<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
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Commission file number 0-18368.
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AIRFUND International Limited Partnership
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3037350
- ----------------------------------- ---------------------
(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:
3,040,000 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
<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
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<S> <C> <C>
(a) Documents filed as part of this report:
(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.33-25334).
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 Northwest Airlines, Inc. was
filed in the Registrant's Annual Report on Form 10-K
for the period July 26, 1989 (commencement of
operations) to December 31, 1989 as Exhibit 28 (b) 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 United Air Lines, Inc. was filed
in the Registrant's Annual Report on Form 10-K for
the period July 26, 1989 (commencement of operations)
to December 31, 1989 as Exhibit 28 (c) and is
incorporated herein by reference.
99 (c) Lease agreement with Cathay Pacific Airways Limited was
filed in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 as Exhibit 28 (d)
and is incorporated herein by reference.
99 (d) Lease agreement with Southwest Airlines, Inc. is
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.
AIRFUND International Limited Partnership
By: AFG Aircraft Management Corporation,
a Massachusetts corporation and the
General Partner of the Registrant.
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 and
President and a Director of the a Director of the General Partner
General Partner (Principal Financial Officer)
(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 General Partner
(Principal Accounting Officer)
Date: April 9, 1996
-------------------------
<PAGE>
<TABLE>
<CAPTION>
AIRFUND International Limited Partnership
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
----
<S> <C>
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-6
FINANCIAL STATEMENTS:
Report of Independent Auditors 7
Statement of Financial Position
at December 31, 1995 and 1994 8
Statement of Operations
for the years ended December 31, 1995, 1994 and 1993 9
Statement of Changes in Partners' Capital
for the years ended December 31, 1995, 1994 and 1993 10
Statement of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 11
Notes to the Financial Statements 12-20
ADDITIONAL FINANCIAL INFORMATION:
Statement of Cash and Distributable
Cash From Operations, Sales and Refinancings 21
Schedule of Costs Reimbursed to the
General Partner and its Affiliates as
Required by Section 10.4 of the Amended and
Restated Agreement and Certificate of
Limited Partnership 22
</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 $ 4,588,609 $ 5,166,392 $ 5,822,874 $ 6,227,077 $ 8,193,498
Net income (loss) $ (2,283,720) $ (1,463,495) $ (5,435,348) $ 1,099,052 $ 11,128,151
Per Unit:
Net income (loss) $ (0.71) $ (0.46) $ (1.70) $ 0.34 $ 2.92
Cash distributions
declared $ 1.00 $ 1.25 $ 2.00 $ 2.25 $ 10.75
<CAPTION>
Financial
Position
- -----------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 16,888,606 $ 17,961,111 $ 24,263,282 $ 36,143,240 $ 42,324,675
Total long-term obligations $ 4,742,968 -- -- -- --
Partners' capital $ 11,233,743 $ 16,717,463 $ 22,180,958 $ 34,016,306 $ 40,117,254
</TABLE>
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<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, AIRFUND International Limited
Partnership (the "Partnership") was organized to acquire and lease a portfolio
of commercial jet aircraft subject to lease agreements with third parties. Upon
its inception in 1989, the Partnership purchased three commercial jet aircraft
and a proportionate interest in a fourth aircraft which were leased by major
carriers engaged in passenger transportation. Initially, each aircraft generated
rental revenues pursuant to primary-term lease agreements. In 1991, one of the
Partnership's original aircraft was sold to a third party and a portion of the
sale proceeds was reinvested in a proportionate interest in another aircraft.
During the third quarter of 1995, the Partnership transferred its ownership
interest in the fourth aircraft to the existing lessee, United Air Lines, Inc.
("United") in exchange for a proportionate interest in three aircraft leased to
Southwest Airlines, Inc. ("Southwest") pursuant to lease agreements which
expired in 1999. The Partnership continues to own a proportionate interest in
one aircraft and a complete interest in two other aircraft held in its original
portfolio, all of which are being leased pursuant to renewal lease agreements
which will expire in 1996. Upon expiration of the renewal lease agreements, each
aircraft will be 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. Ultimately, all aircraft will be sold
and the net proceeds will be distributed to the Partners, after all liabilities
and obligations of the Partnership have been satisfied.
Results of Operations
- ---------------------
In September 1995, the Partnership transferred its entire ownership
interest (76.8%) in a Boeing 747-SP aircraft (the "Aircraft") to its lessee,
United. The transaction was structured as a like-kind exchange for income tax
reporting purposes, thereby enabling the Partnership to exchange its interest in
the Aircraft for other aircraft which are expected to generate a better economic
benefit to the Partnership than the Aircraft. The Partnership received aggregate
cash consideration of $6,325,760, including $352,256 for rent accrued through
the transfer date. The net cash consideration of $5,973,504 was deposited into a
special-purpose escrow account through a third-party exchange agent pending the
completion of the aircraft exchange. The Partnership's interest in the Aircraft
had a net book value of $7,914,422 at the date of transfer and resulted in a net
loss for financial reporting purposes of $1,940,918.
In November 1995, the Partnership partially replaced the Aircraft with a
43.41% interest in three Boeing 737-2H4 aircraft leased by Southwest Airlines,
Inc. (the "Southwest Aircraft") at an aggregate cost of $6,355,873. To enable
the Partnership to better achieve its investment objectives, maximize its
aircraft replacement capabilities and enhance the overall economic potential of
the like-kind exchange, the General Partner arranged to finance a portion of the
acquisition cost through a third-party lender. Accordingly, the Partnership
obtained financing of $4,742,968 from a third-party lender and utilized
$1,612,905 of the cash consideration received from United. The Southwest
Aircraft, which are under lease through December 31, 1999, will generate
aggregate lease revenues to the Partnership of $5,563,425. The remaining
ownership interest of 56.59% in the Southwest Aircraft is held by affiliated
equipment leasing programs sponsored by AFG. For financial statement purposes,
the remaining cash consideration of $4,360,599 is reported as Contractual Right
for Equipment on the Statement of Financial Position at December 31, 1995. On
March 25, 1996, the Partnership exchanged the remaining cash consideration,
which was supplemented by additional financing, for a 49.17% interest in two
McDonnell-Douglas MD-82 aircraft leased by Finnair OY (the "Finnair Aircraft"),
thereby concluding all anticipated components of the like-kind exchange. See
Note 7 herein.
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<PAGE>
For the year ended December 31, 1995, the Partnership recognized lease
revenue of $4,588,609 compared to $5,166,392 and $5,822,874 for the years ended
December 31, 1994 and 1993, respectively. The decrease in lease revenue from
1993 to 1995 is due to a decline in the monthly rental rate of two Boeing 727
aircraft leased by Northwest Airlines, Inc. ("Northwest") and to the loss of
rental revenue associated with the United Aircraft during the exchange period.
Future lease revenue will fluctuate due to variations in the rental rates
between the United Aircraft and its replacement aircraft and the expiration of
renewal lease terms described herein. The Partnership also earns interest income
from temporary investments of rental receipts and equipment sales proceeds in
short-term instruments.
The Partnership's two lease agreements with Northwest were renewed for a
period of twelve months commencing May 1, 1994. Subsequently, Northwest extended
the renewal period for an additional twelve months through April 30, 1996. Rents
due under the original expired leases generated aggregate monthly revenue of
$250,000, compared to $124,000 per month for the first twelve month renewal and
$120,000 for the second twelve month renewal. Northwest has opted to extend
these leases for an additional six months until October 31, 1996 at $120,000 per
month.
The Partnership's lease agreement with Cathay Pacific Airways, Ltd
("Cathay") provides for semi-annual rent adjustments based on the six month
London Inter-bank Offered Rate ("LIBOR"). Accordingly, rents generated from this
lease fluctuate in relation to the prevailing LIBOR rate on a semi-annual basis.
The Partnership's renewal lease agreement with Cathay (having an adjusted
semi-annual rent of $535,802) which expires on February 14, 1996 has been
extended until April 11, 1996 and will be adjusted by the applicable LIBOR rate.
Subsequent to this extension, Cathay will lease the aircraft at a fixed rate
until June 30, 1996. The fixed extension agreement will generate approximately
$127,000 in renewal revenue for the Partnership.
The Partnership holds a proportionate ownership interest in the Cathay
and Southwest aircrafts discussed above. The remaining interests are owned by
other affiliated partnerships sponsored by AFG. All partnerships individually
report, in proportion to their respective ownership interests, their respective
shares of assets, liabilities, revenues and expenses associated with the
aircraft. (See Note 3 to the financial statements, herein.)
The Partnership recorded a write-down of aircraft carrying values,
representing impairments, during each of the years ended December 31, 1995, 1994
and 1993. The resulting charges, $1,740,960 ($0.54 per limited partnership unit)
in 1995, $2,534,000 ($0.79 per limited partnership unit) in 1994 and $5,607,584
($1.75 per limited partnership unit) in 1993, were based on a comparison of
estimated net realizable values and corresponding carrying values for each of
the Partnership's aircraft.
Net realizable values were estimated based on (i) third-party appraisals
of the Partnership's aircraft and (ii) AFG's assessment of prevailing market
conditions for similar aircraft. In recent years, market values for used
commercial jet aircraft have deteriorated. Consistent price competition and
other pressures within the airline industry have inhibited sustained
profitability for many carriers. Most major airlines have had to re-evaluate
their aircraft fleets and operating strategies. Such issues complicate the
determination of net realizable value for specific aircraft, and particularly
used aircraft, because cost-benefit and market considerations may differ
significantly between the major airlines. Aircraft condition, age, passenger
capacity, distance capability, fuel efficiency, and other factors also influence
market demand and market values for passenger jet aircraft.
Certain aircraft, such as the 747-SP aircraft previously owned by the
Partnership, suffered market declines due to their nature as Special Purpose
(SP) aircraft. These aircraft were designed to travel long distances on a
non-stop basis. Distance capability was achieved, in part, by reducing the
number of passenger seats contained on a traditional 747 aircraft. In recent
years, new aircraft have become available which compete with the 747-SP in both
passenger capacity and fuel efficiency. This development depressed market values
of used 747-SP aircraft and was the basis for the write-down recognized by the
Partnership in 1994.
Another significant consideration in evaluating used commercial aircraft
is compliance with The Airport Capacity Act of 1990 (the "Airport Act"), which
prohibits the operation of Stage 2 commercial jet aircraft to or from U.S.
airports after December 31, 1999. Stage designations range from Stage 1 to Stage
3 and are indicative of an aircraft's compliance with noise level regulations
promulgated by the Federal Aviation Administration. Stage 3
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<PAGE>
designates the highest level of compliance. The Partnership's two Boeing 727
aircraft leased to Northwest are Stage 2 aircraft. Various hush kit and re-
engineering programs are available to retrofit Stage 2 aircraft to comply with
the Airport Act; however, the cost to effect such improvements is estimated to
range from $2 million to $3 million per aircraft. Accordingly, this factor is a
major consideration in assessing estimated net realizable value for used
aircraft and is a principal reason for the write-downs which the Partnership
recognized in 1993. The write-down in 1995 resulted from deterioration in the
market value for the Partnership's L1011 aircraft on lease to Cathay.
Notwithstanding the foregoing, the ultimate realization of residual
value for any aircraft is dependent upon many factors, including AFG's ability
to sell and re-lease the aircraft. Changes in market conditions, industry
trends, technological advances, and other events could converge to enhance or
detract from asset values at any given time. Accordingly, AFG will attempt to
monitor changes in the airline industry in order to identify opportunities which
may be advantageous to the Partnership and which will maximize total cash
returns for each aircraft.
The total economic value realized upon final disposition of each
aircraft will be comprised of all primary lease term revenues generated from
that aircraft, together with its residual value. The latter consists of cash
proceeds realized upon the aircraft's sale in addition to all other cash
receipts obtained from renting the aircraft on a re-lease, renewal or month-to-
month basis. Consequently, the amount of any future gain or loss reported in the
financial statements may not necessarily be indicative of the total residual
value the Partnership achieved from leasing the aircraft.
During 1995 and 1994, the Partnership incurred interest expense of
$63,568 and $8,133, respectively. Interest expense in 1995 resulted from
financing obtained from a third-party lender in connection with the Southwest
Aircraft described previously. Interest expense will increase in the near term
as a result of this transaction and will be further increased by financing costs
associated with the Finnair Aircraft. The contracted rental streams of both the
Southwest and Finnair aircraft will be sufficient to retire the indebtedness and
related interest costs.
Interest expense in 1994 was incurred on a $600,000 short-term unsecured
note agreement with an institutional lender. Interest was charged at a floating
rate equal to the lender's prime rate of interest plus 2% during the period of
borrowing. The sole purpose of this note was to fund a cash requirement caused
by timing differences between rent receipts and cash distributions to the
Partners. The note matured and was repaid fully on March 11, 1994.
Management fees were 5% of lease revenue during 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 insurance,
printing, and distribution expenses. Collectively, operating expenses
represented 5.2%, 2.8% and 1.8% of lease revenue in 1995, 1994 and 1993,
respectively. The increase in operating expenses from 1993 to 1995 is due
primarily to remarketing expenses incurred in connection with the renewal of two
aircraft on lease to Northwest. 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. Depreciation and
amortization expense was $2,716,474, $3,720,315 and $5,284,452 for the years
ended December 31, 1995, 1994 and 1993, respectively.
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 aircraft 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 pay management fees and operating
costs. Operating activities generated net cash inflows of $3,612,295, $4,550,408
and $5,451,244 in 1995, 1994
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<PAGE>
and 1993, respectively. The expiration of the Partnership's current lease
agreements will cause a decline in the Partnership's lease revenue and
corresponding sources of operating cash. This will be partially offset by rents
generated in connection with the Southwest Aircraft and the Finnair Aircraft.
Overall, expenses associated with rental activities, such as management fees,
and net cash flow from operating activities will decline as the Partnership
remarkets its aircraft. Ultimately, the Partnership will dispose of all aircraft
under lease. This will occur principally through sale transactions whereby each
aircraft will be sold to the existing lessee or to a third party. Generally,
this will occur upon expiration of each aircraft's primary or renewal/re-lease
term.
As described in Results of Operations, the Partnership obtained long-
term financing in connection with the like-kind exchange transactions involving
United, Southwest and Finnair. The corresponding note agreements are recourse
only to the specific equipment financed and to the minimum rental payments
contracted to be received during the debt amortization period. As rental
payments are collected, a portion or all of the rental payment will be used to
repay principal and interest.
Financing activities in 1994 reflect proceeds of $600,000 from a short-
term unsecured note as discussed in Results of Operations. The note was
originated and repaid during the three month period ended March 31, 1994.
Cash distributions to the General Partner and Recognized Owners 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 of
$3,200,000. In accordance with the Amended and Restated Agreement and
Certificate of Limited Partnership (the "Restated Agreement, as amended"), the
Recognized Owners were allocated 95% of these distributions, or $3,040,000, and
the General Partner was allocated 5%, or $160,000. The fourth quarter 1995 cash
distribution was paid on January 22, 1996.
Cash distributions paid to the Recognized Owners 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 aircraft
at its disposal date. Future market conditions, technological changes, the
ability of AFG to manage and remarket the aircraft, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's aircraft portfolio.
The future liquidity of the Partnership 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 is expected to fluctuate
widely as the General Partner attempts to remarket the Partnership's aircraft
and possibly upgrade certain aircraft to meet the standards of potential
successor lessees. The like-kind exchange, involving the United, Southwest and
Finnair aircraft, was undertaken, in part, to mitigate the Partnership's
economic risk resulting from the United aircraft being returned to the
Partnership upon its lease expiration in April 1996 and remaining off-lease for
an extended time period. The exchange enabled the Partnership to replace a
specialized aircraft with other aircraft which are used more widely in the
industry and also to significantly extend its rental stream with two
creditworthy users.
The lease expirations of Northwest in October 1996 will present
additional demands on the Partnership's cash position, depending upon upgrades
or refurbishments which may be necessary to remarket the aircraft. Accordingly,
the General Partner expects to reserve a portion of the Partnership's cash for
such purposes. Over time, aircraft disposals and other remarketing events will
cause the Partnership's net cash from operating activities to diminish.
Accordingly, fluctuations in the level of future quarterly cash distributions
will occur. It is possible that the General Partner will elect not to declare a
cash distribution in a given quarter, depending upon the overall cash
requirements of the Partnership.
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Partners of AIRFUND International Limited Partnership:
We have audited the accompanying statements of financial position of
AIRFUND International 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 AIRFUND
International 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, except for the fourth
paragraph of Note 7, as to which
the date is March 25, 1996
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<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF FINANCIAL POSITION
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
ASSETS --------------- ---------------
- ------
<S> <C> <C>
Cash and cash equivalents $ 1,079,341 $ 1,067,046
Contractual right for equipment 4,360,599 --
Rents receivable 562,594 344,077
Accounts receivable - affiliate 353,803 1,736
Equipment at cost, net of accumulated
depreciation of $22,741,547 and $27,446,669
at December 31, 1995 and 1994, respectively 10,532,269 16,548,252
--------------- ----------------
Total assets $ 16,888,606 $ 17,961,111
=============== ================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 4,742,968 --
Accrued interest 63,568 --
Accrued liabilities 40,527 $ 106,797
Accrued liabilities - affiliate 71,661 19,029
Deferred rental income 136,139 117,822
Cash distributions payable to partners 600,000 1,000,000
---------------- ---------------
Total liabilities 5,654,863 1,243,648
---------------- ---------------
Partners' capital (deficit):
General Partner (1,137,309) (863,123)
Limited Partnership Interests
(3,040,000 Units; initial purchase
price of $25 each) 12,371,052 17,580,586
---------------- ---------------
Total partners' capital 11,233,743 16,717,463
---------------- ---------------
Total liabilities and partners' capital $ 16,888,606 $ 17,961,111
================ ===============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
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<PAGE>
AIRFUND International 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 $ 4,588,609 $ 5,166,392 $ 5,822,874
Interest income 58,206 34,315 29,068
Loss on exchange of equipment (1,940,918) -- --
------------- ------------- -------------
Total income 2,705,897 5,200,707 5,851,942
------------- ------------- -------------
Expenses:
Depreciation and amortization 2,716,474 3,720,315 5,284,452
Write-down of equipment 1,740,960 2,534,000 5,607,584
Interest expense 63,568 8,133 --
Equipment management fees - affiliate 229,430 258,320 291,144
------------- ------------- -------------
Operating expenses - affiliate 239,185 143,434 104,110
------------- ------------- -------------
Total expenses 4,989,617 6,664,202 11,287,290
------------- ------------- -------------
Net loss $ (2,283,720) $ (1,463,495) $ (5,435,348)
============= ============= =============
Net loss
per limited partnership unit $ (0.71) $ (0.46) $ (1.70)
============= ============= =============
Cash distributions declared
per limited partnership unit $ 1.00 $ 1.25 $ 2.00
============= ============= =============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
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<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
General Recognized Owners
Partner ------------------------------
Amount Units Amount Total
-------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 $ 1,819 3,040,000 $34,014,487 $34,016,306
Net loss - 1993 (271,767) -- (5,163,581) (5,435,348)
Cash distributions declared (320,000) -- (6,080,000) (6,400,000)
--------------- --------- ----------- -----------
Balance at December 31, 1993 (589,948) 3,040,000 22,770,906 22,180,958
Net loss - 1994 (73,175) -- (1,390,320) (1,463,495)
Cash distributions declared (200,000) -- (3,800,000) (4,000,000)
--------------- --------- ----------- -----------
Balance at December 31, 1994 (863,123) 3,040,000 17,580,586 16,717,463
Net loss - 1995 (114,186) -- (2,169,534) (2,283,720)
Cash distributions declared (160,000) -- (3,040,000) (3,200,000)
--------------- --------- ----------- -----------
Balance at December 31, 1995 $ (1,137,309) 3,040,000 $12,371,052 $11,233,743
=============== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-10-
<PAGE>
AIRFUND International 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 loss $(2,283,720) $(1,463,495) $(5,435,348)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 2,716,474 3,720,315 5,284,452
Write-down of equipment 1,740,960 2,534,000 5,607,584
Loss on exchange of equipment 1,940,918 -- --
Changes in assets and liabilities:
Decrease (increase) in:
rents receivable (218,517) -- 26,021
accounts receivable - affiliate (352,067) (1,736) 13,145
Increase (decrease) in:
accrued interest 63,568 -- --
accrued liabilities (66,270) (19,015) 12,396
accrued liabilities - affiliate 52,632 (72,914) 81,394
deferred rental income 18,317 (146,747) (138,400)
----------- ----------- -----------
Net cash from operating activities 3,612,295 4,550,408 5,451,244
----------- ----------- -----------
Cash flows from (used in) financing activities:
Proceeds from notes payable -- 600,000 --
Principal payments - notes payable -- (600,000) --
Distributions paid (3,600,000) (4,600,000) (6,400,000)
----------- ----------- -----------
Net cash used in financing activities (3,600,000) (4,600,000) (6,400,000)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 12,295 (49,592) (948,756)
Cash and cash equivalents at beginning of year 1,067,046 1,116,638 2,065,394
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,079,341 $ 1,067,046 $ 1,116,638
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest -- $ 8,133 --
=========== =========== ===========
</TABLE>
Supplemental disclosure of non-cash investing activities:
See Note 3 to the Financial Statements.
The accompanying notes are an integral part of
these financial statements.
-11-
<PAGE>
AIRFUND International 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 January 31,
1989 for the purpose of acquiring and leasing to third parties a specified
portfolio of used commercial aircraft. Partners' capital initially consisted of
contributions of $1,000 from the General Partner (AFG Aircraft Management
Corporation, a Massachusetts corporation) and $100 from the Initial Limited
Partner (AFG Assignor Corporation, a Massachusetts corporation). On July 26,
1989, the Partnership issued 3,040,000 units representing assignments of limited
partnership interests (the "Units") to 4,147 investors. Unitholders and Limited
Partners (other than the Initial Limited Partner) are collectively referred to
as Recognized Owners. The General Partner is an affiliate of American Finance
Group ("AFG"), a Massachusetts partnership. The common stock of the General
Partner is owned by AF/AIP Programs Limited Partnership, of which AFG and a
wholly-owned affiliate are the 99% limited partners and AFG Programs, Inc., a
Massachusetts corporation which is wholly-owned by Geoffrey A. MacDonald, is the
1% general partner. The capital contribution of the General Partner, in
consideration of its general partner interests, equals $1,000. 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(b) of the Amended and Restated
Agreement and Certificate of Limited Partnership (the "Restated Agreement, as
amended").
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.
In 1990, AFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with AFG. AF/AIP
Programs Limited Partnership also entered into a nonexclusive confirmatory
agreement with AFG's former majority-owned subsidiary, AIRFUND Corporation
("AFC"), for the provision of aircraft remarketing services.
Significant operations commenced July 27, 1989 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 95% to the Recognized Owners and 5% to the
General Partner for the life of the Partnership. Payout will occur when the
Recognized Owners have received distributions equal to their original investment
plus a cumulative annual return of 10% (compounded quarterly) 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.)
-12-
<PAGE>
AIRFUND International 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. At December 31,
1995, the Partnership had $1,075,000 invested in reverse repurchase agreements
secured by U.S. Treasury Bills or interests in U.S. Government securities.
Revenue Recognition
- -------------------
Rents are payable to the Partnership monthly or semi-annually. Rents
from Cathay, as provided for in the lease agreement, are adjusted semi-annually
for changes of the six month LIBOR rate. Future rents from Cathay, included
below, reflect the most recent LIBOR effected rental payment. The LIBOR rates
prevailing at future rent adjustment dates will cause fluctuations in the
periodic rental rate to be generated from this lease. All leases are accounted
for as operating leases and are noncancellable. Rents received prior to their
due dates are deferred. Future minimum rents of $7,029,152 are due as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
For the year ending December 31, 1996 $ 3,174,344
1997 1,250,208
1998 1,250,208
1999 1,250,208
2000 104,184
-------------
Total $ 7,029,152
=============
</TABLE>
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1995, 1994 and 1993 is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Northwest Airlines, Inc.
(Two Boeing 727-251ADV) $ 1,456,000 $ 2,203,638 $ 3,000,000
United Airlines, Inc.
(One Boeing 747-SP-21) $ 1,471,286 $ 1,935,360 $ 1,909,409
Cathay Pacific Airways Limited
(One Lockheed L-1011) $ 1,098,730 $ 1,027,394 $ 913,465
Southwest Airlines, Inc.
(Three Boeing 737-2H4) $ 562,594 -- --
</TABLE>
The Partnership's two lease agreements with Northwest were renewed for a
period of twelve months commencing May 1, 1994. Subsequently, Northwest extended
the renewal period for an additional twelve months through April 30, 1996. Rents
due under the original expired leases generated aggregate monthly revenue of
$250,000 compared to $124,000 per month for the first twelve month renewal and
$120,000 for the second twelve month renewal. Northwest has opted to extend the
renewal period for an additional six months until
-13-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
October 31, 1996 at $120,000 per month, at which time the aircraft are expected
to be returned. The General Partner is currently pursuing the re-lease of these
aircraft and expects to incur refurbishment costs.
The Partnership's renewal lease agreement with Cathay which expires
February 14, 1996 was extended until April 11, 1996 and will be adjusted by the
applicable LIBOR rate. Subsequent to this extension, Cathay will lease the
aircraft at a fixed rate until June 30, 1996. The fixed extension agreement will
generate approximately $127,000 in renewal revenue for the Partnership. Cathay
has the option to extend this renewal beyond June 30, 1996 or return the
aircraft to the Partnership.
In September 1995, the Partnership transferred its ownership interests
in a Boeing 747-SP-21 commercial jet aircraft to the existing lessee, United Air
Lines, Inc. ("United"), pursuant to the rules for a like-kind exchange
transaction for income tax reporting purposes. (See Note 3 herein). In November
1995, the Partnership partially replaced the United aircraft with a 43.41%
interest in three Boeing 737-2H4 aircraft leased to Southwest Airlines, Inc.
("Southwest"). The Partnership will receive approximately $1,709,000 in rental
revenue for the year ending December 31, 1996, $1,250,000 in each of the three
years in the period ending December 31, 1999 and $104,000 on January 1, 2000.
This revenue reflects the Partnership's 43.41% ownership interest in the
aircraft.
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 aircraft were acquired from AFG or one of its Affiliates. 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 was the lower of (i) the actual price paid for the
aircraft by AFG or the Affiliate plus all actual costs accrued by AFG or the
Affiliate while carrying the aircraft less, for the aircraft leased to United
and Cathay, the amount of all interim rents received by AFG or the Affiliate
prior to selling the aircraft or (ii) fair market value as determined by the
General Partner in its best judgment, including all liens and encumbrances on
the aircraft, carrying costs and acquisition costs. In no event did the
equipment cost exceed the appraised value of the aircraft.
Depreciation and Amortization
- -----------------------------
The Partnership's depreciation policy is intended to allocate the cost
of aircraft over the period during which they produce economic benefit. The
principal period of economic benefit is considered to correspond to each
aircraft's primary lease term, which term generally represents the period of
greatest revenue potential for each aircraft. Accordingly, to the extent that an
aircraft is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the aircraft and (ii) the estimated residual
value of the aircraft on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of aircraft values at
the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of each aircraft to determine whether it exceeds
estimated net realizable value. Adjustments to reduce the net carrying value of
aircraft are recorded in those instances where estimated net realizable value is
considered to be less than net carrying value. Such adjustments are reflected
separately on the accompanying Statement of Operations as Write-Down of
Equipment.
-14-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
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.
Organization costs were amortized using the straight-line method over a
period of five years.
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 (95% to the
Recognized Owners and 5% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.
Net Loss and Cash Distributions Per Unit
- ----------------------------------------
Net loss and cash distributions per Unit are based on 3,040,000 Units
outstanding during each of the three years in the period ended December 31, 1995
and computed after allocation of the General Partner's 5% share of net loss 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.
Reclassification
- ----------------
Certain reclassifications have been made to prior year financial
statements to conform to the 1995 presentation.
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 acquisition cost of the equipment
did not exceed its fair market value.
-15-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
<TABLE>
<CAPTION>
Lease
Term Equipment
Equipment Type (Months) at Cost Location
- --------------------------------- ----------- ----------- --------------------
<S> <C> <C> <C>
One Boeing 727-251ADV (Northwest) 24 $ 9,520,359 MN
One Boeing 727-251ADV (Northwest) 24 9,520,359 MN
One Lockheed L-1011-50 (Cathay) 18 7,877,225 Foreign
Three Boeing 737-2H4 (Southwest) 49 6,355,873 TX
-----------
Total equipment cost 33,273,816
Accumulated depreciation (22,741,547)
Equipment, net of accumulated depreciation $10,532,269
===========
</TABLE>
The cost of the Lockheed L-1011-50 aircraft and the three Boeing 737-2H4
aircraft represent proportionate ownership interests. The remaining interests
are owned by other affiliated partnerships sponsored by AFG. All partnerships
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the aircraft.
In September 1995, the Partnership transferred its entire ownership
interest (76.8%) in a Boeing 747-SP aircraft (the "Aircraft") to its lessee,
United. The transaction was structured as a like-kind exchange for income tax
reporting purposes, thereby enabling the Partnership to exchange its interest in
the Aircraft for other aircraft which are expected to generate a better economic
benefit to the Partnership than the Aircraft. The Partnership received aggregate
cash consideration of $6,325,760 including $352,256 for rent accrued through the
transfer date. The net cash consideration of $5,973,504 was deposited into a
special-purpose escrow account through a third-party exchange agent pending the
completion of the aircraft exchange. The Partnership's interest in the Aircraft
had a net book value of $7,914,422 at the date of transfer and resulted in a net
loss for financial reporting purposes of $1,940,918.
In November 1995, the Partnership partially replaced the Aircraft with a
43.41% interest in three Boeing 737-2H4 aircraft leased by Southwest Airlines,
Inc. (the "Southwest Aircraft") at an aggregate cost of $6,355,873. To enable
the Partnership to better achieve its investment objective, maximize its
aircraft replacement capabilities and enhance the overall economic potential of
the like-kind exchange, the General Partner arranged to finance a portion of the
acquisition cost through a third-party lender. Accordingly, the Partnership
obtained financing of $4,742,968 from a third-party lender and utilized
$1,612,905 of the cash consideration received from United. The Southwest
Aircraft, which are under lease through December 31, 1999, will generate
aggregate lease revenues to the Partnership of $5,563,425. The remaining
ownership interest of 56.59% in the Southwest Aircraft is held by affiliated
equipment leasing programs sponsored by AFG. For financial statement purposes,
the remaining cash consideration of $4,360,599 is reported as Contractual Right
for Equipment on the Statement of Financial Position at December 31, 1995.
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 $6,356,000
and a net book value of approximately $6,192,000 at December 31, 1995. (See Note
5.)
Generally, the costs associated with maintaining, insuring and operating
the Partnership's aircraft are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
However, the Partnership has purchased supplemental insurance coverage to reduce
the economic
-16-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
risk arising from certain losses. Specifically, the Partnership is insured under
supplemental policies for "Aircraft Hull Total Loss Only" and "Aircraft Hull
Total Loss Only War and Other Perils."
As aircraft are 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 aircraft at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the aircraft is dependent upon, among other things, AFG's
ability to maximize proceeds from selling or re-leasing the aircraft upon the
expiration of the primary lease terms. No aircraft were held for sale or re-
lease at December 31, 1995.
The Partnership recorded a write-down of aircraft carrying values,
representing impairments, during each of the years ended December 31, 1995, 1994
and 1993. The resulting charges, $1,740,960 ($0.54 per limited partnership unit)
in 1995, $2,534,000 ($0.79 per limited partnership unit) in 1994 and $5,607,584
($1.75 per limited partnership unit) in 1993 were based on a comparison of
estimated net realizable values and corresponding carrying values for each of
the Partnership's aircraft.
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 $ 229,430 $ 258,320 $ 291,144
Administrative charges 21,000 12,000 14,955
Reimbursable operating expenses
due to third parties 218,185 131,434 89,155
------------ ----------- ------------
Total $ 468,615 $ 401,754 $ 395,254
============ =========== ============
</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 was compensated by an amount equal to 1.6% 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 operating lease rental revenues
and 2% of gross full payout lease rental revenues received 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 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 10.4(c) 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.
-17-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
All equipment was purchased from AFG or one of its Affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2.
Substantially all rents and proceeds from the sale of aircraft are paid
directly to AFG. 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 $353,803 by AFG for interest on such funds. These
funds were remitted to the Partnership in January 1995.
NOTE 5 - NOTES PAYABLE
- ----------------------
Notes payable at December 31, 1995 consisted of three installment notes
aggregating $4,742,968 payable to a bank. All three notes, which were originated
in connection with the Southwest Aircraft, had interest rates of 8.65% and are
collateralized by the equipment and assignment of the related lease payments.
The installment notes will be fully amortized by noncancellable rents. The
carrying amount of notes payable approximates fair value at December 31, 1995.
<TABLE>
<CAPTION>
The annual maturities of the installment notes payable are as follows:
<S> <C> <C>
For the year ending December 31, 1996 $ 1,449,949
1997 1,004,523
1998 1,094,958
1999 1,193,538
Total $ 4,742,968
=============
</TABLE>
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 (95% to the Recognized Owners and 5% to the General Partner). The
allocation of net income or loss for financial statement purposes differs from
the net 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 net 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 any negative
balance which may exist in the General Partner's tax capital account. At
December 31, 1995, the General Partner had a negative tax capital account
balance of $406,000.
-18-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
The following is a reconciliation between net loss 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 loss $(2,283,720) $(1,463,495) $(5,435,348)
Financial statement depreciation
in excess of (less than) tax depreciation (1,813,446) (997,570) 284,590
Write-down of equipment 1,740,960 2,534,000 5,607,584
Prepaid rental income 18,317 (146,747) (138,400)
Other 2,020,977 (28,953) 18,975
----------- ----------- -----------
Net income (loss) for federal income
tax reporting purposes $ (316,912) $ (102,765) $ 337,401
=========== =========== ===========
</TABLE>
The principal component of "Other" consists of the difference between
the tax gain on equipment disposals and the financial statement gain (loss) on
disposals.
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 $11,233,743 $16,717,463
Add back selling commissions and
organization and offering costs 7,975,000 7,975,000
Financial statement distributions in
excess of tax distributions 30,000 50,000
Cumulative difference between federal income
tax and financial statement income (loss) (2,527,694) (4,494,503)
----------- -----------
Partners' capital for federal income tax
reporting purposes $16,711,049 $20,247,960
=========== ===========
</TABLE>
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
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
-19-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
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.
With respect to the like-kind exchange referred to in Note 3, on March
25, 1996, the Partnership partially replaced the United Aircraft with a 49.17%
interest in two McDonnell-Douglas MD-82 aircraft leased by Finnair OY at an
aggregate cost of $13,620,090. To enable the Partnership to better achieve its
investment objectives, maximize its aircraft replacement capabilities and
enhance the overall economic potential of the like-kind exchange, the General
Partner arranged to finance a portion of the acquisition cost through a third-
party lender. Accordingly, the Partnership obtained financing of $9,165,396 from
a third-party lender and utilized $4,454,694 of the cash consideration received
from United including interest thereon. The Finnair Aircraft, which are under
lease through April 30, 1999, will generate aggregate lease revenues to the
Partnership of $6,567,133. The remaining ownership interest of 50.83% in the
Finnair Aircraft is held by affiliated equipment leasing programs sponsored by
AFG. This exchange concludes all anticipated components of the like-kind
exchange described previously.
-20-
<PAGE>
AIRFUND International 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 loss $ (2,283,720) -- $ (2,283,720)
Add:
Depreciation 2,716,474 -- 2,716,474
Write-down of equipment 1,740,960 -- 1,740,960
Management fees 229,430 -- 229,430
Loss on exchange of equipment 1,940,918 -- 1,940,918
------------- ------------ -------------
Cash from operations, sales
and refinancings 4,344,062 -- 4,344,062
Less:
Management fees (229,430) -- (229,430)
------------- ------------ -------------
Distributable cash from operations, sales
and refinancings 4,114,632 -- 4,114,632
Other sources and uses of cash:
Cash at beginning of year 1,067,046 -- 1,067,046
Net change in receivables and accruals (502,337) -- (502,337)
Less:
Cash distributions paid (3,600,000) -- (3,600,000)
------------- ------------ -------------
Cash at end of year $ 1,079,341 -- $ 1,079,341
============= ============ =============
</TABLE>
-21-
<PAGE>
AIRFUND International Limited Partnership
SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 10.4 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 $ 212,999
-22-
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of AIRFUND International Limited Partnership of our report
dated March 12, 1996, except for the fourth paragraph of Note 7, as to which the
date is March 25, 1996, included in the 1995 Annual Report to the Partners of
AIRFUND International Limited Partnership.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
March 25, 1996
-15-
<PAGE>
- --------------------------------------------------------------------------------
SALE AND LEASE AGREEMENT
dated as of May 25, 1991
between
FIRST SECURITY BANK OF UTAH,
NATIONAL ASSOCIATION
as Owner Trustee,
Lessor
and
SOUTHWEST AIRLINES CO.,
Lessee
----------------------------
One Boeing Model 737-2H4 Aircraft
(N635W)
- --------------------------------------------------------------------------------
Certain of the right, title and interest of Lessor in and to this Sale and
Lease Agreement and the Aircraft (including the Engines) has been assigned to
and is subject to a security interest in favor of NCNB Leasing Corporation, as
Lender. This Sale and Lease Agreement has been executed in several counterparts.
No security interest in Lessor's right, title and interest in and to this Sale
and Lease Agreement may be created through the transfer or possession of any
counterpart other than the original counterpart. This is not the original
counterpart.
<PAGE>
TABLE OF CONTENTS
-----------------
Section Page
- ------- ----
Section 1. Definitions....................................................... 1
Section 2. Sale, Lease and Acceptance........................................ 8
Section 3. Term and Rent..................................................... 9
3.1 General................................................................. 9
3.2 Lease Term.............................................................. 9
3.3 Basic Rent; Renewal Rent................................................ 9
3.4 Supplemental Rent....................................................... 9
3.5 Payments................................................................ 9
Section 4. Lessor's Representations and Warranties; DISCLAIMER; Certain
Agreements of Lessee......................................................... 10
4.1 Lessor's Representations and Warranties; DISCLAIMER..................... 10
4.2 Certain Agreements of Lessee............................................ 11
Section 5. Return of Aircraft................................................ 11
5.1 General Condition upon Return............................................ 11
5.1.1 Airworthiness.................................................. 11
5.1.2 Free of Liens.................................................. 11
5.1.3 Operating Configuration and Condition.......................... 11
5.1.4 Cleanliness and Operability.................................... 12
5.1.5 Parts and Equipment............................................ 12
5.1.6 TCAS and Windshear............................................. 12
5.1.7 Corrosion Treatment............................................ 12
5.2 Return of Other Engines.................................................. 12
5.3 Return at End of Base Lease Term or Renewal Lease Term................... 13
5.3.1 Airframe....................................................... 13
5.3.2 Engines........................................................ 14
5.3.3 Boroscope...................................................... 14
5.3.4 Landing Gears.................................................. 14
5.3.5 APU............................................................ 14
5.3.6 Time-Controlled Components..................................... 14
5.3.7 Cycles/Hours Ratio............................................. 14
5.4 Financial Adjustments.................................................... 14
5.4.1 Airframe....................................................... 15
5.4.2 Engines........................................................ 15
SALE AND LEASE AGREEMENT
-i-
<PAGE>
5.4.3 Landing Gears.................................................. 15
5.4.4 APU............................................................ 15
5.4.5 Time-Controlled Components..................................... 15
5.4.6 Cycles/Hours Ratio............................................. 16
5.4.7 Certificate as to Return Condition, Etc........................ 16
5.4.8 Certain Other Financial Adjustment Provisions.................. 16
5.5 Manual, Service Bulletins, Etc.......................................... 16
5.6 Parking upon Return..................................................... 17
5.7 Failure to Return Aircraft or Engines................................... 17
5.8 Aid in Disposition..................................................... 17
Section 6. Liens............................................................. 17
Section 7. Registration, Operation, Possession, Subleasing and Records....... 18
7.1 Registration and Operation............................................... 18
7.1.1 Registration................................................... 18
7.1.2 Nameplate...................................................... 18
7.1.3 Compliance with Laws........................................... 19
7.1.4 Insurance Requirements; Government Requisition; Indemnity...... 19
7.2 Possession............................................................... 19
7.2.1 Interchange and Pooling........................................ 20
7.2.2 Testing and Service............................................ 20
7.2.3 Civil Reserve Air Fleet Program................................ 20
7.2.4 Installation of Engines........................................ 20
7.2.5 Installation of Engines on Other Airframes..................... 21
7.2.6 Pooling of Parts............................................... 21
7.2.7 Wet Lease...................................................... 21
7.2.8 Sublease to Permitted Air Carriers............................. 21
7.3 Records and Reports...................................................... 23
7.3.1 Records........................................................ 23
7.3.2 Information and Reports........................................ 23
7.3.3 Financial Information.......................................... 23
Section 8. Maintenance; Replacement and Pooling of Parts; Alterations,
Modifications and Additions.................................................. 24
8.1 Maintenance............................................................. 24
8.1.1 Maintenance Program............................................ 24
8.1.2 Compliance with Government Requirements........................ 24
8.2 Replacement of Parts.................................................... 24
8.3 Pooling of Parts........................................................ 25
8.4 Alterations, Modifications and Additions................................ 25
SALE AND LEASE AGREEMENT
-ii-
<PAGE>
Section 9. Default Purchase Option........................................... 26
Section 10. Loss, Destruction, Requisition, Etc.............................. 27
10.1 Event of Loss with Respect to Airframe.................................. 27
10.2 Event of Loss with Respect to an Engine................................. 27
10.2.1 Event of Loss.................................................. 27
10.2.2 Conditions; Lessee's Obligations............................... 28
10.2.3 Recordation and Opinions....................................... 28
10.2.4 Conveyance; Replacement Engine................................. 29
10.2.5 No Reduction of Rent........................................... 29
10.3 Application of Certain Payments......................................... 29
10.3.1 Replacement of Engine.......................................... 29
10.3.2 Nonreplacement................................................. 29
10.4 Requisition of Aircraft for Use by Governmental Authorities............. 29
10.5 Requisition of an Engine for Use by Governmental Authorities........... 30
10.6 Application of Payments During Existence of Default.................... 30
Section 11. Insurance........................................................ 30
11.1 Public Liability and Property Damage Insurance.......................... 30
11.1.1 Type, Form and Amount.......................................... 30
11.1.2 Coverage....................................................... 31
11.1.3 Additional Insureds............................................ 31
11.2 Insurance Against Loss of or Damage to Aircraft and Engines............. 31
11.2.1 Type, Form and Amount.......................................... 31
11.2.2 War-Risk Insurance............................................. 31
11.2.3 Certain Requirements........................................... 31
11.2.3.1 Additional Insureds................................... 32
11.2.3.2 Payment of Proceeds................................... 32
11.2.3.3 Waiver of Subrogation................................. 32
11.2.4 Deductibles.................................................... 32
11.2.5 Government Indemnity........................................... 32
11.3 General Policy Provisions............................................... 32
11.3.1 Primary Insurance.............................................. 33
11.3.2 Coverage for Each Insured...................................... 33
11.3.3 Waiver of Certain Rights....................................... 33
11.3.4 Breach of Warranty............................................. 33
11.3.5 Notice of Termination or Changes............................... 33
11.3.6 Nonliability for Premiums...................................... 33
11.3.7 Identity of Insurers........................................... 33
11.4 Application of Insurance Proceeds....................................... 33
11.5 Certificates; Reports, Etc.............................................. 34
11.6 Lessor's Right to Maintain Insurance.................................... 34
SALE AND LEASE AGREEMENT
-iii-
<PAGE>
11.7 Insurance for Own Account............................................... 34
11.8 Self-Insurance.......................................................... 35
Section 12. Inspection....................................................... 35
Section 13. Assignment....................................................... 35
Section 14. Events of Default................................................ 36
14.1 Failure to Pay Rent..................................................... 36
14.2 Specific Defaults....................................................... 36
14.3 General Default......................................................... 36
14.4 Misrepresentation and Breach of Warranty................................ 36
14.5 Bankruptcy, Etc......................................................... 36
Section 15. Remedies......................................................... 37
15.1 Default; Remedies....................................................... 37
15.1.1 Return; Repossession.......................................... 37
15.1.2 Sale; Use Etc................................................. 37
15.1.3 Certain Liquidated Damages.................................... 37
15.1.4 Liquidated Damages upon Sale.................................. 38
15.1.5 Rescission and Other Remedies................................. 38
15.2 Determination of Fair Market Rental Value and Fair Market Sales Value... 39
15.3 No Waiver, Etc.......................................................... 39
Section 16. Notices.......................................................... 39
Section 17. Net Lease; Lessee's Obligations; No Setoff, Counterclaim, Etc.... 40
Section 18. Renewal Options.................................................. 41
Section 19. Successor Owner Trustee.......................................... 42
Section 20. Right to Perform for Lessee...................................... 42
Section 21. Quiet Enjoyment.................................................. 43
Section 22. Investment of Security Funds; Miscellaneous; Amendment........... 43
22.1 Investment of Security Funds............................................ 43
22.2 Miscellaneous; Amendment................................................ 43
Section 23. Permitted Foreign Air Carriers................................... 44
SALE AND LEASE AGREEMENT
-iv-
<PAGE>
Section 24. Lessee's Consent to Mortgage..................................... 44
Section 25. Section 1110 Compliance.......................................... 45
Section 26. Lease Extension.................................................. 45
Exhibit A - Form of Lease Supplement
Exhibit B - Stipulated Loss Value Schedule
Exhibit C - Permitted Foreign Air Carriers
SALE AND LEASE AGREEMENT
-v-
<PAGE>
THIS SALE AND LEASE AGREEMENT is dated as of May 25, between FIRST SECURITY
BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as
Owner Trustee under the Trust Agreement hereinafter referred to ("Lessor"), and
SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee").
Recitals
--------
1. Lessee owns the Aircraft. On February 11, 1991, an AC Form 8050-2 Bill
of Sale dated February 8, 1991, from Manufacturers Hanover Trust Company,
Trustee, in favor of Lessee covering the Aircraft was recorded by the FAA as
Conveyance Number W13757.
2. The parties hereto desire that Lessor purchase the Aircraft from and
lease it back to Lessee as hereinbelow provided.
In consideration of the premises and the mutual agreements herein
contained, Lessor and Lessee agree as follows:
Section 1. 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. Any agreement referred to below shall mean such agreement
as amended, supplemented and modified from time to time, to the extent permitted
by, and in accordance with, the terms thereof. For all purposes of this Lease
the capitalized terms used but not defined herein are used as defined in the
Participation Agreement.
"Act" means the Federal Aviation Act of 1958, as amended from time to
time.
"Adjusted Rent" means Adjusted Rent as that term is defined in the
Trust Agreement.
"Affiliate" of any Person means any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person.
"Aircraft" means the Airframe with the two Engines (or any Replacement
Engine substituted for either of such Engines hereunder), whether or not any of
such initial or Replacement Engines may on the Delivery Date or from time to
time thereafter be installed on the Airframe or may be installed on any other
airframe or on any other aircraft.
"Airframe" means (i) the Boeing Model 737-2H4 aircraft (excluding
Engines or engines from time to time installed thereon) specified in the initial
Lease Supplement sold hereunder by Lessee to Lessor, and leased back by Lessor
to Lessee, all hereunder and under the initial Lease Supplement, and (ii) any
and all Parts so long as the same shall be
SALE AND LEASE AGREEMENT
1
<PAGE>
incorporated in such aircraft and any and all Parts removed from such aircraft
so long as title thereto shall remain vested in Lessor in accordance with the
terms of Section 8.
"Base Lease Term" means the period commencing on the Delivery Date and
expiring on the Rent Payment Date in December, 1996.
"Basic Rent" means the rent identified as Basic Rent in and payable
pursuant to Section 3.3, and includes amounts representing any Adjusted Rent
payable in accordance with Section 13 of the Participation Agreement
"Bills of Sale" means the FAA Bill of Sale and the Warranty Bill of
Sale.
"Business Day" means a day on which banks are not required or
authorized to close in any of Boston, Massachusetts, Dallas, Texas Salt Lake
City, Utah, and, Charlotte, North Carolina, or such other city as shall be the
situs of the principal office of Owner Participant, Lessee, Lessor or (so long
as the Mortgage shall be in effect) Lender, respectively, at the time in
question.
"Cards" is defined in Section 5.3.1.
"Code" means the United States Internal Revenue Code of 1986, as
amended from time to time.
"Delivery Date" means the date of the initial Lease Supplement, which
date shall be the date on which the Aircraft is delivered by Lessee to, and
accepted by, Lessor hereunder and in turn leased back by Lessor to Lessee
hereunder, which date shall be a Business Day.
"DOT" means the United States Department of Transportation or any
governmental person, agency or authority succeeding to the functions of such
Department of Transportation.
"Engine" means (i) each of the Pratt & Whitney JT8D-9A engines
identified by manufacturer's serial number in the initial Lease Supplement
subjecting the Aircraft to this Lease, whether or not on the Delivery Date or
from time to time thereafter installed on such Airframe or installed on any
other airframe or on any other aircraft, and (ii) any Replacement Engine,
whether or not from time to time thereafter installed on the Airframe or any
other airframe or on any other aircraft, together in each case with any and all
Parts incorporated in such Engine and any and all Parts removed from such Engine
so long as title thereto shall remain vested in Lessor in accordance with the
terms of Section 8. Except as otherwise set forth herein, at such time as a
Replacement Engine shall be substituted
SALE AND LEASE AGREEMENT
2
<PAGE>
hereunder such replaced Engine shall cease to be an Engine hereunder. The term
"Engines" means, as of any date of determination, all Engines then leased
hereunder.
"Event of Loss" means, with respect to the Aircraft, Airframe or any
Engine, any of the following events with respect to such property: (i)
disappearance or theft of such property or the loss of the use thereof for any
reason not covered by any other clause of this definition, including hijacking,
for a period of 180 consecutive days or more (unless the location of the
property is known and Lessee is diligently pursuing recovery of the property,
but in no event beyond the expiration of the Term) or destruction, damage beyond
economic repair or rendition of such property permanently unfit for normal use
for any reason whatsoever; (ii) any damage to such property which results in an
insurance settlement with respect to such property, on the basis of a total
loss, or a constructive or compromised total loss; (iii) the confiscation or
requisition of use of such property by the Government or any purported foreign
government or any instrumentality or agency thereof for a period in excess of
twelve consecutive months or for a period continuing beyond the Term, whichever
first occurs; (iv) as a result of any rule, regulation, order or other action by
the FAA or other governmental body (including any court) having jurisdiction,
the use of such property in the normal course of interstate air transportation
of persons or cargo shall have been prohibited for a period of more than six
consecutive months, unless Lessee, prior to the expiration of such six-month
period, shall have undertaken and shall be diligently carrying forward all steps
which are necessary or desirable to permit normal use by Lessee, or, (A) in the
case in which such prohibition shall apply generally to all similar Boeing Model
737-200 series aircraft, if such prohibition is continuing on the last day of
the Term, or (B) in all other cases, if such prohibition is continuing on the
earlier of the first anniversary of such prohibition and the last day of the
Term; (v) the condemnation or requisition of title to such property by the
Government or any purported foreign government or any instrumentality or agency
thereof; or (vi) respecting any Engine, any divestiture of title to an Engine
treated as an Event of Loss pursuant to Section 7.2.1 or any other provision
hereof. 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. The date of an
Event of Loss shall be deemed to be the date of such insurance settlement, loss
of use, theft, disappearance, condemnation, confiscation, taking or requisition
of title or use or prohibition, except that, for the purposes of clauses (i),
(iii) and (iv) above, no Event of Loss shall be deemed to have occurred until
the expiration of the applicable period referred to therein.
"Extension Period" is defined in Section 26.
"FAA" means the Federal Aviation Administration or any governmental
person, agency or other authority succeeding to the functions of the Federal
Aviation Administration.
"FAA Regulations" means the Federal Aviation Regulations issued
pursuant to the Act from time to time, or any successor regulations thereto.
SALE AND LEASE AGREEMENT
3
<PAGE>
"Government" means the federal government of the United States of
America or any instrumentality or agency thereof.
The term "incorporated in" means installed in or attached to or
otherwise made a part of.
"Indemnified Parties" means (i) First Security Bank of Utah, National
Association, in its individual capacity and as Owner Trustee, (ii) Owner
Participant, (iii) Lender, (iv) the Trust Estate and (v) the respective
successors and assigns of the foregoing.
"Lease", "this Lease", "this Agreement", "hereby", "herein", "hereof",
"hereunder" or other words mean this Sale and Lease Agreement, including without
limitation supplementation hereof by one or more Lease Supplements.
"Lease Default" means any event or condition which, with notice or
lapse of time or both, would constitute a Lease Event of Default.
"Lease Event of Default" is defined in Section 14.
"Lease Period" means each three-month period commencing on the
Delivery Date and each three-month anniversary thereof during the Term.
"Lease Supplement" means a supplement to this Lease, in the case of
the initial such supplement substantially in the form attached as Exhibit A
hereto, subjecting the Aircraft or other property to this Lease.
"Lessee means Southwest Airlines Co., a Texas corporation, and its
successors and permitted assigns.
"Lessor" means Owner Trustee.
"Lessor's Cost" for the Aircraft means $10,000,000.
"Lessor Liens" means Liens of any Person claiming by, through or under
Lessor, First Security Bank of Utah, National Association, in its individual
capacity, or Owner Participant, which arise as a result of (i) claims against
any such Person not related to the transactions contemplated by the Operative
Agreements, (ii) any act or omission of any such Person which is not related to
the transactions contemplated by the Operative Agreements, or is in violation of
any of the express terms of any of the Operative Agreements, (iii) Taxes or
Losses imposed against or incurred by any such Person for which Lessee is not
obligated to indemnify pursuant to the Participation Agreement, or (iv) claims
against any such Person
SALE AND LEASE AGREEMENT
4
<PAGE>
arising out of any transfer by such Person in violation of the express terms of
the Operative Agreements.
"Lien" means any mortgage, pledge, lien, charge, encumbrance, lease or
security interest, or any claim or exercise of rights, affecting the title to or
any interest in property.
"Maintenance Program" is defined in Section 8.1.1.
"Manufacturer" means The Boeing Company, a Delaware corporation, or
any Affiliate thereof whose obligations are guaranteed by The Boeing Company,
and their respective successors and assigns.
"Officer's Certificate" means a certificate signed by the Chairman,
the President, any Vice President, the Treasurer, any Assistant Treasurer, the
Controller, the Secretary or any Assistant Secretary of the Person providing
such certificate.
"OP Bank Guaranty" means that certain Guaranty Agreement, dated as of
May 25, 1991, of Owner Participant to Lender.
"Operative Agreements" means this Agreement, the OP Bank Guaranty,
each Lease Supplement, the Participation Agreement, the Mortgage, the Note, the
Trust Agreement, the Bills of Sale, and the Tax Indemnity Agreement, including
any consents included in or attached to any thereof.
"Overdue Rate" means the lesser of (i) the maximum rate permitted by
applicable law or (ii) 2% in excess of the greater of (x) the interest rate
publicly announced in Charlotte, North Carolina from time to time by NCNB
National Bank of North Carolina as its prime rate, or (y) the interest rate
required to be paid under the Note. Any interest payable hereunder at the
Overdue Rate shall be computed on the basis of a year of 360 days and actual
days elapsed.
"Owner Participant" means American Finance Group, a Massachusetts
general partnership, and its successors and permitted assigns.
"Owner Trustee" means First Security Bank of Utah, National
Association, not in its individual capacity but solely as trustee under the
Trust Agreement, and any successor, separate or additional Owner Trustee
thereunder.
"Participation Agreement" means the Participation Agreement, dated as
of May 25, 1991, among Lessee, Lender, Owner Participant, and Lessor.
SALE AND LEASE AGREEMENT
5
<PAGE>
"Parts" means all appliances, parts, components, instruments,
appurtenances, accessories, furnishings and other equipment of whatever nature
(other than (a) complete Engines or engines and (b) any items leased by Lessee
from a third party (other than Lessor)) which may from time to time be
incorporated in the Airframe or any Engine (and "Part" means any of the
foregoing) or, so long as title thereto shall remain vested in Lessor in
accordance with Section 8.2 hereof, after removal therefrom.
"Permitted Foreign Air Carrier" means any air carrier listed on
Exhibit C hereto (as the same may be modified from time to time in accordance
with Section 23) and any successor of any such carrier.
"Permitted Lien" means any Lien referred to in clauses (a) through (g)
of Section 6.
"Permitted Sublease" means a sublease permitted under Section 7.2.8.
"Permitted Sublessee" means the sublessee under a Permitted Sublease.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Renewal Rent" means the rent payable in respect of a Renewal Term in
an amount determined pursuant to Section 18
"Renewal Term" means any of the successive periods of integral
multiples of two years each (but not more than four years in the aggregate)
which follow the end of the Base Lease Term with respect to which Lessee shall
have exercised its option pursuant to Section 18 hereof.
"Rent" means Basic Rent, Renewal Rent and Supplemental Rent.
"Rent Payment Date" means each three-month anniversary of the Delivery
Date during the Base Lease Term and any Renewal Term.
"Replacement Engine" means a Pratt & Whitney JT8D-9A engine (or an
improved model engine manufactured by Pratt & Whitney that is suitable for
installation and use on the Airframe and fully compatible with the other Engine
or engine installed thereon) which shall have been substituted for an Engine
leased hereunder pursuant to Section 5.2 or 10.2.
SALE AND LEASE AGREEMENT
6
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"SLV Determination Date" means any date set forth in Exhibit B hereto.
"Stipulated Loss Value" means the amount determined by multiplying
the Lessor's Cost of the Aircraft by the percentage set forth in Exhibit B
hereto opposite the SLV Determination Date next preceding the date on which
Stipulated Loss Value is being paid (or, if such payment date is an SLV
Determination Date by the percentage set forth opposite such SLV Determination
Date), as such amount may be adjusted pursuant to Section 13 of the
Participation Agreement.
"Supplemental Rent" means, without duplication, all amounts,
liabilities and obligations (other than Basic Rent or Renewal Rent) which Lessee
assumes or agrees to pay to Lessor or any other Person hereunder, under the
Participation Agreement or any of the other Operative Agreements (other than the
Tax Indemnity Agreement), including without limitation (i) Stipulated Loss Value
payments, (ii) all amounts required to be paid by Lessee under the agreements,
covenants and indemnities contained in the Participation Agreement and (iii) all
amounts required to be paid by Lessee pursuant to Section 3.4 and Section 5
hereof, whether or not designated as Supplemental Rent in any such case.
"Tax Indemnity Agreement" means the Tax Indemnity Agreement, dated as
of May 25, 1991, among Lessor, Owner Participant and Lessee.
"Term" means the term for which the Aircraft is leased pursuant to
Section 3 hereof and shall include the Base Lease Term, any Renewal Term and the
Extension Period, if any.
"Transfer" means, with respect to any Person, to transfer, by bill of
sale or otherwise, all such Person's right, title and interest in and to the
Aircraft, Airframe or any Engine, as the case may be, to another Person on an
"as is, where is" basis, free and clear of any Lessor Lien but otherwise without
recourse, representation or warranty, express or implied, and including an
express disclaimer of warranties, representations and guarantees in a manner
comparable to that set forth in Section 4.1.
"Trust Agreement" means the Trust Agreement, dated as of May 25, 1991,
between Owner Participant and First Security Bank of Utah, National Association,
in its individual capacity.
"Trust Estate" means the Trust Estate as that term is defined in the
Trust Agreement.
SALE AND LEASE AGREEMENT
7
<PAGE>
"UCC" means the Uniform Commercial Code as in effect in any
applicable jurisdiction.
"U.S. Air Carrier" means any United States air carrier (i) as to which
there is in force a certificate issued pursuant to Section 401 of the Act, (ii)
as to which there is in force an air carrier operating certificate issued
pursuant to Part 121 of the FAA Regulations, or which may operate as an air
carrier by certification or otherwise under any successor or substitute
provisions therefor or in the absence thereof, and (iii) which, at the time a
Permitted Sublease is (or is proposed to be) entered into, is not the subject of
proceedings under the Federal Bankruptcy Code of 1978, as amended.
"Wet Lease" means any arrangement whereby Lessee agrees to furnish the
Airframe and Engines or engines installed thereon to a third party pursuant to
which the Airframe and Engines or engines (i) shall be operated solely by
regular employees of Lessee possessing all current certificates and licenses
that would be required under the Act for the performance by such employees of
similar functions within the United States of America (it being understood that
cabin attendants need not be regular employees of Lessee), (ii) shall be
maintained by Lessee in accordance with its Maintenance Program and (iii) shall
be and remain, in the hands of such third party, subject to all other terms and
conditions of this Lease.
Section 2. Sale, Lease and Acceptance.
--------------------------
(a) Lessor, subject to satisfaction or waiver of the conditions set
forth in Section 5 of the Participation Agreement and the concurrent acceptance
hereunder by Lessee of the Aircraft, hereby agrees, to the extent that the funds
received by it pursuant to Section 2 of the Participation Agreement are adequate
for the purpose, to purchase at a purchase price equal to Lessor's Cost and to
accept delivery on the Delivery Date from Lessee hereunder and to lease back to
Lessee hereunder, and Lessee hereby agrees, expressly for the direct benefit of
Lessor and Owner Participant to sell to Lessor and to lease back from Lessor
hereunder on the Delivery Date, the Aircraft, which shall have been accepted by
Lessor and Lessee hereunder as evidenced by the execution by Lessor and Lessee
of the Lease Supplement conveying to Lessor and leasing to Lessee the Aircraft
hereunder; provided, however, that Lessor and Lessee shall have no further
obligation hereunder with respect to the Aircraft if the Delivery Date shall not
have occurred on or before June 15, 1991. The purchase price of the Aircraft
shall be paid by Lessor to Lessee on the Delivery Date in the manner specified
in Section 3 of the Participation Agreement.
(b) Lessor hereby authorizes each of Gary C. Kelly, John D. Owen and
Deborah Ackerman, all of whom are employees of Lessee, as the authorized
representative or representatives of Lessor to accept delivery of the Aircraft
from Lessee pursuant hereto. Lessee hereby agrees that in the event delivery of
the Aircraft shall be accepted by an
SALE AND LEASE AGREEMENT
8
<PAGE>
employee or employees of Lessee pursuant to such authorization by Lessor, such
acceptance of delivery by such employee or employees on behalf of Lessor shall,
without further act, also irrevocably constitute acceptance by Lessee of the
Aircraft for all purposes of this Agreement.
Section 3. Term and Rent.
-------------
3.1 General. Except as otherwise provided herein, the Term for the
-------
Aircraft shall commence on the Delivery Date specified in the initial Lease
Supplement and shall terminate as herein provided.
3.2 Lease Term. Except as provided herein, the Aircraft shall be
----------
leased hereunder for the Base Lease Term, any Renewal Term and the Extension
Period, if any.
3.3 Basic Rent; Renewal Rent. Lessee hereby agrees to pay to Lessor
------------------------
Basic Rent, in arrears, on each Rent Payment Date during the Base Lease Term, in
the amount of $462,154, as such amount may be adjusted pursuant to Section 13 of
the Participation Agreement. If Lessee exercises its option under Section 18 to
renew this Lease for any Renewal Term, then Lessee shall pay to Lessor Renewal
Rent, in arrears, on each Rent Payment Date during such Renewal Term.
3.4 Supplemental Rent. Lessee also agrees to pay (or cause to be paid)
-----------------
to Lessor, or to whomsoever shall be entitled thereto, all Supplemental Rent
with respect to Stipulated Loss Value when and as the same shall become due and
owing and all other amounts of Supplemental Rent within five days after demand
or such other relevant period as may be provided in any Operative Agreement.
Lessee will also pay to Lessor, or to whomsoever shall be entitled thereto, as
Supplemental Rent, to the extent permitted by applicable law, interest at the
Overdue Rate on any part of any installment of Basic Rent or Renewal Rent not
paid when due for any period from and including the date on which the same was
due to but excluding the date of payment in full and (to the extent permitted by
applicable law) on any payment of Supplemental Rent not paid when due to Lessor,
or to whomsoever shall be entitled thereto, as the case may be, for the period
from the date on which the same was due to but excluding the date of payment in
full. The expiration or other termination of Lessee's obligation to pay Basic
Rent or Renewal Rent hereunder shall not limit or modify the obligations of
Lessee with respect to Supplemental Rent.
3.5 Payments. Payments of Rent and any and all other payments payable
--------
to Lessor hereunder shall be paid in funds of the United States of America which
shall be immediately available not later than 11:00 A.M., New York City time, on
the date due at the office of Lessor at 79 Main Street, Salt Lake City, Utah
84111, Attention: Corporate Trust Department, Re: Southwest Airlines 1991 Trust
N63SW, or as otherwise directed by Lessor in writing at least five Business
Days prior to the date such payment is due; provided, however, that until Lessee
shall have received notice from Lender that all amounts payable
SALE AND LEASE AGREEMENT
9
<PAGE>
to Lender under the Mortgage and the Note have been paid in full and satisfied,
all such payments due from Lessee (including without limitation amounts payable
by Lessee under Section 5, Section 9, Section 10, Section 11, Section 15 and
Section 18 hereof but excluding any amounts representing Adjusted Rent) shall be
made by wire transfer to the office of Lender at the address referred to in
Section 12.7 of the Participation Agreement, or as otherwise designated from
time to time in writing by Lender. Except as otherwise expressly provided
herein, whenever any payment of Rent or other payment to be made hereunder shall
be due on a day which is not a Business Day, such payment shall be made on the
next succeeding day which is a Business Day and (provided such payment is made
on such next succeeding Business Day) no interest shall accrue on the amount of
such payment from and after such scheduled date.
Section 4. Lessor's Representations and Warranties: DISCLAIMER: Certain
------------------------------------------------------------
Agreements of Lessee.
- ---------------------
4.1 Lessor's Representations and Warranties: DISCLAIMER. LESSEE
---------------------------------------------------
EXPRESSLY AGREES TO TAKE THE AIRCRAFT "AS IS". NEITHER LESSOR (INDIVIDUALLY OR
AS OWNER TRUSTEE) NOR OWNER PARTICIPANT MAKES, HAS MADE OR SHALL BE DEEMED TO
HAVE MADE, AND EACH HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, AS TO THE TITLE, AIRWORTHINESS, VALUE, CONDITION, DESIGN,
OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT OR ANY PART
----------------------------------
THEREOF, 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, AS TO THE ABSENCE OF OBLIGATIONS BASED ON STRICT LIABILITY IN TORT,
OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH
RESPECT TO THE AIRCRAFT OR ANY PART THEREOF, except that First Security Bank of
Utah, National Association, in its individual capacity (i) represents and
warrants that on the Delivery Date Lessor shall have received whatever title
thereto as was conveyed to it by the Lessee, (ii) represents and warrants that
on the Delivery Date the Aircraft shall be free of Lessor Liens attributable to
it, (iii) agrees that it will not directly or indirectly create, incur, assume
or suffer to exist any Lessor Lien attributable to it on or with respect to the
Airframe or any Engine or any other portion of the Trust Estate, and (iv)
represents and warrants that it is a "citizen of the United States" as defined
in Section 101(16) of the Act and agrees that if at any time a responsible
officer in its Corporate Trust Department shall obtain actual knowledge that it
has ceased to be a "citizen of the United States" within the meaning of Section
101(16) of the Act it will, if required under Section 6.3.1.5 of the
Participation Agreement, promptly resign as Owner Trustee, effective upon the
appointment of a successor Owner Trustee in accordance with Section 9.01 of the
Trust Agreement. Lessor covenants that during the Term (so long as no Lease
Event of Default shall have occurred and be continuing) it will not, through its
own actions or
SALE AND LEASE AGREEMENT
10
<PAGE>
breaches of any of its obligations under the Operative Agreements, interfere or
cause any interference in the quiet enjoyment of the Aircraft by Lessee or any
Permitted Sublessee and agrees that it will not directly or indirectly create,
incur, assume or suffer to exist any Lessor Lien attributable to it on or with
respect to the Airframe or any Engine.
4.2 Certain Agreements of Lessee. All obligations of Lessee in this Lease
---------------------------
shall be done, performed or complied with at Lessee's cost and expense,
whether or not so expressed, unless otherwise expressly stated herein or in the
Participation Agreement. Lessee hereby agrees with Lessor for the benefit of
Owner Participant that it shall perform the agreements, covenants and
indemnities set forth in the Participation Agreement (including, without
limitation, Sections 8.1 and 8.2 of the Participation Agreement) which are
incorporated herein, and hereby restates Lessee's representations and warranties
set forth in the Participation Agreement, as fully and to the same extent and
with the same force and effect as if set forth in full in this Section 4.2.
Section 5. Return of Aircraft.
------------------
5.1 General Condition upon Return. Subject to Sections 9 and 10, upon
-----------------------------
the expiration or termination of this Lease, Lessee (i) will cause the Aircraft,
if then not registered in the name of Lessor or its designee with the FAA for
any reason, to be reregistered in the name of Lessor or such designee with the
FAA, (ii) unless otherwise provided pursuant to Section 5.6, will return the
Aircraft to Lessor by delivering the same at any location in the continental
United States selected by Lessor to which Lessee has regularly scheduled
flights, (iii) if at the time of such delivery the Mortgage shall not have been
fully discharged, will notify Lender of such location and of such delivery, and
(iv) shall comply with the provisions of Section 5.5. All costs associated with
the return flight shall be for the account of Lessee, and Lessor shall have no
obligation to pay Lessee for any fuel or oil remaining in the Aircraft at the
time of such delivery. At the time of such return, the Airframe and Engines or
engines installed thereon, as the context may require:
5.1.1 Airworthiness. Subject to the exception described in clause
-------------
(iii) of Section 8.1.1, shall be duly certificated as an airworthy aircraft by
the FAA under Part 121 of the Federal Aviation Regulations or any successor
provision, and shall have onboard currently valid certificate of airworthiness
issued by the FAA;
5.1.2 Free of Liens. Shall be free and clear of all Liens (other than
-------------
Lessor Liens) and all rights of third parties under pooling, interchange,
overhaul, repair or other similar agreements or arrangements (other than such
rights which constitute Lessor Liens);
5.1.3 Operating Configuration and Condition. Shall be in a
-------------------------------------
configuration suitable for operation in regularly scheduled commercial airline
passenger service in the
SALE AND LEASE AGREEMENT
11
<PAGE>
United States and shall be in as good operating condition as on the Delivery
Date, ordinary wear and tear and changes and alterations properly made by Lessee
as permitted under this Lease excepted, or, in the case of any such engines
owned by Lessee, shall have a value and utility at least equal to, and shall be
in as good operating condition as required by the terms hereof with respect to,
Engines constituting part of the Aircraft but not then installed on the
Airframe. All Lessee or Permitted Sublessee exterior markings, as the case may
be, shall have been painted over in matching exterior colors;
5.1.4 Cleanliness and Operability. Shall be clean by United States
---------------------------
commercial airline operating standards with all installed equipment, systems and
components operable and functioning in accordance with their intended use;
5.1.5 Parts and Equipment. Shall have installed thereon all Engines
-------------------
and Parts installed thereon at the commencement of the Term therefor or Engines
or replacements therefor made in accordance with the terms of this Lease and
Section 13 of the Participation Agreement;
5.1.6 TCAS and Windshear. Shall have installed thereon a Terminal
------------------
Collision Avoidance System and windshear detection system (as required by FAA
airworthiness directive, and as implemented by Lessee for the balance of its
Boeing Model 737-200 fleet), both at Lessee's expense; and
5.1.7 Corrosion Treatment. Shall have been maintained in compliance
-------------------
with the corrosion prevention procedures to the extent set forth in the
Maintenance Program
5.2 Return of Other Engines. In the event that any engine not owned
-----------------------
by Lessor shall be installed on the Airframe returned in accordance with Section
5.1, such engine shall be a Pratt & Whitney JT8D-9A engine (or an improved model
engine manufactured by Pratt & Whitney which is fully compatible with the other
Engine or engine installed on the Airframe). At the time of such replacement,
such engine shall have performance and durability characteristics and a value,
condition and utility at least equal to the Engine it replaced hereunder,
assuming such Engine was maintained in accordance with the requirements of this
Lease, and at the time the Airframe is returned shall fully comply with all the
requirements of this Lease, including this Section 5, which are applicable to
Engines. Upon return of the Aircraft, Lessee shall duly convey to Lessor good
and marketable title to any such replacement engine, free and clear of all Liens
other than Lessor Liens; and, upon such conveyance and as a condition thereto,
Lessee will (a) furnish Lessor with a full warranty (as to title) bill of sale,
in form and substance reasonably satisfactory to Lessor, with respect to each
such replacement engine, together with an opinion of counsel to the effect that
such bill of sale has been duly authorized and delivered and is enforceable in
accordance with its terms and that each such replacement engine is free and
clear of all Liens other than Lessor Liens, and (b) take such other action as
Lessor may reasonably
SALE AND LEASE AGREEMENT
12
<PAGE>
request in order that title to such replacement engine may be duly and properly
vested in Lessor to the same extent as the Engine replaced thereby. Upon
compliance by Lessee with the foregoing and full performance by Lessee of all of
its payment obligations hereunder, Lessor will, so long as no Lease Event of
Default or Lease Default has occurred and is continuing, Transfer to Lessee any
Engine not installed on the Airframe at the time of return, free and clear of
all Lessor Liens, but otherwise without recourse or warranty (other any
manufacturer's or other third-party warranties applicable to such Engines).
5.3 Return at End of Base Lease Term or Renewal Lease Term. Upon
------------------------------------------------------
return of the Aircraft at the expiration or termination of this Lease, Lessee
shall have caused all of the following to be complied with: (i) all FAA
Airworthiness Directives, all mandatory service bulletins from Manufacturer, and
all mandatory service bulletins from the manufacturer of the engines then
installed on the Airframe (in compliance with Section 5.2), in each case
applicable to the Aircraft and required by the terms thereof to have been
complied with on or prior to the return date, and (ii) all such FAA
Airworthiness Directives and bulletins which have been issued not less than six
months prior to the end of the Term and which require compliance after the
return date but prior to the six-month anniversary of the return date. During
the Term, Lessee shall have treated the Aircraft in a manner similar to the
manner in which Lessee treated all other Boeing Model 737-200 aircraft in its
fleet during the Term, including, without limitation, with respect to
maintenance, additions and modifications (other than as contemplated by Section
5.4).
At the request of Lessor delivered to Lessee not more than 30 days prior to
the end of the Term, the Aircraft shall be check flown by Lessee (or any
Permitted Sublessee) on the return flight described in Section 5.1 or the flight
to Lessee's principal maintenance facilities pursuant to Section 5.6, as the
case may be. The form of test flight procedure be to followed shall be in
accordance with Lessee's normal test flight procedure. Up to five of Owner
Participant's designees or representatives may participate in such flight as
observers.
At redelivery of the Aircraft to Lessor hereunder, the following specific
requirements shall be met by Lessee:
5.3.1 Airframe. (I) 25% of the time (or cycles, if applicable)
--------
between the performance of each structural work task card (the "Cards") shall
remain before the next required performance of such Cards (or the equivalent
used at the time under Lessee's Maintenance Program) (it being understood that,
as used herein, the term "Cards" refers to the heaviest airframe check currently
used under Lessee's Maintenance Program), (II) Lessee shall have performed a
complete "C" check or its equivalent (all phases) on the Airframe no more than
200 flight hours prior to its return to Lessor, during which "C" check or
equivalent, as the case may be, Lessor shall have had full access to inspect the
Aircraft, subject to the provisions of Section 12 (and Lessee shall have
corrected to Lessor's reasonable satisfaction any deficiencies discovered during
such check, and will not have deferred any maintenance
SALE AND LEASE AGREEMENT
13
<PAGE>
discrepancies), and (III) Lessee shall have completed a "B" check immediately
prior to redelivery;
5.3.2 Engines. The Engines or engines installed on the Airframe (in
-------
compliance with Section 5.2) shall not have been used for more than an aggregate
of 12,000 hours or 12,000 cycles since the last shop visit;
5.3.3 Boroscope. The hot section of each Engine or engine installed
---------
on the Airframe (in compliance with Section 5.2) shall be inspected by boroscope
and any defects which are outside the manufacturer's recommended airworthiness
limitations shall be corrected such that they are brought within such
limitations;
5.3.4 Landing Gears. Each of the main and nose landing gears shall
-------------
have at least 25% of the time between shop visits remaining until the next
scheduled shop visit or replacement;
5.3.5 APU. The auxiliary power unit ("APU") shall have at least 25%
---
of the Aircraft hours between major shop level inspections remaining until the
next such inspection;
5.3.6 Time-Controlled Components. All time-controlled components,
--------------------------
other than engines and landing gears, shall have at least 3,000 hours (unless
one-half of the allowable hours is actually less than 3,000 hours, in which case
one-half of such allowable hours) or twelve months, as applicable, remaining to
the next scheduled shop visit or replacement; and
5.3.7 Cycles/Hours Ratio. The ratio of cycles to block hours for
------------------
the Aircraft shall not exceed 1.33 to 1.0.
5.4 Financial Adjustments. At such time as the Aircraft is returned
---------------------
pursuant to this Section 5, the hours and cycles, as applicable, remaining with
respect to each item referred to in Section 5.3 shall be determined in
accordance with Section 5.4.7, and, subject to Section 5.3 and Section 5.4.7,
the appropriate financial adjustment shall be determined on the date the Term
ends as follows, and paid at the time of such return:
SALE AND LEASE AGREEMENT
14
<PAGE>
5.4.1 Airframe. In the event that the Airframe is returned to Lessor
--------
with other than 50% of the allowable hours between Cards remaining, then the
adjustment amount in respect of the Airframe shall be determined by multiplying
(i) the difference between the actual number of hours remaining to the next
Cards and 50% of the allowable hours between Cards by (ii) the cost per hour
paid by Lessee to third parties, at the time such Aircraft is returned, for
the performance of such Cards. If the actual number of hours remaining exceeds
50% of the allowable hours, then Lessor shall pay such adjustment amount to
Lessee; otherwise, Lessee shall pay such adjustment amount to Lessor.
5.4.2 Engines. In the event that the Engines or engines installed on
-------
the Airframe (in compliance with Section 5.2) returned to Lessor have less than
an aggregate of 12,000 hours or cycles used since the last shop visit, then the
adjustment amount in respect of the Engines or such engines shall be determined
by multiplying (i) the difference between the actual aggregate number of hours
or cycles used, whichever is the more limiting, and 12,000 hours or cycles, by
(ii) the then-current average cost per hour to Lessee of restoring usable engine
time, and Lessor shall pay such adjustment amount to Lessee. For the purpose of
determining the cost of restoring usable engine time it shall be assumed that
one hour is equal to one cycle.
5.4.3 Landing Gears. In the event that either the main or nose
-------------
landing gear is returned to Lessor with more than 25% of cycles remaining until
the next scheduled shop visit or replacement, then the adjustment amount in
respect of such landing gear shall be determined by multiplying (i) the
difference between the actual number of cycles remaining to the next scheduled
shop visit and 25% of the allowable cycles between shop visits by (ii) the cost
per cycle paid by Lessee to third parties, at the time the Aircraft is returned,
for the overhaul of a nose gear or main gear, as applicable, and Lessor shall
pay such adjustment amount to Lessee. For the purpose of determining the cost of
restoring usable landing gear time it shall be assumed that one hour is equal to
one cycle.
5.4.4 APU. In the event that the APU is returned to Lessor with other
---
than 50% of the Aircraft hours between major shop level inspections remaining
until the next such inspection, then the adjustment amount in respect of the APU
shall be determined by multiplying (i) the difference between the actual number
of Aircraft hours remaining to the next such inspection and 50% of the allowable
Aircraft hours by (ii) the cost per hour paid by Lessee to third parties, at the
time the Aircraft is returned, for the performance of restoring usable time to
such APU. If the actual number of Aircraft hours remaining exceeds 50% of the
allowable Aircraft hours, then Lessor shall pay such adjustment amount to
Lessee; otherwise, Lessee shall pay such adjustment amount to Lessor.
5.4.5 Time-Controlled Components. In the event that any time-
--------------------------
controlled component (other than Engines and landing gears) is returned to
Lessor with more than 3,000 hours (unless one-half of the allowable hours is
actually less than 3,000 hours, in
SALE AND LEASE AGREEMENT
15
<PAGE>
which case more than one-half of such allowable hours) or 12 months, as
applicable, remaining to the next scheduled shop visit or replacement as
provided in Section 5.3.6, then the adjustment amount in respect of such time-
controlled component shall be determined by multiplying (i) the difference
between the number of hours or months, as applicable, remaining and 3,000 hours,
one-half of such allowable hours, or 12 months, as applicable, by (ii) the then-
current average vendor overhaul cost per hour to Lessee for such component, and
Lessor shall pay such adjustment amount to Lessee.
5.4.6 Cycles/Hours Ratio. In the event that the ratio of cycles to
------------------
block hours for the Aircraft exceeds 1.33 to 1.0, then Lessee shall pay to
Lessor an amount equal to $150 for each actual cycle on the Aircraft in excess
of the number obtained by multiplying (i) the number of block hours by (ii)
1.33.
5.4.7 Certificate as to Return Condition, Etc. At the end of the
---------------------------------------
Term, Lessee shall furnish Lessor with an Officer's Certificate setting forth
the hours and cycles remaining on the Engines, the landing gears and the
Airframe. Such certificate shall be used in determining the amount of any
payments due pursuant to this Section 5.4.
5.4.8 Certain Other Financial Adjustment Provisions.
---------------------------------------------
(a) Any payment to be made by either party hereto pursuant to this
Section 5.4 shall be net of all amounts to be paid to such party pursuant to
this Section 5.4.
(b) Notwithstanding any provision herein to the contrary, neither
party hereto shall be required to pay to the other party hereto pursuant to the
provisions of this Section 5.4 any amount in excess of $150,000 (net of all
amounts owed to such party as provided in clause (a) above).
(c) Lessee shall use its best efforts to avoid returning the Engines
with an aggregate number of hours or cycles used since the last shop visit which
is materially less than 12,000, by replacing one or both of the Engines with
such Replacement Engines, if any, as are available immediately prior to such
return.
(d) Lessee shall have the option to perform the work necessary to
conform the Aircraft to the condition required by this Section 5.4 in lieu of
paying any adjustment amount hereunder.
5.5 Manual, Service Bulletins, Etc. Upon return of the Aircraft at
------------------------------
the expiration or termination of this Lease, Lessee shall deliver or cause to be
delivered to Lessor originals or copies of all logs, manuals, drawings and data
and inspection, modification and overhaul records in respect of the Aircraft,
including without limitation originals of all such documents as are required to
be maintained under applicable rules and regulations of
SALE AND LEASE AGREEMENT
16
<PAGE>
the FAA, updated through the date of return. All "no-charge" service bulletin
kits received by or on behalf of Lessee from Manufacturer, Engine manufacturer
or vendors for the Aircraft and Engines or engines and not incorporated therein
shall be returned at no charge to Lessor as cargo on board the Aircraft at the
time of its return. At the time the Aircraft is returned, Lessor shall have the
option to purchase from Lessee, at Lessee's cost therefor, any "charge" service
bulletin kits purchased by Lessee which have not been incorporated in the
Aircraft. All such items shall thereupon become the property of Lessor. In
addition, at the time of such return, Lessee will provide copies of all
documentation, including all Cards, necessary or appropriate to permit Lessor
(or any purchaser or lessee of the Aircraft) to maintain the Aircraft in
accordance with the Maintenance Program.
5.6 Parking upon Return. Upon written request of Lessor received by
-------------------
Lessee at least 10 days prior to its return of the Aircraft at the expiration or
termination of this Lease and in lieu of returning the Aircraft to a location as
provided in Section 5.1, Lessee will provide free parking facilities for the
Aircraft for a period not exceeding 30 days following return thereof by Lessee
at the location at which Lessee has its principal maintenance facilities;
provided, that such parking shall be at Lessor's risk and any expenses in
connection with such parking shall be paid by Lessor, including the cost of any
insurance therefor; provided, further, that Lessee shall provide such parking
facilities for an additional 60 days on a space-available basis.
5.7 Failure to Return Aircraft or Engines. If Lessee shall, for any
-------------------------------------
reason whatsoever, fail to return the Aircraft or any Engine at the time
specified herein, the obligations of Lessee as provided in this Lease (including
the obligation to pay Rent on the same basis as that applicable immediately
prior to such failure) shall continue in effect with respect to the Aircraft or
such Engine until either (i) the Aircraft or such Engine is returned to Lessor
or (ii) the Stipulated Loss Value shall have been paid to Lessor (it being
understood that such Stipulated Loss Value shall be determined as of the date
such return was to have been made); but this Section 5.7 shall not be construed
as permitting Lessee to fail to meet its obligation to return the Aircraft or
such Engine in accordance with the requirements of this Lease or constitute a
waiver of a Lease Event of Default.
5.8 Aid in Disposition. Lessee agrees that, during the last twelve
------------------
months of the Term (and during any storage period) it will cooperate (and will
use its best efforts to cause any sublessee to cooperate) in all reasonable
respects with any efforts of Lessor to lease or sell the Aircraft, including
without limitation (subject to the provisions of Section 12) permitting
potential lessees or purchasers to inspect the Aircraft and the records relating
thereto; provided, that such cooperation shall be without out-of-pocket expense
or risk to Lessee (or any sublessee).
Section 6. Liens. Lessee will not directly or indirectly create, incur,
-----
assume or suffer to exist any Lien on or with respect to the Aircraft, the
Airframe or any Engine, title thereto
SALE AND LEASE AGREEMENT
17
<PAGE>
or any interest therein or in this Lease except: (a) the respective rights of
the parties to the Operative Agreements; (b) the rights of others under
agreements or arrangements to the extent expressly permitted by the terms of
Sections 7.2 and 8.3; (c) Lessor Liens; (d) liens for taxes, assessments or
other governmental charges either not yet due or being contested in good faith
(and for the payment of which adequate reserves have been provided in accordance
with generally accepted accounting principles) by appropriate proceedings so
long as such proceedings do not involve any material danger of the sale,
forfeiture, loss or loss of use of the Aircraft, the Airframe or any Engine or
any interest therein; (e) materialmen's, mechanics', workers', repairers',
employees' or other like Liens arising in the ordinary course of business for
amounts the payment of which is either not yet due or not overdue for a period
of more than 60 days or is being contested in good faith (and for the payment of
which adequate reserves have been provided in accordance with generally accepted
accounting principles) by appropriate proceedings so long as such Liens do not
involve any material danger of the sale, forfeiture, loss or loss of use of the
Aircraft, the Airframe or any Engine or any interest therein; (f) Liens arising
out of any judgment or award against Lessee, unless the judgment secured shall
not, within 45 days after entry thereof, have been discharged or vacated or
execution thereof stayed pending appeal or shall not have been discharged,
vacated or reversed within 45 days after the execution of such stay; and (g) any
other Lien with respect to which Lessee shall have provided a bond or other
security adequate in the reasonable judgment of Lessor. Lessee will promptly
take (or cause to be taken) such action at its own expense as may be necessary
duly to discharge any such Lien not excepted above if the same shall arise at
any time.
Section 7. Registration, Operation, Possession, Subleasing and Records.
-----------------------------------------------------------
7.1 Registration and Operation.
--------------------------
7.1.1 Registration. Lessee shall forthwith upon the delivery
------------
of the Aircraft hereunder cause the Aircraft to be duly registered and at all
times thereafter to remain duly registered in the name of Lessor with the FAA
pursuant to and as permitted by the Act (it being understood that Lessee shall
not be required to comply with this covenant to the extent that First Security
Bank of Utah, National Association's or Owner Participant's failure to comply
with its covenant set forth in Section 6.3.1.5 or Section 6.2.5, respectively,
of the Participation Agreement with regard to its citizenship makes such
compliance by Lessee impossible).
7.1.2 Nameplate. As soon as practicable after the Delivery
---------
Date, and in any event within 30 days thereof, Lessee agrees to affix and
thereafter to maintain in the cockpit of the Airframe adjacent to the
airworthiness certificate and on each Engine a nameplate bearing the inscription
"OWNED BY AND LEASED FROM FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, AS
OWNER TRUSTEE, OWNER AND LESSOR" and, so long as the Mortgage shall be in
effect, "SUBJECT TO A SECURITY
SALE AND LEASE AGREEMENT
18
<PAGE>
INTEREST IN FAVOR OF NCNB LEASING CORPORATION, AS MORTGAGEE" (such nameplate to
be replaced, if necessary, with a nameplate reflecting the name of any successor
Lessor). Except as above provided, Lessee will not allow the name of any person,
association or corporation to be placed on the Airframe or on any Engine as a
designation that might be interpreted as a claim of ownership; provided that
nothing herein contained shall prohibit Lessee (or any Permitted Sublessee) from
placing its customary colors and insignia on the Airframe or any Engine or
displaying information concerning the registration or manufacture of the
Aircraft, the Airframe, any Engine or Part.
7.1.3 Compliance with Laws. Lessee agrees that it will not use or
--------------------
operate the Aircraft, the Airframe or any Engine in violation of any law or any
rule, regulation or order of any government or governmental authority having
jurisdiction (domestic or foreign) or in violation of any airworthiness
certificate, license or registration relating to the Aircraft, the Airframe or
any Engine issued by any such authority, except to the extent Lessee is
contesting in good faith the validity or application of any such law, rule,
regulation or order in any reasonable manner which does not material adversely
affect Lessor's interest in the Aircraft.
7.1.4 Insurance Requirements; Government Requisition; Indemnity.
---------------------------------------------------------
Lessee agrees not to operate, use or locate the Aircraft, the Airframe or any
Engine, or permit any Permitted Sublessee to operate, use or locate the
Aircraft, the Airframe or any Engine, (i) in any area excluded from coverage by
any insurance required by the terms of Section 11, except in the case of a
requisition by the Government where Lessee obtains indemnity (backed by the full
faith and credit of the United States of America) in lieu of such insurance from
the Government against the risks and in the amounts required by Section 11
covering such area, or (ii) in any area where maintenance of war-risk insurance
is required by Section 11 unless fully covered by war-risk insurance satisfying
the terms of Section 11, or unless the Aircraft, the Airframe or such Engine is
operated or used under contract with the Government under which contract the
Government assumes liability (backed by the full faith and credit of the United
States of America) in an amount not less than the amount of insurance otherwise
required by Section 11 for any damage, loss, destruction or failure to return
possession of the Aircraft, the Airframe or such Engine at the end of the term
of such contract or for injury to persons or damage to property of others, or
(iii) with respect to any sublease to a Permitted Foreign Air Carrier, in any
area referred to in subclause 3(iv) of Section 7.2.
7.2 Possession. Lessee will not, without the prior written consent of
----------
Lessor, sublease or otherwise in any manner deliver, transfer or relinquish
possession of the Aircraft, the Airframe or any Engine or install any Engine, or
permit any Engine to be installed, on any airframe other than the Airframe;
provided, however, that, so long as no Lease Event of Default shall have
occurred and be continuing, and so long as Lessee shall comply with
SALE AND LEASE AGREEMENT
19
<PAGE>
the provisions of Section 11, and all FAA approvals required for such purposes
have been obtained, Lessee may, without such prior written consent:
7.2.1 Interchange and Pooling. Subject or permit any Permitted
-----------------------
Sublessee to subject (i) the Aircraft, Airframe or any Engine to normal
interchange agreements customary in the United States domestic commercial
airline industry and entered into by Lessee or such Permitted Sublessee in the
ordinary course of its business, and (ii) any Engine to pooling agreements or
arrangements customary in the airline industry and entered into by Lessee or
such Permitted Sublessee in the ordinary course of its business; but in either
case (A) no transfer of the registration of the Airframe or any Engine shall be
effected in connection therewith and the terms of this Lease and the
Participation Agreement shall be observed, and (B) no such agreement or
arrangement shall contemplate or require the transfer of title to the Aircraft,
Airframe or any Engine and if Lessor's title to any Engine shall be divested
under any such agreement or arrangement, such divestiture shall be deemed to be
an Event of Loss with respect thereto and Lessee shall comply with Section 10.2
hereof;
7.2.2 Testing and Service. Deliver or permit any Permitted Sublessee
-------------------
to deliver possession of the Aircraft, Airframe or any Engine or Part, to the
manufacturer thereof for testing or other similar purposes, or to any
organization for service, repair, maintenance or overhaul work on the Aircraft,
Airframe or any Engine or Part, or for alterations or modifications in or
additions to the Aircraft, Airframe or any Engine to the extent required or
permitted by the terms of Section 8.4;
7.2.3 Civil Reserve Air Fleet Program. Transfer or permit any
-------------------------------
Permitted Sublessee, if required by law to do so, to transfer possession of the
Aircraft, Airframe or any Engine to the Government pursuant to the Civil Reserve
Air Fleet Program administered pursuant to Executive Order No. 10999, as
amended, or any similar or substitute programs, so long as such transfer of
possession does not continue beyond the end of the Term and so long as Lessee
shall (A) promptly notify Lessor upon subjecting the Airframe or any Engine to
such program and provide Lessor with the name and address of the appropriate
party to whom notice must be given pursuant to Section 16 hereof, and (B)
promptly notify Lessor upon transferring possession of the Airframe or any
Engine to the Government pursuant to such program;
7.2.4 Installation of Engines. Install or permit any Permitted
-----------------------
Sublessee to install an Engine on an airframe owned by Lessee or such Permitted
Sublessee, as the case may be, free and clear of all Liens, except (A) Permitted
Liens and those which apply only to the engines (other than Engines),
appliances, parts, instruments, appurtenances, accessories, furnishings and
other equipment (other than Parts) installed on such airframe (but not to the
airframe as an entirety), (B) the rights of air carriers under normal
interchange agreements which are customary in the airline industry and do not
contemplate,
SALE AND LEASE AGREEMENT
20
<PAGE>
permit or require the transfer of title to the airframe or engines installed
thereon and (C) mortgage liens or other security interests, provided that (as
regards this clause (C)) such mortgage liens or other security interests
effectively provide that such Engine shall not become subject to the lien of
such mortgage or security interest, notwithstanding the installation thereof on
such airframe, unless and until Lessee shall become the owner of such Engine;
7.2.5 Installation of Engines on Other Airframes. Install or permit
------------------------------------------
any Permitted Sublessee to install an Engine on an airframe leased to, or
purchased by, Lessee or any Permitted Sublessee subject to a lease, conditional
sale, or other security agreement, but only if (A) such airframe is free and
clear of all Liens, except the rights of the parties to the lease, conditional
sale, or other security agreement covering such airframe, or their successors or
assigns, and except Liens of the type permitted by clauses (A) and (B) of
Section 7.2.4, and (B) the lease, conditional sale, or other security agreement
covering such airframe effectively provides that such Engine should not become
subject to the Lien thereof at any time while such Engine is subject to this
Lease, notwithstanding the installation thereof on such airframe;
7.2.6 Pooling of Parts. To the extent permitted by Section 8.3,
----------------
subject any Parts owned by Lessor and removed from the Airframe or any Engine to
any pooling arrangement referred to in Section 8.3;
7.2.7 Wet Lease. Enter into a Wet Lease for the Airframe and Engines
---------
or engines then installed thereon with any third party for a term not to
continue beyond the Term; and
7.2.8 Sublease to Permitted Air Carriers. Enter into a sublease
----------------------------------
of the Aircraft or the Airframe and Engines or engines then installed on the
Airframe or any Engine, for use on the sublessee's regularly scheduled or
charter routes, with (a) any U.S. Air Carrier or (b) any Permitted Foreign Air
Carrier, in any such case for a term not to continue beyond the remaining Term.
Provided, further, with respect to this Section 7.2, that:
- ---------------------------------------------------------
(1) the rights of any transferee who receives possession by reason of
a transfer permitted by this Section 7.2 (other than the transfer of an Engine
which is deemed an Event of Loss) shall be effectively subject and subordinate
to, and any sublease permitted by this Section 7.2 shall be made expressly
subject and subordinate to, all the terms of this Lease, and to Lessor's rights,
powers and remedies under this Lease, including the rights to repossession
pursuant to Section 15 and to terminate and avoid such sublease upon such
repossession and to require such sublessee to forthwith deliver the Aircraft,
Airframe and Engines subject to such sublease upon such repossession;
SALE AND LEASE AGREEMENT
21
<PAGE>
(2) Lessee shall remain primarily liable hereunder for the performance
of all the terms of this Lease to the same extent as if such sublease or
transfer had not occurred, provided that performance of any such terms by any
Permitted Sublessee shall be as effective, for purposes of this Lease, as
performance thereof directly by Lessee;
(3) any such sublease shall (i) be consistent with the requirements of
this Lease and the applicable requirements of the Participation Agreement, (ii)
include appropriate provisions for the continued registration, maintenance in
accordance with applicable maintenance standards in the appropriate
jurisdiction, operation, insurance (appropriate certificates as to which shall
be furnished to Lessor and (if the Mortgage is then in effect) Lender prior to
Lessee's entry into any such sublease with any Permitted Foreign Air Carrier or
within 10 days thereafter) and return of the subleased property as required
hereunder, (iii) provide that the sublessee may not assign or further sublease
the Aircraft, and (iv) provide that the Aircraft may not be operated into a
country with which the United States does not maintain diplomatic relations or
in which there is open warfare, whether or not declared;
(4) no interchange agreement, transfer, sublease or other
relinquishment of possession permitted hereunder shall affect the registration
of the Aircraft or shall permit any action not permitted to Lessee in this
Lease; and
(5) no such interchange agreement, sublease, transfer or other
relinquishment of possession of the Aircraft, Airframe or any Engine shall in
any way discharge or diminish any of Lessee's obligations to Lessor hereunder or
under any other Operative Agreement or constitute a waiver of Lessor's rights or
remedies hereunder or under any other Operative Agreement.
Lessee shall notify Lessor and (if the Mortgage is then in effect) Lender
within 10 days after the commencement of any sublease permitted hereunder and
shall deliver to Lessor within such period a duly executed copy of any sublease
or interchange or pooling agreement permitted hereunder together with any
certification required by Section 7.2. Upon request of Lessor, Lessee shall
promptly duly execute and deliver to Lessor and, for so long as the Mortgage
shall not have been fully discharged, deliver a copy to Lender of, an assignment
of any such sublease having a term in excess of 12 months in favor of Lessor in
form and substance reasonably satisfactory to Lessor and, for so long as the
Mortgage shall not have been fully discharged, Lender. Lessor hereby agrees, for
the benefit of Lessee (and any Permitted Sublessee) and for the benefit of each
lessor, conditional seller, or secured party of any airframe or engine leased to
or purchased by Lessee (or any Permitted Sublessee) subject to a lease,
conditional sale, or other security agreement, that Lessor will not acquire or
claim, as against such lessor, conditional seller, or secured party, or any
successor or assign thereof, any right, title or interest in any engine as the
result of such
SALE AND LEASE AGREEMENT
22
<PAGE>
engine being installed on the Airframe at any time while such engine is subject
to such lease, conditional sale, or other security agreement and owned by such
lessor or conditional seller or subject to a security interest in favor of such
secured party; provided, however, that such agreement of Lessor shall not be for
the benefit of any lessor or secured party of any airframe (other than the
Airframe) leased to Lessee (or any Permitted Sublessee) or purchased by Lessee
(or any Permitted Sublessee) subject to a conditional sale or other security
agreement or for the benefit of any mortgagee of or any other holder of a
security interest in an airframe owned by Lessee (or any Permitted Sublessee),
unless such lessor, conditional vendor, other secured party or mortgagee has
expressly agreed (which agreement may be contained in such lease, conditional
sale or other security agreement or mortgage) that neither it nor its successors
or assigns will acquire, as against Lessor, any right, title or interest in an
Engine as a result of such Engine being installed on such airframe.
A consolidation, merger, conveyance, transfer, or lease permitted by
Section 7.4 of the Participation Agreement shall not be deemed to be a
transaction to which this Section 7.2 shall apply.
7.3 Records and Reports. Lessee shall:
---------------------------------
7.3.1 Records. Maintain or cause to be maintained all records, logs
-------
and other materials required by the FAA or any other governmental authority
having jurisdiction to be maintained in respect of the Aircraft, the Airframe
and each Engine;
7.3.2 Information and Reports. Upon request, promptly furnish or
-----------------------
cause to be furnished to Lessor (in sufficient number) such information as may
be required to enable Lessor or Owner Participant to file any reports, including
tax returns, required to be filed by Lessor or Owner Participant with any
governmental authority because of Lessor's ownership of the Aircraft, Airframe
or any Engine or because of receipt of Rent or because of the interest of Owner
Participant in the Trust Estate; provided, however, that with respect to any
such information which Lessee deems commercially sensitive or confidential, if
reasonably feasible, Lessor shall afford Lessee a reasonable opportunity to seek
from any such governmental authority a waiver of Lessor's or Owner Participant's
obligation to file any such information or consent to the filing of such
information directly by Lessee in lieu of filing by Lessor or Owner Participant
and if any such waiver or consent is evidenced to the reasonable satisfaction of
Lessor, then Lessee shall not be required to furnish such information to Lessor;
and
7.3.3 Financial Information. Promptly provide Lessor and Owner
---------------------
Participant with (i) such financial information concerning Lessee as is provided
from time to time to the public shareholders of Lessee, (ii) within 60 days
after the end of each of the first three quarterly periods of each fiscal year
of Lessee, a consolidated balance sheet of Lessee and its consolidated
subsidiaries prepared by it as of the close of such period,
SALE AND LEASE AGREEMENT
23
<PAGE>
together with the related consolidated statements of income and cash flows for
such period, (iii) within 120 days after the close of each fiscal year of
Lessee, a consolidated balance sheet of Lessee and its consolidated subsidiaries
as of the close of such fiscal year, together with the related consolidated
statements of income and cash flows for such fiscal year, as certified by
independent public accountants, and (iv) from time to time such other
information as to its financial condition as Lessor or Owner Participant may
reasonably request.
Section 8. Maintenance; Replacement and Pooling of Parts; Alterations,
----------------------------------------------------------
Modifications and Additions.
- ---------------------------
8.1 Maintenance.
-----------
8.1.1 Maintenance Program. Lessee shall maintain, service,
-------------------
repair, overhaul, alter, modify, add to and test (or cause to be maintained,
serviced, repaired, overhauled, altered, modified, added to and tested) the
Aircraft, the Airframe and each Engine, and each other engine installed from
time to time on the Airframe, in accordance with Lessee's FAA-approved
maintenance program for the Aircraft, Airframe and Engines, as such program may
be changed, adjusted, revised or modified from time to time as permitted by the
FAA (the "Maintenance Program"), (i) so as to keep the Aircraft, the Airframe
and each Engine in as good operating condition as on the Delivery Date, ordinary
wear and tear excepted, (ii) in the same manner (subject to Lessee's discretion
with regard to a Stage III Upgrade as provided in Section 13.1 of the
Participation Agreement) and with the same care as used by Lessee with similar
aircraft owned or operated by Lessee, and (iii) so as to keep the Aircraft, the
Airframe and each Engine in such condition as required to enable the FAA
certificate of airworthiness for the Aircraft to be maintained in good standing
at all times under the Act, except when all comparable Boeing Model 737-200
series aircraft registered in the United States of America have been grounded by
the FAA other than as a result of actions taken or omitted to be taken by Lessee
(or, if a sublease is then in effect, any Permitted Sublessee).
8.1.2 Compliance with Government Requirements. Lessee will
---------------------------------------
comply with all service, inspection, maintenance, repair and overhaul
regulations, directives and instructions which are made mandatory by the FAA or
other Government authority upon United States operators of Boeing Model 737-200
series aircraft and Pratt & Whitney JT8D-9A engines and which require compliance
during the Term and prior to return of the Aircraft under this Lease.
8.2 Replacement of Parts. Lessee, at its own cost and expense, will
--------------------
promptly replace (or cause to be replaced) all Parts which may from time to time
be incorporated in the Aircraft, Airframe or any Engine and which 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 Section 8.4. In
SALE AND LEASE AGREEMENT
24
<PAGE>
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, however, Lessee, except as
otherwise provided in Section 8.4, at its own cost and expense, will replace
such Parts as promptly as possible. All replacement Parts shall be free and
clear of all Liens (except for Permitted Liens and except in the case of
replacement property temporarily installed on an emergency basis) and shall be
in as good operating condition as, and shall have a 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 Aircraft, Airframe or any Engine shall remain the property of
Lessor, no matter where located, until such time as such Parts shall be replaced
by Parts which have been incorporated in the Aircraft, Airframe or such Engine
and which meet the requirements for replacement Parts specified above.
Immediately upon any replacement Part becoming incorporated in the Aircraft,
Airframe or such Engine 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 the replaced Part shall no longer be deemed a Part hereunder, (ii)
title to such replacement Part shall thereupon vest in Lessor (subject only to
Permitted Liens and except in the case of replacement property temporarily
installed on an emergency basis), and (iii) such replacement Part shall become
subject to this Lease and be deemed part of the Aircraft, Airframe or such
Engine for all purposes hereof to the same extent as the Parts originally
incorporated in such Aircraft, Airframe or Engine.
8.3 Pooling of Parts. Any Part removed from the Aircraft, Airframe or
----------------
any Engine as provided in Section 8.2 may be subjected by Lessee (or a Permitted
Sublessee) to a normal pooling arrangement customary in the airline industry
entered into in the ordinary course of business of Lessee or such Permitted
Sublessee, so long as a Part replacing such removed Part shall be incorporated
in the Aircraft, Airframe or such Engine in accordance with Section 8.2 as
promptly as practicable after the removal of such removed Part. In addition, any
replacement Part when incorporated in the Aircraft, Airframe or any Engine in
accordance with Section 8.2 may be owned by any third party subject to such a
normal pooling arrangement, so long as Lessee (or any Permitted Sublessee), at
its own cost and expense, as promptly thereafter as practicable either (i)
causes title to such replacement Part to vest in Lessor in accordance with
Section 8.2 by Lessee (or any Permitted Sublessee) acquiring title thereto for
the benefit of, and transferring such title to, Lessor free and clear of all
Liens (except Permitted Liens), or (ii) replaces such replacement Part by
incorporating in the Aircraft, Airframe or such Engine a further replacement
Part owned by Lessee (or any Permitted Sublessee) free and clear of all Liens
(except Permitted Liens) and by causing title to such further replacement Part
to vest in Lessor in accordance with Section 8.2.
8.4 Alterations, Modifications and Additions. Lessee, at its own cost
----------------------------------------
and expense, shall make (or cause to be made) such alterations and modifications
in and
SALE AND LEASE AGREEMENT
25
<PAGE>
additions to the Aircraft, Airframe and each Engine as may be required from time
to time to meet the standards of the FAA or other governmental authority having
jurisdiction and to maintain the FAA certificate of airworthiness for the
Aircraft; provided, however, that Lessee may contest in good faith the validity
or application of any such law, rule, regulation or order in any reasonable
manner which does not materially adversely affect Lessor's interest in the
Aircraft; and provided, further, that Lessee's failure to make (or cause to be
made) any such alterations or modifications shall not constitute noncompliance
with the requirements of this Section 8.4 or a breach of Lessee's undertaking
hereunder for so long a period as may be necessary to remedy such failure, if
such failure can be remedied, so long as during such period Lessee is using due
diligence and reasonable efforts to remedy such failure. In addition, Lessee, at
its own cost and expense, may, from time to time make (or cause to be made) such
alterations and modifications in and additions to the Aircraft, Airframe or any
Engine as Lessee may deem desirable in the proper conduct of its business,
including, without limitation, removal of Parts which Lessee deems obsolete or
no longer suitable or appropriate for use in the Aircraft, Airframe or such
Engine; provided, however, that no such alteration, modification or addition
shall, in Lessee's reasonable judgment, materially diminish the value or utility
of the Aircraft, Airframe or such Engine, or materially impair the condition or
airworthiness thereof, below the value, utility, condition and airworthiness
thereof immediately prior to such alteration, modification or addition assuming
the Aircraft, Airframe or such Engine was then of the value and utility and in
the condition and airworthiness required to be maintained by the terms of this
Lease. Title to all Parts incorporated in the Aircraft, Airframe or such Engine
as the result of such alteration, modification or addition shall, without
further act, vest in Lessor. Notwithstanding the foregoing sentence of this
Section 8.4, so long as no Lease Event of Default or Lease Default shall have
occurred and be continuing, Lessee may, at any time during the Term, remove any
Part if (i) such Part is in addition to, and not in replacement of or
substitution for, any Part originally incorporated in the Aircraft, Airframe or
such Engine at the time of delivery thereof hereunder or any Part in replacement
of or substitution for any such Part, (ii) such Part is not required to be
incorporated in the Aircraft, Airframe or such Engine pursuant to the terms of
this Section 8, and (iii) such Part can be removed from the Aircraft, Airframe
or such Engine without diminishing or impairing the value, utility, condition or
airworthiness required to be maintained by the terms of this Lease which the
Aircraft, Airframe or such Engine would have had at such time had such
alteration, modification or addition not occurred. Upon the removal by Lessee of
any Part as above provided, title thereto shall, without further act, vest in
Lessee and such Part shall no longer be deemed part of the Aircraft, Airframe or
such Engine from which it was removed. Any Part not removed by Lessee as above
provided prior to the return of the Aircraft, Airframe or such Engine to Lessor
hereunder shall remain the property of Lessor.
Section 9. Default Purchase Option. If a Stage III Upgrade (as defined in
-----------------------
the Participation Agreement) shall have occurred and Lessee shall not have been
fully reimbursed as provided in Section 13 of the Participation Agreement,
Lessee shall have the option to
SALE AND LEASE AGREEMENT
26
<PAGE>
purchase the Aircraft. In order to exercise such option, Lessee shall notify
Lessor (and, if the Mortgage is then in effect, Lender) thereof in writing,
specifying a Rent Payment Date on which such purchase is to occur. In such case,
Lessee shall purchase the Aircraft from Lessor on such Rent Purchase Date at a
purchase price equal to (i) the lesser of (A) Lessor's Cost and (B) the fair
market sales value of the Aircraft at the time of such purchase (determined in
accordance with the same appraisal procedures as are set forth in Section 18 and
applicable in the event of a failure of Owner Participant and Lessee to agree on
a fair market rental value), minus (ii) the amount owed to Lessee at the time of
such purchase pursuant to the provisions of Section 13.2 of the Participation
Agreement; provided, that in no event shall such purchase price be less than the
sum of (I) all principal, interest and premium, if any, due with respect to the
prepayment on such date of the Note, and (II) all other amounts then due and
owing to Lender under any Operative Agreement. Upon receipt of such purchase
price from Lessee and all Rent and other amounts then due hereunder and under
any other Operative Agreement, Lessor shall Transfer the Aircraft to Lessee.
Section 10. Loss, Destruction, Requisition, Etc.
-----------------------------------
10.1 Event of Less with Respect to Airframe. Upon the occurrence of
--------------------------------------
an Event of Loss with respect to the Aircraft, Lessee shall forthwith (and in
any event within 15 days after such occurrence) give Lessor and Owner
Participant written notice of such Event of Loss. On or before the Business Day
next preceding the earlier of (i) the 180th day following the date of the
occurrence of such Event of Loss, or (ii) 15 days following the receipt of
insurance proceeds with respect to such occurrence, Lessee shall pay to Lessor,
in the manner and in funds of the type specified in Section 3.5, (A) the
Stipulated Loss Value for the Aircraft, determined as of the date of payment (as
described in the definition of Stipulated Loss Value), (B) all unpaid Basic Rent
due prior to the SLV Determination Date with reference to which the Stipulated
Loss Value is computed and (C) (without duplication) any other Rent which is due
and payable through and including the date of payment. Upon payment in full of
the Stipulated Loss Value for the Aircraft pursuant hereto, (A) the obligation
of Lessee to pay Basic Rent due on or after the SLV Determination Date with
reference to which such Stipulated Loss Value is computed shall terminate (but
Lessee shall remain liable for all payments of Supplemental Rent due through and
including the date of such payment of Stipulated Loss Value), (B) the Term for
the Aircraft shall end, (C) Lessor will Transfer to Lessee the Aircraft and (D)
Lessee will be subrogated to all claims of Lessor, if any, against third parties
for damage to or loss of the Airframe and Engines to the extent of the then
insured value thereof.
10.2 Event of Less with Respect to an Engine.
---------------------------------------
10.2.1 Event of Loss. Upon the occurrence of an Event of
-------------
Loss with respect to an Engine under circumstances in which there has not
occurred an Event of Loss with respect to the Airframe, Lessee shall give Lessor
and Owner Participant prompt written
SALE AND LEASE AGREEMENT
27
<PAGE>
notice (and in any event within 15 days after such occurrence) thereof and
shall, as promptly as possible and in any event within 60 days after the
occurrence of such Event of Loss, convey or cause to be conveyed to Lessor, as
replacement for the Engine with respect to which such Event of Loss occurred,
title to a Replacement Engine free and clear of all Liens, other than Permitted
Liens, and having a value and utility at least equal to, and being in as good
operating condition as, the Engine with respect to which such Event of Loss
occurred, assuming such Engine was of the value and utility and in the condition
and repair required by the terms hereof immediately prior to the occurrence of
such Event of Loss.
10.2.2 Conditions; Lessee's Obligations. Prior to or at the time
--------------------------------
of any such conveyance, Lessee will promptly:
(a) furnish Lessor with a full warranty (as to title) bill of
sale duly conveying to Lessor such Replacement Engine;
(b) cause a Lease Supplement subjecting such Replacement Engine
to this Lease, duly executed by Lessee, to be delivered to Lessor for execution
and to be filed for recordation with the FAA pursuant to the Act;
(c) furnish Lessor with such evidence of compliance with the
insurance provisions of Section 11 hereof with respect to such Replacement
Engine and the payment of all premiums then due with respect to such insurance,
as Lessor may reasonably request;
(d) furnish Lessor with an opinion or opinions of Lessee's
counsel, in form, substance and scope reasonably satisfactory to Lessor, to the
effect that, upon such conveyance, Lessor will acquire good title to such
Replacement Engine free and clear of all Liens other than Permitted Liens, and
that such Replacement Engine will be leased hereunder to the same extent as the
Engine replaced thereby and to such further effect as Lessor may reasonably
request;
(e) furnish Lessor with an Officer's Certificate certifying that,
upon consummation of such replacement, no Lease Event of Default or Lease
Default will exist hereunder; and
(f) furnish such other certificates or documents (including
appropriate UCC-3 amendments to the financing statements filed on or before the
Delivery Date) as Lessor or Owner Participant may reasonably request to effect
such replacement.
10.2.3 Recordation and Opinions. In the case of any Replacement
------------------------
Engine conveyed to Lessor under this Section 10.2, promptly upon the recordation
of the Lease Supplement covering such Replacement Engine pursuant to the Act,
Lessee will cause
SALE AND LEASE AGREEMENT
28
<PAGE>
to be delivered to Lessor an opinion of Crowe & Dunlevy, P.C. or other FAA
counsel satisfactory to Lessor as to the due recordation of such Lease
Supplement.
10.2.4 Conveyance; Replacement Engine. Upon compliance by Lessee
------------------------------
with the terms of this Section 10.2, Lessor will Transfer to Lessee the Engine
with respect to which such Event of Loss occurred, and Lessee will be subrogated
to all claims of Lessor, if any, against third parties for damage to or loss of
such Engine to the extent of the insured value thereof.
10.2.5 No Reduction of Rent. No Event of Loss with respect to an
--------------------
Engine under the circumstances contemplated by the terms of this Section 10.2
shall result in any reduction of Basic Rent or Renewal Rent.
10.3 Application of Certain Payments. Any payments (other than
-------------------------------
insurance proceeds, the application of which is provided for in Section 11)
received at any time by Lessor, Lessee or any Permitted Sublessee from any
governmental authority or other Person with respect to any Event of Loss, will
be applied as follows:
10.3.1 Replacement of Engine. If such payments are received with
---------------------
respect to an Engine that has been or is being replaced by Lessee pursuant to
Section 10.2, so much of such payments remaining after reimbursement of Lessor
and Owner Participant for costs and expenses shall be paid over to, or retained
by, Lessee, provided Lessee shall have fully performed or, concurrently
therewith, will fully perform the terms of Section 10.2 with respect to the
Event of Loss for which such payments are made.
10.3.2 Nonreplacement. If such payments are received with
--------------
respect to the Airframe and/or Engines or engines installed on the Airframe that
have not been and will not be replaced pursuant to Section 10.2, so much of such
payments remaining after reimbursement of Lessor and Owner Participant for costs
and expenses as shall not exceed the Stipulated Loss Value and other amounts
required to be paid by Lessee hereunder shall be applied in reduction of
Lessee's obligation to pay such Stipulated Loss Value and other amounts required
to be paid by Lessee hereunder, if not already paid by Lessee, or, if already
paid by Lessee, shall be applied to reimburse Lessee for its payment of such
Stipulated Loss Value and other amounts. The balance, if any, of such payments
remaining thereafter shall be divided between Lessor and Lessee as their
interests may appear.
10.4 Requisition of Aircraft for Use by Governmental Authorities. In
------------------------------------------------------------
the event of the requisition for use of the Airframe and the Engines or engines
installed on such Airframe during the Term by any governmental authority, Lessee
shall notify Lessor of such requisition, and, unless and until such requisition
becomes an Event of Loss, all of 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 such
SALE AND LEASE AGREEMENT
29
<PAGE>
governmental authority for the use of such Airframe and Engines or engines prior
to the time such requisition becomes an Event of Loss shall be paid over to, or
retained by, Lessee (or, if directed by Lessee, any Permitted Sublessee); and
all payments received by Lessor or Lessee from such governmental authority for
the use of such Airframe and Engines or engines after such time shall be paid
over to, or retained by, Lessor unless Lessee shall have fully performed or,
concurrently therewith, will fully perform the terms of Section 10.1 with
respect to such Event of Loss.
10.5 Requisition of an Engine for Use by Governmental Authorities. In
------------------------------------------------------------
the event of the requisition for use by any governmental authority (other than
in circumstances contemplated by Section 10.4) of any Engine but not the
Airframe, Lessee will replace such Engine hereunder by complying with the terms
of Section 10.2 to the same extent as if an Event of Loss had occurred with
respect to such Engine, and any payments received by Lessor or Lessee from such
governmental authority with respect to such requisition shall be paid over to,
or retained by, Lessee (subject to performance by Lessee of the terms of Section
10.2 to the same extent as if an Event of Loss had occurred with respect to such
requisitioned Engine).
10.6 Application of Payments During Existence of Default. Any amount
---------------------------------------------------
referred to in this Section 10 which is payable or creditable to or retainable
by Lessee shall not be paid or credited to or retained by Lessee if, at the time
of such payment, credit or retention, (A) a Lease Event of Default or (B) a
Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing
hereunder, but shall be paid to and held by Lessor as security for the
obligations of Lessee under this Lease and applied against Lessee's obligations
hereunder as and when due; at such time as there shall not be continuing any
such Lease Event of Default or Lease Default, or at such earlier time as Lessee
shall have paid in full all Rent and other amounts due and payable hereunder and
under the other Operative Agreements by Lessee, any remaining balance of such
amount shall be paid to Lessee to the extent not previously applied in
accordance with the preceding clause of this sentence.
Section 11. Insurance.
---------
11.1 Public Liability and Property Damage Insurance. Lessee shall
----------------------------------------------
at all times maintain, or cause to be maintained, at its or any Permitted
Sublessee's expense, public liability (including without limitation contractual
liability, passenger legal liability and property damage but excluding
manufacturer's product liability coverage) insurance which shall:
11.1.1 Type, Form and Amount. Be of a type and form carried
---------------------
by similarly situated United States commercial air carriers generally, and
carried in amounts not less than that carried by Lessee on other Boeing Model
737-200 series aircraft owned or leased by Lessee and not less than the minimum
amount of $350,000,000 (per occurrence) combined single limit.
SALE AND LEASE AGREEMENT
30
<PAGE>
11.1.2 Coverage. Include, but not be limited to, public
--------
liability insurance, contractual liability insurance, passenger liability
insurance and property damage liability insurance (including cargo and baggage
liability insurance); and
11.1.3 Additional Insureds. Name as additional insureds Lessor
-------------------
(in its individual and trust capacities), Lender and Owner Participant, as their
interests may appear.
11.2 Insurance Against Loss of or Damage to Aircraft and Engines.
-----------------------------------------------------------
Lessee shall at all times maintain, or cause to be maintained, at its or any
Permitted Sublessee's expense, insurance against loss of or damage to the
Aircraft, Airframe and Engines as follows:
11.2.1 Type, Form and Amount. "All-risk" insurance on the
---------------------
Aircraft and "all-risk" coverage on each Engine and on Parts while removed from
the Aircraft or Engines, which is of the type, form and in an amount in
compliance with the last sentence of this Section 11.2.1, not less than that
carried by Lessee on similar equipment owned or leased by Lessee and not less
than that usually carried by similarly situated United States commercial air
carriers generally; and, to the extent so usually carried, at all times that the
Aircraft or any Engine is not covered by the insurance described in Section
11.2.2, coverage against the perils of (i) strikes, riots, civil commotions or
labor disturbances, (ii) any malicious act or act of sabotage and (iii)
hijacking, or any unlawful seizure or wrongful exercise of control of the
Aircraft or crew in flight (including any attempt at such seizure or control)
made by any person or persons on board the Aircraft acting without the consent
of the insured other than hijacking committed by persons engaged in a program of
irregular warfare for terrorist purposes. Such insurance shall, at any date, be
for an amount not less than the Stipulated Loss Value as of such date.
11.2.2 War-Risk Insurance. If at any time (a) war-risk
------------------
insurance is maintained by Lessee or any Permitted Sublessee subleasing the
Aircraft or any Engine with respect to other aircraft operated by Lessee or such
Permitted Sublessee on the same or similar routes, or (b) the Aircraft is
operated on routes where the custom in the United States commercial airline
industry is to carry war-risk insurance, or (c) the Aircraft is operated by a
Permitted Foreign Air Carrier as a Permitted Sublessee in any recognized or
threatened area of hostilities, then war-risk insurance of the type carried by
similarly situated United States commercial air carriers operating the same or
comparable models of aircraft on the same or similar routes shall be maintained
on the Aircraft in an amount not less than that specified in Section 11.2.1.
11.2.3 Certain Requirements. The insurance policies required
--------------------
by this Section 11.2 shall:
SALE AND LEASE AGREEMENT
31
<PAGE>
11.2.3.1 Additional Insureds. Be endorsed to name Lessor (in
-------------------
its individual and trust capacities), Lender and Owner Participant as additional
insureds, as their interests may appear.
11.2.3.2 Payment of Proceeds. Provide that proceeds thereunder
-------------------
shall be paid directly to Lessor as exclusive loss payee; provided, however,
that any proceeds payable as a result of any property damage to the Airframe or
any Engine, which property damage does not exceed $1,500,000 and does not
constitute an Event of Loss with respect to the Aircraft or such Engine, shall
be paid to Lessee unless, prior to such payment, Lessor shall have notified the
insurer making such payment that a Lease Event of Default hereunder or a Lease
Default specified in Section 14.1 or 14.5 has occurred and is continuing.
11.2.3.3 Waiver of Subrogation. Provide that the insurers
---------------------
shall waive any rights of subrogation against Lessor, Lender and Owner
Participant except for claims arising out of gross negligence or willful
misconduct of such Person; provided that the exercise by insurers of rights of
subrogation, if any, permitted by this Section 11.2 shall not, in any way, delay
payment of any claim that would otherwise be payable by such insurers but for
the existence of such rights of subrogation or entitle such insurers to exercise
or to assert any setoff, recoupment, counterclaim or any other deduction in
respect of any amounts payable under such policies.
11.2.4 Deductibles. The insurance required by this Section
-----------
11.2 may, subject to Section 11.8, provide for standard deductibles which are
from time to time in effect in the aviation insurance industry generally and
which are customarily maintained by similarly situated United States commercial
air carriers generally; provided, however, such deductibles shall not be more
than the deductibles generally maintained by Lessee (and which Lessee is under
no compulsion to maintain pursuant to any mortgage, lease or other agreement)
with respect to its fleet of Boeing Model 737-200 series aircraft and Pratt &
Whitney JT8D-9A engines generally.
11.2.5 Government Indemnity. In the case of a contract with
--------------------
the Government in respect of the Aircraft or Engines, a valid agreement by the
Government to indemnify Lessee, Lessor, Lender and Owner Participant against the
same risks which are required hereunder to be insured against in amounts at
least equal to the amounts required hereunder from time to time (such indemnity
to be backed by the full faith and credit of the United States of America),
shall be considered adequate insurance with respect to the Aircraft, Airframe
and any Engine subject to such contract to the extent of the risks and in the
amounts that are the subject of any such agreement to indemnify.
11.3 General Policy Provisions. Each insurance policy to be procured
-------------------------
and maintained hereunder shall:
SALE AND LEASE AGREEMENT
32
<PAGE>
11.3.1 Primary Insurance. Be primary and without right of
-----------------
contribution from other insurance which may provide coverage to Lessor, Lender
or Owner Participant with respect to its interest in the Aircraft, Airframe or
any Engine or its liabilities with respect to or arising out of the transactions
contemplated by the Operative Agreements;
11.3.2 Coverage for Each Insured. Expressly provide that all the
-------------------------
provisions thereof, except the agreed values and the limits of the liability of
the insurer under such policy, shall operate in the same manner as if there were
a separate policy covering each insured;
11.3.3 Waiver of Certain Rights. Waive any right of the insurers to
------------------------
any setoff, recoupment, counterclaim or any other deduction, whether by
attachment or otherwise, in respect of any liability of Lessee, Lessor, Lender
or Owner Participant;
11.3.4 Breach of Warranty. Provide that, in respect of Lessor, Lender
------------------
and Owner Participant, such insurance shall not be invalidated by any action or
inaction by Lessee and shall insure the interests of Lessor, Lender and Owner
Participant regardless of any breach or violation by Lessee of any
representation, warranty, declaration or condition contained in such policy;
11.3.5 Notice of Termination or Changes. Provide for not less than 30
--------------------------------
days' prior written notice to be received by Lessor, Lender and Owner
Participant before any lapse, alteration, termination or cancellation of the
insurance evidenced thereby shall be effective as to Lessor, Lender and Owner
Participant, except that war-risk and allied perils policies may provide for
not less than seven days' prior written notice or such lesser or greater notice
as shall at the time be customary in the aviation insurance industry generally,
and which are customarily in effect with respect to major United States
commercial air carriers generally from time to time;
11.3.6 Nonliability for Premiums. Provide that neither Lessor, Lender
-------------------------
nor Owner Participant shall be liable for any insurance premium; and
11.3.7 Identity of Insurers. Be with insurance companies,
--------------------
underwriters or funds of recognized responsibility.
11.4 Application of Insurance Proceeds. As between Lessor and Lessee,
---------------------------------
all insurance proceeds received under policies required to be maintained (or to
be caused to be maintained) by Lessee pursuant to Section 11.2 as a result of
the occurrence of an Event of Loss with respect to the Aircraft, Airframe or any
Engine will be applied in accordance with Section 10.3.1 or 10.3.2, as the case
may be (except that the balance referred to in Section 10.3.2 shall be paid over
to, or retained by, Lessee). All insurance proceeds in respect of any property
damage loss not constituting an Event of Loss with respect to the Airframe or
SALE AND LEASE AGREEMENT
33
<PAGE>
an Engine will be applied in payment for repairs or for replacement property in
accordance with the terms of Section 8, if not already paid for by Lessee, and
any balance remaining after compliance with such Section with respect to such
loss shall be paid to Lessee. In the case of a loss with respect to an engine
(other than an Engine) installed on the Airframe, Lessor shall hold any payment
to it of any insurance proceeds in respect of such loss for the account of
Lessee or any other third party that is entitled to receive such proceeds. The
provisions of Section 10.6 shall apply to amounts referred to in this Section
11.4.
11.5 Certificates.: Reports, Etc. With respect to any policy required
---------------------------
hereunder, Lessee shall cause to be furnished to Lessor, Lender and Owner
Participant on or prior to the Delivery Date of the Aircraft and on or prior to
expiration of such policy, certificates of the insurer or insurers (or their
authorized representatives) providing insurance pursuant to the requirements of
this Section 11, as to hull and liability insurance. On or before the Delivery
Date of the Aircraft, and annually thereafter on or before such expiration date,
Lessee shall cause to be furnished to Lessor, Lender and Owner Participant a
report signed by Frank B. Hall & Co. (or any other firm of independent aircraft
insurance brokers, appointed by Lessee, reasonably satisfactory to Owner
Participant) describing in reasonable detail the insurance then carried and
maintained with respect to the Aircraft and stating the opinion of such firm
that the insurance then carried and maintained on the Aircraft complies with the
terms hereof as to hull and liability insurance. Lessee agrees that it will
cause such firm to advise Lessor, Lender and Owner Participant in writing
promptly of any default in the payment of any premium or any other act or
omission on the part of Lessee or any Permitted Sublessee of which they have
knowledge and which might invalidate or render unenforceable, in whole or
in part, the insurance on the Aircraft. Lessee further agrees to cause such firm
to advise Lessor, Lender and Owner Participant in writing at least 30 days
(seven days in the case of war-risk and allied perils coverage, or such lesser
or greater notice as is provided pursuant to Section 11.3.5) prior to the
expiration or termination date of any insurance carried and maintained on the
Aircraft pursuant to this Section 11.
11.6 Lessor's Right to Maintain Insurance. In the event that Lessee
------------------------------------
shall fail to maintain or cause to be maintained insurance as herein provided,
Lessor or Owner Participant may at its option (but shall not be obligated to)
provide such insurance and in such event, Lessee shall, upon demand, reimburse
such Person, as Supplemental Rent, for the cost thereof. No such payment,
performance or compliance shall be deemed to cure any Lease Default hereunder or
otherwise relieve Lessee of its obligations with respect thereto.
11.7 Insurance for Own Account. Nothing in Section 11 shall limit or
-------------------------
prohibit Owner Participant (directly or through Lessor) from obtaining insurance
for its own account, and any proceeds payable thereunder shall be payable as
provided in the insurance policy relating thereto; provided, however, that no
such insurance may be obtained which would limit or otherwise adversely affect
the availability or coverage or cost of any insurance required to be obtained or
maintained pursuant to this Section 11. Nothing in this Section
SALE AND LEASE AGREEMENT
34
<PAGE>
11 shall limit or prohibit Lessor from obtaining insurance for its own account,
and any proceeds payable thereunder shall be payable as provided in the
insurance policy relating thereto; provided, however, that no such insurance may
be obtained which would limit or otherwise adversely affect the availability or
coverage or cost of any insurance required to be obtained or maintained pursuant
to this Section 11 or obtained by Owner Participant pursuant to the preceding
sentence.
11.8 Self-Insurance. Notwithstanding the foregoing provisions of this
--------------
Section 11, Lessee may, from time to time, self-insure with respect to the
Aircraft to the same extent as it does with respect to, or maintain policies
with deductibles or premium adjustment provisions consistent with similar
provisions applicable to, other comparable aircraft operated by Lessee;
provided, however, that if at any time Lessee's unsecured senior long-term debt
securities are not rated "Investment Grade", in the case of hull insurance such
self-insurance shall in no case be in an amount greater than 4% of Lessee's
tangible net worth (as defined in accordance with accepted financial practice);
and provided, further that, in the case of public liability insurance, such
self-insurance shall in no event exceed $50,000,000. As used in this Section
11.8, the term "Investment Grade" means a rating of "Baa3" or higher from
Moody's Investors Service, Inc. or a rating from any other nationally recognized
bond rating service equivalent to or better than such a rating.
Section 12. Inspection. At all reasonable times, and upon reasonable
----------
notice, Lessor, Owner Participant or, for so long as the Mortgage shall not have
been fully discharged, Lender, or any of their respective authorized
representatives, may inspect the Aircraft and inspect and copy (subject to any
confidentiality agreements, copyright restrictions and the like) the books and
records of Lessee relative thereto. Any such inspection of the Aircraft shall be
without out-of-pocket expense or risk to Lessee and shall be a visual, walk-
around inspection; provided that no exercise of such inspection right shall
interfere with the normal operation or maintenance of the Aircraft by, or the
business of, Lessee (or any Permitted Sublessee). Neither Lessor, Lender nor
Owner Participant shall have any duty to make any such inspection and shall not
incur any liability or obligation by reason of not making any such inspection.
Section 13. Assignment. Except as otherwise expressly permitted in Section
----------
7.2 hereof or Section 12.5.1 of the Participation Agreement, or as required in
the case of any requisition by the Government referred to in Section 7.1.4,
Lessee will not, without the prior or written consent of Lessor, assign or
transfer any of its rights or obligations under this Lease. Lessor may assign or
convey any of its right, title and interest in and to this Lease or the Aircraft
in accordance with the Participation Agreement, the Trust Agreement or the
express provisions of this Lease. The terms and provisions of the Lease shall be
binding upon and inure to the benefit of Lessor and Lessee and their respective
permitted successors and assigns.
SALE AND LEASE AGREEMENT
35
<PAGE>
Section 14. Events of Default. The following events shall constitute Lease
-----------------
Events of Default (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), and each such Lease Event of
Default shall continue so long as, but only so long as, it shall not have been
remedied or waived:
14.1 Failure to Pay Rent. Lessee shall fail to make any payment of
-------------------
Basic Rent, Renewal Rent or Stipulated Loss Value within 5 Business Days from
the due date thereof; or Lessee shall fail to make any other Supplemental Rent
payments required under the Operative Agreements within 5 Business Days after
its receipt of written notice of such default from Lessor.
14.2 Specific Defaults. Lessee shall fail to carry and maintain (or
-----------------
cause to be carried and maintained) insurance on or with respect to the Aircraft
in accordance with the provisions of Section 11, provided that any such failure
shall not constitute a Lease Event of Default so long as such failure is for a
period of not more than 30 days, Lessee shall not operate the Aircraft at a time
when such insurance is not in effect and the Aircraft continues to be covered by
such insurance as is required when the Aircraft is on the ground; or
14.3 General Default. Lessee shall fail to perform or observe any
---------------
other material covenant, condition or agreement to be performed or observed by
it hereunder or under any other Operative Agreement (other than the Tax
Indemnity Agreement), and such failure shall continue unremedied for a period of
30 days after written notice thereof to Lessee, unless Lessee shall be
diligently proceeding to correct such failure and such failure is cured within
180 days after receipt of such notice; or
14.4 Misrepresentation and Breach of Warranty. Any representation or
----------------------------------------
warranty made by Lessee herein or in the Participation Agreement or in any other
Operative Agreement (other than the Tax Indemnity Agreement) or in any document
or certificate furnished by Lessee in connection with any thereof, shall prove
to have been incorrect in any material respect at the time made and shall remain
incorrect in any material respect after 30 days after written notice thereof to
Lessee;
14.5 Bankruptcy, Etc. Lessee shall commence a voluntary case or
---------------
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official or agency in an
involuntary case or other proceeding commenced against it, or shall make a
general assignment for the benefit of creditors, or shall fail generally to pay
its debts as they become due, or shall take any
SALE AND LEASE AGREEMENT
36
<PAGE>
corporate action to authorize any of the foregoing; or an involuntary case or
other proceeding shall be commenced against Lessee seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official or agency of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and unstayed
for a period of 90 days.
Section 15. Remedies.
--------
15.1 Default: Remedies. Upon the occurrence of a Lease Event of
-----------------
Default and at any time thereafter so long as the same shall be continuing,
Lessor may, at its option, declare by written notice to Lessee this Lease to be
in default; and at any time thereafter, so long as any such Lease Event of
Default shall be continuing, Lessor may exercise one or more of the following
remedies as Lessor in its sole discretion shall elect, to the extent permitted
by, and subject to compliance with any mandatory requirements of, applicable law
then in effect which have not been effectively waived by Lessee:
15.1.1 Return: Repossession. Lessor may cause Lessee, upon written
--------------------
demand by Lessor and at Lessee's expense, to return promptly, and Lessee shall
return promptly, all or any part of the Aircraft, Airframe or Engines as Lessor
may so demand to Lessor or its order in the manner and condition required by,
and otherwise in accordance with all the provisions of, Section 5 as if the
Aircraft, Airframe or Engines were being returned at the end of the Term; or
Lessor, at its option, may enter upon the premises where the Aircraft, Airframe
or any Engine or part thereof is located and take immediate possession of and
remove the same by summary proceedings or otherwise, all without liability
accruing to Lessor for or by reason of such entry or taking of possession,
whether for the restoration of damage to property caused by such taking or
otherwise, and Lessee expressly waived any right it may have under applicable
law to a hearing prior to repossession of the Aircraft, Airframe or any Engine
or part thereof; or
15.1.2 Sale: Use Etc. Lessor may sell all or any part of the
-------------
Aircraft, Airframe or any Engine, at public or private sale, at such times and
places, to such Persons (including Lessor or Owner Participant) as Lessor may
determine, or otherwise dispose of, hold, use, operate, lease to others or keep
idle the Aircraft, Airframe or any Engine or part thereof, 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; or
15.1.3 Certain Liquidated Damages. Whether or not Lessor shall have
--------------------------
exercised, or shall thereafter at any time exercise, any of its rights under
Section 15.1.1 or 15.1.2 with respect to the Aircraft, Airframe or any Engine or
part thereof, Lessor, by written
SALE AND LEASE AGREEMENT
37
<PAGE>
notice to Lessee specifying a payment date (which shall be an SLV Determination
Date) not earlier than ten days from the date of such notice, may cause Lessee
to pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified
in such notice, as liquidated damages for loss of a bargain and not as a penalty
(in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after
the date specified for payment in such notice), the sum of (i) any unpaid Basic
Rent or Renewal Rent, as the case may be, due prior to such SLV Determination
Date plus (ii) an amount equal to the excess, if any, of the Stipulated Loss
Value of the Aircraft, computed as of such SLV Determination Date, over the fair
market rental value (determined as hereafter provided in this Section 15) of the
Aircraft for the remainder of the Term, after discounting such fair market
rental value semiannually (effective on each Rent Paymcnt Date) by a rate equal
to the interest rate required to be paid under the Note (or the rate at which
the last payments thereunder were made, if the Note has been paid in full), to
present worth as of the date specified for payment in such notice, together with
interest, if any, on such amount and unpaid Basic Rent or Renewal Rent, as the
case may be, at the Overdue Rate from the date specified for payment in such
notice to the date of payment in full; or
15.1.4 Liquidated Damages upon Sale. If Lessor, pursuant to
----------------------------
Section 15.1.2 or applicable law, shall have sold the Aircraft, Lessor, in lieu
of exercising its rights under Section 15.1.3 with respect to the Aircraft, may,
if Lessor shall so elect, upon giving written notice to Lessee, cause Lessee to
pay Lessor, and Lessee shall pay to Lessor, on the date of such sale, as
liquidated damages for loss of a bargain and not as a penalty (in lieu of the
Basic Rent or Renewal Rent, as the case may be, due on or after the date of such
sale), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to
the SLY Determination Date on or immediately preceding such date of sale plus
the amount of any deficiency between (i) the net proceeds of such sale or (if
such sale is a private sale and is made to Lessor, Owner Participant or any
Affiliate thereof) the fair market sales value of the Aircraft, determined as of
the date of such sale as hereinafter provided in this Section 15, as applicable,
and (ii) the Stipulated Loss Value of the Aircraft, computed as of the date of
such sale, together with interest, if any, on such amount and such unpaid Basic
Rent or Renewal Rent at the Overdue Rate from the date of such sale, to the date
of payment in full; or
15.1.5 Rescission and Other Remedies. Lessor may rescind this Lease
-----------------------------
as to the Aircraft, or 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 for the breach hereof, including
without limitation Lessee's agreement to lease the Aircraft for the Term and to
pay Rent.
In addition to the foregoing remedies, Lessee shall be liable (except as
otherwise provided above and without duplication of amounts otherwise payable
hereunder) for any and all unpaid Rent due hereunder before, during or after the
exercise of any of the foregoing
SALE AND LEASE AGREEMENT
38
<PAGE>
remedies and for all reasonable and actual legal fees and other costs and
expenses (including the fees and expenses of all appraisers required by this
Section 15) of Lessor and Owner Participant, incurred by reason of the
occurrence of any Lease Event of Default or the exercise of Lessor's remedies
with respect thereto, including all insurance and storage costs and all costs
and expenses incurred in connection with the return of the Aircraft, Airframe or
any Engine or part thereof, in accordance with the terms of Section 5 or in
placing the Aircraft, Airframe or any Engine or part thereof, in the condition
and airworthiness required by Section 5.
15.2 Determination of Fair Market Rental Value and Fair Market Sales
---------------------------------------------------------------
Value. For the purpose of this Section 15, the "fair market rental value" or the
- -----
"fair market sales value" of the Aircraft shall be the rental value or sales
value, as the case may be, which would be obtained in an arm's-length
transaction between an informed and willing lessee or purchaser, as the case may
be, under no compulsion to lease or purchase, as the case may be, and an
informed and willing lessor or seller in possession, as the case may be, and in
each case shall be determined on an "as is, where is" basis pursuant to an
appraisal by a recognized independent aircraft appraiser chosen by Lessor and
approved by Lessee, which approval shall not be unreasonably withheld or delayed
and shall be deemed granted if such choice is not rejected within 10 days after
Lessee's receipt of notice of Lessor's choice.
15.3 No Waiver, Etc. No remedy referred to in this Section 15 is
--------------
intended to be exclusive, but each shall be cumulative and in addition to any
other remedy referred to above or otherwise available to Lessor at law or in
equity; and the exercise or beginning of exercise by Lessor of any one or more
of such remedies shall not preclude the simultaneous or later exercise by Lessor
of any or all of such other remedies. No express or implied waiver by Lessor of
any Lease Event of Default shall in any way be, or be construed to be, a waiver
of any earlier or subsequent Lease Event of Default. To the extent permitted by
applicable law, Lessee hereby waives any rights now or hereafter conferred by
statute or otherwise which may require Lessor to sell, lease or otherwise use
the Aircraft, Airframe or any Engine, or part thereof, in mitigation of Lessor's
damages as set forth in this Section 15 or which may otherwise limit or modify
any of Lessor's rights or remedies under this Section 15.
Section 16. Notices. All notices required under the terms and provisions
-------
hereof shall be in writing and shall be given by certified mail, telecopy, or
any other customary means of written communication, addressed:
If to Lessee, at 2702 Love Field Dr., P.O. Box 36611, Dallas, Texas 75235-
1611 (telecopy no. 214/904-4022), Attention: Treasurer, or at such other address
as Lessee shall from time to time designate in writing; and
SALE AND LEASE AGREEMENT
39
<PAGE>
If to Lessor, at 79 Main Street, Salt Lake City, Utah 84111 (telecopy no.
801/350-5053) Attention: Corporate Trust Department, or at such other address as
Lessor shall from time to time designate in writing; and
If to Lender or Owner Participant, at its address set forth in the
signature pages of the Participation Agreement or Schedule I thereto, or at such
other address as it shall from time to time designate in writing.
The effective date of any such notice shall be the date on which it is
received by the addressee. Lessee shall furnish to Lessor for transmission to
Owner Participant a sufficient number of copies of all reports, notices,
requests, demands, certificates, financial statements and other instruments
furnished hereunder, except in any case where Lessee shall have transmitted the
same directly to such Person.
Section 17. Net Lease: Lessee's Obligations; No Setoff, Counterclaim, Etc.
-------------------------------------------------------------
This is a net lease, and all costs and expenses arising from the use, possession
and operation of the Aircraft, including but not limited to maintenance costs
(including costs related to compliance with FAA Airworthiness Directives or
bulletins with which Lessee is required to comply pursuant to Section 5.3),
insurance and taxes (other than taxes based upon or measured by the income of
Owner Participant or Owner Trustee), shall, unless otherwise specifically
provided for herein, be for the account of Lessee. It is hereby recognized that
Lessor is the owner of the Aircraft (except that Owner Participant will be the
owner for income tax purposes) and Lessee is the lessee thereof. It is the
intent of the parties hereto that this Lease be a "true lease". Lessee's
obligation to pay all Rent payable hereunder shall be absolute and unconditional
and shall not be affected by any circumstance, including without limitation: (a)
any setoff, counterclaim, recoupment, defense or other right which Lessee may
have against Lessor (in its individual or trust capacity, including any
specifically relating to Lessor's payment obligations set forth in Section 5),
Owner Participant, any Indemnified Party or any other Person for any reason
whatsoever (except as expressly provided in Section 13.4 of the Participation
Agreement or in Section 5 of the Tax Indemnity Agreement); (b) any defect in the
title, airworthiness, condition, design, operation or fitness for use of, or any
damage to or loss or destruction of, the Aircraft, Airframe or any Engine, or
any interruption or cessation in the use or possession thereof by Lessee for any
reason whatsoever; (c) any insolvency, bankruptcy, reorganization or similar
proceedings by or against Lessee; (d) any restriction, prevention or curtailment
of or interference with any use of the Aircraft or part thereof; (e) any
invalidity or unenforceability or disaffirmance of this Lease or any provision
hereof or any of the other Operative Agreements or any provision thereof, in
each case whether against or by Lessee or otherwise; or (f) any other
circumstance, happening or event whatsoever, whether or not similar to any of
the foregoing.
If for any reason whatsoever this Lease shall be terminated in whole or in
part by operation of law or otherwise except as specifically provided herein,
Lessee nonetheless
SALE AND LEASE AGREEMENT
40
<PAGE>
agrees to pay an amount equal to each Basic Rent, Renewal Rent and Supplemental
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. Ail Rent payable by Lessee shall be paid without notice or demand
(except as otherwise expressly provided) and without abatement, suspension,
deferment, deduction, diminution or proration by reason of any circumstance or
occurrence whatsoever (except as expressly provided in Section 13.4 of the
Participation Agreement or in Section 5 of the Tax Indemnity Agreement). Lessee
hereby waives, to the extent permitted by applicable law, any and all rights
which it may now have or which at any time hereafter may be conferred upon it,
by statute or otherwise, to terminate, cancel, quit or surrender this Lease or
any part hereof, or to any abatement, suppression, deferment, diminution,
reduction or proration of Rent except in accordance with the express terms
hereof. Each payment of Rent made by Lessee shall be final as to Lessor and
Lessee. Lessee will not seek to recover all or any part of any such payment of
Rent for any reason whatsoever.
Section 18. Renewal Options. At the end of the Base Lease Term or any
---------------
Renewal Term, so long as no Lease Event of Default or Lease Default has occurred
and is continuing and the aggregate of all Renewal Terms (including the Term to
be elected) shall not exceed four years, Lessee shall have the option to renew
this Lease for a Renewal Term. In order to exercise the option to renew, Lessee
shall notify Lessor thereof in writing not less than 180 days prior to the
commencement of the applicable Renewal Term (which notice shall be irrevocable).
The Renewal Rent payable for such Renewal Term hereunder shall be the lesser of
(i) Basic Rent and (ii) the fair market rental value of the Aircraft calculated
as of the commencement of such Renewal Term; provided, that if a Stage III
Upgrade with respect to the Aircraft shall have occurred prior to the
commencement of such Renewal Term, the Renewal Rent shall be the amount
calculated pursuant to clause (ii) above. (In the event of a Stage III Upgrade,
the Renewal Rent shall be an amount equal to: (1) the Adjusted Rent calculated
under Section 13.3 of the Participation Agreement plus (2) the fair market
rental value determined in accordance with this Section 18 less the Adjusted
Rent referred to in clause (1) above; provided, however, in no event shall
Renewal Rent exceed the fair market rental value determined hereunder.) Such
fair market rental value shall be determined not later than three months prior
to the commencement of such Renewal Term by mutual consent of Owner Participant
and Lessee or, if they shall be unable so to agree, by three recognized
independent aircraft appraisers, one chosen and paid for by Owner Participant,
one chosen and paid for by Lessee and the third appraiser chosen by the mutual
consent of the first two appraisers and paid for equally by Owner Participant
and Lessee, the appraisals of which three appraisers shall be averaged and such
average shall be deemed to be the fair market rental value of the Aircraft for
all purposes hereof; provided, however, that if the appraisal of one appraiser
is more disparate from the average of all three appraisals than each of the
other two appraisals, then the appraisal of such appraiser shall be excluded,
the remaining appraisals shall be averaged and such average shall be deemed to
be the fair market rental value of the Aircraft for all purposes hereof. If
either Owner Participant or
SALE AND LEASE AGREEMENT
41
<PAGE>
Lessee shall fail to appoint an appraiser by the date which is two months prior
to the commencement of such Renewal Term or if such two appraisers cannot agree
on the amount of such appraisal and fail to appoint a third appraiser by the
date which is one month before the commencement of such Renewal Term, then
either Owner Participant or Lessee may apply to any court having jurisdiction to
make such appointment. Fair market rental value shall be the cash rental
obtainable in an arm's-length lease between an informed and willing lessee
(under no compulsion to lease) and an informed and willing lessor (under no
compulsion to lease) and shall be determined on the assumptions that the
Aircraft is in the United States of America, available for use by Lessee and in
the return condition required by Section 5 of this Lease and otherwise in
compliance with the requirements of this Lease. Stipulated Loss Value amounts
that are payable during each such Renewal Term shall be calculated as of the
date of commencement of such Renewal Term and shall be equal to the fair market
sales value of the Aircraft at such time; provided, however, that no such amount
shall be less than the principal amount of any indebtedness then secured by a
Lien on the Aircraft. Such fair market sales value shall be determined in the
same manner as fair market rental value. Fair Market sales value shall be the
cash price obtainable in an arm's-length sale between an informed and willing
buyer (under no compulsion to buy) and an informed and willing seller (under no
compulsion to sell) and shall be determined on the assumptions that the Aircraft
is in the United States of America, available for use by the buyer and in the
return condition required by Section 5 of this Lease and otherwise in compliance
with the requirements of this Lease.
Section 19. Successor Owner Trustee. Lessee agrees that in the case of
-----------------------
the appointment of any successor Owner Trustee pursuant to the terms of the
Trust Agreement, such successor Owner Trustee shall, upon written notice by such
successor Owner Trustee to Lessee, succeed to all the rights, powers and title
of Lessor hereunder and shall be deemed to be Lessor and the owner of the
Aircraft for all purposes hereof without the necessity of any consent or
approval by Lessee (but such successor Owner Trustee shall qualify under the
terms of Section 10.2 of the Participation Agreement) and without in any way
altering the terms of this Lease or Lessee's obligations hereunder. One such
appointment and designation of a successor Owner Trustee shall not exhaust the
right to appoint and designate further successor or additional Owner Trustees
pursuant to the Trust Agreement, and such right may be exercised repeatedly as
long as this Lease shall be in effect.
Section 20. Right to Perform for Lessee. If Lessee fails to perform or
---------------------------
comply with any of its agreements contained herein, Lessor may (but shall not be
obligated to) make such payment or perform or comply with such agreement, and
the amount of such payment and the amount of the expenses of Lessor incurred in
connection with such payment or the performance of or compliance with such
agreement, as the case may be, together with interest thereon at the Overdue
Rate, shall be deemed Supplemental Rent, payable by Lessee upon demand.
SALE AND LEASE AGREEMENT
42
<PAGE>
Section 21. Quiet Enjoyment. So long as this Lease shall not have been
---------------
declared to be in default pursuant to Section 15, during the Term Lessor will
not, through its own actions or inactions, interfere in the quiet enjoyment of
the Aircraft by Lessee or any Permitted Sublessee.
Section 22. Investment of Security Funds; Miscellaneous; Amendment.
-------------------------------------------------------
22.1 Investment of Security Funds. Any moneys required to be paid to
----------------------------
or retained by Lessor which are not required to be paid to Lessee pursuant to
Section 10.6 or 11.4 solely because a Lease Event of Default or Lease Default
under Section 14.1 or 14.5 shall have occurred and be continuing, or which are
held by Lessor pending payment to Lessee pursuant to Section 11.4 or which are
required to be paid to Lessee pursuant to Section 10.3 or 11.4 after completion
of a replacement to be made pursuant to Section 10.2, shall, until paid to
Lessee as provided in Section 10 or 11 or applied as provided herein or in the
Trust Agreement, be invested by Lessor from time to time as directed in writing
by Lessee and at the expense and risk of Lessee in the following securities
(which, except in the case of the shares described in clause (e) below, shall
mature within 91 days of the date of purchase thereof): (a) direct obligations
of the Government; (b) obligations fully guaranteed by the Government; (c) open
market commercial paper of any corporation incorporated under the laws of the
United States of America or any State thereof rated P-1 or its equivalent by
Moody's Investors Service, Inc. and A-1 or its equivalent by Standard & Poor's
Corporation; (d) certificates of deposit issued by, or bankers' acceptances of,
or time deposits or a deposit account with (i) the Owner Trustee or (ii) any
bank, trust company or national banking association incorporated or doing
business under the laws of the United States of America or any state thereof
having a combined capital and surplus of at least $50,000,000; or (e) shares of
a money market fund registered under the Investment Company Act of 1940, as
amended, the sole assets of which are direct obligations of the Government.
There shall be promptly remitted to Lessee or its order any gain (including
interest received) realized as the result of any such investment (net of any
fees, commissions and other expenses, if any, incurred in connection with such
investment) unless a Lease Event of Default or a Lease Default under Section
14.1 or 14.5 shall have occurred and be continuing. Lessee will promptly pay to
Lessor, on demand, the amount of any loss realized as the result of any such
investment (together with any fees, commissions and other expenses, if any,
incurred in connection with such investment), such amount to be disposed of in
accordance with the terms of the Trust Agreement.
22.2 Miscellaneous; Amendment. Lessee shall do, execute, acknowledge
------------------------
and deliver, or shall cause to be done, executed, acknowledged and delivered,
all such further acts, conveyances and assurances as Owner Trustee or Owner
Participant shall reasonably require for accomplishing the purposes of this
Agreement and the other Operative Agreements. Any provision of this Lease which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
SALE AND LEASE AGREEMENT
43
<PAGE>
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, Lessee hereby waives any provision of law which
renders any provision hereof prohibited or unenforceable in any respect. 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. This
Lease shall constitute an agreement of lease, and nothing herein shall be
construed as conveying to Lessee any right, title or interest in or to the
Aircraft, Airframe or Engines except as a lessee only. The section and paragraph
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. THIS LEASE HAS BEEN, AND
EACH LEASE SUPPLEMENT AND AMENDMENT HERETO IS INTENDED TO BE, DELIVERED IN THE
STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE IN
SUCH STATES BY RESIDENTS THEREOF AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE,
INCLUDING All MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. This Lease and
each Lease Supplement and amendment hereto may be executed in several
counterparts, each of which shall be deemed an original, and all such
counterparts shall constitute one and the same instrument.
Section 23. Permitted Foreign Air Carriers. Lessor may, in the exercise
------------------------------
of its reasonable business judgment, by written notice to Lessee, remove any
foreign air carrier from Exhibit C and Lessee may, by written notice to Lessor,
request that any foreign air carrier be added to Exhibit C, subject to Lessor's
prior written consent, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, no deletion of an airline from the list of
Permitted Foreign Air Carriers pursuant hereto shall (i) reduce the number of
Permitted Foreign Air Carriers below 24, (ii) affect any existing sublease or
other agreement providing for transfer of possession of the Aircraft, Airframe,
any Engine or Part which was permitted hereunder at the time entered into, or
(iii) preclude any subsequent renewal or extension of such sublease or other
agreement to which the Permitted Foreign Air Carrier under a sublease is
entitled by the terms thereof as originally in effect.
Section 24. Lessee's Consent to Mortgage. Lessee hereby acknowledges
----------------------------
receipt of due notice that Lessor's interest in this Lease (including each Lease
Supplement and any amendments hereto) has been assigned to Lender pursuant to
the Mortgage. Unless and until Lessee shall have received written notice from
Lender that the Mortgage has been discharged, except as otherwise provided in
the Mortgage, Lender shall have the right to exercise the rights of Lessor under
this Lease to give consents, approvals, waivers, notices or the like, to make
elections, demands or the like and to take any other discretionary action
SALE AND LEASE AGREEMENT
44
<PAGE>
under this Lease as though named as Lessor herein and no amendment or
modification of, or waiver by or consent of Lessor in respect of, any of the
provisions of this Lease shall be effective unless Lender shall have joined in
such amendment, modification, waiver or consent or shall have given its prior
written consent thereto. Lessee further agrees to deliver to Lender a copy of
each notice, certificate, financial statement or other document or instrument
delivered or required to be delivered by Lessee to Lessor hereunder or under
any of the other Operative Agreements (except the Tax Indemnity Agreement),
unless and until Lender has delivered written notice to Lessee that the Mortgage
has been discharged. Nothing in this Section 24 shall be deemed to constitute a
waiver by Lessee of any of the provisions of Section 10 of the Participation
Agreement.
Section 25. Section 1110 Compliance. Each of the parties hereto agrees that
-----------------------
the transactions contemplated by this Agreement and the other Operative
Agreements are intended to be, and, to the extent permitted by applicable law,
shall be and should be constructed so as to be, entitled to the full benefits of
11 U.S.C. Section 1110.
Section 26. Lease Extension. Notwithstanding any provisions contained
---------------
herein or in any other Operative Agreement to the contrary, at the end of the
Basic Term or any Renewal Term, and in the event that (i) the Mortgage shall
have been fully discharged, (ii) no subsequent Renewal Term shall occur and
(iii) any amount shall be due and owing to Lessee pursuant to the provisions of
Section 13.2 of the Participation Agreement, then Lessee shall be entitled to
retain possession of the Aircraft and to extend the provisions of this Lease
(other than the provisions for the payment of Basic Rent or Renewal Rent) for
the Extension Period (as defined below), and no Basic Rent or Renewal Rent shall
accrue or be payable by Lessee with respect to such Extension Period. The term
"Extension Period" means the number of days (rounded to the next full day) equal
to (A) the amount due and owing to Lessee pursuant to such Section 13.2, divided
by (B) the fair market rental value per day of the Aircraft at the commencement
of the Extension Period (determined in accordance with the same appraisal
procedures as are set forth in Section 15.2, except that the appraiser shall be
selected by Lessee and approved by Lessor (such approval to be given under the
same conditions as are set forth in Section 15.2)).
SALE AND LEASE AGREEMENT
45
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be
duly executed and delivered as of the day and year first above written.
Lessor:
FIRST SECURITY BANK OF UTAH,
NATIONAL ASSOCIATION,
not in its individual
capacity except as
expressly stated herein, but solely as Owner
Trustee under the Trust Agreement
By
------------------------
Title:
Lessee:
SOUTHWEST AIRLINES CO.
By[SIGNATURE APPEARS HERE]
------------------------
Treasurer:
SALE AND LEASE AGREEMENT
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be
duly executed and delivered as of the day and year first above written.
Lessor:
FIRST SECURITY BANK OF UTAH,
NATIONAL ASSOCIATION,
not in its individual capacity except as
expressly stated herein, but solely as Owner
Trustee under the Trust Agreement
By_____________________
Title: Trust Officer
Lessee:
SOUTHWEST AIRLINES CO.
By,____________________
Treasurer:
SALE AND LEASE AGREEMENT
<PAGE>
EXHIBIT A TO
LEASE AGREEMENT
SALE AND LEASE AGREEMENT SUPPLEMENT NO.__________
THIS SALE AND LEASE AGREEMENT SUPPLEMENT NO.______, dated ___________, ___
is between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its
individual capacity but solely as Owner Trustee under that certain Trust
Agreement, dated as of May 25, 1991 (the "Trust Agreement"), between the Owner
Participant named therein and such Bank ("Lessor"), and SOUTHWEST AIRLINES CO.,
a Texas corporation ("Lessee").
RECITALS.
--------
A. Lessor and Lessee have heretofore entered into that certain Sale and
Lease Agreement dated as of May 25, 1991, as supplemented and amended from time
to time (herein called the "Lease Agreement" and the defined terms therein being
herein used with the same meaning), which Lease Agreement provides in Section 2
for the execution of a Lease Supplement substantially in the form hereof for the
purpose of Lessee's selling to Lessor, and Lessor's leasing back to Lessee, the
Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in
accordance with the terms thereof; and
B. the Lease Agreement relates to the airframe and engines described
below, and a counterpart of the Lease Agreement is attached hereto and made a
part hereof and this Lease Supplement, together with such attachment, is being
filed for recordation with the FAA on the date hereof as one document.
In consideration of the premises and other good and sufficient
consideration, and pursuant to Section 2 of the Lease Agreement, Lessor and
Lessee hereby agree as follows:
- ------------------------------
Certain of the right, title and interest of Lessor in and to this Sale and
Lease Agreement Supplement has been assigned to and is subject to a security
interest in favor of NCNB Leasing Corporation, as Mortgagee. This Sale and Lease
Agreement Supplement has been executed in several counterparts. No security
interest in Lessor's right, title and interest in and to this Sale and Lease
Agreement Supplement may be created through the transfer or possession of any
counterpart other than the original counterpart. This is not the original
counterpart.
SALE AND LEASE AGREEMENT
A-1
<PAGE>
1. Lessee hereby delivers and sells to Lessor and Lessor hereby accepts
and purchases from Lessee and in turn delivers and leases back to Lessee, and
Lessee hereby accepts and leases back from Lessor, under the Lease Agreement, as
herein supplemented, the following-described Boeing Model 737-2H4 Aircraft (the
"Delivered Aircraft"), which Delivered Aircraft as of the date hereof consists
of the following:
Airframe: U.S Registration Number N63SW; Manufacturer's Serial No.22061;
and
Engines: Two Pratt & Whitney JT8D-9A Engines installed thereon bearing
Engine Manufacturer's Serial Numbers as follows: P707409B and P707419B.
Each of the Engines described above has 750 or more rated takeoff horsepower or
the equivalent of such horsepower.
2. The Delivery Date of the Delivered Aircraft is the date of this Lease
Supplement set forth in the opening paragraph hereof.
3. Lessee hereby confirms to Lessor that the Delivered Aircraft has been
or will be duly marked in accordance with the terms of Section 7.1.2 of the
Lease and that Lessee has accepted the Delivered Aircraft for all purposes
hereof and of the Lease Agreement, including its being airworthy, in accordance
with specifications, in good working order and repair and without defect or
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 Permitted Liens.
4. All the provisions of the Lease Agreement are hereby incorporated by
reference in this Lease Supplement, on and as of the date of this Lease
Supplement, to the same extent as if fully set forth herein.
5. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF TEXAS AND
SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF TEXAS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
SALE AND LEASE AGREEMENT
A-2
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to
be duly executed and delivered as of the date and year first above written.
Lessor:
FIRST SECURITY BANK OF UTAH, NATIONAL
ASSOCIATION, not in its individual capacity
but solely as Owner Trustee under the Trust
Agreement
By
-------------------------------------
Title:
Lessee:
SOUTHWEST AIRLINES CO.
By
------------------------------------
Title:
(cmh)SOU630-AFG-VOLII(b) A:\lease63.531
SALE AND LEASE AGREEMENT
A-3
<PAGE>
EXHIBIT B TO
LEASE AGREEMENT
STIPULATED LOSS VALUE SCHEDULE
<TABLE>
<CAPTION>
SLV STIPULATED LOSS VALUE
DETERMINATION DATE (% OF LESSOR'S COST)
- ------------------ ---------------------
<S> <C>
Prior to the Rent Payment Date in September, 1991 115.00
Rent Payment Date in September, 1991 111.75
Rent Payment Date in December, 1991 110.74
Rent Payment Date in March, 1992 109.69
Rent Payment Date in June, 1992 108.59
Rent Payment Date in September, 1992 107.46
Rent Payment Date in December, 1992 106.27
Rent Payment Date in March, 1993 105.05
Rent Payment Date in June, 1993 103.77
Rent Payment Date in September, 1993 102.45
Rent Payment Date in December, 1993 101.07
Rent Payment Date in March, 1994 99.64
Rent Payment Date in June, 1994 98.16
Rent Payment Date in September, 1994 96.61
Rent Payment Date in December, 1994 95.01
Rent Payment Date in March, 1995 93.34
Rent Payment Date in June, 1995 91.61
Rent Payment Date in September, 1995 89.81
Rent Payment Date in December, 1995 87.94
Rent Payment Date in March, 1996 86.00
Rent Payment Date in June, 1996 83.98
Rent Payment Date in September, 1996 81.88
Rent Payment Date in December, 1996 80.00
</TABLE>
SALE AND LEASE AGREEMENT
B-1
<PAGE>
EXHIBIT C TO
LEASE AGREEMENT
PERMITTED FOREIGN AIR CARRIERS
Aer Lingus
Air Canada
Air France
Air Inter
Alitalia
Ail Nippon Airways
Ansett Airlines of Australia
Austrian Airlines
British Airways
British Midland
Canadian Airlines International
Finnair
Iberia
Japan Air Lines
Japan Air Systems
KLM
Lufthansa
Malaysian Airline System
QANTAS Airways
Sabena
SAS
Singapore Airlines
Swissair
UTA
SALE AND LEASE AGREEMENT
C-1
<PAGE>
- --------------------------------------------------------------------------------
SALE AND LEASE AGREEMENT
dated as of July 10, 1991
between
FIRST SECURITY BANK OF UTAH,
NATIONAL ASSOCIATION
as Owner Trustee,
Lessor
and
SOUTHWEST AIRLINES CO.,
Lessee
------------------------------
One Boeing Model 737-2H4 Aircraft
(N62SW)
------------------------------
THIS SALE AND LEASE AGREEMENT HAS BEEN ASSIGNED TO AND IS SUBJECT TO A
SECURITY INTEREST AND LIEN IN FAVOR OF NATIONWIDE LIFE INSURANCE COMPANY
("LENDER") UNDER AND TO THE EXTENT SET FORTH IN THE SECURITY AGREEMENT AND
MORTGAGE ("MORTGAGE") DATED AS OF JULY 10, 1991 BETWEEN LENDER AND FIRST
SECURITY BANK OF UTAH, N.A, AS OWNER TRUSTEE (AS SUCH MORTGAGE MAY BE
AMENDED OR SUPPLEMENTED AS PERMITTED THEREBY). THIS SALE AND LEASE AGREEMENT HAS
BEEN EXECUTED IN SEVERAL COUNTERPARTS. TO THE EXTENT THAT THIS SALE
AND LEASE AGREEMENT CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE
UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION), NO
SECURITY INTEREST IN THIS SALE AND LEASE AGREEMENT MAY BE CREATED THROUGH
THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE ORIGINAL
COUNTERPART THAT CONTAINS THE RECEIPT THEREFOR EXECUTED BY LENDER ON THE
SIGNATURE PAGE THEREOF.
[THIS IS NOT THE ORIGINAL COUNTERPART.]
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Section Page
<C> <S> <C>
Section 1. Definitions..................................................... 1
Section 2. Sale, Lease and Acceptance...................................... 8
Section 3. Term and Rent................................................... 8
3.1 General......................................................... 8
3.2 Lease Term...................................................... 9
3.3 Basic Rent...................................................... 9
3.4 Supplemental Rent............................................... 9
3.5 Payments........................................................ 9
Section 4. Lessor's Representations and Warranties; DISCLAIMER; Certain
Agreements of Lessee................................................. 10
4.1 Lessor's Representations and Warranties; DISCLAIMER............. 10
4.2 Certain Agreements of Lessee.................................... 10
Section 5. Return of Aircraft.............................................. 11
5.1 General Condition upon Return................................... 11
5.1.1 Airworthiness........................................... 11
5.1.2 Free of Liens........................................... 11
5.1.3 Operating Configuration and Condition................... 11
5.1.4 Cleanliness and Operability............................. 11
5.1.5 Parts and Equipment..................................... 11
5.1.6 TCAS and Windshear...................................... 12
5.1.7 Corrosion Treatment..................................... 12
5.2 Return of Other Engines......................................... 12
5.3 Return at End of Base Lease Term or Renewal Lease Term.......... 12
5.4 Financial Adjustments........................................... 14
5.4.1 Airframe................................................ 14
5.4.2 Engines................................................. 14
5.4.3 Landing Gear............................................ 14
5.4.4 APU..................................................... 15
5.4.5 Time-Controlled Components.............................. 15
5.4.6 Cycles/Hours Ratio...................................... 15
5.4.7 Certificate as to Return Condition, Etc................. 15
5.4.8 Certain Other Financial Adjustment Provisions........... 15
5.5 Manual, Service Bulletins, Etc.................................. 16
5.6 Parking upon Return............................................. 16
</TABLE>
SALE AND LEASE AGREEMENT
-i-
<PAGE>
<TABLE>
<C> <S> <C>
5.7 Failure to Return Aircraft or Engines........................... 16
5.8 Aid in Disposition.............................................. 17
Section 6. Liens........................................................... 17
Section 7. Registration, Operation, Possession, Subleasing and Records..... 18
7.1 Registration and Operation...................................... 18
7.1.1 Registration............................................ 18
7.1.2 Nameplate............................................... 18
7.1.3 Compliance with Laws.................................... 18
7.1.4 Insurance Requirements; Government Requisition;
Indemnity.............................................. 18
7.2 Possession...................................................... 19
7.2.1 Interchange and Pooling................................. 19
7.2.2 Testing and Service..................................... 19
7.2.3 Civil Reserve Air Fleet Program......................... 20
7.2.4 Installation of Engines................................. 20
7.2.5 Installation of Engines on Other Airframes.............. 20
7.2.6 Pooling of Parts........................................ 20
7.2.7 Wet Lease............................................... 20
7.2.8 Sublease to Permitted Air Carriers...................... 21
7.3 Records and Reports............................................. 22
7.3.1 Records................................................. 22
7.3.2 Information and Reports................................. 23
7.3.3 Financial Information................................... 23
7.3.4 Notification of Default................................. 23
Section 8. Maintenance; Replacement and Pooling of Parts; Alterations,
Modifications and Additions......................................... 23
8.1 Maintenance..................................................... 23
8.1.1 Maintenance Program..................................... 23
8.1.2 Compliance with Government Requirements................. 24
8.2 Replacement of Parts............................................ 24
8.3 Pooling of Parts................................................ 25
8.4 Alterations, Modifications and Additions........................ 25
Section 9. Default Purchase Option......................................... 26
Section 10. Loss, Destruction, Requisition, Etc............................. 27
10.1 Event of Loss with Respect to Aircraft.......................... 27
10.2 Event of Loss with Respect to an Engine......................... 27
10.2.1 Event of Loss........................................... 27
10.2.2 Conditions; Lessee's Obligations........................ 27
</TABLE>
SALE AND LEASE AGREEMENT
-ii-
<PAGE>
<TABLE>
<C> <S> <C>
10.2.3 Recordation and Opinions................................ 28
10.2.4 Conveyance; Replacement Engine.......................... 28
10.2.5 No Reduction of Rent.................................... 28
10.3 Application of Certain Payments................................. 29
10.3.1 Replacement of Engine................................... 29
10.3.2 Nonreplacement.......................................... 29
10.4 Requisition of Aircraft for Use by Governmental Authorities..... 29
10.5 Requisition of an Engine for Use by Governmental Authorities.... 29
10.6 Application of Payments During Existence of Default............. 30
Section 11. Insurance....................................................... 30
11.1 Public Liability and Property Damage Insurance.................. 30
11.1.1 Type, Form and Amount................................... 30
11.1.2 Coverage................................................ 30
11.1.3 Additional Insureds..................................... 30
11.2 Insurance Against Loss of or Damage to Aircraft and Engines..... 30
11.2.1 Type, Form and Amount................................... 31
11.2.2 War-Risk Insurance...................................... 31
11.2.3 Certain Requirements.................................... 31
11.2.3.1 Additional Insureds........................... 31
11.2.3.2 Payment of Proceeds........................... 31
11.2.3.3 Waiver of Subrogation......................... 32
11.2.4 Deductibles............................................. 32
11.2.5 Government Indemnity.................................... 32
11.3 General Policy Provisions....................................... 32
11.3.1 Primary Insurance....................................... 32
11.3.2 Coverage for Each Insured............................... 32
11.3.3 Waiver of Certain Rights................................ 32
11.3.4 Breach of Warranty...................................... 33
11.3.5 Notice of Termination or Changes........................ 33
11.3.6 Nonliability for Premiums............................... 33
11.3.7 Identity of Insurers.................................... 33
11.4 Application of Insurance Proceeds............................... 33
11.5 Certificates; Reports, Etc...................................... 33
11.6 Lessor's Right to Maintain Insurance............................ 34
11.7 Insurance for Own Account....................................... 34
11.8 Self-Insurance.................................................. 34
Section 12. Inspection...................................................... 35
Section 13. Assignment...................................................... 35
</TABLE>
SALE AND LEASE AGREEMENT
-iii-
<PAGE>
<TABLE>
<C> <S> <C>
Section 14. Events of Default............................................... 35
14.1 Failure To Pay Rent............................................. 36
14.2 Specific Defaults............................................... 36
14.3 General Default................................................. 36
14.4 Misrepresentation and Breach of Warranty........................ 36
14.5 Bankruptcy, Etc................................................. 36
Section 15. Remedies........................................................ 37
15.1 Default; Remedies............................................... 37
15.1.1 Return; Repossession................................... 37
15.1.2 Sale; Use Etc.......................................... 37
15.1.3 Certain Liquidated Damages............................. 37
15.1.4 Liquidated Damages upon Sale........................... 38
15.1.5 Rescission and Other Remedies.......................... 38
15.2 Certain Definitions............................................. 39
15.3 No Waiver, Etc.................................................. 39
Section 16. Notices......................................................... 39
Section 17. Net Lease; Lessee's Obligations; No Setoff, Counterclaim, Etc... 40
Section 18. Renewal Options................................................. 41
18.1 Renewal After Stage III Upgrade................................. 41
18.2 Renewal Without Stage III Upgrade............................... 42
Section 19. Successor Owner Trustee......................................... 43
Section 20. Right to Perform for Lessee..................................... 43
Section 21. Quiet Enjoyment................................................. 43
Section 22. Investment of Security Funds; Miscellaneous; Amendment.......... 43
22.1 Investment of Security Funds.................................... 43
22.2 Miscellaneous; Amendment........................................ 44
Section 23. Permitted Foreign Air Carriers.................................. 45
Section 24. Lessee's Consent to Mortgage.................................... 45
Section 25. Section 1110 Compliance......................................... 46
Section 26. Lease Extension................................................. 46
</TABLE>
SALE AND LEASE AGREEMENT
-iv-
<PAGE>
Exhibit A - Form of Lease Supplement
Exhibit B - Stipulated Loss Value Schedule
Exhibit C - Permitted Foreign Air Carriers
SALE AND LEASE AGREEMENT
-v-
<PAGE>
THIS SALE AND LEASE AGREEMENT is dated as of July 10, 1991, between FIRST
SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but
solely as Owner Trustee under the Trust Agreement hereinafter referred to
("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee").
Recitals
--------
1. Lessee owns the Aircraft.
2. The parties hereto desire that Lessor purchase the Aircraft from and
lease it back to Lessee as hereinbelow provided.
In consideration of the premises and the mutual agreements herein
contained, Lessor and Lessee agree as follows:
Section 1. 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. Any agreement referred to below shall mean such agreement
as amended, supplemented and modified from time to time, to the extent permitted
by, and in accordance with, the terms thereof. For all purposes of this Lease
the capitalized terms used but not defined herein are used as defined in the
Participation Agreement.
"Act" means the Federal Aviation Act of 1958, as amended from time to
time.
"Affiliate" of any Person means any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person.
"Aircraft" means the Airframe with the two Engines (or any Replacement
Engine substituted for either of such Engines hereunder), whether or not any of
such initial or Replacement Engines may on the Delivery Date or from time to
time thereafter be installed on the Airframe or may be installed on any other
airframe or on any other aircraft.
"Airframe" means (i) the Boeing Model 737-2H4 aircraft (excluding
Engines or engines from time to time installed thereon) specified in the initial
Lease Supplement sold hereunder by Lessee to Lessor, and leased back by Lessor
to Lessee, all hereunder and under the initial Lease Supplement, and (ii) any
and all Parts so long as the same shall be incorporated in such aircraft and any
and all Parts removed from such aircraft so long as title thereto shall remain
vested in Lessor in accordance with the terms of Section 8.
"Base Lease Term" means the period commencing on the Delivery Date and
expiring on January 15, 1997.
SALE AND LEASE AGREEMENT N62SW
1
<PAGE>
"Basic Rent" means the rent identified as Basic Rent in and payable
pursuant to Section 3.3.
"Bills of Sale" means the FAA Bill of Sale and the Warranty Bill of
Sale.
"Business Day" means a day on which banks are not required or
authorized to close in any of the City of New York, New York, Dallas, Texas,
Columbus, Ohio, and Salt Lake City, Utah, or such other city as shall be the
situs of the principal office of Lender, Lessee or Lessor at the time in
question.
"Cards" is defined in Section 5.3.1.
"Code" means the United States Internal Revenue Code of 1986, as
amended from time to time.
"Delivery Date" means the date of the initial Lease Supplement, which
date shall be the date on which the Aircraft is delivered by Lessee to, and
accepted by, Lessor hereunder and in turn leased back by Lessor to Lessee
hereunder, which date shall be a Business Day.
"DOT" means the United States Department of Transportation or any
governmental person, agency or authority succeeding to the functions of such
Department of Transportation.
"Engine" means (i) each of the Pratt & Whitney JT8D-9A engines
identified by manufacturer's serial number in the initial Lease Supplement,
whether or not on the Delivery Date or 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, whether or not from time to time thereafter
installed on the Airframe or any other airframe or on any other aircraft,
together in each case with any and all Parts incorporated in such Engine and any
and all Parts removed from such Engine so long as title thereto shall remain
vested in Lessor in accordance with the terms of Section 8. Except as otherwise
set forth herein, at such time as a Replacement Engine shall be substituted
hereunder, such replaced Engine shall cease to be an Engine hereunder. The term
"Engines" means, as of any date of determination, all Engines then leased
hereunder.
"Event of Loss" means, with respect to the Aircraft, Airframe or any
Engine, any of the following events with respect to such property: (i)
disappearance or theft of such property or the loss of the use thereof for any
reason not covered by clause (iii) or (iv) of this definition, including
hijacking, for a period of 180 consecutive days or more (unless the location of
the property is known and Lessee is diligently pursuing recovery of the
property)
SALE AND LEASE AGREEMENT N62SW
2
<PAGE>
or beyond the expiration of the Term, or destruction, damage beyond economic
repair or rendition of such property permanently unfit for normal use for any
reason whatsoever; (ii) any damage to such property which results in an
insurance settlement with respect to such property, on the basis of a total
loss, or a constructive or compromised total loss; (iii) the confiscation or
requisition of use of such property by the Government or any purported foreign
government or any instrumentality or agency thereof for a period in excess of
twelve consecutive months or for a period continuing beyond the Term, whichever
first occurs; (iv) as a result of any rule, regulation, order or other action by
the FAA or other governmental body (including any court) having jurisdiction,
the use of such property in the normal course of interstate air transportation
of persons or cargo shall have been prohibited for a period of more than six
consecutive months, unless Lessee, prior to the expiration of such six-month
period, shall have undertaken and shall be diligently carrying forward all steps
which are necessary or desirable to permit normal use by Lessee, or, (A) in the
case in which such prohibition shall apply generally to all similar Boeing Model
737-200 series aircraft, if such prohibition is continuing on the last day of
the Term, or (B) in all other cases, if such prohibition is continuing on the
earlier of the first anniversary of such prohibition and the last day of the
Term; (v) the condemnation or requisition of title to such property by the
Government or any purported foreign government or any instrumentality or agency
thereof; or (vi) respecting any Engine, any divestiture of title to an Engine
treated as an Event of Loss pursuant to Section 7.2.1 or any other provision
hereof. 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. The date of an
Event of Loss shall be deemed to be the date of such insurance settlement, loss
of use, theft, disappearance, condemnation, confiscation, divestiture, taking or
requisition of title or use or prohibition, except that, for the purposes of
clauses (i), (iii) and (iv) above, no Event of Loss shall be deemed to have
occurred until the expiration of the applicable period referred to therein.
"FAA" means the Federal Aviation Administration or any governmental
person, agency or other authority succeeding to the functions of the Federal
Aviation Administration.
"FAA Regulations" means the Federal Aviation Regulations issued
pursuant to the Act from time to time, or any successor regulations thereto.
"Government" means the federal government of the United States of
America or any instrumentality or agency thereof.
"incorporated in" means installed in or attached to or otherwise made
a part of.
"Indemnified Parties" means (i) First Security Bank of Utah, National
Association, in its individual capacity and as Owner Trustee, (ii) Owner
Participant, (iii)
SALE AND LEASE AGREEMENT N62SW
3
<PAGE>
Lender, (iv) the Trust Estate, (v) the respective successors and assigns of the
foregoing and (vi) the respective directors, officers, employees and agents of
the foregoing.
"Lease", "this Lease", "this Agreement", "hereby", "herein", "hereof",
"hereunder" or other words mean this Sale and Lease Agreement, including without
limitation supplementation hereof by one or more Lease Supplements.
"Lease Default" means any event or condition which, with notice or
lapse of time or both, would constitute a Lease Event of Default.
"Lease Event of Default" is defined in Section 14.
"Lease Period" means each three-month period commencing on January 15,
April 15, July 15, and October 15, as the case may be, during the Base Lease
Term.
"Lease Supplement" means a supplement to this Lease, in the case of
the initial such supplement substantially in the form attached as Exhibit A
hereto, subjecting the Aircraft or other property to this Lease.
"Lessee" means Southwest Airlines Co., a Texas corporation, and its
successors and permitted assigns.
"Lessor" means Owner Trustee.
"Lessor's Cost" means the amount identified as such in the initial
Lease Supplement.
"Lessor Liens" means Liens of any Person claiming by, through or under
Lessor, First Security Bank of Utah, National Association, in its individual
capacity, Lender, Owner Participant or any Affiliate of Owner Participant which
arise as a result of (i) claims against any such Person not related to the
transactions contemplated by the Operative Agreements, (ii) any act or omission
of any such Person which is not related to the transactions contemplated by the
Operative Agreements, or is in violation of any of the express terms of any of
the Operative Agreements, (iii) Taxes or Losses imposed against or incurred by
any such Person for which Lessee is not obligated to indemnify pursuant to the
Participation Agreement, or (iv) claims against any such Person arising out of
any transfer by such Person in violation of the express terms of the Operative
Agreements.
"Lien" means any mortgage, pledge, lien, charge, encumbrance, lease or
security interest, or any claim or exercise of rights, affecting the title to or
any interest in property.
"Maintenance Program" is defined in Section 8.1.1.
SALE AND LEASE AGREEMENT N62SW
4
<PAGE>
"Manufacturer" means The Boeing Company, a Delaware corporation, or
any Affiliate thereof whose obligations are guaranteed by The Boeing Company,
and their respective successors and assigns.
"Mortgage Supplement" has the meaning set forth in the Mortgage.
"Officer's Certificate" means a certificate signed by the Chairman,
the President, any Vice President, the Treasurer, any Assistant Treasurer, the
Controller, the Secretary or any Assistant Secretary of the Person providing
such certificate.
"Operative Agreements" means this Agreement, each Lease Supplement,
the Participation Agreement, the Mortgage, each Mortgage Supplement, the Notes,
the Trust Agreement, the Bills of Sale, and the Tax Indemnity Agreement,
including any consents included in or attached to any thereof.
"Overdue Rate" means the lesser of (i) the maximum rate permitted by
applicable law or (ii) 2% in excess of the greater of (x) the interest rate
publicly announced in New York City from time to time by The Chase Manhattan
Bank (National Association) as its prime or base lending rate, or (y) the
interest rate required to be paid under the Note. Any interest payable hereunder
at the Overdue Rate shall be computed on the basis of a year of 360 days and
actual days elapsed.
"Owner Participant" means Cypress Equipment Fund, Ltd., a Florida
limited partnership and its successors and permitted assigns.
"Owner Trustee" means First Security Bank of Utah, National
Association, not in its individual capacity but solely as trustee under the
Trust Agreement, and any successor, separate or additional Owner Trustee
thereunder.
"Participation Agreement" means the Participation Agreement, dated as
of July 10, 1991, among Lessee, Lender, Owner Participant, and Lessor.
"Parts" means all appliances, parts, components, instruments,
appurtenances, accessories, furnishings and other equipment of whatever nature
(other than (a) complete Engines or engines and (b) any items leased by Lessee
from a third party (other than Lessor)) which may from time to time be
incorporated in the Airframe or any Engine (and "Part" means any of the
foregoing) or, so long as title thereto shall remain vested in Lessor in
accordance with Section 8.2 hereof, after removal therefrom.
"Permitted Foreign Air Carrier" means any air carrier listed on
Exhibit C hereto (as the same may be modified from time to time in accordance
with Section 23) and any
SALE AND LEASE AGREEMENT N62SW
5
<PAGE>
other "foreign air carrier" (as defined in the Act), as to which there is in
force a permit issued pursuant to Section 402 of the Act.
"Permitted Lien" means any Lien referred to in clauses (a) through (g)
of Section 6.
"Permitted Sublease" means a sublease permitted under Section 7.2.8.
"Permitted Sublessee" means the sublessee under a Permitted Sublease.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Renewal Rent" means the rent payable in respect of a Renewal Term
determined pursuant to Section 18.
"Renewal Term" means any of the successive periods of one, two, three
or four years each (but not more than four years in the aggregate) which follow
the end of the Base Lease Term with respect to which Lessee shall have exercised
one or more options pursuant to Section 18 hereof.
"Rent" means Basic Rent, Renewal Rent and Supplemental Rent.
"Rent Payment Date" means each January 15, April 15, July 15, and
October 15 during the Term, commencing October 15, 1991.
"Replacement Engine" means a Pratt & Whitney JT8D-9A engine (or an
improved model engine suitable for installation and use on the Airframe and
fully compatible with the other Engine or engine installed thereon) which shall
have been substituted for an Engine leased hereunder pursuant to Section 5.2 or
10.2.
"Securities Act" means the Securities Act of 1933, as amended.
"SLV Determination Date" means any date set forth in Exhibit B hereto.
"Stipulated Loss Value" means the amount determined by multiplying the
Lessor's Cost of the Aircraft by the percentage set forth in Exhibit B hereto
opposite the SLV Determination Date next preceding the date on which Stipulated
Loss Value is being paid (or, if such payment date is an SLV Determination Date
by the percentage set forth opposite such SLV Determination Date), as adjusted
pursuant to Section 13 of the Participation Agreement.
SALE AND LEASE AGREEMENT N62SW
6
<PAGE>
"Supplemental Rent" means, without duplication, all amounts,
liabilities and obligations (other than Basic Rent or Renewal Rent) which Lessee
assumes or agrees to pay to Lessor or any other Person hereunder, under the
Participation Agreement or any of the other Operative Agreements (other than the
Tax Indemnity Agreement), including without limitation (i) Stipulated Loss Value
payments, (ii) all amounts required to be paid by Lessee under the agreements,
covenants and indemnities contained in the Participation Agreement and (iii) all
amounts required to be paid by Lessee pursuant to Section 3.4 and Section 5
hereof.
"Tax Indemnity Agreement" means the Tax Indemnity Agreement, dated as
of July 10, 1991, between Owner Participant and Lessee.
"Term" means the term for which the Aircraft is leased pursuant to
Section 3 hereof and shall include the Base Lease Term and any Renewal Term.
"Transfer" means, with respect to any Person, to transfer, by bill of
sale or otherwise, all such Person's right, title and interest in and to the
Aircraft, Airframe or any Engine, as the case may be, to another Person on an
"as is, where is" basis, free and clear of any Lessor Lien but otherwise without
recourse, representation or warranty, express or implied, and including an
express disclaimer of warranties, representations and guarantees in a manner
comparable to that set forth in Section 4.1.
"Trust Agreement" means the Trust Agreement, dated as of July 10,
1991, between Owner Participant and First Security Bank of Utah, National
Association, in its individual capacity.
"Trust Estate" means the Trust Estate as that term is defined in the
Trust Agreement.
"UCC" means the Uniform Commercial Code as in effect in any applicable
jurisdiction.
"U.S. Air Carrier" means any United States air carrier (i) as to which
there is in force a certificate issued pursuant to Section 401 of the Act, (ii)
as to which there is in force an air carrier operating certificate issued
pursuant to Part 121 of the FAA Regulations, or which may operate as an air
carrier by certification or otherwise under any successor or substitute
provisions therefor or in the absence thereof, and (iii) which, at the time a
Permitted Sublease is (or is proposed to be) entered into, is not the subject of
proceedings under the Federal Bankruptcy Code of 1978, as amended.
SALE AND LEASE AGREEMENT N62SW
7
<PAGE>
"Wet Lease" means any arrangement whereby Lessee agrees to furnish the
Airframe and Engines or engines installed thereon to a third party pursuant to
which the Airframe and Engines or engines (i) shall be operated solely by
regular employees of Lessee possessing all current certificates and licenses
that would be required under the Act for the performance by such employees of
similar functions within the United States of America (it being understood that
cabin attendants need not be regular employees of Lessee), (ii) shall be
maintained by Lessee in accordance with its Maintenance Program and (iii) shall
be and remain, in the hands of such third party, subject to all other terms and
conditions of this Lease.
Section 2. Sale, Lease and Acceptance.
--------------------------
(a) Lessor, subject to satisfaction or waiver of the conditions set
forth in Section 5 of the Participation Agreement and the concurrent acceptance
hereunder by Lessee of the Aircraft, hereby agrees, to the extent that the funds
received by it pursuant to Section 2 of the Participation Agreement are adequate
for the purpose, to purchase at a purchase price equal to Lessor's Cost and to
accept delivery on the Delivery Date from Lessee hereunder and to lease back to
Lessee hereunder, and Lessee hereby agrees, expressly for the direct benefit of
Lessor and Owner Participant to sell to Lessor and to lease back from Lessor
hereunder on the Delivery Date, the Aircraft, which shall have been accepted by
Lessor and Lessee hereunder as evidenced by the execution by Lessor and Lessee
of the Lease Supplement conveying to Lessor and leasing to Lessee the Aircraft
hereunder; provided, however, that Lessor and Lessee shall have no further
obligation hereunder with respect to the Aircraft if the Delivery Date shall not
have occurred on or before August 15, 1991. The purchase price of the Aircraft
shall be paid by Lessor to Lessee on the Delivery Date in the manner specified
in Section 3 of the Participation Agreement.
(b) Lessor hereby authorizes each of Gary C. Kelly, John D. Owen,
Deborah Ackerman and Laura Wright, all of whom are employees of Lessee, as the
authorized representative or representatives of Lessor to accept delivery of the
Aircraft from Lessee pursuant hereto. Lessee hereby agrees that in the event
delivery of the Aircraft shall be accepted by an employee or employees of Lessee
pursuant to such authorization by Lessor, such acceptance of delivery by such
employee or employees on behalf of Lessor shall, without further act, also
irrevocably constitute acceptance by Lessee of the Aircraft for all purposes of
this Agreement.
Section 3. Term and Rent.
-------------
3.1 General. Except as otherwise provided herein, the Term for the
-------
Aircraft shall commence on the Delivery Date specified in the initial Lease
Supplement and shall terminate as herein provided.
SALE AND LEASE AGREEMENT N62SW
8
<PAGE>
3.2 Lease Term. Except as provided herein, the Aircraft shall be
----------
leased hereunder for the Base Lease Term and the Renewal Term, if any.
3.3 Basic Rent. Lessee hereby agrees to pay to Lessor Basic Rent with
----------
respect to the Aircraft, in arrears, on each Rent Payment Date, in an amount
equal to $462,154, as adjusted pursuant to Section 13 of the Participation
Agreement.
3.4 Supplemental Rent. Lessee also agrees to pay (or cause to be
-----------------
paid) to Lessor, or to whomsoever shall be entitled thereto, all Supplemental
Rent with respect to Stipulated Loss Value when and as the same shall become due
and owing and all other amounts of Supplemental Rent within five days after
demand or such other relevant period as may be provided in any Operative
Agreement. Lessee will also pay to Lessor, or to whomsoever shall be entitled
thereto, as Supplemental Rent, to the extent permitted by applicable law,
interest at the Overdue Rate on any part of any installment of Basic Rent or
Renewal Rent not paid when due for any period from and including the date on
which the same was due to but excluding the date of payment in full and (to the
extent permitted by applicable law) on any payment of Supplemental Rent not paid
when due to Lessor, or to whomsoever shall be entitled thereto, as the case may
be, for the period from the date on which the same was due to but excluding the
date of payment in full. The expiration or other termination of Lessee's
obligation to pay Basic Rent or Renewal Rent hereunder shall not limit or modify
the obligations of Lessee with respect to Supplemental Rent.
3.5 Payments. Payments of Rent and any and all other payments payable
--------
to Lessor hereunder shall be paid in funds of the United States of America which
shall be immediately available not later than 11:00 A.M., New York City time, on
the date due at the office of Lessor at 79 Main Street, Salt Lake City, Utah
84111, Attention: Corporate Trust Department, Re: Southwest Airlines 1991 Trust
N62SW, or as otherwise directed by Lessor in writing at least five Business Days
prior to the date such payment is due; provided, however, that until Lessee
shall have received notice from Lender that all amounts payable to Lender under
the Mortgage and the Note have been paid in full and satisfied, all such
payments due from Lessee (including without limitation amounts payable by Lessee
under Section 5, Section 9, Section 10, Section 11, Section 15 and Section 18
hereof) shall be made by wire transfer to the office of Lender at the address
referred to in Section 12.7 of the Participation Agreement, or as otherwise
designated from time to time in writing by the Lender. Except as otherwise
expressly provided herein, whenever any payment of Rent or other payment to be
made hereunder shall be due on a day which is not a Business Day, such payment
shall be made on the next succeeding day which is a Business Day and (provided
such payment is made on such next succeeding Business Day) no interest shall
accrue on the amount of such payment from and after such scheduled date.
SALE AND LEASE AGREEMENT N62SW
9
<PAGE>
Section 4. Lessor's Representations and Warranties; DISCLAIMER; Certain
------------------------------------------------------------
Agreements of Lessee.
- --------------------
4.1 Lessor's Representations and Warranties; DISCLAIMER. LESSEE
---------------------------------------------------
EXPRESSLY AGREES TO TAKE THE AIRCRAFT "AS IS". NEITHER LESSOR (INDIVIDUALLY OR
AS OWNER TRUSTEE) NOR OWNER PARTICIPANT NOR LENDER MAKES, HAS MADE OR SHALL BE
DEEMED TO HAVE MADE, AND EACH HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR
WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, AIRWORTHINESS, VALUE, CONDITION,
DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT OR ANY
PART THEREOF, 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, AS TO THE ABSENCE OF OBLIGATIONS BASED ON STRICT LIABILITY IN TORT,
OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH
RESPECT TO THE AIRCRAFT OR ANY PART THEREOF, except that First Security Bank of
Utah, National Association, in its individual capacity (i) represents and
warrants that on the Delivery Date Lessor shall have received whatever title
thereto as was conveyed to it by the Lessee, (ii) represents and warrants that
on the Delivery Date the Aircraft shall be free of Lessor Liens attributable to
it, (iii) agrees that it will not directly or indirectly create, incur, assume
or suffer to exist any Lessor Lien attributable to it on or with respect to the
Airframe or any Engine or any other portion of the Estate, and (iv) represents
and warrants that it is a "citizen of the United States" as defined in Section
101(16) of the Act and agrees that if at any time a responsible officer in its
Corporate Trust Department shall obtain actual knowledge that it has ceased to
be a "citizen of the United States" within the meaning of Section 101(16) of the
Act it will promptly resign as Owner Trustee, effective upon the appointment of
a successor Owner Trustee in accordance with Section 9.01 of the Trust
Agreement. Lessor covenants that during the Term (so long as no Lease Event of
Default shall have occurred and be continuing) it will not, through its own
actions or breaches of any of its obligations under the Operative Agreements,
interfere or cause any interference in the quiet enjoyment of the Aircraft by
Lessee or any Permitted Sublessee and agrees that it will not directly or
indirectly create, incur, assume or suffer to exist any Lessor Lien attributable
to it on or with respect to the Airframe or any Engine.
4.2 Certain Agreements of Lessee. All obligations of Lessee in this
----------------------------
Lease shall be done, performed or complied with at Lessee's cost and expense,
whether or not so expressed, unless otherwise expressly stated. Lessee hereby
agrees with Lessor for the benefit of Owner Participant that it shall perform
the agreements, covenants and indemnities set forth in the Participation
Agreement (including, without limitation, Sections 8.1 and 8.2 of the
Participation Agreement) which are incorporated herein, and hereby restates
Lessee's representations and warranties set forth in the Participation
Agreement, as fully and to the same extent and with the same force and effect as
if set forth in full in this Section 4.2.
SALE AND LEASE AGREEMENT N62SW
10
<PAGE>
Section 5. Return of Aircraft.
5.1 General Condition upon Return. Subject to Sections 10 and 26,
-----------------------------
upon the expiration or termination of this Lease, Lessee (i) will cause the
Aircraft, if then not registered in the name of Lessor or its designee with
the FAA for any reason, to be reregistered in the name of Lessor or such
designee with the FAA, (ii) unless otherwise provided pursuant to Section 5.6,
will return the Aircraft to Lessor by delivering the same at any location in the
continental United States selected by Lessor to which Lessee has regularly
scheduled flights, (iii) if at the time of such delivery the Mortgage shall not
have been fully discharged, will notify Lender of such location and of such
delivery, and (iv) shall comply with the provisions of Section 5.5. All costs
associated with the return flight shall be for the account of Lessee, and Lessor
shall have no obligation to pay Lessee for any fuel or oil remaining in the
Aircraft at the time of such delivery. At the time of such return, the Airframe
and Engines or engines installed thereon, as the context may require:
5.1.1 Airworthiness. Subject to the exception described in
-------------
clause (iii) of Section 8.1.1, shall be duly certificated as an airworthy
aircraft by the FAA under Part 121 of the Federal Aviation Regulations or any
successor provision, and shall have onboard a currently valid certificate of
airworthiness issued by the FAA;
5.1.2 Free of Liens. Shall be free and clear of all Liens (other
-------------
than Lessor Liens) and all rights of third parties under pooling, interchange,
overhaul, repair or other similar agreements or arrangements (other than such
rights which constitute Lessor Liens);
5.1.3 Operating Configuration and Condition. Shall be in a
-------------------------------------
configuration suitable for operation in regularly scheduled commercial airline
passenger service in the United States and shall be in as good operating
condition as on the Delivery Date, ordinary wear and tear and changes and
alterations properly made by Lessee as permitted under this Lease excepted, or,
in the case of any such engines, shall be as described in Section 5.2. All
Lessee or Permitted Sublessee exterior markings, as the case may be, shall have
been painted over in matching exterior colors;
5.1.4 Cleanliness and Operability. Shall be clean by United
---------------------------
States commercial airline operating standards with all installed equipment,
systems and components operable and functioning in accordance with their
intended use;
5.1.5 Parts and Equipment. Shall have installed thereon all
-------------------
Engines and Parts installed thereon at the commencement of the Term, or
replacements therefor made in accordance with the terms of this Lease;
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
5.1.6 TCAS and Windshear. Shall have installed thereon a
------------------
Terminal Collision Avoidance System and windshear detection system (as required
by FAA airworthiness directive, and as implemented by Lessee for the balance of
its 737-200 fleet), both at Lessee's expense; and
5.1.7 Corrosion Treatment. Shall have been maintained in
-------------------
compliance with the corrosion prevention procedures to the extent set forth in
the Maintenance Program.
5.2 Return of Other Engines. In the event that any engine not
-----------------------
owned by Lessor shall be installed on the Airframe returned in accordance with
Section 5.1, such engine shall be a Pratt & Whitney JT8D-9A engine (or an
improved model engine manufactured by Pratt & Whitney which is fully compatible
with the other Engine or engine installed on the Airframe). At the time of such
replacement, such engine shall have performance and durability characteristics
and a value, condition and utility at least equal to the Engine it replaced
hereunder, assuming such Engine was maintained in accordance with the
requirements of this Lease, and at the time the Airframe is returned shall fully
comply with all the requirements of this Lease, including this Section 5, which
are applicable to Engines. Upon return of the Aircraft, Lessee shall duly convey
to Lessor good and marketable title to any such replacement engine, free and
clear of all Liens other than Lessor Liens; and, upon such conveyance and as a
condition thereto, Lessee will (a) furnish Lessor with a full warranty (as to
title) bill of sale, in form and substance reasonably satisfactory to Lessor,
with respect to each such replacement engine, together with an opinion of
counsel to the effect that such bill of sale has been duly authorized and
delivered and is enforceable in accordance with its terms and that each such
replacement engine is free and clear of all Liens other than Lessor Liens, and
(b) take such other action as Lessor may reasonably request in order that title
to such replacement engine may be duly and properly vested in Lessor to the same
extent as the Engine replaced thereby. Upon compliance by Lessee with the
foregoing and full performance by Lessee of all of its payment obligations
hereunder, Lessor will, so long as no Lease Event of Default or Lease Default
has occurred and is continuing, subject such replacement engine to the Lien of
the Mortgage and Transfer to Lessee any Engine not installed on the Airframe at
the time of return, free and clear of all Lessor Liens and the Lien of the
Mortgage, but otherwise without recourse or warranty (other than any
manufacturer's or other third-party warranties applicable to such Engines).
5.3 Return at End of Base Lease Term or Renewal Lease Term. Upon
------------------------------------------------------
return of the Aircraft at the expiration or termination of this Lease, Lessee
shall have caused all of the following to be complied with: (i) all FAA
Airworthiness Directives, all mandatory service bulletins from Manufacturer, and
all mandatory service bulletins from the manufacturer of the Engines then
installed on the Airframe (in compliance with Section 5.2), in each case
applicable to the Aircraft and required by the terms thereof to have been
complied with on or prior to the return date, and (ii) all such FAA
Airworthiness Directives and bulletins which have been issued not less than six
months prior to the end of the Term
SALE AND LEASE AGREEMENT N62SW
12
<PAGE>
and which require compliance after the return date but prior to the six-month
anniversary of the return date. During the Term, Lessee shall have treated the
Aircraft in a manner similar to the manner in which Lessee treated all other
Boeing 737-200 aircraft in its fleet during the Term, including, without
limitation, with respect to maintenance, additions and modifications (other than
as contemplated by Section 5.4).
At the request of Lessor delivered to Lessee not more than 30 days prior to
the end of the Term, the Aircraft shall be check flown by Lessee (or any
Permitted Sublessee) on the return flight described in Section 5.1 or the flight
to Lessee's principal maintenance facilities pursuant to Section 5.6, as the
case may be. The form of test flight procedure to be followed shall be in
accordance with Lessee's normal test flight procedure. Up to five of Owner
Participant's designees or representatives may participate in such flight as
observers.
At redelivery of the Aircraft to Lessor hereunder, the following specific
requirements shall be met by Lessee:
5.3.1 (I) 25% of the time (or cycles, if applicable) between the
performance of each structural work task card (the "Cards") shall remain before
the next required performance of such Cards (or the equivalent used at the time
under Lessee's Maintenance Program) (it being understood that, as used herein,
the term "Cards" refers to the heaviest airframe check currently used under
Lessee's Maintenance Program), (II) Lessee shall have performed a complete "C"
check or its equivalent (all phases) on the Airframe no more than 200 flight
hours prior to its return to Lessor, during which "C" check or equivalent, as
the case may be, Lessor shall have had full access to inspect the Aircraft,
subject to the provisions of Section 12 (and Lessee shall have corrected to the
Lessor's reasonable satisfaction any deficiencies discovered during such check,
and will not have deferred any maintenance discrepancies), and (III) Lessee
shall have completed a "B" check immediately prior to redelivery;
5.3.2 The Engines shall not have been used for more than an
aggregate of 12,000 hours or 12,000 cycles since the last shop visit;
5.3.3 The hot section of each Engine or Replacement Engine shall
be inspected by boroscope and any defects which are outside the manufacturer's
recommended airworthiness limitations shall be corrected such that they are
brought within such limitations;
5.3.4 Each of the main and nose landing gears shall have 25% of
the time between shop visits remaining until the next scheduled shop visit or
replacement;
5.3.5 The auxiliary power unit (the "APU") shall have at least
25% of the Aircraft hours between major shop level inspections remaining until
the next such inspection;
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
5.3.6 All time-controlled components, other than Engines and
landing gear, shall have 3,000 hours (unless one-half of the allowable hours is
actually less than 3,000 hours, in which case one-half of such allowable hours)
or twelve months, as applicable, remaining to the next scheduled shop visit or
replacement; and
5.3.7 The ratio of cycles to block hours for the Aircraft shall
not exceed 1.33 to 1.0.
5.4 Financial Adjustments. At such time as the Aircraft is returned
---------------------
pursuant to this Section 5, the hours and cycles, as applicable, remaining with
respect to each item referred to in Section 5.3 shall be determined in
accordance with Section 5.4.6, and, subject to Section 5.3 and Section 5.4.6,
the appropriate financial adjustment shall be determined on the date the Term
(or the Extension Period, as defined in Section 26) ends as follows, and paid at
the time of such return:
5.4.1 Airframe. In the event that the Airframe is returned to
--------
Lessor with other than 50% of the allowable hours between Cards remaining, then
the adjustment amount in respect of the Airframe shall be determined by
multiplying (i) the difference between the actual number of hours remaining to
the next Cards and 50% of the allowable hours between Cards by (ii) the cost per
hour paid by Lessee to third parties, at the time such Aircraft is returned, for
the performance of such Cards. If the actual number of hours remaining exceeds
50% of the allowable hours, then Lessor shall pay such adjustment amount to
Lessee; otherwise, Lessee shall pay such adjustment amount to Lessor.
5.4.2 Engines. In the event that the Engines are returned to
-------
Lessor with less than an aggregate of 12,000 hours or cycles used since the last
shop visit, then the adjustment amount in respect of the Engines shall be
determined by multiplying (i) the difference between the actual aggregate number
of hours or cycles used, whichever is the more limiting, and 12,OOO hours or
cycles, by (ii) the then-current average cost per hour to Lessee of restoring
usable engine time, and Lessor shall pay such adjustment amount to Lessee. For
the purpose of determining the cost of restoring usable engine time it shall be
assumed that one hour is equal to one cycle.
5.4.3 Landing Gear. In the event that the landing gear are
------------
returned to Lessor with more than 25% of cycles remaining until the next
scheduled shop visit or replacement, then the adjustment amount in respect of
such landing gears shall be determined by multiplying (i) the difference between
the actual number of cycles remaining to the next scheduled shop visit and 25%
of the allowable cycles between shop visits by (ii) the cost per cycle paid by
Lessee to third parties, at the time the Aircraft is returned, for the overhaul
of a nose gear or main gear, as applicable, and Lessor shall pay such
SALE AND LEASE AGREEMENT N62SW
14
<PAGE>
adjustment amount to Lessee. For the purpose of determining the cost of
restoring usable landing gear time it shall be assumed that one hour is equal to
one cycle.
5.4.4 APU. In the event that the APU is returned to Lessor with
---
other than 50% of the Aircraft hours between major shop level inspections
remaining until the next such inspection, then the adjustment amount in respect
of the APU shall be determined by multiplying (i) the difference between the
actual number of Aircraft hours remaining to the next such inspection and 50% of
the allowable Aircraft hours by (ii) the cost per hour paid by Lessee to third
parties, at the time such Aircraft is returned, for the performance of restoring
usable time to such APU. If the actual number of Aircraft hours remaining
exceeds 50% of the allowable Aircraft hours, then Lessor shall pay such
adjustment amount to Lessee; otherwise, Lessee shall pay such adjustment amount
to Lessor.
5.4.5 Time-Controlled Components. In the event that any time-
--------------------------
controlled component (other than Engines and landing gear) is returned to Lessor
with more than 3,000 hours (unless one-half of the allowable hours is actually
less than 3,000 hours, in which case more than one-half of such allowable hours)
or 12 months, as applicable, remaining to the next scheduled shop visit or
replacement as provided in Section 5.3.6, then the adjustment amount in respect
of such time-controlled component shall be determined by multiplying (i) the
difference between the number of hours or months, as applicable, remaining and
3,000 hours, one-half of such allowable hours, or 12 months, as applicable, by
(ii) the then-current average vendor overhaul cost per hour to Lessee for such
component, and Lessor shall pay such adjustment amount to Lessee.
5.4.6 Cycles/Hours Ratio. In the event that the ratio of cycles
------------------
to block hours for the Aircraft exceeds 1.33 to 1.0, then Lessee shall pay to
Lessor an amount equal to $150 for each actual cycle on the Aircraft in excess
of the number obtained by multiplying (i) the number of block hours by (ii)
1.33.
5.4.7 Certificate as to Return Condition. Etc. At the end of the
---------------------------------------
Term, Lessee shall furnish Lessor with an Officer's Certificate setting forth
the hours and cycles remaining on the Engines, the landing gear and the
Airframe. Such certificate shall be used in determining the amount of any
payments due pursuant to this Section 5.4.
5.4.8 Certain Other Financial Adjustment Provisions.
---------------------------------------------
(a) Any payment to be made by any party hereto pursuant to this
Section 5.4 shall be net of all amounts to be paid to such party pursuant to
this Section 5.4.
(b) Lessee shall use its best efforts to avoid returning the
Engines with an aggregate number of hours or cycles used since the last shop
visit which is materially less
SALE AND LEASE AGREEMENT N62SW
15
<PAGE>
than 12,000, by replacing one or both of the Engines with such spare Replacement
Engines, if any, as are available immediately prior to such return.
(c) Lessee shall have the option to perform the work necessary to
conform the Aircraft to the condition required by this Section 5.4 in lieu of
paying any adjustment amount hereunder.
5.5 Manual, Service Bulletins, Etc. Upon return of the Aircraft at
------------------------------
the expiration or termination of this Lease, Lessee shall deliver or cause to
be delivered to Lessor originals or copies of all logs, manuals, drawings and
data and inspection, modification and overhaul records in respect of the
Aircraft, including without limitation originals of all such documents as are
required to be maintained under applicable rules and regulations of the FAA,
updated through the date of return. All "no-charge" service bulletin kits
received by or on behalf of Lessee from Manufacturer, engine manufacturer or
vendors for the Aircraft and Engines or engines and not incorporated therein
shall be returned at no charge to Lessor as cargo on board the Aircraft at the
time of its return. At the time the Aircraft is returned, Lessor shall have the
option to purchase from Lessee, at Lessee's cost therefor, any "charge" service
bulletin kits purchased by Lessee which have not been incorporated in the
Aircraft. All such items shall thereupon become the property of Lessor. In
addition, at the time of such return, Lessee will provide copies of all
documentation, including all Cards, necessary or appropriate to permit Lessor
(or any purchaser or lessee of the Aircraft) to maintain the Aircraft in
accordance with the Maintenance Program.
5.6 Parking upon Return. Upon written request of Lessor received by
-------------------
Lessee at least 10 days prior to its return of the Aircraft at the expiration or
termination of this Lease and in lieu of returning the Aircraft to a location as
provided in Section 5.1, Lessee will provide free parking facilities for the
Aircraft for a period not exceeding 30 days following return thereof by Lessee
at the location at which Lessee has its principal maintenance facilities;
provided, that such parking shall be at Lessor's risk and any expenses in
connection with such parking shall be paid by Lessor, including the cost of any
insurance therefor; provided, further, that Lessee shall provide such parking
facilities for an additional 60 days on a space-available basis.
5.7 Failure to Return Aircraft or Engines. If Lessee shall, for any
-------------------------------------
reason whatsoever, fail to return the Aircraft or any Engine at the time
specified herein, the obligations of Lessee as provided in this Lease (including
the obligation to pay Rent on the same basis as that applicable immediately
prior to such failure) shall continue in effect with respect to the Aircraft or
such Engine until either (i) the Aircraft or such Engine is returned to Lessor
or (ii) the greater of the Stipulated Loss Value and the fair market sales value
of the Aircraft or such Engine (determined in accordance with the provisions set
forth in Section 15.2) shall have been paid to Lessor (it being understood that
such Stipulated Loss Value or fair market sales value shall be determined as of
the date such return was to have
SALE AND LEASE AGREEMENT N62SW
16
<PAGE>
been made); but this Section 5.7 shall not be construed as permitting Lessee to
fail to meet its obligation to return the Aircraft or such Engine in accordance
with the requirements of this Lease or constitute a waiver of a Lease Event of
Default.
5.8 Aid in Disposition. Lessee agrees that, during the last twelve
------------------
months of the Term (and during any storage period) it will cooperate (and will
use its best efforts to cause any sublessee to cooperate) in all reasonable
respects with any efforts of Lessor to lease or sell the Aircraft, including
without limitation (subject to the provisions of Section 12) permitting
potential lessees or purchasers to inspect the Aircraft and the records relating
thereto; provided, that such cooperation shall be without out-of-pocket expense
or risk to Lessee (or any sublessee); provided, further, that Lessee (and any
sublessee) shall not be obligated to cooperate in any manner which may interfere
with the normal operation or maintenance of the Aircraft by, or the business of,
Lessee (or such sublessee).
Section 6. Liens. Lessee will not directly or indirectly create, incur,
-----
assume or suffer to exist any Lien on or with respect to the Aircraft, the
Airframe or any Engine, title thereto or any interest therein or in this Lease
except: (a) the respective rights of the parties to the Operative Agreements;
(b) the rights of others under agreements or arrangements to the extent
expressly permitted by the terms of Sections 7.2 and 8.3; (c) Lessor Liens; (d)
liens for taxes, assessments or other governmental charges either not yet due or
being contested in good faith (and for the payment of which adequate reserves
have been provided in accordance with generally accepted accounting principles)
by appropriate proceedings so long as such proceedings do not involve any
material danger of the sale, forfeiture, loss or loss of use of the Aircraft,
the Airframe or any Engine or any interest therein; (e) materialmen's,
mechanics', workers', repairers', employees' or other like Liens arising in the
ordinary course of business for amounts the payment of which is either not yet
due or not overdue for a period of more than 60 days or is being contested in
good faith (and for the payment of which adequate reserves have been provided in
accordance with generally accepted accounting principles) by appropriate
proceedings so long as such Liens do not involve any material danger of the
sale, forfeiture, loss or loss of use of the Aircraft, the Airframe or any
Engine or any interest therein; (f) Liens arising out of any judgment or award
against Lessee, unless the judgment secured shall not, within 45 days after
entry thereof, have been discharged or vacated or execution thereof stayed
pending appeal or shall not have been discharged, vacated or reversed within 45
days after the execution of such stay; and (g) any other Lien with respect to
which Lessee shall have provided a bond or other security adequate in the
reasonable judgment of Lessor. Lessee will promptly take (or cause to be taken)
such action at its own expense as may be necessary duly to discharge any such
Lien not excepted above if the same shall arise at any time.
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
Section 7. Registration, Operation, Possession, Subleasing and Records.
-----------------------------------------------------------
7.1 Registration and Operation.
--------------------------
7.1.1 Registration. Lessee shall forthwith upon the delivery
------------
of the Aircraft hereunder cause the Aircraft to be duly registered and at all
times thereafter to remain duly registered in the name of Lessor with the FAA
pursuant to and as permitted by the Act (it being understood that Lessee shall
not be required to comply with this covenant to the extent that First Security
Bank of Utah, National Association's or Owner Participant's failure to comply
with its covenant set forth in Section 6.3.1.5 or Section 6.2.5, respectively,
of the Participation Agreement with regard to its citizenship makes such
compliance by Lessee impossible).
7.1.2 Nameplate. As soon as practicable after the Delivery
---------
Date, and in any event within 30 days thereof, Lessee agrees to affix and
thereafter to maintain in the cockpit of the Airframe adjacent to the
airworthiness certificate and on each Engine a nameplate bearing the inscription
"OWNED BY AND LEASED FROM FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, AS
OWNER TRUSTEE, OWNER AND LESSOR" and, so long as the Mortgage shall be in
effect, "SUBJECT" TO A SECURITY INTEREST IN FAVOR OF NATIONWIDE LIFE INSURANCE
COMPANY, AS MORTGAGEE" (such nameplate to be replaced, if necessary, with a
nameplate reflecting the name of any successor Lessor). Except as above
provided, Lessee will not allow the name of any person, association or
corporation to be placed on the Airframe or on any Engine as a designation that
might be interpreted as a claim of ownership; provided that nothing herein
contained shall prohibit Lessee (or any Permitted Sublessee) from placing its
customary colors and insignia on the Airframe or any Engine or displaying
information concerning the registration or manufacture of the Aircraft, the
Airframe, any Engine or Part.
7.1.3 Compliance with Laws. Lessee agrees that it will not use
--------------------
or operate the Aircraft, the Airframe or any Engine in violation of any law or
any rule, regulation or order of any government or governmental authority having
jurisdiction (domestic or foreign) or in violation of any airworthiness
certificate, license or registration relating to the Aircraft, the Airframe or
any Engine issued by any such authority, except to the extent Lessee is
contesting in good faith the validity or application of any such law, rule,
regulation or order in any reasonable manner which does not materially adversely
affect Lessor's title to, or Lender's interest in, the Aircraft.
7.1.4 Insurance Requirements; Government Requisition;
----------------------
Indemnity. Lessee agrees not to operate, use or locate the Aircraft, the
Airframe or any Engine, or permit any Permitted Sublessee to operate, use or
locate the Aircraft, the Airframe or any Engine, (i) in any area excluded from
coverage by any insurance required by the terms of Section 11, except in the
case of a requisition by the Government where Lessee obtains
SALE AND LEASE AGREEMENT N62SW
18
<PAGE>
indemnity (backed by the full faith and credit of the United States of America)
in lieu of such insurance from the Government against the risks and in the
amounts required by Section 11 covering such area, or (ii) in any area where
maintenance of war-risk insurance is required by Section 11 unless fully covered
by war-risk insurance satisfying the terms of Section 11, or unless the
Aircraft, the Airframe or such Engine is operated or used under contract with
the Government under which contract the Government assumes liability (backed by
the full faith and credit of the United States of America) in an amount not less
than the amount of insurance otherwise required by Section 11 for any damage,
loss, destruction or failure to return possession of the Aircraft, the Airframe
or such Engine at the end of the term of such contract or for injury to persons
or damage to property of others, or (iii) with respect to any sublease to a
Permitted Foreign Air Carrier, in any area referred to in subclause 3(iv) of
Section 7.2.
7.2 Possession. Lessee will not, without the prior written consent of
----------
Lessor, sublease or otherwise in any manner deliver, transfer or relinquish
possession of the Aircraft, the Airframe or any Engine or install any Engine, or
permit any Engine to be installed, on any airframe other than the Airframe;
provided, however, that, so long as no Lease Event of Default shall have
occurred and be continuing, and so long as Lessee shall comply with the
provisions of Section 11, and all FAA approvals required for such purposes have
been obtained, Lessee may, without such prior written consent:
7.2.1 Interchange and Pooling. Subject or permit any Permitted
-----------------------
Sublessee to subject (i) the Aircraft, Airframe or any Engine to normal
interchange agreements customary in the airline industry and entered into by
Lessee or such Permitted Sublessee in the ordinary course of its business, and
(ii) any Engine to pooling agreements or arrangements customary in the United
States domestic commercial airline industry and entered into by Lessee or such
Permitted Sublessee in the ordinary course of its business; but in either case
(A) no transfer of the registration of the Airframe or any Engine shall be
effected in connection therewith and the terms of this Lease and the
Participation Agreement shall be observed, and (B) no such agreement or
arrangement shall contemplate or require the transfer of title to the Aircraft,
Airframe or any Engine and if Lessor's title to the Aircraft, Airframe or any
Engine shall be divested under any such agreement or arrangement, such
divestiture shall be deemed to be an Event of Loss with respect thereto and
Lessee shall comply with Section 10.2 hereof;
7.2.2 Testing and Service. Deliver or permit any Permitted
-------------------
Sublessee to deliver possession of the Aircraft, Airframe or any Engine or Part,
to the manufacturer thereof for testing or other similar purposes, or to any
organization for service, repair, maintenance or overhaul work on the Aircraft,
Airframe or any Engine or Part, or for alterations or modifications in or
additions to the Aircraft, Airframe or any Engine to the extent required or
permitted by the terms of Section 8.4;
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
7.2.3 Civil Reserve Air Fleet Program. Transfer or permit any
-------------------------------
Permitted Sublessee, if required by law to do so, to transfer possession of the
Aircraft, Airframe or any Engine to the Government pursuant to the Civil Reserve
Air Fleet Program administered pursuant to Executive Order No.10999, as amended,
or any similar or substitute programs, so long as such transfer of possession
does not continue beyond the end of the Term and so long as Lessee shall (A)
promptly notify Lessor upon subjecting the Airframe or any Engine to such
program and provide Lessor with the name and address of the appropriate party to
whom notice must be given pursuant to Section 16 hereof, and (B) promptly notify
Lessor upon transferring possession of the Airframe or any Engine to the
Government pursuant to such program;
7.2.4 Installation of Engines. Install or permit any Permitted
-----------------------
Sublessee to install an Engine on an airframe owned by Lessee or such Permitted
Sublessee, as the case may be, free and clear of all Liens, except (A) Permitted
Liens and those which apply only to the engines (other than Engines),
appliances, parts, instruments, appurtenances, accessories, furnishings and
other equipment (other than Parts) installed on such airframe (but not to the
airframe as an entirety), (B) the rights of air carriers under normal inter-
change agreements which are customary in the airline industry and do not
contemplate, permit or require the transfer of title to the airframe or engines
installed thereon and (C) mortgage liens or other security interests, provided
that (as regards this clause (C)) such mortgage liens or other security
interests effectively provide that such Engine shall not become subject to the
lien of such mortgage or security interest, notwithstanding the installation
thereof on such airframe, unless and until Lessee shall become the owner of
such Engine;
7.2.5 Installation of Engines on Other Airframes. Install or
------------------------------------------
permit any Permitted Sublessee to install an Engine on an airframe leased to, or
purchased by, Lessee or any Permitted Sublessee subject to a lease, conditional
sale, or other security agreement, but only if (A) such airframe is free and
clear of all Liens, except the rights of the parties to the lease, conditional
sale, or other security agreement covering such airframe, or their successors or
assigns, and except Liens of the type permitted by clauses (A) and (B) of
Section 7.2.4, and (B) the lease, conditional sale, or other security agreement
covering such airframe effectively provides that such Engine should not become
subject to the Lien thereof at any time while title to such Engine is held by
any of Owner Trustee, Owner Participant or Lender, notwithstanding the
installation thereof on such airframe;
7.2.6 Pooling of Parts. To the extent permitted by Section 8.3,
----------------
subject any Parts owned by Lessor and removed from the Airframe or any Engine to
any pooling arrangement referred to in Section 8.3;
SALE AND LEASE AGREEMENT N62SW
20
<PAGE>
7.2.7 Wet Lease. Enter into a Wet Lease for the Airframe and
---------
Engines or engines then installed thereon with any third party for a term not to
continue beyond the Term;
7.2.8 Sublease to Permitted Air Carriers. Enter into a sublease
--------
of the Aircraft or the Airframe and Engines or engines then installed on the
Airframe or any Engine, for use on the sublessee's regularly scheduled or
charter routes, with (a) any U.S. Air Carrier or (b) any Permitted Foreign Air
Carrier, in any such case for a term not to continue beyond the remaining Term.
Provided, further, with respect to this Section 7.2, that:
- ---------------------------------------------------------
(1) the rights of any transferee who receives possession by
reason of a transfer permitted by this Section 7.2 (other than the transfer of
an Engine which is deemed an Event of Loss) shall be effectively subject and
subordinate to, and any sublease permitted by this Section 7.2 shall be made
expressly subject and subordinate to, all the terms of this Lease, and to
Lessor's rights, powers and remedies under this Lease, including the rights to
repossession pursuant to Section 15 and to terminate and avoid such sublease
upon such repossession and to require such sublessee to forthwith deliver the
Aircraft, Airframe and Engines subject to such sublease upon such repossession;
(2) Lessee shall remain primarily liable hereunder for the
performance of all the terms of this Lease to the same extent as if such
sublease or transfer had not occurred, provided that performance of any such
terms by any Permitted Sublessee shall be as effective, for purposes of this
Lease, as performance thereof directly by Lessee;
(3) any such sublease shall (i) be consistent with the
requirements of this Lease and the applicable requirements of the Participation
Agreement, (ii) include appropriate provisions for the continued registration,
maintenance in accordance with applicable maintenance standards in the
appropriate jurisdiction, operation, insurance (appropriate certificates as to
which shall be furnished to Lessor and Lender prior to Lessee's entry into any
such sublease with any Permitted Foreign Air Carrier or within 10 days
thereafter) and return of the subleased property as required hereunder, (iii)
provide that the sublessee may not assign or further sublease the Aircraft, and
(iv) provide that the Aircraft may not be operated into a country with which the
United States does not maintain diplomatic relations or in which there is open
warfare, whether or not declared;
(4) no interchange agreement, transfer, sublease or other
relinquishment of possession permitted hereunder shall affect the registration
of the Aircraft or shall permit any action not permitted to Lessee in this
Lease; and
SALE AND LEASE AGREEMENT N62SW
21
<PAGE>
(5) no such interchange agreement, sublease, transfer or other
relinquishment of possession of the Aircraft, Airframe or any Engine shall in
any way discharge or diminish any of Lessee's obligations to Lessor hereunder or
under any other Operative Agreement or constitute a waiver of Lessor's rights or
remedies hereunder or under any other Operative Agreement.
Lessee shall notify Lessor and Lender within 10 days after the commencement
of any sublease permitted hereunder and shall deliver to Lessor within such
period a duly executed copy of any sublease or interchange or pooling agreement
permitted hereunder together with any certification required by Section 7.2.
Upon request of Lessor, Lessee shall promptly duly execute and deliver to Lessor
and, for so long as the Mortgage shall not have been fully discharged, deliver a
copy to Lender of, an assignment of any such sublease having a term in excess
of 12 months in favor of Lessor in form and substance reasonably satisfactory to
Lessor and, for so long as the Mortgage shall not have been fully discharged,
Lender. Lessor hereby agrees, for the benefit of Lessee (and any Permitted
Sublessee) and for the benefit of each lessor, conditional seller, or secured
party of any airframe or engine leased to or purchased by Lessee (or any
Permitted Sublessee) subject to a lease, conditional sale, or other security
agreement, that Lessor will not acquire or claim, as against such lessor,
conditional seller, or secured party, or any successor or assign thereof, any
right, title or interest in any engine as the result of such engine being
installed on the Airframe at any time while such engine is subject to such
lease, conditional sale, or other security agreement and owned by such lessor or
conditional seller or subject to a security interest in favor of such secured
party; provided, however, that such agreement of Lessor shall not be for the
-----------------
benefit of any lessor or secured party of any airframe (other than the Airframe)
leased to Lessee (or any Permitted Sublessee) or purchased by Lessee (or any
Permitted Sublessee) subject to a conditional sale or other security agreement
or for the benefit of any mortgagee of or any other holder of a security
interest in an airframe owned by Lessee (or any Permitted Sublessee), unless
such lessor, conditional vendor, other secured party or mortgagee has expressly
agreed (which agreement may be contained in such lease, conditional sale or
other security agreement or mortgage) that neither it nor its successors or
assigns will acquire, as against Lessor, any right, title or interest in an
Engine as a result of such Engine being installed on such airframe.
A consolidation, merger, conveyance, transfer, or lease permitted by
Section 7.4 of the Participation Agreement shall not be deemed to be a
transaction to which this Section 7.2 shall apply.
7.3 Records and Reports. Lessee shall:
-------------------
7.3.1 Records. Maintain or cause to be maintained all records,
-------
logs and other materials required by the FAA or any other governmental authority
having jurisdiction to be maintained in respect of the Aircraft, the Airframe
and each Engine;
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
7.3.2 Information and Reports. Upon request, promptly furnish or
-----------------------
cause to be furnished to Lessor (in sufficient number) such information as may
be required to enable Lessor or Owner Participant to file any reports, including
tax returns, required to be filed by Lessor or Owner Participant with any
governmental authority because of Lessor's ownership of the Aircraft, Airframe
or any Engine or because of receipt of Rent or because of the interest of Owner
Participant in the Estate; provided, however, that with respect to any such
information which Lessee deems commercially sensitive or confidential, if
reasonably feasible, Lessor shall afford Lessee a reasonable opportunity to seek
from any such governmental authority a waiver of Lessor's or Owner Participant's
obligation to file any such information or consent to the filing of such
information directly by Lessee in lieu of filing by Lessor or Owner Participant
and if any such waiver or consent is evidenced to the reasonable satisfaction
of Lessor, then Lessee shall not be required to furnish such information to
Lessor;
7.3.3 Financial Information. Promptly provide Lessor and Owner
---------------------
Participant with (i) such financial information concerning Lessee as is provided
from time to time to the public shareholders of Lessee, (ii) within 60 days
after the end of each of the first three quarterly periods of each fiscal year
of Lessee, a consolidated balance sheet of Lessee and its consolidated
subsidiaries prepared by it as of the close of such period, together with the
related consolidated statements of income for such period, (iii) within 120 days
after the close of each fiscal year of Lessee, a consolidated balance sheet of
Lessee and its consolidated subsidiaries as of the close of such fiscal year,
together with the related consolidated statements of income and cash flows for
such fiscal year, as certified by independent public accountants, and (iv) from
time to time such other information as to its financial condition as Lessor or
Owner Participant may reasonably request; and
7.3.4 Notification of Default. Promptly provide Lessor and Owner
-----------------------
Participant, as soon as possible and in any event within ten days after any of
the Chairman, the President, the Treasurer, any Assistant Treasurer, the
Controller, the Secretary or any Assistant Secretary of Lessee shall have actual
knowledge of the occurrence of a Lease Default or a Lease Event of Default,
written notice setting forth in reasonable detail the nature of such Lease
Default or Lease Event of Default.
Section 8. Maintenance; Replacement and Pooling of Parts; Alterations,
-----------------------------------------------------------
Modifications and Additions.
- ---------------------------
8.1 Maintenance.
-----------
8.1.1 Maintenance Program. Lessee shall maintain, service,
-------------------
repair, overhaul, alter, modify, add to and test (or cause to be maintained,
serviced, repaired, overhauled, altered, modified, added to and tested) the
Aircraft, the Airframe and each
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
Engine, and each other engine installed from time to time on the Airframe, in
accordance with Lessee's FAA-approved maintenance program for the Aircraft,
Airframe and Engines, as such program may be changed, adjusted, revised or
modified from time to time as permitted by the FAA (the "Maintenance Program"),
(i) so as to keep the Aircraft, the Airframe and each Engine in as good
operating condition as on the Delivery Date, ordinary wear and tear excepted,
(ii) in the same manner and with the same care as used by Lessee with similar
aircraft owned or operated by Lessee, and (iii) so as to keep the Aircraft, the
Airframe and each Engine in such condition as required to enable the FAA
certificate of airworthiness for the Aircraft to be maintained in good standing
at all times under the Act, except when all comparable Boeing Model 737-200
series aircraft registered in the United States of America have been grounded by
the FAA other than as a result of actions taken or omitted to be taken by Lessee
(or, if a sublease is then in effect, any Permitted Sublessee).
8.1.2 Compliance with Government Requirements. Lessee will
---------------------------------------
comply with all service, inspection, maintenance, repair and overhaul
regulations, directives and instructions which are made mandatory by the FAA or
other Government authority upon United States operators of Boeing Model 737-200
series aircraft and Pratt & Whitney JT8D-9A engines and which require compliance
during the Term and prior to return of the Aircraft under this Lease.
8.2 Replacement of Parts. Lessee, at its own cost and expense, will
--------------------
promptly replace (or cause to be replaced) all Parts which may from time to time
be incorporated in the Aircraft, Airframe or any Engine and which 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 Section 8.4. 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, however, Lessee, except as otherwise provided in Section 8.4, at
its own cost and expense, will replace such Parts as promptly as possible. All
replacement Parts shall be free and clear of all Liens (except for Permitted
Liens and except in the case of replacement property temporarily installed on an
emergency basis) and shall be in as good operating condition as, and shall have
a 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 Aircraft, Airframe or any Engine
shall remain the property of Lessor, no matter where located, until such time as
such Parts shall be replaced by Parts which have been incorporated in the
Aircraft, Airframe or such Engine and which meet the requirements for
replacement Parts specified above. Immediately upon any replacement Part
becoming incorporated in the Aircraft, Airframe or such Engine 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 the replaced Part
shall no longer
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
be deemed a Part hereunder, (ii) title to such replacement Part shall thereupon
vest in Lessor (subject only to Permitted Liens and except in the case of
replacement property temporarily installed on an emergency basis), and (iii)
such replacement Part shall become subject to this Lease and be deemed part of
the Aircraft, Airframe or such Engine for all purposes hereof to the same extent
as the Parts originally incorporated in such Aircraft, Airframe or Engine.
8.3 Pooling of Parts. Any Part removed from the Aircraft, Airframe or
----------------
any Engine as provided in Section 8.2 may be subjected by Lessee (or a Permitted
Sublessee) to a normal pooling arrangement customary in the airline industry
entered into in the ordinary course of business of Lessee or such Permitted
Sublessee, so long as a Part replacing such removed Part shall be incorporated
in the Aircraft, Airframe or such Engine in accordance with Section 8.2 as
promptly as practicable after the removal of such removed Part. In addition, any
replacement Part when incorporated in the Aircraft, Airframe or any Engine in
accordance with Section 8.2 may be owned by any third party subject to such a
normal pooling arrangement, so long as Lessee (or any Permitted Sublessee), at
its own cost and expense, as promptly thereafter as practicable either (i)
causes title to such replacement Part to vest in Lessor in accordance with
Section 8.2 by Lessee (or any Permitted Sublessee) acquiring title thereto for
the benefit of, and transferring such title to, Lessor free and clear of all
Liens (except Permitted Liens), or (ii) replaces such replacement Part by
incorporating in the Aircraft, Airframe or such Engine a further replacement
Part owned by Lessee (or any Permitted Sublessee) free and clear of all Liens
(except Permitted Liens) and by causing title to such further replacement Part
to vest in Lessor in accordance with Section 8.2.
8.4 Alterations, Modifications and Additions. Lessee, at its own cost
----------------------------------------
and expense, shall make (or cause to be made) such alterations and modifications
in and additions to the Aircraft, Airframe and each Engine as may be required
from time to time to meet the standards of the FAA or other governmental
authority having jurisdiction and to maintain the FAA certificate of
airworthiness for the Aircraft; provided, however, that Lessee may contest in
good faith the validity or application of any such law, rule, regulation or
order in any reasonable manner which does not materially adversely affect
Lessor's title to, or Lender's interest in, the Aircraft; and provided, further,
that Lessee's failure to make (or cause to be made) any such alterations or
modifications shall not constitute noncompliance with the requirements of this
Section 8.4 or a breach of Lessee's undertaking hereunder for so long a period
as may be necessary to remedy such failure, if such failure can be remedied, so
long as during such period Lessee is using due diligence and reasonable efforts
to remedy such failure. In addition, Lessee, at its own cost and expense, may,
from time to time make (or cause to be made) such alterations and modifications
in and additions to the Aircraft, Airframe or any Engine as Lessee may deem
desirable in the proper conduct of its business, including, without limitation,
removal of Parts which Lessee deems obsolete or no longer suitable or
appropriate for use in the Aircraft, Airframe or such Engine; provided, however,
that no such alteration, modification or addition shall, in Lessee's
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
reasonable judgment, materially diminish the value or utility of the Aircraft,
Airframe or such Engine, or materially impair the condition or airworthiness
thereof, below the value, utility, condition and airworthiness thereof
immediately prior to such alteration, modification or addition assuming the
Aircraft, Airframe or such Engine was then of the value and utility and in the
condition and airworthiness required to be maintained by the terms of this
Lease. Title to all Parts incorporated in the Aircraft, Airframe or such Engine
as the result of such alteration, modification or addition shall, without
further act, vest in Lessor. Notwithstanding the foregoing sentence of this
Section 8.4, so long as no Lease Event of Default or Lease Default shall have
occurred and be continuing, Lessee may, at any time during the Term, remove any
Part if (i) such Part is in addition to, and not in replacement of or
substitution for, any Part originally incorporated in the Aircraft, Airframe or
such Engine at the time of delivery thereof hereunder or any Part in replacement
of or substitution for any such Part, (ii) such Part is not required to be
incorporated in the Aircraft, Airframe or such Engine pursuant to the terms of
this Section 8, and (iii) such Part can be removed from the Aircraft, Airframe
or such Engine without diminishing or impairing the value, utility, condition or
airworthiness required to be maintained by the terms of this Lease which the
Aircraft, Airframe or such Engine would have had at such time had such
alteration, modification or addition not occurred. Upon the removal by Lessee of
any Part as above provided, title thereto shall, without further act, vest in
Lessee and such Part shall no longer be deemed part of the Aircraft, Airframe dr
such Engine from which it was removed. Any Part not removed by Lessee as above
provided prior to the return of the Aircraft, Airframe or such Engine to Lessor
hereunder shall remain the property of Lessor.
Section 9. Default Purchase Option. If a Stage III Upgrade (as defined in
-----------------------
the Participation Agreement) shall have occurred and Lessee shall not have been
fully reimbursed as provided in Section 13 of the Participation Agreement,
Lessee shall have the option to purchase the Aircraft. In order to exercise such
option, Lessee shall notify Lessor (and, if the Mortgage is then in effect,
Lender) thereof in writing, specifying a Rent Payment Date on which such
purchase is to occur. In such case, Lessee shall purchase the Aircraft from
Lessor on such Rent Payment Date at a purchase price equal to (i) the lesser of
(A) Lessor's Cost and (B) the fair market sales value of the Aircraft at the
time of such purchase (determined in accordance with the same appraisal
procedures as are set forth in Section 18 and applicable in the event of a
failure of Owner Participant and Lessee to agree on a fair market rental value),
minus (ii) the amount owed to Lessee at the time of such purchase pursuant to
the provisions of Section 13.2 of the Participation Agreement; provided, that in
no event shall such purchase price be less than the sum of (I) all principal,
interest and premium, if any, due with respect to the prepayment on such date of
the Note, and (II) all other amounts then due and owing to Lender under any
Operative Agreement. Upon receipt of such purchase price from Lessee and all
Rent and other amounts then due hereunder and under any other Operative
Agreement, Lessor shall Transfer the Aircraft to Lessee.
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
Section 10. Loss, Destruction, Requisition. Etc.
-----------------------------------
10.1 Event of Loss with Respect to Aircraft. Upon the occurrence of
--------------------------------------
an Event of Loss with respect to the Aircraft, Lessee shall forthwith (and in
any event within 15 days after such occurrence) give Lessor and Owner
Participant written notice of such Event of Loss. On or before the Business Day
next preceding the earlier of (i) the 180th day following the date of the
occurrence of such Event of Loss, or (ii) 15 days following the receipt of
insurance proceeds with respect to such occurrence, Lessee shall pay to Lessor,
in the manner and in funds of the type specified in Section 3.5, (A) the
Stipulated Loss Value for the Aircraft, determined as of the date of payment (as
described in the definition of Stipulated Loss Value), (B) all unpaid Basic Rent
due prior to the SLV Determination Date with reference to which the Stipulated
Loss Value is computed and (C) (without duplication) any other Rent which is due
and payable through and including the date of payment. Upon payment in full of
the Stipulated Loss Value for the Aircraft pursuant hereto, (A) the obligation
of Lessee to pay Basic Rent due on or after the SLV Determination Date with
reference to which such Stipulated Loss Value is computed shall terminate (but
Lessee shall remain liable for all payments of Supplemental Rent due through and
including the date of such payment of Stipulated Loss Value), and (B) the Term
for the Aircraft shall end. Upon compliance by Lessee with all of the terms of
this Section 10.1, (i) Lessor will Transfer to Lessee the Airframe and Engines,
and (ii) Lessee will be subrogated to all claims of Lessor, if any, against
third parties for damage to or loss of such Airframe and Engines to the extent
of the then insured value thereof.
10.2 Event of Loss with Respect to an Engine.
---------------------------------------
10.2.1 Event of Loss. Upon the occurrence of an Event of Loss
-------------
with respect to an Engine under circumstances in which there has not occurred an
Event of Loss with respect to the Airframe, Lessee shall give Lessor and Owner
Participant prompt written notice (and in any event within 15 days after such
occurrence) thereof and shall, as promptly as possible and in any event within
60 days after the occurrence of such Event of Loss, convey or cause to be
conveyed to Lessor, as replacement for the Engine with respect to which such
Event of Loss occurred, title to a Replacement Engine free and clear of all
Liens, other than Permitted Liens, and having a value and utility at least equal
to, and being in as good operating condition as, the Engine with respect to
which such Event of Loss occurred, assuming such Engine was of the value and
utility and in the condition and repair required by the terms hereof immediately
prior to the occurrence of such Event of Loss.
10.2.2 Conditions: Lessee's Obligations. Prior to or at the time
--------------------------------
of any such conveyance, Lessee, at its own expense, will promptly:
(a) furnish Lessor with a full warranty (as to title) bill of
sale duly conveying to Lessor such Replacement Engine;
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
(b) cause a Lease Supplement subjecting such Replacement Engine
to this Lease, duly executed by Lessee, to be delivered to Lessor for execution
and to be filed for recordation with the FAA pursuant to the Act;
(c) furnish Lessor with such evidence of compliance with the
insurance provisions of Section 11 hereof with respect to such Replacement
Engine and the payment of all premiums then due with respect to such insurance,
as Lessor may reasonably request;
(d) furnish Lessor with an opinion or opinions of Lessee's
counsel, in form, substance and scope reasonably satisfactory to Lessor, to the
effect that, upon such conveyance, Lessor will acquire good and marketable title
to such Replacement Engine free and clear of all Liens other than Permitted
Liens, and that such Replacement Engine will be leased hereunder and to the same
extent as the Engine replaced thereby and to such further effect as Lessor may
reasonably request;
(e) furnish Lessor with an Officer's Certificate certifying that,
upon consummation of such replacement, no Lease Event of Default or Lease
Default will exist hereunder; and
(f) furnish such other certificates or documents (including
appropriate UCC-3 amendments to financing statements filed by Lessee) as Lessor
or Owner Participant may reasonably request to effect such replacement.
10.2.3 Recordation and Opinions. In the case of any Replacement
------------------------
Engine conveyed to Lessor under this Section 10.2, promptly upon the recordation
of the Lease Supplement and the Mortgage Supplement covering such Replacement
Engine pursuant to the Act, Lessee will cause to be delivered to Lessor an
opinion of Crowe & Dunlevy, P.C., or other FAA counsel satisfactory to Lessor as
to the due recordation of such Lease Supplement and Mortgage Supplement.
10.2.4 Conveyance: Replacement Engine. Upon compliance by Lessee
------------------------------
with the terms of this Section 10.2, Lessor will Transfer to Lessee the Engine
with respect to which such Event of Loss occurred, and Lessee will be subrogated
to all claims of Lessor, if any, against third parties for damage to or loss of
such Engine to the extent of the insured value thereof.
10.2.5 No Reduction of Rent. No Event of Loss with respect to an
--------------------
Engine under the circumstances contemplated by the terms of this Section 10.2
shall result in any reduction of Basic Rent or Renewal Rent.
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
10.3 Application of Certain Payments. Any payments (other than
-------------------------------
insurance proceeds, the application of which is provided for in Section 11)
received at any time by Lessor, Lessee or any Permitted Sublessee from any
governmental authority or other Person with respect to any Event of Loss will be
applied as follows:
10.3.1 Replacement of Engine. If such payments are received with
---------------------
respect to an Engine in respect of which an Event of Loss has occurred pursuant
to Section 10.2, so much of such payments remaining after reimbursement of
Lessor, Lender and Owner Participant for costs and expenses shall be paid over
to, or retained by, Lessee, provided Lessee shall have fully performed or,
concurrently therewith, will fully perform the terms of Section 10.2 with
respect to the Event of Loss for which such payments are made.
10.3.2 Nonreplacement. If such payments are received with
--------------
respect to the Airframe and/or an Engine in respect of which an Event of Loss
has occurred pursuant to Section 10.1, so much of such payments remaining after
reimbursement of Lessor, Lender and Owner Participant for costs and expenses as
shall not exceed the Stipulated Loss Value and other amounts required to be paid
by Lessee hereunder shall be applied in reduction of Lessee's obligation to pay
such Stipulated Loss Value and other amounts required to be paid by Lessee
hereunder, if not already paid by Lessee, or, if already paid by Lessee, shall
be applied to reimburse Lessee for its payment of such Stipulated Loss Value and
other amounts.
10.4 Requisition of Aircraft for Use by Governmental Authorities. In
-----------------------------------------------------------
the event of the requisition for use of the Airframe and the Engines or engines
installed on such Airframe during the Term by any governmental authority, Lessee
shall notify Lessor of such requisition, and all of 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 such governmental authority for the use of such Airframe and Engines or
engines prior to the time such requisition becomes an Event of Loss shall be
paid over to, or retained by, Lessee (or, if directed by Lessee, any Permitted
Sublessee); and all payments received by Lessor or Lessee from such governmental
authority for the use of such Airframe and Engines or engines after such time
shall be paid over to, or retained by, Lessor unless Lessee shall have fully
performed or, concurrently therewith, will fully perform the terms of Section
10.1 with respect to such Event of Loss.
10.5 Requisition of an Engine for Use by Governmental Authorities. In
------------------------------------------------------------
the event of the requisition for use by any governmental authority (other than
in circumstances contemplated by Section 10.4) of any Engine but not the
Airframe, Lessee will replace such Engine hereunder by complying with the terms
of Section 10.2 to the same extent as if an Event of Loss had occurred with
respect to such Engine, and any payments received by Lessor or Lessee from such
governmental authority with respect to such requisition shall be paid over to,
or retained by, Lessee (subject to performance by Lessee of the terms of
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
Section 10.2 to the same extent as if an Event of Loss had occurred with respect
to such requisitioned Engine).
10.6 Application of Payments During Existence of Default. Any amount
---------------------------------------------------
referred to in this Section 10 which is payable or creditable to or retainable
by Lessee shall not be paid or credited to or retained by Lessee if, at the time
of such payment, credit or retention, (A) a Lease Event of Default or (B) a
Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing
hereunder, but shall be paid to and held by Lessor as security for the
obligations of Lessee under this Lease and applied against Lessee's obligations
hereunder as and when due; at such time as there shall not be continuing any
such Lease Event of Default or Lease Default, or at such earlier time as Lessee
shall have paid in full all Rent and other amounts due and payable hereunder and
under the other Operative Agreements by Lessee, any remaining balance of such
amount shall be paid to Lessee to the extent not previously applied in
accordance with the preceding clause of this sentence.
Section 11. Insurance.
---------
11.1 Public Liability and Property Damage Insurance. Lessee shall at
---------------------------------------------
all times maintain, or cause to be maintained, at its or any Permitted
Sublessee's expense, public liability (including without limitation contractual
liability, passenger legal liability and property damage but excluding
manufacturer's product liability coverage) insurance which shall:
11.1.1 Type, Form and Amount. Be of a type and form carried by
---------------------
similarly situated United States commercial air carriers generally, and carried
in amounts not less than that carried by Lessee on similar equipment owned or
leased by Lessee and not less than the minimum amount of $350,000,000 (per
occurrence) combined single limit (or such greater amount as Lessee may carry
from time to time on other 737-200 series aircraft in its fleet);
11.1.2 Coverage. Include, but not be limited to, public liability
--------
insurance, contractual liability insurance, passenger liability insurance and
property damage liability insurance (including cargo and baggage liability
insurance); and
11.1.3 Additional Insureds. Name as additional insureds Lessor
-------------------
(in its individual and trust capacities), Lender and Owner Participant, as their
interests may appear.
11.2 Insurance Against Loss of or Damage to Aircraft and Engines.
-----------------------------------------------------------
Lessee shall at all times maintain, or cause to be maintained, at its or any
Permitted Sublessee's expense, insurance against loss of or damage to the
Aircraft, Airframe and Engines as follows:
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
11.2.1 Type, Form and Amount. "All-risk" insurance on the
---------------------
Aircraft and "all-risk" coverage on each Engine and on Parts while removed from
the Aircraft or Engines, which is of the type, form and in an amount in
compliance with the last sentence of this Section 11.2.1, not less than that
carried by Lessee on similar equipment owned or leased by Lessee and not less
than that usually carried by similarly situated United States commercial air
carriers generally; and, to the extent so usually carried, at all times that the
Aircraft or any Engine is not covered by the insurance described in Section
11.2.2, coverage against the perils of (i) strikes, riots, civil commotions or
labor disturbances, (ii) any malicious act or act of sabotage and (iii)
hijacking, or any unlawful seizure or wrongful exercise of control of the
Aircraft or crew in flight (including any attempt at such seizure or control)
made by any person or persons on board the Aircraft acting without the consent
of the insured other than hijacking committed by persons engaged in a program of
irregular warfare for terrorist purposes. Such insurance shall, at any date, be
for an amount not less than the Stipulated Loss Value as of such date.
11.2.2 War-Risk Insurance. If at any time (a) war-risk insurance
------------------
is maintained by Lessee or any Permitted Sublessee subleasing the Aircraft or
any Engine with respect to other aircraft operated by Lessee or such Permitted
Sublessee on the same or similar routes, or (b) the Aircraft is operated on
routes where the custom in the United States commercial airline industry is to
carry war-risk insurance, or (c) the Aircraft is operated by a Permitted Foreign
Air Carrier as a Permitted Sublessee in any recognized or threatened area of
hostilities, then war-risk insurance of the type carried by similarly situated
United States commercial air carriers operating the same or comparable models of
aircraft on the same or similar routes shall be maintained on the Aircraft in an
amount not less than that specified in Section 11.2.1.
11.2.3 Certain Requirements. The insurance policies required by
--------------------
this Section 11.2 shall:
11.2.3.1 Additional Insureds. Be endorsed to name Lessor
-------------------
(in its individual and trust capacities), Lender and Owner Participant as
additional insureds, as their interests may appear.
11.2.3.2 Payment of Proceeds. Provide that proceeds
-------------------
thereunder shall be paid directly to Lessor as exclusive loss payee; provided,
however, that any proceeds payable as a result of any property damage to the
Airframe or any Engine, which property damage does not exceed $1,500,000 and
does not constitute an Event of Loss with respect to the Aircraft or such
Engine, shall be paid to Lessee unless, prior to such payment, Lessor shall have
notified the insurer making such payment that a Lease Event of Default hereunder
has occurred and is continuing.
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
11.2.3.3 Waiver of Subrogation. Provide that the insurers
---------------------
shall waive any rights of subrogation against Lessor, Lender and Owner
Participant except for claims arising out of gross negligence or willful
misconduct of such Person; provided that the exercise by insurers of rights of
subrogation, if any, permitted by this Section 11.2 shall not, in any way, delay
payment of any claim that would otherwise be payable by such insurers but for
the existence of such rights of subrogation or entitle such insurers to exercise
or to assert any setoff, recoupment, counterclaim or any other deduction in
respect of any amounts payable under such policies.
11.2.4 Deductibles. The insurance required by this Section 11.2
-----------
may, subject to Section 11.8, provide for standard deductibles which are from
time to time in effect in the aviation insurance industry generally and which
are customarily maintained by similarly situated United States commercial air
carriers generally; provided, however, such deductibles shall not be more than
the deductibles generally maintained by Lessee (and which Lessee is under no
compulsion to maintain pursuant to any mortgage, lease or other agreement) with
respect to its fleet of Boeing Model 737-200 series aircraft and Pratt & Whitney
JT8D-9A engines generally.
11.2.5 Government Indemnity. In the case of a contract with the
--------------------
Government in respect of the Aircraft or Engines, a valid agreement by the
Government to indemnify Lessee, Lessor, Lender and Owner Participant against the
same risks which are required hereunder to be insured against in amounts at
least equal to the amounts required hereunder from time to time (such indemnity
to be backed by the full faith and credit of the United States of America),
shall be considered adequate insurance with respect to the Aircraft, Airframe
and any Engine subject to such contract to the extent of the risks and in the
amounts that are the subject of any such agreement to indemnify.
11.3 General Policy Provisions. Each insurance policy to be procured
-------------------------
and maintained hereunder shall:
11.3.1 Primary Insurance. Be primary and without right of
-----------------
contribution from other insurance which may provide coverage to Lessor, Lender
or Owner Participant with respect to its interest in the Aircraft, Airframe or
any Engine or its liabilities with respect to or arising out of the transactions
contemplated by the Operative Agreements;
11.3.2 Coverage for Each Insured. Expressly provide that all
-------------------------
the provisions thereof, except the agreed values and the limits of the liability
of the insurer under such policy, shall operate in the same manner as if there
were a separate policy covering each insured;
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
11.3.3 Waiver of Certain Rights. Waive any right of the insurers
------------------------
to any setoff, recoupment, counterclaim or any other deduction, whether by
attachment or otherwise, in respect of any liability of Lessee, Lessor, Lender
or Owner Participant;
11.3.4 Breach of Warranty. Provide that, in respect of Lessor,
------------------
Lender and Owner Participant, such insurance shall not be invalidated by any
action or inaction by Lessee and shall insure the interests of Lessor, Lender
and Owner Participant regardless of any breach or violation by Lessee of any
representation, warranty, declaration or condition contained in such policy;
11.3.5 Notice of Termination or Changes. Provide for not less
--------------------------------
than 30 days' prior written notice to be received by Lessor, Lender and Owner
Participant before any lapse, alteration, termination or cancellation of the
insurance evidenced thereby shall be effective as to Lessor, Lender and Owner
Participant, except that war-risk and allied perils policies may provide for not
less than seven days' prior written notice or such lesser or greater notice as
shall at the time be customary in the aviation insurance industry generally, and
which are customarily in effect with respect to major United States commercial
air carriers generally from time to time;
11.3.6 Nonliability for Premiums. Provide that neither Lessor,
-------------------------
Lender nor Owner Participant shall be liable for any insurance premium; and
11.3.7 Identity of Insurers. Be with insurance companies,
--------------------
underwriters or funds of recognized responsibility.
11.4 Application of Insurance Proceeds. As between Lessor and Lessee,
---------------------------------
all insurance proceeds received under policies required to be maintained (or to
be caused to be maintained) by Lessee pursuant to Section 11.2 as a result of
the occurrences of an Event of Loss with respect to the Aircraft, Airframe or
any Engine will be applied in accordance with Section 10.3.1 or 10.3.2, as the
case may be (except that the balance referred to in Section 10.3.2 shall be paid
over to, or retained by, Lessee). All insurance proceeds in respect of any
property damage loss not constituting an Event of Loss with respect to the
Airframe or an Engine will be applied in payment for repairs or for replacement
property in accordance with terms of Section 8, if not already paid for by
Lessee, and any balance remaining after compliance with such Section with
respect to such loss shall be paid to Lessee. In the case of a loss with
respect to an engine (other than an Engine) installed on the Airframe, Lessor
shall hold any payment to it of any insurance proceeds in respect of such loss
for the account of Lessee or any other third party that is entitled to receive
such proceeds. The provisions of Section 10.6 shall apply to amounts referred
to in this Section 11.4.
11.5 Certificates: Reports, Etc. With respect to any policy required
---------------------------
hereunder, Lessee shall cause to be furnished to Lessor, Lender and Owner
Participant on or prior to
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
the Delivery Date of the Aircraft and on or prior to expiration of such policy,
certificates of the insurer or insurers (or their authorized representatives)
providing insurance pursuant to the requirements of this Section 11, as to hull
and liability insurance. On or before the Delivery Date of the Aircraft, and
annually thereafter on or before June 1, Lessee shall cause to be furnished to
Lessor, Lender and Owner Participant a report signed by Frank B. Hall & Co. (or
any other firm of independent aircraft insurance brokers, appointed by Lessee,
reasonably satisfactory to the Participant) describing in reasonable detail the
insurance then carried and maintained with respect to the Aircraft and stating
the opinion of such firm that the insurance then carried and maintained on the
Aircraft complies with the terms hereof as to hull and liability insurance.
Lessee agrees that it will cause such firm to advise Lessor, Lender and Owner
Participant in writing promptly of any default in the payment of any premium or
any other act or omission on the part of Lessee or any Permitted Sublessee of
which they have knowledge and which might invalidate or render unenforceable, in
whole or in part, the insurance on the Aircraft. Lessee further agrees to cause
such firm to advise Lessor, Lender and Owner Participant in writing at least 30
days (seven days in the case of war-risk and allied perils coverage, or such
lesser or greater notice as is provided pursuant to Section 11.3.5) prior to the
expiration or termination date of any insurance carried and maintained on the
Aircraft pursuant to this Section 11.
11.6 Lessor's Right to Maintain Insurance. In the event that
------------------------------------
Lessee shall fail to maintain or cause to be maintained insurance as herein
provided, Lessor or Owner Participant may at its option (but shall not be
obligated to) provide such insurance and in such event, Lessee shall, upon
demand, reimburse such Person, as Supplemental Rent, for the cost thereof. No
such payment, performance or compliance shall be deemed to cure any Lease
Default hereunder or otherwise relieve Lessee of its obligations with respect
thereto.
11.7 Insurance for Own Account. Nothing in Section 11 shall
-------------------------
limit or prohibit Owner Participant (directly or through Lessor) or Lender from
obtaining insurance for its own account, and any proceeds payable thereunder
shall be payable as provided in the insurance policy relating thereto;
provided, however, that no such insurance may be obtained which would limit or
otherwise adversely affect the availability or coverage or cost of any insurance
required to be obtained or maintained pursuant to this Section 11. Nothing in
this Section 11 shall limit or prohibit Lessor from obtaining insurance for its
own account, and any proceeds payable thereunder shall be payable as provided in
the insurance policy relating thereto; provided, however, that no such
insurance may be obtained which would limit or otherwise adversely affect the
availability or coverage or cost of any insurance required to be obtained or
maintained pursuant to this Section 11 or obtained by Owner Participant or
Lender pursuant to the preceding sentence.
11.8 Self-Insurance. Notwithstanding the foregoing provisions of
--------------
this Section 11, Lessee may, from time to time, self-insure with respect to the
Aircraft to the same extent as it does with respect to, or maintain policies
with deductibles or premium adjustment
SALE AND LEASE AGREEMENT N62SW
34
<PAGE>
provisions consistent with similar provisions applicable to, other comparable
aircraft operated by Lessee; provided, however, that if at any time Lessee's
unsecured senior long-term debt securities are not rated "Investment Grade", in
the case of hull insurance such self-insurance shall in no case be in an amount
greater than 4% of Lessee's tangible net worth (as defined in accordance with
accepted financial practice); and provided, further that, in the case of public
liability insurance, such self-insurance shall in no event exceed $50,000,000.
As used in this Section 11.8, the term "Investment Grade" means a rating of
"Baa3" or higher from Moody's Investors Service, Inc. or a rating from any other
nationally recognized bond rating service equivalent to or better than such a
rating.
Section 12. Inspection. During the Term, Lessee shall use its
----------
reasonable commercial efforts to furnish Lessor with such information concerning
the location, condition, use and operation of the Aircraft and the Engines as
Lessor may reasonably request. At all reasonable times, and upon reasonable
notice, Lessor, Owner Participant and, for so long as the Mortgage shall not
have been fully discharged, Lender, or any of their respective authorized
representatives, may inspect the Aircraft and inspect and copy (subject to any
confidentiality agreements, copyright restrictions and the like) the books and
records of Lessee relative thereto. Any such inspection of the Aircraft shall
be without out-of-pocket expense or risk to Lessee and shall be a visual,
walk-around inspection; provided that no exercise of such inspection right shall
interfere with the normal operation or maintenance of the Aircraft by, or the
business of, Lessee (or any Permitted Sublessee). Neither Lessor, Lender nor
Owner Participant shall have any duty to make any such inspection and shall not
incur any liability or obligation by reason of not making any such inspection.
Section 13. Assignment. Except as otherwise expressly permitted in
----------
Section 7.2 hereof or Section 12.5.1 of the Participation Agreement, or as
required in the case of any requisition by the Government referred to in Section
7.1.4, Lessee will not, without the prior or written consent of Lessor, assign
or transfer any of its rights or obligations under this Lease. Lessor may assign
or convey any of its right, title and interest in and to this Lease or the
Aircraft in accordance with the Participation Agreement, the Trust Agreement,
the Mortgage and the express provisions of this Lease. The terms and provisions
of the Lease shall be binding upon and inure to the benefit of Lessor and Lessee
and their respective permitted successors and assigns.
Section 14. Events of Default. The following events shall constitute
-----------------
Lease Events of Default (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), and each such
Lease Event of Default shall continue so long as, but only so long as, it shall
not have been remedied or waived:
SALE AND LEASE AGREEMENT N62SW
35
<PAGE>
14.1 Failure To Pay Rent. Lessee shall fail to make any payment of
-------------------
Basic Rent or Renewal Rent within 5 Business Days from the due date thereof; or
any other payments required under the Operative Agreements within 5 Business
Days after the receipt of written notice of such default to Lessee from Lessor;
14.2 Specific Defaults. Lessee shall fail to carry and maintain (or
-----------------
cause to be carried and maintained) insurance on or with respect to the Aircraft
in accordance with the provisions of Section 11, provided that any such failure
shall not constitute a Lease Event of Default so long as such failure is for a
period of not more than 30 days, Lessee shall not operate the Aircraft at a time
when such insurance is not in effect and the Aircraft continues to be covered by
such insurance as is required when the Aircraft is on the ground;
14.3 General Default. Lessee shall fail to perform or observe any
---------------
other material covenant, condition or agreement to be performed or observed by
it hereunder or under any other Operative Agreement (other than the Tax
Indemnity Agreement), and such failure shall continue unremedied for a period of
30 days after written notice thereof to Lessee, unless Lessee shall be
diligently proceeding to correct such failure and such failure is cured within
180 days after receipt of such notice;
14.4 Misrepresentation and Breach of Warranty. Any representation or
----------------------------------------
warranty made by Lessee herein or in the Participation Agreement or in any other
Operative Agreement (other than the Tax Indemnity Agreement) or in any document
or certificate furnished by Lessee in connection with any thereof, shall prove
to have been incorrect in any material respect at the time made and shall remain
incorrect in any material respect after 30 days after written notice thereof to
Lessee; or
14.5 Bankruptcy, Etc. Lessee shall commence a voluntary case or other
---------------
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now
or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, or shall consent to any such relief or to the appointment of or
taking possession by any such official or agency in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due, or shall take any corporate action to authorize any of the foregoing; or an
involuntary case or other proceeding shall be commenced against Lessee seeking
liquidation, reorganization or other relief with respect to it or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official or agency of it or any substantial part of its
property, and such involuntary case or other proceeding shall remain undismissed
and unstayed for a period of 90 days.
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
Section 15. Remedies.
--------
15.1 Default; Remedies. Upon the occurrence of a Lease Event of
-----------------
Default and at any time thereafter so long as the same shall be continuing,
Lessor may, at its option, declare by written notice to Lessee this Lease to be
in default; and at any time thereafter, so long as any such Lease Event of
Default shall be continuing, Lessor may exercise one or more of the following
remedies as Lessor in its sole discretion shall elect, to the extent permitted
by, and subject to compliance with any mandatory requirements of, applicable law
then in effect which have not been effectively waived by Lessee:
15.1.1 Return; Repossession. Lessor may cause Lessee, upon
--------------------
written demand by Lessor and at Lessee's expense, to return promptly, and
Lessee shall return promptly, all or any part of the Aircraft, Airframe or
Engines as Lessor may so demand to Lessor or its order in the manner and
condition required by, and otherwise in accordance with all the provisions of,
Section 5 as if the Aircraft, Airframe or Engines were being returned at the end
of the Term; or Lessor, at its option, may enter upon the premises where the
Aircraft, Airframe or any Engine, or part thereof is located and take immediate
possession of and remove the same by summary proceedings or otherwise, all
without liability accruing to Lessor for or by reason of such entry or taking of
possession, whether for the restoration of damage to property caused by such
taking or otherwise, and Lessee expressly waives any right it may have under
applicable law to a hearing prior to repossession of the Aircraft, Airframe or
any Engine or part thereof; or
15.1.2 Sale; Use Etc. Lessor may sell all or any part of the
-------------
Aircraft, Airframe or any Engine, at public or private sale, at such times and
places, to such Persons (including Lessor or Owner Participant) as Lessor may
determine, or otherwise dispose of, hold, use, operate, lease to others or keep
idle the Aircraft, Airframe or any Engine or part thereof, 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; or
15.1.3 Certain Liquidated Damages. Whether or not Lessor shall
--------------------------
have exercised, or shall thereafter at any time exercise, any of its rights
under Section 15.1.1 or 15.1.2 with respect to the Aircraft, Airframe or any
Engine or part thereof, Lessor, by written notice to Lessee specifying a payment
date not earlier than ten days from the date of such notice, may cause Lessee to
pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in
such notice, as liquidated damages for loss of a bargain and not as a penalty
(in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after
the date specified for payment in such notice), the sum of (i) any unpaid Basic
Rent or Renewal Rent, as the case may be, due prior to the SLV Determination
Date immediately preceding the date of such payment, plus (ii) an amount equal
to the excess, if any, of (x) the present value of the aggregate unpaid Basic
Rent due under this Lease for the remainder of the
SALE AND LEASE AGREEMENT N62SW
37
<PAGE>
Term, discounted semiannually (effective on each Rent Payment Date) at the
Discount Rate (as such term is defined in Section 15.2) to the date specified
for payment in such notice, over (y) the fair market rental value of the
Aircraft (determined as hereafter provided in Section 15.2) for the remainder of
the Term, discounted in like manner, together with interest, if any, on such
amount and unpaid Basic Rent or Renewal Rent, as the case may be, at the Overdue
Rate from the date specified for payment in such notice to the date of payment
in full; or
15.1.4 Liquidated Damages upon Sale. If Lessor, pursuant to
----------------------------
Section 15.1.2 or applicable law, shall have sold the Aircraft, Lessor, in lieu
of exercising its rights under Section 15.1.3 with respect to the Aircraft, may,
if Lessor shall so elect, upon giving written notice to Lessee, cause Lessee to
pay Lessor, and Lessee shall pay to Lessor, on the date of such sale, as
liquidated damages for loss of a bargain and not as a penalty (in lieu of the
Basic Rent or Renewal Rent, as the case may be, due on or after the date of such
sale), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to
the SLV Determination Date on or immediately preceding such date of sale plus
the amount of any deficiency between (i) the net proceeds of such sale or (if
such sale is a private sale and is made to Lessor, Owner Participant or any
Affiliate thereof) the fair market sales value of the Aircraft, determined as of
the date of such sale as hereinafter provided in this Section 15, as applicable,
and (ii) the Stipulated Loss Value of the Aircraft, computed as of the date of
such sale, together with interest, if any, on such amount and such unpaid Basic
Rent or Renewal Rent at the Overdue Rate from the date of such sale, to the date
of payment in full; or
15.1.5 Rescission and Other Remedies. Lessor may terminate or
-----------------------------
rescind this Lease as to the Aircraft, or 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 for the breach
hereof, including without limitation Lessee's agreement to lease the Aircraft
for the Term and to pay Rent.
In addition to the foregoing remedies, Lessee shall be liable (except as
otherwise provided above and without duplication of amounts otherwise payable
hereunder) for any and all unpaid Rent due hereunder before, during or after the
exercise of any of the foregoing remedies and for all reasonable and actual
legal fees and other costs and expenses (including the fees and expenses of all
appraisers required by this Section 15) of Lessor and Owner Participant,
incurred by reason of the occurrence of any Lease Event of Default or the
exercise of Lessor's remedies with respect thereto, including all insurance and
storage costs and all costs and expenses incurred in connection with the return
of the Aircraft, Airframe or any Engine or part thereof, in accordance with the
terms of Section 5 or in placing the Aircraft, Airframe or any Engine or part
thereof, in the condition and airworthiness required by Section 5.
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
15.2 Certain Definitions. For the purpose of this Section 15, the
-------------------
"fair market rental value" or the "fair market sales value" of the Aircraft
shall be the rental value or sales value, as the case may be, which would be
obtained in an arm's-length transaction between an informed and willing lessee
or purchaser, as the case may be, under no compulsion to lease or purchase, as
the case may be, and an informed and willing lessor or seller in possession, as
the case may be, and in each case shall be determined on an "as is, where is"
basis pursuant to an appraisal by a recognized independent aircraft appraiser
chosen by Lessor and approved by Lessee, which approval shall not be
unreasonably withheld or delayed and shall be deemed granted if such choice is
not rejected within 10 days after Lessee's receipt of notice of Lessor's choice.
"Discount Rate" shall mean the lesser of (i) the rate per annum publicly
announced from time to time by the Chase Manhattan Bank, N.A., in New York City,
as its prime or base lending rate, and (ii) the interest rate set forth in the
Note.
15.3 No Waiver. Etc. No remedy referred to in this Section 15 is
--------------
intended to be exclusive, but each shall be cumulative and in addition to any
other remedy referred to above or otherwise available to Lessor at law or in
equity; and the exercise or beginning of exercise by Lessor of any one or more
of such remedies shall not preclude the simultaneous or later exercise by Lessor
of any or all of such other remedies. No express or implied waiver by Lessor of
any Lease Event of Default shall in any way be, or be construed to be, a waiver
of any earlier or subsequent Lease Event of Default. To the extent permitted by
applicable law, Lessee hereby waives any rights now or hereafter conferred by
statute or otherwise which may require Lessor to sell, lease or otherwise use
the Aircraft, Airframe or any Engine, or part thereof, in mitigation of Lessor's
damages as set forth in this Section 15 or which may otherwise limit or modify
any of Lessor's rights or remedies under this Section 15.
Section 16. Notices. Ail notices required under the terms and provisions
-------
hereof shall be in writing and shall be given by certified mail, telecopy, telex
or any other customary means of written communication, addressed:
If to Lessee, at 2702 Love Field Dr., P.O. Box 36611, Dallas, Texas 75235-
1611 (telecopy no. 214/904-4022), Attention: Treasurer, or at such other address
as Lessee shall from time to time designate in writing;
If to Lessor, at 79 Main Street, Salt Lake City, Utah 84111 (telecopy
no.801/350-5053) Attention: Corporate Trust Department, or at such other address
as Lessor shall from time to time designate in writing;
If to Lender, at One Nationwide Plaza, Columbus, Ohio 43216 (telecopy no.
614/249-4698 Attention: Steven McKee/Corporate Fixed Income Department, or at
such other address as Lender shall from time to time designate in writing; and
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
If to Owner Participant, at the address set forth in the signature pages of
the Participation Agreement or Schedule I thereto, or at such other address as
Owner Participant shall from time to time designate in writing, or to Lender or
any permitted assignees as Owner Participant may request in writing.
The effective date of any such notice shall be the date on which it is
received by the addressee; provided, however, that if a notice is tendered to an
addressee and the delivery thereof is refused by such addressee, the effective
date of such notice shall be the date of such tender. Lessee shall furnish to
Lessor for transmission to Owner Participant a sufficient number of copies of
all reports, notices, requests, demands, certificates, financial statements and
other instruments furnished hereunder, except in any case where Lessee shall
have transmitted the same directly to any such person.
Section 17. Net Lease: Lessee's Obligations; No Setoff, Counterclaim. Etc.
--------------------------------------------------------------
This is a net lease, and all costs and expenses arising from the use, possession
and operation of the Aircraft, including but not limited to maintenance costs
(including costs related to compliance with FAA Airworthiness Directives or
bulletins with which Lessee is required to comply pursuant to Section 5.3),
insurance and taxes (other than taxes based upon or measured by the income of
Owner Participant or Owner Trustee), shall, unless otherwise specifically
provided for herein, be for the account of Lessee. It is hereby recognized that
Lessor is the owner of the Aircraft (except that Owner Participant will be the
owner for income tax purposes) and Lessee is the lessee thereof. It is the
intent of the parties hereto that this Lease be a "true lease". Lessee's
obligation to pay all Rent payable hereunder shall be absolute and unconditional
and shall not be affected by any circumstance, including without limitation: (a)
any setoff, counterclaim, recoupment, defense or other right which Lessee may
have against Lessor (in its individual or trust capacity, including any
specifically relating to Lessor's payment obligations set forth in Section 5),
Owner Participant, any Indemnified Party or any other Person for any reason
whatsoever (except as expressly provided in Section 13.4 of the Participation
Agreement or in Section 5 of the Tax Indemnification Agreement); (b) any defect
in the title, airworthiness, condition, design, operation or fitness for use of,
or any damage to or loss or destruction of, the Aircraft, Airframe or any
Engine, or any interruption or cessation in the use or possession thereof by
Lessee for any reason whatsoever; (c) any insolvency, bankruptcy, reorganization
or similar proceedings by or against Lessee; (d) any restriction, prevention or
curtailment of or interference with any use of the Aircraft or part thereof; (e)
any invalidity or unenforceability or disaffirmance of this Lease or any
provision hereof or any of the other Operative Agreements or any provision
thereof, in each case whether against or by Lessee or otherwise; or (f) any
other circumstance, happening or event whatsoever, whether or not similar to any
of the foregoing.
If for any reason whatsoever this Lease shall be terminated in whole or in
part by operation of law or otherwise except as specifically provided herein,
Lessee nonetheless
SALE AND LEASE AGREEMENT N62SW
40
<PAGE>
agrees to pay an amount equal to each Basic Rent, Renewal Rent and Supplemental
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. All Rent payable by Lessee shall be paid without notice or demand
(except as otherwise expressly provided) and without abatement, suspension,
deferment, deduction, diminution or proration by reason of any circumstance or
occurrence whatsoever (except as expressly provided in Section 13.4 of the
Participation Agreement or in Section 5 of the Tax Indemnification Agreement).
Lessee hereby waives, to the extent permitted by applicable law, any and all
rights which it may now have or which at any time hereafter may be conferred
upon it, by statute or otherwise, to terminate, cancel, quit or surrender this
Lease or any part hereof, or to any abatement, suppression, deferment,
diminution, reduction or proration of Rent except in accordance with the express
terms hereof. Each payment of Rent made by Lessee shall be final as to Lessor
and Lessee. Lessee will not seek to recover all or any part of any such payment
of Rent for any reason whatsoever.
Section 18. Renewal Options.
---------------
18.1 Renewal After Stage III Upgrade. In the event that a Stage III
-------------------------------
Upgrade shall have occurred with respect to the Aircraft prior to the end of the
Base Lease Term, then at the end of such Base Lease Term or any Renewal Term, so
long as no Lease Event of Default or Lease Default has occurred and is
continuing and the aggregate of all Renewal Terms (including the Term to be
elected) shall not exceed four years, Lessee shall have the option to renew this
Lease for a one-year Renewal Term. In order to exercise the option to renew,
Lessee shall notify Lessor thereof in writing not less than 180 days prior to
the commencement of the applicable Renewal Term (which notice shall be
irrevocable). The Renewal Rent payable for such Renewal Term hereunder shall be
the fair market rental value of the Aircraft calculated as of the commencement
of such Renewal Term. Such fair market rental value shall be determined not
later than three months prior to the commencement of such Renewal Term by mutual
consent of Owner Participant and Lessee or, if they shall be unable so to agree,
by three recognized independent aircraft appraisers, one chosen and paid for by
Owner Participant, one chosen and paid for by Lessee and the third appraiser
chosen by the mutual consent of the first two appraisers and paid for equally by
Owner Participant and Lessee, the appraisals of which three appraisers shall be
averaged and such average shall be deemed to be the fair market rental value of
the Aircraft for all purposes hereof; provided, however, that if the appraisal
of one appraiser is more disparate from the average of all three appraisals than
each of the other two appraisals, then the appraisal of such appraiser shall be
excluded, the remaining appraisals shall be averaged and such average shall be
deemed to be the fair market rental value of the Aircraft for all purposes
hereof. If either Owner Participant or Lessee shall fail to appoint an appraiser
by the date which is two months prior to the commencement of such Renewal Term
or if such two appraisers fail to appoint a third appraiser by the date which is
one month before the commencement of such Renewal Term, then either Owner
Participant or Lessee may apply
SALE AND LEASE AGREEMENT N62SW
41
<PAGE>
to any court having jurisdiction to make such appointment. Fair market rental
value shall be the cash rental obtainable in an arm's-length lease between an
informed and willing lessor (under no compulsion to lease) and an informed and
willing lessor (under no compulsion to lease) and shall be determined on the
assumptions that the Aircraft is in the United States of America, available for
use by Lessee and in the return condition required by Section 5 of this Lease
and otherwise in compliance with the requirements of this Lease. Stipulated Loss
Value amounts that are payable during each such Renewal Term shall be equal to
the appraised value of the Aircraft as of the date of commencement of such
Renewal Term; provided, however, that no such amount shall be less than the
principal amount of any indebtedness then secured by a Lien on the Aircraft.
18.2 Renewal Without Stage III Upgrade. In the event that a Stage III
---------------------------------
Upgrade shall not have occurred with respect to the Aircraft prior to the end of
the Base Lease Term, then at the end of such Base Lease Term or any Renewal
Term, so long as no Lease Event of Default or Lease Default has occurred and is
continuing, and the aggregate of all Renewal Terms (including the Term to be
elected) shall not exceed four years, Lessee shall have the option to renew this
Lease for a Renewal Term of up to four years (or such lower integral number
which, when combined with the length of all prior Renewal Terms, is not greater
than four). In order to exercise the option to renew, Lessee shall notify Lessor
thereof in writing not less than 180 days prior to the commencement of the
applicable Renewal Term (which notice shall set forth the length of such Renewal
Term and shall be irrevocable). The Renewal Rent for such Renewal Term
hereunder, payable in arrears in quarterly rent payments, shall be calculated as
follows:
(A) if the Renewal Term begins in January, 1997, then:
if the Renewal Term is 12 months, the Renewal Rent shall be $580,000/quarter;
if the Renewal Term is 24 months, the Renewal Rent shall be $575,000/quarter;
if the Renewal Term is 36 months, the Renewal Rent shall be $535,000/quarter;
if the Renewal Term is 48 months, the Renewal Rent shall be $495,000/quarter;
(B) if the Renewal Term begins in January, 1998, then:
if the Renewal Term is 12 months, the Renewal Rent shall be $570,000/quarter;
if the Renewal Term is 24 months, the Renewal Rent shall be $510,000/quarter;
if the Renewal Term is 36 months, the Renewal Rent shall be $460,000/quarter;
(C) if the Renewal Term begins in January, 1999, then:
if the Renewal Term is 12 months, the Renewal Rent shall be $440,000/quarter;
if the Renewal Term is 24 months, the Renewal Rent shall be $390,000/quarter;
SALE AND LEASE AGREEMENT N62SW
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<PAGE>
(D) if the Renewal Term begins in January, 2000, then the Renewal Term
shall be 12 months and the Renewal Rent shall be $350,000/quarter.
Stipulated Loss Value amounts that are payable during each such Renewal Term
shall be equal to (i) the Stipulated Loss Value payable at the end of the Base
Lease Term, multiplied by (ii) a fraction, (x) the numerator of which is the
Renewal Rent, and (y) the denominator of which is Basic Rent; provided, however,
that no such amount shall be less than the principal amount of any indebtedness
then secured by a Lien on the Aircraft.
Section 19. Successor Owner Trustee. Lessee agrees that in the case of
-----------------------
the appointment of any successor Owner Trustee pursuant to the terms of the
Trust Agreement, such successor Owner Trustee shall, upon written notice by such
successor Owner Trustee to Lessee, succeed to all the rights, powers and title
of Lessor hereunder and shall be deemed to be Lessor and the owner of the
Aircraft for all purposes hereof without the necessity of any consent or
approval by Lessee (but such successor Owner Trustee shall qualify under the
terms of Section 10.2 of the Participation Agreement) and without in any way
altering the terms of this Lease or Lessee's obligations hereunder. One such
appointment and designation of a successor Owner Trustee shall not exhaust the
right to appoint and designate further successor or additional Owner Trustees
pursuant to the Trust Agreement, and such right may be exercised repeatedly as
long as this Lease shall be in effect.
Section 20. Right to Perform for Lessee. If Lessee fails to perform or
---------------------------
comply with any of its agreements contained herein, Lessor may (but shall not be
obligated to) make such payment or perform or comply with such agreement, and
the amount of such payment and the amount of the expenses of Lessor incurred in
connection with such payment or the performance of or compliance with such
agreement, as the case may be, together with interest thereon at the Overdue
Rate, shall be deemed Supplemental Rent, payable by Lessee upon demand.
Section 21. Quiet Enjoyment. So long as this Lease shall not have been
---------------
declared to be in default pursuant to Section 15, during the Term Lessor will
not, through its own actions or inactions, interfere in the quiet enjoyment of
the Aircraft by Lessee or any Permitted Sublessee.
Section 22. Investment of Security Funds; Miscellaneous; Amendment.
------------------------------------------------------
22.1 Investment of Security Funds. Any moneys required to be paid to
----------------------------
or retained by Lessor which are not required to be paid to Lessee pursuant to
Section 10.6 or 11.4 solely because a Lease Event of Default or Lease Default
under Section 14.1 or 14.5 shall have occurred and be continuing, or which are
held by Lessor pending payment to Lessee pursuant to Section 11.4 or which are
required to be paid to Lessee pursuant to
SALE AND LEASE AGREEMENT N62SW
43
<PAGE>
Section 10.3 or 11.4 after completion of a replacement to be made pursuant to
Section 10.2, shall, until paid to Lessee as provided in Section 10 or 11 or
applied as provided herein or in the Trust Agreement, be invested by Lessor from
time to time as directed in writing by Lessee and at the expense and risk of
Lessee in the following securities (which shall mature within 91 days of the
date of purchase thereof): (a) direct obligations of the Government; (b)
obligations fully guaranteed by the Government; (c) open market commercial paper
of any corporation incorporated under the laws of the United States of America
or any State thereof rated P-1 or its equivalent by Moody's Investors Service,
Inc. and A-1 or its equivalent by Standard & Poor's Corporation; (d)
certificates of deposit issued by, or bankers' acceptances of, or time deposits
or a deposit account with (i) the Owner Trustee or (ii) any bank, trust company
or national banking association incorporated or doing business under the laws of
the United States of America or any state thereof having a combined capital and
surplus of at least $50,000,000; or (e) shares of a money market fund registered
under the Investment Company Act of 1940, as amended, the sole assets of which
are direct obligations of the Government. There shall be promptly remitted to
Lessee or its order any gain (including interest received) realized as the
result of any such investment (net of any fees, commissions and other expenses,
if any, incurred in connection with such investment) unless a Lease Event of
Default or a Lease Default under Section 14.1 or 14.5 shall have occurred and be
continuing. Lessee will promptly pay to Lessor, on demand, the amount of any los
realized as the result of any such investment (together with any fees,
commissions and other expenses, if any, incurred in connection with such
investment), such amount to be disposed of in accordance with the terms of the
Trust Agreement.
22.2 Miscellaneous; Amendment. Lessee shall do, execute, acknowledge
------------------------
and deliver, or shall cause to be done, executed, acknowledged and delivered,
all such further acts, conveyances and assurances as Owner Trustee or Owner
Participant shall reasonably require for accomplishing the purposes of this
Agreement and the other Operative Agreements. Any provision of this Lease which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, Lessee hereby waives any provision of law which
renders any provision hereof prohibited or unenforceable in any respect. 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. This
Lease shall constitute an agreement of lease, and nothing herein shall be
construed as conveying to Lessee any right, title or interest in or to the
Aircraft, Airframe or Engines except as a lessee only. The section and paragraph
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. THIS LEASE HAS BEEN, AND
EACH LEASE
SALE AND LEASE AGREEMENT N62SW
44
<PAGE>
SUPPLEMENT AND AMENDMENT HERETO IS INTENDED TO BE, DELIVERED IN THE STATE
OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE IN SUCH STATE
BY RESIDENTS THEREOF AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING
ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. This Lease and each Lease
Supplement and amendment hereto may be executed in several counterparts, each of
which shall be deemed an original, and all such counterparts shall constitute
one and the same instrument. The representations, warranties, covenants,
agreements and indemnities contained in this Lease or any agreement, certificate
or document delivered pursuant hereto or thereto or in connection herewith or
therewith shall survive the execution and delivery of this Lease and the
expiration or other termination of this Lease to the extent required for full
performance and satisfaction hereof and thereof.
Section 23. Permitted Foreign Air Carriers. Lessor may, in the exercise of
------------------------------
its reasonable business judgment, by written notice to Lessee, remove any
foreign air carrier from Exhibit C and Lessee may, by written notice to Lessor,
request that any foreign air carrier be added to Exhibit C, subject to Lessor's
prior written consent, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, no deletion of an airline from the list of
Permitted Foreign Air Carriers pursuant hereto shall (i) reduce the number of
Permitted Foreign Air Carriers below 24, (ii) affect any existing sublease or
other agreement providing for transfer of possession of the Aircraft, Airframe,
any Engine or Part which was permitted hereunder at the time entered into, or
(ill) preclude any subsequent renewal or extension of such sublease or other
agreement to which the Permitted Foreign Air Carrier under a sublease is
entitled by the terms thereof as originally in effect.
Section 24. Lessee's Consent to Mortgage. Lessee hereby acknowledges
----------------------------
receipt of due notice that Lessor's interest in this Lease (including the
initial Lease Supplement and any amendments hereto) has been assigned to Lender
pursuant to the Mortgage. Unless and until Lessee shall have received written
notice from Lender that the Mortgage has been discharged, (i) Lessee shall pay
all amounts of Basic Rent and Stipulated Loss Value to Lender, (ii) except as
otherwise provided in the Mortgage, all Basic Rent and Stipulated Loss Value due
and payable to Lessor by Lessee shall be paid to Lender without notice on demand
(except as otherwise expressly provided), and without abatement, suspension,
deferment, deduction, diminution or proration by reason of any circumstance or
occurrence whatsoever, including, without limitation, by reason of any claim of
Lessee against Lessor or Owner Participant, (iii) except as otherwise provided
in the Mortgage, Lender shall have the right to exercise the rights of the
Lessor under the Lease to give consents, approvals, waivers notices or the like,
to make elections, demands or the like and to take any other discretionary
action under this Lease as though named as Lessor herein, and (iv) no amendment
or modification of, or waiver by or consent of Lessor in respect of, any of the
provisions of this Lease shall be effective unless Lender shall have joined in
such amendment,
SALE AND LEASE AGREEMENT N62SW
45
<PAGE>
modification, waiver or consent or shall have given its prior written consent
thereto. Lessee further agrees to deliver to Lender a copy of each notice,
certificate, financial statement or other document or instrument delivered or
required to be delivered by Lessee to Lessor hereunder or under any of the other
Operative Agreements unless and until Lender has delivered written notice to
lessee that the Mortgage has been discharged. Nothing in this Section 24 shall
be deemed to constitute a waiver by Lessee of any of the provisions of Section
10 of the Participation Agreement.
Section 25. Section 1110 Compliance. Each of the parties hereto agrees that
-----------------------
the transactions contemplated by this Agreement and the other Operative
Agreements are intended to be, and, to the extent permitted by applicable law,
shall be and should be construed so as to be, entitled to the full benefits of
11 U.S.C. Section 1110.
Section 26. Lease Extension. Notwithstanding any provisions contained
---------------
herein or in any other Operative Document to the contrary, at the end of the
Basic Term or any Renewal Term, and in the event that (i) the Mortgage shall
have been fully discharged, (ii) no subsequent Renewal Term shall occur and
(iii) any amount shall be due and owing to Lessee pursuant to the provisions of
Section 13.2 of the Participation Agreement, then Lessee shall be entitled to
retain possession of the Aircraft and to extend the provisions of this Lease
(other than the provisions for the payment of Basic Rent or Renewal Rent) for
the Extension Period (as defined below), and no Basic Rent or Renewal Rent shall
accrue or be payable by Lessee with respect to such Extension Period. The term
"Extension Period" means the number of days (rounded to the next full day) equal
to (A) the amount due and owing to Lessee pursuant to such Section 13.2, divided
by (B) the fair market rental price per day of the Aircraft at the commencement
of the Extension Period (determined in accordance with the same appraisal
procedures as are set forth in Section 15.2, except that the appraiser shall be
selected by Lessee and approved by Lessor (such approval to be given under the
same conditions as are set forth in Section 15.2)).
SALE AND LEASE AGREEMENT N62SW
46
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be
duly executed and delivered as of the day and year first above written.
Lessor:
FIRST SECURITY BANK OF UTAH,
NATIONAL ASSOCIATION,
not in its individual capacity except as
expressly stated herein, but solely as Owner
Trustee under the Trust Agreement
By [SIGNATURE APPEARS HERE]
------------------------------
Title: Trust Officer
Lessee:
SOUTHWEST AIRLINES CO.,
By
------------------------------
Title: Treasurer
SALE AND LEASE AGREEMENT
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be
duly executed and delivered as of the day and year first above written.
Lessor:
FIRST SECURITY BANK OF UTAH,
NATIONAL ASSOCIATION,
not in its individual capacity except as
expressly stated herein, but solely as Owner
Trustee under the Trust Agreement
By [SIGNATURE APPEARS HERE]
------------------------------
Title: Trust Officer
Lessee:
SOUTHWEST AIRLINES CO.,
By
------------------------------
Title: Treasurer
SALE AND LEASE AGREEMENT
<PAGE>
EXHIBIT A TO
LEASE AGREEMENT
SALE AND LEASE AGREEMENT SUPPLEMENT NO._______
THIS SALE AND LEASE AGREEMENT SUPPLEMENT NO._______, dated _________, _____
between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual
capacity but solely as Owner Trustee under that certain Trust Agreement, dated
as of July 15, 1991 (the "Trust Agreement"), between the Owner Participant named
therein and such Bank ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas
corporation ("Lessee"),
RECITALS.
--------
A. Lessor and Lessee have heretofore entered into that certain Sale and
Lease Agreement dated as of July 15, 1991, as supplemented and amended from time
to time (herein called the "Lease Agreement" and the defined terms therein being
herein used with the same meaning), which Lease Agreement provides in Section 2
for the execution of a Lease Supplement substantially in the form hereof for the
purpose of Lessee's selling to Lessor, and Lessor's leasing back to Lessee, the
Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in
accordance with the terms thereof; and
B. The Lease Agreement relates to the airframe and engines described
below, and a counterpart of the Lease Agreement is attached hereto and made a
part hereof, and this Lease Supplement, together with such attachment, is
being filed for recordation with the FAA on the date hereof as one document.
In consideration of the premises and other good and sufficient
consideration, and pursuant to Section 2 of the Lease Agreement, Lessor and
Lessee hereby agree as follows:
1. Lessee hereby delivers and sells to Lessor and Lessor hereby accepts
and purchases from Lessee and in turn delivers and leases back to Lessee, and
Lessee hereby accepts and leases back from Lessor, under the Lease Agreement, as
herein supplemented, the following-described Boeing Model 737-2H4 Aircraft (the
"Delivered Aircraft), which Delivered Aircraft as of the date hereof consists
of the following:
Airframe: U.S. Registration Number N62SW; Manufacturer's Serial No. 22060;
and
SALE AND LEASE AGREEMENT
A-1
<PAGE>
Engines: Two Pratt & Whitney JT8D-9A Engines installed thereon bearing
Engine Manufacturer's Serial Numbers as follows: 707328 and 687782.
Each of the Engines described above has 750 or more rated takeoff horsepower or
the equivalent of such horsepower.
2. The Delivery Date of the Delivered Aircraft is the date of this Lease
Supplement set forth in the opening paragraph hereof.
3. Lessee hereby confirms to Lessor that the Delivered Aircraft has been or
will be duly marked in accordance with the terms of Section 7.1.2 of the Lease
and that Lessee has accepted the Delivered Aircraft for all purposes hereof and
of the Lease Agreement, including its being airworthy, in accordance with
specifications, in good working order and repair and without defect or 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 Permitted Liens.
4. Lessor's Cost for the Delivered Aircraft is $10,000,000.00.
5. All the provisions of the Lease Agreement are hereby incorporated by
reference in this Lease Supplement, on and as of the date of this Lease
Supplement, to the same extent as if fully set forth herein.
6. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF TEXAS AND
SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF TEXAS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
SALE AND LEASE AGREEMENT
A-2
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to
be duly executed and delivered as of the date and year first above written.
Lessor:
FIRST SECURITY BANK OF UTAH,
NATIONAL ASSOCIATION,
not in its individual capacity but solely as
Owner Trustee under the Trust Agreement
By
------------------------------
Title:
Lessee:
SOUTHWEST AIRLINES CO.,
By
------------------------------
Title: Treasurer
SALE AND LEASE AGREEMENT
A-3
<PAGE>
EXHIBIT B TO
LEASE AGREEMENT
STIPULATED LOSS VALUE SCHEDULE
<TABLE>
<CAPTION>
SLV STIPULATED LOSS VALUE
DETERMINATION DATE (% OF LESSOR'S COST)
- ------------------ --------------------
<S> <C>
Prior to October 15, 1991 115.00
October 15, 1991 111.75
January 15, 1992 110.74
April 15, 1992 109.69
July 15, 1992 108.59
October 15, 1992 107.46
January 15, 1993 106.27
April 15, 1993 105.05
July 15, 1993 103.77
October 15, 1993 102.45
January 15, 1994 101.07
April 15, 1994 99.64
July 15, 1994 98.16
October 15, 1994 96.61
January 15, 1995 95.01
April 15, 1995 93.34
July 15, 1995 91.61
October 15, 1995 89.81
January 15, 1996 87.94
April 15, 1996 86.00
July 15, 1996 83.98
October 15, 1996 81.88
January 15, 1997 80.00
Subsequent to January 15, 1997 80.00
</TABLE>
SALE AND LEASE AGREEMENT
B-1
<PAGE>
EXHIBIT C TO
LEASE AGREEMENT
PERMITTED FOREIGN AIR CARRIERS
Aer Lingus
Air Canada
Air France
Air Inter
Alitalia
All Nippon Airways
Ansett Airlines of Australia
Austrian Airlines
British Airways
British Midland
Canadian Airlines International
Finnair
Iberia
Japan Air Lines
Japan Air Systems
KLM
Lufthansa
Malaysian Airline System
QANTAS Airways
Sabena
SAS
Singapore Airlines
Swissair
UTA
SALE AND LEASE AGREEMENT
C-1
