<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
-------------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------------------- -----------------------
Commission file number 0-15621
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American Income 5 Limited Partnership
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2917026
- ----------------------------------- -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 N. Washington St., Fifth Floor, Boston, MA 02114
- ------------------------------------------------ -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
------------------------------
Securities registered pursuant to Section 12(b) of the Act NONE
----------------------
Title of each class Name of each exchange on which registered
- ----------------------- ----------------------------------------------
- ----------------------- ----------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
71,295 Units Representing Limited Partnership Interest
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(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 XX No
----- ----
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. Not applicable. Securities are nonvoting for
this purpose. Refer to Item 12 for further information.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1995 (Part I and II)
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
(a) Documents filed as part of this report:
<C> <S>
(1) Financial Statements:............................................................................*
Report of Independent Auditors...................................................................*
Statement of Financial Position
at December 31, 1995 and 1994....................................................................*
Statement of Operations
for the years ended December 31, 1995, 1994 and 1993.............................................*
Statement of Changes in Partners' Capital
for the years ended December 31, 1995, 1994 and 1993.............................................*
Statement of Cash Flows
for the years ended December 31, 1995, 1994 and 1993.............................................*
Notes to the Financial Statements................................................................*
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K,
as set forth in Item 601 of Regulation S-K, are not
applicable.
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number
---------
<C> <S>
4 Amended and Restated Agreement and Certificate of
Limited Partnership included as Exhibit A to the
Prospectus which is included in Registration Statement
on Form S-1 (No. 33-1190).
13 The 1995 Annual Report to security holders, a copy of
which is furnished for the information of the
Securities and Exchange Commission. Such Report, except
for those portions thereof which are incorporated
herein by reference, is not deemed "filed" with the
Commission.
23 Consent of Independent Auditors.
99(a) Lease agreement with United Technologies
Corporation, was filed in the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1989 as Exhibit 28 (a) and is incorporated herein by
reference.
</TABLE>
* Incorporated herein by reference to the appropriate portion of the 1995
Annual Report to security holders for the year ended December 31, 1995. (See
Part II)
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
---------
<C> <S>
99 (b) Lease agreement with Northwest Airlines, Inc., was
filed in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1989 as Exhibit 28 (b)
and is incorporated herein by reference.
99 (c) Lease agreement with Comair Inc., was filed in the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 and is included herein.
</TABLE>
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on behalf of the registrant and in the
capacity and on the date indicated.
AMERICAN INCOME 5 LIMITED PARTNERSHIP
By: AFG Leasing Associates II,
a Massachusetts general partnership and the
General Partner of the Registrant.
By: AFG Leasing Incorporated,
a Massachusetts corporation and
General Partner in such general partnership
By: /s/ Geoffrey A. MacDonald By: /s/ Gary D. Engle
------------------------------ ---------------------------
Geoffrey A. MacDonald Gary D. Engle
Chief Executive Officer, President and Chief Operating
Chairman, and a member of the Officer and member of the
Executive Committee of AFG and Executive Committee of AFG
President and a Director of the (Principal Financial Officer)
corporate General Partner
(Principal Executive Officer)
Date: April 9, 1996 Date: April 9, 1996
---------------------------- -------------------------
By: /s/ Gary M. Romano
------------------------------
Gary M. Romano
Vice President and Controller
of AFG and Clerk of the corporate General
Partner
(Principal Accounting Officer)
Date: April 9, 1996
----------------------------
<PAGE>
AMERICAN INCOME PERTNERS II
American Income 5 Limited Partnership
Annual Report to the Partners, December 31, 1995
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT TO THE PARTNERS
<TABLE>
<CAPTION>
Page
------
<S> <C>
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-5
FINANCIAL STATEMENTS:
Report of Independent Auditors 6
Statement of Financial Position
at December 31, 1995 and 1994 7
Statement of Operations
for the years ended December 31, 1995, 1994 and 1993 8
Statement of Changes in Partners' Capital
for the years ended December 31, 1995, 1994 and 1993 9
Statement of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 10
Notes to the Financial Statements 11-18
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 19
Statement of Cash and Distributable
Cash From Operations, Sales and Refinancings 20
Schedule of Costs Reimbursed to the General Partner and its
Affiliates as Required by Section 9.4 of the Amended and
Restated Agreement and Certificate of Limited Partnership 21
</TABLE>
-1-
<PAGE>
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the five years in the period ended December 31, 1995:
<TABLE>
<CAPTION>
Summary of
Operations 1995 1994 1993 1992 1991
- -------------------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Lease revenue $ 1,344,928 $ 1,620,482 $ 1,667,341 $ 1,959,679 $ 3,033,909
Net income (loss) $ 236,296 $ 518,222 $ 521,698 $ 228,943 $ (198,802)
Per Unit:
Net income (loss) $ 3.28 $ 7.20 $ 7.24 $ 3.18 $ (2.76)
Cash distributions $ 12.50 $ 20.63 $ 24.37 $ 27.50 $ 33.75
<CAPTION>
Financial
Position
- --------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 3,194,081 $ 4,136,773 $ 5,952,418 $ 7,255,173 $ 9,613,256
Total long-term
obligations $ 82,037 $ 356,174 $ 1,113,947 $ 1,143,421 $ 1,592,732
Partners' capital $ 2,657,119 $ 3,321,012 $ 4,288,101 $ 5,521,771 $ 7,273,244
</TABLE>
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1995 compared to the year
ended December 31, 1994 and the year ended December 31, 1994
compared to the year ended December 31, 1993
Overview
- --------
As an equipment leasing partnership, American Income 5 Limited
Partnership (the "Partnership") was organized to acquire a diversified portfolio
of capital equipment subject to lease agreements with third parties. The
Partnership was designed to progress through three principal phases:
acquisitions, operations, and liquidation. During the operations phase, a period
of approximately six years, all equipment in the Partnership's portfolio
progresses through various stages. Initially, all equipment generates rental
revenues under primary term lease agreements. During the life of the
Partnership, these agreements expire on an intermittent basis and equipment held
pursuant to the related leases are renewed, re-leased or sold, depending on
prevailing market conditions and the assessment of such conditions by American
Finance Group ("AFG") to obtain the most advantageous economic benefit. Over
time, a greater portion of the Partnership's original equipment portfolio
becomes available for remarketing and cash generated from operations and from
sales or refinancings begins to fluctuate. Ultimately, all equipment will be
sold and the Partnership will be dissolved. In accordance with the Partnership's
stated investment objectives and policies, the General Partner is considering
the winding-up of the Partnership's operations, including the liquidation of its
entire portfolio. The Partnership's operations commenced in 1986.
Results of Operations
- ---------------------
For the year ended December 31, 1995, the Partnership recognized lease
revenue of $1,344,928 compared to $1,620,482 and $1,667,341 for the years ended
December 31, 1994 and 1993, respectively. The decrease in lease revenue between
1993 and 1995 was expected and resulted principally from primary and renewal
lease term expirations and the sale of equipment. The Partnership also earns
interest income from temporary investments of rental receipts and equipment
sales proceeds in short-term instruments.
The Partnership's equipment portfolio includes certain assets in which
the Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by AFG or an affiliated equipment leasing program
sponsored by AFG. Proportionate equipment ownership enables the Partnership to
further diversify its equipment portfolio by participating in the ownership of
selected assets, thereby reducing the general levels of risk which could result
from a concentration in any single equipment type, industry or lessee. The
Partnership and each affiliate individually report, in proportion to their
respective ownership interests, their respective shares of assets, liabilities,
revenues, and expenses associated with the equipment.
In 1995, the Partnership sold equipment which had been fully depreciated
to existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $42,450 compared to a net gain in 1994 of
$75,189 on equipment which had been fully depreciated and a net gain in 1993 of
$139,518 on equipment having a net book value of $47,525.
It cannot be determined whether future sales of equipment will result in
a net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including AFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. AFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
-3-
<PAGE>
The total economic value realized upon final disposition of each asset
is comprised of all primary lease term revenue generated from that asset,
together with its residual value. The latter consists of cash proceeds realized
upon the asset's sale in addition to all other cash receipts obtained from
renting the asset on a re-lease, renewal or month-to-month basis. The
Partnership classifies such residual rental payments as lease revenue.
Consequently, the amount of gain or loss reported in the financial statements is
not necessarily indicative of the total residual value achieved from leasing the
equipment.
Depreciation expense was $1,004,179, $1,004,180 and $1,073,171 for the
years ended December 31, 1995, 1994 and 1993, respectively. For financial
reporting purposes, to the extent that an asset is held on primary lease term,
the Partnership depreciates the difference between (i) the cost of the asset and
(ii) the estimated residual value of the asset at the date of primary lease
expiration on a straight-line basis over such term. To the extent that equipment
is held beyond its primary lease term, the Partnership continues to depreciate
the remaining net book value of the asset on a straight-line basis over the
asset's remaining economic life (See Note 2 to the financial statements herein.)
Interest expense was $13,598 or 1% of lease revenue in 1995, $54,762 or
3.4% of lease revenue in 1994, and $72,724 or 4.4% of lease revenue in 1993. In
the future, interest expense will be minimal due to the scheduled maturity of
the Partnership's debt obligation in 1996.
Management fees were 5% of lease revenue in each of the years ended
December 31, 1995, 1994 and 1993 and will not change as a percentage of lease
revenue in future years.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. In certain cases, equipment storage or
repairs and maintenance costs may be incurred in connection with equipment being
remarketed. Collectively, operating expenses represented approximately 5.8%,
3.8% and 4.5% of lease revenue in 1995, 1994 and 1993, respectively. The amount
of future operating expenses cannot be predicted with certainty; however, such
expenses are usually higher during the acquisition and liquidation phases of a
partnership. Other fluctuations typically occur in relation to the volume and
timing of remarketing activities.
Liquidity and Capital Resources and Discussion of Cash Flows
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity which was
established for specific purposes described in the preceding "Overview". As an
equipment leasing program, the Partnership's principal operating activities
derive from asset rental transactions. Accordingly, the Partnership's principal
source of cash from operations is provided by the collection of periodic rents.
These cash inflows are used to satisfy debt service obligations associated with
leveraged leases, and to pay management fees and operating costs. Operating
activities generated net cash inflows of $1,157,226, $1,586,061, and $1,445,162
in 1995, 1994 and 1993, respectively. Future renewal, re-lease and equipment
sale activities will cause a gradual decline in the Partnership's lease revenues
and corresponding sources of operating cash. Overall, expenses associated with
rental activities, such as management fees, and net cash flow from operating
activities will decline as the Partnership experiences a higher frequency of
remarketing events.
During 1995, the Partnership and other affiliated partnerships, executed
a renegotiated and extended lease agreement in connection with two DC-10-40
aircraft leased by Northwest Airlines, Inc. ("Northwest"). Pursuant to the
agreement, Northwest will continue to lease these aircraft until September 3,
2000. The Partnership, which has a proportionate ownership interest of
approximately 18% in these aircraft, will receive approximately $540,000 each
year through December 31, 1999 and approximately $405,000 during the year ending
December 31, 2000. Additionally, the lease agreement in connection with a SAAB
SF340A aircraft, in which the Partnership has a 26.9% ownership interest, is
scheduled to expire in June 1996. The Partnership's proportionate interest in
the aircraft had a cost and net book value of $2,254,723 and $492,575,
respectively, at December 31, 1995. The General Partner is actively pursuing the
remarketing of this aircraft.
-4-
<PAGE>
Ultimately, the Partnership will dispose of all assets under lease. This
will occur principally through sale transactions whereby each asset will be sold
to the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection of
stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
Cash realized from asset disposal transactions is reported under
investing activities on the accompanying Statement of Cash Flows. During 1995,
the Partnership realized $42,450 in equipment sale proceeds compared to $75,189
and $187,043 in 1994 and 1993, respectively. Future inflows of cash from asset
disposals will vary in timing and amount and will be influenced by many factors
including, but not limited to, the frequency and timing of lease expirations,
the type of equipment being sold, its condition and age, and future market
conditions.
The Partnership obtained long-term financing in connection with certain
equipment leases. The origination of such indebtedness and the subsequent
repayments of principal are reported as components of financing activities. Cash
inflows of $341,373 in 1993 resulted from leveraging a portion of the
Partnership's equipment portfolio with third-party lenders. No leveragings of
equipment occurred in 1994 and 1995.
Each note payable is recourse only to the specific equipment financed
and to the minimum rental payments contracted to be received during the debt
amortization period (which period generally coincides with the lease rental
term). As rental payments are collected, a portion or all of the rental payment
is used to repay the associated indebtedness. The amount of cash used to repay
debt in 1994 increased in contrast to the prior year as a result of leveraging
obtained in 1993. The Partnership's notes payable will be fully amortized by
noncancellable rents in 1996.
Cash distributions to the General and Limited Partners are declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is presented as a component of financing
activities. For the year ended December 31, 1995, the Partnership declared total
cash distributions of Distributable Cash From Operations and Distributable Cash
From Sales and Refinancings of $900,189. In accordance with the Amended and
Restated Agreement and Certificate of Limited Partnership (the "Restated
Agreement, as amended"), the Limited Partners were allocated 99% of these
distributions, or $891,187, and the General Partner was allocated 1%, or $9,002.
The fourth quarter 1995 cash distribution was paid on January 22, 1996.
Cash distributions paid to the Limited Partners consist of both a return
of and a return on capital. To the extent that cash distributions consist of
Cash From Sales or Refinancings, substantially all of such cash distributions
should be viewed as a return of capital. Cash distributions do not represent and
are not indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date. Future market conditions, technological changes, the ability
of AFG to manage and remarket the assets, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's equipment portfolio.
The future liquidity of the Partnership will be influenced by the
foregoing and will be greatly dependent upon the collection of contractual rents
and the outcome of residual activities. The General Partner anticipates that
cash proceeds resulting from these sources will satisfy the Partnership's future
expense obligations. However, the amount of cash available for distribution in
future periods will fluctuate. Equipment lease expirations and asset disposals
will cause the Partnership's net cash from operating activities to diminish over
time; and equipment sale proceeds will vary in amount and period of realization.
In addition, the Partnership may be required to incur asset refurbishment or
upgrade costs in connection with future remarketing activities. Accordingly,
fluctuations in the level of quarterly cash distributions will occur during the
life of the Partnership.
-5-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Partners of American Income 5 Limited Partnership:
We have audited the accompanying statements of financial position of
American Income 5 Limited Partnership as of December 31, 1995 and 1994 and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 American Income 5
Limited Partnership at December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Partners is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
March 12, 1996
-6-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 244,878 $ 309,548
Rents receivable, net of allowance for
doubtful accounts of $20,000 19,700 --
Accounts receivable - affiliate 200,698 94,241
Equipment at cost, net of accumulated depreciation of
$10,098,320 and $9,749,836 at December 31, 1995
and 1994, respectively 2,728,805 3,732,984
------------ ------------
Total assets $ 3,194,081 $ 4,136,773
============ ============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 82,037 $ 356,174
Accrued interest 953 1,263
Accrued liabilities 20,000 15,500
Accrued liabilities - affiliate 5,954 4,328
Deferred rental income 247,980 168,438
Cash distributions payable to partners 180,038 270,058
------------ ------------
Total liabilities 536,962 815,761
------------ -----------
Partners' capital (deficit):
General Partner (129,850) (123,211)
Limited Partnership Interests
(71,295 Units; initial purchase
price of $250 each) 2,786,969 3,444,223
------------ -----------
Total partners' capital 2,657,119 3,321,012
------------ -----------
Total liabilities and partners' capital $ 3,194,081 $ 4,136,773
============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-7-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Income:
Lease revenue $ 1,344,928 $ 1,620,482 $ 1,667,341
Interest income 12,280 24,043 18,745
Gain on sale of equipment 42,450 75,189 139,518
-------------- -------------- --------------
Total income 1,399,658 1,719,714 1,825,604
-------------- -------------- --------------
Expenses:
Depreciation 1,004,179 1,004,180 1,073,171
Interest expense 13,598 54,762 72,724
Equipment management fees - affiliate 67,246 81,024 83,368
Operating expenses - affiliate 78,339 61,526 74,643
-------------- -------------- --------------
Total expenses 1,163,362 1,201,492 1,303,906
-------------- -------------- --------------
Net income $ 236,296 $ 518,222 $ 521,698
============== ============== ==============
Net income
per limited partnership unit $ 3.28 $ 7.20 $ 7.24
============== ============== ==============
Cash distributions declared
per limited partnership unit $ 12.50 $ 20.62 $ 24.37
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-8-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
General Limited Partners
Partner -------------------------------
Amount Units Amount Total
------------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 $ (101,203) 71,295 $ 5,622,974 $ 5,521,771
Net income - 1993 5,217 -- 516,481 521,698
Cash distributions declared (17,554) -- (1,737,814) (1,755,368)
------------- --------- ------------ -----------
Balance at December 31, 1993 (113,540) 71,295 4,401,641 4,288,101
Net income - 1994 5,182 -- 513,040 518,222
Cash distributions declared (14,853) -- (1,470,458) (1,485,311)
------------- --------- ------------ -----------
Balance at December 31, 1994 (123,211) 71,295 3,444,223 3,321,012
Net income - 1995 2,363 -- 233,933 236,296
Cash distributions declared (9,002) -- (891,187) (900,189)
------------- --------- ------------ -----------
Balance at December 31, 1995 $ (129,850) 71,295 $ 2,786,969 $ 2,657,119
============= ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-9-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ -------------- -------------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 236,296 $ 518,222 $ 521,698
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 1,004,179 1,004,180 1,073,171
Gain on sale of equipment (42,450) (75,189) (139,518)
Decrease in allowance for doubtful accounts -- (20,000) (12,000)
Changes in assets and liabilities
Decrease (increase) in:
rents receivable (19,700) 57,151 37,845
accounts receivable - affiliate (106,457) 57,453 (86,442)
Increase (decrease) in:
accrued interest (310) (36,506) (15,860)
accrued liabilities 4,500 (347) (6,653)
accrued liabilities - affiliate 1,626 (2,201) (9,406)
deferred rental income 79,542 83,298 82,327
------------ -------------- -------------
Net cash from operating activities 1,157,226 1,586,061 1,445,162
Cash flows from investing activities:
Proceeds from equipment sales 42,450 75,189 187,043
------------ -------------- -------------
Net cash from investing activities 42,450 75,189 187,043
------------ -------------- -------------
Cash flows from (used in) financing activities:
Proceeds from notes payable -- -- 341,373
Principal payments - notes payable (274,137) (757,773) (370,847)
Distributions paid (990,209) (1,620,338) (1,845,387)
------------ -------------- -------------
Net cash used in financing activities (1,264,346) (2,378,111) (1,874,861)
------------ -------------- -------------
Net decrease in cash and cash equivalents (64,670) (716,861) (242,656)
Cash and cash equivalents at beginning of year 309,548 1,026,409 1,269,065
------------ -------------- -------------
Cash and cash equivalents at end of year $ 244,878 $ 309,548 $ 1,026,409
============ ============== =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 13,908 $ 91,268 $ 88,584
============ ============== ==============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-10-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
December 31, 1995
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
- ---------------------------------------------
The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on April 15,
1986, for the purpose of acquiring and leasing to third parties a diversified
portfolio of capital equipment. Partners' capital initially consisted of
contributions of $1,000 each from the General Partner (AFG Leasing Associates
II) and the Initial Limited Partner (Daniel J. Roggemann). The General Partner
of the Partnership is wholly owned by American Finance Group ("AFG"), a
Massachusetts partnership and its Affiliates. On June 27, 1986, the Partnership
issued 71,295 limited partnership units to 1,491 Limited Partners, including
four Units purchased by the Initial Limited Partner. Initially, the General
Partner had the following five general partners: AFG Leasing Incorporated, a
Massachusetts corporation, Kestutis J. Makaitis, Daniel J. Roggemann, Martin F.
Laughlin and Geoffrey A. MacDonald. Messrs. Makaitis, Roggemann and Laughlin
subsequently elected to withdraw as Individual General Partners. The General
Partner is not required to make any other capital contributions except as may be
required under the Uniform Act and Section 6.1(c) of the Amended and Restated
Agreement and Certificate of Limited Partnership ("Restated Agreement, as
amended"). In accordance with the terms of the Restated Agreement, as amended,
AFG purchased 1,783 Units ($445,750) in the Partnership, representing 2.5% of
total capital contributions received by the Partnership. In 1995, AFG tendered
all of its units to Atlantic Acquisition Limited Partnership. (See Note 4
herein).
AFG is a successor to the business of American Finance Group, Inc., a
Massachusetts corporation engaged since its inception in 1980 in various aspects
of the equipment leasing business. In 1990, certain members of AFG's management,
principally Geoffrey A. MacDonald, Chief Executive Officer and co-founder of
AFG, established AFG Holdings (Massachusetts) Limited Partnership ("Holdings
Massachusetts") to acquire ownership and control of AFG. Holdings Massachusetts
effected this event by acquiring all of the equity interests of AFG's two
partners, AFG Holdings Illinois Limited Partnership ("Holdings Illinois") and
AFG Corporation. Holdings Massachusetts incurred significant indebtedness to
finance this acquisition, a significant portion of which was scheduled to mature
in 1995.
On December 16, 1994, the senior lender to Holdings Massachusetts (the
"Senior Lender") assumed control of its security interests in Holdings Illinois
and AFG Corporation and sold all such interests to GDE Acquisitions Limited
Partnership, a Massachusetts limited partnership owned and controlled entirely
by Gary D. Engle, President and member of the Executive Committee of AFG. As a
result of this transaction, GDE Acquisitions Limited Partnership acquired all of
the assets, rights and obligations of AFG from the Senior Lender and assumed
control of AFG. Geoffrey A. MacDonald remains as Chief Executive Officer of AFG
and member of its Executive Committee.
Significant operations commenced June 30, 1986 when the Partnership made
its initial equipment purchase. Pursuant to the Restated Agreement, as amended,
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings will be allocated 99% to the Limited Partners and 1% to the General
Partner until Payout and 85% to the Limited Partners and 15% to the General
Partner after Payout. Payout will occur when the Limited Partners have received
distributions equal to their original investment plus a cumulative annual return
of 10% (compounded daily) on undistributed invested capital.
Under the terms of a Management Agreement between the Partnership and
AFG, management services are provided by AFG to the Partnership at fees which
the General Partner believes to be competitive for similar services. (Also see
Note 4.)
-11-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Statement of Cash Flows
- -----------------------
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. Under the terms of the
agreements, title to the underlying securities passes to the Partnership. The
securities underlying the agreements are book entry securities.
Revenue Recognition
- -------------------
Rents are payable to the Partnership monthly, quarterly or semi-annually
and no significant amounts are calculated on factors other than the passage of
time. The leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. Future minimum rents of
$3,644,556 are due as follows:
<TABLE>
<S> <C>
For the year ending December 31, 1996 $ 831,027
1997 765,294
1998 765,294
1999 765,294
2000 517,647
------------
Total $ 3,644,556
============
</TABLE>
Future minimum rents include lease revenue to be generated from a
renegotiated and extended renewal agreement with Northwest Airlines, Inc. The
renewal agreement will generate annual rental income to the Partnership of
approximately $540,000 each year through December 31, 1999, and approximately
$405,000 during the year ended December 31, 2000.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during each of the past three years is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Northwest Airlines, Inc. $ 799,020 $ 928,800 $ 883,440
United Technologies Corporation $ 342,995 $ 422,374 $ 425,923
Comair, Inc. $ 143,325 -- --
</TABLE>
During 1995, the renewal lease agreement with United Technologies
Corporation ("United Technologies"), scheduled to expire on December 15, 1996,
was renegotiated to extend the renewal period through December 15, 2000. United
Technologies leases two flight simulators which are owned in a trust between the
Partnership and other affiliated partnerships. The Partnership owns
approximately 28% of these assets at an original cost of approximately
$4,609,000. Rents due under the renegotiated lease are $795,500 per year
beginning December 16, 1995. The Partnership's pro-rata share of these rents is
$225,294 per year. At the end of the renewal period, the lessee has the option
to purchase the equipment for $345,900, with the Partnership's share of these
proceeds being $97,962.
-12-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
At December 31, 1993, the General Partner lowered the aggregate amount
reserved against potentially uncollectable rents to $40,000. This resulted in an
increase in lease revenue of $12,000 in 1993. During 1994, this reserve was
further reduced to $20,000 resulting in an increase in lease revenue of $20,000.
This reserve was reviewed and considered adequate as of December 31, 1995. It
cannot be determined whether the Partnership will recover any past due rents in
the future; however, the General Partner will pursue the collection of all such
items.
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Equipment on Lease
- ------------------
All equipment was acquired from AFG, one of its affiliates, including
other equipment leasing programs sponsored by AFG, or from third-party sellers.
Equipment cost represents asset base price plus acquisition fees and was
determined in accordance with the Restated Agreement, as amended, and certain
regulatory guidelines. Asset base price is affected by the relationship of the
seller to the Partnership as summarized herein. Where the seller of the
equipment was AFG or an affiliate, asset base price was the lower of (i) the
actual price paid for the equipment by AFG or the affiliate plus all actual
costs accrued by AFG or the affiliate while carrying the equipment less the
amount of all rents earned by AFG or the affiliate prior to selling the
equipment or (ii) fair market value as determined by the General Partner in its
best judgment, including all liens and encumbrances on the equipment and other
actual expenses. Where the seller of the equipment was a third party who did not
manufacture the equipment, asset base price was the lower of (i) the price
invoiced by the third party or (ii) fair market value as determined by the
General Partner. Where the seller of the equipment was a third party who also
manufactured the equipment, asset base price was the manufacturer's invoice
price, which price was considered to be representative of fair market value.
Depreciation
- ------------
The Partnership's depreciation policy is intended to allocate the cost
of equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Partnership depreciates the difference between
(i) the cost of the asset and (ii) the estimated residual value of the asset on
a straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Partnership continues to depreciate the remaining net book value of
the asset on a straight-line basis over the asset's remaining economic life.
Periodically, the General Partner evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value. Adjustments to
reduce the net carrying value of equipment are recorded in those instances where
estimated net realizable value is considered to be less than net carrying value.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including AFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. AFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
-13-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Accrued Liabilities - Affiliate
- -------------------------------
Unpaid operating expenses paid by AFG on behalf of the Partnership are
reported as Accrued Liabilities-Affiliate.(See Note 4.)
Allocation of Profits and Losses
- --------------------------------
For financial statement purposes, net income or loss is allocated to
each Partner according to their respective ownership percentages (99% to the
Limited Partners and 1% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.
Net Income and Cash Distributions Per Unit
- ------------------------------------------
Net income and cash distributions per Unit are based on 71,295 Units
outstanding during each of the three years in the period ended December 31, 1995
and computed after allocation of the General Partner's 1% share of net income
and cash distributions.
Provision For Income Taxes
- --------------------------
No provision or benefit from income taxes is included in the
accompanying financial statements. The Partners are responsible for reporting
their proportionate shares of the Partnership's taxable income or loss and other
tax attributes on their tax returns.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Partnership will adopt Statement 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the impact of adoption to be material to
the financial statements of the Partnership.
NOTE 3 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at
December 31, 1995. In the opinion of AFG, the aquisition cost of the equipment
did not exceed its fair market value.
<TABLE>
<CAPTION>
Lease Term Equipment
Equipment Type (Months) at Cost Location
- ----------------------------- ------ ----------- --------------------------------------
<S> <C> <C> <C>
Aircraft 36-60 $ 7,958,361 MN/OH
Flight simulators 120 4,608,992 CT
Materials handling 12-60 146,135 CT/GA/NC/TX
Tractors and heavy duty trucks 24-60 52,369 CA
Trailers and intermodal containers 36-60 22,917 IL
Medical 12-60 20,771 WA
Construction and mining 12-60 17,580 MA
-----------
Total equipment cost 12,827,125
Accumulated depreciation (10,098,320)
----------
Equipment, net of accumulated depreciation $ 2,728,805
============
</TABLE>
-14-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest. The remaining interests are owned by AFG or an
affiliated equipment leasing program sponsored by AFG. The Partnership and each
affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment. Proportionate equipment ownership
enables the Partnership to further diversify its equipment portfolio by
participating in the ownership of selected assets, thereby reducing the general
levels of risk which could result from a concentration in any single equipment
type, industry or lessee. At December 31, 1995, the Partnership's equipment
portfolio included equipment having a proportionate original cost of
$12,567,353, representing approximately 98% of total equipment cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $2,255,000
and a net book value of approximately $493,000 at December 31, 1995.
(See Note 5.)
Generally, the costs associated with maintaining, insuring and operating
the Partnership's equipment are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
As equipment is sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the equipment at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the equipment is dependent upon, among other things, AFG's
ability to maximize proceeds from selling or re-leasing the equipment upon the
expiration of the primary lease terms. At December 31, 1995, the Partnership was
not holding any equipment not subject to a lease and no equipment was held for
sale or re-lease.
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
All operating expenses incurred by the Partnership are paid by AFG on
behalf of the Partnership and AFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 1995, which were paid or accrued by the
Partnership to AFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Equipment management fees $ 67,246 $ 81,024 $ 83,368
Administrative charges 16,128 12,000 14,955
Reimbursable operating expenses
due to third parties 62,211 49,526 59,688
------------- ------------- -------------
Total $ 145,585 $ 142,550 $ 158,011
============= ============= =============
</TABLE>
As provided under the terms of the Management Agreement, AFG is
compensated for its services to the Partnership. Such services include all
aspects of acquisition, management and sale of equipment. For acquisition
services, AFG is compensated by an amount equal to 4.75% of Equipment Base Price
paid by the Partnership. For management services, AFG is compensated by an
amount equal to the lesser of (i) 5% of gross lease rental revenues earned by
the Partnership or (ii) fees which the General Partner reasonably believes to be
competitive for similar services for similar equipment. Both of these fees are
subject to certain limitations defined in the Management Agreement. Compensation
to AFG for services connected to the sale of equipment is calculated as the
lesser of (i) 3% of gross sale proceeds or (ii) one-half of reasonable brokerage
fees otherwise payable under
-15-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
arm's length circumstances. Payment of the remarketing fee is subordinated to
Payout and is subject to certain limitations defined in the Management
Agreement.
Administrative charges represent amounts owed to AFG, pursuant to
Section 9.4 of the Restated Agreement, as amended, for persons employed by AFG
who are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by AFG
on behalf of the Partnership which are reimbursed to AFG.
All equipment was purchased from AFG, one of its affiliates, including
other equipment leasing programs sponsored by AFG, or from third-party sellers.
The Partnership's Purchase Price was determined by the method described in
Note 2.
All rents and proceeds from the sale of equipment are paid directly to
either AFG or to a lender. AFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1995, the Partnership was owed $200,698 by AFG for such funds
and the interest thereon. These funds were remitted to the Partnership in
January 1996.
On August 18, 1995, Atlantic Acquisition Limited Partnership ("AALP"), a
newly formed Massachusetts limited partnership owned and controlled by certain
principals of AFG, commenced a voluntary cash Tender Offer (the "Offer") for up
to approximately 45% of the outstanding units of limited partner interest in
this Partnership and 20 affiliated partnerships sponsored and managed by AFG.
The Offer was subsequently amended and supplemented in order to provide
additional disclosure to unitholders; increase the offer price; reduce the
number of units sought to approximately 35% of the outstanding units; and extend
the expiration date of the Offer to October 20, 1995. Following commencement of
the Offer, certain legal actions were initiated by interested persons against
AALP, each of the general partners (4 in total) of the 21 affected programs, and
various other affiliates and related parties. One action, a class action brought
in the United States District Court for the District of Massachusetts (the
"Court") on behalf of the unitholders (limited partners), sought to enjoin the
Offer and obtain unspecified monetary damages. A settlement of this litigation
was approved by the Court on November 15, 1995. A second class action, brought
in the Superior Court of the Commonwealth of Massachusetts (the "Superior
Court") seeking to enjoin the Offer, obtain unspecified monetary damages, and
intervene in the first class action, was dismissed by the Superior Court. The
Plaintiffs have filed an appeal in this matter. The limited partners of the
Partnership tendered approximately 10,391 units or 14.57% of the total
outstanding units of the Partnership to AALP. The operations of the Partnership
are not expected to be adversely affected by these proceedings or settlements.
NOTE 5 - NOTES PAYABLE
- ----------------------
Notes payable at December 31, 1995 consisted of one installment note of
$82,037 payable to a bank. The installment note is non-recourse, with an
interest rate of 6.35% and is collateralized by the equipment and assignment of
the related lease payments. The installment note will be fully amortized by
noncancellable rents in the year ending December 31, 1996.
NOTE 6 - INCOME TAXES
- ---------------------
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income
or loss to each class of partner according to their respective ownership
percentages (99% to the Limited Partners and 1% to the General Partner).
-16-
<PAGE>
This convention differs from the income or loss allocation requirements for
income tax and Dissolution Event purposes as delineated in the Restated
Agreement, as amended. For income tax purposes, the Partnership allocates net
income or loss in accordance with the provisions of such agreement. The Restated
Agreement, as amended, requires that upon dissolution of the Partnership, the
General Partner will be required to contribute to the Partnership an amount
equal to the lesser of a) any negative balance which may exist in the General
Partner's tax capital account or b) the excess of 1.01% of the total Capital
Contributions contributed by the Limited Partners over the Capital Contributions
previously contributed by the General Partner. At December 31, 1995, the General
Partner had a positive tax capital account balance.
The following is a reconciliation between net income reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net income $ 236,296 $ 518,222 $ 521,698
Financial statement depreciation
in excess of tax depreciation 1,004,178 1,004,180 1,073,171
Prepaid rental income 80,476 83,298 82,327
Other -- (21,281) 87,760
------------- ------------- -------------
Net income for federal income
tax reporting purposes $ 1,320,950 $ 1,584,419 $ 1,764,956
============= ============= =============
</TABLE>
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Partners' capital $ 2,657,119 $ 3,321,012
Add back selling commissions and
organization and offering costs 2,082,616 2,082,616
Financial statement distributions
in excess of tax distributions 1,800 2,701
Cumulative difference between federal income
tax and financial statement income (loss) (2,610,158) (3,694,812)
------------- -------------
Partners' capital for federal income
tax reporting purposes $ 2,131,377 $ 1,711,517
============= =============
</TABLE>
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
-17-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
NOTE 7 - SUBSEQUENT EVENT
- -------------------------
On January 1, 1995, AFG entered into a series of agreements with PLM
International, Inc., a Delaware corporation headquartered in San Francisco,
California ("PLM"), whereby PLM would: (i) purchase, in a multi-step
transaction, certain of AFG's assets and (ii) provide accounting, asset
management and investor services to AFG and certain of AFG's affiliates,
including the Partnership and all other equipment leasing programs managed by
AFG (the "Investment Programs").
On January 3, 1996, AFG and PLM executed an amendment to the 1995
agreements whereby PLM purchased: (i) AFG's lease origination business and
associated contracts, (ii) the rights to the name "American Finance Group" and
associated logo, and (iii) certain furniture, fixtures and computer software.
PLM hired AFG's marketing force and certain other support personnel effective
January 1, 1996 in connection with the transaction and relinquished its
responsibilities under the 1995 agreements to provide accounting, asset
management and investor services to AFG, its affiliates and the Investment
Programs after December 31, 1995. Accordingly, AFG and its affiliates retain
ownership and control and all authority and rights with respect to each of the
general partners or managing trustees of the Investment Programs; and AFG, as
Manager, will continue to provide accounting, asset management and investor
services to the Partnership.
Pursuant to the 1996 amendment to the 1995 agreements, AFG and certain
of its affiliates agreed not to compete with the lease origination business sold
to PLM for a period of five years. AFG reserved the right to satisfy all
equipment needs of the Partnership and all other Investment Programs and
reserved certain other rights not material to the Partnership. AFG also agreed
to change its name, except where it is used in connection with the Investment
Programs. AFG's management considers the amendment to the 1995 agreements to be
in the best interest of AFG and the Partnership.
-18-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1995, 1994 and 1993
The Partnership classifies all rents from leasing equipment as lease
revenue. Upon expiration of the primary lease terms, equipment may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the equipment, in addition to any month-to-month revenues, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition, may not reflect the aggregate residual proceeds
realized by the Partnership for such equipment.
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Rents earned prior to disposal
of equipment, net of interest charges $ 954,082 $ 319,445 $ 1,844,395
Sale proceeds realized upon
disposition of equipment 42,450 75,189 187,043
------------- ------------- -------------
Total cash generated from rents
and equipment sale proceeds 996,532 394,634 2,031,438
Original acquisition cost of
equipment disposed 655,695 314,837 1,540,382
------------- -------------- -------------
Excess of total cash generated
to cost of equipment disposed $ 340,837 $ 79,797 $ 491,056
============= ============== =============
</TABLE>
-19-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1995
<TABLE>
<CAPTION>
Sales and
Operations Refinancings Total
---------------- --------------- ---------------
<S> <C> <C> <C>
Net income $ 193,846 $ 42,450 $ 236,296
Add back:
Depreciation 1,004,179 -- 1,004,179
Management fees 67,246 -- 67,246
Less:
Principal reduction of notes payable (274,137) -- (274,137)
---------------- --------------- ---------------
Cash from operations, sales
and refinancings 991,134 42,450 1,033,584
Less:
Management fees (67,246) -- (67,246)
---------------- ---------------- ---------------
Distributable cash from operations, sales
and refinancings 923,888 42,450 966,338
Other sources and uses of cash:
Cash at beginning of year 309,548 -- 309,548
Net change in receivables and accruals (40,799) -- (40,799)
Less:
Cash distributions paid (947,759) (42,450) (990,209)
---------------- ---------------- ---------------
Cash at end of year $ 244,878 -- $ 244,878
================ ================ ===============
</TABLE>
-20-
<PAGE>
AMERICAN INCOME 5 LIMITED PARTNERSHIP
SCHEDULE OF COSTS REIMBURSED TO THE GENERAL PARTNER AND ITS
AFFILIATES AS REQUIRED BY SECTION 9.4 OF THE AMENDED AND
RESTATED AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
December 31, 1995
For the year ended December 31, 1995, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
Operating expenses $ 65,717
-21-
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of American Income 5 Limited Partnership of our report
dated March 12, 1996, included in the 1995 Annual Report to the Partners of
American Income 5 Limited Partnership.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
March 12, 1996
-15-
<PAGE>
Secured Party's Original
Counterpart # 1
LEASE AGREEMENT dated as of May 10, 1988 between AMERICAN FINANCE GROUP,
INC., a Massachusetts Corporation not in its individual capacity but solely as
Trustee under that certain trust agreement "AmComp AI4/AI5 Trust" (together with
its successors and assigns in such capacity, "Lessor") with its principal place
of business at Exchange Place, Boston, Massachusetts 02109, and COMAIR, INC., an
Ohio Corporation ("Lessee") with its principal place of business at Greater
Cincinnati International Airport, Tower Drive, Erlanger, Kentucky 41018.
INTRODUCTION
------------
This Lease Agreement relates to the Airframe and the Engines and the
Propellers installed on the Airframe described in Lease Supplement No. 1 hereto,
together with the Parts appertaining thereto. A counterpart of this Lease
Agreement is to be filed for recordation with the Federal Aviation
Administration as one document.
ACCORDINGLY, in consideration of the terms, conditions and covenants
contained herein and of other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1
<PAGE>
I. Definitions
-----------
Unless the context otherwise requires, the following terms shall have the
following meanings for all purposes of this Lease and shall be equally
applicable to both the singular and the plural forms of the terms herein
defined:
"Aircraft" - the Airframe to be delivered and leased hereunder together
--------
with the two Engines installed thereon and two Propellers attached thereto
described under the Lease Supplement executed and delivered with respect to the
Airframe (or any Replacement Engine or Replacement Propeller), whether or not
any of such initial or substituted engines or propellers may from time to time
be installed on the Airframe or may be installed on any other airframe, any
spare part delivered with the Aircraft and all logs, manuals and other records
with respect to the Aircraft, and all substitutions, replacements and renewals
of any and all thereof.
"Airframe" - (i) the Saab SF 340A aircraft, serial no. 340A-014 (except
--------
Engines or Propellers or engines or propellers from time to time installed
thereon) leased hereunder by Lessor to Lessee pursuant to the Lease Supplement;
(ii) any and all Parts so long as the same are incorporated or installed in or
attached or belonging to the Airframe or the Aircraft, or so long as title
thereto shall remain vested in Lessor in accordance with the terms of this Lease
after removal from such airframe; and (iii) insofar as title to the same is from
time to time vested in Lessor, all substitutions, replacements or renewals from
time to time made in or to the Airframe or to any of the items referred to in
clauses (i) and (ii) above or to any part thereof as required or permitted under
this Lease.
"Base Lease Period" - a period beginning on the Delivery Date and expiring
-----------------
on a date 60 calendar months thereafter.
"Basic Rent" - for the Aircraft - rent payable throughout the Base Lease
----------
Period for the Aircraft pursuant to Section 3(b).
"Business Day" - any day on which commercial banks are open for business in
------------
the Commonwealth of Massachusetts and Cincinnati, Ohio.
"Default" - an Event of Default or event which would constitute an Event of
-------
Default but for the lapse of time or the giving of notice or both.
"Delivery Date" - the date the Lessee accepts the Aircraft under the Lease
-------------
Supplement.
2
<PAGE>
"Engine" - with respect to the Aircraft - (i) each of the two General
------
Electric model CT7-5A2 aircraft engines, listed by manufacturer's serial numbers
in the Lease Supplement and originally installed on the Airframe of the
Aircraft, whether or not from time to time thereafter installed on the Airframe
or installed on any other airframe or on any other aircraft; and (ii) any
Replacement Engine; (iii) any and all Parts incorporated or installed in or
attached or belonging thereto or any and all Parts removed therefrom so long as
title thereto remains vested in Lessor in accordance with the terms of this
Lease after removal from such Engine; and (iv) insofar as the same belong to
Lessor, all substitutions, replacements or renewals from time to time made in or
to such Engine or to any of the items referred to in clause (i), (ii), or (iii)
above or to any part thereof as required or permitted under this Lease. Except
as otherwise set forth herein, at such time as a Replacement Engine is so
substituted and the Engine for which the substitution is made is released from
the Lien of the Loan Agreement, such replaced Engine shall cease to be an Engine
hereunder. The term "Engines" means, if the context so requires, as of any date
of determination, all Engines then leased hereunder.
"Event of Default" - as defined in Section 12.
----------------
"Event of Loss" - any of the following events: (a) with respect to the
-------------
Aircraft, any Engine or any Propeller, loss of such property or the loss of use
thereof due to theft or disappearance for a period in excess of 90 days or
destruction, damage beyond repair or rendition of such property permanently
unfit for normal use by Lessee for any reason whatsoever, (b) with respect to
the Aircraft, any Engine or any Propeller, any damage to such property which
results in an insurance settlement with respect to such property on the basis of
a total loss or constructive total loss, (c) with respect to the Aircraft, any
Engine or any Propeller, the condemnation, taking, confiscation or seizure of,
or requisition of title to, such property, or the loss of use of such property
for a period in excess of 90 days (or for such shorter period ending on the date
on which an insurance settlement with respect to such property on the basis of a
total loss shall occur), other than a requisition for use by the United States
Government that does not continue beyond the end of the Term, and pursuant to
which requisition, the United States Government shall have agreed to make
payments sufficient in amount for the discharge of the obligations of Lessee
hereunder to pay Rent or Lessee shall have provided other security reasonably
acceptable to Lessor in the event the United States Government shall not have so
agreed to make such payments, (d) with respect to the Aircraft, any Engine, or
any Propeller, as a result of any rule, regulation, order or other action by the
FAA, or other Governmental Body having jurisdiction, the use of such property in
the normal course of interstate air transportation of persons shall have been
prohibited for a period
3
<PAGE>
of 120 consecutive days, unless Lessee, prior to the expiration of such 120-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 or, in any event, if such use shall have been prohibited for a period of
360 consecutive days, or (e) with respect to the Aircraft, the operation or
location thereof, while under requisition for use by the United States
Government, for a period of seven days or more in any area excluded from
coverage by the terms of Section 9 if Lessee shall be unable to obtain indemnity
or insurance in lieu thereof from the United States Government. An Event of Loss
with respect to the Aircraft shall be deemed to have occurred if an Event of
Loss occurs with respect to the Airframe which is a part of the Aircraft.
"FAA" - the Federal Aviation Administration and any successor agency
---
thereto.
"Government Body" - the United States Government or any instrumentality or
---------------
agency thereof.
"Lease" - "this Lease Agreement", "this Lease", "this Agreement", "herein",
-----
"hereunder", "hereby" or other like words in the Lease Agreement as originally
executed or as modified, amended or supplemented pursuant to the applicable
provisions hereof, including, without limitation, supplementation hereof by one
or more Lease supplements entered into pursuant to the applicable provisions
hereof.
"Lease Supplement" - the Lease Supplement, substantially in the form of
----------------
Exhibit A hereto, entered into between Lessor and Lessee for the purpose of
leasing the Aircraft, Airframe, Engines and Propellers under and pursuant to the
terms of this Lease Agreement, including, without limitation, any amendment
thereto entered into subsequent to the Delivery Date of the Aircraft, Airframe,
Engine or Propeller.
"Lender" - Depositors Trust Company, Lexington, Massachusetts 02173.
------
"Lien" - any mortgage, pledge, lien, charge, lease, exercise of rights,
----
security interest or encumbrance of any nature whatsoever.
"Loan Agreement" - collectively, the Continuing Letter of Credit and
--------------
Security Agreement, dated as of May 2, 1988, and the Security Agreement -
Aircraft Chattel Mortgage dated as of May 2, 1988.
"Obsolete Parts" - parts which Lessee reasonably deems obsolete or no
---------------
longer suitable or appropriate for use in the Airframe, Engine, or Propeller.
4
<PAGE>
"Overdue Rate" - shall mean two percent above the per annum rate of
------------
interest announced from time to time by Citibank N.A. in New York City to be its
"prime rate", each change in such "prime rate" to cause a simultaneous and equal
change to the Overdue Rate.
"Parts" - any and all appliances, parts, instruments, appurtenances,
-----
accessories, furnishings and other equipment of whatever nature (other than
complete Engines or engines and other than complete Propellers or propellers),
which may from time to time be incorporated or installed in or attached to the
Airframe, Engines or Propellers.
"Permitted Liens" - Liens arising as a result of (i) claims against or
---------------
arising by, through, or under Lessor not related to this Lease or Lessor's
interest in the Aircraft, (ii) acts of Lessor not permitted hereunder, (iii)
claims against Lessor arising from the voluntary transfer by Lessor of its
interest in the Aircraft when an Event of Default shall not have occured and be
continuing other than a transfer pursuant to Section 7 hereof, (iv) any grant or
transfer by Lessor of a security interest or lien in the Aircraft to any
mortgagee, secured party or other person, other than after an Event of Default
has occurred and is continuing in existence and in connection therewith Lessor
has begun to exercise remedies under Section 13 hereof; (v) construction,
materialmen's, mechanics', workers', suppliers', repairmen's, employees' or
other like liens arising in the ordinary course of business for amounts either
not yet due or being contested in good faith and by appropriate proceedings, so
long as such proceedings shall not involve any material danger of of the sale,
forfeiture or loss of the Aircraft, any Engine or any Propeller or any part
thereof, title thereto or any interest therein and shall not interfere with the
use of the Aircraft, any Engine or any Propeller or the payment of Rent; and
(vi) liens for taxes, levies, imposts, duties, license, permit or inspection
fees or other governmental charges of any kind either not yet due or being
contested in good faith and by appropriate proceedings that suspend the
collection thereof and for the payment of which Lessee shall have provided
adequate reserves on its books in accordance with generally accepted accounting
principles, so long as such proceedings shall not involve any material danger of
the sale, forfeiture or loss of the Aircraft, any Engine or Propeller or any
part thereof, title thereto or any interest therein and shall not interfere with
the use of the Aircraft, any Engine or any Propeller or the payment of Rent.
"Person" - any individual, corporation, joint venture, association, joint
------
stock company, partnership, trust, unincorporated organization or government, or
any agency or political subdivision thereof.
5
<PAGE>
"Propeller" - with respect to an Engine - (i) each of the two Dowty Rotol
---------
model R320/4-123-F/l four-blade aircraft propellers initially attached to or
relating to an Engine installed on the Aircraft and listed by manufacturer's
serial numbers in the Lease Supplement describing the Aircraft whether or not
from time to time thereafter attached to an Engine installed on the Aircraft or
any other Engine or engine, (ii) any Replacement Propeller (iii) any and all
Parts incorporated or installed therein or attached thereto and any and all
Parts removed from such Propeller so long as title thereto remains vested in
Lessor in accordance with this Lease after removal from such Propeller and (iv)
insofar as the same belong to Lessor, all substitutions, replacements or
renewals from time to time made in or to such propeller or to any of the items
referred to in clauses (i), (ii) and (iii) above, or to any part thereof as
required or permitted under the Lease. Except as otherwise set forth herein, at
such time as a Replacement Propeller is so substituted and the Propeller by
which the substitution is made is released from the Lien of the Loan Agreement,
such replaced Propeller shall cease to be a Propeller under the Lease. The term
"Propellers" means, if the context so requires, as of any date of determination,
all Propellers to be leased or then leased hereunder.
"Rent Adjustment" - shall equal an amount equal to (i) the Lessee's actual
---------------
cost for the parts substantially similar to those listed on Exhibit C hereto
(such cost not to exceed the total amount shown thereon) plus (ii) the Lessee's
actual cost to perform Saab Service Bulletin 55-008, both computed on the second
Rent Payment Date of the Lease divided by (iii) five.
"Rent Payment Date" - the (i) Delivery Date and (ii) each of the same date
-----------------
of the month as the Delivery Date commencing with that month 6 months after the
Delivery Date and continuing thereafter for 53 consecutive months for a total of
54 consecutive monthly payments.
"Replacement Engine" - each General Electric model CT7-5A2 aircraft engine
------------------
(or aircraft engine of the same or an improved model), which may be installed on
the Airframe, without materially impairing the value or utility of the Aircraft,
and is certified for use on a Saab SF 340A Aircraft, which shall have been
substituted for an Engine pursuant to Section 7, 8(b), or 8(e) or 15(a),
together with all Parts relating to such engine.
"Replacement Part" - as defined in Section 7(a).
----------------
"Replacement Propeller" - each Dowty Rotol model R320/4-123-F/l four-
---------------------
blade propeller (or propeller of the same or an improved model) which may be
installed on an Engine without materially impairing the value or utility of the
Aircraft and is
6
<PAGE>
certified for use on a Saab 340A Aircraft, which shall have been substituted for
a Propeller pursuant to Section 7, 8(b), 8(e) or 15(a) for any Propeller,
together with all Parts relating to such Propeller.
"Supplemental Rent" - any and all amounts, liabilities and other
-----------------
obligations which Lessee assumes or agrees to pay to any Person under any
Operative Document, (excluding Interim Rent and Basic Rent).
"Term" - as to the Aircraft - the period commencing on the Delivery Date
----
through and including a date 60 months from the Delivery Date, unless sooner
terminated in accordance with the terms of this Lease.
"Termination Value" - for the Aircraft, as of any Rent Payment Date, the
-----------------
amount shown in Exhibit B (Termination Value Schedule) under the heading
"Termination Value".
2. Acceptance Under Lease.
-----------------------
Lessee hereby agrees to accept delivery of the Aircraft on the Delivery
Date and simultaneously to lease the Aircraft as provided hereunder, as
evidenced by the execution by Lessor and Lessee of the Lease Supplement. Lessee
shall be deemed to have accepted delivery of the Aircraft on the date and at the
location set forth in the Lease Supplement. Lessee hereby agrees that such
acceptance of delivery shall, without further act, irrevocably constitute
acceptance by Lessee of the Aircraft for all purposes of this Agreement, and
Lessee shall promptly take possession of the Aircraft pursuant to the terms of
this Lease.
7
<PAGE>
3. Term and Rent.
--------------
(a) Term. The Term for the Aircraft shall consist of the Basic Lease
----
Period.
(b) Basic Rent. The Basic Rent shall be as follows:
-----------
Rent Payment Basic
Date Rent
------------- --------
Delivery Date $350,000
The second and
each subsequent
Rent Payment Date
(commencing 6 months
after the Delivery
Date) $ 60,000
Notwithstanding the foregoing, the payments of Basic Rent due in months 56
through and including 60 of the Term shall be reduced by the Rent Adjustment.
(c) Other Payments to Lessor. Lessee shall also pay to Lessor or to
------------------------
whomever shall be entitled thereto as expressly provided herein or in any other
Operative Document the following amounts:
(i) on demand, any Supplemental Rent (other than Termination Value)
when the same shall be due and payable;
(ii) on the date provided herein, any amount payable hereunder as
Termination Value; and
(iii) on demand, to the extent permitted by applicable law, interest
(computed on the basis of a 360-day year consisting of twelve 30-day months) on
any payment owing hereunder not paid when due for any period during which the
same shall be overdue at the Overdue Rate.
(d) Method of Payment. All payments of Rent hereunder shall be made so
-----------------
that Lender shall have immediately available funds (in such coin or currency of
the United States of America as at the time of payment shall be legal tender for
the payment of public and private debts) no later than 11:00 a.m. (local time)
on the date payable hereunder if such day is a Business Day or if such day is
not a Business Day, the next preceding Business Day, and all payments of Basic
Rent and Supplemental Rent due or
8
<PAGE>
to become due hereunder shall be paid to the Lessor and if made by wire
transfer, to Bank of Boston, 100 Federal Street, Boston, Massachusetts ABA
011000390 for the account of AFG Rent Escrow, Account No. 544-56972, or at such
other address or to such Person as Lessor may direct by notice in writing to
lessee.
(e) No Invoice. Payment made by Lessee hereunder shall be made without
----------
the requirement that Lessee have received an invoice or notice, except as
expressly provided herein.
4. Lessor's Representations and Warranties;
Certain Agreements of Lessee
---------------------------------------
(a) Lessor's Representations and Warranties. LESSOR IS NOT A MANUFACTURER
---------------------------------------
OF THE AIRCRAFT OR A DEALER IN SIMILAR AIRCRAFT AND IT HAS NOT INSPECTED THE
AIRCRAFT PRIOR TO DELIVERY AND TO ACCEPTANCE BY LESSEE. LESSEE (i) ACKNOWLEDGES
AND AGREES THAT THE AIRCRAFT IS BEING DELIVERED BY LESSOR TO LESSEE "AS IS" AND
"WHERE IS" AND THAT NO CONDITION, WARRANTY OR REPRESENTATION OF ANY KIND
WHATSOEVER HAS BEEN OR IS GIVEN BY OR IS TO BE IMPLIED ON THE PART OF LESSOR IN
RELATION TO THE AIRCRAFT, (ii) HEREBY WAIVES AS BETWEEN ITSELF AND LESSOR OF ALL
RIGHTS, EXPRESSED OR IMPLIED (WHETHER STATUTORY OR OTHERWISE) AGAINST LESSOR IN
THE AIRCRAFT RELATING TO THE CAPACITY, AGE, QUALITY, DESCRIPTION, STATE,
CONDITION, TITLE, VALUE, WORKMANSHIP, DESIGN, CONSTRUCTION, USE, OPERATION OR
PERFORMANCE, DURABILITY OR COMPLIANCE WITH SPECIFICATIONS OF THE AIRCRAFT AND
THE LEASING THEREOF BY LESSOR TO LESSEE, OR TO THE MERCHANTABILITY OR
---------------
SUITABILITY OF THE AIRCRAFT OR ITS FITNESS FOR ANY USE OR PURPOSE OR AS TO ITS
------------------------------
AIRWORTHINESS OR AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT
DISCOVERABLE, AS TO THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK OR
COPYRIGHT, OR AS TO THE ABSENCE OF ANY OBLIGATIONS BASED ON STRICT LIABILITY IN
TORT OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED,
WITH RESPECT TO THE AIRCRAFT OR PART THEREOF, AND (iii) AGREES THAT ALL RISKS OF
ANY NATURE, WHETHER PATENT OF LATENT, INCIDENT THERETO ARE TO BE BORNE BY LESSEE
AND LESSOR SHALL HAVE NO LIABILITY OR RESPONSIBILITY WITH RESPECT THERETO,
except that Lessor represents and warrants that on the Delivery Date Lessor
shall have title to the Aircraft free and clear except for the interest of
Lender under the Loan Agreement; Lessor represents and warrants that it has the
right and authority to lease the Aircraft hereunder. In particular and without
prejudice to the generality of the foregoing Lessor shall be under no liability
whatever and howsoever arising, whether in contract or tort or both, in respect
of any loss, liability, damage or delay of or to or in connection with the
Aircraft or any Person (which expression includes, without prejudice to the
generality thereof, states, governments, municipalities and local authorities)
or property whatsoever, whether on board the Aircraft or elsewhere
9
<PAGE>
irrespective of whether such loss, damage or delay shall arise (y) from the
Aircraft not being in an airworthy condition, or (z) from any action or omission
of Lessor (other than any action or omission which constitutes willful
misconduct or gross negligence of Lessor). The provisions of this Section 4 have
been negotiated and are intended to be a complete exclusion and, except as
provided above, negation of any representation of warranty, express or implied,
by Lessor with respect to the Aircraft, or any part thereof, whether arising
pursuant to the Uniform Commercial Code or any other law now or hereafter in
effect or otherwise. None of the provisions of this Section 4 or any other
provision of this Agreement shall be deemed to amend, modify or otherwise affect
the representations (express or implied) of Lessee, any manufacturer,
subcontractor or supplier with respect to the Airframe, any Engine, any
Propeller, or any appliances, spare parts, instruments, accessories, seats or
other equipment or parts of whatever nature forming a part of or installed on or
attached or belonging to the Airframe, Engines or Propellers or to release
Lessee, Manufacturer or any such manufacturer, subcontractor or supplier from
any such representation, warranty or obligation.
(b) Assignment of Warranties. Lessor hereby assigns to Lessee such rights
------------------------
as Lessor may have (to the extent Lessor may validly assign such rights) under
all manufacturers' and suppliers' warranties with respect to the Aircraft,
provided, however, that the foregoing rights shall automatically revert to
- -------- -------
Lessor upon the occurrence and during the continuance of any Event of Default
hereunder, or upon the return of the Aircraft to Lessor.
5. Liens.
-----
Lessee will not directly or indirectly create, incur, assume or suffer to
exist any lien on or with respect to the Aircraft, Lessor's title thereto or any
interest therein or in this Lease or any interest of Lessor in any Rent, except
for Permitted Liens. Lessee will promptly, at its own expense, take such action
as may be necessary duly to discharge any such Lien not so excepted if the same
arises at any time.
6. Registration, Maintenance, Operation and Insignia; Possession.
-------------------------------------------------------------
(a) Lessee, at its own cost and expense, shall: (i) forthwith upon the
delivery thereof hereunder and at all times thereafter (A) cause the Aircraft to
be and remain duly registered under the laws of the United States of America in
the name of Lessor, so long as Lessor remains eligible for such registration,
and shall not do anything that might cause the Aircraft to be ineligible for
United States registration, (B) cause the Loan Agreement and the any other
supplements thereto to
10
<PAGE>
be duly recorded and maintained of record as a first mortgage on the Aircraft
except as prevented by acts of Lessor and/or Lender, and (C) promptly deliver to
Lessor true copies of all applications made in relation to the Aircraft, of all
certificates of registration issued pursuant to such applications and of all
notifications affecting such registration, and shall not do, or permit to be
done by any Person, any act which might cause the Aircraft to be ineligible for
United States registration; (ii) maintain, inspect, service, repair, overhaul
and test the Aircraft in compliance with an FAA-approved maintenance program and
the manufacturers' or suppliers' FAA mandated requirements and instructions and
take any other necessary action so as to keep the Aircraft in as good condition
as when delivered to Lessee hereunder, ordinary wear and tear excepted, in good
operating condition and in such operating condition as may be necessary to
enable the airworthiness certification of the Aircraft to be maintained in good
standing at all times under the Federal Aviation Act of 1958, as amended, and as
may be necessary to maintain in full force all warranties of relevant
manufacturers but in any event in a manner, to an extent and with a standard of
care not less than that employed by Lessee with respect to similar aircraft
owned or leased by Lessee; provided, however, that Lessee shall not be deemed in
-------- -------
violation of this clause (ii) solely as a result of withdrawal of the
airworthiness certification of the Aircraft by the FAA not resulting from
Lessee's failure to maintain the Aircraft so long as Lessee is taking necessary
action to correct the condition resulting in such withdrawal of certification;
(iii) maintain and permit Lessor to examine at any reasonable time all records,
logs and other materials required by the FAA to be maintained in respect of the
Aircraft; (iv) promptly furnish to Lessor such information as may be required to
enable Lessor to file any reports required by any Governmental Body as a result
of Lessor's interest in the Aircraft; and (v) comply with all mandatory
requirements of the FAA or any other Governmental Body having jurisdiction over
the Aircraft. Lessee agrees that the Aircraft will not be maintained, used or
operated in violation of any law or any rule, regulation or order of any
Governmental Body having jurisdiction (domestic or foreign), or in violation of
any airworthiness certificate, license or registration relating to the Aircraft
issued by any Governmental Body. In the event that such laws, rules, regulations
or orders require alteration of the Aircraft, Lessee will conform thereto or
obtain waiver of conformance therewith at no expense to Lessor and will maintain
the same in proper operating condition under such laws, rules, regulations and
orders; provided, however, that Lessee may in good faith (after having delivered
-------- -------
to Lessor a certificate signed by the President or any Vice President of Lessee
stating the facts with respect thereto), contest the validity or application of
any such law, rule, regulation or order in any reasonable manner that does not
have a material adverse effect on Lessor or Lender. Lessee also agrees not to
operate or locate
11
<PAGE>
the Aircraft, or suffer the Aircraft to be operated or located, (i) in any area
excluded from coverage by any insurance in effect or required to be maintained
by the terms of Section 9, except in the case of a requisition by the United
States Government, where Lessee obtains indemnity in lieu of such area or (ii)
in any recognized or threatened area of hostilities unless fully covered by war
risk insurance in accordance with Section 9, or unless the Aircraft is operated
or used under contract with the United States Government under which contract
the United States Government assumes liability for any damage, loss, destruction
or failure to return possession of the Aircraft at the end of the term of such
contract and for injury to persons or damage to property of others. Lessee
further agrees not to operate the Aircraft, or suffer the Aircraft to be
operated, to any destination outside the United States, Canada and all Caribbean
countries except for Cuba.
(b) Lessee will not, without the prior written consent of Lessor, which
consent shall not be unreasonably withheld, sublease or otherwise in any manner
deliver, transfer or relinquish possession, or enter into any contract or
arrangement obligating it to deliver, transfer or relinquish possession, of the
Airframe, Engines or Propellers or install any Engine or Propeller, or permit
any Engine or Propeller to be installed, on any airframe other than the
Airframe, except that, so long as no Event of Default exists, and so long as the
action to be taken shall not affect the security interest created under the Loan
Agreement on the Airframe or any Engine or Propeller, Lessee may, without the
prior written consent of Lessor:
(i) subject any Engine to normal interchange or pooling agreements
or arrangements in each case customary in the airline industry and entered into
by Lessee in the ordinary course of its business with other United States air
carriers; provided (A) no such agreement or arrangement contemplates, permits or
--------
requires the transfer of title to any Engine, (B) if Lessor's title to any such
Engine shall be divested under any such agreement or arrangement, such
divestiture shall be deemed to be an Event of Loss with respect to such Engine
and Lessee shall comply with Section 8(b) in respect thereof and (C) Lessee does
not relinquish possession of such Engine for a continuous period of more than
180 days;
(ii) deliver possession of the Airframe or any Engine or Propeller to
the manufacturer thereof for testing or other similar purposes or to any
organization for service, repair, maintenance or overhaul work on the Airframe,
Engines or Propellers or any part thereof or for alterations or modifications in
or additions to the Airframe, Engines or Propellers to the extent required or
permitted by the terms of Section 7(c);
12
<PAGE>
(iii) install an Engine on an airframe or a Propeller on an engine
owned by Lessee, free and clear of all Liens, except (A) as permitted herein,
(B) the rights of other United States air carriers under normal interchange
agreements that are customary in the airline industry and entered into by Lessee
in the ordinary course of its business, so long as such agreements do not
contemplate a permit or require the transfer of title to such airframe or the
engines installed thereon and (C) the Lien of any mortgage which expressly and
effectively provides that each Engine or Propeller leased to Lessee hereby shall
not become subject to the lien thereof, notwithstanding the installation thereof
on an airframe or engine subject to the Lien of such mortgage, unless and until
Lessee shall become the owner of such Engine or Propeller free of the Lien of
the Loan Agreement; or
(iv) install an Engine on an airframe or a Propeller on an engine
leased to Lessee or purchased by Lessee subject to a conditional sale or other
security agreement, provided (A) such airframe or engine is free and clear of
--------
all Liens except the rights of the parties to the lease or conditional sale or
other security agreement and their purchasers, mortgagees and encumbrancers
covering such airframe or engine and except Liens of the type permitted herein;
(B) Lessee receives (and furnishes to Lessor, within 30 days of the later of the
date such Engine or Propeller is installed or the date on which such lease,
conditional sale or other security agreement becomes a lien on such airframe or
engine) from the lessor, conditional vendor or secured party of such airframe or
engine a written agreement (which may be the lease or conditional sale agreement
or other security agreement covering such airframe) whereby such lessor,
conditional vendor or secured party and each of the purchasers, mortgagees and
encumbrancers of such lessor, conditional vendor or secured party expressly
agrees that neither it nor its successors and assigns will acquire or claim any
right, title or interest in any Engine or Propeller by reason of such Engine or
Propeller being installed on such airframe or engine at any time while such
Engine or Propeller is subject to this Lease or to the Lien of the Loan
Agreement or is owned by Lessor; and (C) Lessor receives from counsel for Lessee
(which counsel may be an employee of Lessee) an opinion, in form and substance
satisfactory to Lessor, to the effect that no creditors of, or bona fide
purchasers from, the lessor or conditional vendor of such airframe or engine
will acquire any right, title or interest in such Engine or Propeller by reason
of such Engine or Propeller being installed on such airframe or engine at any
time while such Engine or Propeller is subject to this Lease.
Lessee shall remain primarily liable hereunder for the performance of all
the terms of this Lease to the same extent as if such transfer or sublease had
not occurred. No interchange agreement, sublease or other relinquishment of
possession of the Airframe or any Engine or Propeller shall in any way discharge
or
13
<PAGE>
diminish any of Lessee's obligations to Lessor or constitute a waiver of any of
Lessor's rights and remedies hereunder. In the event Lessee shall have received
from the lessor, conditional vendor or secured party of any airframe leased to
Lessee or purchased by Lessee subject to a conditional sale or other security
agreement a written agreement complying with clause (B) of subparagraph (iv) of
this paragraph (b), and the lease or conditional sale or other security
agreement covering such airframe also covers an engine or engines or propeller
or propellers owned by the lessor under such lease or subject to a security
interest in favor of such secured party under such conditional sale or other
security agreement, Lessor hereby agrees for the benefit of such lessor or
secured party that Lessor will not acquire or claim, as against such lessor or
secured party, any right, title or interest in any such engine as the result of
such engine being installed on the Airframe or any propeller being attached to
any Engine at the time while such engine or propeller is subject to such lease
or conditional sale or other security agreement and owned by such lessor or
subject to a security interest in favor of such secured party. Lessor also
hereby agrees for the benefit of the mortgagee under any mortgage complying with
clause (C) of subparagraph (iii) of this paragraph (b) that Lessor will not
acquire or claim, as against such mortgagee, any right, title or interest in any
engine or propeller subject to the lien of such mortgage as the result of such
engine being installed on the Airframe for any propeller being installed on any
Engine at any time while such engine or propeller is subject to the lien of such
mortgage.
(c) Lessee will cause to be affixed to and maintained in the cockpit of
the Aircraft in a clearly visible location and on each Engine a plate of a size
and shape acceptable to Lessor bearing the following legend:
LEASED FROM AMERICAN FINANCE GROUP, INC. AS SUCCESSOR
TRUSTEE AND LESSOR.
Except as above provided, Lessee will not allow the name of any Person to
be placed on the Aircraft as a designation that might be interpreted as a claim
of ownership; provided, however, that Lessee may cause the Aircraft to be
-------- -------
lettered with its name or in some other appropriate manner for convenience of
identification of the interest therein of Lessee and to bear insignia plates or
other markings identifying the supplier or manufacturer of the Aircraft or any
parts thereof.
14
<PAGE>
7. Replacement of Parts; Alterations, Modifications and Additions
--------------------------------------------------------------
(a) Replacement of Parts. Lessee, at its own cost and expense, will
--------------------
promptly replace all Parts that may from time to time be incorporated or
installed in or attached to the Airframe, Engine, or Propeller and that may from
time to time become worn out, lost, stolen, destroyed, seized, confiscated,
damaged beyond repair or permanently rendered unfit for use for any reason
whatsoever, except as otherwise provided in paragraph (c) of this Section 7 with
respect to Obsolete Parts. In addition, Lessee may, at its own cost and expense,
remove in the ordinary course of maintenance, service, repair, overhaul or
testing, any Parts, whether or not worn out, lost, stolen, destroyed, seized,
confiscated, damaged beyond repair or permanently rendered unfit for use;
provided that Lessee, except as otherwise provided in paragraph (c) of this
Section 7, will, at its own cost and expense, replace such Parts as promptly as
possible. All replacement Parts (such Parts, for purposes of this Section 7,
called "Replacement Parts") shall be free and clear of all Liens and shall be in
as good operating condition as, and shall have value and utility at least equal
to, the Parts replaced assuming such replaced Parts were in the condition and
repair required to be maintained by the terms hereof. All Parts at any time
removed from the Airframe, Engine, or Propeller shall remain the property of
Lessor, no matter where located, until such time as such Parts shall be replaced
by Parts that have been incorporated or installed in or attached to the
Airframe, Engines, or Propellers and that meet the requirements for Replacement
Parts specified above. Immediately upon any Replacement Part becoming
incorporated or installed in or attached to the Airframe, Engines, or Propellers
as above provided, without further act, (i) title to the replaced Part shall
thereupon vest in Lessee, free and clear of all rights of Lessor, and shall no
longer be deemed a Part hereunder, (ii) title to such Replacement Part shall
thereupon vest in Lessor, and (iii) such Replacement Part shall become subject
to this Lease and be deemed part of the Airframe, Engines, or Propellers for all
purposes hereof to the same extent as the parts originally incorporated or
installed in or attached to the Airframe, Engines, or Propellers.
(b) Pooling of Parts. Any Part removed from the Airframe, Engine, or
----------------
Propeller as provided in paragraph (a) of this Section 7 may be subjected by
Lessee to a normal pooling arrangement customary in the airline industry entered
into in the ordinary course of Lessee's business with other United States air
carriers, provided that the Part replacing such removed Part shall be
--------
incorporated or installed in or attached to the Airframe, Engines or Propellers
in accordance with such paragraph (a) as promptly as possible after the removal
of such removed part. In addition, any Replacement Part when incorporated or
installed in or attached to the Airframe, Engines, or Propellers
15
<PAGE>
in accordance with such paragraph (a) may be owned by a United States air
carrier subject to such a normal pooling arrangement, provided that Lessee, at
--------
its expense, as promptly thereafter as possible, either (i) causes title to such
Replacement Part to vest in Lessor in accordance with such paragraph (a) by
Lessee acquiring title thereto for the benefit of, and transferring such title
to, Lessor free and clear of all liens or (ii) replaces such Replacement Part by
incorporating or installing in or attaching to the Airframe, Engines, or
Propellers a further Replacement Part owned by Lessee free and clear of all
Liens and by causing title to such further Replacement Part to vest in Lessor in
accordance with such paragraph (a).
(c) Alterations, Modifications and Additions. Lessee, at its own expense,
----------------------------------------
will make such alterations and modifications in and additions to the Airframe,
Engines, and Propellers as may be required from time to time by the FAA or other
Governmental Body having jurisdiction as a condition to the use of the Airframe,
Engines and Propellers in ordinary commerical passenger service, unless the
validity of such requirements is being contested by appropriate legal
proceedings and non-compliance therewith does not impose a material risk of
material penalties on Lessee, Lessor, or Lender. In addition, Lessee, at its own
expense, may from time to time make such alterations and modifications in and
additions to the Airframe, Engines, or Propellers as Lessee may deem desirable
in the proper conduct of its business, including without limitation, removal of
Obsolete Parts; provided that no such alteration, modification or addition shall
--------
diminish the value or utility of the Airframe, Engines or Propellers or impair
the value, utility, condition or airworthiness thereof, below the value,
utility, condition and airworthiness thereof immediately prior to such
alteration, modification or addition assuming the Airframe, Engines or
Propellers were then of the value or utility and in the condition and
airworthiness required to be maintained by the terms of this Lease. So long as
no Event of Default exists, Lessee may, at any time during the Term, hereof,
remove any Part (i) which is in addition to, and not in replacement of or
substitution for, any Part originally incorporated or installed or attached to
the Airframe, Engines or Propellers at the time of delivery thereof hereunder or
any Part in replacement of or substitution for any such Part,(ii) which is not
required to be incorporated or installed in or attached or added to the
Airframe, Engines or Propellers pursuant to the terms of Section 6 or this
Section 7 and (iii) which can be removed from the Airframe, Engines or
Propellers without causing material damage to the Airframe, Engine or Propeller
or diminishing or impairing the value, utility, condition or airworthiness which
the Airframe, Engines or Propellers would have had at such time had the addition
of such Part not occurred (such Part, for purposes of this paragraph (c), called
a "Removable Part"). Title to all Parts incorporated or installed in or attached
or added to the Airframe, Engines, or Propellers as the result of alterations,
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<PAGE>
modifications or additions under this paragraph (c), except Removable Parts,
shall, without further act, vest in Lessor. Title to any Removable Parts shall
not vest in Lessor, and upon the removal by Lessee of any Removable Part as
above provided, such Removable Part shall no longer be deemed part of the
Airframe, Engines or Propellers from which it was removed. Any Removable Part
not removed by Lessee as above provided prior to the return of the Airframe,
Engines, or Propellers to Lessor hereunder shall become the property of Lessor
at the time of such return.
Lessee may, at its own expense, make such improvements, modifications or
additions to the Airframe, Engines, or Propellers (which improvement,
modification or addition shall not decrease the value and utility of the
Aircraft, Engine or Part, as the case may be) as are not readily removable
without causing material damage to the Airframe, Engines or Propellers (any such
improvement, modification or addition being hereinafter referred to as a
"Nonseverable Improvement"), without giving notice to Lessor thereof; provided,
--------
however, that Lessee shall notify Lessor in advance of any such Nonseverable
- -------
Improvement the cost of which exceeds $250,000. Any such Nonseverable
Improvement shall thereupon become part of the Airframe, Engines or Propellers
and the property of Lessor. Lessee, with respect to such Nonseverable
Improvement, shall have the same obligations hereunder as with respect to the
Airframe, Engines or Propellers.
Lessee shall provide Lessor not less than 90 days before the end of the
Basic Lease Period with a list of all Removable Parts which it is entitled to
and intends to remove at such end date or termination. Lessee will consider in
good faith such offer as Lessor may make to purchase such Removable Parts.
8. Loss, Destruction, Requisition, Etc.
-----------------------------------
Commencing upon acceptance of the Aircraft by Lessee on the Delivery Date
hereunder and continuing until the termination of this Lease and the return by
Lessee of the Aircraft to Lessor at the airport designated by Lessor pursuant to
and in accordance with the terms of Section 15, Lessee assumes the entire risk
of loss for the Aircraft.
(a) Event of Loss with Respect to the Airframe: Payment. Upon the
---------------------------------------------------
occurrence of an Event of Loss with respect to the Airframe or the Airframe and
the Engines or engines and Propellers or propellers then installed on the
Airframe, Lessee shall forthwith (and, in any event, within 10 days after such
occurrence) give Lessor written notice of such Event of Loss, and on or before
the earlier of (i) 45 days following such occurrence of such Event of Loss and
(ii) the date of receipt of insurance payments in respect of such occurrence,
Lessee shall
17
<PAGE>
pay to Lessor the sum of (A) the Termination Value for the Aircraft computed as
of the Rent Payment Date next following the date on which such Event of Loss
occurred (or, if such Event of Loss occurred on a Rent Payment Date, computed as
of such Rent payment Date), (B) any Basic Rent otherwise due and payable on or
before the Rent Payment Date next following the date on which such Event of Loss
occurred, and (C) any Supplemental Rent otherwise due and payable; and, upon
payment in full of such Termination Value and all such other amounts, (A) the
obligation of Lessee to pay all succeeding installments of Basic Rent hereunder
with respect to the Aircraft shall terminate and (B) provided that no Event of
Default shall have occurred and be continuing, Lessor will transfer to Lessee or
to Lessee's insurer the Airframe and the Engines and Propellers. Such transfer
to Lessee shall not affect or limit in any way any obligations of Lessee
hereunder unless specifically discharged by such payment of Termination Value
and Rent.
(b) Event of Loss with Respect to an Engine or Propeller: Replacement.
-----------------------------------------------------------------
Upon the occurrence of an Event of Loss with respect to an Engine or Propeller
in any case where the provisions of paragraph (a) of this Section 8 are not
applicable, Lessee shall give Lessor prompt written notice thereof and shall,
within 45 days after the occurrence of such Event of Loss, duly convey to
Lessor, as replacement for the Engine or Propeller with respect to which such
Event of Loss occurred, title to another engine or propeller of the same make
and model (or engine or propeller of the same manufacturer of equivalent utility
and value and suitable for installation and use on the Airframe or Engine
constituting part of the Aircraft) free and clear of all Liens whatsoever and
having a value and utility at least equal to, and being in as good operating
condition as, the Engine or Propeller with respect to which such Event of Loss
occurred, but in all events in at least as good condition and repair as required
by the terms hereof immediately prior to the occurrence of such Event of Loss
and of the same make and model as the other Engines and Propellers and in such
case, Lessee, at its own expense, will prior to or at the time of any such
conveyance (i) furnish Lessor with a bill of sale, in form and substance
satisfactory to Lessor, with respect to such Replacement Engine or Propeller,
(ii) cause a supplement hereto, in form and substance satisfactory to Lessor,
subjecting such Replacement Engine or Propeller to this Lease, to be duly
executed by Lessee and recorded pursuant to the Federal Aviation Act of 1958, as
amended, (iii) furnish Lessor with such evidence of Lessee's title to such
Replacement Engine or Propeller (including, if requested, an opinion of Lessee's
counsel) and of compliance with the insurance provisions of Section 9 with
respect to such Replacement Engine or Propeller as Lessor may reasonably
request; iv) furnish such documents and evidence as Lessor or its counsel may
reasonably request in order to establish the consummation of the transactions
contemplated by this Section 9(b), the taking of
18
<PAGE>
all corporate proceedings in connection therewith and compliance with the
conditions set forth in this Section 9(b), in each case in form and substance
satisfactory to such party; and (v) take such other action as Lessor may
reasonably request in order that such Replacement Engine or Replacement
Propeller be duly and properly titled in Lessor, leased hereunder and subjected
to the Lien of the Loan Agreement to the same extent as the Engine or propeller
replaced thereby. Upon full compliance by Lessee with the terms of this
paragraph (b) Lessor will transfer to Lessee (i) the Engine or Propeller with
respect to which such Event of Loss occurred and (ii) all claims for damage to
such Engine or Propeller, if any, against third persons arising from the Event
of Loss (except to the extent any insurance carrier requires that such claims be
assigned to it). For all purposes hereof, each such Replacement Engine or
Replacement Propeller shall be deemed part of the property leased hereunder,
shall be deemed an "Engine" or "Propeller" as defined herein and shall be deemed
part of the same Aircraft as was the Engine or Propeller replaced thereby. An
Event of Loss covered by this paragraph (b) shall not result in any reduction in
Basic Rent.
(c) Application of Payments from Governmental Bodies or Others. Any
----------------------------------------------------------
payments (other than insurance proceeds the application of which is provided for
in Section 9) received at any time by Lessor or by Lessee from any Governmental
Body or other party with respect to an Event of Loss resulting from the
condemnation, confiscation, theft or seizure of, or requisition of title to or
use of, the Airframe, Engines, or Propellers (other than a requisition for use
by the United States Government), will, if paid to Lessee shall immediately be
paid over to Lessor except to the extent Lessee is then entitled to such amounts
pursuant to (i) and (ii) below, and in any event be applied as follows:
(i) if such payments are received with respect to the Airframe or any
airframe and the Engines or engines then installed on the Airframe and the
Propellers or propellers then attached to such Engines or engines, so much of
such payments as shall not exceed the Termination Value required to be paid by
Lessee pursuant to paragraph (a) of this Section 8 and any past due Rent shall
be applied in reduction of Lessee's obligation to pay such Termination Value and
any past due Rent, if not already paid by Lessee, or, if already paid by Lessee,
shall be applied to reimburse Lessee for its payment of such Termination Value
and any past due Rent, and the balance, if any, of such payment remaining
thereafter will be retained by Lessor; and
(ii) if such payment is received with respect to an Engine not then
installed on the Airframe or under the circumstances contemplated by paragraph
(b) of this Section 8, all such payments shall be paid over to, retained by,
Lessee, provided Lessee shall have fully performed the terms of this
19
<PAGE>
Section 8 with respect to the Event of Loss for which such payments are made and
provided no Event of Default shall have occurred and be continuing.
(d) Requisition for Use by United States Government with Respect to the
-------------------------------------------------------------------
Airframe, Engines and Propellers. Upon the requisition for use by the United
- --------------------------------
States Government of the Airframe or an airframe and the Engines or engines then
installed on the Airframe and the Propellers or propellers then attached to such
Engine or engine during the Term for the Aircraft, all Lessee's obligations
under this Lease with respect to the Aircraft shall continue, to the same extent
as if such requisition had not occurred. All payments received by Lessor or
Lessee from the United States Government for the use of the Airframe, Engines or
engines and Propellers or propellers during the Term for the Aircraft shall be
paid over to, or retained by, Lessee, provided no Event of Default shall have
occurred and be continuing. All payments received by Lessor or Lessee from the
United States Government for the use of the Airframe, Engines and Propellers
after the Term for the Aircraft shall be paid over to, or retained by, Lessor.
Lessee shall promptly notify Lessor in writing of such requisition. In the event
of any such requisition for use, Lessee agrees to use its best efforts to obtain
reimbursement from the United States Government to Lessor for damages suffered
by Lessor as a result of such requisition for use. Lessee agrees to notify
Lessor promptly in writing in advance of the time when any negotiations between
Lessee and the United States Government with respect to any such requisition
shall commence and will consult with Lessor regarding methods or procedures that
are most appropriate to effect recovery from the United States Government for
any damage suffered by Lessor by reason of such requisition for use.
(e) Requisition for Use by United States Government of an Engine or
---------------------------------------------------------------
Propeller Not Installed on the Airframe. In the event of the requisition for use
- ---------------------------------------
by the United States Government of any Engine or Propeller not then installed on
the Airframe or of any Propeller not then attached to an Engine, Lessee shall
replace such Engine or Propeller hereunder by complying with the terms of
paragraph (b) of this Section 8 to the same extent as if an Event of Loss had
occurred with respect to such Engine or Propeller, and any payments received by
Lessor or Lessee from the United States Government with respect to such
requisition shall be paid over to, or retained by, Lessee, provided no Event of
Default shall have occurred and be continuing.
(f) Application of Payments Other Than for an Event of Loss. Any payments
-------------------------------------------------------
received at any time by Lessor or by Lessee from any Governmental Body, insurer
or other Person with respect to loss or damage to or requisition for use of the
Airframe, Engines or Propellers not constituting an Event of Loss shall be
20
<PAGE>
applied in payment for repairs or for replacement property in accordance with
Sections 6 and 7 and any balance remaining after compliance with such sections
with respect to such damage or loss shall be paid over to or retained by Lessee
if Lessor receives from Lessee notice that the property so damaged or lost has
been repaired or replaced in full and that the costs of such repairs or
replacements have been paid in full. If such repairs or replacements are made
pursuant to contracts requiring progress payments or are made by Lessee, such
proceeds, if received by Lessee, shall be paid over to Lessor and remitted by
Lessor to Lessee from time to time upon appropriate certification by Lessee.
(g) Application of Payments During Existence of an Event of Default. Any
---------------------------------------------------------------
amount referred to in paragraph (c), (d), (e) or (f) of this Section 8 that is
payable to Lessee shall not be paid to Lessee if at the time of such payment an
Event of Default shall have occurred and be continuing, but shall be held by
Lessor, as security for the obligations of Lessee under this Lease and at such
time as there shall not be continuing such Event of Default such amount, unless
theretofore otherwise applied in exercise of Lessor's remedies hereunder, shall
be paid to Lessee.
9. Insurance.
---------
(a) Lessee shall maintain at all times on the Aircraft, at its expense,
property damage, all risk hull and liability insurance, against such risks, in
such form and with such insurers as will be reasonably satisfactory to Lessor,
and including, without limitation, the following: all risk ground and flight
insurance on the Aircraft in an amount which shall not on any date be less than
(and Lessor shall not require such amount to be any greater than) the
Termination Value of the Aircraft as of such date, with no deductible in excess
of $100,000 per occurrence if on the ground and $250,000 per occurrence if in
the air; aircraft liability (including passenger liability) insurance in an
amount which shall not on any date be less than (and Lessor shall not require
such amount to be greater than) $100,000,000 or such higher amount carried by
Lessee on the remainder of its fleet on such date, with no deductible in excess
of $250,000; and at least 15 days prior to any use or operation of the Aircraft
outside of the areas designated in Section 6, war risk (including expropriation)
insurance on the Aircraft in an amount which shall not on any date be less than
(and Lessor shall not require such amount to be any greater than) the
Termination Value of the Aircraft as of such date, which insurance shall cover
the Aircraft for the period of time for which the Aircraft is being or will be
used or operated outside of the Areas designated in Section 6, and shall be in
full force and effect throughout any geographic areas at any time traversed by
the Aircraft.
21
<PAGE>
Lessee shall arrange for appropriate certification of coverages and forms
of endorsements to be made promptly to Lessor by the underwriters of any
policies carried in accordance with this Section 9 covering the Aircraft and any
policies taken out in substitution or replacement thereof. All such policies:
(1) shall be payable in lawful currency of the United States in the United
States;
(2) shall not impose liability on Lessor or Lender to pay premiums for
such insurance;
(3) shall (a) insure Lessor and Lender regardless of any breach or
violation of any warranty, declaration or condition contained in such policies,
including without limitation operation of the Aircraft by non-certified pilots;
(b) be primary without right of contribution from any other insurance carried by
Lessor and/or Lender; (c) waive any rights of subrogation and any rights of set
off, counterclaim or deduction against each named insured; (d) provide for 30
days' notice of cancellation, material change, nonrenewal, expiration or lapse
prior to the effectiveness thereof against Lessor or Lender;
(4) in the case of policies covering liability, shall name Lessor as owner
of the Aircraft and Lender as additional insureds and shall be endorsed to
acknowledge and include the contractual liability of Lessee herein;
(5) in the case of policies covering loss or damage to the Aircraft, shall
be made payable to Lessor and Lender as their respective interests may appear
and shall be endorsed to provide the foregoing coverages and other standard
commercial endorsements reasonably satisfactory to Lessor and Lender.
If Lessee fails to maintain insurance as herein provided, Lessor may at its
option provide such insurance and, in such event, Lessee shall upon demand,
reimburse Lessor, as Supplemental Rent, for the cost thereof.
Lessee and Lessor shall each have the right to carry additional insurance
on the Aircraft for its own benefit in amounts over and above the amounts
required by the foregoing provisions provided however no hull insurance carried
-------- -------
by Lessor in an amount exceeding the Termination Value of the Aircraft shall
interfere with Lessee's ability to obtain such insurance in an amount exceeding
such Termination Value.
Lessee will furnish to Lessor (i) on the date hereof, and (ii) annually a
report, signed by a firm of independent aircraft insurance brokers, appointed by
Lessee, reasonably satisfactory to Lessor, stating the opinion of such firm that
the insurance as
22
<PAGE>
of the date of such report carried and maintained on the Aircraft complies with
the terms thereof.
10. Inspection.
----------
Lessor and Lender and their respective authorized representatives may
inspect (subject to Lessee's normal requirements regarding operations and
security and not more than once a quarter), at their own expense, the Aircraft
and the books and records of Lessee with respect to the Aircraft, and make
copies and extracts therefrom, and may discuss Lessee's affairs, finances and
accounts relating to the Aircraft with its officers, and Lessee shall furnish to
Lessor statements accurate in all material respects regarding the condition and
state of repair of the Aircraft, all upon such reasonable notice and at such
reasonable times during normal hours and as often as may be reasonably
requested and all at the expense of the Person requesting the same. Lessor and
Lender shall have no duty to make any such inspection or inquiry and shall not
incur any liability or obligation by reason of not making any such inspection or
inquiry.
11. Assignments.
-----------
Except as otherwise expressly provided herein, Lessee will not, without the
prior written consent of Lessor (such consent not to be unreasonably withheld),
assign any of its rights hereunder or sublease or otherwise transfer its
interest in the Aircraft.
12. Events of Default.
-----------------
The following events shall each constitute an event of default (herein
called "Event of Default") under this Lease (whether any such event 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 or order of any court or
any order, rule or regulation of any administrative or Governmental Body):
(a) Lessee shall fail to make any payment of Basic Rent within ten
days after the date when due or shall fail to make any other payment of Rent
within twenty days after the date when due; or
(b) Lessee shall fail to maintain the insurance required by Section 9,
or to perform or observe any of the covenants contained in Section 6(b) or
Section 11;
(c) Lessee shall fail to perform or observe any covenant, condition or
agreement to be performed or observed by it hereunder, and such failure shall
continue unremedied for 30
23
<PAGE>
days after the earlier of (a) the date on which Lessee obtains actual knowledge
of such failure; or (b) the date on which notice thereof shall be given by
Lessor to Lessee; or
(d) any representation or warranty made by Lessee herein or in any
document, certificate or financial or other statement now or hereafter furnished
Lessor in connection with this Lease shall prove at any time to have been untrue
or misleading in any material respect as of the time when made; or
(e) Lessee shall default beyond any applicable grace period in the
payment or performance of any obligation of Lessee owing to Lessor; or
(f) Lessee shall (A) default in the payment of any installment or
other payment for borrowed money or under any lease or for the deferred purchase
price of property, including interest thereon, beyond the period of grace, if
any, provided with respect thereto if the total amount of borrowed money or the
total of all payments remaining to be paid under such lease or deferred payment
contract exceeds $1,500,000, or (B) default in the performance or observance of
any other term, condition, or agreement contained in any obligation for borrowed
money or obligation under a lease or for the deferred purchase price of property
or in any agreement relating thereto if the total of all payments remaining
under such lease or deferred payment contract exceeds $1,500,000, if the effect
of such default is to cause the holder or beneficiary of such obligation to
accelerate the maturity of such obligation or to realize upon any collateral
given as security therefor; or
(g) the filing of a petition seeking a reorganization, arrangement,
adjustment, or composition of or in respect of Lessee in an involuntary
proceeding or case under the federal bankruptcy laws, as now or hereafter
constituted or any other applicable federal or state bankruptcy, insolvency or
other similar law, or appointing a receiver, liquidator, assignee, custodian,
trustee, or sequestrator (or similar official) of Lessee or of any substantial
part of its property, or ordering the winding up or liquidation of the affairs
of Lessee, and the continuance of any such decree or order unstayed and in
effect for a period of 60 days; or
(h) the institution by Lessee of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by Lessee to the institution of bankruptcy
or insolvency proceedings against it, or the commencement by Lessee of a
voluntary proceeding or case under the federal bankruptcy laws, as now or
hereafter constituted, or any other applicable federal or state bankruptcy,
insolvency or other similar law, or the consent by Lessee to the filing of any
such petition or to the appointment of or taking possession by receiver,
liquidator, assignee, trustee, custodian,
24
<PAGE>
or sequestrator (or other similar official) of Lessee or of any substantial part
of its property, or the making by Lessee of any assignment for the benefit of
creditors or the admission by Lessee of its inability to pay its debts generally
as they become due or its willingness to be adjudicated a bankrupt or the
failure of Lessee generally to pay its debts as they become due or the taking of
corporate action by Lessee in furtherance of any of the foregoing.
13. Remedies.
--------
If a Event of Default shall occur and be continuing Lessor may, at its
option, declare this Lease to be in default; and at any time thereafter Lessor
may do any one or more of the following with respect to the Aircraft or any part
thereof as Lessor in its sole discretion shall elect, to the extent permitted by
applicable law then in effect:
(a) demand that Lessee, and Lessee shall at its expense upon such
demand, return the Aircraft promptly to Lessor, in the condition required by
Section 15(a), at such place in the continental United States of America as
Lessor shall specify, or Lessor, at its option, may enter upon the premises
where the Aircraft is located and take immediate possession of the Aircraft and
remove the same by summary proceedings or otherwise, all without liability 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;
(b) with or without taking possession thereof, sell the Aircraft,
Airframe, Engines, and/or Propellers, in one or more public or private sales,
severally or in lots with or without notice, advertisement or publication, as
Lessor may determine, or otherwise dispose of, hold, use, operate, lease to
others or keep idle the Aircraft as Lessor in its sole discretion may determine,
all free and clear of any rights of Lessee and without any duty to account to
Lessee with respect to such action or inaction or for any proceeds with respect
thereto;
(c) in order to preserve for Lessor the benefits intended by the
transactions contemplated, hereunder, Lessor may proceed under either (i) or
(ii) below, but not under more than one of such clauses:
(i) whether or not Lessor has exercised, or at any time exercises,
any of its rights under paragraph (a) or (b) above with respect to the Aircraft,
Lessor, by written notice to Lessee specifying a payment date, which shall be a
Rent Payment Date not earlier than 20 days from the date of such notice, in
order to preserve for Lessor the benefits intended by the transactions
contemplated, hereunder, shall cause Lessee to pay to Lessor, and Lessee shall
pay to Lessor, on the payment date
25
<PAGE>
specified in such notice all remaining Rent present valued at 9% monthly and
return the Aircraft in accordance with the provision in Section 15 hereof; upon
its repossession of the Aircraft, Lessor agrees to use commercially reasonable
efforts to re-lease the Aircraft to a fully qualified lessee for a term not
exceeding the remaining Term of the Lease and shall pay to Lessee, such rent
received by Lessor pursuant to this Section 13 (c)(i), as and when received by
Lessor, which equals those amounts theretofore received by Lessor from Lessee
pursuant to this Section 13 (c)(i);
(ii) receive from Lessee (and sue to enforce the payment thereof), as
liquidated damages for loss of the bargain and not as a penalty, and in addition
to all accrued and unpaid Basic Rent and other sums due under the Lease, an
amount equal to the Termination Value calculated as of the Rent Payment Date for
the last payment of Basic Rent actually received by Lessor interest thereon at
the Overdue Rate from the date of such Rent Payment Date until the date of
payment, and, after receipt in good funds of the sums described above, Lessor
will, if it has not already done so, terminate this Lease and, at its option,
either pay over to Lessee as, when and if received, any net proceeds (after all
costs and expenses) from any sale, lease or other disposition of the Aircraft,
or convey to Lessee all of its right, title and interest in and to the Aircraft,
as is, where is and with all faults, without recourse and without warranty
except that the Aircraft shall be free and clear of any liens and encumbrances
created by or through Lessor;
(d) Lessor may terminate this Lease as to the Aircraft and may
exercise any other right or remedy which may be available to it under applicable
law or proceed by appropriate court action to enforce the terms hereof or to
recover damages or the breach hereof.
(e) In addition to the other obligations of Lessee under this Section
13, Lessee shall be liable, except as otherwise provided in this Section 13, for
any and all unpaid Rent due thereunder and any interest owing under Section
3(c)(iii) before, after or during the exercise of any of the foregoing remedies
and for all legal fees (including the allocated charges of internal counsel) and
other reasonable costs and expenses incurred by reason of the occurrence of any
Event of Default or the exercise of Lessor's or Lender's remedies with respect
thereto, including all reasonable costs and expenses incurred in connection with
the return of the Aircraft, the Airframe, any Engine, or Propeller in accordance
with the terms of Section 15 or in placing the Aircraft, the Airframe or any
Engine, or Propeller in the condition and airworthiness required by Section 15.
Except as otherwise expressly provided above, no remedy referred to in this
section 13 is intended to be exclusive, but each shall be cumulative and in
addition to any
26
<PAGE>
other remedy referred to above or otherwise available to Lessor at law or in
equity, and the exercise or beginning of exercise of any one or more of such
remedies shall not be deemed an election of such remedies and shall not preclude
the simultaneous or later exercise by Lessor of any or all of such other
remedies.
Upon the transfer by Lessor of its right, title and interest in and to the
Aircraft to a third party or upon a termination pursuant to Section 13(d), the
obligation of the Lease under this Lease to pay Rent shall terminate with
respect to the Aircraft except for the obligation of Lessee to pay the amounts
set forth in this Section 13.
(f) To the full extent that Lessee may lawfully agree, (i) Lessee
agrees that it will not at any time claim or take the benefit of any appraisal,
valuation, stay, extension, moratorium or redemption law now or hereafter in
effect in order to prevent of delay the enforcement of this Lease or the
absolute sale of the Aircraft, the Engines, the Propellers, or any part thereof
or the possession thereof by any purchaser at any sale pursuant to this Section
13, and (ii) Lessee hereby waives the benefit of all such laws. No express or
implied waiver by Lessor of any Event of Default shall in any way be, or be
construed to be, a waiver of any future or subsequent Event of Default.
14. Lessor's Right to Perform.
-------------------------
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 itself make such payment or perform or comply with such
agreement, and the amount of such payment and the amount of the reasonable
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, to the extent permitted by applicable law, thereon, at the Overdue
Rate per annum from the date of the making of such payment or the incurring of
such expenses by Lessor to the date of payment of such Supplemental Rent by
Lessee, shall be deemed Supplemental Rent, payable by Lessee upon demand.
15. Expiration of Lease Term.
------------------------
(a) Return.
------
(i) Lessee shall, upon the expiration, cancellation or earlier
termination of the Term of the Aircraft, return the Aircraft to Lessor at
Hanscom Field, Bedford, Massachusetts. Until the Aircraft is returned to Lessor
pursuant to the provisions of this Section, all of the provisions of this Lease
with respect thereto shall continue in full force and effect. Lessee shall pay
all the costs and expenses in
27
<PAGE>
connection with or incidental to the return of the Aircraft, including, without
limitation the cost of removing, assembling, packing, insuring and transporting
the Aircraft.
(ii) At the time of such expiration, cancellation or termination of
the Term, and at the time of such return, (A) the Aircraft shall be in the
condition and repair required to be maintained by and otherwise in full
compliance with Sections 6 and 7 hereof and free and clear of all Permitted
Liens except those described in (i) through (iv) of the definition of Permitted
Liens; (B) the Aircraft shall have installed all Engines and Propellers, or
Replacement Engines or Replacement Propellers, as the case may be, (C) shall be
in as good condition, state of repair and appearance as when delivered to Lessee
ordinary wear and tear and changes and alterations properly made by Lessee as
permitted under this Lease excepted; and (D) shall be in good operating
condition as required by Section 6(a) hereof. Lessee shall pay for any repairs
necessary to restore the Aircraft to such condition. In addition, the Aircraft
shall have a currently effective Airworthiness Certificate issued by the FAA and
be in compliance with all airworthiness directives issued by the FAA and all
FAA mandated manufacturers' change notices and/or service bulletins including
all recommended service bulletins with which the Lessee has completed for a
majority of other aircraft similar to the Aircraft in its control or operations.
If before the expiration, cancellation or termination of the Term, an
airworthiness directive, an FAA mandated manufacturers' change notice or service
bulletin is issued which requires any modification or improvement in the
Aircraft or any Engine, Propeller or Part by a date within six months after the
date of expiration, cancellation or termination of the Term, then Lessee shall
either (i) make such modification or improvement prior to the date of
expiration, cancellation or termination of the Term, or (ii) pay to Lessor on
the date of such expiration, cancellation or termination, an amount equal to the
cost of Lessee making such modification or improvement. Lessee, upon Lessor's
written request, agrees to perform any such modifications or improvements. All
markings of Lessee on the Aircraft shall be removed by Lessee by methods
approved by Lessor. Lessee shall execute and deliver to Lessor such instruments
of release and termination of this Lease as to the Aircraft, in form suitable
for recording at the FAA Aircraft Registry and other public offices, as Lessor
may reasonably request to make clear upon public records that the Aircraft is
free and clear of all rights of Lessee therein hereunder or otherwise, and shall
authorize Lessor to date such instruments with the effective date of expiration
or earlier cancellation or termination of the Term of this Lease as to the
Aircraft.
(iii) When the Aircraft is returned to the Lessor, the Lessee will
have performed a full 2,500 hour inspection on the Airframe within the last 100
hours and each life limited
28
<PAGE>
part or component of any Engine or Replacement Engines or Propeller or
Replacement Propellers, as the case may be, shall have no less than an average
fifty percent time remaining on its life, whether measured in hours or cycles,
before replacement or rebuilding is required; such life limitation to be
determined by manufacturers' service bulletins and in the event Lessee cannot
meet the above conditions with respect to the Engines or Replacement Engines, as
the case may be, and Propellers or Replacement Propellers, as the case may be,
Lessee shall pay a dollar amount per hour per each such item for each hour by
which the times on each such item shall exceed fifty percent of Lessee's
allowable time of operation between overhauls, which dollar amount reflects
Lessee's pro rata cost of the overhaul on each such item, however, each Engine
or Replacement Engine, as the case may be, shall be returned with a fresh hot
section within 250 hours of operation and no other part or component of any
Engine or Replacement Engines, as the case may be, or any Propeller or
Replacement Propellers, as the case may be, have less than twenty five percent
time remaining on its life, whether measured in hours or cycles before
replacement or rebuilding is required, such life limitation to be determined by
manufacturers' service bulletins.
(iv) Lessee shall also deliver to Lessor upon the return of the
Aircraft, all aircraft log books, manuals, certificates, data, inspections,
modification and overhaul records applicable to the Aircraft required to be
maintained with respect thereto under applicable rules and regulations of the
FAA.
(v) Specific Items. With respect to the Aircraft, the following
specific items in paragraphs (a) - (g), shall be in the following general
condition or, to the extent addressed in Lessee's maintenance manual or
maintenance procedures, in the condition required by such manual or procedures
normal wear and tear excepted. (a) The Aircraft shall: (1) be clean; (2) have
installed the full complement of equipment, parts and accessories and loose
equipment, as delivered, as would remain installed in the Aircraft if the
Aircraft were to remain in Lessee's service, and shall be in a condition
suitable for operation in commercial service; (3) comply with the manufacturer's
original specifications therefore, as amended and to the extent still in
effect; (4) have been inspected and treated with respect to corrosion as defined
in the Lessee's maintenance manual. (b) The fuselage, windows and doors each
shall be with respect to: (1) the fuselage, free of major dents and abrasions,
all scab patches will be to Lessee's maintenance manual standards and loose or
pulled rivets shall be corrected to Lessee's maintenance manual procedures; and
(2) all windows, free of delamination and replaced in accordance with Lessee's
maintenance manual procedures; (c) The wings and empennage shall each have: (1)
all control surfaces waxed and polished; (2) all unpainted cowlings
29
<PAGE>
and fairings polished; and (3) notwithstanding Lessee's maintenance manual or
maintenance procedures, all wings free of fuel leaks. (d) The condition of the
interior of the Aircraft shall be such that the appearance and serviceability of
the interior shall be to a standard at least equal to the average of Lessee's
other aircraft. (e) All cockpit decals shall be clean, secure and legible;
(f) The fuselage shall be substantially free from corrosion or shall be
adequately treated and an approved corrosion prevention program shall be in
operation and all fuel tanks shall be free from contamination and corrosion and
a tank treatment program shall be in operation; and (g) the general condition of
the Aircraft upon return will be a condition equal to that of the average of the
fleet.
(vi) Upon any expiration or termination of the Lease, upon the
written request of Lessor, Lessee agrees to provide Lessor at Lessee's expense
with storage, insurance and facilities which shall be sufficient to properly
preserve the Aircraft for up to 30 days at Lessee's facilities. If required by
Lessor, Lessee shall provide an additional 60 days' storage facilities upon
mutually agreeable terms and conditions.
16. Federal Bankruptcy Act.
----------------------
To the extent provided thereby (or to the fullest extent it may lawfully so
agree whether or not provided thereby) Lessee hereby agrees in accordance with
the provision of Title 11 U.S.C. Section 1110, if applicable, or any analogous
section of the federal bankruptcy laws, as amended from time to time, that the
title of Lessor to the Aircraft and any right of Lessor to take possession of
the Aircraft in compliance with the provisions of this Lease shall not be
affected by the provisions of the Federal bankruptcy law, as amended from time
to time, including, without limitation, the provisions of Section 362 or 363 of
such Title or other analogous part of any superseding statute, as amended from
time to time.
17. Further Assurance.
-----------------
Forthwith upon the execution and delivery of the Lease Supplement, Lessee
will cause such supplements to be duly filed and recorded and, in the case of
the Aircraft, will also cause this Lease and the Loan Agreement to be duly filed
and recorded in each case in accordance with the Federal Aviation Act of 1958,
as amended. In addition, Lessee will promptly and duly execute and deliver to
Lessor and to such other persons as Lessor shall reasonably designate such
further documents and assurances and take such further action as Lessor may from
time to time reasonably request in order more effectively to carry out the
intent and purpose of this Lease and to establish and protect (i) the rights and
remedies created or intended to be created in favor of Lessor hereunder, and
(ii) the Lien of the Loan
30
<PAGE>
Agreement, including, without limitation, if requested by Lessor, at the expense
of Lessee, the execution and delivery of supplements or amendments hereto, in
recordable form subjecting to this Lease any Replacement Engine or Replacement
Propeller and the recording or filing of counterparts hereof or thereof, or of
financing statements with respect hereto, in accordance with the laws of such
jurisdictions as Lessor may from time to time deem advisable. On or before the
one hundred twentieth day of each fiscal year, commencing with the first fiscal
year beginning on or after April 1, 1988, Lessee shall deliver to Lessor a
certificate of Lessee, signed by the President or the principal accounting or
financial officer of Lessee, to the effect that the signer is familiar with or
has reviewed the relevant terms of the Lease and has made, or caused to be made
under his 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 calendar year, nor does the signer have knowledge of the
existence as of the date of such certificate, of any condition or event which
constitutes a Default, or, if any such condition or event existed or exists,
specifying the nature and period of existence thereof and what action Lessee
has taken or is taking or proposes to take with respect thereto.
18. Notices.
-------
All notices required under the terms and provisions hereof shall be in
writing, and any such notice shall be addressed to the recipient at its address
set forth above (or such other address as hereinafter designated by Lessor or
Lessee) and shall become effective when received by addressee.
19. Net Lease, No Set-Off, Counterclaim, Etc.
----------------------------------------
THIS LEASE IS A NET LEASE, AND LESSEE ACKNOWLEDGES AND AGREES THAT LESSEE'S
OBLIGATION TO PAY ALL RENT HEREUNDER, AND THE RIGHTS OF LESSOR IN AND TO SUCH
RENT, SHALL BE ABSOLUTE AND UNCONDITIONAL AND SHALL NOT BE SUBJECT TO ANY
ABATEMENT, REDUCTION, SET-OFF, DEFENSE, COUNTERCLAIM OR RECOUPMENT
("ABATEMENTS") FOR ANY REASON WHATSOEVER, INCLUDING, WITHOUT LIMITATION,
ABATEMENTS DUE TO ANY PRESENT OR FUTURE CLAIMS OF LESSEE AGAINST LESSOR UNDER
THIS LEASE OR OTHERWISE, AGAINST MANUFACTURER OR VENDOR, OR AGAINST ANY OTHER
PERSON FOR WHATEVER REASON, INCLUDING, WITHOUT LIMITATION: (i) any default,
misrepresentation, negligence, gross negligence, misconduct, willful misconduct
or other action or inaction of any kind by Lessor, Lender, any manufacturer or
seller of any part of the Aircraft, Lessee, or any other Person, whether under
or in connection with this Lease or any other document relating to this Lease;
(ii) the insolvency, bankruptcy, reorganization or cessation of existence, or
discharge or forgiveness of indebtedness of, any entity or Person referred to in
clause (i) above or any other Person, including, without limitation, with
respect to the Lender only, the disaffirmance or rejection of
31
<PAGE>
this Lease pursuant to Section 365(a) of the United States Bankruptcy Code (or
any successor thereto); (iii) the invalidity, unenforceability, impossiblity or
illegality of performance of this Lease or any other agreement referred to in
clause (i) above for any reason; (iv) any defect in the title, condition,
design, operation or fitness for use of, or any Lien or other restriction of any
kind upon, all or any part of the Aircraft, any loss or destruction of, or
damage to, the Aircraft, or any interruption in or cessation of the ownership,
possession, operation or use of any thereof for any reason whatsoever; (v) any
restriction, prevention or curtailment of or interference with the Aircraft or
the use thereof or any part thereof for any reason whatsoever, including,
without limitation, by any Governmental Body; (vi) any applicable laws now or
hereafter in force; (vii) any failure to obtain any required governmental
consent for a transfer of rights or title to Lessor, Lessee or any other Person;
(viii) any amendment or other change of, or any assignment of any rights
hereunder, or any waiver or other action or inaction under or in respect of
this Lease, or any exercise of non-exercise of any right or remedy under or in
respect to this Lease, including, without limitation, the exercise of any
foreclosure or other remedy under the Loan Agreement or this Lease or the sale
of the Aircraft or any portion thereof or interest therein; or (ix) any other
cause dissimilar to any of the foregoing, any present or future law
notwithstanding. It is the intention of the parties hereto that all Rent payable
by Lessee hereunder shall continue to be payable in all events in the manner and
at the times provided herein. 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 Lease except in accordance with the express terms
hereof. If for any reason whatsoever this Lease is terminated in whole or in
part by operation of law or otherwise except as specifically provided herein
Lessee nonetheless may agree to pay to Lessor an amount equal to each Rent
payment at the time such payment would have become due and payable in accordance
with the terms hereof had this Lease not been terminated in whole or in part.
Each Rent payment made pursuant to this Lease by Lessee shall be final and
Lessee will not seek to recover all or any part of such payment from Lessor for
any reason whatsoever. Nothing in this section shall be construed to preclude
Lessee from bringing any suit at law or in equity which it would otherwise be
entitled to bring for breach of any representation, warranty, covenant or duty
of Lessor hereunder.
20. Ownership by Lessor; Security for Lessor's Obligation to Lenders;
-----------------------------------------------------------------
Lessor's Assignment.
- -------------------
The Aircraft is and shall at all times remain the sole and exclusive
property of Lessor, its successors and assigns subject only to the Lien of the
Loan Agreement. The only interest Lessee
32
<PAGE>
shall have in the Aircraft is that of a lessee hereunder.
To secure the Obligations under the Loan Agreement, Lessor has agreed in
the Loan Agreement, among other things, to assign this Lease and the Lease
Supplement and to mortgage the Aircraft. To the extent, if any, that this Lease
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 may be created through the transfer or possession of any counterpart other
than the original executed counterpart marked "Original". Lessee hereby accepts
and consents to the assignment of all of Lessor's right, title and interest in
and to this Lease pursuant to the terms of the Loan Agreement, including,
without limitation, the right to receive payment of any Rent or any other
payment due under this Lease, the right to transfer or assign title to the
Aircraft this Lease, and the right to make all waivers, election and agreements,
to give all notices, consents and releases, or take all action upon the
happening of an Event of Default under this Lease or to do any and all other
things whatsoever which Lessor is or may become entitled to do under this Lease;
provided, however, that Lessor shall remain liable for the performance of all of
- -------- -------
the terms, conditions, covenants, and provisions for which it is obligated under
this Lease notwithstanding such assignment. Without limiting the generality of
the foregoing provisions of this Section 20, Lessee further acknowledges and
agrees, (A) to do any and all things required of Lessee hereunder and not to
terminate this Lease, notwithstanding any default by Lessor or the existence of
any other offset as between Lessor and Lessee 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; (B) not to require the Lender to perform any
duty, covenant or condition required to be performed by Lessor under the terms
of this Lease, all rights of Lessee in any such connection being hereby waived
as to the Lender; and (C) to comply with all reasonable requests respecting
assignment and to execute any documents (or consents to the assignment) which
Lessor or Lender may reasonably request in order to effectuate the foregoing.
21. General Indemnity; Expenses.
---------------------------
Lessee hereby agrees at all times to indemnify and hold the Lessor, its
Lender and the beneficiaries of any trust relating to the Aircraft or of which
Lessor is trustee, and their officers, agents and employees ("Indemnitees")
harmless from and against all and any liabilities, losses, claims, proceedings,
damages, penalties, fines, fees (including attorneys' fees), costs and expenses
whatsoever which may at any time be made or claimed by any person or persons of
any description, arising directly or indirectly out of or in any way connected
with: (i) the possession, transportation, management, control, use or
33
<PAGE>
operation, condition, delivery, leasing, or redelivery of the Aircraft (either
in the air or on the ground) or any part of the Aircraft or technical records
relating to the Aircraft or Parts, by the Lessee or any other persons; and (ii)
the testing, maintenance, repair, service, modification, overhaul, replacement
or removal of the Aircraft (either in the air or on the ground) or any part of
the Aircraft or technical records relating to the Aircraft or Parts, by the
Lessee or any other person on behalf of the Lessee (other than the Lessor or the
Lessor's agent); whether or not such liabilities, losses, claims, proceedings,
penalties, fines, costs and expenses may be attributable to any defect in the
Aircraft or Parts or the technical records relating to the Aircraft or Parts or
to the design, testing or use thereof or from any maintenance, service, repair,
overhaul, or to any other reason whatsoever (whether similar to any of the
foregoing or not), and regardless of when the same shall arise whether during,
or after termination of the Lease.
22. Quiet Enjoyment.
---------------
So long as no Event of Default exists, Lessor covenants and agrees that
neither it nor any person claiming through it shall interfere with the peaceful
and quiet enjoyment and use of the Aircraft by Lessee.
23. Miscellaneous.
-------------
(a) Counterparts. This Lease may be executed in any number of
------------
counterparts and by the parties hereto on separate counterparts, each of which
counterparts, shall for all purposes be deemed to be an original; and all such
counterparts shall together constitute but one and the same Lease. Only one
counterpart marked "Original" shall exist. Accordingly, such counterpart of this
Lease constitutes chattel paper (as such term is defined in the Uniform
Commercial Code as in effect in any applicable jurisdiction), no other
counterpart of this Lease constitutes chattel paper (as so defined), and no
security interest in the Lease may be created by the transfer or possession of
any counterpart other than the counterpart marked "Original" hereof.
(b) Severability, Etc. The invalidity of any one or more Sections or
-----------------
clauses of this Lease or of any supplement hereto or of any part hereof or
thereof shall not affect the remaining portions of this Lease or of any
supplement or any part hereof or thereof, respectively. If one or more of the
Sections or clauses contained in this Lease or in any supplement or any part
hereof or thereof is held by any court of law to be invalid, this Lease and all
supplements shall be construed as if such invalid clauses or Sections or part or
parts thereof had not been contained herein or therein. To the extent permitted
by applicable law,
34
<PAGE>
Lessee hereby waives any provision of law which renders any provision hereof
prohibited or unenforceable in any respect.
(c) Effect of Headings. The section and other headings in this Lease and
------------------
the table of contents are for convenience of reference only and shall not
modify, define, expand or limit any of the terms or provisions hereof and all
references herein to numbered sections, unless otherwise indicated, are to
sections of this Lease.
(d) Operation of Law; Amendments; Waivers. No term or provision of this
-------------------------------------
Lease may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which the enforcement of the
change, waiver, discharge or termination is sought and approved in writing by
Lessor.
(e) Successors and Assigns. This Lease and the covenants and agreements
----------------------
contained herein shall be binding upon, and inure to the benefit of, Lessor and
its successors and assigns and Lessee and its permitted successors and assigns.
(f) Applicable Law. This Lease shall in all respects be governed by, and
--------------
construed in accordance with, the laws of the State of Ohio applicable to
agreements made and to be performed entirely within such state, including all
matters of construction, validity and performance.
35
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease Agreement
to be duly executed as of the date and year first above written.
AMERICAN FINANCE GROUP, INC. not in
its individual capacity but solely
as Trustee,
as Lessor
By /s/ (Signature Appears Here)
------------------------------------
Its Executive Vice President
COMAIR, INC.
as Lessee
By /s/ (Signature Appears Here)
------------------------------------
Its Controller
36
<PAGE>
Exhibit A
To
Lease Agreement
---------------
LEASE SUPPLEMENT NO. 1, dated ______________
between American Finance Group, Inc., not in
its individual capacity but solely as trustee
("Lessor"), and COMAIR, INC. ("Lessee")
Lessor and Lessee have heretofore entered into the Lease Agreement dated as
of May 10, 1988, relating to a Saab model SF 340A aircraft (the "Lease
Agreement"); defined terms therein being hereinafter used with the same
meanings. The Lease Agreement provides for the execution and delivery of a Lease
Supplement for the purpose of leasing the Aircraft under the Lease Agreement as
and when delivered by Lessor to Lessee in accordance with the terms thereof.
A counterpart of this Lease Supplement will be filed with a counterpart of
the Lease Agreement for recordation with the Federal Aviation Administration as
one document.
The Lease Agreement relates to the Airframe, the two Engines and the two
Propellers described below, together with the Parts thereof.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient considerations, Lessor and Lessee hereby agree as follows:
1. Lessor hereby delivers and leases to Lessee under the Lease
Agreement, and Lessee hereby accepts and leases from Lessor under the Lease
Agreement, the following Aircraft, which Aircraft as of the date hereof consists
of the following components:
(i) Airframe: Saab model SF 340A, U.S. registration no. N340SF;
manufacturer's serial no. 340A-014.
37
<PAGE>
(ii) Engines: two General Electric model CT7-5A2 aircraft engines
bearing manufacturer's serial nos. GE-E-367187D and GE-E-367147D
(each of which has 750 or more rated takeoff horsepower); and
(iii) Propellers: two Dowty Rotol R320/4-123/F/l four blade aircraft
propellers bearing manufacturer's serial nos. DRG/3131/83 and
DRG/1682/83 (each of which propellers is capable of absorbing 750 or
more rated takeoff shaft 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 to Lessor that the Airframe and each Engine
installed thereon have been duly marked in accordance with the terms of Section
6(c) of the Lease Agreement and that Lessee has accepted the Aircraft for all
purposes hereof and of the Lease Agreement as being airworthy, in accordance
with specifications, in good working order and repair and without defect of
inherent vice in title, condition, design, operation or fitness for use, whether
or not discoverable by Lessee as of the date hereof, and free and clear of all
Liens except the Lien of the Loan Agreement and the Lease, provided that nothing
--------
contained herein or in the Lease Agreement shall in any way diminish or
otherwise affect any right Lessee or Lessor may have with respect to the
Aircraft against manufacturer or any subcontractor or supplier of manufacturer.
4. All the terms and provisions of the Lease Agreement are hereby
incorporated by reference in this Lease Supplement to the same extent as if
fully set forth herein, and the Aircraft as of the date hereof is fully subject,
in all respects, to the terms and conditions of the Lease.
5. This Lease Supplement may be executed in any number of counterparts,
and each of such counterparts, except as provided in Section 21 of the Lease
Agreement, shall for all purposes be deemed to be an original, and all such
counterparts shall together constitute but one and the same Lease Supplement.
38
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to
be duly executed by their authorized officers as of the day and year first above
written.
AMERICAN FINANCE GROUP, INC.,
not in its individual capacity
but solely as Trustee,
as Lessor
By
-----------------------------
Title
--------------------------
COMAIR, INC.
as Lessee
By
-----------------------------
Title
--------------------------
39
<PAGE>
EXHIBIT B
TO
LEASE
AGREEMENT
TERMINATION VALUE TABLE
<TABLE>
<CAPTION>
RENT PAYMENT TERMINATION
DATE VALUE
------------ -----------
<S> <C>
$7,500,000
7,400,000
7,390,000
7,380,000
7,375,000
7,370,000
7,365,000
7,360,000
7,355,000
7,350,000
7,340,000
7,330,000
7,320,000
7,315,000
7,310,000
7,305,000
7,300,000
7,295,000
7,290,000
7,280,000
7,270,000
7,260,000
7,250,000
7,240,000
7,235,000
7,230,000
7,225,000
7,220,000
7,210,000
7,200,000
7,195,000
7,190,000
7,180,000
7,170,000
7,160,000
7,150,000
</TABLE>
40
<PAGE>
EXHIBIT B
TO
LEASE
AGREEMENT
(Continued)
TERMINATION VALUE TABLE
<TABLE>
<CAPTION>
RENT PAYMENT TERMINATION
DATE VALUE
------------ -----------
<S> <C>
$7,145,000
7,140,000
7,135,000
7,130,000
7,125,000
7,120,000
7,110,000
7,100,000
7,090,000
7,085,000
7,080,000
7,075,000
7,070,000
7,065,000
7,060,000
7,050,000
7,030,000
7,010,000
6,995,000
And Thereafter
</TABLE>
41
<PAGE>
EXHIBIT C
TO
LEASE
AGREEMENT
ADDITIONAL SPARE PARTS
Below listed are the spares necessary to support Serial #014:
<TABLE>
<S> <C> <C> <C>
APP-85 AUTO PILOT PANEL 622-6208-001 $ 3,984.00
MSP-85 MODE SELECT PANEL 622-6209-007/008 $ 3,740.00
FCC-86B FLT CONTROL 622-7492-010 $ 36,812.00
CTL-22 COM CONTROL 622-6520-001 $ 2,120.00
VHF-21A VHF COM 622-6389-001 $ 6,310.00
CTL-32 NAV CONTROL 622-6521-009 $ 2,120.00
VIR-32 NAV RECEIVER 622-6137-001 $ 10,590.00
CTL-62 ADF CONTROL 622-6522-001 $ 2,120.00
ADF-60B ADF RECEIVER 622-2873-001 $ 6,720.00
ANT-60B ADF ANTENNA 622-3710-001 $ 2,810.00
CAD-62 CONTROL ADAPTER 622-6590-001 $ 665.00
BDI-36 BFSE/DIST. INDICATOR 622-3702-009 $ 9,995.00
DME-42 DME R/T UNIT 622-6263-001 $ 9,985.00
IND-42C DME INDICATOR 622-7318-001 $ 2,330.00
CTL-92 XPNDR CON622-6523-001 622-6523-001 $ 2,120.00
TAI-80A SAT/TAS INDICATOR 622-2294-014 $ 3,780.00
ASI-80F AIRSPEED IND SERV 622-6728-011 $ 9,920.00
COPILOT ALTIMETER IDC523-29702-4113 $ 20,000.00
COPILOT AIRSPD INDICATOR IDC39948-E2320 $ 15,000.00
COPILOT VERT SPD IND IDC40620-E2300 $ 5,000.00
STBY ALTIMETER IDC57O-31400-007 $ 15,000.00
STBY AIRSPD IND IDC530-36950-346 $ 6,000.00
RAD ALT CONVERTER IDC995-29400-4217 $ 9,246.00
STBY GYRO HORIZON JET AI-904AH $ 11,785.00
BAKER PAX BRIEF SYS M2000 $ 1,848.00
$196,016.00
</TABLE>
Should you have any questions, please call.
42
