THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON MARCH 30, 2000
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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, 1999.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the
transition period from to .
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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
(816) 243-2100
(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
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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, 2000, there were 17,106,746 shares of
Common Stock outstanding, of which 15,287,361 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, 2000 of $2.88, was $5,239,829.
Documents incorporated by reference: Portions of the
Registrant's Proxy Statement for the 1999 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 (816) 243-2100.
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 twelve leased Boeing 737-200
jet aircraft. The Company's schedule provides an average of
86 daily weekday flights serving Kansas City, Atlanta,
Buffalo/Niagara Falls, Chicago-Midway, Dallas/Fort Worth,
Denver, Minneapolis/St. Paul, Myrtle Beach and Pittsburgh.
The Company commenced service to Buffalo/Niagara Falls from
Chicago-Midway on May 13, 1999 and service to Cincinnati
from Chicago-Midway on April 15, 1999. Due to a poor
performance, service to Cincinnati from Chicago-Midway was
discontinued on March 1, 2000. In November 1999, the
Company signed a letter of intent to lease six additional
Boeing 737-200 aircraft with deliveries anticipated as
follows: four in the first five months of 2000, one in
December 2000 and one in January 2001. The Company has
accepted one of the six aircraft as of March 4, 2000. The
Company expects to return two aircraft in 2000 upon the
expiration of their lease terms. 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, $104.3
million for the year ended December 31, 1998 and $125.1
million for the year ended December 31, 1999.
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, which 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 $75 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
<PAGE>
approximately 5 percent. The Company's one-day advance and
walk-up fares are sold on a refundable basis.
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 eight round-trip flights
per day. For the year ended December 31, 1999, the average
stage length of the Company's flights was approximately 453
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 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, 2000, 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) Chicago-Midway and Buffalo/Niagara Falls; (vi)
Dallas/Ft. Worth and Kansas City; (vii) Denver and Kansas
City; (viii) Minneapolis/St. Paul and Kansas City; and (ix)
Atlanta and Myrtle Beach. The Company also provides limited
non-stop seasonal service between (i) Chicago-Midway and
Myrtle Beach; (ii) Buffalo/Niagara Falls and Myrtle Beach
and (iii) Pittsburgh and Myrtle Beach. The Company's
flights are also timed to provide connecting opportunities
to and from other combinations of these city pairs primarily
through 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.
RESERVATION AND INFORMATION SYSTEMS
The Company's reservation system 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 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. On November 23, 1999, the
Company began selling tickets over the internet through its
home page www.flyvanguard.com.
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
<PAGE>
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 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 expects to
display and sell its flights directly through the GALILEO
CRS system by June 2000.
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. 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 regarding
confirmed passengers and flight schedules. The Company
outsourced its computer reservation system hardware to
Hewlett-Packard Open Skies in the second quarter of 1999.
MARKETING AND PROMOTION
A majority of the Company's customers call its
reservation center or visit its web page directly to make
their reservations. The Company currently sells 21 percent
of tickets through its www.flyvanguard.com web page, this
percentage was achieved within three months of commencement.
The Company intends to continue to focus on its internet
strategy and hopes to increase the percentage of its
internet sales. 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) and web
page (www.flyvanguard.com). Currently, the marketing
efforts of the Company are concentrated on price and
destination advertisements. The Company has introduced
numerous initiatives designed to capture a larger share of
the cost-conscious business traveler market. The Company's
Road Warrior 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 Program, the
Company now aggressively pursues group and bulk ticket sales
to price sensitive business travelers.
<PAGE>
Approximately 35 percent of the Company's passenger
revenue comes through travel agent bookings. The Company has
implemented marketing strategies and programs to build on
its relationships with travel agencies throughout its route
system. On October 25, 1999, following the trend in the
industry, the Company reduced its commission to 5 percent
from 8 percent. See "Reservation and Information Systems."
The Company's frequent-flyer program, Vantage Points,
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. Currently, passengers who
book their flights through the Company's web page receive
double credit. 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 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. All departments
in the Company meet weekly to focus on internal and external
customer service issues. Also, 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 has information
lines and an almost 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
implemented a matching component to its 401(K) plan and also
offers an employee stock purchase plan and a profit sharing
plan. 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 33 years and 3,800 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 final
stages of contract negotiations with VAPA. The Company
believes that its low-cost structure is derived from its
<PAGE>
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 nine airports. The
Company has leases with the airport authorities at certain
airports and sublease or handling arrangements directly with
signatory airlines at other airports. The Company provides
its own ground handling services in Kansas City, Chicago-
Midway and Minneapolis. The Company subcontracts its ground
handling services at the remaining airports Most of these
sublease or handling arrangements 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.
AIRCRAFT
The Company's aircraft fleet consists of twelve leased
Boeing 737-200 jet aircraft. The Company's aircraft are 100
percent compliant with Federal Stage III noise level
requirements. In 1999, the Company returned one aircraft in
November and two aircraft in December to their lessors in
connection with the expiration of their leases. Five of the
Company's jet aircraft were manufactured between 1968 and
1970. Seven were manufactured between 1979 and 1982. The
five additional aircraft scheduled for delivery in 2000 and
2001 were manufactured between 1980 and 1983. The twelve
remaining aircraft will be returned upon expiry of the
respective lease as follows: two aircraft in 2000, one in
2001, two in 2002, six in 2004 and one in 2005. 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.
Because the Company's aircraft fleet consists of twelve
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.
<PAGE>
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 and Minneapolis/St.
Paul or in various other cities, as needed, by independent
contractors. The Company employs approximately 49
mechanics. 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.
FUEL
The cost of jet fuel is one of the Company's largest
operating expenses (approximately 15.7 percent of operating
expenses when including taxes and the cost of delivering
fuel into the aircraft for the year ended December 31,
1999). Fuel costs have increased significantly over the
past 12 months. Average fuel costs for 1999 were $0.67 per
gallon, which is an increase over 1998 costs of $0.58 per
gallon, but less than 1997 costs of $0.74 per gallon. For
the first two months of 2000, the Company purchased fuel for
approximately $1.03 per gallon (including taxes and the cost
of delivering fuel into the aircraft), which is
significantly more than the Company has had to pay in the
past. Significant changes in jet fuel prices have
materially affected the Company's operating results in the
past. 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
<PAGE>
(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.
Presently, four airports, Chicago-O'Hare, New York City-
LaGuardia, New York City-JFK and Washington, D.C.-Reagan
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 percent
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. In
the event that Federal law changes, the Company expects to
file an application for slot exemption to allow the Company
to offer non-stop service between Kansas City and
Washington, D.C.-Reagan National.
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, maintenance 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."
<PAGE>
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, 2000 the Company employed approximately
884 full-time and 144 part-time employees consisting of 145
pilots, 156 flight attendants, 49 mechanics, 281 station
agents, 231 reservation agents and 165 management and staff
personnel.
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 reported income from operations of
approximately $1.5 million. In 1999, the Company recorded
loss from operations of $5.0 million and generated positive
cash flow from operations of $3.3 million. As of December
31, 1999, the Company had an accumulated deficit of $76.3
million and a working capital deficit of $14.7 million. As
of December 31, 1999, the Company had positive stockholders'
equity of $1.7 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."
ABILITY TO CONTINUE AS A GOING CONCERN; EXPLANATORY
PARAGRAPH IN ACCOUNTANTS' REPORT. The report issued by the
Company's independent auditors for the year ended December
31, 1999 contains an explanatory paragraph expressing
substantial doubt about the Company's ability to continue as
a going concern. The report states that because of the
Company's net losses and working capital deficit, the
Company has been dependent upon financing from principal
stockholders. The report further states that there can be
no assurance as to the availability of further financing and
that there is substantial doubt about the Company's ability
to continue as a going concern. See also "Management's
Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
<PAGE>
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.
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 15.7 percent of the Company's operating
expenses for the year ended December 31, 1999. The cost of
jet fuel has risen dramatically in the past twelve months.
The Company's average cost per gallon for the past three
years have been $0.74 per gallon in the year ended December
31, 1997 and $0.58 per gallon in the year ended December 31,
1998 and $0.67 in the year ended December 31, 1999. In
January and February 2000, the Company has paid on average
of $1.03 per gallon. Jet fuel costs are subject to wide
fluctuations as a result of disruptions in supply or other
international events. 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 results 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 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.
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.
LIMITED NUMBER OF AIRCRAFT; AIRCRAFT ACQUISITIONS. The
Company's fleet consists of twelve 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 regulations would not
have a material adverse effect on the Company's business,
financial condition and results of operations.
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. 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.
<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 14,155 square feet of
office space near Kansas City International Airport ("KCI")
for corporate administration, training, operation and
maintenance functions. The Company is in negotiations with
the City of Kansas City to lease the facility for an
extended term. The Company also leases approximately 660
square feet for supplies and parts storage on a month-to
month lease at KCI. The Company leases approximately 9,188
square feet of office space in Mission, Kansas 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 and
has subleased this facility to a third party since its
closure through the remainder of its term.
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.
<PAGE>
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, 1999.
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, 2000:
NAME AGE POSITION
Robert J. Spane 59 Chairman of the Board,
Chief Executive Officer and
President
James E. Eckart 56 Vice President - Ground
Operations
Brian S. Gillman 30 Vice President, General
Counsel and Secretary
Alan R. Gorthy, Jr. 54 Vice President -
Maintenance
James B. Miller 61 Vice President -
Engineering and Quality Assurance
William F. McKinney 60 Vice President -
Operations
Lee M. Gammill, Jr. 65 Director
Denis T. Rice 67 Director
Leighton W. Smith 60 Director
Set forth below is a description of the business
experience of each executive officer and director of the
Company.
MR. 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.
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.
<PAGE>
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. 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.
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.
<PAGE>
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.
The following table sets forth, for the periods indicated,
the high and low sales prices of the Common Stock as reported
on the OTC Bulletin Board or the NASDAQ SmallCap Market, as
the case may be. The Common Stock was delisted from the
NASDAQ SmallCap Market on December 16, 1996. The Common
Stock traded on the OTC Bulletin Board from December 16, 1996
to June 15, 1999 at which time the stock resumed trading on
the Nasdaq SmallCap Market. On May 20, 1999, the Company
completed a one-for-five reverse stock split. Prices set
forth below reflect the one-for-five reverse split.
High Low
1998
First Quarter $3.75 $2.50
Second Quarter $8.13 $2.81
Third Quarter $9.38 $4.69
Fourth Quarter $5.63 $4.38
1999
First Quarter $5.63 $4.38
Second Quarter $5.00 $3.88
Third Quarter $7.38 $4.63
Fourth Quarter $5.00 $3.19
2000
January $3.36 $3.16
February $3.25 $2.78
The Company has not declared or paid dividends on its
Common Stock. The Company has never paid cash dividends and
has no plans to do so. As of March 1, 2000, there were
approximately 651 holders of record of Common Stock.
SALE OF UNREGISTERED SECURITIES
On January 17, 1999, two of the Company's principal
stockholders agreed to renew 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 agreed to
issue up to 800,000 warrants to purchase shares of Common
Stock with an exercise price of $5.00 per share. Upon
execution of the letter of credit, 160,000 warrants were
issued to each stockholder and were immediately vested. The
remaining 640,000 will be issued and vest quarterly according
to the amount of exposure under such letter of credit. Each
warrant expires on January 18, 2004. This transaction was
made under an exemption from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof.
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, 1998 and 1999. The selected
financial data in the table have been derived from the
audited financial statements of the Company, which, for the
three years ended December 31, 1999, 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
<PAGE>
Analysis of Financial Condition and Results of Operations
included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1995 31, 1996 31, 1997 31, 1998 31,1999
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Total
operating
revenues $36,159,018 $68,589,101 $81,384,138 $104,268,542 $125,080,735
Total
operating
expenses 48,225,313 92,503,417 106,758,900 102,814,267 130,102,510
-----------------------------------------------------------------
Operating
income
(loss) (12,066,295) (23,914,316) (25,374,762) 1,454,275 (5,021,775)
Total other
expense,
net (129,235) (1,893,754) (2,871,241) (2,933,212) (126,688)
---------------------------------------------------------------------
Net
loss $(12,195,530) (25,808,070) (28,246,003) (1,478,937) (5,148,463)
==================================================================
Net loss per
share (1) $ (8.24) $ (14.25) $ (9.27) $ (0.11) $(0.30)
======================================================================
Weighted
average
common shares
outstanding
(1) 1,479,184 1,811,378 3,046,580 13,153,528 17,085,352
=================================================================
OPERATING
DATA: (2)
Revenue
passenger
miles (RPMs) 290,030,187 667,845,140 767,239,664 702,003,589 854,802,727
Available
seat miles
(ASMs) 562,340,660 1,090,058,358 1,295,760,836 1,042,688,790 1,295,781,362
Load
factor
(percent) 51.58 61.27 59.21 67.33 65.97
Break-even
load factor
(3) (percent) 69.95 83.87 79.62 66.55 68.88
Passenger
yield per
RPM $ 0.1172 $0.0973 $0.0998 $0.1393 $0.1382
Total revenue
per ASM $ 0.0643 $0.0629 $0.0628 $0.1000 $0.0965
Operating
cost per
ASM $ 0.0858 $0.0849 $0.0824 $0.0986 $0.1004
Block hours
flown 14,781 24,721 29,859 28,122 35,340
Average
flight length
(miles) 372 530 585 466 453
Operating
cost per
block hour $ 3,263 $3,742 $3,575 $3,656 $3,681
Aircraft in
service (end
of period) 7 8 9 9 11
Airports
served (end
of period) 9 15 9 8 10
BALANCE SHEET
DATA:
Cash and cash
equivalents $ 3,491,640 $402,083 $1,082,712 $7,417,048 $6,440,684
Working
capital
deficiency (4,172,305) (16,296,881) (22,352,910) (7,915,882) (14,711,200)
Property and
equipment
net 4,550,818 5,049,658 5,484,684 8,131,453 10,849,511
Total
assets 16,425,698 20,318,247 24,763,884 33,646,583 37,703,168
Long-term
debt - 5,000,000 1,900,000 - --
Total
stockholders'
equity
(deficit) 3,544,633 (13,238,017) (11,944,434) 5,783,872 1,677,862
<FN>
(1) Restated to reflect one-for-five reverse stock split on
May 20, 1999.
(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 $434,410, $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, 1999,
1998, 1997, 1996 and 1995, respectively.
</FN>
</TABLE>
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
<PAGE>
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. 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.
The Company currently operates twelve leased Boeing 737-200
jet aircraft. In 1999, the Company accepted delivery of
five aircraft and returned three to their lessors, with a
net addition of two aircraft in 1999. The Company's current
schedule provides an average of 86 daily weekday flights
serving Kansas City, Atlanta, Buffalo/Niagara Falls, Chicago-
Midway, Dallas/Fort Worth, Denver, Minneapolis/St. Paul,
Pittsburgh and Myrtle Beach. The Company continues to review
its financing alternatives and working capital 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'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 capacity,
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.
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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1998
OVERVIEW
The Company had a net loss of $5.1 million or $0.30 per
share for the year ended December 31, 1999 as compared to a
net loss of $1.5 million or $0.11 per share for the year
ended December 31, 1998. ASMs, a measure of the Company's
capacity, increased 24 percent in 1999 because of additional
leased aircraft being placed in service. Operating revenues
increased 20 percent and operating expenses increased 27
percent. Operating cost per ASM increased 2 percent from
9.86 cents for the year ended December 31, 1998 to 10.04
cents for the year ended December 31, 1999. Fuel costs
increased 49 percent, in part due to a 16 percent increase
in the average cost per gallon of fuel.
<PAGE>
As of December 31, 1999, the Company had an accumulated
deficit of $76.3 million. At December 31, 1999, current
liabilities exceeded current assets by $14.7 million. The
Company generated positive cash flow from operations in 1999
of $3.3 million. 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.
OPERATING REVENUES
Total operating revenues increased 20 percent from
$104.3 million for the year ended December 31, 1998 to
$125.1 million for the year ended December 31, 1999. This
increase was primarily attributable to an increase in the
number of passengers and capacity in the year ended December
31, 1999 as compared to 1998. The number of passengers
increased 27 percent from 1.5 million in the year ended
December 31, 1998 to 1.9 million in the year ended December
31, 1999. ASMs increased 24 percent from 1,043 million in
the year ended December 31, 1998 to 1,296 million in the
year ended December 31, 1999. RPMs increased 22 percent
from 702 million during the year ended December 31, 1998 to
855 million during the year ended December 31, 1999. The
increase was primarily attributable to the increase in
capacity. The Company terminated service from Kansas City
to San Francisco in January 1998 and service from Kansas
City to New York City-JFK in May 1998. In 1999, the Company
commenced service to Buffalo/Niagara Falls in May and
Cincinnati in April. Service to Cincinnati from Chicago-
Midway was discontinued on March 1, 2000. From 1998 to
1999, the average stage length decreased 13 miles from 466
miles to 453 miles. Load factor decreased 2 percent from 67
percent for the year ended December 31, 1998 to 66 percent
for the year ended December 31, 1999. This decrease was
primarily the result of a 4 percent decrease in the average
fare per segment in the year ended December 31, 1999 as
compared to the year ended December 31, 1998.
Passenger yield per RPM decreased 1 percent from 13.9
cents in the year ended December 31, 1998 to 13.8 cents in
the year ended December 31, 1999. 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 Class and greater
frequencies between city pairs. The Company's
implementation of its strategic plan showed positive results
in the years ended December 31, 1998 and 1999. In late
August and early September of 1998, 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 in 1998 as a result of the strike.
The Company anticipates the passenger yield and load factor
in 2000 will remain consistent with those in 1999. 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 2000, 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 $75 service charge (increased from
$50 on October 25, 1999), as described below, subject to
certain restrictions. This credit may be redeemed for a
period of 180 days 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 $8.6 million (approximately
8 percent of total operating revenues) and $12.4 million
(approximately 10 percent of total operating
<PAGE>
revenues) for the years ended December 31, 1998 and 1999,
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 and an increase in the
number of promotions offering discounted fares during the
year ended December 31, 1999 as compared to the year ended
December 31, 1998. 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 an 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 $75 service charge
(increased from $50 as of October 25, 1999) for these
passengers. These service charges were $5.0 million
(approximately 5 percent of total operating revenues) and
$5.1 million (approximately 4 percent of operating revenues)
in the years ended December 31, 1998 and 1999, respectively.
OPERATING EXPENSES
The following table sets forth the percentage of total
operating revenues represented by these expense categories:
<TABLE>
Year ended December 31,
----------------------------------------
1999 1998
------ ------
Percent of Percent of
---------- ------------
Revenues Cents Per ASM Revenues Cents Per ASM
-------------------------------------------------------
<S> <C> <C> <C> <C>
Total operating revenues 100.0 percent 9.65 cents 100.0 percent 10.00 cents
=======================================================
Operating expenses:
Flying operations 19.0 percent 1.84 cents 17.3 percent 1.73 cents
Aircraft fuel 16.3 1.57 13.2 1.32
Maintenance 23.3 2.25 21.0 2.10
Passenger service 6.0 0.58 6.4 0.64
Aircraft and traffic
servicing 16.7 1.61 16.2 1.62
Promotion and sales 16.1 1.55 17.9 1.79
General and
administrative 3.4 0.33 3.9 0.39
Depreciation and
amortization 3.2 0.31 2.7 0.27
-------------------------------------------------------
Total operating expenses 104.0 10.04 98.6 9.86
Total other expense, net (0.1) (0.01) (2.8) (0.28)
-------------------------------------------------------
Net loss (4.1) percent(0.40) cents (1.4)percent (0.14)cents
=======================================================
</TABLE>
Flying operations expenses increased 32 percent from
$18.0 million (approximately 17 percent of operating
revenues) for the year ended December 31, 1998 to $23.8
million (approximately 19 percent of operating revenues) for
the year ended December 31, 1999. The increase in flying
operations expenses was primarily the result of the increase
in the average number of aircraft in the fleet from 9.0 to
11.1 and the associated volume increases in gross aircraft
rent and in pilot pay. Pilot pay increased as a result of
wage per hour increases in late 1998. Block hours increased
from 28,122 hours in the year ended December 31, 1998 to
35,340 in the year ended December 31, 1999. Flying
operations expense increased on a cents per ASM basis from
1.73 cents for the year ended December 31, 1998 to 1.84
cents for the year ended
<PAGE>
December 31, 1999. The Company's base rent increased due to
additional aircraft resulting in an increased cost per ASM.
Aircraft fuel expenses increased 49 percent from $13.7
million (approximately 13 percent of operating revenues) for
the year ended December 31, 1998 to $20.4 million
(approximately 16 percent of operating revenues) for the
year ended December 31, 1999. Higher fuel expense is
directly related to the increase in block hours flown by the
Company as well as a increase in cost per gallon in the year
ended December 31, 1999 versus 1998. Fuel cost per block
hour increased $89 or 18 percent from $488 in the year ended
December 31, 1998 to $577 in the year ended December 31,
1999 primarily due to an increase in average fuel price per
gallon. Specifically, the average price increased from
$0.58 per gallon (including taxes and into-plane costs) in
the year ended December 31, 1998 to $0.67 per gallon
(including taxes and into-plane costs) in the year ended
December 31, 1999, a 16 percent increase. 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.
Maintenance expenses include all maintenance-related
labor, parts, supplies and other expenses related to the
upkeep of aircraft. Maintenance expenses increased 33
percent from $21.9 million (approximately 21 percent of
operating revenues) for the year ended December 31, 1998 to
$29.1 million (approximately 23 percent of operating
revenues) for the year ended December 31, 1999. Maintenance
expense increased $7.2 million in 1999 due primarily to the
following items. Fleet growth, 11 aircraft versus 9 in
1998, generated additional maintenance expense totaling $2.8
million. Both actual and estimated unrecoverable
supplemental maintenance reserves and deficiency payments
totaling $2.4 million associated with the expiration of
certain aircraft leases were expensed in 1999. The Company
increased its accrual rate for future engine repairs during
1999, thus generating additional expense of $0.5 million
during the course of 1999. Additionally, the Company
expensed $0.3 million at year-end to provide for future
engine repairs. This adjustment was deemed necessary based
on forecast engine removal dates driven by life-limited
parts, mandated inspections and estimated average on-wing
times. Lastly, the Company expensed approximately $0.8
million to provide for actual heavy aircraft maintenance
incurred in excess of accrued amounts and for the
performance of certain airworthiness directives, which are
expensed as incurred according to Company policy. The
Company attributed the under accruals to unanticipated
structural and corrosion repairs associated with its 1968
and 1969 model 737-200 aircraft. Other expense categories
increased $0.4 million relative to 1998 but were within
expectations given the Company's growth. In the last
quarter of 1999, the Company entered into an agreement with
Bax Global, Inc. to provide aviation material management
expertise to the operation of the Company's Kansas City
warehouse. It is expected that the Company will achieve
improvements in inventory accuracy, movement of parts both
to and from Company aircraft and vendors as well as
improvements in the mix of inventory held by the Company so
as to minimize the Company's exposure to AOG (aircraft on
ground) situations. The Company entered into an agreement
with Israel Aircraft Industries, LTD. to provide repair and
overhaul services for a selected block of rotable
components. Again, the Company expects to improve both the
turn-around time and the cost of rotable component repair,
thus making more of the Company's inventory available for
use at any given point in time at an acceptable cost. 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 2.10 cents for the year ended
December 31, 1998 to 2.25 cents for the year ended December
31, 1999. This increase in cents per ASM mainly resulted
because of the increases in maintenance expense as described
above.
Passenger service expenses increased 13 percent from
$6.7 million (approximately 6 percent of operating revenues)
for the year ended December 31, 1998 to $7.5 million
(approximately 6 percent of operating revenues) for the year
ended December 31, 1999. Flight attendant salaries
increased in accordance with the 24 percent increase in ASMs
for the year ended December 31, 1999 as compared to
<PAGE>
the year ended 1998. In addition, the Company realized cost
savings from a reduction in the Company's passenger
liability insurance rates.
Aircraft and traffic servicing expenses increased 23
percent from $16.9 million (approximately 16 percent of
operating revenues) for the year ended December 31, 1998 to
$20.8 million (approximately 17 percent of operating
revenues) for the year ended December 31, 1999. The Company
experienced increases in station rent, employee salaries and
benefits related to the Company's station personnel in the
year ended December 31, 1999 as compared to the year ended
December 31, 1998. These increases were partially offset by
decreases in station ground handling expenses and station
salaries as a result of the Company employing its own
underwing servicing in Kansas City in July 1998 and
Minneapolis/St. Paul in February 1999. As a result, the
Company decreased its average cost per departure from $897
for the year ended December 31, 1998 to $849 for the year
ended December 31, 1999. Aircraft and traffic servicing
expenses decreased on a cents per ASM basis from 1.62 cents
for the year ended December 31, 1998 to 1.61 cents for the
year ended December 31, 1999 as a result of the increased
efficiencies being utilized over the 24 percent increase in
ASMs.
Promotion and sales expenses increased 8 percent from
$18.7 million (approximately 18 percent of operating
revenues) in the year ended December 31, 1998 to $20.1
million (approximately 16 percent of operating revenues) in
the year ended December 31, 1999. This increase was
primarily the result of the increase 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, 1999 as compared to the year
ended December 31, 1998. During the year ended December 31,
1999, the Company incurred direct advertising costs of $7.0
million versus $5.4 million in the year ended December 31,
1998. In April 1998, the Company took the reservation
center in-house and has realized a significant savings since
that time. Greater call volume and passenger bookings in
1999 led to increases in CRS fees and credit card processing
fees. The average promotion and sales cost per passenger
decreased $1.76 or 14 percent from $12.40 in the year ended
December 31, 1998 to $10.64 in the year ended December 31,
1999. Promotion and sales expenses decreased on a cents per
ASM basis from 1.79 cents for the year ended December 31,
1998 to 1.55 cents for the year ended December 31, 1999.
This decrease in cents per ASM resulted from the fixed costs
of the Company's promotion and sales functions being spread
over 24 percent greater ASMs.
General and administrative increased 4 percent from
$4.1 million (approximately 4 percent of operating revenues)
in the year ended December 31, 1998 to $4.2 million
(approximately 3 percent of operating revenues) in the year
ended December 31, 1999. The increase in general and
administrative expenses in the year ended December 31, 1999
as compared to 1998 is the result of increases in salaries
and bonuses which were offset by decreases in outside
services.
Depreciation and amortization expenses increased 45
percent from $2.8 million (approximately 3 percent of
operating revenues) in the year ended December 31, 1998 to
$4.1 million (approximately 3 percent of operating revenues)
in the year ended December 31, 1999. This increase was
primarily due to an increase in rotable aircraft parts
inventory of approximately $2 million, $2.8 million
associated with acquisition of aircraft in 1999; and the
purchase of new telephone switchboards for the reservation
center and corporate headquarters in the year ended December
31, 1999.
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 the Company
issued certain stockholders warrants to purchase shares of
Common Stock at an exercise price of $5.00 per share. Warrants
vest quarterly in amounts dependent on the Company's
exposure under the letter, as defined in the respective
agreements. Accordingly, the estimated fair value of the
warrants issued related to the agreements totaling $946,000
during the year ended December 31, 1999 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, 1999 as
a result of the payoff of the line of
<PAGE>
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, 1998 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1997
OPERATING REVENUES
Total operating revenues increased 28 percent 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 percent 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 percent 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 percent 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 percent 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 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 percent for the year ended
December 31, 1997 to 67 percent for the year ended December
31, 1998. This increase was primarily the result of a 20
percent decrease in capacity but only a 9 percent 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 percent 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 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.
<PAGE>
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 percent of total operating revenues) and $8.6 million
(approximately 8 percent 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 percent of total operating revenues) and
$5.0 million (approximately 5 percent of operating revenues)
in the years ended December 31, 1997 and 1998, 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:
<TABLE>
Year ended December 31,
----------------------------------------
1998 1997
------ ------
Percent of Percent of
---------- ------------
Revenues Cents Per ASM Revenues Cents Per ASM
-------------------------------------------------------
<S> <C> <C> <C> <C>
Total operating revenues 100.0 percent 10.00 cents 100.0 percent 6.28 cents
=======================================================
Operating expenses:
Flying operations 17.3 percent 1.73 cents 21.0 percent 1.32 cents
Aircraft fuel 13.2 1.32 22.8 1.43
Maintenance 21.0 2.10 23.8 1.49
Passenger service 6.4 0.64 9.0 0.57
Aircraft and traffic
servicing 16.2 1.62 20.6 1.29
Promotion and sales 17.9 1.79 25.5 1.60
General and
administrative 3.9 0.39 6.0 0.38
Depreciation and
amortization 2.7 0.27 2.5 0.16
-------------------------------------------------------
Total operating expenses 98.6 9.86 131.2 8.24
Total other expense, net (2.8) (0.28) (3.5) (0.22)
-------------------------------------------------------
Net loss (1.4) percent(0.14) cents (34.7)percent (2.18)cents
=======================================================
</TABLE>
<PAGE>
Flying operations expenses increased 5 percent from
$17.1 million (approximately 21 percent of operating
revenues) for the year ended December 31, 1997 to $18.0
million (approximately 17 percent 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 percent 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 percent fewer ASMs resulted in an increased
cost per ASM.
Aircraft fuel expenses decreased 26 percent from $18.6
million (approximately 23 percent of operating revenues) for
the year ended December 31, 1997 to $13.7 million
(approximately 13 percent 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 percent 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 percent 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.
Maintenance expenses include all maintenance-related
labor, parts, supplies and other expenses related to the
upkeep of aircraft. Maintenance expenses increased 13
percent from $19.3 million (approximately 24 percent of
operating revenues) for the year ended December 31, 1997 to
$21.9 million (approximately 21 percent 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
<PAGE>
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
percent 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 percent
fewer ASMs.
Passenger service expenses decreased 9 percent from
$7.3 million (approximately 9 percent of operating revenues)
for the year ended December 31, 1997 to $6.7 million
(approximately 6 percent 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 percent increase in
the number of passengers for the year ended December 31,
1998 compared to 1997. Finally, despite a 6 percent
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
percent from $16.7 million (approximately 21 percent of
operating revenues) for the year ended December 31, 1997 to
$16.9 million (approximately 16 percent 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 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 percent fewer ASMs.
Promotion and sales expenses decreased 10 percent from
$20.7 million (approximately 25 percent of operating
revenues) in the year ended December 31, 1997 to $18.7
million (approximately 18 percent 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
percent 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 percent 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 percent fewer ASMs.
<PAGE>
General and administrative decreased 17 percent from
$4.9 million (approximately 6 percent of operating revenues)
in the year ended December 31, 1997 to $4.1 million
(approximately 4 percent 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
percent from $2.1 million (approximately 3 percent of
operating revenues) in the year ended December 31, 1997 to
$2.8 million (approximately 3 percent 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.
<PAGE>
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,
exercise of warrants and the issuance of debt primarily to
its principal stockholders. As of March 1, 2000, the
Company has received net proceeds from the sale of its
equity securities aggregating approximately $70.3 million.
The Company's balance sheet reflected cash and cash
equivalents of $6.4 million as of December 31, 1999.
During 1999, the Company generated sufficient passenger
ticket sales to provide for its operational cash needs. As
of December 31, 1999, the Company had a working capital
deficit of $14.7 million. In January 1999, two principal
stockholders of the Company agreed to renew a two-year $4.0
million letter of credit facility to secure the Company's
credit card processor. At December 31, 1999, the credit
card exposure was less than $6.0 million and, consequently,
the Company had no restricted cash. In March 2000, the
Company established a one-year surety bond, which replaced
the $2.0 million guaranty that had expired, in the amount of
$8 million as collateral to additionally secure the credit
card processor. As a result, approximately $6 million was
released by the Company's credit processor from a restricted
cash account to the Company's operating account. In 2000,
to the extent that exposure exceeds $12.0 million, the
Company must deposit cash from ticket sales as collateral to
secure the Company credit card processor. As of March 13,
2000 due to increased ticket sales, the Company's credit
card exposure was approximately $12.1 million. The Company
funded the credit card exposure in excess of $12.0 million
with one hundred thousand dollars in available cash on hand.
The Company estimates that its credit card exposure will
range between $10.0 and $13 million through the end of the
third quarter when the balance should decline due to
expected seasonality. Any cash utilized as collateral will
be refunded by the credit card processor, on a daily basis,
when the Company's exposure falls below the previously
calculated exposure or $12.0 million.
The Company estimates that scheduled heavy maintenance
of its existing aircraft fleet through December 2000 will
cost $8.2 million, of which $2.0 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, additional heavy ground equipment 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 November 1999, the
Company entered into a letter of intent for the lease of six
additional Boeing 737-200 jet aircraft and accepted delivery
of one of these aircraft as of March 15, 2000. The Company
must deposit with the lessor or establish a letter of credit
in the aggregate amount of $825,000 for these remaining
aircraft expected in 2000 and 2001. As of March 12, 2000,
the Company had placed deposits totaling $495,000 with the
lessor.
The Company expects to continue to generate sufficient
cash to support its operations through the second quarter of
2000. The Company is evaluating options on raising
additional capital or issuing debt during 2000 in order to
execute its capital expenditure plans for 2000 and to
account for the signifcant increase is the cost of fuel. In
addition, 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, the Company's
continued operations are dependent upon additional
financings. Two of the Company's principal stockholders
have committed to invest up to $7,500,000, if necessary, to
fund the Company's continued operations. Failure to raise
additional funds in the future could result in the Company
<PAGE>
significantly curtailing or ceasing operations. 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 management can provide for the Company's necessary
capital requirements or that principal shareholders will
continue to provide financing.
IMPACT OF THE YEAR 2000
The Company has completed all significant aspects of
its Year 2000 project. The Company's Year 2000 project
encompassed information technology systems as well as
embedded technology assets along with assessments of
material third-party relationships and associated risks.
All of the Company's internal systems and software,
including virtually all software and services provided by
third parties, appropriately handled the Year 2000 date
changeover and the Company's operations were also
unaffected. While the Company has experienced no Year 2000
related disruptions to date, there are remaining risks
associated with the Year 2000 issue and the Company
continues to monitor possible future implications of Year
2000 issues. Based on currently available information,
management believes that Year 2000 related disruptions, if
any, will not have a material adverse effect on the
Company's financial condition or results of operations.
OTHER MATTERS
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 1999 cost per gallon of fuel. Based on 1999 actual
fuel usage, such an increase would have resulted in an
increase to aircraft fuel expense of approximately $2.0
million in 1999. Comparatively, based on projected 2000 fuel
usage, such an increase would result in an increase to
aircraft fuel expense of approximately $3.1 million in 2000.
The increase in exposure to fuel price fluctuations in 2000
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.
<PAGE>
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 24, 2000 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 24, 2000 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 24, 2000 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 24, 2000 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.
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 24, 2000 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 33
Balance Sheets -
December 31, 1999 and December 31, 1998 34
Statements of Operations for the
years ended
December 31, 1999, 1998 and 1997 35
Statements of Stockholders'
Equity (Deficit) for the years
ended December 31, 1999, 1998
and 1997 36
Statements of Cash Flows for
the years ended December 31,
1999, 1998 and 1997 37
Notes to Financial Statements 39
<PAGE>
(2) The following financial statement schedule is
included herein:
Schedule II - Valuation and Qualifying
Accounts 51
All other schedules 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 3.2
to the Registrant's Form 10-K for the year
ended December 31, 1997 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).
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).
<PAGE>
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 Registrant's Form 10-Q for
the Quarterly Period Ended June 30, 1997
and incorporated herein by reference).
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.) (filed as
Exhibit 10.12 to Registrant's Form 10-K
for the year ended December 31, 1999 and
incorporated herein by reference).
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 (filed as
Exhibit 10.18 to the Registrant's Form 10-
K for the year ended December 31, 1998 and
incorporated herein by reference).
10.19 Aircraft Lease Agreement (MSN 21735),
dated as of January 5, 1999 between
AeroUSA, Inc. and the Registrant (filed as
Exhibit 10.18 to the Registrant's Form 10-
K for the year ended December 31, 1998 and
incorporated herein by reference).
10.20 Aircraft Lease Agreement (MSN 22120), dated as of
August 27, 1999 between Aircraft 22120, Inc. and the
Registrant (filed as Exhibit 10.37 to the Registrant's Form
10-Q for the quarter ended September 30, 1999).
10.21 Aircraft Lease Agreement (MSN 22121), dated as of
July 22, 1999 between Aircraft 22121, Inc. and the
Registrant (filed as Exhibit 10.36 to the Registrant's Form
10-Q for the quarter ended September 30, 1999).
10.22 Aircraft Lease Agreement (MSN 22122), dated as of
October 19, 1999 between Aircraft 22122, Inc. and the
Registrant.
10.23 Aircraft Lease Agreement (MSN 22882),
dated as of February 22, 2000 between US
Airways, Inc. and the Registrant.
10.24 Employment Agreement, dated November
3, 1997 between the Registrant and Robert
J. Spane (filed as Exhibit 10.20 to the
Registrant's Form 10-Q for the quarter
ended September 30, 1999 and incorporated
herein by reference).
10.25 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).
10.26 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).
10.27 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).
10.28 Lease, dated July 15, 1999, between
the Gerson Company and Registrant.
10.29 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).
10.30 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).
10.31 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).
<PAGE>
10.32 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
Registrant's Form 10-K for the year ended
December 31, 1996 and incorporated herein
by reference).
10.33 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).
10.34 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).
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, 1999 and
1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed on the
Index at Item 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 auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by 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, 1999
and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
As more fully described in Note 2, the Company has incurred
operating losses and has a working capital deficiency.
These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability
and classification of assets or the amounts and
classification of liabilities that may result from the
outcome of this uncertainty.
Ernst & Young LLP
Kansas City, Missouri
February 25, 2000
<PAGE>
<TABLE>
<CAPTION>
Vanguard Airlines, Inc.
Balance Sheets
DECEMBER 31
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,440,684 $ 7,417,048
Accounts receivable, less allowance
for doubtful accounts of $96,000
in 1999 ($303,000 in 1998) 1,295,515 2,030,309
Inventories 1,321,047 1,168,054
Prepaid expenses and other current 1,835,125 1,022,953
assets
Current portion of supplemental
maintenance 5,351,279 4,490,281
deposits
------------- ------------
Total current assets 16,243,650 16,128,645
Property and equipment, at cost:
Aircraft improvements and 7,626,144 4,854,683
leasehold costs
Aircraft engines and rotable 7,763,835 6,243,693
inventory
Reservation system and 1,804,783 1,867,954
communication equipment
Other property and equipment 4,777,339 2,624,579
------------- ------------
21,972,101 15,590,909
Less accumulated depreciation and
amortization (11,122,590) (7,459,456)
------------- ------------
10,849,511 8,131,453
Other assets:
Supplemental maintenance deposits,
less current portion 4,168,617 5,121,050
Deferred debt issuance costs 595,038 83,448
Leased aircraft deposits 3,428,000 2,299,000
Fuel and security deposits 708,030 883,610
Other 1,710,322 999,377
------------- ------------
10,610,007 9,386,485
------------- ------------
Total assets $37,703,168 $33,646,583
============= ============
</TABLE>
<PAGE>
<TABLE>
DECEMBER 31
1999 1998
------------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $7,357,821 $5,848,635
Accrued expenses 4,701,841 3,062,823
Accrued maintenance 10,057,044 6,902,847
Air traffic liability 8,649,452 8,230,222
Current portion of capital lease
obligations 188,692 --
------------- -----------
Total current liabilities 30,954,850 24,044,527
Accrued maintenance, less current
portion 4,713,701 3,818,184
Capital lease obligations, less
current portion 356,755 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -
2,000,000
Issued and outstanding
shares - 302,362 302 302
Liquidation preference -
$3,023,620
Common stock, $.001 par value:
Authorized shares - 200,000,000
Issued and outstanding
shares - 17,107,617 in
1999 (17,074,462 in 1998) 17,108 17,075
Additional paid-in capital 77,979,912 76,954,670
Accumulated deficit (76,319,460) (71,170,997)
------------- -----------
1,677,862 5,801,050
Deferred stock compensation -- (17,178)
------------- - ----------
Total stockholders' equity 1,677,862 5,783,872
------------- -----------
Total liabilities and stockholders'
equity $37,703,168 $33,646,583
============= ===========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
Vanguard Airlines, Inc.
Statements of Operations
YEAR ENDED DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues:
Passenger revenue $118,126,125 $97,810,522 $76,560,373
Other 6,954,610 6,458,020 4,823,765
----------- ----------- -----------
Total operating revenues 125,080,735 104,268,542 81,384,138
Operating expenses:
Flying operations 23,821,216 17,997,741 17,080,316
Aircraft fuel 20,388,390 13,725,011 18,571,472
Maintenance 29,124,877 21,928,784 19,334,251
Passenger service 7,519,973 6,677,818 7,342,237
Aircraft and traffic 20,830,769 16,941,063 16,746,727
servicing
Promotion and sales 20,100,628 18,680,369 20,701,511
General and administrative 4,246,920 4,065,266 4,914,469
Depreciation and
amortization 4,069,737 2,798,215 2,067,917
----------- ----------- -----------
Total operating expenses 130,102,510 102,814,267 106,758,900
----------- ----------- -----------
Operating income (loss) (5,021,775) 1,454,275 (25,374,762)
Other income (expense):
Deferred debt issuance cost
amortization (434,410) (2,629,785) (1,858,767)
Interest expense (16,865) (516,626) (1,110,465)
Interest income 508,366 213,199 97,991
Other (183,779) - -
Total other expense, net (126,688) 2,933,212) (2,871,241)
----------- ----------- -----------
Net loss $ (5,148,463)$(1,478,937)$(28,246,003)
=========== =========== ===========
Net loss per share - basic
and diluted $ (0.30) $ (0.11) $ (9.27)
=========== =========== ===========
Weighted-average common
shares outstanding 17,085,352 13,153,528 3,046,580
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
<TABLE>
<CAPTION>
Vanguard Airlines, Inc.
Statements of Shareholders' Equity (Deficit)
CONVERTIBLE
PREFERRED STOCK TOTAL
SERIES A COMMON STOCK ADDITIONAL DEFERRED STOCKHOLDERS'
-----------------------------------------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 31,1996 -- $ -- 1,996,490 $1,997 $ 28,291,981 $(41,446,057) $ (85,938) $(13,238,017)
Issuance of warrants -- -- -- -- 4,082,000 -- -- 4,082,000
Amoritization of deferred
stock compensation -- -- -- -- -- -- 34,380 34,380
Issuance of common stock in
a private placement -- -- 1,030,000 1,030 10,233,970 -- -- 10,235,000
Issuance of common stock in
a rights offering -- -- 6,091,143 6,091 15,168,909 -- -- 15,175,000
Exercise of stock options -- -- 21,549 22 13,184 -- -- 13,206
Net loss -- -- -- -- -- (28,246,003) -- (28,246,003)
------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 9,139,182 9,140 57,790,044 (69,692,060) (51,558) (11,944,434)
Issuance of warrants -- -- -- -- 490,000 -- -- 490,000
Amoritization 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 -- -- 4,225,954 4,226 10,560,661 -- -- 10,564,887
Issuance of common stock
through exercise of warrants -- -- 2,060,000 2,060 5,147,940 -- -- 5,150,000
Issuance of common stock
through cashless exercise
of warrants -- -- 1,622,187 1,622 (1,622) -- -- --
Exercise of stock options -- -- 27,139 27 46,202 -- - 46,229
Net loss -- -- -- -- -- (1,478,937) -- (1,478,937)
-----------------------------------------------------------------------------------------------
Balance at December 31, 1998 302,362 302 17,074,462 17,075 76,954,670 (71,170,997) (17,178) 5,783,872
Issuance of warrants -- -- -- -- 946,000 -- -- 946,000
Amortization of deferred
stock compensation -- -- -- -- -- -- 17,178 17,178
Exercise of stock options -- -- 33,155 33 79,242 -- -- 79,275
Net loss -- -- -- -- -- (5,148,463) -- (5,148,463)
-----------------------------------------------------------------------------------------------
Balance at December 31, 1999 302,362 $302 17,107,617 $17,108 $77,979,912 $(76,319,460) $ -- $1,677,862
===============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
<CAPTION>
Vanguard Airlines, Inc.
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,148,463) $ (1,478,937) $(28,246,003)
Adjustments to reconcile net
loss to net cash provided
by (used in) operating
activities:
Depreciation 2,504,888 1,519,808 848,948
Amortization 1,564,849 1,278,407 1,218,969
Loss on disposal of property
and equipment 37,390 - 11,400
Deferred debt issuance cost
amortization 434,410 2,629,785 1,858,767
Compensation related to
stock options 17,178 34,380 34,380
Provision for uncollectible 109,014 10,895 253,276
accounts
Provision for expendable and
rotable inventory - 433,000 -
obsolescence
Changes in operating assets
and liabilities:
Restricted cash -- - 1,822,998
Accounts receivable 625,780 271,235 888,703
Inventories (152,993) (358,434) (169,282)
Prepaid expenses and other
current assets (812,172) (11,536) (144,313)
Supplemental maintenance 91,435 (1,842,632) (3,045,441)
deposits
Accounts payable 1,509,186 (247,268) (2,308,293)
Accrued expenses 1,639,018 176,226 355,201
Accrued maintenance 2,090,997 1,472,805 1,563,588
Air traffic liability 419,230 2,241,137 (620,524)
Deposits and other (1,664,365) (143,907) (712,690)
-------------- ------------- --------------
Net cash provided by (used
in) operating activities 3,265,382 5,984,964 (26,390,316)
INVESTING ACTIVITIES
Purchases of property and
equipment (4,158,855) (5,844,984) (2,061,343)
FINANCING ACTIVITIES
Proceeds from issuance of
notes payable to related
parties - 3,000,000 29,148,816
Proceeds from line of
credit borrowings - 1,900,000 2,275,000
Principal payments on line
of credit - (3,800,000) (5,375,000)
Proceeds from issuance of
notes payable - 275,000 -
Proceeds from sale of common
stock and the exercise of
stock options and warrants,
net of offering costs 79,275 5,196,229 3,242,131
Offering costs incurred on
issuance of preferred stock
through conversion of - (101,873) -
related-party notes payable
Principal payments on notes
payable and capital lease
obligations (162,166) (275,000) (158,659)
-------------- ------------- --------------
Net cash provided (used in)
by financing activities (82,891) 6,194,356 29,132,288
-------------- ------------- --------------
</TABLE>
(continued on following page)
<PAGE>
<TABLE>
<CAPTION>
Vanguard Airlines, Inc.
Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1999 1998 1997
------------- --------------- --------------
<S> <C> <C> <C>
Net increase (decrease) in cash
and cash equivalents $ (976,364) $ 6,334,336 $ 680,629
Cash and cash equivalents at
beginning of year 7,417,048 1,082,712 402,083
------------- --------------- ----------------
Cash and cash equivalents at
end of year $ 6,440,684 $ 7,417,048 $ 1,082,712
============= ============= ==============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the year for
interest $ 16,865 $ 190,935 $ 377,122
============= ============= ==============
Cash paid during the year for
income taxes $ 60,000 $ -- $ --
============= ============= ==============
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 $ 946,000 $ 490,000 $ 4,082,000
============= ============= ==============
Aircraft leasehold costs
associated with accrued
maintenance at inception of
lease $ 2,396,425 $ -- $ 453,000
============= ============= ==============
Property and equipment acquired
through issuance of capital
lease obligations $ 707,613 $ -- $ --
============= ============= ==============
Write off of the net book value
of an impaired engine against
related accrued maintenance $ 437,708 $ -- $ --
============= ============= ==============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Vanguard Airlines, Inc. (the Company) was incorporated in
Delaware in April 1994 and commenced flight operations on
December 4, 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.
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 1999 and 1998, the risk of loss exposure
for the Company's largest credit card processor was
calculated daily. During 1999, if the risk of loss exposure
exceeded $6,000,000 (the amount secured by letters of credit
and a guarantee discussed in NOTE 8), the Company was
required to maintain a restricted cash balance in an amount
equal to the additional exposure. At December 31, 1999 and
1998, 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, 1999 and 1998, the restricted cash
balance related to this credit card processor totaling
$236,466 and $227,183, 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.
<PAGE>
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 10, 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 the lower of cost reserve. These items
are charged to expense when issued for use under the first-
in, first-out method.
The Company is a party to 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, 1999 and 1998, the Company held consigned
parts and supplies of approximately $1,846,000 and
$1,628,000, 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, 1999 and 1998, aircraft
rotable inventory was recorded net of a $300,000 and
$400,000 obsolescence reserve, respectively. 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
$6,989,000, $5,458,000 and $7,792,000 for the years ended
December 31, 1999, 1998 and 1997, 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 multi-tier
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.
BARTER TRANSACTION
The Company exchanges passenger tickets for certain
services, including advertising and other business
activities. The Company recognizes expense and a liability
is initially recorded at the fair market value of the ticket
vouchers issued when the Company receives the service. The
liability is relieved at the time transportation is
provided.
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 4.
DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution plan (the
"Plan") covering substantially all employees. Participants
may contribute a portion of their pay to the Plan. On
January 1, 1999, the Company began matching participant
contributions to the Plan equal to 100 percent of the first
3 percent of each participant's compensation deferral.
Contributions made by the Company amounted to approximately
$380,000 during 1999.
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.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, cash equivalents and deposits
reported in the balance sheet approximate fair value. The
fair values of warrants issued in 1999, 1998 and 1997, as
described in NOTES 6 AND 8, were estimated using the
discounted Black-Scholes pricing model.
2. BASIS OF PRESENTATION
In the fourth quarter of 1999, the Company incurred a net
loss of approximately $7.3 million and cash flow from
operations for the year ended December 31, 1999, decreased
by approximately $2.7 million, from approximately $6.0
million for the year ended December 31, 1998. The Company's
working capital deficiency at December 31, 1999 was
approximately $14.7 million. In addition, the cost per
gallon of fuel has increased significantly in the first
quarter of 2000, from an average of approximately $0.87 per
gallon for the fourth quarter of 1999 to approximately $1.03
per gallon for the two months ended February 29, 2000.
Accordingly, the Company anticipates that additional debt or
equity financing will be required to fund on-going
operations in 2000. Two of the Company's principal
stockholders have committed to inject up to $7,500,000, if
necessary, to fund the Company's continued operations. The
Company is currently negotiating to raise additional capital
and to secure bank financing; however, there can be no
assurance that the Company will successfully complete these
transactions or, if completed, the amounts will be
sufficient to fund on-going operations in 2000. The
inability to secure additional funding could have material
adverse effect on the Company, including the possibility
that the Company could have to cease operations.
3. STOCKHOLDERS' EQUITY
On May 18, 1999, the Company's stockholders approved a one-
for-five reverse stock split to stockholders of record on
that date resulting in a reduction of 68,297,847 shares of
outstanding common stock. The par value per share remained
at $0.001 per share and 200,000,000 common shares remained
authorized. All historical information presented in the
accompanying financial statements and footnotes has been
adjusted retroactively to reflect the reverse stock split.
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 7, 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 8 shares of common stock at an exercise
price of $2.75 per share and expires 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 1,200,000 and 1,218,896, 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 1,622,187 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, 1999, 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 4 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 common stock voting rights determined
on an as-converted basis.
<PAGE>
3. STOCKHOLDERS' EQUITY (CONTINUED)
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 7, were converted,
at $2.50 per share, to an equivalent number of shares of
common stock. The Company issued 4,225,954 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 2,060,000
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 $2.50 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 2,060,000 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 21,452 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
$2.50.
In December 1997, the Company completed a sale of 6,091,143
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
$2.50 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 $12,181,000 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.
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 1,030,000
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
1,000,000 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 $12.50. 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 $10.00 per share. In conjunction
with the Company's Rights Offering discussed above, the
redeemable warrants were repriced to $2.50, 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 $0.25 per warrant on 45 days' prior notice if the
average closing bid price of the Company's common stock
equals or exceeds $5.00 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.
The Company has reserved 6,046,085 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 and for shares
<PAGE>
3. STOCKHOLDERS' EQUITY (CONTINUED)
available under the employee stock purchase plan as follows:
NUMBER OF
SHARES
RESERVED
------------
Stock options (NOTE 4) 2,577,893
Stock purchase warrants (NOTES 3,
6 AND 8) 2,058,744
Series A Preferred Stock (NOTE 3) 1,209,448
Employee stock purchase plan
(NOTE 5) 200,000
-------------
6,046,085
============
4. STOCK OPTIONS
The Company established the Vanguard Airlines, Inc. 1994 Stock
Option Plan (the 1994 Plan) whereby options for up to 340,000
(increased to 2,000,000 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 15,200 shares
of common stock were repriced to $9.05. 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 207,500 shares of
common stock were repriced to $2.50. 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:
<TABLE>
1999 1998 1997
---------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exerci Exercise
OPTIONS PRICE Options Price Options Price
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,584,110 $ 3.85 253,053 $3.20 94,646 $12.00
Granted 274,278 4.44 887,387 4.85 450,500 5.80
Transferred from
1997 Program - - 717,396 2.65 - -
Repriced - - - - (222,700) 11.40
Exercised (33,155) 2.51 (27,139) 1.70 (21,549) 0.60
Forfeited (165,137) 4.60 (246,587) 3.45 (47,844) 8.40
-------------------------------------------------------
Outstanding at end
of year 1,660,096 3.90 1,584,110 3.85 253,053 3.20
=======================================================
Exercisable at end
of year 745,969 3.87 444,615 3.80 47,007 6.75
Weighted-average
fair value of
options granted
during the year 2.91 2.40 2.80
</TABLE>
<PAGE>
Exercise prices for options outstanding under the 1994 Plan as of
December 31, 1999 for incentive stock options granted to
employees range from $0.55 to $6.63. The exercise prices for
certain nonstatutory options granted range from $3.44 to $10.63
for 175,000 options and equals $46.25 for an additional 5,000
options outstanding under the Plan. The weighted-average
remaining contractual life at December 31, 1999 of all
outstanding options under the 1994 Plan is 7.83 years. The
weighted average exercise price of all options granted under the
1994 plan is $4.08.
During 1999, the Company granted options to purchase 664,322
shares of common stock to certain officers of the Company. The
exercise price for 3,487 options equals $0.50 and for 660,835
options granted range from $3.94 to $4.81. The options vest
ranging from 2 to 4 years and have a contractual term of 10 years
from the date of issuance. At December 31, 1999, there were
111,627 options exercisable and the weighted average contractual
life is 9.52 years. The weighted-average fair value of options
granted during 1999 is $2.23.
Under a separate stock option program (the 1997 Program), the
Company granted options to purchase 1,394,792 shares of common
stock to certain directors and officers of the Company. Options
totaling 717,396 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 2,000,000. The remaining 677,396 options under the
1997 Program have an exercise price of $2.50, vest over a period
of two years and have a contractual term of five
years from the date of issuance. None of these options were
exercised or forfeited during the years ended December 31, 1999
or 1998. At December 31, 1999, there are 677,396 options
exercisable under the 1997 Program, and the weighted-average
remaining contractual life of all outstanding options is 7.5
years. The weighted-average fair value of all options originally
granted under the 1997 Program is $1.05.
The fair values of options granted in 1999, 1998 and 1997 were
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for
1999, 1998 and 1997, respectively: risk free interest rates of
4.97 percent, 5.37 percent and 5.78 percent; volatility factors
of the expected market price of the Company's common stock of
.88, .57 and .55; and a weighted-average expected life of the
option of 3.53, 3.90 and 2.96 years. The Company assumed a 0
percent 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:
1999 1998 1997
------------ ------------ --------------
Pro forma net loss $(6,376,913) $(2,192,258) $(28,701,314)
Pro forma net loss
per share (0.37) (0.17) (9.42)
5. 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 200,000 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 percent 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 percent 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 percent by the
participating employee and 15 percent by the Company.
<PAGE>
6. 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
percent 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.
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 3. 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 455,000 shares of
common stock at an exercise price of $5.00. Upon execution of the
Agreement, the Company issued 182,000 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 and was 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 136,500 and 114,000 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
was charged to expense over the remaining term of the guarantee.
Accumulated amortization related to the warrants totaled
$1,477,552 at December 31, 1998. The warrants were fully
amortized at December 31, 1999. Each warrant expires 10 years
from the date of issuance. Warrants for purchase of 52,500 shares
were terminated and warrants for purchase of 22,500 shares were
forfeited in December 1997 as a result of the release of one of
the stockholder's guarantee.
At December 31, 1999, 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 238,068 shares of
common stock at a weighted-average exercise price of $22.30 per
share. These warrants are fully vested and expire in varying
amounts in 2005 and 2006.
7. NOTES PAYABLE TO RELATED PARTIES
During January and March 1998, the Company issued a total of
$3,000,000 of unsecured 9.0 percent 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 3. 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 $2.50 per share, as
described in NOTE 3.
The Company recorded related-party interest expense (excluding
deferred debt issuance costs amortization) during 1998 and 1997
of approximately $332,000 and $762,000, respectively. No related
party interest expense was incurred during 1999. There were no
interest payments made to related parties in 1999, 1998 and 1997.
8. FINANCIAL INSTRUMENTS
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 800,000 warrants to the major stockholders to
purchase shares of the Company's
<PAGE>
8. FINANCIAL INSTRUMENTS (CONTINUED)
common stock at an exercise price of $5.00. Upon execution of the
letter of credit, the Company issued 320,000 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 was 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 162,891 and 259,779 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 was charged to expense over the remaining
term of the guarantee. The warrants were fully amortized at
December 31, 1998. 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
57,329 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 expired 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 206,186 warrants to the major stockholder to
purchase shares of the Company's common stock at an exercise
price of $9.70 Upon execution of the guarantee, the Company
issued 82,474 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 was 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
41,237 and 82,474 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. Each warrant
expires on January 18, 2004.
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
800,000 warrants to the major stockholders to purchase shares of
the Company's common stock at an exercise price of $5.00. Upon
execution of the letter of credit, the Company issued 160,000
warrants that vested immediately. Accordingly, in January 1999,
the estimated 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
through October 2000 according to the amount of exposure under
such letter of credit, as defined in the agreement. In 1999, the
Company issued an additional 237,333 warrants. Accordingly, the
estimated fair value of the additional warrants issued in 1999,
totaling $708,000, was recorded as deferred debt issuance costs
and is being changed to expense over the remaining term of the
guarantee. Accumulated amortization related to the warrants
totaled approximately $351,000 at December 31, 1999. Each
warrant expires 10 years from the date of issuance.
<PAGE>
9. INCOME TAXES
A reconciliation of the income tax benefit at the federal
statutory rate to the provision (benefit) for income taxes to
income (benefit) at the federal statutory rate of 34 percent is
as follows:
YEAR ENDED DECEMBER 31
1999 1998 1997
----------- ----------- -----------
Benefit at statutory rate $(1,750,477) $(502,839) $(9,603,640)
State benefit, net of
federal benefit (237,859) (68,327) (1,304,965)
Amortization of deferred
debt issuance costs 169,420 1,025,616 724,919
Meals and entertainment 142,291 103,329 72,944
Other 59,629 (5,620) (112,530)
Change in valuation
allowance 1,616,996 (552,159) 10,223,272
----------- ----------- -----------
$ - $ - $ -
====================================
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:
1999 1998
------------- ---------------
Deferred tax assets:
Net operating loss
carryforwards $23,651,021 $23,433,318
Accrued overhaul
maintenance 5,760,591 4,181,202
Amortization of aircraft
leasehold costs 794,462 616,186
Accrued vacation 248,078 189,778
Inventory reserve 117,000 168,870
Other 148,656 243,320
------------- ---------------
Total deferred tax assets 30,719,808 28,832,674
Valuation allowance (26,601,106) (24,984,110)
------------- ---------------
4,118,702 3,848,564
Deferred tax liabilities:
Supplemental maintenance
deposits 3,712,759 3,748,419
Prepaid insurance 30,507 25,478
Other 375,436 74,667
------------- ---------------
Total deferred tax
liabilities 4,118,702 3,848,564
------------- ---------------
$ - $ -
============= ==============
The Company has provided a valuation reserve of $26,601,106 and
$24,984,110 as of December 31, 1999 and 1998, 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, 1999, net operating loss carryforwards of
approximately $60,643,643 are available to reduce income taxes of
future years and will begin to expire in 2009, if unused. The
Company made income tax payments of $60,000 for the year ended
December 31, 1999. No income tax payments were made for the
years ended December 31, 1998, and 1997.
<PAGE>
10. LEASES
AIRCRAFT
From the date of inception through December 31, 1999, the Company
has entered into operating lease agreements (collectively, the
Lease Agreements) for fourteen Boeing 737-200 and two Boeing 737-
300 Series aircraft requiring fixed monthly rental payments.
Three Boeing 737-200 and two 737-300 aircraft were returned upon
expiration of their respective lease terms in 1999 and 1997. The
Company recorded rent expense for aircraft of approximately
$14,186,000, $10,236,000 and $9,261,000 for the years ended
December 31, 1999, 1998 and 1997, 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, 1999 and 1998,
the Company has recorded approximately $9,520,000 and $9,611,000,
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 $2,396,000 and $453,000 for the years ended
December 31, 1999 and 1997, respectively. There was no overhaul
component capitalized for the year ended December 31, 1998. The
capitalized component is being amortized on the straight-line
method over five to seven years, the estimated lease terms.
Amortization totaled approximately $590,000, $423,000 and
$405,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The Lease Agreements have lease terms of five years and generally
contain no option to extend the lease term. In December 1998, a
lease extension agreement was modified to extend the lease term
on one Boeing 737-200 aircraft through December 2000. In
December 1999, one lease agreement was modified to extend its
lease term through July 2000. Certain Boeing 737-200 Lease
Agreements each have an option to purchase the aircraft at a
value defined by the respective agreement.
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 certain 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,
1999, 1998 and 1997 was approximately $4,141,000, $3,306,000 and
$2,982,000, respectively.
Future minimum lease payments under all noncancelable operating
leases (excluding supplemental payments) at December 31, 1999
were as follows:
2000 16,926,029
2001 13,260,385
2002 11,624,688
2003 7,769,160
2004 3,698,250
Thereafter --
------------
Total minimum lease payments $53,278,512
============
<PAGE>
10. LEASES (CONTINUED)
During 1999, the Company leased property and equipment under
agreements accounted for as capital leases. The lease agreements
expire at varying dates through December 2002 and contain options
allowing the Company to purchase the property for a nominal
amount.
Property and equipment at December 31, 1999 includes the
following amounts for assets held under capital leases:
Other property and equipment $707,613
Less accumulated amortization (52,391)
-----------
Net assets held under capital
lease $655,222
===========
Amortization of the property and equipment held under capital
leases is computed by the straight-line method over the lesser of
the life of the lease or estimated useful life of the asset and
is included in depreciation expense. Future
minimum payments under the capital leases are as follows at
December 31, 1999:
Year ending December 31 Capital
Leases
------------
2000 $230,725
2001 228,720
2002 158,085
------------
Total minimum lease payments 617,530
Amounts representing interest 72,083
------------
545,447
Less current portion 188,692
------------
$356,755
===========
11. 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>
<TABLE>
<CAPTION>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
VANGUARD AIRLINES, INC.
BALANCE AT CHARGED TO
BEGINNING CHARGED TO OTHER DEDUCTIONS BALANCE AT END
OF COSTS AND ACCOUNTS- -- OF
PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DESCRIPTION
- -----------
YEAR ENDED DECEMBER 31, 1999:
Accrued Maintenance 10,721,031 11,898,993 2,396,425(1) (10,245,704)(2) 14,770,745
Reserves and allowances deducted from
asset accounts:
Valuation reserve for deferred tax
assets: $24,984,110 $1,616,996 $ - $ -- $26,601,106
YEAR ENDED DECEMBER 31, 1998:
Accrued Maintenance 9,248,226 12,889,623 - (11,416,818)(3) 10,721,031
Reserves and allowances deducted from
asset accounts:
Valuation reserve for deferred tax
assets: $25,536,269 $ - $ - $552,159(4) $24,984,110
YEAR ENDED DECEMBER 31, 1997:
Accrued Maintenance 7,231,638 12,018,705 453,000(1) (10,455,117)(3) 9,248,226
Reserves and allowances deducted from
asset accounts:
Valuation reserve for deferred tax
assets: $15,312,997 $10,223,272 $ - $ - $25,536,269
</TABLE>
[FN]
(1) Non-cash aircraft leasehold costs capitalized in association
with accrued maintenance at inception of lease.
(2) Reduction due to the performance of heavy maintenance, reduction
due to the elimination of maintenance accruals associated with the
return of aircraft, and reduction in maintenance accruals in
conjunction with the write-off of the net book value of an impaired
engine.
(3) Reduction due to the performance of maintenance.
(4) 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 30, 2000 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, 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, 1999,
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 30, 2000
Robert J. Spane, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer and Principal
Financial and Accounting Officer)
/s/ Lee M. Gammill, Jr.
----------------------- March 30, 2000
Lee M. Gammill, Jr. Director
/s/ Denis T. Rice
----------------------- March 30, 2000
Denis T. Rice, Director
/s/ Leighton W. Smith
----------------------- March 30, 2000
Leighton W. Smith, Director
<PAGE>
_________________________________________________________________
THIS LEASE AGREEMENT HAS BEEN EXECUTED IN SEVERAL COUNTERPARTS.
TO THE EXTENT, IF ANY, THAT THIS LEASE 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 LEASE AGREEMENT MAY BE CREATED THROUGH THE
TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE ORIGINAL
EXECUTED COUNTERPART CONTAINING THE RECEIPT EXECUTED BY LESSOR
OR, IF LESSOR HAS ASSIGNED ITS RIGHTS TO A THIRD PARTY IN
ACCORDANCE WITH THIS LEASE AGREEMENT, SUCH THIRD PARTY ON THE
SIGNATURE PAGE OF THIS LEASE AGREEMENT.
________________________________________________________________
DATED: October 19, 1999
AIRCRAFT 22122, INC.
(Lessor)
- and -
VANGUARD AIRLINES, INC.
(Lessee)
___________________________________
LEASE AGREEMENT 22122
- relating to -
Boeing 737-230 Aircraft
Manufacturers Serial No: 22122
U.S. Registration Mark N124NJ
_____________________________________
FELTMAN, KARESH, MAJOR & FARBMAN,
Limited Liability Partnership
Carnegie Hall Tower
152 West 57th Street
New York, New York 10019
<PAGE>
TABLE OF CONTENTS
CLAUSE PAGE
1. DEFINITIONS and INTERPRETATION 1
1.1 Definitions 1
1.2 Interpretation 19
2. REPRESENTATIONS and WARRANTIES 19
2.1 Lessee's Representations and Warranties 19
2.2 Lessee's Further Representations and Warranties 21
2.3 Repetition 22
2.4 Lessor's Representations and Warranties 22
2.5 Repetition 23
3. CONDITIONS PRECEDENT 23
3.1 Lessor's Documentary Conditions Precedent 23
3.2 Lessor's Other Conditions Precedent 25
3.3 Lessor's Waiver 25
3.4 Lessee's Conditions Precedent 25
3.5 Lessee's Waiver 26
4. COMMENCEMENT 27
4.1 Leasing 27
4.2 Delivery 27
4.3 Delayed Delivery 29
4.4 Acceptance and Risk 30
5. PAYMENTS 30
5.1 Security Deposit; Letter of Credit 30
5.2 Rental Periods 32
5.3 Basic Rent 32
5.4 Additional Rent 33
5.5 Lessor's Moneys 34
5.6 Payments 34
5.7 Gross-up 35
5.8 Taxation 36
5.9 Information 36
5.10 Taxation of Indemnity Payments 37
5.11 Default Interest 37
5.12 Contest 38
<PAGE>
5.13 Absolute 39
6. MANUFACTURER'S WARRANTIES 40
6.1 Assignment 40
6.2 Proceeds 40
6.3 Parts 41
6.4 Agreement 41
7. LESSOR'S COVENANTS and DISCLAIMERS 42
7.1 Quiet Enjoyment 42
7.2 Lessor's Maintenance Contribution 42
7.3 Lessor's Engine Maintenance Contribution 45
7.4 Lessor's AD Cost Sharing Contribution 45
7.5 Registration and Filings 46
7.6 Agreed Maintenance Performers 46
7.7 Exclusion 47
7.8 Lessee's Waiver 47
7.9 Lessee's Confirmation 47
8. LESSEE'S COVENANTS 48
8.1 Duration 48
8.2 Information 48
8.3 Lawful and Safe Operation 50
8.4 Taxes and Other Charges 52
8.5 Sub-Leasing 52
8.6 Inspection 54
8.7 Protection of Title 55
8.8 General 56
8.9 Records 57
8.10 Registration and Filings 57
8.11 Maintenance and Repair 58
8.12 Removal of Engines and Parts 59
8.13 Installation of Engines and Parts 60
8.14 Non-Installed Engines and Parts 62
8.15 Pooling of Engines and Parts 63
8.16 Equipment Changes 63
8.17 Title to Engines and Parts 64
8.18 Third Parties 65
8.19 Non-Discrimination 65
9. INSURANCE 65
9.1 Insurances 65
9.2 Requirements 66
<PAGE>
9.3 Insurance Covenants 66
9.4 Failure to Insure 68
9.5 Continuing Indemnity 68
9.6 Application of Insurance Proceeds 69
10. INDEMNITY 70
10.1 General 70
10.2 Mitigation 71
10.3 Duration 72
11. EVENTS OF LOSS 72
11.1 Total Loss 72
11.2 Engine Loss 73
11.3 Requisition 74
12. RETURN OF AIRCRAFT 75
12.1 Redelivery 75
12.2 Final Checks 75
12.3 Final Inspection 76
12.4 Non-Compliance 77
12.5 Export Documentation 77
12.6 Acknowledgment 78
12.7 Maintenance Program 78
12.8 Storage 78
13. DEFAULT 79
13.1 Events 79
13.2 Rights 83
13.3 Export 84
13.4 Default Payments 84
13.5 Waiver of Certain Article 2A Rights 85
14. ASSIGNMENT and TRANSFER 85
14.1 No Assignment by Lessee 85
14.2 Lessor Assignment 85
14.3 Grants of Security Interests 88
14.4 Sale and Leaseback by Lessor 90
14.5 Further Acknowledgments 90
14.6 Certain Protections for Lessee's Benefit 90
15. MISCELLANEOUS 91
15.1 Waivers, Remedies Cumulative 91
15.2 Delegation 91
<PAGE>
15.3 Appropriation 91
15.4 Currency Indemnity 91
15.5 Payment by the Lessor 92
15.6 Severability 92
15.7 Remedy 92
15.8 Expenses 92
15.9 Time of Essence 93
15.10 Notices 93
15.11 Law and Jurisdiction 94
15.12 Sole and Entire Agreement 95
15.13 Indemnities 95
15.14 Counterparts 95
15.15 Confidentiality 96
<PAGE>
SCHEDULES
1. Basic Rent and Other Terms 98
2. Aircraft Specification 100
3. Operating Condition at Delivery 107
4. Operating Condition at Redelivery 112
5. Insurance Requirements 117
EXHIBITS
A. Form of Certificate of Acceptance 122
B. Form of Certificate of Delivery Condition 124
C. Form of Consent 128
D. Form of Legal Opinion 129
E. Form of Letter of Credit 130
F. Form of Monthly Status Report 131
G. Form of Certificate of Redelivery 135
<PAGE>
THIS LEASE AGREEMENT 22122 is made the ____ day of October, 1999
BETWEEN:
(1) AIRCRAFT 22122, INC., a Delaware corporation having its
principal place of business at c/o Unicapital Air Group,
Inc., 1900 Summit Tower Blvd., Suite 860, Orlando, Florida
32810 (the "Lessor"), and
(2) VANGUARD AIRLINES, INC., a company organized and existing
under the laws of the State of Delaware having its principal
place of business at 533 Mexico City Avenue, Kansas City
International Airport, Kansas City, Missouri 64153 (the
"Lessee").
WHEREAS:
(A) Pursuant to a Sale Agreement, dated as of December 23, 1997,
between the Previous Operator, as seller, and NSJ
Corporation of Florida, Inc., as buyer ("NSJ-Florida"), as
assigned by the Previous Operator to the Previous Owner and
by NSJ-Florida to Lessor pursuant to the Assignment,
Assumption and Consent Agreement, dated as of October __,
1999, Lessor has agreed to purchase the Leased Property from
the Previous Owner on or before the Delivery Date.
(B) Lessor wishes to lease the Leased Property to the Lessee,
and Lessee agrees to lease the Leased Property from the
Lessor, with effect immediately from the purchase of the
Aircraft upon and subject to the covenants, terms and
conditions set out in this Agreement.
NOW IT IS HEREBY AGREED as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this Agreement the following expressions shall, unless
the context otherwise requires, have the following
respective meanings:
Actual Cost as it applies to any maintenance
work on the Aircraft, means the
actual cost of replacement parts
plus the cost of the associated
labor at Lessee's in-house labor
rates (if the work is performed by
Lessee) or at third party costs
charged to Lessee (if the work is
performed by third parties) and
shall in no event include late
charges, mark-ups, interest or
other similar amounts.
<PAGE>
Additional Rent collectively, Airframe Additional
Rent, APU Additional Rent, Engine
Additional Rent and Landing Gear
Additional Rent.
Affiliate in relation to any Person, any
other Person controlled directly or
indirectly by that Person, any
other Person that controls directly
or indirectly that Person or any
other Person under common control
with that Person. For this purpose
"control" of any Person means
ownership of a majority of the
voting power of such Person.
Agreed Maintenance
Performer the Lessee or any other reputable
maintenance organization that is
(i) experienced in maintaining
aircraft and/or engines of the same
type as the Aircraft and the
Engines, (ii) duly certificated by
the FAA under FAR Part 145, and
(iii) not objected to by Lessor
pursuant to Clause 7.6.
Agreed Maintenance
Program the Lessee's current Maintenance
Program, which shall at all times
be in compliance with the
Manufacturer's MPD and the Engine
Manufacturer's MPD, as the same may
be amended from time to time in
accordance with this Agreement.
Agreed Value the amount set forth on Schedule 1.
Aircraft the aircraft described in Part l of
Schedule 2 (which term includes,
where the context admits, a
separate reference to all Engines
and Parts).
Aircraft Documents the documents, data and records
identified in Part 2 of Schedule 2
and all additions, renewals,
revisions and replacements from
time to time made in accordance
with this Agreement.
Airframe the Aircraft, excluding the Engines
and the Aircraft Documents.
Airframe Additional
Rent as defined in Clause 5.4(a)(i).
<PAGE>
Airframe Additional
Rent Rate the amount set forth in Schedule 1.
Airframe Reimbursable
Expenses as defined in Clause 7.2(a)(i).
Applicable Law all applicable (i) laws, treaties
and international agreements of any
national government, (ii) laws of
any state, province, territory,
locality or other political
subdivision of a national
government, and (iii) rules,
regulations, judgments, decrees,
orders, injunctions, writs,
directives, licenses and permits of
any Government Entity or
arbitration authority.
Appraisal Procedure with respect to any amount to be
determined, the amount mutually
agreed by Lessor and Lessee or, if
Lessor and Lessee are unable to
agree upon any such amount to be
determined, the average of the
amounts determined by three
FAA-approved service centers in the
continental United States, one such
service center appointed by Lessor,
one by Lessee and one by their
appointed service centers, except
that if any party fails to appoint
a service center the Manufacturer
or the Engine Manufacturer
(whichever is appropriate) shall be
deemed appointed.
APU (i) the auxiliary power unit listed
in Schedule 2, (ii) any and all
Parts, so long as such Parts are
incorporated in, installed on or
attached to such auxiliary power
unit or so long as title to such
Parts is vested in the Lessor in
accordance with the terms of Clause
8.17(b) after removal from such
auxiliary power unit, and
(iii) insofar as the same belong to
Lessor, all substitutions,
replacements or renewals from time
to time made in or to such
auxiliary power unit or to any of
the Parts referred to in clause
(ii) above, as required or
permitted under this Agreement.
APU Additional Rent as defined in Clause 5.4(a)(iv).
APU Additional Rent
Rate the amount set forth in Schedule 1.
APU Reimbursable
Expenses as defined in Clause 7.2(d)(i).
<PAGE>
Assignment the Assignment of Lease Agreement,
dated the Delivery Date, between
Lessor and Mortgagee, and any
present or future assignment by the
Lessor in favor of any Financing
Party of the Lessor's rights under
this Agreement as security for its
obligations to a Financing Party.
Aviation Authority the FAA or, if the State of
Registration ceases to be the
United States of America, the
authority and/or Government Entity
and/or agency which, under the laws
of the State of Registration, from
time to time (i) has control or
supervision of civil aviation; or
(ii) has jurisdiction over
registration, airworthiness or
operation of the Aircraft.
Basic Rent all amounts payable pursuant to
Clause 5.3.
Basic Rent Amount the amount set forth in Schedule 1.
Business Day a day (other than a Saturday or
Sunday) on which business of the
nature required by this Agreement
is carried out in Orlando, Florida
and the city in which Lessee's
office listed in Clause 15.10(b) is
located or, where used in relation
to payments, on which banks are
open for business in New York, New
York.
C-Check a maintenance check on the Airframe
under the Agreed Maintenance
Program designated as a "C" check
and consisting of full and complete
zonal, systems and structural check
including the corresponding lower
checks ("A" and "B" or equivalent)
and any other maintenance and
inspections tasks that are a part
of such checks, all in accordance
with the Agreed Maintenance
Program, or if the Agreed
Maintenance Program changes and no
longer refers to a full and
complete zonal, systems and
structural block "C" check, then a
check consisting of those items of
maintenance characterized by the
MPD and best industry practice as a
"C" check (or its equivalent), but
in any event not including repairs
arising as the result of
operational or maintenance
mishandling or accidental damage.
<PAGE>
CER an engine refurbishment, including
with respect to any Engine the
complete visual inspection and
repair as necessary of required
modules of the Engine in an engine
repair/overhaul station, including
complete or partial disassembly,
complete or partial visual
inspection, de-blading of LLPs as
required, visual inspection of all
LLPs, verification that all snap
diameters on LLPs 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 LLPs using
new lock plates, assembly of rotors
in the turbine, balance of all
rotors, and installation of rotors
in the Engine.
Certificate of
Acceptance a certificate in the form attached
as Exhibit A to be completed and
executed by Lessor and Lessee on
Delivery.
Certificate of
Delivery Condition a certificate in the form attached
as Exhibit B to be completed and
executed by Lessor and Lessee on
Delivery.
Certificate of
Redelivery a certificate in the form attached
as Exhibit G to be completed and
executed by Lessor upon redelivery
of the Aircraft and Aircraft
Documents in accordance with this
Agreement.
Consent the Lessee's Acknowledgment of and
Consent to Assignment of Lease,
dated the Delivery Date, between
Lessor, Lessee and Mortgagee in the
form attached as Exhibit C pursuant
to which, inter alia, Lessee
consents to the Assignment and
Mortgagee covenants to preserve
Lessee's quiet enjoyment.
Coopesa The Self-Managed Cooperative of
Aero Industrial Services R.L.
CPCP Lessee's Corrosion Prevention and
Control Program under the Agreed
Maintenance Program.
<PAGE>
Credit Agreement the Secured Loan Agreement, dated
as of October __, 1999, between
Lender and Lessor.
Cycle one take-off and landing of an
airframe.
Damage Notification
Threshold the amount set forth in Schedule 1.
Default any Event of Default and any event,
which with the giving of notice,
lapse of time or fulfilment of any
other condition or any combination
of the foregoing would constitute
an Event of Default.
Default Rate at any time and from time to time,
3.0% plus the prime or base
commercial lending rate as
announced (i) if the Mortgagee is a
bank or trust company, by the
Mortgagee at its principal banking
office in New York City, New York,
or (ii) if the Mortgagee is not a
bank or trust company, by Citibank,
N.A., in either case compounded
monthly and calculated on the basis
of the actual number of days
elapsed and on a 360 day year.
Delivery the delivery of the Aircraft to the
Lessee in accordance with the terms
of this Agreement.
Delivery Date the date on which Delivery takes
place, which shall be the Scheduled
Delivery Date or such other date
notified by Lessor to Lessee in
accordance with the provisions of
this Agreement, including Clauses
4.2(e) and 4.3.
Delivery Location Kansas City International Airport,
Kansas City, Missouri.
Dollars and $ the lawful currency of the United
States of America.
Engine whether or not installed on the
Aircraft:
(a) each engine of the
manufacture, model and serial
number specified in Part 1 of
Schedule 2 and having 750 or
more rated take-off<PAGE>
horsepower, title to which
shall belong to the Lessor; or
(b) any engine which replaces that
engine, title to which passes
to the Lessor in accordance
with Clause 8.17(d);
and in each case includes all
modules and Parts from time to time
belonging to, installed in or
appurtenant to that engine.
Engine Additional Rent as defined in Clause 5.4(a)(ii).
Engine Additional Rent
Rate the amount set forth in Schedule 1.
Engine Loss the occurrence, with respect to an
Engine, of one of the events set
forth in clauses (a) through (d) of
the definition of "Total Loss" as
if references to the "Airframe"
were to such "Engine".
Engine Loss Date the relevant date determined in
accordance with the definition of
"Total Loss Date" as if that
definition applied to an Engine
Loss.
Engine Manufacturer the Pratt & Whitney Division of
United Technologies Corporation.
Engine Reimbursable
Expenses as defined in Clause 7.2(b)(i).
Engine Shop Visit a shop visit requiring disassembly
of an Engine (but excluding for
this purpose any removal,
installation, maintenance and
repair of "Quick Engine Change"
kits) and during which there shall
be performed a hot section
restoration or repair or a cold
section restoration or repair or a
replacement of LLPs.
Equipment Change as defined in Clause 8.16(a).
Event of Default an event specified in Clause 13.1.
Excusable Delay with respect to delivery of the
Aircraft, delay or non-performance
due to or arising out of acts of
God<PAGE> or public enemy, civil
war, insurrection or riot, fire,
flood, explosion, earthquake,
serious accident, epidemic,
quarantine restriction, import
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, adverse
weather conditions preventing any
services, inspections or flights of
the Aircraft 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 the Scheduled Expiry Date or any
other date on which:
(a) the Aircraft has been
redelivered in accordance with
this Agreement and all
obligations of Lessee have
been satisfied; or
(b) the Lessor receives the Agreed
Value following a Total Loss
and any other amounts then due
and owing in accordance with
this Agreement.
FAA the Federal Aviation Administration
of the U.S. Department of
Transportation, or any successor
Government Entity succeeding to the
functions thereof.
FARs the Federal Aviation Regulations
for the time being in force, issued
by the FAA pursuant to the Federal
Aviation Law and published in Title
14 of the Code of Federal
Regulations.
Federal Aviation Law Title 49 of the United States Code,
as amended, or any successor
statutory provisions and the
regulations promulgated under such
provisions.
<PAGE>
Financial Indebtedness any indebtedness in respect of:
(a) moneys borrowed;
(b) any liability under any
debenture, bond, note, loan
stock, acceptance credit,
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) the capitalized value
(determined in accordance with
accounting practices generally
accepted in the United States
of America) of obligations
under finance leases; or
(e) any guarantee, indemnity or
similar assurance against
financial loss of any Person
in respect of the above.
Financing Parties collectively (i) Lender, (ii)
Mortgagee, (iii) any Additional
Mortgagee, (iv) any Person that
lends money to Lessor and for whom
an Additional Mortgagee holds a
Security Interest in the Leased
Property, and (v) the successors
and permitted assigns of such
Persons.
Flight Hour each hour or part thereof (rounded
up to one decimal place) elapsing
from the moment the wheels of the
Airframe leave the ground on take
off until the moment the wheels of
the Airframe next touch the ground.
GAAP generally accepted accounting
principles as in effect from time
to time and, subject to changes in
such principles from time to time,
consistently applied in accordance
with the past practices of a
Person.
Government Entity (a) any national, state or
local government, political
subdivision thereof or local
jurisdiction therein;
<PAGE>
(b) any board, commission,
department, division,
instrumentality, court, agency
or political subdivision
thereof; 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.
Heavy Check the maintenance checks under the
Agreed Maintenance Program
designated as "Q1" and "Q2", or any
comparable major airframe overhaul
under any other or amended
maintenance program.
IATA the International Air Transport
Association.
Indemnitees Lessor, each of the Financing
Parties, the respective successors
and assigns of such Persons and the
shareholders, directors, officers,
agents and employees of such
Persons.
Insurances as defined in Clause 9.1.
Landing Gear the landing gear assembly of the
Aircraft excluding the wheels and
brake units.
Landing Gear Additional
Rent as defined in Clause 5.4(a)(iii).
Landing Gear Additional
Rent Rate the amount set forth in Schedule 1.
Landing Gear
Reimbursable Expenses as defined in Clause 7.2(c)(i).
Leased Property the Aircraft and the Aircraft
Documents.
Lender FINOVA Capital Corporation and its
successors and assigns as "Lender"
under the Credit Agreement.
Lessee Installed Part a Part installed on the Aircraft
after Delivery not in replacement
for any Part and not required under
the<PAGE> FARs on the Aircraft,
title to which is held by Lessee
(and which may be subject to a
Security Interest in favor of an
unrelated third party) or title to
which is held by an unrelated third
party and such Part is leased or
conditionally sold to Lessee.
Lessor Lien (a) the Mortgage and any
other Security Interest
whatever from time to time
created by or arising through
the Lessor and/or any
Financing Party in connection
with the financing or
refinancing of the Aircraft;
(b) any other Security Interest in
respect of the Aircraft that
results from acts or omissions
of, or claims against, the
Lessor and/or any Financing
Party not related to the
operation of the Aircraft or
the transactions contemplated
by or permitted under this
Agreement; and
(c) liens in respect of the
Aircraft for Non-Indemnified
Taxes.
Letter of Credit an irrevocable standby letter of
credit, in the form set out in
Exhibit E or otherwise in form and
substance reasonably satisfactory
to Lessor, to be issued (at the
Lessee's option) in favor of Lessor
(or, if designated by Lessor, in
favor of Mortgagee) by a bank
reasonably acceptable to Lessor and
Mortgagee for the payment of the
Security Deposit.
LLPs life limited Parts.
Maintenance Program an Aviation Authority approved
maintenance program for the
Aircraft encompassing scheduled
maintenance, condition monitored
maintenance and/or on-condition
maintenance of Airframe, Engines
and Parts, including servicing,
testing, preventative maintenance,
repairs, structural inspections,
system checks, overhauls, approved
modifications, service bulletins,
engineering orders, airworthiness
directives, corrosion control,
inspections and treatments.
<PAGE>
Major Checks any Heavy Check, C-Check, "C"
check, multiple or phase "C" check,
"D" check or annual heavy
maintenance visit or segment
thereof suggested for commercial
aircraft of the same model as the
Aircraft by the Manufacturer
(however denominated in the Agreed
Maintenance Program).
Manufacturer The Boeing Company, a Delaware
corporation with a place of
business in Seattle, Washington.
Minimum Liability
Coverage the amount set forth on Schedule 1.
Mortgage the First Priority Aircraft Chattel
Mortgage and Security Agreement,
dated the Delivery Date, between
Lessor, as debtor, and Mortgagee,
as secured party, whereby Lessor
has granted to Mortgagee a first
priority security interest in the
Aircraft and its right, title and
interest in the Operative
Documents.
Mortgagee FINOVA Capital Corporation and its
successors and assigns as mortgagee
under the Mortgage.
MPD for any manufacturer, such
manufacturer's Maintenance Planning
Document.
Non-Indemnified
Taxes (a) Taxes imposed as a direct
result of activities of any
Tax Indemnitee in the
jurisdictions imposing the
liability unrelated to such
Tax Indemnitee's dealings with
Lessee pursuant to the
Operative Documents or to the
transactions contemplated by
the Operative Documents or the
operation of the Aircraft by
Lessee;
(b) Taxes on or measured by the
income, profits, gains,
capital or net worth
(including minimum taxes,
withholding taxes and taxes on
or measured by any items of
tax preference) and any doing
business or franchise taxes,
and interest, additions to
tax, penalties or other
charges in respect thereof,
imposed on any Tax Indemnitee
(i) by any Federal Government
Entity in the United States of
America, (ii) by<PAGE> any
Government Entity in the
jurisdictions where such Tax
Indemnitee is incorporated,
formed or organized or has its
principal place of business,
(iii) by any state or local
Government Entity in the
United States of America in
which such Tax Indemnitee has
a nexus as a result of
activities other than those
contemplated by the Operative
Documents, or (iv) by any
Government Entity in any other
jurisdiction where such Tax
Indemnitee is liable for such
Taxes in the absence of the
transactions contemplated by
this Agreement;
(c) Taxes imposed with respect to
any period ending or event
occurring before the date of
this Agreement or any period
commencing or event occurring
after the Expiry Date;
(d) Taxes imposed as a direct
result of the sale, financing
or other disposition or
assignment of the Aircraft, or
any interest in any trust or
other entity that holds a
direct or indirect interest in
the Aircraft, unless such sale
or disposition occurs as a
consequence of an Event of
Default;
(e) Taxes imposed by a taxing
jurisdiction for a particular
tax period in which none of
the following is true for that
tax period: (i) the
operation, registration,
location, presence or use of
the Aircraft, the Airframe,
any Engine or any Part
thereof in such jurisdiction,
(ii) the place of
incorporation, commercial
domicile or other presence in
such jurisdiction of the
Lessee, any sublessee or any
user of or Person in
possession of the Aircraft,
the Airframe, any Engine or
any Part thereof in such
jurisdiction, or (iii) any
payments made under this
Agreement and related
documents being made from such
jurisdiction;
<PAGE>
(f) Taxes to the extent caused by
the gross negligence or
willful misconduct of any Tax
Indemnitee or the breach by
any Tax Indemnitee of any of
their obligations under the
Operative Documents;
(g) Taxes to the extent caused by
a failure by any Tax
Indemnitee to furnish in a
timely manner notice or
information which it is
required to furnish to Lessee
by the terms of this
Agreement;
(h) any Taxes imposed on or with
respect to a transferee or
assignee of the Aircraft or
any interest therein to the
extent that, under Applicable
Law in effect at the time of
the transfer or assignment,
such Taxes would not have been
imposed on or with respect to
the transferor or assignor;
and
(i) any Taxes resulting from or
attributable to a Lessor Lien.
Operative Documents this Agreement, the Certificate of
Acceptance, the Certificate of
Delivery Condition and the Consent.
Part whether or not installed on the
Aircraft:
(a) any component, furnishing or
equipment (other than a
complete Engine) furnished
with, installed on or
appurtenant to the Airframe
and Engines on Delivery; and
(b) any other component,
furnishing or equipment (other
than a complete Engine) title
to which has, or should have,
passed to the Lessor pursuant
to the Sale Agreement or
Clause 8.17(b),
but excludes any such items title
to which has, or should have,
passed to Lessee pursuant to
Clause 8.17(c) and any Lessee
Installed Part.
<PAGE>
Permitted Lien (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, hangar
keeper, unpaid seller or other
similar lien arising in the
ordinary course of business or
by operation of law in respect
of obligations which are not
overdue in accordance with
Applicable Law (or, if
applicable, generally accepted
accounting principles and
practices in the relevant
jurisdiction) or are being
contested in good faith by
appropriate proceedings; and
(c) any Lessor Lien;
but only if, in the case of (a) and
(b): (i) adequate reserves have
been provided by Lessee for the
payment of the Taxes or obligations
in accordance with generally
accounting principles and practices
in the relevant jurisdiction; and
(ii) such proceedings, or the
continued existence of the lien, do
not give rise to any reasonable
likelihood of the sale, forfeiture
or other loss of the Aircraft or
any interest therein or of criminal
liability on the Lessor or any
Financing Party.
Person any individual, corporation,
partnership, limited liability
company, limited liability
partnership, joint venture,
association, joint stock company,
trust, unincorporated organization
or Government Entity.
Previous Operator Deutsche Lufthansa
Aktiengesellschaft.
Previous Owner First Security Bank, National
Association, as trustee f/b/o the
Previous Operator
Redelivery Location Kansas City International Airport
or any other location agreed by
Lessor and Lessee.
<PAGE>
Reimbursable Expenses collectively, Airframe Reimbursable
Expenses, APU Reimbursable
Expenses, Engine Reimbursable
Expenses and Landing Gear
Reimbursable Expenses.
Rent collectively, all Basic Rent,
Additional Rent and Supplemental
Rent.
Rental Period each period ascertained in
accordance with Clause 5.2.
Rent Date the Delivery Date and the
corresponding day of each calendar
month during the Term or, for any
calendar month that does not have a
corresponding day, the last day of
such calendar month.
Scheduled Delivery Date October __, 1999.
Scheduled Expiry Date the fifth anniversary of the
Delivery Date.
Security Deposit the amount set forth on Schedule 1.
Security Interest any mortgage, charge, pledge, lien,
assignment, hypothecation, right of
set-off, or any agreement or
arrangement having the effect of
creating a security interest.
Special FAA Counsel McAfee & Taft of Oklahoma City,
Oklahoma.
SRM the Manufacturer's structural
repair manual.
State of Incorporation State of Delaware.
State of Registration United States of America.
Subsidiary (a) in relation to any
reference to accounts, any
company wholly or partially
owned by Lessee whose accounts
are consolidated with the
accounts of the Lessee in
accordance with accounting
principles generally accepted
under accounting standards of
the State of Incorporation;
and
(b) for any other purpose, an
entity from time to time:
<PAGE>
(i) of which another has
direct or indirect
control or owns directly
or indirectly more than
50% 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 all amounts, liabilities and
obligations (other than Basic Rent
and Additional Rent) that Lessee
assumes or agrees to pay under this
Agreement to Lessor or any other
Person, including payment of
deposits, indemnities and the
Agreed Value.
Tax Indemnitees Lessor and each of the Financing
Parties.
Taxes all present and future taxes,
levies, imposts, duties or charges
in the nature of taxes, whatever
and wherever imposed, including
customs duties, value added taxes
or similar taxes and any franchise,
transfer, sales, use, business,
occupation, excise, personal
property, stamp or other tax or
duty imposed by any national or
local taxing or fiscal authority or
agency, together with any
withholding, penalties, additions
to tax, fines or interest thereon
or with respect thereto.
Term the period commencing on the
Delivery Date and ending on the
Expiry Date or any later date
pursuant to Clause 12.4.
Total Loss with respect to the Airframe:
(a) the actual, arranged or
constructive total loss of the
Airframe (including any damage
to the Airframe 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);
<PAGE>
(b) the Airframe being destroyed,
damaged beyond repair or
permanently rendered unfit for
normal use for any reason
whatsoever;
(c) the requisition of title, or
other compulsory acquisition,
capture, seizure, deprivation,
confiscation or detention for
any reason of the Airframe by
the government of the State of
Registration (whether de jure
or de facto), but excluding
requisition for use or hire
not involving requisition of
title; or
(d) the hi-jacking, theft,
condemnation, confiscation,
seizure or requisition for use
or hire of the Airframe
(excluding any of the
foregoing which is
attributable to a Lessor Lien
or the enforcement thereof)
which deprives any Person
permitted by this Agreement to
have possession and/or use of
the Airframe for more than 60
consecutive days.
Total Loss Date (a) in the case of an actual
total loss, the actual date on
which the loss occurs or, if
such date is unknown, the day
on which the Aircraft was last
heard of;
(b) in the case of any of the
events described in
sub-paragraph (a) of the
definition of "Total Loss"
(other than an actual total
loss), the earlier of (i) 30
days after the date on which
notice claiming such total
loss is given to the relevant
insurers, and (ii) the date on
which such loss is admitted or
compromised by the insurers;
(c) in the case of any of the
events described in
sub-paragraph (b) of the
definition of "Total Loss",
the date on which such
destruction, damage or
rendering unfit occurs;
<PAGE>
(d) in the case of any of the
events described in
sub-paragraph (c) of the
definition of "Total Loss",
the date on which the relevant
requisition of title or other
compulsory acquisition,
capture, seizure, deprivation,
confiscation or detention
occurs;
(e) in the case of any of the
events described in
sub-paragraph (d) of the
definition of "Total Loss",
the expiry of the period of 60
days referred to in such
sub-paragraph (d);
and, in each case, the Total Loss
shall be deemed to have occurred at
noon Greenwich Mean Time on such
date.
1.2 INTERPRETATION
(a) In this Agreement, unless the contrary intention
is stated, a reference to:
(i) each of "Lessor", "Lessee", "Financing Party"
or any other Person includes without
prejudice to the provisions of this Agreement
any successor in title to it and any
permitted assignee;
(ii) words importing the plural shall include the
singular and vice versa;
(iii) the term "including", when used in this
Agreement, means "including without
limitation" and "including but not limited
to".
(iv) any document shall include that document as
amended, novated or supplemented from time to
time unless expressly stated to the contrary;
(v) a law (1) includes any statute, decree,
constitution, regulation, order, judgment or
directive of any Government Entity; (2)
includes any treaty, pact, compact or other
agreement to which any Government Entity is a
signatory or party; (3) includes any judicial
or administrative interpretation or
application thereof; and (4) is a reference
to that provision as amended, substituted or
re-enacted; and
(vi) a Clause, Schedule or Exhibit is a reference
to a clause of, a schedule to or an exhibit
to this Agreement.
<PAGE>
(b) The headings in this Agreement are to be ignored
in construing this Agreement.
2. REPRESENTATIONS AND WARRANTIES
2.1 LESSEE'S REPRESENTATIONS AND WARRANTIES
The Lessee represents and warrants as of the date
hereof to the Lessor as follows:
(a) STATUS: The Lessee is a corporation duly
organized, validly existing and in good standing
under the laws of the State of Incorporation, has
the corporate power to own its assets and carry on
its business as it is being conducted and is (or
will at the relevant time be) 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: The 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, each of the
Operative Documents and the transactions
contemplated by the Operative Documents.
(c) LEGAL VALIDITY: Each of the Operative Documents
constitutes the Lessee's legal, valid and binding
agreement, enforceable against Lessee in
accordance with its terms.
(d) NON-CONFLICT: The entry into and performance by
the Lessee of, and the transactions contemplated
by, the Operative Documents do not and will not:
(i) conflict with any Applicable Laws binding on
the Lessee;
(ii) conflict with the constitutional documents of
the Lessee; or
(iii) conflict with or result in default under any
document which is binding upon the Lessee or
any of its assets, or result in the creation
of any Security Interest over any of its
assets, other than Permitted Liens.
(e) AUTHORIZATION: All authorizations, consents and
registrations required by, and all notifications
to be given by, the Lessee in connection with the
entry into, performance, validity and
enforceability of, the Operative Documents and the
transactions contemplated by the Operative
Documents have been (or will on or before Delivery
have been) obtained, effected or given (as<PAGE>
appropriate) and are (or will on their being
obtained or effected be) in full force and effect.
(f) NO IMMUNITY:
(i) The Lessee is subject to civil commercial law
with respect to its obligations under this
Agreement.
(ii) Neither the Lessee nor any of its assets is
entitled to any right of immunity and the
entry into and performance of the Operative
Documents by the Lessee constitute private
and commercial acts.
(g) FINANCIAL STATEMENTS: the audited consolidated
financial statements of the Lessee and its
Subsidiaries most recently delivered to the
Lessor:
(i) have been prepared in accordance with
accounting principles and practices generally
accepted and consistently applied in the
State of Registration; and
(ii) fairly present the consolidated financial
condition of the Lessee and its Subsidiaries
as at the date to which they were drawn up
and the consolidated results of operations of
the Lessee and its Subsidiaries for the
periods covered by such statements.
(h) PARI PASSU: The obligations of the Lessee under
this Agreement rank at least pari passu with all
other present and future unsecured and
unsubordinated obligations (including contingent
obligations) of the Lessee, with the exception of
such obligations as are mandatorily preferred by
law and not by virtue of any contract.
2.2 LESSEE'S FURTHER REPRESENTATIONS AND WARRANTIES
The Lessee further represents and warrants as of the
date hereof to the Lessor that:
(a) NO DEFAULT: No Event of Default has occurred and
is continuing or might reasonably be expected to
result from the entry into or performance of any
of the Operative Documents.
(b) REGISTRATION:
(i) It is not necessary or advisable under the
laws of the State of Registration in order to
ensure the validity, effectiveness and
enforceability of the Operative Documents or
to establish, perfect or<PAGE> protect the
property rights of Lessor or any Financing
Party in the Leased Property that any
instrument relating thereto other than this
Agreement, the Certificate of Acceptance, the
Assignment or the Mortgage be filed,
registered or recorded or that any other
action be taken or, if any such filings,
registrations, recordings or other actions
are necessary, the same have been effected or
will have been effected on or before
Delivery.
(ii) Under all Applicable Laws, including the laws
of the State of Incorporation and the State
of Registration, the property rights of the
Lessor and the Financing Parties (pursuant to
the Assignment and Mortgage) in the Leased
Property as of the Delivery Date have been
fully established, perfected and protected
and this Agreement will have priority in all
respects over the claims of all creditors of
the Lessee, with the exception of such claims
as are mandatorily preferred by law and not
by virtue of any contract.
(c) LITIGATION: No litigation, arbitration or
administrative proceedings are pending or, to the
Lessee's knowledge, threatened against the Lessee
which, if adversely determined, would have a
material adverse effect upon its financial
condition or business or its ability to perform
its obligations under the Operative Documents.
(d) TAXES: The Lessee has delivered all necessary
returns and payments due to all tax authorities
having jurisdiction over Lessee, including those
in the State of Incorporation and the State of
Registration, except where the failure to do so
would not have a material adverse effect upon its
financial condition or business or its ability to
perform its obligations under the Operative
Documents, and based upon the representations of
Lessor in Clause 2.4 and on the assumption that
Lessor is a "United States person" within the
meaning of Section 7701(a)(30) of the Internal
Revenue Code of 1986, as amended, Lessee is not
required by law to deduct or withhold any Taxes
from any payments under this Agreement.
2.3 REPETITION
The representations and warranties in Clause 2.1 and
Clause 2.2 will survive the execution of this
Agreement. The representations and warranties
contained in Clause 2.1 and Clause 2.2 will be deemed
to be repeated by the Lessee on Delivery with reference
to the facts and circumstances then existing. The
representations and warranties contained in Clause 2.1
will be deemed to be repeated by the Lessee on each
Rent Date as if made with reference to the facts and
circumstances then existing.
<PAGE>
2.4 LESSOR'S REPRESENTATIONS AND WARRANTIES
The Lessor represents and warrants to the Lessee that:
(a) STATUS: Lessor is a corporation duly organized,
validly existing and in good standing under the
laws of the State of Delaware and has the
corporate power to own the Leased Property and
carry on the business contemplated of Lessor under
the Operative Documents. Lessor is a "citizen of
the United States" within the meaning of Section
40102(a)(15) of the Federal Aviation Law.
(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, each of the
Operative Documents and the transactions
contemplated by the Operative Documents.
(c) LEGAL VALIDITY: Each of the Operative Documents
constitutes Lessor's legal, valid and binding
agreement, enforceable against Lessor in
accordance with its terms.
(d) NON-CONFLICT: The entry into and performance by
Lessor of, and the transactions contemplated by,
the Operative Documents do not and will not:
(i) conflict with any Applicable Laws binding on
Lessor;
(ii) conflict with the certificate of
incorporation or bylaws of Lessor; or
(iii) conflict with or result in default under any
document which is binding upon Lessor or any
of its assets.
(e) AUTHORIZATION: So far as concerns the obligations
of Lessor, all authorizations, consents,
registrations and notifications required in
connection with the entry into, performance,
validity and enforceability of, and the
transactions contemplated by, the Operative
Documents by Lessor have been (or will on or
before Delivery have been) obtained, effected or
given (as appropriate) and are (or will on their
being obtained or effected be) in full force and
effect.
<PAGE>
(f) NO IMMUNITY:
(i) Lessor is subject to civil commercial law
with respect to its obligations under the
Operative Documents.
(ii) Neither Lessor nor any of its assets is
entitled to any right of immunity and the
entry into and performance of the Operative
Documents by Lessor constitute private and
commercial acts.
(g) RIGHT TO LEASE: On the Delivery Date, Lessor
shall have the right to lease the Aircraft to
Lessee under this Agreement.
2.5 REPETITION
The representations and warranties in Clause 2.4 will
survive the execution of this Agreement. The
representations and warranties contained in Clause 2.4
will be deemed to be repeated by Lessor on Delivery and
on each subsequent Rent Date as if made with reference
to the facts and circumstances then existing.
3. CONDITIONS PRECEDENT
3.1 LESSOR'S DOCUMENTARY CONDITIONS PRECEDENT
Lessor's obligation to lease the Leased Property to
Lessee under this Agreement is subject to the receipt
of the following by Lessor and Mortgagee from Lessee on
or before Delivery in form and substance satisfactory
to the Lessor, provided that it shall not be a
condition precedent to the obligations of the Lessor
that any document be produced, or action taken, which
is to be produced or taken by it or any Person within
its control:
(a) CONSTITUTIONAL DOCUMENTS: a copy of the
constitutional documents of the Lessee;
(b) RESOLUTIONS: a copy of a resolution of the board
of directors of the Lessee approving the terms of,
and the transactions contemplated by, the
Operative Documents, resolving that it enter into
the Operative Documents, and authorizing a
specified individual or individuals to execute the
Operative Documents and accept delivery of the
Aircraft on its behalf;
(c) OPINIONS: (i) an opinion, in the form set out in
Exhibit D, in respect of Lessee's obligations
under the Operative Documents issued by
independent<PAGE> legal counsel acceptable to
Lessor, and (ii) an opinion from Special FAA
Counsel as to such matters as Lessor may
reasonably request;
(d) APPROVALS: evidence of the issuance 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;
(e) LICENSES: copies of the Lessee's air transport
license, air operator's certificate and all other
licenses, certificates and permits required by the
Lessee in relation to, or in connection with, the
operation of the Aircraft;
(f) CERTIFICATE: a certificate of a duly authorized
officer of the Lessee:
(i) setting out a specimen of each signature
referred to in Clause 3.1(b); and
(ii) certifying that each copy of a document
specified in this Clause 3.1 is correct,
complete and in full force and effect;
(g) INSURANCES: certificates of insurance, brokers'
undertakings and other evidence satisfactory to
the Lessor and Mortgagee that the Lessee is taking
the required steps to ensure due compliance with
the provisions of this Agreement as to insurances
with effect on and after Delivery;
(h) FILINGS: evidence that all filings,
registrations, recordings and other actions have
been or will be taken which are necessary to
ensure the validity, effectiveness and
enforceability of the Operative Documents and to
protect the respective rights of the Lessor and
the Mortgagee in the Leased Property; and
(i) GENERAL: such other documents as Lessor may
reasonably request.
3.2 LESSOR'S OTHER CONDITIONS PRECEDENT
The obligation of the Lessor to deliver and lease the
Leased Property under this Agreement is also subject to
the following additional conditions precedent:
(a) REPRESENTATIONS AND WARRANTIES: the
representations and warranties of Lessee under
Clauses 2.1 and 2.2 are correct and would be
correct if repeated on Delivery; and
<PAGE>
(b) PAYMENTS: all payments due to Lessor under this
Agreement on or before Delivery, including the
first payment of Basic Rent, shall have been
received by Lessor.
3.3 LESSOR'S WAIVER
The conditions specified in Clauses 3.1 and 3.2(a) and
(b) are for the sole benefit of the Lessor and the
Financing Parties and may be waived or deferred in
whole or in part and with or without conditions by the
Lessor.
3.4 LESSEE'S CONDITIONS PRECEDENT
The Lessee's obligation to accept the Leased Property
on lease from Lessor under this Agreement is subject to
the satisfaction by the Lessor of the following
conditions precedent:
(a) RESOLUTIONS: a copy of a resolution of the board
of directors of the Lessor approving the terms of,
and the transactions contemplated by, the
Operative Documents, resolving that it enter into
the Operative Documents, and authorizing a
specified individual or individuals to execute the
Operative Documents;
(b) CERTIFICATE: the receipt by the Lessee of a
certificate of a duly authorized officer of the
Lessor:
(i) setting out a specimen of each signature
referred to in sub-clause (a) above; and
(ii) certifying that the copy of the resolutions
referred to in sub-clause (a) above is
correct, complete and in full force and
effect;
(c) REPRESENTATIONS AND WARRANTIES: the
representations and warranties of the Lessor under
Clause 2.4 are correct and would be correct if
repeated on Delivery;
(d) REGISTRATION: evidence that title to the Aircraft
is held by Lessor and that the Aircraft has been
validly registered under the laws of the State of
Registration;
(e) DELIVERY CONDITION: the Aircraft shall be in the
condition set forth on Schedule 3;
<PAGE>
(f) CONSENT: the receipt by Lessee of the Consent,
duly signed by Lessor and Mortgagee;
(g) NO INJUNCTIONS: no action or proceedings shall
have been instituted nor shall governmental action
be threatened before any Government Entity, nor
shall any order, judgment or decree have been
issued or proposed to be issued by any Government
Entity at the time of the Delivery Date to set
aside, restrain, enjoin or prevent the completion
and consummation of this Agreement or the
transactions contemplated hereby;
(h) OPERATIVE DOCUMENTS: Lessee shall have received
executed counterparts of each of the Operative
Documents; and
(i) NO CHANGE IN LAW: no change shall have occurred
after the date of this Agreement in Applicable Law
(including changes in interpretations thereof by
Government Entities) which, in the reasonable
opinion of Lessee, would make it a violation of
Applicable Law for Lessee to enter into any
transaction contemplated by the Operative
Documents.
3.5 LESSEE'S WAIVER
The conditions specified in Clause 3.4 are for the sole
benefit of the Lessee and may be waived or deferred in
whole or in part and with or without conditions by the
Lessee. If any of those conditions are not satisfied
on or before Delivery and the Lessee (in its absolute
discretion) nonetheless agrees to lease the Leased
Property from the Lessor, then Lessor will ensure that
those conditions are fulfilled within one month after
the Delivery Date.
4. COMMENCEMENT
4.1 LEASING
(a) The Lessor will lease the Leased Property to the
Lessee and the Lessee will take the Leased
Property on lease in accordance with this
Agreement for the duration of the Term.
(b) The Lessor and the Lessee intend that this
Agreement constitute a "true lease" and a lease
for all United States federal income tax purposes.
Lessor and Lessee further intend and agree that
the Lessor shall be entitled to the full benefits
afforded lessors of aircraft under 11 U.S.C.
Section 1110, as amended.
<PAGE>
4.2 DELIVERY
(a) DELIVERY CONDITION: Lessor shall deliver the
Leased Property in compliance with the delivery
conditions set forth in Schedule 3 and otherwise
"as is, where is and with all faults", except for
any items set forth on Annex 2 to the Certificate
of Delivery Condition and any other items agreed
in writing by Lessor and Lessee. Lessor
represents and warrants to Lessee that Lessor has
an agreement with Coopesa for the modification of
the Aircraft, which commenced __________, 1999, to
cause the Aircraft to comply with the delivery
conditions set forth on Schedule 3.
(b) DELIVERY INSPECTION: Before the Delivery Date,
Lessor shall cause Coopesa to make the Leased
Property available for Lessee to conduct a ground
inspection of the Aircraft and an inspection of
the Aircraft Documents to its satisfaction
(collectively, the "Ground Inspection"). The
Ground Inspection of the Aircraft shall include
the following:
(i) Lessee shall be entitled to perform, at
Lessee's expense, a videotape borescope
inspection of all accessible gas path
sections of each Engine (accessible whether
by borescope port or other means), including
the low pressure and high pressure
compressors and the turbine area of such
Engine. All items beyond the Engine
Manufacturer's maintenance manual limits will
be rectified at Lessor's sole cost and
expense. No Engine will be "on watch" for
any reason requiring special or out of
sequence inspection.
(ii) In accordance with the Engine Manufacturer's
MPD, Lessor shall cause Coopesa to perform a
maximum power assurance run and condition,
acceleration and bleed valve scheduling
checks on each Engine. Coopesa will record
and evaluate each Engine's performance, with
Lessee's representatives entitled to be
present. Each Engine shall pass such tests
without operational limitations throughout
the operating envelope in accordance with the
Engine Manufacturer's maintenance manual.
(iii) Lessor shall perform a videotape borescope
inspection of the APU, and all items beyond
the manufacturer's recommended limits will be
rectified at Lessee's sole cost and expense.
(iv) The Aircraft shall be weighed just prior to
Delivery.
<PAGE>
(c) AIRCRAFT DOCUMENTS: The Aircraft will be
accompanied by the Aircraft Documents listed on
Part 2 of Schedule 2. Lessor will also provide to
Lessee all historical and current maintenance
manuals, aircraft and engine technical records and
data, and other aircraft documentation provided to
the Lessor by the Previous Operator. Upon the
request of Lessee, Lessor shall use reasonable
efforts to obtain any required maintenance and
technical records or documents not in its custody.
(d) ACCEPTANCE FLIGHT: Before the Delivery Date,
Lessee shall be entitled to perform an acceptance
flight of the Aircraft of up to two hours with up
to four representatives of Previous Operator and
Lessor on-board as observers (the "Acceptance
Flight") in accordance with Lessee's acceptance
flight protocol. Lessee shall also perform on
behalf of Lessor such further acceptance flights
as may be necessary in the event that the first or
subsequent flights do not confirm that the
Aircraft complies with the delivery requirements
of this Agreement. Lessee shall insure the
Aircraft during all such acceptance flights, and
Lessor shall reimburse Lessee for all of its costs
in connection with all such acceptance flights.
(e) CORRECTION OF DISCREPANCIES: The obligation of
Lessee to lease the Leased Property from Lessor is
subject to Lessor delivering the Leased Property
to Lessee in compliance with the conditions set
forth on Schedule 3. If Lessor corrects all
material discrepancies from the conditions set
forth on Schedule 3 before delivery, or if Lessor
and Lessee agree that Lessor will correct or pay
for their correction as set forth on Annex 2 to
the Certificate of Delivery Condition, then Lessee
shall accept the Leased Property. If, on the
Scheduled Delivery Date, the Aircraft is not, in
all material respects, in the condition set forth
in Schedule 3 and Lessor and Lessee do not agree
upon the correction of or payment for such
material discrepancies within 60 days after the
Scheduled Delivery Date, then Lessee may by notice
to Lessor given not later than 75 days after the
Scheduled Delivery Date terminate this Agreement.
If Lessee fails to give any such termination
notice within 75 days after the Scheduled Delivery
Date, Lessee shall be deemed to have accepted the
Leased Property for all purposes of this
Agreement.
(f) LESSEE'S PRE-DELIVERY MODIFICATIONS: During the
pre-Delivery modifications performed by Coopesa,
Lessee shall be permitted to request that Lessor
cause Coopesa to replace or deactivate certain
aircraft systems identified by Lessee, so long as
such requested maintenance work will not prevent
Lessor from delivering the Aircraft on the
Scheduled Delivery Date and are reasonably agreed
to by Lessor. Lessee shall pay Coopesa, or
reimburse Lessor for, all charges of Coopesa for
performing such replacement or deactivation.
Any<PAGE> materials or components that are removed
from the Aircraft and replaced shall be the
property of Lessee. Any materials or components
that are deactivated or are otherwise removed and
not replaced shall remain the property of Lessor
and be returned to Lessor at Lessor's cost.
(g) FERRY FLIGHT: Following completion of the
Delivery Inspection, the Acceptance Flight and the
correction by Lessor of all discrepancies
discovered during the Delivery Inspection and/or
the Acceptance Flight (or, at Lessee's option, the
agreement of Lessor and Lessee to correct some or
all of such discrepancies after Delivery), Lessee
shall irrevocably accept the condition of the
Leased Property. Following such technical
acceptance of the Aircraft, Lessee shall ferry the
Aircraft from Coopesa's maintenance facility to
the Delivery Location on behalf of, and pursuant
to an agreement with, the Previous Owner, Previous
Operator and Lessor (the "Ferry Flight"). All
costs and expenses in connection with the ferry
flight shall be borne by Lessee.
4.3 DELAYED DELIVERY
If owing to Coopesa delaying in the completion of the
performance of the pre-Delivery modifications referred
to in Clause 4.2(f) above or any Excusable Delay,
Lessor delays in the delivery of, or fails to deliver,
the Aircraft under this Agreement on the Scheduled
Delivery Date, then in any such case:
(a) 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; and
(b) 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, unless 60 days have elapsed after the
Scheduled Delivery Date and Lessee has given
written notice to Lessor to the effect that Lessee
terminates this Agreement.
4.4 ACCEPTANCE AND RISK
(a) The Leased Property will be delivered to, and will
be accepted by, the Lessee at the Delivery
Location on the Delivery Date immediately
following satisfaction of the conditions precedent
specified in Clauses 3.1, 3.2 and 3.4 (or their
waiver or deferral by the party entitled to grant
such waiver or deferral).
(b) Immediately following satisfaction of the
conditions precedent specified in Clauses 3.1, 3.2
and 3.4 (or their waiver or deferral by the party
entitled to<PAGE> grant such waiver or deferral),
the Lessee and the Lessor shall forthwith complete
Annex 1 to the Certificate of Delivery Condition
(specifying the maintenance status of the
Airframe, Engines, APU and Landing Gear) and
Lessor and Lessee shall sign and deliver to each
other the Certificate of Acceptance and the
Certificate of Delivery Condition. Delivery of
the signed Certificate of Acceptance to the Lessor
shall constitute deemed delivery of the Aircraft
to the Lessee.
(c) On and from Delivery, the Leased Property will be
in every respect at the sole risk of the Lessee,
which will bear all risk of loss, theft, damage or
destruction to the Leased Property from any cause
whatsoever.
(d) Concurrently with Delivery, Lessor shall file for
recordation this Agreement at the FAA Aircraft
Registry.
5. PAYMENTS
5.1 SECURITY DEPOSIT; LETTER OF CREDIT
(a) SECURITY DEPOSIT: On the date of this Agreement,
Lessee shall pay to Lessor an amount that, when
added to amounts previously paid to Lessor, equal
the Security Deposit. The Security Deposit shall
constitute additional security for performance by
Lessee of its obligations under this Agreement,
and the following provisions shall apply:
(i If an Event of Default occurs and for as long
as it continues, the Lessor may (but shall
not be obligated to) apply all or any portion
of the Security Deposit in or towards
satisfaction of any sums due and payable to
the Lessor under the Operative Documents or
to compensate the Lessor for any sums which
it may, in its discretion, advance or expend
as a result of any such Event of Default.
Notwithstanding any such use or application
by the Lessor, the Lessee shall remain in
default under this Agreement until the full
amount owed by the Lessee, including interest
accrued thereon pursuant to Clause 5.11,
shall have been paid to the Lessor. If the
Lessor so uses or applies all or any portion
of the Security Deposit, the Lessee shall, on
demand of the Lessor, replenish the Security
Deposit in an amount equal to the amount so
used or applied within five Business Days
after Lessor's demand therefor.
(ii Lessor may commingle the Security Deposit
with its general funds and may deposit the
Security Deposit in any account selected by
Lessor,<PAGE> whether interest-bearing or
not, and any interest earned on the Security
Deposit will be the sole property of Lessor.
(iii The Security Deposit shall be returned to
Lessee within five Business Days of (1)
delivery to Lessor of a Letter of Credit in
accordance with Clause 5.1(b), (2) redelivery
of the Aircraft to the Lessor in the
condition required by Clause 12 and Schedule
4, or (3) receipt by the Lessor of the Agreed
Value following a Total Loss and all other
amounts due under Clause 11.1(b); provided,
that if, upon the occurrence of any event
specified in the foregoing subclause (1), (2)
or (3), any amounts payable by Lessee under
this Agreement remain outstanding, then the
Security Deposit shall be returned to Lessee
within five Business Days of the Lessor being
satisfied that the Lessee has irrevocably
paid to the Lessor all amounts that are at
that time outstanding under this Agreement.
(b LETTER OF CREDIT: At any time on or after the
Delivery Date, Lessee shall be entitled, instead
of paying and having the Lessor hold the Security
Deposit in cash in accordance with Clause 5.1(a)
above, to provide the Lessor with the Letter of
Credit. In the event that the Lessee elects to
provide the Letter of Credit, the following
provisions shall apply:
(i Lessee shall cause the Letter of Credit to be
renewed or replaced by the issuing bank not
later than 30 days before the expiration of
such Letter of Credit, and shall cause the
Letter of Credit to remain in effect, as
renewed, until 90 days after the Expiry Date,
subject to Clause 5.1(b)(iii) below.
(ii If an Event of Default occurs and for as long
as it continues, the Lessor may (but shall
not be obliged to) call on the Letter of
Credit and use or apply the proceeds in or
towards satisfaction of any sums due and
payable to the Lessor under this Agreement or
to compensate the Lessor for any sums which
it may, in its discretion, advance or expend
as a result of any such Event of Default.
Notwithstanding any such use or application
by the Lessor, the Lessee shall remain in
default under this Agreement until the full
amount owed by the Lessee, including interest
accrued thereon pursuant to Clause 5.11,
shall have been paid to the Lessor. If the
Lessor so uses or applies all or any portion
of the amount available under the Letter of
Credit, the Lessee shall immediately, on
demand of the Lessor, procure the issue of a
new Letter of Credit acceptable to the Lessor
for an amount equal to the amount so used or
applied, or shall pay to the Lessor an
amount<PAGE> in cash equal to the amount so
used or applied to be held pursuant to Clause
5.1(a).
(iii The Letter of Credit shall be returned to the
Lessee within five Business Days of:
(1) redelivery of the Aircraft to the Lessor
in the condition required by Clause 12
and Schedule 3; or
(2) receipt by the Lessor of the Agreed
Value following a Total Loss and all
other amounts due under Clause 11.1(b);
provided, that if, upon the occurrence of any
event specified in the foregoing subclause (1) or
(2), any amounts payable by Lessee under this
Agreement remain outstanding, then the Letter of
Credit shall be returned to Lessee within five
Business Days of the Lessor being satisfied that
the Lessee has irrevocably paid to the Lessor all
amounts which are at that time outstanding under
this Agreement.
5.2 RENTAL PERIODS
The first Rental Period will commence on the Delivery
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 next succeeding Rent Date
except that if a Rental Period would otherwise overrun
the Expiry Date, it will end on the Expiry Date.
5.3 BASIC RENT
(a TIME OF PAYMENT: The Lessee will pay to the
Lessor or its order Basic Rent in advance on each
Rent Date. Payment must be initiated adequately
in advance of the Rent Date to ensure that the
Lessor receives credit for the payment on the Rent
Date.
(b AMOUNT: The Basic Rent payable in respect of each
Rental Period will be the Basic Rent Amount as set
forth in Schedule 1.
<PAGE>
5.4 ADDITIONAL RENT
(a AMOUNT: Subject to the proviso to Clause
7.2(e)(iii), Lessee will pay to Lessor Additional
Rent in relation to each calendar month (or
portion thereof) during the Term on the 12th day
following the end of that calendar month (or, with
respect to the last calendar month during the
Term, on the Expiry Date):
(i in respect of the Airframe, the Airframe
Additional Rent Rate for each Flight Hour
flown by the Airframe during that calendar
month ("Airframe Additional Rent");
(ii in respect of the Engines, the Engine
Additional Rent Rate for each Flight Hour
operated by each Engine during that calendar
month ("Engine Additional Rent");
(iii in respect of the Landing Gear, the Landing
Gear Additional Rent Rate for each Flight
Hour flown by the Airframe during that
calendar month ("Landing Gear Additional
Rent"); and
(iv in respect of the APU, the APU Additional
Rent Rate for each Flight Hour flown by the
Airframe during that calendar month ("APU
Additional Rent");
(b ADJUSTMENT: Lessor and Lessee, acting in good
faith, may mutually adjust the amount of
Additional Rent after the Delivery Date, upon
notice from one to the other, not more frequently
than annually based on the following:
(i by reference to increases in the Consumer
Price Index as released by the Bureau of
Labor Statistics, United States Department of
Labor since the date of this Agreement;
(ii by reference to Manufacturer's and Engine
Manufacturer's recommendations, industry
experience, any change in the operational
environment of the Aircraft that materially
affects the cost of maintaining the Aircraft
and any change in the Flight Hour to Cycle
ratio of the operation of the Aircraft (it
being understood that the Additional Rent is
based on the assumption that the operation of
the Aircraft during the Term will, on
average, be not less than one Flight Hour for
each Cycle); and
(iii by reference to the Actual Costs experienced
by Lessee in the maintenance of the Aircraft
under this Agreement.
<PAGE>
5.5 LESSOR'S MONEYS: Lessor and Lessee intend that the
Additional Rent are amounts paid by Lessee to the
Lessor in consideration for the use of the Leased
Property by the Lessee and the satisfaction of the
Lessor's obligations under the Operative Documents and
that, when paid, the Additional Rent is irrevocably and
unconditionally the property of Lessor.
Notwithstanding that stated intent, if and to the
extent that the Additional Rent or any part thereof,
under any Applicable Law or otherwise, is determined to
be security deposits or otherwise the property of
Lessee or if it is so determined those moneys are a
debt owed to Lessee or that the Lessee shall have any
interest in those moneys (the "Lessors's Moneys"),
Lessee and Lessor agree that subclauses (a) and (b)
below shall apply:
(a To the fullest extent permitted by law and by way
of continuing security, Lessee grants a Security
Interest in the Lessor's Moneys and all rights of
Lessee to payment thereof, the debt represented
thereby and all interest thereon and/or any and
all interest of Lessee therein to Lessor by way of
first priority Security Interest as security for
the Lessee's obligations and liability under this
Agreement (the "Lessee's Liabilities"). Except as
expressly permitted under this Agreement, Lessee
will not be entitled to payment of the Lessor's
Moneys. Lessee will not assign, transfer or
otherwise dispose of all or part of its rights or
interest in the Lessor's Moneys and Lessee agrees
that it will enter into any additional documents
and instruments necessary or reasonably requested
by Lessor or the Mortgagee to evidence, create or
perfect the Lessor's rights to the Lessor's
Moneys.
(b If Lessee fails to comply with any provision of
this Agreement or any Event of Default has
occurred and is continuing, Lessor may immediately
or at any time thereafter, without prior notice to
Lessee:
(i offset all or any part of the Lessee's
Liabilities against the liabilities of the
Lessor in respect of the Lessor's Moneys; or
(ii apply or appropriate the Lessor's Moneys in
or towards the payment or discharge of the
Lessee's Liabilities in such order as Lessor
sees fit.
5.6 PAYMENTS
(a All payments of Rent by the Lessee to the Lessor
under this Agreement will be made for value on the
due date, for the full amount due, in Dollars and
in same day 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
telegraphic transfer to the account<PAGE> of the
Mortgagee at Citibank, N.A., ABA No. 021000089,
Account No. 4068-0522, Reference: "Vanguard
22122".
(b If any Rent or other payment would otherwise
become due on a day which is not a Business Day,
it shall be due on the immediately succeeding
Business Day.
5.7 GROSS-UP
(a All payments by the Lessee under or in connection
with this Agreement will be made without offset or
counterclaim, free and clear of and without
deduction or withholding for or on account of any
Taxes (other than Non-Indemnified Taxes that
Lessee is compelled by law to deduct or withhold).
(b All Taxes (other than Non-Indemnified Taxes) in
respect of payments under this Agreement shall be
for the account of the Lessee.
(c If the Lessee is compelled by law to make payment
to an Indemnitee under or in connection with this
Agreement subject to any Tax and such Indemnitee
does not actually receive for its own benefit on
the due date a net amount equal to the full amount
provided for under this Agreement (other than
Non-Indemnified Taxes that Lessee is compelled by
law to deduct or withhold), the Lessee will pay
all necessary additional amounts to ensure receipt
by such Indemnitee of the full amount (other than
Non-Indemnified Taxes that Lessee is compelled by
law to deduct or withhold) so provided for.
<PAGE>
5.8 TAXATION
(a The Lessee will on demand pay and indemnify each
Tax Indemnitee against all Taxes (other than
Non-Indemnified Taxes) levied or imposed against
or upon such Tax Indemnitee or the Lessee and
relating to or attributable to the Lessee, the
Operative Documents or the Aircraft directly or
indirectly in connection with the registration,
ownership, leasing, sub-leasing, 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 or other amounts arising therefrom.
(b If any Tax Indemnitee shall realize any Tax
savings (by way of refund, deduction, credit or
otherwise) in respect of any amount with respect
to which the Lessee shall have made a payment (or
increased payment) pursuant to Clause 5.7 or 5.10
or shall have indemnified such Tax Indemnitee
pursuant to Clause 5.8(a), or in respect of the
occurrence or transaction which gave rise to such
payment or indemnification, and such Tax savings
shall not have been taken into account previously
in calculating any indemnity payment made by the
Lessee, then such Tax Indemnitee shall, subject to
the Lessee's obligations to repay such amount to
such Tax Indemnitee if the relevant savings are
subsequently disallowed or canceled, pay to the
Lessee the amount of such Tax savings (together
with, in the case of a refund, any interest
received thereon); provided, that no Tax
Indemnitee shall be obliged to make any payment to
the Lessee pursuant to this Clause 5.8(b) to the
extent that the amount of any Tax savings in
respect of which such payment is to be made would
exceed the aggregate amount of all prior payments
made by the Lessee to, on behalf of or as
indemnification of such Tax Indemnitee under this
Agreement for Taxes less the amount of all prior
payments made pursuant to this Clause 5.8(b) in
respect of such Tax savings. The Lessee
acknowledges that nothing contained in this Clause
5.8(b) shall interfere with the right of any Tax
Indemnitee to arrange its tax affairs in
whatsoever proper manner it thinks fit and, in
particular, no Tax Indemnitee shall be under any
obligation to claim any Tax savings in priority to
any other savings available to it; provided, that
subject to the foregoing each Tax Indemnitee shall
use reasonable good faith diligence to realize Tax
savings as described above.
5.9 INFORMATION
<PAGE>
If Lessee is required by any Applicable Law, or by any
third party, to deliver any report or return in
connection with any Taxes (other than Non-Indemnified
Taxes), the Lessee will duly complete the same and, in
particular, will not state therein that any Person
other than Lessee is responsible for the use and
operation of the Aircraft and for the Taxes (other than
Non-Indemnified Taxes) arising therefrom, and the
Lessee will, on request, supply a copy of the report or
return to any Tax Indemnitee. If Lessee requires any
information or cooperation from any Tax Indemnitee in
order to satisfy its obligations as set forth above,
such Tax Indemnitee shall promptly furnish such
information or cooperation as Lessee may reasonably
request upon written request by Lessee. If actual
notice is given by any taxing authority to Lessor that
a report or return is required to be filed with respect
to any Taxes (other than Non-Indemnified Taxes), the
Lessor shall promptly notify Lessee of such required
report or return.
5.10 TAXATION OF INDEMNITY PAYMENTS
(a If and to the extent that any sums payable to any
Tax Indemnitee by Lessee under this Agreement by
way of indemnity are insufficient, by reason of
any Taxes (other than Non-Indemnified Taxes)
payable in respect of those sums, for such Tax
Indemnitee to discharge the corresponding
liability to the relevant third party (including
any taxation authority), or to reimburse such Tax
Indemnitee for the cost incurred by it to a third
party (including any taxation authority), Lessee
will pay to such Tax Indemnitee such sum as will,
after the tax liability has been fully satisfied,
leave such Tax Indemnitee with the same amount as
it would have been entitled to receive in the
absence of that liability, together with interest
on the amount of the deficit at the Default Rate
in respect of the period commencing on the date on
which the payment of taxation is finally due until
payment by the Lessee (both before and after
judgment).
(b If and to the extent that any sums constituting
(directly or indirectly) an indemnity to any Tax
Indemnitee but paid by the Lessee to any Person
other than such Tax Indemnitee are treated as
taxable in the hands of such Tax Indemnitee (other
than as a result of Non-Indemnified Taxes), then
Lessee will pay to such Tax Indemnitee such sum as
will, after the tax liability has been fully
satisfied, indemnify such Tax Indemnitee to the
same extent as it would have been indemnified in
the absence of such liability, together with
interest on the amount payable by Lessee under
this Clause 5.10(b) at the Default Rate in respect
of the period commencing on the date on which the
payment of taxation is finally due until payment
by the Lessee (both before and after judgment).
<PAGE>
5.11 DEFAULT INTEREST
If the Lessee fails to pay any amount payable under
this Agreement on the due date, the Lessee will pay on
demand from time to time to Lessor or any Financing
Party (as the case may be) interest (both before and
after judgment) at the Default Rate on such amount from
the due date to the day of payment in full by Lessee to
Lessor or such Financing Party. All such interest
shall be compounded monthly and calculated on the basis
of the actual number of days elapsed assuming a year of
360 days.
5.12 CONTEST
If written claim is made against any Tax Indemnitee for
or with respect to any Taxes (other than
Non-Indemnified Taxes), such Tax Indemnitee shall
promptly notify the Lessee. If reasonably requested by
the Lessee in writing within 30 days after such
notification, such Tax Indemnitee shall, upon receipt
of indemnity satisfactory to such Tax Indemnitee and at
the expense of the Lessee (including all reasonable
out-of-pocket costs, expenses, losses, legal and
accountants' fees and disbursements, penalties and
interest), in good faith contest or to the extent
permissible by law allow Lessee to contest in Lessee's
or such Tax Indemnitee's name, the validity,
applicability or amount of such Taxes by either (i)
resisting payment thereof if practicable and permitted
by Applicable Law, or (ii) if payment is made, using
reasonable efforts to obtain a refund thereof in
appropriate administrative and judicial proceedings,
and in the contest of any such claim by any Tax
Indemnitee, such Tax Indemnitee shall apprise the
Lessee of all material developments with respect to
such contest, shall forward copies of all material
submissions made in such contest and shall materially
comply in good faith with any reasonable request
concerning the conduct of any such contest; provided,
that no Tax Indemnitee will be obliged to take any such
action:
(a if it waives its right under this Agreement to the
indemnity at issue in such contest; or
(b unless there is a reasonable basis for such
contest, and if the amount of Tax in controversy
exceeds $50,000, Lessee provides such Tax
Indemnitee with an opinion of independent tax
counsel satisfactory to such Tax Indemnitee, both
as to counsel and substance, to the effect that
there is a reasonable basis for such contest; or
(c for which Lessee has not made adequate provision
to the reasonable satisfaction of the Lessor or
such Financing Party (as the case may be) in
respect of the expense concerned; or
<PAGE>
(d if such action gives 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 the Lessor or
any Financing Party.
If any Tax Indemnitee, in accordance with the
foregoing, determines to pay such Taxes and seek a
refund, Lessee will either pay such Taxes on such Tax
Indemnitee's behalf and pay such Tax Indemnitee any
amount due with respect to such payment or will
promptly reimburse such Tax Indemnitee for such Taxes.
If any Tax Indemnitee shall obtain a refund of all or
any part of such Taxes paid by the Lessee, such Tax
Indemnitee shall pay Lessee the amount of such refund;
provided, that such amount shall not be payable before
such time as the Lessee shall have made all payments or
indemnities to any Tax Indemnitee then due with respect
to Taxes and so long as no Default has occurred and is
continuing. If in addition to such refund any Tax
Indemnitee shall receive an amount representing
interest, attorneys fees or any other amount with
respect to such refund, Lessee shall be paid that
proportion of such interest, attorneys fees or any
other amount which is fairly attributable to the Taxes
paid by the Lessee prior to the receipt of such refund.
No Tax Indemnitee shall enter into a settlement or
other compromise with respect to, or otherwise concede,
any claim by a taxing authority on account of Taxes
being contested by Lessee pursuant to this Clause 5.12
without the written consent of Lessee, which consent
shall not be unreasonably withheld. If a Tax
Indemnitee enters into a settlement or other compromise
without the written consent of Lessee in accordance
with the preceding sentence, such Tax Indemnitee shall
be deemed to have waived its right to be indemnified by
Lessee with respect to such claim (but not with respect
to any future claims).
5.13 ABSOLUTE
Lessee's obligations under this Agreement are absolute
and unconditional irrespective of any contingency
whatever including (but not limited to):
(a any right of offset, counterclaim, recoupment,
defense or other right which either party to this
Agreement may have against the other;
(b any unavailability of the Aircraft for any reason,
including a requisition of the Aircraft or any
prohibition or interruption of, interference with
or other restriction against the Lessee's use,
operation or possession of the Aircraft;
(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<PAGE> or documentation under the laws
of any relevant jurisdiction, or any Total 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
the Lessor or the Lessee;
(e any invalidity, unenforceability or lack of due
authorization of, or other defect in, this
Agreement; or
(f any other cause which, but for this provision,
would or might otherwise have the effect of
terminating or in any way affecting any obligation
of the Lessee under this Agreement;
provided always, however, that this Clause 5.13 shall
be without prejudice to the Lessee's right to claim
damages and other relief from the courts in the event
of any breach by the Lessor of its obligations under
this Agreement, or in the event that, as a result of
any lack or invalidity of title to the Aircraft on the
part of the Lessor, the Lessee is deprived of its
possession of the Aircraft.
6. MANUFACTURER'S WARRANTIES
6.1 ASSIGNMENT
Notwithstanding this Agreement and subject to the
rights of Mortgagee pursuant to the Assignment, the
Lessor will remain entitled to the benefit of each
warranty, express or implied, and any unexpired
customer and/or product support given or provided in
respect of the Aircraft, any Engine or Part by any
manufacturer, vendor, maintenance performer,
subcontractor or supplier. Unless an Event of Default
shall have occurred and be continuing, Lessor hereby
authorizes Lessee to pursue any claim thereunder in
relation to defects affecting the Aircraft, any Engine
or Part, and the Lessee agrees diligently to pursue any
such claim which arises at its own cost. The Lessee
will notify the Lessor promptly upon becoming aware of
any such claim. The Lessor will provide such
assistance to the Lessee in making a claim under any
such warranties or customer and/or product support as
the Lessee may reasonably request, and, if requested by
the Lessee and at the Lessee's expense, will pursue a
claim in its own name where the relevant manufacturer,
vendor, maintenance performer, subcontractor or
supplier has refused to acknowledge the Lessee's right
to pursue that claim.
<PAGE>
6.2 PROCEEDS
Unless an Event of Default shall have occurred and be
continuing, all proceeds of any such claim as is
referred to in Clause 6.1 and which exceed $250,000
will be paid directly to Lessor at the account set
forth in Clause 5.6(a), but if and to the extent that
such claim relates:
(a to defects affecting the Aircraft which the Lessee
has rectified; or
(b to compensation for loss of use of the Aircraft,
an Engine or any Part during the Term; or
(c to costs incurred by the Lessee in pursuing such
claim (whether or not proceeds of such claim are
payable to the Lessee);
and provided no Default shall have occurred and be
continuing, the proceeds will be promptly paid to the
Lessee by Lessor but, in the case of (a), only on
receipt of evidence reasonably satisfactory to Lessor
that Lessee has rectified the relevant defect.
6.3 PARTS
Except to the extent the Lessor otherwise agrees in a
particular case, the Lessee will procure that all
engines, components, furnishings or equipment provided
by the manufacturer, vendor, maintenance performer,
subcontractor or supplier as a replacement for a
defective Engine or Part pursuant to the terms of any
warranty or customer and/or product support arrangement
comply with Clause 8.13(a), are installed on the
Aircraft promptly and that title thereto vests in the
Lessor in accordance with Clause 8.17(a). On
installation those items will be deemed to be an Engine
or Part, as applicable.
6.4 AGREEMENT
To the extent any warranties or customer and/or product
support relating to the Aircraft are made available
under an agreement between any manufacturer, vendor,
maintenance performer, subcontractor or supplier and
the Lessee, this Clause 6 is subject to that agreement.
However, Lessee will:
(a pay the proceeds of any claim thereunder that
exceed $250,000 to Lessor at the account set forth
in Clause 5.6(a) to be applied pursuant to
Clause 6.2 and, pending such payment, will hold
the claim and the proceeds on trust for Lessor;
and
<PAGE>
(b take all such steps as are necessary and requested
by the Lessor at the end of the Term to ensure the
benefit of any of those warranties or customer
and/or product support which have not expired are
vested in the Lessor (but subject to the rights of
Mortgagee under the Mortgage).
7. LESSOR'S COVENANTS AND DISCLAIMERS
7.1 QUIET ENJOYMENT
Provided no Event of Default shall have occurred and be
continuing, none of the Lessor, its successors and
assigns, any Financing Party or any Person claiming by,
through or on account of any of such parties will
interfere with the quiet use, possession and enjoyment
of the Aircraft by the Lessee.
7.2 LESSOR'S MAINTENANCE CONTRIBUTION
(a AIRFRAME REIMBURSABLE EXPENSES:
(i Upon the performance by Lessee of a Heavy
Check on the Airframe during the Term of this
Lease, the Lessee's Actual Costs incurred in
completing, with respect to the Airframe, all
routine Heavy Check tasks shall constitute
"Airframe Reimbursable Expenses".
(ii In connection with the performance of any
part of a Heavy Check, Lessee shall present
written evidence satisfactory to Lessor as to
the workscope to be performed and payment
installments relating to the performance
thereof in connection with such Heavy Check
and the amount of the Airframe Reimbursable
Expenses for approval by Lessor. Upon
receipt of such written evidence, and
provided there then exists no Default, Lessor
shall pay to Lessee, or to the independent
repair facility performing such work if
directed by Lessee, an amount equal to the
lesser of (i) the Airframe Reimbursable
Expenses or (ii) an amount equal to (1) all
Airframe Additional Rent previously paid by
Lessee under this Lease, minus (2) all
previous payments by Lessor under this Clause
7.2(a).
<PAGE>
(b ENGINE REIMBURSABLE EXPENSES:
(i Upon the accomplishment of any CER for any
Engine during the Term requiring shop repair,
including any premature removal of an Engine
due to accelerated performance deterioration
revealed by Lessee's trend monitoring data
and replacement of LLPs during any such shop
visit, the Lessee's Actual Cost incurred in
completing such CER shall constitute "Engine
Reimbursable Expenses".
(ii Upon accomplishment of any CER for an Engine,
Lessee shall present written evidence
satisfactory to Lessor as to the completion
of such CER to such Engine and the amount of
Engine Reimbursable Expenses for approval by
Lessor. Such shop visit shall include a
build standard to be mutually agreed upon by
Lessor and Lessee. Upon receipt of such
written evidence, and provided there then
exists no Default, Lessor shall pay to
Lessee, or to the independent repair facility
performing such work if directed by Lessee,
an amount equal to the lesser of (i) the
Engine Reimbursable Expenses with respect to
such Engine or (ii) an amount equal to (1)
all Engine Additional Rent previously paid by
Lessee for such Engine pursuant to this
Lease, minus (2) all previous payments for
such Engine by Lessor under this Clause
7.2(b).
(c LANDING GEAR REIMBURSABLE EXPENSES:
(i Upon the performance by Lessee of an overhaul
of any Landing Gear or the replacement of
LLPs of any Landing Gear, in each case in
accordance with the Agreed Maintenance
Program, the Lessee's Actual Cost incurred in
completing such overhaul shall constitute
"Landing Gear Reimbursable Expenses".
(ii Upon accomplishment of any such overhaul,
Lessee shall present written evidence
satisfactory to Lessor as to the completion
of such overhaul and the amount of Landing
Gear Reimbursable Expenses for approval by
Lessor. Upon receipt of such written
evidence, and provided there then exists no
Default, Lessor shall pay to Lessee, or to
the independent repair facility performing
such work if directed by Lessee, an amount
equal to the lesser of (i) the Landing Gear
Reimbursable Expenses or (ii) an amount equal
to (1) all Landing Gear Additional Rent
previously paid by Lessee pursuant to this
Lease, minus (2) all previous payments by
Lessor under this Clause 7.2(c).
<PAGE>
(d APU REIMBURSABLE EXPENSES:
(i Upon the performance by Lessee of an overhaul
of the APU in accordance with the Agreed
Maintenance Program, the Lessee's Actual Cost
incurred in completing such overhaul shall
constitute "APU Reimbursable Expenses".
(ii Upon accomplishment of any such overhaul,
Lessee shall present written evidence
satisfactory to Lessor as to the completion
of such overhaul and the amount of APU
Reimbursable Expenses for approval by Lessor.
Upon receipt of such written evidence, and
provided there then exists no Default, Lessor
shall pay to Lessee, or to the independent
repair facility performing such work if
directed by Lessee, an amount equal to the
lesser of (i) the APU Reimbursable Expenses
or (ii) an amount equal to (1) all APU
Additional Rent previously paid by Lessee
pursuant to this Lease, minus (2) all
previous payments by Lessor under this Clause
7.2(d).
(e ADDITIONAL PROVISIONS:
(i Notwithstanding the provisions of Clauses
7.2(a)(i), (b)(i), (c)(i) and (d)(i),
Reimbursable Expenses shall not include the
cost of (1) any replacements or repairs
caused by foreign object damage, ingestion,
accident, faulty maintenance or installation,
any incident, improper operations, abuse,
neglect, misuse or elective parts replacement
(except to the extent ordinarily accomplished
during such maintenance or overhaul), (2) any
modifications or interior reconfiguration,
(3) the accomplishment of all airworthiness
directives or manufacturer's service
bulletins not incorporated into the
Maintenance Program, (4) maintenance work
that is reimbursable by a claim under the
manufacturer's warranties or by insurance
(but including deductibles for purposes of
this provision) or (5) any overhaul of time
controlled components accomplished during the
Heavy Check, CER or overhaul except such as
are part of the routine tasks included at
such Heavy Check, CER or overhaul or that,
when tested during such Heavy Check, CER or
overhaul, fail and need to be replaced.
(ii Notwithstanding anything to the contrary
contained in this Clause 7.2, any such
maintenance and the extent and nature of such
maintenance to be performed shall be
conducted at an Agreed Maintenance Performer.
Lessor shall be entitled to have
representatives present<PAGE> during the
performance of such maintenance to oversee
and approve all aspects of such performance,
including the workscope thereof to ensure
that such maintenance is in accordance with
the Agreed Maintenance Program. Lessor shall
be notified by Lessee prior to the
commencement of any maintenance work
described in this Clause 7.2, including as to
the Agreed Maintenance Performer and for
Lessor's approval of the workscope.
(iii Lessee acknowledges that Lessee is required
to pay the full cost of and to perform (or
cause to be performed) any check, shop visit,
overhaul or other maintenance required by the
Agreed Maintenance Program, whether or not
Lessor is required to make any payments
pursuant to this Clause 7.2, and any costs
incurred by Lessee in performing any such
check, shop visit, overhaul or other
maintenance required by the Agreed
Maintenance Program shall be for Lessee's
account solely; provided, that if Lessor's
contribution pursuant to Clause 7.2(a), (b),
(c) or (d) above is ever less than the
Reimbursable Expenses incurred by Lessee with
respect to the Airframe, Engines, Landing
Gear or APU, then Lessee's obligation under
Clause 5.4 to make payments of Additional
Rent with respect to the Airframe, Engines,
Landing Gear or APU, respectively, shall be
suspended until an equivalent amount to such
shortfall has been retained by Lessee.
(iv Lessor shall deposit all Additional Rent in
an interest-bearing account with the
Mortgagee or with another financial
institution that Mortgagee uses for other
similar amounts deposited with it. Lessor
shall not commingle its general funds in such
account, but such account may hold security
deposits, additional rent and similar
payments paid to Affiliates of Lessor under
other aircraft leases. Any interest earned
on the Additional Rent will be added to and
become a part of the Additional Rent.
7.3 LESSOR'S ENGINE MAINTENANCE CONTRIBUTION
Provided no Default has occurred and is continuing,
upon the performance by Lessee of the first CER during
the Term on the Engine bearing manufacturer's serial
number 687338, Lessor will pay to Lessee, by way of
contribution to the cost of maintenance of the
Aircraft, an amount equal to the product of (a) the
difference between 4,000 Flight Hours or Cycles
(whichever is more limiting) and the number of Flight
Hours or Cycles, as the case may be, remaining to the
first limiter on such Engine at Delivery, multiplied by
(b) the Engine Additional Rent Rate then in effect.
<PAGE>
7.4 LESSOR'S AD COST SHARING CONTRIBUTION
(a Provided no Default has occurred and is
continuing, upon the performance by Lessee of
"Qualifying AD Work" (as hereinafter defined)
relating to (i) any single airworthiness directive
issued by the Aviation Authority after the
Delivery Date and requiring terminating action
during the Term, (ii) any FAR regulation
promulgated after the Delivery Date requiring the
installation on the Aircraft during the Term of a
16-parameter flight data recorder or (iii) any FAR
regulation promulgated after the Delivery Date
requiring the installation in the cargo
compartment of the Aircraft during the Term of
fire indicators, Lessor will pay to Lessee, by way
of contribution to the cost of maintenance of the
Aircraft, an amount equal to the product of
(1) the amount by which the Actual Cost of the
Qualifying AD Work for such single airworthiness
directive or either of such regulations exceeds
$50,000, multiplied by (2) a fraction the
numerator of which is 84 minus the number of
months (rounded to the nearest whole number of
months) from the Delivery Date to the date of
completion of such Qualifying AD Work and the
denominator is 84.
(b "Qualifying AD Work" means maintenance work
performed on the Aircraft solely in order to
comply fully with airworthiness directives issued
by the Aviation Authority after the Delivery Date
on a terminating action basis or with the two FAR
regulations described in Clause 7.4(a)(ii) and
(iii), and excluding work performed for any other
purpose, such as compliance with airworthiness
directives by means of repetitive inspections,
recording compliance work in the Aircraft
Documents and all other maintenance work.
(c The Lessor will be obligated to pay any amount
specified in Clause 7.4(a) within 14 days after
submission by the Lessee to the Lessor of an
invoice and supporting documentation reasonably
satisfactory to the Lessor evidencing the
performance of Qualifying AD Work for an
airworthiness directive.
<PAGE>
7.5 REGISTRATION AND FILINGS
The Lessor shall, at the Lessor's cost:
(a maintain the registration of the Aircraft with the
Aviation Authority reflecting (so far as permitted
by Applicable Law) the respective interests of
Lessor and Lessee and not do or suffer to be done
anything which might reasonably be expected to
adversely affect that registration; and
(b do all acts and things (including making any
filing or registration with the Aviation Authority
or any other Government Entity) as may be required
following any change in the ownership or financing
of the Aircraft.
7.6 AGREED MAINTENANCE PERFORMERS
The Lessor may object to and may exclude any
maintenance organization (other than Lessee) being
included as an "Agreed Maintenance Performer" for a
valid business reason; provided, that Lessor must
provide such objection within 45 days of scheduled
maintenance. The Lessor shall furnish to Lessee in
writing from time to time a list of all maintenance
organizations excluded from the definition of "Agreed
Maintenance Performer" pursuant to the preceding
sentence, which list may be amended by Lessor from time
to time. The Lessor and the Lessee shall consult in
good faith regarding any organizations on such list
from time to time at the request of either party.
7.7 EXCLUSION
THE AIRCRAFT IS ACCEPTED BY THE LESSEE "AS IS, WHERE IS
WITH ALL FAULTS" AND LESSEE AGREES AND ACKNOWLEDGES
THAT, SAVE AS IS EXPRESSLY STATED IN THIS AGREEMENT,
LESSOR WILL HAVE NO LIABILITY IN RELATION TO, AND
LESSOR HAS NOT AND WILL NOT BE DEEMED TO HAVE MADE OR
GIVEN, ANY CONDITIONS, WARRANTIES OR REPRESENTATIONS,
EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT,
INCLUDING:
(a THE DESCRIPTION, AIRWORTHINESS, MERCHANTABILITY,
FITNESS FOR ANY USE OR PURPOSE, VALUE, CONDITION,
OR DESIGN, OF THE AIRCRAFT OR ANY PART; OR
(b ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY
IN TORT, WHETHER OR NOT ARISING FROM LESSOR'S
NEGLIGENCE, ACTUAL OR IMPUTED (BUT EXCLUDING ANY
SUCH OBLIGATION,<PAGE> LIABILITY, RIGHT, CLAIM OR
REMEDY IN TORT WHICH ARISES FROM LESSOR'S GROSS
NEGLIGENCE OR WILFUL MISCONDUCT); OR
(c ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY
FOR LOSS OF OR DAMAGE TO THE AIRCRAFT, FOR ANY
LIABILITY OF LESSEE TO ANY THIRD PARTY, OR FOR ANY
OTHER DIRECT, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES.
7.8 LESSEE'S WAIVER
LESSEE HEREBY WAIVES, AS BETWEEN ITSELF AND THE LESSOR,
ALL ITS RIGHTS IN RESPECT OF ANY CONDITION, 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
THE OPERATION OR PERFORMANCE OF THE AIRCRAFT OR THIS
AGREEMENT EXCEPT AS IS OTHERWISE EXPRESSLY STATED IN
THIS AGREEMENT.
7.9 LESSEE'S CONFIRMATION
LESSEE CONFIRMS THAT IT IS FULLY AWARE OF THE
PROVISIONS OF CLAUSES 7.7 AND 7.8 AND ACKNOWLEDGES THAT
BASIC RENT AND OTHER AMOUNTS HAVE BEEN CALCULATED
NOTWITHSTANDING ITS PROVISIONS.
8. LESSEE'S COVENANTS
8.1 DURATION
The undertakings in this Clause 8 and in Clause 12
will:
(a except as otherwise stated, be performed at the
expense of the Lessee; and
(b remain in force until redelivery of the Aircraft
to the Lessor in accordance with this Agreement
and thereafter to the extent of any accrued rights
of the Lessor in relation to those undertakings.
8.2 INFORMATION
The Lessee shall:
<PAGE>
(a furnish to the Lessor, with a copy to Mortgagee:
(i within 60 days after the last day of the
first three fiscal quarters of each fiscal
year of the Lessee, unaudited consolidated
quarterly financial statements of the Lessee
prepared for such quarter, including a
consolidated balance sheet of the Lessee and
its Subsidiaries as of the last day of such
quarter and consolidated statements of income
and retained earnings for such fiscal quarter
and for the year to date and, on a
comparative basis, figures for the
corresponding periods of the immediately
preceding fiscal year, all in reasonable
detail, each such statement to be certified
in a certificate of Lessee's chief financial
officer or chief accounting officer as fairly
presenting the financial position and the
results of operations of the Lessee as at its
date and for such quarter (subject to year-
end audit adjustments) and as having been
prepared in accordance with GAAP;
(ii as soon as available but not in any event
later than 105 days after the last day of
each fiscal year of the Lessee, audited
consolidated financial statements of the
Lessee prepared for such year, including a
consolidated balance sheet of the Lessee and
its Subsidiaries as of the last day of such
year, consolidated statements of income and
retained earnings of the Lessee and its
Subsidiaries for such fiscal year, a
consolidating balance sheet of the Lessee and
its Subsidiaries as of the last day of such
year and consolidating statements of income
and retained earnings of the Lessee and its
Subsidiaries for such fiscal year and in all
cases on a comparative basis figures for the
immediately preceding fiscal year, all in
reasonable detail, each prepared in
accordance with GAAP and certified without
qualification by Ernst & Young or another of
the largest international firms of
independent certified public accountants as
fairly presenting the financial position and
the results of operations of Lessee and its
Subsidiaries at the end of and for such
fiscal year and as having been prepared in
accordance with GAAP;
(iii in lieu of delivering the financial
statements referred to in sub-clauses (i) and
(ii) above, (1) Lessee may deliver Quarterly
Reports on Form 10-Q and Annual Reports on
Form 10-K for the respective periods filed by
the Lessee pursuant to and in accordance with
the Securities Exchange Act of 1934, as
amended, and (2) Lessee may cause such
financial statements (or 10-Qs and 10-Ks) to
be publicly available on the internet through
EDGAR filings with the Securities and
Exchange Commission or otherwise;
<PAGE>
(iv at the same time as it is issued to the
creditors of the Lessee, a copy of each
notice or circular issued to the Lessee's
creditors as a group; and
(v on request from time to time such other
information regarding the Lessee and its
business and affairs as the Lessor or
Mortgagee may reasonably request;
(b on request, inform the Lessor as to the current
location of the Airframe and Engines and the
serial number and owner of any engine installed on
the Airframe;
(c promptly furnish to Lessor all information that
Lessor from time to time reasonably requests
regarding the Aircraft, any Engine or any Part and
its use, location and condition, including the
hours available on the Aircraft and any Engine
until the next scheduled check, inspection,
overhaul or shop visit, as the case may be;
(d on request, furnish to the Lessor evidence
reasonably satisfactory to the Lessor that all
Taxes and charges incurred by the Lessee with
respect to the Aircraft have been paid and
discharged in full;
(e provide to the Lessor, within five days following
the end of each calendar month during the Term, a
monthly report on the Aircraft in the form set out
in Exhibit F or such other form as the Lessee may
select providing substantially the same
information;
(f) promptly notify Lessor and Mortgagee of:
(i) any Total Loss, any Engine Loss, any theft of
the Airframe or any Engine, any damage to the
Aircraft if the potential cost of repair may
reasonably be expected to exceed the Damage
Notification Threshold or any modification to
the Aircraft if the potential cost may
reasonably be expected to exceed the Damage
Notification Threshold;
(ii) any claim or other occurrence likely to give
rise to a claim under the Insurances (but, in
the case of hull claims only, in excess of
the Damage Notification Threshold) and
details of any negotiations with the
insurance brokers over any such claim; and
<PAGE>
(iii) any litigation, arbitration or administrative
proceedings that are pending or, to the
Lessee's knowledge, threatened against the
Lessee which, if adversely determined, would
have a material adverse effect upon its
financial condition or business or its
ability to perform its obligations under this
Agreement.
8.3 LAWFUL AND SAFE OPERATION
The Lessee shall:
(a) comply with all Applicable Law for the time being
in force in any country or jurisdiction in which
the Aircraft is being operated which is applicable
to the Aircraft or the use and operation of the
Aircraft;
(b) not use the Aircraft in any manner contrary to any
requirement or regulation of the Aviation
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 Aviation Authority
and Applicable Law;
(d) use the Aircraft solely in commercial or other
operations for which the Lessee is duly authorized
by the Aviation Authority and Applicable Law;
(e) not knowingly use the Aircraft (or use it when the
Lessee ought reasonably to have known that it was
being so used) for the carriage of:
(i) whole animals, living or dead, except in the
cargo compartments according to IATA
regulations, and except domestic pet animals
carried in a suitable container to prevent
the escape of any liquid and to ensure the
welfare of the animal;
(ii) acids, toxic chemicals, other corrosive
materials, explosives, nuclear fuels, nuclear
wastes or any nuclear assemblies or
components, except as permitted for cargo
aircraft under the "Restriction of Goods"
schedule issued by IATA from time to time and
provided that all the requirements for
packaging or otherwise contained therein are
fulfilled;
<PAGE>
(iii) any other goods, materials or items of cargo
which could reasonably be expected to cause
damage to the Aircraft and which would not be
adequately covered by the Insurances; or
(iv) any item or substance whose carriage is
illegal under Applicable Law;
(f) not utilize the Aircraft for purposes of training,
qualifying or re-confirming the status of cockpit
personnel except for the benefit of the 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 the Lessee;
(g) not (other than for bona fide safety reasons)
cause or permit the Aircraft to proceed to, or
remain at, any location which is for the time
being the subject of a prohibition order (or any
similar order or directive) by:
(i) any Government Entity of the State of
Registration; or
(ii) any Government Entity of the country in which
such location is situated; or
(iii) any Government Entity having jurisdiction
over the Lessee or the Aircraft;
(h) obtain and maintain in full force all
certificates, licenses, permits and authorizations
required for the use and operation of the Aircraft
for the time being, and for the making of payments
required by, and the compliance by the Lessee with
its other obligations under, this Agreement.
8.4 TAXES AND OTHER CHARGES
The Lessee will promptly pay:
(a) all license and registration fees, Taxes (other
than Non-Indemnified Taxes) and other amounts of
any nature imposed by any Government Entity that
are imposed on the Lessee or for which the Lessee
is responsible under this Agreement with respect
to the Aircraft, including the purchase,
ownership, delivery, leasing, possession, use,
operation, return, sale or other disposition of
the Aircraft; and
<PAGE>
(b) all rent, fees, charges, Taxes (other than
Non-Indemnified Taxes) imposed on the Lessee and
other amounts in respect of any premises where the
Aircraft or any Part thereof is located from time
to time during the Term;
except to the extent that such payment is being contested in
good faith by appropriate proceedings in accordance with
Clause 5.12.
8.5 SUB-LEASING
Lessee will not sub-lease or otherwise part with
possession of the Aircraft, the Engines or any Part
except that the 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 an Agreed Maintenance
Performer for service, repair, maintenance or
overhaul work or for alterations, modifications or
additions to the extent required or permitted by
this Agreement;
(b) with respect to an Engine or Part, as expressly
permitted by this Agreement;
(c) with respect to the Aircraft or an Engine,
pursuant to an ACMI (aircraft crew, maintenance
and insurance) "wet" lease or charter of the
Aircraft in which operational control of the
Aircraft remains with the Lessee at all times,
provided the Aircraft remains registered with the
Aviation Authority;
(d) with respect to the Aircraft or an Engine, and
with the consent of Lessor and Mortgagee (which
consent shall not be unreasonably withheld),
pursuant to a sublease to a certificated air
carrier under the following conditions:
(i) no Default shall have occurred and be
continuing;
(ii) notwithstanding such sublease, Lessee shall
remain primarily responsible to Lessor
hereunder and the sublease, by its terms,
shall be expressly subject and subordinate in
all respect to this Agreement;
(iii) the sublease shall include clauses identical
to or having the same substantive effect as
Clauses 2.1, 2.2, 5, 7.7, 7.8, 8, 9, 10, 13,
15.11 and Schedule 5 of this Agreement,
except that a sublease may impose additional
or more stringent obligations on, or give
fewer rights to, any sublessee than are
imposed on Lessee under the provisions of
this Agreement and that the term of the
sublease shall not be capable of extending
beyond the Expiry Date; provided, that any
sublease to a<PAGE> certificated air carrier
that is an Affiliate of Lessee (an "Affiliate
Sublease") need only include clauses
identical to or having the same substantive
effect as Clauses 8 and 9 and Schedule 5 of
this Agreement;
(iv) the rights, title and interests of Lessor and
the Financing Parties in and to the Leased
Property and this Agreement shall be duly
evidenced and protected to the satisfaction
of Lessor and such Financing Parties
(including as to the making of all necessary
filings and registrations) and such interests
shall not, in Lessor's reasonable opinion, be
prejudiced by the sublease;
(v) Lessee and the sublessee shall have executed
and delivered to Lessor a security assignment
in respect of the sublease together with an
acknowledgment of such assignment, each such
document to be in such form as Lessor and
Mortgagee shall reasonably require;
(vi) the sublessee shall be a reputable air
carrier, experienced in operating aircraft of
the same type as the Aircraft, shall hold all
necessary consents, licenses, permits and
authorizations required under the applicable
law of the state of incorporation or
establishment of such carrier for the public
transport of passengers and cargo, and shall
not be subject to any event of the types
described in Clauses 13.1(g), (h) or (i) as
of the commencement of the sublease;
(vii) the Aircraft shall not be based or re-
registered outside the State of Registration
if the Lessor or Mortgagee determines, in its
absolute discretion, that the foreign
jurisdiction is not acceptable in terms of
political and judicial risk;
(viii) Lessee shall give written notice to Lessor
and the Financing Parties of any proposed
sublease at least 30 days prior to the date
on which it is proposed that such sublease be
executed (which notice shall include the
identity of any proposed change in the State
of Registration and, if then determined, the
term and the delivery date of the proposed
Sublease), and within a reasonable period
prior to the execution by Lessee of any
sublease, Lessee will provide Lessor and the
Financing Parties with a copy of the draft
sublease in order for Lessor and the
Financing Parties to satisfy themselves that
the conditions set out in this Clause 8.5(d)
as to the form of the sublease are fulfilled;
provided, that in connection with an
Affiliate Sublease that does not contemplate
a change in the State of Registration, Lessee
need only give Lessor<PAGE> and the Financing
Parties written notice of such Affiliate
Sublease five days prior to the date on which
such Affiliate Sublease is proposed to be
executed;
(ix) prior to delivery of the Aircraft to the
sublessee under any sublease, Lessee shall
deliver to Lessor an original counterpart of
the sublease duly executed by Lessee and
sublessee, and except in connection with an
Affiliate Sublease shall provide Lessor with
the equivalent of the conditions precedent
set forth in Clause 3.1 and 3.2 applicable to
such sublessee;
(x) Lessee shall be responsible for all
reasonable costs incurred by Lessor and any
Financing Party in connection with the
Sublease; and
(xi) the sublease shall provide that no further
subleases of the Aircraft by the sublessee
shall be permitted.
8.6 INSPECTION
(a) Lessor, any Financing Party and any Person
designated by Lessor or any Financing Party may at
any time visit, inspect and survey the Aircraft,
any Engine or any Part and for such purpose may,
subject to any applicable Aviation Authority
regulation, travel on the flight deck as observer.
Subject to Clause 8.6(c)(ii) below, Lessor, any
Financing Party or any designee shall not be
restricted during such inspection from opening any
panels, bays or doors on the Aircraft or from
inspecting any part of the Aircraft.
(b) Lessee shall have no responsibility for the costs
and expenses of Lessor and any Financing Party in
connection with any such visit, inspection or
survey.
(c) The Lessor shall:
(i) have no duty to make, or liability arising
out of, any such visit, inspection or survey;
and
(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 maintenance or
operation of the Aircraft.
8.7 PROTECTION OF TITLE
The Lessee shall:
<PAGE>
(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 respective rights, title and
interest of Mortgagee as mortgagee of the Aircraft
and assignee of this Agreement or the Lessor as
owner of the Aircraft and lessor under this
Agreement or the validity, enforceability or
priority of the Mortgage and the Assignment;
(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 the
Lessor and is subject to the Mortgage;
(c) not at any time:
(i) represent or hold out the Lessor or any
Financing Party 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 the Lessee; or
(ii) pledge the credit of the Lessor or any
Financing Party;
(d) ensure that there is always affixed, and not
removed or in any way obscured, a fireproof plate
(having dimensions of not less than 6 in. x 4 in.)
in a reasonably prominent position on the Aircraft
and on each Engine stating:
"This [Aircraft/Engine] is owned by
Aircraft 22122, Inc., is leased to
Vanguard Airlines, Inc. and is subject
to a mortgage and security agreement in
favor of FINOVA Capital Corporation. It
may not be operated by any other person
without the prior written consent of
Aircraft 22122, Inc. and FINOVA Capital
Corporation."
(e) not create or permit to exist any Security
Interest upon the Aircraft, any Engine or any
Part, except Permitted Liens;
(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, appropriation, damage or
destruction occurs, give the Lessor notice and use
its best efforts to procure the immediate release
of the Aircraft, such Engine or such Part, as the
case may be;
<PAGE>
(g) not abandon the Aircraft, the 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 reasonably be expected to give rise
to a Security Interest (other than a Permitted
Lien) 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 other than as
expressly permitted by this Agreement.
8.8 GENERAL
Lessee will:
(a) not make any substantial change in the nature of
the business in which it is engaged if such
change, in the reasonable opinion of the Lessor or
Mortgagee, might reasonably be expected to have a
material adverse effect on the Lessee's
performance of its obligations under this
Agreement;
(b) preserve its corporate existence, and will not
merge or consolidate with any Person unless the
successor Person resulting from such merger or
consolidation (the "Successor")
(i) is a Person incorporated, formed or organized
under the laws of a State of the United
States of America;
(ii) shall have a net worth immediately after such
merger or consolidation of not less than the
Lessee's net worth immediately prior thereto;
(iii) shall be authorized under Applicable Law to
perform the Lessee's obligations under this
Agreement to the same extent as the Lessee;
(iv) shall deliver to Lessor and Mortgagee an
agreement in form and substance reasonably
satisfactory to Lessor containing an
assumption by the Successor of Lessee's
representations and warranties under this
Agreement, together with the due and punctual
performance of all of Lessee's obligations
under this Agreement; and
(v) shall deliver to Lessor and Mortgagee an
opinion of counsel reasonably satisfactory in
form and substance to Lessor and<PAGE>
Mortgagee covering the Operative Documents
and the agreement referred to in sub-clause
(iv) above and substantially in the form of
the legal opinion set forth in Exhibit D.
8.9 RECORDS
The Lessee shall procure that accurate, complete and
current records of all flights made by, and all
maintenance carried out on, the Aircraft (including, in
relation to each Engine or Part subsequently installed,
before its installation) are kept in English, and shall
keep the records in such manner as the Aviation
Authority may from time to time require. The records
will form part of the Aircraft Documents.
8.10 REGISTRATION AND FILINGS
Lessee shall:
(a) not do anything that might reasonably be expected
to adversely affect the registration of the
Aircraft with the Aviation Authority reflecting
(so far as permitted by Applicable Law) the
respective interests of the Lessor and Mortgagee;
and
(b) do all acts and things (including making any
filing or registration with the Aviation Authority
or any other Government Entity) and executing and
delivering all documents (including any amendment
of this Agreement) as may be required by the
Lessor 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
respective rights of the Lessor and Mortgagee
under this Agreement apply with the same effect as
before.
8.11 MAINTENANCE AND REPAIR
The Lessee shall:
(a) keep the Aircraft airworthy in all respects and in
good repair and condition, and all maintenance
will be carried out in accordance with the Agreed
Maintenance Program;
(b) advise the Lessor and Mortgagee in writing of all
material changes to the Agreed Maintenance
Program;
<PAGE>
(c) maintain the Aircraft in accordance with the
Agreed Maintenance Program through Agreed
Maintenance Performers and perform (at the
respective intervals provided in the Agreed
Maintenance Program) all Major Checks, and before
performing any Major Check Lessee will consult
with Lessor as to the workscope for such Major
Check;
(d) maintain the Aircraft in accordance with FAR Part
121 and all other rules and regulations of the
Aviation Authority as are applicable to aircraft
of the same type as the Aircraft operated by
United States of America air carriers;
(e) without limiting the provisions of Clause 7.4,
comply with all mandatory inspection and
modification requirements, airworthiness
directives and similar requirements applicable to
the Aircraft, any Engine or Part having a
compliance date on or before 90 days after the
Expiry Date and that are required by the Aviation
Authority;
(f) comply with all alert service bulletins issued by
any manufacturer of the Aircraft, Engines or
Parts, and comply (including scheduling compliance
work and then performing such work on schedule)
with all other service bulletins issued by any
such manufacturer if and to the extent that the
Lessee brings or schedules to bring in compliance
at least one-half of the applicable aircraft it
operates (excluding for purposes of such
calculation aircraft acquired from unrelated third
parties that already comply with such other
service bulletins);
(g) comply with all Applicable Laws and the
regulations of the Aviation Authority and any
other aviation authorities with jurisdiction over
the Lessee or the Aircraft, any Engine or Part
that relate to the maintenance, condition, use or
operation of the Aircraft or require any
modification or alteration to the Aircraft, any
Engine or Part;
(h) maintain in good standing a current U.S. Standard
Transport Category Certificate of Airworthiness
for the Aircraft issued by the Aviation Authority
in accordance with FAR Part 21 except when the
Aircraft is undergoing maintenance, modification
or repair required or permitted by this Agreement,
and shall from time to time provide to the Lessor
a copy on request;
(i) if required by the Aviation Authority, maintain a
current certification as to maintenance issued by
or on behalf of the Aviation Authority in respect
of the Aircraft and shall from time to time
provide to the Lessor a copy on request;
<PAGE>
(j) maintain the Engines with respect to overhaul
build standards and disc replacements at a level
which is consistent with the level applied by the
Lessee in relation to other engines of the same
type as the Engines in its fleet;
(k) maintain the Engines and the APU in an "on
condition" program as set forth in the respective
manufacturer's maintenance planning document;
(l) subject to Clause 11.2, procure promptly the
replacement of any Engine or 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 an engine or part complying
with the conditions set out in Clause 8.13(a); and
(m) maintain the Airframe at all times in compliance
with the requirements of the Manufacturer's Aging
Aircraft Program, SID Program and CPCP and related
mandates of the Aviation Authority, with all
documentation necessary to assure and demonstrate
compliance becoming part of the Aircraft
Documents.
8.12 REMOVAL OF ENGINES AND PARTS
The Lessee will ensure that no Engine or Part installed
on the Aircraft is at any time removed from the
Aircraft other than:
(a) if replaced as expressly permitted by this
Agreement; or
(b) If the removal is of an obsolete item and is in
accordance with the Agreed Maintenance Program; or
(c) pursuant to, and in accordance with, Clause 8.15;
or
(d) (i) during the course of maintaining,
servicing, repairing, overhauling or testing
that Engine or the Aircraft, as the case may
be; or
(ii) as part of a normal engine or part rotation
program; or
(iii) for the purpose of making such modifications
to the Engine or the Aircraft, as the case
may be, as are permitted under this
Agreement,
and then in each case only if it is reinstalled or
replaced by an engine or part complying with
Clause 8.13(a) as soon as practicable and in any
event no later than the Expiry Date.
<PAGE>
8.13 INSTALLATION OF ENGINES AND PARTS
(a) The Lessee will ensure that, except as permitted
by this Agreement, no engine or part is installed
on the Aircraft unless:
(i) in the case of an engine, it is an engine of
the same model as, or an improved or advanced
version of the Engine it replaces (provided,
in the case of an improved or advanced
version, it can be installed and operated on
the Airframe without modification of the
Airframe or the engine, whether or not the
other installed Engine is also such an
improved or advanced version), which has
attached to it a current "serviceable tag"
issued by the manufacturer or supplier
indicating that the engine is new,
serviceable or overhauled, and the Lessee
shall retain all such tags;
(ii) in the case of a part, it is in as good
operating condition, is of the same
interchangeable modification status as the
replaced Part and has attached to it a
current "serviceable tag" issued by the
manufacturer or supplier indicating that the
part is new, serviceable or overhauled, and
the Lessee shall retain all such tags;
(iii) in the case of a part, it has become and
remains the property of the Lessor free from
Security Interests and on installation on the
Aircraft will, without further act, be
subject to this Agreement and to the Security
Interest created by the Mortgage, in which
case title to the removed part shall
automatically become vested in Lessee without
further action or warranty on the part of
Lessor except that such Part shall be free of
Lessor Liens; and
(iv) in each case, the Lessee has full details as
to its source and maintenance records.
(b) If no Event of Default has occurred which is
continuing, the Lessee will be entitled to install
any engine or part on the Aircraft by way of
replacement notwithstanding Clause 8.13(a) if:
(i) there is not available to Lessee at the time
and in the place that engine or part is
required to be installed on the Aircraft a
replacement engine or part complying with the
requirements of Clause 8.13(a);
(ii) it would result in an unreasonable disruption
of the operation of the Aircraft or the
business of Lessee to ground the Aircraft
until an<PAGE> engine or part complying with
Clause 8.13(a) becomes available for
installation on the Aircraft; and
(iii) as soon as practicable after installation of
the same on the Aircraft but, in any event,
no later than the earlier of (1) 90 days
after such installation and (2) the Expiry
Date, the Lessee removes any such engine or
part and replaces it with the Engine or Part
replaced by it or by an engine or part
complying with Clause 8.13(a).
(c) If no Default has occurred which is continuing,
the Lessee will be entitled to install Lessee
Installed Parts on the Airframe by way of
replacement notwithstanding Clause 8.13(a)(iii) so
long as:
(i) the terms of any lease, conditional sale
agreement or security agreement, as the case
may be, covering such Lessee Installed Part
will not have the effect of prejudicing the
title and interest of the Lessor in and to
the Aircraft (including its Engines and
Parts) or the interest of Mortgagee in
respect thereof under the Mortgage;
(ii) the secured party, lessor or conditional
vendor, as the case may be, of such Lessee
Installed Part has confirmed and acknowledged
in writing (which confirmation and
acknowledgment may be contained in the lease,
conditional sale agreement or security
agreement covering such Lessee Installed
Part) to the Lessor and Mortgagee that it
will recognize the respective rights, title
and interest of the Lessor and Mortgagee in
and to the Aircraft (including its Engines
and Parts) and that it will not seek to
exercise any rights whatever in relation
thereto; and
(iii) before the Expiry Date the Lessee removes any
such Lessee Installed Part and replaces it
with the Part replaced by it or by another
part, in either case complying with
Clause 8.13(a).
(d) Lessor agrees, for the benefit of Lessee and any
mortgagee or holder of any other Security Interest
in any engine (other than an Engine) or Lessee
Installed Part owned by the Lessee, any lessor of
any engine (other than an Engine leased to the
Lessee) or Lessee Installed Part and any
conditional vendor of any engine (other than an
Engine purchased by the Lessee subject to a
conditional sale agreement or any other security
agreement) or Lessee Installed Part, that no
right, title to or interest in any such engine or
Lessee Installed Part shall be exercised or
asserted by the Lessor and the Lessor acknowledges
and confirms that it will not acquire any right,
title or interest<PAGE> to or in any such engine
or Lessee Installed Part as a result of its
installation on the Airframe.
8.14 NON-INSTALLED ENGINES AND PARTS
(a) The Lessee shall ensure that any Engine or Part
which is not installed on the Airframe (or any
other airframe as permitted by this Agreement) is,
except as expressly permitted by this Agreement,
properly and safely stored and kept free from
Security Interests (other than Permitted Liens),
with insurance thereon complying with the
requirements of this Agreement.
(b) Notwithstanding Clause 8.14(a), the Lessee shall
be permitted, if no Default has occurred and is
continuing, to install any Engine on an airframe
and any Part on an airframe or engine:
(i) owned and operated by the Lessee free from
Security Interests, other than Permitted
Liens;
(ii) leased or hired to the Lessee pursuant to a
lease or conditional sale agreement on a
long-term basis and on terms whereby the
Lessee has full operational control of that
aircraft or engine; or
(iii) acquired or financed by the Lessee and
operated by the Lessee on terms that
ownership of that aircraft or engine, as the
case may be, pursuant to a lease, conditional
sale agreement or Security Interest is vested
in or held by any other Person;
provided that in the case of (ii) and (iii):
(1) the terms of any such lease, conditional sale
agreement or Security Interest will not have
the effect of prejudicing the title and
interest of the Lessor in and to that Engine
or Part or the interest of Mortgagee in
respect thereof under the Mortgage; and
(2) the lessor under such lease, the seller under
such conditional sale agreement or the
secured party of such Security Interest, as
the case may be, has confirmed and
acknowledged in writing (which such
confirmation and acknowledgment may be
contained in the lease, conditional sale
agreement or document creating the Security
Interest covering that Engine or Part) to the
Lessor and Mortgagee, in form and substance
satisfactory to the Lessor, that it will
recognize the respective rights, title and
interest of the Lessor and Mortgagee to
and<PAGE> in that Engine or Part and that it
will not seek to exercise any rights whatever
in relation thereto.
8.15 POOLING OF ENGINES AND PARTS
The Lessee will not enter into nor permit any pooling
agreement or arrangement in respect of an Engine or
Part without the prior written consent of the Lessor
and Mortgagee, such consent not to be unreasonably
withheld in any case where an Engine or Part is leased,
let on hire or otherwise made available by the Lessee
(on terms conferring no more than a contractual right
in personam against the Lessee and not a right in rem
against such Engine or Part) pursuant to a pooling
agreement to which the Lessee is a party and:
(a) the other parties to which are reputable, solvent
commercial air carriers or the manufacturers or
suppliers of the Engine or Part (or other
reputable, solvent organizations whose business
includes the administration of and participation
in such pooling agreements or arrangements); and
(b) which does not contemplate the transfer of title
to the pooled Engine or Part; and
(c) either provides that Lessor (or Mortgagee, as the
case may be) will be sole loss payee in respect of
any loss or damage to the Engine or Part, or
provides for Lessor to acquire title to a
substitute engine or part satisfying the
conditions set out in Clause 8.13(a) if the Engine
or Part is destroyed.
8.16 EQUIPMENT CHANGES
(a) The Lessee will not make any modification or
addition to the Aircraft (each an "Equipment
Change"), except for an Equipment Change that:
(i) is expressly permitted by any other provision
of this Agreement, or
(ii) has the prior written approval of the Lessor
and Mortgagee (which approval shall not be
unreasonably withheld provided the proposed
Equipment Change will not, in the reasonable
opinion of the Lessor and Mortgagee, diminish
the value, utility, condition or
airworthiness of the Aircraft), except for
painting or minor cabin interior
modifications not affecting the structure of
the Airframe, any or all of which may be made
without such prior approval.
<PAGE>
(b) So long as no Event of Default has occurred and is
continuing, the 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.
8.17 TITLE TO ENGINES AND PARTS
(a) Title to any engine installed on the Aircraft,
whether by way of replacement as the result of an
Equipment Change or otherwise (except as provided
for replacement engines pursuant to Clause 11.2
below) will not vest in Lessor.
(b) Title to all Parts installed on the Aircraft,
whether by way of replacement as the result of an
Equipment Change or otherwise (except those
installed pursuant to Clause 8.13(b) or Clause
8.15) will on installation, without further act,
vest in the Lessor subject to this Agreement free
and clear of all Security Interests other than the
Mortgage. The Lessee will at its own expense take
all such steps and execute, and procure the
execution of, all such instruments that are
necessary to ensure that title so passes to the
Lessor and is subject to the Security Interest
created by the Mortgage according to all
Applicable Laws. At any time when requested by
the Lessor, the Lessee will provide evidence to
the Lessor's reasonable satisfaction (including
the provision, if required, to the Lessor of one
of more legal opinions) that title has so passed
to the Lessor and is subject to the Security
Interest created by the Mortgage.
(c) The Lessor may require the Lessee to remove any
Equipment Change other than an Equipment Change
permitted under Clause 8.16(a), and to restore the
Aircraft to its condition prior to that Equipment
Change.
(d) Any Engine at any time removed from the Aircraft
will remain the property of the Lessor until, in
the event of an Engine Loss, a replacement has
been made in accordance with Clause 11.2 and title
to that replacement has passed, according to
Applicable Laws and pursuant to Clause 11.2, to
the Lessor subject to this Agreement free of all
Security Interests, whereupon title to the removed
Engine will, provided no Default has occurred and
is continuing, pass to the Lessee free of Lessor
Liens. Except as referred to in Clause 8.16(b),
any Part at any time removed from the Aircraft
will remain the property of the Lessor until a
replacement has been made in accordance with this
Agreement and until title to that replacement has
passed, according to Clause 8.17(b) and Applicable
Laws, to the Lessor subject to this Agreement free
of all Security Interests, whereupon title to the
removed Part will, provided no Default has
occurred and is continuing, pass to the Lessee
free of Lessor Liens.
<PAGE>
8.18 THIRD PARTIES
The Lessee shall procure that no Person having
possession of the Aircraft during the Term will act in
any manner inconsistent with the Lessee's obligations
under this Agreement and that all such Persons shall
comply with those obligations as if references to
"Lessee" included a separate reference to those
Persons.
8.19 NON-DISCRIMINATION
(a) Lessee shall not discriminate against the Aircraft
in its use, maintenance or operation of the
Aircraft compared to other similar Aircraft owned
or operated by Lessee, and Lessee shall service,
repair, maintain and overhaul the Aircraft so as
to keep the Aircraft maintained in the same manner
and with the same care as used by Lessee with
similar aircraft owned or operated by Lessee.
(b) Subject to a sublease permitted pursuant to Clause
8.5, Lessee shall continue to use the Aircraft in
its regular commercial passenger operations until
delivery to the Return Location immediately prior
to the Final Inspection.
(c) Lessee further agrees that normal progressive
maintenance will continue to be performed on the
Aircraft throughout the Term, and no unusual
maintenance procedures or cessation of maintenance
shall occur during the one year period prior to
the Expiry Date.
9. INSURANCE
9.1 INSURANCES
The Lessee will maintain in full force and effect
during the Term insurances in respect of the Aircraft
in accordance with this Clause 9 and Schedule 5 (the
"Insurances") through such brokers and with such
insurers and having such deductibles and being subject
to such exclusions as are usual and customary in the
worldwide aviation insurance marketplace for major
international air carriers operating similar equipment
who are similarly situated with Lessee. The Insurances
will be effected either:
(a) on a direct basis with insurers of recognized
standing who normally participate in aviation
insurances in the leading international insurance
markets and led by reputable underwriters approved
by Lessor and the Mortgagee, or
(b) with a single insurer or group of insurers
approved by Lessor and the Mortgagee who does not
retain the risk, but effects substantial
reinsurance in<PAGE> the leading international
insurance markets and through brokers of
recognized standing and acceptable to Lessor and
the Mortgagee for a percentage acceptable to the
Lessor and the Mortgagee of all risks insured,
and Lessor acknowledges and confirms that the current
deductibles and exclusions, together with the existing
brokers and insurers, in respect of the insurances
maintained by Lessee on the date of this Agreement are
acceptable to it and Mortgagee.
9.2 REQUIREMENTS
The Lessor's current requirements as to Insurances are
as specified in this Clause 9 and in Part 1 of Schedule
5. Except for the amount of the Agreed Value, the
Minimum Liability Coverage and the deductible under
Lessee's hull and war risk insurance policies, the
Lessor may from time to time stipulate such other
requirements for the Insurances as the Lessor
reasonably considers necessary to ensure that the scope
and level of cover is maintained in accordance with the
then prevailing industry practice in relation to
aircraft of the same type as the Aircraft and in
relation to operators of similar standing to the
Lessee. In the event that it proposes any such
stipulation, Lessor shall notify the Lessee accordingly
and the Lessor and/or its brokers will then consult in
good faith with the Lessee and the Lessee's approved
independent insurance brokers with regard to such
proposed stipulation. If, following the consultation,
the Lessee's independent insurance brokers confirm that
the proposed stipulation is in accordance with
prevailing industry practice for airlines similarly
situated to Lessee, then Lessee shall comply with the
proposed requirements at the time of its next renewal
of Insurances.
9.3 INSURANCE COVENANTS
The Lessee shall:
(a) ensure that all legal requirements as to insurance
of the Aircraft, any Engine or any Part that may
from time to time be imposed by the laws of the
State of Registration or any jurisdiction to, from
or over which the Aircraft may be flown, in so far
as they affect or concern the operation of the
Aircraft, are complied with and, in particular,
those requirements compliance with which is
necessary to ensure that:
(i) the Aircraft does not become subject to
detention or forfeiture;
(ii) the Insurances remain valid and in full force
and effect; and
<PAGE>
(iii) the interests of the Indemnitees in the
Insurances and the Aircraft or any Part are
not thereby prejudiced;
(b) not use, cause or permit the Aircraft, any Engine
or any Part to be used for any purpose or in any
manner not covered by the Insurances or outside
any geographical limit imposed by the Insurances;
(c) comply with the terms and conditions of each
policy of the Insurances and not do, consent or
agree to any act or omission that:
(i) invalidates or may reasonably be expected to
invalidate the Insurances;
(ii) renders or may reasonably be expected to
render void or voidable the whole or any part
of any of the Insurances; or
(iii) brings any particular liability within the
scope of an exclusion or exception to the
Insurances;
(d) not take out without the prior written approval of
the Lessor any insurance in respect of the
Aircraft other than those of the type required
under this Agreement unless relating solely to
hull total loss, business interruption, engine
break-down, profit commission and deductible risk
or which would otherwise have no adverse impact on
the Insurances required to be carried by Lessee
under this Agreement;
(e) commence renewal procedures at least 30 days prior
to the expiration of any of the Insurances and
provide to the Lessor and Mortgagee:
(i) if requested by the Lessor, a written status
report of renewal negotiations 14 days prior
to each expiration date;
(ii) telefaxed confirmation of completion of
renewal prior to each expiration date; and
(iii) a certificate of insurance and broker's
letter of undertaking substantially in the
form set out in Parts 2 and 3 of Schedule 5,
detailing the coverage and confirming the
insurers' agreement to the specified
insurance requirements of this Agreement
within seven days after each renewal date;
(f) provide to the Lessor and Mortgagee copies of
those documents evidencing the Insurances which
the Lessor and Mortgagee may reasonably request;
<PAGE>
(g) on request, provide to the Lessor and Mortgagee
evidence that the Insurance premiums have been
paid;
(h) not make any modification or alteration to the
Insurances material and adverse to the interests
of any of the Indemnitees;
(i) be responsible for any deductible under the
Insurances; and
(j) provide any other insurance related information,
or assistance, in respect of the Insurances as the
Lessor may reasonably request.
9.4 FAILURE TO INSURE
If the Lessee fails to maintain the Insurances in
compliance with this Agreement, each of the Indemnitees
will be entitled but not obligated (without prejudice
to any other rights of the Lessor under this
Agreement):
(a) to pay the premiums due or to effect and maintain
insurances satisfactory to it or otherwise remedy
the Lessee's failure in such manner (including to
effect and maintain an "owner's interest" policy)
as it considers appropriate, and any sums so
expended by it will become immediately due and
payable by the Lessee to the Lessor on demand
(such demand being made as soon as reasonably
practicable following the incurring of such
expenditure), together with interest thereon at
the Default Rate from the date of expenditure by
it up to the date of reimbursement by the Lessee
(before and after any judgment); 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
reasonable satisfaction.
9.5 CONTINUING INDEMNITY
(a) Lessor may require Lessee to effect and to
maintain insurance after the Expiry Date with
respect to its liability under the indemnities in
Clause 10 for such period as the Lessor may
reasonably require (but in any event not more than
three years) providing for each Indemnitee to be
named as additional insured.
(b) Lessee's obligation under this Clause 9.5 shall
not be affected by the Lessee ceasing to be lessee
of the Aircraft or any of the Indemnitees ceasing
to have any interest in respect of the Aircraft,
and upon a Transfer pursuant to Clause<PAGE> 14.2
Lessee shall continue to name the Indemnitees as
additional insureds under the Insurance policies
covered by Clause 1(d) of Schedule 5 for three
years after the Transfer date.
9.6 APPLICATION OF INSURANCE PROCEEDS
As between Lessor and Lessee:
(a) All insurance payments, up to the Agreed Value,
received as the result of a Total Loss occurring
during the Term will be paid to Mortgagee.
(b) All insurance proceeds in respect of any damage or
loss to the Aircraft, any Engine or any Part
occurring during the Term not constituting a Total
Loss and involving insurance proceeds in excess of
the Damage Notification Threshold will be paid to
Mortgagee and applied in payment (or to reimburse
Lessee) for repairs or replacement property upon
Lessor and Mortgagee being reasonably satisfied
that the repairs or replacement have been effected
in accordance with this Agreement. Insurance
proceeds in amounts less than the Damage
Notification Threshold may be paid by the insurer
directly to the Lessee. Any balance remaining may
be retained by the Lessee.
(c) All insurance proceeds in respect of third party
liability will be paid to the relevant third
party.
(d) Notwithstanding Clauses 9.6(a) and (b), 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 Mortgagee
to be applied toward payment of any amounts that
may be or become payable by the Lessee in such
order as the Lessor and Mortgagee see fit or as
the Lessor and Mortgagee may elect. In the event
that the Lessee remedies any such Default to the
reasonable satisfaction of Lessor, then Lessor
shall procure that all such insurance proceeds
then held by Mortgagee in excess of the amounts
(if any) applied by Lessor in accordance with this
sub-clause (d) shall be paid promptly to Lessee.
<PAGE>
10. INDEMNITY
10.1 GENERAL
The Lessee shall defend, indemnify and hold harmless
the Indemnitees from and against any and all claims,
proceedings, losses, liabilities, suits, judgments,
costs, expenses, penalties or fines (each a "Claim")
regardless of when the same is made or incurred,
whether during or after the Term (but not before):
(a) that may at any time be suffered or incurred
directly or indirectly as a result of or connected
with possession, delivery, performance,
management, registration, control, maintenance,
condition, service, repair, overhaul, leasing,
subleasing, use, operation or return of the
Aircraft, any Engine or Part (either in the air or
on the ground) whether or not the Claim may be
attributable to any defect in the Aircraft, any
Engine or any Part or to its design, testing, use
or otherwise, and regardless of when the same
arises or whether it arises out of or is
attributable to any act or omission, negligent or
otherwise, of any Indemnitee;
(b) that arise out of any act or omission that
invalidates or that renders voidable any of the
Insurances;
(c) that 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,
but excluding any Claim to the extent that:
(1) it arises directly as a result of the wilful
misconduct or gross negligence of an
Indemnitee;
(2) it arises directly as a result of a breach by
an Indemnitee of its express obligations
under any Operative Document or as a result
of a representation or warranty given by an
Indemnitee in any Operative Document not
being true and correct at the date when, or
when deemed to have been, given or made;
(3) it constitutes or is attributable to a
Non-Indemnified Tax or Lessor Lien;
<PAGE>
(4) it represents or is attributable to a Tax or
loss of tax benefits (the Lessee's
liabilities for which, to the extent thereof,
are set out in Clauses 5.7, 5.8 and 5.10);
(5) it constitutes or is attributable to a cost
or expense that is required to be borne by
the Lessor in accordance with another
provision of this Agreement;
(6) it results from any disposition of all or any
part of an Indemnitee's rights, title or
interest in or to the Aircraft or under any
Operative Document, unless such disposition
occurs as a consequence of an Event of
Default;
(7) it is attributable to an event occurring
after the Term unless the Claim results from
or arises out of an act or omission by the
Lessee, or any circumstance existing, during
the Term; or
(8) it is brought after the Term and relates to a
claimed patent infringement by the
Manufacturer occurring during the Term.
<PAGE>
10.2 MITIGATION
(a) The Lessor agrees that it shall, as soon as
reasonably practicable after it becomes aware of
any circumstances that would, or would reasonably
be expected to, become the subject of a claim for
indemnification pursuant to Clause 10.1, notify
the Lessee in writing accordingly. Lessor (and
any other Indemnitee seeking indemnification, as
the case may be) and Lessee shall then consult
with one another in good faith in order to
determine what action (if any) may reasonably be
taken to avoid or mitigate such Claim. The Lessee
shall have the right to take all reasonable action
(on behalf and, if necessary, in the name of the
Lessor or such other Indemnitee) in order to
resist, defend or settle (provided such settlement
is accompanied by payment) any claims by third
parties giving rise to such Claim, provided always
that the Lessee shall not be entitled to take any
such action unless adequate provision, reasonably
satisfactory to the Lessor and such other
Indemnitee, shall have been made in respect of the
third party claim and the costs thereof. The
Lessee or, if the Claim is covered by Lessee's
Insurances, the Lessee's insurers shall be
entitled to select any counsel to represent it or
them, the Lessor and such other Indemnitee in
connection with any such action, subject in the
case of Lessee to the approval of the Lessor and
such other Indemnitee (such approval not to be
unreasonably withheld) and any action taken by the
Lessee shall be on a full indemnity basis in
respect of the Lessor and such other Indemnitee.
(b) Any sums paid by the Lessee to the Lessor or any
Indemnitee in respect of any Claim pursuant to
Clause 10.1 shall be paid subject to the condition
that, in the event that the Lessor or such
Indemnitee is subsequently reimbursed in respect
of that Claim by any other Person, the Lessor or
such Indemnitee shall, provided no Default shall
have occurred and be continuing, promptly pay to
the Lessee an amount equal to the sum paid to it
by the Lessee, including any interest on such
amount to the extent attributable thereto and
received by the Lessor or such Indemnitee, less
any Tax payable by the Lessor or such Indemnitee
in respect of such reimbursement (net of any tax
benefit derived from the Claim or the
reimbursement of Lessee by Lessor).
10.3 DURATION
The indemnities contained in this Agreement will
survive and continue in full force after the Expiry
Date.
<PAGE>
11. EVENTS OF LOSS
11.1 TOTAL LOSS
(a) PRE-DELIVERY AIRFRAME LOSS: If a Total 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 except that the Lessor will rebate to
the Lessee the Security Deposit (if theretofore
paid pursuant to Clause 5.1) or, as the case may
be, return the Letter of Credit to the Lessee.
(b) POST-DELIVERY AIRFRAME LOSS: If a Total Loss
occurs after Delivery, the Lessee will pay the
Agreed Value to Mortgagee on the earlier of
(i) the date of receipt of the insurance proceeds
payable as a result of the Total Loss, or (ii) the
60th day after the Total Loss Date (the
"Settlement Date"), unless the Aircraft is
restored to the Lessor or the Lessee within that
period (or, in the case of a Total Loss coming
within paragraph (c) of the definition of Total
Loss and involving the loss of the Lessor's title
to the Aircraft, if both the Aircraft and the
Lessor's title thereto are restored to Lessor or,
in the case of the Aircraft, to Lessee and
Mortgagee's rights under the Mortgage are fully
restored). The receipt by Mortgagee of the
insurance proceeds in respect of the Total Loss on
or prior to the Settlement Date shall discharge
the Lessee from its obligation to pay the Agreed
Value to the Lessor pursuant to this
Clause 11.1(b), provided such proceeds are not
less than the Agreed Value. In the event that the
insurance proceeds are paid initially to the
Lessee and not to Mortgagee, they may be retained
by the Lessee if the Lessee shall have paid the
Agreed Value to Mortgagee, otherwise the Lessee
shall pay the Agreed Value to Mortgagee not later
than the next Business Day following receipt by
the Lessee of such proceeds. In the event that
the Lessee pays the Agreed Value to the Lessor or
Mortgagee in accordance with this Clause 11.1(b),
the Lessor shall promptly assign to the Lessee its
rights under the Insurances to receive the
insurance proceeds in respect of the Total Loss to
the extent that such proceeds shall not have been
paid to the Lessee. Subject to the rights of any
insurers or other third parties, upon irrevocable
payment in full to the Lessor or Mortgagee of that
amount and all other amounts that may be or become
payable to the Lessor under this Agreement, the
Lessor shall:
(i) without recourse or warranty (except as to
the absence of Lessor Liens), and without
further act, be deemed to have transferred to
the Lessee all of the Lessor's rights to any
Engines or Parts not installed when the Total
Loss occurred, all on an "as-is where is"
basis, and<PAGE> shall, at the Lessee's
expense, execute and deliver such bills of
sale and other documents and instruments as
the Lessee may reasonably request to evidence
(on the public record or otherwise) the
transfer and the vesting of the Lessor's
rights in such Engines and Parts in the
Lessee, free and clear of all rights of the
Lessor and any Lessor Liens; and
(ii) pay to Lessee, as a rebate of prepaid Basic
Rent, and amount equal to the product of (1)
one month's Basic Rent multiplied by (2) a
fraction the numerator of which is the number
of days remaining in the then current Rental
Period and the denominator of which is the
number of days in the then current Rental
Period.
11.2 ENGINE LOSS
Upon the occurrence of an Engine Loss (including, for
the avoidance of doubt, at a time when the Engine is
not installed on the Airframe) in circumstances in
which there has not also occurred a Total Loss, the
Lessee shall give the Lessor and Mortgagee written
notice promptly upon becoming aware of the same and
shall (unless the Lessor has received the insurance
proceeds relating to such Engine Loss), within 60 days
after the Engine Loss Date, convey or cause to be
conveyed to the Lessor, as replacement for such Engine,
title to a replacement engine that is in the same or
better operating condition, has the same or greater
value and utility as the lost Engine and that complies
with the conditions set out in Clause 8.13(a). The
Lessee will at its own expense take all such steps and
execute, and procure the execution of, a full warranty
bill of sale covering such replacement engine, a
supplement to this Agreement adding such replacement
engine to the Leased Property and all such other
agreements and instruments that are necessary to ensure
that title to such Engine passes to the Lessor and is
subject to the Security Interest created by the
Mortgage and such replacement engine becomes an
"Engine", all according to Applicable Laws. At any
time when requested by the Lessor, the Lessee will
provide evidence to the Lessor's reasonable
satisfaction (including the provision, if required, to
the Lessor of one of more legal opinions) that title
has so passed to the Lessor and is subject to the
Security Interest created by the Mortgage. Upon
compliance with the foregoing title transfer
provisions, the leasing of the replaced Engine the
subject of the Engine Loss shall cease and title to
such replaced Engine shall (subject to any salvage
rights of insurers) vest in the Lessee free of Lessor
Liens. If the Lessor or Mortgagee subsequently
receives any insurance proceeds relating to such Engine
Loss, the Lessor shall promptly remit such proceeds or
cause such proceeds to be remitted to the Lessee. No
Engine Loss with respect to any Engine that is replaced
in accordance with the provisions of this Clause 11.2
shall result in any increase or decrease in Basic Rent,
Additional Rent or the Agreed Value.
<PAGE>
11.3 REQUISITION
During any requisition for use or hire of the Aircraft,
any Engine or Part that does not constitute a Total
Loss:
(a) the Basic Rent, Additional Rent and Supplemental
Rent payable under this Agreement will not be
suspended or abated either in whole or in part,
and the Lessee will not be released from any of
its other obligations under this Agreement (other
than operational obligations with which the Lessee
is unable to comply solely by virtue of the
requisition); and
(b) so long as no Default has occurred and is
continuing, the Lessee will be entitled to any
compensation payable by the requisitioning
authority in respect of the Term. The Lessee
will, as soon as practicable after the end of any
such requisition (with the Term being extended if
and to the extent that the period of requisition
continues beyond the Scheduled Expiry Date), cause
the Aircraft to be put into the condition required
by this Agreement. The 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 the
Lessor will apply such compensation in reimbursing
the Lessee for the cost of complying with its
obligations under this Agreement in respect of any
such change; provided, that, if any Default has
occurred and is continuing, the Lessor may apply
the compensation in or towards settlement of any
amounts owing by the Lessee under this Agreement.
All such sums shall be held by Mortgagee.
12. RETURN OF AIRCRAFT
12.1 REDELIVERY
On the Expiry Date or termination of the leasing of the
Aircraft under this Agreement, the Lessee shall, unless
a Total Loss has occurred, at its expense, redeliver
the Aircraft and Aircraft Documents to the Lessor at
the Redelivery Location in a condition complying with
this Clause 12 and Schedule 4, free and clear of all
Security Interests and Permitted Liens (other than
Lessor Liens).
12.2 FINAL CHECKS
Immediately prior to return of the Aircraft, Lessee
shall perform the following:
<PAGE>
(a) Lessee shall perform (or have performed by an
Agreed Maintenance Performer) a C-Check. At
return, the Airframe will have zero Flight Hours
since such C-Check, except for the acceptance
flights and the ferry flight to the Redelivery
Location. Lessee will also weigh the Aircraft.
Any discrepancies revealed during such inspection
will be corrected in accordance with
Manufacturer's maintenance and repair manuals or
FAA-approved data. Lessee shall also perform
during such check, to the extent it is able, any
other work reasonably required by Lessor (and not
otherwise required under this Agreement) so long
as such work does not prevent Lessee from
returning the Aircraft on the Expiry Date or
extend the time the Aircraft is in maintenance,
and Lessor shall reimburse Lessee for the Actual
Cost of such work at Lessee's preferred customer
rates (if the work is performed by Lessee) or at
the third party rates charged Lessee.
(b) Lessee shall perform (or have performed by an
Agreed Maintenance Performer) an internal and
external corrosion inspection in accordance with
the CPCP so that CPCP inspection items will be
free of requirements for a minimum of two years
after the Expiry Date, and any discrepancies will
be addressed in accordance with the
recommendations of the Manufacturer and the SRM.
In addition, all inspected areas will be properly
treated with corrosion inhibitor as recommended by
Manufacturer.
(c) If Lessee performed any structural inspections or
tasks on a sampling basis on aircraft similar to
the Aircraft but did not perform such inspections
on the Aircraft, such work shall also be performed
on the Aircraft.
(d) Lessor shall perform, at Lessor's expense, a
videotape borescope inspection of all accessible
gas path sections of each Engine (accessible
whether by borescope port or other means),
including the low pressure and high pressure
compressors and the turbine area of such Engine.
All items beyond the Engine Manufacturer's
maintenance manual limits will be rectified at
Lessee's sole cost and expense. No Engine will be
"on watch" for any reason requiring special or out
of sequence inspection.
(e) In accordance with the Engine Manufacturer's MPD,
Lessee shall perform a maximum power assurance run
and condition, acceleration and bleed valve
scheduling checks on each Engine. Lessee will
record and evaluate each Engine's performance,
with Lessor and/or its representatives entitled to
be present. Each Engine shall pass such tests
without operational limitations throughout the
operating envelope in accordance with the Engine
Manufacturer's maintenance manual.
<PAGE>
(f) Lessee shall perform a videotape borescope
inspection of the APU, and all items beyond the
manufacturer's recommended limits will be
rectified at Lessee's sole cost and expense.
(g) Lessee shall have removed and blended all external
and interior markings.
(h) If any historical and technical records, condition
trend monitoring data, power assurance runs or
borescope inspection indicate an abnormal
acceleration in the rate of performance
deterioration or oil consumption in any Engine or
the APU, Lessee shall correct such conditions
causing the accelerated rate of deterioration.
12.3 FINAL INSPECTION
(a) During the C-check prior to redelivery of the
Aircraft, the Lessee will make the Aircraft and
Aircraft Documents available to representatives of
Lessor and the Financing Parties for inspection
("Final Inspection") in order to verify that the
condition of the Aircraft complies with this
Agreement. The Final Inspection will be long
enough to permit the representatives of Lessor and
the Financing Parties to inspect, at their own
cost, the Aircraft Documents, the Aircraft and any
uninstalled Parts and Engines. The
representatives of Lessor and the Financing
Parties shall attend and conduct the Final
Inspection diligently and, without limiting their
right to conduct the full Final Inspection
permitted by this Agreement, will cooperate with
Lessee in order to complete the Final Inspection
as soon as reasonably practical.
(b) Lessor and the Financing Parties shall also be
entitled, as part of the Final Inspection, to
require Lessee to perform an acceptance flight of
up to two hours at Lessee's cost (with up to four
representatives of Lessor and the Financing
Parties on-board as observers) and such further
acceptance flights as may be necessary in the
event that the first or subsequent flights do not
confirm that the Aircraft complies with the
redelivery requirements of this Agreement.
(c) At the request of Lessor, Lessee shall perform
"bridging" maintenance procedures for the purpose
of standardizing the Aircraft to the maintenance
program of any subsequent operator of the
Aircraft; provided, that Lessor shall pay to
Lessee the Actual Cost of all "bridging"
procedures that are in excess of or not in lieu of
the "C" Check to be performed pursuant to
Clause 12.2 and Schedule 4.
12.4 NON-COMPLIANCE
<PAGE>
To the extent that, at the time of Final Inspection,
the condition of the Aircraft does not comply with this
Agreement, the Lessee shall immediately rectify the
non-compliance and, to the extent that the
non-compliance extends beyond the Expiry Date, the Term
will be automatically extended until the non-compliance
has been rectified. If, on any date more than 14 days
after the Expiry Date, the condition of the Aircraft
still does not comply with this Agreement, the Lessee
shall, at the option of the Lessor and Mortgagee
exercised by notice to Lessee, redeliver the Aircraft
to the Lessor and indemnify the Lessor, and provide
security reasonably acceptable to the Lessor and
Mortgagee for that indemnity, against the cost of
putting the Aircraft into the condition required by
this Agreement. During any extension of the Term
pursuant to this Clause 12.4, this Agreement will
remain in full force and effect, including the
obligation to pay Basic Rent (which Lessee shall pay on
a per diem basis weekly in advance); provided, however,
that Lessee shall not operate, or permit others to
operate, the Aircraft after the Expiry Date except for
acceptance flights pursuant to Clause 12.2 and a ferry
flight to the Redelivery Location.
12.5 EXPORT DOCUMENTATION
Upon redelivery and upon request by the Lessor, the
Lessee shall (a) provide to the Lessor all documents
necessary to export the Aircraft from the State of
Registration (including a valid and subsisting export
license for the Aircraft), and (b) provide any
documents reasonably requested by the Lessor in
connection with, and otherwise cooperate with, the
deregistration of the Aircraft by the Aviation
Authority, including causing the Aviation Authority to
issue an Export Certificate of Airworthiness to a
country specified by the Lessor.
12.6 ACKNOWLEDGMENT
Provided the Lessee has complied with its obligations
under this Agreement, upon redelivery of the Aircraft
by the Lessee to the Lessor at the Redelivery Location,
the Lessor will deliver simultaneously to the Lessee
the Certificate of Redelivery.
<PAGE>
12.7 MAINTENANCE PROGRAM
(a) During the 20 day period preceding the Scheduled
Expiry Date and upon the Lessor's request, the
Lessee will provide the Lessor or its agent
reasonable access to the Agreed Maintenance
Program and the Aircraft Documents in order to
facilitate the Aircraft's integration into any
subsequent operator's fleet. The Lessor agrees
that it will not disclose (and will not permit its
agents to disclose) the contents of the Agreed
Maintenance Program to any Person except to the
extent necessary to monitor the Lessee's
compliance with this Agreement and/or to bridge
the maintenance program for the Aircraft from the
Agreed Maintenance Program to another program
after the Expiry Date.
(b) Concurrent with providing the Aircraft Documents
for Lessor's review, Lessee shall provide to
Lessor a written summary of all sampling programs
involving or affecting the Aircraft.
12.8 STORAGE
If the Lessor so requests, and subject to the
availability of the requisite space, the Lessee shall
park and store the Aircraft at a secure storage area,
which may be at the Redelivery Location or at any other
suitable facility of the Lessee selected by the Lessee,
wherever located (the "Storage Location"), on behalf of
the Lessor for a period not exceeding 30 days from the
Expiry Date. During that period the Aircraft shall be
at the Lessor's risk (save as to any loss or damage
caused by the Lessee's wilful misconduct or gross
negligence), and the Lessee shall maintain and store
the Aircraft in accordance with the respective
manufacturer?s maintenance planning document and shall
insure the Aircraft in accordance with a "ground risk
only" policy usual and customary in the worldwide
aviation insurance marketplace. All storage,
maintenance and insurance costs (which shall be at
Lessee's preferred customer rates or at the actual
third-party rates charged to Lessee) shall be borne by
the Lessor.
13. DEFAULT
13.1 EVENTS
Each of the following events will constitute an Event
of Default and a repudiation of this Agreement by the
Lessee:
(a) NON-PAYMENT: Lessee (i) fails to pay the Agreed
Value and all other amounts required under Clause
11.1(b) on the Settlement Date, (ii) fails to make
any payment of Basic Rent or Additional Rent
within five Business Days after the date on which
such payment is due, or (iii) fails to pay any
other amount<PAGE> payable by it under this
Agreement within five Business Days after written
notice from Lessor or Mortgagee that such amounts
are due; or
(b) MATERIAL COVENANTS: Lessee (i) fails to maintain
in full force and effect any insurance required to
be maintained under Clause 9, or (ii) transfers
possession of the Airframe or any Engine to
another Person other than as permitted by this
Agreement; or
(c) BREACH: Lessee fails to comply with any other
provision of this Agreement and, if such failure
is, in the reasonable opinion of the Lessor,
capable of remedy, the failure continues for 30
days after notice from the Lessor to the Lessee,
provided, that if such failure cannot reasonably
be remedied within such 30 day period and the
Lessee is diligently undertaking all necessary
remedial action, the 30 day period shall be
extended for a further 30 days; or
(d) REPRESENTATION: any representation or warranty
made (or deemed to be repeated) by the Lessee in
this Agreement or in any document or certificate
furnished to the Lessor pursuant to or in
connection with this Agreement is or proves to
have been incorrect in any material respect when
made or deemed to be repeated and the Lessee's
ability to comply with its obligations under this
Agreement, and/or the Lessor's or Mortgagee's
rights, title and interest to and in the Aircraft
and/or under this Agreement, are thereby
materially and adversely affected; or
(e) CROSS DEFAULT:
(i) any Financial Indebtedness of the Lessee or
any of its Affiliates that exceeds $2,000,000
is not paid when due and any applicable grace
period shall have expired;
(ii) the security for any Financial Indebtedness
is enforced; or
(iii) any lease, conditional sale, installment sale
or forward purchase agreement of the Lessee
or any of its Affiliates in respect of an
aircraft is terminated as a consequence of an
event of default or termination event
(however described);
provided always, in any such case, it shall not
constitute an Event of Default under this
Agreement:
(1) if the relevant Financial Indebtedness
constitutes non-recourse borrowing or
financing; or
<PAGE>
(2) if the non-payment, acceleration, termination
or event in question is being contested by
the Lessee in good faith and on reasonable
grounds and any declaration of default,
termination of agreement or enforcement of
security has been stayed by a court of
competent jurisdiction; 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:
(i) any authorization required by the Lessee of,
or in connection with, the execution,
delivery, validity, enforceability or
admissibility in evidence of this Agreement
or the performance by the Lessee of its
obligations under this Agreement; or
(ii) any airline license, air transport license,
franchise, concession, permit, certificate,
right or privilege required by the Lessee for
the conduct of its business,
is modified, withheld, revoked, suspended,
canceled, withdrawn, terminated or not renewed, or
otherwise ceases to be in full force and is not
reissued, reinstated or renewed within 30 days,
provided however that any such modification,
withholding, revocation, suspension, cancellation,
withdrawal, termination or non-renewal shall only
constitute an Event of Default if it has a
material adverse effect on the Lessee's ability to
perform its obligations under the Operative
Documents or on the Lessor's rights, title and
interest to and in the Aircraft or under this
Agreement; or
(g) INSOLVENCY:
(i) the Lessee or any of its Affiliates 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) the Lessee or any of its Affiliates 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 AND SIMILAR PROCEEDINGS
<PAGE>
(i) Lessee shall consent to the appointment of a
receiver, trustee or liquidator for itself or
for a substantial part of its property; or
(ii) Lessee shall admit in writing its inability
to pay its debts generally as they become
due, or Lessee shall make a general
assignment for the benefit of creditors; or
(iii) Lessee shall file a voluntary petition in
bankruptcy or a voluntary petition or answer
seeking reorganization in a proceeding under
11 U.S.C. Sections 101 et seq. or under any other
laws dealing with bankruptcy, insolvency,
moratorium or creditors' rights generally
(any or all of which are hereinafter referred
to as "Bankruptcy Laws"), or an answer
admitting the material allegations of a
petition filed against Lessee in any such
proceeding, or Lessee shall by voluntary
petition or answer consent to or fail to
oppose the seeking of relief under the
provisions of any Bankruptcy Laws; or
(iv) any order, judgment or decree is entered by a
court of competent jurisdiction appointing a
receiver, trustee or liquidator of Lessee or
a substantial part of its property, or
ordering a substantial part of Lessee's
property to be sequestered, is instituted or
done with the consent of Lessee or, if
instituted by another Person, the order,
judgment or decree is not dismissed,
remedied or relinquished within 60 days; or
(v) a petition against Lessee in a proceeding
under any Bankruptcy Laws shall be filed and
shall not be withdrawn or dismissed within 60
days thereafter, or if, under the provisions
of any Bankruptcy Laws that may apply to
Lessee, any court of competent jurisdiction
shall assume jurisdiction, custody or control
of Lessee or of any substantial part of its
property; or
(vi) any step (including petition, proposal or
convening a meeting) is taken with a view to
a composition, assignment or arrangement with
any creditors of, or the reorganization,
rehabilitation, administration, liquidation,
or dissolution of, the Lessee or any of its
Affiliates or any other insolvency
proceedings involving the Lessee or any of
its Affiliates; or
(i) OTHER JURISDICTION: there occurs in relation to
the Lessee any event anywhere which, in the
reasonable opinion of the Lessor, corresponds with
any of those mentioned in Clause 13.1(h); or
<PAGE>
(j) UNLAWFUL: it becomes unlawful for the Lessee to
perform any of its material obligations under this
Agreement or this Agreement becomes wholly or
partly invalid or unenforceable, provided that any
such partial invalidity or unenforceability shall
only constitute an Event of Default if it has a
material adverse effect on the Lessee's ability to
perform its obligations under this Agreement or
the Lessor's rights, title and interest in and to
the Aircraft or under this Agreement; or
(k) SUSPENSION OF BUSINESS: the Lessee suspends or
ceases to carry on all or a substantial part of
its business; or
(l) DISPOSAL: the Lessee disposes or threatens to
dispose of all or a material part of its assets,
whether by one or a series of transactions,
related or not, other than pursuant to a merger or
consolidation as referred to in, and subject to,
Clause 8.8(b) or for the purpose of any other
reorganization or amalgamation the terms of which
have received the previous consent in writing of
the Lessor; or
(m) RIGHTS: the existence, validity, enforceability
or priority of the rights of the Lessor as owner
and lessor in respect of the Aircraft or the
rights of Mortgagee as mortgagee of the Aircraft
and assignee of this Agreement are challenged by
the Lessee or any other Person claiming by or
through the Lessee and, in the case of a Person
other than Lessee, such claim presents a material
risk of loss or forfeiture of the rights of Lessor
or Mortgagee with respect to the Aircraft; or
(n) DELIVERY: the Lessee fails to accept delivery of
the Aircraft when validly tendered pursuant to
this Agreement by the Lessor (provided that the
Lessor shall have satisfied the conditions
precedent set out in Clause 3.4); or
(o) ADVERSE CHANGE: any event or series of events
occurs which, in the reasonable opinion of the
Lessor, could be expected to have a material
adverse effect on the financial condition or
operations of the Lessee and its Affiliates or on
the ability of the Lessee to comply with its
obligations under this Agreement; or
(p) LETTER OF CREDIT: if the Lessee has elected to
deliver the Letter of Credit in lieu of the
Security Deposit pursuant to Clause 5.1(b), the
Letter of Credit ceases for any reason to be in
full force and effect or is not renewed or
replaced 30 days before its expiration in
accordance with Clause 5.1(b) and the Lessee does
not immediately provide the Lessor with cash in an
amount equal to the Security Deposit.
<PAGE>
13.2 RIGHTS
If an Event of Default occurs, and for as long as it
shall continue, the Lessor may at its option (and
without prejudice to any of its other rights under this
Agreement or that may arise by operation of Applicable
Law), at any time thereafter:
(a) treat such event as a repudiation by the Lessee of
its obligations under this Agreement and by notice
to the Lessee with immediate effect terminate the
leasing of the Aircraft (but without prejudice to
the continuing obligations of the Lessee under
this Agreement), whereupon all rights of the
Lessee under this Agreement shall cease; and/or
(b) proceed by appropriate court action or actions to
enforce performance of this Agreement or to
recover damages for the breach of this Agreement;
and/or
(c) either:
(i) take possession of the Aircraft, for which
purpose the Lessor may enter any premises
belonging to, occupied by or under the
control of the Lessee (for which purpose the
Lessee hereby grants to the Lessor an
irrevocable license to the extent permitted
by Applicable Law) where the Aircraft may be
located, or cause the Aircraft to be
redelivered to the Lessor at the Redelivery
Location (or such other location as the
Lessor may require), and the Lessor is hereby
irrevocably authorized and empowered, to the
extent permitted by Applicable Law, to
direct pilots of the Lessee or other pilots
to fly the Aircraft to that airport and will
have all the powers and authorizations
necessary for taking such action; or
(ii) by serving notice, require Lessee to
redeliver the Aircraft to Lessor at the
Redelivery Location (or such other location
as Lessor may require) in the condition
required by Clause 12 and Schedule 4.
13.3 EXPORT
If an Event of Default occurs, and for as long as it
shall continue, the Lessor may sell or otherwise deal
with the Aircraft as if this Agreement had never been
made and the Lessee will, at the request of the Lessor,
take all steps necessary to deregister the Aircraft
from the aircraft registry of the State of Registration
(if other than the United States of America) and export
the Aircraft from the country where the Aircraft is for
the time being registered or situated and any other
steps necessary to enable the Aircraft to be
redelivered to the Lessor in accordance with this
Agreement. The<PAGE> Lessee hereby irrevocably and by
way of security for its obligations under this
Agreement authorizes and empowers the Lessor as its
attorney-in-fact and agent (such agency being coupled
with an interest), in Lessor's own name or in the name
of Lessee, to execute and deliver any documentation and
to do any act or thing required in connection with the
foregoing.
13.4 DEFAULT PAYMENTS
If a Default occurs, the Lessee will indemnify and pay
to Lessor on demand against any loss, damage, expense,
cost or liability which the Lessor may sustain or incur
directly or indirectly as a result, including:
(a) all unpaid Basic Rent, Additional Rent and
Supplemental Rent then due and unpaid;
(b) any loss of profit (calculated on an after-tax
basis) suffered by the Lessor because of the
Lessor's inability to place the Aircraft on lease
with another Lessee on terms as favorable to the
Lessor as this Agreement or because whatever use,
if any, to which the Lessor is able to put the
Aircraft upon its return to the Lessor, is not as
profitable (calculated on an after-tax basis) to
the Lessor as this Agreement would have been but
for such Default or non-delivery;
(c) in the event that the Aircraft is sold prior to
Lessor entering into a replacement lease, the
amount (if any) by which (i) the aggregate of (1)
the net sale proceeds (calculated by deducting the
costs of sale together with the cost of preparing
the Aircraft for sale and the repayment of any
outstanding indebtedness in relation to the
financing of the Aircraft) plus (2) the present
value of the anticipated after-tax net income to
be derived from such net sale proceeds up to the
Scheduled Expiry Date, discounted on a monthly
basis using 9.5% per annum as the discount rate,
are less than (ii) the aggregate of (1) the
present value of the anticipated net sale proceeds
(computed on the same basis as the net sale
proceeds referred to in (i)(1) above), assuming
that the Aircraft would have been sold as soon as
reasonably practicable following the Scheduled
Expiry Date plus (2) the present value of the
income that would have been derived from the
future Basic Rent payable until the Scheduled
Expiry Date, discounted on a monthly basis using
9.5% per annum as the discount rate;
(d) any amount of principal, interest, fees or other
sums whatsoever paid or payable on account of
funds borrowed in order to carry any amount unpaid
by the Lessee;
<PAGE>
(e) any loss, premium, penalty or expense that may be
incurred in repaying funds raised to finance the
Aircraft or in unwinding any swap, forward
interest rate agreement or other financial
instrument relating in whole or in part to the
Lessor's financing of the Aircraft; and
(f) any loss, cost, expense or liability sustained or
incurred by the Lessor owing to the Lessee's
failure to redeliver the Aircraft on the date, at
the place and in the condition required by this
Agreement.
For the avoidance of doubt, the provisions of Clause
5.7(a) will apply to any sums payable by the Lessee
pursuant to this Clause 13.4.
13.5 WAIVER OF CERTAIN ARTICLE 2A RIGHTS
To the fullest extent permitted by Applicable Law, each
of Lessor and Lessee hereby agree that no rights or
remedies referred to in Article 2A of the Uniform
Commercial Code shall be conferred upon either Lessor
or Lessee unless otherwise expressly granted in this
Agreement.
14. ASSIGNMENT AND TRANSFER
14.1 NO ASSIGNMENT BY LESSEE
The Lessee will not assign any of its right, title,
interests, duties, obligations or liabilities in, to or
under this Agreement, or create or permit to exist any
Security Interest (other than Permitted Liens) over any
of its rights under this Agreement, and any such
purported assignment or grant of a security interest
shall be void ab initio and of no force or effect.
14.2 LESSOR ASSIGNMENT
The Lessor may sell, assign (for purposes of this
Clause 14.2, not including an assignment for security
purposes) or transfer all or any of its rights under
this Agreement and in the Leased Property provided that
the provisions of this Clause 14.2 are satisfied (a
"Transfer") and the Lessor will have no further
obligations under this Agreement following a Transfer
(other than obligations that are outstanding as of the
date of such Transfer) but, notwithstanding any
Transfer, will remain entitled to the benefit of each
indemnity under this Agreement.
(a) In connection with any Transfer, the following
conditions shall apply:
<PAGE>
(i) Lessor shall give Lessee written notice of
such Transfer at least 10 Business Days
before the date of such Transfer, specifying
the name and address of the proposed
purchaser, assignee or transferee (the
"Transferee");
(ii) the Transferee will be either (1) a Person
reasonably experienced in aircraft leasing
(or the Transferee's rights and powers under
this Agreement shall be exercised or serviced
on its behalf pursuant to an appropriate
management or servicing agreement by a Person
having such experience) with a net worth in
excess of $15,000,000, or (2) a Person with
at least 10 years of experience (or whose
principals have at least 10 years of
experience) in aircraft leasing (or the
Transferee's rights and powers under this
Agreement shall be exercised or serviced on
its behalf pursuant to an appropriate
management or servicing agreement by a Person
having such experience) with a net worth in
excess of $7,500,000 and which causes a
United States bank, trust company or other
financial institution to agree to hold all
Additional Rent paid to Lessor in a
segregated, interest-bearing account of such
institution to be applied to the obligations
of Lessor pursuant to Clause 7.2 of this
Agreement;
(iii) the Transferee will be a "citizen of the
United States" within the meaning of
Section 40102(a)(15) of the Federal Aviation
Law and have full corporate power and
authority to enter into and perform the
transactions contemplated by this Agreement
on the part of "Lessor";
(iv) on the Transfer date the Lessor and the
Transferee shall enter into an agreement or
agreements acceptable to Lessee in its
reasonable discretion in which the Transferee
confirms that it shall be deemed a party to
this Agreement and agrees to be bound by all
the terms of, and to undertake all of the
obligations of, the Lessor contained in this
Agreement;
(v) such Transfer shall not violate any
Applicable Law;
(vi) the Transferee shall provide to Lessee an
opinion of its regular independent counsel as
to the matters set forth in sub-clause (iii)
and as to the legality, validity, binding
effect and enforceability of the agreement or
agreements between Lessor and Transferee
referred to in sub-clause (iv); and
<PAGE>
(vii) Lessee shall have no obligation to consent to
any changes in this Agreement requested by
the Lessor or Transferee.
(b) Upon any Transfer, the Transferee shall be deemed
Lessor for all purposes of this Agreement, each
reference in this Agreement to the "Lessor" shall
thereafter be deemed for all purposes to refer to
the Transferee, and the transferor shall be
relieved of all obligations of the "Lessor" under
this Agreement arising after the time of such
Transfer except to the extent attributable to acts
or events occurring prior to the time of such
Transfer.
(c) Upon compliance by Lessor and a Transferee with
the terms and conditions of Clause 14.2(a), Lessee
shall at the time of Transfer, at the specific
written request of Lessor and with Lessor paying
all of Lessee's reasonable out-of-pocket costs and
expenses and, if Lessee does not use outside
counsel in connection with such Transfer, Lessee's
reasonable internal legal costs:
(i) execute and deliver to Lessor and to such
Transferee an agreement, in form and
substance satisfactory to Lessor, Lessee and
such Transferee, dated the date of such
transfer, consenting to such transfer,
agreeing to pay all or such portion of the
Basic Rent, Additional Rent and other
payments under this Agreement to such
Transferee or its designee as such Transferee
shall direct, and agreeing that such
Transferee shall be entitled to rely on all
representations and warranties made by Lessee
in the Operative Documents as though such
Transferee was the original "Lessor";
provided, that such representations shall not
be deemed to be re-made as of the date of any
Transfer;
(ii) execute and deliver to Lessor or such
Transferee, as the case may be, precautionary
Uniform Commercial Code financing statements
or amendments reflecting the interests of
such Transferee in the Aircraft and this
Agreement;
(iii) deliver to Lessor and to such Transferee a
certificate, signed by a duly authorized
officer of Lessee, dated the date of such
transfer, to the effect that no Event of
Default has occurred and is continuing or, if
one is then continuing, describing such Event
of Default;
(iv) cause to be delivered to Lessor and such
Transferee certificates of insurance and
broker's letter of undertaking substantially
in the form set out in Parts 2 and 3 of
Schedule 5, detailing the coverage and
confirming the insurers' agreement to the
specified insurance requirements of this
Agreement and listing the Lessor and
Transferee<PAGE> as additional insureds and
the Transferee as sole loss payee (subject to
other direction by Mortgagee);
(v) deliver to Lessor and to such Transferee an
opinion of Lessee's counsel (which may be
Lessee's General Counsel), addressed to
Lessor and such Transferee to the effect
that the agreement referred to in sub-clause
(i) has been duly authorized and executed by
Lessee and constitutes the legal, valid and
binding obligation of Lessee, enforceable
against Lessee in accordance with its terms
(subject to customary exceptions), and (if
such counsel delivered the opinion attached
as Exhibit D on the Delivery Date) to the
effect that such Transferee may rely on the
opinion delivered by such counsel in
connection with this Agreement on the
Delivery Date with the same force and effect
as if such Transferee was an original
addressee of such opinion when given;
(vi) deliver to Lessor and such Transferee
information on the location of the Airframe
and Engines at all times requested by Lessor
in order to permit the Transfer to take place
at a time and on a date so as to eliminate or
minimize any Taxes applicable to the
Transfer; and
(vii) such other documents as Lessor or such
Transferee may reasonably request.
14.3 GRANTS OF SECURITY INTERESTS
The Lessor shall be entitled at any time after Delivery
to grant a security interest in the Leased Property or
its right, title and interest in this Agreement (each,
an "Additional Mortgage") in favor of any Person (each,
an "Additional Mortgagee"). Any Additional Mortgage
may be a successor mortgage to the Security Interest
granted to Mortgagee, or may be in addition to
Mortgagee's Security Interest and previous Additional
Mortgages and with a priority senior, equal or
subordinate to Mortgagee's Security Interest and
previous Additional Mortgages as Mortgagee and previous
Additional Mortgagees may permit. In the case of any
such grant by Lessor of an Additional Mortgage to an
Additional Mortgagee in all or any portion of Lessor's
rights, title and interest in and to the Aircraft and
this Agreement, Lessee shall promptly, at the specific
written request of Lessor and with Lessor paying all of
Lessee's reasonable out-of-pocket costs and expenses:
(a) execute and delivery to Lessor and to such
Additional Mortgagee an agreement, substantially
in the form of the Consent and otherwise in form
and substance satisfactory to Lessor, such
Additional Mortgagee and Lessee, dated the date of
the grant of such Additional Mortgage,
(i) consenting to<PAGE> such Additional Mortgage and to
any assignment of Lessor's rights, title and
interest in and to this Agreement to such
Additional Mortgagee for security purposes,
(ii) if requested by Lessor and consented to by
the previous payee, agreeing that Lessee will pay
the Basic Rent and other payments under this
Agreement to such Additional Mortgagee, and
(iii) agreeing that such Additional Mortgagee
shall be entitled to rely on all representations
and warranties made by Lessee in this Agreement or
in any certificate or document furnished by Lessee
in connection with this Agreement Documents as
though such Additional Mortgagee was originally
the "Mortgagee";
(b) execute and deliver to Lessor and such Additional
Mortgagee such agreements as the Lessor may
reasonably require and which are acceptable to
Lessee for the purposes of effecting all necessary
amendments to this Agreement;
(c) execute and deliver to Lessor or such Additional
Mortgagee, as the case may be, precautionary
Uniform Commercial Code financing statements or
amendments reflecting the assignment of Lessor's
interests in the Operative Documents to such
Additional Mortgagee;
(d) deliver to Lessor and such Additional Mortgagee a
certificate, signed by a duly authorized officer
of Lessee, dated the date of the grant of the
Additional Mortgage, to the effect that no Event
of Default has occurred and is continuing or, if
one is then continuing, describing such Event of
Default;
(e) cause to be delivered to Lessor and such
Additional Mortgagee certificates of insurance and
broker's letter of undertaking substantially in
the form set out in Parts 2 and 3 of Schedule 5,
detailing the coverage and confirming the
insurers' agreement to the specified insurance
requirements of this Agreement, adding such
Additional Mortgagee as an additional insured and,
if requested by Lessor and consented to by the
previous loss payee, listing such Additional
Mortgagee as sole loss payee;
(f) deliver to Lessor and such Additional Mortgagee an
opinion of Lessee's counsel (which may be Lessee's
General Counsel), addressed to Lessor and such
Additional Mortgagee (i) to the effect that the
agreements referred to in sub-clauses (a) and (b)
have been duly authorized and executed by Lessee
and constitute the legal, valid and binding
obligations of Lessee, enforceable against Lessee
in accordance with their terms (subject to
customary exceptions), and (ii) if such counsel
delivered the opinion attached as Exhibit D on the
Delivery Date, to the effect that such Additional
Mortgagee may rely on the opinion delivered by
such counsel in connection with this
Agreement<PAGE> on the Delivery Date with the same
force and effect as if such Additional Mortgagee
was an original addressee of such opinion when
given; and
(g) such other documents as Lessor or such Additional
Mortgagee may reasonably request.
14.4 SALE AND LEASEBACK BY LESSOR
In addition to the Transfers and grants of Security
Interests permitted by Clauses 14.2 and 14.3, but
subject to the provisions thereof, Lessor shall be
entitled to transfer its right, title and interests in
and to the Leased Property to any Person and lease the
Aircraft from such Person (a "Head Lessor"), and in
such event Lessor shall retain its rights and
obligations as the "Lessor" under this Agreement. In
the event of such a sale and lease-back by Lessor,
(a) the Head Lessor shall meet the requirements for a
"Transferee" as defined in Clause 14.2(a)(ii) above,
(b) the Lessor shall be entitled to assign its rights
in this Agreement to such Head Lessor as security for
its obligations under the head lease, (c) the Head
Lessor shall be entitled to grant to one or more
purchase money lenders, or to an indenture trustee on
behalf of such lenders, an Additional Mortgage covering
the Leased Property and the Operative Documents,
(d) Lessee shall execute and deliver to Lessor, such
Head Lessor, such Additional Mortgagee and any trustees
on their behalf, as appropriate, the documents
specified in Clauses 14.2(c)(i) through (vi) and
Clauses 14.3(a) through (f) above, and Lessee shall
cooperate with Lessor to make such other changes to
this Agreement as Lessor may reasonably request so long
as such changes do not adversely affect the rights or
increase or extend the obligations of Lessee under this
Agreement or otherwise adversely affect Lessee and with
Lessor paying all of Lessee's reasonable out-of-pocket
costs and expenses.
14.5 FURTHER ACKNOWLEDGMENTS
Lessee further acknowledges that any Transferee or
Additional Mortgagee shall in turn have the rights of,
and be subject to the conditions to, transfer and
grants of Security Interests set forth above in this
Clause 14.
14.6 CERTAIN PROTECTIONS FOR LESSEE'S BENEFIT
The rights of Lessee under this Agreement shall be
superior to the rights of any Additional Mortgagee or
Head Lessor, and the Lessor shall require each
Additional Mortgagee and Head Lessor to agree in
writing with the Lessee that such Additional
Mortgagee's and Head Lessor's rights in and to the
Leased Property shall be subject to the terms of this
Agreement, including to the Lessee's rights to the
quiet use, possession and enjoyment provisions
contained in this Agreement. The Lessor's<PAGE>
obligations to perform the terms and conditions of this
Agreement shall remain in full force and effect
notwithstanding the creation of any Additional Mortgage
or Head Lease. Lessor shall not create any Additional
Mortgage or enter into any Head Lease that violates the
terms of this Clause 14.6.
15. MISCELLANEOUS
15.1 WAIVERS, REMEDIES CUMULATIVE
The rights of Lessor or Lessee under this Agreement may
be exercised as often as necessary, are cumulative and
not exclusive of that party's rights under any law and
may be waived only in writing and specifically. Delay
in exercising or non-exercise of any such right is not
a waiver of that right.
15.2 DELEGATION
Lessor or any Financing Party may delegate to any
Person or Persons all or any of the trusts, 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 the Lessor or such Financing Party,
respectively, in its absolute discretion thinks fit.
15.3 APPROPRIATION
If any sum paid or recovered in respect of the
liabilities of the Lessee under this Agreement is less
than the amount then due, the Lessor may apply that sum
to amounts due under this Agreement in such proportions
and order and generally in such manner as the Lessor
may determine.
15.4 CURRENCY INDEMNITY
(a) If the Lessor receives an amount in respect of the
Lessee's liability under this Agreement or if such
liability is converted into a claim, proof,
judgment or order in a currency other than
Dollars:
(i) the Lessee will indemnify the Lessor, as an
independent obligation, against any loss
arising out of or as a result of such
conversion;
(ii) if the amount received by the Lessor, when
converted into Dollars (at the market rate at
which the Lessor is able on the relevant date
to purchase Dollars in New York City with
that other currency) is less than the amount
owed in Dollars, the Lessee will, forthwith
on<PAGE> demand, pay to the Lessor an amount
in Dollars equal to the deficit; and
(iii) the Lessee will pay to the Lessor on demand
any exchange costs and Taxes payable in
connection with the conversion.
(b) The Lessee waives, to the extent permitted by
Applicable Law, any right it may have in any
jurisdiction to pay any amount under this
Agreement in a currency other than Dollars.
15.5 PAYMENT BY THE LESSOR
The Lessor will not be obliged to pay any amounts to
the Lessee under this Agreement so long as any sums
which are then due from the Lessee under this Agreement
remain unpaid and any such amounts which would
otherwise be due will fall due only if and when the
Lessee has paid all such sums.
15.6 SEVERABILITY
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.
15.7 REMEDY
If the Lessee fails to comply with any provision of
this Agreement, the Lessor may, without being in any
way obliged to do so or responsible for so doing and
without prejudice to the ability of the Lessor to treat
the non-compliance as a Default, effect compliance on
behalf of the Lessee, whereupon the Lessee shall become
liable to pay immediately any sums expended by the
Lessor together with all costs and expenses (including
reasonable legal costs) necessarily incurred in
connection therewith.
15.8 EXPENSES
(a) The Lessor and the Lessee shall each bear their
respective expenses (including legal, professional
and out-of-pocket expenses) incurred or payable in
connection with the negotiation, preparation and
execution of this Agreement,<PAGE> and shall share
equally the fees and expenses of Special FAA
Counsel in connection with the transactions
contemplated by this Agreement, including in
connection with the Assignment and Mortgage.
Lessor shall otherwise bear and be responsible for
all fees and expenses in connection with the
importation and registration of the Aircraft and
the registration and recording of the Assignment
and Mortgage.
(b) The Lessee shall pay to the Lessor on demand all
expenses (including legal, professional and
out-of-pocket expenses) incurred or payable by the
Lessor in connection with the granting of any
waiver or consent under this Agreement.
(c) The Lessee will pay to the Lessor on demand all
expenses (including reasonable legal, survey and
other costs) payable or incurred by the Lessor in
contemplation of, or otherwise in connection with,
the enforcement of or preservation of any of the
Lessor's rights under this Agreement, or in
respect of the repossession of the Aircraft.
(d) The Lessor will pay to the Lessee on demand all
expenses (including reasonable legal costs)
payable or incurred by the Lessee in contemplation
of, or otherwise in connection with, the
enforcement of or preservation of any of the
Lessee's rights under this Agreement.
15.9 TIME OF ESSENCE
The time stipulated in this Agreement for all payments
payable by the Lessee to the Lessor and for the
performance of the Lessee's other obligations under
this Agreement that are due on a specified or
determinable date will be of the essence of this
Agreement (subject always to any applicable grace
period).
15.10 NOTICES
(a) All notices and other communications given under
or in connection with this Agreement shall be in
writing (including telegram) and shall be deemed
to have been received when delivered to the
address specified in clause 15.10(b).
(b) All such notices, requests, demands and other
communications shall be sent:
<PAGE>
(i) to Lessor at: c/o Unicapital Air Group, Inc.
1900 Summit Tower Blvd.
Suite 860
Orlando, Florida 32810
Attention: Mr. Samuel J. Thornton
Telephone: +1-407-916-8000
Telefax: +1-407-916-8001
copied to
Mortgagee
at: FINOVA Capital Corporation
1850 North Central Avenue
Phoenix, Arizona 85002
Attention: Vice President - Operations
Management
Telefax: +1-602-262-1551
(ii) to Lessee
at: 7000 Squibb Road, 3rd Floor
Mission, Kansas 66202
Attention: Mr. William A. Garrett, III
Telephone: +1-913-789-1769
Telefax: +1-913-789-1779
or to such other address as shall have been notified by
one party to the other in the manner set out in this
Clause 15.10.
15.11 LAW AND JURISDICTION
(a) THIS AGREEMENT SHALL, IN ALL RESPECTS, INCLUDING
ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS ENTERED INTO IN THE STATE
OF NEW YORK BY RESIDENTS OF SUCH STATE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE.
(b) The Lessor and the Lessee hereby irrevocably agree
to submit to the non-exclusive jurisdiction of the
United States District Court for the Southern
District of New York and the Supreme Court of the
State of New York located in the Borough of
Manhattan, County of New York (the "Agreed
Courts") in the event of any claims or disputes
arising under this Agreement. Such submission to
jurisdiction shall not be construed so as to limit
the right of either party to take proceedings
against the other in whatever jurisdiction shall
to it seem fit nor shall the taking of proceedings
in any one or more jurisdictions preclude the
taking of proceedings in any other
jurisdiction,<PAGE> whether concurrently or not.
Final judgment against Lessor or Lessee in any
such suit shall be conclusive and may be enforced
in any other jurisdiction by suit on the judgment
or as otherwise permitted by Applicable Law, a
certified or true copy of which shall be
conclusive evidence of the facts and of the amount
of any indebtedness or liability of Lessor or
Lessee. Each of Lessor and Lessee hereby
irrevocably waives any objection which it may now
or hereafter have to the laying of venue in any
suit, action or proceeding brought in any Agreed
Court, and irrevocably waives any claim that any
such suit, action or proceeding brought in any
Agreed Court has been brought in an inconvenient
forum.
(c) THE LESSEE AND THE LESSOR HEREBY WAIVE TRIAL BY
JURY IN ANY JUDICIAL PROCEEDING TO WHICH THEY ARE
PARTIES INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER ARISING OUT OF OR RELATING TO THIS
AGREEMENT.
(d) Without prejudice to any other mode of service,
each of the Lessor and the Lessee consents to the
service of process relating to any proceedings
involving, directly or indirectly, any matter
arising out of or relating to this Agreement by
U.S. Postal Service registered mail (prepaid,
return receipt requested) of a copy of the process
to the Lessee's address identified in Clause
15.10(b).
15.12 SOLE AND ENTIRE AGREEMENT
This Agreement is the sole and entire agreement between
the Lessor and the Lessee in relation to the leasing of
the Aircraft, and supersedes all previous agreements in
relation to that leasing. The terms and conditions of
this Agreement can only be varied by an instrument in
writing executed by both parties or by their duly
authorized representatives.
15.13 INDEMNITIES
All rights expressed to be granted to each Indemnitee
under this Agreement (other than any Financing Party)
are given to the Lessor as agent for and on behalf of
that Indemnitee.
15.14 COUNTERPARTS
This Agreement may be executed in one or more
counterparts, each of which shall constitute an
original and, when taken together, all of which shall
constitute one and the same Agreement.
<PAGE>
15.15 CONFIDENTIALITY
Neither the Lessor nor the Lessee shall, without the
other's prior written consent, communicate or disclose
the terms of this Agreement or any information or
documents furnished pursuant to this Agreement (except
to the extent that the same are within the public
domain) to any third party (other than any Financing
Party, any prospective Transferee, any material
investor in the Lessee or creditor in Lessee,
Additional Mortgagees or Head Lessors, the respective
external legal advisers, auditors, insurance brokers or
underwriters of Lessor, Lessee and such parties, and
the Manufacturer and Engine Manufacturer); provided,
that disclosure will be permitted, to the extent
required:
(a) pursuant to an order of any court of competent
jurisdiction; or
(b) pursuant to any procedure for discovery of
documents in any proceedings before any such
court; or
(c) pursuant to any law or regulation having the force
of law; or
(d) pursuant to a lawful requirement of any authority
with whose requirements the disclosing party is
legally obliged to comply; or
(e) in order to perfect any assignment of any
assignable warranties.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF Lessor and Lessee have executed this Lease
Agreement 22122 on the date shown at the beginning of this
Agreement.
SIGNED on behalf of
AIRCRAFT 22122, INC.
By:/s/ Richard Giles
Name: Richard Giles
Title: Vice President
SIGNED on behalf of
VANGUARD AIRLINES, INC.
By:/s/ William A. Garrett
Name: William A. Garrett
Title: Vice President - Finance
and Chief Financial
Officer
[FINOVA Capital Corporation hereby acknowledges receipt
of this Original Executed Counterpart of Lease Agreement 22122 in
Phoenix, Arizona on this ____ day of October 1999.
FINOVA CAPITAL CORPORATION
By:__________________________
Name:
Title]<F1>
[FN]
<F1>
This text will only appear on one counterpart of Lease Agreement
22122.
</FN>
<PAGE>
SCHEDULE 1
BASIC RENT AND OTHER TERMS
[Intentionally Omitted as Containing
Confidential Information]<F2>
1. ADDITIONAL DEFINITIONS
In addition to the definitions set forth in Clause 1.1, the
following expressions shall, unless the context otherwise
requires, have the following respective meanings in this
Agreement:
Agreed Value $8,250,000.00
Airframe Additional Rent Rate $70.00
APU Additional Rent Rate $7.00
Basic Rent Amount $115,000.00
Security Deposit $230,000.00
Damage Notification Threshold $250,000.00
Engine Additional Rent Rate $85.00
Hull Insurance Deductible $500,000.00
Landing Gear Additional Rent Rate $12.00
Minimum Liability Coverage $600,000,000.00 on each occurrence.
[FN]
<F2>
2. For inclusion on FAA filed copies of this Lease Agreement in
lieu of the following information.
</FN>
<PAGE>
2. RETURN CONDITION FINANCIAL ADJUSTMENTS
In addition to the requirements set forth in Clause 12 and
Schedule 4, on the Expiry Date (other than by reason of the
occurrence of a Total Loss) Lessor and Lessee will make the
following payments:
(a) For each Engine, if the number of Flight Hours or Cycles
(whichever is more limiting) of such Engine until its next
scheduled Engine Shop Visit on the Expiry Date is more than
the number of Flight Hours or Cycles (as the case may be) of
such Engine until its next scheduled Engine Shop Visit on
the Delivery Date, in each case under the Agreed Maintenance
Program, then Lessor shall pay to Lessee a Dollar amount
equal to (i) the product of such difference (based on actual
Delivery and redelivery) multiplied by the Engine Additional
Rent Rate, minus (ii) all amounts previously paid to Lessee
pursuant to Clause 7.3.
(b) For each Engine, if the number of Flight Hours or Cycles
(whichever is more limiting) of such Engine until its next
scheduled Engine Shop Visit on the Expiry Date is fewer than
the number of Flight Hours or Cycles (as the case may be) of
such Engine until its next scheduled Engine Shop Visit on
the Delivery Date, in each case under the Agreed Maintenance
Program, then Lessee shall pay to Lessor a Dollar amount
equal to the product of such difference (based on actual
Delivery and redelivery) multiplied by the Engine Additional
Rent Rate.
(c) Any amounts owed by Lessee to Lessor pursuant to Clause 2(b)
of this Schedule 1 with respect to an Engine may be offset
by an amount equal to the lesser of (i) such amount owed or
(ii) an amount equal to (1) all Engine Additional Rent
previously paid by Lessee for such Engine pursuant to this
Agreement, minus (2) all previous payments for such Engine
by Lessor under Clause 7.2(b).
<PAGE>
SCHEDULE 2
PART 1
AIRCRAFT SPECIFICATION
IDENTIFICATION:
Aircraft Model: Boeing Model 737-230
Registration Mark: N124NJ
Serial Number: 22122
Date of Manufacture: February 1981
WEIGHT DATA:
Maximum Taxi Weight: 120,000 lbs. (subject to
Item 1(g) of Schedule 3)
Maximum Takeoff Weight: 119,500 lbs. (subject to
Item 1(g) of Schedule 3)
Maximum Landing Weight: 103,000 lbs.
Maximum Zero Fuel Weight: 95,000 lbs.
Fuel Capacity: 34,469 U.S. Gallons
AIRFRAME AND INTERIOR EQUIPMENT:
Galleys four Locations: two forward; two aft
Lavatories three Locations: ___ forward and ___ aft
Air Stairs ___ Locations: ___ forward
Passenger Seats 105 Locations/Types: 12 first class;
93 economy class
Overhead bins ___
Cargo Door ___
ENGINES:
Manufacturer: Pratt & Whitney
Position No.1 No.2
Model: JT8D-15 JT8D-15
Serial Numbers: 702911 687338
<PAGE>
APU:
Model: [_____]
Serial Number: [_____]
LANDING GEAR:
Position: Nose Left Main Right Main
Type: [_____] [_____] [_____]
Serial Number: [_____] [_____] [_____]
HARD TIME COMPONENTS:
[to be supplied, as listed in Exhibit B to LOI]
MAJOR AVIONICS EQUIPMENT:
Description Manufacturer Part No. Quantity
[to be supplied]
<PAGE>
PART 2
AIRCRAFT DOCUMENTS
1. MANUALS
The following manuals shall be delivered with the Aircraft.
Each manual shall be current and include all temporary
revisions. Each manual shall be in the English language.
(a) FAA-Approved Airplane Flight Manual.
(b) Weight and Balance Control and Cargo Loading Manual and
Supplements (load and trim sheet). Include last weight
paperwork and delivery equipment list with Previous
Operator running W&B computation sheets.
(c) Operations Manual and Quick Reference Handbook
including Cabin Safety/F/A Manual (PAX A/C).
(d) Structural Repair Manual
(e) Aircraft/Engine/APU Maintenance Manuals
(f) Boeing Component Overhaul Manuals, including Galley
Manuals (CMM, IPC, OHM)
(g) Aircraft/Engine/APU Illustrated Parts Catalog (IPC)
(Operator Customized)
(h) Wiring Diagram Manual including the following:
(i) Equipment List
(ii) Standard Practices (Chapter 20)
(iii) Charts and Graphs (Chapter 91)
(iv) Hook Up Charts
(v) Splice List
(vi) Ground List
(vii) Terminal List
(i) Engine and APU Overhaul Manuals
(j) Previous Operator's Maintenance Schedule and (COSL)
component operating an<PAGE> storage limits manual
2. AIRWORTHINESS DIRECTIVES ("A.D.") DOCUMENTATION
The following data will be provided as well as all records
associated with A.D. compliance:
(a) A single, complete and current A.D. status list of each
airframe, appliances, Engine and APU Airworthiness
Directive applicable to each Aircraft, appliances,
Engine and APU. This list shall be consistent with the
preliminary A.D. status reports received during the
initial inspection. The list shall be typed, certified
and signed by authorized quality assurance
representative of Previous Operator.
(b) Lessor will provide legible copies of the completion
documentation that accomplish each A.D. If the A.D. is
a repetitive inspection documentation, the last
accomplishment is sufficient. If the original
completion documents are not available, Lessor shall
provide at a minimum a copy of the job card of
engineering order that accomplished the A.D., plus a
certification letter signed by Previous Operator's
airworthiness department stating that the A.D. in
question was accomplished at a certain time and cycles,
date and reference all pertinent support documentation
(i.e. engineering order, alternate means of compliance,
etc.). However, any A.D. that was complied with by an
alternate means of compliance must have all original
documentation and necessary air authority approvals.
(c) Exemptions or deviations granted by the FAA to the
Previous Operator on A.D. compliance, including copy of
exemption request.
3. ENGINEERING DOCUMENTATION
(a) Lessor shall provide a single, current list in English
language (except for the ADA list referenced in
3(a)(ii) below:
(i) Service Bulletin status based on the Boeing
provided summary of all Boeing service bulletins
to the Aircraft and consistent with the "reference
only" status report provided during the initial
inspection.
(ii) List of all Previous Operator initiated on-
aircraft modifications consistent with the ADA
list covering all Spec. 100 ATA chapters. A
current copy of all engineering orders listed on
the ADA list shall be provided with appropriate
certification stamp on the ADA list.
(iii) Major repairs list
<PAGE>
(iv) Supplement Type Certificate list
(b) Data package covering all non-manufacturer/non-Aviation
Authority approved repairs or alterations, including
the submittal to the Previous Operator's aviation
authority for an approval, if applicable.
4. ADDITIONAL DOCUMENTATION
(a) Master Minimum Equipment List and Configuration
Deviation List
(b) Set of cockpit drawings (full scale preferably)
(c) Quarterly Reliability Reports for one (1) year (if
available)
(d) Location map of emergency equipment with description
(e) Interior configuration drawings
(f) Passenger/Cargo Equipment List (seats, galleys,
lavatories, entertainment)
(g) Complete paperwork for last "D" Check overhaul and last
"A", "B" and/or "C" check inspections (if available)
(h) Compass card and F.D.R. calibration documentation
(i) All life records for the assemblies and rotable parts
installed during the last overhaul for each nose, left
hand and right hand main landing gears
5. INDIVIDUAL AIRCRAFT AND ENGINE RECORDS
(a) Letter of Declaration for each major aircraft/engine
accident or major incident which shall include complete
documentation reports, if any
(b) Major structural damage reports, if any
(c) Engine trend monitoring data (1 year minimum provided
the Engine was operated by Lessee) for each Engine
(d) Copies of logbook entries for the last twelve (12)
months of operation (at delivery) (if available)
(e) List of open items, watch items, deferred items
<PAGE>
(f) Serviceable/overhaul tags for all life limited parts,
hard time components listed in the rotable components
list; serviceable overhaul tags for OC (on condition)
and CM (condition monitored) parts listed in the
rotable components list for the last 12 months as at
delivery shall be provided to Lessor by Previous
Operator on a case by case basis up to a maximum of one
(1) year after delivery)(if available)
(g) Listing of Aircraft, Engine and APU components status
by P/N-S/N-Description Position TBO-TSI-TSO-TSN, total
time, next due time, including interpretation keys,
(Rotable Component List)
(h) Engine and APU logbooks or equivalent reports or
documentation (if available)
(i) Aircraft and Engine time status at delivery with serial
number, total time, total cycles and times of the last
letter check inspection
(j) Engine time report and engine on log which shall
include ASB 6038 status for each engine
(k) All Engine and APU records, for the last heavy
maintenance shop visit including back to birth history
for each engine life limited part. Exceptions will be
acceptable for parts introduced to Previous Operator
before 1993 when back to birth history records was not
mandatory, however Previous Operator has agreed to
assist Lessor in obtaining full traceability on these
parts, if any
(l) Manufacturer's delivery documents for Engines
(m) Manufacturer's Electrical Load Analysis documents and
data
(n) Last power plant test cell run documents for Engines
and APU
(o) Letter certifying that at the time of delivery the
Aircraft is a non-SSID candidate aircraft
(p) Previous Operator's Corrosion Control Program (See
Maintenance Schedule)
(q) Aircraft Readiness Log (from aircraft manufacturer)
(r) Copies of all applicable Master Changes (M.C.)
performed on each aircraft
(s) Previous Operator's aviation authority approvals and
Previous Operator's certification reports for major
modifications alterations and repairs which are not
covered by<PAGE> manufacturers service bulletins. For
minor modifications not covered by manufacturers
service bulletins, Lessor shall cause Previous Operator
to provide the requested substantiation work. (i.e.
certification reports to the extent required by the
Previous Operator's aviation authority)
(t) Fire blocking status for all seats, interior
fabrics/material, including burn test documentation and
certification
(u) Current Aging Aircraft and CPCP Status Report
(v) Current list outlining all waiver items/components not
approved by the FAA
(w) Any historical records applicable to the aircraft,
engines or APU that may be available at reasonable
effort and within reasonable time by the Previous
Operator
(x) List detailing Previous Operator's component shop
history for all components on the rotable components
list on a case by case basis (up to a maximum of one
(1) year after aircraft delivery)
<PAGE>
SCHEDULE 3
OPERATING CONDITION AT DELIVERY
On the Expiry Date the Aircraft, subject to fair wear and tear
generally, will be in the condition set out below.
1. GENERAL CONDITION
The Aircraft will:
(a) be clean to a standard of aircraft fresh from overhaul;
(b) have installed the full of parts, accessories and loose
equipment required under the Agreed Maintenance
Program;
(c) be airworthy, conform to type design and be in a
condition suitable for immediate, safe operation in
commercial service with all equipment, components and
systems operating in accordance with their intended use
and within limits established by the manufacturer and
approved by the Aviation Authority, and all pilot
discrepancies and deferred maintenance items cleared on
a terminating action basis;
(d) have a U.S. Standard Transport Category Certificate of
Airworthiness issued by the FAA in accordance with FAR
Part 21 and unconditionally meet all Aviation Authority
requirements for immediate operations under FAR Part
121;
(e) be fresh from a Manufacturer's MPD "D" Check (phases C1
through C7), including 20,000 hour structural items and
complete CPCP inspection;
(f) have all gauges (including dipsticks) converted from
the metric system to the U.S. imperial system (pounds)
and accompanied by all required documentation from the
Manufacturer relative to the gauges; in addition, the
cockpit switches shall be reconfigured into the
Manufacturer's standard;
(g) be certified to operate at 120,000 lbs. Maximum Take
Off Weight; provided, that Lessee agrees to accept
delivery of the Aircraft at a Maximum Take Off Weight
of 116,000 lbs. subject to Lessor providing evidence to
Lessee that the weight upgrade has been ordered from
Boeing;
(h) have had accomplished all outstanding airworthiness
directives and mandatory orders<PAGE> affecting that
model of Aircraft issued by the Aviation Authority that
are due within 90 days after the Delivery Date on a
terminating action basis; airworthiness directives and
mandatory orders that do not have a terminating action
will be accomplished at the highest level of inspection
or modification permitted;
(j) no special or unique manufacturer inspection or check
requirements specific to the Aircraft will exist (which
shall not include airworthiness directives or service
bulletins) unless there is no terminating action
available from any source;
(k) have TCAS, Windhsear, 11 parameter DFDR and escape path
lighting installed in accordance with FAA requirements;
(l) be free of any system-related leaks;
(m) all fluid reservoirs (including fuel, oil, oxygen,
hydraulic and water) will be full, and the waste tank
serviced in accordance with the manufacturer's
instructions;
(n) all fuel tanks will have recently undergone an
anti-fungus/biological growth contamination laboratory
evaluation, and any excessive levels of contamination
corrected;
(o) have all FAA-required signs and decals clean, secure
and legible and in the English language;
(p) shall be stripped and painted in the Lessee's livery
(including wings and stabilizers) in accordance with
the SRM and the paint manufacturer's instructions and
avoiding any overspray on other surfaces; and
(q) shall be accompanied by the aircraft records listed on
Part 2 of Schedule 2.
2. PARTS
(a) The Aircraft shall have installed the hard time
components as listed in Part 1 of Schedule 2.
(b) Each life limited or hard time controlled Part,
excluding Engine Parts, shall have not less than 50% of
the number of Flight Hours or Cycles (whichever is the
more limiting factor) remaining to the next scheduled
removal in accordance with the Agreed Maintenance
Program.
(c) Each calendar limited Part (including hard time
controlled Parts with calendar limits) will have 50% of
its life or time between removals, as the case may be
(but not less<PAGE> than 12 months), remaining to its
next scheduled removal in accordance with the Agreed
Maintenance Program.
3. ENGINES
(a) The Aircraft shall have installed two serviceable Pratt
& Whitney JT8D-15 engines, and each such Engine shall
have installed a Nordam stage III LGW hushkit.
(b) The Engine bearing manufacturer's serial number 702911
shall have at least ____ Flight Hours and ____ Cycles
remaining to its next limiter under the Agreed
Maintenance Program. The Engine bearing manufacturer's
serial number 687338 shall have at least ____ Flight
Hours and ____ Cycles remaining to its next limiter
under the Agreed Maintenance Program.
(c) No Engine shall be "on engineering watch", on a reduced
interval inspection or otherwise have any defect that
reduces the Flight Hours or Cycles (whichever is more
limiting) of remaining life pursuant to Engine
Manufacturer's or airworthiness requirements until shop
visit to less than the number specified for such Engine
in Item 3(b) of this Schedule 3.
(d) The historical and technical records, condition trend
monitoring data, power assurance runs and borescope
inspection shall not indicate an abnormal acceleration
in the rate of performance deterioration or oil
consumption in any Engine.
4. FUSELAGE, WINDOWS AND DOORS
(a) The fuselage will not contain any dents, corrosion or
abrasions that exceed the prescribed limits under the
SRM and shall be free of loose, pulled or missing
rivets.
(b) The windows will not contain any delamination,
blemishes or crazing that exceed the prescribed limits
under the Manufacturer's maintenance manual and will be
properly sealed.
(c) The doors will be free moving, correctly rigged and
fitted with serviceable seals.
5. WINGS AND EMPENNAGE
(a) The leading edges will not contain any damage that
exceeds the prescribed limits under the SRM.
(b) All unpainted cowlings and fairings will be polished.
<PAGE>
(c) All wings will be free of fuel leaks.
6. INTERIOR
(a) The interior will be fully serviceable and in a
120-seats all economy configuration as operated by
Lessee with Weber 4001 passenger seats installed
including the installation of one G4 galley; all other
galleys installed in the Aircraft during the Lessee's
preliminary inspection will be removed or remain
installed pursuant to the Lessee's interior
configuration LOPA, and the Lessee shall be responsible
for providing all approved engineering documentation
relative to the installation of such interior
configuration.
(b) All emergency equipment installed in accordance with
Lessee's Emergency Equipment Diagram having a calendar
life will have a minimum of one year or 100% of its
total approved life remaining, whichever is less.
(c) All curtains, carpets, seat covers and seat cushions
installed in accordance with Lessee's requirements will
be serviceable, clean and free from stains and worn out
(threadbare) areas and will conform to FAR fire
resistance regulations as applicable to an FAR Part 121
operator.
7. COCKPIT
(a) All fairing panels shall be free of stains and cracks,
clean, secure and repainted as necessary.
(b) All floor coverings will be clean and effectively
sealed.
(c) All seat covers will be in good condition, clean and
free of stains and will conform to FAR fire resistance
regulations as applicable to an FAR Part 121 operator.
(d) All seats will be serviceable, in good condition and
repainted as necessary.
8. CARGO COMPARTMENTS
(a) All panels will be in serviceable condition and
effectively sealed in accordance with FAA requirements.
(b) All nets will be in serviceable condition in accordance
with FAA requirements.
(c) The cargo compartments will comply with FAR fire
resistance and containment regulations as applicable to
an FAR Part 121 operator.
<PAGE>
9. LANDING GEAR
(a) The installed main and nose landing gear components and
their associated actuators and parts shall be zero time
from overhaul, and shall have not less than 13,000
Cycles remaining for all life limited components.
(b) The tires and brakes will have 50% of the wear, as
specified by the manufacturer as serviceable limits,
remaining until next removal.
(c) The landing gear and wheel wells will be clean, free of
leaks and repaired as necessary.
10. APU
(a) The APU shall be serviceable in accordance with the
Agreed Maintenance Program parameters.
(b) The historical and technical records, condition trend
monitoring data, power assurance runs and borescope
inspection shall not indicate an abnormal acceleration
in the rate of performance deterioration or oil
consumption in the APU.
11. CORROSION
(a) The Aircraft will be in compliance with the CPCP and
will have been inspected and treated with respect to
corrosion as required by the CPCP; and
(b) The biocide treatment program for the fuel tanks will
be in operation and up-to-date under the Agreed
Maintenance Program.
<PAGE>
SCHEDULE 4
OPERATING CONDITION AT REDELIVERY
On the Expiry Date the Aircraft, subject to fair wear and tear
generally, will be in the condition set out below.
1. GENERAL CONDITION
The Aircraft will:
(a) be clean by United States airline standards;
(b) have installed the full complement of engines and other
equipment, parts and accessories and loose equipment
required under the Agreed Maintenance Program and
usually installed in the other Boeing 737-200 aircraft
operated by Lessee (together with any additions and
improvements thereto, or replacements thereof, effected
pursuant to and in accordance with this Agreement);
(c) be airworthy, conform to type design and be in a
condition suitable for immediate, safe operation in
commercial service with all equipment, components and
systems operating in accordance with their intended use
and within limits established by the manufacturer and
approved by the Aviation Authority, and all pilot
discrepancies and deferred maintenance items cleared on
a terminating action basis;
(d) have a U.S. Standard Transport Category Certificate of
Airworthiness issued by the FAA in accordance with FAR
Part 21 (or if required by the Lessor, a valid export
certificate of airworthiness with respect to the
Aircraft issued by the Aviation Authority) and
unconditionally meet all Aviation Authority
requirements for immediate operations under FAR Part
121;
(e) comply with the manufacturer's original specification
to the extent that it so complied on the Delivery Date
and subject to any alterations made pursuant to and in
accordance with this Agreement after such date;
(f) have undergone, immediately prior to redelivery, a "C"
Check in accordance with Clause 12.2(a) (so that all
Airframe inspections falling due within the next
following 3,000 Flight Hours or 13 months of operation
in accordance with the Agreed Maintenance Program have
been accomplished);
<PAGE>
(g) have at least two years remaining until the next Heavy
Check (or equivalent heavy maintenance check) under the
Agreed Maintenance Program;
(h) have had accomplished all outstanding airworthiness
directives and mandatory orders affecting that model of
Aircraft issued by the Aviation Authority that are due
during the Term or within 90 days after the Expiry Date
on a terminating action basis; airworthiness directives
and mandatory orders that do not have a terminating
action will be accomplished at the highest level of
inspection or modification permitted;
(i) be in compliance with the requirements of Clause
8.11(m);
(j) have no special or unique manufacturer inspection or
check requirements specific to the Aircraft (which
shall not include airworthiness directives or service
bulletins) unless there is no terminating action
available from any source;
(k) have installed all applicable vendor's and
manufacturer's service bulletin kits received free of
charge by the Lessee that are appropriate for the
Aircraft and, to the extent not installed, those kits
retained by Lessee will be furnished free of charge to
the Lessor;
(l) be free of any system-related leaks;
(m) all fluid reservoirs (including fuel, oil, oxygen,
hydraulic and water) will be full, and the waste tank
serviced in accordance with the manufacturer's
instructions;
(o) have all signs and decals clean, secure and legible;
and
(p) shall be stripped of Lessee's livery and either painted
white or painted in the livery of the next operator, as
identified by Lessor so long as such follow-on livery
is substantially the same as Lessee (and with Lessor
furnishing the next operator's paint scheme and logo
pounce pattern), in either case in accordance with the
SRM and the paint manufacturer's instructions and
avoiding any overspray on other surfaces; provided,
that Lessor shall bear any cost to Lessee of stripping
and painting the Aircraft in excess of $60,000.
2. PARTS
(a) Each life limited or hard time controlled Part,
excluding Engine Parts, shall have not less than 50% of
the number of Flight Hours or Cycles (whichever is the
more limiting factor) remaining to the next scheduled
removal in accordance with the Agreed Maintenance
Program; and
<PAGE>
(b) Each calendar limited Part (including hard time
controlled Parts with calendar limits) will have 50% of
its life or time between removals, as the case may be
(but not less than 12 months), remaining to its next
scheduled removal in accordance with the Agreed
Maintenance Program.
3. ENGINES
(a) Each engine installed on the Aircraft shall be an
Engine and (if not the engine installed at Delivery)
shall, to the extent not previously provided to the
Lessor, be accompanied by all documentation the Lessor
may require to evidence that title thereto is properly
vested in the Lessor in accordance with Clause 8.17(d).
(b) Each Engine shall have at least the same number of
Flight Hours and Cycles remaining to the next LLP
replacement as on the Delivery Date, and shall have at
least 4,000 Flight Hours and 4,000 Cycles remaining
until the next scheduled CER under the Agreed
Maintenance Program;
(c) No Engine shall be "on engineering watch", on a reduced
interval inspection or otherwise have any defect that
reduces the Flight Hours or Cycles (whichever is more
limiting) of remaining life pursuant to Engine
Manufacturer's or airworthiness requirements until
overhaul to less than 4,000; and
(d) The historical and technical records, condition trend
monitoring data, power assurance runs and borescope
inspection shall not indicate an abnormal acceleration
in the rate of performance deterioration or oil
consumption in any Engine.
4. FUSELAGE, WINDOWS AND DOORS
(a) The fuselage will not contain any dents, corrosion or
abrasions that exceed the prescribed parameters under
the SRM and shall be free of loose, pulled or missing
rivets. All repairs to the fuselage performed during
the Term will be flush instead of scab patches unless a
flush repair is not feasible.
(b) The windows will not contain any delamination,
blemishes or crazing that exceed the prescribed
parameters under the Manufacturer's maintenance manual
and will be properly sealed.
(c) The doors will be free moving, correctly rigged and
fitted with serviceable seals.
5. WINGS AND EMPENNAGE
(a) The leading edges will not contain any damage that
exceeds the prescribed parameters<PAGE> under the SRM.
(b) All unpainted cowlings and fairings will be polished.
(c) All wings will be free of fuel leaks.
6. INTERIOR
(a) The interior will be fully serviceable and in the
configuration as at the Delivery Date.
(b) All emergency equipment having a calendar life will
have a minimum of one year or 100% of its total
approved life remaining, whichever is less.
(c) All curtains, carpets, seat covers and seat cushions
will be clean and free from stains and worn out
(threadbare) areas and will conform to FAR fire
resistance regulations as applicable to an FAR Part 121
operator.
7. COCKPIT
(a) All fairing panels shall be free of stains and cracks,
clean, secure and repainted as necessary.
(b) All floor coverings will be clean and effectively
sealed.
(c) All seat covers will be in good condition, clean and
free of stains and will conform to FAR fire resistance
regulations as applicable to an FAR Part 121 operator.
(d) All seats will be serviceable, in good condition and
repainted as necessary.
8. CARGO COMPARTMENTS
(a) All panels will be in good condition and effectively
sealed.
(b) All nets will be in good condition.
(c) The cargo compartments will comply with FAR fire
resistance and containment regulations as applicable to
an FAR Part 121 operator.
<PAGE>
9. LANDING GEAR
(a) The installed main and nose landing gear components and
their associated actuators and parts will be cleared of
all inspections for not less than 12 months, 3,000
Flight Hours or 3,000 Cycles of operation (whichever is
more limiting).
(b) The tires and brakes will have 50% of the wear, as
specified by the manufacturer as serviceable limits,
remaining until next removal.
(c) The landing gear and wheel wells will be clean, free of
leaks and repaired as necessary.
10. APU
(a) The APU shall be serviceable in accordance with the
Agreed Maintenance Program.
11. CORROSION
(a) The Aircraft will be in compliance with the CPCP and
will have been inspected and treated with respect to
corrosion as required by the CPCP; and
(b) The biocide treatment program for the fuel tanks will
be in operation and up-to-date under the Agreed
Maintenance Program.
<PAGE>
SCHEDULE 5
PART 1
(INSURANCE REQUIREMENTS)
1. The Insurances required to be maintained are as follows:
(a) HULL "ALL RISKS" of loss or damage while flying and on
the ground with respect to the Aircraft for the Agreed
Value and with a deductible not exceeding the Hull
Insurance Deductible.
(b) HULL WAR AND ALLIED PERILS, covering those war risks
excluded from the Hull "All Risks" Policy to the extent
such coverage is available from the leading
international insurance markets, including confiscation
and requisition by the State of Registration, for the
Agreed Value;
(c) "ALL RISKS" PROPERTY INSURANCE (INCLUDING WAR AND
ALLIED RISK except when on the ground or in transit
other than by air or sea) on all Engines and Parts when
not installed on the Aircraft (to the extent not
covered under the Aircraft hull insurances described in
paragraphs (a) and (b) above), including Engine test
and running risks, in an amount equal to replacement
value in the case of the Engines;
(d) AIRCRAFT THIRD PARTY, BODILY INJURY/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 in respect of any one
occurrence (but, in respect of products liability, this
limit may be an aggregate limit for any and all losses
occurring during the currency of the policy, and in
respect of liability arising out of certain offences,
the limit (within the said combined single limit) may
be $25,000,000 in respect of any one offence and in the
aggregate, and cargo and mail legal liability may be
subject to a limit of $1,000,000 any one occurrence);
War and Allied Risks are also to be covered under the
Policy to the extent available in the leading
international insurance markets. The Minimum Liability
Coverage may be adjusted upwards from time to time to
such an amount as the Lessor may be advised by its
insurance brokers constitutes the standard Minimum
Liability Coverage applicable to Boeing 737-200 series
aircraft operating in North America by an airline
similarly situated as Lessee. If the Lessee disputes
any such adjustment, the matter shall be referred to a
reputable independent insurance broker in the United
States of America appointed by the Lessor, whose
decision, acting as expert, shall be<PAGE> conclusive
and binding on the Lessee.
2. All required hull and spares insurance specified in Clauses
1(a), 1(b) and 1(c) above, so far as it relates to the
Aircraft, will:
(a) provide that any loss will be settled with the Lessee
(who undertakes to consult with the Lessor and
Mortgagee in regard thereto), and any claim that
becomes payable on the basis of a Total Loss shall be
paid in Dollars to Mortgagee as loss payee as its
interests may appear up to the Agreed Value, and loss
proceeds in excess of the Agreed Value shall be payable
to Lessee, with any other claim being payable as may be
necessary for the repair of the damage to which it
relates;
(b) if separate Hull "All Risks" and "War Risks" insurances
are arranged, include a 50/50 provision in the terms of
Lloyd's endorsement AVS103 or its equivalent; and
(c) confirm that the Insurers are not entitled to replace
the Aircraft in the event of a Total Loss.
3. All required liability insurances specified in Clause 1(d)
above will:
(a) include the Indemnitees and, for a period of three
years after the Delivery Date, the Previous Owner and
the Previous Operator as additional assureds for their
respective rights and interests, warranted (each as to
itself only) no operational interest; but the coverage
provided will not include claims arising out of their
legal liability as manufacturer, repairer or servicing
agent of the aircraft or any part thereof;
(b) include a severability of interest clause;
(c) contain a provision confirming that the policy is
primary without right of contribution and that the
liability of the insurers will not be affected by any
other insurance of which any Indemnitee or the Lessee
have the benefit; and
(d) accept and insure the indemnity provisions of this
Agreement to the extent of the risks covered by the
relevant policy or policies.
4. All Insurances will:
(a) be in accordance with normal industry practice of
Persons operating similar aircraft in similar
circumstances;
(b) provide coverage on a worldwide basis subject to those
territorial exclusions which are usual and customary
for carriers similarly situated with Lessee in the case
of War Risks and Allied Perils coverage which are
advised to and approved by Lessor, such<PAGE> approval
not to be unreasonably withheld;
(c) acknowledge that the insurers are aware that the
Aircraft is owned by the Lessor and is subject to this
Agreement;
(d) provide that, in relation to the interests of each of
the additional assureds, the Insurances will not be
invalidated by any act or omission of the Insured which
results in a breach of any terms, conditions or
warranty of the policies;
(e) provide that the Insurers will waive any rights of
recourse and/or subrogation against each additional
assured to the same extent that Lessee has waived or
has no rights of recovery against such additional
assured in the Lease;
(f) provide that the additional assureds will have no
obligation or responsibility for the payment of any
premiums (but reserve the right to pay the same should
any of them elect to do so) and that the Insurers will
waive any right of offset or counterclaim against the
respective additional assureds other than for
outstanding premiums in respect of the Aircraft, any
Engine or Part;
(g) provide that, except in the case of any provision for
cancellation or automatic termination specified in the
policies or endorsements thereof, the Insurance can
only be canceled or materially altered in a manner
adverse to the additional assureds by giving at least
30 days' written notice to the Lessor and each
Financing Party, except in the case of war risks (or
radioactive contamination), for which seven days'
written notice (or such lesser period as is or may be
customarily available in respect thereof) will be
given; and
(h) include a services of suit clause; and
(i) provide coverage with respect to losses in connection
with the change of year from 1999 to 2000, the change
of date from 21 August 1999 to 22 August 1999 and/or
any other change of year, date or time to the fullest
extent available in the worldwide aviation insurance
market including date recognition limited coverage
clauses AVN2001 and AVN2002 or their equivalent.
<PAGE>
PART 2
(FORM OF BROKER'S UNDERTAKING)
[To be supplied by Lessee's Broker]
<PAGE>
PART 3
[FORM OF INSURANCE CERTIFICATE]
[To be supplied by Lessee's Broker]
<PAGE>
EXHIBIT A
CERTIFICATE OF ACCEPTANCE
This Certificate of Acceptance is delivered on the date
set forth in paragraph 1 below by Vanguard Airlines, Inc. (the
"Lessee") to Aircraft 22122, Inc. (the "Lessor") pursuant to
Lease Agreement 22122, dated October __, 1999, between the Lessor
and the Lessee (the "Agreement"). Capitalized terms used but not
defined in this Certificate of Acceptance shall have the meaning
given to such terms in the Agreement.
1. DETAILS OF ACCEPTANCE
The Lessee hereby confirms to the Lessor that the Lessee has
at __:__ _.m. G.M.T. on this _____ day of October __, 1999,
at San Jose, Costa Rica, accepted the following, in
accordance with the provisions of the Agreement.
(a) one Boeing Model 737-230 airframe, bearing
manufacturer's serial number22122 and U.S. registration
mark N124NJ;
(b) two Pratt & Whitney Model JT8D-15 engines, bearing
manufacturer's serial numbers 702911 and 687338;
(c) all Parts installed on, attached to or appurtenant to
the Airframe and Engines; and
(d) the Aircraft Documents specified in Schedule 1 - Part 2
of the Agreement.
2. LESSEE'S CONFIRMATION The Lessee confirms to the Lessor
that as at the time indicated above, being the time of
Delivery:
(a) the Lessee's representations and warranties contained
in Clauses 2.1 and 2.2 of the Agreement are hereby
repeated;
(b) the Aircraft is insured as required by the Agreement;
and
(c) the Lessee confirms that there have been affixed to the
Aircraft and the Engines the fireproof notices required
by the Agreement.
3. LESSOR'S CONFIRMATION The Lessor confirms to the Lessee
that, as at the time indicated above, being the time of
Delivery, the Lessor's representations and warranties
contained in Clause 2.4 of the Agreement are hereby
repeated.
<PAGE>
IN WITNESS WHEREOF Lessor and Lessee have executed this
Certificate of Acceptance on the date set forth in Clause 1 of
this Certificate.
SIGNED on behalf of
AIRCRAFT 22122, INC.
By:__________________________
Name:
Title:
SIGNED on behalf of
VANGUARD AIRLINES, INC.
By:__________________________
Name:
Title:
<PAGE>
EXHIBIT B
CERTIFICATE OF DELIVERY CONDITION
This Certificate of Delivery Condition is delivered on
October __, 1999 by Vanguard Airlines, Inc. (the "Lessee") to
Aircraft 22122, Inc. (the "Lessor") pursuant to Lease Agreement
22122, dated October __, 1999, between the Lessor and the Lessee
(the "Agreement"). Capitalized terms used but not defined in
this Certificate of Delivery Condition shall have the meaning
given to such terms in the Agreement.
1. AIRCRAFT ACCEPTANCE: Lessee hereby confirms to Lessor that,
pursuant to the Agreement, Lessee has accepted the Boeing Model
737-230 airframe bearing manufacturer's serial number 22122 and
U.S. registration mark N124NJ, together with the two Pratt &
Whitney Model JT8D-15 engines bearing manufacturer's serial
numbers 702911 and 687338, all Parts installed on, attached to or
appurtenant to the Airframe and Engines and the Aircraft
Documents, and Lessor and Lessee agree that such Airframe,
Engines and Parts are in the condition set forth on the attached
Annex 1.
2. CONFIRMATION OF DELIVERY CONDITION: Lessee confirms to
Lessor that at the time of acceptance of the Leased Property, the
Leased Property complied in all respects with the condition
required at Delivery under Clause 4.2 and Schedule 3 of the
Agreement, except for the items (if any) listed on the attached
Annex 2 (the "Discrepancies"). Lessor and Lessee agree that the
Discrepancies (if any) shall be corrected as set forth on the
attached Annex 2.
IN WITNESS WHEREOF Lessor and Lessee have executed this
Certificate of Acceptance on the date set forth at the beginning
of this Certificate.
SIGNED on behalf of SIGNED on behalf of
AIRCRAFT 22122, INC. VANGUARD AIRLINES, INC.
By:______________________ By:________________________
Name: Name:
Title: Title:
<PAGE>
ANNEX 1
MAINTENANCE STATUS AT DELIVERY
DATE: October __, 1999
AIRFRAME TIME:
Total Flight Hours: _____
Total Cycles: _____
AIRFRAME LIMITS:
Type of Check: C Check
Check Interval: 13 Month
Time Since Last Check: 0
ENGINE DATA:
Position: No.1 No.2
Model: JT8D-15 JT8D-15
Serial Numbers: 702911 687338
Total Flight Hours: _____ _____
Total Cycles: _____ _____
Flight Hours Since Last CER: 0 0
Cycles Since Last CER: 0 0
Flight Hours to Next Hard Limit: _____ _____
Cycles to Next Hard Limit: _____ _____
APU:
Model: GTCP85-1298
Serial Number: P-137
Total Flight Hours: ______
Total Cycles: ______
Flight Hours Since Last CER: 0
Cycles Since Last CER: 0
Flight Hours Remaining on LLPs: No LLPs
Cycles Remaining on LLPs: No LLPs
<PAGE>
LANDING GEAR LIMITS:
Position: Nose Left Right
Overhaul Interval: 20,000H 20,000H 20,000H
Time Since Overhaul: 0 0 0
Time to Next Overhaul: 20,000H 20,000H 20,000H
<PAGE>
ANNEX 2
DISCREPANCIES
DESCRIPTION OF DISCREPANCY AGREED CORRECTIVE ACTION
<PAGE>
EXHIBIT C
FORM OF CONSENT
[To be Supplied]
<PAGE>
EXHIBIT D
FORM OF LEGAL OPINION
[To be Supplied]
<PAGE>
EXHIBIT E
FORM OF LETTER OF CREDIT
[N/A]
<PAGE>
EXHIBIT F
FORM OF MONTHLY STATUS REPORT
AIRCRAFT TYPE REG. MARK SERIAL NO. MONTH ENDING
Boeing 737-230 N124NJ 22122 ......................
1. AIRCRAFT UTILIZATION:
(a) Airframe Total Flight Hours .............
(b) Airframe Total Cycles .............
(c) Airframe Flight Hours for Month .............
(d) Airframe Cycles for Month .............
(e) Airframe Flight Hours since Overhaul .............
(f) Airframe Cycles since Overhaul .............
(g) Airframe Flight Hours since C-Check .............
(h) Airframe Cycles since C-Check .............
2. POWERPLANT STATUS: NO.1 NO.2
(a) Serial Nos. of Delivered Engines 702911 687338
(b) Serial Nos. of Replacement Engines ............ .............
(if applicable)
(c) Serial Nos. of Installed Engines ............ .............
(if different from (a) or (b) above)
(d) Current Location of Delivered or ............ .............
Replacement Engines (as applicable)
(if not installed on Airframe)
<PAGE>
(e) Total Time Since New of Delivered ............ .............
or Replacement Engines (as applicable)
(f) Total Cycles Since New of Delivered ............ .............
or Replacement Engines (as applicable)
(g) Total Time Since Last Service ............ .............
(h) Total Cycles Since Last Service ............ .............
(i) Flight Hours to Limiter ............ .............
(j) Cycles to Limiter ............ .............
(k) Limiter ............ .............
(l) Total Flight Hours for the Month for ............ .............
each Delivered or Replacement Engine
(as applicable)
(m) Total Cycles for the Month for each ............ .............
Delivered or Replacement Engine
(as applicable)
(n) Serial No. of Delivered APU .............
(o) Serial No. of Replacement APU .............
(if applicable)
(p) Serial No. of Installed APU .............
(if different from (a) or (b) above)
(q) Current Location of Delivered or .............
Replacement APU (as applicable)
(if not installed on Airframe)
(r) Total Time Since New of Delivered .............
or Replacement APU (as applicable)
(s) Total Cycles Since New of Delivered .............
or Replacement APU (as applicable)
<PAGE>
(t) Total Hours for the Month for .............
Delivered or Replacement APU
(as applicable)
(u) Total Cycles for the Month for .............
Delivered or Replacement APU
(as applicable)
3. ROUTINE CHECKS / A.D. AND S.B. COMPLIANCE:
(a) Routine Checks (A and above) performed during Month:
(b) Airworthiness Directives complied with during Month:
(c) Service Bulletins complied with during Month:
4. AIRCRAFT DAMAGE OR ENGINE CHANGES:
Details of any repairs carried out to the Aircraft beyond
SRM limits and Engine changes, giving reasons for repair or
change:
5. UPCOMING MAINTENANCE CHECKS
(a) Maintenance Checks (C segment and above) scheduled or
expected to be performed on the Airframe during the next 12
months:
(b) Scheduled shop visits or heavy maintenance visits scheduled
or expected to be performed on the Engines during the next
12 months:
(c) Overhauls, or replacements scheduled or expected to be
performed on the APU or Landing Gear during the next 12
months:
Date:___________, ___ CERTIFIED FOR AND ON BEHALF OF VANGUARD
AIRLINES, INC.
By:_______________________________
Name:
Title:
<PAGE>
EXHIBIT G
CERTIFICATE OF REDELIVERY
This Certificate of Redelivery is delivered by Aircraft
22122, Inc. (the "Lessor") to Vanguard Airlines, Inc. (the
"Lessee") pursuant to Lease Agreement 22122, dated October __,
1999, between the Lessor and the Lessee (the "Agreement").
Capitalized terms used but not defined in this Certificate of
Acceptance shall have the meaning given to such terms in the
Agreement.
1. DETAILS OF ACCEPTANCE
The Lessor hereby confirms to the Lessee that the Lessor has
at __:__ _.m. G.M.T. on this _____ day of _________, at
__________, ________ accepted for redelivery the following,
in accordance with the provisions of the Agreement.
(a) one Boeing Model 737-230 airframe, bearing
manufacturer's serial number 22122 and U.S.
registration mark N124NJ;
(b) two Pratt & Whitney Model JT8D-15 engines, bearing
manufacturer's serial numbers [______] and [______];
(c) all Parts installed on, attached to or appurtenant to
the Airframe and Engines; and
(d) the Aircraft Documents specified in Schedule 1 - Part 2
of the Agreement.
2. LESSOR'S CONFIRMATION The Lessee confirms to the Lessor
that as at the time indicated above the Lessor is satisfied
that the Aircraft is in the condition required Clause 12 and
Schedule 4 of the Agreement and has been redelivered to the
Lessor in accordance with the Agreement.
IN WITNESS WHEREOF, Lessor has executed this Certificate of
Redelivery on the date set forth in Clause 1 of this Certificate
of Redelivery.
AIRCRAFT 22122, INC.
By:___________________________
Name:
Title:
<PAGE>
AIRCRAFT LEASE AGREEMENT
(MSN 22882)
This AIRCRAFT LEASE AGREEMENT (MSN 22882), dated as of
February 22, 2000 (this "Agreement" or "Lease"), is entered by
and between US AIRWAYS, INC., a Delaware corporation, as lessor
("Lessor"), and VANGUARD AIRLINES, INC., a Delaware corporation,
as lessee ("Lessee").
RECITALS:
WHEREAS, Lessee desires to lease from Lessor and Lessor is
willing to lease to Lessee the Aircraft described herein upon the
terms and conditions of this Lease.
NOW, THEREFORE, for and in consideration of the premises
and the mutual agreements contained herein and for other good and
valuable consideration, the sufficiency and receipt of which are
hereby acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINITIONS AND CONSTRUCTION
Capitalized terms used but not defined herein shall have the
respective meanings set forth or incorporated by reference, and
shall be construed and interpreted in the manner described, in
Annex A.
SECTION 2. DELIVERY AND ACCEPTANCE
2.1 AGREEMENT TO LEASE
Subject to the satisfaction or waiver of the conditions set
forth herein, Lessor hereby agrees to lease to Lessee hereunder,
and Lessee hereby agrees to lease from Lessor hereunder, the
Aircraft for the Term, as evidenced by the execution by Lessor
and Lessee of a Lease Supplement leasing the Aircraft hereunder.
2.2 ACCEPTANCE BY LESSEE
By executing and delivering Lease Supplement No. 1, Lessee
confirms to Lessor that (i) Lessee has duly accepted delivery of
the Aircraft and Aircraft Documents for all purposes of this
Agreement, (ii) Lessee has duly accepted the Aircraft and
Aircraft Documents as being in satisfactory condition and in good
working order, without defect in design, operation or fitness for
use, whether or not discoverable by Lessee and (iii) the Aircraft
has been duly marked in accordance with Section 7.1.3(a). Subject
to the satisfaction of the conditions set forth in Section 1 of
Letter Agreement No. 1, Lessee acknowledges and agrees that
Lessee shall accept the Aircraft and Aircraft Documents in their
respective "AS-IS, WHERE-IS" condition and that Lessee shall
execute and deliver Lease Supplement No. 1, as evidence of such
satisfaction and acceptance, immediately upon tender of the
Aircraft and Aircraft Documents by Lessor to Lessee on the
Delivery Date.
<PAGE>
2.3 CONDITIONS TO LESSOR'S OBLIGATIONS
Lessor's obligation to deliver the Aircraft to Lessee for
lease hereunder shall be subject to Lessor's receipt of the
following documents or other evidence, and to the completion of
the following actions and other requirements, in each case in
form and substance satisfactory to Lessor, on or before the
Delivery Date:
(a) This Lease, Letter Agreement No. 1 and Lease Supplement
No. 1, each executed by Lessee and Lessor;
(b) A certificate of the corporate secretary or other
officer of Lessee (i) certifying the incumbency of the person or
persons authorized to execute and deliver this Lease and the
other Operative Agreements and the documents related hereto and
thereto on behalf of Lessee and (ii) certifying and attaching a
copy of the authorizing resolutions of Lessee's Board of
Directors.
(c) A certificate signed by an authorized officer of Lessee
stating that: (i) the representations and warranties of Lessee
set forth in Schedule 4 hereto are true and accurate on and as of
such date as though made on and as of such date (except, to the
extent that such representations and warranties relate solely to
an earlier date), in which case it shall state that such
representations and warranties are true and accurate as of such
earlier date, and (ii) no Default or Event of Default has
occurred and is continuing, or would result from the lease of the
Aircraft pursuant to the Lease;
(d) An insurance certificate and broker's opinion letter
signed by Lessee's insurance brokers evidencing compliance with
the insurance provisions of Section 10 not later than five (5)
Business Days before the Delivery Date;
(e) A favorable opinion of counsel to Lessee, dated the
Delivery Date, insubstantially the form of Schedule 4 hereto,
addressed to Lessor;
(f) [Intentionally Omitted]; (g) [Intentionally Omitted];
(h) Such other evidence as Lessor may reasonably require
with respect to the satisfaction of the conditions precedent set
forth in this Lease;
(i) Lessor's receipt of the first installment of Basic Rent
hereunder not later than the Delivery Date; and
(j) Lessor's receipt of the aggregate amount of the
Security Deposit not later than two (2) Business Days before the
Delivery Date.
SECTION 3. TERM, RENT AND SECURITY DEPOSIT
3.1 TERM
The Term of this Lease will commence on the Delivery Date
and expire on the Expiration Date, unless this Agreement or the
leasing of the Aircraft is earlier terminated in accordance with
any provision of this Agreement.
<PAGE>
3.2 RENT
3.2.1 BASIC RENT
During the Term, Lessee shall pay to Lessor, on each
Payment Date, in the manner and in funds of the type specified in
Section 3.4, Basic Rent, monthly in advance, in the amount
specified in Schedule 1 hereto.
3.2.2 SUPPLEMENTAL RENT
Lessee shall also pay to Lessor, or to whosoever shall
be entitled thereto, any and all Supplemental Rent when and as
the same shall become due and owing. Lessee will also pay to
Lessor, or to whosoever shall be entitled thereto, on demand, as
Supplemental Rent, to the extent permitted by applicable law,
interest at the Payment Due Rate on any part of any amount of
Rent (including, without limitation, Supplemental Rent) not paid
by 3:00 PM, New York City time, on the date when due, for the
period from and including the date on which the same was due to,
but excluding, the date of payment in full.
3.2.3 HOURLY RENT
Lessee shall pay with respect to each Hourly Rent
Interval, additional Rent for the use of the Aircraft during the
Term as follows:
(a) Rent for the "Q"-Check equal to the "Q"-Check
Hourly Rate multiplied by the number of Cycle/Flight Hours
(measured to two decimal places) operated by Lessee during such
Hourly Rent Interval (""Q"-Check Hourly Rent");
(b) Rent for each Engine equal to the Engine Hourly
Rate multiplied by the number of Cycle/Flight Hours (measured to
two decimal places) operated by Lessee during such Hourly Rent
Interval (for each Engine, "Engine Hourly Rent"); and
(c) Rent for each landing gear equal to the Landing
Gear Hourly Rate multiplied by the number of Cycle/Flight Hours
(measured to two decimal places) operated by Lessee during such
Hourly Rent Interval (for each year, "Landing Gear Hourly Rent").
The "Q"-Check Hourly Rent, the Engine Hourly Rent and
the Landing Gear Hourly Rent shall accrue during each Hourly Rent
Interval and shall be paid by Lessee to Lessor as Supplemental
Rent in the manner provided by Section 3.2.2 not later than 15
days after the conclusion of the Hourly Rent Interval for which
it is calculated. Concurrently with the payment thereof, Lessee
shall report to Lessor the number of flight hours and cycles
accumulated in respect of the Hourly Rent Interval for which
payment is being made.
All Hourly Rent is the property of Lessor. As such,
Lessor may commingle all Hourly Rent payments with its general
funds and Lessee has no interest therein and except as otherwise
provided in this Agreement, Lessee has no right to seek to use
any such payments, and all Hourly Rent Balances may be applied by
Lessor in its sole and reasonable discretion to satisfy any of
Lessee's obligations under the Operative Agreements.
<PAGE>
3.3 SECURITY DEPOSIT
(a) Before the Delivery Date, Lessee shall pay to Lessor
the aggregate amount of the Security Deposit (the "Cash Deposit")
in immediately available funds, as follows: (i) Lessor hereby
acknowledges receipt of the Initial Deposit; (ii) the Additional
Deposit is payable by Lessee upon its execution of this Lease;
and (iii) the Final Deposit is payable by Lessee not later than
two (2) Business Days prior to the Delivery Date. The Cash
Deposit shall be nonrefundable unless (x) the Aircraft suffers a
total loss prior to the Delivery Date or (y) the Aircraft suffers
material deterioration to the agreed delivery condition thereof
as set forth in Letter Agreement No. 1 prior to the Delivery Date
and Lessor does not undertake to correct or cause the correction
of such material deterioration within 30 days after the projected
delivery date of February 18, 2000. Notwithstanding the
foregoing and subject to the delivery of the sixth Boeing 737-200
Advanced aircraft to Lessee from Lessor as contemplated by the
LOI, and so long as no Default or Event of Default has occurred
and is continuing hereunder, Lessee may substitute an irrevocable
freely transferable letter of credit in the amount of the Final
Deposit, in form and substance and from a U.S. bank reasonably
acceptable to Lessor for the equivalent amount of the Cash
Deposit ("Letter of Credit") which Letter of Credit together with
the balance of the Cash Deposit shall comprise the Security
Deposit. Within five (5) Business Days of Lessor's receipt of
the Letter of Credit, Lessor shall promptly return the amount of
the Final Deposit to Lessee.
(b) The Security Deposit shall be held by Lessor as
security for the timely payment by Lessee of all amounts payable
by it hereunder, under each other Operative Agreement and any
other aircraft lease agreement between Lessor or any of its
Affiliates and Lessee or any of its Affiliates ("Other Lease
Agreement"), so long as Lessor and/or any of its Affiliates has
an interest hereunder and under any such Other Lease Agreement,
and the due and punctual performance by Lessee of all of its
obligations hereunder and thereunder, and Lessee hereby assigns,
transfers and pledges to Lessor, and hereby grants to Lessor a
first-priority security interest in, the Security Deposit to
secure such payment and such performance. Lessee shall not
assign, transfer, pledge or otherwise dispose of any of its
rights or interests in the Security Deposit except as provided in
the preceding sentence.
(c) The Security Deposit may be assigned, pledged, or
charged by Lessor to or in favor of any Permitted Transferee.
Interest shall accrue on the Cash Deposit at the simple interest
rate (i.e., no compounding) of three percent (3%) per annum, and
such interest shall be retained in the Cash Deposit. Upon
Lessee's request, Lessor shall provide to Lessee on or before
January 31 of each year during the Term (or within 30 days of
such request in the event that Lessee makes such request after
January 1 of any year during the Term).
(d) If an Event of Default occurs, in addition to all other
rights Lessor shall have as a secured party under applicable law,
Lessor may apply the Security Deposit as provided in Section
13.15 hereof. If Lessor applies all or any portion of such
Security Deposit, such application shall not be deemed a cure of
any such Event of Default, unless Lessee shall within three (3)
Business Days after written demand therefor by Lessor cause the
Cash Deposit to be restored to its original amount of $220,000 or
the amount of the Final Deposit if a Letter of Credit has been
furnished by Lessee and either (i) cause the credit available
under the Letter of Credit comprising a portion of the Security
Deposit to be restored to its original level or (ii) cause a new
Letter of Credit to be issued by a bank reasonably acceptable to
the Lessor in the <PAGE> original amount. The failure of Lessee
to do so shall be an Event of Default under this Lease. The Cash
Deposit may be commingled with other amounts of Lessor (or its
designee). The Letter of Credit and Cash Deposit (including
accrued interest) comprising the Security Deposit shall be
released or returned by Lessor, within five (5) Business Days of
the expiration or earlier termination of this Lease and
performance by Lessee of all its obligations hereunder, and the
Letter of Credit shall expire no earlier than 30 days after the
return of the Aircraft to Lessor.
3.4 PAYMENTS
(a) Payments of Rent and any and all other amounts payable
by Lessee hereunder and under any other Operative Agreement shall
be paid by wire transfer of immediately available Dollars, in
such manner that Lessor receives the full amount of such payments
not later than 3:00 PM, New York City time, on the date when due,
to the account of Lessor specified under "Payment Location" on
Schedule 2 hereto or to such other account in the United States
as directed by Lessor to Lessee in writing or, in the case of any
payment of Supplemental Rent expressly payable to a person other
than Lessor, to the person that shall be entitled thereto to such
account in the United States as such person may specify from time
to time to Lessee.
(b) Except as otherwise expressly provided herein,
whenever any payment of Rent, or any other amount payable under
this Agreement, Letter Agreement No. 1 or any other Operative
Agreement shall be due on a day that is not a Business Day, such
payment shall be made on the next day that is a Business Day,
and, if such payment is made on such next Business Day, no
interest shall accrue on the amount of such payment during such
extension.
(c) All computations of interest under this Agreement
shall be made on the basis of a year of 360 days comprised of
twelve 30-day months.
SECTION 4. DISCLAIMER; CERTAIN AGREEMENTS OF LESSOR; SECTION
1110 MATTERS
4.1 DISCLAIMER
UPON LESSEE'S EXECUTION AND DELIVERY OF LEASE SUPPLEMENT
NO. 1, LESSOR LEASES AND LESSEE ACCEPTS AND TAKES THE AIRCRAFT IN
ITS "AS-IS, WHERE-IS" CONDITION. EXCEPT AS OTHERWISE PROVIDED IN
THE OPERATIVE AGREEMENTS, LESSEE ACKNOWLEDGES AND AGREES THAT AS
BETWEEN LESSEE AND LESSOR (i) THE AIRFRAME AND EACH ENGINE ARE OF
A SIZE, DESIGN, CAPACITY AND MANUFACTURE SELECTED BY AND
ACCEPTABLE TO LESSEE, (ii) LESSEE IS SATISFIED THAT THE AIRFRAME
AND EACH ENGINE ARE SUITABLE FOR THEIR RESPECTIVE PURPOSES, AND
(iii) LESSOR DOES NOT MAKE, HAS NOT MADE AND SHALL NOT BE DEEMED
TO HAVE MADE, AND WILL BE DEEMED TO HAVE EXPRESSLY DISCLAIMED,
AND LESSEE HEREBY WAIVES, RELEASES AND RENOUNCES, ANY WARRANTY,
REPRESENTATION, GUARANTY, LIABILITY AND OBLIGATION OF LESSOR AND
ANY RIGHT, CLAIM AND REMEDY OF LESSEE AGAINST LESSOR, EXPRESS OR
IMPLIED, ARISING BY OPERATION OF LAW, COURSE OF PERFORMANCE,
COURSE OF DEALING, USAGE OF TRADE OR OTHERWISE, AS TO:
<PAGE>
(w) THE TITLE, AIRWORTHINESS, VALUE, CONDITION, DESIGN,
OPERATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY
OR FITNESS FOR USE OR FOR ANY PARTICULAR PURPOSE OF
THE AIRFRAME, ANY ENGINE, ANY PART, ANY DATA OR ANY
OTHER THING DELIVERED, SOLD OR TRANSFERRED
HEREUNDER,
(x) THE QUALITY OF THE MATERIAL OR WORKMANSHIP WITH
RESPECT TO THE AIRFRAME, ANY ENGINE, ANY PART, ANY
DATA OR ANY OTHER THING DELIVERED, SOLD OR
TRANSFERRED HEREUNDER,
(y) THE ABSENCE OF LATENT OR ANY OTHER DEFECT OR
NONCONFORMANCE IN THE AIRFRAME, ANY ENGINE, ANY
PART, ANY DATA OR ANY OTHER THING DELIVERED, SOLD OR
TRANSFERRED HEREUNDER, WHETHER OR NOT DISCOVERABLE,
OR
(z) THE ABSENCE OF ANY ACTUAL OR ALLEGED INFRINGEMENT OF
ANY PATENT, TRADEMARK OR COPYRIGHT OR THE LIKE.
EXCEPT AS OTHERWISE PROVIDED IN THIS LEASE, LESSEE FURTHER
WAIVES, DISCLAIMS, RELEASES AND RENOUNCES ANY LIABILITY, RIGHT,
CLAIM, REMEDY OR OBLIGATION BASED ON TORT, INCLUDING STRICT
LIABILITY, WHETHER OR NOT ARISING FROM THE NEGLIGENCE (WHETHER
ACTIVE, PASSIVE OR IMPUTED) OF LESSOR, ANY OBLIGATION, LIABILITY,
RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO THE AIRFRAME, ANY
ENGINE, ANY PART, ANY DATA OR ANY OTHER THING DELIVERED, SOLD OR
TRANSFERRED HEREUNDER, OR ANY OTHER REPRESENTATION OR WARRANTY
WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRFRAME, ANY
ENGINE, ANY PART, ANY DATA OR ANY OTHER THING DELIVERED, SOLD OR
TRANSFERRED HEREUNDER.
4.2 CERTAIN AGREEMENTS OF LESSOR
So long as no Default or Event of Default shall have
occurred and be continuing, Lessor agrees to make available to
Lessee such rights as Lessor may have under any warranty with
respect to the Aircraft made, or made available, by Airframe
Manufacturer or Engine Manufacturer or any of their respective
subcontractors or suppliers, as the case may be, or any other
party to the extent the same may be assignable.
4.3 QUIET ENJOYMENT
So long as no Default or Event of Default shall have
occurred and be continuing, Lessor shall not interfere, and shall
not permit any Person lawfully claiming through Lessor to
interfere, with Lessee's rights hereunder to quiet use,
possession and enjoyment of the Aircraft during the Term. 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
<PAGE> RENOUNCES AND LESSOR EXPRESSLY DISCLAIMS. The foregoing,
however, shall not be construed or deemed to modify or condition
in any respect the obligations of Lessee pursuant to Section 15,
which obligations are absolute and unconditional.
4.4 TITLE TRANSFERS BY LESSOR
If Lessor shall be required to transfer title to the
Aircraft, Airframe or any Engine to Lessee or any other person
pursuant to Sections 5.3 or 18.1, as the case may be, then (a)
Lessor shall (1) transfer to Lessee or such other person, as the
case may be, all of Lessor's right, title and interest in and to
the Aircraft, Airframe or such Engine, as the case may be, in its
respective "AS-IS, WHERE-IS" condition, (2) assign to Lessee or
such other person, as the case may be, all warranties of Airframe
Manufacturer, Engine Manufacturer or any other party with respect
to the Aircraft, Airframe or such Engine, to the extent the same
may be assignable and (3) assign to Lessee or such other person,
as the case may be, if and to the extent permitted, all claims,
if any, for damage to the Aircraft, Airframe or such Engine, in
each case free of Lessor Liens, and without recourse or warranty
of any kind whatsoever (except as to the transfer described in
clause (1) above and as to the absence of such Lessor Liens, as
aforesaid), and (b) Lessor shall promptly deliver to Lessee or
such other person, as the case may be, a bill of sale and
agreements of assignment, as aforesaid, and such other
instruments of transfer, all in form and substance reasonably
satisfactory to Lessor and Lessee (or such other person, as the
case may be), as Lessee (or such other person, as the case may
be) may reasonably request.
4.5 LESSOR'S INTEREST IN CERTAIN ENGINES
In the event Lessee shall have received from the lessor,
conditional seller, indenture trustee or secured party of any
airframe leased to, or purchased by, Lessee (which is subject to
a lease, conditional sale, trust indenture or other security
agreement) a written agreement complying with clause (b) of
Section 7.2.5, Lessor hereby agrees for the benefit of such
lessor, conditional seller, indenture trustee or secured party
that Lessor will not acquire or claim, as against such lessor,
conditional seller, indenture trustee or secured party, any
right, title or interest in any engine as the result of such
engine being installed on the Airframe at any time while such
engine is subject to such lease, conditional sale, trust
indenture or other security agreement and owned by such lessor or
conditional seller or subject to a trust indenture or security
interest in favor of such indenture trustee or secured party.
4.6 LEASE FOR U.S. FEDERAL INCOME TAX LAW PURPOSES;
SECTION 1110 OF BANKRUPTCY CODE
(a) Lessee and Lessor agree that this Lease is, and shall
be treated as, a lease for U.S. federal income tax purposes of
the Aircraft, Airframe, Engines, Parts and Aircraft Documents.
(b) It is the intention of each of Lessee and Lessor that
Lessor shall be entitled to the benefits of Section 1110 with
respect to the right to take possession of the Aircraft,
Airframe, Engines, Parts and Aircraft Documents as provided in
this Lease, and in any instance where more than one construction
of the terms and conditions of this Lease or any other pertinent
Operative Agreement is possible, or of the facts and
circumstances underlying the transactions contemplated herein or
therein, Lessor and Lessee agree that a construction which would
create <PAGE> and preserve such benefits shall control over any
construction which would not create and preserve such benefits.
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
(c) Lessor and Lessee agree that, for all purposes of
applicable Law, this Lease constitutes an agreement of lease and
nothing contained herein shall be construed as conveying to
Lessee any right, title or interest in the Aircraft, Airframe,
Engines, Parts or Aircraft Documents except as a lessee only.
4.7 CONTRIBUTION BY LESSOR FOR CERTAIN MAINTENANCE AND
OVERHAULS
Upon submission by Lessee to Lessor of invoices,
statements, certificates, receipts or mutually acceptable
documentation which may include internal Lessee documents
(collectively, "Maintenance Invoices") in detail reasonably
satisfactory to Lessor as to the identity of the specific
Airframe, Engine or landing gear, the content of the work,
completion of the work, the date of completion of the work and
the cost of the work from an FAA-approved maintenance facility
or maintenance facility included in Lessee's FAA-approved
operations specification evidencing the performance of such
maintenance:
(a) for the Airframe, for the accomplishment of a
completed scheduled "Q"-Check (a major inspection and
rectification of structural deficiencies or overhauls of an
Airframe) in accordance with Lessee's Maintenance Program (""Q"-
Check Maintenance");
(b) for any Engine, for performance of a completed engine
shop visit (i.e. heavy maintenance visit) for an Engine which, at
a minimum, includes the repair or refurbishment of one or more of
the following: the hot section, the high pressure section, the
high or low turbines, the low compressor or high compressor,
casings, shafts, bearings, N1 Gearbox, N2 Gearbox or life limited
parts (LLPs) replacement; and
(c) with respect to any landing gear, for the
performance of an overhaul of such landing gear assembly,
including replacement of any LLPs ("Landing Gear Maintenance").
Lessor shall, so long as no Financial Default or Event of
Default exists, pay, as an independent obligation to (i) Lessee,
or (ii) at Lessor's option, to the maintenance or overhaul
facility, if Lessee has not paid such maintenance performer such
amounts if they are due, in the case of "Q"-Check Maintenance,
from the applicable "Q"-Check Hourly Rent Balance for such
Airframe, in the case of Engine Maintenance, from the applicable
Engine Hourly Rent Balance for such Engine, and, in the case of
Landing Gear Maintenance, from the applicable Landing Gear Hourly
Rent Balance for such gear, a sum equal to the applicable amount
evidenced by <PAGE> such Maintenance Invoices to the extent that
there are funds sufficient for such payment then remaining from
the applicable Hourly Rent Balance, as the case may be. To the
extent the applicable Hourly Rent Balance is insufficient to pay
such Maintenance Invoice in full, the deficiency shall be the
responsibility of Lessee and paid by Lessee to the applicable
maintenance performer, and Lessee shall not be entitled to
payment with respect to an inapplicable or insufficient Hourly
Rent Balance, nor to a credit against Hourly Rent payments then
payable or to be made in the future or to be made against any
other Item or Part.
Lessee understands and agrees that in no event shall
Lessor be required to make any payments if there exists a zero or
deficit balance in any specific Hourly Rent Balance nor shall
Lessor be obliged to apply funds from any other Hourly Rent
Balance or otherwise. Lessee further understands and agrees that
Lessor shall have no obligation to reimburse or otherwise pay,
indemnify or compensate Lessee for the cost of any maintenance or
repair except as expressly and specifically enumerated in sub-
clauses (a) - (c) of this Section 4.7. Without limiting the
generality of the foregoing, and except as otherwise provided
herein, it is understood that Lessor shall not reimburse Lessee
for maintenance or repairs covered by insurance or warranty or
required as a result of an airworthiness directive (including
Stage 3 noise regulations), manufacturer's service bulletin,
routine airframe maintenance, i.e., "A," "B," or "C" checks, non-
routine or improper operations, misuse, neglect, accident,
ingestion, foreign object damage or other accidental cause. No
other reimbursement of Hourly Rent will be made in any other
circumstances.
Hourly Rent Balances shall bear simple interest (i.e.,
without compounding) at a rate of three percent (3%) per annum.
Such interest shall be deemed to become part of the respective
Hourly Rent Balances and may be available for the above-described
maintenance.
SECTION 5. RETURN OF AIRCRAFT
5.1 COMPLIANCE WITH ANNEX B
Lessee shall comply with each of the provisions of Annex B
hereto, which provisions are hereby incorporated by this
reference as if set forth in full herein. Without limiting any
other rights of Lessor under this Lease or any other Operative
Agreement, Lessee acknowledges that the provisions of this
Section 5 and of Annex B, are of the essence of this Lease and
the transactions contemplated herein.
5.2 RETURN OF OTHER ENGINES
In the event that any Engine owned by Lessor shall not be
installed on the Airframe at the time of return hereunder, such
Engine shall be deemed to have suffered an Event of Loss as of
the sixty-first day prior to the date of such return, with the
effect that Lessee shall be required to return the Airframe
hereunder with a Replacement Engine meeting the requirements of,
and in accordance with, Section 10 hereof and Annex B hereto.
5.3 FAILURE TO RETURN AIRCRAFT
If Lessee shall, for any reason whatsoever, fail to return
the Aircraft and the Aircraft Documents at the time specified
herein, all obligations of Lessee under this Lease (including,
<PAGE> without limitation, the obligation to pay Basic Rent
hereunder, at a daily rate equal to (a) Basic Rent divided by 30
days for the first 15 days and (b) 150% of Basic Rent divided by
30 days for each day in excess of 15 days, shall continue in
effect with respect to the Aircraft until the Aircraft is
returned to Lessor in compliance with the requirements of this
Section 5 and Annex B to this Lease; provided, however, that this
Section 5.3 shall not be construed as permitting Lessee to fail
to meet its obligation to return the Aircraft or the Aircraft
Documents in accordance with the requirements hereof or
constitute, or be deemed to constitute, a waiver of any Event of
Default resulting from Lessee's failure to return the Aircraft or
the Aircraft Documents or otherwise.
SECTION 6. LIENS
Lessee shall not, directly or indirectly, create, incur,
assume or suffer to exist any Lien on or with respect to the
Aircraft, the Airframe, any Engine, any Part or any Aircraft
Documents, title to any of the foregoing or any interest therein,
or this Lease or any interest of Lessor herein, or any amount
payable hereunder, including, without limitation, any Rent,
except (a) the respective rights of Lessor or Lessee under the
Operative Agreements, or of any Permitted Sublessee under any
Permitted Sublease; (b) Lessor Liens; (c) the rights of others
under agreements or arrangements to the extent expressly
permitted by the terms of Sections 7.2 and 7.3 and Section F of
Annex C; (d) Liens for Taxes of Lessee (and its U.S. federal tax
law consolidated group), or Liens for Taxes of any Tax Indemnitee
(and its U.S. federal tax law consolidated group) for which
Lessee is obligated to indemnify such Tax Indemnitee under any of
the Operative Agreements, in any such case either not yet due or
being contested in good faith by appropriate proceedings so long
as such Liens and such proceedings do not involve any material
risk of the sale, forfeiture or loss (including loss of use) of
the Aircraft, the Airframe, any Engine or any of the Aircraft
Documents, or any interest therein or any discernible risk of
criminal liability or any material risk of civil penalty against
Lessor; (e) materialmen's, mechanics', workers', repairers',
employees' or other like Liens arising in the ordinary course of
business for amounts the payment of which is either not yet
delinquent or is being contested in good faith by appropriate
proceedings, so long as such Liens and such proceedings do not
involve any material risk of the sale, forfeiture or loss
(including loss of use) of the Aircraft, the Airframe, any Engine
or any of the Aircraft Documents, or any interest therein or any
discernible risk of criminal liability or any material risk of
civil penalty against Lessor; and (f) Liens arising out of any
judgment or award against Lessee (or any Permitted Sublessee), so
long as such judgment shall, within 30 days after the entry
thereof, have been discharged or vacated, or execution thereof
stayed pending appeal or shall have been discharged, vacated or
reversed within 30 days after the expiration of such stay, and so
long as during any such 30-day period there is not, or any such
judgment or award does not involve, any material risk of the
sale, forfeiture or loss (including loss of use) of the Aircraft,
the Airframe, any Engine or any of the Aircraft Documents, or any
interest therein or any discernible risk of criminal liability or
any material risk of civil penalty against Lessor. Lessee shall
promptly take such action as may be necessary duly to pay,
satisfy, remove and discharge any Lien on or with respect to the
Aircraft, the Airframe, any Engine, any Part or any Aircraft
Documents, title to any of the foregoing or any interest therein,
or this Lease or any interest of Lessor herein, or any amount
payable hereunder not excepted above if the same shall at any
time arise in respect of the Aircraft, the Airframe, any Engine,
any Part, or the Aircraft Documents and shall promptly provide to
Lessor evidence of such payment, satisfaction, removal or
discharge.
<PAGE>
SECTION 7. REGISTRATION, OPERATION, POSSESSION, SUBLEASING AND
RECORDS
7.1 REGISTRATION AND OPERATION
7.1.1 REGISTRATION AND RECORDATION
Lessor shall cause the Aircraft to be, and at all times
during the Term to remain, duly registered with the FAA under the
Act in the name of Lessor as owner and lessor, at Lessor's
expense.
7.1.2 MARKINGS
(a) On or prior to the Delivery Date, Lessee will
cause to be affixed to, and maintained in, the cockpit of the
Airframe and on each Engine, in each case, in a clearly visible
location (it being understood that the location of such placards,
as identified to the Lessor prior to the Delivery Date, shall be
deemed to be in compliance with this requirement), a placard of a
reasonable size and shape bearing the legend, in English, set
forth under the option "Lease Identification" in Schedule 3.
Lessee shall not remove or permit the removal of such placards,
except that such placards may be removed temporarily, if
necessary, in the course of maintenance of the Airframe or
Engines. If any such placard is damaged or becomes illegible,
Lessee shall promptly replace it with a placard complying with
the requirements of this Section 7.1.2.
(b) During the Term, Lessee may letter, paint or mark
the Aircraft with the name and logo of Lessee or any Permitted
Sublessee and may cause the Aircraft to bear insignia plates or
other markings identifying the supplier or manufacturer of the
Airframe or the Engines or any Parts. Except as provided above,
Lessee will not allow the name of any person to be placed on the
Airframe or on any Engine as a designation that could reasonably
be interpreted as a claim of ownership.
7.1.3 COMPLIANCE WITH LAWS
Lessee shall not, and shall not allow any other person
to, operate, use, maintain, service, repair, overhaul or
otherwise similarly deal with the Aircraft (a) in violation of
any Law binding on or applicable to the Lessee or to the
Aircraft, the Airframe or any Engine, or any of the Aircraft
Documents, or to the operation, use, maintenance, service, repair
or overhaul of, or similar dealings in, the Aircraft, Airframe or
any Engine, or (b) in violation of any airworthiness certificate,
license or registration of any Government Entity relating to
Lessee or to the Aircraft, the Airframe or any Engine, except (1)
immaterial or non-recurring violations of which Lessee or any
Permitted Sublessee had no prior knowledge or information and
with respect to which corrective measures are taken promptly by
Lessee or a Permitted Sublessee, as the case may be, upon
discovery thereof, and (2) to the extent Lessee or any Permitted
Sublessee is contesting the validity or application of any such
law, rule, regulation, order, certificate, license or
registration in good faith in any reasonable manner which does
not involve any material risk of the sale, forfeiture or loss
(including loss of use) of the Aircraft, the Airframe, any Engine
or any of the Aircraft Documents or any interest therein or any
discernible risk of criminal liability or any material risk of
civil penalty against Lessor.
<PAGE>
7.1.4 OPERATION
Lessee agrees not to operate, use or locate the
Aircraft, the Airframe or any Engine, or allow the Aircraft, the
Airframe or any Engine to be operated, used or located (a) in any
area excluded from coverage by any insurance required by the
terms of Section 10, or (b) in any recognized or threatened area
of hostilities.
7.2 POSSESSION
Lessee will not, without the prior written consent of
Lessor, sublease or otherwise in any manner deliver, transfer or
relinquish possession of the Aircraft, the Airframe or any Engine
or install any Engine, or permit any Engine to be installed, on
any airframe other than the Airframe; provided, however, subject
to the provisions of Section 7.3, that if and for so long as (a)
no Event of Default shall have occurred and be continuing, (b)
with respect to any sublease or transfer contemplated by Section
7.2.6 below, no Default or Event of Default shall have occurred
and be continuing at the time of such sublease and (c) all
approvals, consents or authorizations required by the FAA in
connection with any such sublease or such delivery, transfer or
relinquishment of possession have been obtained and remain in
full force and effect, then Lessee may, without such prior
written consent:
7.2.1 INTERCHANGE AND POOLING
Subject or permit any Permitted Sublessee to subject
any Engine to normal interchange agreements or pooling agreements
or arrangements, in each case customary in the commercial airline
industry and entered into in writing by Lessee or such Permitted
Sublessee, as the case may be, in the ordinary course of business
and with any U.S. Air Carrier. If, notwithstanding the
foregoing, Lessor's title to any such Engine is divested under
any such agreement or arrangement, then such Engine shall be
deemed to have suffered an Event of Loss as of the date of such
divestiture, with the effect that Lessee shall be required to
replace such Engine with a Replacement Engine meeting the
requirements of, and in accordance with, Section 9.
7.2.2 TESTING AND SERVICE
Deliver or permit any Permitted Sublessee to deliver
possession of the Aircraft, Airframe, any Engine or any Part to
the manufacturer thereof or, to the extent permitted by Section B
of Annex C, to any third-party maintenance provider, for testing,
service, repair, maintenance or overhaul work on the Aircraft,
Airframe, any Engine or any Part, or, to the extent required or
permitted by the terms of Section D of Annex C, for alterations
or modifications in or additions to the Aircraft, Airframe or any
Engine, it being understood that, with respect to Engines and
Parts, delivery may be accomplished by transport on licensed or
bonded common carriers qualified in the shipping and transport of
such items.
7.2.3 INSTALLATION OF ENGINES ON OWNED AIRCRAFT
Install or permit any Permitted Sublessee to install an
Engine on an airframe owned by Lessee or such Permitted
Sublessee, as the case may be, free and clear of all Liens,
except (a) those of the type permitted under clauses (d), (e) and
(f) of Section 6 and those that <PAGE> apply only to engines
(other than Engines) and/or only to parts, appliances,
instruments, appurtenances, accessories, furnishings and other
equipment (other than Parts), and (b) the rights of third parties
under normal interchange or pooling agreements and arrangements
of the type that would be permitted under Section 7.2.1.
7.2.4 INSTALLATION OF ENGINES ON OTHER AIRFRAMES
Install or permit any Permitted Sublessee to install an
Engine on an airframe leased to Lessee or such Permitted
Sublessee, or purchased by Lessee or such Permitted Sublessee
subject to a mortgage, security agreement, conditional sale or
other secured financing arrangement, but only if (a) such
airframe is free and clear of all Liens, except (i) the rights of
the parties to such lease, or any such secured financing
arrangement, covering such airframe and (ii) Liens of the type
permitted by clauses (a) and (b) of Section 7.2.3 and (b) Lessee
shall have received from the lessor, mortgagee, secured party or
conditional seller, in respect of such airframe, a written
agreement (which may be a copy of the lease, mortgage, security
agreement, conditional sale or other agreement covering such
airframe), whereby such Person agrees, for the effective and
enforceable benefit of, among others, Lessor, that neither such
Person nor its successors or assigns will acquire or claim any
right, title or interest in, or Lien on, such Engine by reason of
such Engine being installed on such airframe.
7.2.5 INSTALLATIONS OF ENGINES ON FINANCED AIRCRAFT
Install or permit any Permitted Sublessee to install an
Engine on an airframe owned by Lessee or such Permitted
Sublessee, leased to Lessee or such Permitted Sublessee, or
purchased by Lessee or such Permitted Sublessee subject to a
conditional sale or other security agreement under circumstances
where neither Section 7.2.3 or 7.2.4 is applicable; provided,
however, that in the event of any such installation, such Engine
shall be deemed to have suffered an Event of Loss as of the date
of such installation, with the effect that Lessee shall be
required to replace such Engine with a Replacement Engine meeting
the requirements of, and in accordance with, Section 10. Until
Section 10 has been fully complied with, Lessor's interest in any
such Engine shall continue in full force and effect.
7.2.6 SUBLEASING
With respect to the Aircraft, Airframe or any Engine,
enter into a sublease with any U.S. Air Carrier or certificated
Canadian air carrier, but only if:
(a) Lessee shall provide 15 days' advance written
notice to Lessor;
(b) At the time that Lessee enters into such sublease,
no such U.S. Air Carrier or certificated Canadian air carrier
shall be insolvent or subject to any bankruptcy, insolvency,
liquidation, reorganization, dissolution or similar proceeding,
or any similar non-ordinary course transaction, shall be seeking
any reorganization or any readjustment of its debts or shall be,
or shall have substantially all of its property, in the
possession of any liquidator, trustee, receiver or similar
person;
(c) No such sublease shall provide for payment of
rent, or any amount in lieu of rent, (i) more than three months
in advance, or (ii) less frequently than once every month;
<PAGE>
(d) Any such sublease (i) shall include provisions for
the registration, maintenance, operation, possession, insurance
and inspection of the Aircraft that are substantially the same
as, or (from a lessor's perspective) more favorable than, the
applicable provisions of Sections 7, 10 and 11, (ii) shall
provide that such U.S. Air Carrier or certificated Canadian air
carrier may not further sublease or transfer its interests
(except transfers of the type permitted in Sections 7.2.1 through
7.2.5, inclusive) in the Aircraft, Airframe, Engines or Aircraft
Documents, (iii) shall not extend beyond the end of the Term, and
(iv) shall be expressly subject and subordinate to all the terms
of this Agreement and to the rights, powers and remedies of
Lessor hereunder, including, without limitation, Lessor's rights
under Section 14 to repossess the Aircraft, Airframe, Engines and
Aircraft Documents and to terminate such sublease, upon the
occurrence of an Event of Default;
(e) Lessee shall furnish to Lessor evidence reasonably
satisfactory to Lessor that the insurance required by Section 10
remains in effect;
(f) All necessary action, if any, shall have been
taken to continue in full force and effect (i) the perfection of
Lessor's title to and interest in the Aircraft, Airframe, Engines
and Aircraft Documents and (ii) Lessor's rights under this Lease;
(g) All necessary documents shall have been duly
filed, registered or recorded in such public offices as may be
required fully to preserve the title of, and the priority of the
interest of, Lessor and Lessor's Lender, if any, in the Aircraft,
Airframe, Engines and Aircraft Documents;
(h) Each such sublease shall be assigned by Lessee to
Lessor as security for the performance of all of Lessee's
obligations under this Lease (with Lessee retaining all rights of
sublessor thereunder, to the extent consistent with this Section
7.2.6, (i) except the right to receive rents and (ii) if and for
so long as there shall not have occurred and be continuing an
Event of Default);
(i) Lessee shall reimburse the reasonable out-of-
pocket fees and expenses, including, without limitation,
reasonable fees and disbursements of counsel, incurred by Lessor
in connection with any such sublease; and
(j) For all purposes of this Section 7.2.6, the term
"sublease" shall be deemed to include interchange agreements with
respect to the Aircraft or Airframe.
7.3 CERTAIN LIMITATIONS ON SUBLEASING OR OTHER
RELINQUISHMENT OF POSSESSION
Notwithstanding anything to the contrary in Section 7.2:
(a) The rights of any person that receives possession of
the Aircraft in accordance with Section 7.2 shall be subject and
subordinate to all the terms of this Lease, and to Lessor's
rights, powers and remedies hereunder, including, without
limitation (i) Lessor's right to repossess the Aircraft pursuant
to Section 14, (ii) Lessor's right to terminate and avoid such
sublease, delivery, transfer or relinquishment of possession upon
the occurrence of an Event of Default and (iii) the right to
require such person to forthwith deliver the Aircraft, the
Airframe, Engines and Aircraft Documents subject to such transfer
upon the occurrence of an Event of Default;
<PAGE>
(b) Lessee shall remain primarily liable hereunder for the
performance of all the terms of this Lease to the same extent as
if such transfer had not occurred and no transfer of possession
of the Aircraft, the Airframe or any Engine, any Part or any
Aircraft Documents shall in any way discharge or diminish any of
Lessee's obligations to Lessor hereunder or under any Operative
Agreement;
(c) Lessee shall ensure that no sublease, delivery,
transfer or relinquishment permitted under Section 7.2 shall
affect the United States registration of the Aircraft;
(d) Any event that constitutes or would, with the passage
of time, constitute an Event of Loss under paragraph (c), (d), or
(e) of the definition of such term (as set forth in Annex A)
shall not be deemed to violate the provisions of Section 7.2; and
(e) Any Wet Lease customary in the North American
commercial airline industry and entered into by Lessee for a term
of less than six (6) months in the ordinary course of its
business with U.S. Air Carriers and certificated Canadian air
carriers that are not insolvent or subject to any bankruptcy,
insolvency, liquidation, reorganization, dissolution or similar
proceeding, or any similar non-ordinary course transaction, shall
be seeking any reorganization or any readjustment of its debts or
shall be, or shall have substantially all of its property, in the
possession of any liquidator, trustee, receiver or similar person
shall not constitute a delivery, transfer or relinquishment of
possession for purposes of Section 7.2.
SECTION 8. MAINTENANCE; REPLACEMENT AND POOLING OF PARTS;
ALTERATIONS, MODIFICATIONS AND ADDITIONS; OTHER
LESSEE COVENANTS
8.1 MAINTENANCE; REPLACEMENT AND POOLING OF PARTS;
ALTERATIONS, MODIFICATIONS AND ADDITIONS
At all times during the Term, Lessee shall comply with, or
cause to be complied with, each of the provisions of Annex C,
which provisions are hereby incorporated by this reference as if
set forth in full herein. Without limiting any other rights of
Lessor under this Lease or any other Operative Agreement, Lessee
acknowledges that the provisions of this Section 8 and of Annex C
are of the essence of this Lease and the transactions
contemplated herein.
8.2 Information, Certificates, Notices and Reports
8.2.1 FINANCIAL INFORMATION
Upon Lessor's request, Lessee will furnish to Lessor to
the extent not already provided pursuant to Section 8.2.3:
(a) Within 60 days after the end of each of the first
three fiscal quarters in each fiscal year of Lessee, a
consolidated balance sheet of Lessee as of the end of such
quarter and related statements of income and cash flows for the
period commencing at the end of the previous fiscal year and
ending with the end of such quarter, setting forth in each case
in comparative form the corresponding figures for the
corresponding period in the preceding fiscal year, prepared in
accordance with GAAP; provided that so long as Lessee is subject
to the <PAGE> reporting requirements of the Securities Exchange
Act of 1934, a copy of Lessee's report on Form 10-Q for such
fiscal quarter (together with all documents containing such
financial information incorporated by reference therein) will
satisfy this paragraph (a).
(b) Within 120 days after the end of each fiscal year
of Lessee, a consolidated balance sheet of Lessee as of the end
of such fiscal year and related statements of income and cash
flows of Lessee for such fiscal year, in comparative form with
the preceding fiscal year, prepared in accordance with GAAP,
together with a report of Lessee's independent certified public
accountants with respect to their audit of such financial
statements; provided that so long as Lessee is subject to the
reporting requirements of the Securities Exchange Act of 1934, a
copy of Lessee's report on Form 10-K for such fiscal year
(including all corresponding publicly-available annual reports to
stockholders, if not previously furnished) will satisfy this
paragraph (b).
8.2.2 ANNUAL CERTIFICATE
Upon Lessor's request, within 120 days after the close
of each fiscal year of Lessee, Lessee shall deliver to Lessor a
certificate of Lessee, signed by any Vice President of Lessee, to
the effect that such Vice President is familiar with or has
reviewed or caused to be reviewed the relevant terms of this
Lease and the other Operative Agreements and has made, or caused
to be made under his or her supervision, a review of the
transactions and condition of Lessee during the preceding fiscal
year, and that such review has not disclosed the existence during
such fiscal year, nor does such Vice President have knowledge of
the existence as at the date of such certificate, of any Default
or Event of Default or, if any such Default or Event of Default
existed or exists, specifying the nature and period of existence
thereof and the action Lessee has taken or is taking or proposes
to take with respect thereto.
8.2.3 SEC REPORTS
Lessee will furnish to Lessor:
(a) upon Lessor's request, promptly after filing with
the SEC, copies of Lessee's annual reports on Form 10-K
(including all corresponding publicly-available annual reports to
stockholders, if not previously furnished), and quarterly reports
on Form 10-Q (in each case, excluding exhibits unless Lessor
requests otherwise); and
(b) promptly after filing with the SEC, copies of
current reports on Form 8-K, or any similar reports filed with
the SEC (in each case, excluding exhibits unless Lessor requests
otherwise), and (ii) upon Lessor's request, promptly upon
distribution thereof, copies of all periodic reports furnished by
Lessee to its stockholders generally.
8.2.4 NOTICE OF DEFAULT
Lessee will furnish to Lessor, immediately upon any
senior officer or financial officer of Lessee, or other
administrative officer of Lessee having any material
responsibility for Lessee's day-to-day compliance with its
obligations under this Lease, becoming aware that a Default or an
Event of Default has occurred, a certificate of Lessee, signed by
any such officer of <PAGE> Lessee, describing such Default or
Event of Default in reasonable detail, with a statement
describing the action Lessee has taken or is taking or proposes
to take with respect thereto.
8.2.5 INFORMATION FOR FILINGS
Lessee shall promptly furnish to Lessor such
information (other than with respect to the citizenship of
Lessor) within Lessee's or any Permitted Sublessee's possession,
or reasonably available to or obtainable by Lessee or such
Permitted Sublessee, as may be required to enable Lessor timely
to file any reports required to be filed by it as lessor under
the Lease with any Government Entity because of, or in connection
with, the interest of Lessor in the Aircraft, Airframe, Engines
or Aircraft Documents or this Lease; provided, however, that with
respect to any such information which Lessee reasonably deems
commercially sensitive or confidential, Lessor shall afford
Lessee a reasonable opportunity to seek from any such Government
Entity a waiver of the obligation of Lessor to file any such
information, or shall consent to the filing of such information
directly by Lessee in lieu of filing by Lessor and if any such
waiver or consent is evidenced to the reasonable satisfaction of
Lessor, then Lessee shall not be required to furnish such
information to Lessor.
8.2.6 OTHER INFORMATION
Lessee shall provide to Lessor from time to time such
other information or data as Lessor may reasonably request
concerning the Aircraft, Airframe, Engines or Aircraft Documents,
or Lessee's financial condition, or otherwise relating to the
transactions or matters contemplated herein and in the other
Operative Agreements, in each case if and to the extent within
Lessee's or any Permitted Sublessee's possession, or reasonably
available to or obtainable by Lessee or such Permitted Sublessee.
8.3 REPRESENTATIONS AND WARRANTIES
(a) Lessee hereby makes each of the representations and
warranties set forth in Part A of Schedule 3 hereto.
(b) Lessor hereby makes each of the representations and
warranties set forth in Part B of Schedule 3 hereto.
SECTION 9. LOSS, DESTRUCTION, REQUISITION, ETC.
9.1 EVENT OF LOSS WITH RESPECT TO AIRCRAFT
9.1.1 NOTICE
(a) Upon the occurrence of an Event of Loss with
respect to the Airframe, or the Airframe and the Engines and/or
engines installed thereon at the time of such Event of Loss,
Lessee shall promptly (and in any event within five (5) days
after such occurrence) give Lessor written notice of such Event
of Loss.
<PAGE>
9.1.2 PAYMENT OF LOSS AND TERMINATION OF LEASE
(a) On or before the Business Day next following the
earlier of (x) the sixty-first day following the date of the
occurrence of such Event of Loss, and (y) the second Business Day
following the receipt of insurance proceeds with respect to such
occurrence (the actual date of payment being sometimes referred
to as the "Event of Loss Payment Date"), Lessee shall pay to
Lessor: (A) the Stipulated Loss Value of the Aircraft, plus
(B) all unpaid Basic Rent due on or before the Event of Loss
Payment Date, plus (C) all unpaid Supplemental Rent due on or
prior to the Event of Loss Payment Date, minus (D) any prepaid
Basic Rent applicable to the period following the date of payment
in full of all amounts specified in clauses (A) - (C).
(b) Upon payment in full of all amounts described in
the foregoing paragraph (a), (i) the obligation of Lessee to pay
Basic Rent hereunder with respect to the Aircraft shall
terminate, (ii) the Term for the Aircraft shall end, and (iii)
Lessor will transfer the Aircraft to Lessee in its "AS-IS, WHERE-
IS" condition and subject to any insurer's salvage rights, but
otherwise in the manner described in Section 4.5.
9.2 EVENT OF LOSS WITH RESPECT TO AN ENGINE
9.2.1 NOTICE
Upon the occurrence of an Event of Loss with respect to
an Engine under circumstances in which an Event of Loss with
respect to the Airframe has not occurred, Lessee shall promptly
(and in any event within 15 days after such occurrence) give
Lessor written notice of such Event of Loss.
9.2.2 REPLACEMENT OF ENGINE
Lessee shall, as promptly as possible and in any event
within 60 days after the occurrence of such Event of Loss, convey
or cause to be conveyed to Lessor, in compliance with Section
9.2.3 and as replacement for the Engine with respect to which any
Event of Loss occurred, title to a Replacement Engine free and
clear of all Liens other than Permitted Liens. Such Replacement
Engine shall be an engine manufactured by Engine Manufacturer
that is the same model and modification status as the Engine to
be replaced thereby, or an improved model and/or modification
status, and that is suitable for installation and use on the
Airframe, and that has performance and durability
characteristics, and a value, utility and remaining useful life,
at least equal to, and is in at least as good operating condition
as, the Engine to be replaced thereby (assuming that such Engine
was of the value and utility and in the condition and repair
required by the terms hereof immediately prior to the occurrence
of the Event of Loss).
9.2.3 CONDITIONS TO REPLACEMENT OF ENGINE
Prior to or at the time of conveyance of title to any
Replacement Engine to Lessor, Lessee shall promptly take each of
the following actions at its cost and expense, and shall promptly
furnish the following agreements, instruments, certificates and
documents to (and in each case reasonably satisfactory in form
and substance to) Lessor:
<PAGE>
(a) furnish Lessor with a full warranty bill of sale
duly conveying to Lessor such Replacement Engine, together with
such evidence of title as Lessor may reasonably request;
(b) cause (i) a Lease Supplement subjecting such
Replacement Engine to this Lease, duly executed by Lessee, to be
delivered to Lessor for execution and, upon such execution, to be
filed for recordation with the FAA pursuant to the Act and (ii)
such Financing Statements and other filings, as Lessor may
reasonably request, duly executed by Lessee and, to the extent
applicable, Lessor (and Lessor shall execute and deliver the
same), to be filed in such locations as any such party may
reasonably request;
(c) furnish such evidence of compliance with the
insurance provisions of Section 10 with respect to such
Replacement Engine as Lessor may reasonably request;
(d) furnish an opinion of Lessee's counsel reasonably
satisfactory to Lessor to the effect that (i) upon such
conveyance, Lessor will acquire full legal and marketable title
to such Replacement Engine free and clear of all Liens other than
Permitted Liens, (ii) such Replacement Engine will be leased
hereunder to the same extent as the Engine replaced thereby and
(iii) to such further effect as Lessor may reasonably request;
(e) furnish an opinion of Crowe & Dunlevy, as special
FAA counsel, at Lessee's cost and expense, as to the due
recordation of each Lease Supplement with respect to such
Replacement Engine and as to such other matters concerning the
Act as Lessor may reasonably request;
(f) furnish a certificate of an Appraiser, certifying
that such Replacement Engine has performance and durability
characteristics, and a value, utility and remaining useful life
at least equal to, and is in at least as good operating condition
as, the Engine so replaced, assuming such Engine was of the
value, utility and remaining useful life, and in the condition
and repair required by the terms hereof immediately prior to the
occurrence of such Event of Loss;
(g) take such other actions and furnish such other
certificates and documents, as Lessor may reasonably request in
order that such Replacement Engine be duly and properly titled in
Lessor and leased hereunder to the same extent as initially
required with respect to the Engine so replaced.
9.2.4 CONVEYANCE TO LESSEE
Upon full compliance by Lessee with the applicable
terms of Sections 9.2.2 and 9.2.3, Lessor will transfer to Lessee
the Airframe or Engine, as the case may be, with respect to which
such Event of Loss occurred, in accordance with Section 4.4,
provided that Lessor shall not be required to effect any such
transfer if and for so long as there shall have occurred and be
continuing any Default (other than with respect to Section 14.4
or 14.5) or Event of Default.
<PAGE>
9.3 APPLICATION OF PAYMENTS
Any amounts, other than insurance proceeds in respect of
damage or loss not constituting an Event of Loss (the application
of which is provided for in Section 10), received at any time by
Lessor, Lessee or any Permitted Sublessee from any Person in
respect of any Event of Loss will be applied as follows:
9.3.1 LOSS OF AIRFRAME
If such amounts are received, in whole or in part, with
respect to the Airframe, such amounts shall be applied as
follows:
(a) first, if the sum described in Section 9.1.2 has
not then been paid in full by Lessee, such amounts shall be paid
to Lessor to the extent necessary to pay in full such sum;
(b) second, the remainder, if any, shall, subject to
Section 9.4, be paid to Lessee.
9.3.2 LOSS OF ENGINE
If such amounts are received with respect to an Engine
under the circumstances contemplated in Section 9.2.1, such
amounts shall be paid over to, or retained by, Lessor and shall
be held in accordance with Section 9.4 and if, and at such time
as, Lessee shall have fully complied with the applicable terms of
Sections 9.2.2 and 9.2.3 with respect to the Event of Loss for
which such amounts are received, such amounts shall, subject to
Section 9.4, be paid to Lessee.
9.4 APPLICATION OF PAYMENTS DURING EXISTENCE OF DEFAULT
Any amount described in this Section 9 that is payable or
creditable to, or retainable by, Lessee shall not be paid or
credited to, or retained by, Lessee if at the time such payment,
credit or retention would otherwise occur a Default or an Event
of Default shall have occurred and be continuing, but shall
instead be held by or paid over to Lessor as security for the
obligations of Lessee under this Lease and the other Operative
Agreements and applied to Lessee's obligations under this Lease
and the other Operative Agreements as and when due. At such time
as there shall not be continuing any Default or any Event of
Default, such amount shall be paid to Lessee to the extent not
previously applied in accordance with this Section 9.4.
SECTION 10. INSURANCE
10.1 LESSEE'S OBLIGATION TO INSURE
Lessee shall comply with, or cause to be complied with, each
of the provisions of Annex D, which provisions are hereby
incorporated by this reference as if set forth in full herein.
Without limiting any other rights of Lessor under this Lease or
any other Operative Agreement, Lessee acknowledges that the
provisions of this Section 10 and of Annex D are of the essence
of this Lease and the transactions contemplated herein.
<PAGE>
10.2 LESSOR'S RIGHT TO MAINTAIN INSURANCE
In the event that Lessee shall fail to maintain, or cause to
be maintained, insurance as herein provided, Lessor may at its
option (but shall not be obligated to) provide such insurance
and, in such event, Lessee shall, upon demand, reimburse Lessor,
as Supplemental Rent, for the cost thereof. No such payment,
performance or compliance shall be deemed to cure any Default or
Event of Default or otherwise relieve Lessee of its obligations
with respect thereto.
10.3 INSURANCE FOR OWN ACCOUNT
Nothing in Section 10 shall limit or prohibit (a) Lessee
from maintaining the policies of insurance required under Annex D
with higher limits than those specified in Annex D, or (b) Lessor
from obtaining insurance for its own account (and any proceeds
payable under such separate insurance shall be payable as
provided in the policy relating thereto); provided, however, that
no insurance may be obtained or maintained by Lessee or Lessor
that would limit or otherwise adversely affect the coverage of
any insurance required to be obtained or maintained by Lessee
pursuant to this Section 10 and Annex D.
10.4 APPLICATION OF INSURANCE PROCEEDS
As between Lessor and Lessee, all insurance proceeds
received as a result of the occurrence of an Event of Loss with
respect to the Aircraft or any Engine under policies required to
be maintained by Lessee pursuant to this Section 10 will be
applied in accordance with Section 9.3. All proceeds of
insurance required to be maintained by Lessee, in accordance with
Section 10 and Section B of Annex D, in respect of any property
damage or loss not constituting an Event of Loss with respect to
the Aircraft, Airframe or any Engine will be applied in payment
(or to reimburse Lessee) for repairs or for replacement property
in accordance with the terms of Section 8.1, and any balance
remaining after compliance with said Section 8.1 with respect to
such damage or loss shall be paid over to, or retained by,
Lessee.
10.5 APPLICATION OF PAYMENTS DURING EXISTENCE OF DEFAULT
Any amount described in this Section 10 that is payable or
creditable to, or retainable by, Lessee shall not be paid or
credited to, or retained by, Lessee if at the time such payment,
credit or retention would otherwise occur a Default or an Event
of Default shall have occurred and be continuing, but shall
instead be held by or paid over to Lessor as security for the
obligations of Lessee under this Lease and the other Operative
Agreements and applied to Lessee's obligations under this Lease
and the other Operative Agreements as and when due. At such time
as there shall not be continuing any Default or any Event of
Default, such amount shall be paid to Lessee to the extent not
previously applied in accordance with this Section 10.5.
SECTION 11. INSPECTION
(a) At all reasonable times Lessor and its authorized
representatives (collectively, the "Inspecting Parties") may
inspect the Aircraft, Airframe, Engines and Aircraft Documents
and Lessee shall cooperate, and shall cause any Permitted
Sublessee to cooperate, with the Inspecting Parties in connection
with any such inspection (including, without limitation,
permitting any <PAGE> such Inspecting Party to make copies of
such Aircraft Documents not reasonably deemed confidential by
Lessee or such Permitted Sublessee).
(b) Subject to the provisions of Section 11(c)(ii) below,
such inspection of the Aircraft hereunder shall not restrict
Lessor from opening any panels, bays, doors, etc..
(c) With respect to such rights of inspection, Lessor
shall not:
(i) have any duty or liability to make, or any duty
or liability arising out of, any such visit, inspection or
survey or failure to make any such visit, inspection or
survey; or
(ii) so long as no Default or Event of Default has
occurred and is continuing, exercise its inspection rights
hereunder other than on reasonable notice and so as not to
unreasonably interfere with Lessee's maintenance and
operation of the Aircraft, Airframe and Engines.
(d) Each Inspecting Party inspecting the Aircraft,
Airframe, Engines and Aircraft Documents hereunder shall bear its
own expenses in connection with any such inspection, unless (i) a
Default or Event of Default has occurred and is continuing or
(ii) such person discovers, in connection therewith, any material
failure by Lessee or any Permitted Sublessee to comply with the
provisions of this Lease, in each such case Lessee shall bear all
such expenses.
(e) Lessor will indemnify and hold harmless Lessee from
and against all losses arising from death or injury to any
Inspecting Party in connection with any such visit, inspection or
survey unless arising from the gross negligence or willful
misconduct of Lessee.
(f) If requested by Lessor, Lessee shall give, or shall
cause any Permitted Sublessee to give, reasonable prior notice to
Lessor of the date upon which the Aircraft, Airframe or any
Engine undergoes its next scheduled maintenance visit and/or next
major check, and with respect to any Engine the next off-the-wing
maintenance, and shall advise Lessor of the name and location of
the relevant maintenance performer and shall, at least 5 days
prior to commencement of such major check or maintenance, make
available for inspection by Lessor all relevant Aircraft
Documents at Lessee's records facility in the United States, or
at such Permitted Sublessee's records facility, or at the
premises of the maintenance performer.
SECTION 12. ASSIGNMENT; MERGER; LESSEE COVENANTS
12.1 IN GENERAL
(a) This Lease and the other Operative Agreements shall
be binding upon and inure to the benefit of Lessor and Lessee and
their respective successors and permitted assigns. Except as
otherwise expressly permitted in Section 7.2 or 7.3, or as
permitted by Section 12.2.1, Lessee will not, without the prior
written consent of Lessor, assign any of its rights under this
Lease.
(b) Lessee acknowledges and agrees that Lessor shall have
the absolute right to transfer or assign to any person, firm,
corporation or other entity (whether or not an affiliate of
Lessor), including, but not limited to, a special purpose
corporation owned directly or indirectly <PAGE> by Lessor, any or
all of Lessor's rights, obligations, benefits and interests under
this Lease, including, without limitation, the right to receive
Rent or any other payment due under this Lease, the right to
transfer, assign or pledge title to any Item or to transfer or
assign the right to purchase any Item and the right to make all
waivers and agreements, to give all notices, consents and
releases, to take all action upon the occurrence of an Event of
Default, or to do any and all other things which Lessor is or may
become entitled to do under this Lease; provided, however, that
in the event any transfer, pledge or assignment would otherwise
cause any increase in the tax indemnification obligations of
Lessee, Lessee's obligations in respect of any tax
indemnification obligations hereunder shall be limited to the
amount that would have been payable had no such transfer, pledge
or assignment taken place. Notwithstanding the foregoing, Lessor
shall not transfer, assign or pledge title to the Aircraft or any
Item (i) if, as a result of such transfer, assignment or pledge,
the Aircraft would be deregistered or (ii) if such transferee,
assignee or pledgee shall be a Person (other than a special
purpose corporation owned directly or indirectly by Lessor) with
a Net Worth of less than $20,000,000. Lessee agrees that no such
transfer, pledge or assignment will materially change the duty of
or materially increase the burden of risk imposed on Lessee, and
Lessee waives any provision of applicable Law that would or might
grant Lessee the right to demand assurances or compensation of
any kind from the transferee or to require the transferee to take
any action on account of such transfer or assignment, other than
as expressly required herein. Lessee acknowledges that, if
Lessor should sell or transfer to a third party all of Lessor's
interest under this Lease and in the Aircraft, Lessor shall
thereupon be relieved of all of its obligations hereunder (except
in the case of a transfer to a special purpose corporation owned
or controlled by Lessor) and Lessor's transferee (and, if the
transferee is a trust, the beneficial owners of such trust) shall
succeed to all of Lessor's rights, interests and obligations
under this Lease as though Lessor's transferee had been the
initial lessor hereunder. Lessor shall notify Lessee in writing
written 10 days of any assignment or transfer pursuant to this
Section 12.1(b) (but failure to do so shall not constitute a
default by Lessor under this Lease).
(c) Without limiting the generality of Section 12.1(b),
Lessee acknowledges and agrees that the terms and conditions of
this Lease have been agreed to by Lessor in anticipation of its
being able to sell, assign, transfer or otherwise dispose of its
rights under and interests in this Lease and its rights in the
Aircraft and/or its being able to grant a pledge or security
interest in all or any of its rights and interest under this
Lease and in the Aircraft or any Item to one or more lenders, to
an agent or trustee representing such lenders, or to any other
party having an interest in any Item or participation in the
transaction which is the subject of this Lease, any or all of
which may rely on and shall be entitled to the benefit of the
provisions of this Section 12.1(c). Lessee shall, upon the
written instruction of Lessor: (i) consent to and recognize any
such assignment or pledge; (ii) accept the directions or demands
or such assignee in place of those of Lessor; (iii) surrender any
leased property only to such assignee; (iv) pay all Rent payable
hereunder and do any and all things required of Lessee hereunder
directly to or for the benefit of such assignee, and not
terminate this Lease, notwithstanding any default by Lessor or
the existence of any other liability or obligation of any kind or
character on the part of Lessor to Lessee whether or not arising
hereunder; provided, however, nothing herein shall constitute a
waiver by Lessee of any rights or claims it may have against
Lessor with respect to such default, liability or obligation; (v)
not require any assignee or pledgee of this Lease to perform any
duty, covenant or condition required to be performed by Lessor
under the terms of this Lease for which Lessor agrees to remain
liable, all rights of Lessee in any such connection aforesaid
being <PAGE> hereby waived as to any and all such assignees to
the extent permitted by applicable law; (vi) expand general tax
indemnity and general indemnity obligations under Sections 16 and
17 to cover, and cause to be named as loss payee/additional
insured under policies of insurance maintained by Lessee under
Section 10, as instructed by Lessor, any purchaser/assignee of
the Aircraft and this Lease or any lender/collateral
assignee/pledgee of the Aircraft and this Lease, while
maintaining such indemnity obligations for the benefit of Lessor;
(vii) extend to such assignees, representations, warranties,
waivers and disclaimers of Lessee under the Operative Agreements
which remain in effect on the date of any such sale, assignment,
transfer, other disposition, grant or pledge, and otherwise
cooperate and execute or provide any documents, certificates or
opinions which Lessor may reasonably request in order to
effectuate any such transfer, pledge or assignment or any of the
foregoing; (viii) execute an estoppel certificate regarding the
existence or absence of defaults hereunder and a consent to such
financing, in each case in such form and containing such
additional terms as Lessor may reasonably request and at Lessor's
sole cost and expense; (ix) enter into a lease amendment and
novation agreement and/or a pledge agreement between Lessor, the
Pledgee and Lessee (or any permitted sublessee) in its capacity
of third party holder of the pledged Aircraft in each case in
such form as Lessor may reasonably request to the extent that
such lease amendment and novation agreement and/or pledge
agreement does not adversely affect Lessee's rights in any
material respect or materially increase Lessee's obligations
under the Operative Agreements; and (x) subject to mutual
agreement between the parties as to schedule, Lessee will,
consistent with its operational requirements, make the Aircraft
and the Aircraft Documents available for inspection by any
potential transferee or assignee of Lessor; provided that
arrangements for such inspection are made through Lessor and that
such potential transferee or assignee shall be accompanied by
Lessor during such inspection. Notwithstanding the foregoing,
Lessor agrees to obtain from any lender/collateral
assignee/pledgee of the Aircraft or Lease on behalf of Lessee
quiet enjoyment rights substantially equivalent to the rights
provided under Section 4.3 hereof. Lessor further agrees that
to the extent Lessee incurs reasonable out-of-pocket costs,
including, without limitation, reasonable attorneys' fee, in
connection with the preparation, review and execution of
documentation referenced in the foregoing clauses (vii), (viii)
and (ix) of this Section 12.1(c), such costs shall be for the
account of Lessor.
12.2 MERGER OF LESSEE
12.2.1 IN GENERAL
Lessee shall not consolidate or merge with or into any
other Person under circumstances in which Lessee is not the
surviving corporation, or convey, transfer or lease in one or
more transactions all or substantially all of its assets to any
other Person, unless:
(a) such person is organized, existing and in good
standing under the Laws of the United States, any State of the
United States or the District Columbia;
(b) such person is a U.S. Air Carrier;
<PAGE>
(c) such person executes and delivers to Lessor a duly
authorized, legal, valid, binding and enforceable agreement,
reasonably satisfactory in form and substance to Lessor,
containing an express assumption by such person of the due and
punctual performance and observance of each covenant, agreement
and condition in the Operative Agreements to be performed or
observed by Lessee;
(d) such person makes such filings and recordings,
including, without limitation, any filing or recording with the
FAA pursuant to the Act, as shall be necessary or desirable to
evidence such consolidation or merger;
(e) immediately after giving effect to such
consolidation or merger (i) no Default or Event of Default shall
have occurred and be continuing and (ii) the Net Worth of such
person shall not be less than the Net Worth of Lessee immediately
prior to such consolidation or merger; and
(f) Lessee shall deliver to Lessor a certificate
signed by the President or any Vice President of Lessee stating
that such consolidation or merger and the assumption agreement
described in clause (c) above comply with this Section 12.2, and
an opinion in form and substance satisfactory to Lessor of
outside counsel satisfactory to Lessor to the effect that the
agreements entered into to effect such consolidation or merger
and such assumption agreement are legal, valid and binding
obligations of such person, and such other matters as Lessor may
reasonably request.
12.2.2 EFFECT OF MERGER
Upon any such consolidation or merger of Lessee with or
into, or the conveyance, transfer or lease by Lessee of all or
substantially all of its assets to, any Person in accordance with
this Section 12.2, such Person will succeed to, and be
substituted for, and may exercise every right and power of,
Lessee under the Operative Agreements with the same effect as if
such person had been named as "Lessee" therein. No such
consolidation or merger, or conveyance, transfer or lease, shall
have the effect of releasing Lessee or such Person from any of
the obligations, liabilities, covenants or undertakings of Lessee
under the Operative Agreements.
12.3 COVENANTS OF LESSEE
Lessee covenants and agrees, at its own cost and expense, as
follows:
(a) Lessee shall at all times maintain its corporate
existence, except as permitted by Section 12.2 of this Lease, and
shall not wind-up, liquidate or dissolve or take any action, or
fail to take any action, that would have the effect of any of the
foregoing. Lessee will do or cause to be done all things
necessary to preserve and keep in full force and effect its
rights (charter and statutory) and franchises, except that Lessee
shall not be required to preserve or keep in full force and
effect any right or franchise if Lessee shall reasonably
determine that the preservation thereof is no longer necessary or
desirable in the conduct of its business and if the loss thereof
does not (i) adversely affect or diminish the rights of Lessor
under the Operative Agreements or (ii) materially and adversely
affect Lessee's ability to observe or perform its obligations,
liabilities and agreements under the Operative Agreements.
<PAGE>
(b) Lessee shall at all times remain a U.S. Air Carrier
and shall at all times be otherwise certificated and registered
to the extent necessary to entitle Lessor the rights afforded to
lessors of aircraft equipment under Section 1110.
(c) Lessee will give Lessor timely written notice (but in
any event not later than three Business Days after its
occurrence) of any relocation of its chief executive office (as
such term is defined in Article 9 of the UCC) from its then
present location and will promptly take any action required by
Section 12.3(d)(iii) as a result of such relocation.
(d)(i) Lessee shall duly execute, acknowledge and
deliver, or shall cause to be executed, acknowledged and
delivered, all such further agreements, instruments, certificates
or documents, and shall do and cause to be done such further acts
and things, in any case, as Lessor shall reasonably request in
connection with its administration of, or to carry out more
effectually the purposes of, or to better assure and confirm unto
it the rights and benefits to be provided under, this Agreement
and the other Operative Agreements; provided, however, that no
such agreement, instrument, certificate or document shall
adversely affect Lessor's rights in any material respect or
materially increase Lessee's obligations under the Operative
Agreements.
(ii) Lessee shall promptly take such action with
respect to the recording, filing, rerecording and refiling of
this Lease and the supplements hereto, including, without
limitation, Lease Supplement No. 1, as shall be necessary to
establish, perfect and protect the interests and rights of Lessor
in and to the Aircraft and under the Lease. Lessee shall furnish
to Lessor such information in Lessee's possession or otherwise
reasonably available to Lessee as may be required to enable
Lessor to make application for registration of the Aircraft under
the Act (subject to Lessee's rights under Section 7.1.2 of this
Lease). Lessee shall bear the reasonable attorneys' fees and
disbursements of Crowe & Dunlevy, special FAA Counsel, in
connection with the filing for recordation of the FAA Filed
Documents with the FAA Aircraft Registry in Oklahoma City.
(iii) Lessee, at its sole cost and expense, will
cause the Financing Statements and all continuation statements
(and any amendments necessitated by any combination,
consolidation or merger pursuant to Section 12.2 of this Lease,
or any relocation of its chief executive office) in respect of
the Financing Statements to be prepared and, subject only to the
execution and delivery thereof by Lessor, duly and timely filed
and recorded, or filed for recordation, to the extent permitted
under the UCC or similar law of any other applicable
jurisdiction.
(e) Neither Lessee nor any person authorized to act on
its behalf will directly or indirectly offer any beneficial
interest or Security relating to the ownership of the Aircraft or
this Lease for sale to, or solicit any offer to acquire any such
interest or Security from, or sell any such interest or Security
to, any person in violation of the Securities Act or applicable
state or foreign securities Laws.
SECTION 13. EVENTS OF DEFAULT
The occurrence of any one or more of the following
circumstances, conditions, acts or events, for any reason
whatsoever and whether any such circumstance, condition, act or
event <PAGE> shall be voluntary or involuntary or come about or
be effected by operation of Law or pursuant to or in compliance
with any judgment, decree, order, rule or regulation of any
Government Entity, shall constitute an Event of Default:
13.1 PAYMENTS
Lessee shall fail to pay any amount of Basic Rent,
Supplemental Rent and/or Stipulated Loss Value within three (3)
Business Days after the same shall have become due, or Lessee
shall fail to pay any other amount due hereunder or under any
other Operative Agreement related to this Lease and such failure
shall continue for a period in excess of ten (10) days from and
after the date of any written demand therefor from Lessor,
accompanied by reasonably detailed invoices or other supporting
documentation establishing that Lessor is entitled to the amount
demanded.
13.2 INSURANCE
Lessee shall fail to carry and maintain, or cause to be
carried and maintained, insurance on and in respect of the
Aircraft, Airframe and Engines in accordance with the provisions
of Section 10, or Lessee shall operate the Aircraft, Airframe or
Engines, or permit the Aircraft, Airframe or Engines to be
operated, at any time when such insurance shall not be in effect.
13.3 CORPORATE EXISTENCE
Lessee shall fail to maintain at all times its corporate
existence (except as permitted by Section 12.2), or Lessee shall
otherwise wind-up, liquidate or dissolve, or Lessee shall take or
fail to take any action that would have the effect of any of the
foregoing.
13.4 CERTAIN COVENANTS
Lessee shall not observe, perform or comply with, or shall
otherwise breach, any of its obligations under Section 7.1 (other
than Sections 7.1.3 and 7.1.4, which shall be subject to Section
13.5), Section 7.2 (in respect of the Aircraft or Airframe) or
Sections 12.1 or 12.2.
13.5 OTHER COVENANTS
Lessee shall fail to observe, perform or comply with, or
shall otherwise breach, any other covenant, agreement or
obligation set forth herein or in any other Operative Agreement
(other than the covenants, agreements and obligations set forth
in the first sentence of Section 4.6 (a) of this Lease), and such
failure shall continue unremedied for a period of ten (10) days
(or any shorter period as may be expressly set forth in such
other Operative Agreement) from and after the earliest of (i) the
date of written notice thereof to Lessee and (ii) an officer of
Lessee having actual or constructive knowledge of such failure to
perform or observe; provided, that if the Airworthiness
Certificate of an Aircraft is revoked and Lessor provides Lessee
with written notice of such revocation or Lessee has actual or
constructive knowledge of such revocation, any subsequent flight
operation of such Aircraft shall constitute an immediate Event of
Default.
<PAGE>
13.6 REPRESENTATIONS AND WARRANTIES
Any representation or warranty made by Lessee herein or in
any other Operative Agreement (a) shall prove to have been
untrue, inaccurate or misleading in any material respect as of
the date made, and (b) if curable, the same shall remain uncured
for a period in excess of 10 days from and after the earlier of
(i) the date of written notice thereof to Lessee and (ii) an
officer of the Lessee having actual or constructive knowledge of
the falsity of such representation or warranty.
13.7 BANKRUPTCY AND INSOLVENCY
(a) Lessee shall consent to the appointment of or the
taking of possession by a receiver, trustee or liquidator of
itself or of a substantial part of its property, or Lessee shall
admit in writing its inability to pay its debts generally as they
come due, or does not pay its debts generally as they become due
or shall make a general assignment for the benefit of creditors,
or Lessee shall file a voluntary petition in bankruptcy or a
voluntary petition or an answer seeking reorganization,
liquidation or other relief in a case under any bankruptcy Laws
or other insolvency Laws (as in effect at such time) or an answer
admitting the material allegations of a petition filed against
Lessee in any such case, or Lessee shall seek relief by voluntary
petition, answer or consent, under the provisions of any other
bankruptcy or other similar Law providing for the reorganization
or winding-up of corporations (as in effect at such time) or
Lessee shall seek an agreement, composition, extension or
adjustment with its creditors under such Laws, or Lessee's board
of directors shall adopt a resolution authorizing corporate
action in furtherance of any of the foregoing; or
(b) an order, judgment or decree shall be entered by any
court of competent jurisdiction appointing, without the consent
of Lessee, a receiver, trustee or liquidator of Lessee or of any
substantial part of its property, or any substantial part of the
property of Lessee shall be sequestered, or granting any other
relief in respect of Lessee as a debtor under any bankruptcy Laws
or other insolvency Laws (as in effect at such time), and any
such order, judgment or decree of appointment or sequestration
shall remain in force undismissed, unstayed and unvacated for a
period of 60 days after the date of entry thereof; or
(c) a petition against Lessee in a case under any
bankruptcy Laws or other insolvency Laws (as in effect at such
time) is filed and not withdrawn or dismissed within 60 days
thereafter, or if, under the provisions of any Law providing for
reorganization or winding-up of corporations which may apply to
Lessee, any court of competent jurisdiction assumes jurisdiction,
custody or control of Lessee or of any substantial part of its
property and such jurisdiction, custody or control remains in
force unrelinquished, unstayed and unterminated for a period of
60 days.
13.8 OTHER AGREEMENTS WITH LESSOR
Any "Event of Default" exists under any Other Lease
Agreement between Lessee and Lessor (or any Affiliate of either)
so long as either Lessor or any Affiliate thereof is the owner of
the Aircraft and/or the aircraft subject to such Other Lease
Agreement at the time of such "Event of Default."
<PAGE>
13.9 DEREGISTRATION
Lessee causes the Aircraft to be deregistered in
contravention of Section 7.1.1 hereof or ceases to be a U.S. Air
Carrier.
13.10 TRANSFER
Lessee wrongfully transfers possession of the Aircraft,
Airframe, any Engine or any Part.
13.11 JUDGMENTS
A single uninsured judgment rendered by a court of
competent jurisdiction against the Lessee for the payment of more
than $1,000,000 is entered and not stayed, bonded (to Lessor's
reasonable satisfaction), or discharged within 30 days of the
date of entry.
13.12 MATERIAL ADVERSE CHANGE
Any Material Adverse Change, as determined by Lessor in
its sole and reasonable discretion, shall occur.
13.13 INDEBTEDNESS
Any indebtedness (defined in the broadest context) of at
least $1,000,000 in principal amount shall be accelerated by
reason of default.
13.14 OPERATIVE AGREEMENTS
The validity or enforceability of any Operative Agreement
shall be contested by Lessee.
13.15 SECURITY DEPOSIT
Upon the occurrence of an Event of Default hereunder,
Lessor shall have the right to apply all or any portion of the
Cash Deposit and to draw immediately, and without notice to
Lessee, upon the Letter of Credit. One or more drawings may be
made upon, or cash applied from, the Security Deposit up to the
amount of Lessor's damages resulting from all existing Events of
Default. If Lessor applies all or any portion of the amount so
drawn or applied for the purpose of curing any Event of Default
of Lessee hereunder, such Event of Default shall not be deemed
cured unless Lessee shall, within three (3) Business Days after
written demand therefor by Lessor, cause (i) the credit available
under the original Letter of Credit or any new or replacement
Letter of Credit and (ii) the Cash Deposit, together comprising
the Security Deposit, to be restored to their respective levels
(i.e., prior to such application or draw, as the case may be).
<PAGE>
SECTION 14. REMEDIES AND WAIVERS
14.1 REMEDIES
If any Event of Default shall occur and be continuing,
Lessor may, at its option and at any time and from time to time,
exercise any one or more of the following remedies as Lessor in
its sole discretion shall elect:
14.1.1 RETURN AND REPOSSESSION
Lessor may cause Lessee, upon giving written notice to
Lessee, to return promptly, and Lessee shall return promptly, all
or any part of the Aircraft, Airframe, Engines and Aircraft
Documents as Lessor may so demand, to Lessor or its order in the
manner and condition required by, and otherwise in accordance
with, all the provisions of Section 5 as if the Aircraft or
Aircraft Documents or any part thereof were being returned at the
end of the Term, or Lessor, at its option, may enter upon the
premises where the Aircraft, Airframe, any Engine, Aircraft
Documents, or any part thereof, are located and take immediate
possession of and remove the same by summary proceedings or
otherwise, 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 caused by such taking or
otherwise (except for any thereof arising from Lessor's gross
negligence or willful misconduct), and Lessee expressly waives
any right it may have under applicable Law to a hearing prior to
repossession of the Aircraft, Airframe, any Engine, Aircraft
Documents, or any part thereof.
14.1.2 SALE AND USE
Lessor may sell the Aircraft, Airframe, any Engine,
Aircraft Documents, or any part thereof, at public or private
sale, at such times and places, and to such Persons (including
Lessor), as Lessor may determine and, without limiting the
generality of the provisions of this Section 14, Lessor may hold
Lessee liable for the payment of any Basic Rent or Supplemental
Rent remaining unpaid at the time of such sale and relating to
any period prior to the date of such sale; or Lessor may
otherwise dispose of, hold, use, operate, lease to others or keep
idle the Aircraft, Airframe, any Engine, Aircraft Documents, or
any part thereof, as Lessor, in its sole discretion, may
determine, all free and clear of any rights of Lessee, except as
hereinafter set forth in this Section 14, and without any duty to
account to Lessee with respect to such action or inaction or for
any proceeds with respect thereto (except in connection with any
calculation of liquidated damages under Section 14.1.3(b) below
and except to the extent that such proceeds would constitute,
under applicable Law, a mitigation of Lessor's damages suffered
or incurred as a result of the subject Event of Default).
14.1.3 CERTAIN LIQUIDATED DAMAGES
Whether or not Lessor shall have exercised, or shall
thereafter at any time exercise, any of its rights under Section
14.1.1 or 14.1.2 with respect to the Aircraft, Airframe, any
Engine, Aircraft Documents, or any part thereof, Lessor, by
written notice to Lessee specifying a payment date (which shall
be a Payment Date occurring not less than 10 days after the date
of such notice), may demand Lessee to pay to Lessor, and Lessee
shall pay to Lessor, on the payment date so specified and in the
manner and in funds of the type specified in Section 3.3, <PAGE>
as liquidated damages for loss of a bargain and not as a penalty
(in lieu of the Basic Rent for the Aircraft in respect of all
periods commencing on or after the date specified for payment in
such notice), the following amounts:
(a) all unpaid Basic Rent and Supplemental Rent due at
any time prior to the Payment Date specified in such notice; plus
(b) whichever of the following amounts that Lessor, in
its sole discretion, shall specify in such notice:
(i) the amount, if any, by which the aggregate
Rent for the remainder of the Term (determined without
reference to any right of Lessor to terminate 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, exceeds the Fair Market
Rental Value of the Aircraft for the remainder of the Term,
after discounting such Fair Market Rental Value periodically
(equal to installment frequency) to present worth as of the
Payment Date specified in such notice at the Discount Rate;
or
(ii) if Lessor shall have re-let the Aircraft,
the amount, if any, by which the aggregate Rent for the
Aircraft, which would otherwise have become due over the
remainder of the Term (determined without reference to any
right of Lessor to terminate the leasing of the Aircraft,
whether or not such right is exercised), discounted
periodically (equal to installment frequency) to present
worth as of the date of re-letting at the Discount Rate,
exceeds the aggregate basic rental payments to become due
under the re-letting from the date of such re-letting to
the date upon which the Term for the Aircraft would have
expired but for Lessee's default, discounted periodically
(equal to installment frequency) to present worth as of the
date of the re-letting at the Discount Rate; plus
(c) interest on the amounts specified in the foregoing
clause (a) at the Payment Due Rate from and including the date on
which any such amount was due to the date of payment of such
amount in full; plus
(d) interest on the amount specified in the foregoing
clause (b)(i) or (b)(ii), according to Lessor's election, at the
Payment Due Rate from and including the Payment Date specified in
such notice to the date of payment of such amount in full.
14.1.4 RESCISSION, COSTS AND LOSSES
Lessor may (i) at its option, rescind or terminate this
Lease as to the Aircraft, Airframe, any Engine, Aircraft
Documents, or any part thereof, or (ii) exercise any other right
or remedy that may be available to it under applicable Law or
proceed by appropriate court action to enforce the terms hereof
or to recover damages for the breach hereof, including, without
limitation:
(a) all Rent and other amounts which are or become due
and payable hereunder prior to the date Lessor recovers
possession of the Aircraft;
<PAGE>
(b) at Lessor's election, either one of the amounts
determined pursuant to Section 14.1.3(b) or any lost profits
suffered by Lessor as a consequence of Lessor's inability to
place the Aircraft with another lessee on financial terms that
are as favorable to Lessor as the terms of this Agreement;
(c) all costs associated with Lessor's exercise of its
remedies hereunder, including, but not limited to, repossession
costs, legal fees, Aircraft storage costs, Aircraft re-lease or
sale costs, any other out-of-pocket costs incurred by Lessor;
(d) any loss, cost, expense or liability sustained by
Lessor due to Lessee's failure to redeliver the Aircraft in the
condition required by this Agreement; and
(e) any other losses (including lost profits), damage,
expense, cost or liability which Lessor suffers or incurs as a
result of the Event of Default and/or termination of this
Agreement, including an amount sufficient to fully compensate
Lessor for any loss of or damage to Lessor's residual interest in
the Aircraft caused by such Event of Default.
14.1.5 OTHER REMEDIES
In addition to the foregoing remedies (but without
duplication of amounts otherwise paid under this Section 14),
Lessee shall be liable for any and all unpaid Rent due hereunder
before, during or after (except as otherwise provided in Sections
14.1.2, 14.1.3 and 14.1.4 hereof ) the exercise of any of the
foregoing remedies and for all attorneys' fees and other costs
and expenses of Lessor, including, without limitation, interest
on overdue Rent at the rate as herein provided, incurred by
reason of the occurrence of any Event of Default or the exercise
of Lessor's remedies with respect thereto, including all costs
and expenses incurred in connection with the return of the
Aircraft, Airframe, any Engine, the Aircraft Documents, or any
part thereof, in accordance with the terms of Section 5 or in
placing the Aircraft, Airframe, any Engine, the Aircraft
Documents, or any part thereof, in the condition and
airworthiness required by Section 5.
14.2 RIGHT TO PERFORM FOR LESSEE
If Lessee fails to make any payment of Rent required to be
made by it hereunder or fails to perform or comply with any of
its agreements contained herein, Lessor may (but shall not be
obligated to) make such payment or perform or comply with such
agreement, and the amount of such payment and the amount of the
expenses of Lessor incurred in connection with such payment or
the performance of or compliance with such agreement, as the case
may be, together with interest thereon at the Payment Due Rate,
shall be deemed Supplemental Rent, payable by Lessee upon demand.
No such payment, performance or compliance by Lessor shall be
deemed to cure any Default or Event of Default or otherwise
relieve Lessee of its obligations with respect thereto.
14.3 DETERMINATION OF FAIR MARKET RENTAL VALUE
<PAGE>
For the purpose of this Section 14, the "Fair Market
Rental Value" of the Aircraft, Airframe or any Engine, or any
part thereof shall be determined on an "AS-IS, WHERE-IS" basis
and shall take into account customary brokerage and other out-of-
pocket fees and expenses which typically would be incurred in
connection with a re-lease or sale of the Aircraft, Airframe or
any Engine. Any such determination shall be made by an Appraiser
selected by Lessor and the costs and expenses associated
therewith shall be borne by Lessee, unless Lessor does not obtain
possession of the Aircraft, Airframe, Engines and Aircraft
Documents pursuant to this Section 14, in which case an Appraiser
shall not be appointed and Fair Market Rental Value for purposes
of this Section 14 shall be zero.
14.4 LESSOR APPOINTED ATTORNEY-IN-FACT
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 and any other Operative 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 Section 14.4 after a 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 the Operative
Agreements, 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 Lease and (ii) make
proof of loss, appear in and prosecute any action arising from
any policy or policies of insurance maintained pursuant to this
Lease, 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.
14.5 REMEDIES CUMULATIVE
Nothing contained in this Lease shall be construed to limit
in any way any right, power, remedy or privilege of Lessor
hereunder or under any other Operative Agreement or now or
hereafter existing at law or in equity. Each and every right,
power, remedy and privilege hereby given to, or retained by,
Lessor in this Lease shall be in addition to and not in
limitation of every other right, power, remedy and privilege
given under the Operative Agreements or now or hereafter existing
at law or in equity. Each and every right, power, remedy and
privilege of Lessor under this Lease and any other Operative
Agreement may be exercised from time to time or simultaneously
and as often and in such order as may be deemed expedient by
Lessor. All such rights, powers, remedies and privileges shall
be cumulative and not mutually exclusive, and except as expressly
provided herein, the exercise of one shall not be deemed a waiver
of the right to exercise any other. Lessee hereby waives to the
extent permitted by applicable Law any right which it may have to
require Lessor to choose or elect remedies.
<PAGE>
SECTION 15. LESSEE'S OBLIGATIONS; NO SETOFF, COUNTERCLAIM, ETC.
(a) Lessee's obligation to pay Rent and all other amounts
payable hereunder, under Letter Agreement No. 1 or under any
other Operative Agreement shall be absolute and unconditional,
and shall be construed as covenants separate and independent from
the agreements or undertakings of any other Person, including,
without limitation, Lessor, and shall not be affected by any
event or circumstance, including, without limitation: (i) any
setoff, counterclaim, recoupment, defense or other right that
Lessee may have against Lessor, Airframe Manufacturer, Engine
Manufacturer, any Indemnitee or any other Person for any reason
whatsoever; (ii) any defect in the title, airworthiness,
condition, design, operation or fitness for use of, or any damage
to or loss or destruction of, the Aircraft, Airframe or any
Engine, or any interruption or cessation in the use or possession
thereof by Lessee for any reason whatsoever; (iii) any
insolvency, bankruptcy, reorganization or similar proceedings by
or against Lessee or any other Person; (iv) any restriction,
prevention or curtailment of or interference with any use of the
Aircraft, Airframe, any Engine, Aircraft Documents, or any part
thereof; (v) any change, waiver, extension, indulgence or other
action or omission in respect of any obligation or liability of
Lessee or Lessor; (vi) any claim that Lessee has or might have
against any Person; (vii) any failure on the part of Lessor to
perform or comply with any of the terms of this Lease or any
other Operative Agreement; (viii) any invalidity or
unenforceability or disaffirmance of this Lease or any provision
hereof or any of the other Operative Agreements or any provision
thereof, in each case whether against or by Lessee or otherwise;
or (ix) any other circumstance, happening or event whatsoever,
whether or not similar to any of the foregoing.
(b) If for any reason whatsoever this Lease shall be
terminated in whole or in part by operation of Law or otherwise
except as specifically provided herein, Lessee nonetheless agrees
to pay an amount equal to each Basic Rent and Supplemental Rent
payment at the time such payment would have become due and
payable in accordance with the terms hereof had this Agreement
not been terminated in whole or in part. All Rent payable by
Lessee shall be paid without notice or demand (except as
otherwise expressly provided) and without abatement, suspension,
deferment, deduction, diminution or proration by reason of any
circumstance or occurrence whatsoever. Lessee hereby waives, to
the extent permitted by applicable Law, any and all rights that
it may now have or that at any time hereafter may be conferred
upon it, by statute or otherwise, to terminate, cancel, quit or
surrender this Agreement or any part hereof, or to any abatement,
suppression, deferment, diminution, reduction or proration of
Rent, except in accordance with the express terms hereof. Each
payment of Rent made by Lessee shall be final as to Lessor and
Lessee and, except for any manifest clerical computational error,
Lessee will not seek to recover all or any part of any such
payment of Rent for any reason whatsoever.
(c) All obligations, liabilities, covenants and
undertakings of Lessee in this Agreement or in any other
Operative Agreement shall be performed, observed and complied
with at Lessee's sole cost and expense, whether or not so
expressed, unless otherwise expressly provided.
(d) Nothing set forth in this Section 15 shall be
construed to prohibit Lessee from separately pursuing any claim
that it may have from time to time against Lessor or any other
Person with respect to any matter (other than the absolute and
unconditional nature of Lessee's obligations hereunder to pay
Rent, and other than the matters specified in paragraphs (b) and
(c) above).
<PAGE>
SECTION 16. GENERAL TAX INDEMNITY
16.1 GENERAL
(a) Indemnity
Lessee agrees to pay and, on written demand, in indemnify,
protect, save and hold Lessor and any of its successors,
Permitted Transferees and affiliates ("Tax Indemnitee") harmless
from all license, recording, documentation and registration fees,
sales and use taxes, personal property taxes, value added and any
and all other taxes, levies, imposts, duties, charges,
assessments or withholdings of any nature whatsoever together
with any and all penalties, additions to tax, fines or interest
thereon (collectively, "Taxes") imposed against Tax Indemnitee,
Lessee or any Item of Equipment, by any Federal, state or local
government or taxing authority in the United States, or territory
or possession of the United States, or by any taxing authority or
governmental subdivision of a foreign country or international
organization, upon or in connection with or with respect to any
Item of Equipment arising out of this Agreement, or upon the
ownership, delivery, leasing, charter, subleasing, possession,
presence, use operation, registration, change in registration,
transfer or title, documentation, landing, rejection, departure,
financing, maintenance, repair, overhaul, location, storage,
replacement, improvement, modification, abandonment, return or
other disposition thereof pursuant to this Agreement, or upon the
rentals, receipts or upon the earnings of Lessee arising
therefrom, or upon or with respect to this Lease or related
documents and amendments and supplements hereto and thereto and
the transactions contemplated thereby,
(b) Limitation on Indemnity
Notwithstanding the provisions or paragraph (a) of this
Section 16.1, Lessee shall have no obligation thereunder as to
(i) Taxes based on or measured by the gross receipts or net
income of Lessor (including, without limitation, capital gains
taxes, minimum taxes, and taxes on tax preference items and
whether imposed by withholding or otherwise) 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 but excluding sales, use and similar taxes
(collectively, "Income Taxes").imposed by the United States of
America or by any state or local taxing authorities within the
United States and Income Taxes a Tax Indemnitee by the country
of tax domicile of any such Tax Indemnitee; provided, however,
Lessee shall be liable for Income Taxes based on or measured by
such Tax Indemnitee's net income if, but only if, (a) such taxes
are in lieu of Income Taxes on any Item of Equipment which Lessee
would otherwise be required to pay hereunder, or (b)such Tax
Indemnitee would not otherwise be subject to Income Taxes in such
taxing jurisdiction, but for use or operation of any Item of
Equipment within the jurisdiction of such taxing authority or
other activities or the residency of Lessee in the jurisdiction
of such taxing authority; (ii) Taxes imposed upon a sale,
transfer or assignment of any interest in any Item of Equipment
by such Tax Indemnitee other than in the exercise of its remedies
hereunder after an Event of Default or upon Lessee's request;
(iii) Taxes to the extent they exceed the Taxes which would have
been imposed had there not been a sale, transfer or assignment of
any interest in any Item of Equipment by Lessor, but excluding
any transfer in the exercise of Lessor's remedies hereunder after
an Event of Default or upon Lessee's request, (; and (iv) Taxes
imposed with respect to any period prior to Delivery Date or
after the return of <PAGE> possession of the Aircraft to Lessor
in accordance with the terms of this Lease; (v) Taxes resulting
from or attributable to a Lessor Lien; (vi) Taxes imposed as a
result of a Tax Indemnitee's gross negligence, misconduct, breach
of this Lease or misrepresentation; and (vii) Taxes for which Tax
Indemnitee's entitlement to indemnification is governed by
Section 17.3. If there is a change in any law after the date
hereof that results in the imposition of Taxes that would be the
responsibility of Lessee under this Section 16, Lessor shall
reasonably cooperate with Lessee, upon Lessee's written request
and at Lessee's expense, to minimize in a lawful manner such
Taxes relating to the Aircraft; provided, however, that Lessor
shall not be obligated under this paragraph to take any action
which in Lessor's reasonable judgment would increase Lessor's
risk or expenses under, or adversely affect Lessor's financial
interests in, this Lease or the Aircraft or any interest therein
or which would result in any other material detriment to Lessor's
commercial interests.
16.2 AFTER-TAX NATURE OF INDEMNITY
Lessee further agrees that, with respect to any payment or
indemnity hereunder, such payment or indemnity shall include any
amount necessary to hold Tax Indemnitee harmless on an after-tax
basis from all Taxes required to be paid by the Tax Indemnitee
with respect to such payment or indemnity under the laws of any
Federal, state or local government or taxing authority in the
United States, or under the laws of any taxing authority or
governmental subdivision of a foreign country or international
organization; provided that, if Tax Indemnitee realizes a tax
benefit by reason of such payment or indemnity (whether such tax
benefit shall be by means of a depreciation deduction or
otherwise) and actually utilizes such benefit in reducing its
Taxes, Tax Indemnitee shall pay Lessee an amount equal to the net
value to Tax Indemnitee of such tax benefit when, as, if and to
the extent realized (such payments not to exceed in the aggregate
the amount of the related indemnity paid by Lessee including,
without limitation, payments made in respect to withholding taxes
under Section 16.5 hereof), but not before Lessee shall have made
all payments of indemnities to Tax Indemnitee required pursuant
to this Section 16; provided further, however, that if
subsequent to any payment to Lessee in accordance with the
foregoing, it is determined that such tax benefit is not
allowable in whole or in part, Lessee shall return the
appropriate portion of the payment made to Lessee by such Tax
Indemnitee.. Tax Indemnitee shall in good faith use reasonable
diligence in filing its tax returns and in dealing with taxing
authorities to seek and claim any such tax benefit.
16.3 CONTEST
If written claim is made against a Tax Indemnitee for any
Taxes referred to in this Section 16, Tax Indemnitee shall
promptly notify Lessee, provided that a failure to so notify
shall not relieve the Lessee of its obligation under this Section
16 unless it actually or effectively precludes or materially
adversely impacts a contest of such claim. If reasonably
requested by Lessee in writing within 30 days after such
notification, Tax Indemnitee shall upon receipt of an indemnity
satisfactory to it and at the expense of Lessee (including,
without limitation, all reasonable costs, expenses, losses, legal
and accountants' fees and disbursements, penalties and interest)
in good faith contest the validity, applicability or amount of
such Taxes by either (i) resisting payment thereof if
practicable, or (ii) if payment is made, using reasonable efforts
to obtain a refund thereof in appropriate administrative and
judicial proceedings; provided, however, that the Tax Indemnitee
shall not be required to take any action to contest a claim
<PAGE> unless (a) Lessee provides with such written request an
opinion of independent counsel, satisfactory both as to counsel
and substance, to the effect that there is a meritorious basis
for such contest, (b) such action to be taken will not result in
a material risk of a sale, forfeiture or loss of, or creation of
a Lien (other than a Permitted Lien) on, any Item of Equipment,
(c) the Lessee acknowledges its liability under this Section 16
for any Taxes being contested, and (d) no Event of Default shall
have occurred or be continuing. If Tax Indemnitee determines to
pay such Taxes and seek a refund, Lessee will either pay such
Taxes on Tax Indemnitee's behalf and pay Tax Indemnitee any
amount due with respect to such payment pursuant to Section 16.2
hereof or will promptly reimburse Tax Indemnitee for such Taxes
pursuant to Sections 16.1 and 16.2. If Tax Indemnitee shall
obtain a refund of all or any part of such Taxes paid by Lessee,
Tax Indemnitee shall pay Lessee the amount of such refund net of
any recovery expenses; provided that such amount shall not be
payable during such time as a Default or Event of Default shall
have occurred and be continuing or before such time as Lessee
shall have made all payments of indemnities to Tax Indemnitee
then due under this Section 16 and such payment shall be limited
to the amount previously paid by Lessee hereunder with respect to
such Taxes. If in addition to such refund Tax Indemnitee shall
receive an amount representing interest on the amount of such
refund, Lessee shall be paid that proportion of such interest
which is fairly attributable to the Taxes paid by Lessee prior to
the receipt of such refund. In case any report or return is
required to be made with respect to any obligation of Lessee
under this Section 16 or arising out of this Section 16, Lessee
will promptly notify Lessor of such requirement and will inform
Lessor whether Lessee (i) will file such report or return in such
manner as will show the ownership in Lessor of each Item of
Equipment and send a copy of such report or return to Lessor or
(ii) will make such report or return for filing by Lessor in such
manner as shall be satisfactory to Lessor. In the event of a
contest of any Taxes hereunder, Tax Indemnitee shall apprise
Lessee of all material developments with respect to such contest,
shall forward copies of all material submissions made in such
contest and the forum of such contest, shall consider in good
faith any request concerning the conduct of any such contest and
without waiving its right to be indemnified hereunder with
respect to such claim shall not settle or concede any such
contest without the written consent of Lessee. At Lessee's
written request and at Lessee's expense (including, without
limitation, all reasonable costs, expenses, losses, legal and
accountant's fees and disbursements, penalties, if any, and
interest). Tax Indemnitee shall appeal an adverse decision at the
administrative or judicial level to the appropriate forum,
provided that Tax Indemnitee shall not be required to request a
hearing before the U.S. Supreme Court.
16.4 APPLICATION OF PAYMENTS DURING EXISTENCE OF EVENT OF
DEFAULT
Any amount payable to Lessee pursuant to the terms of this
Section 16 shall not be paid to or retained by Lessee if at the
time of such payment or retention a Financial Default or an Event
of Default shall have occurred and be continuing under the Lease.
At such time as there shall not be continuing any such Financial
Default or Event of Default, such amount shall be paid to Lessee
to the extent not previously applied against Lessee's obligations
hereunder as and when due.
16.5 WITHHOLDING TAX
Notwithstanding any other provision of this Section 16, in
the event a withholding tax is imposed by a jurisdiction outside
the United States in connection with any payment due by <PAGE>
Lessee hereunder, Lessee agrees to (i) pay Tax Indemnitee an
additional amount such that the net amount actually received per
month by Tax Indemnitee equals the amount which Tax Indemnitee
would have received under the terms hereof from Lessee had such
withholding tax not been imposed, (ii) pay to the relevant
taxation or other authority the full amount of the withheld tax,
and (iii) provide Tax Indemnitee with proof that such tax has
been paid as set forth in clause (ii).
16.6 SURVIVAL OF INDEMNITIES
All of the obligations of Lessee under this Section 16 shall
continue in full force and effect notwithstanding the expiration
or earlier termination of this Lease and are expressly made for
the benefit of, and shall be enforceable by, the Tax Indemnitees
and their successors and assigns.
SECTION 17. GENERAL INDEMNIFICATION
17.1 THE INDEMNITY
Lessee agrees to assume liability for, and does hereby
indemnify, protect, save and keep harmless Lessor and its
affiliates and Permitted Transferees, and the respective
directors, officers, employees, agents and servants of each of
the foregoing and the successors and assigns thereof (all of the
foregoing, an "Indemnitee") from and against any and all claims,
damages, losses, liabilities (including, but not limited to, any
claim or liability for strict liability in tort or otherwise
imposed including, without limitation, liability arising under
any applicable environment or noise or pollution control statute,
rule or regulation), obligations, demands, suits, penalties,
judgments or causes of action and all legal proceedings, whether
civil or criminal, penalties, fines and other sanctions
("Claims"), and any costs and expenses in connection therewith
including, without limitation, reasonable legal fees and expenses
of whatever kind and nature (whether or not also indemnified
against by any other person under any other document and whether
arising before, on or after the Delivery Date), which may result
from or grow or arise in any manner directly or indirectly out of
any one or more of the following:
(a) the condition, ownership, manufacture, construction,
design (including, without limitation, latent and other defects
whether or not discoverable by Lessee or Lessor and any claim for
patent, trademark or copyright infringement), acceptance, non-
acceptance, rejection, delivery, lease, possession, return,
disposition, use or operation during the Term (in each and every
case) of the Aircraft or any Item of Equipment either in the air
or on the ground (except claims arising out of the gross
negligence or willful misconduct of an Indemnitee or its
successors or assigns), or
(b) from the material or any article used in the Aircraft
or any Item of Equipment or from the design, testing or use
thereof or from any maintenance, service, repair, overhaul or
testing of the Aircraft or any Item regardless of when such
defect shall be discovered, whether or not such Aircraft or any
Item is at the time in the possession of Lessee and whether it is
in the United States of America or any other country, or
(c ) any breach of or failure to perform or observe, or any
other noncompliance with, any covenant or agreement or other
obligation to be performed by Lessee under any Operative <PAGE>
Agreement or the falsity of any representation or warranty of
Lessee in any Operative Agreement or the occurrence of any
Default or Event of Default, or
(d) any claim or penalty arising out of violations of
applicable Law by Lessee, or
(e) tort liability, or
(f) death or property damage of passengers, shippers or
others, or
(g) environmental control, noise or pollution, or
(h) any Liens in respect of the Aircraft or any Item of
Equipment.
As to claims arising upon or prior to the end of the Term,
the indemnities contained in this Section shall continue in full
force and effect, notwithstanding the assignment, expiration or
other termination of this Lease.
17.2 EXCEPTIONS TO GENERAL INDEMNITY
The indemnity provided for in Section 17.1 will not extend
to Claims of or against any Indemnitee to the extent arising from
or attributable to any one or more of the following:
(a) The gross negligence or willful misconduct of an
Indemnitee;
(b) Acts or events occurring prior to the Delivery Date or
after the return of possession of the Aircraft to Lessor in
accordance with the terms of this Lease;
(c) Claims representing Taxes, it being acknowledged that
the terms of Section 16 are the exclusive provisions governing
Lessee's indemnity obligations for Taxes;
(d) A breach by Lessor of any of the terms of this
Agreement or any other Operative Agreement;
(e) The inaccuracy of any representation or warranty made
by Lessor in this Agreement or any other Operative Agreement;
(f) Expenses which under the terms of this Agreement or any
other Operative Agreement are required to be paid by an
Indemnitee;
(g) The existence, incurrence, recordation, release,
discharge, assignment or enforcement of any Lessor Lien;or
(h) The sale, assignment, transfer, pledge or other disposition
of the Aircraft or any interest therein or in the Operative
Agreements other than a transfer in the exercise of Lessor's
remedies hereunder after an Event of Default.
17.3 THE LESSEE WAIVER
<PAGE>
Lessee hereby waives and releases any claim now or hereafter
existing against Lessor and any other Indemnitee on account of
any and all claims, demands, suits, judgments or causes of action
for or on account of or arising or in any way connected with
injury to or death of personnel of Lessee or loss or damage to
property of Lessee or the loss of use of any property which may
result from or grow or arise in any manner out of the condition,
use or operation of the Aircraft or any Item, either in the air
or on the ground during the Term hereof (except claims arising
out of the gross negligence or willful misconduct of such
Indemnitee), or which may be caused during the Term hereof by any
defect (whether latent or patent) in the Aircraft or any Item
from the material or any article used therein or from the design,
testing or use thereof or from any maintenance, service, repair,
overhaul or testing of the Aircraft or any Item regardless of
when such defect shall be discovered, whether or not such
Aircraft or any Item is at the time in the possession of Lessee
and whether it is in the United States of America or any other
country.
17.4 THE GROSS-UP
Lessee further agrees that, with respect to any payment or
indemnity hereunder, such payment or indemnity shall include any
amount necessary to hold the recipient of the indemnity harmless
on an after-tax basis from all taxes required to be paid by such
recipient with respect to such payment or indemnity under the
laws of any Federal, state or local government or taxing
authority in the United States, or under the laws of any taxing
authority or governmental subdivision of a foreign country;
provided that, if any recipient of a payment or indemnity
realizes a tax benefit by reason of such payment or indemnity
(whether such tax benefit shall be by means of a depreciation
deduction or otherwise), such recipient shall pay Lessee an
amount equal to the sum of such tax benefit plus any tax benefit
realized as the result of any payment made pursuant to this
proviso, when, as, if and to the extent realized (such payments
not to exceed in the aggregate the amount of the related
indemnity paid by Lessee) but not before Lessee shall have made
all payments or indemnities to such recipient with respect to
such loss pursuant to the provisions of this Section 17; provided
further, however, that if any Indemnitee loses such benefit
subsequent to any payment to Lessee with respect thereto, Lessee
shall indemnify such Indemnitee with respect to such loss
pursuant to the provisions of Section 16 (but without regard to
Section 16.1(b) thereof). Each such recipient shall in good
faith use reasonable efforts in filing its tax returns and in
dealing with taxing authorities to seek and claim any such tax
benefit.
SECTION 18. MISCELLANEOUS
18.1 PURCHASE OPTIONS
Lessor hereby grants to Lessee, or its assignee for
financing purposes, an option to purchase the Aircraft on the
respective dates and at the applicable Purchase Price set forth
in Schedule 1 plus the amount, if any, contributed by Lessor to
the performance of ADs and/or FARs pursuant to Section D.2 of
Annex C attached hereto. Not less than ten (10) days prior to
the Delivery Date and ninety (90) days prior to each six month
anniversary of the Delivery Date, up to and including the twenty
four month anniversary thereof, Lessee may give Lessor written
notice irrevocably electing to purchase the Aircraft and Aircraft
Documents pursuant to the provisions hereof. Should Lessee elect
to purchase the Aircraft and Aircraft Documents as <PAGE> above
provided, then Lessee shall pay such purchase price, plus all
taxes, recordation fees and other charges and expenses incurred
or payable in connection with such purchase, and all other
amounts due and owing hereunder or in any Operative Agreement in
immediately available funds, and Lessor shall transfer to Lessee
all of its right, title and interest in and to the Aircraft and
the Aircraft Documents, with a warranty of good title (other than
for Liens arising by, through or under Lessee), in its "AS-IS,
WHERE-IS" condition, and otherwise without recourse,
representation or warranty, express or implied. Also, in
connection with such purchase of the Aircraft and Aircraft
Documents by Lessee, Lessor shall issue a credit memorandum in
favor of Lessee in the amount of $100,000, which may be used by
Lessee to purchase engines, parts, other equipment and/or
services (including simulator time) that Lessor has for sale from
time-to-time. Further, Lessor agrees to provide Lessee with a
25% discount on then-current rates for services and simulator
time in the event that Lessee elects to use such credit
memorandum to purchase services (including simulator time) from
Lessor.
18.2 AMENDMENTS
No provision of this Agreement may be amended, supplemented,
waived, modified, discharged, terminated or otherwise varied
orally, but only by an instrument in writing that specifically
identifies the provision of this Agreement that it purports to
amend, supplement, waive, modify, discharge, terminate or
otherwise vary and is signed by Lessor and Lessee. Each such
amendment, supplement, waiver, modification, discharge,
termination or variance shall be effective only in the specific
instance and for the specific purpose for which it is given. No
provision of this Agreement shall be varied or contradicted by
oral communication, course of dealing or performance or other
manner not set forth in an agreement, document or instrument in
writing and signed by Lessor and Lessee.
18.3 SEVERABILITY
If any provision hereof shall be held invalid, illegal or
unenforceable in any respect in any jurisdiction, then, to the
extent permitted by Law (a) all other provisions hereof shall
remain in full force and effect in such jurisdiction and (b) such
invalidity, illegality or unenforceability shall not affect the
validity, legality or enforceability of such provision in any
other jurisdiction. If, however, any Law pursuant to which such
provisions are held invalid, illegal or unenforceable may be
waived, such Law is hereby waived by the parties hereto to the
full extent permitted, to the end that this Agreement shall be
deemed to be a valid and binding agreement in all respects,
enforceable in accordance with its terms.
18.4 SURVIVAL
The representations, warranties, indemnities and covenants
set forth herein shall survive the delivery or return of the
Aircraft, the transfer of any interest of Lessor in this
Agreement and the other Operative Agreements, and the expiration
or other termination of this Agreement or any other Operative
Agreement.
18.5 REPRODUCTION OF DOCUMENTS
This Agreement, all annexes, schedules and exhibits hereto
and all agreements, instruments and documents relating hereto,
including, without limitation (a) consents, waivers <PAGE> and
modifications that may hereafter be executed and (b) financial
statements, certificates and other information previously or
hereafter furnished to any party hereto, may be reproduced by
such party by any photographic, photostatic, microfilm, micro-
card, miniature photographic or other similar process, and such
party may destroy any original documents so reproduced. Any such
reproduction shall be admissible in evidence as the original
itself in any judicial or administrative proceeding (whether or
not the original is in existence and whether or not such
reproduction was made by such party in the regular course of
business) and any enlargement, facsimile or further reproduction
of such reproduction likewise is admissible in evidence.
18.6 COUNTERPARTS
This Agreement and any amendments, waivers, consents or
supplements hereto may be executed in any number of counterparts
(or upon separate signature pages bound together into one or more
counterparts), each of which when so executed shall be deemed to
be an original, and all of which counterparts, taken together,
shall constitute one and the same instrument.
18.7 NO WAIVER
No failure on the part of Lessor to exercise, and no delay
by Lessor in exercising, any of its rights, powers, remedies or
privileges under this Agreement or provided at Law, in equity or
otherwise shall impair, prejudice or constitute a waiver of any
such right, power, remedy or privilege or be construed as a
waiver of any breach hereof or default hereunder or as an
acquiescence therein, nor shall any single or partial exercise of
any such right, power, remedy or privilege preclude any other or
further exercise thereof by Lessor or the exercise of any other
right, power, remedy or privilege by Lessor. No notice to or
demand on Lessee in any case shall, unless otherwise required
under this Agreement, entitle Lessee to any other or further
notice or demand in similar or other circumstances or constitute
a waiver of the rights of Lessor to any other or further action
in any circumstances without notice or demand.
18.8 NOTICES
Unless otherwise expressly permitted by the terms hereof,
all notices, requests, demands, authorizations, directions,
consents, waivers and other communications required or permitted
to be made, given, furnished or filed hereunder shall be in
writing (it being understood that the specification of a writing
in certain instances and not in others does not imply an
intention that a writing is not required as to the latter), shall
refer specifically to this Agreement and shall be personally
delivered, sent by registered mail or certified mail, return
receipt requested, postage prepaid, or sent by overnight courier
service, in each case to the respective address or facsimile
number set forth for such party in Schedule 3 hereto to, or to
such other address or number as either party hereto may hereafter
specify by notice to the other party hereto. Each such notice,
request, demand, authorization, direction, consent, waiver or
other communication shall be effective when received or, if made,
given, furnished or filed (a) by facsimile or telecommunication
transmission, when confirmed, or (b) by registered or certified
mail, three Business Days after being deposited, properly
addressed, with the U.S. Postal Service.
18.9 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE
<PAGE>
(a) THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAWS. THIS AGREEMENT IS BEING
DELIVERED IN THE STATE OF NEW YORK.
(b) Each party hereto agrees that the United States
District Court for the Eastern District of Virginia and any
Virginia court of general jurisdiction in the district where
Lessor is located 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, each
party hereto consents to the service of process relating to any
such proceedings by prepaid mailing by air mail, certified or
registered mail of a copy of the process, at the address for such
party set forth in Schedule 3.
(d) LESSEE HEREBY:
(i) WAIVES TO THE FULLEST EXTENT PERMITTED BY
LAW ANY OBJECTION WHICH LESSEE MAY NOW OR HEREAFTER HAVE TO
THE COURTS REFERRED TO IN 18.9(b) ABOVE ON GROUNDS OF
INCONVENIENT FORUM OR OTHERWISE AS REGARDS PROCEEDINGS IN
CONNECTION WITH THIS AGREEMENT;
(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 SECTION 18.9(b); AND
(iii)AGREES THAT A JUDGMENT OR ORDER OF ANY COURT
REFERRED TO IN SECTION 18.9(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 SECTION 18.9 LIMITS THE RIGHT OF
EITHER PARTY TO BRING PROCEEDINGS AGAINST THE OTHER PARTY IN
CONNECTION WITH THIS AGREEMENT:
(i) IN ANY OTHER COURT OF COMPETENT JURISDICTION; OR
(ii) CONCURRENTLY IN MORE THAN ONE JURISDICTION.
(f) LESSEE AND LESSOR EACH HEREBY IRREVOCABLY AND
UNCONDITIONALLY:
(i) WAIVE ANY RIGHT OF IMMUNITY IN RELATION TO
THIS AGREEMENT NO IMMUNITY FROM SUCH LEGAL PROCEEDINGS
(WHICH <PAGE> WILL BE DEEMED TO INCLUDE WITHOUT LIMITATION,
SUIT, ATTACHMENT PRIOR TO JUDGMENT, OTHER ATTACHMENT, THE
OBTAINING OF JUDGMENT, EXECUTION OR OTHER ENFORCEMENT WHICH
IT OR ITS ASSETS NOW HAS OR MAY IN THE FUTURE ACQUIRE; AND
(ii) CONSENT 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.
(g) NOTHING HEREIN SHALL, OR SHALL BE CONSTRUED SO AS TO,
LIMIT THE RIGHT OF EITHER PARTY HERETO TO DEFEND OR TO ASSERT A
COUNTERCLAIM IN, OR TO SEEK RECOGNITION OF OR ENFORCEMENT OF ANY
JUDGMENT RENDERED IN, ANY ACTION, SUIT OR PROCEEDING IN THE
COURTS OF WHATEVER JURISDICTION THAT MAY BE APPROPRIATE IN THE
OPINION OF EITHER SUCH PARTY.
18.10 THIRD-PARTY BENEFICIARY
This Agreement is not intended to, and shall not, provide
any person not a party hereto with any rights of any nature
whatsoever against either of the parties hereto, and no person
not a party hereto shall have any right, power or privilege in
respect of, or have any benefit or interest arising out of, this
Agreement.
18.11 ENTIRE AGREEMENT
This Agreement, together with the other Operative
Agreements, on and as of the date hereof constitutes the entire
agreement of the parties hereto with respect to the subject
matter hereof, and all prior or contemporaneous understandings or
agreements, whether written or oral, between the parties hereto
with respect to such subject matter are hereby superseded in
their entireties.
[This space intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have each caused
this Aircraft Lease Agreement to be duly executed as of the day
and year first above written.
US AIRWAYS, INC., as Lessor
By:/s/ Thomas A. Fink
Name: Thomas A. Fink
Title: Vice President - Purchasing
VANGUARD AIRLINES, INC., as Lessee
By:/s/ Robert J. Spane
Name: Robert J. Spane
Title: Chief Executive Officer
and President
<PAGE>
ANNEX A
DEFINITIONS
GENERAL PROVISIONS
(a) In each Operative Agreement, unless otherwise expressly
provided, a reference to:
(i) each of "Lessee," "Lessor" or any other person
includes, without prejudice to the provisions of any
Operative Agreement, any successor in interest to it and any
permitted transferee, permitted purchaser or permitted
assignee of it;
(ii) words importing the plural include the singular
and words importing the singular include the plural;
(iii) any agreement, instrument or document, or any
annex, schedule or exhibit thereto, or any other part
thereof, includes, without prejudice to the provisions of
any Operative Agreement, that agreement, instrument or
document, or annex, schedule or exhibit, or part,
respectively, as amended, modified or supplemented from time
to time in accordance with its terms and in accordance with
the Operative Agreements, and any agreement, instrument or
document entered into in substitution or replacement
therefor;
(iv) any provision of any Law includes any such
provision as amended, modified, supplemented, substituted,
reissued or reenacted prior to the Delivery Date, and
thereafter from time to time;
(v) the words "Agreement," "this Agreement," "hereby,"
"herein," "hereto," "hereof" and "hereunder" and words of
similar import when used in any Operative Agreement refer to
such Operative Agreement as a whole and not to any
particular provision of such Operative Agreement;
(vi) the words "including," "including, without
limitation," "including, but not limited to," and terms or
phrases of similar import when used in any Operative
Agreement, with respect to any matter or thing, mean
including, without limitation, such matter or thing; and
(vii) a "Section," an "Exhibit," an "Annex" or a
"Schedule" in any Operative Agreement, or in any annex
thereto, is a reference to a section of, or an exhibit, an
annex or a schedule to, such Operative Agreement or such
annex, respectively.
(b) Each exhibit, annex and schedule to each Operative
Agreement is incorporated in, and shall be deemed to be a part
of, such Operative Agreement.
<PAGE>
(c) Unless otherwise defined or specified in any Operative
Agreement, all accounting terms therein shall be construed and
all accounting determinations thereunder shall be made in
accordance with GAAP.
(d) Headings used in any Operative Agreement are for
convenience only and shall not in any way affect the construction
of, or be taken into consideration in interpreting, such
Operative Agreement.
DEFINED TERMS
"ACT" means Part A of Subtitle VII of Title 49, United
States Code.
"ACTUAL KNOWLEDGE" as it applies to Lessee or Lessor, means
actual knowledge of a Vice President or more senior officer of
Lessor or Lessee, respectively, or any other officer of Lessor
or Lessee, respectively, in each case having responsibility for
the transactions contemplated by the Operative Agreements;
provided, that each of Lessee and Lessor shall be deemed to have
"Actual Knowledge" of any matter as to which it has received
notice from the other, such notice having been given pursuant to
Section 18.8 of the Lease.
"ADDITIONAL DEPOSIT" is defined in Schedule 1 to the Lease.
"ADDITIONAL INSURED" is defined by reference to Section 10
of and Annex D to the Lease.
"AFFILIATE" means, with respect to any person, any other
person directly or indirectly controlling, controlled by or under
common control with such person. For purposes of this
definition, "control" means the power, directly or indirectly, to
direct or cause the direction of the management and policies of
such person, whether through the ownership of voting securities
or by contract or otherwise and "controlling," "controlled by"
and "under common control with" have correlative meanings.
"AIRCRAFT" means, collectively, the Airframe, Engines and
Aircraft Documents.
"AIRCRAFT DOCUMENTS" means all updated and current technical
data, manuals and log books, and all inspection, modification and
overhaul records and other service, repair, maintenance and
technical records, including without limitation, Airworthiness
Directives (ADs) status and method of compliance and Supplemental
Type Certificates (STC) amended to the latest amendment revision,
that are required by the FAA, the Lease or the Maintenance
Program to be maintained with respect to the Aircraft, Airframe,
Engines or Parts, or that are of a type required to be delivered
by Lessee upon return of the Aircraft, Airframe or Engines under
Section 5 of the Lease; and such term shall include all
additions, renewals, revisions and replacements of any such
materials from time to time made, or required to be made, in
accordance with the Lease, the Maintenance Program or applicable
FAA Regulations, and in each case in whatever form and by
whatever means or medium (including, without limitation,
microfiche, microfilm, paper or computer disk) such materials may
be maintained or retained by or on behalf of Lessee (provided,
that all such materials shall be maintained in the English
language); and such term shall include, without limitation, the
documents described in Section N of Annex B to the Lease.
<PAGE>
"AIRFRAME" means (a) the Aircraft (excluding Engines or
engines from time to time installed thereon) manufactured by
Airframe Manufacturer and identified by Airframe Manufacturer's
model number, United States registration number and Airframe
Manufacturer's serial number set forth in Lease Supplement No. 1
and (b) any and all Parts incorporated or installed in or
attached or appurtenant to such airframe, and any and all Parts
removed from such airframe, unless title to such Parts shall not
be vested in Lessor in accordance with Section 8.1 and Annex C of
the Lease.
"AIRFRAME MANUFACTURER" means The Boeing Company, a Delaware
corporation.
"APPRAISER" means a firm of internationally recognized,
independent aircraft appraisers.
"APU" means the auxiliary power unit installed on the
Aircraft on the Delivery Date, whether or not installed on the
Aircraft from time to time thereafter, unless title to such APU
shall not be vested in Lessor in accordance with Section 8.1 of
the Lease, and any replacement or substituted auxiliary power
unit installed on the Aircraft in accordance with the Lease.
"AVIATION AUTHORITY" means the FAA.
"BANKRUPTCY CODE" means the United States Bankruptcy Code,
11 U.S.C. Sections 101 et seq.
"BASIC RENT" means the rent payable for the Aircraft
pursuant to Section 3.2.1 of the Lease.
"BUSINESS DAY" means any day other than a Saturday, Sunday
or other day on which commercial banks are authorized or required
by law to close in New York, New York, Pittsburgh, Pennsylvania,
or Kansas City, Missouri.
"CITIZEN OF THE UNITED STATES" is defined in Section
40102(a)(15) of the Act and in the FAA Regulations.
"CLOSING" means the closing of the transactions contemplated
by the Lease on the Delivery Date.
"CYCLE/FLIGHT HOURS" for the Airframe, any Engine or any
landing gear, means the number of flight hours or cycles,
whichever is greater, flown by Lessee on such Airframe, Engines,
landing gear during such Hourly Rent Interval.
"DAMAGE PAYMENT THRESHOLD" is defined in Schedule 1 to the
Lease.
"DEBT" means any liability for borrowed money, or any
liability for the payment of money in connection with any letter
of credit transaction or any other liabilities evidenced or to be
evidenced by bonds, debentures, notes or other similar
instruments.
"DEFAULT" means any condition, circumstance, act or event
that, with the giving of notice, the lapse of time or both, would
constitute an Event of Default.
<PAGE>
"DELIVERY DATE" means the Business Day specified in Lease
Supplement No. 1 as the date on which, among other things, the
Aircraft is delivered to and accepted by Lessee under the Lease
and the Closing occurs.
"DISCOUNT RATE" is defined in Schedule 1.
"DOLLARS," "UNITED STATES DOLLARS" or "$" means the lawful
currency of the United States.
"DOT" means the Department of Transportation of the United
States or any Government Entity succeeding to the functions of
such Department of Transportation.
"ENGINE" means (a) each of the engines manufactured by
Engine Manufacturer and identified by Engine Manufacturer's model
number and Engine Manufacturer's serial number set forth in Lease
Supplement No. 1 and any Replacement Engine, in any case whether
or not from time to time installed on such Airframe or installed
on any other airframe or aircraft, and (b) any and all Parts
incorporated or installed in or attached or appurtenant to such
engine, and any and all Parts removed from such engine, unless
title to such Parts shall not be vested in Lessor in accordance
with Section 8.1 and Annex C of the Lease. Upon substitution of
a Replacement Engine under and in accordance with the Lease, such
Replacement Engine shall become subject to the Lease and shall be
an "Engine" for all purposes of the Lease and the other Operative
Agreements and thereupon the Engine for which the substitution is
made shall no longer be subject to the Lease, and such replaced
Engine shall cease to be an "Engine."
"ENGINE HOURLY RATE" is defined in Schedule 1.
"ENGINE HOURLY RENT BALANCE" means with respect to each
Engine, all Engine Hourly Rent received by Lessor with respect to
such Engine, less any payments made by Lessor for Engine
Maintenance for such Engine or as otherwise applied by Lessor in
its sole and reasonable discretion in connection with an
obligation of Lessee under the Operative Agreement.
"ENGINE MANUFACTURER" means Pratt & Whitney/United
Technologies.
"ERISA" means the Employee Retirement Income Security Act of
1974 and any regulations and rulings issued thereunder all as
amended and in effect from time to time.
"EVENT OF DEFAULT" means any one or more of the conditions,
circumstances, acts or events set forth in Section 14 of the
Lease.
"EVENT OF LOSS" means, with respect to the Aircraft,
Airframe or any Engine, any of the following circumstances,
conditions or events with respect to such property, for any
reason whatsoever:
(a) the destruction of such property, damage to such
property beyond practical or economic repair or rendition of
such property permanently unfit for normal use;
(b) the actual or constructive total loss of such
property or any damage to such property, or requisition of
title or use of such property, which results in an insurance
<PAGE> settlement with respect to such property on the basis
of a total loss or constructive or compromised total loss;
(c) any loss of such property or loss of use of such
property for a period of 90 days or more as a consequence of
any theft, hijacking or disappearance of such property;
(d) any seizure, condemnation, confiscation, taking or
requisition of title to such property by any Government
Entity or purported non-U.S. Government Entity;
(e) any seizure, condemnation, confiscation, taking or
requisition of use of such property, that continues until
the earliest of (i) the last day of the Term, (ii) the date
upon which the Aircraft is modified, altered or adapted in
such a manner as would render conversion of such property
for use in normal commercial passenger service impractical
or uneconomical, (iii) the date on which such property is
operated or located in any area excluded from coverage by
any insurance policy required to be maintained in respect of
such property pursuant to the Lease (unless an indemnity in
lieu of insurance is provided to Lessor in accordance with
Section 10.4 of the Lease) or (iv) the date that is 90 days
following the commencement of such loss of use (unless such
loss of use results from action by the U.S. Government, in
which case this clause (iv) shall not apply to such loss of
use); and
(f) as a result of any law, rule, regulation, order or
other action by the Aviation Authority or by any Government
Entity of the government of registry of the Aircraft or by
any Government Entity otherwise having jurisdiction over the
operation or use of the Aircraft, the use of such property
in the normal course of Lessee's business of passenger air
transportation is prohibited for a period expiring on the
earlier to occur of (i) the last day of the Term or (ii) the
date that is 180 days following commencement of such
prohibition, provided, that if Lessee, prior to the
expiration of such 180-day period, shall have undertaken and
shall be diligently carrying forward all steps which are
necessary or desirable to permit the normal use of such
property by Lessee, then the date that is 360 days following
commencement of such prohibition.
The date of such Event of Loss shall be the date of such loss,
damage, insurance settlement, seizure, condemnation,
confiscation, taking or requisition of title or use or
prohibition, except that for purposes of clauses (c), (e) and (f)
above, no Event of Loss shall be deemed to have occurred until
the date of expiration of the applicable period referred to
therein.
"EXPENSES" means any and all liabilities, obligations,
losses, damages, settlements, penalties, claims (including,
without limitation, claims or liabilities based or asserted upon
(a) negligence, (b) strict or absolute liability, (c) liability
in tort, (d) infringement of patent, trademark or other property
or other right and (e) liabilities arising out of violation of
any Law), actions, suits, costs, expenses and disbursements
(including, without limitation, reasonable fees and disbursements
of legal counsel, accountants, appraisers, inspectors or other
professionals, and costs of investigation), including, without
limitation, all such costs, expenses and disbursements incurred
by any person in asserting or establishing, or in defending any
claims arising out of its assertion of, any rights it may have
under, or its cooperation in connection with any Expenses
indemnified pursuant to, this Lease.
<PAGE>
"EXPIRATION DATE" means the Business Day next preceding the
fifth anniversary of the Delivery Date.
"FAA" means the Federal Aviation Administration of the
United States or any Government Entity succeeding to the
functions of such Federal Aviation Administration.
"FAA FILED DOCUMENTS" means the Lease and Lease Supplement
No. 1.
"FAA REGULATIONS" means the Federal Aviation Regulations
(FARs) issued or promulgated pursuant to the Act from time to
time.
"FAIR MARKET RENTAL VALUE" has the meaning specified in
Section 14.4 of the Lease.
"FINAL DEPOSIT" is defined in Schedule 1 to the Lease.
"FINANCING STATEMENTS" means, collectively, UCC-l (and,
where appropriate, UCC-3) financing statements covering the Lease
and the Aircraft, as a precautionary matter, by Lessee, as
lessee, showing Lessor as lessor for filing in the office of the
Secretary of State of the State of Missouri and each other
jurisdiction that, in the opinion of Lessor, is reasonably
desirable.
"GAAP" means generally accepted accounting principles as set
forth in the statements of financial accounting standards issued
by the Financial Accounting Standards Board of the American
Institute of Certified Public Accountants, as such principles may
at any time or from time to time be varied by any applicable
financial accounting rules or regulations issued by the SEC and,
with respect to any person, shall mean such principles applied on
a basis consistent with prior periods except as may be disclosed
in such person's financial statements.
"GOVERNMENT ENTITY" means (a) any federal, state, provincial
or similar government, and any body, board, department,
commission, court, tribunal, authority, agency or other
instrumentality of any such government or otherwise exercising
any executive, legislative, judicial, administrative or
regulatory functions of such government or (b) any other
government entity having jurisdiction over any matter
contemplated by the Operative Agreements or relating to the
observance or performance of the obligations of any of the
parties to the operative Agreements.
"HOURLY RENT" means Engine Hourly Rent, "Q"-Check Hourly
Rent and Landing Gear Hourly Rent, collectively.
"HOURLY RENT BALANCE" means the Engine Hourly Rent Balance,
the "Q"-Check Hourly Rent Balance and the Landing Gear Hourly
Rent Balance, collectively.
"HOURLY RENT INTERVAL" means the time period commencing on
the first day of each calendar month during the Term of this
Lease and ending on the last day of such calendar month, except
that with respect to the final Hourly Rent Interval, such period
shall end on the last day of the Term of this Lease.
<PAGE>
"INDEMNITEE" means (a) Lessor, (b) Lessor's Lender, if any,
(c) each Affiliate of Lessor and Lessor's Lender, if any, (d) the
respective directors, officers, employees, agents and servants of
each of the persons described in clauses (a) through (c), and (e)
the successors and permitted assigns of the persons described in
clauses (a) through (d), inclusive.
"INITIAL DEPOSIT" is defined in Schedule 1 to the Lease.
"LANDING GEAR HOURLY RATE" is defined in Schedule 1.
"LANDING GEAR HOURLY RENT BALANCE" for each landing gear
(i.e., one of the three (3) such gear installed on the Airframe),
means all Landing Gear Hourly Rent received by Lessor with
respect to such gear, less any payments made by Lessor for
Landing Gear Maintenance for the applicable gear or as otherwise
applied by Lessor in its sole discretion in connection with an
obligation of Lessee under the Operative Agreements.
"LAW" means (a) any constitution, treaty, statute, law,
decree, regulation, order, rule or directive of any Government
Entity, and (b) any judicial or administrative interpretation or
application of, or decision under, any of the foregoing.
"LEASE" or "LEASE AGREEMENT" means the Aircraft Lease
Agreement (MSN 22882), dated as of February 22, 2000, between
Lessor and Lessee, as supplemented by Lease Supplement No. 1, as
the same may be subsequently amended, modified or supplemented.
"LEASE SUPPLEMENT" means a supplement to the Lease, in the
form of Exhibit A to the Lease.
"LEASE SUPPLEMENT NO. 1" means the initial Lease Supplement,
dated the Delivery Date.
"LESSEE" means Vanguard Airlines, Inc., a Delaware
corporation.
"LESSEE PERSON" means Lessee, any sublessee, assignee or
successor of Lessee or any other user, or person in possession,
of the Aircraft, the Airframe or any Engine, with or without
color of right, or any Affiliate of any of the foregoing (other
than any Indemnitee or any Affiliate thereof).
"LESSOR" means US Airways, Inc., a Delaware corporation, or
any successor lessor under the Lease.
"LESSOR LIEN" with respect to the Aircraft, Airframe or an
Engine means (a) any Lien on such property whatsoever from time
to time created by or through Lessor in connection with the
financing of the Aircraft, (b) any other Lien on such property
which results from acts of or claims against Lessor not related
to the transactions contemplated by or permitted under this
Agreement, or (c) any Lien on such property imposed as a result
of Taxes against which Lessor (or any other Tax Indemnitee) is
not required to be indemnified by Lessee under this Lease;
provided, that any Lien that would otherwise constitute a Lessor
Lien hereunder shall not constitute a Lessor Lien hereunder, so
long as (A) the existence of such Lien poses no material risk of
the sale, forfeiture or loss of the Aircraft, Airframe or any
Engine or any interest therein, <PAGE> (B) the existence of such
Lien does not interfere in any way with the use or operation of
the Aircraft by Lessee (or any Permitted Sublessee), (C) Lessor
is diligently contesting such Lien by appropriate proceedings,
and (D) any property subject to such Lien is not then required to
be conveyed to any other Person pursuant to Section 4.5 of the
Lease.
"LESSOR'S LENDER" means the financial institution(s) or
other Person(s) in whose favor Lessor may, from time to time,
grant a security interest in the Aircraft and/or this Lease
pursuant to Section 12.1(c) of the Lease in connection with any
financing made available to Lessor by such financial
institution(s) or Person(s), including any trustee or collateral
agent acting on behalf of any such financial institution(s) or
other Person(s).
"LETTER AGREEMENT NO. 1" means that certain Letter Agreement
No. 1, dated as of February 22, 2000 between Lessor and Lessee
relating to certain matters with respect to the Aircraft.
"LIABILITY DEDUCTIBLE" is defined in Schedule 1 to the
Lease.
"LIEN" means any mortgage, pledge, lien, charge, claim,
encumbrance, lease or security interest affecting the title to or
any interest in property.
"LOI" means that certain Letter of Intent dated October 29,
1999 between Lessor and Lessee, with respect to the proposed
lease of six (6) Boeing Model 737-200 Advanced aircraft.
"MAINTENANCE PROGRAM" is defined in Annex C to the Lease.
"MATERIAL ADVERSE CHANGE" means, with respect to any person,
any event, condition or circumstance that materially and
adversely affects such person's business or consolidated
financial condition, or its ability to observe or perform its
obligations, liabilities and agreements under the Operative
Agreements.
"MINIMUM LIABILITY INSURANCE AMOUNT" is defined in Schedule
1 to the Lease.
"NET WORTH" means, for any person, the excess of its total
assets over its total liabilities.
"OFFICER'S CERTIFICATE" means, a certificate signed by the
Chairman, the President, any Vice President, the Treasurer or the
Secretary of such party.
"OPERATIVE AGREEMENTS" means, collectively, the Lease, Lease
Supplement No. 1, any other Lease Supplements, Letter Agreement
No. 1, and each other agreement between Lessor and Lessee
relating to the transactions contemplated by the Lease.
"PARTS" means all appliances, parts, components,
instruments, appurtenances, accessories, furnishings, seats and
other equipment of whatever nature (including, without
limitation, all avionics, the APU and Passenger Convenience
Equipment, but excluding Engines or engines), that may from time
to time be installed or incorporated in or attached or
appurtenant to the Airframe or any Engine; provided, that the
term "Parts" shall not be deemed to include any Passenger
Convenience Equipment if and for so long as such Equipment shall
be owned by, or <PAGE> shall be subject to a security interest,
license or other interest of, another Person (other than any
Affiliate of Lessee) as provided under Section D.3 of Annex C to
the Lease.
"PASSENGER CONVENIENCE EQUIPMENT" means components or
systems installed on or affixed to the Airframe that are used to
provide individual telecommunications or electronic entertainment
to passengers aboard the Aircraft.
"PAYMENT DATE" means the Delivery Date and the numerically
corresponding day in each successive calendar month thereafter
during the Term or, if any such day is not a Business Day, the
immediately succeeding Business Day.
"PAYMENT DUE RATE" is defined in Schedule 1 to the Lease.
"PERMITTED LIEN" means any Lien described in clauses (a)
through (f), inclusive, of Section 6 of the Lease.
"PERMITTED SUBLEASE" means a sublease permitted under
Section 7.2.6 of the Lease.
"PERMITTED SUBLESSEE" means the sublessee under a Permitted
Sublease.
"PERMITTED TRANSFEREE" means any Person that (i)
acknowledges, accepts and confirms in writing for the benefit of
Lessee the obligations set forth in Section 4.3 of the Lease,
(ii) is a Citizen of the United States, (iii) is neither a
commercial airline in the business of operating scheduled
passenger flights nor an Affiliate of a commercial airlines and
(iv) has a minimum net worth of $20,000,000.
"PERSONS" or "PERSONS" means individuals, firms,
partnerships, joint ventures, trusts, trustees, Government
Entities, organizations, associations, corporations, government
agencies, committees, departments, authorities and other bodies,
corporate or incorporate, whether having distinct legal status or
not, or any member of any of the same.
""Q"-CHECK HOURLY RATE" is defined in Schedule 1 to the
Lease.
""Q"-CHECK HOURLY RENT BALANCE" means all "Q"-Check Hourly
Rent received by Lessor with respect to the Airframe, less any
payments made by Lessor for "Q"-Check Maintenance for the
Airframe or as otherwise applied by Lessor in its sole discretion
in connection with an obligation of Lessee under the Operative
Agreements.
"RENT" means, collectively, Basic Rent and Supplemental
Rent.
"REPLACEMENT ENGINE" means an engine substituted for an
Engine pursuant to Section 5.3, 7.2, 8 or 9 of or Annex C to the
Lease.
RETURN ACCEPTANCE SUPPLEMENT" means a Return Acceptance
Supplement, dated as of the date the Aircraft is returned to
Lessor pursuant to Section 5 of the Lease, by Lessor and Lessee
substantially in the form of Exhibit B to Annex B to the Lease.
<PAGE>
"RETURN LOCATION" means Kansas City, Missouri or such other
location as may be mutually agreed to by Lessor and Lessee.
"SEC" means the Securities and Exchange Commission of the
United States, or any Government Entity succeeding to the
functions of such Securities and Exchange Commission.
"SECTION 1110" means 11 U.S.C. Sections 1110 of the
Bankruptcy Code or any successor or analogous section of the
federal bankruptcy Law in effect from time to time.
"SECURITIES ACT" means the Securities Act of 1933.
"SECURITY" means a "security" as defined in Section 2(1) of
the Securities Act.
"STIPULATED LOSS VALUE" is defined in Schedule 1 to the
Lease.
"SUPPLEMENTAL RENT" means all Hourly Rent, Expenses, and all
other amounts, liabilities, indemnities and obligations (other
than Basic Rent) that Lessee assumes or becomes obliged to or
agrees to pay under the Lease to or on behalf of Lessor or any
other person, including, without limitation, payments of
Stipulated Loss Value and payments of indemnities under the
Lease.
"TAXES" means all license, recording, documentary,
registration and other similar fees and all taxes, levies,
imposts, duties, charges, assessments or withholdings of any
nature whatsoever imposed by any Taxing Authority, together with
any penalties, additions to tax, fines or interest thereon or
additions thereto.
"TAX INDEMNITEE" means (a) Lessor, (b) Lessor's Lender, if
any, (c) any Affiliate of Lessor, (d) each group of corporations
(and each member thereof) that includes Lessor and Lessor's
Leader, if any, and for which a consolidated, combined, unitary
or other group tax return is filed, and (d) each of the
respective successors, assigns, directors, officers, agents and
servants of the persons described in clauses (a) through (c).
"TAXING AUTHORITY" means any federal, state or local
government or other taxing authority in the United States, any
government or other taxing authority in any jurisdiction outside
the United States, and any international taxing authority.
"TERM" means the term of five years, commencing on the
Delivery Date and ending on the Expiration Date, for which the
Aircraft is leased pursuant to Section 3 of the Lease.
"UCC" means the Uniform Commercial Code as in effect in any
applicable jurisdiction.
U.S. AIR CARRIER" means any United States air carrier as to
which there is in force a certificate issued pursuant to Section
41101 of the Act, and as to which there is in force an air
carrier operating certificate issued pursuant to Part 121 of the
regulations promulgated under the Act, or which may operate as an
air carrier by certification or otherwise under any successor or
substitute provisions therefor or in the absence thereof.
<PAGE>
"UNITED STATES" or "U.S." means the United States of
America; provided, that for geographic purposes, "United States"
means, in aggregate, the 50 states and the District of Columbia
of the United States of America.
"U.S. GOVERNMENT" means the federal government of the United
States, or any instrumentality or agency thereof the obligations
of which are guaranteed by the full faith and credit of the
federal government of the United States.
WET LEASE" means any arrangement whereby Lessee agrees to
furnish the Airframe and Engines or engines installed thereon to
a third party pursuant to which the Airframe and such Engines or
engines (i) shall at all times be in the sole possession and
control of Lessee, (ii) shall be operated in all respects solely
by regular employees of Lessee possessing all current
certificates and licenses that are required under the Act or any
FAA Regulations for the possession, use and operation of the
Airframe and such Engines or engines, and (iii) shall in all
events be maintained, insured and otherwise used and operated in
compliance with the terms and provisions of the Lease.
<PAGE>
ANNEX B
[INTENTIONALLY OMITTED]
<PAGE>
ANNEX C
[INTENTIONALLY OMITTED]
<PAGE>
ANNEX D -
INSURANCE
ANNEX D
INSURANCE
Capitalized terms used but not defined herein shall have the
respective meanings set forth or incorporated by reference in
Annex A to the Lease.
A. LIABILITY INSURANCE
As of the Delivery Date and throughout the Term and, subject
to the provisions of Section G, for a period of two years
following the termination or expiration of the Lease, Lessee will
carry or cause to be carried at all times, at no expense to
Lessor, comprehensive airline legal liability (including, without
limitation, third-party and passenger liability and property
damage, including baggage (checked and unchecked), cargo and mail
and premises, hangarkeeper's and products liability and
contractual liability insurance with respect to the Aircraft, the
Airframe and the Engines, which is:
(i) in an amount not less than the greater of (x) the
amount of comprehensive airline legal liability insurance
from time to time applicable to aircraft owned or leased and
operated by Lessee of the same type and operating on similar
routes as the Aircraft and (y) the Minimum Liability
Insurance Amount per occurrence;
(ii) of the type usually carried by prudent major
United States commercial air carriers, engaged in the same
or similar business, similarly situated, and owning or
operating similar aircraft and engines and which covers
risks of the kind customarily insured against by such
prudent United States commercial air carriers; and
(iii) maintained in effect with insurers of nationally
or internationally recognized reputation and responsibility
and substantial financial capacity used by other major
United States commercial air carriers which are reasonably
acceptable to Lessor (such insurers being referred to
herein as "Approved Insurers").
B. HULL INSURANCE
As of the Delivery Date and throughout the Term, Lessee will
carry or cause to be carried at all times, at no expense to
Lessor, with Approved Insurers:
(1) "all-risk" aircraft hull insurance covering each
Aircraft (including the Engines when they are installed on
the Airframe or any other airframe) for an amount
denominated in United States Dollars not less than the
Stipulated Loss Value of the Aircraft; and
<PAGE>
(ii) all risk of physical loss or damage (including
while in transit and including the risks of fire, flood, and
earthquake, and including war and confiscation while in
international transit) insurance on Engines and Parts while
removed from the Aircraft (to the extent such Engines and
Parts are not covered by aircraft hull insurance) in amounts
not less than that usually carried by prudent major United
States commercial air carriers and in no event less than the
replacement cost of such Engines and Parts.
Any policies of insurance carried in accordance with this
Section B covering the Aircraft and any policies taken out in
substitution or replacement for any such policies shall name
Lessor as exclusive loss payee for any proceeds to be paid under
such policies up to an amount equal to the Stipulated Loss Value
pursuant to a loss payable clause in the form attached as Exhibit
D-l hereto.
C. WAR-RISK, HIJACKING AND ALLIED PERILS INSURANCE
If Lessee (or any Permitted Sublessee) shall at any time
operate or propose to operate the Aircraft, Airframe or any
Engine in any area of recognized or threatened hostilities, or if
war-risk, hijacking or allied perils insurance is maintained by
Lessee (or any Permitted Sublessee) with respect to other
aircraft owned or operated by Lessee (or any Permitted Sublessee)
on the same routes or in such areas, or if the Aircraft is
operated outside the United States or Canada, Lessee shall
maintain or cause to be maintained war-risk, hijacking and
related perils insurance of substantially the same type carried
by major United States commercial air carriers operating the same
or comparable models of aircraft on similar routes or in such
areas and in no event in an amount less than (x) the amount set
forth in Section A with respect to liability coverage and (y) the
values stated in Sections B(i) and (ii) with respect to hull
coverage, and such insurance shall, to the extent available,
cover the perils of (i) war, invasion, acts of foreign enemies,
hostilities (whether war be declared or not), civil war,
rebellion, revolution, insurrection, martial law, military or
usurped power or attempts at usurpation of power; (ii) strikes,
riots, civil commotion or labor disturbances; (iii) any act of
one or more Persons, whether or not agents of a sovereign power,
for political or terrorist purposes and whether the loss or
damage resulting therefrom is accidental or intentional; (iv) any
malicious act or act of sabotage; (v) confiscation,
nationalization, seizure, restraint, detention, appropriation,
requisition for title or use by or under the order of any
government (whether civil, military or de facto) or public or
local authority; and (vi) hijacking or any unlawful seizure or
wrongful exercise of control of the Aircraft or any Engine or any
airframe on which any Engine is installed or of crew in flight
(including any attempt at such seizure or control) made by any
Person or Persons on board the Aircraft or such airframe acting
without the consent of Lessee.
D. GENERAL PROVISIONS
Any policies of insurance carried in accordance with
Sections A, B and C, including any policies taken out in
substitution or replacement for such policies:
(i) shall name each Indemnitee as an additional
insured (collectively, the "Additional Insureds");
<PAGE>
(ii) shall apply worldwide and have no territorial
restrictions or limitations (except only in the case of war,
hijacking and related perils insurance required under
Section C, which shall apply to the fullest extent available
in the international insurance market);
(iii) by means of an endorsement submitted to and
approved by Lessor, prior to the Delivery Date, shall
provide that, in respect of the interests of the Additional
Insureds in such policies, the insurance shall not be
invalidated or impaired by any act or omission (including
misrepresentation and nondisclosure) by Lessee (or any
Permitted Sublessee) or any other Person and shall insure
the Additional Insureds regardless of any breach or
violation of any representation, warranty, declaration, term
or condition contained in such policies by Lessee (or any
Permitted Sublessee) or any other Person;
(iv) shall provide that, if the insurers cancel such
insurance for any reason whatsoever, or if the same is
allowed to lapse for nonpayment of premium, or if any
material change is made in the insurance which adversely
affects the interest of any of the Additional Insureds, such
cancellation, lapse or change shall not be effective as to
the Additional Insureds for (a) except only in the case set
forth in subclause (b) below, 30 calendar days after receipt
by Lessor of written notice by such insurers of such
cancellation, lapse or change or (b) in respect of war,
hijacking and related perils insurance required under
Section C, seven days (or such shorter period as may be
available in the international insurance market with respect
to such insurance) after the receipt by Lessor of written
notice of such cancellation, lapse or change, as the case
may be;
(v) shall waive any rights of setoff (including for
unpaid premiums), recoupment, counterclaim or other
deduction, whether by attachment or otherwise, against each
Additional Insured;
(vi) shall waive any right of recourse, subrogation,
setoff, recoupment, counterclaim or other deduction against
any Additional Insured;
(vii) shall be primary without right of contribution
from any other insurance that may be available to any
Additional Insured;
(viii) shall provide that all of the liability insurance
provisions thereof, except the limits of liability, shall
operate in all respects as if a separate policy had been
issued covering each party insured thereunder;
(ix) shall provide that none of the Additional Insureds
shall be liable for any insurance premium;
(x) shall contain a 50/50% Clause per Lloyd's Aviation
Underwriters' Association Standard Policy Form AVS 103 or
it's current equivalent; and
(xi) shall contain endorsements reversing any data
recognition exclusions; and
<PAGE>
(xii) shall specifically refer to this Annex D.
E. REPORTS AND CERTIFICATES; OTHER INFORMATION
On or prior to the Delivery Date and on or prior to each
renewal date of its insurance policies, Lessee will furnish or
cause to be furnished to Lessor insurance certificates describing
in reasonable detail the hull and liability insurance (and
property insurance for detached Engines and Parts) and a report,
signed by a nationally recognized insurance broker (the
"Insurance Broker"), stating the opinion of such Insurance Broker
that (a) all premiums in connection with the insurance then due
have been paid, (b) such insurance complies with the terms of
this Annex D, and (c) such insurance provides coverage against
risks that are customarily insured against by major United States
commercial air carriers. Such Insurance Broker shall further
agree to advise Lessor in writing of any default in the payment
of any premium and of any other act or omission on the part of
Lessee of which it has knowledge and which might invalidate or
render unenforceable, in whole or in part, any insurance on the
Aircraft or Engines or cause the cancellation or termination of
such insurance, and to advise Lessor in writing at least 30 days
(seven days in the case of war-risk and allied perils coverage or
such shorter period as may be available in the international
insurance market, as the case may be) prior to the cancellation,
lapse or material adverse change of any insurance maintained
pursuant to this Annex D. The Additional Insureds shall also be
entitled to such other information as they may reasonably request
of Lessee, the Approved Insurers or the Insurance Broker from
time to time with respect to the insurances to be provided
hereunder.
F. RIGHT TO PAY PREMIUMS
The Additional Insureds shall have the rights but not the
obligations of an additional named insured. Neither Lessor nor
any other Additional Insured shall have any obligation to pay any
premium, commission, assessment or call due on any such insurance
(including reinsurance). Notwithstanding the foregoing, the
insurer shall agree that, in the event of cancellation of any
insurance due to the nonpayment of premiums, Lessor shall have
the option, in its sole discretion, to pay any such premium
reasonably set by insurers in respect of the Aircraft Engines and
Parts that is due in respect of the coverage pursuant to the
Lease and to maintain such coverage, as Lessor may require, until
the natural expiration date of such insurance.
G. EXPIRATION OR TERMINATION OF THE LEASE
Lessee covenants and agrees that, upon expiration or
termination of the Lease, it shall carry the following insurance
coverage:
(a) During each portion of the two-year period following
such expiration or termination that Lessee shall be the owner or
operator of the Aircraft or any Engine (whether resulting from
the purchase of the Aircraft or any Engine from Lessor or
otherwise), Lessee shall carry or cause to be carried, at its own
expense, liability insurance of the types and in the amounts
required under Section A and containing the terms set forth in
Section D in regard to each Indemnitee, each of whom shall be
named as an Additional Insured thereunder; and
<PAGE>
(b) During each portion of such two-year period that
Lessee shall not be the owner or operator of the Aircraft or any
Engine, Lessee shall carry or cause to be carried products
(completed operations) liability insurance in the amount required
under Section A and containing the terms set forth in Section D
in regard to each Indemnitee, each of whom shall be named as an
Additional Insured thereunder.
<PAGE>
LOSS PAYABLE CLAUSE (HULL)
(1) All losses shall be adjusted by Lessee, unless Lessor shall
have notified the underwriters that any Default or an Event
of Default has occurred and is continuing, in which event
all losses shall be adjusted by Lessor or its designee.
(2) (a) The sum in respect of which the Aircraft, Airframe
and Engines are insured for total loss or the sum
negotiated in settlement of a constructive or
compromised or agreed or arranged total loss shall be
paid in full to Lessor as exclusive loss payee in
United States Dollars without any deduction or
deductions whatsoever to an account in the United
States designated by Lessor;
(b) All recoveries, in respect of repairable damage to the
Aircraft, Airframe or Engines, or the loss or
destruction of any Engine, not exceeding the Damage
Payment Threshold in any one case, shall be paid in
full to Lessee; provided, however, that if Lessor shall
have notified the underwriters that any Default or an
Event of Default has occurred and is continuing, all
such recoveries shall be paid in full to Lessor; and
(c) All recoveries in respect of repairable damage to the
Aircraft, Airframe or Engines, or the loss or
destruction of any Engine, exceeding the Damage Payment
Threshold in any one case shall be paid in full to
Lessor as exclusive loss payee in United States Dollars
to an account in the United States designated by
Lessor.
<PAGE>
EXHIBIT A -
LEASE SUPPLEMENT
LEASE SUPPLEMENT NO. 1
LEASE SUPPLEMENT No. 1, dated ________, 2000, between US
Airways, Inc., a Delaware corporation ("Lessor"), and Vanguard
Airlines, Inc., as Lessee ("Lessee").
Lessor and Lessee have heretofore entered into that certain
Aircraft Lease Agreement dated as of February 22, 2000, relating
to one Boeing Model 737-200 Advanced aircraft (herein called the
"Lease" and the defined terms therein being hereinafter used with
the same meanings). The Lease provides for the execution and
delivery of this Lease Supplement for the purpose of evidencing
the effectiveness of the Lease with respect to the Aircraft and
Engines.
The Lease relates to the Airframe and Engines described
below, and a counterpart of the Lease to which this Lease
Supplement is attached and of which this Lease Supplement is a
part, is being filed for recordation on the date hereof with the
Federal Aviation Administration as one document.
NOW, THEREFORE, 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
Lease and Lessee hereby accepts and leases from Lessor under the
Lease the following described Boeing Model 737-200 Advanced
aircraft (the "Aircraft"), which Aircraft as of the date hereof
consists of the following components:
(i) Airframe: U.S. Registration No. N270AU;
manufacturer's serial no. 22882; and
(ii) Engines: two (2) Pratt & Whitney JT8D-15 engines
bearing, respectively, manufacturer's serial nos. P700178
and P654988 (each of which engines has 750 or more rated
takeoff horsepower or the equivalent of such horsepower).
2. The Delivery Date of the Aircraft is the date of this
Lease Supplement set forth in the opening paragraph hereof.
3. Lessee hereby confirms its agreement to pay Lessor Rent
for the Aircraft in accordance with Section 3, and the other
provisions, of the Lease.
4. Lessee hereby confirms to Lessor that Lessee has duly
accepted the Aircraft under and for all purposes hereof, of the
Lease and of the other Operative Agreements.
5. All of the terms and provisions of this Lease Supplement
are hereby incorporated by reference in the Lease to the same
extent as if fully set forth therein.
<PAGE>
6. This Lease Supplement 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 but one and the same instrument.
7. To the extent, if any, that this Lease Supplement
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 Lease Supplement may be created through
the transfer or possession of any counterpart other than the
original executed counterpart, which shall be identified as the
counterpart that states on the signature page thereof that it is
the original chattel paper counterpart.
[This space intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have each caused this
Lease Supplement to be duly executed as of the day and year first
above written.
US AIRWAYS, INC.,
as Lessor
By______________________________
Name:
Title:
VANGUARD AIRLINES, INC.,
as Lessee
By______________________________
Name:
Title:
<PAGE>
SCHEDULE 1 - CERTAIN TERMS
CERTAIN TERMS
DEFINED TERM DEFINITION
Additional Deposit $55,000
Basic Rent $110,000 per month
Damage Payment Threshold $1,000,000
Discount Rate The highest rate for Federal
Funds as quoted in the Wall
Street Journal on the
Business Day preceding the
date of determination.
Engine Hourly Rate $95.00 per flight hour or
flight cycle, whichever is
greater
Final Deposit $110,000
Initial Deposit $55,000
Landing Gear Hourly Rate $14.00 for the shipset of
landing gears per flight
hour, allocated $4.00 per
flight hour for each of the
two main gear and $6.00 per
flight hour for the nose gear
Liability Deductible $500,000
Minimum Liability Insurance $500,000,000
Amount
Payment Due Rate The lesser of (a) the
Citibank, N.A.'s prime rate
plus 2% or (b) the maximum
rate permitted under
applicable Law
<PAGE>
SCHEDULE 1 - CERTAIN TERMS
Purchase Price Delivery Date: $6,150,000
Six Month Anniversary:
$5,800,000
Twelve Month Anniversary:
$5,450,000
Eighteen Month Anniversary:
$5,100,000
Twenty Four Month
Anniversary: $4,750,000
"Q"-Check Hourly Rate $75.00 per flight hour
(provided, however, this rate
will be reviewed following
the initial "Q"-Checks
performed on the first four
(4) 737-200 Advanced aircraft
to be leased by Lessor to
Lessee (as contemplated by
the LOI) based on the total
agreed costs applicable to
such "Q"-Checks. The maximum
rate will be $80.00 and the
minimum will be $70.00. If
the parties do not mutually
agree to a revised rate, the
rate shall remain at $75.00
per flight hour.
Stipulated Loss Value $7,072,500
<PAGE>
SCHEDULE 2 -
LEASE IDENTIFICATION, ETC.
LEASE IDENTIFICATION AND OTHER INFORMATION
Lease Identification: "Leased from US Airways, Inc. as Owner
and Lessor"
Lessee's Address: Vanguard Airlines, Inc.
533 Mexico City Avenue
Kansas City, MO 64153
Attention: Chief Financial Officer
Telephone: (816) 243-2121
Telecopy: (816) 243-2165
With a copy to:Brian S. Gilman
Vice President and General Counsel
Vanguard Airlines, Inc.
533 Mexico City Avenue
Kansas City, MO 64153
Telephone: (816) 243-2102
Telecopy: (816) 243-2165
Lessor's Address: US Airways, Inc.
Crystal Park Four
2345 Crystal Drive
Arlington, VA 22227
Attention: Stuart Peebles
Director - Aircraft Sales
Telephone: (703) 872-7504
Telecopy: (703) 872-7515
With a copy to:
Howard L. Wu
Associate General Counsel
US Airways, Inc.
Crystal Park Four
2345 Crystal Drive, 8th Floor
Arlington, VA 22227
Telephone: (703) 872-5228
Telecopy: (703) 872-5252
Payment Location: PNC Bank
Pittsburgh, Pennsylvania
United States of America
For the account of
Account Number: 101-09-29184
For the account of: US Airways, Inc.
ABA Number 043000096
Reference: Vanguard MSN 22882
<PAGE>
SCHEDULE 3 -
REPRESENTATIONS AND WARRANTIES -
PART A
REPRESENTATIONS AND WARRANTIES
PART A. LESSEE'S REPRESENTATIONS AND WARRANTIES
Lessee represents and warrants to Lessor, as of the date
hereof, that:
(i) Lessee is a corporation duly incorporated,
validly existing and in good standing under the Laws of the State
of Delaware and has the corporate power and authority to conduct
the business in which it is currently engaged and to own or hold
under lease its properties and to enter into and perform its
obligations under the Operative Agreements. Lessee is duly
qualified to do business as a foreign corporation in good
standing in the State of Missouri and in all other jurisdictions
required by Law or in which the nature and extent of the business
conducted by it, or the ownership of its properties, makes such
qualification necessary or desirable except where the failure to
be so qualified would not give rise to a Material Adverse Change
to Lessee.
(ii) Lessee has taken, or caused to be taken, all
necessary corporate action to authorize the execution and
delivery of each of the Operative Agreements and the performance
of its obligations thereunder.
(iii) The execution and delivery by Lessee of the
Operative Agreements and the performance by Lessee of its
obligations thereunder do not and will not (a) violate or
contravene any provision of the Certificate of Incorporation or
By-Laws of Lessee, (b) violate or contravene any Law applicable
to or binding on Lessee, or (c) violate, contravene or constitute
any default under, or result in the creation of any Lien (other
than as permitted under this Lease) upon any property of Lessee
or any of its subsidiaries under, any indenture, mortgage,
chattel mortgage, deed of trust, conditional sales contract,
lease, loan or other material agreement, instrument or document
to which Lessee is a party or by which Lessee or any of its
properties is or may be bound or affected.
(iv) The execution and delivery by Lessee of the
Operative Agreements and the performance by Lessee of its
obligations thereunder do not and will not require the consent,
approval or authorization of, or the giving of notice to, or the
registration with, or the recording or filing of any documents
with, or the taking of any other action in respect of, (a) any
trustee or other holder of any Debt of Lessee and (b) any
Government Entity, other than the filing of the FAA Filed
Documents and the Financing Statements (and continuation
statements periodically) and filings, recordings, notices or
other ministerial actions pursuant to any routine recording,
contractual or regulatory requirements applicable to it.
(v) The Operative Agreements have been duly
authorized, executed and delivered by Lessee and, assuming the
due authorization, execution and delivery thereof by the other
party or parties thereto, constitute the legal, valid and binding
obligations of Lessee and are enforceable against Lessee in
accordance with the respective terms thereof, except as such
<PAGE> enforceability may be limited by bankruptcy, insolvency,
reorganization, receivership, moratorium and other similar Laws
affecting the rights of creditors generally and general
principles of equity, whether considered in a proceeding at law
or in equity.
(vi) Except as set forth in Lessee's most recent
Annual Report on Form 10-K or its Quarterly Report on Form 10-Q
filed by Lessee with the SEC on or prior to the Delivery Date
(copies of which (excluding exhibits), in each case, have been
furnished to Lessor by Lessee), no action, claim or proceeding is
now pending or, to the Actual Knowledge of Lessee, threatened,
against Lessee, at law, in equity or otherwise, before any court,
board, commission, agency or instrumentality of any foreign
government or any federal, state or local government or of any
agency or subdivision thereof, or before any arbitrator or panel
of arbitrators, which is reasonably likely to be determined
adversely to Lessee and if determined adversely to Lessee would
result in a Material Adverse Change to Lessee.
(vii) Lessee has filed or caused to be filed all
material tax returns, reports and statements that are required to
be filed and has paid or caused to be paid all taxes shown to be
due and payable by such returns, reports or statements and any
tax assessments received by Lessee to the extent that such taxes
have become due and payable (except to the extent being contested
in good faith and for the payment of which adequate reserves have
been provided except where the failure to do so would not have a
material adverse effect upon its financial condition or business
or its ability to perform its obligations under the Operative
Agreements).
(viii) The audited consolidated balance sheet of
Lessee as of December 31, 1998 and the related consolidated
statements of cash flows and nonredeemable preferred stock and
common stockholders' deficit for the period then ended (copies of
which have been furnished to Lessor) have been prepared in
accordance with GAAP and fairly present in all material respects
the financial condition of Lessee and its consolidated
subsidiaries as of such date and the results of its operations
and cash flows for such period, and since December 31, 1998 there
has been no material adverse change in such financial condition
or operations, except for matters disclosed in the financial
statements referred to above or in any subsequent Annual Report
on Form 10-K, Quarterly Report on Form 10-Q or Current Report on
Form 8-K filed by Lessee with the SEC on or prior to the date
hereof (copies of which (excluding exhibits) have been delivered
to Lessor by Lessee).
(ix) Except for (a) the filing for recordation
(and recordation) of the FAA Filed Documents, (b) the filing of
the Financing Statements (and continuation statements relating
thereto at periodic intervals), (c) the taking of possession and
retention by Lessor of the original counterparts of the Lease and
Lease Supplement No. 1 and (d) the affixation of the nameplates
referred to in Section 7.1.3 of the Lease, no further action,
including any filing or recording of any document (including any
financing statement in respect thereof under Article 9 of the
UCC) is necessary or advisable in order to establish and perfect
the right, title or interest of Lessor in the Aircraft and the
Lease, as against Lessee or any other Person, in each case, in
any applicable jurisdictions.
(x) The chief executive office (as such term is
defined in Article 9 of the UCC) of Lessee is located at 533
Mexico City Avenue, Kansas City, MO 64153.
<PAGE>
(xi) No event which, if the Aircraft were subject
to the Lease, would constitute a Default or Event of Default has
occurred and is continuing.
(xii) No Event of Loss has occurred with respect
to the Airframe or any Engine, and, to the Actual Knowledge of
Lessee, no circumstance, condition, act or event occurred that,
with the giving of notice or lapse of time or both gives rise to
or constitutes an Event of Loss with respect to the Airframe or
any Engine.
(xiii)(A) Lessee is not in default under, or in
violation of, any Law applicable to Lessee or to which Lessee is
subject, the violation of which would give rise to a Material
Adverse Change to Lessee.
(B) Without limiting the generality of
Part A, Section (xiii)(A) of this Schedule 3:
(I) Lessee is a U.S. Air Carrier;
(II) Lessee holds all licenses, permits
and franchises from the appropriate Government Entities necessary
to authorize Lessee to lawfully engage in air transportation and
to carry on scheduled commercial passenger service as currently
conducted, except where the failure to so hold any such license,
permit or franchise would not give rise to a Material Adverse
Change to Lessee;
(xiv) No Person acting on behalf of Lessee other
than IAMG is or will be entitled to any broker's fee, commission
or finder's fee in connection with the transactions contemplated
by the Lease and the other Operative Agreements.
(xv) Lessor, as lessor under the Lease, is
entitled to the benefits of Section 1110 (as currently in effect)
with respect to the right to take possession of the Airframe and
Engines as provided in the Lease in the event of a case under
Chapter 11 of the Bankruptcy Code in which Lessee is a debtor.
<PAGE>
SCHEDULE 3 REPRESENTATIONS
AND WARRANTIES - PART B
PART B. LESSOR'S REPRESENTATIONS AND WARRANTIES
Lessor represents and warrants to Lessee, as of the date
hereof, that:
(i) Lessor is a corporation duly incorporated,
validly existing and in good standing under the Laws of the State
of Delaware and has the corporate power and authority to conduct
the business in which it is currently engaged and to own or hold
under lease its properties and to enter into, and perform its
obligations under the Operative Agreements.
(ii) Lessor has taken, or caused to be taken, all
necessary corporate action to authorize the execution and
delivery of each of the Operative Agreements, and the performance
of its obligations thereunder.
(iii) The execution and delivery by Lessor of the
Operative Agreements, the performance by Lessor of its
obligations thereunder and the consummation by Lessor on the
Delivery Date of the transactions contemplated thereby, do not
and will not (a) violate or contravene any provision of the
Certificate of Incorporation or By-Laws of Lessor, (b) violate or
contravene any Law applicable to or binding on Lessor of or (c)
violate, contravene or constitute any default under, or result in
the creation of any Lien (other than as provided for or otherwise
permitted in the Operative Agreements) upon the Aircraft under,
any indenture, mortgage, chattel mortgage, deed of trust,
conditional sales contract, lease, loan or other material
agreement, instrument or document to which Lessor is a party or
by which Lessor or any of its properties is or may be bound or
affected.
(iv) The execution and delivery by Lessor of the
Operative Agreements, the performance by Lessor of its
obligations thereunder and the consummation by Lessor on the
Delivery Date of the transactions contemplated thereby do not and
will not require the consent, approval or authorization of, or
the giving of notice to, or the registration with, or the
recording or filing of any documents with, or the taking of any
other action in respect of, (a) any trustee or other holder of
any Debt of Lessor and (b) any Government Entity, other than the
filing of the FAA Filed Documents and the Financing Statements.
(v) The Operative Agreements have been duly
authorized, executed and delivered by Lessor and, assuming the
due authorization, execution and delivery by the other party or
parties thereto, constitute the legal, valid and binding
obligations of Lessor and are enforceable against Lessor in
accordance with the respective terms thereof, except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, receivership, moratorium and other similar Laws
affecting the rights of creditors generally and general
principles of equity, whether considered in a proceeding at law
or in equity.
(vi) Lessor shall have the right to lease the
Aircraft to Lessee in accordance with the terms hereof.
<PAGE>
(vii) Lessor is a Citizen of the United States.
(viii) On the Delivery Date, there are no Lessor
Liens in respect of the Aircraft.
(ix) There are no pending or, to the Actual
Knowledge of Lessor, threatened actions or proceedings against
Lessor before any court, administrative agency or tribunal which,
if determined adversely to Lessor, would materially adversely
affect the ability of Lessor to perform its obligations under the
Operative Agreements.
(x) No Person acting on behalf of Lessor is or
will be entitled to any broker's fee, commission or finder's fee
in connection with the transactions contemplated by the Lease and
the other Operative Agreements.
<PAGE>
SCHEDULE 4 -
OPINION OF LESSEE'S COUNSEL
FORM OF OPINION OF LESSEE'S COUNSEL
[TO COME]
<PAGE>
THIS AIRCRAFT LEASE AGREEMENT CONTAINS CONFIDENTIAL AND
PROPRIETARY INFORMATION
______________________________________________________________________
AIRCRAFT LEASE AGREEMENT
(MSN 22882)
Dated as of February 22, 2000
Between
US AIRWAYS, INC.
Lessor
and
VANGUARD AIRLINES, INC.
Lessee
One Boeing Model 737-200 Advanced Aircraft
Bearing United States Registration No. N270AU and
Bearing Manufacturer's Serial No. 22882
with two Pratt & Whitney JT8D-15 Engines
Bearing Engine Manufacturer's Serial Nos. P700178 and P654988
______________________________________________________________________
______________________________________________________________________
This Aircraft Lease Agreement has been executed in multiple
counterparts; to the extent, if any, that this Aircraft Lease
Agreement constitutes chattel paper (as defined in the Uniform
Commercial Code as in effect in any applicable jurisdiction), no
security interest in Lessor's right, title and interest in and to
this Aircraft Lease Agreement may be perfected through the
delivery or possession of any counterpart of this Aircraft Lease
Agreement other than the counterpart of this Aircraft Lease
Agreement that states on the signature page thereof that it is
the original chattel paper counterpart.
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS AND CONSTRUCTION 1
SECTION 2. DELIVERY AND ACCEPTANCE 1
2.1 Agreement to Lease 1
2.2 Acceptance by Lessee 1
2.3 Conditions to Lessor's Obligations 2
SECTION 3. TERM, RENT AND SECURITY DEPOSIT 3
3.1 Term 3
3.2 Rent 3
3.3 Security Deposit 4
3.4 Payments 5
SECTION 4. DISCLAIMER; CERTAIN AGREEMENTS OF LESSOR;
SECTION 1110 MATTERS 5
4.1 Disclaimer 5
4.2 Certain Agreements of Lessor 6
4.3 Quiet Enjoyment 7
4.4 Title Transfers by Lessor 7
4.5 Lessor's Interest in Certain Engines 7
4.6 Lease For U.S. Federal Income Tax Law
Purposes; Section 1110 of Bankruptcy
Code 8
4.7 Contribution by Lessor for Certain
Maintenance and Overhauls 8
SECTION 5. RETURN OF AIRCRAFT 10
5.1 Compliance with Annex B 10
5.2 Storage and Related Matters 10
5.3 Return of Other Engines 10
5.4 Failure to Return Aircraft 10
SECTION 6. LIENS 11
SECTION 7. REGISTRATION, OPERATION, POSSESSION,
SUBLEASING AND RECORDS 12
7.1 Registration and Operation 12
7.2 Possession 13
7.3 Certain Limitations on Subleasing or
Other Relinquishment of Possession 15
<PAGE>
SECTION 8. MAINTENANCE; REPLACEMENT AND POOLING OF
PARTS; ALTERATIONS, MODIFICATIONS AND
ADDITIONS; OTHER LESSEE COVENANTS 16
8.1 Maintenance; Replacement and Pooling of
Parts; Alterations, Modifications and
Additions 16
8.2 Information, Certificates, Notices and
Reports 16
8.3 Representations and Warranties 18
SECTION 9. LOSS, DESTRUCTION, REQUISITION, ETC. 18
9.1 Event of Loss With Respect to Aircraft 18
9.2 Event of Loss With Respect to an Engine 19
9.3 Application of Payments 21
9.4 Application of Payments During Existence
of Default 21
SECTION 10 INSURANCE 21
10.1 Lessee's Obligation to Insure 21
10.2 Lessor's Right to Maintain Insurance 22
10.3 Insurance for Own Account 22
10.4 Application of Insurance Proceeds 22
10.5 Application of Payments During Existence
of Default 22
SECTION 11. INSPECTION 22
SECTION 12. ASSIGNMENT; MERGER 23
12.1 In General 23
12.2 Merger of Lessee 25
12.3 Covenants of Lessee 26
SECTION 13. EVENTS OF DEFAULT 27
13.1 Payments 27
13.2 Insurance 27
13.3 Corporate Existence 28
13.4 Certain Covenants 28
13.5 Other Covenants 28
13.6 Representations and Warranties 28
13.7 Bankruptcy and Insolvency 28
13.8 Other Agreements with Lessor 29
13.9 Deregistration 29
13.10 Transfer 29
<PAGE>
13.11 Judgments 29
13.12 Materially Adverse Effect 29
13.13 Indebtedness 29
13.14 Operative Agreements 30
13.15 Security Deposit 30
SECTION 14. REMEDIES AND WAIVERS 30
14.1 Remedies 30
14.2 Right to Perform for Lessee 33
14.3 Determination of Fair Market Rental
Value 33
14.4 Lessor Appointed Attorney-in-Fact 33
14.5 Remedies Cumulative 34
SECTION 15. LESSEE'S OBLIGATIONS; NO SETOFF,
COUNTERCLAIM, ETC. 34
SECTION 16. GENERAL TAX INDEMNITY 35
16.1 General 35
16.2 After-Tax Nature of Indemnity 36
16.3 Contest 37
16.4 Application of Payments During Existence
of Event of Default 38
16.5 Withholding Tax 38
16.6 Survival of Indemnities 38
SECTION 17. GENERAL INDEMNIFICATION 38
17.1 The Indemnity 38
17.2 The Lessee Waiver 39
17.3 The Gross-Up 40
SECTION 18. MISCELLANEOUS 40
18.1 Purchase Options 40
18.2 Amendments 41
18.3 Severability 41
18.4 Survival 41
18.5 Reproduction of Documents 41
18.6 Counterparts 42
18.7 No Waiver 42
18.8 Notices 42
18.9 Governing Law; Submission To
Jurisdiction; Venue 42
<PAGE>
18.10 Third-Party Beneficiary 44
18.11 Entire Agreement 44
ANNEXES, EXHIBITS AND SCHEDULES
ANNEX A Definitions
ANNEX B Return Conditions
ANNEX C Maintenance
ANNEX D Insurance
EXHIBIT A Form of Lease Supplement
SCHEDULE 1 Certain Terms
SCHEDULE 2 Lease Identification and Other Information
SCHEDULE 3 Representations and Warranties
SCHEDULE 4 Opinion of Lessee's Counsel
<PAGE>
Office Lease
between
The Gerson Company
and
Vanguard Airlines, Inc.
Dated: July 15, 1999
<PAGE>
OFFICE LEASE
THIS OFFICE LEASE (this "Lease") dated for reference
purposes only as of July 15, 1999, is entered into by
Vanguard Airlines, Inc. ("Tenant"), and The Gerson
Company ("Landlord").
ARTICLE 1 BASIC INFORMATION
1.1 Basic Lease Information. In addition to the
terms that are defined elsewhere in this Lease, these
terms are used in this Lease:
(a) PREMISES: The premises shall be that
certain space located in that portion of the Building
commonly known as Suite 210 and as more specifically
shown on Exhibit A to this Lease.
(b) BUILDING: The Building located on the Land
and which is commonly known as Mission Office Park
Building 3, 7000 Squibb Road, Mission, Johnson County,
Kansas 66202.
(c) LAND: The land on which the Building is
located and which is described in Exhibit B.
(d) RENTABLE AREA OF THE PREMISES: 9,188
square feet.
(e) RENTABLE AREA OF THE BUILDING: 52,196
square feet.
(f) LEASE TERM: three (3) years and one-half
(1/2) month, beginning on the Commencement Date and
ending on the Expiration Date.
(g) COMMENCEMENT DATE: October 15, 1999
(h) EXPIRATION DATE: October 31, 2002
(i) SECURITY DEPOSIT: none
(j) MONTHLY RENT: 11,102.17 dollars per month (14.50
dollars per rentable square foot annually), commencing on the
Commencement Date and ending on the Expiration Date.
The Monthly Rent includes the product of 1/12 of the
Operating Expenses Base times the rentable area of the
Premises.
(k) OPERATING EXPENSES BASE: 3.62 dollars per
rentable square foot of the Premises per annum has been
budgeted in 1999. Estimated expenses for 1999 may be
adjusted up or down by Landlord based on actual
operating expenses.
(l) TENANT'S SHARE: 17.603 percent (determined by
dividing the rentable area of the Premises by the
rentable area of the Building, multiplying the
resulting quotient by 100, and rounding to the 3rd
decimal place). Landlord reserves the right to reduce
<PAGE>
or increase tenant's share at any time during the term
of this Lease Term, in accordance with Article 11.
(m) PARKING SPACES: Landlord shall provide
open, uncovered and unreserved parking in the Building
parking area and in a designated lot in accordance with
Article 26.
(n) BASE YEAR: 1999
(o) LANDLORD'S ADDRESS:
Mission Office Park
c/o The Gerson Company
6100 Broadmoor Mission, KS 66202
With a copy to: The Gerson Company
6100 Broadmoor
Mission, KS 66202
Attention: Peter Gerson
(p) TENANT'S ADDRESS:
Vanguard Airlines, Inc.
7000 Squibb Road, Suite 210
Mission, KS 66202
Attn: Bill Garrett
(q) BROKER:
For the Tenant:
Winbury Realty of K. C., Inc.
4520 Main Street, Suite 1000
Kansas City, MO 64111
For the Landlord: None
(r) ADDITIONAL RENT: Any amounts that this
Lease requires Tenant to pay in addition to Monthly
Rent.
(s) PRIME RATE: The rate of interest from time
to time announced by Commerce Bank of Kansas City NA
("Commerce Bank"), or any successor to it, as its prime
rate. If Commerce Bank or any successor to it ceases to
announce its prime rate, the prime rate will be a
comparable interest rate designated by Landlord to
replace the prime rate.
If any other provision of this Lease contradicts any
definition of this Article, the other provision will
prevail.
<PAGE>
1.2 Exhibits. The following exhibits are attached
to this Lease and are made part of this Lease:
EXHIBIT A--The Premises
EXHIBIT B--Legal Description of the Land
EXHIBIT C--Rules and Regulations
EXHIBIT D--Workletter Agreement
EXHIBIT E--Parking Plan
ARTICLE 2 AGREEMENT
Landlord leases the Premises to Tenant, and Tenant
leases the Premises from Landlord, according to this
Lease. The duration of this Lease will be the Lease
Term. The Lease Term will commence on the Commencement
Date and will expire on the Expiration Date.
ARTICLE 3 DELIVERY OF POSSESSION
Landlord will be deemed to have delivered
possession of the Premises to Tenant on the
Commencement Date. If no Workletter is attached to this
Lease, it will be deemed that Landlord delivered to
Tenant possession of the Premises as is in its present
condition on the Commencement Date. Tenant acknowledges
that neither Landlord nor its agents or employees have
made any representations or warranties as to the
suitability or fitness of the Premises for the conduct
of Tenant's business or for any other purpose, nor has
Landlord or its agents or employees agreed to undertake
any alterations or construct any improvements to the
Premises except as expressly provided in this Lease. If
for any reason Landlord cannot deliver possession of
the Premises to Tenant on the Commencement Date, this
Lease will not be void or voidable, and Landlord will
not be liable to Tenant for any resultant loss or
damage.
ARTICLE 4 MONTHLY RENT
4.1 General. Tenant will pay Monthly Rent to
Landlord as rent for the Premises. Monthly Rent will be
paid in advance on or before the first day of each
calendar month of the Lease Term. If the Lease Term
commences on a day other than the first day of a
calendar month or ends on a day other than the last day
of a calendar month, then Monthly Rent will be
appropriately prorated by Landlord based on the actual
number of calendar days in such month. If the Lease
Term commences on a day other than the first day of a
calendar month, then the prorated Monthly Rent for such
month will be paid on or before the first day of the
Lease Term. Monthly Rent will be paid to Landlord,
without written notice or demand, and without deduction
or offset, except to the extent provided in this Lease,
in lawful money of the United States of America at
Landlord's address, or to such other address as
Landlord may from time to time designate in writing.
<PAGE>
4.2 Late Charges.
(a) Tenant's failure to pay Monthly Rent,
Additional Rent, or any other Lease costs when due
under this Lease may cause Landlord to incur
unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such
costs may include, but are not limited to, processing
and accounting charges and late charges that may be
imposed on Landlord by any ground lease, mortgage, or
deed of trust encumbering the Building.
(b) Therefore, if Landlord does not receive the
Monthly Rent, Additional Rent, or any other Lease costs
in full on or before the seventh (7th) day of the month
it becomes due, Tenant shall pay Landlord a late
charge, which shall constitute liquidated damages,
equal to 25.00 dollars a day for each day rent is late
beginning on the eighth (8th)day of the month ("Late
Charge"), which shall be paid to Landlord together with
such Monthly Rent, Additional Rent, or other Lease
costs then in arrears.
(c) The parties agree that such Late Charge
represents a fair and reasonable estimate of the costs
Landlord will incur by reason of such late payment.
(d) For each Tenant payment check to Landlord
that is returned by a bank for any reason, Tenant shall
pay both a Late Charge (if applicable) and a Returned
Check Charge of 25.00 dollars or such amount as shall be
customarily charged by Landlord's bank at the time.
(e) All Late Charges and any Returned Check
Charge shall then become Additional Rent and shall be
due and payable immediately along with such other
Monthly Rent, Additional Rent, or other Lease costs
then in arrears.
(f) Money paid by Tenant to Landlord shall be
applied to Tenant's account in the following order: (i)
to any unpaid Additional Rent, including, without
limitation, Late Charges, Returned Check Charges, legal
fees and/or court costs legally chargeable to Tenant,
and Operating Expenses; and then (ii) to unpaid Monthly
Rent.
(g) Nothing herein contained shall be construed
so as to compel Landlord to accept any payment of
Monthly Rent, Additional Rent, or other Lease costs in
arrears or Late Charge or Returned Check Charge should
Landlord elect to apply its rights and remedies
available under this Lease or at law or equity in the
event of default hereunder by Tenant. Landlord's
acceptance of Monthly Rent, Additional Rent, or other
Lease costs in arrears or Late Charge or Returned Check
Charge pursuant to this Clause shall not constitute a
waiver of Landlord's rights and remedies available
under this Lease or at law or equity.
ARTICLE 5 OPERATING EXPENSES
5.1 General.
(a) In addition to Monthly Rent, beginning on
the Commencement Date Tenant will pay Tenant's share
<PAGE>
of the amount by which the operating expenses paid,
payable, or incurred by Landlord in each calendar year
or partial calendar year during the Lease Term exceeds
the product of the operating expenses base times the
rentable area of the Building. If Operating Expenses
are calculated for a partial calendar year, the
Operating Expenses Base will be appropriately prorated.
(b) As used in this Lease, the term "Operating
Expenses" means:
(1) All reasonable costs of management,
operation, and maintenance of the Building, including
without limitation real and personal property taxes
levied against the Building, assessments, excises
levies and other charges by any public authority, which
are general or special, ordinary or extraordinary,
foreseen or unforeseen (and any tax levied in whole or
in part in lieu of or in addition to real property
taxes (all of which taxes shall be paid in installments
over the longest period permitted by law)); wages,
salaries, all fringe benefits and workers' compensation
insurance paid by Landlord for employees directly
related to the operation of the Building, and
compensation of employees directly related to the
operation of the Building; consulting, accounting,
legal, maintenance, Building lock and unlock services,
and other services; management fees and costs
(charged by Landlord, any affiliate of Landlord, or any
other entity managing the Building and determined at a
rate consistent with prevailing market rates for
comparable services and projects); reasonable reserves
for operating expenses; that part of office rent or
rental value of space in the project used or furnished
by Landlord to enhance, manage, operate, and maintain
the Building; power, water, waste disposal, and other
utilities; pest control and snow removal; materials and
supplies; maintenance and repairs; insurance obtained
with respect to the Building including deductible;
depreciation on personal property and equipment, except
as set forth in (c) below or which is or should be
capitalized on the books of Landlord; and any other
costs, charges, and expenses that under generally
accepted accounting principles would be regarded as
management, maintenance, and operating expenses; and
(2) The cost (amortized over such period as
Landlord will reasonably determine) together with
interest at the greater of the prevailing prime rate
plus 2 percent or Landlord's borrowing rate for such capital
improvements plus 2 percent of the unamortized balance of any
capital improvements that are made to the Building by
Landlord (i) for the purpose of reducing operating
expenses, or (ii) after the Lease date and by
requirement of any governmental law or regulation
that was not applicable to the Building at Commencement
Date and not as a result of special requirements for
any Tenant's use of the Building, and
(3) Tenant's share of the janitorial expense for
the common areas of the Building, and
(4) Tenant's share of electricity used by the
Building's heating, cooling and ventilation equipment
serving the Premises and common areas, and electricity
used for lighting and maintaining the common areas of
the Building.
(c) The operating expenses will not include:
<PAGE>
(1) depreciation on the Building (other than
depreciation on personal property, equipment,
window coverings on exterior windows provided by
Landlord and carpeting in public corridors and common
area);
(2) costs of alterations of space or other
improvements made for other tenants of the Building;
(3) finders' fees and real estate brokers'
commissions, and advertising and promotional expenses
incurred in connection with leasing space in the
Building;
(4) interest and principal on mortgages or
loans and rental payments under any ground lease or
master lease and all costs and expenses associated with
any such mortgage, loan, ground lease or master lease;
(5) capital items other than those referred to
in clause (b)(2) above;
(6) costs of replacements to personal property
and equipment for which depreciation costs are included
as an operating expense;
(7) expenses incurred by Landlord to the extent
the same are reimbursable or reimbursed from any other
tenants of the Building or third parties;
(8) the cost of repairs due to casualty or
condemnation that are reimbursed by third parties;
(9) any cost due to Landlord's breach of this
Lease;
(10) any income, estate, inheritance, or other
transfer tax and any excess profit, franchise, or
similar taxes on Landlord's business;
(11) all costs, including legal fees, relating
to activities for the solicitation and execution of
leases of space in the Building;
(12) any legal fees incurred by Landlord in
enforcing its rights under other leases for premises in
the Building or in connection with any financing or
syndication of the Building;
(13) electricity used within the Premises which
is separately metered;
(14) janitorial service and rest room supplies
for the Premises;
(15) painting or decorating space leased to
tenants except to the extent such work constitutes
ordinary maintenance of the Building;
(16) repairs necessitated by the negligence of
(1) Landlord, its employees, agents, and contractors,
(2) other tenants in the Building except Tenant, its
employees agents, guests, invitees and contractors, or
(3) required to cure violations of laws, that have
occurred prior to the Commencement Date and any
penalties or interest incurred or accumulated for any
such violations;
<PAGE>
(17) compensation paid to officers or
executives of the Landlord above the level of on-site
building manager or to employees who are not engaged in
the day to day management and maintenance of the
Building. If the foregoing personnel are also employed
to perform duties unrelated to the Building, that
portion of their salary devoted to performing duties
unrelated to the Building shall not be included with
the Operating Expenses for the Building;
(18) Landlord's general corporate overhead and
general administrative expenses;
(19) any cost representing an amount paid for
services or materials to a related person, firm, or
entity to the extent such amount exceeds the amount
that would have been paid for such services or material
at the then-existing market rates to an unrelated
person, firm or entity;
(20) electric power and other utility costs for
which any tenant or occupant of the Building directly
contracts with the local utility provider;
(21) the costs of causing the common areas of
the Building to comply with the Americans with
Disabilities Act;
(22) "Takeover expenses" (i.e. expenses
incurred by Landlord for space located in another
building of any kind or nature in connection with the
leasing of space in the Building);
(23) expenses incurred by Landlord in order to
comply with the provisions of this Lease concerning
Landlord's environmental representations;
(24) any compensation paid to clerks,
attendants, to other person in commercial concessions
operated by or on the behalf of Landlord;
(25) cost for sculptures, paintings or other
objects of art;
(26) costs incurred in the management,
operation and ownership of parking garage or other
parking concessions; and
(27) travel and entertainment expenses; and
(28) expenses in connection with services or
other benefits of a type which are not provided to
Tenant but which are provided to another tenant or
occupant.
(d) Tenant acknowledges that Landlord has not made
any representation or given Tenant any assurances that
the Operating Expenses Base will equal or approximate
the actual Operating Expenses per square foot of
rentable area of the Premises for any calendar year
during the Lease Term.
<PAGE>
(e) If any work included in Operating Expenses is
performed on more than one building in the project, and
it is not feasible to determine the relative amounts of
work performed on each building, then the costs shall
be allocated among the tenants of those buildings in
proportion to the total rentable area of each building.
5.2 Estimated Payments. During each calendar year
or partial calendar year in the Lease Term, in addition
to Monthly Rent, Tenant will pay to Landlord on the
first day of each month an amount equal to 1/12 of the
product of Tenant's share multiplied by the "estimated
operating expenses" (defined below) for such calendar
year. "Estimated operating expenses" for any calendar
year means Landlord's reasonable estimate of operating
expenses for such calendar year, less the product of
the operating expenses base, multiplied by the rentable
area of the Building and will be subject to revision
according to the further provisions of this Article 5.2
and Article 5.3. During any partial calendar year
during the Lease Term, estimated operating expenses
will be estimated on a full year basis. During each
December during the Lease Term, or as soon after each
December as practicable, Landlord will give Tenant
written notice of estimated operating expenses for the
ensuing calendar year. On or before the first day of
each month during the ensuing calendar year (or each
month of the Lease Term, if a partial calendar year),
Tenant will pay to Landlord 1/12 of the product of
Tenant's share multiplied by the estimated operating
expenses for such calendar year; however, if such
written notice is not given in December, Tenant will
continue to make monthly payments on the basis of the
prior year's estimated operating expenses until the
month after such written notice is given, at which time
Tenant will commence making monthly payments based upon
the revised estimated operating expenses. In the month
Tenant first makes a payment based upon the revised
estimated operating expenses, Tenant will pay to
Landlord for each month which has elapsed since
December the difference between the amount payable
based upon the revised estimated operating expenses and
the amount payable based upon the prior year's
estimated operating expenses. In the event it
reasonably appears to Landlord that the actual
operating expenses for any calendar year will vary from
the estimated operating expenses for such calendar
year, Landlord may, not more than twice in any calendar
year, by written notice to Tenant, revise the estimated
operating expenses for such calendar year, and
subsequent payments by Tenant in such calendar year
will be based upon such revised estimated operating
expenses.
5.3 Annual Settlement. Within 90 days after the
end of each calendar year or as soon after such 90 day
period as practicable, Landlord will deliver to Tenant
a written statement of amounts payable under Article
5.1 for such calendar year prepared and certified by
Landlord. Such certified statement will be final and
binding upon Landlord and Tenant unless Tenant objects
to it in writing to Landlord within 30 days after it is
given to Tenant. If such statement shows an amount
owing by Tenant that is less than the estimated
payments previously made by Tenant for such calendar
year, the excess will be held by Landlord and credited
against the next payment of Monthly Rent; however, if
the Lease Term has ended and Tenant was not in default
at its end, Landlord will refund the excess to Tenant.
If such statement shows an amount owing by Tenant that
is more than the estimated payments previously made by
Tenant for such calendar year, Tenant will pay the full
amount of the deficiency to Landlord within 30 days
after the delivery of such statement. Tenant may audit
Landlord's records of the operating expenses a)
<PAGE>
at Tenant's sole cost and expense (unless such audit
discloses Tenant was overcharged by more than ten
percent (10 percent) of annual Operating Expenses, in which
event Landlord shall pay the audit costs), b) at the
place Landlord normally maintains such records, c)
during Landlord's normal business hours, d) upon
reasonable advance written notice, e) within 120 days
following the date of Landlord's statement and, f) only
once per calendar year. Tenant shall provide Landlord
with a copy of Tenant's audit. Notwithstanding the
above, any such audit fee paid by Tenant on a
contingency fee basis shall be adjusted to conform to a
commercially reasonable and customary hourly or flat
fee for services rendered by a reputable, experience
expert regarding the matter in dispute, and in any
event the total reimbursable amount shall not exceed
the amount paid out of pocket by Tenant to an
independent professional auditor. As a condition
precedent to Tenant's right to dispute the Operating
Expenses billed by Landlord pursuant to this paragraph,
Tenant must pay the total amount billed by Landlord
hereunder within the time stipulated in this Lease.
5.4 Final Proration. If this Lease ends on a day
other than the last day of a calendar year, the amount
of increase (if any) in the operating expenses payable
by Tenant applicable to the calendar year in which this
Lease ends will be calculated on the basis of the
number of days of the Lease Term falling within such
calendar year and Tenant's obligation to pay any
increase or Landlord's obligation to refund any overage
will survive the expiration or other termination of
this Lease.
5.5 Other Taxes.
(a) Tenant will reimburse Landlord upon demand for
any and all taxes, assessments, excises, levies, and
other charges by any public authority payable by
Landlord (other than as set forth in subparagraph (b)
below), whether or not now customary or within the
contemplation of Landlord and Tenant:
(1) upon or measured by rent, including without
limitation, any gross revenue tax, excise tax, or value
added tax levied by the federal government or any other
governmental body with respect to the receipt of rent;
and
(2) upon this transaction or any document to
which Tenant is a party creating or transferring an
interest or an estate in the Premises.
(b) Tenant will not be obligated to pay any
inheritance tax, gift tax, transfer tax, franchise tax,
income tax (based on net income), profit tax, sales or
transaction tax, or capital levy imposed upon Landlord.
(c) Tenant will pay promptly when due all personal
property taxes on Tenant's personal property in the
Premises and any other taxes payable by Tenant that if
not paid might give rise to a lien on the Premises or
Tenant's interest in the Premises.
5.6 Additional Rent. Amounts payable by Tenant
according to this Article 5 will be payable as
Additional Rent, without deduction or offset. If Tenant
fails to pay any amounts due according to this Article
5, Landlord will have all the rights and remedies
available to it on account of Tenant's failure to pay
Monthly Rent.
<PAGE>
ARTICLE 6 INSURANCE
6.1 Landlord's Insurance. At all times during the
Lease Term, Landlord will carry and maintain:
(a) Fire and extended coverage insurance covering
the Building, its equipment, and common area
furnishings.
(b) Bodily injury and property damage liability
insurance; and
(c) Such other insurance as Landlord reasonably
determines from time to time; and
(d) "Builder's Risk" insurance during periods of
construction.
The insurance coverage and amounts in this Article 6.1
will be reasonably determined by Landlord, based on
coverages carried by prudent owners of comparable
buildings in the vicinity of the Building.
6.2 Tenant's Insurance. At all times during the
Lease Term, Tenant will carry and maintain, at Tenant's
expense, the following insurance, in the amounts
specified below or such other amounts as Landlord may
from time to time reasonably request, with insurance
companies and on forms satisfactory to Landlord:
(a) Commercial General Liability occurrence form,
or equivalent, covering the Premises and operations of
the Tenant, including personal injury and contractual
liability, with combined single limit for bodily injury
and property damage of not less than 2,000,000 dollars per
occurrence, 2,000,000 dollars annual aggregate, naming
Landlord, its agents and employees, and any others
specified from time to time by Landlord, as additional
insured under such Policy. Such policy will be primary
insurance, and any similar insurance which may be
purchased by the Landlord shall be in excess of
Tenant's policy, and not contributory therewith.
(b) Insurance covering all of Tenant's furniture and
fixtures, machinery, equipment, stock, merchandise and
any other personal property owned or used in Tenant's
business and found in, on, or about the Building, and
any Leasehold improvements to the Premises in excess of
the allowance, if any, provided pursuant to the
Workletter, if any, in an amount not less than the full
replacement value, against Basic Form Causes of Loss
(fire and extended coverage). All policy proceeds will
be used for the repair or replacement of the damaged or
destroyed property; however if this Lease terminates
pursuant to the provisions of Article 18, Tenant will
be entitled to any proceeds resulting from damage to
Tenant's furniture and fixtures, machinery, equipment,
stock and other personal property.
(c) Worker's compensation insurance insuring
against and satisfying Tenant's obligations and
liabilities under the Worker's Compensation laws of the
state of Kansas, including Employer's Liability
insurance with a limit of not less than 1,000,000 dollars.
(d) If Tenant operates owned, hired, or non-owned
vehicles on the project, Automobile Liability insurance
with limits not less than 1,000,000 dollars.
6.3 Certain Insurance Risk. Tenant will not do or
permit to be done any act or thing upon the Premises or
the Building which would:
(a) jeopardize or be in conflict with fire
insurance policies covering the Building and personal
property in the Building:
(b) increase the rate of fire insurance applicable
to the Building to an amount higher than it would
otherwise be for commercial office use; or
(c) subject Landlord to any liability or
responsibility for injury to any person or persons or
to property by reason of any business or operation
being carried on upon the Premises or in the Building.
6.4 Forms of Policies. A duplicate original
insurance policy, an insurance binder (countersigned by
the insurer), or Evidence of Insurance (in form ACCORD
27) for each of the insurance policies Tenant is
required to carry in compliance with its obligations
under this Lease shall be delivered to Landlord at
least ten (10) days prior to the time such insurance is
first required to be carried by Tenant and upon
renewals not less than ten (10) days prior to the
expiration of any such policy. Tenant's insurer shall
have a policyholder rating ("Best Rating") of at least
B+ and be assigned a financial size category of at
least Class VII as rated in the most recent edition of
"Best's Key Rating Guide" for insurance companies, and
be licensed by the State of Kansas.
6.5 Waiver of Subrogation. Landlord and Tenant
hereby waive all rights of action against the other for
any loss, cost, damage, or expense resulting from fire,
explosion or other casualty or occurrence incurred by
either, which loss, cost, damage or expense is then
covered in whole or in part by insurance maintained, or
required to be maintained pursuant to this Lease, and
each party waives any right of subrogation that might
otherwise exist in or accrue to any person or account
thereof.
ARTICLE 7 PREMISES
7.1 Uses. The Premises will be used only for
general business office purposes and purposes
incidental to that use, and for no other purpose.
Tenant will use the Premises in a careful, safe, and
proper manner. Tenant will not use or permit the
Premises to be used or occupied for any purpose or in
any manner prohibited by any applicable law, rule,
regulation or deed covenant, conditions and
restrictions concerning the Premises, including,
without limitation the obligation at Tenant's cost to
alter, maintain, or restore the Premises in compliance
and conformity with all laws relating to the condition,
use or occupancy of the Premises. Tenant will not
commit waste or suffer or permit waste to be committed
in, on, or about the Premises. Tenant will conduct its
business and control its employees, agents, and
invitees in such a manner as not to create any nuisance
or interfere with, annoy, or disturb any other tenant
or occupant of the Building or project, or Landlord in
its operation of the Building.
<PAGE>
ARTICLE 8 REQUIREMENTS OF LAW
8.1 General. Landlord represents and warrants that
as of the date of this Lease, the Premises is free of
asbestos law violations, building code violations and
health and safety violations. At its sole cost and
expense, Tenant will promptly comply with all laws,
statutes, ordinances, and governmental rules,
regulations, or requirements now in force or in force
after the Lease date, with any direction or occupancy
certificate issued pursuant to any law by any public
officer or officers, as well as with the provisions of
all recorded documents affecting the Premises, insofar
as they relate to the condition, use, or occupancy of
the Premises, excluding requirements of structural
changes to the Premises or the Building, unless
required by the unique nature of Tenant's use or
occupancy of the Premises.
8.2 Hazardous Materials.
(a) "Hazardous substance" shall mean the substances
included or which hereafter may be included with the
definitions of the terms "hazardous substance" and
"hazardous material" under the Comprehensive
Environmental Response, Compensation and Liability Act
of 1980, 42 U.S.C. 9601 et seq., the Hazardous
Materials Transportation Act of 1975, 49 U.S.C. 1801 et
seq., and to regulations promulgated under those
various statutes as amended, and petroleum. "Hazardous
waste" shall mean any waste listed as or meeting the
identified characteristics of a "hazardous waste" under
the Resource Conservation and Recovery Act of 1976, 42
U.S.C. 6901 et seq., and regulations promulgated
thereunder, collectively "RCRA", as amended. Also, any
other federal, state, or local statute law, ordinance,
code, rule, regulation, order to decree regulating
relating to, or imposing liability or standards of
conduct concerning hazardous materials, waste, or
substances now or at any time hereafter in effect
(collectively, with all other federal, state, or local
statutes, laws, ordinances, codes, rules, regulations,
order or decree described in this Paragraph 8.2(a),
"Hazardous Materials Laws").
(b) Tenant will not cause or permit the storage,
use, generation, or disposition of any hazardous
materials in, on, or about the Premises or the Building
by Tenant, its agents, employees, or contractors.
Tenant will not permit the Premises to be used or
operated in a manner that may cause the Premises or the
Building to be contaminated by any hazardous materials
in violation of any Hazardous Materials Laws. Tenant
will immediately advise Landlord in writing of (1) any
and all enforcement, cleanup, remedial, removal, or
other governmental or regulatory actions instituted,
completed, or threatened pursuant to any Hazardous
Materials Laws relating to any hazardous materials
affecting the Premises; and (2) all claims made or
threatened by any third party against Tenant, Landlord,
or the Premises relating to damage, contribution, cost
recovery, compensation, loss, or injury resulting from
any hazardous materials on or about the Premises.
Without Landlord's prior written consent, Tenant will
not take any remedial action or enter into any
agreements or settlements in response to the presence
of any hazardous materials in, on, or about the
Premises.
(c) Tenant will be solely responsible for and will
defend, indemnify and hold Landlord, its agents, and
<PAGE>
employees harmless from and against all claims, costs,
and liabilities, including attorney's fees and costs,
arising our of or in connection with Tenant's breach of
its obligations in this Article 8. Tenant will be
solely responsible for and will defend, indemnify, and
hold Landlord, its agents, and employees harmless from
and against any and all claims, costs, and liabilities,
including attorneys' fees and costs, arising out of or
in connection with the removal, cleanup, and
restoration work and materials necessary to return the
Premises and any other property of whatever nature
located on the project to their condition existing
prior to the appearance of Tenant's hazardous materials
on the Premises. Tenant's obligations under this
Article 8 will survive the expiration or other
termination of this Lease.
ARTICLE 9 ASSIGNMENT AND SUBLETTING
9.1 General. Tenant, for itself, its heirs,
distributees, executors, administrators, legal
representatives, successors, and assigns, covenants
that it will not assign, mortgage, or encumber this
Lease, nor sublease, nor permit the Premises or any
part of the Premises to be used or occupied by others,
without the prior written consent of Landlord in each
and every instance, which consent will not be
unreasonably withheld or delayed, with any objections
specified in reasonable detail. Each of Landlord's
Mortgagees shall have consented in writing to the
sublet or assignment. Any assignment or sublease in
violation of this Article 9 will be void. If this Lease
is assigned, or if the Premises or any part of the
Premises are subleased or occupied by anyone other than
Tenant, Landlord may, after default by Tenant, collect
rent from the assignee, subtenant, or occupant, and
apply the net amount collected to rent. No assignment,
sublease, occupancy, or collection will be deemed (a) a
waiver of the provisions of this Article 9.1; (b) the
acceptance of the assignee, subtenant, or occupant as
Tenant; or (c) a release of Tenant from the further
performance by Tenant of covenants on the part of
Tenant contained in this Lease. The consent by Landlord
to an assignment or sublease will not be construed to
relieve Tenant from obtaining Landlord's prior written
consent to any further assignment or sublease. No
permitted subtenant may assign or encumber its sublease
or further sublease all or any portion of its subleased
space, or otherwise permit the subleased space or any
part of its subleased space to be used or occupied by
others, without Landlord's prior written consent in
each instance.
9.2 Submission of Information. If Tenant requests
Landlord's consent to a specific assignment or
subletting, Tenant will submit in writing to Landlord
(a) the name and address of the proposed assignee or
subtenant; (b) the business terms of the proposed
assignment or sublease; (c) reasonably satisfactory
information as to the nature and character of the
business of the proposed assignee or subtenant, and as
to the nature of its proposed use of the space; (d)
banking, financial, or other credit information
reasonably sufficient to enable Landlord to determine
the financial responsibility and character of the
proposed assignee or subtenant; and (e) the proposed
form of assignment or sublease for Landlord's
reasonable approval.
9.3 Payments to Landlord. If Landlord consents to a
proposed assignment or sublease, then Landlord will
have the right to require Tenant to pay to Landlord a
sum equal to (a) any rent or other consideration paid
to Tenant by any proposed transferee that (after
deducting the costs of Tenant, if any, in effecting the
assignment or sublease, including reasonable
alterations costs, commissions and legal fees) is in
excess of the rent allocable to the transferred space
<PAGE>
then being paid by Tenant to Landlord pursuant to this
Lease; (b) one-half of any other profit or gain (after
deducting any necessary expenses incurred) realized by
Tenant from any such sublease or assignment; and (c)
Landlord's reasonable attorneys' fees and costs
incurred in connection with negotiation, review, and
processing of the transfer. All such sums payable will
be payable to Landlord at the time the next payment of
Monthly Rent is due.
9.4 Prohibited Transfers. The transfer of a
majority of the issued and outstanding capital stock of
any corporate Tenant or subtenant of this Lease, or a
majority of the total interest in any partnership
Tenant or subtenant, however accomplished, and whether
in a single transaction or in a series of related or
unrelated transactions, will be deemed an assignment of
this Lease or of such sublease requiring Landlord's
consent in each instance, which consent shall not be
unreasonably withheld, conditioned or delayed. For
purposes of this Article 9, the transfer of outstanding
capital stock of any corporate Tenant will not include
any sale of such stock by persons other than those
deemed "insiders" within the meaning of the Securities
Exchange Act of 1934, as amended, effected through the
"over-the-counter market" or through any recognized
stock exchange.
9.5 Permitted Transfer. Landlord consents to an
assignment of this Lease or sublease of all or part of
the Premises to a wholly-owned subsidiary of Tenant or
the parent of Tenant or to any corporation into or with
which Tenant may be merged or consolidated; provided
that Tenant promptly provides Landlord with a fully
executed copy of such assignment or sublease and that
Tenant is not released from liability under the Lease.
9.6 Remedies. If Tenant believes that Landlord has
unreasonably withheld its consent pursuant to this
Article 9, Tenant's sole remedy will be to seek a
declaratory judgment that Landlord has unreasonably
withheld its consent or an order of specific
performance or mandatory injunction of the Landlord's
agreement to give its consent; however, Tenant may
recover damages if a court of competent jurisdiction
determines that Landlord has acted arbitrarily and
capriciously in evaluating the proposed assignee's or
subtenant's creditworthiness, identity, and business
character and the proposed use and lawfulness of the
use.
ARTICLE 10 RULES AND REGULATIONS
Tenant and its employees, agents, licensees, and
visitors will at all times observe faithfully, and
comply strictly with, the rules and regulations set
forth in Exhibit C and all modifications and additions
thereto. Landlord may, at its sole discretion, from
time to time reasonably amend, delete, or modify
existing rules and regulations, or adopt reasonable new
rules and regulations for the use, safety, cleanliness,
and care of the Premises, the Building, and the
project, and the comfort, quiet, and convenience of
occupants of the project, provided however, any changes
or modifications must be applied uniformly to all
tenants. Modifications or additions to the rules and
regulations will be effective upon 30 days prior
written notice to Tenant from Landlord. In the event of
any breach of any rules or regulations or any
amendments or additions to such rules and regulations,
Landlord will have all remedies that this Lease
provides for default by Tenant, and will in
<PAGE>
addition have any remedies available at law or in
equity, including the right to enjoin any breach of
such rules and regulations. Landlord will not be liable
to Tenant for violation of such rules and regulations
by any other tenant, its employees, agents, visitors,
or licensees or any other person. In the event of any
conflict between the provisions of this Lease and the
rules and regulations, the provisions of this Lease
will govern.
ARTICLE 11 COMMON AREAS
As used in this Lease, the term "common areas"
means, without limitation, the hallways, entryways,
stairs, elevators, driveways, walkways, terraces,
docks, loading areas, restrooms, trash facilities, and
all other areas and facilities in the Building that are
provided and designated from time to time by Landlord
for the general nonexclusive use and convenience of
Tenant with Landlord and other Tenants of the Building
and their respective employees, invitees, licensees, or
other visitors. Landlord grants Tenant, its employees,
invitees, licensees, and other visitors a nonexclusive
license for the Lease Term to use the common areas in
common with others entitled to use the common areas,
subject to the terms and conditions of this Lease.
Without advance written notice to Tenant, except with
respect to matters covered by subsection (a) below, and
without any liability to Tenant in any respect,
provided Landlord will take no action permitted under
this Article 11 in such a manner as to materially
impair or adversely affect Tenant's substantial benefit
and enjoyment of the Premises, Landlord will have the
right to:
(a) close off any of the common areas
to whatever extent required in the opinion of Landlord
and its counsel to prevent a dedication of any of the
common areas or the accrual of any rights by any person
or the public to the common areas;
(b) temporarily close any of the common areas for
maintenance, alteration, or improvement purposes; and
(c) change the size, use, shape, or nature of any
such common areas, including erecting additional
buildings on the common areas, expanding the existing
Building or other buildings to cover a portion of the
common areas, converting common areas to a portion of
the Building or other buildings, or converting any
portion of the Building (excluding the Premises) or
other buildings to common areas. Upon erection of any
additional buildings or change in common areas, the
portion of the project upon which buildings or
structures have been erected will no longer be deemed
to be a part of the common areas. In the event of any
such changes in the size or use of the Building or
common areas of the Building or project, Landlord will
make an appropriate adjustment in the rentable area of
the Building or the Building's pro rata share of
exterior common areas of the project, as appropriate,
and a corresponding adjustment to Tenant's share of the
operating expenses payable pursuant to Article 5 of
this Lease.
ARTICLE 12 LANDLORD'S SERVICES
12.1 Landlord's Repair and Maintenance. Landlord
will maintain, repair and restore the common areas,
including lobbies, stairs, elevators, corridors, and
<PAGE>
restrooms, the windows in the Building, the mechanical,
plumbing and electrical equipment serving the Building,
and the roof and structure of the Building in
reasonably good order and condition.
12.2 Landlord's Other Services.
(a) Landlord will furnish the Premises with those
services customarily provided in comparable office
buildings in the vicinity of the Building, including
without limitation (1) electricity for lighting and the
operation of low-wattage office machines (such as
desktop personal computers, desktop calculators, and
typewriters) although Tenant shall reimburse Landlord
for the cost of such electricity as Additional Rent,
and Landlord will not be obligated to furnish more
power to the Premises than is proportionally allocated
to the Premises under the Building design; (2) heat and
air conditioning reasonably required for the
comfortable occupation of the Premises during business
hours; although Landlord will not be obligated to
furnish more heating or air conditioning to the
Premises than is proportionally allocated to the
Premises under the Building design; (3) elevator
service; (4) lighting replacement during business hours
(for Building standard lights, but not for any special
Tenant lights, which will be replaced at Tenant's sole
cost and expense), (5) window washing with reasonable
frequency, as determined by Landlord, (6) hot and cold
water. Landlord may provide, but will not be obligated
to provide, any such services (except elevator service
and electricity) on holidays or weekends.
(b) Tenant will have the right to purchase for use
during business hours and non-business hours the
service described in clause (a)(2) in excess of the
amounts Landlord has agreed to furnish so long as (1)
Tenant gives Landlord reasonable prior written notice
of its desire to do so; (2) the excess services are
reasonably available to Landlord and to the Premises;
and (3) Tenant pays as Additional Rent (at the time the
next payment of Monthly Rent is due) the cost of such
excess service from time to time charged by Landlord;
subject to the procedures established by Landlord from
time to time for providing such additional or excess
services.
(c) The term "business hours" means 7:00 a.m. to
6:00 p.m. on Monday through Friday, except holidays (as
that term is defined below), and 7:30 a.m. to 12:00
noon on Saturdays, except holidays. The term "holidays"
means New Year's Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
Landlord shall be entitled to charge Tenant for any
services for hours in excess of the standard business
hours as defined in the first sentence of this
paragraph. Access to the Premises is available 24-hours
per day.
12.3 Tenant's Costs. Whenever equipment or lighting
(other than Building standard lights) is used in the
Premises by Tenant and such equipment or lighting
affects the temperature otherwise normally maintained
by the design of the Building's air conditioning
system, Landlord will have the right, after prior
written notice to Tenant, to install supplementary air
conditioning facilities in the Premises or otherwise
modify the ventilating and air conditioning system
serving the Premises; and the cost of such facilities,
modifications, and additional service will be paid by
Tenant as Additional Rent. If Landlord reasonably
believes that Tenant is using more power than Landlord
furnishes pursuant to Article 12.2, Landlord may
install separate meters of Tenant's power usage, and
Tenant will pay for the cost of such <PAGE>
excess power as Additional Rent, together with the cost
of installing any risers, meters, or other facilities
that may be necessary to furnish or measure such excess
power to the Premises.
(b) Electricity used for lighting the Premises,
outlet power, and power used to operate Tenant's
equipment, shall be separately metered and Tenant shall
reimburse Landlord monthly as Additional Rent.
(1) In the event Tenant wishes to utilize
services of an alternative electricity service provider
("ASP") rather than the public utility that is
servicing the Building as of the date of Tenant's
execution of this Lease, no such ASP shall be permitted
to provide service to Tenant or install its lines or
other equipment within the Building without obtaining
the prior written consent of Landlord.
(c) Tenant, at its expense, shall provide for such
cleaning service as it requires. The scope of work
provided by Tenant's cleaning service shall not be less
than Landlord's standard cleaning specifications which
have been provided to Tenant. The cleaning service must
be a locally recognized professional janitorial
cleaning service and must be bonded and fully insured.
A certificate or other verification of insurance
coverage shall be provided to Landlord. Insurance must
be sufficient, in Landlord's sole opinion to cover all
personal liability, theft, or damage to the Building.
12.4 Limitation on Liability. Landlord will not be
in default under this Lease or be liable to Tenant or
any other person for direct or consequential damage, or
otherwise, for any failure to supply any heat, air
conditioning, elevator, cleaning, lighting, security;
for surges or interruptions of electricity; or for
other services Landlord has agreed to supply
(including, but not limited to, the proper and
continuous functioning of the telecommunications cable
noted in paragraph 12.2(d), above) during any period
when Landlord uses reasonable diligence to supply such
services. Landlord will use commercially reasonable
efforts to diligently remedy any interruption in the
furnishing of such services. Landlord reserves the
right temporarily to discontinue such services at such
times as may be necessary by reason of accident;
repairs, alterations or improvements; strikes;
lockouts; riots; acts of God; earthquakes; governmental
preemption in connection with a national or local
emergency; any rule, order, or regulation of any
governmental agency; conditions of supply and demand
that make any product available; Landlord's compliance
with any mandatory governmental energy conservation or
environmental protection program, or any voluntary
governmental energy conservation program at the request
of or with consent or acquiescence of Tenant; or any
other happening beyond the control of Landlord.
Landlord will not be liable to Tenant or any other
person or entity for direct or consequential damages
resulting from the admission to or exclusion from the
Building or project of any person. In the event of
invasion, mob, riot, public excitement, strikes,
lockouts, or other circumstances rendering such action
advisable in Landlord's sole opinion Landlord will have
the right to prevent access to the Building or project
during the continuance of the same by such means as
Landlord, in its sole discretion, may deem appropriate,
including without limitation locking doors and closing
parking areas and other common areas. Landlord will not
be liable for damages to person or property or for
injury to, or interruption of, business for any
discontinuance permitted under this Article 12, nor
will such discontinuance in any
<PAGE>
way be construed as an eviction of Tenant or cause an
abatement of rent or operate to release Tenant from any
of Tenant's obligations under this Lease.
ARTICLE 13 TENANT'S CARE OF THE PREMISES
13.1 Tenant will maintain the Premises (including
Tenant's equipment, personal property, and trade
fixtures located in the Premises) in their condition at
the time they were delivered to Tenant, reasonable wear
and tear excluded. Tenant will immediately advise
Landlord of any damage to the Premises or the Building.
All damage or injury to the Premises, the Building, or
the fixtures, appurtenances, and equipment in the
Premises or the Building that is caused by Tenant, its
agents, employees, or invitees may be repaired,
restored, or replaced by Landlord, at the expense of
Tenant. Such expense (plus 10 percent of such expense for
Landlord's overhead) will be collectible as Additional
Rent and will be paid by Tenant within 10 days after
delivery of a statement for such expense.
13.2 Intentionally deleted.
ARTICLE 14 ALTERATIONS
14.1 General.
(a) During the Lease Term, Tenant will not make or
allow to be made any alterations, additions, or
improvements to or of the Premises or any part of the
Premises, or attach any fixtures or equipment to the
Premises, without first obtaining Landlord's written
consent, which shall not be unreasonably withheld,
conditioned or delayed. All such alterations,
additions, and improvements consented to by Landlord,
and capital improvements that are required to be made
to the Building as a result of the nature of Tenant's
use of the Premises:
(1) Will be performed by contractors approved by
Landlord and subject to conditions specified by
Landlord (which may include requiring the posting of a
mechanic's or materialmen's lien bond); and
(2) intentionally deleted
(b) Tenant shall make no changes, additions,
alterations, or improvements to the Premises that are
visible from outside the Premises without obtaining the
prior written consent of Landlord; and Landlord shall
have the right to withhold such consent in its sole and
absolute discretion.
(c) Subject to Tenant's rights in Article 16, all
alterations, additions, fixtures, and improvements,
whether temporary or permanent in character, made in or
upon the Premises either by Tenant or Landlord, will
immediately become Landlord's property and at the end
of the Term will remain on the Premises without
compensation to Tenant, unless when consenting to such
alterations, additions, fixtures, or improvements,
Landlord has advised Tenant in writing that such
alterations, additions, fixtures, or improvements must
be removed at the expiration or other termination of
this Lease.
<PAGE>
14.2 Free-Standing Partitions. Tenant will have the
right to install free-standing work station partitions,
without Landlord's prior written consent, so long as no
building or other governmental permit is required for
their installation or relocation; however, if a permit
is required, Landlord will not unreasonably withhold
its consent to such relocation or installation. The
freestanding work station partitions for which Tenant
pays will be part of Tenant's trade fixtures for all
purposes under this Lease. All other partitions
installed in the Premises are and will be Landlord's
property for all purposes under this Lease.
14.3 Removal. If Landlord has required Tenant to
remove any or all alterations, additions, fixtures, and
improvements that are made in or upon the Premises
pursuant to this Article 14 prior to the Expiration
Date, Tenant will remove such alterations, additions,
fixtures, and improvements at Tenant's sole cost and
will restore the Premises to the condition in which
they were before such alterations, additions, fixtures,
improvements, and additions were made, reasonable wear
and tear and casualty excepted.
14.4 Exterior Signage. So long as the rentable area
of the Premises is not reduced, Tenant may, at its
expense, maintain its existing signage on the
Building's facade and the existing monument sign
located on the west side of the Building. Any change in
the design, size, location, and method of installation
shall be subject to Landlord's prior approval, which
shall not be unreasonably withheld. Also, any
modification of such signage shall be subject to the
approval of any governmental authority having
jurisdiction. Landlord agrees to reasonably assist
Tenant in seeking governmental approval for any
changes. Tenant shall remove all such signage and
restore the Building and monument sign to its original
condition (exclusive of wear and tear and casualty) at
its expense, within thirty (30) days of 1) the
expiration or early termination of the Lease, 2) the
early termination of a portion of the Premises where
the remaining premises contains less than 9,188
rentable square feet, or 3) written notice from
Landlord that another tenant occupying more than 9,500
rentable square feet in the Building wishes to install
signage on the Building or monument sign.
ARTICLE 15 MECHANICS' LIENS
Tenant will pay or cause to be paid all costs and
charges for work (a) done by Tenant or caused to be
done by Tenant, in or to the Premises, and (b) for all
materials furnished for and in connection with such
work. Tenant will indemnify Landlord against and hold
Landlord, the Premises, the Building and the project
free, clear, and harmless of and from all mechanics'
liens and claims of liens, and all other liabilities,
liens, claims, and demands on account of such work by
or on behalf of Tenant, other than work performed by
Landlord pursuant to the Workletter. If any such lien,
at any time, is filed against the Premises or any part
of the project, Tenant will cause such lien to be
discharged of record within 10 days after the filing of
such lien, except that if Tenant desires to contest
such lien, it will furnish Landlord, within such 10-day
period, security reasonably satisfactory to Landlord of
at least 150 percent of the amount of the claim, plus
estimated costs and interest, or comply with such
statutory procedures as may be available to release the
lien. If a final judgment establishing the validity or
existence of a lien for any amount is entered, Tenant
will pay and satisfy the same at once. If Tenant fails
to pay any charge for which a mechanics' lien has been
filed, and has not given
<PAGE>
Landlord security as described above, or has not
complied with such statutory procedures as may be
available to release the lien, Landlord may, at its
option, pay such charge and related costs and interest,
and the amount so paid, together with reasonable
attorneys' fees incurred in connection with such lien,
will be immediately due from Tenant to Landlord as
Additional Rent. Nothing contained in this Lease will
be deemed the consent or agreement of Landlord to
subject Landlord's interest in the Building or the
project to liability under any mechanics' or other lien
law. If Tenant receives written notice that a lien has
been or is about to be filed against the Premises or
the Building, or that any action affecting title to the
Building has been commenced on account of work done by
or for or materials furnished to or for Tenant, it will
immediately give Landlord written notice of such
notice. At least 15 days prior to the commencement of
any work (including but not limited to any maintenance,
repairs, alterations, additions, improvements, or
installations) in or to the Premises, by or for Tenant,
Tenant will give Landlord written notice of the
proposed work and the names and addresses of the
persons supplying labor and materials for the proposed
work. Landlord will have the right to post notices of
nonresponsibility or similar written notices on the
Premises in order to protect the Premises against any
such liens.
ARTICLE 16 END OF TERM
16.1 End of Lease Term. At the end of this Lease,
Tenant will promptly quit and surrender the Premises
broomclean, in good order and repair, ordinary wear and
tear and casualty excepted. If Tenant is not then in
default, Tenant may remove from the Premises any trade
fixtures, equipment, and movable furniture placed in
the Premises by Tenant, whether or not such trade
fixtures or equipment are fastened to the Building;
Tenant will not remove any trade fixtures or equipment
without Landlord's prior written consent if such
fixtures or equipment are used in the operation of the
Building, or if the removal of such fixtures or
equipment will result in impairing the structural
strength of the Building. Whether or not Tenant is in
default, Tenant will remove such alterations,
additions, improvements, trade fixtures, equipment, and
furniture as Landlord has requested in accordance with
Article 14. Tenant will fully repair any damage
occasioned by the removal of any trade fixtures,
equipment, furniture, alterations, additions, and
improvements. All trade fixtures, equipment, furniture,
inventory, effects, alterations, additions, and
improvements on the Premises after the end of the Lease
Term will be deemed conclusively to have been abandoned
and may be appropriated, sold, stored, destroyed, or
otherwise disposed of by Landlord without written
notice to Tenant or any other person and without
obligation to account for them. Tenant will pay
Landlord for all expenses incurred in connection with
the removal of such property, including but not limited
to the cost of repairing any damage to the Building or
Premises caused by the removal of such property.
Tenant's obligation to observe and perform this
covenant will survive the expiration or other
termination of this Lease.
ARTICLE 17 EMINENT DOMAIN
If all of the Premises are taken by exercise of the
power of eminent domain (or conveyed by Landlord in
lieu of such exercise) this Lease will terminate on a
date (the "Termination Date") which is the earlier of
the date upon which the condemning authority takes
<PAGE>
possession of the Premises or the date on which title
to the Premises is vested in the condemning authority.
If more than 25 percent of the rentable area of the Premises
is so taken, Tenant will have the right to cancel this
Lease by written notice to Landlord given within 20
days after the termination date. If less than 25 percent of
the rentable area of the Premises is so taken, or if
the Tenant does not cancel this Lease according to the
preceding sentence, the Monthly Rent will be abated in
the proportion of the rentable area of the Premises so
taken to the rentable area of the Premises immediately
before such taking, and Tenant's share will be
appropriately recalculated. If 25 percent or more of the
Building or the project is so taken, Landlord may
cancel this Lease by written notice to Tenant given
within thirty (30) days after the Termination Date. In
the event of any such taking, the entire award will be
paid to Landlord and Tenant will have no right or claim
to any part of such award; however, Tenant will have
the right to assert a claim against the condemning
authority in a separate action, so long as Landlord's
award is not otherwise reduced, for Tenant's moving
expenses and Leasehold improvements owned by Tenant.
ARTICLE 18 DAMAGE AND DESTRUCTION
(a) If the Premises or the Building are damaged by
fire or other casualty, Landlord will give Tenant
written notice of the time which will be needed to
repair such damage, as determined by Landlord in its
reasonable discretion, and the election (if any) which
Landlord has made according to this Article 18. Such
notice will be given before the 30th day (the "notice
date") after the fire or other insured casualty.
(b) If the Premises or the Building are damaged by
fire or other casualty to an extent which may be
repaired within one hundred twenty (120) days after the
notice date, as reasonably determined by Landlord,
Landlord will promptly begin to repair the damage after
the notice date and will diligently pursue the
completion of such repair. In that event this Lease
will continue in full force and effect except that
Monthly Rent will be abated on a pro rata basis from
the date of the damage until the date of the completion
of such repairs (the "repair period") based on the
proportion of the rentable area of the Premises Tenant
is unable to use during the repair period.
(c) If the Premises or the Building are damaged by
fire or other casualty to an extent that may not be
repaired within one hundred twenty (120) days after the
notice date, as reasonably determined by Landlord, then
(1) Landlord may cancel this Lease as of the date of
such damage by written notice given to Tenant on or
before the notice date or (2) Tenant may cancel this
Lease as of the date of such damage by written notice
given to Landlord within ten (10) days after Landlord's
delivery of a written notice that the repairs cannot be
made within such one hundred twenty (120) day period.
If neither Landlord nor Tenant so elects to cancel this
Lease, Landlord will diligently proceed to repair the
Building and Premises and Monthly Rent will be abated
on a pro rata basis during the repair period based on
the proportion of the rentable area of the Premises
Tenant is unable to use during the repair period.
(d) Notwithstanding the provisions of subparagraphs
(a), (b), and (c) above, Landlord shall have no
obligation whatsoever to repair, reconstruct, or
restore the Premises and/or the Building if any of the
following occurs:
<PAGE>
(1) The holder of the first deed of trust,
security agreement, or mortgage encumbering the
Building elects not to permit the insurance proceeds
payable upon damage to or destruction of the Building
or Premises to be used for such repair, reconstruction,
or restoration;
(2) The damage or destruction is not fully covered
by insurance maintained by Landlord for Landlord's
benefit;
(3) The damage or destruction occurs during the
last 24 months of the Lease Term or any renewal or
extension thereof;
(4) Tenant is in default of the Lease as described
in Article 25. In such event, Landlord or Tenant
(unless Tenant is in default of the Lease) may
terminate this Lease by written notice to the other
party given within 30 days after the damage or
destruction
(e) If any such damage by fire or other casualty
is the result of the willful conduct or sole negligence
or intentional failure to act of Tenant, its agents,
contractors, employees, or invitees, there will be no
abatement of Monthly Rent as otherwise provided for in
this Article 18. Tenant will have no rights to
terminate this Lease on account of any damage to the
Premises or the Building, except as set forth in this
Lease.
ARTICLE 19 SUBORDINATION
19.1 General. This Lease and Tenant's rights under
this Lease are subject and subordinate to any ground or
underlying Lease, mortgage, indenture, deed of trust,
or other lien encumbrance (each a "superior lien"),
together with any renewals, extensions, modifications,
consolidations, and replacements of such superior lien,
now or after the date affecting or placed, charged or
enforced against the Land, the Building, or all or any
portion of the project or any interest of Landlord in
them or Landlord's interest in this Lease and the
Leasehold estate created by this Lease (except to the
extent any such instrument expressly provides that this
Lease is superior to such instrument). This provision
will be self-operative and no further instrument of
subordination will be required in order to effect it.
Notwithstanding the foregoing, Tenant will execute,
acknowledge, and deliver to Landlord, within twenty
(20) days after written demand by Landlord, such
documents as may be reasonably requested by Landlord or
the holder of any superior lien to confirm or effect
any such subordination.
19.2 Attornment and Nondisturbance.
Tenant agrees that in the event that any holder of a
superior lien succeeds to Landlord's interest in the
Premises, Tenant will pay to such holder all rents
subsequently payable under this Lease. Further, Tenant
agrees that in the event of the enforcement by the
holder of a superior lien of the remedies provided for
by law or by such superior lien, Tenant will, upon
request of any person or party succeeding to the
interest of Landlord as a result of such enforcement,
automatically become the Tenant of and attorn to such
successor in interest without change in the terms or
provisions of this Lease. Such successor in interest
will not be bound by:
<PAGE>
(a) Any payment of rent for more than one month in
advance, except prepayments in the nature of security
for the performance by Tenant of its obligations under
this Lease;
(b) Any amendment or modification of this Lease made
without the written consent of such successor in
interest (if such consent was required under the terms
of such superior lien);
(c) Any claim against Landlord arising prior to the
date on which such successor in interest succeeded to
Landlord's interest; or
(d) Any claim or offset of Monthly Rent against the
Landlord.
Upon request by such successor in interest and without
cost to Landlord or such successor in interest, Tenant
will, within twenty (20) days after written demand,
execute, acknowledge, and deliver an instrument or
instruments confirming the attornment in form and
substance satisfactory to such successor in interest,
so long as such instrument provides that such successor
in interest will not disturb Tenant in its use of the
Premises in accordance with this Lease.
ARTICLE 20 ENTRY BY LANDLORD
Landlord, its agents, employees, and contractors
may enter the Premises at any time in response to an
emergency and at reasonable hours to:
(a) Inspect the Premises;
(b) Exhibit the Premises to prospective purchasers,
lenders, or tenants;
(c) Determine whether Tenant is complying with all
its obligations in this Lease;
(d) Supply services to be provided by Landlord to
Tenant according to this Lease;
(e) Post written notices of nonresponsibility or
similar notices; or
(f) Make repairs required of Landlord under the
terms of this Lease or make repairs
to any adjoining space or utility services or make
repairs, alterations, or improvements to any other
portion of the Building; however, all such work will be
done as promptly as reasonably possible and so as to
cause as little interference to Tenant as reasonably
possible.
Tenant, by this Article 20, waives any claim against
Landlord, its agents, employees, or contractors for
damages for any injury or inconvenience to or
interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises, or any
other loss occasioned by any entry in accordance with
this Article 20, except to the extent of damage caused
by Landlord's intentional acts. Landlord will at all
times have and retain a key with which to unlock all
<PAGE>
of the doors in, on, or about the Premises (excluding
Tenant's vaults, safes, and similar areas designated in
writing by Tenant in advance). Landlord will have the
right to use any and all means Landlord may deem proper
to open doors in and to the Premises in an emergency in
order to obtain entry to the Premises, provided that
Landlord will promptly repair any damages caused by any
forced entry. Any entry to the Premises by Landlord in
accordance with this Article 20 will not be construed
or deemed to be a forcible or unlawful entry into or a
detainer of the Premises or an eviction, actual or
constructive, of Tenant from the Premises or any
portion of the Premises, nor will any such entry
entitle Tenant to damages or an abatement of Monthly
Rent, Additional Rent, or other charges that this Lease
requires Tenant to pay.
ARTICLE 21 INDEMNIFICATION, WAIVER, AND RELEASE
21.1 Indemnification. Except for any injury or
damage to persons or property on the Premises that is
proximately caused by or results from the gross
negligence or deliberate act of Landlord, its
employees, or agents, unless contradicted by other
terms of this Lease, Tenant will neither hold nor
attempt to hold Landlord, its employees, or agents
liable for, and Tenant will indemnify and hold harmless
Landlord, its employees, and agents from and against,
any and all demands, claims, causes of action, fines,
penalties, damages (including consequential damages),
liabilities, judgments, and expenses (including without
limitation reasonable attorneys' fees) incurred in
connection with or arising from:
(a) the use or occupancy or manner of use or
occupancy of the Premises by Tenant or any other person
claiming under Tenant;
(b) any activity, work, or thing done or permitted
by Tenant in or about the Premises, the Building;
(c) any breach by Tenant or its employees, agents,
contractors, or invitees of this Lease; and
(d) any injury or damage to the person, property,
or business of Tenant, its employees, agents,
contractors, or invitees entering upon the Premises
under the express or implied invitation of Tenant.
If any action or proceeding is brought against
Landlord, its employees, or agents by reason of any
such claim for which Tenant has indemnified Landlord,
Tenant, upon written notice from Landlord, will defend
the same at Tenant's expense, with counsel reasonably
satisfactory to Landlord.
21.2 Waiver and Release. Tenant, as a material part
of the consideration to Landlord for this Lease, by
this Article 21.2 waives and releases all claims
against Landlord, its employees, and agents with
respect to all matters for which Landlord has
disclaimed liability pursuant to the provisions of this
Lease.
<PAGE>
ARTICLE 22 SECURITY DEPOSIT
Intentionally Deleted
ARTICLE 23 QUIET ENJOYMENT
Landlord covenants and agrees with Tenant
that so long as Tenant pays the Monthly Rent and
observes and performs all the terms, covenants, and
conditions of this Lease on Tenant's part to be
observed and performed, Tenant may peaceably and
quietly enjoy the Premises subject, nevertheless, to
the terms and conditions of this Lease, and Tenant's
possession will not be disturbed by anyone claiming by,
through, or under Landlord.
ARTICLE 24 EFFECT OF SALE
A sale, conveyance, or assignment of the Building
or the project will operate to release Landlord from
liability from and after the effective date of such
sale, conveyance, or assignment upon all of the
covenants, terms, and conditions of this Lease, express
or implied, except those liabilities that arose prior
to such effective date, and, after the effective date
of such sale, conveyance, or assignment, Tenant will
look solely to Landlord's successor in interest in and
to this Lease. This Lease will not be affected by any
such sale, conveyance, or assignment, and Tenant will
attorn to Landlord's successor in interest to this
Lease, so long as such successor in interest assumes
Landlord's obligations under the Lease from and after
such effective date.
ARTICLE 25 DEFAULT
25.1 Events of Default. The following events are
referred to, collectively, as "events of default" or,
individually, as an "event of default":
(a) Tenant defaults in the due and punctual payment
of Monthly Rent, and such default continues for five
(5) days after written notice from Landlord; however,
Tenant will not be entitled to more than three (3)
written notices for monetary defaults during any twelve
(12)-month period, and if after such written notice any
Monthly Rent is not paid when due, an event of default
will be considered to have occurred without further
notice;
(b) intentionally deleted;
(c) This Lease or the Premises or any part of the
Premises are taken upon execution or by other process
of law directed against Tenant, or are taken upon or
subject to any attachment by any creditor of Tenant or
claimant against Tenant, and said attachment is not
discharged or disposed of within fifteen (15) days
after its levy;
(d) Tenant files a petition in bankruptcy or
insolvency or for reorganization or arrangement under
the bankruptcy laws of the United States or under any
insolvency act of any state, or admits the material
allegations of any such petition by answer or
otherwise, or is dissolved or makes an assignment for
the benefit of creditors;
<PAGE>
(e) Involuntary proceedings under any such
bankruptcy law or insolvency act or for the dissolution
of Tenant are instituted against Tenant, or a receiver
or trustee is appointed for all or substantially all of
the property of Tenant, and such proceeding is not
dismissed or such receivership or trusteeship vacated
within sixty (60) days after such institution or
appointment;
(f) intentionally deleted;
(g) Tenant breaches any of the other agreements,
terms, covenants, or conditions that this Lease
requires Tenant to perform, and such breach continues
for a period of thirty (30) days after written notice
from Landlord to Tenant or, if such breach cannot be
cured reasonably within such thirty (30)-day period, if
Tenant fails to diligently commence to cure such breach
within thirty (30) days after written notice from
Landlord and to complete such cure within a reasonable
time thereafter.
25.2 Landlord's Remedies. If any one or more events
of default set forth in Article 25.1 occurs then
Landlord has the right, at its election:
(a) to give Tenant written notice of Landlord's
intention to terminate this Lease on the earliest date
permitted by law or on any later date specified in such
notice, in which case Tenant's right to possession of
the Premises will cease and this Lease will be
terminated, except as to Tenant's liability, under this
Lease existing as of such termination, as if the
expiration of the Lease term fixed in such notice were
the end of the Lease Term in which event Landlord's
damages shall be calculated pursuant to Article 25.4
below.
(b) without further demand or notice, but in
accordance with the law, to reenter and take possession
of the Premises or any part of the Premises, repossess
the same, expel Tenant and those claiming through or
under Tenant, and remove the effects of both or either,
using such force for such purposes as may be necessary,
without being liable for prosecution, without being
deemed guilty of any manner of trespass. and without
prejudice to any remedies or any preceding breach of
covenants or conditions; or (c) without further demand
or notice to cure any event of default and to charge
Tenant for the cost of effecting such cure, including
without limitation reasonable attorneys' fees and
interest on the amount so advanced at the rate set
forth in Article 1.1(s), provided that Landlord will
have no obligation to cure any such event of default of
Tenant. Should Landlord elect to reenter as provided in
subsection (b), or should Landlord take possession
pursuant to legal proceedings or pursuant to any notice
provided by law, Landlord may, from time to time,
without terminating this Lease, relet the Premises or
any part of the Premises in Landlord's or Tenant's
name, but for the account of Tenant, for such term or
terms (which may be greater or less than the period
which would otherwise have constituted the balance of
the Lease Term) and on such conditions and upon such
other terms (which may include concessions of free rent
and alteration and repair of the Premises) as Landlord,
in its reasonable discretion, may determine, and
Landlord may collect and receive the rent. Landlord
will in no way be responsible or liable for any failure
to relet the Premises, or any part of the Premises, or
for any failure to collect any rent due upon such
reletting.
<PAGE>
No such reentry or taking possession of the Premises by
Landlord will be construed as an election on Landlord's
part to terminate this Lease unless a written notice of
such intention is given to Tenant. No written notice
from Landlord under this Article or under a forcible or
unlawful entry and detainer statute or similar law will
constitute an election by Landlord to terminate this
Lease unless such notice specifically so states.
Landlord reserves the right following any such reentry
or reletting to exercise its right to terminate this
Lease by giving Tenant such written notice, in which
event this Lease will terminate as specified in such
notice.
(d) Landlord shall act in a commercially reasonable
manner to mitigate damages.
25.3 Certain Damages. In the event that Landlord
does not elect to terminate this Lease as permitted in
Article 25.2(a), but on the contrary elects to take
possession as provided in Article 25.2(b), Tenant will
pay to Landlord Monthly Rent and other sums as provided
in this Lease that would be payable under this Lease if
such repossession had not occurred, less the net
proceeds, if any, of any reletting of the Premises
after deducting all of Landlord's reasonable expenses
in connection with such reletting, including without
limitation all repossession costs, brokerage
commissions, attorneys' fees, expenses of employees,
alteration and repair costs, and expenses of
preparation for such reletting. If, in connection with
any reletting, the new lease term extends beyond the
existing Lease Term, or the Premises covered by such
new Lease include other Premises not part of the
Premises, a fair apportionment of the rent received
from such reletting and the expenses incurred in
connection with such reletting, and any rent
concessions will be equally apportioned over the term
of the new lease. Tenant will pay such rent and other
sums to Landlord monthly on the day on which the
Monthly Rent would have been payable under this Lease
if possession had not been retaken, and Landlord will
be entitled to receive such rent and other sums from
Tenant on each such day.
25.4 Continuing Liability After Termination. In the
event this Lease is terminated on account of the
occurrence of an event of default, Landlord will be
entitled to recover against Tenant as damages for loss
of the bargain and not as a penalty:
(a) The worth at the time of award of the unpaid
Monthly Rent that has been earned at the time of
termination;
(b) The worth at the time of award of the amount by
which the unpaid Monthly Rent that would have been
earned after termination until the time of award
exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided by Landlord;
and
(c) Any other amount necessary to compensate
Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this
Lease or which in the ordinary course of things would
be likely to result therefrom.
The "worth at the time of award" of the amounts
referred to in clauses (a) and (b) above is computed by
adding interest at the per annum interest rate
described in Article 1.1(s) on the date on which this
Lease is terminated from the date of termination until
the time of the award. The "worth at the time of award"
of the amount referred to in clause (c) above
<PAGE>
is computed by discounting such amount at the discount
rate of the Federal Reserve Bank of Kansas City,
Missouri, at the time of award plus 1 percent.
25.5 Cumulative Remedies. Any suit or suits for the
recovery of the amounts and damages set forth in
Articles 25.3 and 25.4 may be brought by Landlord, from
time to time, at Landlord's election, and nothing in
this Lease will be deemed to require Landlord to await
the date upon which this Lease or the Lease Term would
have expired had there occurred no event of default.
Each right and remedy provided for in this Lease is
cumulative and is in addition to every other right or
remedy provided for in this Lease or now or after the
Lease date existing at law or in equity or by statute
or otherwise, and the exercise or beginning of the
exercise by Landlord of any one or more of the rights
or remedies provided for in this Lease or now or after
the Lease date existing at law or in equity or by
statute or otherwise will not preclude the simultaneous
or later exercise by Landlord of any or all other
rights or remedies provided for in this Lease or now or
after the Lease date existing at law or in equity or by
statute or otherwise. All costs incurred by Landlord in
collecting any amounts and damages owing by Tenant
pursuant to the provisions of this Lease or to enforce
any provision of this Lease, including reasonable
attorneys' fees from the date any such matter is turned
over to an attorney, whether or not one or more actions
are commenced by Landlord, will also be recoverable by
Landlord from Tenant.
25.6 Waiver of Redemption. Tenant waives any right
of redemption arising as a result of Landlord's
exercise of its remedies under this Article 25.
ARTICLE 26 PARKING
26.1 Tenant is hereby granted a non- exclusive
license to park vehicles in a maximum of forty-six (46)
parking spaces contained in the Building's Parking Lot,
and an additional license to use an additional fifty-
four (54) parking spaces in the area shown on Exhibit E
attached hereto, marked as "Additional Parking". The
current owner of the Additional Parking is Landlord.
The Additional Parking is contained in the parking lot
adjacent to the Gerson Company Building. Said Parking
Lot is sometimes called herein the "Gerson Parking
Lot".
At any time during the term of this Lease, the
Owner of the Additional Parking shall be entitled to
terminate Tenant's License to use the Additional
Parking, but only in the event that the Owner enters
into an agreement to sell or lease all or part of the
Gerson Company Building or Gerson Parking Lot. Tenant's
License to use the Additional Parking shall terminate
the later of the ninetieth (90th) day after Owner
provides Tenant with written notice that Owner has
entered into such agreement to sell or lease, or the
date upon which Owner's deed is recorded in the name of
the Purchaser or the date that the new tenant takes
possession of its premises. The failure of Owner to
terminate Tenant's License in the event that the Owner
sells or leases all or part of the Gerson Building or
Gerson Parking Lot shall not be deemed a waiver of
Owner's (or any subsequent Owner's) right to terminate
the License in the event of any future sale or lease.
<PAGE>
26.2 All such parking (including the Additional
Parking) shall be subject to the rules and regulations
set forth in Exhibit C, and any amendments or additions
to them. Tenant shall have the right to use such
parking on a nonexclusive basis at no additional cost.
In order to protect persons and property from injury or
damage due to fire or other casualty and to provide
suitable parking for visitors and the handicapped,
Tenant agrees to restrict the parking of its motor
vehicles and the motor vehicles of all of its employee,
agents, contractors, customers, guests and invitees to
those striped, designated parking areas provided with
the Building and Gerson Parking as the same may be
configured from time to time by Landlord, so that all
roadways, driveways, aisles and entry ramps shall
remain open and unobstructed at all times for use as
fire lanes and those parking spaces reserved for
visitors and the handicapped will be available to those
for whom they are intended. Should a motor vehicle be
parked by Tenant or by any of its employees, agents,
contractors, customers, guests and invitees other than
in such designated parking areas, Tenant covenants and
agrees that Landlord may remove or cause the removal of
such motor vehicle from the Building and Gerson Parking
at the cost of the owner thereof, and Landlord shall
not be liable to such owner or any other person for any
loss or damage which may result therefrom. Landlord
reserves the right to make such additional rules and
regulations pertaining to parking as may be reasonably
necessary for the orderly use, maintenance and
ownership of the Building and Gerson Parking. Tenant
agrees to provide Landlord with a state automobile
license number for the cars of employees working in the
Premises upon request by Landlord.
ARTICLE 27 MISCELLANEOUS
27.1 No Offer. This Lease is submitted to Tenant on
the understanding that it will not be considered an
offer and will not bind Landlord in any way until
Tenant has duly executed and delivered duplicate
originals to Landlord and Landlord has executed and
delivered one of such originals to Tenant.
27.2 Joint and Several Liability. If Tenant is
composed of more than one signatory to this Lease, each
signatory will be jointly and severally liable with
each other signatory for payment and performance
according to this Lease. The act of, written notice to,
written notice from, refund to, or signature of any
signatory to this Lease (including without limitation
modifications of this Lease made by fewer than all such
signatories) will bind every other signatory as though
every other signatory had so acted, or received or
given the written notice or refund, or signed.
27.3 No Construction Against Drafting Party.
Landlord and Tenant acknowledge that each of them and
their counsel have had an opportunity to review this
Lease and that this Lease will not be construed against
Landlord merely because Landlord has prepared it.
27.4 Time of the Essence. Time is of the essence of
each and every provision of this Lease.
27.5 No Recordation. Tenant's recordation of this
Lease or any memorandum or short form of it will be
void and a default under this Lease.
<PAGE>
27.6 No Waiver. The waiver by Landlord of any
agreement, condition, or provision contained in this
Lease will not be deemed to be a waiver of any
subsequent breach of the same or any other agreement,
condition, or provision contained in this Lease, nor
will any custom or practice that may grow up between
the parties in the administration of the terms of this
Lease be construed to waive or to lessen the right of
Landlord to insist upon the performance by Tenant in
strict accordance with the terms of this Lease. The
subsequent acceptance of Monthly Rent by Landlord will
not be deemed to be a waiver of any preceding breach by
Tenant of any agreement, condition, or provision of
this Lease, other than the failure of Tenant to pay the
particular Monthly Rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the
time of acceptance of such Monthly Rent.
27.7 Estoppel Certificates. At any time and from
time to time but within fifteen (15) days after prior
written request by either party, the other party will
execute, acknowledge, and deliver to the requesting
party, promptly upon request, a certificate certifying,
if true (a) that this Lease is unmodified and in full
force and effect or, if there have been modifications,
that this Lease is in full force and effect, as
modified, and stating the date and nature of each
modification; (b) the date, if any, to which Monthly
Rent and other sums payable under this Lease have been
paid; (c) that no written notice of any default has
been delivered to Landlord which default has not been
cured, except as to defaults specified in said
certificate; (d) that there is no event of default
under this Lease or an event which, with notice or the
passage of time, or both, would result in an event of
default under this Lease, except for defaults specified
in said certificate; and (e) such other matters as may
be reasonably requested. Any such certificate may be
relied upon by any prospective purchaser or existing or
prospective mortgagee or beneficiary under any deed of
trust of the Building or any part of the project. The
certifying party's failure to deliver such a
certificate within such time will be conclusive
evidence of the matters set forth in it.
27.8 Waiver of Jury Trial. Landlord and Tenant by
this Article 27.8 waive trial by jury in any action,
proceeding, or counterclaim brought by either of the
parties to this Lease against the other on any matters
whatsoever arising out of or in any way connected with
this Lease, the relationship of Landlord or Tenant,
Tenant's use or occupancy of the Premises, or any other
claims (except claims for personal injury or property
damage), and any emergency statutory or any other
statutory remedy.
27.9 No Merger. The voluntary or other surrender of
this Lease by Tenant or the cancellation of this Lease
by mutual agreement of Tenant and Landlord or the
termination of this Lease on account of Tenant's
default will not work a merger, and will, at Landlord's
option, (a) terminate all or any subleases and
subtenancies or (b) operate as an assignment to
Landlord of all or any subleases or subtenancies.
Landlord's option under this Article 27.9 will be
exercised by written notice to Tenant and all known
subtenants or subtenants in the Premises or any part of
the Premises.
27.10 Holding Over. Tenant will have no right to
remain in possession of all or any part of the Premises
after the expiration of the Lease Term. If Tenant
remains in possession of all or any part of the
Premises after the expiration of the Lease Term, with
the express or implied consent of Landlord: (a) such
<PAGE>
tenancy will be deemed to be a periodic tenancy from
month-to-month only; (b) such tenancy will not
constitute a renewal or extension of this Lease for any
further term; and (c) such tenancy may be terminated by
Landlord upon earlier of thirty (30) days prior
written notice or the earliest date permitted by law.
In such event, Monthly Rent will be increased to an
amount equal to 150 percent of the Monthly Rent payable during
the last month of the Lease Term, and any other sums
due under this Lease will be payable in the amount and
at the times specified in this Lease. Such month-to-
month tenancy will be subject to every other term,
condition, and covenant contained in this Lease.
<PAGE>
27.11 Notices. Any notice, request, demand,
consent, approval, or other communication required or
permitted under this Lease must be in writing and will
be deemed to have been given when personally delivered,
sent by facsimile with receipt acknowledged, deposited
with any nationally recognized overnight carrier that
routinely issues receipts, or deposited in any
depository regularly maintained by the United States
Postal Service, postage prepaid, certified mail, return
receipt requested, addressed to the party for whom it
is intended at its address set forth in Article 1.1.
Either Landlord or Tenant may add additional addresses
or change its address for purposes of receipt of any
such communication by giving ten (10) days prior
written notice of such change to the other party in the
manner prescribed in this Article 27.11.
27.12 Severability. If any provision of this Lease
proves to be illegal, invalid, or unenforceable, the
remainder of this Lease will not be affected by such
finding, and in lieu of each provision of this Lease
that is illegal, invalid, or unenforceable a provision
will be added as a part of this Lease as similar in
terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid, and
enforceable.
27.13 Written Amendment Required. No amendment,
alteration, modification of, or addition to the Lease
will be valid or binding unless expressed in writing
and signed by Landlord and Tenant. Tenant agrees to
make any modifications of the terms and provisions of
this Lease required or requested by any lending
institution providing financing for the Building, or
project, as the case may be, provided that no such
modifications will materially adversely affect Tenant's
rights and obligations under this Lease.
27.14 Entire Agreement. This Lease, the exhibits
and addenda, if any, contain the entire agreement
between Landlord and Tenant. No promises or
representations, except as contained in this Lease,
have been made to Tenant respecting the condition or
the manner of operating the Premises, the Building, or
the project.
27.15 Captions. The captions of the various
articles and sections of this Lease are for convenience
only and do not necessarily define, limit, describe, or
construe the contents of such articles and sections.
27.16 Notice of Landlord's Default. In the event of
any alleged default in the obligation of Landlord under
this Lease, Tenant will deliver to Landlord written
notice listing the reasons for Landlord's default and
Landlord will have thirty (30) days following receipt
of such notice to cure such alleged default or, in the
event the alleged default cannot reasonably be cured
within a thirty (30)-day period, to commence action and
proceed diligently to cure such
<PAGE>
alleged default. A copy of such notice to Landlord will
be sent to any holder of a mortgage or other
encumbrance on the Building or project of which Tenant
has been notified in writing, and any such holder will
also have the same time periods to cure such alleged
default.
27.17 Authority. Tenant and the party executing
this Lease on behalf of Tenant represent to Landlord
that such party is authorized to do so by requisite
action of the board of directors or partners, as the
case may be, and agree upon request to deliver to
Landlord a resolution or similar document to that
effect.
27.18 Brokers. Landlord and Tenant respectively
represent and warrant to each other that neither of
them has consulted or negotiated with any broker or
finder with regard to the Premises except the Broker
named in Article 1.1(q), if any. Each of them will
indemnify the other against and hold the other harmless
from any claims, demands, actions, liabilities,
damages, costs and expenses (including reasonable
attorneys' fees), fees or commissions arising from
either:
(a) A claim for a fee or commission made by any
broker other than the Broker claiming to have acted by
or on behalf of Tenant in connection with the Lease; or
(b) A claim of, or right to, lien under the
Statutes of the state of Kansas relating to real estate
broker liens, with respect to any such broker other
than the Broker.
27.19 Governing Law. This Lease will be governed by
and construed pursuant to the laws of the state of
Kansas.
27.20 No Easements for Air or Light. Any diminution
or shutting off of light, air, or view by any structure
that may be erected on lands adjacent to the Building
will in no way affect this Lease or impose any
liability on Landlord.
27.21 Tax Credits. Landlord is entitled to claim
all tax credits and depreciation attributable to
leasehold improvements in the Premises. Promptly after
Landlord's demand, Landlord and Tenant will prepare a
detailed list of the leasehold improvements and
fixtures and their respective costs for which Landlord
or Tenant has paid. Landlord will be entitled to all
credits and depreciation for those items for which
Landlord has paid by means of any Tenant finish
allowance or otherwise. Tenant will be entitled to any
tax credits and depreciation for all items for which
Tenant has paid with funds not provided by Landlord.
27.22 Relocation of the Premises. Intentionally
deleted.
27.23 Financial Reports. Not more than once during
any calendar year and within fifteen (15) days after
Landlord's request, Tenant will furnish Tenant's most
recent audited financial statements (including any
notes to them) to Landlord, or, if no such audited
statements have been prepared, such other financial
statements (and notes to them) as may have been
prepared by an independent certified public accountant
in accordance with generally accepted accounting
principles. Landlord will not disclose any aspect of
Tenant's financial statements that Tenant designates to
Landlord as confidential except (a) to Landlord's
<PAGE>
lenders or prospective purchasers of the Building or
project, (b) in litigation between Landlord and Tenant,
and (c) if required by court order.
27.24 Landlord's Fees. Whenever Tenant requests
Landlord to take any action or give any consent
required or permitted under this Lease, Tenant will
reimburse Landlord for all of Landlord's reasonable
costs incurred in reviewing the proposed action or
consent, including without limitation reasonable
attorneys', engineers' or architects' fees, within ten
(10) days after Landlord's delivery to Tenant of a
statement of such costs. Tenant will be obligated to
make such reimbursement without regard to whether
Landlord consents to any such proposed action.
27.25 Binding Effect. The covenants, conditions,
and agreements contained in this Lease will bind and
inure to the benefit of Landlord and Tenant and their
respective heirs, distributees, executors,
administrators, successors, and, except as otherwise
provided in this Lease, their assigns.
28.26 Attorney's Fees. If either Landlord or Tenant
commences, engages in, or threatens to commence or
engage in any legal action or proceeding against the
other party (including, without limitation, litigation
or arbitration) arising of or in connection with the
Lease, the Premises, or the Building (including,
without limitation a) the enforcement or interpretation
of either party's rights or obligations under this
Lease (whether in contract, tort, or both) or b) the
declaration of any rights or obligations under this
Lease), the prevailing party shall be entitled to
recover from the losing party reasonable attorney's
fees, together with any costs and expenses, incurred in
any such action or proceeding, including any attorney's
fees , costs, and expenses incurred on collection and
on appeal.
28.27 Landlord and Tenant are parties to that
certain Office Lease dated September 24, 1994, which
was amended by First Amendment to Lease dated March 2,
1995, and Second Amendment to Lease dated May 15, 1996,
relating to the Premises (the "Original Lease"). This
Lease supersedes the Original Lease, and upon its
expiration the Original Lease shall be of no force and
effect.
Landlord and Tenant have executed this Lease as of
the day and year first above written.
VANGUARD AIRLINES, INC.
Date: July 15, 1999
By: /s/ Brian S. Gillman
Printed Name: Brian S. Gillman
Its: Vice President and General Counsel
THE GERSON COMPANY
Date: July 15, 1999
By: /s/ John C. Hjalmarson
Printed Name: John C. Hjalmarson
Its: Co-President
<PAGE>
EXHIBIT A
THE PREMISES
<PAGE>
EXHIBIT B
LEGAL DESCRIPTION OF THE LAND
7000 Squibb Road
All that part of the SW 1/4 of Section 8, Township 12,
Range 25, now in the City of Mission, Johnson County,
Kansas, more particularly described as follows:
Commencing at the Southwest corner of the SW 1/4 of
said Section 8; thence N 0 degrees E along the West
line of the SW 1/4 of the SW 1/4 of said Section 8 a
distance of 861.27 feet; thence N 90 degrees E a
distance of 138.36 feet, to a point on the Easterly
right-of-way line of U.S. Highway No. 69, as now
established and 464.50 feet South of the North line of
the SW 1/4 of the SW 1/4 of said Section 8, said point
also being the true point of beginning of subject
tract; thence S 89 degrees 45' 11" E along a line
464.50 feet South and parallel to the North line of the
SW 1/4 of the SW 1/4 of said Section 8, a distance of
418.32 feet; thence S 0 degrees 14" 49" W along a line
perpendicular to the last described course a distance
of 332.82 feet; thence S 22 degrees 32' 54" W a
distance of 192.22 feet to a point on the Northerly
rightof-way line of U.S. Highway No. 50, as now
established; thence N 67 degrees 27' 06" W along the
Northerly right-of-way line of said U.S. Highway No. 50
a distance of 360 feet, to a point on the Easterly
right-ofway line of said U.S. Highway No. 69; thence N
1 degree 38' 14" W along the Easterly right-of-way line
of said U.S. Highway No. 69 a distance of 374.25 feet,
to the true point of beginning of subject tract
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
1. Landlord may from time to time adopt appropriate
systems and procedures for the security or safety of
the Building, any persons occupying, using, or entering
the Building, or any equipment, finishings, or contents
of the Building, and Tenant will comply with Landlord's
reasonable requirements relative to such systems and
procedures.
2. The sidewalks, halls, passages, exits, entrances,
elevators, and stairways of the Building will not be
obstructed by Tenant or used by any of them for any
purpose other than for ingress to and egress from their
respective Premises. The halls, passages, exits
entrances, elevators, escalators, and stairways are not
for the general public, and Landlord will in all cases
retain the right to control access to such halls,
passages, exits, entrances, elevators, and stairways of
all persons whose presence in the judgment of Landlord
would be prejudicial to the safety, character,
reputation, and interests of the Building and its
Tenants, provided that nothing contained in these rules
and regulations will be construed to prevent such
access to persons with whom any Tenant normally deals
in the ordinary course of its business, unless such
persons are engaged in illegal activities. No Tenant
and no employee or invitee of any Tenant will go upon
the roof of the Building. No Tenant will be permitted
to place or install any object (including without
limitation radio and television antennas, loudspeakers,
sound amplifiers, microwave dishes, solar devices or
similar devices) on the exterior of the Building or on
the roof of the Building.
3. No sign, placard, picture, name, advertisement, or
written notice visible from the exterior of Tenant's
Premises will be inscribed, painted, affixed, or
otherwise displayed by Tenant on any part of the
Building or the Premises without the prior written
consent of Landlord. Landlord will adopt and furnish to
Tenant general guidelines relating to signs inside the
Building on the office floors. Tenants agrees to
conform to such guidelines. All approved signs or
lettering on doors will be printed, painted, affixed,
or inscribed at the expense of the Tenant by a person
approved by Landlord. Other than draperies expressly
permitted by Landlord and Building standard mini-
blinds, material visible from outside the Building will
not be permitted. In the event of the violation of this
rule by Tenant, Landlord may remove the violating items
without any liability, and may charge the expense
incurred by such removal to the Tenant or Tenants
violating this rule.
4. No cooking will be done or permitted by any Tenant
on the Premises, except in the areas of the Premises
which are specially constructed for cooking and except
that use by the Tenant of microwave ovens and
Underwriters' Laboratory approved equipment for brewing
coffee, tea, hot chocolate, and similar beverages will
be permitted, provided that such use is in accordance
with all applicable federal, state and city laws,
codes, ordinances, rules, and regulations.
5. No Tenant will employ any person or persons other
than the cleaning service of Landlord for the purpose
<PAGE>
of cleaning the Premises, unless otherwise agreed to
by Landlord in writing. Except with the written consent
of Landlord, no person or persons other than those
approved by Landlord will be permitted to enter the
Building for the purpose of cleaning it. No Tenant will
cause any unnecessary labor by reason of such Tenant's
carelessness or indifference in the preservation of
good order and cleanliness. Should Tenant's actions
result in any increased expense for any required
cleaning, Landlord reserves the right to assess Tenant
for such expenses.
6. The toilet rooms, toilets, urinals, wash bowls and
other plumbing fixtures will not be used for any
purposes other than those for which they were
constructed, and no sweepings, rubbish, rags, or other
foreign substances will be thrown in such plumbing
fixtures. All damages, resulting from any misuse to the
fixtures will be borne by the Tenant who, or whose
servants, employees, agents, visitors, or licensees,
caused the same.
7. No Tenant will in any way deface any part of the
Premises or the Building of which they form a part. In
those portions of the Premises where carpet has been
provided directly or indirectly by Landlord, Tenant
will at its own expense install and maintain pads to
protect the carpet under all furniture having casters
other than carpet casters.
8. No Tenant will alter, change, replace, or re-key
any lock or install an new lock or a knocker on any
door of the Premises. Landlord, its agents, or
employees will retain a pass (master) key too all door
locks on the Premises. Any new door locks required by
Tenant or any change in keying of existing locks will
be installed or changed by Landlord following Tenant's
written request to Landlord and will be at Tenant's
expense. All new locks and re-keyed locks will remain
operable by Landlord's pass (master) key. Landlord will
furnish each Tenant, free of charge, with two (2) keys
to each door lock on the Premises and two (2) Building
access keys. Landlord will have the right to collect a
reasonable charge for additional keys requested by any
Tenant. Each Tenant, upon termination of its tenancy,
will deliver to Landlord all keys and access cards for
the Premises and Building that have been furnished to
such Tenant.
9. The elevator designated for freight by Landlord
will be available for use by all Tenants in the
Building during the hours and pursuant to such
procedures as Landlord may determine from time to time.
The persons employed to move Tenant's equipment,
material, furniture, or other property in or out of the
Building must be acceptable to Landlord. The moving
company must be a locally recognized professional
mover, whose primary business is the performing of
relocation services, and must be bonded and fully
insured. A certificate or other verification of such
insurance must be received and approved by Landlord
prior to the start of any moving operations. Insurance
must be sufficient, in Landlord's sole opinion, to
cover all personal liability, theft or damage to the
Building, including bur not limited to floor coverings,
doors, walls, elevators, stairs, foliage, and
landscaping. Special care must be taken to prevent
damage to foliage and landscaping during adverse
weather. All moving operations will be conducted at
such times and in such a manner as Landlord will
direct, and all moving will take place during
nonbusiness hours unless Landlord agrees in writing
otherwise. Tenant will be responsible for the provision
of Building security during all moving operations, and
will be liable for all losses and
<PAGE>
damages sustained by any party as a result of the
failure to supply adequate security. Landlord will have
the right to prescribe the weight, size, and position
of all equipment, materials, furniture, or other
property brought into the Building. Heavy objects will,
if considered necessary by Landlord, stand on wood
strips of such thickness as is necessary to properly
distribute the weight. Landlord will not be responsible
for loss of or damage to any such property from any
cause, and all damage done to the Building by moving or
maintaining such property will be repaired at the
expense of Tenant. Landlord reserves the right to
inspect all such property which violates any of these
rules and regulations or the Lease of which these rules
and regulations are a part. Supplies, goods, materials,
packages, furniture, and all other items of every kind
delivered to or taken from the Premises will be
delivered or removed through the entrance and route
designated by Landlord, and Landlord will not be
responsible for the loss or damage of any such property
unless such loss or damage results from the negligence
of Landlord, its agents, or employees.
10. No Tenant will use or keep in the Premises or the
Building any kerosene, gasoline, or inflammable or
combustible or explosive fluid or material or chemical
substance other than the limited quantities of such
materials or substances reasonable necessary for the
operation and maintenance of office equipment or
limited quantities of cleaning fluids and solvents
required in Tenant's normal operations in the Premises.
Without Landlord's prior written approval, no Tenant
will use any method of heating or air conditioning
other than that supplied by Landlord. No Tenant will
use or keep or permit to be used or kept any foul or
noxious gas or substance in the Premises.
11. Landlord will have the right, exercisable upon
written notice and without liability to Tenant, to
change the name and street address of the Building,
provided however, Tenant shall have the option to
terminate this Lease if the name of the Building is
changed to refer to a competitor of Tenant.
12. Landlord will have the right to prohibit any
advertising by Tenant mentioning the Building that, in
Landlord's reasonable opinion, tends to impair the
reputation of the Building or its desirability as a
Building for offices, and upon written notice from
Landlord, Tenant will refrain from or discontinue such
advertising.
13. Tenant will not bring any animals (except "Seeing
Eye' dogs) or birds into the Building, and will not
permit bicycles or other vehicles inside or on the
sidewalks outside the Building except in areas
designated from time to time by Landlord for such
purposes.
14. All persons entering or leaving the Building
between the hours of 6 p.m. and 7 a.m. Monday though
Friday, and at all hours on Saturdays, Sundays, and
holidays will comply with such off-hours regulations as
Landlord may establish and modify from time to time.
Landlord reserves the right to limit reasonable or
restrict access to the Building during such time
periods.
15. Each Tenant will store all its trash and garbage
within the Premises. No materials will be placed in the
trash boxes or receptacles if such material is of such
nature that it may not be disposed of in the ordinary
and customary manner of removing and disposing of trash
and garbage without being in violation of any law or
ordinance governing such disposal. All garbage and
refuse disposal will be made only through entryways and
elevators provided for such purposes and at such times
as Landlord designates. Removal of any furniture or
furnishings, large equipment, packing crates, packing
materials, and boxes will be the responsibility of each
Tenant and such items may not be disposed of in the
Building trash receptacles nor will they be removed by
the Building's janitorial service, except at Landlord's
sole option and at the Tenant's expense. No furniture,
appliances, equipment, or flammable products of any
type may be disposed of in the Building trash
receptacles.
<PAGE>
16. Canvassing, peddling, soliciting, and
distributing handbills or any other written materials
in the Building are prohibited, and each Tenant will
cooperate to prevent the same.
17. The requirements of the Tenants will be attended
to only upon application by written, personal, or
telephone notice at the office of the Building.
Employees of Landlord will not perform any work or do
anything outside of their regular duties unless under
special instructions from Landlord.
18. A directory of the Building will be provided for
the display of the name and location of Tenants only
and such reasonable number of the principal officers
and employees of Tenant as Landlord in its sole
discretion approves, but Landlord will not in any event
be obligated to furnish more than one (1) directory
strip for each 2,500 square feet of rentable area in
the Premises. Any additional name(s) that Tenant
desires to place in such directory must first be
approved by Landlord, and if so approved, Tenant will
pay to Landlord a charge, set by Landlord, for each
such additional name. All entries on the Building
directory display will conform to standards and style
set by Landlord in its sole discretion. Space on any
exterior signage will be provided in Landlord's sole
discretion. No Tenant will have any right to the use of
any exterior sign.
19. Tenant will see that the doors of the Premises
are closed and locked and that all water faucets, water
apparatus, and utilities are shut off before Tenant or
Tenant's employees leave the Premises, so as to prevent
the waste or damage, and for any default or
carelessness in this regard Tenant will make good all
injuries sustained by other Tenants or occupants of the
Building or Landlord. On multiple-tenancy floors, all
Tenants will keep the doors of the Building corridors
closed at all times except for ingress and egress.
20. Tenant will not conduct itself in any manner that
is inconsistent with the character of the Building as a
first quality building or that will impair the comfort
and convenience of other Tenants in the Building.
21. Neither Landlord nor any operator of the parking
areas within the project, as the same are designated
and modified by Landlord, in its sole discretion, from
time to time (the "parking areas") will be liable for
loss of or damage to any vehicle or any contents of
such vehicle or accessories to any such vehicle, or any
property left in any of the parking areas, resulting
from fire, theft, vandalism, accident, conduct of other
users of the parking areas and other persons, or any
other casualty or cause. Further, Tenant understands
and agrees that: (a) Landlord will not be obligated to
provide any traffic control,
<PAGE>
security protection or operator for the parking areas;
(b) Tenant uses the parking areas at its own risk; and
(c) Landlord will not be liable for personal injury or
death, or theft, loss of, or damage to property.
22. Tenant (including Tenant's employees, agents,
invitees, and visitors) will use the parking spaces
solely for the purposes of parking passenger model
cars, small vans, and small trucks and will comply in
all respects with any rules and regulations that may be
promulgated by Landlord from time to time with respect
to the parking areas. The parking areas may be used by
Tenant, its agents, or employees, for occasional
overnight parking of vehicles. Tenant will ensure that
any vehicle parked in any of the parking spaces will be
kept in proper repair and will not leak excessive
amounts of oil or grease or any amount of gasoline. If
any of the parking spaces are at any time used (a) for
any purpose other than parking as provided above; (b)
in any way or manner reasonably objectionable to
Landlord; or (c) by Tenant after default by Tenant
under the Lease, Landlord, in addition to any other
rights otherwise available to Landlord, may consider
such default an event of default under the Lease.
23. Tenant's right to use the parking areas will be
in common with other Tenants of the project and with
other parties permitted by Landlord to use the parking
areas. Landlord reserves the right to assign and
reassign, from time to time, particular parking spaces
for use by persons selected by Landlord, provided that
Tenant's rights under the Lease are preserved. Landlord
will not be liable to Tenant for any unavailability of
Tenant's designated spaces, if any, nor will any
unavailability entitle Tenant to any refund, deduction,
or allowance. Tenant will not park in any numbered
space or any space designated as: RESERVED,
HANDICAPPED, VISITORS ONLY, or LIMITED TIME PARKING (or
similar designation).
24. If the parking areas are damaged or destroyed, or
if the use of the parking areas is limited or
prohibited by any governmental authority, or the use or
operation of the parking areas is limited or prevented
by strikes or other labor difficulties or other causes
beyond Landlord's control, Tenant's inability to use
the parking spaces will not subject Landlord or any
operator of the parking areas to any liability to
Tenant and will not relieve Tenant of any of its
obligations under the Lease and the Lease will remain
in full force and effect.
25. Tenant has no right to assign or sublicense any
of its rights in the parking spaces, except as part of
a permitted assignment or sublease of the Lease;
however, Tenant may allocate the parking spaces among
its employees.
26. Tenant may not repair (except for emergency
repairs necessary for removal of the vehicle), wash or
detail automobiles in the parking areas.
27. No act or thing done or omitted to be done by
Landlord or Landlord's agent during the Lease Term of
the Lease in connection with the enforcement of these
rules and regulations will constitute an eviction by
Landlord if any Tenant nor will it be deemed an
acceptance of surrender of the Premises by any Tenant,
and no agreement to accept such termination or
surrender will be valid unless in a writing signed by
Landlord. The delivery of keys to any employee or agent
of Landlord will not operate as a termination of
<PAGE>
the Lease or a surrender of the Premises unless such
delivery of keys is done in connection with a written
instrument executed by Landlord approving the
termination or surrender.
28. In these rules and regulations, Tenant includes
the employees, agents, invitees, and licensees of
Tenant and others permitted by Tenant to use or occupy
the Premises.
29. Landlord may waive any one or more of these rules
and regulations for the benefit of any particular
Tenant or Tenants, but no such waiver by Landlord will
be construed as a waiver of such rules and regulations
in favor of any other Tenant or Tenants, nor prevent
Landlord from enforcing any such rules and regulations
against any or all of the Tenants of the Building after
such waiver.
30. These rules and regulations are in addition to,
and will not be construed to modify or amend, in whole
or in part, the terms, covenants, agreements, and
conditions of the Lease.
<PAGE>
EXHIBIT D
WORKLETTER AGREEMENT
LANDLORD: THE GERSON COMPANY
TENANT: VANGUARD AIRLINES, INC.
This Workletter Agreement (Agreement) supplements that
certain Lease by and between Landlord and Tenant, with
the terms defined in the Lease to have the same
definition where used herein.
1. Provided Tenant is not in default of the Lease,
Landlord shall provide Tenant with a tenant finish
allowance ("Tenant Improvement Allowance") of up to
27,564.00 dollars (i.e. 3.00 dollars per rentable
square foot of the Premises) to improve the Premises.
Any improvements or modifications to the
Premises that exceed 27,564.00 dollars
shall be at Tenant's expense. Tenant shall have the
option to construct said improvements and Landlord will
reimburse Tenant for the costs thereof, up to, but not
exceeding the Tenant Improvement Allowance. Landlord
will release the Tenant Improvement allowance no later
than thirty (30) days following the end of the month
when Tenant presents copies of invoices and evidence of
payment thereof. Tenant shall have the right to
commence completion of the improvements and effect
completion prior to October 15, 1999.
2. All finished work shall require the installation of
new materials in quality equal to or greater than
Building Standard materials. Such work shall be done in
compliance with the following:
(a) No such work shall proceed without Landlord's
prior approval of:
(1) Tenant's contractor
(2) certificates of insurance for public liability,
automobile liability and property damage, and workmen's
compensation as required, endorsed to show Landlord as
an additional insured; and
(3) detailed plans and specifications for such
work.
(b) All such work shall be done in compliance with
all applicable building codes and regulations. Any work
not acceptable to any governmental authority having
jurisdiction over such work, or not reasonably
satisfactory to Landlord, shall be promptly replaced at
Tenant's expense. Notwithstanding any failure to object
to such work, Landlord shall have no responsibility
therefor.
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 25, 2000, 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, 1999.
Ernst & Young LLP
Kansas City, Missouri
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,440,684
<SECURITIES> 0
<RECEIVABLES> 1,391,515
<ALLOWANCES> (96,000)
<INVENTORY> 1,321,047
<CURRENT-ASSETS> 16,243,650
<PP&E> 21,972,101
<DEPRECIATION> (11,122,590)
<TOTAL-ASSETS> 37,703,168
<CURRENT-LIABILITIES> 30,954,850
<BONDS> 0
0
302
<COMMON> 17,108
<OTHER-SE> 1,660,452
<TOTAL-LIABILITY-AND-EQUITY> 37,703,168
<SALES> 125,080,735
<TOTAL-REVENUES> 125,080,735
<CGS> 130,102,510
<TOTAL-COSTS> 130,102,510
<OTHER-EXPENSES> 109,823
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,865
<INCOME-PRETAX> (5,148,463)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,148,463)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,148,463)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
