, utility, condition or airworthiness of, the
Aircraft, can be removed without causing damage to or
diminishing the condition, airworthiness or value and
utility of the Aircraft and will be so removed at
Lessor's request on redelivery.
In addition to the foregoing, Lessee will not make any
Equipment Change that may adversely affect its ability to
comply with Year 2000 Compliance (as defined in Section
17.1(c) hereof) in relation to the Aircraft or any Part.
(b) So long as no Default has occurred and is continuing,
Lessee may remove any Equipment Change if it can be removed
from the Aircraft without diminishing or impairing the
value, utility, condition or airworthiness of the Aircraft.
8.15 TITLE ON AN EQUIPMENT CHANGE:
(a) Title to all Parts installed on the Aircraft (whether by
way of replacement, as the result of an Equipment Change or
otherwise) will on installation, without further act, vest
in Owner subject to this Agreement, free and clear of all
Security Interests (other than Permitted Liens). Lessee
will at its own expense take all such steps and execute,
and procure the execution of, all such instruments as
Lessor may require and which are necessary to ensure that
title so passes to Owner according to all applicable Laws.
At any time when requested by Lessor, Lessee will provide
evidence to Lessor's satisfaction (including the provision,
if required, to Lessor of bills of sale and one or more
legal opinions) that title has so passed to Owner.
(b) Lessor may require Lessee to remove any Equipment Change on
the Expiry Date and to restore the Aircraft to its
condition prior to that Equipment Change.
<PAGE>
(c) Any Engine or Part at any time removed from the Aircraft
will remain the property of Owner until a replacement has
been effected in accordance with this Agreement and until
title in that replacement has passed, according to
applicable Laws, to Owner subject to this Agreement, free
of all Security Interests (other than Permitted Liens),
whereupon title to the replaced Engine or Part, will,
provided no Default has occurred and is continuing, pass to
Lessee.
9. INSURANCE
9.1 INSURANCES: Lessee will maintain the Insurances in full
force during the Term, and thereafter as expressly required
in this Agreement, through such brokers and with such
insurers and having such deductibles and subject to such
exclusions as may be approved by Lessor from time to time.
Insurances shall in any event meet the requirements set
forth in Schedule 7, which may be amended from time to time
by Lessor so that the scope and level of cover is
maintained in line with best industry practice and the
interests of Lessor and each Indemnitee are prudently
protected.
9.2 CHANGE: If at any time Lessor wishes to revoke its approval
of any insurer, reinsurer, insurance or reinsurance, Lessor
and/or its brokers will consult with Lessee and Lessee's
brokers (as for the time being approved by Lessor)
regarding whether that approval should be revoked to
protect the interests of the parties insured. If, following
such consultation, Lessor considers that any change should
be made (and provides a reasonable written explanation to
Lessee for such change), Lessee will then arrange or
procure the arrangement of alternative cover satisfactory
to Lessor.
9.3 INSURANCE UNDERTAKINGS AND INFORMATION: Lessee will:
(a) comply with the terms and conditions of each policy of the
Insurances and not do, consent or agree to any act or
omission which:
(i) invalidates or may invalidate the Insurances; or
(ii) renders or may render void or voidable the whole or
any part of any of the Insurances; or
<PAGE>
(iii) brings any particular liability within the scope
of an exclusion or exception to the Insurances;
(b) not take out without the prior written approval of Lessor
any insurance or reinsurance in respect of the Aircraft
other than those required under this Agreement unless
relating solely to hull total loss, business interruption,
profit commission and deductible risk;
(c) commence renewal procedures at least 30 days prior to
expiry of any of the Insurances and provide to Lessor:
(i) if requested by Lessor, a written status report of
renewal negotiation 14 days prior to each expiry date;
(ii) telecopy confirmation of completion of renewal prior
to each expiry date;
(iii) certificates of insurance (and where appropriate
certificates of reinsurance), and broker's (and any
reinsurance brokers') letter of undertaking in a form
acceptable to Lessor in English, detailing the
coverage and confirming the insurers' (and any
reinsurers') agreement to the specified insurance
requirements of this Agreement within 7 days after
each renewal date;
(d) on request, provide copies to Lessor of documents or other
information evidencing the Insurances; and
(e) provide any other insurance and reinsurance related
information, or assistance, in respect of the Insurances as
Lessor may reasonably require.
9.4 FAILURE TO INSURE: If Lessee fails to maintain the
Insurances in compliance with this Agreement, each of the
Indemnitees will be entitled but not bound (without
prejudice to any other rights of Lessor under this
Agreement):
(a) to pay the premiums due or to effect and maintain
insurances satisfactory to it or otherwise remedy Lessee's
failure in such manner (including, without limitation to
effect and maintain an "owner's interest" policy) as it
considers appropriate. Any sums so expended by it will
become immediately due and payable by Lessee to Lessor on
<PAGE>
an After-Tax Basis together with interest thereon at the
Interest Rate, from the date of expenditure by it up to the
date of reimbursement by Lessee; and
(b) at any time while such failure is continuing to require the
Aircraft to remain at any airport or to proceed to and
remain at any airport designated by it until the failure is
remedied to its satisfaction.
9.5 CONTINUING INDEMNITY: Lessee shall effect and maintain
insurance after the Expiry Date with respect to its
liability under the indemnity in Clause 10 for 2 years, and
such insurance shall name each Indemnitee as an additional
insured.
10. INDEMNITY
10.1 GENERAL: Lessee agrees to defend, indemnify and hold
harmless the Indemnitees on demand from and against any and
all Losses (regardless of when the same are made or
incurred):
(a) which may at any time be suffered or incurred directly or
indirectly as a result of or connected with the possession,
delivery, performance, management, ownership, registration,
control, maintenance, condition, service, repair, overhaul,
leasing, use, operation or redelivery of the Aircraft, any
Engine or Part (either in the air or on the ground), or the
occurrence of any Default, whether or not the Losses may be
attributable to any defect in the Aircraft, any Engine or
any Part or to its design, testing or use or otherwise, and
regardless of when the same arise or whether they arise out
of or are attributable to any act or omission of any
Indemnitee; or
(b) which arise out of any act or omission which invalidates or
which renders voidable any of the Insurances; or
(c) which may at any time be suffered or incurred as a
consequence of any design, article or material in the
Aircraft, any Engine or any Part or its operation or use
constituting an infringement of patent, copyright,
trademark, design or other proprietary right, or a breach
of any obligation of confidentiality owed to any person in
respect of any of the matters referred to in this paragraph
(c);
<PAGE>
but excluding any Losses in relation to a particular
Indemnitee to the extent that such Losses (i) are covered
pursuant to another indemnity provision of this Agreement
or (ii) arise solely as a result of the gross negligence or
wilful misconduct of that Indemnitee or (iii) arise solely
as a result of Lessor Taxes or a Lessor Lien or (iv) arise
from events occurring after re-delivery of the Aircraft in
accordance with the provisions hereof unless such Losses
result from or arise out of an act or omission by Lessee,
or (v) arise solely as a result of a breach by Lessor of
its representations and warranties contained in Schedule 2,
Clause 13 or as a result of the failure by Lessor to
perform any warranties contained in Schedule 2, Clause 13
or as a result of the failure by Lessor to perform any of
its obligations under this Agreement (but excluding any
such failure which results from any Default), or (vi) have
been expressly agreed for payment by an Indemnitee, or
(vii) relate to any Taxes (without prejudice to Lessor's
rights under any other indemnity provisions of this
Agreement), or (viii) arise solely as a result of any sale,
assignment, transfer or other disposition (whether
voluntary or involuntary) by such Indemnitee of the
Aircraft or any interest therein, unless such sale,
transfer or other disposition has resulted from or occurred
following an Event of Default. For purposes of the
foregoing provision, "gross negligence" means, in relation
to an Indemnitee, any intentional or conscious action or
decision of such Indemnitee which is taken with reckless
disregard for the consequences of such action or decision.
10.2 DURATION: The indemnities contained in this Agreement will
continue in full force following the Expiry Date
notwithstanding any breach or repudiation by Lessor or
Lessee of this Agreement or any termination of the leasing
of the Aircraft hereunder.
10.3 SUBROGATION: Upon payment in full to an Indemnitee of any
demand for indemnification under Clause 10.1, Lessee shall
be subrogated to all rights and remedies capable of
subrogation which any Indemnitee may have against the
Manufacturer of the Aircraft, its subcontractors and any
other Person as to any Losses in respect of which payment
has been made, to the extent, in each case, that such
Indemnitee shall not have exhausted or divested itself of
such rights and remedies, and without warranty as to the
enforceability of such rights and subject to the following
provisions:
<PAGE>
(a) such Indemnitee shall assist Lessee, at Lessee's sole
cost and expense, in any manner reasonably requested
by Lessee for the purpose of enforcing and obtaining
the rights and benefits intended to be conferred by
this Clause 10.3 upon Lessee;
(b) Lessee shall notify Lessor in writing of its intention
to institute or file any claim or proceeding (a
"Subrogated Claim") not less than five (5) Business
Days prior to the proposed date of instituting or
filing such Subrogated Claim;
(c) Lessee shall keep Lessor fully informed of any
Subrogated Claim by Lessee, shall consult with Lessor
regarding the conduct of such Subrogated Claim;
(d) Lessor shall be entitled to prohibit conduct of a
Subrogated Claim by Lessee if the nature of the
Subrogated Claim (or any related circumstances) is
such that Lessor or any Indemnitee reasonably
considers that its reputation may be damaged by such
Subrogated Claim or be Lessee conducting such
Subrogated Claim, or (on any other reasonable grounds)
Lessor or such Indemnitee determines that it is
prudent for such Subrogated Claim to be conducted by
Lessor or such Indemnitee itself;
(e) Lessor shall be entitled, upon consultation with and
prior written notice to Lessee, to terminate Lessor's
conduct of Subrogated Claim where an act, delay or
omission of Lessee indicates that the interests of any
Indemnitee may be materially adversely prejudiced by
Lessee's continued conduct thereof;
(f) the assertion of all such Subrogated Claims herein
shall comply in all respects with the terms and
provisions of the Insurances.
11. EVENTS OF LOSS
11.1 EVENTS OF LOSS:
(a) If an Event of Loss occurs prior to Delivery, this
Agreement will immediately terminate and except as
expressly stated in this Agreement neither party will have
any further obligation or liability under this Agreement
other than pursuant to Clause 5.19 except that Lessor will
return the Deposit to Lessee, including any interest earned
thereon and will return to Lessee or cancel the Letter of
Credit.
<PAGE>
(b) If an Event of Loss occurs after Delivery, Lessee will pay
the Agreed Value to Lessor on or prior to the earlier of
(i) 45 days after the Event of Loss and (ii) the date of
receipt of insurance proceeds in respect of that Event of
Loss.
(c) Subject to the rights of any insurers and reinsurers or
other third party, upon irrevocable payment in full to
Lessor of the Agreed Value and all other amounts which may
be or become payable to Lessor under this Agreement, Lessor
will without recourse or warranty (except as to freedom
from Lessor's Liens) procure that Owner transfers to Lessee
all of Owner's rights to the Aircraft and to any Engines
and Parts not installed when the Event of Loss occurs but
which are covered under the Agreed Value, on an as-is
where-is basis, and procure that Owner will at Lessee's
expense, execute and deliver such bills of sale and other
documents and instruments as Lessee may reasonably request
to evidence (on the public record or otherwise) such
transfer, free and clear of all rights of Lessor and Owner
and Lessor Liens. Lessee shall indemnify on an After-Tax
Basis Lessor and Owner for all fees, expenses and Taxes
incurred by Lessor or Owner in connection with any such
transfer.
(d) Upon the occurrence of an Engine Event of Loss in respect
of an Engine, Lessee shall give Lessor prompt written
notice thereof and shall, within 60 days after such
occurrence, convey to Lessor, as replacement for such
Engine, title to a Replacement Engine. Each Replacement
Engine shall be free of all Security Interests (except
Permitted Liens) and shall be in as good operating
condition as the Engine being replaced (assuming that the
Engine being replaced was in the condition and repair
required by this Agreement immediately prior to the Engine
Event of Loss). Lessee shall have full details of such
Replacement Engine's source and maintenance records. Upon
full compliance by Lessee with the terms of this Clause
11.1(d), Lessor will transfer to Lessee title to the Engine
which suffered the Engine Event of Loss. Prior to or at
the time of any such conveyance, Lessee, at its own
expense, will promptly:
(i) furnish Lessor with a full warranty bill of sale, in
form and substance reasonably satisfactory to Lessor,
with respect to such Replacement Engine;
<PAGE>
(ii) duly execute a lease supplement (in form and substance
satisfactory to Lessor) subjecting such Replacement
Engine to this Agreement, and cause it to be recorded
pursuant to applicable Law;
(iii) furnish Lessor with such evidence of title to
such Replacement Engine as Lessor may reasonably
request;
(iv) furnish Lessor with an opinion of Lessee's counsel to
the effect that title to such Replacement Engine has
been duly conveyed to Lessor, free and clear of all
Security Interests, and that such Replacement Engine
is duly leased hereunder;
(v) furnish a certificate signed by a duly authorized
financial officer or executive of Lessee certifying
that, upon consummation of such replacement, no Event
of Default will have occurred or be continuing;
(vi) furnish Lessor with such documents as Lessor may
reasonably request in connection with the consummation
of the transactions contemplated by this Clause
11.1(d), in each case in form and substance
satisfactory to Lessor; and
(vii) furnish such financing statements incorporating
the Replacement Engine as may be reasonably requested
by Lessor.
11.2 REQUISITION: During any requisition for use or hire of the
Aircraft, any Engine or Part which does not constitute an
Event of Loss:
(a) the Rent and other charges payable under this Agreement
will not be suspended or abated either in whole or in part,
and Lessee will not be released from any of its other
obligations under the Agreement (other than operational
obligations with which Lessee is unable to comply solely by
virtue of the requisition); and
(b) so long as no Default has occurred and is continuing,
Lessee will be entitled to any hire paid by the
requisitioning authority in respect of the Term. Lessee
will, as soon as practicable after the end of any such
requisition, cause the Aircraft to be put into the
condition required by this Agreement. Lessor will be
<PAGE>
entitled to all compensation payable by the requisitioning
authority in respect of any change in the structure, state
or condition of the Aircraft arising during the period of
requisition, and Lessor will apply such compensation in
reimbursing Lessee for the cost of complying with its
obligations under this Agreement in respect of any such
change, but, if any Default has occurred and is continuing,
Lessor may apply the compensation or hire in or towards
settlement of any amounts owing by Lessee under this
Agreement.
12. RETURN OF AIRCRAFT
12.1 RETURN: On the Expiry Date or redelivery of the Aircraft
pursuant to Clause 13.2 or termination of the leasing of
the Aircraft under this Agreement, Lessee will, unless (i)
the Aircraft is not then in possession of Lessee as a
result of a breach by Lessor of its obligations under
Clause 7.1 of this Agreement (provided however that Lessee
shall not be excused in such event from (x) complying with
the conditions set forth in Schedule 6 and (y) ensuring
that the Aircraft is in a condition qualifying for
immediate certification of airworthiness by the FAA) or
(ii) an Event of Loss has occurred, redeliver the Aircraft
and Aircraft Documents at Lessee's expense to Lessor at the
Redelivery Location, in accordance with the procedures and
in compliance with the conditions set forth in Schedule 6,
free and clear of all Security Interests (other than Lessor
Liens) and in a condition qualifying for immediate
certification of airworthiness by the FAA or as otherwise
agreed by Lessor and Lessee. If requested by Lessor,
Lessee shall thereupon cause the Aircraft to be
deregistered by the Air Authority.
12.2 NON-COMPLIANCE: Unless Lessor and Lessee otherwise mutually
agree, if at the time of Final Inspection Lessee has not
fully complied with any of its obligations under this
Agreement (including without limitation the Return
Conditions), or Lessee fails to make the Aircraft available
to Lessor on a timely basis for inspection and redelivery
pursuant to Clause 12.1 and Schedule 6 (whether such
failure is due to any act or omission of Lessee or any
other circumstance whatsoever), the Term shall be extended
until the time when the Aircraft has been redelivered to
Lessor in full compliance with this Agreement, for the sole
purpose of enabling such non-compliance or failure to be
promptly rectified, and during such extension period:
(a) Lessee shall not use the Aircraft in flight operations;
<PAGE>
(b) all Lessee's obligations and covenants under this Agreement
will remain in full force until Lessee so redelivers the
Aircraft, and
(c) Lessee shall pay Rent to Lessor at a rate per month equal
to the monthly Rent specified in Clause 5.3 plus 50 per
cent, calculated on per diem basis.
Any such extension shall not prejudice Lessor's right to
treat such non-compliance or failure as an Event of Default
at any time, and to enforce such rights and remedies as may
be available to Lessor in respect thereof under the terms
of this Agreement or applicable Law. Without limiting the
generality of the foregoing, Lessee's Rent obligation under
paragraph (c) above shall be without prejudice to Lessor's
rights to cancel the letting of the Aircraft and to recover
damages for the breach of this Agreement pursuant to Clause
13.2.
Lessor may elect (either on first tender of the Aircraft by
Lessee or at any time during the said extension period) to
accept redelivery of the Aircraft notwithstanding non-
compliance with Clause 12.1 or the Return Conditions, in
which case Lessee will indemnify Lessor, and provide cash
to Lessor (in an amount reasonably satisfactory to Lessor)
as security for that indemnity, in respect of the cost to
Lessor of putting the Aircraft into the condition required
by this Agreement.
12.3 REDELIVERY: Upon redelivery Lessee will provide to Lessor,
upon Lessor's request, all documents necessary to export
the Aircraft from the Habitual Base (including, without
limitation, a valid and subsisting export license for the
Aircraft) and required in relation to the deregistration of
the Aircraft with the Air Authority.
12.4 ACKNOWLEDGMENT: Provided Lessee has complied with its
obligations under Clause 12 and Schedule 6 of this
Agreement, following redelivery of the Aircraft by Lessee
to Lessor at the Redelivery Location, Lessor will deliver
to Lessee an acknowledgment confirming that Lessee has
redelivered the Aircraft to Lessor in accordance with this
Agreement, which acknowledgement shall be without prejudice
to Lessor's accrued and continuing rights under this
Agreement.
<PAGE>
13. DEFAULT
13.1 EVENTS: The occurrence of the Events of Default will
constitute a repudiation (but not a termination) of this
Agreement by Lessee (whether any such event or condition is
voluntary or involuntary or occurs by operation of law or
pursuant to or in compliance with any judgment, decree or
order of any court or any order, rule or regulation of any
Government Entity). Lessee acknowledges that the
occurrence of any Event of Default would represent a
material default in the performance of its obligations
under this Agreement.
13.2 RIGHTS AND REMEDIES: If an Event of Default occurs and is
continuing, Lessor may at its option (and without prejudice
to any of its other rights under this Agreement), at any
time thereafter (without notice to Lessee except as
required under applicable Law):
(a) by notice to Lessee and with immediate effect on dispatch
of such notice cancel the letting of the Aircraft (but
without prejudice to the continuing obligations of Lessee
under this Agreement), whereupon all rights of Lessee under
this Agreement shall cease; and/or
(b) proceed by appropriate court action or actions to enforce
performance of this Agreement, including, without
limitation, the payment of all Rent and all other amounts
payable to Lessor or any Indemnitee pursuant to the terms
hereof; and/or
(c) proceed by appropriate court action or actions to recover
damages for the breach of this Agreement which shall
include, without limitation:
(i) all Rent and other amounts which are or become due and
payable hereunder prior to the earlier to occur of the
date Lessor sells or re-leases the Aircraft or
receives payment of the amount calculated pursuant to
clause (ii) below;
(ii) an amount equaling the aggregate Rent for the
remainder of the Term (determined without reference to
any right of Lessor to cancel the leasing of the
Aircraft, whether or not such right is exercised),
discounted periodically (equal to installment
frequency) to present worth at the Discount Rate to
the date of payment by Lessee to Lessor, less the
<PAGE>
amount, if any, of the Mitigation Credit (calculated
as provided below in Clause 13.4);
(iii) all costs and other incidental damages associated
with Lessor's exercise of its remedies hereunder or
otherwise incurred by Lessor as a result of an Event
of Default, including, but not limited to,
repossession costs, legal fees, Aircraft storage,
maintenance and insurance costs, Aircraft re-lease or
sale costs (including, in the case of a re-lease, any
costs incurred to transition the Aircraft to the next
operator's maintenance program) and Lessor's internal
costs and expenses (including the cost of personnel
time calculated based upon the compensation paid to
the individuals involved on an annual basis and a
general Lessor overhead allocation), all such costs
and incidental damages being referred to herein
collectively as "Enforcement and Remarketing Costs";
(iv) any loss, premium, penalty or expense which may be
incurred in repaying funds raised to finance the
Aircraft or in unwinding any financial instrument
relating in whole or in part to Lessor's financing of
the Aircraft, all such amounts being referred to
herein collectively as "Unwind Expenses";
(v) any loss, cost, expense or liability, or damage to
Lessor's residual interest in the Aircraft, sustained
by Lessor due to Lessee's failure to maintain the
Aircraft in accordance with the terms of this
Agreement or Lessee's failure to redeliver the
Aircraft in the condition required by this Agreement,
all such amounts being referred to herein collectively
as "Aircraft Condition Damages"; and
(vi) such additional amount, if any, as may be necessary to
place Lessor in the same economic position, on an
After-Tax Basis, as Lessor would have been in if
Lessee had timely performed each of its obligations
under this Agreement; and/or
(d) either:
(i) enter upon the premises where all or any part of the
Aircraft is located and take immediate possession of
and, at Lessor's sole option, remove the same (and/or
any engine which is not an Engine but which is
<PAGE>
installed on the Airframe, subject to the rights of
the owner, lessor or secured party thereof), all
without liability accruing to Lessor for or by reason
of such entry or taking of possession whether for the
restoration of damage to property, conversion or
otherwise, caused by such entry or taking, except
damages caused by gross negligence or willful
misconduct; or
(ii) by delivering notice to Lessee, require Lessee to
redeliver the Aircraft to Lessor at Shannon
International Airport, Ireland (or such other location
as Lessor may require) on the date specified in such
notice and in all respects in the condition required
by this Agreement upon the Return Occasion (it being
understood that Lessee shall not delay any such return
for the purpose of placing the Aircraft in such
condition, but shall nevertheless be liable to Lessor
for the failure of the Aircraft to be in such
condition); and/or
(e) sell at private or public sale, as Lessor may determine, or
hold, use, operate or lease to others the Aircraft as
Lessor in its sole discretion may determine, all free and
clear of any rights of Lessee; and/or
(f) by written notice to Lessee specifying a payment date
(which shall be a date not earlier than five (5) Business
Days following the date of such notice), Lessor may demand
that Lessee pay to Lessor, and Lessee shall pay to Lessor
on the payment date specified in such notice (in lieu of
the Rent due for the period commencing after the date
specified for payment in such notice) the sum of the
following amounts:
(i) all Rent and other amounts which are or are expected
to become due and payable hereunder prior to the
payment date specified by Lessor;
(ii) an amount equaling the aggregate Rent for the
remainder of the Term (determined without reference to
any right of Lessor to cancel the leasing of the
Aircraft, whether or not such right is exercised),
discounted periodically (equal to installment
frequency) to present worth at the Discount Rate to
the payment date specified by Lessee to Lessor, less
the amount, if any, of the Mitigation Credit
(calculated as provided in Clause 13.4 below);
<PAGE>
(iii) an amount equaling Lessor's reasonably
anticipated Enforcement and Remarketing Costs, Unwind
Expenses and Aircraft Condition Damages; and
(iv) such additional amount, if any, as may be necessary to
place Lessor in the same economic position, on an
After-Tax Basis, as Lessor would have been in if
Lessee had timely performed each of its obligations
under this Agreement;
it being understood that, to the extent that any of the
foregoing amounts represents an estimate by Lessor of
losses, damages, costs or expenses which Lessor expects to
incur, (a) Lessor shall adjust the amount thereof as needed
to reflect the actual amount of such losses, damages, costs
or expenses incurred by Lessor when substantially all of
such amounts become known to Lessor, but Lessee shall
nevertheless be obligated to pay the amount demanded by
Lessor (subject to such subsequent adjustment), and (b)
notwithstanding the amount specified in such demand, Lessor
shall be entitled to claim such other (and greater) amount
in any action against Lessee hereunder; and/or
(g) by written notice to Lessee specifying a payment date
(which shall be a date not earlier than five (5) Business
Days following the date of such notice), Lessor may demand
that Lessee pay to Lessor, and Lessee shall pay to Lessor
on the payment date specified in such notice (in lieu of
the Rent due for the period commencing after the date
specified for payment in such notice), any unpaid Rent for
the Aircraft and other amounts payable under this Agreement
(prorated in the case of Rent on a daily basis) to and
including the payment date specified in such notice, plus
an amount equaling the aggregate Rent for the remainder of
the Term, discounted periodically (equal to installment
frequency) to present worth at the Discount Rate, it being
understood that upon payment of such amount, Lessee shall
be deemed to have cured the then pending Event of Default,
and in the absence of a further Event of Default, Lessee
shall be entitled to retain possession of the Aircraft for
the remainder of the Term; and/or;
(h) draw upon the Security Deposit and apply such amounts to
amounts owing to Lessor hereunder.
In addition to the foregoing, Lessor shall be entitled to
exercise such other rights and remedies as may be available
<PAGE>
under applicable Law and Lessee shall be liable on an
After-Tax Basis for, and shall pay Lessor on demand: (i)
interest on all unpaid amounts at the Interest Rate, from
the due date until the date of payment in full; (ii) all
reasonable legal fees and other reasonable costs and
expenses incurred by Lessor by reason of the occurrence of
any Event of Default or the exercise of Lessor's remedies
with respect thereto; and (iii) all reasonable expenses,
disbursements, costs and fees incurred in (A) repossessing,
storing, preserving, shipping, maintaining, repairing and
refurbishing the Aircraft, the Airframe, any Engine or Part
to the condition required by Clause 12 hereof and
(B) preparing the Aircraft, the Airframe, an Engine or Part
for sale or lease, advertising the sale or lease of the
Aircraft, the Airframe, an Engine or Part and selling or
releasing the Aircraft, the Airframe, an Engine or Part.
Lessor is hereby authorized and instructed, but shall have
no obligation, to make any expenditures which Lessor, in
its sole discretion, considers advisable to repair and
restore the Aircraft, the Airframe, an Engine or Part to
the condition required by Clause 12 hereof (it being
understood that Lessee shall be liable for all such
expenditures).
Lessee hereby agrees that, in the event of the return to or
repossession by Lessor of the Aircraft, the Airframe, an
Engine or Part, any rights in any warranty (express or
implied) previously assigned to Lessee or otherwise held by
Lessee shall without further act, notice or writing be
assigned or reassigned to Lessor, if assignable.
No remedy referred to in this Clause 13 is intended to be
exclusive, but, to the extent permissible hereunder or
under applicable Law, each shall be cumulative and in
addition to any other remedy referred to above or otherwise
available to Lessor at Law or in equity; and the exercise
or beginning of exercise by Lessor of any one or more of
such remedies shall not preclude the simultaneous or later
exercise by Lessor of any or all of such other remedies;
provided, however, that nothing in this Clause 13 shall be
construed to permit Lessor to obtain a duplicate recovery
of any element of damages to which Lessor is entitled. No
express or implied waiver by Lessor of any Default or Event
of Default shall in any way be, or be construed to be, a
waiver of any future or subsequent Default or Event of
Default.
<PAGE>
13.3 POWER OF ATTORNEY: Lessee hereby appoints Lessor as the
attorney-in-fact of Lessee, with full authority in the
place and stead of Lessee and in the name of Lessee or
otherwise, for the purpose of carrying out the provisions
of this Agreement and taking any action and executing any
instrument that Lessor may deem necessary or advisable to
accomplish the purposes hereof; provided, however, that
Lessor may only take action or execute instruments under
this Clause 13 after an Event of Default has occurred and
is continuing. Lessee hereby declares that the foregoing
powers are granted for valuable consideration, constitute
powers granted as security for the performance of the
obligations of Lessee hereunder and are coupled with an
interest and shall be irrevocable. Without limiting the
generality of the foregoing or any other rights of Lessor
under this Agreement, upon the occurrence and during the
continuation of an Event of Default, Lessor shall have the
sole and exclusive right and power to (i) settle,
compromise, compound, adjust or defend any actions, suits
or proceedings relating to or pertaining to the Aircraft,
Airframe or any Engine, or this Agreement and (ii) make
proof of loss, appear in and prosecute any action arising
from any policy or policies of insurance maintained
pursuant to this Agreement, and settle, adjust or
compromise any claims for loss, damage or destruction
under, or take any other action in respect of, any such
policy or policies.
13.4 MITIGATION CREDIT: Lessee shall be entitled to have a
Mitigation Credit deducted from any recovery by Lessor from
Lessee of Rent for the unexpired portion of the Term. Such
Mitigation Credit shall be in one of the following amounts,
with Lessor to select the amount which in its reasonable
judgment will place Lessor in the same economic position,
on an After-Tax Basis, as Lessor would have been in if
Lessee had timely performed each of its obligations under
this Agreement:
(a) in the event that Lessor has re-let the Aircraft on terms
(other than rental payment terms) which, taken as a whole,
Lessor regards as being substantially similar to the terms
of this Agreement, an amount equaling the aggregate basic
rental payments to become due for the period coinciding
with the remainder of the Term (determined without
reference to any right of Lessor to cancel the leasing of
the Aircraft, whether or not such right is exercised),
discounted periodically (equal to installment frequency) to
<PAGE>
present worth at the Discount Rate to the date of payment
by Lessee; or
(b) in the event that Lessor has not re-let the Aircraft or has
re-let the Aircraft on terms (other than rental payment
terms) which, taken as a whole, Lessor does not regard as
being substantially similar to the terms of this Agreement,
an amount equaling the fair market rental value (determined
pursuant to the Appraisal Procedure) of the Aircraft for
the period commencing with the date that Lessor reasonably
anticipates that the Aircraft could be re-let at such
rental rate and ending with the date that the Term was
scheduled to expire (determined without reference to any
right of Lessor to cancel the leasing of the Aircraft,
whether or not such right is exercised), discounted
periodically (equal to installment frequency) to present
worth at the Discount Rate to the date of payment by
Lessee; or
(c) in the event that Lessor has not recovered possession of
the Aircraft, or Lessor has recovered possession of the
Aircraft but Lessee's breach of this Agreement has resulted
in a reduction in the volume of Lessor's business, the
amount of expense, if any, avoided by Lessor as a result of
being relieved of its obligations to Lessee under this
Agreement prior to the date that the Term was scheduled to
expire (determined without reference to any right of Lessor
to cancel the leasing of the Aircraft, whether or not such
right is exercised).
14. ASSIGNMENT
14.1 LESSEE: LESSEE WILL NOT ASSIGN, TRANSFER (VOLUNTARILY OR
INVOLUNTARILY, BY OPERATION OF LAW OR OTHERWISE) OR CREATE
OR PERMIT TO EXIST ANY SECURITY INTEREST OVER, ANY OF ITS
RIGHTS UNDER THIS AGREEMENT WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR, SUCH CONSENT NOT TO BE UNREASONABLY
WITHHELD IN THE CASE OF ASSIGNMENTS OR TRANSFERS BY MERGER.
14.2 ASSIGNMENT BY LESSOR: Lessee agrees that Lessor may at any
time during the Term assign its rights under this
Agreement. Notwithstanding any such assignment, Lessor
will remain entitled to the benefit of each indemnity and
the liability insurances effected under this Agreement. At
Lessor's sole cost and expense, Lessee will promptly
execute all documents reasonably requested by Lessor to
<PAGE>
effect, perfect, record or implement any such assignment,
and will promptly comply with any other reasonable requests
of Lessor, its successors and assigns in respect of any
such assignment.
14.3 TRANSFER BY LESSOR: Lessee agrees that Lessor may at any
time during the Term transfer by way of novation its rights
and obligations under this Agreement, and upon completion
of any such novation (including the assumption by the
transferee of all of Lessor's remaining obligations under
this Agreement) Lessor will be released from and will have
no further obligation under this Agreement. At Lessor's
sole cost and expense, Lessee will promptly execute all
documents reasonably requested by Lessor to effect,
perfect, record or implement any such novation, and will
promptly comply with any other reasonable requests of
Lessor, its successors and assigns in respect of any such
novation. Lessor shall pay all costs and expenses of Lessee
(including reasonable legal fees and expenses) in
connection with any sale, assignment or transfer by Lessor,
other than a sale, assignment or transfer to Lessee or
unless such sale, assignment or transfer has resulted from
or occurs following an Event of Default.
14.4 CONDITIONS OF RIGHTS OF ASSIGNMENT AND TRANSFER: Lessor's
rights of assignment, transfer, sale, encumbrance or other
disposition as set forth in this Clause 14 above are
subject to compliance with the following conditions:
(a) prior to such assignment, transfer, sale, encumbrance or
other disposition becoming effective, Lessor will procure
that the assignee (including any security assignee) or
transferee or any new owner of the Aircraft (save where
such new owner is also the "Lessor" hereunder) or any new
holder of a mortgage over the Aircraft or (where lessor as
transferor is not the original Lessor hereunder or an
affiliate thereof) any holder of any interest in the
Aircraft (by way of security or otherwise), as the case may
be, shall execute and deliver to Lessee a letter of quiet
enjoyment in respect to Lessee's use and possession of the
Aircraft substantially in the form set forth in Schedule 14
hereto;
(b) Lessee shall, immediately after such assignment, transfer,
sale, encumbrance or other disposition not be liable to pay
any Person, including any new owner of the Aircraft, for
any greater amount hereunder than that which it would have
been obliged to pay under this Agreement if no such
<PAGE>
assignment, transfer, sale, encumbrance or other
disposition had taken place;
(c) such assignment, transfer, sale, encumbrance or other
disposition shall not alter the terms and conditions of
this Agreement as they define Lessee's rights and
obligations without the prior consent of Lessee; provided,
however, that such consent shall not be withheld or
required where Lessee's obligations are not increased as a
result thereof;
(d) in connection with any proposed assignment, transfer, sale,
encumbrance or other disposition, Lessor will provide to
Lessee such financial and other relevant information
available to it and not subject to any agreement with
respect to confidentiality in respect of the proposed
transferee (and, as appropriate, the entity which supports
the proposed transferee) within a reasonable period prior
to the effectiveness of such transfer as Lessee may
reasonably request; and
(e) Lessor shall not effect such assignment, transfer, sale,
encumbrance or other disposition to any proposed transferee
which is or shares common owners with a certified air
carrier which operates a commercial airline business.
15. ILLEGALITY
If it is or becomes unlawful in any jurisdiction for Lessor
to give effect to any of its obligations as contemplated by
this Agreement or to continue this Agreement, the parties
hereto shall use their best efforts to modify or amend this
Agreement so as to render it valid, legal and enforceable.
In the event that it is not reasonably possible to so
modify or amend this Agreement within a reasonable time
period, Lessor may by notice in writing to Lessee terminate
the leasing of the Aircraft under this Agreement, such
termination to take effect on the latest date (the
"Effective Date") on which Lessor may continue such leasing
and such obligations without being in breach of applicable
laws or regulations, and Lessee will forthwith redeliver
the Aircraft to Lessor in accordance with Clause 12.
Without prejudice to the foregoing, Lessor will consult in
good faith with Lessee up to the Effective Date as to any
steps which may be taken (at no cost to Lessor) to
restructure the transaction to avoid such unlawfulness, but
will be under no obligation to take any such steps.
<PAGE>
16. MISCELLANEOUS
16.1 WAIVERS, REMEDIES CUMULATIVE: The rights of Lessor under
this Agreement may be exercised as often as necessary, are
cumulative and not exclusive of its rights under any Law;
and may be waived only in writing and specifically. Delay
by Lessor in exercising, or non-exercise of, any such right
will not constitute a waiver of that right.
16.2 DELEGATION: Lessor may delegate to any Person all or any of
the rights, powers or discretions vested in it by this
Agreement and any such delegation may be made upon such
terms and conditions and subject to such regulations
(including power to sub-delegate) as Lessor in its absolute
discretion thinks fit.
16.3 SEVERABILITY: Without prejudice to Clause 15 and paragraph
(k) of Schedule 9, if a provision of this Agreement is or
becomes illegal, invalid or unenforceable in any
jurisdiction, that will not affect:
(a) the legality, validity or enforceability in that
jurisdiction of any other provision of this Agreement; or
(b) the legality, validity or enforceability in any other
jurisdiction of that or any other provision of this
Agreement.
16.4 REMEDY: If Lessee fails to comply with any provision of
this Agreement, Lessor may, without being in any way
obliged to do so or responsible for so doing and without
prejudice to the ability of Lessor to treat such non-
compliance as a Default, effect compliance on behalf of
Lessee, whereupon Lessee shall become liable to reimburse
Lessor on an After-Tax Basis immediately any sums expended
by Lessor together with all costs and expenses (including
legal costs) in connection therewith.
16.5 TIME OF ESSENCE: The time stipulated in this Agreement for
all payments payable by Lessee to Lessor and the prompt,
punctual performance of Lessee's other obligations under
this Agreement are of the essence of this Agreement.
<PAGE>
16.6 NOTICES: All notices under, or in connection with, this
Agreement will, unless otherwise stated, be given in
writing by letter, or facsimile. Any such notice is deemed
effectively to be given as follows:
(i) if by letter, on the earlier of the date when
delivered and the 7th day after dispatch; and
(ii) if by facsimile, when transmitted and full
transmission has been separately notified by telephone
by the transmitting party.
The addresses and facsimile and telephone numbers of Lessee
and Lessor are as follows:
Lessee:
Address: 7000 Squibb Road, 3rd Floor
Mission, Kansas 66202
Attn: Vice President Finance and CFO
Facsimile: (913) 789-1351
Telephone: (913) 789-1769
with a copy to:
Address: 7000 Squibb Road, 3rd Floor
Mission, Kansas 66202
Attn: Vice President and General Counsel
Facsimile: (913) 789-1351
Telephone: (913) 789-1713
Lessor:
Address: Lee Farm Corporate Park
83 Wooster Heights Road
Danbury, CT 06810
Attn: Contracts
Facsimile: (203) 830-4764
Telephone: (203) 830-4760
With a copy to: GE Capital Aviation Services, Inc.
201 High Ridge Road
Stamford, CT 06927-4900
Attn: Senior Vice President - Portfolio
and Risk Management
Facsimile: (203) 357-4585
Telephone: (203) 357-3776
<PAGE>
16.7 GOVERNING LAW AND JURISDICTION:
(a) THIS AGREEMENT IN ALL RESPECTS SHALL BE GOVERNED AND
CONSTRUED IN ACCORDANCE WITH THE GOVERNING LAW (INCLUDING
WITHOUT LIMITATION MATTERS OF FORMATION, CONSTRUCTION,
VALIDITY AND PERFORMANCE BUT EXCLUDING CONFLICTS OF LAW
PRINCIPLES).
(b) For the benefit of Lessor, Lessee agrees that the courts of
the United States District Court for the Southern District
of New York and any New York state court sitting in the
City of New York, New York are to have nonexclusive
jurisdiction to settle any disputes arising out of or
relating to this Agreement and submits itself and its
property to the nonexclusive jurisdiction of the foregoing
courts with respect to such disputes.
(c) Without prejudice to any other mode of service, Lessee:
(i) appoints Corporation Services Company, 80 State
Street, Albany, New York 12207-2543 as its agent for
service of process relating to any proceedings before
the New York courts in connection with this Agreement
and agrees to maintain the process agent in New York
notified to Lessor;
(ii) agrees that failure by a process agent to notify
Lessee of the process shall not invalidate the
proceedings concerned; and
(iii) consents to the service of process relating to
any such proceedings by prepaid mailing of a copy of
the process to Lessee's agent at the address
identified in paragraph (i) or by prepaid mailing by
air mail, certified or registered mail of a copy of
the process to Lessee at the address set forth in
Clause 16.7.
(d) Lessee:
(i) waives to the fullest extent permitted by Law any
objection which Lessee may now or hereafter have to
the courts referred to in Clause 16.7(b) above on
grounds of inconvenient forum or otherwise as regards
proceedings in connection with this Agreement;
<PAGE>
(ii) waives to the fullest extent permitted by Law any
objection which Lessee may now or hereafter have to
the laying of venue of any suit, action or proceeding
arising out of or relating to this Agreement brought
in the courts referred to in Clause 16.7(b); and
(iii) agrees that a judgment or order of any court
referred to in Clause 16.7(b) in connection with this
Agreement is conclusive and binding on it and may be
enforced against it in the courts of any other
jurisdiction.
(e) Nothing in this Clause 16.7 limits the right of Lessor to
bring proceedings against Lessee in connection with this
Agreement:
(i) in any other court of competent jurisdiction; or
(ii) concurrently in more than one jurisdiction.
(f) Lessee irrevocably and unconditionally:
(i) agrees that if Lessor brings legal proceedings against
it or its assets in relation to this Agreement no
immunity from such legal proceedings (which will be
deemed to include without limitation, suit, attachment
prior to judgment, other attachment, the obtaining of
judgment, execution or other enforcement) will be
claimed by or on behalf of itself or with respect to
its assets;
(ii) waives any such right of immunity which it or its
assets now has or may in the future acquire; and
(iii) consents generally in respect of any such
proceedings to the giving of any relief or the issue
of any process in connection with such proceedings
including, without limitation, the making, enforcement
or execution against any property whatsoever
(irrespective of its use or intended use) of any order
or judgment which may be made or given in such
proceedings.
16.8 SOLE AND ENTIRE AGREEMENT: This Agreement is the sole and
entire agreement between Lessor and Lessee in relation to
the leasing of the Aircraft, and supersedes all previous
agreements in relation to that leasing.
<PAGE>
16.9 INDEMNITEES: All rights expressed to be granted to each
Indemnitee (other than Lessor) under this Agreement are
given to Lessor on behalf of that Indemnitee.
16.10 COUNTERPARTS: This Agreement may be executed two or
more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one
and the same instrument. To the extent, if any, that this
Agreement constitutes chattel paper (as such term is
defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction) no security interest in this
Agreement may be created through the transfer or possession
of any counterpart other than the counterpart that has been
marked "Counterpart No. 1" on the cover page thereof.
16.11 LANGUAGE: All notices to be given under this Agreement
will be in English. All documents delivered to Lessor
pursuant to this Agreement (including without limitation
any documents to be delivered pursuant to the Conditions
Precedent) will be in English, or if not in English, will
be accompanied by a certified English translation. If
there is any inconsistency between the English version of
this Agreement and any version in any other language, the
English version will prevail.
17. DISCLAIMERS AND WAIVERS:
LESSOR AND LESSEE AGREE THAT THE DISCLAIMERS, WAIVERS AND
CONFIRMATIONS SET FORTH IN CLAUSES 17.1 TO 17.4 BELOW SHALL
APPLY AT ALL TIMES DURING THE TERM. LESSEE'S ACCEPTANCE OF
THE AIRCRAFT IN ACCORDANCE WITH CLAUSE 4.2 SHALL BE
CONCLUSIVE EVIDENCE THAT LESSEE HAS FULLY INSPECTED THE
AIRCRAFT AND EVERY PART THEREOF AND THAT THE AIRCRAFT, THE
ENGINES, THE PARTS AND THE AIRCRAFT DOCUMENTS ARE
TECHNICALLY ACCEPTABLE TO LESSEE AND SATISFY THE DELIVERY
CONDITION REQUIREMENTS AND ARE IN SUITABLE CONDITION FOR
DELIVERY TO AND ACCEPTANCE BY LESSEE.
17.1 EXCLUSION: THE AIRCRAFT IS TO BE LEASED AND DELIVERED
HEREUNDER "AS IS, WHERE IS", AND LESSEE AGREES AND
ACKNOWLEDGES THAT, SAVE AS EXPRESSLY STATED IN THIS
AGREEMENT:
(a) LESSOR WILL HAVE NO LIABILITY IN RELATION TO, AND LESSOR
HAS NOT AND WILL NOT BE DEEMED TO HAVE MADE OR GIVEN
(WHETHER BY VIRTUE OF HAVING DONE OR FAILED TO DO ANY ACT,
OR HAVING ACQUIRED OR FAILED TO ACQUIRE ANY STATUS UNDER OR
IN RELATION TO THIS AGREEMENT OR OTHERWISE), ANY WARRANTIES
<PAGE>
OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO,
THE AIRCRAFT OR ANY ENGINE OR PART, INCLUDING (BUT NOT
LIMITED TO) THE DESCRIPTION, AIRWORTHINESS, COMPLIANCE WITH
SPECIFICATIONS, OPERATION, MERCHANTABILITY, FREEDOM FROM
INFRINGEMENT OF PATENT OR OTHER PROPRIETARY RIGHTS, FITNESS
FOR ANY PARTICULAR USE OR PURPOSE, VALUE, DURABILITY,
CONDITION, OR DESIGN, OR AS TO THE QUALITY OF THE MATERIAL
OR WORKMANSHIP, THE ABSENCE OF LATENT OR OTHER DEFECTS,
WHETHER OR NOT DISCOVERABLE, OR AS TO ANY OTHER MATTER
WHATSOEVER, EXPRESS OR IMPLIED (INCLUDING ANY IMPLIED
WARRANTY ARISING FROM A COURSE OF PERFORMANCE OR DEALING OR
USAGE OF TRADE) WITH RESPECT TO THE AIRCRAFT, ANY ENGINE OR
ANY PART; AND
(b) LESSOR SHALL NOT HAVE ANY OBLIGATION OR LIABILITY
WHATSOEVER TO LESSEE (WHETHER ARISING IN CONTRACT OR IN
TORT, AND WHETHER ARISING BY REFERENCE TO NEGLIGENCE OR
STRICT LIABILITY OF LESSOR OR OTHERWISE) FOR:
(i) ANY LIABILITY, LOSS OR DAMAGE CAUSED OR ALLEGED TO BE
CAUSED DIRECTLY OR INDIRECTLY BY THE AIRCRAFT OR ANY
ENGINE OR BY ANY INADEQUACY THEREOF OR DEFICIENCY OR
DEFECT THEREIN OR BY ANY OTHER CIRCUMSTANCE IN
CONNECTION THEREWITH;
(ii) THE USE, OPERATION OR PERFORMANCE OF THE AIRCRAFT OR
ANY RISKS RELATING THERETO;
(iii) ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR
ANTICIPATED PROFITS OR ANY OTHER DIRECT, INDIRECT OR
CONSEQUENTIAL LOSS OR DAMAGE; OR
(iv) THE DELIVERY, OPERATION, SERVICING, MAINTENANCE,
REPAIR, IMPROVEMENT OR REPLACEMENT OF THE AIRCRAFT,
ANY ENGINE OR ANY PART.
(c) LESSOR WILL HAVE NO LIABILITY OR OBLIGATION WHATSOEVER IN
CONNECTION WITH, THE YEAR 2000 COMPLIANCE (AS HEREINAFTER
DEFINED) OF THE AIRCRAFT OR ANY PART THEREOF. FOR PURPOSES
OF THIS AGREEMENT, THE TERM "YEAR 2000 COMPLIANCE" SHALL
MEAN AND INCLUDE THE ABILITY OF THE AIRCRAFT AND EACH PART
THEREOF TO ACCURATELY PROCESS, PROVIDE AND/OR RECEIVE
DATE/TIME DATA (INCLUDING WITHOUT LIMITATION CALCULATING,
COMPARING, OUTPUTTING AND SEQUENCING), WITHIN, FROM, INTO,
AND BETWEEN THE TWENTIETH CENTURY AND THE TWENTY-FIRST
CENTURY, INCLUDING LEAP YEAR CALCULATIONS SUCH THAT NEITHER
THE AIRCRAFT NOR ANY PART THEREOF OR SERVICE RELATED
<PAGE>
THERETO WILL BE AFFECTED BY DATES/TIMES PRIOR TO, ON, AFTER
OR SPANNING JANUARY 1, 2000.
17.2 WAIVER: LESSEE HEREBY WAIVES, AS BETWEEN ITSELF AND THE
LESSOR, ALL ITS RIGHTS IN RESPECT OF ANY WARRANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, ON THE PART OF LESSOR
AND ALL CLAIMS AGAINST LESSOR HOWSOEVER AND WHENEVER
ARISING AT ANY TIME IN RESPECT OF OR OUT OF ANY OF THE
MATTERS REFERRED TO IN CLAUSE 17.1.
17.3 DISCLAIMER OF CONSEQUENTIAL DAMAGES: EACH OF LESSOR AND
LESSEE AGREES THAT IT SHALL NOT BE ENTITLED TO RECOVER, AND
HEREBY DISCLAIMS AND WAIVES ANY RIGHT THAT IT MAY OTHERWISE
HAVE TO RECOVER, LOST PROFITS OR REVENUES OR CONSEQUENTIAL
DAMAGES AS SUCH TERM IS DEFINED IN SECTION 2-A-520 OF THE
NEW YORK UNIFORM COMMERCIAL CODE AS A RESULT OF ANY BREACH
OR ALLEGED BREACH BY LESSOR OF ANY OF THE AGREEMENTS,
REPRESENTATIONS OR WARRANTIES OF LESSOR CONTAINED IN THIS
AGREEMENT OR THE OTHER OPERATIVE DOCUMENTS.
17.4 CONFIRMATION: LESSEE CONFIRMS THAT IT IS FULLY AWARE OF THE
PROVISIONS OF THIS CLAUSE 17 AND ACKNOWLEDGES THAT RENT AND
OTHER AMOUNTS HAVE BEEN CALCULATED BASED ON ITS PROVISIONS
18. BROKERS AND OTHER THIRD PARTIES.
18.1 NO BROKERS: Each of the parties hereby represents and
warrants to the other that it has not paid, agreed to pay
or caused to be paid directly or indirectly in any form,
any commission, percentage, contingent fee, brokerage or
other similar payments of any kind, in connection with the
establishment or operation of this Agreement, to any Person
(other than fees payable to Lessee's legal advisors or
IAMG).
18.2 INDEMNITY: Each party agrees to indemnify and hold the
other harmless from and against any and all claims, suits,
damages, costs and expenses (including, but not limited to
reasonable attorneys' fees) asserted by any agent, broker
or other third party for any commission or compensation of
any nature whatsoever based upon this Agreement or the
Aircraft, if such claim, suit, damage, cost or expense
arises out of breach by the indemnifying party, its
employees or agents of Clause 18.1.
<PAGE>
19. SECTION 1110
(a) Lessee acknowledges that Lessor would not have entered into
this Agreement unless it had available to it the benefits
of a lessor under Section 1110 of Title 11 of the United
States Code. Lessee covenants and agrees with Lessor that
to better ensure the availability of such benefits, Lessee
shall support any motion, petition or application filed by
Lessor with any bankruptcy court having jurisdiction over
Lessee, whereby Lessor seeks recovery of possession of the
Aircraft under said Section 1110 and shall not in any way
oppose such action by Lessor unless Lessee shall have
complied with the requirements of said Section 1110 to be
fulfilled in order to entitle Lessee to continued use and
possession of the Aircraft hereunder. In the event said
Section 1110 is amended, or if it is repealed and another
statute is enacted in lieu thereof, Lessor and Lessee agree
to amend this Agreement and take such other action not
inconsistent with this Agreement as Lessor reasonably deems
necessary so as to afford to Lessor the rights and benefits
as such amended or substituted statute confers upon owners
and lessors of aircraft similarly situated to Lessor.
(b) Lessor and Lessee mutually agree and acknowledge that this
Agreement is to be treated as a lease for United States
federal income tax purposes.
20. USURY LAWS: The parties intend to contract in strict
compliance with the usury Laws of the State of New York
and, to the extent applicable, the United States of
America. Notwithstanding anything to the contrary in the
Operative Documents, Lessee will not be obligated to pay
any interest in excess of the maximum non-usurious interest
rate, as in effect from time to time, which may by
applicable Law be charged, contracted for, reserved,
received or collected by Lessor in connection with the
Operative Documents. During any period of time in which
the then-applicable highest lawful rate is lower than the
rate specified in Clauses 5.11 or 13.2, interest will
accrue and be payable at such highest lawful rate; however,
if at later times such highest lawful rate is greater than
the rate specified in Clauses 5.11 or 13.2, then Lessee
will pay interest at the highest lawful rate until the
aggregate amount of interest paid by Lessee equals the
amount of interest that would have been payable in
accordance with the interest rate specified in Clauses 5.11
or 13.2.
<PAGE>
21. MODIFICATION OR REVISION:
Neither this Agreement nor any term of this Agreement may be
modified, rescinded, changed waived, discharged or
terminated except by a writing signed by the party to be
charged. Lessor and Lessee acknowledge their agreement to
the provision of this Clause 21 by their initials below:
LESSOR: __________ LESSEE: ____________
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date shown at the beginning of this
Agreement.
LESSOR: SIGNED on behalf of AEROUSA, INC.
By: ___________________________
Name: ___________________________
Title: ___________________________
LESSEE: SIGNED on behalf of VANGUARD AIRLINES, INC.
By: ___________________________
Name: ___________________________
Title: ___________________________
<PAGE>
SCHEDULE 1
DEFINITIONS
The following words and expressions have the respective meanings
set forth below:
"A" CHECK means an "A" check in accordance with the
Manufacturer's Maintenance Planning Document as in effect on the
Delivery Date.
AFTER-TAX BASIS means in the case of any amount payable on an
"After-Tax Basis" to or for the benefit of any Person (including
any amount payable pursuant to this definition), after deduction
of the net amount of all Taxes required to be paid by such
Person with respect to the receipt or accrual by it of such
amount (and assuming that such Person is subject to (i) United
States Federal income tax at the highest marginal statutory rate
imposed on corporations for the relevant period, (ii) United
States state and local income taxes at the composite of the
highest marginal statutory rates imposed on such Person for the
relevant period, as such composite rate shall be certified by a
financial officer of such Person, and (iii) income taxes (if
any) imposed by countries outside the United States at the
actual rates imposed on such Person).
AGREEMENT means this Agreement, each Lease Supplement, any
schedules or documents executed pursuant to the Schedules
hereto, and any and all amendments, revisions, supplements and
modifications thereto.
AIR AUTHORITY means the FAA.
AIRCRAFT means the aircraft described in Part 1 of Schedule 4,
(which term includes where the context admits a separate
reference to all Engines, Parts and Aircraft Documents).
AIRCRAFT CONDITION DAMAGES has the meaning given in Clause
13.2(c)(v).
AIRCRAFT DOCUMENTS means the documents, data and records
identified in the list attached to the Certificate of Technical
Acceptance and any other documents and records referred to in
Clause 8.8, and all additions, renewals, revisions and
replacements from time to time made in accordance with this
Agreement.
<PAGE>
AIRFRAME means the Aircraft, excluding the Engines and Aircraft
Documents.
APPRAISAL PROCEDURE means the following procedure for
determining the "fair market rental value" of the Aircraft: (a)
Lessor shall select an independent aircraft appraiser who shall
make a determination of "fair market rental value" of the
Aircraft; and (b) the fees and expenses of the appraiser shall
be paid by Lessee. "Fair market rental value" shall mean the
value determined by an appraisal completed on an "as-is" and
"where-is" basis.
APU means the auxiliary power unit installed on the Aircraft on
the Delivery Date and any replacement auxiliary power unit
installed on the Aircraft and title to which is transferred to
Owner in accordance with this Agreement.
"B" CHECK means a "B" check in accordance with the
Manufacturer's Maintenance Planning Document as in effect on the
Delivery Date.
BOEING means The Boeing Company, a Delaware corporation with
its principal office in Seattle, State of Washington, U.S.A.
BUSINESS DAY means any day other than a Saturday, Sunday or
other day on which banking institutions in New York, New York
are authorized or required by Law to be closed.
"C" CHECK means a "C" check in accordance with the
Manufacturer's Maintenance Planning Document as in effect on the
Delivery Date.
CERTIFICATED AIR CARRIER means any Person (except the United
States Government) that is a citizen of the United States of
America (as defined in Section 40102 of Title 49 of the United
States Code) and holding a Certificate of Public Convenience and
Necessity issued under Section 41102 of Title 49 of the United
States Code by the Department of Transportation or any
predecessor or successor agency thereto, or, in the event such
certificates shall no longer be issued, any Person (except the
United States Government) that is a citizen of the United States
of America (as defined in Section 40102 of Title 49 of the
United States Code) and legally engaged in the business of
transporting for hire passengers or cargo by air predominantly
to, from or between points within the United States of America,
and, in either event, operating commercial jet aircraft capable
of carrying ten or more individuals or 6,000 pounds or more of
<PAGE>
cargo, which also is certificated so as to entitle Lessor, as a
lessor, to the benefits of Section 1110 of Title 11 of the
United States Code with respect to the Aircraft.
COLD SECTION REFURBISHMENT means, with respect to any Engine,
the completion of the following: complete unstacking of both
high and low compressors and complete visual inspection; de-
blading discs as necessary; visual inspections of all discs;
verification that all snap diameters on discs are within limits;
inspection of all blades for proper chord dimensions and
cracking; repair or replacement of blades below minimums;
inspection and repair of stators as necessary; blade-up of discs
using new lock plates; assembly of rotors in the compressor;
balance of all rotors; and installation of rotors in the Engine.
CYCLE means one take-off and landing of the Aircraft.
DAMAGE NOTIFICATION THRESHOLD means $100,000.
"D" CHECK means a "D" check in accordance with the
Manufacturer's Maintenance Planning Document as in effect on the
Delivery Date.
DEFAULT means any Event of Default or any event or circumstance
which, with the giving of notice and/or lapse of time and/or
determination of materiality and/or fulfillment of a condition
would constitute an Event of Default.
DELIVERY means delivery of the Aircraft by Lessor to Lessee
under this Agreement.
DELIVERY CONDITION REQUIREMENTS means the requirements specified
in Part 2 of Schedule 4.
DELIVERY DATE means the date on which Delivery occurs.
DELIVERY LOCATION means Budapest International Airport,
Budapest, Hungary.
DEPOSIT means all amounts payable pursuant to Clause 5.1.
DOLLARS AND $ means the lawful currency of the United States of
America.
ERISA means the Employee Retirement Income Security Act of 1974,
as amended.
ENFORCEMENT AND REMARKETING COSTS has the meaning given in
Clause 13.2(c)(iii).
<PAGE>
ENGINE means, whether or not installed on the Aircraft:
(a) each engine of the manufacture and model specified in Part
1 of Schedule 4 (each of which has 750 or more rated
takeoff horsepower or the equivalent of such horsepower)
which Lessor elects to tender to Lessee with the Airframe
on the Delivery Date, such engines being described as to
serial numbers on the Certificate of Technical Acceptance
to be executed by Lessee on or prior to delivery of the
Aircraft and in Schedule 1 to Lease Supplement No. 1 to be
executed by Lessee and Lessor upon delivery of the
Aircraft;
(b) any Replacement Engine, with effect from the time when
title has passed to Owner in accordance with this
Agreement;
and in each case includes all modules and Parts from time to
time belonging to or installed in that engine but excludes any
properly replaced engine, title to which should have passed to
Lessee pursuant to this Agreement.
ENGINE CYCLE means operation of an engine on an aircraft from
and including a take-off to and including the landing of that
aircraft.
ENGINE EVENT OF LOSS means the occurrence with respect to an
Engine only, whether or not installed on the Airframe, of any of
those events described in the definition of Event of Loss.
ENGINE FLIGHT HOUR means each hour or part thereof an Engine is
operated, elapsing from the moment the wheels of an aircraft on
which such Engine is installed leave the ground until the wheels
of such aircraft next touch the ground.
ENGINE REFURBISHMENT means all scheduled and unscheduled off-
the-wing Engine maintenance and repair accomplished for each
module in accordance with the performance restoration or full
overhaul sections of the Manufacturer's workscope planning
guide.
EQUIPMENT CHANGE has the meaning given in Clause 8.14(a).
EVENT OF DEFAULT means any event or condition specified Schedule
9.
EVENT OF LOSS means with respect to the Aircraft (including for
the purposes of this definition the Airframe):
<PAGE>
(a) the actual or constructive total loss of the Aircraft
(including any damage to the Aircraft which results in an
insurance settlement on the basis of a total loss, or
requisition for use or hire which results in an insurance
settlement on the basis of a total loss); or
(b) the Aircraft being destroyed, damaged beyond economic
repair or permanently rendered unfit for normal use for any
reason whatsoever; or
(c) the requisition of title, or other compulsory acquisition
of title for any reason of the Aircraft by the government
of the State of Registration or any other authority
(whether de jure or de facto); or
(d) the hijacking, theft, disappearance, condemnation,
confiscation, seizure, detention or requisition for use or
hire of the Aircraft which deprives any Person permitted by
this Agreement to have possession and/or use of the
Aircraft of its possession and/or use for (i) more than 15
days (or 30 days in the case of requisition for use or hire
by the government of the State of Registration) or (ii) if
earlier, a period ending on the Expiry Date.
EXCUSABLE DELAY means, with respect to delivery of the Aircraft,
delay or non-performance due to or arising out of acts of God or
public enemy, civil war, insurrection or riot, fire, flood,
explosion, earthquake, accident, epidemic, quarantine
restriction, any act of government, governmental priority,
allocation, regulation or order affecting directly or
indirectly, the Aircraft, any manufacturer, Lessor or any
materials or facilities, strike or labor dispute causing
cessation, slowdown or interruption of work, inability after due
and timely diligence to procure equipment, data or materials
from manufacturers, suppliers, any existing owner, seller or
lessee in a timely manner, damage, destruction or loss, or any
other cause to the extent that such cause is beyond the control
of Lessor, whether above mentioned or not and whether or not
similar to the foregoing.
EXPIRY DATE means the date falling 60 months after the Rent
Commencement Date, as such day is specified in Lease Supplement
No. 1, or, if earlier, (i) the date when Lessor, acting in
accordance with the provisions of this Agreement, terminates the
leasing of the Aircraft to Lessee under this Agreement, or (ii)
subject to the provisions of Clauses 11.1(a) and 11.2, the date
Lessor receives the Agreed Value together with any other amounts
<PAGE>
then due and unpaid under this Agreement and the Other
Agreements following an Event of Loss; provided that if the Term
is extended pursuant to Clause 12.2, the Expiry Date shall be
extended to the date when the Aircraft has been redelivered to
Lessor in full compliance with this Agreement.
FAA means the Federal Aviation Administration of the United
States of America and any successor thereof.
FAR means the Federal Aviation Regulations set forth in Title 14
of the United States Code of Federal Regulations, as amended and
modified from time to time.
FINAL INSPECTION has the meaning given in Clause 1.1 of Schedule
6.
FINANCIAL INDEBTEDNESS means any indebtedness in respect of:
(a) moneys borrowed or raised;
(b) any liability under any debenture, bond, note, loan stock,
acceptance, documentary credit or other security;
(c) the acquisition cost of any asset to the extent payable
before or after the time of acquisition or possession; or
(d) any guarantee, indemnity or similar assurance against
financial loss of any person in respect of the above.
FINANCING PARTIES means the Person or Persons from time to time
notified by Lessor to Lessee as providing financing to Lessor
and/or Owner in respect of its acquisition, ownership or leasing
of the Aircraft, whether by way of superior lease, loan or
otherwise.
FINANCING STATEMENTS means Uniform Commercial Code Financing
Statements in respect of the Aircraft and Engines leased
hereunder prepared in a form acceptable for filing with the
applicable Government Entities in the Habitual Base, is subject
or in whose activities any of the above is a participant.
FLIGHT HOUR means each hour or part thereof elapsing from the
moment the wheels of the Aircraft leave the ground on take off
until the wheels of the Aircraft next touch the ground.
GAAP means generally accepted accounting principles in the
United States.
GECAS means either or both of GE Capital Aviation Services, Inc.
and GE Capital Aviation Services, Limited.
<PAGE>
GENEVA CONVENTION means the Convention for the International
Recognition of Rights in Aircraft, signed (ad referendum) at
Geneva, Switzerland, on June 19, 1948, and amended from time to
time, but excluding the terms of any adhesion thereto or
ratification thereof containing reservations to which the United
States of America does not accede.
GOVERNING LAW means the Laws of New York, excluding, however,
the provisions of Section 7-101 of the New York General
Obligations Law, which the parties have agreed, for avoidance of
doubt, are inapplicable to this transaction.
GOVERNMENT ENTITY means:
(a) any national government, political subdivision thereof, or
local jurisdiction therein;
(b) any instrumentality, board, commission, court, or agency of
any of the above, however constituted; and
(c) any association, organization, or institution of which any
of the above is a member or to whose jurisdiction any
thereof is subject or in whose activities any of the above
is a participant.
HABITUAL BASE means the United States.
HOT SECTION REFURBISHMENT means, with respect to any Engine, the
complete visual inspection and repair as necessary of the
combustion section of an Engine in an engine repair/overhaul
station, including (without limitation) complete unstacking of
the high pressure turbine; complete visual inspection; de-
blading of discs as required; visual inspections of all discs;
verification that all snap diameters on discs are within limits;
inspection of all blades for proper chord dimensions and
cracking; repair or replacement of all blades below minimums;
inspection and repair of stators as necessary; blade-up of discs
using new lock plates; assembly of rotors in the turbine;
balance of all rotors; and installation of rotors in the Engine.
INDEMNITEE means each of Lessor, Owner, GECAS, the Financing
Parties, Bankers Trust Company, GPA Group plc, Airplanes Limited
and each of their respective successors and assigns,
shareholders, subsidiaries, affiliates, partners, contractors,
directors, officers, servants, agents and employees.
<PAGE>
INSURANCES means insurances in respect of the Aircraft in
form and substance satisfactory to Lessor, and includes (without
limitation) any insurances and reinsurances required by Schedule
7.
LANDING GEAR means the landing gear assembly and the life
limited parts, as defined by the relevant Boeing service letter,
of the Aircraft excluding any rotable components.
LAW means and includes (a) any statute, decree, constitution,
regulation, order judgment or other directive of any Government
Entity; (b) any treaty, pact, compact or other agreement to
which any Government Entity is a signatory or party; (c) any
judicial or administrative interpretation or application of any
Law described in (a) or (b) above; and (d) any amendment or
revision of any Law described in (a), (b) or (c) above.
LEASE SUPPLEMENT means a Lease Supplement, substantially in the
form of Schedule 13 hereto, entered into between Lessor and
Lessee.
LESSEE AFFILIATE means any Subsidiary for the time being of
Lessee.
LESSEE CONDITIONS PRECEDENT means the Lessee conditions
specified in Schedule 3.
LESSEE'S MAINTENANCE PROGRAM means the Maintenance Program
specifically approved by the Air Authority for Lessee's
maintenance of the Aircraft.
LESSOR CONDITIONS PRECEDENT means the Lessor conditions
specified in Schedule 3.
LESSOR LIEN means:
(a) any Security Interest whatsoever from time to time created
by Lessor or Owner in connection with the financing of the
Aircraft;
(b) any other Security Interest in respect of the Aircraft
which results from acts of or claims against Lessor or
Owner not related to the transactions contemplated by or
permitted under this Agreement; and
(c) any Security Interest in respect of the Aircraft for Lessor
Taxes.
<PAGE>
LESSOR TAX means any Tax that is:
(a) imposed solely as the result of activities of Lessor or
Owner in the jurisdiction imposing the Tax that is
unrelated to Lessor's dealings with Lessee or the
transactions contemplated by this Agreement or the
operation of the Aircraft by Lessee; or
(b) imposed on or measured by the net income, profits or gains
of Lessor or Owner including, without limitation, minimum
taxes and taxes on tax preference items and taxes which are
capital, doing business, franchise, excess profits, or net
worth taxes and interest, additions to tax, penalties or
other charges in respect thereof by any Government Entity
in the United State of America; or
(c) imposed solely as the result of an event that occurs prior
to the Delivery Date or subsequent to the Return Occasion
and that is unrelated to Lessor's dealings with Lessee or
to the transactions contemplated by this Agreement; or
(d) imposed on or with respect to a Tax Indemnitee resulting
from a Tax Indemnitee's gross negligence, willful
misconduct, breach of this Lease, or misrepresentation; or
(e) any taxes resulting from or attributable to a Lessor Lien;
or
(f) any Taxes in the nature of a withholding tax imposed as a
result of a Tax Indemnitees not being a United States
person within the meaning of Internal Revenue Code Section
7701(a)(30); or
(g) any interest, penalties, or additions to tax imposed on a
Tax Indemnitee attributable to the failure of a Tax
Indemnitee to properly and timely file any return unless
such failure was due to (1) the failure of the Lessee to
notify the Tax Indemnity of any tax filing or reporting
requirement that was due to the place of use or operation
of the Aircraft or the location of Lessee, or (2) the
failure of the Lessee to provide to the Tax Indemnitee any
information required for the filing of such return.
LETTER OF CREDIT means the letter of credit issued pursuant to
Clause 5.12 and any replacement or renewal of that letter of
credit.
<PAGE>
LOSSES means any claims, proceedings, losses, liabilities,
damages (whether direct, indirect, special, incidental or
consequential) , suits, judgments, costs, expenses, fees,
penalties or fines (whether civil or criminal) of every nature
and kind, including any of the foregoing arising or imposed with
or without any Indemnitee's fault or negligence, whether passive
or active or under the doctrine of strict liability.
MAINTENANCE PERFORMER means such Person as is approved by the
FAA to perform maintenance and/or modification services on
commercial aircraft and/or commercial aircraft engines, which
Person shall be agreed by Lessee and Lessor to have recognized
standing and experience, suitable facilities, and suitable
equipment to perform such services on aircraft and/or engines of
the same or improved model as the Aircraft or, in the case of
engines, the Engines.
MAINTENANCE PROGRAM means an Air Authority approved maintenance
program for the Aircraft in accordance with the Manufacturer's
specifications, service bulletins, planning documents,
maintenance manuals and documents and encompassing scheduled
maintenance (including block maintenance), condition monitored
maintenance, and/or on-condition maintenance of Airframe,
Engines and Parts, including but not limited to, servicing,
testing, preventive maintenance, repairs, structural
inspections, system checks, overhauls, approved modifications,
service bulletins, engineering orders, airworthiness directives,
corrosion control, inspections and treatments.
MAJOR CHECKS means any C-Check, multiple C-Check, D-Check, Q-
Check or annual heavy maintenance visit or segment thereof
suggested by its manufacturer and approved by the FAA for
commercial aircraft of the same model as the Aircraft (however
denominated) as set out in the Agreed Maintenance Program.
MANUFACTURER means Boeing.
MANUFACTURER'S MAINTENANCE PLANNING DOCUMENT means the
recommended maintenance program for the Aircraft issued by the
Manufacturer.
MINOR CHECKS means any A-Check or B-Check.
MITIGATION CREDIT has the meaning given in Clause 13.4.
OWNER means Emerald Aviation Investments Limited.
PART means, whether or not installed on the Aircraft:
<PAGE>
(a) any component, furnishing or equipment (other than a
complete Engine) furnished with the Aircraft on the
Delivery Date; and
(b) any other component, furnishing or equipment (other than a
complete Engine), with effect from the time when title
thereto has passed to Owner pursuant to this Agreement;
but excludes any such items title to which should have passed to
Lessee pursuant to this Agreement.
PART 36 OR FAR PART 36 means Part 36 of the FAR, as amended or
modified from time to time.
PART 121 OR FAR PART 121 means Part 121 of the FAR, as amended
or modified from time to time.
PERMITTED LIEN means:
(a) any lien for Taxes not assessed or, if assessed, not yet
due and payable, or being contested in good faith by
appropriate proceedings;
(b) any lien of a repairer, mechanic, carrier, hangarkeeper or
other similar lien arising in the ordinary course of
business by operation of Law in respect of obligations
which are not overdue or are being contested in good faith
by appropriate proceedings;
but only if (in the case of both (a) and (b)) (i) adequate
reserves have been provided by Lessee for the payment of
the Taxes or obligations; and (ii) such proceedings, or the
continued existence of the lien, do not give rise to any
likelihood of the sale, forfeiture or other loss of the
Aircraft or any interest therein or of criminal liability
on Lessor or Owner; and
(c) any Lessor Lien.
PERSON means any individual person, corporation, partnership,
firm, joint stock company, joint venture, trust, estate,
unincorporated organization, association, Government Entity, or
organization or association of which any of the above is a
member or a participant.
"Q" CHECK means a "Q" Check in accordance with Lessee's
Maintenance Program as in effect on the Delivery Date.
<PAGE>
REDELIVERY LOCATION means a location within 3,500 nautical miles
of Kansas City, Missouri or such other airport as may be agreed
in writing by Lessor and Lessee.
RENT means all amounts payable pursuant to Clause 5.3.
RENTAL PERIOD means each period ascertained in accordance with
Clause 5.2.
RENT COMMENCEMENT DATE means the date on which Lessor validly
tenders the Aircraft for Delivery to Lessee under Clause 4.1.
RENT DATE means the first day of each Rental Period.
REPLACEMENT ENGINE means an engine of the same manufacturer and
model, and having equivalent value, utility, modification
status, time elapsed since Hot Section Refurbishment and Cold
Section Refurbishment and remaining warranty status as the
Engine it is intended to replace under Clause 11.1(d), or, at
Lessee's option, an engine of the same manufacturer as such
Engine but of an improved model, and otherwise of an equivalent
value and utility and suitable for installation and use on the
Airframe without impairing the value or utility of the Airframe
and compatible with the remaining installed Engine.
REQUIRED LC EXPIRY DATE means the date being 90 days after the
Expiry Date.
RETURN OCCASION means the date on which the Aircraft is
redelivered to Lessor in accordance with Clause 12.
SALES TAXES has the meaning given in Schedule 11, Paragraph 2.
SCHEDULED DELIVERY DATE means February 28, 1999.
SECURITY INTEREST means any mortgage, charge, pledge, lien,
encumbrance, assignment, hypothecation, right of set-off, right
of detention or any other agreement or arrangement having the
effect of conferring security.
STATE OF INCORPORATION means Delaware.
STATE OF REGISTRATION means the United States of America.
SUBSIDIARY means:
(a) in relation to any reference to accounts, any company whose
accounts are consolidated with the accounts of Lessee in
accordance with GAAP; or
<PAGE>
(b) for any other purpose, an entity from time to time
(i) of which another has direct or indirect control or
owns directly or indirectly more than 50 percent of
the voting share capital; or
(ii) which is a direct or indirect subsidiary of
another under the Laws of the jurisdiction of its
incorporation.
SUPPLEMENTAL RENT means all amounts payable by Lessee pursuant
to Clause 5.4 and under Clause 4 of Schedule 10.
TAXES means any and all present and future taxes, duties,
withholdings, levies, assessments, imposts, fees and other
governmental charges of all kinds together with any penalties,
fines, surcharges and interest thereon and any additions
thereto.
TAX INDEMNITEES means Owner, Lessor and each Financing Party.
TERM means the period commencing on the Delivery Date and ending
on the Expiry Date.
U.S.C. means the United States Code.
UNWIND EXPENSES has the meaning given in Clause 13.2(c)(iv).
YEAR 2000 COMPLIANCE has the meaning given in Clause 17.1(c).
The definitions of certain words and expressions which pertain
to confidential and proprietary provisions of the Agreement have
the respective meanings set forth in Clause 2 of Schedule 10.
<PAGE>
SCHEDULE 2
REPRESENTATIONS AND WARRANTIES
1.1 LESSEE'S REPRESENTATIONS AND WARRANTIES
Lessee's representations and warranties to Lessor are as
follows:
(a) STATUS: Lessee is a corporation duly incorporated and
validly existing in good standing under the Laws of the
State of Incorporation and has the corporate power to own
its assets and carry on its business as it is being
conducted and is the holder of all necessary air
transportation licenses required in connection therewith
and with the use and operation of the Aircraft;
(b) POWER AND AUTHORITY: Lessee has the corporate power to
enter into and perform, and has taken all necessary
corporate action to authorize the entry into, performance
and delivery of, this Agreement and the transactions
contemplated by this Agreement;
(c) LEGAL VALIDITY: this Agreement has been duly authorized,
executed and delivered by Lessee, and constitutes a legal,
valid and binding obligation of Lessee, enforceable in
accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization,
moratorium or other similar Laws affecting the enforcement
of creditors' rights generally, and, by such principles of
equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law) as a court
having jurisdiction may impose and by Laws which may affect
some of such remedies but which do not make the available
remedies inadequate for the substantial realization of the
benefits provided herein;
(d) NON-CONFLICT: the entry into and performance by Lessee of,
and the transactions contemplated by, this Agreement do not
and will not:
(i) conflict with any Laws binding on Lessee; or
(ii) conflict with the constitutional documents of Lessee;
or
<PAGE>
(iii) conflict with or result in default under any
agreement or instrument which is binding upon Lessee
or any of its assets nor result in the creation of any
Security Interest over any of its assets;
(e) AUTHORIZATION: so far as concerns the obligations of
Lessee, all authorizations, consents, registrations and
notifications required in connection with the entry into,
performance, validity and enforceability of, this Agreement
and the transactions contemplated by this Agreement, have
been (or will on or before the Delivery Date have been)
obtained or effected (as appropriate) and are (or will on
their being obtained or effected be) in full force and
effect;
(f) INTENTIONALLY LEFT BLANK
(g) MATERIAL ADVERSE CHANGE: there has been no material
adverse change in the consolidated financial condition of
Lessee and the Lessee Affiliates or the financial condition
of Lessee and the Lessee Affiliates since the date to which
the accounts most recently provided to Lessor on or prior
to the Delivery Date were drawn up;
(h) LITIGATION: no litigation, arbitration or administrative
proceedings are pending or to Lessee's knowledge threatened
against Lessee or any Lessee Affiliate which, if adversely
determined, would have a material adverse effect upon
Lessee's financial condition or business or Lessee's
ability to perform its obligations under this Agreement;
(i) PARI PASSU: the obligations of Lessee under this Agreement
rank at least pari passu with all other present and future
unsecured and unsubordinated obligations (including
contingent obligations) of Lessee, with the exception of
such obligations as are mandatorily preferred by Law and
not by virtue of any contract;
(j) CHIEF EXECUTIVE OFFICE: Lessee's chief executive office
(as that term is defined in Article 9 of the Uniform
Commercial Code as in effect in the State of Kansas) is
located at 533 Mexico City Avenue, Kansas City, Missouri
64153 and the records of the Lessee concerning the Aircraft
are maintained at such chief executive office;
(k) CERTIFICATED AIR CARRIER: Lessee is a Certificated Air
Carrier and Lessee will not take a position adversely
effecting Lessor, as lessor of the Aircraft to Lessee,
under Section 1110 of Title 11 of the United States Code
with respect to the Aircraft; and
<PAGE>
(l) CITIZEN OF THE UNITED STATES: Lessee is a "citizen of the
United States" as defined in Section 40102 of Title 49 of
the United States Code.
1.2 LESSEE'S FURTHER REPRESENTATIONS AND WARRANTIES
Lessee's further representations and warranties to Lessor
are as follows:
(a) ACCOUNTS: the audited consolidated accounts of Lessee and
the Lessee Affiliates most recently delivered to Lessor,
including the balance sheets and statements of income and
retained earnings:
(i) have been prepared in accordance with GAAP; and
(ii) fairly represent the consolidated financial condition
and operations of Lessee and the Lessee Affiliates as
at the date to which they were drawn up;
(iii) NO DEFAULT: No Default has occurred and is
continuing or might result from the entry into or
performance of this Agreement;
(b) REGISTRATION:
(i) except for the filing for recordation of this
Agreement and a Lease Supplement with the FAA, and the
filing of any Uniform Commercial Code financing
statements required (and continuation statements at
periodic intervals), no further filing or recording of
this Agreement or of any other document (including any
financing statement under Article 9 of the Uniform
Commercial Code) and no further action, is or will be
necessary under the Laws of the United States of
America, the State of Incorporation, the State of
Registration, and the Habitual Base or any other
states in order to (A) fully establish, perfect and
protect Owner's title to, and the interests of Lessor
and Owner in, the Aircraft or any Engine or Part as
against Lessee or any third party, or (B) ensure the
validity, effectiveness and enforceability of this
Agreement or any other Operative Document to which the
Lessee is a party; and
<PAGE>
(ii) under the Laws of the State of Incorporation, the
State of Registration and the Habitual Base the
property rights of Lessor and Owner in the Aircraft
have been fully established, perfected and protected;
(c) TAXES: Lessee has delivered all necessary returns and
payments due to the tax authorities in the State of
Incorporation, the State of Registration and the Habitual
Base and all other jurisdictions in which Lessee is
required to pay Taxes and/or file tax returns or reports
and Lessee is not required by Law to deduct any Taxes from
any payments under this Agreement;
(d) FULL DISCLOSURE: each of this Agreement and any other
document, certificate or statement (excluding any
forecasts, plans and projections) furnished to Lessor by or
on behalf of Lessee in connection with the transactions
contemplated hereby (including without limitation financial
information) does not contain any untrue statement of a
material fact or omit to state a material fact necessary in
order to make the statements contained herein and therein
not misleading; all forecasts and opinions contained
therein were honestly made on reasonable grounds after due
and careful inquiry by Lessee;
(e) ERISA: Lessee is not engaged in any transaction in
connection with which it could be subjected to either a
civil penalty assessed pursuant to Section 502 of ERISA or
any tax imposed by Section 4975 of the Internal Revenue
Code; no material liability to the Pension Benefit Guaranty
Corporation has been or is expected by Lessee to be
incurred with respect to any employee pension benefit plan
(as defined in Section 3 of ERISA) maintained by Lessee or
by any trade or business (whether or not incorporated)
which together with Lessee would be treated as a single
employer under Section 4001 of ERISA and Section 414 of the
Internal Revenue Code; there has been no reportable event
(as defined in Section 4043(b) of ERISA) with respect to
any such employee pension benefit plan; no notice of intent
to terminate any such employee pension benefit plan has
been filed or is expected to be filed, nor has any such
employee pension benefit been terminated; no circumstance
exists or is anticipated that constitutes or would
constitute grounds under Section 4042 of ERISA for the
Pension Benefit Guaranty Corporation to institute
proceedings to terminate, or to appoint a trustee to manage
the administration of, such an employee pension benefit
plan; and no accumulated funding deficiency (as defined in
<PAGE>
Section 302 of ERISA or Section 412 of the Internal Revenue
Code), whether or not waived, exists with respect to any
such employee pension benefit plan.
1.3 LESSOR'S REPRESENTATIONS AND WARRANTIES:
Lessor's representations and warranties to Lessee are as
follows:
(a) STATUS: Lessor is a corporation duly incorporated, validly
existing and in good standing under the Laws of Connecticut
and has the corporate power to own its assets and carry on
its business as it is now being conducted;
(b) POWER AND AUTHORITY: Lessor has the corporate power to
enter into and perform, and has taken all necessary
corporate action to authorize the entry into, performance
and delivery of, this Agreement and the transactions
contemplated by this Agreement;
(c) LEGAL VALIDITY: this Agreement has been duly authorized,
executed and delivered by Lessor and constitutes Lessor's
legal, valid and binding obligation enforceable in
accordance with its terms except as may be limited by
applicable bankruptcy, insolvency, reorganization,
moratorium or other similar Laws affecting the enforcement
of creditors' rights generally, and, by such principles of
equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law) as a court
having jurisdiction may impose and by Laws which may affect
some of such remedies but which do not make the available
remedies inadequate for the substantial realization of the
benefits provided herein;
(d) NON-CONFLICT: the entry into and performance by Lessor of,
and the transactions contemplated by, this Agreement do not
and will not:
(i) conflict with any Laws binding on Lessor; or
(ii) conflict with the constitutional documents of Lessor;
or
(iii) conflict with or result in default under any
agreement or instrument which is binding upon Lessor
or any of its assets nor result in the creation of any
Security Interest over any of its assets (other than
this Agreement);
<PAGE>
(e) AUTHORIZATION: so far as concerns the obligations of
Lessor, all authorizations, consents, registrations and
notifications required under the Governing Law or the laws
of Lessor's state of incorporation in connection with the
entry into, performance, validity and enforceability of,
and the transactions contemplated by, this Agreement by
Lessor have been (or will on or before the Delivery Date
have been) obtained or effected (as appropriate) and are
(or will on their being obtained or effected be) in full
force and effect;
(f) RIGHT TO LEASE: on the Delivery Date, Lessor shall have
the right to lease the Aircraft to Lessee in accordance
with the terms hereof;
(g) CITIZENSHIP: Lessor is a "citizen of the United States" as
defined in Section 40102 of Title 49 of the United States
Code.
<PAGE>
SCHEDULE 3
CONDITIONS PRECEDENT
2. LESSEE CONDITIONS PRECEDENT
The conditions precedent to Lessor's obligation to deliver and
to commence the leasing of the Aircraft are as follows.
2.1 PRELIMINARY CONDITIONS
Lessor will receive from Lessee not later than two Business Days
prior to the Scheduled Delivery Date each of the following in
form and substance satisfactory to Lessor:
(a) OPINION: evidence that an opinion in the form of Schedule
8 will be issued on the Delivery Date by independent legal
counsel acceptable to Lessor in the State of Registration,
the Habitual Base and the State of Incorporation;
(b) FAA OPINION: evidence that there will be issued an opinion
of Daugherty, Fowler, Peregrin & Haught in a form
acceptable to Lessor as to the due filing for recordation
of this Agreement;
(c) APPROVALS: evidence of the issue of each approval, license
and consent which may be required in relation to, or in
connection with the performance by Lessee of any of its
obligations hereunder;
(d) IMPORT: evidence that any required import license, and all
customs formalities, relating to the import of the Aircraft
into the Habitual Base have been obtained or complied with,
and that the import of the Aircraft into the Habitual Base
is exempt from Taxes;
(e) LICENSES: copies of Lessee's air transport license, air
operator's certificates and all other licenses,
certificates and permits required by Lessee in relation to,
or in connection with, the operation of the Aircraft;
(f) PROCESS AGENT: a letter from the process agent appointed
by Lessee in this Agreement accepting that appointment;
<PAGE>
(g) CERTIFICATE OF LEASE TERMINATION: a certificate of lease
termination executed by a duly authorized officer of
Lessee, substantially in the form of Schedule 12 to this
Agreement, acknowledging that this Agreement is no longer
in effect with respect to the Aircraft and Engines, which
certificate Lessor will hold in escrow to be filed at the
FAA upon the expiration or other termination of this
Agreement; and
(h) GENERAL: such other documents as Lessor may reasonably
request;
2.2 FINAL CONDITIONS
(a) FINAL DOCUMENTS: Lessor shall receive on or before the
Delivery Date each of the following:
(i) CERTIFICATE OF TECHNICAL ACCEPTANCE: the Certificate
of Technical Acceptance, dated and fully completed,
and executed by Lessor and Lessee, certifying that
Lessee has completed its inspection of the Aircraft in
accordance with Clause 4.5 and that the Aircraft
conforms to the provisions set forth all therein and
is in all respects acceptable to Lessee, or if not so
acceptable, then setting forth discrepancies and
corrective action to be taken;
(ii) LEASE SUPPLEMENT: in the form of Schedule 13 hereto,
to be dated the Delivery Date, fully completed and
executed by Lessor and Lessee, and filed for recording
at the FAA;
(iii) OPINIONS: a signed original of each of the
opinions referred to in 1.1(a) and 1.1(b) above, which
shall be dated the Delivery Date;
(iv) PAYMENTS: all sums due to Lessor under this Agreement
on or before the Delivery Date;
(v) INSURANCES: certificates of insurance, an opinion and
undertaking from Lessee's insurance broker and other
evidence satisfactory to Lessor that Lessee is taking
the required steps to ensure due compliance with the
provisions of this Agreement as to Insurances with
effect on and after the Delivery Date;
(vi) ACCOUNTS: the latest available accounts of Lessee as
described in Clause 8.2(b)(i) and (ii);
<PAGE>
(vii) LESSEE'S MAINTENANCE PROGRAM: such information
and documents relating to Lessee's Maintenance Program
as Lessor may require;
(viii) FILINGS: evidence on the Delivery Date that the
Financing Statements have been duly filed and that all
filings, registrations, recordings and other actions
have been or will be taken which are necessary or
advisable to ensure the validity, effectiveness and
enforceability of this Agreement and to protect the
property rights of Lessor and Owner in the Aircraft,
any Engine or any Part; and
(ix) GENERAL: such other documents as Lessor may reasonably
request;
(b) REPRESENTATIONS/WARRANTIES: the representations and
warranties of Lessee in Schedule 2 shall be correct, and
would be correct if repeated on Delivery; and
(c) NO DEFAULT: no Default shall have occurred and be
continuing on Delivery or might result from the leasing of
the Aircraft to Lessee under this Agreement.
3. Lessor Conditions Precedent
The conditions precedent to Lessee's obligation to accept
delivery and commence the leasing of the Aircraft are as
follows:
3.1 REPRESENTATIONS/WARRANTIES: the representations and
warranties of Lessor in Schedule 2 shall be correct, and
would be correct if repeated on Delivery; and
3.2 DELIVERY CONDITIONS REQUIREMENTS: the Delivery Condition
Requirements in Part 2 of Schedule 4 shall be satisfied on
Delivery.
<PAGE>
SCHEDULE 4
PART 1
DESCRIPTION OF AIRCRAFT
AIRCRAFT
Manufacturer: Boeing
Model: 737-200A
Serial Number: 21735
FAA Registration Number: __________________
ENGINES
Engine Type: Pratt & Whitney JT8D-15
Serial Nos: 708363 and 708349
<PAGE>
PART 2
DELIVERY CONDITION REQUIREMENTS
1.1 GENERAL CONDITION
The Aircraft will:
(a) be in good operating condition and be clean by scheduled
airline standards, and all structural damage shall have
been repaired to a permanent standard and a coach class
configuration with 110 seats;
(b) have installed the full complement of equipment, parts,
accessories, furnishings and loose equipment as normally
installed in the Aircraft for continued regular service,
and be in a condition suitable for immediate operations;
(c) have in existence a valid certificate of airworthiness (or
if required, a valid export certificate of airworthiness)
with respect to the Aircraft issued by the Hungarian Air
Authority;
(d) comply with the manufacturer's original specifications as
at the Delivery Date;
(e) have undergone, immediately prior to Delivery, a "C" Check
in block format so that all Airframe inspections falling
due within the next following 3,000 Flight Hours and 1 year
of operation in accordance with the Manufacturer's
Maintenance Planning Document, have been accomplished;
(f) have had accomplished all outstanding Airworthiness
Directives affecting that model of Aircraft issued by the
FAA which, if the Aircraft were registered with the FAA,
would have to be complied with during the Term or within 90
days after the Delivery Date; for this purpose, compliance
shall be by terminating action if:
(i) Lessee has complied by terminating action for other
aircraft of the same model and series then operated by
Lessee; or
(ii) the latest date permitted by such Airworthiness
Directive for compliance by terminating action falls
within 90 days after the Delivery Date;
<PAGE>
(g) have installed all applicable vendor's and manufacturer's
service bulletin kits received free of charge by Lessor
that are appropriate for the Aircraft and to the extent not
installed, those kits will be furnished free of charge to
Lessor;
(h) be in Lessee's livery;
(i) have all signs and decals clean, secure and legible; and
(j) have no open, deferred, continued, carry over or placarded
log book items.
1.2 COMPONENTS
(a) Each Flight Hour and Cycle controlled Hard Time Component
(other than the APU) shall have not less than 3,000 Flight
Hours of life remaining to the next scheduled removal in
accordance with the prior lessee's Maintenance Program and
shall be supported by appropriate certification
documentation indicating TSN, CSN, TSO and CSO such as JAR
form 1 or FAA form 8130-1; for this purpose "Hard Time
Component" means any component which has a limited on-wing
life in accordance with the prior lessee's Maintenance
Program and which can have life fully restored through
appropriate maintenance;
(b) Each calendar-limited component including safety equipment
will have not less than 12 months life remaining to the
next scheduled removal in accordance with the prior
lessee's Maintenance Program;
(c) Each "on-condition" and "condition-monitored" component
will be serviceable;
(d) The installed components as a group will have an average of
total flight time since new of not more than that of the
Airframe;
(e) Each Airframe Life-Limited Component will have not less
than 3,000 Flight Hours remaining to the next scheduled
removal and will be supported by certification
documentation necessary to demonstrate back-to-birth
traceability; for this purpose "Airframe-Life Limited
Component" means a component with an ultimate life which
cannot be restored through appropriate maintenance.
<PAGE>
1.3 ENGINES
Each Engine will be installed on the Aircraft and comply
with the following:
(a) Each Engine will have not less than 3,500 Flight Hours
expected life remaining to the next scheduled removal. The
expected life remaining will be determined by the
inspection and checks accomplished by Lessor in accordance
with this Agreement;
(b) Each Engine shall have just completed at the Delivery
Location for Lessee's acceptance a hot (including
combustion chamber) and cold section video borescope
inspection, which inspection shall be performed at Lessee's
expense, and a power assurance run performed at Lessor's
expense in accordance with the Manufacturer's maintenance
manual and any defects discovered in such inspections which
exceed the Engine manufacturer's in-service limits shall be
corrected at Lessor's expense. Lessor shall cause such
borescope inspections to be performed and to be recorded on
videotape by an agency selected by Lessee and shall provide
Lessee with a copy of such videotape on the Delivery Date.
No Engine shall be on "watch" for any reason requiring any
special or out of sequence inspection. Each such Engine
shall comply with the operations specification of Lessee
without waiver or exceptions. All items beyond the Engine
manufacturer's in-service limits shall be repaired; and
(c) Each Engine will have no defect which places less than
3,500 Flight Hours of remaining life pursuant to
Manufacturer's or airworthiness requirements until removal.
1.4 FUSELAGE, WINDOWS AND DOORS
(a) The fuselage will be free of major dents and abrasions,
loose or pulled or missing rivets, and all structural
repairs shall be permanent repairs and in accordance with
FAA approved data;
(b) Windows will be free of delamination, blemishes, crazing
and will be properly sealed and within the Manufacturer's
specifications; and
(c) Doors will be free moving, correctly rigged and be fitted
with serviceable seals.
<PAGE>
1.5 WINGS AND EMPENNAGE
(a) Leading edges will be free from damage; and
(b) Unpainted surfaces will be polished.
1.6 INTERIOR AND COCKPIT
Carpets and seat covers will be in good condition, clean
and free of stains and meet FAR fire resistance
regulations.
1.7 LANDING GEAR; WHEELS AND BRAKES
(a) The Landing Gear and wheel wells will be clean, free of
leaks and repaired as necessary.
(b) Each installed Landing Gear shall have no more Cycles
accumulated than the Airframe and shall have not less than
5,000 Flight Hours/3,000 Cycles and 18 months life
remaining to the next scheduled removal in accordance with
the Manufacturer's Maintenance Planning Document.
(c) The wheels and brakes will have not less than half of their
useful life remaining.
1.8 RETURN OF AUXILIARY POWER UNIT (APU)
The APU shall have just completed a borescope inspection
and shall meet all air outputs and temperature limitations
under load in accordance with the Manufacturer's
maintenance manual, and any defects discovered in such
inspection, which exceed the APU manufacturer's in service
limits, shall be corrected at Lessor's expense. The number
of Flight Hours of APU operation to the next hot section
inspection shall be no greater than 2,000 Flight Hours.
1.9 CORROSION
(a) The Aircraft shall be in compliance with the Manufacturer's
corrosion prevention and control program (CPCP)
requirements. All CPCP inspections which would normally be
accomplished while access is provided during structural
inspection in accordance with the prior lessee's
Maintenance Program during the Term shall have been
accomplished;
<PAGE>
(b) The entire fuselage will be substantially free from
corrosion and will be adequately treated and a corrosion
prevention program approved by the Manufacturer will be in
operation; and
Fuel tanks will be free from contamination and corrosion and a
tank treatment program will be in operation.
<PAGE>
SCHEDULE 5
CERTIFICATE OF TECHNICAL ACCEPTANCE
This Certificate of Technical Acceptance (this "Certificate") is
delivered, on the date set out below by Vanguard Airlines, Inc.
("Lessee"), to AeroUSA, Inc. ("Lessor"), pursuant to the
Aircraft Lease Agreement dated as of January 5, 1999 between
Lessor and Lessee (the "Agreement"). The capitalized terms used
in this Certificate shall have the meaning given to such terms
in the Agreement.
1. DETAILS OF ACCEPTANCE
Lessee hereby confirms to Lessor that Lessee has at [ ]
o'clock on this [ ] day of [ ], 1999, at [ ], technically
accepted the following, in accordance with the provisions of the
Agreement:
(a) Boeing Model 737-200A airframe, Manufacturer's Serial No.
21735;
(b) Pratt & Whitney JT8D-15 Engines:
Engine Manufacturer's Serial No.
1) 708363;
2) 708349;
(Each of which shall have more than 750 rated takeoff
horsepower or the equivalent of such horsepower);
(c) Fuel on Board as of the date of this
Certificate:____________________;
(d) Loose Equipment Check List: as set forth below or as per
list signed by Lessor and Lessee and attached hereto; and
(e) Aircraft Documents: as per list signed by Lessor and
Lessee and attached hereto.
2. HOURS AND CYCLES DATA (AS OF DELIVERY DATE)
(a) Airframe:
Number of Hours since last phase "D" Check (Heaviest Check):
______ hours
<PAGE>
"C" Check (or Equivalent):
Interval: ___________________________
Time Since: _______________________
(b) LANDING GEAR OVERHAUL:
Number of Cycles Since Last Overhaul:
Left Gear __________________________ cycles/hours
Right Gear _________________________ cycles/hours
Nose Gear _________________________ cycles/hours
Center Gear ________________________ cycles/hours
Interval: Left Gear _________________________
Right Gear _________________________
Nose Gear _________________________
Center Gear ________________________
(c) ENGINES:
Number of Hours Since Last Heavy Shop Visit:
S/N :______ hours
S/N :______ hours
Number of Hours Since Last Hot Section Refurbishment:
S/N :______ hours
S/N :______ hours
Number of Hours Since Last Cold Section Refurbishment:
S/N :______ hours
S/N :______ hours
Hot Section Inspection:
Interval: ___________________________
<PAGE>
Time Since (S/N ):
__________________________
Time Since (S/N ):
__________________________
Time Remaining to First Restriction:
Engine S/N: 708363
Hours: __________ Restriction: __________
Cycles: __________ Restriction: __________
Engine S/N: 708349
Hours: __________ Restriction: __________
Cycles: __________ Restriction: __________
Average Cycles in Life Limited Parts (see attached
Schedule):
Engine S/N: 708363 _________
Engine S/N: 708349 _________
(d) AUXILIARY POWER UNIT:
Number of APU Hours Since Last Heavy Shop Visit:
__________ hours Date accomplished __________
Hot Section Inspection:
Interval: ________________________
Time Since: ________________________
(e) TIME CONTROLLED COMPONENTS: [See attached DUJX Report]
(f) INTERIOR EQUIPMENT:
Number of Passenger Seats and Configuration:_______________
____________________
Number of Galleys and Location: _________ __________
Number of Lavatories and Location: _________
__________
<PAGE>
LOPA - Attached __________ __________
List of Loose Equipment on Board:
______________________________________ _________________
______________________________________ _________________
______________________________________ _________________
______________________________________ _________________
______________________________________ _________________
______________________________________ _________________
(g) AVIONICS:
DESCRIPTION MODEL PART
NO.
______________________________________ _________
___________
______________________________________ _________
___________
______________________________________ _________
___________
______________________________________ _________
___________
______________________________________ _________
___________
______________________________________ _________
___________
(h) [ VIDEO SYSTEM:
Projector _________________________________________
Tape Reproducer_______________________________________
System Control Unit____________________________________
System Monitor________________________________________ ]
<PAGE>
3. ACCEPTANCE:
Lessee hereby confirms that the Aircraft, Engines, Parts
and Aircraft Documents are technically acceptable to it,
satisfy all of the Delivery Condition Requirements and are
in the condition for delivery and acceptance as required
under the Agreement.
IN WITNESS WHEREOF, Lessee and Lessor have, by their duly
authorized representative, executed this Certificate on the date
in paragraph 1 above.
LESSEE: VANGUARD AIRLINES, INC.
By: _________________________
Title: _________________________
LESSOR: AEROUSA, INC.
By: _________________________
Title: _________________________
<PAGE>
SCHEDULE 6
PROCEDURES AND OPERATING CONDITION AT REDELIVERY
On the Return Occasion the Aircraft, subject to fair ordinary
wear and tear of a kind and to an extent consistent with similar
aircraft engaged in commercial airline operations, will be
redelivered to Lessor by Lessee in accordance with the
procedures and in any event in the condition set out below.
1.1 FINAL INSPECTION
Immediately prior to the Return Occasion, Lessee will make the
Aircraft available to Lessor for inspection ("Final Inspection")
in order to verify that the condition of the Aircraft complies
with this Agreement. The Final Inspection will permit, and be
long enough for, Lessor to:
(a) inspect the Aircraft Documents;
(b) inspect the Aircraft and uninstalled Parts;
(c) inspect the Engines, including without limitation (i) a
complete video borescope inspection, to be completed at
Lessor's sole cost and expense, of (A) the low pressure and
high pressure compressors and (B) turbine area and (ii)
engine condition runs; and
(d) observe a 2 hour demonstration flight at Lessee's cost
(with Lessor's representatives as on-board observers).
Lessor will indemnify and hold harmless Lessee on an After-
Tax Basis from and against all Losses arising from death or
injury to any observer or any employee of Lessor in
connection with any such demonstration flight of the
Aircraft by Lessor.
1.2 GENERAL CONDITION
The Aircraft will:
(a) be in good operating condition and be clean by scheduled
airline standards, and all structural damage shall have
been repaired to a permanent standard and in the
configuration as modified at the FAA approved maintenance
facility indicated in the notice delivered pursuant to
Clause 7.4, or as otherwise agreed upon by Lessor and
Lessee;
<PAGE>
(b) have installed the full complement of equipment, parts,
accessories, furnishings and loose equipment as when
originally delivered to Lessee and as normally installed in
the Aircraft for continued regular service, and be in a
condition suitable for immediate operations under FAR Part
121 as then in effect without waiver or restriction; and if
any of the engines tendered for redelivery with the
Aircraft is not one of the Engines referred to in the
Acceptance Certificate or a Replacement Engine installed
pursuant to Clause 11.1(d) following an Engine Event of
Loss, Lessor shall have no obligation to accept such engine
unless Lessee furnishes to Lessor all the documents and
evidence in respect of such engine specified in Clause
11.1(d), as if such engine were a Replacement Engine;
(c) have in existence a valid certificate of airworthiness (or
if required by Lessor, a valid export certificate of
airworthiness) with respect to the Aircraft issued by the
Air Authority;
(d) comply with the manufacturer's original specifications as
at the Delivery Date;
(e) have undergone, immediately prior to redelivery, a "C"
Check in block format so that all Airframe inspections
falling due within the next following 3,000 Flight Hours
and 1 year of operation in accordance with the
Manufacturer's Maintenance Planning Document, have been
accomplished;
(f) have had accomplished all outstanding Airworthiness
Directives affecting that model of Aircraft issued by the
FAA which, if the Aircraft were registered with the FAA,
would have to be complied with during the Term or within 90
days after the Expiry Date; for this purpose, compliance
shall be by terminating action if:
(i) Lessee has complied by terminating action for other
aircraft of the same model and series then operated by
Lessee; or
(ii) the latest date permitted by such Airworthiness
Directive for compliance by terminating action falls
within 90 days after the Expiry Date;
<PAGE>
(g) have installed all applicable vendor's and manufacturer's
service bulletin kits received free of charge by Lessee
that are appropriate for the Aircraft and to the extent not
installed, those kits will be furnished free of charge to
Lessor;
(h) be in such external livery as advised by Lessor or at
Lessor's option in Lessee's livery with a cash adjustment
equivalent to the cost of Lessee's livery based on third
party rates;
(i) have all signs and decals clean, secure and legible;
(j) meet the requirements of FAR Part 36, Appendix C, Stage 3
noise compliance as then in effect without waiver or
restriction; and
(k) have no open, deferred, continued, carry over or placarded
log book items.
1.3 COMPONENTS
(a) Each Flight Hour and Cycle controlled Hard Time Component
(other than the APU) shall have not less than 3,000 Flight
Hours of life remaining to the next scheduled removal in
accordance with the Lessee's Maintenance Program and shall
be supported by appropriate certification documentation
indicating TSN, CSN, TSO and CSO such as JAR form 1 or FAA
form 8130-1; for this purpose "Hard Time Component" means
any component which has a limited on-wing life in
accordance with the Lessee's Maintenance Program and which
can have life fully restored through appropriate
maintenance;
(b) Each calendar-limited component including safety equipment
will have not less than 12 months life remaining to the
next scheduled removal in accordance with the Lessee's
Maintenance Program;
(c) Each "on-condition" and "condition-monitored" component
will be serviceable;
(d) The installed components as a group will have an average of
total flight time since new of not more than that of the
Airframe;
<PAGE>
(e) Each Airframe Life-Limited Component will have not less
than 3,000 Flight Hours remaining to the next scheduled
removal and will be supported by certification
documentation necessary to demonstrate back-to-birth
traceability; for this purpose "Airframe-Life Limited
Component" means a component with an ultimate life which
cannot be restored through appropriate maintenance.
1.4 ENGINES
(a) Each Engine will be installed on the Aircraft and comply
with the following:
(b) Each Engine will have not less than 3,500 Cycles expected
life remaining to the next scheduled removal. The expected
life remaining will be determined by the inspection and
checks accomplished by Lessor in accordance with this
Agreement;
(c) Each Engine shall have just completed at the location for
Lessor's acceptance on the Return Occasion a hot (including
combustion chamber) and cold section video borescope
inspection, which inspection shall be performed at Lessor's
expense, and a power assurance run performed at Lessee's
expense in accordance with the Lessee's Maintenance Program
or Manufacturer's maintenance manual and any defects
discovered in such inspections which exceed the Engine
manufacturer's in-service limits shall be corrected at
Lessee's expense. Lessee shall cause such borescope
inspections to be performed and to be recorded on videotape
by an agency selected by Lessor and shall provide Lessor
with a copy of such videotape on the Return Occasion. No
Engine shall be on "watch" for any reason requiring any
special or out of sequence inspection. Each such Engine
shall comply with the operations specification of Lessee
without waiver or exceptions. All items beyond the Engine
manufacturer's in-service limits shall be repaired; and
(d) Each Engine will have no defect which places less than
3,500 Cycles of remaining life pursuant to Manufacturer's
or airworthiness requirements until removal.
1.5 FUSELAGE, WINDOWS AND DOORS
(a) The fuselage will be free of major dents and abrasions,
loose or pulled or missing rivets, and all structural
repairs shall be permanent repairs;
<PAGE>
(b) Windows will be free of delamination, blemishes, crazing
and will be properly sealed; and
(c) Doors will be free moving, correctly rigged and be fitted
with serviceable seals.
1.6 WINGS AND EMPENNAGE
(a) Leading edges will be free from damage; and
(b) Unpainted surfaces will be polished.
1.7 INTERIOR AND COCKPIT
Carpets and seat covers will be in good condition, clean
and free of stains and meet FAR fire resistance
regulations.
1.8 LANDING GEAR; WHEELS AND BRAKES
(a) The Landing Gear and wheel wells will be clean, free of
leaks and repaired as necessary.
(b) Each installed Landing Gear shall have no more Cycles
accumulated than the Airframe and shall have not less than
5,000 Flight Hours/3,000 Cycles and 18 months life
remaining to the next scheduled removal in accordance with
the Manufacturer's Maintenance Planning Document.
(c) The wheels and brakes will have not less than half of their
useful life remaining.
1.9 RETURN OF AUXILIARY POWER UNIT (APU)
(a) The APU shall have just completed a borescope inspection
and shall meet all air outputs and temperature limitations
under load in accordance with the Lessee's Maintenance
Program and the Manufacturer's maintenance manual, and any
defects discovered in such inspection, which exceed the APU
manufacturer's in service limits, shall be corrected at
Lessee's expense. The number of Flight Hours of APU
operation to the next hot section inspection shall be no
greater than 2,000 Flight Hours.
<PAGE>
1.10 CORROSION
(a) The Aircraft shall be in compliance with the Manufacturer's
corrosion prevention and control program (CPCP)
requirements. All CPCP inspections which would normally be
accomplished while access is provided during structural
inspection in accordance with the Lessee's Maintenance
Program during the Term shall have been accomplished;
(b) The entire fuselage will be substantially free from
corrosion and will be adequately treated and a corrosion
prevention program approved by Lessor will be in operation;
and
(c) Fuel tanks will be free from contamination and corrosion
and a tank treatment program will be in operation.
1.11 FUEL
(a) At redelivery, Lessor will pay to Lessee or Lessee will pay
to Lessor (as the case may require) a cash adjustment in
respect of the difference in fuel on board at Delivery
versus redelivery, at the then prevailing cost of fuel at
the Redelivery Location.
1.12 MAINTENANCE PROGRAM
(a) Prior to the Return Occasion and upon Lessor's request,
Lessee will provide Lessor or its agent reasonable access
to Lessee's Maintenance Program and the Aircraft Documents
in order to facilitate the Aircraft's integration into any
subsequent operator's fleet;
(b) Lessee will, if requested by Lessor to do so, upon return
of the Aircraft deliver to Lessor a certified true current
and complete copy of the Lessee's Maintenance Program.
Lessor agrees that it will not disclose the contents of the
Lessee's Maintenance Program to any person or entity except
to the extent necessary to monitor Lessee's compliance with
this Agreement and/or to bridge the maintenance program for
the Aircraft from the Lessee's Maintenance Program to
another program after the Return Occasion.
<PAGE>
SCHEDULE 7
INSURANCE REQUIREMENTS
1.1 TYPES OF INSURANCE. The Insurances required to be
maintained are as follows:
(a) HULL ALL RISKS of loss or damage whilst flying and on the
ground with respect to the Aircraft on an agreed value
basis for the Agreed Value and with a deductible not
exceeding $750,000, or such other amount agreed by Lessor
from time to time;
(b) HULL WAR AND ALLIED PERILS, being such risks excluded from
the Hull All Risks Policy to the fullest extent available
from the leading international insurance markets, including
confiscation and requisition by the State of Registration
for the Agreed Value;
(c) ALL RISKS (INCLUDING WAR AND ALLIED RISK) except when on
the ground or in transit other than by air) property
insurance on all Engines and Parts when not installed on
the Aircraft on an "agreed value" basis for their full
replacement value and including engine test and running
risks;
(d) AIRCRAFT THIRD PARTY, PROPERTY DAMAGE, PASSENGER, BAGGAGE,
CARGO AND MAIL AND AIRLINE GENERAL THIRD PARTY (INCLUDING
PRODUCTS) LEGAL LIABILITY for a combined single limit
(bodily injury/property damage) of an amount not less than
the Minimum Liability Coverage for the time being for any
one occurrence (but in respect of products and personal
injury liability, this limit may be an aggregate limit for
any and all losses occurring during the currency of the
policy). War and Allied Risks are also to be covered under
the policy to the fullest extent available from the leading
international insurance markets;
<PAGE>
1.2 Terms of Hull and Spares Insurance
All required hull and spares insurance, so far as it relates to
the Aircraft, will:
(a) ADDITIONAL ASSUREDS: name Lessor and Owner and their
respective successors and assigns as additional assureds
for their respective rights and interests;
(b) SETTLEMENT OF LOSSES: provide that any loss will be
settled jointly with Owner and Lessee, and will be payable
in Dollars to Owner, for the account of all interests,
except where the loss does not exceed the Damage
Notification Threshold, and Lessor has not notified the
insurers to the contrary, in which case the loss will be
settled with and paid to Lessee;
(c) 50/50 PROVISION: if separate Hull "all risks" and "war
risks" insurances are arranged, include a 50/50 provision
in accordance with market practice (AVS. 103 is the current
market language);
(d) NO OPTION TO REPLACE: confirm that the insurers are not
entitled to replace the Aircraft in the event of an insured
Event of Loss; and
(e) NO DISCHARGE BY BROKER: confirm that the insurers will not
obtain a valid discharge of the obligations under the
Insurances by payment to the broker, notwithstanding market
practice to the contrary;
1.3 TERMS OF LIABILITY INSURANCE
All required liability insurances will:
(a) ADDITIONAL ASSUREDS: include Lessor and each of the other
Indemnitees, and their respective successors and assigns
and their respective shareholders, subsidiaries, directors,
officers, agents, employees and indemnitees, as additional
insureds for their respective rights and interests,
warranted, each as to itself only, no operational interest;
(b) SEVERABILITY: include a severability of interests clause
which provides that the insurance, except for the limit of
liability, will operate to give each assured the same
protection as if there was a separate policy issued to each
assured; and
<PAGE>
(c) PRIMARY POLICY: contain a provision confirming that the
policy is primary without right of contribution and the
liability of the insurers will not be affected by any other
insurance of which Lessor , Owner or Lessee have the
benefit so as to reduce the amount payable to the
additional insureds under such policies;
1.4 TERMS OF ALL INSURANCES
All Insurances will:
(a) PRUDENT INDUSTRY PRACTICE: be in accordance with prudent
industry practice of persons operating similar aircraft in
similar circumstances;
(b) DOLLARS: provide cover denominated in Dollars and any
other currencies which Lessor may reasonably require in
relation to liability insurance;
(c) WORLDWIDE: operate on a worldwide basis subject to such
limitations and exclusions as Lessor may agree;
(d) ACKNOWLEDGMENT: acknowledge the insurer is aware (and has
seen a copy) of this Agreement and that the Aircraft is
owned by Owner;
(e) BREACH OF WARRANTY: provide that, in relation to the
interests of each of the additional assureds, the
Insurances will not be invalidated by any act or omission
by Lessee, or any other person other than the respective
additional assureds seeking protection and shall insure the
interests of each of the additional assureds regardless of
any breach or violation by Lessee, or any other person
other than the respective additional assured seeking
protection of any warranty, declaration or condition,
contained in such Insurances;
(f) SUBROGATION: provide that the insurers will hold harmless
and waive any rights of recourse against the additional
assureds or to be subrogated to any rights of Lessor or
Lessee;
(g) PREMIUMS: provide that the additional assureds will have
no obligation or responsibility for the payment of any
premiums due (but reserve the right to pay the same should
any of them elect so to do) and that the insurers will not
exercise any right of set-off or counter-claim in respect
of any premium due against the respective interests of the
additional assureds other than outstanding premiums
relating to the Aircraft, any Engine or Part the subject of
the relevant claim;
<PAGE>
(h) CANCELLATION/CHANGE: provide that the Insurances will
continue unaltered for the benefit of the additional
assureds for at least 30 days after written notice by
registered mail or telex of any cancellation, change, event
of non-payment of premium or installment thereof has been
sent to Lessor, except in the case of war risks for which 7
days (or such lesser period as is or may be customarily
available in respect of war risks or allied perils) will be
given, or in the case of war between the 5 great powers or
nuclear peril for which termination is automatic;
(i) REINSURANCE: if reinsurance is a requirement of this
Agreement such reinsurance will:
(aa) be on the same terms as the original insurances and
will include the provisions of this Schedule;
(bb) provide that notwithstanding any bankruptcy,
insolvency, liquidation, dissolution or similar
proceedings of or affecting the reinsured that the
reinsurers' liability will be to make such payments as
would have fallen due under the relevant policy of
reinsurance if the reinsured had (immediately before
such bankruptcy, insolvency, liquidation, dissolution
or similar proceedings) discharged its obligations in
full under the original insurance policies in respect
of which the then relevant policy of reinsurance has
been effected; and
(cc) contain a "cut-through" clause in the following form
(or otherwise satisfactory to Lessor): "The Reinsurers
and the Reinsured hereby mutually agree that in the
event of any claim arising under the reinsurances in
respect of a total loss or other claim where as
provided by this Agreement dated as of January 5, 1999
and made between AeroUSA, Inc. and Vanguard Airlines,
Inc. such claim is to be paid to the person named as
sole loss payee under the primary insurances, the
Reinsurers will in lieu of payment to the Reinsured,
its successors in interest and assigns pay to the
person named as sole loss payee under the primary
insurances effected by the Reinsured that portion of
any loss due for which the Reinsurers would otherwise
<PAGE>
be liable to pay the Reinsured (subject to proof of
loss), it being understood and agreed that any such
payment by the Reinsurers will (to the extent of such
payment) fully discharge and release the Reinsurers
from any and all further liability in connection
therewith"; subject to such provisions not
contravening any Law of the State of Incorporation;
(j) INDEMNITIES: accept and insure the indemnity provisions of
this Agreement, to the extent of the risks covered by the
policies.
1.5 DEDUCTIBLES
Lessee shall be responsible for any and all deductibles under
the Insurances.
1.6 APPLICATION OF INSURANCE PROCEEDS
The Insurances will be endorsed to provide for payment of
proceeds as follows:
(a) EVENT OF LOSS: all insurance payments received as the
result of an Event of Loss occurring during the Term will
be paid to Owner and Lessor will pay the balance of those
amounts to Lessee after deduction of all amounts which may
be or become payable by Lessee to Lessor under this
Agreement and the Other Agreements (including under Clause
11.1(b));
(b) EXCEEDING DAMAGE NOTIFICATION THRESHOLD: all insurance
proceeds of any property, damage or loss to the Aircraft,
any Engine or any Part occurring during the Term not
constituting an Event of Loss and in excess of the Damage
Notification Threshold will be paid to Owner and applied in
payment (or to reimburse Lessee) for repairs or replacement
property upon Lessor being satisfied that the repairs or
replacement have been effected in accordance with this
Agreement. Any balance remaining may be retained by Owner;
(c) BELOW DAMAGE NOTIFICATION THRESHOLD: insurance proceeds in
amounts below the Damage Notification Threshold may be paid
by the insurer directly to Lessee; and
<PAGE>
(d) DEFAULT: notwithstanding the foregoing paragraphs, if at
the time of the payment of any such insurance proceeds a
Default has occurred and is continuing, all such proceeds
will be paid to or retained by Owner to be applied toward
payment of any amounts which may be or become payable by
Lessee in such order as Lessor may elect.
To the extent that insurance proceeds are paid to Lessee, Lessee
agrees to comply with the foregoing provisions and apply or pay
over such proceeds as so required.
<PAGE>
SCHEDULE 8
FORM OF LEGAL OPINION
To: AeroUSA, Inc.
Lee Farm Corporate Park
83 Wooster Heights Road
Danbury, CT 06810
GE Capital Aviation Services, Inc.
201 High Ridge Road
Stamford, CT 06927-4900
Attn: Senior Vice President-Marketing
[Date]
Dear Sirs,
1. You have asked us to render an opinion in connection with
the transaction governed by or subject to, inter alia, the
under mentioned documents.
1.1 the Agreement as defined in subparagraph 1.3;
1.2 the Articles of Incorporation and Bylaws of Lessee; and
1.3 all other documents, approvals and consents of whatever
nature and wherever kept which it was, in our judgment and
to our knowledge, necessary or appropriate to examine to
enable us to give the opinion expressed below.
Words and expressions used and not otherwise defined herein
will bear the same meanings as defined in an Aircraft Lease
Agreement dated as of January 5, 1999 between AeroUSA, Inc.
("Lessor") and Vanguard Airlines, Inc. ("Lessee") in
respect of one Boeing 737-200A aircraft with manufacturer's
serial number 21735 together with the two installed Pratt &
Whitney JT8D-15 engines (the "Aircraft"). As used herein
the term "Agreement" means and includes the Aircraft Lease
Agreement as defined in the Aircraft Lease Agreement.
<PAGE>
2. Having considered the documents listed in paragraph 1
above, and having regard to the relevant laws of the State
of New York and the United States of America we are pleased
to advise that in our opinion:
(a) Lessee is a corporation duly organized and validly existing
under the laws of [ ], is qualified to do business as a
foreign corporation in each jurisdiction where failure to
so qualify would have a materially adverse effect on
Lessee's business or its ability to perform its obligations
under the Agreement, and is subject to suit in its own
name, and, to the best of our knowledge, no steps have
been, or are being, taken to appoint a receiver,
liquidator, trustee or similar officer over, or to wind up,
Lessee;
(b) Lessee has the corporate power to enter into and perform,
and has taken all necessary corporate action to authorize
the entry into, execution, delivery and performance by it
of, the Agreement and the transactions contemplated by the
Agreement;
(c) the entry into and performance by Lessee of, and the
transactions contemplated by, the Agreement do not and will
not:
(i) conflict with any laws binding on Lessee; or
(ii) conflict with the Certificate of Incorporation or
Bylaws of Lessee; or
(iii) conflict with or result in default under any
agreement or instrument which is binding upon Lessee
or any of its assets or result in the creation of any
Security Interest over any of its assets;
(d) no authorizations, consents, licenses, approvals and
registrations (other than those which have been obtained
and of which copies are attached hereto) are necessary or
desirable to be obtained from any governmental or other
regulatory authorities in [Missouri] having jurisdiction
over Lessee or its properties to enable Lessee:
(i) to enter into and perform the transactions
contemplated by the Agreement;
(ii) to import the Aircraft into the United States for the
duration of the Term;
<PAGE>
(iii) to operate the Aircraft to, from or within in the
United States for the transport of fare-paying
passengers; or
(iv) to make the payments provided for in the Agreement;
(e) except for the filing and recordation of the Agreement with
the FAA and the filing of the Financial Statements with [
] (which filings have been duly made on or before
this date) it is not necessary or desirable, to ensure the
priority, validity and enforceability of all the
obligations of Lessee under the Agreement that the
Agreement be filed, registered, recorded or notarized in
any public office or elsewhere or that any other instrument
relating thereto be signed, delivered, filed, registered or
recorded, that any tax or duty be paid or that any other
action whatsoever be taken;
(f) the interests of Lessor in the Aircraft are registered on
the public register of aircraft of the Air Authority and no
other steps are necessary or desirable to record or perfect
Lessor's interest in the Aircraft in the United States or
[];
(g) on termination of the Agreement (whether on expiry or
otherwise) as contemplated in the Agreement, Lessor would
be entitled:
(i) to repossess the Aircraft;
(ii) to deregister the Aircraft from the register of the
Air Authority;
(iii) to export the Aircraft from [ ];
without requiring any further consents, approvals or
licenses from any governmental or regulatory authority in
the United States or [ ];
(h) the Agreement has been properly signed and delivered on
behalf of Lessee and the obligations on the part of Lessee
contained therein are valid and legally binding on and
enforceable against Lessee under the laws of New York;
(i) the events described in Schedule 9 paragraphs (g), (h) and
(i) of the Agreement comprise an accurate and complete
statement of all events and situations provided for by the
laws of [] which may lead to the cessation of activities,
winding up or dissolution of Lessee;
<PAGE>
(j) Lessee is a Certificated Air Carrier;
(k) Lessee is a "citizen of the United States" as defined in
Section 40102 of Title 49 of the United States Code;
(l) Lessor is entitled, with respect to the Aircraft and the
Agreement, to the benefits of a lessor under Section 1110
of Title 11 of the United States Code;
(m) Lessee's chief executive office (as defined in the Uniform
Commercial in effect in Kansas) is located at 7000 Squibb
Road, 3rd Floor, Mission, Kansas 66202;
(n) the obligations of Lessee under the Agreement rank at least
pari passu with all other present and future unsecured and
unsubordinated (including contingent obligations) of
Lessee;
(o) there is no withholding tax or other Tax to be deducted
from any payment whatsoever which may be made by Lessee
pursuant to the Agreement; with respect to any
withholdings, the provisions of Clauses 5.6, and Schedule
11 of the Agreement are fully effective; and the
arrangements contemplated by the Agreement do not give rise
to any charge whatsoever to Taxes in [];
(p) there is no applicable usury or interest limitation law in
[] which may restrict the recovery of payments in
accordance with the Agreement;
(q) there are no registration, stamp or other taxes or duties
of any kind payable in [] in connection with the signature,
performance or enforcement by legal proceedings of the
Agreement;
(r) Lessor will not violate any law or regulation in [] nor
become liable to tax in [] by reason of entering into the
Agreement with Lessee, or performing its obligations
thereunder;
(s) it is not necessary to establish a place of business in []
in order to enforce any provisions of the Agreement;
(t) the choice of the Governing Law to govern the Agreement
will be upheld as a valid choice of law in any action in
the courts of [];
<PAGE>
(u) the consent to the jurisdiction by Lessee contained in the
Agreement is valid and binding on Lessee and not subject to
revocation;
(v) any judgment for a definite sum given by the courts of [
] against Lessee would be recognized and accepted by
the courts of [] without re-trial or examination of the
merits of the case;
(w) Lessee is subject to civil commercial law with respect
to its obligations under the Agreement; and
(ii) neither Lessee nor any of its assets is entitled to
any right of immunity and the entry into and
performance of the Agreement by Lessee constitute
private and commercial acts; and
(x) there are no laws or other rules in [ ] (including,
without limitation, emergency powers laws) pursuant to
which Lessee may be deprived of the Aircraft by any
Government Entity or any other person, other than Lessor or
any assignee of Lessor.
Yours faithfully,
<PAGE>
SCHEDULE 9
EVENTS OF DEFAULT
Each of the following events or conditions constitutes an Event
of Default:
(a) NON-PAYMENt: Lessee fails to make any payment under this
Agreement on the due date; or
(b) INSURANCE: Lessee fails to comply with any provision of
Clause 9 or Schedule 7, or any insurance required to be
maintained under this Agreement is cancelled or terminated,
or a notice of cancellation is given in respect of any such
insurance; or
(c) BREACH: Lessee fails to comply with any other provision of
this Agreement and, if such failure is in the opinion of
Lessor capable of remedy, the failure continues for 10 days
after notice from Lessor to Lessee; or
(d) REPRESENTATION: any representation or warranty made (or
deemed to be repeated) by Lessee in or pursuant to this
Agreement or in any document or certificate or statement is
or proves to have been incorrect in any material respect
when made or deemed to be repeated; or
(e) Cross-Default:
(i) any Financial Indebtedness of Lessee or any Lessee
Affiliate in excess of $250,000 is not paid when due;
or
(ii) any such Financial Indebtedness in excess of $250,000
becomes due or capable of being declared due prior to
the date when it would otherwise have become due; or
(iii) the security for any such Financial Indebtedness
becomes enforceable; or
(iv) any event of default or termination event, howsoever
described, occurs under any Other Agreement or any
lease, hire purchase, conditional sale or credit sale
agreement of Lessee or any Lessee Affiliate; or
(f) APPROVALS: any consent, authorization, license,
certificate or approval of or registration with or
declaration to any Government Entity in connection with
this Agreement, including, without limitation:
<PAGE>
(i) any authorization required by Lessee to authorize, or
in connection with, the execution, delivery, validity,
enforceability or admissibility in evidence of this
Agreement or the performance by Lessee of its
obligations under this Agreement; or
(ii) the registration of the Aircraft or the Aircraft's
certificate of airworthiness; or
(iii) any airline license or air transport license
required of Lessee including, without limitation,
authority to operate the Aircraft under FAR Part 121
and a Certificate of Public Convenience and Necessity
issued under Section 4102 of Title 49 of the United
States Code;
is modified in a manner unacceptable to Lessor or is
withheld, or is revoked, suspended, canceled, withdrawn,
terminated or not renewed, or otherwise ceases to be in
full force; or
(g) INSOLVENCY:
(i) Lessee or any Lessee Affiliate is, or is deemed for
the purposes of any relevant law to be, unable to pay
its debts as they fall due or to be insolvent, or
admits inability to pay its debts as they fall due; or
(ii) Lessee or any Lessee Affiliate suspends making
payments on all or any class of its debts or announces
an intention to do so, or a moratorium is declared in
respect of any of its indebtedness; or
(h) BANKRUPTCY, ETC.:
(i) Lessee or any Lessee Affiliate consents to the
appointment of a custodian, receiver, trustee or
liquidator of itself or all or any material part of
Lessee's property or Lessee's consolidated property,
or Lessee or any Lessee Affiliate admits in writing
its inability to, or is unable to, or does not, pay
its debts generally as they come due, or makes a
general assignment for the benefit of creditors, or
Lessee or any Lessee Affiliate files a voluntary
<PAGE>
petition in bankruptcy or a voluntary petition seeking
reorganization in a proceeding under any bankruptcy or
insolvency Laws (as now or hereafter in effect) or any
answer admitting the material allegations of a
petition filed against Lessee or any Lessee Affiliate
in any such proceeding, or Lessee or any Lessee
Affiliate by voluntary petition, answer or consent
seeks relief under the provisions of any other
bankruptcy, insolvency or other similar Law providing
for the reorganization or winding-up of corporations,
or provides for an agreement, composition, extension
or adjustment with its creditors, or any corporate
action (including, without limitation, any board of
directors or shareholder action) is taken by Lessee or
any Lessee Affiliate in furtherance of any of the
foregoing, whether or not the same is fully effected
or accomplished; or
(ii) an order, judgment or decree is entered by any court
appointing, without the consent of Lessee or any
Lessee Affiliate, a custodian, receiver, trustee or
liquidator of Lessee or any Lessee Affiliate, or of
all or any material part of Lessee's property or
Lessee's consolidated property is sequestered, and any
such order, judgment or decree of appointment or
sequestration remains in effect, undismissed, unstayed
or unvacated for a period of 30 days after the date of
entry thereof of at any time an order for relief is
granted; or
(iii) an involuntary petition against Lessee or any
Lessee Affiliate in a proceeding under the United
States Federal Bankruptcy Laws or other insolvency
Laws (as now or hereafter in effect) is filed and is
not withdrawn or dismissed within 30 days thereafter
or at any time an order for relief is granted in such
proceeding, or if, under the provisions of any Law
providing for reorganization or winding-up of
corporations which may apply to Lessee or any Lessee
Affiliate, any court of competent jurisdiction
assumes jurisdiction over, or custody or control of,
Lessee or any Lessee Affiliate or of all or any
material part of Lessee's property, or Lessee's
consolidated property and such jurisdiction, custody
or control remains in effect, unrelinquished, unstayed
or unterminated for a period of 30 days or at any time
an order for relief is granted in such proceeding; or
<PAGE>
(i) OTHER JURISDICTION: there occurs in relation to Lessee or
any Lessee Affiliate any event anywhere which, in the
reasonable opinion of Lessor, corresponds with any of those
mentioned in paragraphs (g) or (h) above; or
(j) UNLAWFUL: it is or becomes unlawful for Lessee to perform
any of its obligations under this Agreement, or this
Agreement is or becomes wholly or partly invalid or
unenforceable; or
(k) SUSPENSION OF BUSINESS: Lessee or any Lessee Affiliate
suspends or ceases or threatens to suspend or cease to
carry on all or a substantial part of its business; or
(l) DISPOSAL: Lessee or any Lessee Affiliate disposes, conveys
or transfers or threatens to dispose, convey or transfer of
all or a material part of its assets, liquidates or
dissolves or consolidates or merges with any other Person
(whether by one or a series of transactions, related or
not), other than for the purpose of a reorganization the
terms of which have received the prior written approval of
Lessor; or
(m) RIGHTS AND REMEDIES: Lessee or any other Person claiming
by or through Lessee challenges the existence, validity,
enforceability or priority of the rights of Lessor as owner
or as lessor or of Owner as owner in respect of the
Aircraft; or
(n) CHANGE OF CONTROL: any single person, or group of persons
acquire control of Lessee without the previous consent in
writing of Lessor not unreasonably withheld; or
(o) DELIVERY: Lessee fails to comply with its obligation under
Clause 4 to accept delivery of the Aircraft; or
(p) LETTER OF CREDIT:
(i) the issuer of the Letter of Credit fails to make any
payment under the Letter of Credit when due; or
(ii) the Letter of Credit is not in full force or, for any
reason ceases to constitute the legal, valid and
binding obligation of the issuer; or
(iii) any of the events listed in paragraph (f)(i)
above, with respect to the performance by the issuer
of its obligations under the Letter of Credit, or
paragraphs (g), (h) or (i) above apply to the issuer
(references in those sub-paragraphs to Lessee being
deemed to be to the issuer); or the issuer ceases or
suspends its business operations; or
<PAGE>
(iv) where applicable, the Letter of Credit is not renewed
within the time required by Clause 5.12;
and each reference in this paragraph (p) to "the issuer"
shall include a reference to any confirming bank for the
Letter of Credit; or
(q) OWNERSHIP, LIENS AND RELATED MATTERS: Lessee fails to
timely comply with its obligations under Clause 8.6; or
(r) TRANSFER: Lessee makes or permits any assignment or
transfer of this Agreement, or any interest herein, or of
the right to possession of the Aircraft, the Airframe, or
any Engine except as expressly permitted by this Agreement;
or
(s) REDELIVERY: Lessee fails to return the Aircraft to Lessor
on the Expiry Date in accordance with Clause 12; or
(t) LITIGATION: a judgment of a court or tribunal for the
payment of money not covered by insurance in excess of
US$500,000 shall be rendered against Lessee and the same
shall remain undischarged for a period of 90 days, unless
during such period execution of such judgment shall have
been effectively stayed by agreement of the parties
involved or by court order or such judgment shall have been
adequately bonded.
<PAGE>
SCHEDULE 10
INTENTIONALLY OMITTED FROM THE VERSION OF THIS DOCUMENT FILED
WITH THE FAA AS CONTAINING CONFIDENTIAL AND PROPRIETARY
INFORMATION
<PAGE>
SCHEDULE 11
TAX INDEMNITY
1. TAX INDEMNITY:
(a) GENERAL:
(i) Lessee will on demand pay and indemnify each Tax
Indemnitee against all Taxes (other than Lessor Taxes)
levied or imposed against or upon or payable by such
Tax Indemnitee or Lessee and arising from, with
respect to or in connection with the transactions
pursuant to the Operative Documents, including (but
not limited to) all Taxes relating or attributable to
Lessee, any Operative Document or the Aircraft
directly or indirectly in connection with the
importation, exportation, registration, ownership,
leasing, sub-leasing, purchase, delivery, possession,
use, operation, repair, maintenance, overhaul,
transportation, landing, storage, presence or
redelivery of the Aircraft or any part thereof or any
rent, receipts, insurance proceeds, income,
indemnification payment or other amounts arising
therefrom, or the making of any Equipment Change or
the permanent replacement of any Engine.
(ii) All Taxes indemnified pursuant to this Clause 1 shall
be paid by Lessee directly to the appropriate taxing
authority (to the extent permitted by applicable Law)
at or before the time prescribed by applicable Law.
After any payment by Lessee of any Tax directly to a
taxing authority, Lessee shall furnish to Lessor, on
written request, a certified copy of a receipt for
Lessee's payment of such Tax or such other evidence of
payment of such Tax as is reasonably obtainable by
Lessee and reasonably acceptable to Lessor.
<PAGE>
(iii) Any amount payable by Lessee to an Tax Indemnitee
pursuant to Clause 1 shall be paid within ten days
after receipt of a written demand therefor from the
relevant Tax Indemnitee accompanied by a written
statement describing in reasonable detail the basis
for such indemnity and the computation of the amount
so payable and copies of all notices, invoices,
assessments and correspondence relating to such
indemnified Tax, provided that if an amount of any
indemnified Tax is being contested in accordance with
Clause 7 and Lessee shall have duly performed (and
shall continue to perform) all its obligations under
Clause 1 with respect to such contest, then payment of
the indemnity with respect to such Tax under Clause 1
shall , at Lessee's election, be deferred until the
date the contest has been completed.
(b) If any payment is made by Lessee under Clause 1(a) of
Schedule 11 and the Tax Indemnitee receiving such payment
in good faith determines that it has actually received a
credit or deduction against, or relief or remission for, or
payment of, any Tax paid or payable by the Tax Indemnitee
in respect of or calculated with reference to the Tax
giving rise to such payment, the Tax Indemnitee shall, to
the extent that it can do so without prejudice to the
retention of the amount of such credit, deduction, relief,
remission or repayment and without leaving the Tax
Indemnitee in any worse position than that in which it
would have been had such payment of Tax not been required
to be made, pay to Lessee such amount as the Tax Indemnitee
shall in good faith have determined to be attributable to
the relevant Tax.
2. SALES AND USE TAXES:
(a) Lessee shall pay to Lessor (or, if permitted by applicable
Law and at Lessee's option, Lessee shall pay to the
relevant tax authority for the account of Lessor), in
addition to the amounts specified as "Rent" in Schedule 10:
<PAGE>
(i) all sales, use, rental, value added, goods and
services and similar taxes ("Sales Taxes") required to
be paid to the tax authority of the jurisdiction in
which the Delivery Location is situated or to the
jurisdiction in which the Aircraft is habitually based
with respect to the lease of the Aircraft to Lessee
pursuant to the Operative Documents unless Lessee
delivers to Lessor on or prior to the Delivery Date
such exemption certificate or other document as may be
required by applicable Law to evidence Lessee's
entitlement to exemption from all Sales Taxes imposed
by such jurisdiction with respect to the lease of the
Aircraft pursuant to the Operative Documents; and
(ii) all Sales Taxes required to be paid to the tax
authority of any jurisdiction in which the Aircraft
may be used, operated or otherwise located from time
to time unless Lessee delivers to Lessor such
exemption certificates or other documents as may be
required by applicable Law to evidence Lessee's
entitlement to exemption from all Sales Taxes imposed
by each such jurisdiction with respect to the lease of
the Aircraft pursuant to the Operative Documents.
(b) Lessee will cooperate with Lessor in connection with the
preparation and filing of any exemption application or
similar document that is reasonably necessary or desirable
under applicable Law to avoid the imposition of any Sales
Taxes with respect to the transactions contemplated by the
Operative Documents.
(c) The specific obligations with respect to sales and use
taxes set forth in this Clause 2 are in addition to, and
are not in substitution for, the Lessee's obligation to
indemnify for sales and use taxes pursuant to Clause 1.
3. VALUE ADDED TAX:
(a) For the purposes of this Clause 3:
(i) "VAT" means value added tax and any goods and
services, sales or turnover tax, imposition or levy of
a like nature (other than Lessor Taxes);
(ii) "supply" includes anything on or in respect of which
VAT is chargeable.
<PAGE>
(b) Lessee will pay to Lessor or the relevant taxing authority,
as the case may be, the amount of any VAT chargeable in
respect of any supply for VAT purposes under any of the
Operative Documents.
(c) Each amount stated as payable by Lessee under any of the
Operative Documents is exclusive of VAT (if any); if VAT is
payable in respect of any amount as aforesaid, Lessee shall
pay all such VAT and indemnify Lessor against any claims
for the same (and where appropriate, Lessee shall increase
the payments which would otherwise be required to be made
hereunder so that Lessor is left in the same position as
Lessor would have been in had no VAT been payable) and
Lessee shall provide evidence to Lessor, if available, in
respect of payment of any such VAT.
4. INFORMATION:
(a) If Lessee is required by any applicable Law, or by any
third party, to deliver any report or return in connection
with any Taxes for which Lessee would be obligated to
indemnify Lessor or any Indemnitee under the Operative
Documents, Lessee will complete the same and, on request,
supply a copy of the report or return to Lessor.
(b) If any report, return or statement is required to be made
by Lessor or any Indemnitee with respect to any Tax for
which there is an indemnity obligation of Lessee under this
Schedule 11 or otherwise under the Operative Documents,
Lessee will promptly notify Lessor of the requirement and:
(i) if permitted by applicable Law, make and timely file
such report, return or statement (except for any
report, return or statement that Lessor has notified
Lessee that Lessor or any Indemnitee intends to
prepare and file), prepare such return in such manner
as will show Lessor as lessor of the Aircraft and the
ownership of the Aircraft in Lessor if required or
appropriate, and provide Lessor upon request a copy of
each such report, return or statement filed by Lessee,
or
(ii) if Lessee is not permitted by applicable Law to file
any such report, return or statement, Lessee will
prepare and deliver to Lessor a proposed form of such
report, return or statement within a reasonable time
prior to the time such report, return or statement is
to be filed.
<PAGE>
Lessee will provide such information and documents as
Lessor may reasonably request to enable Lessor to comply
with its tax filing, audit and litigation obligations.
5. INDEMNITY PAYMENTS TO BE MADE ON AN AFTER-TAX BASIS: Lessee
agrees that, with respect to any payment or indemnity pursuant
to Clause 1 (Tax Indemnity), Clause 2 (Sales and Use Taxes), or
Clause 3 (Value Added Tax) of this Schedule 11 or Clause 10
(Indemnity) of the Agreement to or for the benefit of any
Indemnitee, Lessee's indemnity obligations shall include such
amount as may be necessary to hold such Tax Indemnitee harmless
on an After-Tax Basis from all Taxes required to be paid by such
Tax Indemnitee with respect to such payment or indemnity
(including any payments pursuant to this Clause 5, determined
based on the assumption that at the time each such payment or
indemnity is accrued by the relevant Indemnitee, such payment or
indemnity will be subject to (i) United States Federal income
tax at the highest marginal statutory tax rate applicable to
corporations, (ii) United States state and local income taxes at
the composite of the highest marginal statutory tax rates
applicable to the Tax Indemnitee and (iii) income taxes (if any)
imposed by countries outside the United States at the actual
rates imposed on the relevant Indemnitee.
6. LATE PAYMENT INTEREST: If Lessee fails to pay any amount
payable under this Agreement on the due date, Lessee will pay on
demand from time to time to Lessor interest (both before and
after judgment) on that amount, from the due date to the date of
payment in full by Lessee to Lessor, at the Interest Rate;
provided, however, that in no event shall such rate exceed the
maximum permitted by Law. All such interest will be compounded
monthly and calculated on the basis of the actual number of days
elapsed in the month assuming a 30 day month and a 360 day year.
7. CONTEST:
(a) If Lessor receives a written claim for any Tax for which
Lessee would be required to pay an indemnity pursuant to
Clause 1, Clause 2 or Clause 3 of this Schedule 11, Lessor
shall notify Lessee promptly of such claim, provided that
any failure to provide such notice will not relieve Lessee
of any indemnification obligation pursuant to Clause 1,
Clause 2 or Clause 3 except to the extent that Lessee's
ability to defend such claim has been materially adversely
affected by such failure. If requested by Lessee in
writing promptly after receipt of Lessor's notice, Lessor
shall, upon receipt of indemnity satisfactory to it and at
the expense of Lessee (including, without limitation, all
<PAGE>
costs, expenses, legal and accountants' fees and
disbursements, and penalties, interest and additions to tax
incurred in contesting such claim) in good faith contest or
(if permitted by applicable Law) permit Lessee to contest
such claim by (i) resisting payment thereof if practicable
and appropriate, (ii) not paying the same except under
protest if protest is necessary and proper, or (iii) if
payment is made, using reasonable efforts to obtain a
refund of such Taxes in appropriate administrative and
judicial proceedings. Lessor shall determine the method of
any contest conducted by Lessor and (in good faith
consultation with Lessee) control the conduct thereof.
Lessee shall determine the method of any contest conducted
by Lessee and (in good faith consultation with Lessor)
control the conduct thereof. Lessee shall pay in full all
payments of Rent and other amounts payable pursuant to the
Operative Documents, without reduction for or on account of
any Tax, while such contest is continuing. Lessor shall
not be required to contest, or to continue to contest, a
claim for Taxes under this Clause 7 if (x) such contest
would result in a risk of criminal penalties or of a sale,
forfeiture or loss of, or the imposition of a Lien (other
than a Permitted Lien) on (except to the extent covered by
a bond reasonably acceptable to Lessor), or (y) Lessee
shall not have furnished an opinion of independent tax
counsel selected by Lessor and reasonably satisfactory to
Lessee, that a reasonable basis exists for such contest, or
(z) a Default or an Event of Default shall be continuing
(unless Lessee shall have provided security reasonably
satisfactory to Lessor securing Lessee's performance of its
obligations under this Schedule 11). If Lessor contests
any claim for Taxes by making a payment and seeking a
refund thereof, then Lessee shall advance to Lessor, on an
interest-free basis, an amount equal to the Taxes to be
paid by Lessor in connection with the contest and shall
indemnify Lessor on an After-Tax Basis for any adverse tax
consequences to Lessor of such interest-free advance. Upon
the final determination of any contest pursuant to this
Clause 7 in respect of any Taxes for which Lessee shall
have made an advance to Lessor in accordance with the
immediately preceding sentence, the amount of Lessee's
obligation shall be determined as if such advance had not
been made; any indemnity obligation of Lessee to Lessor
under this Schedule 11 and Lessor's obligation to repay the
advance will be satisfied first by setoff against each
other, and any difference owing by either party shall be
paid within ten days after such final determination.
<PAGE>
(b) If Lessor obtains a refund of all or any part of any Taxes
for which a full indemnity was paid by Lessee, Lessor shall
pay Lessee the amount of such refund, reduced by any Taxes
imposed on Lessor on receipt or accrual of such refund and
increased by any Taxes saved by Lessor by reason of the
deductibility of such payment by Lessor. If, in addition
to such refund, Lessor receives an amount of interest on
such refund, Lessor shall pay to Lessee the portion of such
interest which is fairly attributable to such refund,
reduced by any Taxes imposed by Lessor on receipt or
accrual of such interest and increased by any Taxes saved
by reason of the deductibility of such payment by Lessor.
Lessor shall not be required to make any payment to Lessee
pursuant to this Clause 7 if, and for so long as, an Event
of Default shall have occurred and be continuing.
(c) Lessor in its sole discretion (by written notice to Lessee)
may waive its rights to indemnification pursuant to Clause
1 with respect to any claim for any Tax and may refrain
from contesting or continuing the contest of such claim, in
which event Lessee shall have no obligation to indemnify
Lessor for the Taxes that are the subject of such claim.
If Lessor agrees to a settlement of any contest conducted
pursuant to this Clause 7 without the prior written consent
of Lessee, which consent shall not be unreasonably
withheld, then Lessor shall be deemed to have waived its
rights to the indemnification provided for in Clause 7 with
respect to the Tax liability accepted in such settlement.
<PAGE>
SCHEDULE 12
FORM OF LEASE TERMINATION CERTIFICATE
The undersigned hereby certify that the Aircraft Lease Agreement
dated as of January 5, 1999 between the undersigned Lessor and
undersigned Lessee, and as further described in the Appendix
attached hereto, has terminated and the aircraft and aircraft
engines covered thereby are no longer subject to the terms
thereof. This certificate may be executed in one or more
counterparts each of which when taken together shall constitute
one and the same instrument.
DATED this __________ day of ____________________,
__________
LESSOR LESSEE
AEROUSA, INC. VANGUARD AIRLINES, INC.
By:________________________________
By:__________________________
Title:_______________________________
Title:__________________________
<PAGE>
APPENDIX
FAA RECORDING DATE FAA CONVEYANCE NO.
<PAGE>
SCHEDULE 13
LEASE SUPPLEMENT NO. 1
LEASE SUPPLEMENT NO. 1, dated ___________, ______, between
AeroUSA, Inc., a corporation organized under the laws of
______________ ("Lessor"), and Vanguard Airlines, Inc., a
corporation organized under the laws of the
____________________("Lessee").
Lessor and Lessee have previously entered into that certain
Aircraft Lease Agreement dated as of January 5, 1999 (herein
referred to as the "Agreement" and the defined terms therein
being hereinafter used with the same meaning). The Agreement
provides for the execution and delivery from time to time of a
Lease Supplement substantially in the form hereof for the
purpose of leasing the aircraft described below under the
Agreement as and when delivered by Lessor to Lessee in
accordance with the terms thereof.
The Agreement and this Lease Supplement relate to the Aircraft,
Engines and Parts as more precisely described below and in the
Certificate of Technical Acceptance. A counterpart of the
Agreement is attached hereto and this Lease Supplement and the
Agreement shall form one document.
In consideration of the premises and other good and sufficient
consideration, Lessor and Lessee hereby agree as follows:
1. Lessor hereby delivers and leases to Lessee under the
Agreement and Lessee hereby accepts, acknowledges receipt of
possession and leases from Lessor under the Agreement, that
certain Boeing 737-200A commercial jet Aircraft, and the two (2)
Pratt & Whitney JT8D-15 Engines (each of which Engines has 750
or more rated takeoff horsepower or the equivalent of such
horsepower) described in Schedule 1 hereto, together with the
Aircraft Documents described in the Agreement (the "Delivered
Aircraft").
2. The Delivery Date of the Delivered Aircraft is the date of
this Lease Supplement set forth in the opening paragraph hereof.
<PAGE>
3. The Term for the Delivered Aircraft shall commence on the
Delivery Date and shall end on the Expiry Date, which shall be
_______________________________________.
4. The amount of Rent for the Delivered Aircraft is set forth
in Schedule 10 to the Agreement.
5. Lessee hereby confirms to Lessor that (i) the Delivered
Aircraft and each delivered Engine have been duly marked in
accordance with the terms of Clause 8.6(d) of the Agreement,
(ii) the Aircraft is insured as required by the Agreement,
(iii) the representations and warranties of Lessee referred to
in Clause 2 of the Agreement are hereby repeated with effect as
of the date first above written, (iv) having inspected the
Delivered Aircraft, Lessee acknowledges that the Delivered
Aircraft satisfies all conditions required for Lessee's
acceptance of delivery as set forth in the Agreement, and (v)
the execution and delivery of this Lease Supplement signifies
absolute and irrevocable acceptance by Lessee of the Delivered
Aircraft for all purposes hereof and of the Agreement.
6. All of the terms and provisions of the Agreement are hereby
incorporated by reference in this Lease Supplement to the same
extent as if fully set forth herein.
7. This Lease Supplement may be executed in any number of
counterparts; each of such counterparts, shall for all purposes
be deemed to be an original; and all such counterparts shall
together constitute but one and the same Lease Supplement.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease
Supplement No. 1 to be duly executed as of the day and year
first above written.
LESSOR, LESSEE,
AEROUSA, INC. VANGUARD AIRLINES, INC.
By:_____________________________
By:_____________________________
Name:__________________________
Name:__________________________
Title:____________________________
Title:____________________________
<PAGE>
SCHEDULE 1
TO
LEASE SUPPLEMENT NO. ___
ONE USED
BOEING 737-200A
1. Airframe
(a) Registration Mark: ______________________________
(b) Manufacturer's Serial No.: 21735
2. Installed Engines
(a) Model No.: JT8D-15
Serial Nos.: 708363 and 708349
Each of the above-described Aircraft Engines is 750 or more
rated takeoff horsepower or its equivalent.
<PAGE>
SCHEDULE 14
QUIET ENJOYMENT LETTER
From: __________ ("Owner")
To: Vanguard Airlines, Inc. ("Lessee")
Dated ________________,___ Ladies and Gentlemen:
AIRCRAFT LEASE AGREEMENT DATED AS OF JANUARY 5, 1999
BETWEEN _______________ ("LESSOR") AND LESSEE (THE "LEASE")
RELATING TO ONE BOEING 737-200A AIRCRAFT BEARING MANUFACTURER'S
SERIAL NUMBER 21735 (THE "AIRCRAFT")
Capitalized words and expressions defined in the Lease,
shall unless the context otherwise requires, bear the same
meanings herein.
1. We confirm to you that we will not interfere with the quiet
possession and use of the Aircraft by Lessee throughout the
Term, so long as Lessor has not issued a termination notice
pursuant to Clause 13 of the Lease in respect of an Event
of Default.
2. The foregoing undertaking is not to be construed as
restricting our rights to dispose of the Aircraft to such
persons and on such terms as we consider appropriate.
However, if we exercise such rights during the Term, and
provided that the condition referred to in paragraph 1
above continues to be fulfilled at the time of such
disposal, we will (subject to any requirements or
restrictions imposed by applicable law) dispose of the
Aircraft expressly subject to the Lease and on terms that
require the purchaser to issue an undertaking to Lessee
that it will not interfere with the quiet possession and
use of the Aircraft by Lessee throughout the remaining
portion of the Term, so long as the condition referred to
in paragraph 1 above continues to be fulfilled.
3. The rights conferred by this letter are granted only to
Lessee and do not extend to any assignee, successor or
sub-lessee of Lessee.
<PAGE>
Please countersign this letter in order to confirm your
agreement to the arrangements contained herein.
Yours faithfully,
[OWNER]
Agreed and accepted:
[LESSEE]
<PAGE>
INDEX
CLAUSE PAGE
1. INTERPRETATION 1
1.1 Definitions 1
1.2 Construction 1
2. REPRESENTATIONS AND WARRANTIES 2
2.1 Lessee's Representations and Warranties 2
2.2 Repetition 2
2.3 Lessor's Representations and Warranties 2
3. CONDITIONS PRECEDENT 2
3.1 Lessee Conditions Precedent 2
3.2 Waiver 2
3.3 Lessor Conditions Precedent 2
3.4 Waiver 2
4. COMMENCEMENT 2
4.1 Leasing 2
4.2 Delivery 3
4.3 Delayed Delivery 3
4.4 Licenses 4
4.5 Inspection 4
4.6 Indemnity 5
5. PAYMENTS 5
5.1 Deposit 5
5.2 Rental Periods 5
5.3 Rent 5
5.4 Supplemental Rent 5
5.5 Payments 6
5.6 Withholding 6
5.7 Taxes and Other Outgoings 7
5.8 Tax Indemnity 7
5.9 Lessor Obligations Following Expiry Date 7
5.10 Net Lease 7
5.11 Further Provisions regarding Deposit: 8
5.12 Letter of Credit: 9
5.13 Reserved 9
<PAGE>
5.14 Late Payment Interest 9
5.15 Currency 10
5.16 Certificates 10
5.17 Appropriation 10
5.18 Set-off 10
5.19 Expenses 10
6. MANUFACTURER'S WARRANTIES 11
6.1 Assignment 11
6.2 Proceeds 11
6.3 Parts 12
6.4 Agreement 12
7. LESSOR'S COVENANTS 12
7.1 Quiet Enjoyment 12
7.2 Lessor Liens 12
7.3 Maintenance Contributions 12
7.4 Payment for Certain Components: 13
8. LESSEE'S COVENANTS 13
8.1 Duration 13
8.2 Information 13
8.3 Lawful and Safe Operation 14
8.4 Subleasing 15
8.5 Inspection 16
8.6 Ownership; Property Interests; Related Matters 16
8.7 General 17
8.8 Records 18
8.9 Protection 18
8.10 Maintenance and Repair 19
8.11 Removal/Interchange of Engines 19
8.12 Removal/Interchange of Parts 20
8.13 Pooling of Engines and Parts 21
8.14 Equipment Changes 21
8.15 Title on an Equipment Change 21
<PAGE>
9. INSURANCE 22
9.1 Insurances 22
9.2 Change 22
9.3 Insurance Undertakings and Information 22
9.4 Failure to Insure 23
9.5 Continuing Indemnity 23
10. INDEMNITY 23
10.1 General 23
10.2 Duration 24
10.3 Subrogation 24
11. EVENTS OF LOSS 25
11.1 Events of Loss 25
11.2 Requisition 26
12. RETURN OF AIRCRAFT 27
12.1 Return 27
12.2 Non-Compliance 27
12.3 Redelivery 28
12.4 Acknowledgment 28
13. DEFAULT 28
13.1 Events 28
13.2 Rights and Remedies 28
13.3 Power of Attorney 32
13.4 Mitigation Credit 32
14. ASSIGNMENT 33
14.1 Lessee 33
14.2 Assignment by Lessor 33
14.3 Transfer by Lessor 33
14.4 Conditions of Rights of Assignment and Transfer 33
15. ILLEGALITY 34
16. MISCELLANEOUS 35
16.1 Waivers, Remedies Cumulative 35
16.2 Delegation 35
16.3 Severability 35
16.4 Remedy 35
<PAGE>
16.5 Time of Essence 35
16.6 Notices 35
16.7 Governing Law and Jurisdiction 36
16.8 Sole and Entire Agreement 38
16.9 Indemnitees 38
16.10 Counterparts 38
16.11 Language 38
17. DISCLAIMERS AND WAIVERS 38
17.1 Exclusion 38
17.2 Waiver 40
17.3 Disclaimer Of Consequential Damages 40
17.4 Confirmation 40
18. BROKERS AND OTHER THIRD PARTIES. 40
18.1 No Brokers 40
18.2 Indemnity 40
19. SECTION 1110 40
20. USURY LAWS 41
21. MODIFICATION OR REVISION 1
SCHEDULE 1 DEFINITIONS 1
SCHEDULE 2 REPRESENTATIONS AND WARRANTIES 1
SCHEDULE 3 CONDITIONS PRECEDENT 1
SCHEDULE 4 PART 1 DESCRIPTION OF AIRCRAFT 1
PART 2 DELIVERY CONDITION REQUIREMENTS 2
SCHEDULE 5 CERTIFICATE OF TECHNICAL ACCEPTANCE 1
SCHEDULE 6 PROCEDURES AND OPERATING CONDITION AT
REDELIVERY 1
SCHEDULE 7 INSURANCE REQUIREMENTS 1
SCHEDULE 8 FORM OF LEGAL OPINION 1
SCHEDULE 9 EVENTS OF DEFAULT 1
SCHEDULE 10 CERTAIN FINANCIAL TERMS 1
SCHEDULE 11 TAX INDEMNITY 1
SCHEDULE 12 FORM OF LEASE TERMINATION CERTIFICATE 1
SCHEDULE 13 LEASE SUPPLEMENT NO. 1 1
SCHEDULE 14 QUIET ENJOYMENT LETTER 1
<PAGE>
AIRCRAFT LEASE AGREEMENT
Dated as of January 5, 1999
between
AEROUSA, INC.
as Lessor
and
VANGUARD AIRLINES, INC.
as Lessee
IN RESPECT OF AIRCRAFT: One Boeing 737-200A
SERIAL NO: 21735
FAA REGISTRATION NO.:
NOTE: THIS AIRCRAFT LEASE AGREEMENT HAS BEEN EXECUTED IN
SEVERAL COUNTERPARTS OF WHICH THIS IS COUNTERPART NO. ____.
SEE CLAUSE 16.10 HEREOF FOR INFORMATION CONCERNING THE
DISTINCTION BETWEEN VARIOUS COUNTERPARTS.
<PAGE>
CONTRACT #308-99
SERVICE CONTRACT FOR AERONAUTICAL MAINTENANCE
ENTERED INTO ON FEBRUARY 26TH, 1999, BETWEEN:
1. The Self-Managed Cooperative of Aero Industrial Services
R.L., ("COOPESA"), an Aircraft Maintenance Repair
Station, located in Alajuela, Costa Rica, duly
authorized by the Aeronautical Authorities of the
Government of Costa Rica (the Technical Council of Civil
Aviation) and by the United States Federal Aviation
Administration (FAA); represented by its Executive
President, Mr. Bernardo Delgado, and
2. VANGUARD AIRLINES, INC ("The Customer"), a Delaware
company; represented by Mr. J. B. Miller, Vice President
of Engineering and Quality Assurance.
3. Whereas The Customer contracts COOPESA for the rendering
of maintenance services to the aircraft described in
Article II, which the terms and conditions of this
Contract refer to.
Therefore:
4. In consideration of the above established, The Parties
agree to enter into the present Contract.
ARTICLE I. DEFINITIONS
SUBSEQUENTLY, THE FOLLOWING TERMS SHALL HAVE THE FOLLOWING
MEANINGS:
I.1 AIRCRAFT: The Customer's Aircraft, as identified in
Article II of the Contract.
I.2 APPENDIX: All documents incorporated in the present
Contract, which the parties agree to be an integral part
of the Contract, and which must be signed by both
Parties.
I.3 SERVICE CENTER: COOPESA's facilities located at Juan
Santamaria Airport, in Alajuela, Costa Rica.
I.4 MAINTENANCE MANUAL: Any Aircraft maintenance manual
provided by The Customer to COOPESA, which is acceptable
and abides by the regulations and guidelines of the
Federal Aviation Administration "FAA" and of COOPESA.
I.5 SERVICE: Those tasks requested by The Customer and done
by COOPESA, as will later be incorporated into Appendix
"A", described in writing by The Customer and approved
in writing by COOPESA.
I.6 REPRESENTATIVE: The Representative-technician of The
Customer, designated by The Customer, having sufficient
powers to issue and/or cancel work orders as well as to
carry out the transactions related to the execution of
the present Contract, except approval of invoices.
I.7 WORK ORDERS: The modifications to the initial Work
Order, included in Appendix "A" to the present Contract,
by which The Customer, through the Representative, shall
instruct COOPESA about the services to be performed on
the Aircraft.
ARTICLE II. IDENTIFICATION OF THE AIRCRAFT
II.1 COOPESA's service, described in the present Contract and
its appendixes, refer to the Aircraft described below,
as well as any other acquired or returned Aircraft by
The Customer during the term of the contract:
B737-200 N912MP S/N 19607
B737-200 N209US S/N 19548
B737-200 N208AU S/N 19547
B737-200 N603DJ S/N 19955
B737-200 N412CE S/N 20412
B737-200 N204AU S/N 19603
B737-200 N5WM S/N 22629
B737-200 N620PC S/N 19708
B737-200 N219US S/N 20414
ARTICLE III. DELIVERY AND REDELIVERY OF THE AIRCRAFT
III.1 The Customer, at its own expense, shall deliver the
Aircraft to COOPESA, at its maintenance facilities.
III.2 The Aircraft shall be delivered to COOPESA in accordance
with the Maintenance Planning Forecast.
III.3 If the delivery of the Aircraft by The Customer to
COOPESA does not take place on the established date, The
Customer may have to wait for COOPESA's next production
opportunity. Customer shall provide COOPESA with thirty
(30) days prior notice of any changes to anticipated
delivery dates.
III.4 COOPESA shall perform the services referred to in this
Contract on the Aircraft, and shall return the Aircraft
to The Customer, at the same maintenance facilities, for
inspection and test flight, according to the pre-
determined time-table in article III.5 and the usual
procedures accepted by The Parties.
III.5 COOPESA shall use its best efforts to redeliver the
Aircraft to The Customer, at the Maintenance Facilities,
on or before the agreed upon dates in each case as
stated in the quotation for each service. Nonetheless,
COOPESA does not assume any responsibility for delays
caused by circumstances attributable to The Customer, or
by acts of God; war; rebellion; insurrection; fire;
strikes; impossibility of obtaining any repairing parts
and materials of the Aircraft, its engines and
navigation equipment, or any other cause that is out of
its control.
III.6 The redelivery to The Customer's satisfaction shall be
certified in writing, by COOPESA through the signature
of the Aircraft clearance and service acceptance
certificate by The Customer when so satisfied.
III.7 COOPESA shall notify The Customer in writing promptly
about any delay that may occur of the predetermined date
of redelivery of the Aircraft.
III.8 The redelivery shall take place only if The Customer's
payments to COOPESA are in accordance with Article XI.1.
III.9 All additional costs and expenses should be invoiced at
redelivery and shall be paid within 30 days by The
Customer, such as fuel in excess, and additional test
flights or landing fees required by The Customer (if
any), as long as it is not related to a warranty claim
item. Supportive documents will be furnished of
requested additional costs.
III.10 At the time of the redelivery of the Aircraft, all
spare parts and materials provided by The Customer or
obtained on its behalf for the execution of the services
shall be returned to The Customer under inventory.
COOPESA will provide a secure storage area for
Customers' parts and will be responsible for all missing
parts from this inventory that are not used on The
Customer's aircraft.
ARTICLE IV. DESCRIPTION OF THE SERVICE
IV.1 Subject to the terms and conditions of this Contract,
COOPESA shall perform the services on the Aircraft
described in each service quotation in Appendix "A".
IV.2 COOPESA shall provide the physical space to shelter the
Aircraft during service, the skilled labor, as well as
the standard tools, equipment and other facilities
required in order to execute the work contracted.
IV.3 The necessary spare parts and components shall be
provided directly by The Customer, or acquired by
COOPESA, from certified agencies on The Customer's
account. Likewise, all reasonable expenses for the
acquisition and transportation of such pieces or parts,
shall be paid by The Customer.
IV.4 The repairs and service to the Aircraft parts and
components, its engines and the navigation equipment
(avionics), shall be on The Customer's account,
including transportation, and transportation insurance.
IV.5 All Work Orders shall contain a detailed description of
the requested service including labor and parts in as
much as possible, and must be signed by The Customer or
Representative and by COOPESA.
IV.6 If during the service process, there are circumstances
related to the condition of the Aircraft, which, for
airworthiness reasons make it imperative to be
corrected, to such extent that if they are not,
airworthiness of the same would be affected, COOPESA
shall notify it to The Customer, who will evaluate and
issue the corresponding Work Order, if necessary.
ARTICLE V. TERM
V. The term of this agreement shall commence on January 1st,
1999, or upon full ratification by both Parties and
shall continue in effect until December 31st, 1999, or
unless otherwise agreed to by The Parties.
ARTICLE VI. CERTIFICATION
VI. The service contracted by The Customer shall be
performed on the Aircraft in COOPESA's Maintenance
Facilities, according to the standards established by
the Civil Aviation Authorities of the Government of
Costa Rica, and those of the FAA.
ARTICLE VII. COOPESA'S RESPONSIBILITIES
VII.1 Under the provisions of this Contract, COOPESA's
responsibilities are:
(a) To service the Aircraft according to the highest quality
standards , in accordance with The Customers' GMM, and
following all other applicable manuals, Customer
provided specifications and approved data.
(b) To redeliver the Aircraft to The Customer on the
predetermined date, except for as provided in clause
III.5 above.
(c) To provide all spare parts and materials not provided
directly by The Customer, whose cost, as established in
article IV.3 above, shall be covered by The Customer.
(d) To keep strict confidentiality about all information
related to The Customer, the Aircraft, the service,
except for that requested by the Costa Rican DGAC, and
the FAA. The Customer must be notified prior to release
of any information.
(e) To use skilled labor and properly trained for performing
the services.
(f) To provide The Customer's Representative with an office,
phone and fax from the time of delivery of the Aircraft,
and until five (5) days after its redelivery, and
provide a secure place to store The Customers' manuals
and other data.
(g) To perform an engine run-up at the beginning and at the
end of each maintenance check, and those checks required
by The Customers' Maintenance Program, all of which will
be issued as Special Request items, and will be at
Customers' expense.
(h) To comply with all provisions of the Federal Aviation
Regulations applicable thereto, including, but not
limited to, Part 145, and shall maintain all required
records and documents pursuant thereto. Such records
and documents shall be available for inspection at all
times during COOPESA's normal business hours. The
records will be given to The Customer per Article XI.7.
ARTICLE VIII. CUSTOMER'S RESPONSIBILITIES
VIII.1 Under the provisions of this Contract, The
Customer's responsibilities are the following:
(a) Pay COOPESA, at the time and according to the
established conditions, all amounts charged to its
account.
(b) Deliver the Aircraft, together with the documentation
referred to in clause f) hereunder, to COOPESA at the
Maintenance Facilities, on the date established in
clause III.2 above.
(c) Keep an accredited Representative-technician, as defined
in clause I.6 above.
(d) Provide COOPESA or authorize COOPESA to procure as
directed by The Customer, with all parts, spare parts,
materials and kits, COOPESA has identified which are
necessary but not available at COOPESA, related to the
contracted service and within the agreed term.
(e) Send COOPESA, at least fifteen days in advance, the task
cards, Engineering Orders and Special Requests related
to the parts, the Aircraft and the service.
(f) Send COOPESA, together with the Aircraft, all applicable
and necessary manuals and technical documents, as well
as their modifications and amendments, including the
M.M., I.P.C., SRM, W.D., MEL, Engineering Orders and the
Operator's General Maintenance Manual. The Customer
shall present a letter which indicates all the manuals
are in accordance with the latest revision of the
manufacturer.
(g) Fulfill all the material requirements of The Customer's
General Maintenance Manual, with respect to the
subcontracting of maintenance agencies; including the
designation of COOPESA's personnel who shall sign the
required inspection items and the Aircraft's return to
service.
h) Adjust the redelivery schedule if necessary in the event
that the actual work package for the Aircraft has not
arrived at least eight (8) days prior to Aircraft
induction.
VIII.2 During the course of this contract, the parties must
refrain from contracting each other's current employees.
ARTICLE IX. PARTS AND COMPONENTS
IX.1 The Customer must provide COOPESA with all spare parts,
replacement parts and components of the Aircraft, which
COOPESA has informed The Customer in advance are not
available at COOPESA but required by them, unless The
Customer authorizes COOPESA to secure (procure) the
parts.
IX.2 Said materials must be supplied, within a reasonable
time after the date COOPESA provides the corresponding
list to The Customer, so as not to delay completion of
the service. The Customer shall be responsible for the
delays incurred due to its non-fulfilment of the
obligations hereby described, and The Customer may
authorize COOPESA to procure the required material.
IX.3 All parts, spare parts and materials provided by The
Customer or acquired on its account by COOPESA from
third party suppliers, must be of appropriate quality
and duly certified by the FAA. COOPESA may refuse to
use those parts and materials provided by The Customer,
which do not meet the requirements.
In the event that The Customer fails to supply the parts
needed to complete the process of the Aircraft on
schedule, according to the delivery estimation, COOPESA
may decide to dedicate its man-power and hangar
allocation to fulfilling commitments with other
customers that may be affected by the late provision of
parts until such parts are received and the work is re-
scheduled.
IX.4 Upon request, COOPESA must return all off units on BER
(Beyond Economical Repair) or scrapped condition.
ARTICLE X. REPRESENTATION ON THE PART OF THE CUSTOMER
X.1 In order to be represented in issues related to
execution of the contracted service, The Customer shall
appoint The Representative in accordance with this
article.
X.2 The designation and appearance of The Representative
shall take place before, or concurrent with the delivery
of the Aircraft and at the beginning of each service, in
the form provided by COOPESA to The Customer, which
should be incorporated in the present document as
Appendix "B".
X.3 The Customer' Representative shall give instructions to
COOPESA for the execution of the services.
X.4 Particularly, the following functions correspond to the
Representative:
(a) To review and approve the work done by COOPESA.
(b) To request the execution of extraordinary work.
(c) To approve the estimated man-hours for the carrying out
of non-routine, special and extraordinary work.
(d) To give his approval to COOPESA, within twenty four
hours of request, for purchase of any required parts,
components and materials, or, in lack of that, provide
as soon as practicable all those parts The Customer
decides to supply directly himself.
(e) To cancel work orders, defer or cancel task cards
related to the service, as well as defer extraordinary
items.
(f) Sign work requests binding The Customer with respect to
the service performed.
X.5 COOPESA shall provide the Representative, as indicated
in clause VIII.If above, with space and facilities for
the carrying out of his functions, in the same buildings
as the Service Center.
XI. FINANCIAL STIPULATIONS
XI.1 The Customer shall make payments for each individual
aircraft in accordance with Appendix A and individual
aircraft addendums.
a. 30% at induction; 30% half way into the check and 40%
plus any additional balance at re-delivery.
b. Additional jobs to the initial workscope, exceeding the
amount of US$20,000.00 in total requires at least 50% of
downpayment when it is requested. The Customer may make
those payments within five working days following the
receipt of COOPESA's request.
XI.2 All payments shall be made in United States of America
dollars.
XI.3 The man-hour rate is [intentionally omitted].
XI.4 The Customer shall pay an additional management charge
related to the supply of parts and materials,
established as 10% of their CIF (cost, insurance,
freight) cost with a cap of US $750.00 per line item.
Customer supplied parts will not incur any mark ups.
XI.5 The costs of crew; fuel; airport duties, and any other
charges to be paid to the Airport Authorities, for first
test flight, shall be covered by The Customer. In case
a second test flight be necessary, due to the work
performed by COOPESA, COOPESA shall pay for the fuel;
airport duties and any other charges to be paid to
Airport Authorities.
XI.6 With the exception established in section XI.11 below,
all pending payments should be made within thirty days
of their invoicing. The Parties establish a penalty
interest rate of 18% per annum for the amounts due in
dollars.
XI.7 COOPESA shall keep, available to The Customer, the
records related to the service performed on the
Aircraft, as well as the parts and materials used. The
records will be given to The Customer at the conclusion
of each service.
XI.8 The obligation of payment of the amounts charged by
COOPESA to the Customer, shall not be interrupted by the
formulation of any discrepancy on the part of The
Customer. If this occurs, The Customer shall pay the
total amounts not in dispute, until the differences are
settled.
XI.9 The claims for discrepancies with respect to the
invoiced charges, must be lodged, at the latest, forty-
five (45) calendar days after the presentation of the
invoice. COOPESA shall reply to those claims within
fifteen (15) calendar days after they have been
formulated, except for billing errors.
XI.10 Three days before the redelivery of each Aircraft,
COOPESA shall make a preliminary invoice stipulating the
amounts due by The Customer and an estimation for
pending and unscheduled jobs and which must be paid off
before receiving it back. After the redelivery of each
individual Aircraft, a final invoice containing all the
charges derived from the service will be sent to The
Customer.
XI.11 If there were any unpaid bill in accordance with
Article XI.1 on the part of The Customer, upon receipt
of the Aircraft, he should grant COOPESA payment
guarantees of immediate execution sufficient to cover
said amounts.
XI.12 The payments and fund issuance, may be directly made by
The Customer at the following bank address:
[INTENTIONALLY OMITTED]
XI.13 When a redelivery estimation (in days) is reached and
the Aircraft is not ready due to Customer's failure to
supplying parts, components and/or materials thus
affecting the on-time performance of COOPESA, COOPESA
may prepare a draft invoice stating the amount due so
far.
XI.14 In the event that The Customer requests additional jobs
totalling US $5,000.00(labor & materials) or more, after
receiving the Draft Invoice, The Customer shall make
payment of this balance before redelivery of the
Aircraft except if it is not possible to transfer due to
weekend, holidays, where The Customer will be able to
make the transfer until next the business day.
ARTICLE XII. CONTRACTING
XII.1 During the aircraft service, any special jobs required
that can not be accomplished by COOPESA will be
contracted to an outside agency by The Customer
directly.
ARTICLE XIII. INSURANCE
XIII.1 The Customer, at his own expense, must have the
Aircraft duly insured against all applicable risks, from
the time of delivery to its redelivery, including all
the stages of service and test flights, provided however
The Customer shall not be liable for any losses arising
from the negligence or wilful default of COOPESA, its
employees, servants, agents or sub-contractors.
XIII.2 The Customer shall obtain and keep effective, the
necessary insurance to cover his representatives and
employees' risks, while in the Maintenance Facilities or
on board of the Aircraft, during the service or test
flights.
XIII.3 COOPESA shall maintain its own insurance policies
to cover its facilities, employees and civil
responsibility towards third parties and any rights not
covered by The Customer in Article XIII.1.
XIII.4 The Customer and COOPESA shall provide each other
before the Aircraft's entry to the Maintenance
Facilities, with the necessary documents supporting the
validity of the related insurance policies, and COOPESA
will present its hangar keeper insurance.
ARTICLE XIV. WARRANTY
XIV.1 COOPESA hereby warrants its workmanship for the
Services/Additional Services performed on the Aircraft
to be free from defects for a period of 1200 operating
hours or 180 calendar days from the date of notification
to The Customer under Article III.4 that the Aircraft is
ready for redelivery, whichever first occurs.
XIV.2 COOPESA's obligations and liabilities under this
warranty are applicable only to the Aircraft parts and
components that are demonstrated to have malfunctioned
due to defective workmanship by COOPESA. This warranty
does not extend, to any claim of malfunction, failure or
damage attributable to, but not limited to the
following:
a) Defects in design or manufacture of Aircraft or its
parts.
B) Defects of the materials, the components or the spare
parts, acquired directly by COOPESA from third party
suppliers, or provided by The Customer.
C) Normal wear and tear.
D) Rust, corrosion or entry of any foreign materials
which is not caused by or the result of previous work
accomplished by COOPESA.
E) The Customer's failure to operate, maintain, or care
for the Aircraft in accordance with the manufacturer's
specifications and recommendations or the applicable
governmental Aviation Authority regulations and
recommendations.
F) The malfunctioning of any part or system which is
either directly or indirectly caused by failure or
malfunctioning of any Aircraft component or system not
serviced by COOPESA.
G) Operation of the Aircraft or any part thereupon after
being involved in an accident.
h) Faulty shipping, storage, handling or installation by
anyone other than COOPESA.
XIV.3 COOPESA shall assign to The Customer any warranties
received by COOPESA with respect to parts and materials
transferred to The Customer by COOPESA or incorporated
by COOPESA into the Aircraft.
XIV.4 The obligations and responsibilities of COOPESA pursuant
to this warranty for the Services and Additional
Services shall be limited to either the repair or
overhaul of any part or components repaired or
overhauled by COOPESA including freight, fuel and
landing fees. COOPESA shall provide all necessary parts
and materials required for such repair or overhaul at no
additional cost to The Customer.
XIV.5 COOPESA's cumulative liability under this warranty is
hereby limited to an amount which shall not exceed the
total price for all Services performed by COOPESA on the
Aircraft, including all components parts or labor.
XIV.6The Customer shall provide COOPESA with written notice
of any malfunction claimed to be within the scope of this
warranty within fifteen (15) days of discovery.
XIV.7 All Aircraft parts or components must be properly
preserved, packaged and shipped to avoid corrosion or
damage in transit.
XIV.8 In the event that an investigation by COOPESA discloses
no defects in workmanship performed by COOPESA, then The
Customer, shall be responsible for all costs incurred by
COOPESA in performing the investigation, including costs
associated with tear-down investigation, re-assembly and
testing, and any additional costs of shipment of any
part to or from COOPESA's facility. Likewise, if the
investigation discloses defects in COOPESA's
workmanship, then COOPESA shall be responsible for all
costs incurred by COOPESA in performing the
investigation including costs associated with tear-down
investigation re-assembly and testing and any
additional costs of shipment of any part to or from
COOPESA's facility.
XIV.9 The warranties, obligations and liability of COOPESA
and remedies of The Customer set forth in Article XIV
are exclusive and in substitutions for, and The Customer
hereby waives, releases, and renounces all other
warranties, obligations and liabilities of COOPESA and
rights claims and remedies of The Customer against
COOPESA, express or implied, arising by or otherwise,
with respect to any defect in the Aircraft, including
but not limited to (a) any implied warranty of
mechantability or fitness for use, (b) any implied
warranty arising from the course of performance, course
of dealing or usage of trade and (c) any obligation,
liability, right, claim, or remedy for loss of or damage
with respect to the Aircraft, for loss of use, revenue
or profit with respect to the Aircraft, or for any
other direct, incidental or consequential damages.
XIV.10 The Customer and COOPESA hereby agree that Article
XIV.9 has been the subject of discussion and negotiation
and is fully understood by the parties, and that the
total price for the services to be performed by COOPESA
and the other mutual agreements of the parties set forth
in this agreement were arrived at in consideration of
the provisions of this paragraph, specifically including
the waiver, release and renunciation be The Customer set
forth above.
ARTICLE XV. PARKING AND STORAGE CHARGES
XV.1 Once COOPESA has notified The Customer that the service
has been completed and the Aircraft is in condition to
be redelivered, The Customer has the obligation of
removing the Aircraft, its engines, and any other
component, part or material belonging to him which are
in the Maintenance Facilities or in any other facilities
belonging to or rented by COOPESA, at its own expense,
for a period that cannot exceed two weeks, unless prior
arrangements are agreed to between COOPESA and The
Customer per III.10.
XV.2 If the indicated time is up, and the Aircraft, its
engines, components or materials have not been removed
by The Customer, COOPESA may charge a reasonable daily
rate for parking and storing, according to the space
used. For such purposes, the following rates are
established:
(a) $100.00 a day per Aircraft
XVI. ACTS OF GOD
XVI.1 None of the Parties shall be deemed responsible for the
non-fulfilment of its Contract obligations, due to acts
of God, war, rebellion, insurrection, turmoil, flood,
strike, impossibility to obtain parts, materials and
information, or other causes out of the non-performing
parties' control.
XVII. TAXES
XVII.1COOPESA shall be responsible and shall pay for all
taxes and duties due to the Costa Rican Customs and tax
Authorities, except those inherent to the importation of
parts (if any) and materials, obtained or supplied by
The Customer to be installed on the Aircraft, out of the
work-scope of this contract. The Customer shall be
responsible and shall pay for all taxes and duties other
than those assessed by reference to COOPESA's gross
revenue, imposed in relation to the Aircraft in the
country where it is domiciled, or any other State.
COOPESA shall notify in writing to The Customer about
all payments COOPESA has to make or those COOPESA has
made on behalf of The Customer to the tax, fiscal and
customs authorities of Costa Rica and other States.
Except as otherwise provided herein, Airport
Authorities charges like landing fees, etc, will be paid
by The Customer additionally (approximately
US$1,500.00).
XVIII. INDEMNIFICATION
XVIII.1 The Customer hereby agrees to defend, indemnify and
hold harmless COOPESA, its directors, officers,
employees, agents, servants and representatives, from
any and all loss, damage, claim, injury to or death of
persons, including employees of The Customer and of
COOPESA (except for injuries to and the death of
employees of COOPESA, which are covered by workers
compensation insurance), including loss of or damage to
property of The Customer, COOPESA or any other third
parties, arising out of or in any manner connected with
the Services/Additional Services by COOPESA pursuant to
this Agreement, except for loss or damage resulting
form the gross negligence or willful misconduct of
COOPESA.
XVIII.2 COOPESA hereby agrees to defend, indemnify and hold
harmless The Customer ,its directors, officers,
employees, agents, servants and representatives, from
any and all loss, damage, claim, injury to or death of
persons, including employees of Customer and of COOPESA
(except for injuries to and the death of employees of
The Customer, which are covered by workers compensation
insurance), including loss of or damage to property of
COOPESA, The Customer or any other third parties,
arising out of or in any manner connected with the
Services/Additional Services by The Customer pursuant
to this Agreement, except for loss or damage resulting
form the gross negligence or willful misconduct of The
Customer.
XVIII.3 Should there be any loss or damage to the property of
The Customer, COOPESA reserves the discretionary right
to elect to repair the property, if The Customer
agrees. This section shall not relieve COOPESA of any
other obligations under this agreement.
XIX. LIENS
XIX.1 Any and all liens claimed by third parties may hold upon
the property of The Customer or of COOPESA, shall not
affect the rights of the parties secured herein.
XIX.2 Any lien or encumbrance placed upon the Aircraft, its
components and parts, or any other of The Customer's
property, as a result of any of COOPESA's obligations in
favour of third parties, shall be immediately settled by
COOPESA.
XIX.3 The Customer shall immediately settle any lien or
encumbrance placed upon goods at the Service Center
which belong to COOPESA, its clients, suppliers or any
other third party, and which has been placed as a result
of The Customer's outstanding obligations.
XX. ASSIGNMENT
XX.1 This agreement and its rights and duties may not be
transferred or assigned by any of the Parties, without
the previous written consent of the other Party.
XXI. NOTIFICATIONS
XXI. All notifications required under the terms of this
Contract shall be expressed in writing and directly
addressed, forwarded and delivered, by hand, by fax,
telex, or sent by courier or certified mail, with
prepaid postage, as follows:
TO COOPESA:
300 mts West Aeropuerto Int'l Juan Santamaria
Mr. Rodolfo Solis
Phone: (506) 442-9818 / 442-2022
Fax: (506) 441-2943 / 442-1009
Sita: SJOCZCR
e-mail: [email protected]
TO VANGUARD AIRLINES
533 Mexico City Ave.
Kansas City International Airport
Kansas City, Missouri, 64153
Phone: (816) 243-2103
Fax: (816) 243-2154
Mr. J.B.Miller. Vice President Engineering &
Quality Assurance
e-mail: [email protected]
XXII. TERMINATION
XXII.1 Upon completion by COOPESA of all Service/Additional
Services hereunder, and upon full payment by The
Customer of all amounts due hereunder, this Agreement
shall be deemed terminated and shall be binding upon the
Parties, except as provided by Article XXII.4 herein.
XXII.2 This Agreement may be terminated at any time by either
Party upon with thirty (30) days written notice to the
other Party.
XXII.3 In the event that either Party fails to fulfill
obligations contained herein, the other party shall,
upon ten (10) days written notice, have deemed this
Agreement terminated.
XXII.4 Regardless of any termination of this Agreement, The
Customer shall remain liable to COOPESA for all amounts
due hereunder.
XXII.5 Whenever The Customer or COOPESA executes their right
to terminate the Contract, COOPESA will be granted and
will take the necessary time to do the necessary work on
the Aircraft to make it airworthy, and The Customer must
pay COOPESA all due amounts to COOPESA prior to taking
redelivery of the aircraft.
XXIII LAW AND APPLICABLE JURISDICTION
XXIII.1 The parties agree that any interpretation or dispute
related to this contract and its execution, shall be
settled in conformity with the Costa Rican laws and
settled before the Costa Rican Courts.
In witness whereof, each party hereto has executed this
agreement as of the day and year first written above.
COOPESA R.L. VANGUARD AIRLINES
/s/Bernardo Delgado /s/ J. B. Miller
Bernardo Delgado J.B. Miller
Executive President Vice President,
Engineering & Quality
Assurance
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 333-172 and Form S-8 No. 333-342)
pertaining to the Vanguard Airlines, Inc. 1994 Stock Option Plan
and the Employee Stock Purchase Plan of Vanguard Airlines, Inc.
of our report dated February 22, 1999, with respect to the
financial statements and schedule of Vanguard Airlines, Inc.
included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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0
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