<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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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
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3037350
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad Street, Sixth Floor, Boston, MA 02110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
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Securities registered pursuant to Section 12(b) of the Act NONE
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Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
3,040,000 Units Representing Limited Partnership Interest
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(Title of class)
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(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, 1997 (Part I and II)
<PAGE>
AIRFUND International Limited Partnership
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1 Business 3
Item 2 Properties 5
Item 3 Legal Proceedings 5
Item 4 Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for the Partnership's Securities and
Related Security Holder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 7
PART III
Item 10. Directors and Executive Officers of the Partnership 8
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners
and Management 10
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 13-15
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PART I
Item 1. Business.
(a) General Development of Business
AIRFUND International Limited Partnership (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 Equis Financial Group Limited Partnership (formerly
American Finance Group), a Massachusetts limited partnership ("EFG"). The
capital contribution of the General Partner, in consideration of its general
partner interest, was $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").
(b) Financial Information About Industry Segments
The Partnership is engaged in only one industry segment: the business of
acquiring used commercial aircraft and leasing the aircraft to creditworthy
lessees on an operating lease basis. Full-payout leases are those in which
aggregate noncancellable rents equal or exceed the Purchase Price of the leased
equipment. Operating leases are those in which the aggregate noncancellable
rents are less than the Purchase Price of the leased equipment. Industry segment
data is not applicable.
(c) Narrative Description of Business
The Partnership was organized to acquire a specified portfolio of used
commercial jet aircraft subject to various full-payout and operating leases and
to lease the aircraft to third parties as income-producing investments. More
specifically, the Partnership's primary investment objectives are to acquire and
lease aircraft which will:
1. Generate quarterly cash distributions;
2. Preserve and protect Partnership capital; and
3. Maintain substantial residual value for ultimate sale of the aircraft.
The Partnership has the additional objective of providing certain federal
income tax benefits.
The Closing date of the Offering of Units of the Partnership was July 26,
1989. The initial purchase of the aircraft and the associated lease commitments
occurred on July 27, 1989. The acquisition of the Partnership's aircraft and its
associated leases is described in Note 3 to the financial statements included in
Item 14, herein. The Partnership is expected to terminate no later than December
31, 2004; however, the Partnership is a Nominal Defendant in a Class Action
Lawsuit. The outcome of the Class Action Lawsuit could alter the nature of the
Partnership's organization and its future business operations. See Note 7 to the
accompanying financial statements.
The Partnership has no employees; however, it is managed pursuant to a
Management Agreement with EFG or one of its affiliates (the "Manager"). The
Manager's role, among other things, is to (i) evaluate, select, negotiate, and
consummate the acquisition of aircraft, (ii) manage the leasing, re-leasing,
financing, and refinancing of aircraft, and (iii) arrange the resale of
aircraft. The Manager is compensated for such services as described in the
Restated Agreement, as amended, Item 13, herein and in Note 4 to the financial
statements, included in Item 14, herein.
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The Partnership's investment in commercial aircraft is, and will continue
to be, subject to various risks, including physical deterioration, technological
obsolescence and defaults by lessees. A principal business risk of owning and
leasing aircraft is the possibility that aggregate lease revenues and aircraft
sale proceeds will be insufficient to provide an acceptable rate of return on
invested capital after payment of all operating expenses. Consequently, the
success of the Partnership is largely dependent upon the ability of the General
Partner and its Affiliates to forecast technological advances, the ability of
the lessees to fulfill their lease obligations and the quality and marketability
of the aircraft at the time of sale.
In addition, the leasing industry is very competitive. Although all funds
available for acquisitions have been invested in aircraft, subject to
noncancellable lease agreements, the Partnership will encounter considerable
competition when the aircraft are re-leased or sold at the expiration of current
lease terms. The Partnership will compete with lease programs offered directly
by manufacturers and other equipment leasing companies, including lease programs
organized and managed similarly to the Partnership, and including other
EFG-sponsored partnerships and trusts, which may seek to re-lease or sell
aircraft within their own portfolios to the same customers as the Partnership.
Many competitors have greater financial resources and more experience than the
Partnership, the General Partner and the Manager.
In recent years, market values for certain models of 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. Aircraft condition, age, passenger capacity, distance
capability, fuel efficiency, and other factors influence market demand and
market values for passenger jet aircraft.
Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft is dependent upon many factors, including EFG'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, EFG 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 General Partner will determine when each aircraft should be sold and
the terms of such sale based upon numerous factors with a view toward achieving
the investment objectives of the Partnership. The General Partner is authorized
to sell the aircraft prior to the expiration of the initial lease terms and
intends to monitor and evaluate the market for resale of the aircraft to
determine whether an aircraft should remain in the Partnership's portfolio or be
sold. As an alternative to sale, the Partnership may enter re-lease agreements
when considered advantageous by the General Partner and the Manager.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1997, 1996 and 1995 is
incorporated herein by reference to Note 2 to the financial statements in the
1997 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the
Securities and Exchange Commission.
Default by a lessee under a lease may cause aircraft to be returned to the
Partnership at a time when the General Partner or the Manager is unable to
arrange for the re-lease or sale of such aircraft. This could result in the loss
of a material portion of anticipated revenues and significantly weaken the
Partnership's ability to repay related indebtedness.
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
Direct-Participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as
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remarketing agent and asset manager, and provides leasing support services, such
as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
Item 2. Properties.
Incorporated herein by reference to Note 3 to the financial statements in
the 1997 Annual Report.
Item 3. Legal Proceedings.
Incorporated herein by reference to Note 7 to the financial statements in
the 1997 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for the Partnership's Securities and Related Security Holder
Matters.
(a) Market Information
There is no public market for the resale of the Units and it is not
anticipated that a public market for resale of the Units will develop.
(b) Approximate Number of Security Holders
At December 31, 1997, there were 4,100 record holders of Units in the
Partnership.
(c) Dividend History and Restrictions
Pursuant to Article VI of the Restated Agreement, as amended, the
Partnership's Distributable Cash From Operations and Distributable Cash From
Sales or Refinancings are determined and distributed to the Partners quarterly.
Distributions may be made to the General Partner prior to the end of the fiscal
quarter; however, the amount of such distribution reflects only amounts to which
the General Partner is entitled at the time such distribution is made. As the
General Partner attempts to remarket the Partnership's aircraft, the amount of
cash available for distribution fluctuates widely. The Partnership may also be
required to incur significant costs to upgrade certain aircraft to meet the
standards of potential successor lessees. Accordingly, the General Partner did
not declare any distributions to the Partners in 1997 and expects to continue to
suspend such distributions between the periods corresponding to major
remarketing events.
Distributions declared in 1996 were made as follows:
<TABLE>
<CAPTION>
General Recognized
Total Partner Owners
----------- ----------- -----------
<S> <C> <C> <C>
Total 1996 distributions $ 5,000,000 $ 250,000 $ 4,750,000
</TABLE>
Distributions payable at December 31, 1996 were $1,000,000.
"Distributable Cash From Operations" means the net cash provided by the
Partnership's normal operations after general expenses and current liabilities
of the Partnership are paid, reduced by any reserves for working capital and
contingent liabilities to be funded from such cash, to the extent deemed
reasonable by the General Partner, and increased by any portion of such reserves
deemed by the General Partner not to be required for Partnership operations and
reduced by all accrued and unpaid Equipment Management Fees and, after Payout,
further reduced by all accrued and unpaid Subordinated Remarketing Fees.
Distributable Cash From Operations does not include any Distributable Cash From
Sales or Refinancings.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings as reduced by (i)(a) for a period of two years from Final Closing,
Cash From Sales or Refinancings, which the General Partner reinvests in
additional aircraft, and (b) amounts realized from any loss or destruction of
any aircraft which the General Partner reinvests in replacement aircraft, and
(ii) any accrued and unpaid Equipment Management Fees and, after Payout, any
accrued and unpaid Subordinated Remarketing Fees.
"Cash From Sales or Refinancings" means cash received by the Partnership
from Sale or Refinancing transactions, as (i) reduced by (a) all debts and
liabilities of the Partnership required to be paid as a result of Sale or
Refinancing transactions, whether or not then due and payable (including any
liabilities on aircraft which are not assumed by the buyer and any remarketing
fees required to be paid to persons not affiliated with the General Partner, but
not including any Subordinated Remarketing Fees required to be accrued) and (b)
any reserves for working capital and contingent liabilities funded from such
cash to the extent deemed reasonable by the General
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Partner and (ii) increased by any portion of such reserves deemed by the General
Partner not to be required for Partnership operations. In the event the
Partnership accepts a note in connection with any Sale or Refinancing
transaction, all payments subsequently received in cash by the Partnership with
respect to such note shall be included in Cash From Sales or Refinancings,
regardless of the treatment of such payments by the Partnership for tax or
accounting purposes. If the Partnership receives purchase money obligations in
payment for aircraft sold, which are secured by liens on such aircraft, the
amount of such obligations shall not be included in Cash From Sales or
Refinancings until the obligations are fully satisfied.
Each distribution of Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings of the Partnership shall be made 95% to the
Recognized Owners and 5% to the General Partner. "Payout" is defined as the
first time when the aggregate amount of all distributions to the Recognized
Owners of Distributable Cash From Operations and Distributable Cash From Sales
or Refinancings equals the aggregate amount of the Recognized Owners' original
capital contributions plus a cumulative annual return of 10% (compounded
quarterly and calculated beginning with the last day of the month of the
Partnership's Closing Date) on their aggregate unreturned capital contributions.
For purposes of this definition, capital contributions shall be deemed to have
been returned only to the extent that distributions of cash to the Recognized
Owners exceed the amount required to satisfy the cumulative annual return of 10%
(compounded quarterly) on the Recognized Owners' aggregate unreturned capital
contributions, such calculation to be based on the aggregate unreturned capital
contributions outstanding on the first day of each fiscal quarter.
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings ("Distributions") are distributed within 30 days after the
completion of each quarter, beginning with the first full fiscal quarter
following the Partnership's Closing Date. Each Distribution is described in a
statement sent to the Recognized Owners.
Item 6. Selected Financial Data.
Incorporated herein by reference to the section entitled "Selected
Financial Data" in the 1997 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated herein by reference to the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1997 Annual Report.
Item 8. Financial Statements and Supplementary Data.
Incorporated herein by reference to the financial statements and
supplementary data included in the 1997 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership.
(a-b) Identification of Directors and Executive Officers
The Partnership has no Directors or Officers. As indicated in Item 1 of
this report, AFG Aircraft Management Corporation is the sole General Partner of
the Partnership. Under the Restated Agreement, as amended, the General Partner
is solely responsible for the operation of the Partnership's properties and the
Recognized Owners have no right to participate in the control of such
operations. The names, titles and ages of the Directors and Executive Officers
of the General Partner as of March 15, 1998 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF
THE GENERAL PARTNER (See Item 13)
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<TABLE>
<CAPTION>
Name Title Age Term
- ------------------------ -------------------------------------------- --- -----------
<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the Until a
Executive Committee of EFG successor
and President and a Director is duly
of the General Partner 49 elected
and
qualified
Gary D. Engle President and Chief Executive
Officer and member of the
Executive Committee of EFG and a
Director of the General Partner 49
Gary M. Romano Executive Vice President and Chief
Operating Officer of EFG and
Clerk of the General Partner 38
James A. Coyne Executive Vice President of EFG 37
Michael J. Butterfield Vice President, Finance and Treasurer
of EFG and Treasurer of the
General Partner 38
James F. Livesey Vice President, Aircraft and Vessels
of EFG 48
Sandra L. Simonsen Senior Vice President, Information Systems
of EFG 47
Gail D. Ofgant Vice President, Lease Operations of EFG 32
</TABLE>
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Partners,
Directors or Executive Officers.
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<PAGE>
(e) Business Experience
Mr. MacDonald, age 49, is a co-founder, Chairman and a member of the
Executive Committee of EFG and President and a Director of the General Partner.
Mr. MacDonald was also a co-founder, Director and Senior Vice President of EFG's
predecessor corporation from 1980 to 1988. Mr. MacDonald is President of
American Finance Group Securities Corp. and a limited partner in Old North
Capital Limited Partnership ("ONC"). Prior to co-founding EFG's predecessors,
Mr. MacDonald held various executive and management positions in the leasing and
pharmaceutical industries. Mr. MacDonald holds an M.B.A. from Boston College and
a B.A. degree from the University of Massachusetts (Amherst).
Mr. Engle, age 49, is President and Chief Executive Officer and a
member of the Executive Committee of EFG and President of AFG Realty
Corporation. Mr. Engle is Vice President and a Director of certain of EFG's
affiliates and a Director of the General Partner. On December 16, 1994, Mr.
Engle acquired control of EFG, the General Partner and each of EFG's
subsidiaries. Mr. Engle is a limited partner in ONC. Mr. Eagle is also
Chairman, Chief Executive Officer and a member of the Board of Directors of
Semele Group Inc. ("Semele"). From 1987 to 1990, Mr. Engle was a principal
and co-founder of Cobb Partners Development, Inc., a real estate and mortgage
banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and
Chief Financial Officer of Arvida Disney Company, a large scale community
development company owned by Walt Disney Company. Prior to 1980, Mr. Engle
served in various management consulting and institutional brokerage
capacities. Mr. Engle has an M.B.A. from Harvard University and a B.S. degree
from the University of Massachusetts (Amherst).
Mr. Romano, age 38, is Executive Vice President and Chief Operating
Officer of EFG and certain of its affiliates and Clerk of the General
Partner. Mr. Romano is Vice President and Chief Financial Officer of Semele.
Mr. Romano joined EFG in November 1989 and was appointed Executive Vice
President and Chief Operating Officer in April 1996. Prior to joining EFG, Mr.
Romano was Assistant Controller for a privately-held real estate company which
he joined in 1987. Mr. Romano held audit staff and manager positions at Ernst &
Whinney (now Ernst & Young LLP) from 1982 to 1986. Mr. Romano is a C.P.A. and
holds a B.S. degree from Boston College.
Mr. Coyne, age 37, is Executive Vice President of EFG and President,
Chief Operating Officer and a member of the Board of Directors of Semele. Mr.
Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG in
November 1994. In September 1997, Mr. Coyne was appointed Executive Vice
President of EFG. Mr. Coyne is a limited partner in ONC. From May 1993
through November 1994, he was with the Raymond Company, a private investment
firm, where he was responsible for financing corporate and real estate
acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real
estate investment company and an equipment leasing company. Prior to 1985 he
was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He
has a BS in Business Administration from John Carroll University, a Masters
Degree in Accounting from Case Western Reserve University and is a Certified
Public Accountant.
Mr. Butterfield, age 38, joined EFG in June 1992 and became Vice
President, Finance and Treasurer of EFG and certain of its affiliates in
April 1996 and is Treasurer of the General Partner and Semele. Prior to
joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP,
which he joined in 1987. Mr. Butterfield was employed in public accounting
and industry positions in New Zealand and London (U.K.) prior to coming to
the United States in 1987. Mr. Butterfield attained his Associate Chartered
Accountant (A.C.A.) professional qualification in New Zealand and has
completed his C.P.A. requirements in the United States. He holds a Bachelor
of Commerce degree from the University of Otago, Dunedin, New Zealand.
Mr. Livesey, age 48, is Vice President, Aircraft and Vessels, of EFG. Mr.
Livesey joined EFG in October, 1989, and was promoted to Vice President in
January 1992. Prior to joining EFG, Mr. Livesey held sales and marketing
positions with two privately-held equipment leasing firms. Mr. Livesey holds an
M.B.A. from Boston College and B.A. degree from Stonehill College.
Ms. Simonsen, age 47, joined EFG in February 1990 and was promoted to
Senior Vice President, Information Systems of EFG in April 1996. Prior to
joining EFG, Ms. Simonsen was Vice President, Information Systems with Investors
Mortgage Insurance Company which she joined in 1973. Ms. Simonsen provided
systems consulting for a subsidiary of American International Group and authored
a software program published by IBM. Ms. Simonsen holds a B.A. degree from
Wilson College.
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Ms. Ofgant, age 32, is Vice President, Lease Operations of EFG and certain
of its affiliates. Ms. Ofgant joined EFG in June 1989, and was promoted to
Manager, Lease Operations in April 1994. In April 1996, Ms. Ofgant was appointed
Vice President, Lease Operations. Prior to joining EFG, Ms. Ofgant was employed
by Security Pacific National Trust Company. Ms. Ofgant holds a B.S. degree in
Finance from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
See Item 10 (a-b) above.
Item 11. Executive Compensation.
(a) Cash Compensation
Currently, the Partnership has no employees. However, under the terms of
the Restated Agreement, as amended, the Partnership is obligated to pay all
costs of personnel employed full or part-time by the Partnership, including
officers or employees of the General Partner or its Affiliates. There is no plan
at the present time to make any partners or employees of the General Partner or
its Affiliates employees of the Partnership. The Partnership has not paid and
does not propose to pay any options, warrants or rights to the officers or
employees of the General Partner or its Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other Compensation
Although the Partnership has no employees, as discussed in Item 11(a),
pursuant to section 10.4(c) of the Restated Agreement, as amended, the
Partnership incurs a monthly charge for personnel costs of the Manager for
persons engaged in providing administrative services to the Partnership. A
description of the remuneration paid by the Partnership to the General Partner
and its Affiliates for such services is included in Item 13, herein and in Note
4 to the financial statements included in Item 14, herein.
(d) Compensation of Directors
None.
(e) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the General Partner
or its Affiliates which results or may result from their resignation, retirement
or any other termination.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
By virtue of its organization as a limited partnership, the Partnership
has outstanding no securities possessing traditional voting rights. However, as
provided for in Section 11.2(a) of the Restated Agreement, as amended (subject
to Sections 11.2(b) and 11.3), a majority interest of the Recognized Owners have
voting rights with respect to:
1. Amendment of the Restated Agreement;
2. Termination of the Partnership;
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3. Removal of the General Partner; and
4. Approval or disapproval of the sale of all, or substantially all, of
the assets of the Partnership (except in the orderly liquidation of
the Partnership upon its termination and dissolution).
As of March 1, 1998, the following person or group owns beneficially more
than 5% of the Partnership's 3,040,000 outstanding Units:
<TABLE>
<CAPTION>
Name and Amount Percent
Title Address of of Beneficial of
of Class Beneficial Owner Ownership Class
- ------------------------------- ------------------------------------- ---------------- ---------
<S> <C> <C> <C>
Units Representing Old North Capital Limited Partnership
Limited Partnership 88 Broad Street 205,040 Units 6.74%
Interests Boston, MA 02110
</TABLE>
Messrs. Engle, MacDonald and Coyne have ownership interests in ONC. In
December 1996, EFG purchased a 49% limited partnership interest in ONC. See
Items 10 and 13 of this report.
The ownership and organization of EFG is described in Item 1 of this
report.
Item 13. Certain Relationships and Related Transactions.
The General Partner of the Partnership is AFG Aircraft Management
Corporation, an affiliate of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
1997, 1996 and 1995, which were accrued or paid by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Equipment management fees $ 192,913 $ 217,311 $ 229,430
Administrative charges 49,788 28,376 21,000
Reimbursable operating expenses
due to third parties 304,188 1,069,846 218,185
----------- ----------- ----------
Total $ 546,889 $ 1,315,533 $ 468,615
=========== =========== ==========
</TABLE>
As provided under the terms of the Management Agreement, EFG is
compensated for its services to the Partnership. Such services include all
aspects of acquisition, management and sale of equipment. For acquisition
services, EFG was compensated by an amount equal to 1.6% of Equipment Base Price
paid by the Partnership. For management services, EFG 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 EFG 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.
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Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG. At December 31, 1997,
the Partnership was owed $121,626 by EFG for such funds and the interest
thereon. These funds were remitted to the Partnership in January 1998.
All aircraft were purchased from EFG or one of its Affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2 to
the financial statements included in Item 14, herein.
In 1990, EFG 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 EFG. AF/AIP
Programs Limited Partnership also entered into a nonexclusive confirmatory
agreement with EFG's former majority-owned subsidiary, AIRFUND Corporation
("AFC"), for the provision of aircraft remarketing services.
Old North Capital Limited Partnership ("ONC"), a Massachusetts Limited
Partnership formed in 1995 and owned and controlled by certain principals of
EFG, owns 205,040 Units or 6.74% of the total outstanding units of the
Partnership. EFG owns a 49% limited partnership interest in ONC, which it
acquired in December 1996.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
See Item 13(a) above.
-12-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors..................................*
Statement of Financial Position
at December 31, 1997 and 1996...................................*
Statement of Operations
for the years ended December 31, 1997, 1996 and 1995............*
Statement of Changes in Partners' Capital
for the years ended December 31, 1997, 1996 and 1995............*
Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995............*
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.
Exhibit
Number
------
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 1997 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.
* Incorporated herein by reference to the appropriate portion of the 1997 Annual
Report to security holders for the year ended December 31, 1997 (see Part II).
-13-
<PAGE>
Exhibit
Number
------
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. was filed in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 as Exhibit 99 (d) and is incorporated herein
by reference.
99 (e) Lease agreement with Southwest Airlines, Inc. was filed in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 as Exhibit 99 (d) and is incorporated herein
by reference.
99 (f) Lease agreement with Southwest Airlines, Inc. was filed in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 as Exhibit 99 (d) and is incorporated herein
by reference.
99 (g) Lease agreement with Finnair OY was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 as Exhibit 99 (e) and is incorporated herein
by reference.
99 (h) Lease agreement with Finnair OY was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 as Exhibit 99 (f) and is incorporated herein
by reference.
99 (i) Lease agreement with Aer Lease Limited is filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 and is included herein.
(b) Reports on Form 8-K
None.
-14-
<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
Chairman and a member of the President and Chief Executive
Executive Committee of EFG and Officer and a member of the
President and a Director of the Executive Committee of EFG and a
General Partner Director of the General Partner
(Principal Executive Officer)
Date: March 31, 1998 Date: March 31, 1998
------------------------------ ---------------------------
By: /s/ Gary M. Romano By: /s/ Michael J. Butterfield
--------------------------------- -----------------------------
Gary M. Romano Michael J. Butterfield
Executive Vice President and Chief Vice President, Finance and
Operating Officer of EFG and Clerk Treasurer of EFG and Treasurer
of the General Partner of the General Partner
(Principal Financial Officer) (Principal Accounting Officer)
Date: March 31, 1998 Date: March 31, 1998
------------------------------ ---------------------------
-15-
<PAGE>
AIRFUND International Limited Partnership
Annual Report to the Partners, December 31, 1997
<PAGE>
AIRFUND International Limited Partnership
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
----
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-7
FINANCIAL STATEMENTS:
Report of Independent Auditors 8
Statement of Financial Position
at December 31, 1997 and 1996 9
Statement of Operations
for the years ended December 31, 1997, 1996 and 1995 10
Statement of Changes in Partners' Capital
for the years ended December 31, 1997, 1996 and 1995 11
Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 12
Notes to the Financial Statements 13-20
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 21
Statement of Cash and Distributable
Cash From Operations, Sales and Refinancings 22
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 23
-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, 1997:
<TABLE>
<CAPTION>
Summary of
Operations 1997 1996 1995 1994 1993
- --------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Lease revenue $ 3,858,270 $ 4,346,218 $ 4,588,609 $ 5,166,392 $ 5,822,874
Net income (loss) $ 49,656 $ 4,360,899 $ (2,283,720) $ (1,463,495) $ (5,435,348)
Per Unit:
Net income (loss) $ 0.02 $ 1.36 $ (0.71) $ (0.46) $ (1.70)
Cash distributions
declared $ -- $ 1.56 $ 1.00 $ 1.25 $ 2.00
<CAPTION>
Financial Position
- ------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 19,864,413 $ 23,700,585 $ 16,888,606 $ 17,961,111 $ 24,263,282
Total long-term
obligations $ 8,864,307 $ 11,321,769 $ 4,742,968 $ -- $ --
Partners' capital $ 10,644,298 $ 10,594,642 $ 11,233,743 $ 16,717,463 $ 22,180,958
</TABLE>
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to the year
ended December 31, 1996 and the year ended December 31, 1996
compared to the year ended December 31, 1995
Certain statements in this annual report of AIRFUND International Limited
Partnership (the "Partnership") that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements, and the ability of Equis Financial Group Limited
Partnership (formerly American Finance Group), a Massachusetts limited
partnership ("EFG"), to collect all rents due under the attendant lease
agreements and successfully remarket the Partnership's equipment upon the
expiration of such leases.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. The computer
programs of EFG were designed and written using four digits to define the
applicable year. As a result, EFG does not anticipate system failure or
miscalculations causing disruptions of operations. Based on recent assessments,
EFG determined that minimal modification of software is required so that its
network operating system will function properly with respect to dates in the
year 2000 and thereafter. EFG believes that with these modifications to the
existing operating system, the Year 2000 Issue will not pose significant
operational problems for its computer systems. EFG will utilize internal
resources to upgrade software for Year 2000 modifications and anticipates
completing the Year 2000 project by December 31, 1998, which is prior to any
anticipated impact on its operating system. The total cost of the Year 2000
project is expected to be insignificant and have no effect on the results of
operations of the Partnership.
Overview
As an equipment leasing 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 used 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. Subsequently, all of
the aircraft in the Partnership's original portfolio have been re-leased,
renewed, exchanged for other aircraft or sold (see below). At December 31, 1997,
the Partnership owned a proportionate interest in six aircraft. All of the
Partnership's aircraft are currently on lease. Upon expiration of the lease
agreements, each aircraft will be re-leased or sold depending on prevailing
market conditions and the assessment of such conditions by EFG to obtain the
most advantageous economic benefit. Presently, the Partnership is a Nominal
Defendant in a Class Action Lawsuit. The outcome of the Class Action Lawsuit
could alter the nature of the Partnership's organization and its future business
operations. See Note 7 to the accompanying financial statements.
Results of Operations
For year ended December 31, 1997, the Partnership recognized lease revenue
of $3,858,270 compared to $4,346,218 and $4,588,609 for the years ended December
31, 1996 and 1995, respectively. The decrease in lease revenue from 1995 to 1997
resulted from the expiration of the leases related to the Partnership's interest
in a Lockheed L-1011-50 aircraft during 1996 and the sale of two 727-251
Advanced aircraft, also in 1996. These decreases were partially offset by the
re-lease of the Lockheed L-1011-50 aircraft effective April 1997 and the
Partnership's aircraft exchange (discussed below), which was concluded in the
first quarter of 1996 (see Note 2 - Revenue Recognition, to the accompanying
financial statements, for revenue recognized for each aircraft during the years
ended December 31, 1997, 1996 and 1995). As a result of the aircraft exchange,
the Partnership replaced its ownership interest in a Boeing 747-SP aircraft,
having aggregate quarterly lease revenues of
-3-
<PAGE>
$495,360, with interests in five other aircraft (three Boeing 737 aircraft
leased by Southwest Airlines, Inc. and two McDonnell Douglas MD-82 aircraft
leased by Finnair OY) having aggregate quarterly lease revenues of $842,160. Due
to the conclusion of this transaction late in the first quarter of 1996, 1997
was the first year the Partnership recognized a full year's revenue related to
its interests in all five of these replacement aircraft.
The Partnership's lease agreements with Northwest Airlines, Inc.
("Northwest") related to the two Boeing 727-251 Advanced aircraft 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 and a further six months through October 31, 1996. Rents due under the
initial twelve month renewals generated aggregate monthly revenue of $124,000
per month compared to $120,000 per month for each of the second and third
renewals. During 1996, the Partnership sold both of the aircraft to Northwest
and, in addition to the sales proceeds, received lease termination rents with
respect to one of the aircraft (see below).
The Partnership's original lease agreement with Cathay Pacific Airways,
Ltd ("Cathay") provided for semi-annual rent adjustments based on the six month
London Inter-bank Offered Rate ("LIBOR"). Accordingly, rents generated from this
lease fluctuated 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) expired on February 14, 1996 and was extended
until April 11, 1996. Subsequent to this extension, Cathay leased the aircraft
at a fixed rate until June 30, 1996 at which date the aircraft was returned to
the Partnership. The fixed extension agreement generated approximately $127,000
in renewal revenue for the Partnership. Upon return of the aircraft, the
aircraft underwent heavy maintenance which cost the Partnership approximately
$570,000, the majority of which was expensed during 1996. The Partnership
entered into a new 1-year lease agreement with Aer Lease Limited ("Aer Lease")
at a base rent to the Partnership of $60,450 per month, beginning April 27,
1997. In addition, Aer Lease has entered into an agreement with the Partnership
to purchase the L-1011-50 aircraft at the expiration of the lease term. The
Partnership is expected to receive proceeds of approximately $846,000 related to
the sale of its interest in this aircraft. The demand for L-1011 aircraft is
weak, limited principally to air cargo carriers and operators of passenger
charters. Several major airlines have reduced their commitment to the L-1011
aircraft. Such circumstances inhibited the remarketing of the Partnership's
L-1011-50 aircraft and required the Partnership to refurbish the aircraft to
meet the needs of Aer Lease.
The Partnership holds a proportionate ownership interest in the Cathay,
Southwest and Finnair Aircraft, discussed above. The remaining interests are
owned by other affiliated partnerships sponsored by EFG. 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).
Interest income for the year ended December 31, 1997 was $130,552 compared
to $261,557 and $58,206 for the years ended December 31, 1996 and 1995,
respectively. Interest income is typically generated from temporary investments
of rental receipts and equipment sale proceeds in short-term instruments.
Interest income in 1996 included $130,268 earned on cash held in a
special-purpose escrow account in connection with the like-kind exchange
transactions and also reflected a temporary increase in the Partnership's cash
available for investment resulting from the receipt of sale proceeds associated
with the Northwest aircraft.
During July 1996, the Partnership sold a Boeing 727-251 Advanced jet
aircraft with an original cost and net book value of $9,520,359 and $426,560,
respectively, to the existing lessee. In connection with this sale, the
Partnership realized sale proceeds of $3,210,000, which resulted in a net gain,
for financial statement purposes, of $2,783,440. The Partnership also realized
lease termination rents of $180,000 relating to this sale as the aircraft was
sold prior to the expiration of the related lease term. During November 1996,
the Partnership sold a second Boeing 727-251 Advanced jet aircraft with an
original cost and net book value of $9,520,359 and $261,697, respectively, to
the existing lessee. In connection with this sale, the Partnership realized sale
proceeds of $3,454,313, which resulted in a net gain, for financial statement
purposes, of $3,192,616.
In September 1995, the Partnership transferred its entire ownership
interest (76.8%) in a Boeing 747-SP aircraft (the "United Aircraft") to its
lessee, United. The transaction was structured as a like-kind exchange for
income tax reporting purposes. 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
-4-
<PAGE>
a special-purpose escrow account through a third-party exchange agent pending
the completion of the aircraft exchange. The Partnership's interest in the
United 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 United Aircraft
with a 43.41% ownership interest in the Southwest Aircraft, at an aggregate cost
of $6,355,873. To acquire the interest in the Southwest Aircraft, the
Partnership obtained financing of $4,742,968 from a third-party lender and
utilized $1,612,905 of the cash consideration received from the transfer of the
United Aircraft. The remaining ownership interest of 56.59% in the Southwest
Aircraft is held by affiliated equipment leasing programs sponsored by EFG.
Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 49.17% ownership interest in the Finnair Aircraft at
a total cost to the Partnership of $13,762,438. To acquire the ownership
interest in the Finnair Aircraft, the Partnership paid $4,601,325, including the
balance of the cash consideration, and obtained financing of $9,161,113 from a
third-party lender. The remaining ownership interest of 50.83% in the Finnair
Aircraft is held by affiliated equipment leasing programs sponsored by EFG. 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 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 lessees.
The Partnership recorded a write-down of aircraft carrying values,
representing impairments, during the years ended December 31, 1996 and 1995. The
resulting charges, $967,200 ($0.30 per limited partnership unit) in 1996 and
$1,740,960 ($0.54 per limited partnership unit) in 1995, 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) EFG's assessment of prevailing market
conditions for similar aircraft. In recent years, market values for certain
models of 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. Aircraft condition,
age, passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft. The
write-downs in 1996 and 1995 resulted from the deterioration in the market value
of the Partnership's interest in the Lockheed L-1011-50 aircraft.
Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft is dependent upon many factors, including EFG'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, EFG 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
is 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 gain or loss reported in the financial statements is
not necessarily indicative of the total residual value the Partnership achieved
from leasing the aircraft.
During 1997, 1996 and 1995, the Partnership incurred interest expense of
$890,289, $874,683 and $63,568, respectively. Interest expense resulted from
financing obtained from third-party lenders in connection with the Southwest
Aircraft and the Finnair Aircraft, described above. The financing of the
Southwest and Finnair Aircraft occurred in December 1995 and March 1996,
respectively. Interest expense in future years is expected to decline as the
principal balance of notes payable is reduced through the application of rent
receipts to outstanding debt.
-5-
<PAGE>
Management fees were 5% of lease revenue during 1997, 1996 and 1995 and
will not change as a percentage of lease revenue in future periods.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as insurance,
printing, distribution and remarketing expenses. The overall increase in
operating expenses from 1995 to 1997 was due primarily to increases in
administrative charges, professional service costs and remarketing expenses.
Operating costs in 1996 included heavy maintenance costs incurred and accrued in
connection with the Partnership's interest in the L-1011-50 aircraft which was
subsequently remarketed (see above) and legal expenses and broker fees incurred
in connection with the like-kind exchange transactions, also discussed above.
The amount of future operating expenses cannot be predicted with certainty;
however, such expenses are usually higher during the acquisition and liquidation
phases of a partnership. Other fluctuations will occur in relation to the volume
and timing of aircraft remarketing activities. Depreciation expense was
$2,501,988, $3,065,516 and $2,716,474 for the years ended December 31, 1997,
1996 and 1995, respectively. The increase in depreciation expense in 1996
compared to 1995 reflects the transfer of the United Aircraft during 1995 and
the completion of the aircraft exchange during 1996.
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
generally derive from aircraft rental transactions. Accordingly, the
Partnership's principal source of cash from operations is generally provided by
the collection of periodic rents. These cash inflows are used to satisfy debt
service obligations associated with leveraged leases, and to pay management fees
and operating costs. Operating activities generated net cash inflows of
$2,001,652, $3,806,235 and $3,612,295 in 1997, 1996 and 1995, respectively. The
expiration of the Partnership's lease agreements related to its interest in the
Lockheed L-1011-50 and the sale of the two Boeing 727-251 Advanced aircraft have
caused an overall decline in the Partnership's lease revenue and corresponding
sources of operating cash. This decline has been partially offset by an increase
in rents generated in connection with the Southwest Aircraft and the Finnair
Aircraft and the re-lease of the aircraft to Aer Lease (see Results of
Operations). 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.
Cash expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. For the year ended December 31, 1996, the
Partnership expended $240,726 in cash in connection with the like-kind exchange
transactions referred to above. There were no equipment acquisitions in 1997 and
1995. During the year ended December 31, 1996, the Partnership realized
$6,664,313 in proceeds from the sale of two Boeing 727-251 Advanced aircraft.
There were no equipment sales in 1997 and 1995. Future inflows of cash from
asset disposals will vary in timing and amount and will be influenced by many
factors including, but not limited to, the frequency and timing of lease
expirations, the equipment's condition and age, and future market conditions.
As described in Results of Operations, the Partnership obtained long-term
financing in connection with the like-kind exchange transactions involving the
Southwest Aircraft and the Finnair Aircraft. 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. The Partnership also has balloon payment
obligations at the expiration of the primary lease term related to the Finnair
Aircraft of $4,671,150.
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. 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,
-6-
<PAGE>
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 EFG 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.
Overall, the future liquidity of the Partnership will be greatly dependent
upon the collection of contractual rents and the outcome of residual activities,
as well as the outcome of the Class Action Lawsuit described in Note 7 to the
accompanying financial statements. The General Partner anticipates that cash
proceeds resulting from the collection of contractual rents and the outcome of
residual activities 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. Accordingly, the General Partner
expects to suspend the declaration of quarterly cash distributions between the
periods corresponding to major remarketing events.
-7-
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, 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.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 1998
-8-
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF FINANCIAL POSITION
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents $ 2,671,041 $ 4,126,851
Accounts receivable - affiliate 121,626 --
Equipment at cost, net of accumulated
depreciation of $10,923,789 and
$8,421,801 at December 31, 1997
and 1996, respectively 17,071,746 19,573,734
------------- -------------
Total assets $ 19,864,413 $ 23,700,585
============= =============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 8,864,307 $ 11,321,769
Accrued interest 98,052 118,940
Accrued liabilities 8,250 442,400
Accrued liabilities - affiliate 36,219 63,930
Deferred rental income 213,287 158,904
Cash distributions payable to partners -- 1,000,000
------------- -------------
Total liabilities 9,220,115 13,105,943
------------- -------------
Partners' capital (deficit):
General Partner (1,166,781) (1,169,264)
Limited Partnership Interests
(3,040,000 Units; initial purchase
price of $25 each) 11,811,079 11,763,906
------------- -------------
Total partners' capital 10,644,298 10,594,642
------------- -------------
Total liabilities and partners'
capital $ 19,864,413 $ 23,700,585
============= =============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-9-
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Lease revenue $ 3,858,270 $ 4,346,218 $ 4,588,609
Interest income 130,552 261,557 58,206
Gain on sale of equipment -- 5,976,056 --
Loss on exchange of equipment -- -- (1,940,918)
------------ ------------ ------------
Total income 3,988,822 10,583,831 2,705,897
------------ ------------ ------------
Expenses:
Depreciation 2,501,988 3,065,516 2,716,474
Write-down of equipment -- 967,200 1,740,960
Interest expense 890,289 874,683 63,568
Equipment management fees -
affiliate 192,913 217,311 229,430
Operating expenses -
affiliate 353,976 1,098,222 239,185
------------ ------------ ------------
Total expenses 3,939,166 6,222,932 4,989,617
------------ ------------ ------------
Net income (loss) $ 49,656 $ 4,360,899 $ (2,283,720)
============ ============ ============
Net income (loss)
per limited partnership unit $ 0.02 $ 1.36 $ (0.71)
============ ============ ============
Cash distributions declared
per limited partnership unit $ -- $ 1.56 $ 1.00
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-10-
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Recognized Owners
Partner ---------------------------
Amount Units Amount Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
Net income - 1996 218,045 -- 4,142,854 4,360,899
Cash distributions declared (250,000) -- (4,750,000) (5,000,000)
------------ ------------ ------------ ------------
Balance at December 31, 1996 (1,169,264) 3,040,000 11,763,906 10,594,642
Net income - 1997 2,483 -- 47,173 49,656
------------ ------------ ------------ ------------
Balance at December 31, 1997 $ (1,166,781) 3,040,000 $ 11,811,079 $ 10,644,298
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-11-
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ 49,656 $ 4,360,899 $ (2,283,720)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation 2,501,988 3,065,516 2,716,474
Write-down of equipment -- 967,200 1,740,960
Gain on sale of equipment -- (5,976,056) --
Loss on exchange of equipment -- -- 1,940,918
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable -- 562,594 (218,517)
Accounts receivable - affiliate (121,626) 353,803 (352,067)
Increase (decrease) in:
Accrued interest (20,888) 55,372 63,568
Accrued liabilities (434,150) 401,873 (66,270)
Accrued liabilities - affiliate (27,711) (7,731) 52,632
Deferred rental income 54,383 22,765 18,317
---------------- ---------------- ----------------
Net cash from operating activities 2,001,652 3,806,235 3,612,295
---------------- ---------------- ----------------
Cash flows from (used in) investing activities:
Purchase of equipment -- (240,726) --
Proceeds from equipment sales -- 6,664,313 --
---------------- ---------------- ----------------
Net cash from investing activities -- 6,423,587 --
---------------- ---------------- ----------------
Cash flows used in financing activities:
Principal payments - notes payable (2,457,462) (2,582,312) --
Distributions paid (1,000,000) (4,600,000) (3,600,000)
---------------- ---------------- ----------------
Net cash used in financing activities (3,457,462) (7,182,312) (3,600,000)
---------------- ---------------- ----------------
Net increase (decrease) in cash
and cash equivalents (1,455,810) 3,047,510 12,295
Cash and cash equivalents at beginning of year 4,126,851 1,079,341 1,067,046
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 2,671,041 $ 4,126,851 $ 1,079,341
================ ================ ================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 911,177 $ 819,311 $ --
================ ================ ================
Supplemental disclosure of non-cash investing and financing activities:
See Note 3 to the Financial Statements.
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-12-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
December 31, 1997
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
AIRFUND International Limited Partnership (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 Equis Financial Group Limited Partnership
(formerly American Finance Group), a Massachusetts limited partnership ("EFG").
The common stock of the General Partner is owned by AF/AIP Programs Limited
Partnership, of which EFG 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, was $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").
EFG is a Massachusetts partnership formerly known as American Finance
Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Partnership and
several other Direct-Participation equipment leasing programs sponsored or
co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to
broker or originate equipment leases, acts as remarketing agent and asset
manager, and provides leasing support services, such as billing, collecting, and
asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
In 1990, EFG 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 EFG.
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.
-13-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services (see Note 4).
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 federal agency
discount notes and 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, 1997, the Partnership had $2,567,323 invested in
federal agency discount notes and 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 and quarterly and no
significant amounts are calculated on factors other than the passage of time.
All leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$5,433,988 are due as follows:
<TABLE>
<S> <C>
For the year ending December 31, 1998 $ 3,549,988
1999 1,884,000
-----------
Total $ 5,433,988
===========
</TABLE>
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Finnair OY
(Two MD-82) $ 2,118,453 $ 1,433,334 $ --
Southwest Airlines, Inc.
(Three Boeing 737-2H4) $ 1,250,208 $ 1,250,208 $ 562,594
Aer Lease Limited
(One Lockheed L-1011-50) $ 489,609 $ -- $ --
Northwest Airlines, Inc.
(Two Boeing 727-251 ADV) $ -- $ 1,200,000 $ 1,456,000
Cathay Pacific Airways Limited
(One Lockheed L-1011-50) $ -- $ 462,676 $ 1,098,729
United Air Lines, Inc.
(One Boeing 747-SP-21) $ -- $ -- $ 1,471,286
</TABLE>
The Partnership entered into a new 1-year lease agreement with Aer Lease
Limited ("Aer Lease") for its proportionate interest in a Lockheed L-1011-50
aircraft at a base rent to the Partnership of $60,450 per month, beginning April
27, 1997. In addition, Aer Lease has entered into an agreement with the
Partnership to purchase the aircraft at the expiration of the lease term. The
Partnership is expected to receive proceeds of approximately $846,000 related to
the sale of its interest in this aircraft.
-14-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
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 EFG 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 EFG or the Affiliate plus all actual costs accrued by EFG or the
Affiliate while carrying the aircraft less, for the aircraft leased to Cathay,
the amount of all interim rents received by EFG 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.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG'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.
Accrued Liabilities - Affiliate
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees 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.
-15-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
Net Income (Loss) and Cash Distributions Per Unit
Net income (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, 1997 and computed after allocation of the General Partner's 5% share of net
income (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.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
December 31, 1997. Remaining Lease Term (Months), as used below, represents the
number of months remaining from December 31, 1997 under contracted lease terms.
In the opinion of EFG, the acquisition cost of the equipment did not exceed its
fair market value.
<TABLE>
<CAPTION>
Remaining
Lease
Term Equipment
Equipment Type (Months) at Cost Location
------------------------------------ --------- ------------ --------
<S> <C> <C> <C>
Two McDonnell-Douglas MD-82 (Finnair) 19 $ 13,762,438 Foreign
One Lockheed L-1011-50 (Aer Lease) 4 7,877,224 Foreign
Three Boeing 737-2H4 (Southwest) 24 6,355,873 TX
------------
Total equipment cost 27,995,535
Accumulated depreciation (10,923,789)
------------
Equipment, net of accumulated depreciation $ 17,071,746
============
</TABLE>
The cost of the Lockheed L-1011-50 aircraft, the three Boeing 737-2H4
aircraft and the two McDonnell-Douglas MD-82 aircraft represent proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by EFG. 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 76.8% interest in a
Boeing 747-SP-21 commercial jet aircraft leased to United Air Lines, Inc. (the
"United Aircraft"), pursuant to the rules for a like-kind exchange for income
tax reporting purposes. In November 1995, the Partnership partially replaced the
United Aircraft with a 43.41% interest in the Southwest Aircraft, at an
aggregate cost of $6,355,873. To acquire the interests in the Southwest
Aircraft, the Partnership obtained financing of $4,742,968 from a third-party
lender and utilized $1,612,905 of the cash consideration received from the
transfer of the United Aircraft. The remaining ownership interest of 56.59% in
the Southwest Aircraft is held by affiliated equipment leasing programs
sponsored by EFG.
In March 1996, the Partnership completed the replacement of the United
Aircraft with a 49.17% ownership interest in two MD-82 aircraft leased to
Finnair OY (the "Finnair Aircraft") at a total cost to the Partnership of
$13,762,438. To acquire the ownership interest in the Finnair Aircraft, the
Partnership paid $4,601,325 in cash
-16-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
and obtained financing of $9,161,113 from a third-party lender. The remaining
ownership interests of 50.83% in the Finnair Aircraft are held by affiliated
equipment leasing programs sponsored by EFG.
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
$20,118,000 and a net book value of approximately $16,306,000 at December 31,
1997 (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 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, EFG's
ability to maximize proceeds from selling or re-leasing the aircraft upon the
expiration of the primary lease terms.
The Partnership recorded a write-down of aircraft carrying values,
representing impairments related to the Partnership's interest in the Lockheed
L-1011-50 aircraft, during each of the years ended December 31, 1996 and 1995.
The resulting charges, $967,200 ($0.30 per limited partnership unit) in 1996 and
$1,740,960 ($0.54 per limited partnership unit) in 1995 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 EFG on
behalf of the Partnership and EFG 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, 1997, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Equipment management fees $ 192,913 $ 217,311 $ 229,430
Administrative charges 49,788 28,376 21,000
Reimbursable operating
expenses due to third parties 304,188 1,069,846 218,185
------------ ------------ ------------
Total $ 546,889 $ 1,315,533 $ 468,615
============ ============ ============
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include all aspects of
acquisition, management and sale of equipment. For acquisition services, EFG was
compensated by an amount equal to 1.6% of Equipment Base Price paid by the
Partnership. For management services, EFG 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 EFG for services connected
to the sale of equipment is calculated as the lesser of (i) 3% of
-17-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
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 EFG, pursuant to Section
10.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG.
All equipment was purchased from EFG or one of its Affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2.
All rents and proceeds from the sale of aircraft are paid directly to EFG.
EFG temporarily deposits collected funds in a separate interest-bearing escrow
account prior to remittance to the Partnership. At December 31, 1997, the
Partnership was owed $121,626 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in January 1998.
Old North Capital Limited Partnership ("ONC"), a Massachusetts Limited
Partnership which was formed in 1995 and is owned and controlled by certain
principals of EFG who own 205,040 units or 6.74% of the total outstanding units
of the Partnership. EFG owns a 49% limited partnership interest in ONC, which it
acquired in December 1996.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1996 consisted of installment notes payable
to banks of $8,864,307. All of the installment notes are non-recourse, with
interest rates ranging between 8.65% and 8.89% and are collateralized by the
equipment and assignment of the related lease payments. All of the notes were
originated in connection with the Southwest Aircraft and the Finnair Aircraft.
The installment notes related to the Southwest Aircraft will be fully amortized
by noncancellable rents. The Partnership has a balloon payment obligation at the
expiration of the primary lease term related to the Finnair Aircraft of
$4,671,150. The carrying amount of notes payable approximates fair value at
December 31, 1997.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<S> <C>
For the year ending December 31, 1998 $ 2,680,097
1999 6,184,210
-----------
Total $ 8,864,307
</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
-18-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
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, 1997, the
General Partner had a positive tax capital account balance.
The following is a reconciliation between net income (loss) reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) $ 49,656 $ 4,360,899 $ (2,283,720)
Tax depreciation in excess of
financial statement
depreciation (551,768) (1,654,141) (1,813,446)
Write-down of equipment -- 967,200 1,740,960
Deferred rental income 54,383 22,765 18,317
Other (424,651) (1,333,616) 2,020,977
------------ ------------ ------------
Net income (loss) for federal
income tax reporting purposes $ (872,380) $ 2,363,107 $ (316,912)
============ ============ ============
</TABLE>
The principal component of "Other" consists of the difference between the
tax gain (loss) on equipment disposals and the financial statement gain (loss)
on disposals. It also includes reversal of the maintenance reserves.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Partners' capital $ 10,644,298 $ 10,594,642
Add back selling commissions and
organization and offering costs 7,975,000 7,975,000
Financial statement distributions in
excess of tax distributions -- 50,000
Cumulative difference between federal
income tax and financial statement
income (loss) (5,447,522) (4,525,486)
------------ ------------
Partners' capital for federal income tax
reporting purposes $ 13,171,776 $ 14,094,156
============ ============
</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- LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs")
filed a class and derivative action, captioned Leonard Rosenblum, et al. v.
Equis Financial Group Limited Partnership, et al., in the United States
District Court for the Southern District of Florida (the "Court") on behalf
of a proposed class of investors in 28 equipment leasing programs sponsored
-19-
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
by EFG, including the Partnership (collectively, the "Nominal Defendants"),
against EFG and a number of its affiliates, including the General Partner, as
defendants (collectively, the "Defendants"). Certain of these Plaintiffs, on
or about June 24, 1997, had filed an earlier derivative action, captioned
Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership, et
al., in the Superior Court of the Commonwealth of Massachusetts on behalf of
the Nominal Defendants against the Defendants. Both actions are referred to
herein collectively as the "Class Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the
Securities Exchange Act of 1934, common law fraud, breach of contract, breach
of fiduciary duty, and violations of the partnership or trust agreements that
govern each of the Nominal Defendants. The Defendants have denied, and
continue to deny, that any of them have committed or threatened to commit any
violations of law or breached any fiduciary duties to the Plaintiffs or the
Nominal Defendants.
On March 9, 1998, counsel for the Defendants and the Plaintiffs
entered into a Memorandum of Understanding setting forth the terms pursuant
to which a settlement of the Class Action Lawsuit is intended to be achieved
and which, among other things, is expected to reduce the burdens and expenses
attendant to continuing litigation. The Memorandum of Understanding
represents a preliminary step towards a comprehensive Stipulation of
Settlement between the parties that must be presented to and approved by the
Court as a condition precedent to effecting a settlement. The Memorandum of
Understanding (i) prescribes a number of conditions necessary to achieving a
settlement, including providing the partners (or beneficiaries, as
applicable) of the Nominal Defendants with the opportunity to vote on any
settlement and (ii) contemplates various changes that, if effected, would
alter the future operations of the Nominal Defendants. With respect to the
Partnership and 10 affiliated partnerships (hereafter referred to as the
"Exchange Partnerships"), the Memorandum of Understanding provides for the
restructuring of their respective business operations into a single successor
company whose securities would be listed and traded on a national stock
exchange. The partners of the Exchange Partnerships would receive both
common stock in the new company and a cash distribution in exchange for their
existing partnership interests. Such a transaction would, among other
things, allow for the consolidation of the Partnership's operating expenses
with other similarly-organized equipment leasing programs. To the extent
that the parties agree upon a Stipulation of Settlement that is approved by
the Court, the complete terms thereof will be communicated to all of the
partners (or beneficiaries) of the Nominal Defendants to enable them to vote
thereon.
There can be no assurance that the parties will agree upon a
Stipulation of Settlement, or that it will be approved by the Court, or that
the outcome of the voting by the partners (or beneficiaries) of the Nominal
Defendants, including the Partnership, will result in a settlement finally
being effected or in the Partnership being included in any such settlement.
The General Partner and its affiliates, in consultation with counsel, concur
that there is a reasonable basis to believe that a Stipulation of Settlement
will be agreed upon by the parties and approved by the Court. In the absence
of a Stipulation of Settlement approved by the Court, the Defendants intend
to defend vigorously against the claims asserted in the Class Action Lawsuit.
The General Partner and its affiliates cannot predict with any degree of
certainty the ultimate outcome of such litigation.
-20-
<PAGE>
AIRFUND International Limited Partnership
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1997, 1996 and 1995
The Partnership classifies all rents from leasing aircraft as lease
revenue. Upon expiration of the primary lease terms, aircraft may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the aircraft, in addition to any month-to-month revenue, represent the total
residual value realized for each aircraft. Therefore, the financial statement
gain or loss, which reflects 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 may not reflect the aggregate residual proceeds realized by the
Partnership for such aircraft.
The following is a summary of cash excess associated with the aircraft
dispositions which occurred in the year ended December 31, 1996. No aircraft
were disposed of during the years ended December 31, 1997 and 1995.
<TABLE>
<S> <C>
Rents earned prior to disposal of aircraft $ 17,831,499
Sale proceeds realized upon disposition of
aircraft 6,664,313
------------
Total cash generated from rents and aircraft
sale proceeds 24,495,812
Original acquisition cost of aircraft disposed 19,040,719
------------
Excess of total cash generated to cost of
aircraft disposed $ 5,455,093
============
</TABLE>
-21-
<PAGE>
ADDITIONAL FINANCIAL INFORMATION
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1997
<TABLE>
<CAPTION>
Sales and
Operations Refinancings Total
------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 49,656 $ -- $ 49,656
Add:
Depreciation 2,501,988 -- 2,501,988
Management fees 192,913 -- 192,913
Less:
Principal repayment of notes
payable (2,457,462) -- (2,457,462)
------------ ------------ ------------
Cash from operations, sales
and refinancings 287,095 -- 287,095
Less:
Management fees (192,913) -- (192,913)
------------ ------------ ------------
Distributable cash from
operations, sales and
refinancings 94,182 -- 94,182
Other sources and uses of cash:
Cash at beginning of year 2,062,538 2,064,313 4,126,851
Net change in receivables and
accruals (549,992) -- (549,992)
Less:
Cash distributions paid -- (1,000,000) (1,000,000)
------------ ------------ ------------
Cash at end of year $ 1,606,728 $ 1,064,313 $ 2,671,041
============ ============ ============
</TABLE>
-22-
<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, 1997
For the year ended December 31, 1997, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
<TABLE>
<S> <C>
Operating expenses $ 772,686
</TABLE>
-23-
<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 10,
1998 included in the 1997 Annual Report to the Partners of AIRFUND International
Limited Partnership.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 1998
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,671,041
<SECURITIES> 0
<RECEIVABLES> 121,626
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,792,667
<PP&E> 27,995,535
<DEPRECIATION> 10,923,789
<TOTAL-ASSETS> 19,864,413
<CURRENT-LIABILITIES> 355,808
<BONDS> 8,864,307
0
0
<COMMON> 0
<OTHER-SE> 10,644,298
<TOTAL-LIABILITY-AND-EQUITY> 19,864,413
<SALES> 0
<TOTAL-REVENUES> 3,988,822
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,048,877
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 890,289
<INCOME-PRETAX> 49,656
<INCOME-TAX> 0
<INCOME-CONTINUING> 49,656
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,656
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LEASE AGREEMENT (MSN1O24)
dated as of January 31, 1997
between
Investors Asset Holding Corp.
Lessor
and
G.P. Aer Lease Limited
Lessee
---------------------
Lockheed L-1O11-1
Aircraft
Manufacturers Serial No. 1024
and
Three Rolls Royce RB211-22B Engines
and Related Parts and Records
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. DEFINITIONS ............................................................ 1
SECTION 2. AGREEMENT TO LEASE; TERM ............................................... 7
2.1. Leasing of Aircraft ......................................................... 7
2.2. Delivery of Aircraft ........................................................ 7
2.3. Term ........................................................................ 7
2.4. Guarantys ................................................................... 7
SECTION 3. LESSEE'S REPRESENTATIONS, WARRANTIES AND
COVENANTS ......................................................................... 7
3.1. Organization; Good Standing; Certification ................................... 7
3.2. Authority; Consent ........................................................... 7
3.3. Legal, Valid and Binding ..................................................... 8
3.4. Compliance with Other Instruments ............................................ 8
3.5. Governmental Consents ........................................................ 8
3.6. No Adverse Agreements ........................................................ 8
3.7. No Defaults or Violations .................................................... 8
3.8. Litigation ................................................................... 8
3.9. Tax Returns .................................................................. 8
3.10. Filing or Recordation ....................................................... 9
3.11. Principal Place of Business ................................................. 9
3.12. Financial Statements ........................................................ 9
3.13. Financial and Other Information to be Supplied .............................. 9
3.14. Maintenance of Corporate Status; No Merger or Consolidation .................10
3.15. Notice of Default or Adverse Occurrence .....................................11
3.16. Maintenance of Consents and Approvals .......................................11
SECTION 4. LESSOR REPRESENTATIONS, WARRANTIES AND
AGREEMENTS ........................................................................11
SECTION 5. CONDITIONS PRECEDENT ...................................................11
5.1. Conditions Precedent to Obligation of Lessor to Lease Aircraft ...............11
5.2. Conditions Precedent to Obligation of Lessee to Lease the Aircraft ...........13
5.3. Acceptance for Lease .........................................................14
5.4. Non-fulfillment of Conditions Precedent under Section 5.2 ....................14
SECTION 6. PAYMENTS ...............................................................14
6.1. Basic Rent ...................................................................14
6.2. NET LEASE; NO SET-OFF OR DEDUCTIONS ..........................................14
-i-
<PAGE>
6.3. Immediately Available Funds ..................................................15
6.4. Supplemental Rent ............................................................16
6.5. Security Deposit .............................................................16
6.6. Reserves .....................................................................17
6.7 Cost of Pre-delivery Check ....................................................18
SECTION 7. DISCLAIMER OF WARRANTIES AND MANUFACTURERS'
WARRANTIES ........................................................................18
7.1. Disclaimer ...................................................................18
7.2. Other Warranties .............................................................19
SECTION 8. USE, OPERATION AND MAINTENANCE .........................................19
8.1. General ......................................................................19
8.2. Operation and Use ............................................................20
8.3. Maintenance in General .......................................................20
8.4. Specific Items of Maintenance ................................................20
8.5. Parts ........................................................................21
8.6. Airworthiness Directives .....................................................22
8.7. Service Bulletins ............................................................23
8.8. Modification Payments by the Government ......................................23
8.9. Corrosion Control ............................................................23
8.10. Modifications ...............................................................23
8.11. Possession ..................................................................24
8.12. Reports .....................................................................25
8.13. Right to Inspect ............................................................25
8.14. Aircraft Records ............................................................26
SECTION 9. RETURN OF AIRCRAFT .....................................................26
9.1. Return Location, Notices, Costs, Taxes and Fees ..............................26
9.2. Return of Other Engines ......................................................27
9.3. Condition of Aircraft ........................................................27
9.4. Condition of Airframe ........................................................28
9.5. APU ..........................................................................29
9.6. Engine Condition .............................................................29
9.7. Borescope Inspection .........................................................29
9.8. Inspection ...................................................................29
9.9. Operational Ground Check .....................................................30
9.10. Operational Check Flight ....................................................30
9.11. Acceptance ..................................................................30
9.12. Deferred Return Condition Discrepancy Correction ............................30
9.13. Costs .......................................................................31
9.14. Manuals and Technical Records ...............................................31
-ii-
<PAGE>
9.15. Lessee's Special Exterior Markings ..........................................31
9.16. Ownership ...................................................................31
9.17. Parking of Aircraft Upon Return .............................................31
9.18. Lease Continues .............................................................31
SECTION 10. TITLE; REGISTRATION; LIENS ............................................32
10.1. Title .......................................................................32
10.2. Registration ................................................................32
10.3. Liens .......................................................................32
10.4. Notice of Ownership .........................................................32
SECTION 11. INSURANCE .............................................................33
11.1. All-Risk Insurance ..........................................................33
11.2. War Risk Insurance ..........................................................33
11.3. Liability Insurance .........................................................33
11.4. Additional Requirements; Loss Payment .......................................34
11.5. No Set-off ..................................................................35
11.6. Notice of Material Alteration or Cancellation ...............................35
11.7. Application of Hull Insurance Proceeds ......................................35
11.8. Insurance for Own Account ...................................................35
11.9. Reports .....................................................................35
11.10. Continuing Insurance .......................................................36
SECTION 12. LOSS, DAMAGE OR REQUISITION ...........................................36
12.1. Total Loss of Airframe ......................................................36
12.2. Total Loss of Engine ........................................................36
12.3. Repairable Damage; Use of Insurance Proceeds ................................37
12.4. Payment from Governmental Authorities for Requisition of Title or Use;
Requisition .......................................................................38
12.5. Application of Payments During Existence of Event of Default ................38
12.6. Risk of Loss ................................................................38
SECTION 13. EVENT OF DEFAULT ......................................................38
13.1. Failure to Make Payments ....................................................38
13.2. Failure to Obtain or Maintain Insurance .....................................38
13.3. Failure to Perform Other Obligations ........................................39
13.4. Representations and Warranties Untrue .......................................39
13.5. Guaranty Default ............................................................39
13.6. Other Defaults ..............................................................39
13.7. Insolvency or Bankruptcy ....................................................39
13.8. Loss of License .............................................................40
-iii-
<PAGE>
SECTION 14. REMEDIES ..............................................................40
SECTION 15. INDEMNITIES ...........................................................42
15.1. General Indemnification and Waiver of Certain Claims ........................42
15.2. Taxes and Other Charges .....................................................43
15.3. Continuing Indemnification ..................................................44
SECTION 16. TRANSFER, ASSIGNMENT AND SUBLEASE .....................................44
16.1. Assignment or Encumbrance by Lessor .........................................44
16.2. Sublease of Aircraft or Assignment by Lessee ................................45
16.3. Consolidation, Merger or Transfer by Lessee .................................45
16.4. Nonrecourse As to Trustee ...................................................45
SECTION 17. OPTION TO PURCHASE ....................................................45
SECTION 18. NOTICES ...............................................................45
SECTION 19. LESSOR'S RIGHT TO PERFORM FOR LESSEE ..................................46
SECTION 20. MISCELLANEOUS .........................................................46
20.1. Federal Bankruptcy Code .....................................................46
20.2. Waivers, Headings ...........................................................46
20.3. Counterparts ................................................................47
20.4. Agreement to Lease ..........................................................47
20.5. Governing Law ...............................................................47
20.6. Benefit and Binding Effect ..................................................47
20.7. Further Assurances ..........................................................47
20.8. Capitalized or Boldface Provisions ..........................................47
20.9 Venue ........................................................................48
20.10. Entire Agreement ...........................................................48
EXHIBIT A .........................................................................A-1
EXHIBIT B .........................................................................B-1
EXHIBIT C .........................................................................C-1
EXHIBIT D .........................................................................D-1
EXHIBIT E .........................................................................E-1
EXHIBIT F .........................................................................F-1
-iv-
</TABLE>
<PAGE>
EXECUTION COPY
JANUARY 31, 1997
LEASE AGREEMENT (MSN 1024)
This LEASE AGREEMENT (MSN 1024), dated as of January 31, 1997, ("Lease"),
is by and between Investors Asset Holding Corp., a Massachusetts corporation,
having its principal place of business at c/o Equis Financial Group, 98 North
Washington Street, Boston, MA 02114, solely as trustee and not in its individual
capacity ("Lessor"), and G.P. Aer Lease Limited, a corporation organized and
existing under the laws of the Republic of Cyprus, having its principal place of
business at c/o T.B.G. Airways Limited, Stansted Airport, Stansted, Essex CM24
1AF U.K. ("Lessee");
W I T N E S S E T H
WHEREAS, Lessor desires to lease the Aircraft to Lessee and Lessee desires
to lease the Aircraft from Lessor in each case pursuant to the terms and
conditions of this Lease;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows.
SECTION 1. DEFINITIONS.
The following terms shall have the following respective meanings for all
purposes of this Agreement:
"Acceptance Certificate (Delivery)" means a certificate in
substantially the form of Exhibit C hereto, to be signed by Lessor and Lessee on
the Delivery Date as required under Section 2.2.
"Acceptance Certificate (Return)" means a certificate in
substantially the form of Exhibit D hereto, to be signed by Lessor and Lessee
upon the return of the Aircraft to Lessor as required by Section 9.1 hereof.
"ACMI Lease" means any arrangement whereby Lessee agrees to furnish
the Aircraft to a third party pursuant to which (i) Lessee's crew at all times
shall maintain full operational control of the Aircraft, (ii) the Aircraft shall
be operated solely by regular employees of Lessee possessing all current
appropriate IAA certificates and licenses, (iii) the insurance required under
Section 11 shall remain in full force and effect, (iv) the Aircraft shall be
maintained in accordance with the Maintenance Program as required by the terms
of this Lease and (v) the term of any such ACMI Lease does not extend beyond the
Term.
"Aircraft" means (A) the Airframe identified and described in
Exhibit A hereto (including all Parts, including, without limitation, the APU,
comprising such Airframe) together with the three Engines delivered in
connection therewith as identified and described in Exhibit A hereto (or any
engine substituted
<PAGE>
for any of said Engines pursuant to Section 9.2 or Section 12.2 of this Lease),
whether or not any of such initial Engines or substitute engines may from time
to time be installed on such Airframe or may be installed on any other airframe
or on any other aircraft; and (B) where the context permits, the Manuals and
Technical Records.
"Airframe" means the Aircraft except the Engines or engines from
time to time installed thereon and the Manuals and Technical Records.
"Airworthiness Directive(s)" has the meaning given the 8.6 hereof.
"Applicable Law" means all applicable laws and treaties of any
government and applicable, legally adopted rules, regulations, and orders of any
governmental body, instrumentality, agency or authority.
"APU" means the auxillary power unit installed on the Airframe from
time to time.
"A.T.T. Guaranty" means the Guaranty Agreement pursuant to which Aer
Turas Teoranta, an Irish corporation, is guaranteeing the obligations of Lessee
hereunder.
"Basic Rent" means the rent payable on Rent Payment Dates
throughout the Basic Term for the Aircraft pursuant to 6.1 of the Lease.
"Basic Term" means the period during which Lessee shall lease the
Aircraft in accordance with this Lease, which shall be a period commencing on
the Delivery Date and continuing for the 12 calendar months following the
Delivery Date and any extension thereof pursuant to the terms of the proviso in
clause (iv)(B) of the definition herein of Total Loss.
"Business Day(s)" means any day other than a Saturday, a Sunday or a
day on which commercial banking institutions are authorized by law to be closed
in any city where the principal business office of Lessee and Lessor are
located.
"Certificated Air Carrier" means an "air carrier" duly authorized
under the laws of the Republic of Ireland or any other jurisdiction having the
authority to regulate Lessee's operations of the Aircraft in the manner
contemplated by this Lease.
"Claims" has the meaning given in Section 15.1(a) hereof.
"Cycle" means one take-off and landing of the Aircraft.
"Day" means one calendar day when used to measure intervals in the
Maintenance Program relating to hard time calendar controlled Parts.
-2-
<PAGE>
"Delivery Date" means the date on which Lessee signs and delivers to
Lessor an Acceptance Certificate (Delivery) for the Aircraft, in accordance with
Section 2.2 hereof.
"Direct Labor Rate" means Lessee's cost without, giving any account
for overhead charges or profit, per hour of productive labor.
"Dollars" or "$" means United States dollars.
"Engine" means any of the Rolls-Royce RB211-22B engines identified
and described in Exhibit A, whether or not from time to time installed on the
Airframe or installed on any other airframe; and any engine that may from time
to time be substituted, pursuant to Section 9.2 or Section 12.2 of this Lease,
for such Engine and constituting a Replacement Engine.
"Event of Default" has the meaning given in Section 13 hereof.
"Guarantors" means either or both of T.B.G. Airways Limited, an
English corporation and Aer Turas Teoranta, a corporation organized and existing
under the laws of the Republic of Ireland.
"Guaranty" means either or both of the A.T.T. Guaranty and T.B.G.
Guaranty.
"Hour(s)" means Aircraft flight time, expressed in hours, between
take-off and landing.
"IAA" means the Irish Civil Aviation Authority.
"Indemnified Person" has the meaning given in Section 15.1(a)
hereof.
"Lease" means this Lease Agreement as the same may be modified,
amended or supplemented from time to time pursuant to the terms hereof.
"Lease Documents" means the Lease with attachments and schedules and
those documents in the form of Exhibits A through D hereto.
"Lease Commencement Date" means the date designated for the
commencement of the Lease as set forth on the Acceptance Certificate.
"Lessee" means G.P. Aer Lease Limited, a corporation organized and
existing under the laws of the Republic of Cyprus.
"Lessor" means Investors Asset Holding Corp., a Massachusetts
corporation, not in its individual capacity but solely as trustee of the Trust,
and its successors and assigns.
"Lessor's Lien" means any Lien arising as a result of (i) claims
against Lessor not related to the transactions contemplated by this Lease, (ii)
any
-3-
<PAGE>
act or omission of Lessor which is not related to the transactions contemplated
by this Lease or is in violation of any of the terms of this Lease, or (iii)
arising out of claims against Lessor with respect to Taxes against which Lessee
is not required to indemnify Lessor.
"Letter Agreement" means that certain letter agreement of even date
herewith between Lessor and Lessee relating to the sharing of the expenses
needed to place the Aircraft in the condition required for its acceptance for
lease hereunder, the form of which is attached hereto as Exhibit E.
"Lien" means any mortgage, pledge, lien, charge, encumbrance, lease
or security interest relating to the Aircraft, the Lease or any Part, as the
context may require.
"Maintenance Program" has the meaning given in Section 8.3 hereof.
"Manuals and Technical Records" means all such manuals, technical
data, log books and other records pertaining to the Aircraft (including, without
limitation, the technical manuals and aircraft records listed in Exhibit B
hereto) to be maintained by Lessee as shall be required to comply with the
requirements of the IAA or otherwise by Applicable Law.
"Modification Payment" has the meaning given in Section 8.8 hereof.
"Officer's Certificate" means as to any company a certificate signed
by any officer duly authorized to execute such certificate.
"Operative Documents" means the Lease Documents, each document
provided by or entered into by Lessee, Lessor and Guarantor in conjunction with
this Lease.
"Optional Modifications" has the meaning given in Section 8.10(b)
hereof.
"Overdue Rate" means the rate of interest per annum, announced from
time to time by the Bank of Boston in Boston, Massachusetts as its "base" rate
of interest which serves as the basis on which effective rates of interest for
loans are calculated, plus 3.0 percentage points; each change in such base rate
shall cause an equal and corresponding change in the Overdue Rate on the day
specified is the Bank's public announcement of such change.
"Parts" means all appliances, parts, instruments, appurtenances,
accessories, furnishings and other equipment of whatever nature (other than
Engines or engines) but including the APU, which may from time to time be
incorporated or installed in or attached to the Airframe or any Engine or so
long as title thereto shall remain vested in Lessor in accordance with Section
8.5 hereof after removal therefrom.
-4-
<PAGE>
"Permitted Liens" means (a) the respective rights of Lessor and
Lessee as provided herein, including, without limitation, any encumbrance which
Lessor has caused to be placed on the Aircraft as permitted pursuant to Section
16.1 hereof; (b) the rights of others under agreements or arrangements to the
extent expressly permitted in Section 8.1 1 hereof; (c) Liens for Taxes either
not yet due or being contested in good faith (and for the payments of which
adequate reserves have been provided by Lessee) by appropriate proceedings so
long as such proceedings do not involve any material danger of the sale,
forfeiture or loss of the Airframe or any Engine; (d) material suppliers',
mechanics', workers', repairers', employees' or other like liens arising in the
ordinary course of business and for amounts the payment of which is not yet
delinquent or is being withstood in good faith by appropriate proceedings and so
long as such proceedings do not involve a material danger of the sale,
forfeiture or loss of the Airframe or any Engine; and (e) Lessor's Liens.
"Permitted Sublease" means a sublease entered into by Lessee with
the prior written consent of Lessor with either of the Guarantors as sublessee.
"Permitted Sublessee" means any sublessee under a Permitted
Sublease.
"Person" means an individual, partnership, corporation, business
trust, joint venture, governmental authority or other entity of whatever nature.
"Pre-delivery Check" means the Segment C Check to be performed on
the Aircraft in or about February, 1997 and prior to the acceptance of the
Aircraft for lease hereunder which, in this instance, constitutes a full C
Check.
"Rent" means Basic Rent and Supplemental Rent.
"Rent Payment Date" has the meaning given in Section 6.1 hereof.
"Rent Period" means the period of time between any Rent Payment Date
and the next succeeding Rent Payment Date, or between the last Rent Payment Date
and the expiration of the Term.
"Replacement Engine" means an engine of the same or an improved
model as an Engine being replaced pursuant to Sections 9.2 or 12.2 hereof, which
is suitable for installation and use on the Airframe without impairing the value
or utility of the Aircraft and having a time status, modification status, value,
manufacturer's warranty status, condition and utility at least equal to the
Engine it is replacing (assuming such Engine was in the modification status,
condition, and repair required by the terms hereof immediately prior to being
replaced). Any such Replacement Engine shall be an Engine hereunder.
"Required Modifications" has the meaning given in Section 8.10(a)
hereof.
"Reserve Tasks" has the meaning given to such term in Section 6.6
hereof.
-5-
<PAGE>
"Reserves" has the meaning given to such term in Section 6.6 hereof.
"Return Location" has the meaning given in Section 9.1(a) hereof.
"Segment C Check" means the inspection, overhaul, repair,
preservation and replacement of Parts of the Aircraft, including preventive
maintenance, identified as a Segment C Check under the Airframe manufacturer's
maintenance manuals and planning documents. Such Segment C Check shall include
all structural inspections, corrosion control and other work normally completed
in conjunction with each Segment C Check.
"Security Deposit" has the meaning given in Section 6.5 hereof.
"Service Bulletin" has the meaning given in Section 8.7 hereof.
"Stipulated Loss Value" for the Aircraft means $2,800,000.
"Supplemental Rent" means all monetary amounts, liabilities and
obligations (other than Basic Rent) which Lessee assumes or agrees to pay under
any Lease Document to Lessor including, without limitation, Stipulated Loss
Value and the purchase option price in the event of the exercise of Lessee's
option to purchase set forth in Section 17 hereof.
"T.B.G. Guaranty" means the Guaranty Agreement pursuant to which
T.B.G. Airways Limited, an English corporation, is guaranteeing the obligations
of Lessee hereunder.
"Tax" means all license and registration fees and all taxes, levies,
imposts, duties, charges, assessments or withholdings of any nature whatsoever
together with any penalties, additions to tax, fines or interest thereon.
"Term" means the Basic Term pursuant to Section 2.3 and any
extension thereof pursuant to the terms hereof or otherwise as Lessor and Lessee
may hereinafter agree.
"Total Loss" with respect to the Aircraft, Airframe, any Engine or
Part means any of the following events with respect to such property; (i) loss
of such property or the use thereof due to theft or disappearance for more than
45 consecutive days; (ii) loss of such property or the use thereof due to
destruction, damage beyond economic repair or rendition of such property
permanently unfit for normal use; (iii) any event which should or does result in
the receipt of insurance proceeds with respect to such property on the basis of
a total loss, arranged total loss, constructive or agreed total loss; (iv) (A)
the confiscation or seizure of title to the Aircraft or Airframe (B) the
condemnation, taking, confiscation or seizure of the use of the Aircraft or
Airframe for a period equal to the shorter of 90 consecutive days or the date
the Aircraft is required to be returned to Lessor pursuant to Section 9 hereof
by any government or agency or instrumentality thereof; (v) with respect to any
Engine, the taking of title or requisition for use by any government
-6-
<PAGE>
and any divestiture of title deemed a Total Loss pursuant to Section 12.2 of
this Lease; or (vi) as a result of any rule, regulation, order or other action
(generally applicable to aircraft of the same type as the Aircraft) by the IAA
or other governmental body (including any court) having jurisdiction, the use of
the Aircraft for the commercial transportation of persons is prohibited for a
period of 180 consecutive days. A Total Loss with respect to the Aircraft shall
be deemed to occur if a Total Loss occurs with respect to the Airframe.
"Trust" has the meaning given in Section 16.4 hereof.
SECTION 2. AGREEMENT TO LEASE; TERM
2.1. LEASING OF AIRCRAFT. Subject to the terms and conditions of the Lease
Documents, and in reliance upon the agreements, representations and warranties
therein contained and made pursuant hereto, Lessor agrees to lease the Aircraft
to Lessee hereunder on the Delivery Date, such leasing to be evidenced by Lessor
executing and delivering the Acceptance Certificate hereunder.
2.2. DELIVERY OF AIRCRAFT. The Aircraft shall be delivered to Lessee by
Lessor for purposes of this Lease at facilities of Marshall of Cambridge
Aerospace Limited, The Airport, Cambridge CB5 8RX England.
2.3. TERM. Except as otherwise provided herein, the Aircraft shall be
leased for the Term which shall comprises the Basic Term and any extension
thereof pursuant to the terms hereof except that the Term shall end upon any
earlier termination of this Lease in accordance with its terms.
2.4. GUARANTYS. Simultaneously with the execution and delivery of the
Acceptance Certificate by Lessee and Lessor hereunder, Guarantors shall execute
and deliver the Guarantys in favor of Lessor.
SECTION 3. LESSEE'S REPRESENTATIONS, WARRANTIES AND COVENANTS. Lessee
represents, warrants and agrees as follows:
3.1. ORGANIZATION; GOOD STANDING; CERTIFICATION. Lessee and each Guarantor
is a corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation and has the corporate power and
authority to own or hold under lease its properties and to enter into and
perform its obligations hereunder. Lessee and each Guarantor is duly qualified
and authorized to do business wherever the nature of its activities or
properties requires such authorization. Aer Turas Teoranta is as of the date
hereof and at all times during the Term shall remain a Certificated Air Carrier.
3.2. AUTHORITY; CONSENT. Lessee and each Guarantor has the full power,
authority and legal right to execute, deliver and perform the terms of each of
the Lease Documents to which it is a party. The execution, delivery and
performance of each of the Lease Documents to which it is a party have been duly
authorized by all necessary corporate action of Lessee and each Guarantor and do
not require any stockholder approval or approval or consent of, or notice to,
any trustee or holders of any indebtedness or obligations of Lessee.
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<PAGE>
3.3. LEGAL, VALID AND BINDING. Each of the Operative Documents to which
Lessee and each Guarantor is a party has been duly executed and delivered by
Lessee and constitutes a legal, valid and binding obligation of Lessee,
enforceable in accordance with its terms.
3.4. COMPLIANCE WITH OTHER INSTRUMENTS. Neither the execution, delivery or
performance by Lessee or each Guarantor of the Operative Documents to which it
is a party nor the consummation or performance by Lessee of the transactions
contemplated therein will conflict with or result in any violation of, or
constitute a default under, the certificate of incorporation or by-laws of
Lessee or each Guarantor or any agreement, mortgage, indenture, lease or other
instrument or any Applicable Law by which Lessee or each Guarantor or their
properties or assets are bound.
3.5. GOVERNMENTAL CONSENTS. Neither the execution and delivery of any of
the Lease Documents nor the performance of any of the transactions contemplated
thereby by Lessee or each Guarantor requires the consent or approval of, the
giving of notice to, the registration with, or the taking of any other action in
respect to the IAA, any other Irish or foreign governmental authority or agency,
including any judicial body.
3.6. NO ADVERSE AGREEMENTS. Neither Lessee nor each Guarantor is a party
to any agreement or instrument or subject to any charter or any corporate
restriction, which if performed in accordance with its terms, would materially
and adversely affect Lessee's or each Guarantor's financial condition, business
or operations or the ability of Lessee or each Guarantors to perform its
obligations under any of the Operative Documents to which it is a party.
3.7. NO DEFAULTS OR VIOLATIONS. Lessee and each Guarantor are not now, and
during the Term will not, be in default under any mortgage, deed of trust,
indenture or other instrument or agreement to which Lessee or each Guarantor is
a party or by which it or any of its properties or assets may be bound, or be in
violation of any Applicable Law, which default or violation would have a
material adverse effect on the financial condition, business or operations of
Lessee or its ability to perform any of their obligations under any of the Lease
Documents to which it is a party.
3.8. LITIGATION. There are no pending or, to the best of Lessee's
knowledge after due inquiry, threatened actions or proceedings by or before any
court, administrative agency, regulatory authority or arbitrator that would if
decided against Lessee either individually or in the aggregate materially and
adversely affect the financial condition, business or operations of Lessee or
the ability of Lessee to perform its obligations under any of the Lease
Documents to which it is a party.
3.9. TAX RETURNS. Lessee and each Guarantor have filed or caused to be
filed all tax returns which are required to be filed by it, and has paid or
caused to be paid all taxes shown to be due or payable on said returns or on any
assessment received by Lessee or each Guarantor, except as may be contested in
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good faith by appropriate proceedings. There are no currently pending audits for
any federal or state income taxes or any other taxes for any period.
3.10. FILING OR RECORDATION. Except for the filing made with the Irish
Civil Aircraft register, no other filing or recording of this Lease with the
IAA, no further filing or recording of this Lease or of any other document and
no further action, are necessary or desirable in order to (A) fully protect and
establish Lessor's title to, and interest in, and property rights with respect
to the Aircraft as against Lessee or any third party claiming through Lessee and
to ensure that the property rights of Lessor therein will have priority in all
respects over the claims of all creditors of Lessee, or (B) ensure the validity,
effectiveness and enforceability of this Lease and the other Operative
Documents.
3.11. PRINCIPAL PLACE OF BUSINESS. Unless Lessee gives the notice provided
in this Section 3.11, Lessee shall maintain its principal place of business and
chief executive office and the office where it keeps its business and financial
records and files concerning the Lease Documents at the location specified in
Section 18 hereof. Lessee shall hold and preserve such records and files
concerning the Lease Documents as are required hereunder and shall permit
representatives of Lessor at any time during normal business hours upon
reasonable notice to inspect and make abstracts from such records and files.
Lessee shall give Lessor at least 30 days' prior written notice of any change in
Lessee's principal place of business and chief executive office, and shall
cooperate with Lessor in executing and delivering all such documents as Lessor
may reasonably request which are required or desirable as a result of such
change of principal place of business of Lessee. Notwithstanding any of the
foregoing provisions of this Section 3.11 to the contrary, Lessee shall not
maintain its principal place of business in any location which would cause
Lessee not to be a Certificated Air Carrier.
3.12. FINANCIAL STATEMENTS. The audited consolidated balance sheet of
Lessee and each Guarantor and their subsidiaries, as of the end of each of its
last three fiscal years (up to December 31, 1995) and the related audited
consolidated statements of income and changes in financial position for the
years then ended and the unaudited consolidated balance sheet of Lessee and each
Guarantor and their subsidiaries as of September, 1996 and the related
statements of income and changes in financial position for the three months then
ended (copies of each of which will be furnished to Lessor), each prepared in
accordance with generally accepted accounting principles and practices, fairly
and accurately present the financial position of Lessee and each Guarantor, as
of the dates thereof and for the periods covered thereby. Since September, 1996,
there has been no material adverse change in the financial condition, business,
operations or prospects of Lessee and each Guarantor.
3.13. FINANCIAL AND OTHER INFORMATION TO BE SUPPLIED. Lessee agrees to
furnish to Lessor during the Term:
(a) As soon as possible and in any event within 5 days after the
occurrence of an Event of Default which is continuing, an Officer's Certificate
setting forth in detail the nature of such Event of Default and the action which
Lessee proposes to take with respect thereto;
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(b) as soon as available, and in any event within 30 days after the
end of each calendar month falling during the Term, consolidated balance sheets
of Lessee and Aer Turas Teoranta as of the end of such month and related
statements of income, shareholders' equity and changes in financial condition of
Lessee for the period commencing at the end of the previous fiscal year and
ending with the end of such month, setting forth in each case in comparative
form the corresponding figures for the corresponding period in such other
preceding fiscal year, all in reasonable detail and duly certified (subject to
year-end audit adjustments) by a financial officer of Lessee and each Guarantor
as having been prepared in accordance with generally accepted accounting
principles and practices, consistently applied; notwithstanding the foregoing,
provided no Event of Default has occurred and is then continuing, absent a
request by Lessor, Lessee need not provide the reports required by this Section
3.13(b) after the report due on or about August 31, 1997.
(c) as soon as available, and in any event within 90 days after the
end of each of Lessee's and each Guarantor's fiscal years falling during the
Term, a copy of the annual report for such year for Lessee and its subsidiaries
on a consolidated basis, including therein consolidated balance sheets of Lessee
and each Guarantor as of the end of such fiscal year and related statements of
income, shareholders' equity and changes in financial condition of Lessee for
such fiscal year, in comparative form with the preceding fiscal year, in each
case certified by independent certified public accountants of national standing
as having been prepared in accordance with generally accepted accounting
principles and practices consistently applied.
(d) promptly upon the sending or filing thereof, copies of all such
proxy statements, financial statements and reports which Lessee or the
affiliated group of which Lessee is a member sends to its stockholders
generally, and copies of all regular periodic and special reports and all
registration statements under the Securities Act of 1933, as amended, which
Lessee files with the Securities and Exchange Commission or any governmental
authority which may be substituted therefor, or with any national securities
exchange;
(e) from time to time, such other information relating to its
financial, operational or business affairs or conditions as Lessor may
reasonably request.
3.14. MAINTENANCE OF CORPORATE STATUS; NO MERGER OR CONSOLIDATION. Lessee
and each Guarantor will preserve and maintain its corporate existence and such
of its rights, privileges, licenses and franchises in any jurisdiction where
failure to obtain such licensing or qualification would have a material adverse
effect upon Lessee and each Guarantor. The Lessee and each Guarantor shall not
consolidate or merge with or into any other corporation or sell, convey,
transfer, lease or otherwise dispose of, whether in one transaction or a series
of related transactions, any of its assets if the aggregate value thereof
represents all or substantially all of its assets unless the surviving entity
has the same or greater net worth as that of Lessee or each Guarantor (as the
case may be) immediately prior to
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any such consolidation or merger and such surviving entity agrees in writing to
assume all of the obligations of Lessee under this Lease or Guarantor under the
related Guaranty, as the case may be. Lessee and each Guarantor shall not
voluntarily permit to be revoked, canceled or otherwise terminated all or
substantially all of the franchises, concessions, permits, rights or privileges
required for the conduct of business and operations of Lessee or the free and
continued use and exercise thereof
3.15. NOTICE OF DEFAULT OR ADVERSE OCCURRENCE. The Lessee shall
promptly inform the Lessor of any occurrence of which it becomes aware which
might adversely affect its ability to perform any of its obligations under this
Lease and the other Operative Documents to which the Lessee is a party or the
ability of each Guarantor to perform its obligations under its respective
Guaranty.
3.16. MAINTENANCE OF CONSENTS AND APPROVALS. Lessee shall obtain or
cause to be obtained, maintain in full force and effect and comply in all
material respects with the conditions and restrictions (if any) imposed on, or
in connection with, every consent, license, authorization, approval, filing and
registration obtained or effected in connection with this Lease, including
without limitation foreign exchange and transfer permits regarding Dollar
amounts due hereunder, or which may from time to time be necessary under
Applicable Law for the continued due performance of all obligations of the
Lessee under this Lease, including without limitation qualifications to operate
the Aircraft in accordance with Applicable Laws. Where it is required under
Applicable Law with respect to this Lease, consent, approval, sanction, to
stamp, file, register or attend to any act, matter or thing, Lessee will do so
promptly and within any applicable prescribed time period in respect thereof.
SECTION 4. LESSOR REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
Subject to certain disclaimers set forth in Section 7 hereof, Lessor
represents, warrants and agrees as follows:
4.1. Lessor covenants and agrees that provided no Event of Default
has occurred and remains unremedied, neither it nor anyone claiming exclusively
by, through or under Lessor will interfere with Lessee's quiet use and enjoyment
of the Aircraft during the Term.
4.2 Lessor is the legal owner of the Aircraft and that the Aircraft
is not subject to any Lien and Lessor hereby covenants and agrees to discharge
any Lien arising from facts or circumstances existing prior to the commencement
of the Pre-delivery Check.
SECTION 5. CONDITIONS PRECEDENT.
5.1. CONDITIONS PRECEDENT TO OBLIGATION OF LESSOR TO LEASE AIRCRAFT.
The obligation of Lessor to lease the Aircraft to Lessee under this Lease is
subject to the fulfillment to the satisfaction of Lessor, on or before the
Delivery Date or
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concurrently with Lessor's leasing of the Aircraft hereunder (unless waived in
writing by Lessor), of the following conditions precedent:
(a) Each of the Operative Documents and such other documents deemed
necessary or reasonably desirable by Lessor, shall have been duly authorized,
executed and delivered by the respective party or parties thereto and shall be
satisfactory in form and substance to Lessor, and an executed original or
conformed copy, as appropriate, of the Lease Documents and such other documents
deemed necessary or desirable by Lessor shall have been delivered to Lessor.
(b) On the Delivery Date, the following statements shall be true and
Lessor shall have received evidence in form and substance reasonably
satisfactory to it that:
(i) The Aircraft is duly registered with and certificated by the
IAA as to type and airworthiness in accordance with the terms
of this Lease;
(ii) The Lease and Acceptance Certificate shall be in due form for
recording and shall be duly filed pursuant to Applicable Law;
(c) On the Delivery Date for the Aircraft (i) the representations
and warranties of Lessee contained in the Lease Documents shall be true and
accurate; (ii) nothing shall have occurred which materially and adversely has
affected or will affect the ability of Lessee to carry on its business and to
perform its obligations under the Lease Documents; and (iii) no event shall have
occurred and be continuing, or would result from the lease of the Aircraft,
which constitutes an Event of Default.
(d) Lessee shall have delivered an Officer's Certificate to Lessor
certifying as to the matters set forth with respect to Lessee in Section 5.1(c)
hereof.
(e) No change shall have occurred after the date of this Agreement
in Applicable Law that in the opinion of Lessor would make it illegal for Lessor
to maintain its interest in the Aircraft.
(f) in furtherance of and not in limitation of its rights set forth
in Section 5.1(a), Lessor shall have received the following, in each case in
form and substance satisfactory to it:
(i) incumbency certificates of Lessee and Guarantors regarding the
officers of Lessee and Guarantors authorized to execute and
deliver the Lease Documents to which each is a party,
respectively, and other documents and agreements delivered in
connection therewith;
(ii) an insurance broker's letter of undertaking in substantially
the form of Exhibit F hereto;
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(iii) certified copies of all documents evidencing the corporate
actions of Lessee and Guarantors and the Board of Directors of
Lessee and Guarantor, duly authorizing the lease by Lessee of
the Aircraft hereunder and the execution, delivery and
performance by Lessee of each of the Lease Documents to which
it is a party and the Guaranty by Guarantor, of Lessee's
obligations under the Lease Documents;
(iv) such other documents and evidence with respect to Lessee as
Lessor may reasonably request in order to consummate the
transactions contemplated by the Lease Documents, the taking
of all corporate actions in connection therewith and
compliance with the conditions herein set forth.
(g) Lessor shall have received the Security Deposit, in cash, from
Lessee.
(h) a favorable opinion from Gore & Grimes, counsel to Aer Turas
Teoranta, covering such matters incident to the transactions contemplated hereby
as it may reasonably request.
5.2. CONDITIONS PRECEDENT TO OBLIGATION OF LESSEE TO LEASE THE AIRCRAFT.
The obligation of Lessee to lease the Aircraft from Lessor under this Lease is
subject to the fulfillment to the satisfaction of Lessee, on or before the
Delivery Date of the following conditions precedent. With respect to subsections
(c), (d) and (f) below, the standards of the Aircraft's former Cathay Pacific
Airways maintenance program shall be applicable:
(a) Lessor shall have delivered proof reasonably satisfactory to
Lessee that the Aircraft has completed the Pre-delivery Check which may be
satisfied by having a representative of Lessee present at a check flight of the
Aircraft of at least two hours duration flown following the completion of the
Predelivery Check so that Lessee may be reasonably satisfied that the
Pre-delivery Check has been satisfactorily completed and that the Aircraft is
otherwise in the condition required by this Section 5.2. In the event the person
performing the Predelivery Check would not ordinarily perform such a check
flight, Lessor shall perform a check flight reasonably acceptable to Lessee at
Lessor's expense upon Lessee's request, which check flight shall not exceed two
hours duration without Lessor's consent.
(b) The Aircraft has been fitted with at least 299 passenger seats.
(c) Each Engine shall have not less than 3,000 Hours and 1,500
Cycles remaining until such Engine's next limiter or next scheduled shop visit.
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(d) Each landing gear shall have at least 3,000 Hours remaining
until its next schedule shop overhaul.
(e) The APU shall be serviceable.
(f) The Aircraft shall have received a certificate of airworthiness
from the IAA.
(g) the time controlled components of the Aircraft shall have at
least twelve calendar months or 3,000 Hours of life remaining to their next
scheduled overhaul or replacement.
5.3. ACCEPTANCE FOR LEASE. Upon the execution of the Acceptance
Certificate, it shall be conclusively presumed that the conditions set forth in
Sections 5.1 and Section 5.2 have been met in full (or that any discrepancies
have been irrevocably waived by Lessee), and that the Aircraft shall, by the
execution of the Acceptance Certificate, be accepted for lease by Lessee for all
purposes hereunder.
5.4. NON-FULFILLMENT OF CONDITIONS PRECEDENT UNDER SECTION 5.2. In the
event that Lessor has failed to fulfill any or all of the conditions set our in
Section 5.2. hereof and Lessee has not waived such non-fulfillment, Lessee shall
be under no obligation to take the Aircraft on Lease and the parties hereto
shall be released from all obligations to each other hereunder save that Lessor
shall forthwith return to Lessee any installments of the Security Deposit paid
to it by Lessee.
SECTION 6. PAYMENTS.
6.1. BASIC RENT. During the Basic Term Lessee shall pay Lessor, in
accordance with the provisions of Section 6.3 hereof Basic Rent each in the
amount of One Hundred Thousand Dollars $100,000 on each Rent Payment Date as
hereinafter defined. Basic Rent in the foregoing amount is due and payable on
the Lease Commencement Date and such Basic Rent shall be due and payable
thereafter on the same day of each month during the Basic Term as the day of the
month the Lease Commencement Day fell (each such day a "Rent Payment Date").
6.2. NET LEASE; NO SET-OFF OR DEDUCTIONS. THIS LEASE IS A NET LEASE.
LESSEE ACKNOWLEDGES AND AGREES THAT ITS OBLIGATIONS TO PAY ALL RENT DUE AND
OWING UNDER THE TERMS HEREOF SHALL BE ABSOLUTE AND UNCONDITIONAL AND SHALL NOT
BE AFFECTED BY ANY CIRCUMSTANCE WHATSOEVER, INCLUDING, WITHOUT LIMITATION (A)
ANY SET-OFF, COUNTERCLAIM, RECOUPMENT, DEFENSE OR OTHER RIGHT WHICH LESSEE MAY
HAVE AGAINST LESSOR OR ANYONE ELSE FOR ANY REASON WHATSOEVER, (B) ANY DEFECT IN
THE TITLE, AIRWORTHINESS, ELIGIBILITY FOR REGISTRATION UNDER
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THE IAA, OR ANY DAMAGE TO OR LOSS OR DESTRUCTION OF, THE AIRCRAFT, OR ANY
INTERFERENCE, INTERRUPTION OR CESSATION IN OR PROHIBITION OF THE USE OR
POSSESSION THEREOF BY LESSEE FOR ANY REASON WHATSOEVER, INCLUDING, WITHOUT
LIMITATION, ANY SUCH INTERFERENCE, INTERRUPTION, CESSATION OR PROHIBITION
RESULTING FROM THE ACT OF ANY GOVERNMENTAL AUTHORITY (C) ANY LIENS, ENCUMBRANCES
OR RIGHTS OF OTHERS WITH RESPECT TO THE AIRCRAFT, (D) THE INVALIDITY OR
UNENFORCEABILITY OR LACK OF DUE AUTHORIZATION OR OTHER INFIRMITY OF THIS LEASE
OR ANY LACK OF RIGHT, POWER OR AUTHORITY OF LESSOR OR LESSEE TO ENTER INTO THIS
LEASE, (E) ANY INSOLVENCY, BANKRUPTCY REORGANIZATION OR SIMILAR PROCEEDINGS BY
OR AGAINST LESSEE, LESSOR, OR ANY OTHER PERSON, OR (F) ANY OTHER CAUSE WHETHER
SIMILAR OR DISSIMILAR TO THE FOREGOING, ANY PRESENT OR FUTURE LAW
NOTWITHSTANDING, IT BEING THE INTENTION OF THE PARTIES HERETO THAT ALL RENT
PAYABLE BY LESSEE HEREUNDER SHALL CONTINUE TO BE PAYABLE IN ALL EVENTS IN THE
MANNER AND AT THE TIMES PROVIDED HEREIN. SUCH RENT SHALL NOT BE SUBJECT TO ANY
ABATEMENT AND THE PAYMENTS HEREOF SHALL NOT BE SUBJECT TO ANY SET-OFF OR
REDUCTION FOR ANY REASON WHATSOEVER, INCLUDING ANY PRESENT OR FUTURE CLAIMS OF
LESSEE AGAINST LESSOR UNDER THIS LEASE OR OTHERWISE. EACH RENT PAYMENT MADE
PURSUANT TO THIS LEASE BY LESSEE SHALL BE FINAL AND LESSEE WILL NOT SEEK TO
RECOVER ALL OR ANY PART OF SUCH PAYMENT FROM LESSOR OR FOR ANY REASON
WHATSOEVER. 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 OR AS OTHERWISE AGREED, LESSEE NONETHELESS AGREES TO PAY TO LESSOR AN
AMOUNT EQUAL TO EACH PAYMENT OF BASIC RENT AND SUPPLEMENTAL RENT DUE HEREUNDER
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. THE
OBLIGATION OF LESSEE IN THIS SECTION 6.2 SHALL SURVIVE THE EXPIRATION OR THE
TERMINATION OF THIS LEASE OTHER THAN IN ACCORDANCE WITH ITS TERMS. TO THE EXTENT
PERMITTED BY APPLICABLE LAW, LESSEE HEREBY WAIVES ANY RIGHTS WHICH IT MAY NOW
HAVE OR WHICH MAY BE CONFERRED UPON IT, BY STATUTE OR OTHERWISE, TO TERMINATE,
CANCEL, QUIT OR SURRENDER THIS LEASE EXCEPT IN ACCORDANCE WITH THE TERMS HEREOF.
6.3. IMMEDIATELY AVAILABLE FUNDS. All Rent shall be paid in United
States Dollars by wire transfer in immediately available funds by 12:00 noon EST
or EDT, as the case may be, on the day it is due and payable hereunder to Lessor
at Fleet Bank, N.A., 80 Pine Street, New York, NY, ABA No. 021200339, Account
No. 2181-01-7572, Re: AFG Rent Escrow, with sufficient information to identify
the source and application of such funds. If any Rent is due on a day which is
not a Business Day, it shall be due on the immediately preceding Business Day.
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6.4. SUPPLEMENTAL RENT. Lessee also agrees to pay to Lessor, in
accordance with the provisions of Section 6.3 hereof, any and all Supplemental
Rent when the same shall become due and owing, and in the event of any failure
on the part of Lessee to pay any Supplemental Rent, Lessor shall have all
rights, powers and remedies provided for herein or by law or equity in the case
of nonpayment of Basic Rent. Lessee will also pay, on demand, as Supplemental
Rent, interest at the Overdue Rate on any part of any installment of Basic Rent
not paid when due for any period for which the same shall be overdue and, to the
extent permitted by Applicable Law, on any payment of Supplemental Rent not paid
when due for the period until the same shall be paid.
6.5. SECURITY DEPOSIT. On or before the acceptance of the Aircraft
for lease hereunder, Lessee shall deposit with Lessor in an amount in cash equal
to three hundred thousand Dollars ($300,000) to serve as security for Lessee's
full and faithful performance of all of its obligations under this Lease (the
"Security Deposit").
6.5.1. Lessor hereby acknowledges receipt of $50,000 as the
initial installment of the Security Deposit. The balance of the
Security Deposit shall be payable by Lessee to Lessor as follows:
$50,000 upon the earlier to occur of the execution of this Lease or
fourteen days prior to the Delivery Date and the balance of $200,000
shall be due and payable on the Delivery Date. In the event Lessor
has satisfied the conditions precedent set forth in Section 5.2
hereof and Lessee fails to accept the Aircraft for lease hereunder,
Lessor may retain the Security Deposit in its possession as
liquidated damages for loss of bargain and not as a penalty.
6.5.2 If Lessee fails to pay Rent or any other sums due or
fails to perform any of the other terms or provisions of this Lease
or is otherwise in default hereunder, in addition to all other
rights Lessor shall have, Lessor may use, apply or retain all or any
portion of the Security Deposit in partial payment for any sums it
may in its discretion advance as a result of a default by the Lessee
or to apply toward losses or expenses Lessor may suffer of incur as
a result of such Default. If Lessor uses or applies all or any
portion of the Security Deposit, such application shall not be
deemed a cure of any default, and Lessee shall immediately upon
receipt of written demand from Lessor pay an amount necessary to
restore the Security Deposit to its required amount, and the failure
to do so shall be an Event of Default without further notice. In the
event that the Lessee does not make timely payments of Basic Rent in
any two consecutive months during the Term, the Lessor, without
limitation to any other rights and remedies hereunder, may on each
such occasion require the Lessee to increase the Security Deposit by
an amount equal to one payment of Basic Rent. The Security Deposit
shall remain in effect until after the Aircraft is returned in the
condition required by this Lease. Lessee shall not be entitled to
off-set any Rent against the Security Deposit. After the return of
the Aircraft in the condition required by this Lease, Lessor shall
return the Security Deposit, without
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interest, provided that Lessee has otherwise fulfilled all its
obligations hereunder.
6.5.3. Provided Lessee has duly exercised its option to
purchase under Section 17 hereof, Lessor shall retain the entire
Security Deposit as part of the purchase price of the Aircraft. In
the event Lessee has not exercised its option to purchase under
Section 17 and the Aircraft has been returned to Lessor in
accordance with the provisions of Section 9 hereof, the Security
Deposit shall be refunded to Lessee without interest within 30 days
following the expiration of the Basic Term.
6.6. RESERVES. Segment C Checks, Engine heavy maintenance requiring
shop repair, landing gear overhauls, and auxiliary power unit overhauls are
collectively and individually referred to as "Reserve Tasks." In addition to
monthly installments of Basic Rent, Lessee shall pay to Lessor an Hourly payment
to be reserved for Reserve Tasks as follows:
6.6.1. The Lessee shall, on or before the 10th day following
the second and each subsequent Rent Payment Date and the 10th day
following the expiration of the Basic Term if Lessee has not
exercised its option under Section 17, submit to Lessor a true
summary of the Aircraft usage for the preceding Rent Period,
specifying the number of Hours the Aircraft shall have flown in such
Rent Period. Such usage shall be determined by Lessee by reference
to the Aircraft operating logs, subject to audit and verification by
Lessor. On or before the 15th day following the second and
subsequent Rent Payment Dates and the 15th day following the
expiration of the Basic Term if Lessee has not exercised its option
under Section 17, Lessee shall pay to Lessor for each Hour the
Aircraft was operated during the Rent Period with respect to which
such usage data applies the following amounts applicable to the
specified Reserve Tasks: for Segment C Checks, $200; for Engine
heavy maintenance (including overhaul, hot section inspection,
replacement of internal Life Limited Components that have reached
their applicable hour or cycle limits, disassembly, assembly and
testing required thereof) requiring shop repair $175 per Engine; for
complete landing gear overhaul, $15, combined for all landing gear;
and for complete auxiliary power unit overhaul, $10. The foregoing
amounts shall be collectively or individually referred to as
"Reserves."
6.6.2. Lessee shall obtain Lessor's prior written approval of
Reserve Tasks and the cost thereof, such consent not to be
unreasonably withheld. Upon submission by Lessee to Lessor of
invoices or receipts evidencing the performance of a Reserve Task in
accordance with the provisions hereof, Lessor shall, provided than
an Event of Default shall not have occurred and be continuing,
reimburse Lessee from Reserves corresponding to the Reserve Task,
but not in an amount to exceed the actual invoice or receipts, and
not in excess of Reserves actually received for the corresponding
Reserve Task. Under no circumstance shall Reserves be used to
reimburse Lessee for the cost of repairs arising as a result of
foreign object damage, an insured occurrence, or operational
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mishandling. If, on any occasion, Reserves actually received are
insufficient to pay for the corresponding Reserve Task, the
shortfall shall be for the account of the Lessee and may not be
carried forward or made the subject of any further claim for
payment.
6.6.3. Reserves shall be and remain the property of the Lessor
until disbursed. Except as otherwise set forth in Section 12.1(a)
hereof, all undisbursed Reserves, upon the expiration or earlier
termination of this Lease, shall be retained by Lessor as additional
Rent for the Aircraft unless Lessee has exercised its option to
purchase under Section 17 hereof in which case the amount of any
then remaining Reserves shall be paid to Lessee at the time title to
the Aircraft is transferred to Lessee pursuant to Section 17. Lessor
shall be under no obligation to segregate Reserves, and may mingle
Reserves with other funds.
6.7 COST OF PRE-DELIVERY CHECK. The cost of the Pre-delivery Check
shall be allocated as follows: The first $500,000 of the Pre-delivery Check
shall be for the account of Lessor. Lessor and Lessee shall each share equally
the cost, if any, above $500,000 to a maximum of $750,000 with all remaining
expenses of the Pre-delivery Check, if any, for the account of Lessee. Under no
circumstances shall Lessor be obligated to pay more than $625,000 for the
Pre-delivery Check and except as specifically set forth in the Letter Agreement,
under no circumstance will Lessor be obligated to pay more than $625,000 to
place the Aircraft in the condition required for its acceptance for lease
hereunder by Lessee. Lessor and Lessee agree to promptly pay when due the
respective amounts owed by them to the party performing the Pre-delivery Check.
SECTION 7. DISCLAIMER OF WARRANTIES AND MANUFACTURERS' WARRANTIES.
7.1. DISCLAIMER. UPON THE ACCEPTANCE OF THE AIRCRAFT FOR LEASE
HEREUNDER IT SHALL BE DEEMED TO BE LEASED HEREUNDER "AS IS" AND "WHERE IS."
LESSOR HAS NOT AND SHALL NOT BE DEEMED TO HAVE MADE (WHETHER BY VIRTUE OF HAVING
LEASED THE AIRCRAFT UNDER THIS LEASE OR HAVING ACQUIRED THE AIRCRAFT, OR HAVING
DONE OR FAILED TO DO ANY ACT, OR HAVING ACQUIRED OR FAILED TO ACQUIRE ANY STATUS
UNDER OR IN RELATION TO THIS LEASE OR OTHERWISE), AND LESSOR HEREBY SPECIFICALLY
DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE,
CONDITION, DESIGN, OPERATION, MERCHANTABILITY, FREEDOM FROM CLAIMS OF
INTERFERENCE OR INFRINGEMENT OR THE LIKE, OR FITNESS FOR USE FOR A PARTICULAR
PURPOSE OF THE AIRCRAFT, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF
THE AIRCRAFT, THE ABSENCE THEREFROM OF LATENT OR OTHER DEFECTS, WHETHER OR NOT
DISCOVERABLE, OR AS TO ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS
OR IMPLIED (INCLUDING ANY IMPLIED WARRANTY ARISING FROM A COURSE OF PERFORMANCE
OR DEALING OR USAGE OF TRADE), WITH RESPECT TO THE AIRCRAFT; AND LESSEE HEREBY
WAIVES,
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RELEASES, RENOUNCES AND DISCLAIMS EXPECTATION OF OR RELIANCE UPON ANY SUCH
WARRANTY OR WARRANTIES. LESSOR SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY TO
LESSEE OR ANY OTHER PERSON, WHETHER ARISING IN CONTRACT OR TORT OUT OF ANY
NEGLIGENCE OR STRICT LIABILITY OF LESSOR OR OTHERWISE, FOR (I) ANY LIABILITY,
LOSS OR DAMAGE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY OR INDIRECTLY BY THE
AIRCRAFT OR ANY ENGINE OR BY ANY INADEQUACY THEREOF OR DEFICIENCY OR DEFECT
THEREIN OR BY ANY OTHER CIRCUMSTANCE IN CONNECTION THEREWITH, (II) THE USE,
OPERATION OR PERFORMANCE OF THE AIRCRAFT OR ANY RISKS RELATING THERETO, (III)
ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR ANTICIPATED PROFITS OR
CONSEQUENTIAL DAMAGES OR (IV) THE DELIVERY, OPERATION, SERVICING, MAINTENANCE,
REPAIR, IMPROVEMENT OR REPLACEMENT OF THE AIRCRAFT. THE WARRANTIES AND
REPRESENTATIONS SET FORTH IN THIS SECTION 7.1 ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, AND LESSOR
SHALL NOT BE DEEMED TO HAVE MADE ANY OTHER WARRANTIES, EXCEPT AND ONLY TO THE
EXTENT OF THOSE WARRANTIES SET FORTH IN SECTION 4 OF THIS LEASE.
7.2. OTHER WARRANTIES. So long as no Event of Default shall have
occurred, Lessor agrees that if there are any outstanding warranties of
manufacturers and suppliers relating to the Aircraft or any of the Engines which
would otherwise inure to the benefit of or be enforceable by Lessor during the
Term, they shall, notwithstanding title to the Airframe and Engines being vested
in Lessor, inure to the benefit of Lessee throughout the Term and Lessor agrees
to authorize Lessee to exercise for the account of Lessor such rights as Lessor
may have under such warranties.
SECTION 8. USE, OPERATION AND MAINTENANCE
8.1. GENERAL. Lessee, at its own cost and expense, shall during the
Term service, repair, maintain and overhaul or cause the same to be done to the
Airframe and each Engine under the Maintenance Program for so long as the
Aircraft is in the possession of Lessee or subject to this Lease with the same
or better care as used by Lessee at a minimum, give the Aircraft the same level
of attention and maintenance as the Lessee or either Guarantor affords to the
other aircraft in its fleet, including Airworthiness Directive compliance and
level of incorporation, improvements, repairs, cleanliness, and correction of
items of a cosmetic nature (such as hail damage), and the "build standard"
applicable to all Engine shop visits with regard to both exhaust gas temperature
and life limited components, except where the terms of this Lease dictate higher
standards; and maintain the Aircraft in compliance with the requirements of the
Airframe manufacturer's aging aircraft and corrosion control program document
and supplemental inspection document as periodically revised. By way of
expansion and not in limitation of the foregoing, Lessee agrees to (i) keep the
Airframe and each Engine in as good operating condition as when delivered to
Lessee hereunder, ordinary wear and tear excepted, (ii) keep the Aircraft in
such condition as is necessary to enable the airworthiness certification of the
Aircraft to be maintained
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in good standing at all times under Applicable Law, (iii) maintain the Manuals
and Technical Records in the English language in accordance with such
Maintenance Program and in a manner acceptable to the IAA and (iv) cause the
Aircraft to be maintained in a manner which will not discriminate against the
Aircraft compared with other similar aircraft owned or leased by Lessee.
8.2. OPERATION AND USE.
(a) Lessee agrees not to operate or locate the Airframe or any
Engine, or suffer the Airframe or any Engine to be operated or located, in any
area (i) excluded from coverage by any insurance policy required to be
maintained hereunder or (ii) in any recognized or, in Lessor's reasonable
judgment, threatened area of hostilities unless fully covered by war risk
insurance meeting the terms of Section 11 hereof, except in the case of a
requisition by the United States government, where Lessee obtains indemnity from
the United States government against the risks and in the amounts required by
Section 11 hereof covering such area. Lessee agrees not to operate the Aircraft,
or suffer the Aircraft to be operated during the Term (1) unless the Aircraft is
covered by insurance as required by the provisions of Section 11 hereof or (2)
contrary to the terms of such insurance as required by the provisions of Section
11 hereof.
(b) Lessee agrees not to (i) operate the Airframe or any Engine or
permit the Airframe or any Engine to be operated during the Term except in a
passenger configuration, in commercial or other operations for which Lessee is
duly authorized by the IAA or otherwise in accordance with Applicable Law; or
(ii) use or permit the Aircraft to be used for a purpose for which the Aircraft
is not designed or reasonably suitable. Lessee will not permit the Airframe or
any Engine to be maintained, used or operated during the Term in violation of
any Applicable Law, or contrary to any manufacturer's operating manuals or
instructions.
8.3. MAINTENANCE IN GENERAL. Lessee agrees it solely has the
obligation to maintain and repair the Airframe and Engines in accordance with a
maintenance program which meets the IAA requirements for commercial airline
operations under the relevant laws and regulations of the Republic of Ireland,
and to the extent such requirements are more stringent, meets the requirements
of the manufacturers with respect to its recommended standards of maintenance
and repair of Lockheed L-1O11-1 aircraft and Rolls-Royce RB211-22B engines, and
meets the non-discrimination requirements set forth in Sections 8.1 and 8.7
hereof (the "Maintenance Program"), so as to keep it in at least as good a
condition during the Term as on the Delivery Date and until the Aircraft is
redelivered to Lessor pursuant to Section 9 hereof, ordinary wear and tear
excepted. Included within the obligation of maintenance and repair under the
Maintenance Program is the obligation and affirmative undertaking by Lessee to
replace from time to time all worn or defective Parts, to the extent required to
cause the Aircraft to be in an airworthy condition in all respects and to be
covered by an effective Certificate of Airworthiness at all times.
8.4. SPECIFIC ITEMS OF MAINTENANCE. Lessee agrees that maintenance
and repairs shall include, but shall not be limited to, the following specific
items:
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(a) to perform or have performed in accordance with Section 8.3 all
routine maintenance work, including on-line maintenance on the Aircraft, and to
ensure that all such maintenance shall be in accordance with the regulations and
directives of the IAA or other applicable government authority. Lessee shall
have all maintenance and repairs performed at repair facilities approved by the
IAA;
(b) to correct promptly and diligently any deficiencies revealed at
any time by any inspection of Lessor which under the Maintenance Program require
proper repair, replacement, overhaul and adjustment;
(c) to maintain all Aircraft documentation, including, without
limitation, the Manuals and Technical Records, in compliance with IAA
regulations and in up-to-date status, (if necessary, through manufacturers'
revision service) and to make these available for review and copying by Lessor
on reasonable notice at Lessee's principal maintenance base;
(d) to incorporate into the Aircraft all those Airframe, Engine, and
Parts manufacturer and other vendor service bulletins which Lessee plans to
adopt during the Term for the Term for the rest of its Lockheed L-1011 aircraft
fleet. The Aircraft, with respect to the rest of Lessee's fleet, shall not be
discriminated against in service bulletin compliance or other maintenance
matters.
8.5. PARTS
(a) Unless the Airframe or an Engine has suffered a Total Loss,
Lessee, at its own cost and expense, will during the Term promptly replace all
Parts that may from time to time become worn out, lost, stolen, destroyed,
seized, confiscated, damaged beyond repair or permanently rendered unfit for use
for any reason whatsoever and shall replace such Parts as promptly as
practicable with replacement Parts. All replacement Parts shall be made by the
same manufacturer and of the same model number and modification status, or be
IAA-approved substitutes normally used by Lessee, shall be free and clear of all
Liens except Permitted Liens and shall be in at least as good operating
condition as, and shall have a value, utility, and useful life 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.
(b) All Parts at any time removed from the Airframe or any Engine
shall remain the property of Lessor and subject to this Lease, no matter where
located, until such time as such Parts shall be replaced by Parts that have been
incorporated or installed in or attached to such Airframe or Engine and that
meet the requirements for replacement Parts specified in clause (a) of this
Section 8.5. Immediately upon any replacement Part becoming incorporated or
installed in or attached to such Airframe or Engine as provided in clause (a)
hereof, without further act, (i) title to such replacement Part shall thereupon
vest in Lessor; (ii) such replacement Part shall become subject to this Lease
and be deemed part of such Airframe or Engine, as the case may be, for all
purposes hereof to the same extent as the Parts originally incorporated or
installed in or attached to such Airframe or Engine; and (iii) title to the
replaced Part shall thereupon vest in
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Lessee, free and clear of all rights of Lessor and shall no longer be deemed a
Part hereunder.
(c) Title to all Parts incorporated or installed in or attached or
added to the Airframe or any Engine as the result of any alteration,
modification or addition effected by Lessee shall, without further act vest in
Lessor and become subject to this Lease.
8.6. AIRWORTHINESS DIRECTIVES.
(a) During the Term hereof Lessee agrees at its sole cost and
expense (except as otherwise stated) to comply with any IAA airworthiness
directive, manufacturers' mandatory service bulletin or any other mandatory
regulation, directive or instruction ("Airworthiness Directive") which the IAA
or other competent regulatory authority may from time to time issue (whether
prior to or subsequent to the commencement of the Term) and with respect to
which compliance is required during the Term in order to meet the requirements
of Applicable Law for the public transport of passengers and/or cargo. All
Airworthiness Directives shall be accomplished in accordance with all applicable
bulletins and manuals published by the manufacturer of the Airframe or Engines
or Parts.
(b) Lessor shall hold title to any Parts included in a new system
installed on the Aircraft pursuant to an Airworthiness Directive which is
required by such Airworthiness Directive to be installed during the Term.
(c) If Lessee would normally perform the terminating action
specified by an Airworthiness Directive, the terms of which permit performance
after the end of the Term, prior to the end of the Term on its entire fleet of
Lockheed L- 1011 aircraft pursuant to its schedule for performing such
Airworthiness Directive applicable to its fleet of such aircraft, Lessee shall
perform such Airworthiness Directive in accordance with Section 8.6(a), above.
(d) If Lessee would not normally perform the terminating action
specified by an Airworthiness Directive, the terms of which permit performance
after the end of the Term, pursuant to its schedule for performing such
Airworthiness Directive applicable to its fleet of Lockheed L-1011 aircraft and
Lessor requests Lessee, in writing, to perform such Airworthiness Directive,
Lessee shall perform such Airworthiness Directive, PROVIDED, HOWEVER, that
Lessee's obligations to perform such Airworthiness Directive pursuant to this
Section 8.6(d) shall be subject to availability of the necessary material, labor
and facilities to perform such Airworthiness Directive. The costs of such
performance shall be borne solely by Lessor and shall be equal to the sum of
material costs and the associated Direct Labor Rate cost of performing such
Airworthiness Directive.
(e) In the event an Airworthiness Directive can be complied with by
both more frequent inspection of such Part or the Aircraft than had theretofore
been the case or by repair or replacement of the relevant Part and if, in
accordance with the Maintenance Program, Lessee has elected to comply by more
frequent inspections, Lessee shall no later than the Segment C check referred to
in
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Section 9.4(a) hereof perform the repair or replacement needed to obviate the
more frequent inspections of the Aircraft arising out of such Airworthiness
Directive.
(f) Lessee shall be solely responsible for the expense of complying
with each particular Airworthiness Directive; in the event the cost of
compliance exceeds $25,000, Lessee may be reimbursed up to the contents of the
Reserve account relating to the Part or a portion of the Airframe or Engine
subject to the Airworthiness Directive in question with the balance of the
compliance costs, if any, for the account of Lessee.
8.7. SERVICE BULLETINS. Lessee agrees, at its sole cost and expense,
to incorporate into the Aircraft, all Lockheed, Rolls-Royce and other vendor
service bulletins ("Service Bulletins") which Lessee adopts and incorporates
during the Term into its Lockheed L-1011 aircraft fleet.
8.8. MODIFICATION PAYMENTS BY THE GOVERNMENT. In the event that,
during the Term, Applicable Law shall provide for the payment to Lessee from a
governmental entity (a "Modification Payment") with respect to a modification of
the Aircraft, including without limitation, in whole or in part with respect to
the retrofitting or replacement of Engines installed on any Lockheed L-1011
aircraft operated by Lessee in order for Lessee to comply with any laws or
regulations relating to emissions, noise, or other pollution, environmental or
fuel economy standards and requirements, Lessee shall comply with such law or
regulation by performing upon the Aircraft such modifications as are required
thereby, and only under such circumstances may Lessee retain such Modification
Payment. In the event that Lessee is not required by such law or by this
Agreement to perform any such modification upon the Aircraft and Lessee has not
theretofore given to Lessor its irrevocable written commitment to perform such
modification, Lessee shall pay Lessor, within 30 days of Lessee's receipt
thereof the Modification Payment.
8.9. CORROSION CONTROL. Lessee shall carry out such work as may be
required for the control or corrosion, including, without limitation, periodic
inspections for penetration of fuel tanks, periodic inspections and clean-up
under galleys, forward and aft cargo pit areas and lavatories, periodic
treatment of all mild and moderate corrosion and correcting of all severe or
exfoliated corrosion, in accordance with the Maintenance Program.
8.10. MODIFICATIONS.
(a) Lessee, at its own expense, shall make such alterations and
modifications in and additions to the Airframe or any Engine pursuant to Section
8.6 hereof as may be required to be made from time to time by Applicable Law
during the Term regardless upon whom such requirements are, by their terms,
nominally imposed, as required by Section 8.6 hereof ("Required Modifications").
(b) Lessee, at its own expense, may from time to time make such
alterations and modifications in and additions to the Airframe or any Engine as
Lessee may deem desirable in the proper conduct of its business provided that no
such alteration, modification or addition shall diminish the value or utility of
the Aircraft, or impair the condition or airworthiness thereof, below the value,
utility,
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condition and airworthiness thereof prior to such alteration, modification or
addition assuming the Aircraft met the requirements of this Lease prior to such
alteration, modification or addition. In addition, Lessee may, at any time
during the Term remove any Part pursuant to this paragraph, provided that (1)
such Part is in addition to, and not in replacement of or substitution for, any
part originally incorporated or installed in or attached to the Aircraft at the
time of delivery thereof hereunder or any Part in replacement of, or
substitution for any such Part, and (2) such Part can be removed from the
Aircraft without diminishing or impairing the value, utility, condition or
airworthiness required to be maintained by the terms of this Lease which the
Aircraft would have had at such time had such alteration, modification or
addition not occurred. Notwithstanding the foregoing, Lessee shall not, without
Lessor's prior written consent, make any major modifications, alterations or
additions, (collectively, "Optional Modifications") to the Aircraft. For the
purposes of this section Optional Modifications shall exclude the Required
Modifications and modifications or required by the terms of this Lease, but
shall include all modifications to the Aircraft with a cost of $100,000. Ail
Optional Modifications shall be accomplished by Lessee at its own expense.
(c) NOTWITHSTANDING ANY OTHER PROVISION OF THIS LEASE, NO OPTIONAL
MODIFICATION SHALL BE MADE WITHOUT LESSOR'S PRIOR WRITTEN CONSENT (WHICH CONSENT
MAY BE WITHHELD FOR ANY REASON WHATSOEVER) IF ANY OPTIONAL MODIFICATION HAS THE
EFFECT OF DECREASING THE UTILITY OR VALUE OF THE AIRCRAFT OR ADVERSELY AFFECTS
ITS AIRWORTHINESS OR USE FOR TRANSPORTING PASSENGERS IN COMMERCIAL SERVICE.
8.11. POSSESSION. Lessee shall not sublease the Aircraft or otherwise in
any manner deliver, relinquish or transfer possession of the Airframe or any
Engine to any Person or install any Engine, or permit any Engine to be
installed, on any airframe other than the Airframe, during the Term, without the
prior written consent of Lessor, provided, however, that so long as Lessee shall
comply with the provisions of Section 11 hereof Lessee may, without the prior
written consent of Lessor:
(a) enter into an ACMI Lease in the ordinary course of Lessee's
business;
(b) deliver possession of the Airframe or an Engine to the
manufacturer thereof for testing or other similar purposes or to any
organization for service, repair, maintenance or overhaul work on the Airframe
or Engines or for alterations or modifications in or additions to the Airframe
or Engines, provided such organization is qualified and duly licensed to perform
such work and otherwise to the extent required or permitted by the terms of this
Lease;
(c) subject any Engine to normal interchange or pooling agreements
or arrangements, in each case customary in the European airline industry
applicable to other similar aircraft and engines operated by Lessee, if any, and
entered into by Lessee in the ordinary course of its business with any
Certificated Air Carrier, provided that (i) no such agreement or arrangement
contemplates or requires the transfer of title to any Engine, and (ii) if
Lessor's title
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to any Engine shall be divested under any such agreement or arrangement, such
divestiture shall be deemed to be a Total Loss with respect to such Engine and
Lessee shall comply with Section 12.2 hereof in respect of such Engine;
(d) install an Engine on an airframe owned by Lessee provided that
following such installation such Engine shall be free and clear of all liens,
except (i) Permitted Liens, and (ii) 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), and (C) those created by
the rights of other Certificated Air Carriers under normal interchange or
pooling agreements or arrangements customary in the airline industry which do
not contemplate, permit or require the transfer of title to such airframe or
engines installed thereon;
(e) install an Engine on an airframe leased to Lessee or purchased
by Lessee subject to a conditional sale or other security agreement, provided
that (i) such airframe is free and clear of all liens except (A) the rights of
the parties to the lease, conditional sale or other security agreement and (B)
Liens of the type permitted by clause (d) above, and (ii) such lease,
conditional sale or other security agreement effectively provides that such
Engine shall not become subject to the Lien of such lease, conditional sale or
other security agreement, notwithstanding the installation thereof on such
airframe;
(f) Notwithstanding any transfers of possession of the Airframe or
any Engine permitted pursuant to this Section 8.11, Lessee shall at all times
during the Term of this Lease remain fully liable and obligated to perform all
of the terms of this Lease to the same extent as if such transfer had not
occurred.
8.12. REPORTS. Lessee shall furnish to Lessor the following reports on a
monthly basis: (i) the Hours and Cycles operated by the Airframe as required
pursuant to Section 6.6 hereof; (ii) the Hours and Cycles operated by each of
the Engines (noting their location) as required pursuant to Section 6.6 hereof;
(iii) scheduled and unscheduled Engine and Parts changes; (iv) monthly aircraft
maintenance planning sheet; (v) monthly deferred items carried forward; (vi)
damage reports; (vii) a list of those service bulletins, Airworthiness
Directives and engineering modifications issued during such month and applicable
to the Aircraft, whether or not incorporated on the Aircraft; (viii) copies of
any written communications with the manufacturers with respect to defects or
malfunctions of the Aircraft or such other matters; and (ix) Segment C Check and
Engine shop visit scheduled dates. In addition, Lessee shall notify Lessor of
all accidents, cases of significant theft or vandalism, extended periods of
Aircraft grounding for cause, and insured occurrences as practicable.
8.13. RIGHT TO INSPECT.
(a) Lessor and its agents shall have the right to inspect the
Aircraft at any reasonable time without interrupting Lessee's commercial
operation of the Aircraft, upon giving Lessee reasonable notice, to ascertain
the condition of the Aircraft and to satisfy Lessor that the Aircraft is being
repaired and maintained in accordance with the requirements of this Lease.
Lessee shall, at the request of
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Lessor, provide Lessor with such information concerning the location of the
Aircraft as may be necessary to facilitate such inspection and shall permit any
duly authorized representative of Lessor to be present during any overhaul or
the performance of any major scheduled maintenance check of the Aircraft. The
cost of the inspection or survey shall be paid by Lessee if the Aircraft, or any
part thereof, is not in the condition required by this Lease but shall otherwise
be for the account of Lessor. All repairs which shall be shown by the inspection
or survey to be required shall be made at Lessee's expense in accordance with
the Maintenance Program. All required repairs shall be performed as soon as
practicable thereafter. In the event of a dispute between Lessor and Lessee as
to the proper performance by Lessee of the repairs required hereunder, the
decision of a publicly-recognized aircraft appraiser selected by Lessor and
reasonably acceptable to Lessee of the Airframe, Engine or Part, as the case may
be, shall control. The non-prevailing party shall be responsible for payment of
all expenses of such appraiser incurred in connection with the rendering of its
decision. Lessor shall have no duty to make any such inspection and shall not
incur any liability or obligation by reason of not making such inspection.
(b) Lessee shall make available to Lessor for its review (i) such
records as it may have in its possession which Lessor may request in the course
of an inspection by Lessor as contemplated by subsection (a), above; (ii) such
other written communications with the IAA or other regulatory authority or any
manufacturer as it may have in its possession relating to defects or
malfunctions of the Aircraft or Parts or any other matters relating to the
Aircraft; and (iii) Lessee's most recent IAA-approved operations specifications,
including any amendments or additions made thereto.
8.14. AIRCRAFT RECORDS. Lessee shall maintain all Manuals and Technical
Records during the term of this Lease relating to the service, inspection,
maintenance, modification, repair and overhaul of the Airframe, Engines and
Parts installed therein as required by the IAA and the Maintenance Program which
records will at all times be "back to birth" and be kept current and up-to-date.
Aircraft records for life limited Parts shall establish total service, origin
and authenticity back to the original manufacturer thereof and shall establish
strict compliance with the IAA type data sheet and with the Maintenance Program.
SECTION 9. RETURN OF AIRCRAFT
9.1. RETURN LOCATION, NOTICES, COSTS, TAXES AND FEES. The return of the
Aircraft at the expiration or earlier termination of this Lease shall be subject
to the following provisions:
(a) At the end of the Term or upon the earlier termination of this
Lease pursuant to Section 14 hereof, Lessee shall return the Airframe and
Engines to Lessor in Marana, Arizona, U.S.A. as Lessor in its sole discretion
shall determine (the "Return Location"). The Aircraft at the time of its return
shall be free and clear of all Liens other than Lessor's Liens. At the time of
return of the Aircraft to Lessor, and provided Lessee is in compliance with the
terms of this Lease, Lessor and Lessee shall execute an Acceptance Certificate
(Return) at the Return Location.
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(b) Lessee and Lessor agree that Lessee shall pay all costs of
returning the Aircraft to Lessor including, but not limited to, fuel, oil, crew,
inspections, insurance, maintenance, repairs, service and other costs of the
Aircraft to the Return Location.
(c) TAXES AND FEES. Lessee shall pay all Taxes and fees arising out
of the return of the Aircraft at the Return Location.
9.2. RETURN OF OTHER ENGINES. In the event at the time the Aircraft is
returned to Lessor pursuant to the terms of this Section 9 and an Engine fails
to meet the return conditions for such Engine as set forth herein, Lessee may
return installed on the Airframe a Rolls-Royce RB211-22B engine not owned by
Lessor but meeting all of the standards set forth in this Section 9; any such
engine shall be a Replacement Engine, and Lessee shall, at its own expense and
concurrently with such return, furnish Lessor with a full warranty bill of sale,
in form and substance satisfactory to Lessor, with respect to each such
Replacement Engine and shall take such other actions conveying title to the
Replacement Engine to Lessor free and clear of all liens other than Lessor's
Liens and such additional documents, including an opinion of counsel acceptable
to Lessor, as Lessor may request in order that title to such Replacement Engine
shall be duly and properly vested in Lessor. Any Replacement Engine shall, at
the time it replaces an Engine, have a fair market value at least as great as
the Engine it replaces and no such Replacement Engine shall, prior to its
installation on the Airframe and the. return of the Aircraft to Lessor, have had
any disk, module or other Part removed and replaced with a disk, module or other
part of lesser value than that it replaced. Upon passage of title to Lessor such
Replacement Engine shall be deemed to be an Engine for all purposes hereunder
and thereupon Lessor shall transfer to Lessee, without recourse or warranty
except a warranty of title excluding Lessor's Liens, all of Lessor's right,
title and interest in and to any Engine not installed on the Airframe at the
time of the return thereof to Lessor.
9.3. CONDITION OF AIRCRAFT. The Aircraft at the time of the return to
Lessor shall have been maintained and repaired in accordance with the
Maintenance Program and this Lease, and shall meet the following requirements:
(a) OPERATING CONDITION. The Aircraft shall be in at least as good
operating condition as on the Delivery Date, ordinary wear and tear from normal
airline passenger operations excepted.
(b) CLEANLINESS STANDARDS. The Aircraft shall be clean by European
commercial airline standards and shall have received an exterior wash and an
interior deep cleaning since its last commercial flight.
(c) CERTIFICATE OF AIRWORTHINESS. The Aircraft shall have, and be in
compliance with a current valid Standard Certificate of Airworthiness issued by
the IAA without any corrections, repairs, modifications, alterations or
overhauls having to be performed by Lessor to meet such standards and rules, and
shall comply with the then current provisions of the applicable IAA rules and
regulations. If required by Lessor, Lessee shall at Lessee's expense request in
the name of Lessor a Certificate of Airworthiness for Export so as to allow
Lessor to place the
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Aircraft on a registry other than that of the Republic of Ireland. If any fees
to a manufacturer or the IAA, or any work, including engineering, is required on
the Aircraft to obtain such Certificate of Airworthiness for Export, Lessee
shall perform such work at its expense.
(d) COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. The Aircraft shall be
in compliance with all Airworthiness Directives affecting the Aircraft and
requiring performance during the Term, or as otherwise required under this
Lease. In the event Lessee has obtained a waiver or deviation from the IAA from
having to comply with any such Airworthiness Directives, Lessee shall,
irrespective of such waiver or deviation, fully comply with all such
Airworthiness Directives covered by such waiver or deviation prior to the return
of the Aircraft to Lessor as if such waiver or deviation did not exist.
(e) DEFERRED MAINTENANCE. The Aircraft shall have had accomplished
thereon all outstanding deferred maintenance items. Items deferred because of
maintenance concessions (i.e., an exemption to operate beyond the normal limits
by monitoring) shall be brought up-to-date as if such maintenance concessions or
exemptions did not exist. Parts whose time status exceeds the conditions or
requirements imposed by this Lease shall be brought into compliance with such
conditions or requirements.
(f) CORROSION TREATMENT. The Aircraft shall have been maintained by
cleaning and treating of all mild corrosion and correcting of all moderate and
severe or exfoliated corrosion in accordance with the recommendations of the
manufacturer of the Airframe. All fuel tanks shall be free of leaks.
(g) CONFIGURATION AND CONDITION. The Aircraft shall be returned
having the same configuration and in the same or better condition with all Parts
installed therein as on the Delivery Date, excepting only Modifications,
additions, replacements and substitution of Parts as may have been properly made
by Lessee pursuant to Section 8 and as specifically otherwise set forth in this
Section 9.
9.4. CONDITION OF AIRFRAME. The Airframe at the time of its return to
Lessor shall meet the requirements set forth below, all at Lessee's expense,
except as otherwise provided herein:
(a) At the end of the Term, Lessee shall have performed immediately
prior to redelivery to Lessor a Segment C Check, including all phases and
multiples in accordance with the Maintenance Program, a corrosion inspection and
clean-up under galleys, forward and aft cargo pit areas and lavatories. Items
deferred because of maintenance concessions (i.e., an exemption to operate
beyond the normal limits by monitoring) shall be brought up-to-date as if such
maintenance concessions or exemptions did not exist. Components whose time
status exceeds the conditions or requirements imposed by this Lease shall be
brought into compliance with such conditions or requirements.;
(b) The cockpit shall be clean by normal airline standards and paint
shall not be cracked or peeled. Lessee shall insure that any items which are
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found to be defective in the Aircraft's interior will be replaced or
repaired in accordance with the Maintenance Program;
(c) Lessee shall permanently repair the fuselage. including but not
limited to (i) dents, abrasions, and scab patches; and (ii) loose or pulled
rivets, impact damage to the Aircraft caused by ground handling equipment or
impact damage caused by foreign objects. The exterior of the Airframe shall be
clear of all names, logos and other special markings, which markings the Lessee
shall remove.
(d) All life limited time controlled Airframe Parts (except for the
landing gear and APU) shall be serviceable in accordance with IAA standards and
have a value, modification status and time since overhaul or replacement
equivalent to the Parts installed in the Aircraft when accepted by Lessee for
lease hereunder, reasonable wear and tear excepted.
9.5. APU. Lessee will return the Aircraft's installed APU in good and
efficient operating condition in accordance with the manufacturer's
specifications and those of the Maintenance Program, ordinary wear and tear
alone excepted. Immediately prior to the return of the Aircraft the APU shall be
inspected and all items requiring repair or replacement shall be repaired or
replaced at Lessee's expense. Any operational discrepancies of the APU shall be
corrected in accordance with the Maintenance Program at Lessee's expense prior
to the return of the Aircraft to Lessor.
9.6. ENGINE CONDITION. Upon return of the Aircraft there shall be
installed on the Aircraft three Rolls Royce RB211-22B Engines. Each Engine shall
meet both the Engine manufacturer specifications and the Maintenance Program
parameters for acceptable exhaust gas temperature margin, engine pressure ratio
maximum rated thrust and fuel flow at maximum certificated rated thrust.
9.7. BORESCOPE INSPECTION. A full videotaped borescope inspection on all
Engine and APU sections in accordance with manufacturer's specification shall be
performed in the presence of a representative of Lessor at Lessee's expense at
the time of the Aircraft's return, but prior to any parking pursuant to Section
9.17, and Lessee shall provide evidence satisfactory to Lessor that no
discrepancies exist beyond the applicable shop repair limits of the manufacturer
of the Engines including no abnormal repetitive inspection limits.
9.8. INSPECTION.
(a) Lessor may, from time to time, wish to make the Aircraft
available for inspection to Persons evaluating the Aircraft for use after the
Term provided always that such inspection does not interfere with Lessee's
commercial operation of the Aircraft. Lessor agrees to give Lessee not less than
3 Business Days' advance notice of any such inspection and Lessee agrees to
cooperate with Lessor's requests in making the Aircraft and the Manuals and
Technical Records available to such Persons.
(b) The Aircraft (including the Manuals and Technical Records to be
returned therewith as set forth in this Section 9) shall be made available to
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Lessor for ground inspection by Lessor at Lessee's facilities where the Segment
C check required by Section 9.4(a) is being performed, while such Segment C
check is being performed. During the Segment C check required by Section 9.4(a),
while Lessee has removed the Aircraft from service and opened the areas of the
Aircraft needed to perform such C check, Lessee shall allow Lessor to accomplish
its inspection in order to determine that the Aircraft (including the Manuals
and Technical Records) is in the condition required by the provisions of this
Section 9. Lessee at its sole cost and expense shall promptly correct any
discrepancies from the condition required by the provisions of this Section 9.
9.9. OPERATIONAL GROUND CHECK. Promptly after completion of any
corrections required under Section 9.8, Lessee shall conduct an operational
ground check in accordance with the requirements of the Maintenance Program and
shall correct any discrepancies disclosed by such check.
9.10.OPERATIONAL CHECK FLIGHT. Promptly after completion of all
corrections required under Sections 9.8 and 9.9 above, the Aircraft shall be
check flown by Lessee at its expense, using qualified flight personnel
demonstrating to Lessor the satisfactory operation of the Aircraft and its
equipment and systems. Lessor's employees or representatives may participate in
such flight as observers. Such flight shall be flown using standard air carrier
operational check flight procedures requested by Lessor's representative and be
sufficient to demonstrate the proper operation of all systems for normal
passenger use. Upon completion of such operational check flight, the
representatives of Lessee and Lessor participating in such flight shall agree in
writing upon any discrepancies in such Aircraft required to be corrected by
Lessee in order to comply with provisions of this Section 9 and Lessee shall
promptly correct or cause to be corrected at Lessee's expense any such
discrepancies. If any of the discrepancies referred to in Sections 9.8 and 9.9
or 9.10 continue to persist, Lessor may (but shall not be obligated to) accept
delivery of the Aircraft and apply the procedure set forth in Section 9.12 for
such discrepancies.
9.11. ACCEPTANCE. Upon completion of the operational check flight
specified in Section 9.10, after Lessee has corrected the discrepancies as
specified therein and after Lessee has delivered the Aircraft to the Return
Location and the Aircraft is in the condition required by this Section 9, the
Aircraft shall be technically accepted by Lessor's representatives at the Return
Location and Lessor's representative shall thereupon execute the Acceptance
Certificate (Return).
9.12. DEFERRED RETURN CONDITION DISCREPANCY CORRECTION. If,
notwithstanding Lessee's best efforts to fully comply with the provisions of
Section 9 hereof, any return condition discrepancies are found during the ground
inspection, operational ground check and operational check flight set forth in
Sections 9.8, 9.9 and 9.10 above, which were not corrected by Lessee prior to
return of the Aircraft to Lessor, at the election of Lessor such discrepancies
may be corrected by Lessor or its designee after return of the Aircraft and
Lessee shall reimburse Lessor for all costs and expenses incurred by Lessor or
its designee for accomplishing such discrepancy corrections or, in the
alternative, Lessor may reasonably determine the cost of performing such
maintenance and repairs and in either event Lessee shall, upon receipt of
Lessor's invoice, pay Lessor for all such costs and expenses. Any late payments
shall be subject to interest at the Overdue Rate.
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9.13. COSTS. All flights pursuant to Sections 9.10 shall be made at
Lessee's expense and Lessee shall pay for any and all costs associated with such
flights including, but not limited to, costs for crew, fuel, oil, airport fees,
insurance, takeoff/landing fees, airway communication fees, and ground handling
fees. At the option of Lessor, Lessee's obligations under this Lease, including
but not limited to Lessees obligations under Sections 11 and 15 hereof and its
obligation to pay Basic Rent shall remain in effect until the execution of the
Acceptance Certificate (Return).
9.14. MANUALS AND TECHNICAL RECORDS. Lessee at its sole cost and expense
shall return to Lessor, at the time the Aircraft is returned to Lessor, all of
the Manuals and Technical Records and other data described in Exhibit B hereto,
originally received from Lessor, and subject to IAA retention time limits,
updated and maintained by Lessee through the date of return of the Aircraft. In
addition. Lessee shall also provide Lessor, at the time the Aircraft is returned
to Lessor, all records, documents, manuals, authorizations, drawings and data in
English (or with English translations thereof) which were developed or caused to
be developed by Lessee and required by the IAA or any other regulatory entity
having authority over the Aircraft, updated and maintained by Lessee for the
Aircraft and through the date of return of the Aircraft in an accurate and
correct condition. At the time of return of the Manuals and Technical Records
for the Aircraft and the other documents required to be delivered by Lessee
pursuant to this Section 9.14 to Lessor and provided such documents are in the
condition they are required to be in hereunder, Lessee and Lessor shall execute
the Acceptance Certificate (Return).
9.15. LESSEE'S SPECIAL EXTERIOR MARKINGS. At the time of the return of the
Aircraft, Lessee shall, at Lessor's election, remove and paint over all of
Lessee's logos and other exterior markings painted on the Aircraft by Lessee. In
the event that, notwithstanding Lessee's obligation to do so, Lessee does not
remove such markings, Lessor shall have no obligation to remove such markings
prior to the sale, lease, or other disposition of the Aircraft by Lessor after
its return.
9.16. OWNERSHIP. Any documents, equipment and any other property returned
to Lessor pursuant to this Section 9 which are not already owned by Lessor shall
thereupon and without further act become the property of Lessor.
9.17. PARKING OF AIRCRAFT UPON RETURN. Upon the written request of Lessor
given at least 15 Business Days prior to the end of the Term, Lessee, at
Lessee's expense shall provide parking facilities for the Aircraft at the Return
Location or at such other location as Lessor shall designate, for a period not
to exceed 30 days. During the period referred to in the preceding sentence,
Lessee shall continue to bear the risk of loss of the Aircraft and shall pay all
maintenance costs, ground insurance costs, and other costs with respect to the
Aircraft.
9.18. LEASE CONTINUES. In the event, for any cause, Lessee does not return
the Aircraft to Lessor on the last Business Day of the Term or earlier
termination of the Lease in the condition required hereunder, then all of the
obligations of Lessee under this Lease shall continue and such continued use
shall not be considered a renewal of the Term of this Lease or a waiver of any
right of
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Lessor hereunder. During such continued use, Rent shall continue to be paid by
Lessee to Lessor and the other performance and obligations of Lessee to Lessor
shall continue hereunder and the same shall be prorated at the rate of one
thirtieth (1/30) of 125% of the monthly installment of Basic Rent for each day
until the Aircraft is actually delivered to Lessor, and all other terms and
conditions of this Lease shall remain in full force and effect. Payment shall be
made upon presentation of Lessor's invoice and any failure to pay shall
constitute an Event of Default of Lessee.
SECTION 10. TITLE: REGISTRATION; LIENS.
10.1. TITLE. Lessee acknowledges that legal title to the Aircraft shall
remain vested in Lessor, notwithstanding the possession and use thereof by
Lessee, and Lessee shall do all acts and things Lessor may reasonably require to
evidence the interest of Lessor in the Aircraft or to protect such interest
against the claims of any other person. Lessee shall not attempt to hold itself
out as having any power to sell or dispose of the Aircraft or any Engine.
10.2. REGISTRATION. Lessee acknowledges that, throughout the Term, the
Aircraft shall be registered on the Irish Civil Aircraft Register and Lessor
shall be stated on such Register to be lessor and Lessee shall not do, and shall
further use its best endeavors to ensure that no third party does, any act or
things which might prejudice or cancel such registration.
10.3. LIENS. Lessee shall not directly or indirectly create, incur, assume
or suffer to exist any Lien on or with respect to the Airframe or any Engine
other than Permitted Liens. Lessee shall promptly, at its own expense, take such
action as may be necessary to duly discharge any Lien other than a Permitted
Lien if the same shall arise at any time, which obligations of the Lessee shall
survive the termination of this Lease.
10.4. NOTICE OF OWNERSHIP. Within 10 Business Days after the Delivery
Date, Lessee shall (i) remove from the Aircraft all notices of the ownership
interest of any prior owner or mortgagee of the Aircraft and (ii) affix in a
reasonably prominent position on the flight deck or cockpit, and on each of the
Engines, a legible notice supplied by Lessor reading as follows:
"Investors Asset Holding Corp., as Trustee,
Owner and Lessor
Leased to G.P. Aer Lease Limited
Lessee"
Once affixed as aforesaid, such notice shall not be defaced, covered or
removed during the Term, unless Lessor instructs Lessee to change such notice.
Lessee shall not allow the name of any person other than Lessor or any assignee
of Lessor's interest hereunder to be placed on the Airframe or any Engine as a
designation that might be interpreted as a claim of ownership or any interest
therein, provided,
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however, that Lessee may operate the Aircraft in its livery, including its name
and logo.
SECTION 11. INSURANCE.
On or before the Delivery Date and throughout the Term, Lessee shall
without cost or expense to Lessor obtain, maintain and keep in full force and
effect the following insurance with respect to the Aircraft, carried with
responsible insurers acceptable to Lessor of recognized and good reputation in
the aviation industry.
11.1. ALL-RISK INSURANCE. "All-risk" hull, ground and flight insurance on
the Aircraft (with flight, taxiing and ingestion coverage) in an amount not less
than the Stipulated Loss Value with a deductible amount not exceeding
$1,000,000. In addition, Lessor may request such greater amounts of coverage as
Lessor may determine necessary or desirable from time to time (and for which
Lessor shall reimburse Lessee for its cost of increased premium, if any, for
such greater amounts of insurance). Such hull insurance shall cover Engines or
engines and Parts temporarily removed from the Airframe pending installation of
the same or similar Engines, engines or Parts on the Airframe in an aggregate
amount not less than their replacement cost.
11.2. WAR RISK INSURANCE. War risk and allied perils insurance on the
Aircraft in an amount not less than the Stipulated Loss Value covering the
perils of:
(a) war, invasion, acts of foreign enemies, hostilities (whether war
be declared or not), civil war, rebellion, revolution, insurrection, martial
law, military or usurped power, or attempts at usurpation of power;
(b) strikes, riots, civil commotions or labor disturbances;
(c) any act of one or more persons, whether or not agents of a
sovereign power, for political or terrorist purposes and whether the loss or
damage therefrom is accidental or intentional;
(d) any malicious act or act of sabotage;
(e) confiscation, nationalization, seizure, restraint, detention,
appropriation, requisition of title or use by or under the order of any
government (whether civil, military or de facto) or public or local authority
other than the government or any public or local authority of the country of
registration; and
(f) hijacking or any unlawful seizure or wrongful 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 Lessee.
11.3. LIABILITY INSURANCE. Public liability insurance for a combined
single limit of not less than $500,000,000 per occurrence or such greater
amounts as
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Lessee may carry from time to time on other aircraft in its fleet similar to the
Aircraft, which shall:
(a) include public liability insurance, passenger liability
insurance and property damage liability insurance; and
(b) provide that all the provisions thereof, except the limits of
liability, shall operate in the same manner as if there were a separate policy
covering each such insured.
In the event that Lessee increases its public liability insurance
coverage, it shall do so with respect to the Aircraft contemporaneously with
increasing its insurance coverage on other aircraft similar to the Aircraft
which it owns or operates.
11.4. ADDITIONAL REQUIREMENTS; LOSS PAYMENT. The insurance required under
this Section 11 shall be provided on an agreed value basis, and the policies
shall:
(a) name Lessor, and any assignee of its interests hereunder as
additional insured and (with respect to Lessor) as sole loss payee for up to the
Stipulated Loss Value for total loss of the Aircraft;
(b) provide that the insurance shall not be invalidated by any
action or inaction by Lessee and insure the interest of Lessor regardless of any
breach or violation by Lessee or any other named insured of any warranty,
declaration or condition contained in such policies;
(c) provide that in the event of separate insurance being arranged
to cover the all-risk hull insurance and the war risk and allied perils
insurance, the underwriters subscribing to such insurance agree to a 50/50 claim
funding arrangement in the event of any dispute as to which insurance is
applicable;
(d) with respect to the liability coverage required hereunder, be
primary and without right of contribution from other insurance which may be
available to Lessor;
(e) extend to, and the underwriters thereof have agreed to insure,
the indemnification provided in Section 15.1 hereof to the extent of the
insurance;
(f) be of the type usually carried by corporations engaged in the
same or a similar business, similarly situated with Lessee and owning and
operating similar aircraft and engines, and covering risks of the kind
customarily insured against by such corporations;
(g) provide that Lessor shall have no liability for premiums,
commissions, calls or assessments with respect to such policies; and
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(h) provide in the case of the insurance required by Sections 11.1
and 11.2 hereof that, so long as the insurers shall not have received written
notice that an Event of Default has occurred and is continuing, any proceeds of
less than $50,000 shall be payable to Lessee: and any proceeds in excess of
$50,000, and any and all proceeds in respect of a Total Loss, or if the insurers
shall have received written notice that an Event of Default has occurred and is
continuing, any single loss regardless of the amount, shall be payable to
Lessor.
11.5. NO SET-OFF. Each insurance policy to be maintained under this
Section 11 shall contain a waiver of any right of the insurers to any set-off or
counterclaim or any other deduction against Lessee or Lessor.
11.6. NOTICE OF MATERIAL ALTERATION OR CANCELLATION. No cancellation or
lapse of coverage for nonpayment of premium or otherwise, and no substantial
change of coverage which adversely affects Lessor shall be effective as to
Lessor until not less than 30 days (7 days in the case of war risk policies,
subject to exceptions uniformly applied in war risk policies then available
commercially) after sending written notice to Lessor from the insurers (or
Lessee's insurance broker) of such cancellation, lapse or change.
11.7. APPLICATION OF HULL INSURANCE PROCEEDS. As between Lessor and
Lessee, any payments received under policies of insurance required to be
maintained by Lessee pursuant to Sections 11.1 or 11.2, shall be applied as
follows:
(a) if such payments are received by Lessor with respect to loss or
damage (including a Total Loss with respect to an Engine) not constituting a
Total Loss with respect to the Airframe such payments shall be paid over to
Lessee upon Lessee's performance of its repair or replacement obligations under
this Lease pursuant to Section 12.3 hereof and
(b) if such payments are received with respect to a Total Loss with
respect to the Airframe, so much of such payments as shall not exceed the amount
required to be paid by Lessee pursuant to Section 12.1 hereof shall be applied
in reduction of Lessee's obligation to pay such amount if not already paid by
Lessee, and to reimburse Lessee if it shall have paid all or part of such
amount, and the balance, if any, of such payments shall be paid over to or
retained by Lessor.
11.8. INSURANCE FOR OWN ACCOUNT. Nothing in this Section 11 shall prohibit
Lessor or Lessee from obtaining insurance for its own account and any proceeds
payable thereunder shall be payable as provided in the insurance policy relating
thereto, provided that no such insurance may be obtained which would limit or
otherwise adversely affect the coverage or payment of any insurance required to
be obtained or maintained pursuant to this Section 11.
11.9. REPORTS. Lessee shall furnish to Lessor not later than the Delivery
Date a report signed by a firm of aircraft insurance brokers reasonably
satisfactory to Lessor an undertaking of such firm in substantially the form of
Exhibit F hereto. Lessee shall during the Term furnish to Lessor evidence of
renewal of the insurance policies required pursuant to this Section 11 prior to
the cancellation, lapse or expiration of such insurance policies and, on the
renewal dates of the insurance
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policies carried by Lessee pursuant to this Section 11, a report similar to that
required by the preceding sentence.
11.10. CONTINUING INSURANCE. Lessee's insurance coverage shall cover all
liabilities from an occurrence which arises during the Term, regardless of the
date on which any claim is made with respect to such occurrence and Lessee at
Lessor's request shall provide evidence of the existence of such insurance
following the expiration or earlier termination of this Lease. Lessee shall in
any event be responsible for any and all liabilities to which Lessor may be
exposed as a result of Lessee's lease, use, possession, or operation of the
Aircraft.
SECTION 12. LOSS, DAMAGE OR REQUISITION.
12.1. TOTAL LOSS OF AIRFRAME.
(a) Upon the occurrence of a Total Loss with respect to the Airframe
during the Term, Lessee shall give Lessor immediate written notice of such Total
Loss. Lessee shall pay or cause to be paid to Lessor in immediately available
funds on the earlier of 60 days following the Total Loss or the date hull
insurance proceeds are received with respect to such Total Loss, an amount equal
to (i) the Basic Rent, if any, due and payable on or before such payment date,
plus (ii) all unpaid Supplemental Rent due on or before such payment date,
(including the Stipulated Loss Value for the Aircraft) plus (iii) an amount
equal to the daily equivalent of Basic Rent for each day during the period
commencing the day after the last Rent Payment Date up to and including such
payment date. Upon its receipt of the foregoing amounts, Lessor shall promptly
remit to Lessee all Reserves then held by it.
(b) In the event of a payment in full of the Stipulated Loss Value
for the Aircraft and other Rent payable as provided above, (i) this Lease and
the obligations of Lessee to pay Basic Rent and Supplemental Rent (except for
Supplemental Rent obligations surviving pursuant to Section 15 hereof or which
have otherwise accrued but not been paid as of the date of such payment and the
insurance to be provided pursuant to Section 11.10) shall terminate; and (ii)
Lessor shall convey to Lessee all of Lessor's right, title and interest, as-is,
where-is without recourse or warranty, express or implied, except to warrant
that it is free and clear of liens placed thereon by Lessor, in and to the
Airframe and Engines.
(c) In the event Lessee has itself paid the amounts specified in
Section 12.1(a)(i), (ii) and (iii) above and Lessor thereafter receives the hull
insurance policy proceeds with respect to the Total Loss in question, Lessor
shall promptly remit such proceeds to Lessee.
12.2. TOTAL LOSS OF ENGINE.
(a) Upon the occurrence during the Term of a Total Loss with respect
to an Engine whether or not installed on the Airframe and not involving a Total
Loss with respect to the Airframe, Lessee shall give Lessor written notice
thereof within 10 Business Days of such loss and shall within 60 days of the
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occurrences of such Total Loss and on at least 5 days' prior written notice to
Lessor substitute a Replacement Engine for such Engine, provided, however, under
all circumstances a Replacement Engine shall be substituted on or before the
expiration of the Term. In such event, immediately upon the effectiveness of
such substitution on the date set forth in such notice and without further act,
(i) title to the Replacement Engine shall thereupon vest in Lessor
(subject only to Permitted Liens),
(ii) title to the replaced engine shall thereupon vest in Lessee, in
as-is, where-is condition, free and clear of all rights of Lessor and shall no
longer be deemed an Engine hereunder, and
(iii) such Replacement Engine shall become subject to this Lease and
be deemed part of the Aircraft for all purposes hereof to the same extent as the
Engine originally installed on or attached to the Airframe.
(b) Upon such substitution, Lessee shall execute and deliver to
Lessor such bills of sale, opinions of counsel and other documents and
instruments as Lessor shall reasonably request, in form and substance acceptable
to Lessor, to evidence the interest of Lessor and conveyance to Lessor of good
and marketable title to such Replacement Engine. Upon such substitution, (i)
Lessor shall execute and deliver to Lessee such bills of sale and other
documents and instruments, prepared at Lessee's expense, as Lessee shall
reasonably request to evidence such transfer and vesting of title in and to the
replaced Engine in Lessee, free and clear of all rights of Lessor and (ii)
Lessee shall receive all insurance proceeds and proceeds in respect of any Total
Loss causing such replacement to the extent not previously applied to the
purchase price of the Replacement Engine as provided in Section 12.3 hereof. No
Total Loss with respect to an Engine under the circumstances contemplated by
this Section 12.2 shall result in any reduction of Lessee's obligations to pay
Rent hereunder.
12.3. REPAIRABLE DAMAGE; USE OF INSURANCE PROCEEDS. In the event of
repairable damage to the Aircraft or any of the Engines, or any Engine loss
(when no Total Loss of the Aircraft has occurred), Lessor shall forthwith either
pay any insurance proceeds received by it to Lessee upon Lessee's furnishing
evidence to Lessor that such damage has been made good or repaired such that the
condition of the Aircraft shall be at least equivalent to its condition,
assuming compliance with the provisions of this Lease, immediately prior to the
event of damage or, in the case of an Engine loss, evidence that Lessee has
purchased or otherwise acquired and installed a Replacement Engine. All damage
to the Aircraft shall be documented and any repair to the Aircraft shall be
documented and accomplished pursuant to the applicable manufacturer's structural
repair manual instructions and (where applicable) the Maintenance Program. Such
repairs shall be permanent. Repairs to the skin of the Aircraft shall be flush
and not merely patched, unless otherwise specified in the Airframe manufacturer
structural repair manual. Lessee shall notify Lessor of any repair to the
structure or skin of the Aircraft or any other repair costing in excess of One
Hundred Thousand Dollars ($100,000) promptly after its being made (but in any
event no later than fifteen (15) calendar days thereafter); provided, however,
that Lessor shall have no liability to
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Lessee or third parties with regard to such repair or the quality thereof and
Lessee shall indemnify and hold Lessor harmless with regard thereto. All
technical and engineering data, calculations, drawings, and documentation
covering major repairs shall become a permanent part of the Aircraft documents.
12.4. PAYMENT FROM GOVERNMENTAL AUTHORITIES FOR REQUISITION OF TITLE OR
USE; REQUISITION. In the event of a requisition for use by any government, so
long as it does not constitute a Total Loss of the Airframe, Lessee shall
promptly notify Lessor of such requisition and all Lessee's obligations under
this Lease shall continue to the same extent as if such requisition had not
occurred; including, without limitation, that Lessee's obligations for the
payment of Rent and its obligations under Section 11 hereof shall in no way be
affected, reduced or delayed by such requisition. In the circumstances described
in the preceding sentence, any payments received by Lessor or Lessee from such
government with respect to such requisition shall be paid over to or retained
by, Lessee. In the event of the requisition for use by a government of any
Engine (but not the Airframe), Lessee shall replace such Engine hereunder by
complying with the terms of Section 12.2 hereof to the same extent as if a Total
Loss had occurred with respect to such Engine. Any payments received by Lessor
or Lessee from such government with respect to such requisition shall be paid
over to, or retained by, Lessor until Lessee's replacement of such Engine
pursuant to Section 12.2 hereof, at which point it shall be paid over to Lessee.
12.5. APPLICATION OF PAYMENTS DURING EXISTENCE OF EVENT OF DEFAULT. Any
amount referred to in Sections 11 or 12 hereof which is payable to Lessee shall
not be paid to Lessee, or, if it has been previously paid directly to Lessee,
shall not be retained by Lessee, if at the time of such payment an Event of
Default shall have occurred and be continuing, but shall be paid to and held by
Lessor as security for the obligations of Lessee under this Lease.
12.6. RISK OF LOSS. The Lessee will bear the entire risk of destruction,
loss, theft, requisition of title, or use, confiscation, taking or damage of or
to the Aircraft from any cause during he period commencing when the Acceptance
Certificate (Delivery) is executed and delivered by Lessee and ending when the
Acceptance Certificate (Return) is executed and delivered by Lessor.
SECTION 13. EVENT OF DEFAULT.
Each of the following events shall be an Event of Default:
13.1. FAILURE TO MAKE PAYMENTS. If Lessee shall fail to make any payment
of Rent when due within three Business Days following written notice from Lessor
of its failure to pay such Rent;
13.2. FAILURE TO OBTAIN OR MAINTAIN INSURANCE. If Lessee fails to obtain
or maintain any insurance required by Section 11 of this Lease or operates or
locates or permits operation or location of the Airframe in violation of Section
8.2(a) hereof;
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13.3. FAILURE TO PERFORM OTHER OBLIGATIONS. If Lessee fails to duly
observe or perform any of its other obligations or agreements under any Lease
Document to which Lessee is a party and such failure shall not have been
remedied within a period of 20 days (5 days with respect to Lessee's agreement
in Section 10.3 of this Lease) after written notice specifying the same from
Lessor:
13.4. REPRESENTATIONS AND WARRANTIES UNTRUE. If any representation or
warranty made by Lessee in any Lease Document or in any document or certificate
furnished to Lessor in connection therewith shall prove to be untrue in any
material respect when made;
13.5. GUARANTY DEFAULT. If either Guarantor is in default of its
obligations under its respective Guaranty, PROVIDED. HOWEVER, in the case of a
default under the A.T.T. Guaranty occurring on or before July 31, 1997, it shall
be deemed cured if within 5 Business Days of Lessee's discovery of such default
it pays to Lessor an additional $200,000 in cash as an addition to the Security
Deposit PROVIDED FURTHER that a default under the A.T.T. Guaranty shall not
constitute a default hereunder if such default under the A.T.T. Guaranty occurs
on or after August 1, 1997 and T.B.G. Airways Limited is not in default of its
obligations under the T.B.G. Guaranty.
13.6. OTHER DEFAULTS. If Lessee or either Guarantor shall fail to make any
payment in excess of $250,000 of indebtedness (other than Rent payable
hereunder) for money borrowed or indebtedness under any capitalized lease or
other purchase money obligation or shall fail to perform the terms of any
agreement relating to such indebtedness and such default shall continue, without
having been duly cured, waived or consented to, beyond the period of grace, if
any, therein specified, or any such indebtedness shall be accelerated or
declared due and payable prior to the stated maturity thereof.
13.7. INSOLVENCY OR BANKRUPTCY
(a) If any action is taken by any person to appoint, an
administrator, administrative receiver, assignee, custodian, sequestrator,
trustee or liquidator (or other similar official) of Lessee or either Guarantor
or the taking possession by any such person of a substantial part of the
property of any of them, or Lessee or either Guarantor shall fail to pay its
debts generally as they come due, or shall admit in writing its inability to pay
its debts as they become due, or shall make a general assignment for the benefit
of its creditors, or Lessee or either Guarantor shall commence a voluntary case
or other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under the bankruptcy laws of Cyprus, the Republic
of Ireland, as now or hereafter constituted or any other applicable bankruptcy,
insolvency or other similar laws or shall consent to the entry of an order for
relief in an involuntary case under any such law or Lessee shall file an answer
admitting the material allegations of a petition filed against Lessee in any
such proceedings or otherwise seek relief under the provisions of any now
existing or future bankruptcy, insolvency or other similar laws providing for
the reorganization or winding-up of corporations, or providing for an agreement,
composition, extension or adjustment with its creditors.
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(b) If an order, judgment or decree shall be entered in any
proceedings by any court of competent jurisdiction appointing, without the
consent of Lessee, a receiver, trustee or liquidator of Lessee or either
Guarantor, or of any substantial part of its property, or any substantial part
of the property of Lessee or either Guarantor shall be sequestered, and any such
order, judgment or decree or appointment or sequestration shall remain in force
undismissed, unstayed or unvacated for a period of 60 days after the date of
entry thereof;
(c) If a petition against Lessee or either Guarantor in a proceeding
or case under the bankruptcy laws or other insolvency laws shall be filed and
shall not be withdrawn or dismissed within 60 days thereafter, or, in case the
approval of such petition by a court of competent jurisdiction is required, the
petition as filed or amended shall be approved by such a court as properly filed
and such approval shall not be withdrawn or the proceeding dismissed within 60
days thereafter, or a decree or order fir relief in respect of Lessee or either
Guarantor shall be entered by a court of competent jurisdiction in an
involuntary case under the bankruptcy laws of the Republic of Ireland, as now or
hereafter constituted, or any other applicable bankruptcy, insolvency or other
similar laws, as now or hereafter constituted and such decree or order shall
remain unstayed in effect for a period of 60 days, or if, under the provisions
of any law providing for reorganization or winding-up of corporations which may
apply to Lessee or either Guarantor any court of competent jurisdiction shall
assume jurisdiction, custody or control of Lessee or either Guarantor or of any
substantial part of their property and such jurisdiction, custody or control
shall remain in force unrelinquished, unstayed or underminated for a period of
60 days.
13.8. LOSS OF LICENSE. Aer Turas Teoranta or a Permitted Sublessee shall
cease to be a Certificated Air Carrier.
SECTION 14. REMEDIES.
Upon the occurrence of any Event of Default and at any time thereafter so
long as the same shall be continuing, Lessor may, at its option, declare this
Lease to be in default; and at any time thereafter, Lessor may do, and Lessee
shall comply with, any one or more of the following with respect to all or any
part of the Aircraft, as Lessor in its sole discretion shall elect:
(a) Cause Lessee, upon the written demand of Lessor and at Lessee's
expense, to, and Lessee shall, promptly return the Aircraft to Lessor at such
location in the continental United States of America selected by Lessor in the
manner and condition required by, and otherwise in accordance with all of the
provisions of, Section 9 hereof as if such Airframe or such Engines were being
returned at the end of the Term; or Lessor, at its option, may enter upon the
premises where the Airframe or any or all Engines are located or believed to be
located and take immediate possession of and remove such Airframe or Engines
without the necessity for first instituting proceedings, or by summary
proceedings or otherwise, and Lessee shall comply therewith, all without
liability to Lessor for or by reason of such entry or taking possession, whether
for the restoration of damage to property caused by such taking or otherwise;
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(b) Sell or otherwise dispose of the Aircraft at a commercially
reasonable market price, at public or private sale and with or without notice to
Lessee or advertisement, as Lessor may determine or hold, use, operate, lease to
others or keep idle all or any part of the Airframe or any Engine as Lessor, in
its sole discretion, may determine, in any such case 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 except to the extent
required by paragraph (d) below in the event Lessor elects to exercise its
rights under said paragraph in lieu of its rights under paragraph (c) below;
(c) Whether or not Lessor shall have exercised, or shall thereafter
at any time exercise, any of its rights under paragraph (a) or paragraph (b)
above with respect to the Aircraft, Lessor, by written notice to Lessee
specifying a payment date 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, any installment of Basic
Rent with respect to the Aircraft due on or before such payment date plus an
amount equal to all amounts of Basic Rent to be paid during the balance of the
Term, together with interest at the Overdue Rate on such amount from such
payment date specified pursuant to this paragraph (c) to the date such amount is
actually received by Lessor in cash;
(d) In the event Lessor, pursuant to paragraph (b) above, shall have
sold the Aircraft, Lessor, in lieu of exercising its rights under paragraph (c)
above with respect to the Aircraft, may, if it shall so elect, 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 for the Aircraft due after the date on which such sale occurs but in
addition to any installment of Basic Rent for this Aircraft due on or up to the
date on which such sale occurs), the amount of any deficiency of the net
proceeds of such sale below the Stipulated Loss Value of the Aircraft,
determined as of the date of such sale, together with interest at the Overdue
Rate on the amount of such deficiency from the date as of which such Stipulated
Loss Value is determined to the date such amount is actually received by Lessor
in cash; or
(e) Rescind this Lease as to the Aircraft or exercise any other
right or remedy which may be available under Applicable Law or proceed by
appropriate court action to enforce the terms hereof or to recover damages for
the breach hereof. In addition, Lessee shall be liable for any and all
Supplemental Rent due hereunder before or after any termination hereof,
including all costs and expenses (including reasonable attorneys' fees and
disbursements) incurred by reason of the occurrence of any Event of Default or
the exercise of Lessor's remedies with respect thereto including all costs and
expenses incurred in connection with the return of the Airframe or any Engine in
accordance with the terms of Section 9 hereof or any appraisal of the Aircraft.
No remedy referred to in this Section 14 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, including, without
limitation, those remedies set forth in Article 2A-523(1) of the Uniform
Commercial Code; and the exercise or beginning of exercise by Lessor of any one
or more of such remedies shall not preclude the simultaneous or later
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exercise by Lessor of any or all such other remedies. No express or implied
waiver by Lessor of any Event of Default hereunder shall in any way be, or be
construed to be, a waiver of any future or subsequent Event of Default.
SECTION 15. INDEMNITIES.
15.1. GENERAL INDEMNIFICATION AND WAIVER OF CERTAIN CLAIMS.
(a) For the purposes of this Lease, "Claims" shall mean any and all
liabilities (including strict or absolute liability and costs, actions or suits
and all legal proceedings whether civil or criminal, fines and other sanctions,
which may be imposed on, incurred by, suffered by, or asserted against Lessor
its successors and assigns and the officers, directors, agents, partners and
employees of Lessor, its successors and assigns, and in addition if Lessor is a
trustee under any trust, the beneficiaries of any such trust and its or their
officers, directors, agents, partners and employees, their successors and
assigns (individually, an "Indemnified Person" for purposes of this Section
15.1) and, except as otherwise expressly provided in this Section 15.1, shall
include all reasonable costs, disbursements and expenses (including attorneys'
fees and expenses) of an Indemnified Person in connection therewith or related
thereto.
(b) Lessee agrees to indemnify, defend and hold harmless each
Indemnified Person against Claims resulting from, arising out of, or related to:
(i) the operation, possession, use, non-use, maintenance, storage,
overhaul, testing or disposition of the Aircraft, Airframe or
any Engine, or any engine used in connection with the
Airframe, or any Part or part thereof by Lessee or any other
Person whatsoever, whether or not such operation, possession,
use, non-use, maintenance, storage, overhaul or testing is in
compliance with the terms of the Lease including, without
limitation, Claims for death, personal injury or property
damage or other loss or harm to any Person whatsoever,
including, without limitation, any passengers, shippers or
other persons wherever located, and Claims relating to any
laws, rules or regulations, including, without limitation,
environmental control, noise and pollution laws, rules or
regulations;
(ii) the sale, purchase, acceptance, rejection, delivery,
condition, repair, modification, servicing, rebuilding,
airworthiness, performance, nondelivery, sublease,
merchantability, fitness for use, substitution or replacement
of the Airframe, an Engine or part under the Lease, or other
transfer of use or possession of the Aircraft, Airframe,
Engine or Part, and registration of the Aircraft, Airframe or
any Engine, including, without limitation, latent and other
defects, whether or not discoverable; and
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(iii) any breach of or failure to perform or observe, or any other
non-compliance with, any covenant or agreement to be
performed, or other obligation of Lessee under any Lease
Document.
(c) An Indemnified Person shall notify Lessee of any Claim as to
which indemnification is sought. Lessee shall have the right to investigate and
the right to defend, and with the prior written consent of such Indemnified
Party, such consent not to be unreasonably withheld, compromise any Claim for
which indemnification is sought under this Section 15.1, and the Indemnified
Person shall cooperate with all reasonable requests of Lessee in connection
therewith: provided that at such time no Event of Default shall have occurred
and be continuing. In discharging its obligations, under this Section 15.1
Lessee agrees to utilize counsel reasonably acceptable to such Indemnified
Person. An Indemnified Person may participate at its own expense in any judicial
proceeding controlled by Lessee pursuant to the preceding provisions, and such
participation shall not constitute a waiver of the indemnification provided in
this Section 15.1. Nothing contained in this Section 15.1(c) shall be deemed to
require an Indemnified Person to contest any Claim or to assume responsibility
for or control of any judicial proceeding with respect thereto.
(d) In the event Lessee is required to indemnify any Indemnified
Person under this Section 15.1, Lessee shall pay to such Indemnified Person an
amount which, after deduction of all taxes actually required to be paid by such
Indemnified Person in respect of the receipt of such amount under the Applicable
Laws of any government or taxing jurisdiction, shall be equal to the amount of
the indemnification required.
(e) Lessee hereby waives and releases any Claim now or hereafter
existing against any Indemnified Person arising out of death or personal injury
to personnel of the Lessee, loss or damage to property of Lessee, or the loss of
use of any property of Lessee, which may result from or arise out of the
condition, use or operation of the Aircraft during the Term, including without
limitation any latent or patent defect whether or not discoverable unless caused
by the negligence or willful misconduct of Lessor, its employees or agents or on
the part of any Indemnified Person.
(f) The general indemnification provisions of this Section 15.1 are
not intended to waive or supersede any specific provisions of this Lease to the
extent such provisions apply to any Claim.
15.2. TAXES AND OTHER CHARGES.
(a) Lessee shall pay, indemnify and hold Lessor harmless from all
Taxes which relate to the leasing of the Aircraft pursuant hereto which may be
levied or assessed against, or imposed on Lessor, the Aircraft or any Part or
part thereof upon or with respect to or as a result of (i) the interest of
Lessee or Lessor in the Aircraft, (ii) any Rent, (iii) this Lease or the
interest of Lessee or Lessor hereunder, (iv) the manufacture, purchase,
delivery, leasing, operation, return, possession, use, occupancy, installation,
construction, maintenance, repair, renewal
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or modification of the Aircraft, the Airframe, the Engines, the Parts or any
part of any of the foregoing, (v) receipts from the Aircraft, or (vi) the
earnings arising from the possession, use or occupancy thereof. Without
limitation of the foregoing, Lessee shall also pay and discharge, as and when
due and payable without penalty, all Taxes which may be levied or assessed
against or payable by Lessee or Lessor on account of the ownership, leasing, or
use of the Aircraft. Notwithstanding the foregoing provisions of this Section
15.2(a), Lessee shall not be required to pay any Tax levied or based on Lessor's
net income, profits or gains and imposed on Lessor by any taxing jurisdiction in
which Lessor is subject to such tax solely by reason of activities unrelated to
the acquisition, ownership, financing, installation. construction, leasing or
use of the Aircraft unless any such Tax or a portion thereof is imposed or
levied upon or assessed against Lessor in substitution for or in place of any
other Tax required to be paid by Lessee pursuant to this Section 15.2.
(b) Lessee shall furnish to Lessor, upon Lessor's written request,
proof of the payment of any such Tax which is payable by Lessee pursuant to
Section l5.2(a).
(c) Whenever the term "Lessor" is used in this Section 15.2, such
term shall include every Indemnified Person, Lessor, its successors,
transferees, assigns and partners, and if any Lessor is a trust, the beneficiary
and the owner of such trust and the partners of each such beneficiary and owner.
In addition, the indemnities in this Section 15.2 shall apply to any Taxes which
at any time prior to or during the Term may be levied or assessed against, or
imposed on, Lessor, Lessee, the Aircraft or any part thereof upon or with
respect to or as a result of any of the items described in the clauses (i)
through (vi) of the first sentence of Section 15.2(a) and the second sentence of
Section 15.2(a).
15.3. CONTINUING INDEMNIFICATION. The agreements and indemnities contained
in this Section 15 shall survive the end of the Term.
SECTION 16. TRANSFER, ASSIGNMENT AND SUBLEASE.
16.1. ASSIGNMENT OR ENCUMBRANCE BY LESSOR. Lessor may, without notice to
or the consent of Lessee, at its expense sell the Aircraft or assign any of its
rights hereunder whether as collateral security or otherwise, subject only to
the condition that any such assignment or security interest be expressly made
subject to Lessee's rights under Section 4 hereof and provided that such
assignment shall not materially increase the aggregate financial exposure of
Lessee under this Lease. In connection with any such assignment, Lessee further
agrees to take all actions as may be reasonably requested by Lessor to secure
such assignee's interest, including without limitation: (i) indemnifying any
assignee to the same extent as Lessor under Section 15 hereof; (ii) adding any
assignee as additional insureds and loss payees to all insurance policies so
naming the Lessor in accordance with Section 11 hereof; (iii) executing,
recording and filing all consents, agreements, certificates, financing
statements, opinions and other documents or instruments as may be reasonably
necessary or desirable to recognize, evidence, secure or perfect any assignees
ownership or security interest in the Aircraft and this Lease; (iv) permit
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the Liens created by security interests granted pursuant hereto: and (v) to
recognize all rights of such any assignee to exercise any and all rights of
Lessor hereunder.
16.2. SUBLEASE OF AIRCRAFT OR ASSIGNMENT BY LESSEE. Without the prior
written consent of Lessor, such consent not to be unreasonably withheld, Lessee
may not sublease of the Aircraft, including the Airframe or any of the Engines
to any person other than a Guarantor. LESSEE MAY NOT WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR ASSIGN TO ANY OTHER PERSON THE AIRCRAFT OR ANY OF LESSEE'S
RIGHTS OR OBLIGATIONS HEREUNDER.
16.3. CONSOLIDATION, MERGER OR TRANSFER BY LESSEE. Lessee shall not,
without the prior written consent of Lessor, consolidate with or merge into any
other corporation or convey, transfer or lease all or substantially all of its
assets as an entity to any Person.
16.4. NONRECOURSE AS TO TRUSTEE. Neither the Lessor nor any entity acting
as successor trustee shall be personally liable for, or for any loss in respect
of, any of the statements, representations, warranties, agreements, actions,
failures to act or obligations of Lessor hereunder; Lessee hereby agrees to look
solely to the trust estate of the owner trust created by the trust agreement
pursuant to which the Aircraft and this Lease are held by Lessor ("Trust") in
the event of any default by Lessor of its obligations hereunder or otherwise.
SECTION 17. OPTION TO PURCHASE
Provided no Event of Default has occurred and is continuing, Lessee upon
not less than 90 days prior written notice to Lessor may purchase the Aircraft
effective as of the last day of the Basic Term for a purchase price equal to
$1,400,000. All Taxes, levied or assessed on the transfer of title pursuant to
Lessee's exercise of its option to purchase shall be for the account of Lessee.
Lessor shall retain the Security Deposit and on the last day of the Basic Term
Lessor shall transfer title to the Aircraft and the Reserves then held by Lessor
to Lessee or its designee against Lessor's receipt in good funds of $1,400,000
less the Security Deposit then held by Lessor. Upon the transfer of title to the
Aircraft, Lessor shall warrant to Lessee that it holds good and marketable title
to the Aircraft, free and clear of all liens and encumbrances placed thereon by
Lessor but otherwise that title is transferred "AS IS" and "WHERE IS" without
additional warranty of any kind. Lessee agrees to provide the insurance
specified in Section 11.3 for period of two years following the transfer of
title to the Aircraft.
SECTION 18. NOTICES.
Unless otherwise specifically provided herein, all notices required or
permitted by the terms hereof shall be in writing. Any written notice shall
become effective the earlier of when received or five days after the deposit of
such notice by first class airmail (or its equivalent in the United Kingdom).
Any written notice shall be sent by mail (as specified in the preceding
sentence) or sent in the form of a facsimile
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message, or by overnight delivery service or delivered by hand. Any written
notice shall be addressed as follows:
If to Lessor:
c/o Equis Financial Group Limited Partnership
98 North Washington Street
Boston, MA 02114, U.S.A.
Attn: Vice President Aircraft Management
Fax:(617) 523-1410
If to Lessee:
c/o T.B.G. Airways Limited Stansted Airport
Stansted, Essex CM24 lAF, U.K.
Attention: G. Thornton
Fax:44-1279-681482
Such persons and addresses may be changed, from time to time, by means of a
notice given in the manner provided in this Section 18.
SECTION 19. LESSOR'S RIGHT TO PERFORM FOR LESSEE. If Lessee fails to make
any payment of Rent required to be made by it hereunder, or fails to perform or
comply with any of its agreements contained herein, then Lessor may itself make
such payment or perform or comply with such agreement, and the amount of such
payment and the amount of the reasonable expenses of Lessor incurred in
connection with such payment or the performance of or compliance with such
agreement (including reasonable attorneys' fees), as the case may be, together
with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent,
payable by Lessee upon demand.
SECTION 20. MISCELLANEOUS.
20.1. FEDERAL BANKRUPTCY CODE. To the extent provided thereby (or to the
fullest extent it may lawfully so agree, whether or not provided thereby) Lessee
hereby agrees in accordance with 11 U.S.C. Section 1110, or any superseding
statute, as amended from time to time, that the title of Lessor to the Aircraft
and any right of Lessor to take possession of such Aircraft in compliance with
the provisions of this Agreement shall not be affected by the provisions of 11
U.S.C. Sections 362 or 363, or other analogous part of any superseding statute,
as amended from time to time.
20.2. WAIVERS, HEADINGS. No term or provision of this Lease may be
changed, waived, discharged or terminated orally, but only by an instrument in
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writing signed by Lessor and Lessee or their respective successors and permitted
assigns. The headings contained herein are for convenience and reference only
and are not intended to define or limit the scope of any provisions of this
Lease.
20.3. COUNTERPARTS. This Lease may be signed in one or more counterparts
with the same effect as if the signatures to each counterpart were upon a single
instrument.
20.4. AGREEMENT TO LEASE. This Lease shall constitute an agreement to
lease, and nothing contained herein shall be construed as conveying to Lessee
any right, title or interest in any Aircraft except as a lessee only. In
recognition of the fact that a court of competent jurisdiction could determine
that this Lease constitutes a "lease intended as security" under applicable law
(including under Section 1-201(37) of the Uniform Commercial Code) Lessee hereby
grants to Lessor to secure Lessee's performance of its obligations under this
Lease a first priority security interest in the Aircraft and all replacements,
substitutions accessions thereto and proceeds (cash and non-cash) thereof,
including the proceeds of all insurance policies on the Aircraft. Lessee agrees
that, with respect to the Aircraft, Lessor shall have all the rights and
remedies of a first priority secured party under the UCC.
20.5. GOVERNING LAW. This Lease has been delivered in the Commonwealth of
Massachusetts and shall in all respects be governed by, and construed in
accordance with, the laws of the Commonwealth of Massachusetts, including all
matters of construction, validity and performance but without giving effect to
its choice of law provisions and including Article 2A of the Uniform Commercial
Code in effect in the Commonwealth of Massachusetts, Lessor and Lessee intend
that this Lease be characterized as a "finance lease" within the meaning of
Article 2A-103(1)(g), whether or not each requirement of the definition thereof
has been technically or strictly met, and this Lease is to be so construed if
permitted by law.
20.6. BENEFIT AND BINDING EFFECT. The terms and provisions of this Lease
shall inure to the benefit of and be binding on Lessor its successors and
assigns and Lessee and its successors and permitted assigns.
20.7. FURTHER ASSURANCES. Lessor and Lessee shall, from time to time, do
and perform such other and further acts and execute and deliver any and all such
other and further instruments as may be required by law or reasonably requested
by the other party to establish, maintain and protect the respective rights and
remedies of the other party and to carry out the intent and purpose of this
Lease. In furtherance of and not in limitation of the foregoing and
notwithstanding any breach or alleged breach by Lessor of its obligations
hereunder, Lessee agrees that unless Lessee has exercised its rights under
Section 17 hereof upon the expiration or earlier termination of this Lease to
promptly execute upon Lessor s request a lease termination certificate or
similar instrument in a form suitable for recordation with the IAA.
20.8. CAPITALIZED OR BOLDFACE PROVISIONS. Capitalized or boldfaced items
in this Agreement are conspicuous, in writing and specific. Lessee understands
all
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such items and has read, understood and concurred in all Sections of this
Agreement.
20.9. VENUE. Lessor and Lessee hereby agree that any legal action or
proceeding with respect to this Lease, or to enforce any judgment obtained
against the Lessee, may be brought in the courts of the Commonwealth of
Massachusetts, in the United Stated federal courts in the Commonwealth of
Massachusetts or in the courts of any other appropriate jurisdiction as Lessor
may elect, and Lessee hereby irrevocably submits to such jurisdiction. In
addition, with respect to any action or proceeding within the jurisdictions of
the courts of the Commonwealth of Massachusetts and of the United States federal
courts in the Commonwealth of Massachusetts, the Lessee hereby irrevocably
consents to the service of process out of said Massachusetts or United States
courts in any such action or proceeding by the mailing thereof by United States
registered mail to it at its address set forth in Section 18 hereof.
20.10. ENTIRE AGREEMENT. This Agreement (together with all schedules and
attachments hereto) constitutes the entire agreement between Lessor and Lessee.
[The remainder of this page left intentionally blank.]
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Lease Agreement (MSN1024) dated
as of January 31, 1997
IN WITNESS WHEREOF, Lessor and Lessee have executed this Agreement as
of the date first set forth above.
LESSOR:
By: James F. Livesey
-----------------------------
Title: VICE PRESIDENT
-----------------------------
LESSEE:
By:
-----------------------------
Title: Managing Director
-----------------------------
THIS LEASE IS COUNTERPART NO. 1 OF THREE SERIALLY NUMBERED ORIGINAL
EXECUTED COUNTERPART COPIES OF THIS LEASE. TO THE EXTENT, IF ANY, THAT THIS
LEASE CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM
COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY
INTEREST IN THIS LEASE MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY
COUNTERPART OTHER THAN THE ORIGINAL EXECUTED COUNTERPART MARKED COUNTERPART NO.
1.
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EXHIBIT A
DESCRIPTION OF AIRCRAFT
<TABLE>
<CAPTION>
Model Serial
Manufacturer Configuration Number
- ------------ ------------- ------
<S> <C> <C>
Lockheed L-1011-1 1024
Martin
Corporation
Number and Type Serial
of Engines Number
- ---------- ------
3 Rolls Royce 10524
RB211-22B 10209
10154
</TABLE>
A-1
<PAGE>
EXHIBIT B
to
Lease Agreement (MSN1024)
AIRCRAFT DOCUMENTS
A. CERTIFICATES
1. IAA Certificate of Airworthiness (on board aircraft), or returned to the
Lessor if Aircraft is delivered to another country.
2. Current Certificate of Registration (on board aircraft), or proof of
deregistration of the Aircraft to be submitted to the authorities in
subsequent country of registration.
3. Noise Certificate affirming that the aircraft meet Chapter III noise
standards.
4. Radio Certificate affirming the current approved radio equipment is
installed.
B. AIRCRAFT STATUS SUMMARIES
1. Signed statement giving total hours flown, total landings, and the time
and landings since the last major check, average utilization stated as
average Hours per month and average Cycles per month.
2. IAA Regulation Compliance Summary.
3. Record for the most recent 90 days of operation showing Hours and
Cycles.
4. Summary of Airworthiness Directives accomplished on the aircraft,
engines and appliances including the date, time and/or cycles and the
method of accomplishment.
5. Summary of all Service Bulletins accomplished to aircraft, engines and
appliances including the date, time and/or cycles and the method of
accomplishment.
6. A record of the Supplemental Structural Inspections (SSID) accomplished,
including a copy of the approved document that authorizes the SSID
program.
7. A record of the Corrosion Prevention Control Program (CPCP)
accomplished, including a copy of the approved document that authorizes
the CPCP program.
B-1
<PAGE>
8. A record of Lessee modifications, with reference documents issued by the
Lessee that authorize the modifications.
9. A record of all alterations and repairs made beyond the Structural
Repair Manual including the date, Hours and/or Cycles when the repair
was done, and reference to the document used to accomplish the repair
including Designated Engineering Representative Approval or equivalent.
10. Signed Statement with Respect to Accident/Incident/Major Damage to
Aircraft
11. List of Repetitive Inspections Resulting from Existing Known Aircraft
Defects (including inspection manhour requirement and interval)
12. List and Status of Life Limited Components
13. Check/Inspection Status
14. A current summary and status of all time/cycles controlled components,
showing time and type of maintenance - "Hard Time", "On-Condition" or
"Condition Monitored" and the time and/or cycles since the last overhaul
or major shop visit.
15. Serialized On-Condition/Condition Monitored Components Inventory of
Installed Units, if available.
C. AIRCRAFT MAINTENANCE RECORDS
Airframe inspection, maintenance, modification, and repair documents with
maintenance and/or inspection signatures (as required) and description of
work done.
1. Last "A", "B", and "Segment C" Checks (or equivalents). (In the event
that a check is performed in phases, all phases necessary to constitute
a complete block check are required. In the event that check content
varies by multiples of the check, all multiples necessary to constitute
a complete cycle are required.)
2. Airworthiness Directive, Service Bulletin and Modification compliance
documents including engineering orders, drawings, shop cards, etc., as
necessary to establish method of compliance, and approval authority.
3. Documentation of Major Repairs and Alterations including engineering
orders, drawings, Supplemental Type Certificates, Master Change Notice,
etc., as necessary to define work done, certification basis, and
approval authority.
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4. Aircraft weigh records, including cabin layout and equipment list.
D. ENGINE RECORDS (for each engine)
1. Signed Statement giving Engine Total Hours and Cycles and Time Since
Last Shop Visit as of Time of Delivery
2. Engine Airworthiness Directive Applicability and Compliance Report
(giving date, time, method of compliance and status)
3. Service Bulletin Compliance Report
4. List of Operator Modifications Incorporated, if any, with Accomplishment
Instructions
5. List of Repetitive Inspections Resulting from Existing Known Engine
Defects (including inspection manhour requirement and interval)
6. List and Current Status of Life Limited Components
7. Check/Inspection Status
8. List and Status of Time Controlled Components and Record of Last
Overhaul
9. Serialized On-Condition/Condition Monitored Components List of Installed
Units, if available
10. Engine Build Specifications
11. Repair, overhaul and inspection documents
12. Documents necessary to establish current total time in service on all
life-limited parts.
13. Test Cell Records for last test
E. APU RECORDS
1. APU Log Book (or equivalent documentation)
2. Airworthiness Directive Applicability and Compliance Report
3. Manufacturer Service Bulletin Compliance Report
4. List and Current Status of Life Limited Components
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<PAGE>
5. List and Status of Time Controlled Components
6. Serialized On-Condition/Condition Monitored Components Inventory of
Installed Units, if available
7. Repair, overhaul and inspection documents including FAA Forms 337
F. COMPONENT RECORDS
1. Time Controlled Component Historical Records
2. Installation records and serviceable tags for Serialized
On-Condition/Condition Monitored Components, if available
G. MANUALS
1. IAA Approved Airplane Flight Manual (paper copy)
2. Weight and Balance Manual Chapter 1 (paper copy)
3. Weight and Balance Report Chapter 2 (paper copy)
4. Weight and Balance Manual (paper copy)
5. Maintenance Manual (microfilm)
6. Wiring Diagram Manual (microfilm)
7. Wire Lists and Hookup Charts (microfilm)
8. Power Plant Buildup Manual (paper copy)
9. Illustrated Parts Catalog (microfilm)
10. Structural Repair Manual (microfilm)
11. Flight Crew Operating Manual (paper copy)
12. Any supplements to the manual set forth in items 1 and 3 through 10
above, if available
13. Copy of Aircraft operations specs for bridging the Maintenance Program
to the next Lessee.
14. Fueling Manual.
B-4
<PAGE>
H. MISCELLANEOUS TECHNICAL DOCUMENTS
1. Interior Configuration Layout Drawing
2. Aircraft Readiness Log (manufacturer delivery document), if available.
3. Master reference copies of Aircraft operators Engineering Orders and
repairs applicable to the Aircraft, airframe, engines and appliances, to
include drawings, data packages, and approval authority
4. Master reference copies of Operator Unique Component Maintenance Manuals
which have been altered by the operator as allowed under the authority
granted to operators with a continuous airworthiness maintenance and
inspection program, if available.
5. Master reference copies of any operator obtained master change Service
Bulletins for the Aircraft, airframe, engine and appliances, if
available.
B-5
<PAGE>
EXHIBIT C
to
Lease Agreement (MSN1024)
ACCEPTANCE CERTIFICATE
(DELIVERY)
G.P. Aer Lease Limited ("Lessee") hereby acknowledges that on the __ day
of 1997, Investors Asset Holding Corp., not in its individual capacity but
solely as trustee of the AFG/Cathay Pacific 1989-1 Trust ("Lessor") delivered
for inspection to Lessee one (1) Lockheed L-1011-1 Airframe, bearing
Manufacturer's Serial Number 1024, together with three (3) Rolls Royce RB211-22B
Engines, bearing manufacturer's serial numbers 10524, 10209 and 10154, together
with all instruments, parts, and other equipment attached hereto or installed
therein ("Parts"), in accordance with the Lease Agreement between Lessor and
Lessee, dated as of ______________ 1997 (the "Lease").
Lessee hereby further acknowledges that: (i) it did conduct an inspection
of the aforementioned Airframe, Engines, and Parts; (ii) the same are acceptable
to it and that the conditions for delivery and acceptance as required under the
Lease as set forth on Schedule 1 hereto have been met or waived; and (iii) the
execution and delivery of this Acceptance Certificate hereby constitutes
irrevocable acceptance of the Aircraft for lease under the Lease.
Notwithstanding the foregoing, but not in derogation of the unconditional
acceptance of the Aircraft for lease as set forth above, the items listed on
Schedule 2 to this Acceptance Certificate (Delivery) are not in the condition
required by the Lease and Lessor hereby agrees that the expense of correcting
such items shall be for the account of Lessor.
IN WITNESS WHEREOF, this Acceptance Certificate has been executed and
delivered at Marshall of Cambridge Aerospace Limited, The Airport, Cambridge,
England, this __ day of _________, 1997.
INVESTORS ASSETS HOLDING G.P. AER LEASE LIMITED (Lessee)
CORP., as trustee (Lessor)
By: By:
-------------------------------- --------------------------------
Title: Title:
----------------------------- -----------------------------
C-1
<PAGE>
SCHEDULE 1
TO
ACCEPTANCE CERTIFICATE
(DELIVERY)
Aircraft Status
Just Prior to Delivery Date
1. AIRFRAME SEGMENT "C" CHECK:
Interval:
Time Remaining:
2. LANDING GEAR OVERHAUL:
Interval:
Time Remaining:
Hrs. Left Gear
Hrs. Right Gear
Hrs. Nose Gear
3. ENGINES:
Interval: On Condition
Hot Section Inspection ("HSI"):
S/N Time Since HSI* Cycles Since HSI*
- ----------------------------------------------
- ----------------------------------------------
- ----------------------------------------------
* Times and cycles since Acceptance Borescope
Interval: On Condition
Cold Section Inspection ("CSI"):
C-2
<PAGE>
S/N Time Since CSI* Cycles Since CSI*
- ----------------------------------------------
- ----------------------------------------------
- ----------------------------------------------
* Times and cycles since Acceptance Borescope
4. Engines Time Remaining to First Restriction:
Engine S/N: ___ Limiter:
Hours: ___ ___
Cycles: ___ ___
Engine S/N: ___ Limiter:
Hours: ___ ___
Cycles: ___ ___
Engine S/N: ___ Limiter:
Hours: ___ ___
Cycles: ___ ___
5. Auxiliary Power Unit:
On Condition
Time Since Last APU _____
Heavy Shop Visit:
Date of Last APU ______
Heavy Shop Visit:
C-3
<PAGE>
SCHEDULE 2
TO
ACCEPTANCE CERTIFICATE
(DELIVERY)
DISCREPANCIES (Append additional pages as required and initial each such page):
FOR: INVESTORS ASSET HOLDING FOR: G.P. AER LEASE LIMITED
CORP., as trustee of the AFG/
Cathay Pacific 1989-1 Trust
By: By:
-------------------------------- --------------------------------
Title: Title:
----------------------------- -----------------------------
Date: Date:
------------------------------ ------------------------------
C-4
<PAGE>
EXHIBIT D
to
LEASE AGREEMENT (MSN1024)
ACCEPTANCE CERTIFICATE
(RETURN)
Investors Asset Holding Corp., not in its individual capacity but solely
as trustee of the AFG/Cathay Pacific 1989-1 Trust ("Lessor") hereby acknowledges
that on this _____ day of ____________, 1998 G.P. Aer Lease Limited ("Lessee")
delivered for inspection to Lessor one (1) Lockheed L-1011-1 Airframe, bearing
Manufacturer's Serial Number 1024, together with three (3) Rolls Royce RB211-22B
Engines, bearing manufacturer's serial numbers 10524, 10209 and 10154, together
with all instruments, parts, and other equipment attached hereto or installed
therein ("Parts"), in accordance with the Lease Agreement between Lessor and
Lessee, dated as of ______________ __, 1997 (the "Lease").
Lessor hereby further acknowledges that: (i) it did conduct an inspection
of the aforementioned Airframe, Engines, and Parts; and (ii) the same are
acceptable to it and that the conditions for redelivery and acceptance as
required under the Lease as set forth on Schedule 1 hereto have been met or
waived. Notwithstanding the foregoing, the items listed on Schedule 2 to this
Acceptance Certificate (Return) are not in the condition required by the Lease
and Lessor hereby agrees that the expense of correcting such items shall be for
the account of Lessor.
IN WITNESS WHEREOF, this Acceptance Certificate has been executed and
delivered at ___________________________________ this __ day of
_________________ 1998.
INVESTORS ASSETS HOLDING G.P. AER LEASE LIMITED (Lessee)
CORP., as trustee (Lessor)
By: By:
-------------------------------- --------------------------------
Title: Title:
----------------------------- -----------------------------
D-1
<PAGE>
SCHEDULE 1
TO
ACCEPTANCE CERTIFICATE
(RETURN)
Aircraft Status
Just Prior to Return
1. AIRFRAME SEGMENT "C" CHECK:
Interval:
Time Remaining:
2. LANDING GEAR OVERHAUL:
Interval:
Time Remaining:
Hrs. Left Gear
Hrs. Right Gear
Hrs. Nose Gear
3. ENGINES:
Interval: On Condition
Hot Section Inspection ("HSI"):
S/N Time Since HSI* Cycles Since HSI*
- -------------------------------------
- -------------------------------------
- -------------------------------------
*Times and cycles since Acceptance Borescope
Interval: On Condition
D-2
<PAGE>
Cold Section Inspection ("CSI"):
S/N Time Since CSI* Cycles Since CSI*
- -------------------------------------
- -------------------------------------
- -------------------------------------
* Times and cycles since Acceptance Borescope
4. Engines Time Remaining to First Restriction:
Engine S/N: ___ Limiter:
Hours: ___ ___
Cycles: ___ ___
Engine S/N: ___ Limiter:
Hours: ___ ___
Cycles: ___ ___
Engine S/N: ___ Limiter:
Hours: ___ ___
Cycles: ___ ___
5. Auxiliary Power Unit:
On Condition
Time Since Last APU _____
Heavy Shop Visit:
Date of Last APU ______
Heavy Shop Visit:
D-3
<PAGE>
SCHEDULE 2
TO
ACCEPTANCE CERTIFICATE
(RETURN)
Discrepancies (Append additional pages as required and initial each such page):
FOR: INVESTORS ASSET HOLDING FOR: G.P. AER LEASE LIMITED
not in its individual capacity
but solely as trustee of the AFG/
Cathay Pacific 1989-1 Trust
By: By:
-------------------------------- --------------------------------
Title: Title:
----------------------------- -----------------------------
Date: Date:
------------------------------ ------------------------------
D-4
<PAGE>
EXHIBIT E
to
Lease Agreement (MSN1024)
POSSIBLE CATHAY ITEMS
1. APU Air Inlet Act s/n 750207 TBO
2. APU Pressure Switch CX2808
3. APU Fuel Pump - PE 1224
4. APU FCU A15089
5. APU Inlet Guide- EB61176
6. APU Surge Valve - HM62658
7. APU Surge Controller - DK40984
8. APU Shock Switch - CG60206
9. APU Load Compress Controller
10. No. 2 Engine Fuel Pump
11. No. 1 Eng Misc Actuator - 1093
12. No. 3 Eng Misc Actuator - 1116
13. No. 1 P4/PF Press Ratio Switch
14. No. 2
15. No. 1 Eng Press Reg/SO Valve
16. No. 2 Eng Press Reg/SO Valve
17. No. 3 Eng Press Reg/SO Valve
18. No. 3 Eng Air Starter
OTHER ITEMS
1. Device Emergency Descent #2
p\n 379103-15
2. " "#3
3. " "#4
4. " "#5
5. Assy Slideraft Hose L1
6. " "R1
7. " "R2
8. " "L3
9. " "L2
E-1
<PAGE>
10. Desalter Slideraft R1
p\n MILD5531E
11. Kit Slideraft First Aid R2
p\n 56-01-0014
12. Unit Power Slideraft R2
p\n p4-01-0014-110
13. Assy Slideraft Hose L4
p\n D17469-507
14. Cylinder Slideraft Air R4
p\n D17468-523
15. Pack survival o/head R4
p\n L25-6007
16. " " R3
17. Extinguisher #2\apu
p\n 895752-01
18. Tape DFDR readout
p\n MS313101
19. MLG CYL Ring Grove Insp L\H&R\H
20. H20 ster & purif Pot Sys
(Expect filter need changing)
Filter p\n AD9410F17 or 1-3811-3-0028
21. Disk Rotor LP Comp #1
p\n UL19630
22. Pump Fuel Eng #2
p\n PAC1O1MK8
23. Aux Battery Cap Test
24. No. RH Door Electrical
25. ARU Starts when mixture Power Switches on
26. UFG Smoke detector Test inop
27. No. 4 RH Cabin Crew Emergency Torch Missing
28. CVR ULB Battery Cap Test
29. FDR ULB Battery Cap test due
30. Avionic Air Fwd Fan not running
31. Capts RDDMI LH Selector (VOR/ADF) button defective
32. Row 54 Seat K-Seat Back Pocket Bungee u\s
33. Seat 56G Recline u\s
34. Seat 55G Life vest expries
35. Seat 55E Life Vest expries
36. Seat 55A Seat Cover heavily stained
37. Seat 54B Recline fails to retract
38. Seat 53A - seat cover stained
39. Seat 53B Life vest expires
E-2
<PAGE>
40. Seat 51B Life Vest expires
41. No. 2 RH MED safety strap broken
42. NLG retract Jack Waring please investigate
43. C3 FRT Door will not close electrically
44. External water service point drain valve leaking
45. Crack in HSC canted
bulkhead BS1212(RH)
46. Seat rows 38 thru 42 (centre) removed for access for repair in item 63
(HGI63)
47. 2 off centre RH Floor Boards removed for access for repair in item 63 (Row
38-42)
48. Reconnect all Electronic Sort units and check function multiplex System
49. FAK at MED No. 1 LH expires
50. FAK at MED No. 2 LH Expires
51. FAK at MED No. 4 LH expire
52. FAK at MED No. 5 LH exprie
53. MESC external access door craked at bottom edge (1 1/2" long)
54. APU Aft isolation valve slow to close
55. RH hand lift lower RH well section of material adrift causing lift to
deflect at down position
56. Seat 45C life Vest expire
57. " 40A
58. " 40B
59. " 38C
60. " 37C
61. " 36B
62. " 50G
63. " 47G
64. " 46E
65. " 46F
66. " 39D
67. " 39F
68. " 38E
69. " 37D
70. " 35D
71. " 35K
72. " 44J
73. " 32G
74. " 30A
75. " 11F
76. Seat 11C recline u\s
77. No. 1 RH MED - operation intermittent
78. No. 2 RH MED - operation intermittent
79. No. 5 MED - attendants life vest exprie
E-3
<PAGE>
80. No. 4 MED LH - Firec weight check
81. Ref card no. 6200-03044 cnk operation of basin heater when motor system
serviced check for leaks
82. Ref card no. 62-00-0250 a chk
83. RH ATT fuselage Panel to RH stabservd Mesh cracked (Panel 317CB)
84. LH Nose wheel tyre tread damaged - o\b side (1 50" missing)
85. "C" system reservoir well not hold pressure (after pumps turned off)
86. "C" system reservoir has drip\leak for Air Bleed with pressure on
87. 3 Eng exhause cone cracked (6") above previous repair
88. Light fuselage lower skin corrosion at FS850 area
89. Signs of HYD LEAK from lower rudder area
90. Seat 14A - Dado panel lens cracked
91. RHS Fwd w\robe Firex
92. No. 2 Engine Thrust Reversor Locked Out
93. Intermittant fault in Auto Pilot\drgs off
94. Rader is spokes on 1 & 2 needs check
95. Main RHS\LVS 1, 3 & 5 Brake units out of limits
E-4
<PAGE>
EXHIBIT F
TO
LEASE AGREEMENT (MSN1024)
FORM OF BROKERS' LETTER OF UNDERTAKING
To: Investors Asset Holding Corp., as trustee
of the AFG/Cathay Pacific 1989-1 Trust
and
The persons named as additional insureds
in the Schedule hereto
Dear Sirs,
We confirm that insurances are in effect on and in respect of the Lockheed
L-1011-1 aircraft whose manufacturer's serial number is 1024 and whose
registration mark is [ ] (the "Aircraft") for the risks set out in the attached
Certificate of Insurance and that all premiums due at the date hereof in respect
of such insurance have been paid in full. We also confirm that those named in
the Schedule to this letter are named as additional or joint insured(s), as the
case may be, on the insurance policies evidenced in the attached Certificate of
Insurance for the period stipulated therein.
We further undertake:
1. to advise you in writing immediately of any material changes notified to
us which are proposed to be made in the terms of the insurance which
might adversely affect your interests or are inconsistent with the terms
of Section 11 of a Lease Agreement (MSN1024) dated January 31, 1997 made
between Investors Asset Holding Corp., as trustee, and G.P. Aer Lease
Limited (the "Lessee") (and not to effect any such changes without
giving you at least thirty (30) days prior written notice) and to notify
you subject to Automatic Termination Clause and the Amendment of Terms
Clause at least thirty (30) days prior to the expiry of these insurances
if we have not received renewal instructions from the Lessee and in the
event of our receiving
F-1
<PAGE>
instructions to renew to advise you promptly of the details thereof:
2. to pay to IAHC without any set-off or deduction of any kind for any
reason, any and all proceeds from the physical damage insurances
collected from underwriters except as might be otherwise permitted in
the relevant Loss Payable Clause;
3. to advise you promptly in writing:
(a) if any underwriter or insurer cancels or gives notice of
cancellation of this insurance, or in the case of any non-renewal.
termination or other cancellation, at least thirty (30) days (except
that in respect of War and Allied Risks policies not less than seven
(7) days' prior written notice shall be given (subject to exceptions
uniformly provided in War and Allied Risk policies then available on
commercial reasonable terms)) before such cancellation is to take
effect as to any named insured;
(b) of any act of omission or of any event of which we have any
knowledge and which might invalidate or render unenforceable in
whole or in part this insurance.
The above undertakings are given:
(1) subject to our lien, if any, on the policies referred to above for
premiums due under such Policies in respect of the Aircraft (but no other
aircraft) and subject to underwriters' right of cancellation on default in
payment of such premiums, but we undertake to advise you immediately if
such premiums are not paid to us by the due date and to give you a
reasonably opportunity of paying such amounts of such premiums outstanding
before notification of non-payment of premiums to underwriters or
notification of cancellation on behalf of underwriters;
(2) subject to our continuing appointment for the time being as insurance
brokers to the Lessee and through whom any claim or claims shall be
collected from underwriters;
(3) in consideration of your approving us as brokers for the insurance on the
above Aircraft.
We also undertake for the consideration aforesaid to advise you immediately if
we cease to be insurance brokers to the Lessee.
F-2
<PAGE>
This letter shall be governed and construed in all respects in accordance with [
] law.
Yours faithfully,
--------------------------------
Director
F-3
<PAGE>
LEASE AGREEMENT (MSN1024)
ACCEPTANCE CERTIFICATE
(DELIVERY)
G.P. Aer Lease Limited ("Lessee") hereby acknowledges that on the 28th day
of April, 1997, Investors Asset Holding Corp., not in its individual capacity
but solely as trustee of the AFG/Cathay Pacific 1989-1 Trust ("Lessor")
delivered for inspection to Lessee one (1) Lockheed L-1011-1 Airframe, bearing
Manufacturer's Serial Number 1024, together with three (3) Rolls Royce RB211-22B
Engines, bearing manufacturer's serial numbers 10524, 10209 and 10154, together
with all instruments, parts, and other equipment attached hereto or installed
therein ("Parts"), in accordance with the Lease Agreement between Lessor and
Lessee, dated as of JANUARY 31, 1997 (the "Lease").
Lessee hereby further acknowledges that: (i) it did conduct an inspection
of the aforementioned Airframe, Engines, and Parts; (ii) the same are acceptable
to it and that the conditions for delivery and acceptance as required under the
Lease as set forth on Schedule 1 hereto have been met or waived; and (iii) the
execution and delivery of this Acceptance Certificate hereby constitutes
irrevocable acceptance of the Aircraft for lease under the Lease.
Notwithstanding the foregoing, but not in derogation of the unconditional
acceptance of the Aircraft for lease as set forth above, the items listed on
Schedule 2 to this Acceptance Certificate (Delivery) are not in the condition
required by the Lease and Lessor hereby agrees that the expense of correcting
such items shall be for the account of Lessor.
IN WITNESS WHEREOF, this Acceptance Certificate has been executed and
delivered at Marshall of Cambridge Aerospace Limited, The Airport, Cambridge,
England, this 28th day of April, 1997.
INVESTORS ASSETS HOLDING G.P. AER LEASE LIMITED (Lessee)
CORP., as trustee (Lessor)
By: James F. Livesey By:
-------------------------------- -----------------------------
Title: Vice President Title: Director
-------------------------------- -----------------------------
<PAGE>
SCHEDULE 1
TO
ACCEPTANCE CERTIFICATE
(DELIVERY)
Aircraft Status
Just Prior to Delivery Date
1. AIRFRAME SEGMENT "C" CHECK:
Interval: 2 years
Time Remaining: 2 years
2. LANDING GEAR OVERHAUL:
Interval: 120 months
Time Remaining:
Hrs. Left Gear- Due date July 17, 2003
Hrs. Right Gear- Due date July 17, 2003
Hrs. Nose Gear - Due date July 17, 2003
3. ENGINES:
Interval: On Condition
Hot Section Inspection ("HSI):
<TABLE>
<CAPTION>
S/N Time Since HSI* Cycles Since HSI*
<S> <C> <C>
10524 17 hours 5 cycles
10209 17 hours 5 cycles
10154 17 hours 5 cycles
</TABLE>
* Times and cycles since Acceptance Borescope
Interval: On Condition
2
<PAGE>
4. ENGINES TIME REMAINING TO FIRST RESTRICTION:
Engine S/N 10524 Limiter:
Hours: ___ ___
Cycles: 1520.8 L.P. Comp. Rotor Disk
Engine S/N 10209 Limiter:
Hours: ___ ___
Cycles: 1572 L.P. Comp. Stage 1.5
Engine S/N 10154 Limiter:
Hours: ___ ___
Cycles: 1567 L.P. Comp. Fan Blade
5. AUXILIARV POWER UNIT:
On Condition
Time Since Last APU 622 hours
Heavy Shop Visit:
Date of Last APU
Heavy Shop Visit: NK (Not known)
6. OTHER:
Aircraft TSN (Time Since New): 46,494.05 hours
CSN (Cycles Since New): 23,810
"Parts" on board specifically include (without limitation) complete sets
of galley equipment, life vests and life rafts.
3
<PAGE>
SCHEDULE 2
TO
ACCEPTANCE CERTIFICATE
(DELIVERY)
DISCREPANCIES (Append additional pages as required and initial each such page):
The following items are to be actioned at the next suitable input.
WQCNA 008244 RH Wing Lwr Surface Inspection
008246 Vertical Stab Rear Spar Inspection
10825 Rudder Act. Attach Assy Terminating Action
10872 Wing Centre Sections Inspection
10885 RH ECS Bay Sidewall Terminating Action
FOR: INVESTORS ASSETS HOLDING FOR: G.P. AER LEASE LIMITED
CORP., as trustee of the AFG/
Cathay Pacific 1989-1 Trust
By: James F. Livesey By:
-------------------------------- -----------------------------
Title: Vice President Title: Director
-------------------------------- -----------------------------
As of April 28, 1997
4
