<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-18364
------------------------
AMERICAN INCOME PARTNERS V-A LIMITED
PARTNERSHIP
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3057303
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
88 BROAD ST., SIXTH FLOOR, BOSTON, MA 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
Securities registered pursuant to Section 12(b) of the Act NONE
------------------------
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
---------------------------------------- ---------------------------------
Securities registered pursuant to Section 12(g) of the Act:
1,380,661 UNITS REPRESENTING LIMITED PARTNERSHIP INTEREST
(Title of class)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ 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, 1998 (Part I and II)
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<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 4
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....................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8
Item 8. Financial Statements and Supplementary Data................................................... 8
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 8
PART III
Item 10. Directors and Executive Officers of the Partnership........................................... 9
Item 11. Executive Compensation........................................................................ 11
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 11
Item 13. Certain Relationships and Related Transactions................................................ 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 14-15
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS.
(a) General Development of Business
American Income Partners V-A Limited Partnership (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on July 24, 1989 for the purpose of
acquiring and leasing to third parties a diversified portfolio of capital
equipment. Partners' capital initially consisted of contributions of $1,000 from
the General Partner (AFG Leasing IV Incorporated) and $100 from the Initial
Limited Partner (AFG Assignor Corporation). On September 29, 1989, the
Partnership issued 1,380,661 units, representing assignments of limited
partnership interests (the "Units"), to 1,815 investors. Unitholders and Limited
Partners (other than the Initial Limited Partner) are collectively referred to
as Recognized Owners. The Partnership has one General Partner, AFG Leasing IV
Incorporated, a Massachusetts corporation formed in 1987 and an affiliate of
Equis Financial Group Limited Partnership (formerly known as 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 subsidiary are the 99% limited partners and AFG Programs,
Inc., which is wholly-owned by EFG, is the 1% general partner. 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 capital equipment and leasing the equipment to creditworthy lessees on
a full payout or operating lease basis. Full payout leases are those in which
aggregate undiscounted noncancellable rents equal or exceed the acquisition cost
of the leased equipment. Operating leases are those in which the aggregate
undiscounted noncancellable rental payments are less than the acquisition cost
of the leased equipment. Industry segment data is not applicable.
(c) Narrative Description of Business
The Partnership was organized to acquire a diversified portfolio of capital
equipment subject to various full payout and operating leases and to lease the
equipment to third parties as income-producing investments. More specifically,
the Partnership's primary investment objectives were to acquire and lease
equipment that would:
1. Generate quarterly cash distributions;
2. Preserve and protect invested capital; and
3. Maintain substantial residual value for ultimate sale.
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 September
29, 1989. The initial purchase of equipment and the associated lease commitments
occurred on September 29, 1989. The acquisition of the equipment and its
associated leases is described in Note 3 to the financial statements included in
Item 14, herein. The Restated Agreement, as amended, provides that the
Partnership will terminate no later than December 31, 2000. However, the
Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of
which could significantly 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 equipment, (ii) manage the leasing,
3
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re-leasing, financing, and refinancing of equipment, and (iii) arrange the
resale of equipment. The Manager is compensated for such services as provided
for in the Restated Agreement, as amended, described in Item 13 herein, and in
Note 5 to the financial statements included in Item 14, herein.
The Partnership's investment in equipment 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 equipment is the possibility that aggregate lease revenues and equipment
sale proceeds will be insufficient to provide an acceptable rate of return on
invested capital after payment of all debt service costs and operating expenses.
In addition, the leasing industry is very competitive. The Partnership is
subject to encounter considerable competition when equipment is re-leased or
sold at the expiration of primary lease terms. The Partnership must compete with
lease programs offered directly by manufacturers and other equipment leasing
companies, including limited partnerships and trusts organized and managed
similarly to the Partnership and including other EFG sponsored partnerships and
trusts, which may seek to re-lease or sell equipment 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 addition, default by a lessee under a lease may
cause equipment 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
equipment. This could result in the loss of anticipated revenue.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1998, 1997 and 1996 is
incorporated herein by reference to Note 2 to the financial statements in the
1998 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the
Securities and Exchange Commission.
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 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, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle
established Equis Corporation and GDE LP in December 1994 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 1998 Annual Report.
4
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ITEM 3. LEGAL PROCEEDINGS.
Incorporated herein by reference to Note 7 to the financial statements in
the 1998 Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
5
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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, 1998, there were 1,628 record holders of Units in the
Partnership.
(c) Dividend History and Restrictions
Pursuant to Article VI of the Restated Agreement, as amended, the amount of
cash distributions to be declared and paid to the Partners is determined on a
quarterly basis. Each quarter's distribution may vary in amount and is made 95%
to the Limited Partners and 5% to the General Partner. Generally, cash
distributions are paid within 30 days after the completion of each calendar
quarter.
Distributions in 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
GENERAL RECOGNIZED
TOTAL PARTNER OWNERS
------------ --------- ------------
<S> <C> <C> <C>
Total 1998 distributions................................................... $ 545,002 $ 27,250 $ 517,752
Total 1997 distributions................................................... 681,245 34,062 647,183
------------ --------- ------------
Total...................................................................... $ 1,226,247 $ 61,312 $ 1,164,935
------------ --------- ------------
------------ --------- ------------
</TABLE>
Distributions payable were $136,250 at both December 31, 1998 and 1997.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket equipment upon lease expiration. Liquidity is
especially important as the Partnership matures and sells equipment, because the
remaining equipment base consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining assets. In particular,
the Partnership's ownership interests in commercial aircraft involve unique
risks resulting from the specialized nature of these assets and the potential
for the Partnership to incur significant remarketing costs at lease expiration.
Accordingly, the General Partner has maintained significant cash reserves within
the Partnership in order to minimize the risk of a liquidity shortage primarily
in connection with the Partnership's aircraft. At December 31, 1998, the
Partnership owned interests in two Boeing 727 aircraft, one of which was under
contract to be sold to a third party buyer subject to the buyer's right to
return the aircraft on or before May 15, 1999. See Notes 3 and 7 of the
accompanying financial statements concerning this aircraft. See also Note 8 of
the accompanying financial statements concerning the sale of the second aircraft
in January 1999.
In addition, the Partnership is a Nominal Defendant in a Class Action
Lawsuit described in Note 7 to the accompanying financial statements. A
preliminary settlement agreement will allow the Partnership to invest in new
equipment or other activities, subject to certain limitations, effective March
22, 1999. To the extent that the Partnership has exposure to aircraft
investments that could require capital reserves, the General Partner does not
anticipate that the Partnership will invest in new assets, regardless of its
authority to do so. Until the Class Action Lawsuit is adjudicated, the General
Partner does not expect that the level of future quarterly cash distributions
paid by the Partnership will be increased above amounts paid in the fourth
quarter of 1998. In addition, the proposed settlement, if effected, will
materially change the future
6
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organizational structure and business interests of the Partnership, as well as
its cash distribution policies. See Note 7 to the accompanying financial
statements.
Cash distributions consist of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings.
"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) amounts realized from any loss or destruction
of equipment which the General Partner determines shall be reinvested in similar
equipment for the remainder of the original lease term of the lost or destroyed
equipment, or in isolated instances, in other equipment, if the General Partner
determines that investment of such proceeds will significantly improve the
diversity of the Partnership's equipment portfolio, and subject in either case
to satisfaction of all existing indebtedness secured by such equipment to the
extent deemed necessary or appropriate by the General Partner, or (b) the
proceeds from the sale of an interest in equipment pursuant to any agreement
governing a joint venture which the General Partner determines will be invested
in additional equipment or interests in equipment and which ultimately are so
reinvested 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 reduced by (i)(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 an item of equipment sold 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 whether or
not then due and payable) and (b) any reserves for working capital and
contingent liabilities funded from such cash to the extent deemed reasonable by
the General 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 equipment sold, which are secured by liens on such equipment, the
amount of such obligations shall not be included in Cash From Sales or
Refinancings until the obligations are fully satisfied.
"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 11% (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 11% (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.
7
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ITEM 6. SELECTED FINANCIAL DATA.
Incorporated herein by reference to the section entitled "Selected Financial
Data" in the 1998 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
1998 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated herein by reference to the financial statements and
supplementary data included in the 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
8
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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 Leasing IV Incorporated 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. The
Limited Partners have no right to participate in the control of the
Partnership's general operations, but they do have certain voting rights, as
described in Item 12 herein. The names, titles and ages of the Directors and
Executive Officers of the General Partner as of March 15, 1999 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF
THE GENERAL PARTNER (SEE ITEM 13)
<TABLE>
<CAPTION>
NAME TITLE AGE TERM
- ---------------------------------- ---------------------------------- --- ----------------------------------
<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the Until a successor is duly elected
Executive Committee of EFG and and qualified
President and a Director of the
General Partner 50
Gary D. Engle President and Chief Executive
Officer and member of the
Executive Committee of EFG and a
Director of the General Partner 50
Gary M. Romano Executive Vice President and Chief
Operating Officer of EFG and Clerk
of the General Partner 39
James A. Coyne Executive Vice President of EFG 38
Michael J. Butterfield Senior Vice President, Finance and
Treasurer of EFG and Treasurer of
the General Partner 39
Sandra L. Simonsen Senior Vice President, Information
Systems of EFG 48
Gail D. Ofgant Senior Vice President, Lease
Operations of EFG 33
</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.
9
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(e) Business Experience
Mr. MacDonald, age 50, 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 Atlantic
Acquisition Limited Partnership ("AALP") and 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 a M.B.A. from Boston College and a B.A. degree
from the University of Massachusetts (Amherst).
Mr. Engle, age 50, is President and Chief Executive Officer of EFG and sole
shareholder and Director of its general partner, Equis Corporation and a member
of the Executive Committee of EFG and President of AFG Realty Corporation. Mr.
Engle joined EFG in 1990 as Executive Vice President and acquired control of EFG
and its subsidiaries in December 1994. Mr. Engle is Vice President and a
Director of certain of EFG's subsidiaries and affiliates, a limited partner in
AALP and ONC and controls the general partners of AALP and ONC. Mr. Engle 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 a MBA from Harvard University and a BS degree from the University
of Massachusetts (Amherst).
Mr. Romano, age 39, became Executive Vice President and Chief Operating
Officer of EFG, and Secretary of Equis Corporation in 1996 and is Secretary or
Clerk of several of EFG's subsidiaries and affiliates. Mr. Romano joined EFG in
November 1989, became Vice President and Controller in April 1993 and Chief
Financial Officer in April 1995. Mr. Romano assumed his current position in
April 1996. Mr. Romano is also Vice President and Chief Financial Officer of
Semele. Prior to joining EFG, Mr. Romano was Assistant Controller for a
privately held real estate development and mortgage origination company that he
joined in 1987. Previously, Mr. Romano was an Audit Manager at Ernst & Whinney
(now Ernst & Young LLP), where he was employed from 1982 to 1986. Mr. Romano is
a Certified Public Accountant and holds a B.S. degree from Boston College.
Mr. Coyne, age 38, is Executive Vice President, Capital Markets 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 AALP and ONC. From May 1993
through November 1994, he was employed by 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 39, is Senior Vice President, Finance and Treasurer of
EFG and certain of its affiliates and is Treasurer of the General Partner and
Semele. Mr. Butterfield joined EFG in June 1992, became Vice President, Finance
and Treasurer of EFG and certain of its affiliates in April 1996 and was
promoted to Senior Vice President, Finance and Treasurer of EFG and certain of
its affiliates in July 1998. 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
(UK) 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 CPA
10
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requirements in the United States. He holds a Bachelor of Commerce degree from
the University of Otago, Dunedin, New Zealand.
Ms. Simonsen, age 48, 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 BA degree from Wilson
College.
Ms. Ofgant, age 33, is Senior Vice President, Lease Operations of EFG and
certain of its affiliates. Ms. Ofgant joined EFG in July 1989, was promoted to
Manager Lease Operations in April 1994, and became Vice President of Lease
Operations in April 1996. In July 1998, Ms. Ofgant was promoted to Senior Vice
President of Lease Operations. Prior to joining EFG, Ms. Ofgant was employed by
Security Pacific National Trust Company. Ms. Ofgant holds a BS 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 officers 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 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 Manager for such services is
included in Item 13, herein and Note 5 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
no outstanding securities possessing traditional voting rights. However, as
provided in Section 11.2(a) of the Restated Agreement, as
11
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amended (subject to Sections 11.2(b) and 11.3), a majority interest of the
Recognized Owners has voting rights with respect to:
1. Amendment of the Restated Agreement;
2. Termination of the Partnership;
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, 1999, the following person or group owns beneficially more
than 5% of the Partnership's 1,380,661 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 Limited Partnership Atlantic Acquisition Limited Partnership 125,843 Units 9.11%
Interests 88 Broad Street
Boston, MA 02110
</TABLE>
Messrs. Engle, MacDonald and Coyne have ownership interests in AALP. The
general partner of AALP is controlled by Gary D. Engle. See Item 10 and Item 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 Leasing IV Incorporated, 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,
1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Equipment management fees.................................................... $ 23,344 $ 81,303 $ 181,367
Administrative charges....................................................... 58,836 55,668 36,560
Reimbursable operating expenses due to third parties......................... 584,743 270,409 406,871
---------- ---------- ----------
Total...................................................................... $ 666,923 $ 407,380 $ 624,798
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG is compensated by an
amount equal to 2.23% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenues and 2% of gross full payout lease rental revenue
received by the Partnership. Both acquisition and management fees are subject to
certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative
12
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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 actual cost.
All equipment was purchased from EFG, one of its affiliates or from
third-party sellers. The Partnership's acquisition cost was determined by the
method described in Note 2 to the financial statements included in Item 14,
herein.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1998, the Partnership was owed $787,967 by EFG for such funds
and the interest thereon. Included in this balance is the sale proceeds from the
sale of the Partnership's interest in a Boeing 727 aircraft. For additional
discussion, see Note 3 to the financial statements included in Item 14 herein.
These funds were remitted to the Partnership in January 1999.
During 1997, the Partnership and certain affiliated investment programs
sponsored by EFG exchanged their ownership interests in certain vessels for
aggregate consideration of $11,565,375. The Partnership's share of such
consideration was $2,018,804, consisting of common stock in Semele valued at
$512,153, a note receivable from Semele of $771,450 and cash of $735,201. For
further discussion, see Note 4, "Investment Securities--Affiliate / Note
Receivable--Affiliate", to the financial statements included in Item 14 herein
and Item 10.
Certain affiliates of the General Partner own Units in the Partnership as
follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
AFFILIATE UNITS OWNED OUTSTANDING UNITS
- --------------------------------------------------------------------------------- ------------ -------------------
<S> <C> <C>
Atlantic Acquisition Limited Partnership......................................... 125,843 9.11%
Old North Capital Limited Partnership............................................ 4,452 0.32%
</TABLE>
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital
Limited Partnership ("ONC") are both Massachusetts limited partnerships formed
in 1995 and affiliates of EFG. The general partners of AALP and ONC are
controlled by Gary D. Engle. In addition, the limited partnership interests of
ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and
CEO of Semele.
On September 30, 1996, the Partnership sold (i) a 23% ownership interest,
representing its entire ownership interest, in a cargo vessel leased by Gearbulk
Shipowning Ltd. ("Gearbulk"), formerly Kristian Gerhard Jebsen Skipsrederi A/S
(the "Vessel"), having an original cost to the Partnership of $1,829,796 and a
net book value at September 30, 1996 of $782,887 and (ii) a 50% ownership
interest, representing its entire ownership interest, in 22 locomotives leased
by Union Pacific Railroad Company (the "Locomotives"), having an original cost
to the Partnership of $4,692,023 and a net book value at September 30, 1996 of
$2,584,785. The Partnership received net sale proceeds of $3,104,537, a portion
of which was used to repay the outstanding principal balance of notes payable
associated with the Vessel of $65,690. The Partnership sold its interests in the
Vessel and Locomotives prior to the expiration of the related lease terms. These
sales were effected in connection with a joint remarketing effort involving 15
individual equipment leasing programs sponsored by EFG, consisting of the
Partnership and 14 affiliates.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
See Item 13(a) above.
13
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C> <C> <C>
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors................................................. *
Statement of Financial Position at December 31, 1998 and 1997.................. *
Statement of Operations for the years ended December 31, 1998, 1997 and 1996... *
Statement of Changes in Partners' Capital for the years ended December 31,
1998, 1997 and 1996............................................................ *
Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996... *
Notes to the Financial Statements.............................................. *
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601
of Regulation S-K, are not applicable.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
<C> <S>
4 Amended and Restated Agreement and Certificate of Limited Partnership included as Exhibit A to the
Prospectus, which is included in Registration Statement on Form S-1 (No. 33-27828).
13 The 1998 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 year ended December 31, 1990 as Exhibit 28 (b) and is incorporated herein by reference.
99(b) Lease agreement with Gearbulk Shipowning Ltd. (formerly Kristian Gerhard Jebsen Skipsrederi A/S) was
filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 as Exhibit
28 (c) and is incorporated herein by reference.
99(c) Lease agreement with Union Pacific Railroad Company was filed in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 as Exhibit 99(c) and is incorporated herein by
reference.
</TABLE>
- ------------------------
* Incorporated herein by reference to the appropriate portion of the 1998
Annual Report to security holders for the year ended December 31, 1998 (see
Part II).
14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
<C> <S>
99(d) Lease agreement with Sunworld International Airlines, Inc. was filed in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99(d) and is incorporated herein
by reference.
99(e) Lease agreement with Transmeridian Airlines is filed in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998 and is included herein.
</TABLE>
(b) Reports on Form 8-K
None.
15
<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.
<TABLE>
<S> <C> <C>
AMERICAN INCOME PARTNERS V-A
LIMITED PARTNERSHIP
By: AFG Leasing IV Incorporated,
-----------------------------------------
a Massachusetts corporation and the
General Partner of the Registrant.
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ GEOFFREY A. MACDONALD By: /s/ GARY D. ENGLE
---------------------------------------- ----------------------------------------
Geoffrey A. MacDonald Gary D. Engle
CHAIRMAN AND A MEMBER OF THE EXECUTIVE PRESIDENT AND CHIEF EXECUTIVE OFFICER AND
COMMITTEE OF EFG AND PRESIDENT AND A A MEMBER OF THE EXECUTIVE COMMITTEE OF
DIRECTOR OF THE GENERAL PARTNER EFG AND A DIRECTOR OF THE GENERAL PARTNER
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 31, 1999 Date: March 31, 1999
By: /s/ GARY M. ROMANO By: /s/ MICHAEL J. BUTTERFIELD
---------------------------------------- ----------------------------------------
Gary M. Romano Michael J. Butterfield
EXECUTIVE VICE PRESIDENT AND CHIEF SENIOR VICE PRESIDENT, FINANCE AND
OPERATING OFFICER OF EFG AND CLERK OF THE TREASURER OF EFG AND TREASURER OF THE
GENERAL PARTNER (PRINCIPAL FINANCIAL GENERAL PARTNER (PRINCIPAL ACCOUNTING
OFFICER) OFFICER)
Date: March 31, 1999 Date: March 31, 1999
</TABLE>
16
<PAGE>
AMERICAN INCOME PARTNERS V
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
ANNUAL REPORT TO THE PARTNERS, DECEMBER 31, 1998
<PAGE>
AMERICAN INCOME PARTNERS V-A
LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT TO THE PARTNERS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SELECTED FINANCIAL DATA................................................................................... 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 3-10
FINANCIAL STATEMENTS:
Report of Independent Auditors............................................................................ 11
Statement of Financial Position at December 31, 1998 and 1997............................................. 12
Statement of Operations for the years ended December 31, 1998, 1997 and 1996.............................. 13
Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996............ 14
Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................. 15
Notes to the Financial Statements......................................................................... 16-29
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed..................... 30
Statement of Cash and Distributable Cash From Operations, Sales and Refinancings.......................... 31
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................................... 32
</TABLE>
<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, 1998:
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS 1998 1997 1996 1995 1994
- ------------------------------------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Lease revenue............................. $ 466,883 $ 1,626,206 $ 3,616,524 $ 3,993,645 $ 6,528,735
Net income (loss)......................... $ (361,806) $ 698,307 $ 2,922,308 $ 974,602 $ 782,396
Per Unit:
Net income (loss)....................... $ (0.25) $ 0.48 $ 2.01 $ 0.67 $ 0.54
Cash distributions...................... $ 0.38 $ 0.47 $ 4.18 $ 2.00 $ 2.94
FINANCIAL POSITION
- ------------------------------------------
Total assets.............................. $ 4,155,864 $ 3,794,549 $ 4,266,781 $ 9,980,073 $ 14,457,077
Total long-term obligations............... $ -- $ -- $ 144,594 $ 2,231,365 $ 4,725,690
Partners' capital......................... $ 2,902,855 $ 3,621,873 $ 3,792,601 $ 6,952,468 $ 8,884,521
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1997
COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Certain statements in this annual report of American Income Partners V-A
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, the collection of all rents due under the Partnership's
lease agreements and the remarketing of the Partnership's equipment.
YEAR 2000 ISSUE
The Year 2000 Issue generally refers to the capacity of computer programming
logic to correctly identify the calendar year. Many companies utilize computer
programs or hardware with date sensitive software or embedded chips that could
interpret dates ending in "00" as the year 1900 rather than the year 2000. In
certain cases, such errors could result in system failures or miscalculations
that disrupt the operations of the affected businesses. The Partnership uses
information systems provided by EFG and has no information systems of its own.
EFG has adopted a plan to address the Year 2000 Issue that consists of four
phases: assessment, remediation, testing, and implementation and has elected to
utilize principally internal resources to perform all phases. EFG completed
substantially all of its Year 2000 project by December 31, 1998 at an aggregate
cost of less than $50,000 and at a di minimus cost to the Partnership. Remaining
items are expected to be minor and be completed by March 31, 1999. All costs
incurred in connection with EFG's Year 2000 project have been expensed as
incurred.
EFG's primary information software was coded by IBM at the point of original
design to use a four digit field to identify calendar year. All of the
Partnership's lease billings, cash receipts and equipment remarketing processes
are performed using this proprietary software. In addition, EFG has gathered
information about the Year 2000 readiness of significant vendors and third party
servicers and continues to monitor developments in this area. All of EFG's
peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and have required only minor modifications to function properly with respect to
dates in the year 2000 and thereafter. EFG understands that each of its and the
Partnership's significant vendors and third-party servicers are in the process,
or have completed the process, of making their systems Year 2000 compliant.
Substantially all parties queried have indicated that their systems would be
Year 2000 compliant by the end of 1998.
Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Partnership's results of operations,
liquidity, or financial position. The Partnership's equipment leases were
structured as triple net leases, meaning that the lessees are responsible for,
among other things, (i) maintaining and servicing all equipment during the lease
term, (ii) ensuring that all equipment functions properly and is returned in
good condition, normal wear and tear excepted, and (iii) insuring the assets
against casualty and other events of loss. Non-compliance with lease terms on
the part of a lessee, including failure to address Year 2000 Issues, could
result in lost revenues and impairment of residual values of the Partnership's
equipment assets under a worst-case scenario.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its or the
Partnership's
3
<PAGE>
business operations. However, EFG has no means of ensuring that all customers,
vendors and third-party servicers will conform ultimately to Year 2000
standards. The effect of this risk to the Partnership is not determinable.
OVERVIEW
The Partnership was organized in 1989 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. The value of the Partnership's equipment
portfolio decreases over time due to depreciation resulting from age and usage
of the equipment, as well as technological changes and other market factors. In
addition, the Partnership does not replace equipment as it is sold; therefore,
its aggregate investment value in equipment declines from asset disposals
occurring in the normal course of business. Presently, the Partnership is a
Nominal Defendant in a Class Action Lawsuit, the outcome of which could
significantly alter the nature of the Partnership's organization and its future
business operations. See Note 7 to the accompanying financial statements.
Pursuant to the Restated Agreement, as amended, the Partnership is scheduled to
be dissolved by December 31, 2000.
RESULTS OF OPERATIONS
For the year ended December 31, 1998, the Partnership recognized lease
revenue of $466,883 compared to $1,626,206 and $3,616,524 for the years ended
December 31, 1997 and 1996, respectively. The decrease in lease revenue between
1997 and 1998 resulted principally from lease term expirations and the sale of
equipment. The decrease in lease revenue from 1996 to 1997 resulted principally
from the Partnership's sale of its interest in two Boeing 727-Advanced aircraft,
a vessel and certain railroad equipment in 1996 (see discussions below).
Partially offsetting this decrease was the receipt in 1997 of prepaid
contractual rental obligations of $991,703 associated with the exchange of the
Partnership's interest in a second vessel during 1997 (see discussion below).
Lease revenue for the year ended December 31, 1996 also included the receipt of
$846,649 of lease termination rents received in connection with the sale of the
Partnership's interest in the two aircraft in 1996.
Interest income for the year ended December 31, 1998 was $202,483 compared
to $131,575 and $133,238, for the years ended December 31, 1997 and 1996,
respectively. Interest income is typically generated from temporary investment
of rental receipts and equipment sale proceeds in short-term instruments.
Interest income in 1998 and 1997 included $77,145 and $15,215, respectively,
earned on a note receivable from Semele Group, Inc. (formerly Banyan Strategic
Land Fund II) ("Semele") (see Note 4 to the financial statements herein). The
amount of future interest income is expected to fluctuate in relation to
prevailing interest rates, the collection of lease revenue and the proceeds from
equipment sales.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by EFG. Proportionate equipment ownership enabled the Partnership to
further diversify its equipment portfolio at inception by participating in the
ownership of selected assets, thereby reducing the general levels of risk which
could have resulted from a concentration in any single equipment type, industry
or lessee. The Partnership and each affiliate individually report, in proportion
to their respective ownership interests, their respective shares of assets,
liabilities, revenues, and expenses associated with the equipment.
In 1998, the Partnership sold equipment, which had been fully depreciated,
to existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $19,725, compared to a net gain of $102,027 on
fully depreciated equipment in 1997. During 1997, the Partnership also exchanged
its interest in a vessel with an original cost and net book value of $3,666,680
and $1,385,750, respectively. In connection with this transaction, the
Partnership realized proceeds of $1,027,101, which resulted in a net loss for
financial statement purposes, of $358,649. In addition, as this vessel was
disposed of prior to the
4
<PAGE>
expiration of the related lease term, the Partnership received a prepayment of
the remaining contracted rent due under the vessel's lease agreement, as
described above.
On April 30, 1997, the vessel partnerships, in which the Partnership and
certain affiliated investment programs are limited partners and through which
the Partnership and the affiliated investment programs shared economic interests
in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd
(formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged
their ownership interests in the Vessels for aggregate consideration of
$11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of
common stock in Semele, a purchase money note of $8,219,500 (the "Note") and
cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987
and has its common stock listed on NASDAQ (NASDAQ SmallCap Market effective
January 5, 1999). At the date of the exchange transaction, the common stock of
Semele had a net book value of approximately $1.50 per share and closing market
value of $1.00 per share. Semele has one principal real estate asset consisting
of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho
Malibu").
The exchange was organized through an intermediary company (Equis Exchange
LLC, 99% owned by Semele and 1% owned by EFG), which was established for the
sole purpose of facilitating the exchange. There were no fees paid to EFG by
Equis Exchange LLC or Semele or by any other party that otherwise would not have
been paid to EFG had the Partnership sold its beneficial interest in the Vessels
directly to the Lessee. The Lessee prepaid all of its remaining contracted
rental obligations and purchased the Vessels in two closings occurring on May 6,
1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery
of a $4,419,500 note from Semele (the "Semele Note").
As a result of the exchange transaction and its original 46.46% beneficial
ownership interest in Larkfield, one of the three Vessels, the Partnership
received $735,201 in cash, became the beneficial owner of 341,435 shares of
Semele common stock (valued at $512,153 ($1.50 per share) at the time of the
exchange transaction) and received a beneficial interest in the Semele Note of
$771,450. The Semele Note bears an annual interest rate of 10% and will be
amortized over three years with mandatory principal reductions, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
Rancho Malibu.
Cash equal to the amount of the Semele Note was placed in escrow for the
benefit of Semele in a segregated account pending the outcome of certain
shareholder proposals. Specifically, as part of the exchange, Semele agreed to
seek consent ("Consent") from its shareholders to: (1) amend its certificate of
incorporation and by-laws; (2) make additional amendments to restrict the
acquisition of its common stock in a way to protect Semele's net operating loss
carry-forwards, and (3) engage EFG to provide administrative services to Semele,
which services EFG will provide at cost. On October 21, 1997, such Consent was
obtained from Semele's shareholders. The Consent also allowed for (i) the
election of a new Board of Directors nominated by EFG for terms of up to three
years and an increase in the size of the Board to as many as nine members,
provided a majority of the Board shall consist of members independent of Semele,
EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual
and changing its name from Banyan Strategic Land Fund II. Contemporaneously with
the Consent being obtained, Semele declared a $0.20 per share dividend to be
paid on all shares, including those beneficially owned by the Partnership. A
dividend of $68,287 was paid to the Partnership on November 17, 1997. This
dividend represented a return of equity to the Partnership, which
proportionately reduced the Partnership's investment in Semele.
In 1996, the Partnership sold equipment having a net book value of
$4,679,670 to existing lessees and third parties. These sales resulted in a net
gain, for financial statement purposes, of $1,410,867. These equipment sales
included the sale of the Partnership's interest in two Boeing 727-Advanced jet
aircraft with an original cost and net book value of $7,622,493, and $1,188,593,
respectively, which the Partnership sold to the existing lessee in July 1996. In
connection with these sales, the Partnership realized sale proceeds of
$1,959,671, which resulted in a net gain, for financial statement purposes, of
$771,078. This equipment was
5
<PAGE>
sold prior to the expiration of the related lease term. The Partnership realized
lease termination rents equal to $846,649, relating to these aircraft. In
addition, equipment sales in 1996 included the Partnership's interest in a
vessel with an original cost and net book value of $1,829,796 and $782,887,
respectively, which the Partnership sold to a third-party in September 1996. In
connection with this sale, the Partnership realized net sale proceeds of
$603,243, which resulted in a net loss, for financial statement purposes, of
$179,644. This equipment was sold prior to the expiration of the related lease
term. The Partnership also sold its interest in certain railroad equipment with
an original cost and net book value of $4,692,023 and $2,584,785, respectively,
to a third-party. The Partnership realized net sale proceeds of $2,501,294,
which resulted in a net loss, for financial statement purposes, of $83,491. This
equipment was sold prior to the expiration of the related lease term. The sales
of the vessel and the railroad equipment were effected in connection with a
joint remarketing effort involving 15 individual leasing programs sponsored by
EFG, consisting of the Partnership and 14 affiliates.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including 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. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Partnership classifies
such residual rental payments as lease revenue. Consequently, the amount of gain
or loss reported in the financial statements is not necessarily indicative of
the total residual value the Partnership achieved from leasing the equipment.
Depreciation expense was $80,952, $392,082 and $1,540,402 for the years
ending December 31, 1998, 1997 and 1996, respectively. For financial reporting
purposes, to the extent that an asset was held on primary lease term, the
Partnership depreciated the difference between (i) the cost of the asset and
(ii) the estimated residual value of the asset on a straight-line basis over
such term. For purposes of this policy, estimated residual values represented
estimates of equipment values at the date of primary lease expiration. To the
extent that an asset was held beyond its primary lease term, the Partnership
depreciated the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
Interest expense was $3,390 and $73,721, or 1% and 2% of lease revenue for
the years ending December 31, 1997 and 1996, respectively. The Partnership's
notes payable were fully amortized during the year ending December 31, 1997.
Management fees were approximately 5% of lease revenue during each of the
years ended December 31, 1998, 1997, and 1996. Management fees during the year
ended December 31, 1996 included $6,065, resulting from an underaccrual in 1995.
Management fees are based on 5% of gross lease revenue generated by operating
leases and 2% of gross lease revenue generated by full payout leases.
Write-down of investment securities-affiliate was $303,022 for the year
ended December 31, 1998. The General Partner determined that the decline in
market value of the Semele common stock was other-than-temporary at December 31,
1998. As a result, the Partnership wrote down the cost of the Semele common
stock from $15 per share to $4.125 per share (the quoted price of Semele stock
on NASDAQ at December 31, 1998).
6
<PAGE>
Operating expenses were $643,579, $326,077 and $443,431 for the years ended
December 31, 1998, 1997 and 1996, respectively. During the year ended December
31, 1998, the Partnership incurred or accrued approximately $304,800 for certain
legal and administrative expenses related to the Class Action Lawsuit described
in Note 7 to the financial statements. In addition, the Partnership expensed
$83,776 related to the refurbishment an aircraft engine and engine leasing costs
(See Notes 3 and 7 to the financial statements). Significant operating expenses
were incurred during the years ended December 31, 1997 and 1996 due to heavy
maintenance and airframe overhaul costs incurred in connection with the
Partnership's interests in two Boeing 727 aircraft. In 1996, the Partnership
entered into a new 36-month lease agreement with Sunworld International
Airlines, Inc. to re-lease one of the aircraft at a base rent to the Partnership
of $14,560 per month. The second aircraft was re-leased to Transmeridian
Airlines beginning April 1997 at a base rent to the Partnership of $17,920 per
month for 8 months and $15,680 per month for 10 months (see Note 3 to the
financial statements regarding the disposition of these aircraft). Other
operating expenses consist principally of administrative charges, professional
service costs, such as audit and other legal fees, as well as printing,
distribution and remarketing expenses. In certain cases, equipment storage or
repairs and maintenance costs may be incurred in connection with equipment being
remarketed.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity. As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Accordingly, the Partnership's principal source of
cash from operations is 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 $359,965 in 1998, $1,605,911 and
$2,745,878 in 1997 and 1996, respectively. Net cash from operating activities in
both 1997 and 1996 included lease termination rents as described above. Future
renewal, re-lease and equipment sale activities will cause a decline in the
Partnership's lease revenue and corresponding sources of operating cash.
Overall, expenses associated with rental activities, such as management fees,
and net cash flow from operating activities will also decline as the Partnership
experiences a higher frequency of remarketing events.
Cash expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. During the year ended December 31, 1998,
the Partnership realized net cash proceeds or $19,725, compared to $102,027 and
$6,090,537 in 1997 and 1996, respectively. The proceeds in 1996 included cash in
the amount of $3,038,847 representing the net sale proceeds resulting from the
Partnership's sale of its interest in a vessel and certain railroad equipment
less an associated debt payment, discussed above. Future inflows of cash from
asset disposals will vary in timing and amount and will be influenced by many
factors including, but not limited to, the frequency and timing of lease
expirations, the type of equipment being sold, its condition and age, and future
market conditions. During the year ended December 31, 1996, the Partnership
expended $245,280 to replace certain aircraft engines to facilitate the re-lease
of an aircraft, in which the Partnership has an ownership interest, to
Transmeridian Airlines (as discussed above). There were no equipment
acquisitions during 1998 or 1997.
In November 1998, the Partnership and certain affiliated investment programs
(collectively, the "Programs") entered into an agreement to sell their ownership
interests in a Boeing 727-251 ADV aircraft and three engines (collectively the
"Aircraft") to a third party (the "Purchaser"). The Programs will receive gross
sale proceeds of $4,350,000. Previously, the Aircraft had been leased to
Transmeridian Airlines ("Transmeridian"). In December 1998, the Purchaser
remitted $3,350,000 for the Aircraft, excluding one of three engines which had
been damaged while the Aircraft was leased to Transmeridian. (See Note 7
regarding legal action undertaken by the Programs related to Transmeridian and
the damaged engine). The Purchaser also deposited $1,000,000 into a third-party
escrow account (the "Escrow") pending repair of the damaged engine and
re-installation of the refurbished engine on the Aircraft. Upon installation,
the
7
<PAGE>
escrow agent will transfer the Escrow amount plus interest thereon to the
Programs. Currently, the engine is being refurbished at the expense of the
Programs. The associated cost is estimated to be approximately $260,000, of
which the Partnership's share is approximately $58,240. All of the Partnership's
costs were accrued at December 31, 1998 in connection with the Partnership's
legal action against Transmeridian discussed in Note 7.
The Programs also are required to reimburse the Purchaser for its cost to
lease a substitute engine during the period that the damaged engine is being
repaired. This cost is expected to be approximately $114,000, of which the
Partnership's share is $25,536, all of which has been accrued in 1998 in
connection with the litigation referenced above. If the engine repair and
re-installation do not occur on or before May 11, 1999, the Escrow plus all
interest thereon will be returned to the Purchaser and the Programs' obligation
to pay for the cost of a substitute engine will be terminated.
In addition, the purchase and sale agreement permits the Purchaser to return
the Aircraft to the Programs, subject to a number of conditions, for $4,350,000,
reduced by an amount equivalent to $450 multiplied by the number of flight hours
since the Aircraft's most recent C Check. Among the conditions precedent to the
Purchaser's returning the Aircraft, the Purchaser must have completed its
intended installation of hush-kitting on the Aircraft to conform to Stage 3
noise regulations. This work was completed in January 1999. In addition, the
Escrow funds must have been released to the Programs, assuming the repaired
engine is reinstalled on the Aircraft by May 11, 1999. The Purchaser's return
option expires on May 15, 1999.
Due to the contingent nature of the sale, the Partnership has deferred
recognition of the sale and a resulting gain at December 31, 1998 until
expiration of the Purchaser's return option on May 15, 1999. The Partnership's
share of the December proceeds was $750,400, which amount was deposited into
EFG's customary escrow account and transferred to the Partnership, together with
the Partnership's other December rental receipts, in January 1999. At December
31, 1998, the entire amount was classified as accounts receivable--affiliate,
with an equal amount reflected in other liabilities on the accompanying
Statement of Financial Position. The remainder of the sale consideration, or
$1,000,000, will be paid to the Programs upon release of the Escrow discussed
above. The Partnership's share of this payment will be $224,000. Based upon
current information, the Partnership expects to recognize a gain for financial
reporting purposes of approximately $974,400 in connection with this
transaction. The Partnership's interest in the Aircraft had a cost of $2,420,734
and was fully depreciated at December 31, 1998.
Pursuant to a purchase option contained in the lease agreement, the lessee,
Sunworld International Airlines, Inc., purchased the Partnership's interest in a
Boeing 727-251 ADV aircraft for approximately $548,800 in January 1999, at the
expiration of the existing lease term (see Note 8 Subsequent Event for
additional discussion).
At December 31, 1998, the Partnership was due aggregate future minimum lease
payments of $26,019 from contractual lease agreements (see Note 2 to the
financial statements). At the expiration of the individual renewal lease terms
underlying the Partnership's future minimum lease payments, the Partnership will
sell the equipment or enter re-lease or renewal agreements when considered
advantageous by the General Partner and EFG. Such future remarketing activities
will result in the realization of additional cash inflows in the form of
equipment sale proceeds or rents from renewals and re-leases, the timing and
extent of which cannot be predicted with certainty. This is because the timing
and extent of remarketing events often is dependent upon the needs and interests
of the existing lessees. Some lessees may choose to renew their lease contracts,
while others may elect to return the equipment. In the latter instances, the
equipment could be re-leased to another lessee or sold to a third-party.
Accordingly, as the terms of the currently existing contractual lease agreements
expire, the cash flows of the Partnership will become less predictable. In
addition, the Partnership will need cash outflows to pay management fees and
operating expenses.
8
<PAGE>
As a result of the vessel exchange transaction and its original 46.46%
beneficial ownership interest in Larkfield, one of the three Vessels, the
Partnership received $735,201 in cash, became the beneficial owner of 341,435
shares of Semele common stock (valued at $512,153 ($1.50 per share) at the time
of the exchange transaction) and received a beneficial interest in the Semele
Note of $771,450. The Semele Note bears an annual interest rate of 10% and will
be amortized over three years with mandatory principal reductions, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
Rancho Malibu.
On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed
by a 30-for-1 forward stock split resulting in a reduction of the number of
shares of Semele common stock owned by the Partnership to 34,144 Shares. In
accordance with the Financial Accounting Standard Board's Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are required to be carried at
fair value. During the year December 31, 1998, the Partnership decreased the
carrying value of its investment in Semele common stock to $4.125 per share (the
quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an
unrealized loss in 1998 of $115,232. In 1997, the Partnership recorded an
unrealized loss of $187,790 relate to its investment in the Semele common stock.
Each of these losses were reported as a component of comprehensive income or
loss, included in partners' capital. At December 31, 1998, the General Partner
determined that the decline in market value of the Semele common stock was
other-than-temporary. As a result, the Partnership wrote down the cost of the
Semele common stock to $4.125 per share (the quoted price of the Semele stock on
NASDAQ at December 31, 1998) for a total realized loss of $303,022 in 1998.
The Partnership obtained long-term financing in connection with certain
equipment leases. The repayments of principal related to such indebtedness are
reported as a component of financing activities. The Partnership's notes payable
were fully amortized during the year ended December 31, 1997.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket equipment upon lease expiration. Liquidity is
especially important as the Partnership matures and sells equipment, because the
remaining equipment base consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining assets.
In addition, the Partnership is a Nominal Defendant in a Class Action
Lawsuit described in Note 6 to the accompanying financial statements. A
preliminary settlement agreement will allow the Partnership to invest in new
equipment or other activities, subject to certain limitations, effective March
22, 1999. Until the Class Action Lawsuit is adjudicated, the General Partner
does not expect that the level of future quarterly cash distributions paid by
the Partnership will be increased above amounts paid in the fourth quarter of
1998. In addition, the proposed settlement, if effected, will materially change
the future organizational structure and business interests of the Partnership,
as well as its cash distribution policies. See Note 6 to the accompanying
financial statements.
Cash distributions to the General Partner and Recognized Owners are declared
and generally paid within fifteen days following the end of each calendar
quarter. The payment of such distributions is presented as a component of
financing activities. For the year ended December 31, 1998, the Partnership
declared total cash distributions of $545,002. In accordance with the Restated
Agreement, as amended, the Recognized Owners were allocated 95% of these
distributions, or $517,752, and the General Partner was allocated 5%, or
$27,250. The fourth quarter 1998 cash distribution was paid on January 15, 1999.
Cash distributions paid to the Recognized Owners consist of both a return of
and a return on capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on
9
<PAGE>
investment cannot be determined with any certainty until conclusion of the
Partnership and will be dependent upon the collection of all future contracted
rents, the generation of renewal and/or re-lease rents, and the residual value
realized for each asset at its disposal date.
The Partnership's future cash distributions will be adversely affected by
the bankruptcy of a former lessee of the Partnership, Midway Airlines, Inc. In
1993, the Partnership's interests in two DC-9-30 aircraft leased by Midway were
transferred to a designee of the lender in lieu of foreclosure. Although this
bankruptcy had no immediate adverse effect on the Partnership's cash flow, as
the Partnership had almost fully leveraged its ownership interest in the
underlying aircraft, this event resulted in the Partnership's loss of any future
interest in the residual value of the aircraft. Notwithstanding such adverse
impact, the overall investment results to be achieved by the Partnership will be
dependent upon the collective performance results of all of the Partnership's
equipment leases.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 6 to the accompanying financial statements). For instance, selling
commissions, organization and offering costs pertaining to syndication of the
Partnership's limited partnership units are not deductible for federal income
tax purposes, but are recorded as a reduction of partners' capital for financial
reporting purposes. Therefore, such differences are permanent differences
between capital accounts for financial reporting and federal income tax
purposes. Other differences between the bases of capital accounts for federal
income tax and financial reporting purposes occur due to timing differences.
Such items consist of the cumulative difference between income or loss for tax
purposes and financial statement income or loss, the difference between
distributions (declared vs. paid) for income tax and financial reporting
purposes, and the treatment of unrealized gains or losses on investment
securities, if any, for book and tax purposes. The principal component of the
cumulative difference between financial statement income or loss and tax income
or loss results from different depreciation policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at December 31, 1998. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Amended and Restated
Agreement and Certificate of Limited Partnership, requires that upon the
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, 1998, the
General Partner had a positive tax capital account balance.
The future liquidity of the Partnership will be influenced by, among other
factors, prospective market conditions, technological changes, the ability of
EFG to manage and remarket the assets, and many other events and circumstances,
that could enhance or detract from individual asset yields and the collective
performance of the Partnership's equipment portfolio. However, the outcome of
the Class Action Lawsuit described in Note 6 to the accompanying financial
statements will be the principal factor in determining the future of the
Partnership's operations
10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of American Income Partners V-A Limited Partnership:
We have audited the accompanying statements of financial position of
American Income Partners V-A Limited Partnership, as of December 31, 1998 and
1997, 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,
1998. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Income Partners V-A
Limited Partnership at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
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, 1999
11
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................... $ 2,448,960 $ 2,614,272
Rents receivable.................................................................... 6,643 3,971
Accounts receivable--affiliate...................................................... 787,967 67,828
Note receivable--affiliate.......................................................... 771,450 771,450
Investment securities--affiliate.................................................... 140,844 256,076
Equipment at cost, net of accumulated depreciation of $5,498,839 and $5,824,458 at
December 31, 1998 and 1997, respectively.......................................... -- 80,952
------------- -------------
Total assets.................................................................... $ 4,155,864 $ 3,794,549
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities................................................................. $ 350,276 $ 9,200
Accrued liabilities--affiliate...................................................... 6,864 16,868
Deferred rental income.............................................................. 9,219 10,358
Other liabilities................................................................... 750,400 --
Cash distributions payable to partners.............................................. 136,250 136,250
------------- -------------
Total liabilities............................................................... 1,253,009 172,676
------------- -------------
Partners' capital (deficit):
General Partner................................................................... (1,385,829) (1,349,878)
Limited Partnership Interests (1,380,661 Units; initial purchase price of $25
each)........................................................................... 4,288,684 4,971,751
------------- -------------
Total partners' capital......................................................... 2,902,855 3,621,873
------------- -------------
Total liabilities and partners' capital......................................... $ 4,155,864 $ 3,794,549
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of
These financial statements.
12
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Lease revenue......................................................... $ 466,883 $ 1,626,206 $ 3,616,524
Interest income....................................................... 125,338 116,360 133,238
Interest income--affiliate............................................ 77,145 15,215 --
Gain on sale of equipment............................................. 19,725 102,027 1,410,867
Loss on exchange of equipment......................................... -- (358,649) --
------------ ------------ ------------
Total income........................................................ 689,091 1,501,159 5,160,629
------------ ------------ ------------
Expenses:
Depreciation.......................................................... 80,952 392,082 1,540,402
Interest expense...................................................... -- 3,390 73,121
Equipment management fees............................................. 23,344 81,303 181,367
Write-down of investment securities--affiliate........................ 303,022 -- --
Operating expenses--affiliate......................................... 643,579 326,077 443,431
------------ ------------ ------------
Total expenses...................................................... 1,050,897 802,852 2,238,321
------------ ------------ ------------
Net income (loss)....................................................... $ (361,806) $ 698,307 $ 2,922,308
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per limited partnership unit.......................... $ (0.25) $ 0.48 $ 2.01
------------ ------------ ------------
------------ ------------ ------------
Cash distributions declared per limited partnership unit................ $ 0.38 $ 0.47 $ 4.18
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of
These financial statements.
13
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
GENERAL RECOGNIZED OWNERS
PARTNER -------------------------
AMOUNT UNITS AMOUNT TOTAL
------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995............................ $ (1,183,347) 1,380,661 $ 8,135,815 $ 6,952,468
Net income--1996...................................... 146,115 -- 2,776,193 2,922,308
------------- ---------- ------------- -------------
Comprehensive income.................................... 146,115 -- 2,776,193 2,922,308
------------- ---------- ------------- -------------
Cash distributions declared............................. (304,109) -- (5,778,066) (6,082,175)
------------- ---------- ------------- -------------
Balance at December 31, 1996............................ (1,341,341) 1,380,661 5,133,942 3,792,601
Net income--1997...................................... 34,915 -- 663,392 698,307
Unrealized loss on investment securities.............. (9,390) -- (178,400) (187,790)
------------- ---------- ------------- -------------
Comprehensive income.................................... 25,525 -- 484,992 510,517
------------- ---------- ------------- -------------
Cash distributions declared............................. (34,062) -- (647,183) (681,245)
------------- ---------- ------------- -------------
Balance at December 31, 1997............................ (1,349,878) 1,380,661 4,971,751 3,621,873
Net loss--1998........................................ (18,091) -- (343,715) (361,806)
Unrealized loss on investment securities.............. (5,762) -- (109,470) (115,232)
Less: reclassification adjustment for writedown of
investment securities............................... 15,152 -- 287,870 303,022
------------- ---------- ------------- -------------
Comprehensive loss...................................... (8,701) -- (165,315) (174,016)
------------- ---------- ------------- -------------
Cash distributions declared............................. (27,250) -- (517,752) (545,002)
------------- ---------- ------------- -------------
Balance at December 31, 1998............................ $ (1,385,829) 1,380,661 $ 4,288,684 $ 2,902,855
------------- ---------- ------------- -------------
------------- ---------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of
These financial statements.
14
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss)...................................................... $ (361,806) $ 698,307 $ 2,922,308
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation....................................................... 80,952 392,082 1,540,402
Gain on sale of equipment.......................................... (19,725) (102,027) (1,410,867)
Write-down of investment securities--affiliate..................... 303,022 -- --
Loss on exchange of equipment...................................... -- 358,649 --
Decrease in allowance for doubtful accounts........................ -- (5,000) --
Non-cash proceeds on termination rents............................. -- (256,502) --
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable................................................... (2,672) 215,367 (34,393)
Accounts receivable--affiliate..................................... (720,139) 416,530 (349,917)
Increase (decrease) in:
Accrued interest................................................... -- (1,836) (29,831)
Accrued liabilities................................................ 341,076 (29,230) 18,430
Accrued liabilities--affiliate..................................... (10,004) (79,123) 86,445
Deferred rental income............................................. (1,139) (1,306) 3,301
Other liabilities.................................................. 750,400 -- --
------------ ------------ -------------
Net cash from operating activities............................... 359,965 1,605,911 2,745,878
------------ ------------ -------------
Cash flows from (used in) investing activities:
Dividend received.................................................... -- 68,287 --
Purchase of equipment................................................ -- -- (245,280)
Proceeds from equipment sales........................................ 19,725 102,027 6,090,537
------------ ------------ -------------
Net cash from investing activities............................... 19,725 170,314 5,845,257
------------ ------------ -------------
Cash flows used in financing activities:
Principal payments--notes payable.................................... -- (144,594) (2,086,771)
Distributions paid................................................... (545,002) (726,660) (6,627,174)
------------ ------------ -------------
Net cash used in financing activities............................ (545,002) (871,254) (8,713,945)
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents................... (165,312) 904,971 (122,810)
Cash and cash equivalents at beginning of year......................... 2,614,272 1,709,301 1,832,111
------------ ------------ -------------
Cash and cash equivalents at end of year............................... $ 2,448,960 $ 2,614,272 $ 1,709,301
------------ ------------ -------------
------------ ------------ -------------
Supplemental disclosure of cash flow information: Cash paid during the
year for interest.................................................... $ -- $ 5,226 $ 102,952
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of
These financial statements.
15
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1-- ORGANIZATION AND PARTNERSHIP MATTERS
American Income Partners V-A Limited Partnership (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on July 24, 1989 for the purpose of
acquiring and leasing to third parties a diversified portfolio of capital
equipment. Partners' capital initially consisted of contributions of $1,000 from
the General Partner (AFG Leasing IV Incorporated) and $100 from the Initial
Limited Partner (AFG Assignor Corporation). On September 29, 1989, the
Partnership issued 1,380,661 units, representing assignments of limited
partnership interests (the "Units"), to 1,815 investors. Unitholders and Limited
Partners (other than the Initial Limited Partner) are collectively referred to
as Recognized Owners. The Partnership has one General Partner, AFG Leasing IV
Incorporated, a Massachusetts corporation formed in 1987 and an affiliate of
Equis Financial Group Limited Partnership (formerly known as 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 subsidiary are the 99% limited partners and AFG Programs,
Inc., which is wholly-owned by EFG, is the 1% general partner. 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").
Significant operations commenced September 29, 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.
Under the terms of a management agreement between the Partnership and AF/AIP
Programs Limited Partnership and the terms of an identical management agreement
between AF/AIP Programs Limited Partnership and EFG (collectively, the
"Management Agreement") management services are provided by EFG to the
Partnership at fees which the General Partner believes to be competitive for
similar services (see Note 5).
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 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, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle
established Equis Corporation and GDE LP in December 1994 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
16
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
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.
NOTE 2-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
the display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Partnership's net income or partners'
capital. Statement 130 requires unrealized gains or losses on the Partnership's
available-for-sale securities, which prior to adoption were reported separately
in partners' capital to be included in comprehensive income (loss). At December
31, 1997, the cumulative amount of other comprehensive losses was $187,790.
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 securities.
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, 1998, the Partnership had $2,337,900 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 or quarterly and no significant
amounts are calculated on factors other than the passage of time. The leases are
accounted for as operating leases and are noncancellable. Rents received prior
to their due dates are deferred. Future minimum rents of $26,019 are due as
follows:
<TABLE>
<C> <S> <C>
For the year ending December 31,
1999 ............................. $ 16,446
2000 ............................. 7,923
2001 ............................. 1,650
---------
Total ............................. $ 26,019
---------
---------
</TABLE>
17
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
Transmeridian Airlines.................................................... $ 187,637 $ -- $ --
Sunworld International Airlines, Inc...................................... $ 174,720 $ 174,720 $ --
Gearbulk Shipowning Ltd. (formerly Kristian Gerhard Jebsen Skipsrederi
A/S).................................................................... $ -- $ 1,110,453 $ 905,688
Northwest Airlines, Inc................................................... $ -- $ -- $ 1,535,146
Union Pacific Railroad Company............................................ $ -- $ -- $ 463,087
</TABLE>
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
EQUIPMENT ON LEASE
All equipment was acquired from EFG, one of its Affiliates or from
third-party sellers. Equipment Cost means the actual cost paid by the
Partnership to acquire the equipment, including acquisition fees. Where
equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the
actual price paid for the equipment by EFG or the Affiliate plus all actual
costs incurred by EFG or the Affiliate while carrying the equipment, including
all liens and encumbrances, less the amount of all primary term rents earned by
EFG or the Affiliate prior to selling the equipment. Where the seller of the
equipment was a third party, Equipment Cost reflects the seller's invoice price.
DEPRECIATION
The Partnership's depreciation policy was intended to allocate the cost of
the equipment over the period during which it produced economic benefit. The
principal period of economic benefit was considered corresponded to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset was
held on primary lease term, the Partnership depreciated the difference between
(i) the cost of the asset and (ii) the estimated residual value of the asset on
a straight-line basis over such term. For purposes of this policy, estimated
residual values represented estimates of equipment values at the date of primary
lease expiration. To the extent that an asset was held beyond its primary lease
term, the Partnership continued to depreciate the remaining net book value of
the asset on a straight-line basis over the asset's remaining economic life.
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.
18
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
INVESTMENT SECURITIES--AFFILIATE
The Partnership's investment in Semele Group, Inc. is considered to be
available-for-sale and as such is carried at fair value with unrealized gains
and losses reported as a separate component of Partner's Capital).
Other-than-temporary declines in market value are recorded as write down of
investment in the Statement of Operations (see Note 4).
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 5).
ALLOCATION OF PROFITS AND LOSSES
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.
NET INCOME AND CASH DISTRIBUTIONS PER UNIT
Net income and cash distributions per Unit are based on 1,380,661 Units
outstanding during each of the three years in the period ended December 31, 1998
and computed after allocation of the General Partner's 5% share of net income
and cash distributions.
PROVISION FOR INCOME TAXES
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.
NOTE 3-- EQUIPMENT
The following is a summary of equipment owned by the Partnership at December
31, 1998. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1998 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment
19
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
either held for sale or re-lease or being leased on a month-to-month basis. 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>
Aircraft.................................... 0-1 $ 4,596,188 KY/TX
Materials handling.......................... 0-27 861,659 GA/IL/IN/MA/MI/NC/NY/PA/SC/ TX
Communications.............................. 0 40,992 MO
------------
Total equipment cost 5,498,839
Accumulated depreciation (5,498,839)
------------
Equipment, net of accumulated depreciation $ --
------------
------------
</TABLE>
In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest. The remaining interests are owned by EFG or an
affiliated equipment leasing program sponsored by EFG. The Partnership and each
affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment. Proportionate equipment ownership
enabled the Partnership to further diversify its equipment portfolio at
inception by participating in the ownership of selected assets, thereby reducing
the general levels of risk which could have resulted from a concentration in any
single equipment type, industry or lessee. At December 31, 1998, the
Partnership's equipment portfolio included equipment having a proportionate
original cost of $4,596,188 representing approximately 84% of total equipment
cost.
Generally, the costs associated with maintaining, insuring and operating the
Partnership's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Partnership.
As equipment is sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the equipment at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the equipment is dependent upon, among other things, EFG's
ability to maximize proceeds from selling or re-leasing the equipment upon the
expiration of the primary lease terms.
At December 31, 1998, the Partnership had fully depreciated equipment held
for sale with a cost of approximately $4,596,000. This equipment represents the
Partnership's proportionate interests in two Boeing 727-251 ADV aircraft. In
January 1999, at the expiration of the existing lease term, the Partnership sold
its interest in one of these aircraft having a cost of $2,175,454 (see Note 8
Subsequent Event). See below for discussion related to the Partnership's
interest in the second aircraft. The summary above also includes equipment being
leased on a month to month basis.
DEFERRED SALE
In November 1998, the Partnership and certain affiliated investment programs
(collectively, the "Programs") entered into an agreement to sell their ownership
interests in a Boeing 727-251 ADV aircraft and three engines (collectively the
"Aircraft") to a third party (the "Purchaser"). The Programs will receive gross
sale proceeds of $4,350,000. Previously, the Aircraft had been leased to
Transmeridian Airlines
20
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
("Transmeridian"). In December 1998, the Purchaser remitted $3,350,000 for the
Aircraft, excluding one of three engines which had been damaged while the
Aircraft was leased to Transmeridian. (See Note 7 regarding legal action
undertaken by the Programs related to Transmeridian and the damaged engine). The
Purchaser also deposited $1,000,000 into a third-party escrow account (the
"Escrow") pending repair of the damaged engine and re-installation of the
refurbished engine on the Aircraft. Upon installation, the escrow agent will
transfer the Escrow amount plus interest thereon to the Programs. Currently, the
engine is being refurbished at the expense of the Programs. The associated cost
is estimated to be approximately $260,000, of which the Partnership's share is
approximately $58,240. All of the Partnership's costs were accrued at December
31, 1998 in connection with the Partnership's legal action against Transmeridian
discussed in Note 7.
The Programs also are required to reimburse the Purchaser for its cost to
lease a substitute engine during the period that the damaged engine is being
repaired. This cost is expected to be approximately $114,000, of which the
Partnership's share is $25,536, all of which has been accrued in 1998 in
connection with the litigation referenced above. If the engine repair and
re-installation do not occur on or before May 11, 1999, the Escrow plus all
interest thereon will be returned to the Purchaser and the Programs' obligation
to pay for the cost of a substitute engine will be terminated.
In addition, the purchase and sale agreement permits the Purchaser to return
the Aircraft to the Programs, subject to a number of conditions, for $4,350,000,
reduced by an amount equivalent to $450 multiplied by the number of flight hours
since the Aircraft's most recent C Check. Among the conditions precedent to the
Purchaser's returning the Aircraft, the Purchaser must have completed its
intended installation of hush-kitting on the Aircraft to conform to Stage 3
noise regulations. This work was completed in January 1999. In addition, the
Escrow funds must have been released to the Programs, assuming the repaired
engine is reinstalled on the Aircraft by May 11, 1999. The Purchaser's return
option expires on May 15, 1999.
Due to the contingent nature of the sale, the Partnership has deferred
recognition of the sale and a resulting gain at December 31, 1998 until
expiration of the Purchaser's return option on May 15, 1999. The Partnership's
share of the December proceeds was $750,400, which amount was deposited into
EFG's customary escrow account and transferred to the Partnership, together with
the Partnership's other December rental receipts, in January 1999. At December
31, 1998, the entire amount was classified as accounts receivable--affiliate,
with an equal amount reflected in other liabilities on the accompanying
Statement of Financial Position. The remainder of the sale consideration, or
$1,000,000, will be paid to the Programs upon release of the Escrow discussed
above. The Partnership's share of this payment will be $224,000. The
Partnership's interest in the Aircraft had a cost of $2,420,734 and was fully
depreciated at December 31, 1998.
NOTE 4-- INVESTMENT SECURITIES--AFFILIATE / NOTE RECEIVABLE--AFFILIATE
On April 30, 1997, the vessel partnerships, in which the Partnership and
certain affiliated investment programs are limited partners and through which
the Partnership and the affiliated investment programs shared economic interests
in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd
(formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged
their ownership interests in the Vessels for aggregate consideration of
$11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of
common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land
Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375.
Semele is a Delaware corporation
21
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
organized on April 14, 1987 and has its common stock listed on NASDAQ (NASDAQ
SmallCap Market effective January 5, 1999). At the date of the exchange
transaction, the common stock of Semele had a net book value of approximately
$1.50 per share and closing market value of $1.00 per share. Semele has one
principal real estate asset consisting of an undeveloped 274 acre parcel of land
near Malibu, California ("Rancho Malibu").
The exchange was organized through an intermediary company (Equis Exchange
LLC, 99% owned by Semele and 1% owned by EFG), which was established for the
sole purpose of facilitating the exchange. There were no fees paid to EFG by
Equis Exchange LLC or Semele or by any other party that otherwise would not have
been paid to EFG had the Partnership sold its beneficial interest in the Vessels
directly to the Lessee. The Lessee prepaid all of its remaining contracted
rental obligations and purchased the Vessels in two closings occurring on May 6,
1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery
of a $4,419,500 note from Semele (the "Semele Note").
As a result of the exchange transaction and its original 46.46% beneficial
ownership interest in Larkfield, one of the three Vessels, the Partnership
received $735,201 in cash, became the beneficial owner of 341,435 shares of
Semele common stock (valued at $512,153 ($1.50 per share) at the time of the
exchange transaction) and received a beneficial interest in the Semele Note of
$771,450. The Semele Note bears an annual interest rate of 10% and will be
amortized over three years with mandatory principal reductions, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
Rancho Malibu. The Partnership recognized interest income of $77,145 and $15,215
related to the Semele Note during 1998 and 1997, respectively. The Partnership's
interest in the vessel had an original cost and net book value of $3,666,680 and
$1,385,750, respectively. The proceeds realized by the Partnership of $1,027,101
resulted in a net loss, for financial statement purposes, of $358,649. In
addition, as this vessel was disposed of prior to the expiration of the related
lease term, the Partnership received a prepayment of the remaining contracted
rent due under the vessel's lease agreement of $991,703.
Cash equal to the amount of the Semele Note was placed in escrow for the
benefit of Semele in a segregated account pending the outcome of certain
shareholder proposals. Specifically, as part of the exchange, Semele agreed to
seek consent ("Consent") from its shareholders to: (1) amend its certificate of
incorporation and by-laws; (2) make additional amendments to restrict the
acquisition of its common stock in a way to protect Semele's net operating loss
carry-forwards, and (3) engage EFG to provide administrative services to Semele,
which services EFG will provide at cost. On October 21, 1997, such Consent was
obtained from Semele's shareholders. The Consent also allowed for (i) the
election of a new Board of Directors nominated by EFG for terms of up to three
years and an increase in the size of the Board to as many as nine members,
provided a majority of the Board shall consist of members independent of Semele,
EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual
and changing its name from Banyan Strategic Land Fund II. Contemporaneously with
the Consent being obtained, Semele declared a $0.20 per share dividend to be
paid on all shares, including those beneficially owned by the Partnership. A
dividend of $68,287 was paid to the Partnership on November 17, 1997. This
dividend represented a return of equity to the Partnership, which
proportionately reduced the Partnership's investment in Semele. Subsequent to
the exchange transaction, Gary D. Engle, President and Chief Executive Officer
of EFG, was elected to the Board of Directors and appointed Chief Executive
Officer of Semele and James A. Coyne, Executive Vice President of EFG was
appointed Semele's President and Chief Operating Officer, and was elected to the
Board of Directors.
22
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed
by a 30-for-1 forward stock split resulting in a reduction of the number of
shares of Semele common stock owned by the Partnership to 34,144 Shares. In
accordance with the Financial Accounting Standard Board's Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are required to be carried at
fair value. During the year December 31, 1998, the Partnership decreased the
carrying value of its investment in Semele common stock to $4.125 per share (the
quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an
unrealized loss in 1998 of $115,232. In 1997, the Partnership recorded an
unrealized loss of $187,790 relate to its investment in the Semele common stock.
Each of these losses was reported as a component of comprehensive income or
loss, included in partners' capital. At December 31, 1998, the General Partner
determined that the decline in market value of the Semele common stock was
other-than-temporary. As a result, the Partnership wrote down the cost of the
Semele common stock to $4.125 per share (the quoted price of the Semele stock on
NASDAQ at December 31, 1998) for a total realized loss of $303,022 in 1998.
NOTE 5-- 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 the years ended December 31,
1998, 1997 and 1996 which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Equipment management fees.................................................... $ 23,344 $ 81,303 $ 181,367
Administrative charges....................................................... 58,836 55,668 36,560
Reimbursable operating expenses due to third parties......................... 584,743 270,409 406,871
---------- ---------- ----------
Total.................................................................... $ 666,923 $ 407,380 $ 624,798
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG is compensated by an
amount equal to 2.23% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Partnership. Both acquisition and management fees are subject to
certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4 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 actual cost.
All equipment was acquired from EFG, one of its affiliates, including other
equipment leasing programs sponsored by EFG, or from third-party sellers. The
Partnership's Purchase Price was determined by the method described in Note 2,
Equipment on Lease.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1998, the Partnership was owed $787,967 by EFG for such funds
and the
23
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
interest thereon. Included in this balance are the proceeds from the sale of the
Partnership's interest in a Boeing 727-251aircraft (see Note 3 for additional
discussion). These funds were remitted to the Partnership in January 1999.
Certain affiliates of the General Partner own Units in the Partnership as
follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
AFFILIATE UNITS OWNED OUTSTANDING UNITS
- --------------------------------------------------------------------------------- ------------ -------------------
<S> <C> <C>
Atlantic Acquisition Limited Partnership......................................... 125,843 9.11%
------------ ---
Old North Capital Limited Partnership............................................ 4,452 0.32%
------------ ---
</TABLE>
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital
Limited Partnership ("ONC") are both Massachusetts limited partnerships formed
in 1995 and affiliates of EFG. The general partners of AALP and ONC are
controlled by Gary D. Engle. In addition, the limited partnership interests of
ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and
CEO of Semele.
On September 30, 1996, the Partnership sold (i) a 23% ownership interest,
representing its entire ownership interest, in a cargo vessel leased by Gearbulk
Shipowning Ltd. ("Gearbulk"), formerly Kristian Gerhard Jebsen Skipsrederi A/S
(the "Vessel"), having an original cost to the Partnership of $1,829,796 and a
net book value at September 30, 1996 of $782,887 and (ii) a 50% ownership
interest, representing its entire ownership interest, in 22 locomotives leased
by Union Pacific Railroad Company (the "Locomotives"), having an original cost
to the Partnership of $4,692,023 and a net book value at September 30, 1996 of
$2,584,785. The Partnership received net sale proceeds of $3,104,537, a portion
of which was used to repay the outstanding principal balance of notes payable
associated with the Vessel of $65,690. The Partnership sold its interests in the
Vessel and Locomotives prior to the expiration of the related lease terms. These
sales were effected in connection with a joint remarketing effort involving 15
individual equipment leasing programs sponsored by EFG, consisting of the
Partnership and 14 affiliates.
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). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax purposes, the Partnership allocates net income or net
loss, in accordance with the provisions of such agreement. The Restated
Agreement, as amended, requires that upon dissolution of the Partnership, the
General Partner will be required to contribute to the Partnership an amount
equal to any negative balance which may exist in the General Partner's tax
capital account. At December 31, 1998, the General Partner had a positive tax
capital account balance.
24
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Net income (loss).......................................................... $ (361,806) $ 698,307 $ 2,922,308
Financial statement depreciation in excess of (less than) tax
depreciation........................................................... (340,912) (162,802) 60,169
Deferred rental income................................................... (1,139) (1,306) 3,301
Other.................................................................... 337,798 148,614 (83,593)
----------- ---------- ------------
Net income (loss) for federal income tax reporting purposes................ $ (366,059) $ 682,813 $ 2,902,185
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
The principal component of "Other" consists of the difference between the
tax gain or loss on equipment disposals and the financial statement gain or loss
on disposals.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Partners' capital..................................................................... $ 2,902,855 $ 3,621,873
Unrealized loss on investment securities............................................ -- 187,790
Add back selling commissions and organization and offering costs.................... 3,878,114 3,878,114
Financial statement distributions in excess of tax distributions.................... 6,812 6,812
Cumulative difference between federal income tax and financial statement income
(loss)............................................................................ 1,036,193 1,040,446
------------ ------------
Partners' capital for federal income tax reporting purposes....................... $ 7,823,974 $ 8,735,035
------------ ------------
------------ ------------
</TABLE>
Unrealized loss on investment securities, 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
In January 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 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 the 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.
25
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth 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 Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
Prior to issuing a final order, the Court will hold a fairness hearing that will
be open to all interested parties and permit any party to object to the
settlement. The investors of the Partnership and all other plaintiff class
members in the Class Action Lawsuit will receive a Notice of Settlement and
other information pertinent to the settlement of their claims that will be
mailed to them in advance of the fairness hearing. Since first executing the
Stipulation of Settlement, the Court has scheduled two fairness hearings, the
first on December 11, 1998 and the second on March 19, 1999, each of which was
postponed because of delays in finalizing certain information materials that are
subject to regulatory review prior to being distributed to investors.
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 15, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divides the
Class Action Lawsuit into two separate sub-classes that can be settled
individually. This revision is expected to expedite the settlement of one
sub-class by the middle of 1999. However, the second sub-class, involving the
Partnership and 10 affiliated partnerships (collectively referred to as the
"Exchange Partnerships"), is expected to remain pending for a longer period due,
in part, to the complexity of the proposed settlement pertaining to this class.
Specifically, the settlement of the second sub-class is premised on the
consolidation of the Exchange Partnerships' net assets (the "Consolidation"),
subject to certain conditions, into a single successor company ("Newco"). Under
the proposed Consolidation, the partners of the Exchange Partnerships would
receive both common stock in Newco and a cash distribution; and thereupon the
Exchange Partnerships would be dissolved. In addition, EFG would contribute
certain management contracts, operations personnel, and business opportunities
to Newco and cancel its current management contracts with all of the Exchange
Partnerships. Newco would operate as a finance company specializing in the
acquisition, financing and servicing of equipment leases for its own account and
for the account of others on a contract basis. Newco also would use its best
efforts to list its shares on the Nasdaq National Market or another national
exchange or market as soon after the Consolidation as Newco deems that market
conditions and its business operations are suitable for listing its shares and
Newco has satisfied all necessary regulatory and listing requirements. The
potential benefits and risks of the Consolidation will be presented in a
Solicitation Statement that will be mailed to all of the partners of the
Exchange Partnerships as soon as the associated regulatory review process is
completed and at least 60 days prior to the fairness hearing. A preliminary
Solicitation Statement was filed with the Securities and Exchange Commission on
August 24, 1998 and remains pending. Class members will be notified of the
actual fairness hearing date when it is confirmed.
One of the principal objectives of the Consolidation is to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives,
26
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
including continuing the Partnership's customary business operations until all
of its assets are disposed in the ordinary course of business. To facilitate the
realization of this objective, the Amended Stipulation provides, among other
things, that commencing March 22, 1999, the Exchange Partnerships may
collectively invest up to 40% of the total aggregate net asset values of all of
the Exchange Partnerships in any investment, including additional equipment and
other business activities that the general partners of the Exchange Partnerships
and EFG reasonably believe to be consistent with the anticipated business
interests and objectives of Newco, subject to certain limitations, including
that the Exchange Partnerships retain sufficient cash balances to pay their
respective shares of the cash distribution referenced above in connection with
the proposed Consolidation.
In the absence of the Court's authorization to enter into such activities,
the Partnership's Restated Agreement, as amended, would not permit new
investment activities without the approval of limited partners owning a majority
of the Partnership's outstanding Units. Accordingly, to the extent that the
Partnership invests in new equipment, the Manager (being EFG) will (i) defer,
until the earlier of the effective date of the Consolidation or December 31,
1999, any acquisition fees resulting therefrom and (ii) limit its management
fees on all such assets to 2% of rental income. In the event that the
Consolidation is consummated, all such acquisition and management fees will be
paid to Newco. To the extent that the Partnership invests in other business
activities not consisting of equipment acquisitions, the Manager will forego any
acquisition fees and management fees related to such investments. In the event
that the Partnership has acquired new investments, but the Partnership does not
participate in the Consolidation, Newco will acquire such new investments for an
amount equal to the Partnership's net equity investment plus an annualized
return thereon of 7.5%. Finally, in the event that the Partnership has acquired
new investments and the Consolidation is not effected, the General Partner will
use its best efforts to divest all such new investments in an orderly and timely
fashion and the Manager will cancel or return to the Partnership any acquisition
or management fees resulting from such new investments.
The Amended Stipulation and previous Stipulation of Settlement prescribe
certain conditions necessary to effecting final settlements, including providing
the partners of the Exchange Partnerships with the opportunity to object to the
participation of their partnership in the Consolidation. Assuming the proposed
settlement is effected according to present terms, the Partnership's share of
legal fees and expenses related to the Class Action Lawsuit is estimated to be
approximately $77,700 all of which was accrued and expensed by the Partnership
in 1998. In addition, the Partnership's share of fees and expenses related to
the proposed Consolidation is estimated to be approximately $227,100 all of
which was accrued and expensed by the Partnership in 1998.
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permits the partners to transfer Units to family members or as a
result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.
There can be no assurance that settlement of either sub-class of the Class
Action Lawsuit will receive final Court approval and be effected. There also can
be no assurance that all or any of the Exchange Partnerships will participate in
the Consolidation because if limited partners owning more than one-third of the
outstanding Units of a partnership object to the Consolidation, then that
partnership will be excluded from the Consolidation. The General Partner and its
affiliates, in consultation with counsel,
27
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
concur that there is a reasonable basis to believe that final settlements of
each sub-class will be achieved. However, in the absence of final settlements
approved by the Court, the Defendants intend to defend vigorously against the
claims asserted in the Class Action Lawsuit. Neither the General Partner nor its
affiliates can predict with any degree of certainty the cost of continuing
litigation to the Partnership or the ultimate outcome.
In addition to the foregoing, the Partnership is a party to other lawsuits
that have arisen out of the conduct of its business, principally involving
disputes or disagreements with lessees over lease terms and conditions. The
following actions had not been finally adjudicated at December 31, 1998:
ACTION INVOLVING NATIONAL STEEL CORPORATION
EFG, on behalf of the Partnership and certain affiliated investment programs
(collectively, the "Plaintiffs"), filed an action in the Commonwealth of
Massachusetts Superior Court, Department of the Trial Court in and for the
County of Suffolk on July 27, 1995, for damages and declaratory relief against a
lessee of the Partnership, National Steel Corporation ("National Steel"). The
Complaint seeks reimbursement from National Steel of certain sales and/or use
taxes paid to the State of Illinois in connection with equipment leased by
National Steel from the Plaintiffs and other remedies provided under the Master
Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of
Removal, which removed the case to United States District Court, District of
Massachusetts. On September 7, 1995, National Steel filed its Answer to the
Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and
sought declaratory relief, alleging breach of contract, implied covenant of good
faith and fair dealing, and specific performance. The Plaintiffs filed an Answer
to National Steel's Counterclaims on September 29, 1995. The parties discussed
settlement with respect to this matter for some time; however, the negotiations
were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint
alleging further default under the MLA and filed a motion for Summary Judgment
on all claims and Counterclaims. The Court held a hearing on the Plaintiff's
motion in December 1997 and later entered a decision dismissing certain of
National Steel's Counterclaims, finding in favor of the Plaintiffs on certain
issues and in favor of National Steel on other issues. In March 1999, the
Plaintiffs obtained payment for certain of the disputed items and have resumed
settlement discussions to resolve remaining issues. The General Partner does not
believe that the resolution of the remaining claims will have a material adverse
effect on the Partnership's financial position or results of operations.
ACTION INVOLVING NORTHWEST AIRLINES, INC.
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in United States
District Court for the District of Massachusetts against a lessee of the
Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that
Northwest did not fulfill its maintenance obligations under its Lease Agreements
with the Plaintiffs and seeks declaratory judgment concerning Northwest's
obligations and monetary damages. Northwest filed an Answer to the Plaintiffs'
Complaint and a motion to transfer the venue of this proceeding to Minnesota.
The Court denied Northwest's motion. On June 29, 1998, a United States
Magistrate Judge recommended entry of partial summary judgment in favor of the
Plaintiffs. Northwest appealed this decision and a hearing was scheduled for
January 1999 by the District Judge to consider arguments and review the
Magistrate's recommendation. A ruling by the District Judge remains pending. The
General Partner believes that the Plaintiff's claims ultimately will prevail and
that the Partnership's financial position will not be adversely affected by the
outcome of this action.
28
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
ACTION INVOLVING TRANSMERIDIAN AIRLINES
On November 9, 1998, First Security Bank, N.A., as trustee of the
Partnership and certain affiliated investment programs (collectively, the
"Plaintiffs), filed an action in Superior Court of the Commonwealth of
Massachusetts in Suffolk County against Prime Air, Inc. d/b/a Transmeridian
Airlines ("Transmeridian"), Atkinson & Mullen Travel, Inc., and Apple Vacations,
West, Inc., both d/b/a Apple Vacations, asserting various causes of action for
declaratory judgment and breach of contract. The action subsequently was removed
to United States District Court for the District of Massachusetts. Transmeridian
filed counterclaims for breach of contract, quantum meruit, conversion, breach
of the implied covenant of good faith and fair dealing, and violation of M.G.L.
c. 93A. The Plaintiffs subsequently filed an Amended Complaint asserting claims
for breaches of contract and covenant of faith and fair dealing against
Transmeridian and breach of guaranty against Apple Vacations.
The Plaintiffs are seeking damages for, among other things, breach of
contract arising out of Transmeridian's refusal to repair or replace burned
engine blades found in one engine during a pre-return inspection of an aircraft
leased by Transmeridian from the Plaintiffs, a Boeing 727-251 ADV aircraft (the
"Aircraft"). The estimated cost to repair the engine and lease a substitute
engine during the repair period is approximately $374,000. The Plaintiffs intend
to enforce written guarantees issued by Apple Vacations that absolutely and
unconditionally guarantee Transmeridian's performance under the lease agreement
and are seeking recovery of all costs, lost revenue and monetary damages in
connection with this matter. Notwithstanding the foregoing, the Plaintiffs will
be required to advance the cost of repairing the engine and leasing a substitute
engine and cannot be certain whether the guarantees will be enforced. Therefore,
the Partnership has accrued and expensed its share of these costs, or $83,776,
in 1998. Discovery has not yet commenced, and although the General Partner plans
to vigorously pursue this action, it is too early to predict the Plaintiffs'
likelihood of success. This Aircraft was fully depreciated at December 31, 1998
for financial reporting purposes. (See Note 3 concerning the remarketing of this
Aircraft.)
NOTE 8-- SUBSEQUENT EVENT
On January 19, 1999, at the expiration of the aircraft's lease term, the
Partnership sold its proportional interest in a Boeing 727-251 aircraft to the
lessee, Sunworld International Airlines, Inc. The Partnership received net sale
proceeds of approximately $548,000 for its interest in this aircraft which had a
cost of $2,175,454 and was fully depreciated at December 31, 1998.
29
<PAGE>
ADDITIONAL FINANCIAL INFORMATION
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Partnership classifies all rents from leasing equipment as lease
revenue. Upon expiration of the primary lease terms, equipment may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the equipment, in addition to any month-to-month revenues, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition, may not reflect the aggregate residual proceeds
realized by the Partnership for such equipment.
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------ -------------
<S> <C> <C> <C>
Rents earned prior to disposal of equipment, net of interest charges.... $ 616,787 $ 1,800,550 $ 17,670,136
Sale proceeds realized upon disposition of equipment.................... 19,725 102,027 6,090,537
---------- ------------ -------------
Total cash generated from rents and equipment sale proceeds............. 636,512 1,902,577 23,760,673
Original acquisition cost of equipment disposed......................... 406,571 1,551,218 19,929,876
---------- ------------ -------------
Excess of total cash generated to cost of equipment disposed............ $ 229,941 $ 351,359 $ 3,830,797
---------- ------------ -------------
---------- ------------ -------------
</TABLE>
30
<PAGE>
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS
SALES AND REFINANCINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
SALES AND
OPERATIONS REFINANCINGS TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Net income.............................................................. $ (381,531) $ 19,725 $ (361,806)
Add:
Depreciation.......................................................... 80,952 -- 80,952
Management fees....................................................... 23,344 -- 23,344
Write-down of investment securities--affiliate........................ 303,022 -- 303,022
Less:
Principal reduction of notes payable.................................. -- -- --
------------ ------------ ------------
Cash from operations, sales and refinancings.......................... 25,787 19,725 45,512
Less:
Management fees....................................................... (23,344) -- (23,344)
------------ ------------ ------------
Distributable cash from operations, sales and refinancings............ 2,443 19,725 22,168
Other sources and uses of cash:
Cash at beginning of year............................................. 2,614,272 -- 2,614,272
Net change in receivables and accruals................................ 357,522 -- 357,522
Less:
Cash distributions paid............................................... (525,277) (19,725) (545,002)
------------ ------------ ------------
Cash at end of year..................................................... $ 2,448,960 $ -- $ 2,448,960
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
31
<PAGE>
AMERICAN INCOME PARTNERS V-A 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, 1998
For the year ended December 31, 1998, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:
<TABLE>
<S> <C>
Operating expenses................................................ $ 311,404
</TABLE>
32
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of American Income Partners V-A Limited Partnership, of our report dated
March 10, 1999, included in the 1998 Annual Report to the Partners of American
Income Partners V-A Limited Partnership.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 1999
<PAGE>
EXHIBIT 99(e)
================================================================================
AIRCRAFT LEASE AGREEMENT
between
FIRST SECURITY BANK OF UTAH, N.A.
as Owner Trustee,
Lessor
and
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
Lessee
Dated as of March 15, 1996
covering one Boeing model 727-251 Aircraft
equipped with Pratt & Whitney model JT8D-15A Engines
Serial No. 21160, Registration N281US
================================================================================
<PAGE>
LEASE AGREEMENT
TABLE OF CONTENTS
SECTION 1. Definitions ...................................................... 1
SECTION 2. Lease and Delivery of the Aircraft ............................... 6
2.1. Lease, Lessee's Obligations, and Conditions Precedent ............ 6
2.1.1. Execution of Operative Documents ......................... 7
2.1.2. Evidence of Legal Authority to Lease and Operate the
Aircraft ............................................... 7
2.1.3. Evidence of Corporate Authority .......................... 7
2.1.4. Evidence of Insurance .................................... 7
2.1.5. Opinion of Counsel ....................................... 7
2.1.6. Payment of Basic Rent and Security Deposit ............... 7
2.2. Delivery ......................................................... 7
SECTION 3. Term and Rent .................................................... 8
3.1. Term ............................................................. 8
3.1.1. Initial Term ............................................. 8
3.1.2. Extensions ............................................... 8
3.2. Basic Rent ....................................................... 8
3.3. Method of Payment ................................................ 8
3.4. Supplemental Rent ................................................ 9
3.5. Security Deposit ................................................. 9
3.6. Reserves ......................................................... 10
3.7. Hushkits ......................................................... 11
SECTION 4. Representations, Warranties and Miscellaneous Covenants .......... 11
4.1. The Lessee's Representations and Warranties ...................... 12
4.1.1. Organization and Qualification ........................... 12
4.1.2. Corporate Authorization .................................. 12
4.1.3. Government Approval ...................................... 12
4.1.4. Valid and Binding Agreements ............................. 13
4.1.5. Litigation ............................................... 13
4.1.6. Financial Condition ...................................... 13
4.1.7. Accuracy and Disclosure of Information ................... 13
4.2. Representations and Warranties of the Lessor ..................... 13
4.2.1. Due Organization ......................................... 13
4.2.2. Due Authorization; Enforceability ........................ 13
4.2.3. No Violation ............................................. 14
4.2.4. Ownership of Aircraft .................................... 14
4.3. Disclaimer and Acknowledgement of Disclaimer; Waiver of
Consequential Damages .......................................... 14
4.4. Lessee's Miscellaneous Covenants ................................. 15
4.4.1. Maintenance of Corporate Status; No Merger or
Consolidation .......................................... 15
4.4.2. Notice of Default or Adverse Occurrence .................. 15
4.4.3. Maintenance of Consents and Approvals .................... 16
<PAGE>
4.4.4. Change of Locale ......................................... 16
4.4.5. Financial Information and Reports ........................ 16
4.5. Lessor's Covenant of Quiet Enjoyment ............................. 16
SECTION 5. Operation, Maintenance, Possession ............................... 17
5.1. Title ............................................................ 17
5.2. Operation ........................................................ 17
5.3. Maintenance in General ........................................... 17
5.3.1. Lessor Provision of Spare Engine ......................... 18
5.4. Parts ............................................................ 18
5.5. Airworthiness Directives ......................................... 18
5.6. Service Bulletins ................................................ 19
5.7. Optional Modifications ........................................... 19
5.8. Reports .......................................................... 20
5.9. Right to Inspect ................................................. 20
5.10. Damage and Repairs .............................................. 20
5.11. Aircraft Documents .............................................. 21
5.11.1. Airworthiness Directives ................................ 21
5.11.2. Life Limited Components ................................. 21
5.11.3. Damage and Repairs ...................................... 21
5.12. Possession ...................................................... 21
5.13. Assignment of Warranties ........................................ 23
SECTION 6. Return of the Aircraft ........................................... 23
6.1. Return ........................................................... 23
6.2. Lease Continues .................................................. 23
6.3. Return of Engines ................................................ 24
6.4. Condition of Aircraft ............................................ 24
6.4.1. Operating Condition ...................................... 24
6.4.2. Cleanliness Standards .................................... 24
6.4.3. Certificate of Airworthiness ............................. 25
6.4.4. Compliance with Governmental Requirements ................ 25
6.4.5. Deferred Maintenance ..................................... 25
6.4.6. Corrosion Treatment ...................................... 25
6.4.7. Configuration and Condition .............................. 25
6.5. Condition of Airframe ............................................ 25
6.5.1. C Check .................................................. 25
6.5.2. D Check .................................................. 26
6.5.3. Parts .................................................... 26
6.6. Condition of Landing Gear ........................................ 27
6.7. Condition of Auxiliary Power Unit ("APU") ........................ 27
6.8. Condition of Engines ............................................. 27
6.9. Historical Records; Trend Monitoring Data ........................ 27
6.10. Inspections ..................................................... 27
6.11. Acceptance ...................................................... 28
6.12. Discrepancy Correction; Financial Settlement .................... 28
<PAGE>
6.13. Aircraft Documents .............................................. 28
6.14. Service Bulletin Kits ........................................... 28
6.15. Lessee's Special Exterior Markings .............................. 28
6.19. Disputes ........................................................ 29
SECTION 7. Liens ............................................................ 29
SECTION 8. Taxes ............................................................ 29
8.1. Tax Indemnity .................................................... 29
8.2. Withholding ...................................................... 31
8.3. After-tax Payment ................................................ 32
SECTION 9. Risk of Loss; Event of Loss; Requisition for Use ................. 32
9.1. Risk of Loss ..................................................... 32
9.2. Airframe Event of Loss ........................................... 32
9.3. Engine Event of Loss ............................................. 33
9.4. Requisition ...................................................... 33
SECTION 10. Insurance ....................................................... 33
10.1. Reports ......................................................... 34
10.2. Lessor Maintaining Insurances ................................... 34
10.3. Insurance Proceeds .............................................. 34
10.4. Property Insurance .............................................. 34
10.5. Liability Insurance ............................................. 35
10.6. Provisions Relating To All Insurances ........................... 35
SECTION 12. Further Assurances .............................................. 37
SECTION 13. Events of Default ............................................... 37
13.1. Failure to Pay Basic Rent ....................................... 37
13.2. Failure to Pay Supplemental Rent ................................ 37
13.3. Failure to Maintain Insurance ................................... 37
13.4. Misrepresentation or Breach of Warranty ......................... 37
13.5. Bankruptcy, Etc. ................................................ 37
13.6. General Default ................................................. 38
13.7. Loss of Airline or Corporate Authority .......................... 38
13.8. Other Obligations ............................................... 38
13.9. Guarantor Default ............................................... 38
SECTION 14. Remedies ........................................................ 38
14.1. Return and Repossession ......................................... 38
14.2. Sale, Use, Etc. ................................................. 39
14.3. Liquidated Damages: Fair Market Rental .......................... 39
14.4. Cancellation, Termination, and Rescission ....................... 39
14.5. Other Remedies .................................................. 39
<PAGE>
SECTION 15. General Indemnity and Expenses .................................. 40
15.1. General Indemnity ............................................... 40
15.2. Legal Fees and Expenses ......................................... 41
SECTION 16. Assignment and Alienation ....................................... 41
SECTION 17. Notices ......................................................... 42
SECTION 18. No Set-Off, Counterclaim, Etc. .................................. 42
SECTION 19. Governing Law ................................................... 43
19.1. Consent to Jurisdiction ......................................... 43
19.2. Choice of Law ................................................... 43
SECTION 20. Miscellaneous ................................................... 44
SECTION 21. Truth-In-Leasing ................................................ 45
EXHIBIT A: FORM OF LEASE SUPPLEMENT AND RECEIPT ............................. 46
EXHIBIT B: FORM OF AIRCRAFT RETURN RECEIPT AND LEASE TERMINATION ............ 52
EXHIBIT C: FORM OF LETTER OF CREDIT ......................................... 56
<PAGE>
AIRCRAFT LEASE AGREEMENT
This AIRCRAFT LEASE AGREEMENT dated as of March 15, 1996 between
FIRST SECURITY BANK OF UTAH, N.A., a national banking association organized and
existing under the laws of the United States, not in its individual capacity but
solely as owner trustee under that certain Trust Agreement dated as of December
10, 1989, by and among the Lessor and the Beneficiaries (defined below), with
its principal place of business at 79 South Main Street, Salt Lake City, Utah
84111 ("Lessor"), and PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES, a Texas
corporation, with its principal place of business at 2700 Post Oak Boulevard,
Suite 2200, Houston, Texas 77056 ("Lessee"),
WHEREAS, the Lessee desires to lease from the Lessor and the Lessor
is willing to lease to the Lessee the aircraft described herein upon and subject
to the terms and conditions of this Lease;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the Lessee and Lessor agree as follows:
SECTION 1. Definitions. The following terms shall have the following
meanings for all purposes of this Lease:
"Aircraft" means the Airframe, Engines, Appliances, and the Aircraft
Documents. Engines and Appliances shall be deemed part of the "Aircraft" whether
or not from time to time attached to the Airframe or to another airframe or on
the ground.
"Aircraft Documents" has the meaning given such term in Section 5.11
hereof.
"Airframe" means the Boeing model 727-251 airframe, manufacturer serial
number 21160, registration mark N281US, and component Parts thereof (including
landing gear) so long as such Parts shall be either incorporated or installed in
or attached to the Airframe or required to be subject to this Lease as provided
in Section 5 hereof.
"Airworthiness Directive" means any airworthiness directive or other
mandatory regulation, directive or instruction that the Aviation Authority may
from time to time issue and that is required to be carried out on airframes,
engines or appliances of the same type as the Airframe, Engines, or Appliances
in order to meet the requirements of Aviation Law for the commercial
transportation of passengers or cargo.
"Appliance" means any instrument, mechanism, equipment, apparatus,
appurtenance, or accessory, including communications equipment and auxiliary
power units, that is used or intended to be used in operating or controlling the
Aircraft in flight, and is installed in or attached to the Aircraft, but is not
part of the Airframe or Engines, and component Parts thereof, so long as the
same shall be either incorporated or installed in or attached to such Appliance
or required to be subject to this Lease as provided in Section 5 hereof.
<PAGE>
"Applicable Law" means, without limitation, all applicable laws, treaties,
international agreements, decisions and orders of any court, arbitration or
governmental agency or authority and rules, regulations, orders, directives,
licenses and permits of any governmental body, instrumentality, agency or
authority, including, without limitation, the law of the Commonwealth of
Massachusetts, and such laws of the United States which prohibit trade with
enemies of the United States.
"Approved Maintenance Program" means the maintenance program of Sun
Country Airlines, or another maintenance program applicable to the Aircraft
meeting the respective Airframe, Engine, and Appliance manufacturer's
recommendations, encompassing scheduled maintenance, condition monitored
maintenance, and on-condition maintenance of Airframe, Engines and Appliances,
including, but not limited to, servicing, testing, preventive maintenance,
repairs, structural inspections, systems checks, approved modifications, service
bulletins, engineering orders, Airworthiness Directives, corrosion control
inspections and treatments, and which meets the Aviation Law requirements for
commercial airline passenger operations and is approved by the appropriate
Aviation Authority officer having responsibility for Lessee's operations and
maintenance of the Aircraft.
"Aviation Authority" means the Federal Aviation Administration of the
United States Department of Transportation or any successor agency, or any such
other governmental authorities from time to time vested with the control and
supervision of the Aviation Law, or having jurisdiction over the registration,
airworthiness, operation of or other matters relating to the Aircraft or civil
aviation in the United States.
"Aviation Law" means the Applicable Law of United States including all
regulations promulgated by the Aviation Authority pursuant to Aviation Law, as
amended from time to time, respecting the ownership and operation of aircraft
registered or operated in the United States.
"Basic Rent" means the rent payable for the Aircraft pursuant to Section
3.2 hereof.
"Beneficiary" means each of American Income Partners V-A Limited
Partnership, American Income Partners V-B Limited Partnership, American Income
Partners V-C Limited Partnership, and American Income Fund I-A Limited
Partnership, each a Massachusetts limited partnership with its principal place
of business at 98 North Washington Street, Boston, Massachusetts 02114.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which commercial banking institutions are authorized to be closed by Applicable
Law in Boston, Massachusetts, or Houston, Texas.
"C Check" means the inspection, overhaul, repair, preservation and
replacement of Parts of the Aircraft, including preventive maintenance,
identified as a full block C Check under the Airframe manufacturer's maintenance
manuals and planning documents. Such full block C
2
<PAGE>
Check shall include all structural inspections, corrosion control and other work
normally completed in conjunction with each block C Check.
"D Check" means the inspection, overhaul, repair, preservation and
replacement of Parts of the Aircraft, including preventive maintenance,
identified as a full block D Check under the Airframe manufacturer's maintenance
manuals and planning documents, which is also known as a "C 10" check in the
Boeing maintenance planning document. Such full block D Check shall include all
structural inspections, corrosion control and other work normally completed in
conjunction with such block D Check.
"Default" means an event which with the passage of time or the giving of
notice, or both, would constitute an Event of Default.
"Delivery Date" has the meaning given such term in Section 2.2 hereof.
"Delivery Location" has the meaning given such term in Section 2.2 hereof.
"Engine" means each of three Pratt & Whitney model JT8D-15A engines,
serial numbers 695256, 700215, and 696523, or any other engine which may from
time to time replace an Engine leased hereunder in accordance with the terms
hereof, and component Parts thereof, so long as the same shall be either
incorporated or installed in or attached to such Engine or required to be
subject to this Lease as provided in Section 5 hereof.
"Event of Default" has the meaning given such term in Section 13 hereof.
"Event of Loss" shall mean any of the following events with respect to any
property:
(i) loss of such property due to theft, disappearance, destruction,
damage beyond economic repair or rendition of such property permanently
unfit for normal use for any reason;
(ii) any damage to such property which results in an insurance
settlement with respect to such property on the basis of an actual,
constructive, agreed, arranged, or compromised total loss; or
(iii) the condemnation, confiscation or seizure of, or requisition
of title to such property by private persons or by any governmental or
purported governmental authority (but excluding requisition for use or
hire not involving requisition of title, provided such requisition for use
or hire does not continue for more than sixty days).
"Expiry" shall mean any of the following: (i) expiration of the Term
through the passage of time in accordance with the terms of this Lease, or (ii)
termination, cancellation, or rescission of the Lease in accordance with its
terms and in accordance with Applicable Law.
3
<PAGE>
"Guarantor" means one or more guarantors reasonably satisfactory to the
Lessor.
"Guaranty" means a guaranty made by the Guarantor in favor of the Lessor
in form and substance reasonably satisfactory to the Lessor.
"Indemnitee" means (i) the Lessor; the Beneficiary and each partner
comprising the Beneficiary; (ii) any Lender; (iii) Equis Financial Group, a
Massachusetts general partnership, and (iv) their respective successors,
assigns, representatives, employees, officers, directors and agents, and each of
them.
"Lease" shall mean this Aircraft Lease Agreement, as supplemented by the
Lease Supplement and Receipt, and as may be amended in accordance with Section
20 hereof.
"Lease Supplement and Receipt" shall mean a Lease Supplement and Receipt,
substantially in the form of Exhibit A hereto.
"Lender" shall mean any holder of a security interest in the Aircraft
and/or assignee of this Lease (or any interest therein), which security interest
and/or assignment was acquired in exchange for financing provided to Lessor to
acquire the Aircraft or to refinance Lessor's acquisition of the Aircraft.
"Lessor Liens" means Liens which result from claims against or affecting
the Lessor not related to the transactions contemplated by this Lease, or any
Lien which Lessor has caused to be placed on the Aircraft as permitted pursuant
to Section 19 hereof.
"Lien" means any mortgage, security interest, lease or other charge or
encumbrance or claim or right of others, including, without limitation, rights
of others under any airframe, appliance or engine interchange or pooling
agreement.
"Life Limited Component" means any Part that is required either by the
Airframe, Engine, Appliance, or Part manufacturer or by the Aviation Authority
or by the Approved Maintenance Program to be overhauled or replaced after a
certain number of hours, calendar time, cycles, or landings, including without
limitation life-limited parts, rotables, and discard items.
"Maintenance Provider" means Sun Country Airlines, or a recognized
service, overhaul and repair agency fully qualified to service, repair and
overhaul the Airframe, Engines and Appliances approved by the Aviation
Authority, as selected by Lessee and approved in writing by Lessor.
"Operative Documents" means this Lease (including a Lease Supplement and
Receipt), the Guaranty, the Other Lease, and any ancillary documents executed in
connection therewith.
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"Other Aircraft" means that certain Boeing model 727-251 aircraft,
manufacturer serial number 21159, and registration mark N280US, which Other
Aircraft is covered by the Other Lease.
"Other Lease" means that certain Aircraft Lease Agreement, dated as of
March 15, 1996, between First Security Bank of Utah, N.A., not in its individual
capacity but sole as owner trustee, as lessor, and Lessee, as lessee, covering
the Other Aircraft.
"Overdue Payment Rate" means 18% per annum.
"Parts" means all components, parts, instruments, appurtenances,
accessories, furnishings or other equipment of whatever nature (other than
complete engines or appliances) which may from time to time be incorporated or
installed in or attached to the Airframe or any Engine or any Appliance,
including replacement parts.
"Permitted Liens" means: (i) Lessor Liens; (ii) Liens for Taxes; (iii)
materialmen's, mechanics', workmen's, repairmen's, employees' or other like
Liens arising in the ordinary course of business, including (without limitation)
Liens in respect of airport user and en route charges; and (iv) Liens arising
out of judgments or awards; provided, however, that with respect to foregoing
clauses (ii), (iii), and (iv), the payments associated with the Liens described
therein are either not yet due or being contested in good faith (and for the
payment of which adequate reserves have been provided) by appropriate
proceedings so long as such proceedings in the opinion of the Lessor do not
involve any danger of the sale, forfeiture, confiscation, seizure or loss of the
Airframe or any Engine or interest therein.
"Rent" means Basic Rent, Reserves, and Supplemental Rent.
"Rent Payment Date" means the day of each calendar month following the
Delivery Date which corresponds to the Delivery Date (or, if any such month does
not have such a corresponding day then the last day of such month) during the
Term.
"Reserves" has the meaning given to such term in Section 3.6 hereof.
"Reserve Tasks" has the meaning given to such term in Section 3.6 hereof.
"Return Date" has the meaning given to such term in Section 6.1 hereof.
"Return Location" has the meaning given to such term in Section 6.1
hereof.
"Security Deposit" has the meaning given to such term in Section 3.5
hereof.
"Stipulated Loss Value" has the meaning given to such term in Section
10.4.1 hereof.
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"Supplemental Rent" means all amounts, liabilities, indemnifications and
obligations of any kind whatsoever (other than Basic Rent but including any
payment of Stipulated Loss Value or any amount calculated by reference thereto)
which the Lessee is obligated to pay in accordance with the terms of this Lease.
"Tax" has the meaning given to such word in Section 8.1 hereof.
"Term" means the Initial Term, as defined in Section 3.1.1 hereof,
together with any extensions provided in Section 3.1.2.
"US$ and Dollars" means the lawful currency of the United States.
SECTION 2. Lease and Delivery of the Aircraft.
2.1. Lease, Lessee's Obligations, and Conditions Precedent.
The Lessor agrees to lease to the Lessee, and the Lessee agrees to lease
from the Lessor, the Aircraft, on the terms and conditions of this Lease.
(x) On or before the Delivery Date, the Lessor shall deliver the Aircraft
in the following condition: (1) fresh from C Check and D Check; (2) with Aging
Aircraft Modification Service Bulletins 55-71, 53-144, and 53-159 completed; (3)
current under an approved Corrosion Prevention and Control Program (4) with all
Airworthiness Directives cleared for no less than 3,000 hours or one year; (5)
with all installed Airframe Life Limited Components (excluding landing gear)
cleared for a minimum of 3,000 hours (or zero time in the case of an Airframe
Life Limited Component with a total useful life of less than 3,000 hours), or
365 days in the case of an Airframe Life Limited Component controlled by
calendar time, in each case as required by the Northwest Airlines maintenance
program; provided, however, that the Lessor shall not be responsible for delays
arising out of an occurrence of a force majeure.
(y) The Lessee's obligation to lease the Aircraft shall be conditioned
upon the Aircraft not having suffered an Event of Loss prior to the Delivery
Date, and being in the following condition (the "Conditions Precedent to
Lessee's Acceptance") at Lessor's expense: (1) with 170 same-class seats
installed; (2) with a refurbished passenger interior; (3) with windshear
detection installed; (4) with the fuselage painted all white and the wings
painted gray; (5) with an eleven parameter digital flight data recorder
installed; (6) with maximum take-off weight upgraded to 194,500 pounds and zero
fuel weight increased to 141,000 pounds; (7) with a current and valid
certificate of airworthiness issued by the Aviation Authority; and (8) with all
systems operating normally. The Lessee shall be entitled to a predelivery
inspection of the Aircraft that shall include a full borescope and power
assurance check on all Engines and the auxiliary power unit and a test flight,
all at Lessor's expense. At any such predelivery inspection and flight Lessee's
representatives may be accompanied by an Aviation Authority Designated
Airworthiness Representative. Lessor shall exercise reasonable efforts to cause
the Aircraft to meet the Conditions Precedent to Lessee's Acceptance on the
Delivery Date. In the event that the
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Aircraft does not meet the Conditions Precedent to Lessee's Acceptance on the
Delivery Date, then Lessee shall have the right to terminate this agreement by
written notice to Lessor. In no event shall Lessor be liable to Lessee for
breach of contract or consequential damages if the Aircraft does not meet the
Conditions Precedent to Lessee's Acceptance.
The Lessor's obligation to lease the Aircraft shall be conditioned upon
the absence of any Default hereunder, the absence of any materially adverse
change in the Lessee's financial condition or prospects from the date of this
Lease to the Delivery Date, and the performance by Lessee of each of the
following obligations on or before the Delivery Date (unless a sooner date is
specified), all in form and substance satisfactory to Lessor and its counsel:
2.1.1. Execution of Operative Documents. The Lessee shall have
executed and delivered this Lease, the Lease Supplement and Receipt (dated
the Delivery Date), and each other Operative Document to which it is a
party, and each Guarantor shall have executed and delivered the Guaranty,
including written directions for notices to the Guarantor;
2.1.2. Evidence of Legal Authority to Lease and Operate the
Aircraft. [INTENTIONALLY OMITTED];
2.1.3. Evidence of Corporate Authority. The Lessee shall have
delivered to the Lessor certified resolutions of the board of directors of
the Lessee and each Guarantor, duly authorizing the execution, delivery
and performance of this Lease, the other Operative Documents to which the
Lessee or either Guarantor is a party, and other satisfactory evidence as
may be requested by Lessor that the Lessee and each Guarantor have taken
all corporate action necessary to authorize the Operative Documents and
the transactions contemplated hereby, together with an incumbency
certificate as to the person or persons authorized to execute and deliver
the same;
2.1.4. Evidence of Insurance. The Lessee shall have delivered to the
Lessor reports and certificates of insurance in compliance with the
requirements of Section 10 hereof;
2.1.5. Opinion of Counsel. At Lessee's expense, the Lessor shall
have received a favorable opinion addressed to Lessor from counsel to
Lessee, dated the Delivery Date and in form and substance reasonably
satisfactory to the Lessor;
2.1.6. Payment of Security Deposit. Lessor shall have received
payment of the Security Deposit.
2.2. Delivery. The Aircraft shall be delivered to the Lessee "AS IS,"
"WHERE IS," AND SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND
REPRESENTATION AS SET FORTH IN SECTIONS 4.3 HEREOF. Lessee shall accept delivery
of the Aircraft at Smyrna Airport, Smyrna, Tennessee, or such other place as may
be
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mutually agreed upon in writing by the Lessor and Lessee (the "Delivery
Location") and on a date as soon as practicable (the "Delivery Date", which date
shall be the date of the Lease Supplement and Receipt). Upon tender of delivery
hereunder by the Lessor, Lessee shall immediately inspect the Aircraft and
accept delivery of the Aircraft. Upon acceptance of the Aircraft, the Lessee
shall execute and deliver the Lease Supplement and Receipt to the Lessor, which
shall constitute, without further act, unconditional and irrevocable acceptance
by the Lessee of the Aircraft under, and for all purposes of, this Lease and as
being airworthy, in accordance with specifications, in good working order and
repair and without defect or inherent vice in condition, design, operation or
fitness for use, whether or not discoverable by the Lessee on the Delivery Date.
There shall be attached to the Lease Supplement and Receipt Schedule 3, signed
by both parties, setting forth qualifications affecting the return conditions
set forth in Section 6 hereof.
SECTION 3. Term and Rent.
3.1. Term.
3.1.1. Initial Term. The term for which the Aircraft is leased
hereunder (the "Term") shall be twenty-nine (29) months, commencing on the
Delivery Date, unless Expiry occurs sooner pursuant to the express
provisions of this Lease.
3.1.2. Extensions. Provided in each case that no Event of Default
has occurred and is continuing, that no material adverse change has
occurred to the financial condition of Lessee or either Guarantor, and
that Lessee has provided Lessor with irrevocable written notice sixty days
in advance, then Lessee, may, at its option, extend the Term beyond the
Initial Term as follows: (i) up to a time to coincide with the expiration
of the then-current C Check; and/or (ii) if the Lessee elects to install
hushkits in accordance with Section 3.7 hereof, for an additional sixty
(60) months from the first Rent Payment Date following hushkit
installation.
3.2. Basic Rent. The Lessee shall pay to the Lessor monthly rental for the
Aircraft (the "Basic Rent"), payable in advance on each Rent Payment Date during
the Term, in the amount of Eighty Thousand United States Dollars (US$80,000) for
the second through the nineteenth months of the Term, and in the amount of
Seventy Thousand United States Dollars (US$70,000) for the twentieth through the
twenty-ninth months of the Term; provided, however, that if the Lessee elects to
install hushkits in accordance with Section 3.7 hereof, the Lessee shall pay
Basic Rent in the amount of One Hundred Fifteen Thousand United States Dollars
($115,000), subject to adjustment as set forth in Section 3.7, from the first
Rent Payment Date following hushkit installation for the remainder of the Term
(i.e., sixty months). Basic Rent to cover an extension of the Term less than a
calendar month to coincide with expiration of the then-current C Check shall be
calculated per diem. Basic Rent shall be abated during the first month of the
Term.
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3.3. Method of Payment. All Rent hereunder shall be paid by the Lessee not
later than 2:00 P.M., North Carolina time, on the date due thereof in U.S.
Dollars and in immediately available funds to the Lessor by deposit to:
National Westminster Bank
80 Pine Street
New York, New York 10005
ABA#021-000-322
Acct.#2181-01-7585
Acct. Name: Equis Financial Group
Reference: AFG TransMeridian
or to such other account as the Lessor shall specify to the Lessee in writing.
Any Rent due on a day which is not a Business Day shall be due on the next
Business Day.
3.4. Supplemental Rent. The Lessee also agrees to pay to the Lessor any
and all Supplemental Rent promptly as the same shall become due and owing. In
the event of any failure on the part of the Lessee to pay any Supplemental Rent,
the Lessor shall have all rights, powers and remedies provided for herein or by
law or equity in the case of nonpayment of Basic Rent. The Lessee will also pay,
on demand, as Supplemental Rent, an amount equal to interest at the Overdue
Payment Rate on any part of any payment of Rent not paid on the date it becomes
due for any period for which the same shall be overdue.
3.5. Security Deposit. Upon the execution of this Lease, Lessee shall make
a deposit, in cash, with Lessor or deliver to Lessor a letter of credit in favor
of Lessor, in an amount equal to One Hundred Sixty Thousand United States
Dollars (US$160,000) to serve as security for Lessee's full and faithful
performance of all of its obligations under this Lease (the "Security Deposit").
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 or 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.
3.5.1. The Security Deposit shall remain in effect until after the
Aircraft is returned in the condition required by this Lease. Any letter
of credit shall have a stated termination date thirty days after
expiration of the Term. Lessee shall not be entitled to off-set any Rent
against the Security Deposit. After the return of the Aircraft in the
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<PAGE>
condition required by this Lease, Lessor shall return the Security
Deposit, without interest, provided that Lessee has otherwise fulfilled
all its obligations hereunder.
3.5.2. If Lessee shall provide a letter of credit, it must (A) be
issued or confirmed by a United States money center bank acceptable to
Lessor in its sole discretion; (B) provide that it is irrevocable; (C)
provide that it shall be automatically extended throughout the Term and
until thirty days after expiration of the Term, unless eighty days prior
to expiration of the letter of credit the issuing or confirming bank
notifies Lessor in writing by registered mail, return receipt requested,
that the letter of credit shall expire; (D) be available by sight payment;
(E) provide for partial draws; and (F) be substantially in the form
attached hereto as Exhibit C. Lessor shall be entitled to draw the entire
amount of the letter of credit (i) upon an Event of Default, including,
without limitation, failure of Lessee to accept delivery of or lease the
Aircraft in accordance herewith; or (ii) if it receives notice by the
issuing bank or Lessee that the letter of credit shall expire, or not be
renewed as required hereunder during the Term of this Lease and until
thirty days after expiration of the Term and it has not been replaced or
extended within sixty (60) days prior to its expiration. In addition to
any other amounts Lessee shall pay hereunder, Lessee shall pay all costs
of maintaining the letter of credit and pay Lessor any expenses incurred
in exercising its rights to draw on such letter of credit, including any
attorney's fees required to enforce its rights.
3.6. Reserves. D Checks; C Checks; Engine HSI, EHM1 and EHM2; landing gear
overhauls; and APU shop visits 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:
3.6.1. The Lessee shall, on or before the 10th day of each month
during the Term of this Lease, submit to Lessor a true summary of the
Aircraft usage for the preceding month, specifying the number of flight
hours the Aircraft shall have flown in such month. 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 of each
month, Lessee shall pay to Lessor for each flight hour the Aircraft was
operated during the immediately preceding month the following amounts
applicable to the specified Reserve Tasks: for D Check, US$50; for C
Checks, US$50; for Engine HSI, EHM1 or EHM2 US$60 per Engine, and
applicable per specific Engine (a separate Engine Reserve shall be
established and maintained for each Engine); for complete landing gear
overhaul, US$12, combined for all landing gear; and for APU shop visits,
US$3. The foregoing amounts shall be collectively or individually referred
to as "Reserves." Reserves applicable to an Engine shall be payable only
for flight hours such Engine is operated; provided that Reserves shall be
applicable to the spare engine provided by Lessor pursuant to Section
5.3.1.
3.6.2. Lessee shall obtain Lessor's prior written approval of
Reserve Tasks and the cost thereof. Upon submission by Lessee to Lessor of
invoices or receipts evidencing
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the performance of a Reserve Task in accordance with the provisions
hereof, Lessor shall, provided that an Event of Default shall not have
occurred and be continuing, promptly reimburse Lessee from Reserves
corresponding to the Reserve Task, but not in an amount to exceed the
actual invoices or receipts, and not in excess of Reserves actually
received for the corresponding Reserve Task, and not for repairs arising
as a result of foreign object damage, an insured occurrence, or
operational mishandling. Except as expressly set forth below in subsection
3.6.4, 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.
3.6.3. Reserves shall be and remain the property of the Lessor until
disbursed. All undisbursed Reserves, upon Expiry, shall be retained by
Lessor as additional Rent for the Aircraft. Lessor shall be under no
obligation to segregate Reserves, and may mingle Reserves with other
funds.
3.6.4. Lessor Contribution for Reserve Tasks. Only for the first
Reserve Task for each Engine during the Term, the Lessor shall be
responsible for any expense in excess of Reserves actually received
necessary to restore the Engine to no less than 7,000 hours and 3,000
cycles. Lessor, at its option, may substitute a serviceable engine, which
shall become a replacement Engine, in lieu of bearing the expense for
restoring an Engine.
3.7. Hushkits. Lessee may elect to hushkit the Aircraft, subject to the
following terms and conditions: (i) Lessee shall provide Lessor with reasonably
advance irrevocable written notice of its election to hushkit the Aircraft after
the twenty-fourth month of the Term; (ii) no Event of Default shall have
occurred and be continuing; (iii) no material adverse change in the financial
condition of the Lessee or either Guarantor shall have occurred; (iv) the Lessor
shall pay for the acquisition and installation of the hushkits directly or shall
reimburse the Lessee for the same up to a maximum of Two Million Seven Hundred
Thousand Dollars ($2,700,000), and the Lessee shall pay any costs related to the
hushkits of the installation thereof in excess of such amount; (v) the Term
shall be extended in accordance with Section 3.1.2 above; (vi) the Basic Rent
shall be increased in accordance with Section 3.2 above; and (vi) title to the
hushkits shall transfer to Lessor. Provided, however, the Lessor's obligation to
purchase and install hushkits shall be conditioned upon the Lessor's ability to
acquire and install the hushkits for a total price to Lessor of $2,700,000 and
to finance 100 per cent of such price at an interest rate of Citibank prime plus
one over five years; further provided, that if the foregoing conditions
precedent are not met, the Lessor's obligation to purchase and install the
hushkits shall be subject to a mutually agreeable adjustment to the Basic Rent
amount following hushkit acquisition and installation. Provided Lessor has
approved in advance the schedule for installation of the hushkits, Rent shall be
abated during hushkit installation.
SECTION 4. Representations, Warranties and Miscellaneous Covenants.
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4.1. The Lessee's Representations and Warranties. The Lessee represents
and warrants as follows:
4.1.1. Organization and Qualification. The Lessee is a corporation
duly incorporated in and validly existing under the laws of Texas,
possessing perpetual corporate existence, having the capacity to sue and
be sued in its own name, has full power, legal right and authority
(corporate and otherwise) to carry on its business as currently conducted,
to own and hold under lease its properties and to execute, deliver and
perform and observe the provisions of this Lease and other Operative
Documents to which it is a party, and is duly qualified to do business in
good standing wherever the nature of its business makes such qualification
necessary.
4.1.2. Corporate Authorization. The execution, delivery, and
performance by the Lessee of this Lease and each of the other Operative
Documents to which it is or will be a party (A) have been duly authorized
by all necessary corporate action on behalf of the Lessee, (B) do not
require the consent or approval of the Lessee's stockholders or of any
trustee or the holders of any indebtedness or obligations of the Lessee
(except such as have been obtained, and certified copies of which have
been furnished to the Lessor), (C) do not contravene any existing
Applicable Law to which the Lessee is subject, (D) do not conflict with or
result in any breach of any of the terms or constitute a default under any
document, instrument, or agreement to which the Lessee is a party or is
subject or by which it or any of its assets are bound, (B) do not
contravene the Lessee's charter or by-laws, or any other provisions of
Lessee's constitutive documents, and (F) do not and will not result in the
creation or imposition of or oblige Lessee to create any Lien on or over
the Aircraft other than any Permitted Lien.
4.1.3. Government Approval. Excepting only requirements covered in
Section 4.4.6 below, every consent, authorization, and approval required
by the Lessee to enable it to carry on its business or required by it to
authorize or in connection with the execution, delivery, legality,
validity, priority, enforceability, admissibility in evidence, or
effectiveness of this Lease and the other Operative Documents to which
Lessee is or will be a party or the performance by it of any of its
obligations under this Lease and each of the other Operative Documents to
which it is or will be a party has been duly obtained or made and is in
full force and effect and there has been no default in observance or
performance of any of the conditions, restrictions (if any), imposed on or
in connection with any such consent or approval or sanction. At Delivery,
the Lessee will have and will thereafter maintain valid all necessary
certificates and licenses for the operation of (a) its business as an
airline operating scheduled or charter flights for the carriage of
passengers and cargo and (b) the Aircraft on such flights; the Lessee is
not exempt from the obtaining of any such certificates or licenses usually
required by commercial airline operators.
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<PAGE>
4.1.4. Valid and Binding Agreements. This Lease constitutes the
legal, valid and binding obligations of the Lessee enforceable against the
Lessee in accordance with their respective terms.
4.1.5. Litigation. There are no unsatisfied judgements against
Lessee, and there is no pending or, to the best of the Lessee's knowledge,
threatened action or proceeding affecting the Lessee before any court,
tribunal, governmental agency or arbitrator which may materially adversely
affect the financial condition or operations of the Lessee or the ability
of the Lessee to perform its obligations under the Lease.
4.1.6. Financial Condition. The Lessee is not in default in the
performance of any of its obligations (A) for the payment of indebtedness
for borrowed money or any interest or premium thereon or (B) for the
payment of rent under any lease or agreement to lease real, personal or
mixed property. The Lessee has not taken nor proposes to take any
corporate action nor have any other steps or administrative or legal
proceedings been taken or started or threatened against it for the
winding-up, dissolution, reorganization or amalgamation of the Lessee or
for the appointment of a liquidator, administrator, receiver,
administrative receiver, trustee or similar officer of the Lessee or all
or any of its revenues or assets nor has the Lessee sought any other
relief under any applicable insolvency or bankruptcy law.
4.1.7. Accuracy and Disclosure of Information. All information
furnished by the Lessee to the Lessor in connection with this Lease and
the Operative Documents and the transactions contemplated hereby and
thereby, was and remains true and correct in all respects and there are no
other facts or considerations the omission of which would render any such
information misleading. The Lessee has fully disclosed in writing to the
Lessor all facts relating to the Lessee which the Lessee knows or should
reasonably know and which might reasonably be expected to influence the
Lessor in deciding whether or not to enter into this Lease and to lease
the Aircraft to the Lessee hereunder.
4.2. Representations and Warranties of the Lessor. The Lessor makes the
following representations and warranties:
4.2.1. Due Organization. The Lessor is a national banking
association duly organized and validly existing in good standing under the
laws of the United States, and has the power and authority to enter into
and perform its obligations under this Lease and the Lease Supplement and
Receipt, and any other documents delivered by lessor in connection
therewith;
4.2.2. Due Authorization; Enforceability. This Lease has been, and
the Lease Supplement and Receipt to which the Lessor is a party will be,
duly authorized, executed and delivered by the Lessor, and, assuming due
authorization, execution and delivery thereof by the other parties hereto
and thereto, are, or in the case of the Lease
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<PAGE>
Supplement and Receipt will be, legal, valid and binding obligations of
the Lessor, enforceable in accordance with their respective terms.
4.2.3. No Violation. The execution and delivery by the Lessor of
this Lease are not, and the execution and delivery by the Lessor of the
Lease Supplement and Receipt will not be, and the performance by the
Lessor of its obligations under each of the foregoing documents will not
be, inconsistent with its partnership agreement or by-laws, do not and
will not contravene any law, governmental rule or regulation, judgment or
order applicable to it, and do not and will not contravene any provision
of, or constitute a default under, any indenture, mortgage, contract or
other instrument to which the Lessor is a party or by which it is bound or
require the consent or approval of, the giving of notice to, the
registration with or the taking of any action in respect of or by, any
Federal, state or local governmental authority or agency, except such as
have been obtained, given or accomplished.
4.2.4. Ownership of Aircraft. On the Delivery Date, the Lessor shall
have full legal title to the Aircraft, free and clear of all Liens except
any Lien which Lessor caused to be placed on the Aircraft as permitted
pursuant to Section 19 hereof.
4.2.5. Confidentiality of Lessee Information. Except as required by
law, Lessor shall keep all Lessee's and the Guarantors' financial
information confidential and not to disclose or reveal any such financial
information to any person other than those employed by Lessor or on
Lessor's behalf who are actively and directly participating in the
evaluation of Lessee.
4.3. Disclaimer and Acknowledgement of Disclaimer: Waiver of Consequential
Damages. THE AIRCRAFT SHALL BE LEASED BY THE LESSOR TO THE LESSEE "AS IS" AND
"WHERE IS," WHICH IS ACKNOWLEDGED AND AGREED TO BY THE LESSEE. THE WARRANTIES
AND REPRESENTATIONS SET FORTH IN 4.2 ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, AND LESSOR
HAS NOT MADE, SHALL NOT BE CONSIDERED TO HAVE MADE, AND SPECIFICALLY DISCLAIMS
(1) ANY EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY WITH RESPECT TO THE
AIRCRAFT, REGARDING CONDITION, DESIGN, OPERATION, MERCHANTABILITY, FREEDOM FROM
CLAIMS OF INFRINGEMENT OR THE LIKE, FITNESS FOR USE FOR A PARTICULAR PURPOSE,
QUALITY OF MATERIALS OR WORKMANSHIP, OR ABSENCE OF DISCOVERABLE OR
NONDISCOVERABLE DEFECTS; (2) ANY OTHER EXPRESS OR IMPLIED REPRESENTATION OR
WARRANTY WITH RESPECT TO THE AIRCRAFT (INCLUDING ANY IMPLIED WARRANTY ARISING
FROM A COURSE OF PERFORMANCE, COURSE OF DEALING, OR USAGE OF TRADE); AND (3) ANY
EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY WITH RESPECT TO CONDITIONS
PRECEDENT TO LESSEE'S ACCEPTANCE.
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<PAGE>
THE LESSEE HEREBY WAIVES, RELEASES, DISCLAIMS AND RENOUNCES ALL
EXPECTATION OF OR RELIANCE UPON ANY SUCH WARRANTY OR WARRANTIES.
THE LESSOR SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY TO THE LESSEE
WHETHER ARISING IN CONTRACT OR TORT OUT OF ANY NEGLIGENCE OR STRICT LIABILITY OF
LESSOR OR OTHERWISE, AND LESSEE HEREBY DISCLAIMS AND WAIVES ANY RIGHT IT WOULD
OTHERWISE HAVE TO RECOVER FOR (1) ANY LIABILITY, LOSS OR DAMAGE CAUSED OR
ALLEGED TO BE CAUSED DURING THE TERM DIRECTLY OR INDIRECTLY BY THE AIRCRAFT OR
BY ANY INADEQUACY THEREOF OR DEFICIENCY OR DEFECT THEREIN; (2) THE USE,
OPERATION OR PERFORMANCE OF THE AIRCRAFT OR ANY RISKS RELATING TO IT; OR (3) ANY
CONSEQUENTIAL DAMAGES, INCLUDING THOSE FOR INTERRUPTION OF SERVICE, LOSS OF
BUSINESS OR ANTICIPATED PROFITS, OR FOR CONSEQUENTIAL DAMAGES AS A RESULT OF ANY
BREACH OR ALLEGED BREACH BY THE LESSOR OF ANY OF THE AGREEMENTS, REPRESENTATION,
OR WARRANTIES OF THE LESSOR CONTAINED IN THIS LEASE; PROVIDED, HOWEVER, THAT
NOTHING HEREIN SHALL RELIEVE LESSOR OF ANY RESPONSIBILITY OR LIABILITY TO LESSEE
FOR, OR CONSTITUTE A WAIVER BY LESSEE OF RIGHTS WITH RESPECT TO (a) ANY BREACH
BY LESSOR OF THE COVENANT SET FORTH IN SECTION 4.5 HEREOF, OR (b) LESSOR'S
OBLIGATIONS PURSUANT TO SECTIONS 3.6.4 AND 5.5 HEREOF.
4.4. Lessee's Miscellaneous Covenants.
4.4.1. Maintenance of Corporate Status; No Merger or Consolidation.
Lessee 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. The Lessee 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. Lessee shall not (A) voluntarily
suspend its certificated operations; or (B) voluntarily or involuntarily
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.
4.4.2. 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 either Guarantor to perform its obligations
under the Guaranty and, without prejudice to the generality of the
foregoing, it will inform the Lessor of the occurrence of or the existence
of a Default forthwith upon becoming aware of such Default.
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4.4.3. Maintenance of Consents and Approvals. The 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 and the Operative Documents, 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 Aviation Law, and under the other Operative Documents. Where it is
required under Applicable Law with respect to this Lease or under any
Operative Document, 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.
4.4.4. Change of Locale. Lessee will not, without prior written
notice to Lessor, change its principal place of business or chief
executive office if there is more than one place of business.
4.4.5. Financial Information and Reports. The Lessee shall provide
the Lessor (i) as soon as available after the end of each fiscal year of
each of the Lessee and each Guarantor, the Lessee's and each Guarantor's
respective consolidated balance sheet, together with related statements of
income, retained income and cash flows, all in reasonable detail and
prepared in accordance with Statements on Standards for Accounting and
Review Services issued by the American Institute of Certified Public
Accounts, and reviewed by an unaffiliated auditing firm; and (ii) with
such other information respecting the Lessee's or either Guarantor's
financial condition or operations as the Lessor may from time to time
reasonably request, including without limitation quartery financial
information after a material adverse change in the financial condition of
Lessee or either Guarantor. The Lessee's fiscal year ends December 31.
Each Guarantor's fiscal year ends October 31.
4.4.6. Evidence of Legal Authority to Lease and Operate the
Aircraft. No later than thirty days after the Delivery Date, the Lessee
shall have obtained all licenses, permits and approvals required with
respect to the Aircraft by the Aviation Authority or Applicable Law for
the lease of the Aircraft, and for the commercial operation thereof by the
Lessee, and Lessee shall provide Lessor with certified copies of such;
provided, however, that if Lessee is unable to obtain the requisite
approvals by such date despite its diligent efforts to do so, such date
shall be extended, subject to Lessor's consent not to be unreasonably
withheld.
4.5. Lessor's Covenant of Quiet Enjoyment. The Lessor agrees that, so long
as no Event of Default shall have occurred and be continuing, neither the Lessor
nor anyone validly claiming
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through or under the Lessor will take (or fail to take) any action, the taking
(or failure to take) of which causes interference with the Lessee's peaceful and
quiet use, operation and possession of the Aircraft under this Lease.
SECTION 5. Operation, Maintenance, Possession
5.1. Title. Title to the Aircraft shall remain vested in Lessor.
5.2. Operation. Lessee agrees not to operate the Aircraft unless the
Aircraft is covered by insurance as required by the provisions of Section 10
hereof or contrary to the terms of such insurance. Lessee agrees not to (i)
operate the Aircraft except in a passenger configuration, in commercial or other
operations for which Lessee is duly authorized by the Aviation Authority; 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, an
Engine or Appliance 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. Lessee shall pay all costs incurred in the operation of
the Aircraft, including but not limited to flight crews, cabin personnel, fuel,
oil, lubricants, maintenance, insurance, landing and navigation fees, airport
charges, passenger service and any and all other expenses of any kind or nature,
arising directly or indirectly in connection with or related to the use,
movement and operation of the Aircraft by Lessee during the Term, with respect
to obligations incurred during the Term. The obligations of Lessee under this
provision shall survive the end of the Term.
5.3. Maintenance in General. Lessee, at its own cost and expense, shall
(i) service, repair, maintain and overhaul the Airframe, each Engine, and each
Appliance so as to keep the same in as good operating condition as when
delivered to Lessee hereunder, and in such operating condition as may be
necessary to enable the airworthiness certification of the Aircraft to be
maintained in good standing at all times under Aviation Law, and (ii) at a
minimum, give the Aircraft the same level of attention and maintenance as the
Lessee 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 (iii) 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. Included within the obligation of maintenance and repair
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 covered by an effective
commercial passenger transport category certificate of airworthiness at all
times except during those periods when the Aircraft is undergoing maintenance or
repairs as required by this Lease. Selection of a Maintenance Provider shall be
subject to Lessor's prior written approval; provided, Lessor consents to Sun
Country Airlines as a Maintenance Provider. All maintenance (other than routine
flight line
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maintenance) shall be performed by the Maintenance Provider in accordance with
the Approved Maintenance Program, provided that C Checks shall be supervised by
the Maintenance Provider.
5.3.1. Lessor Provision of Spare Engine. For a period mutually
agreed to in advance in writing, Lessor shall provide at its expense a
spare engine suitable for installation on the Aircraft and on the Other
Aircraft to enable Lessee to accomplish the first Reserve Task on each
Engine and the first Reserve Task on each engine installed on the Other
Aircraft. The Lessee shall pay Reserves for each flight hour such spare
engine is operated in Lessee's service. Lessor, at its option, may
substitute a serviceable engine, which shall become a replacement Engine,
in lieu of providing a spare engine.
5.4. Parts.
5.4.1. Unless the Airframe, an Engine or an Appliance has suffered
an Event of 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. In
addition, in the ordinary course of maintenance, service, repair, overhaul
or testing, Lessee may remove any Parts, whether or not worn out, lost,
stolen, destroyed, seized, confiscated, damaged beyond repair or
permanently rendered unfit for use, provided that Lessee shall replace
such Parts as promptly as practicable with replacement Parts. All
replacement Parts shall be of the same modification status, shall be free
and clear of all Liens except Permitted Liens and shall be in as good
operating condition as, and shall have a value and utility at least equal
to, the Parts replaced assuming such replaced Parts were in the condition
and repair required to be maintained by the terms hereof.
5.4.2. All Parts at any time removed from the Airframe, an Engine or
an Appliance 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, Engine, or Appliance and that meet the requirements for
replacement Parts specified in this Section 5. Immediately upon any
replacement Part becoming incorporated or installed in or attached to such
Airframe, Engine, or Appliance, 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, Engine, or Appliance, 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 or Appliance; and
(iii) title to the replaced Part shall thereupon vest in Lessee, free and
clear of all rights of Lessor and shall no longer be deemed a Part
hereunder.
5.5. Airworthiness Directives. Except as expressly provided below, Lessee
agrees to comply with all Airworthiness Directives which become due during the
Term. All Airworthiness Directives shall be accomplished in strict compliance
with all issuing agency's
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specific instructions. Lessee shall comply with all Airworthiness Directives at
its sole cost and expense up to a maximum of US$15,000 per any one Airworthiness
Directive and up to a maximum of US$100,000 in the aggregate for any
twelve-month period during the Term. If the Lessee's cost of complying with any
Airworthiness Directive that must be accomplished during the Term exceeds the
foregoing maximums, then Lessee may, by written notice to Lessor, elect not to
pay any portion of the cost of complying with such Airworthiness Directive
costing in excess of the foregoing maximums, in which event Lessor shall have
the right to comply with the Airworthiness Directive at its own expense, or by
written notice to the Lessee within 15 days following receipt of such notice
from Lessee, may advise Lessee that Lessor shall not perform such Airworthiness
Directive (the "Excepted AD"), in which case the Lease shall terminate,
effective upon the earlier of the end of the Term or the final compliance date
for the Excepted AD, whereupon the Lessee shall return the Aircraft to the
Lessor in accordance with the provisions of Section 6 hereof, excepting only the
Excepted AD and the C Check required by Section 6.5.1.
5.6. Service Bulletins. Lessee agrees, at its sole cost and expense, to
incorporate into the Aircraft all those Airframe, Engine, and Appliance
manufacturer and other vendor service bulletins which Lessee plans to adopt
during the Term for the rest of its 727-200 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.
5.7. Optional Modifications. Lessee shall not, without Lessor's prior
written consent, make any major modifications, alterations or additions
(collectively, "Optional Modifications") to the Aircraft. For purposes of this
Section 5, the term Optional Modifications shall include, but shall not be
limited to, (i) changes to the Aircraft structure or performance, and (ii)
changes which could adversely affect spare parts, interchangeability or
replaceability. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO
OPTIONAL MODIFICATION SHALL BE MADE WHICH 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. All Optional Modifications
shall be accomplished by Lessee at its own expense. Lessee shall provide advance
copies of all drawings and data to be used by Lessee in accomplishing such
Optional Modifications for Lessor's approval prior to such work. In the event
Lessor does not consent to certain Optional Modifications to the Aircraft
desired by Lessee, Lessor may give its qualified consent in writing to Lessee to
accomplish such modifications which are unacceptable to Lessor on the condition
that Lessee agrees to remove all such unacceptable modifications accomplished by
Lessee and to reconstruct the modified areas to their original configuration in
a good and workmanlike manner prior to return of the Aircraft to Lessor. In the
event of Lessor's granting such qualified consent in writing, Lessee shall, at
Lessee's sole expense, accomplish all such Optional Modifications, removal of
such modifications and required reconstruction necessary to return the Aircraft
to Lessor in its original configuration at the end of the Term.
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5.8. Reports. Lessee shall furnish to Lessor the following reports on
monthly basis: (i) the hours and cycles operated by the Airframe; (ii) the hours
and cycles operated by each of the Engines (noting their location). Lessee shall
furnish to Lessor the following reports on quarterly basis: (iii) scheduled and
unscheduled Engine and Appliance 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 manufacturers with respect to defects or
malfunctions of the Aircraft or such other matters; and (ix) C Check, D 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 promptly as
practicable.
5.9. Right to Inspect. Lessor and its agents shall have the right to
inspect the Aircraft or the Aircraft Documents at any reasonable time, upon
giving Lessee reasonable notice, to ascertain the condition of the Aircraft and
to satisfy Lessor that the Aircraft is being properly repaired and maintained in
accordance with the requirements of this Lease. 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 Approved Maintenance Program. All required repairs shall be
performed as soon as practicable after such inspection. 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 the manufacturer of the Airframe,
Engines, Appliances, or Part(s) (as applicable) shall control. Lessee shall be
responsible for payment of all expenses of the manufacturer 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.
5.10. Damage and Repairs. 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 Approved Maintenance Program. Lessee shall have all repairs
accomplished on the Aircraft by an Aviation Authority-authorized and approved
agency. 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 and
the manufacturer of any repair to the structure or skin of the Aircraft or any
other repair costing in excess of One Hundred Thousand Dollars (US$ 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 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.
Any disagreement between Lessor and Lessee as to what constitutes a "major"
repair or a "permanent" repair shall be referred to the applicable manufacturer
and the Aviation Authority.
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5.11. Aircraft Documents. Lessee, at its expense, will at all times
maintain and preserve all flight records, maintenance records, historical
records, modification records, overhaul records, manuals, logbooks,
authorizations, drawings and data required or recommended by the Airframe,
Engine, Appliance, or any Part manufacturer, or required from time to time by
the Aviation Authority with respect to the Aircraft, including without
limitation shop records detailing service checks, inspections, tests, repairs,
or overhauls. All documentation of any type referred to in the preceding
sentence is herein individually and collectively referred to as the "Aircraft
Documents." Records produced by electronic data processing or other automated
means are not acceptable, except as summary documents accompanied by original,
or manual, records, unless specifically approved by the Lessor in writing.
Aircraft Documents pertaining to maintenance shall contain verification of
accomplishment and quality assurance by actual identifiable signature. All
Aircraft Documents shall be the property of the Lessor. All Aircraft Documents
shall be stored by Lessee during the Term at a secure facility, and Lessee shall
notify Lessor in writing of the location of such facility. All Aircraft
Documents will be at all times kept current and up to date in order to
facilitate Lessor's ability to inspect periodically the Aircraft, monitor the
maintenance of the Aircraft during the Term and to facilitate the sale or
re-lease of the Aircraft to a third party at the end of the Term. The Lessee
shall retain a revision service for all Airframe, Engine, Appliance and Part
manufacturer's manuals and documentation, and the Aircraft Documents shall at
all times contain the latest issued revisions and reflect the current
configuration and status of the Airframe, Engines, Appliances, and Parts.
5.11.1. Airworthiness Directives. Lessee shall include within the
Aircraft Documents all documentation necessary to establish the source
data, method of compliance, verification of accomplishment, quality
assurance, and all schedules of recurring action of any Airworthiness
Directive.
5.11.2. Life Limited Components. AIRCRAFT DOCUMENTS FOR LIFE LIMITED
COMPONENTS INSTALLED DURING THE TERM SHALL ESTABLISH TOTAL SERVICE,
ORIGIN, AND AUTHENTICITY; SHALL BE "BACK-TO-BIRTH" WITH RESPECT TO ENGINE
LIFE-LIMITED PARTS AND BACK TO LAST OVERHAUL WITH RESPECT TO OTHER
LIFE-LIMITED COMPONENTS; AND SHALL ESTABLISH STRICT COMPLIANCE WITH THE
AIRCRAFT AVIATION AUTHORITY TYPE DATA SHEET AND WITH THE APPROVED
MAINTENANCE PROGRAM.
5.11.3. Damage and Repairs. All damage to the Aircraft, whether
repaired or not, and all repairs to the Aircraft shall be documented in
strict accordance with the manufacturer's structural repair manual.
5.12. Possession. The Lessee will not, without the prior written consent
of the Lessor, which may be withheld in the sole and absolute discretion of
Lessor, assign any of its rights or obligations under this Lease or sublease or
otherwise in any manner deliver, transfer or relinquish possession or control
of, or transfer any right, title or interest in, the Airframe, any Engine,
Appliance or Part (whether through pooling or interchange agreements or
otherwise) or
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install any Engine or Appliance, or permit any Engine or Appliance to be
installed, on any airframe other than the Airframe, provided that the Lessee
may, without the prior written consent of the Lessor:
5.12.1. deliver temporary possession and control of the Airframe, an
Engine, and Appliance or Part to the manufacturer or Maintenance Provider
thereof for testing, service, maintenance, overhaul or repair or, to the
extent permitted by this Section 5, for modifications or additions;
5.12.2. install an Engine or Appliance on an airframe owned by the
Lessee free and clear of all Liens except Permitted Liens;
5.12.3. install an Engine or Appliance on an airframe leased to the
Lessee or owned by the Lessee and subject to a security agreement under
which the Lessee is the debtor, provided that (A) such airframe is free
and clear of all Liens except the rights of the parties to such lease or
security agreement and except Permitted Liens, and (B) such lessor or
secured party agrees in writing that it shall not acquire any right, title
or interest in such Engine or Appliance;
5.12.4. in the ordinary course of testing, servicing, maintenance,
repair or overhaul, remove any Part from the Airframe, an Engine, or an
Appliance, provided that the Lessee replaces such Part as promptly as
possible with a Part which has a value and utility at least equal to the
Part being replaced and is owned by the Lessee free and clear of all Liens
except Permitted Liens; and any such replacement Part shall thereby become
subject to this Lease without necessity of further act; provided, however,
that any Part removed from the Airframe, an Engine, or an Appliance for
such purpose shall remain subject to this Lease until replaced by a
replacement Part as provided in this clause; and
5.12.5. enter into a wet lease (defined as a lease of the Aircraft
and flight crew, during which Lessee maintains exclusive operational
control of the Aircraft and during which lease Lessee continues to
maintain the Aircraft in accordance with Lessee's Approved Maintenance
Program) for the Aircraft with any third party provided, however, that the
term of such wet lease shall not extend beyond the end of the Term.
5.12.6. enter into a sublease of the Aircraft with a certificated
United States airline provided (i) the Lessee shall provide not less than
thirty days prior written notice to the Lessor; (ii) any Default or Event
of Default shall be cured simultaneously with such sublease; (iii) the
term of any such sublease shall not exceed the Term of this Lease; (iv)
the aircraft maintenance procedures of any sublessee shall be equivalent
to those of the Lessee; (v) the Lessee shall assign any such sublease to
the Lessor as security for Lessee's obligations under this Lease, provided
that so long as no Event of Default shall have occurred and be continuing,
(A) the Lessee, to the exclusion of the Lessor, may exercise all rights
and powers, and have all benefits, of the sublessor under any such
sublease, including, without limitation, the right
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to collect and retain for the Lessee's own account all rent and other
payments due from the sublessee thereunder, and (B) Lessor shall not,
without the prior written consent of Lessee, amend, modify or terminate
such sublease; (vi) any sublessee shall be solvent and not seeking
protection from its creditors; (vii) any sublessee shall covenant not to
sublease or part with possession of the Aircraft other than for
maintenance, required modifications, or repairs to comply with this Lease;
(viii) any sublessee shall agree in writing that such sublease shall be
subordinate to this Lease and all terms hereof, and shall terminate if
this Lease shall terminate; and (ix) the Lessee shall pay Lessor's
reasonable expenses, including attorney fees, in connection with any such
sublease.
No transfer of possession or control or other right afforded the Lessee pursuant
to this Section 5 shall in any manner affect any of the obligations of the
Lessee under this Lease or under the other Operative Documents, which
obligations shall remain primary and shall continue to the same extent as in the
absence of such transfer or other right. In the event that the Lessor shall have
received a written agreement or existing security agreement or lease complying
with the terms of clause 5.12.3, the Lessor hereby agrees for the benefit of the
lessor or secured party furnishing such agreement that the Lessor will not
acquire or claim, as against such lessor or secured party, any right, title or
interest in any engine owned by such lessor or in which such secured party has a
security interest by reason of such engine being installed on the Airframe.
5.13. Assignment of Warranties. Lessor hereby assigns and agrees to assign
or otherwise make available to Lessee such rights as the Lessor may have under
any warranty (express or implied) or otherwise with respect to the Aircraft,
made by the manufacturer of the Aircraft or by any subcontractor or supplier of
such manufacturer, as the case may be, or made by a repair station or supplier
in respect to repair or overhaul of the Aircraft to the extent that the same
exist in favor of Lessor and is capable of being assigned or otherwise made
available.
SECTION 6. Return of the Aircraft.
6.1. Return. Subject to any qualifications as may be set forth in a
Schedule 3 signed by both parties and attached to the executed Lease Supplement
and Receipt, on the last Business Day of the Term or earlier Expiry (the "Return
Date"), all of the terms of this Section 6 shall apply and the Lessee shall
return the Aircraft to the Lessor by delivering the same, at the Lessee's own
risk and expense, to Pinal County Airport, Marana, Arizona, or such other place
as may be mutually agreed upon in writing by the Lessor and Lessee (the "Return
Location"), fully equipped with all Engines installed thereon. The Aircraft at
the time of its return shall be in the condition set forth in this Section 6 and
shall be free and clear of all Liens other than Lessor Liens. At the time of
acceptance of return of the Aircraft to Lessor, Lessor and Lessee shall execute
an Aircraft Return Receipt and Lease Termination in the form attached hereto as
Exhibit B.
6.2. 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 Expiry in
condition required hereunder, then all of the obligations of Lessee under this
Lease shall continue and such
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continued use shall not be considered a renewal of the Term of this Lease or a
waiver of any right of Lessee 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 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. Any discrepancies found
during the inspections hereinafter described that were not corrected by Lessee
prior to return of the Aircraft to Lessor may be corrected by Lessor or its
designee after return of the Aircraft and Lessee shall reimburse Lessor for
expenses incurred by Lessor or its designee for accomplishing such discrepancy
corrections. Lessee shall pay Lessor for such expenses incurred upon
presentation of Lessor's invoice therefor. Any late payments shall be subject to
interest at the Overdue Payment Rate.
6.3. Return of Engines and Appliances. In the event any engine or
appliance not owned by Lessor shall be returned with the Airframe, Lessee will,
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 or appliance and shall take such other
action as Lessor may reasonably request in order that such replacement engine or
appliance shall be duly and properly titled in Lessor. Upon passage of title to
Lessor such replacement engine or appliance shall be deemed to be an Engine or
Appliance for all purposes hereof and thereupon Lessor will transfer to Lessee,
without recourse or warranty except a warranty against Lessor's Liens, all of
Lessor's right, title and interest in and to an Engine or Appliance not
installed on such Airframe at the time of the return thereof. Provided, however,
that any replacement engine or appliance shall, in the opinion of the Lessor,
have a value and utility at least equal to (and be in as good operating
condition as) such Engine or Appliance replaced, assuming compliance by the
Lessee with all of the terms of this Lease with respect to such Engine or
Appliance.
6.4. Condition of Aircraft. The Aircraft at the time of its return to
Lessor shall have been maintained and repaired in accordance with the Approved
Maintenance Program and this Lease with the same care and consideration for the
technical condition of the Aircraft as if it were to have been kept in continued
regular service by the Lessee, and shall meet the following requirements:
6.4.1. Operating Condition. The Aircraft shall be in as good
operating condition as on the Delivery Date, with all of the Aircraft
Engines, Appliances, Parts, equipment, components, and systems functioning
in accordance with their intended use irrespective of deviations or
variations authorized by the minimum equipment list or configuration
deviation list.
6.4.2. Cleanliness Standards. The Aircraft shall be clean by
commercial airline standards and shall have received an exterior and an
interior deep cleaning since its last commercial flight.
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6.4.3. Certificate of Airworthiness. The Aircraft shall have, and be
in compliance with, a legal and valid transport-category certificate of
airworthiness for commercial passenger operations issued by the Aviation
Authority, and shall be airworthy according to manufacturer's
specifications and Aviation Authority regulations.
6.4.4. Compliance with Governmental Requirements. Subject only to
the express obligations of Lessor herein, the Aircraft shall be in
compliance with all Airworthiness Directives affecting the Aircraft which
have an effective date for compliance within the Term. In the event Lessee
has obtained a waiver or deviation from the Aviation Authority 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.
6.4.5. Deferred Maintenance. The Aircraft shall have had
accomplished thereon all outstanding deferred maintenance items,
carry-over items, configuration deviation list items and flight
discrepancies. 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.
6.4.6. 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
manufacturer's recommended corrosion prevention and control procedures and
the Approved Maintenance Program. Fuel tanks shall be free from
contamination and corrosion and in compliance with an approved tank
treatment program.
6.4.7. Configuration and Condition. The Aircraft shall be returned
in the same configuration and 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 5. Lessee shall, prior to such return of the
Aircraft, furnish Lessor a listing of all such modifications, additions,
or replacements made during the Term. Lessee shall provide Lessor with all
supporting paperwork, drawings, calculations and approvals associated with
all repairs and modifications to the Aircraft.
6.5. Condition of Airframe. The Airframe at the time of its return to
Lessor shall meet the requirements as set forth below, all at Lessee's expense,
except as otherwise provided herein:
6.5.1. C Check. The Airframe shall be no more than three hundred
(300) hours out of a C Check, which C Check shall include the requirements
of FAA regulation Part
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43, Appendix D, 100 Hour Inspection, and a corrosion inspection and
clean-up under galleys, forward and aft cargo pit areas and lavatories.
Lessee will correct any deficiencies revealed during such check and all
deferred maintenance items.
6.5.2. D Check. [INTENTIONALLY OMITTED]
6.5.3. Parts. All Parts installed in the Aircraft shall be
serviceable in accordance with Aviation Authority standards and have a
value, modification status and condition equivalent to the Parts in the
Aircraft on the Delivery Date, ordinary wear and tear excepted, and all
installed Airframe Life Limited Components (excluding landing gear) shall
be cleared for a minimum of 3,000 hours (or 2,700 in the case of an
Airframe Life Limited Component with a total useful life of less than
3,000 hours), or 365 days in the case of an Airframe Life Limited
Component controlled by calendar time, in each case as required by the
Northwest Airlines maintenance program.
6.5.4. Fuselage, Windows and Doors. The fuselage shall be free of
major dents and abrasions, scab patches and loose or pulled or missing
rivets. Paint will be touched up. Windows shall be free of delamination,
blemishes, crazing and shall be properly sealed. Doors shall be free
moving, correctly rigged and be fitted with serviceable seals.
6.5.5. Wings and Empennage. All leading edges shall be free from
damage. All unpainted surfaces shall be waxed and polished. All paint
shall be touched up. All unpainted cowlings and fairings shall be
polished. Wings shall be free of fuel leaks.
6.5.6. Interior. Ceilings, sidewalls and bulkhead panels shall be
clean and free of cracks and stains. All floor panels shall be firm. All
window shades shall operate properly and be undamaged. All carpets and
seat covers shall be in good condition, clean and stain free and meet all
international fire resistance regulations. All seats shall be serviceable,
in good condition and repainted as necessary. Recline mechanism and table
operation shall be satisfactory, and table condition level, tight, and
undamaged. All signs and decals shall be in the English language, clean
and legible. All emergency equipment having a calendar life shall have a
minimum of one year or one hundred per cent of its total approved life
whichever is less, remaining.
6.5.7. Cockpit. All decals shall be in the English language, clean,
secure and legible. All fairing panels shall be free of stains and cracks,
shall be clean, secure and repainted as necessary. Floor coverings shall
be clean and effectively sealed, and painted as necessary. Seat covers
shall be in good condition, clean and shall conform to all international
fire resistance regulations. Seats shall be fully serviceable and shall be
repainted as necessary. Wear areas will be painted or refurbished as
necessary.
6.5.8. Cargo Compartment. All panels and nets shall be in good
condition.
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6.6. Condition of Landing Gear. Each landing gear shall be clean, free of
leaks and repaired as necessary. All decals shall be in the English language,
clean, secure, and legible.
6.7. Condition of Auxiliary Power Unit ("APU"). Lessee will return the
Aircraft's installed APU in good operating condition, in accordance with the
manufacturer's specifications. Any operational discrepancies of the APU shall be
corrected at Lessee's expense prior to the return of the Aircraft to Lessor.
6.8. Condition of Engines. [INTENTIONALLY OMITTED]
6.9. Historical Records; Trend Monitoring Data. [INTENTIONALLY OMITTED]
6.10. Inspections. The following inspections shall be conducted utilizing
the standards and specifications of the applicable manufacturer maintenance
manual for the Airframe, Engines, Appliances, and component Parts thereof. Any
item or discrepancy noted during the inspections that is found to be
non-compliant with the tolerances and conditions of the applicable manufacturer
maintenance manual shall be classified as a condition of non-airworthiness and
shall be corrected or rectified by Lessee prior to return of the Aircraft.
6.10.1. The Aircraft (including the Aircraft Documents) shall be
made available to Lessor for ground inspection by Lessor at Lessee's
facilities where and while the C Check required by this Section 6 is being
performed. Lessee shall open areas of the Aircraft, including without
limitation galleys, lavatories, and cargo pits, as determined by Lessor,
and shall allow Lessor to accomplish its inspection in order to determine
that the Aircraft (including the Aircraft Documents) is in the condition
required by the provisions of this Section 6.
6.10.2. A full, videotaped borescope inspection of all Engine and
APU sections in accordance with manufacturer specifications (including
manufacturer service bulletins) shall be performed under the surveillance
of Lessor at Lessee's expense at the time of the Aircraft's return to
Lessor at the Return Location.
6.10.3. Lessee shall conduct an operational ground check in
accordance with the requirements of the Approved Maintenance Program.
6.10.4. The Aircraft shall be test flown by Lessee at Lessee's
expense for not more than two (2) hours on a non-commercial flight, for
the purpose of demonstrating to Lessor the airworthiness of the Aircraft
and the proper functioning of all systems, equipment, and Appliances. Five
(5) of Lessor's employees or representatives (or more if consented to by
Lessee) may participate in such flight as observers. Lessee's pilot shall
be in command of the Aircraft. Such flight shall be flown using standard
operational check flight procedures as specified by the Airframe
manufacturer's flight functional acceptance procedure or operational test
flight procedures to demonstrate full
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certificated performance without limitation. Such test flight may be
combined with a ferry flight to the Return Location.
6.11. Acceptance. Upon completion of the foregoing inspections and after
Lessee has corrected the discrepancies as required to comply with this Section
6, the return of the Aircraft shall be accepted by Lessor's representatives at
the Return Location. At the time of acceptance of return of the Aircraft to
Lessor, Lessor and Lessee shall execute an Aircraft Return Receipt and Lease
Termination in the form attached hereto as Exhibit B.
6.12. Discrepancy Correction; Financial Settlement. Any discrepancies
found during the inspections set forth in Section 6.10 above which are not
corrected by Lessee prior to return of the Aircraft to Lessor 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. Lessee shall pay Lessor for all
such costs and expenses incurred within ten (10) days of the date of Lessor's
invoice therefor. Any late payments shall be subject to interest at the Overdue
Payment Rate. In the event that the time since overhaul or check for the
Airframe, any Engine, Appliance or component Part thereof on the Return Date is
less than set forth above, Lessee shall pay Lessor a financial settlement to
account for the difference based upon (1) the then current interval between such
overhaul, check, or inspection prescribed by Lessee's Approved Maintenance
Program (provided that such interval shall not be greater than on the Delivery
Date), and (2) the then current cost to perform such overhaul or check
established by averaging the cost estimates for such overhaul or check by three
Aviation Authority-certified repair stations selected by Lessee and reasonably
acceptable to Lessor. In no event shall the time since overhaul or check for the
Airframe, any Engine, Appliance or component Part thereof exceed the minimums
set fort herein. Lessor shall not be obligated to compensate Lessee in the event
that the Aircraft is in better condition on the Return Date than required
hereunder.
6.13. Aircraft Documents. Lessee shall return to Lessor, at the time the
Aircraft is returned to Lessor, all of the Aircraft Documents, updated and
maintained by Lessee through the date of return of the Aircraft. In the event of
missing, incomplete, mutilated, or otherwise unacceptable Aircraft Documents,
the Lessee shall, at its sole cost and expense, re-accomplish the tasks
necessary to produce such Aircraft Documents in accordance with the provisions
of Section 5.11.
6.14. Service Bulletin Kits. All vendors' and manufacturers' service
bulletin kits ordered for the Aircraft but not installed therein shall be
returned with the Aircraft, as part of the Aircraft at the time of return, and
shall be loaded by Lessee on board the Aircraft as cargo.
6.15. Lessee's Special Exterior Markings. At the time of the return of the
Aircraft, Lessee shall, at Lessor's election, either remove or paint over
exterior markings painted on such Aircraft by Lessee and the area where such
markings were removed or painted over shall be refurbished by Lessee as
necessary to blend in with the surrounding surface. In the event that,
notwithstanding Lessee's obligation to do so, Lessee does not remove such
markings, Lessor
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shall have no obligation to remove such markings prior to the sale, lease, or
other disposition of the Aircraft by Lessor after its return; however, if Lessor
elects to remove such markings, Lessee shall pay Lessor's costs and expenses for
such removal within ten (10) days of the date of Lessor's invoice therefor. Any
late payments shall be subject to interest at the Overdue Payment Rate.
6.19. Disputes. Any dispute between Lessee and Lessor regarding the
condition of the Aircraft arising under this Lease shall be referred to and be
determined by the Airframe, Engine, or Appliance manufacturer, provided this
subsection shall not be construed as requiring binding arbitration. Lessee shall
not be required to correct at return conditions existing at delivery and noted
in Schedule 3 to the Lease Supplement and Receipt.
SECTION 7. Liens. The Lessee will not create or suffer to exist any
Lien upon or with respect to the Aircraft, the Airframe, any Engine or any
Appliance, except for the rights of the Lessor and the Lessee hereunder and
Permitted Liens.
SECTION 8. Taxes.
8.1. Tax Indemnity. The Lessee agrees to pay, and to indemnify each
Indemnitee for all taxes, fees, levies, imposts, duties, charges and
withholdings of any nature (together with any and all fines, penalties,
additions to tax and/or interest thereon or computed by reference thereto)
(individually, a "Tax" and collectively, "Taxes") which are imposed by any
government, governmental subdivision or other taxing authority of or in any
jurisdiction, or by any international organization, and which are imposed with
respect to or in connection with any of the following:
8.1.1. The Aircraft or any Engine or any part thereof or any
interest therein;
8.1.2. The acceptance, possession, ownership, delivery, use,
operation, location, leasing, subleasing, condition, maintenance, repair,
modification, overhaul, testing, storage, abandonment, repossession, or
return of the Aircraft or any Engine or any part thereof or any interest
therein;
8.1.3. The rentals, receipts or earnings arising from the Aircraft
or any Engine or any part thereof or any interest therein;
8.1.4. This Lease or any other Operative Document; any agreement or
instrument executed in connection with or pursuant to any of the
foregoing; any future amendment, supplement, waiver or consent requested
by Lessee with respect to any thereof, or the execution, delivery,
recording or performance of any thereof; or
8.1.5. Any payment made pursuant to this Lease or any other
Operative Document;
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provided, however, that the Lessee shall not be required by this paragraph (a)
to indemnify an Indemnitee for any of the following:
8.1.6. Taxes in respect of net or gross income, profits, gains,
capital or net worth imposed by the United States or any state or local
governments therein;
8.1.7. Taxes which would not have arisen but for delay or failure by
an Indemnitee in notifying the Lessee or in the filing of Tax Returns or
payment of Taxes assessed on such Indemnitee, which delay or failure shall
not have been consented to, caused by or requested by the Lessee;
8.1.8. Any Tax to the extent it results directly from any act or
omission on the part of the Lessor which constitutes a breach by the
Lessor of its express obligations to the Lessee under this Lease or any
Operative Document or otherwise constitutes wilful misconduct or gross
negligence on the part of the Lessor;
8.1.9. Any Taxes to the extent properly attributable to any time or
period prior to the date of this Lease or after its Expiry;
8.1.10. In the event that the Lessor assigns, transfers or encumbers
in whole or in part its interest in the Aircraft or this Lease and/or the
proceeds thereof, any Taxes if and to the extent that such Taxes exceed
those which would have been imposed and in respect of which the Lessee
would have been liable to indemnify the Lessor under this Lease had the
Lessor not so assigned, transferred, or encumbered its interest;
8.1.11. Any Taxes which are caused by or arise out of or as a
consequence of a Lessor Lien;
8.1.12. Any Taxes in respect of ownership not attributable to
Lessee's acts or omissions under this Lease; or
8.1.13. Any Taxes (including, without limitation, sales, value added
or other transfer Taxes) which arise upon any sale, assignment, transfer
or other disposition of the Aircraft or any interest therein by the Lessor
or any other Indemnitee (or any sale, assignment, transfer or other
disposition by an Indemnitee of any interest in another Indemnitee).
If the Lessor becomes aware of any Taxes in respect of which the Lessee may be
required to make an indemnity or other payment pursuant to this Section 8.1, the
Lessor shall promptly notify the Lessee in writing accordingly. If reasonably
requested by the Lessee in writing, the Lessor shall, in good faith, diligently
contest (including pursuing all administrative appeals) in the name of the
Lessor or, if appropriate and requested by the Lessee, in the name of the Lessee
(and will permit the Lessee, if requested by the Lessee, to contest in the name
of the Lessee or the Lessor) the validity, applicability or amount of such Taxes
and shall (i) resist payment
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thereof if reasonably practicable; (ii) pay the same only under protest, if
protest is necessary or proper; and (iii) if payment is made, seek a refund
thereof in appropriate administrative or judicial proceedings Provided that (aa)
prior to any such action the Lessee shall have agreed to indemnify the Lessor to
the Lessor's reasonable satisfaction for all costs and expenses which the Lessor
may incur in connection with such contest, including (without limitation) all
reasonable legal and accountants' fees and disbursements, and the amount of any
interest or penalties which may be payable as a result of the contest; and (bb)
if the Lessor determines in its reasonable discretion that such contest is to be
initiated by the payment of (and the claiming of a refund for) such Taxes, the
Lessee shall have advanced to the Lessor sufficient funds (on an interest-free
basis and, if such advance constitutes taxable income in the hands of the
Lessor, on an after-tax basis) to make such payment.
If the Lessor shall obtain a refund, rebate, credit or other relief in respect
of all or any part of any Taxes in respect of which the Lessee shall have made
payment pursuant to this Section 8.1, the Lessor shall, provided no Event of
Default shall have occurred and be continuing, promptly pay to the Lessee an
amount which is equal to the amount of the refund, rebate, credit or other
relief, plus any interest or other addition received on any refund, Provided
always that any such payment by the Lessor shall leave the Lessor in no more and
no less favorable a position that it would have been in had the Lessee not been
required to make any payment in respect of such Taxes.
Lessee will pay all Taxes imposed upon it, or upon its income or profits, or
upon any property belonging to it, prior to the date on which penalties attach
thereto and prior to the date on which any lawful claim, if not paid, would
become a Lien upon any of the material property of Lessee. The Expiry of this
Lease shall not limit or modify the obligations of the Lessee with respect to
any indemnities contained in this Section 8.
8.2. Withholding. If the Lessee is required by Applicable Law to make any
withholding from any amount payable by the Lessee to or for the benefit of an
Indemnitee pursuant to this Lease or any related agreement, then, subject only
to such payee or Indemnitee being a United States person, the Lessee shall (i)
pay such additional amount as may be necessary to make the net amount actually
received by the person entitled to receive the payment, after all withholdings,
equal to the amount such person would have received if no withholding had been
required, and (ii) as soon as practicable thereafter, deliver to the Indemnitee
a receipt or other document reasonably satisfactory to the Indemnitee evidencing
the withholding and the payment of the amount withheld to the relevant
governmental authority.
8.2.1. If the Lessor receives the benefit of a Tax repayment,
set-off, credit, allowance or deduction resulting from a payment which
includes an additional amount paid by the Lessee under this Section 8.2
(or the Taxes deducted or withheld from such payment) it shall pay to the
Lessee a sum equal to the value to the Lessor of such benefit (account
being taken also of the value to the Lessor of any tax benefit arising by
reason of such payment) as in the opinion of the Lessor's auditors will
leave the Lessor (after
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such payment) in no more and no less favorable a position than it would
have been if no additional amount had been required to be paid Provided
always that:
8.2.1.1. The Lessor's auditors shall determine in their sole
discretion (acting in good faith) the amount of any such benefit and
the date on which it is received;
8.2.1.2. The Lessor shall have an absolute discretion as to
the order and manner in which it claims tax credits, allowances and
deductions available to it; and
8.2.1.3. The Lessor shall not be obliged to disclose to the
Lessee any information regarding its Tax affairs or Tax
computations.
If and to the extent that the Lessor makes a payment to the Lessee on account of
a tax benefit and it subsequently transpires that the Lessor did not receive
such benefit, the Lessee shall pay to the Lessor such sum as the Lessor's
auditors may certify as being appropriate to restore the after-tax position of
the Lessor to that which it would have been if such tax benefit had been
received.
8.3. After-tax Payment. Each indemnity pursuant to Section 15 or this
Section 8 shall be in an amount which, after taking into account all Taxes
required to be paid by the Indemnitee entitled to the indemnity as a result of
the receipt or accrual of the indemnity and any deductions, credits or other
benefits available to such Indemnitee in respect of such indemnity, shall be
equal to the total amount of the indemnity that the Lessee would be required to
pay if the Indemnitee were not subject to Taxes as a result of the receipt or
accrual of the indemnity.
SECTION 9. Risk of Loss; Event of Loss; Requisition for Use.
9.1. 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 the period commencing when the Lease
Supplement and Receipt is executed and delivered by Lessee and ending when the
Aircraft Return Receipt and Lease Termination is executed and delivered by
Lessor.
9.2. Airframe Event of Loss. If an Event of Loss shall occur with respect
to the Airframe, the Lessee will forthwith notify the Lessor thereof in writing
and will pay to the Lessor, in U.S. Dollars and in immediately available funds
(i) 60 days after the date of the occurrence of such Event of Loss, or (ii) the
date of receipt of insurance proceeds, whichever is earlier, an amount equal to
the Stipulated Loss Value of the Aircraft; provided, however, that if the date
such payment is made by the Lessee is not a Rent Payment Date, there shall be
deducted from the amount payable by the Lessee an amount equal to a pro rata
portion of the Basic Rent for the Aircraft computed on a daily basis from and
including the date such payment is made by the Lessee to but not including the
Rent Payment Date immediately following the
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date such payment is made by the Lessee. In addition, the Lessee will pay in
full when due, but without duplication, the Basic Rent for the Aircraft payable
on each Rent Payment Date occurring prior to the date payment is made by the
Lessee pursuant to the immediately preceding sentence hereof. Upon payment in
full by the Lessee of all amounts referred to above in this Section 9.2, (i) the
Lessee shall have no further obligation to pay Basic Rent for such Aircraft due
thereafter, (ii) upon payment in full of any Supplemental Rent then owing this
Lease shall terminate with respect to the Aircraft and (iii) upon request of the
insurers of the Aircraft, the Lessor will transfer to such insurers title to the
Airframe and each Engine, without any recourse, representation or warranty on
the part of the Lessor except that the Airframe and Engines are free and clear
of Lessor Liens.
9.3. Engine Event of Loss. If an Event of Loss shall occur with respect to
an Engine when not installed on the Airframe, the Lessee will forthwith notify
the Lessor thereof in writing and will, not later than 30 days after the
occurrence of such Event of Loss, duly convey to the Lessor (or cause to be
conveyed to the Lessor), as replacement for such Engine, title to another engine
of the same make and model which shall be owned by the Lessee free of all Liens
other than Permitted Liens and shall, in the opinion of the Lessor, have a value
and utility at least equal to (and be in as good operating condition as) such
Engine immediately prior to such Event of Loss, assuming compliance by the
Lessee with all of the terms of this Lease with respect to such Engine. At the
time of such conveyance the Lessee will (i) cause to be delivered to the Lessor
a favorable opinion of counsel for the Lessee reasonably acceptable to the
Lessor to the effect that the Lessor has acquired full title to such replacement
engine free and clear of all Liens except for Permitted Liens and that such
replacement engine is duly subjected to this Lease; (ii) cause a Lease
Supplement and Receipt to be duly executed by Lessee and to be filed for
recording pursuant to the Aviation Law and (iii) cause to be delivered to the
Lessor evidence satisfactory to the Lessor as to the due compliance by the
Lessee with the insurance provisions of Section 10 hereof with respect to such
replacement engine. Upon compliance by the Lessee with the foregoing terms of
this subsection within the 30-day period referred to above, the Lessor will (A)
upon request by the insurers of such Engine transfer title to such insurers of
the Engine so replaced without any recourse, representation or warranty on the
part of the Lessor except that such Engine is free and clear of any of the
Lessor Liens and (B) execute and deliver to the Lessee a partial release, in
recordable form, releasing such Engine from this Lease. Such replacement engine
shall thereupon constitute an "Engine" for all purposes hereof.
9.4. Requisition. [INTENTIONALLY OMITTED]
SECTION 10. Insurance. Throughout the Term and thereafter until the
Aircraft has been returned to the Lessor in compliance with Section 6, the
Lessee shall cause to be obtained maintained and kept in full force and effect
property and liability insurance (the "Insurances") with respect to the Aircraft
issued through brokers and with underwriters reasonably satisfactory to the
Lessor. Such Insurances shall name the Lessor as an additional insured and loss
payee for its interests and shall otherwise comply with the insurance
requirements set out in this Section 10.
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10.1. Reports. On or before the Delivery Date, and not later than seven
(7) days prior to each renewal of the Insurances, the Lessee shall provide the
Lessor with evidence satisfactory to the Lessor that the Insurances are and will
continue in full force after the Delivery Date or the renewal date of the
Insurances (as the case may be) for such period as shall then be stipulated and
the Lessee shall produce to the Lessor upon request receipts in respect of
payment of the premiums required by the policies relating to the Insurances (or
installments thereof) or other evidence reasonably acceptable to the Lessor of
the payment thereof. In addition, the Lessee shall furnish or cause to be
furnished to the Lessor, as and when reasonably required by the Lessor, (i)
insurance certificates, and (ii) an opinion of a firm of independent insurance
brokers satisfactory to Lessor (the "Approved Broker") stating the opinion of
the Approved Broker that the insurance then carried and maintained on the
Aircraft complies with the terms hereof. If any material variation is made to
the terms of the Insurances, the Lessee shall forthwith give notice to the
Lessor of such variation and shall provide such further details in relation
thereto (excluding details relating to premiums) as the Lessor may reasonably
require. The Lessee shall pay or cause to be paid all additional premiums or
surcharges necessary in order to maintain in full force and effect the
Insurances.
10.2 Lessor Maintaining Insurances. If the Insurances are not kept in full
force and effect the Lessor, without prejudice to any other rights it may have
on the occurrence of an Event of Default, shall be entitled (but not bound) to
pay the premiums due to or to take out and maintain new insurances and any sums
so expended by the Lessor shall become immediately due and payable to the Lessor
by the Lessee together with interest thereon from the date of expenditure by the
Lessor until the date of reimbursement thereof by the Lessee at the Overdue
Rate. In addition, the Lessor may at any time while the Insurances are not
maintained in full force and effect and if such Insurances cannot be procured by
the Lessor, as the case may be, require the Aircraft to be grounded or, subject
to the Aircraft being adequately insured, require the Aircraft to proceed to and
remain at an airport designated by the Lessor until the provisions of this
Section shall be fully complied with.
10.3 Insurance Proceeds. Until such time as the Approved Broker is
notified of an Event of Default hereunder, all insurance proceeds in respect of
repairable damage to the Aircraft not amounting to an Event of Loss shall be
payable by the insurers directly to such party or parties as may be necessary to
repair the Aircraft unless otherwise agreed between the Lessor, the Lessee and
the insurers in accordance with Lloyd's Endorsement AVN67B and shall be applied
to the cost of restoration, repair or replacement of the Aircraft hereunder. To
the extent that such insurance proceeds may be insufficient to pay the cost or
the estimated cost of completing such restoration, repair or replacement, the
Lessee will pay or procure the payment of such deficiency. All insurance
proceeds in circumstances resulting from an Event of Loss or if the Approved
Broker has been notified in writing of an Event of Default hereunder shall be
payable by the insurers directly to the Lessor unless and until such insurers
shall be notified in writing that such Event of Default is no longer continuing.
10.4 Property Insurance. The Lessee shall ensure that there is obtained
and maintained with respect to the Aircraft:
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10.4.1. "All Risks" hull insurance on the Aircraft (including all
flight and ground risks and ingestion coverages) in an amount not less
than Three Million Seven Hundred Fifty Thousand Dollars (US$3,750,000)
(the "Stipulated Loss Value").
10.4.2. "All Risks" insurance on the Engines while not installed on
any Airframe in an amount not less than replacement cost thereof.
10.4.3. "War Risks" and related insurance covering the following
perils on the Aircraft in an amount not less than the Stipulated Loss
Value: (i) war, invasion, acts of foreign enemies, hostilities (whether
war be declared or not), civil war, rebellion, revolution, insurrection,
martial law, military or usurped power, or attempts at usurpation of
power; (ii) strikes, riots, civil commotions or labor disturbances; (iii)
any act of one or more persons, whether or not agents of a sovereign
power, for political or terrorist purposes and whether the loss or damage
resulting therefrom is accidental or intentional; (iv) any malicious act
or act of sabotage; (v) confiscation, nationalization, deprivation,
seizure, restraint, detention, appropriation, requisition for title or use
by or under the order of any government (whether civil, military or de
facto) and/or public or local authority other than the government of the
United States; and (vi) hijacking or any unlawful seizure or wrongful
exercise of control of such Aircraft or crew in flight (including any
attempt at such seizure or control) made by any person or persons on board
such Aircraft acting without consent of the Lessee.
10.4.4 The Insurances required under this Subsection 10.4 shall
(except for the insurance referenced in paragraph 10.4.2) be provided on
an agreed value basis and shall: (i) include, in the event of separate
insurances being arranged to cover the "All Risk" hull insurance and the
"War Risk" and related insurance, a 50/50 claims funding arrangement in
the event of any dispute as to whether a claim is covered by the "All
Risks" or "War Risks" policy; and (ii) be subject to a deductible no
greater than Five Hundred Thousand Dollars ($500,000).
10.5. Liability Insurance. The Lessee shall obtain and maintain or procure
that there is obtained and maintained a policy or policies of insurance covering
third party liability, bodily injury and property damage, passenger legal
liability and cargo legal liability for a combined single limit of not less than
Three Hundred Fifty Million Dollars (US$350,000,000) for any one occurrence. The
policies evidencing the Insurances required under this Section 10.5 shall: (i)
include the Indemnitees as additional insureds; (ii) provide that all the
provisions thereof, except the limits of liability, shall operate to give each
insured the same protection as if there were a separate policy covering each
such person; (iii) be primary and without right of contribution from other
insurance which may be available to the Indemnitees; and (iv) not provide
coverage to the Indemnitees with respect to claims arising out of their legal
liability as manufacturer, repairer or servicing agent of the Aircraft or any
Part thereof.
10.6. Provisions Relating To All Insurances. The policies evidencing the
Insurances with respect to the Aircraft required under Subsection 10.4 and 10.5
shall:
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10.6.1. specifically reference this Agreement and shall provide that
the insurers agree that the coverage under the policies is extended (to
the extent of the risks covered by the policies) to insure such Aircraft
in accordance with the terms of this Agreement;
10.6.2. provide for worldwide coverage (subject only to such
exceptions in the War Risks and related insurance as are imposed by the
insurers);
10.6.3. provide that the Lessor has no operational interest in the
Aircraft;
10.6.4. provide that the Insurances shall not be invalidated, so far
as concerns the Indemnitees by any act or omission (including
misrepresentation and non-disclosure) by the Lessee or any other person
which results in a breach of any term, condition or warranty of such
Insurances provided that the Indemnitees have not caused, contributed to
or knowingly condoned such act or omission;
10.6.5. provide that the Lessor shall not be liable for any premiums
in respect thereof, and that the insurers waive any right of set-off or
counterclaim against the Lessor except in respect of outstanding premiums
in respect of the Aircraft;
10.6.6. provide that upon payment of any loss or claim to or on
behalf of an Indemnitee, the insurers shall to the extent and in respect
of such payment be thereupon subrogated to all legal and equitable rights
of the Indemnitees. The insurers shall not exercise such rights without
the consent of those indemnified, such consent not to be unreasonably
withheld. At the expense of the insurers, such persons shall do all things
reasonably necessary to assist the insurers to exercise such subrogated
rights; and
10.6.7. provide that the Insurances provided under such policy may
only be cancelled or materially altered in a manner adverse to the
interests of the Lessor by the giving of not less than thirty (30) days'
notice in writing to the Lessor except that in the case of War Risks
insurance for which seven (7) days' notice (or such lesser period as may
be customarily available in respect of war risks or allied perils
insurance) will be given or in the case of war between any of the five (5)
great powers or nuclear peril for which termination is automatic. Lessee
will cause the Approved Broker to advise Lessor in writing promptly of any
default in the payment of any premium and of any other act of omission on
the part of Lessee of which they have knowledge and which would in the
Approved Broker's opinion invalidate or render unenforceable, in whole or
in any material part, any insurance on the Aircraft.
SECTION 11. The Lessor's Right to Perform for the Lessee. If the
Lessee fails
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to make any payment required hereunder or fails to perform or comply with any of
its other agreements contained herein, the Lessor may make such payment or
perform or comply with such agreement, including, but not limited to, the
placement of insurance required by this Lease, and the amount of such payment
and the amount of its out-of-pocket costs and expenses incurred in connection
with the performance of or compliance with such agreement (together with
interest thereon at the Overdue Payment Rate) shall be payable by the Lessee on
demand as Supplemental Rent.
SECTION 12. Further Assurances. The Lessee at its expense will
promptly and duly execute and deliver such documents and assurances and take
such action as may be necessary or desirable, or as the Lessor may from time to
time reasonably request, in order to more effectively carry out the intent and
purpose of this Lease and the other Operative Documents and to establish and
protect the Lessor's title to the Aircraft and its rights and remedies created
or intended to be created under this Lease and the other Operative Documents, in
form and substance satisfactory to the Lessor, in such jurisdictions as the
Lessor may reasonably request.
SECTION 13. Events of Default. The following events shall constitute
Events of Default (whether any such event shall be voluntary or involuntary or
arise by operation of law or pursuant to or in compliance with any judgment,
decree, order, rule or regulation of any court or any administrative or
governmental body):
13.1. Failure to Pay Basic Rent. The Lessee shall fail to make any payment
of Basic Rent or Stipulated Loss Value within three Business Days after such
payment shall become due; or
13.2. Failure to Pay Supplemental Rent. The Lessee shall fail to make any
other payment of Rent of any kind and such failure shall continue unremedied for
a period of ten Business Days after written demand therefor by the Lessor to the
Lessee; or
13.3. Failure to Maintain Insurance. The Lessee shall fail to maintain
insurance in accordance with Section 10 hereof;
13.4. Misrepresentation or Breach of Warranty. Any representation or
warranty made by the Lessee or any Guarantor in this Lease or in any other
Operative Document or in any document or certificate furnished by the Lessee or
any Guarantor in connection herewith or therewith shall have been incorrect in
any material respect at the time made; or
13.5. Bankruptcy, Etc. The Lessee shall generally not pay its debts as
such debts become due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of creditors; or
any proceeding shall be instituted by or against the Lessee under the laws of
any country seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief or composition of it or its debts under any law of any country relating
to
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bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee, or other
similar official for it or for any substantial part of its property and either
such proceeding shall remain undismissed or unstayed for a period of 45 days or
any of the actions sought in such proceeding (including, without limitation, the
entry of an order for relief against it or the appointment of a receiver,
trustee, custodian or other similar official for it or for any substantial part
of its property) shall occur; or the Lessee shall take any corporate action to
authorize any of the actions set forth above in this subsection 13.5; or
13.6. General Default. The Lessee fails to duly observe or perform any of
its other obligations under this Lease and such failure shall not have been
remedied within a period of ten (10) Business Days after delivery of written
notice specifying the same from Lessor, including without limitation failure to
maintain the Aircraft as required by this Lease or the Aviation Authority or
failure to protect or preserve Lessor's title to the Aircraft and, if
applicable, the Lien of any Lender thereon; or
13.7. Loss of Airline or Corporate Authority. Lessee shall cease to be a
commercial airline, or the franchises, concessions, permits, rights or
privileges required for the conduct of the business and operations of Lessee
shall be revoked, canceled or otherwise terminated or the free and continued use
and exercise thereof curtailed or prevented, and as a result thereof the
preponderant business activity of Lessee shall cease to be that of a commercial
airline; or
13.8. Other Obligations. An event of default shall have occurred under the
Other Lease or under any agreement wherein Lessee is a debtor or a lessee with
respect to aircraft or aircraft engines; or a judgment or judgments for the
payment of money shall be rendered against Lessee and such judgment shall not be
effectively stayed; or Lessee shall fail to pay any portion of any indebtedness
or other obligation of Lessee in excess of the value of US$250,000, or there
shall occur a declaration of default, an acceleration or any exercise of
remedies with respect to any obligation or liability of Lessee in or relating to
an amount in excess of the value of US$250,000; or
13.9. Guarantor Default. An "Event of Default," as defined therein,
shall have occurred under a Guaranty.
SECTION 14. Remedies. Upon the occurrence of any Event of Default
and at any time thereafter so long as the same shall be continuing, the Lessor
may, at its option, declare in writing to the Lessee that this Lease is in
default; and at any time thereafter, so long as the Lessee shall not have
remedied all outstanding Events of Default, the Lessor may do one or more of the
following as the Lessor in its sole discretion shall elect, to the extent
permitted by Applicable Law then in effect:
14.1. Return and Repossession. Lessor may in writing demand the prompt
return, and the Lessee hereby agrees that it shall return promptly, the Aircraft
to the Lessor in the
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manner and condition required by, and otherwise in accordance with all the
provisions of, Section 6 as if the Aircraft were being returned at the end of
the Term, or the Lessor or the Lessor's agent, at its option, may, but shall be
under no obligation to, enter upon the premises where all or any part of the
Airframe or any Engine or Appliance is located and take immediate possession of
and remove the same by summary proceedings or otherwise, all without liability
accruing to the Lessor or the Lessor's agent for or by reason of such entry or
taking of possession or removal whether for the restoration of damage to
property caused by such action or otherwise.
14.2. Sale, Use, Etc. Lessor may sell the Aircraft at public or private
sale, as the Lessor may determine, or otherwise dispose of, hold, use,
operate, lease to others or keep idle the Aircraft as the Lessor may
determine, all free and clear of any rights or claims of the Lessee and
without any duty to account to the Lessee with respect to such action or
inaction or for any proceeds with respect thereto.
14.3. Liquidated Damages: Fair Market Rental. The Lessor, by written
notice to the Lessee specifying a payment date which shall be a Rent Payment
Date not earlier than ten days from the date of such notice, may cause the
Lessee to pay to the Lessor, and the Lessee shall pay to the Lessor, on the
payment date specified in such notice, as liquidated damages for loss of a
bargain and not as a penalty (in lieu of the Basic Rent for the Aircraft due on
Rent Payment Dates occurring on and after the payment date specified for payment
in such notice), any unpaid Basic Rent for the Aircraft due (or which would have
been due in the absence of the Expiry) prior to the payment date specified in
such notice, plus an amount equal to the present value (computed as of the
payment date specified in such notice and using 6%) of the total Basic Rents due
for what would have been the remainder of the Term in the absence of the Expiry
("Liquidated Rental") (together with interest on all amounts payable by the
Lessee under this subsection 14.3 at the Overdue Payment Rate from such
specified payment date until the date of actual payment); and upon such payment
of Liquidated Rental and the payment of all other Rent then due hereunder,
Lessor shall proceed to exercise its best efforts to lease the Aircraft for what
would have been the remainder of the Term in the absence of Expiry and shall pay
over to Lessee an amount equal to the present value of the rents due for the
remainder of the term under the new lease agreement (after deducting from such
rents, all costs and expenses whatsoever incurred by Lessor in connection
therewith and all other amounts which may become payable to Lessor) up to the
amount of Liquidated Rental actually paid.
14.4. Cancellation, Termination, and Rescission. The Lessor may cancel,
terminate, or rescind this Lease, or may exercise any other right or remedy
which may be available to it under Applicable Law or proceed by court action to
enforce the terms hereof or to recover damage for the breach hereof, including
without limitation Lessee's agreement to lease the Aircraft for the Term and to
pay Rent.
14.5. Other Remedies. In addition, the Lessee shall be liable, except as
otherwise provided above, for any and all unpaid Rent due hereunder before,
after or during the
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exercise of any of the foregoing remedies and for all legal fees and other costs
and expenses incurred by reason of the occurrence of any Event of Default or the
exercise of remedies with respect thereto, including all costs and expenses
incurred in connection with any retaking of the Aircraft or in placing the
Aircraft in the condition and airworthiness required by Sections 5 and 6. At any
sale of the Aircraft pursuant to this Section 14 the Lessee may bid for and
purchase such property. 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 the Lessor at law or in equity,
including without limitation the Uniform Commercial Code of the Commonwealth of
Massachusetts; and the exercise or beginning of exercise by the Lessor of any
one or more of such remedies shall not preclude the simultaneous or later
exercise by the Lessor of any or all of such other remedies. No express or
implied waiver by the Lessor of any Event of Default or Default shall in any way
be, or be construed to be, a waiver of any future or subsequent Event of Default
or Default. To the extent permitted by Applicable Law, the Lessee hereby waives
any rights now or hereafter conferred by statute or otherwise which may require
the Lessor to sell, lease or otherwise use the Aircraft in mitigation of the
Lessor's damages except as set forth in this Section 14 or which may otherwise
limit or modify any of the Lessor's rights or remedies under this Section 14.
SECTION 15. General Indemnity and Expenses.
15.1. General Indemnity.
15.1.1. The Lessee agrees to indemnify, reimburse, and hold harmless each
Indemnitee from and against all claims, damages, losses, liabilities, demands,
suits, judgments, causes of action, civil and criminal legal proceedings,
penalties, fines, and other sanctions, and any attorney fees and other
reasonable costs and expenses, arising or imposed with or without the Lessor's
fault or negligence or under the doctrine of strict liability (collectively,
"Claims"), relating to or arising in any manner out of:
15.1.1.1. This Lease or the breach of any representation, warranty,
or covenant made by the Lessee under this Lease,
15.1.1.2. Manufacture, lease, delivery, nondelivery, acceptance,
rejection, ownership, possession, use, operation, or return of the
Aircraft;
15.1.1.3. The Aircraft's condition or any discoverable or
nondiscoverable defect in it arising from its design, testing, or
construction; any article used in the Aircraft; or any maintenance,
service or repair, whether or not the Aircraft is in the Lessee's
possession and regardless of where the Aircraft is located; or
15.1.1.4. Any transaction, approval, or document contemplated by
this Lease.
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15.1.2. The Lessee waives and releases each Indemnitee from any existing
or future Claims in any way connected with injury to or death of the Lessee's
personnel, loss or damage of the Lessee's property, or loss of use of any
property, which may:
15.1.2.1. Result from or arise in any manner out of the ownership,
leasing, condition, use or operation of the Aircraft; or
15.1.2.2. Be caused by any defect in the Aircraft; its design,
testing, or construction; any article used in the Aircraft; or any
maintenance, service, or repair, whether or not the Aircraft is in the
Lessee's possession and regardless of where the Aircraft is located.
15.1.3. The indemnities described in this Section will continue in full
force and effect notwithstanding the expiration or other termination of this
Lease and are expressly made for the benefit of and will be enforceable by each
Indemnitee.
15.2. Legal Fees and Expenses. The Lessee agrees to pay legal fees, costs
and expenses of Lessor in connection with in connection with the enforcement of
this Lease, any other Operative Document and the other documents to be delivered
hereunder or thereunder.
SECTION 16. Assignment and Alienation. Lessor shall have the right
to assign, sell or encumber any interest of Lessor in the Aircraft or this Lease
and/or the proceeds hereof subject to the rights of Lessee under the provisions
of this Lease. To effect or facilitate any such assignment, sale or encumbrance,
Lessee agrees to provide such agreements, consents, conveyances or documents as
may be reasonably requested by Lessor, which shall include, without limitation,
a commercially standard estoppel certificate and an unrestricted release of
Lessor from its obligations under this Lease. Lessee hereby agrees that it will
not assert against an assignee any claim or defense which it may have against
Lessor. The agreements, covenants, obligations and liabilities contained herein
including, but not limited to, all obligations to pay Rent and indemnify each
Indemnitee are made for the benefit of each Indemnitee and their respective
successors and assigns; provided, however, that no assignment, sale or
encumbrance shall increase the aggregate financial exposure under the indemnity
obligations of Lessee under this Lease as compared to what such obligations
would have been had such assignment, sale or encumbrance not occurred. In the
event this Lease is assigned, sold or encumbered by Lessor, any assignee,
transferee or mortgagee shall agree as a condition precedent thereto not to
disturb or otherwise interfere with the quiet enjoyment of Lessee of the
Aircraft so long as not Event or Default shall have occurred and be continuing.
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SECTION 17. Notices. All notices required under the terms and
provisions hereof shall be in writing in the English language, and any such
notice shall become effective when received by the other party, by hand, by
registered mail with proper postage for airmail prepaid, by overnight courier
service, or, if in the form of a telecopy, upon confirmation of receipt thereof,
in each case addressed (i) if to the Lessee:
TransMeridian Airlines
2700 Post Oak Boulevard, Suite 2200
Houston, Texas 77056
Attention: Managing Director
Telecopier: 713 840 2099
with copies to each Guarantor at the address provided in writing to Lessor on
the Delivery Date, or to such other address as the Lessee shall from time to
time designate in writing to the Lessor, or (ii) if to the Lessor:
First Security Bank of Utah, N.A.
79 South Main Street
Salt Lake City, Utah 84111
Attention: Corporate Trust Department
Telecopier: (801) 246-5053
with a copy to:
Equis Financial Group
98 North Washington Street
Boston, Massachusetts 02114
Attention: Jim Livesey
Telecopier: 617 523 1410
or to such other address as the Lessor shall from time to time designate in
writing to Lessee.
SECTION 18. No Set-Off, Counterclaim, Etc. Subject only to the
Lessor's compliance with its express obligations hereunder, the Lessee's
obligation to pay all Rent payable hereunder shall be absolute and
unconditional and shall not be affected by any circumstance, including,
without limitation, (i) any set-off, counterclaim, recoupment, defense or
other right which the Lessee may have against the Lessor, any partner
comprising the Lessor, the manufacturer of the Airframe or of any Engine or
Appliance or anyone else for any reason whatsoever (whether in connection
with the transactions contemplated hereby
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or in connection with any unrelated transaction), (ii) any defect in the
airworthiness, eligibility for registration, condition, design, operation, or
fitness for use of, or any damage to or loss or destruction of, or any Lien
upon, the Aircraft, or any interruption or cessation in the use or possession
thereof by the Lessee (iii) any insolvency, bankruptcy, reorganization or
similar proceedings by or against the Lessee, the Lessor or any other person,
(iv) the invalidity or unenforceability of this Lease or any absence of right,
power, or authority of the Lessor or Lessee to enter into this Lease, or (v) any
other circumstance, happening or event whatsoever, whether or not similar to any
of the foregoing. The Lessee hereby waives, to the extent permitted by
Applicable Law, any and all rights which it may now have or which at any time
hereafter may be conferred upon it, by Applicable Law to terminate, cancel, quit
or surrender this Lease, or any obligation imposed on the Lessee by this Lease.
Nothing in this Section 18 shall be construed to preclude the Lessee from
bringing any suit at law or in equity against any person which it would
otherwise be entitled to bring for breach of any representation, warranty,
covenant or duty hereunder.
SECTION 19. Governing Law.
19.1. Consent to Jurisdiction. Each of the Lessor and the Lessee
irrevocably agrees that any legal suit, action or proceeding arising out of or
relating solely to this Lease or any other Operative Document, or any of the
transactions contemplated hereby or thereby or any document referred to herein
or therein, may be instituted in the state or Federal courts in the Commonwealth
of Massachusetts, and it hereby irrevocably waives, to the fullest extent
permitted by law, any objection which it may have now or hereafter to the laying
of the venue or the jurisdiction or the convenience of the forum of any such
legal suit, action or proceeding and irrevocably submits generally and
unconditionally to the jurisdiction of any such court but only in any such suit,
action or proceeding. Final judgment against the Lessee or the Lessor in any
suit shall be conclusive, and may be enforced in other jurisdictions by suit on
the judgment, a certified or true copy of which shall be conclusive evidence of
the fact and of the amount of any indebtedness or liability of the Lessee or the
Lessor, as the case may be, therein described; provided always that the
plaintiff may at its option bring suit, or institute other judicial proceedings,
against the Lessee or the Lessor, as the case may be, or any of its assets in
the courts of any country or place where the Lessee or the Lessor, as the case
may be, or such assets may be found.
19.2. Choice of Law. THIS LEASE HAS BEEN NEGOTIATED AND 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.
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SECTION 20. Miscellaneous. This Lease constitutes the entire
agreement of the parties. Any provision of this Lease which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibitions or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction. To the extent permitted by applicable law, each of
Lessor and the Lessee hereby waives any provision of Applicable Law which
renders any provision hereof prohibited or unenforceable in any respect.
This Lease shall constitute an agreement of lease, and nothing
herein shall be construed as conveying to the Lessee any right, title or
interest in the Aircraft except as a lessee only.
This Lease, including all agreements, covenants, representations and
warranties, shall be binding upon and inure to the benefit of, and may be
enforced by, (1) Lessor and its agents, servants and personal representatives
and, to the extent permitted hereby, assigns and (2) Lessee and its successors
and, to the extent permitted hereby, assigns. The section and subsection
headings in this Lease are for convenience of reference only and shall not
modify, define, expand or limit any of the terms or provisions hereof. This
Lease may be executed by the parties hereto in separate counterparts, each of
which when so executed and delivered shall be an original, but all such
counterparts shall together constitute but one and the same instrument.
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No term or provision of this Lease may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which the enforcement of the change, waiver, discharge or
termination is sought.
SECTION 21. Truth-In-Leasing
LESSEE REPRESENTS AND WARRANTS THAT IT IS AN AIR CARRIER, CERTIFICATED
UNDER THE FEDERAL AVIATION ACT OF 1958, AS AMENDED, AND THAT THIS LEASE, ANY
LEASE SCHEDULE THERETO, AND ANY RENEWAL SCHEDULE THEREOF IS EXCEPTED FROM THE
FAA TRUTH-IN-LEASING REQUIREMENTS. THE LESSEE CERTIFIES THAT THE LESSEE, AND NOT
THE LESSOR, IS RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT UNDER THIS
LEASE DURING THE TERM HEREOF. THE LESSEE FURTHER CERTIFIES THAT THE LESSEE
UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION
REGULATIONS. THE LESSEE FURTHER CERTIFIES THAT THE AIRCRAFT WILL BE MAINTAINED
AND INSPECTED UNDER PART 121 OF THE FEDERAL AVIATION REGULATIONS FOR OPERATIONS
TO BE CONDUCTED UNDER THIS LEASE. THE LESSEE UNDERSTANDS THAT AN EXPLANATION OF
FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FAA REGULATIONS CAN BE
OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE.
IN WITNESS WHEREOF, the Lessor and the Lessee have each caused this
Lease to be duly executed as of the date and year first above written.
FIRST SECURITY BANK OF UTAH, N.A., not in its
individual capacity but solely as owner trustee
under that certain Trust Agreement dated as of
December 10, 1989,
the Lessor
By: /s/ Greg A. Hawley
Title: Vice President
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES
the Lessee
By: /s/ [ILLEGIBLE]
Title: EXEC VP
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EXHIBIT A: FORM OF LEASE SUPPLEMENT AND RECEIPT
LEASE SUPPLEMENT AND RECEIPT dated __________ , 1996 between FIRST
SECURITY BANK OF UTAH, N.A., not in its individual capacity but solely as owner
trustee pursuant to a Trust Agreement dated as of December 10, 1989 (the
"Lessor"), and PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES (the "Lessee").
The Lessor and the Lessee have heretofore entered into that certain
Aircraft Lease Agreement, dated as of March 15, 1996 (herein called the "Lease"
and the defined terms therein being hereinafter used with the same meanings),
relating to one Boeing model 727-251 aircraft, manufacturer serial number 21160.
The Lease provides for the execution and delivery of a Lease Supplement and
Receipt.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, the Lessor and the Lessee hereby agree as follows:
A. THE LEASE. The Lease and all related Operative Documents to be
executed by the Lessee have been duly authorized, executed and delivered by
Lessee and constitute valid, legal and binding agreements, enforceable in
accordance with their terms. All of the terms and provisions of the Lease are
hereby incorporated by reference in this Lease Supplement and Receipt to the
same extent as if fully set forth herein. The parties confirm that the Delivery
Date is the date of this Lease Supplement and Receipt.
B. THE AIRCRAFT. The Lessee hereby certifies that the Aircraft
described Schedule 1 hereto, consisting of _____ pages (including attachments)
and made a part hereof, and the Aircraft Documents described in Schedule 2
hereto, consisting of _____ pages (including attachments) and made a part
hereof, have been delivered to the Lessee, inspected by the Lessee, found to be
in good order and accepted under, and for all purposes of, the Lease, all on the
date hereof. Any qualifications to the return conditions set forth in Lease
Section 6 are attached hereto in Schedule 3. Lessee accepts delivery of the
Aircraft "AS IS," "WHERE IS," AND SUBJECT TO EACH AND EVERY DISCLAIMER OF
WARRANTY AND REPRESENTATION AS SET FORTH IN SECTIONS 4.3 OF THE LEASE.
C. REPRESENTATIONS BY THE LESSEE. The Lessee hereby represents and
warrants to the Lessor that on the date hereof:
1. The representations and warranties of the Lessee set forth in the
Lease are true and correct in all material respects as though made on and
as of the date hereof.
2. The Lessee has satisfied or complied with all requirements set
forth in the Lease to be satisfied or complied with on or prior to the
date thereof, including without limitation affixing nameplates as required
by Lease Section 5.13.
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3. No default or Event of Default under the Lease has occurred and
is continuing on the date hereof.
4. The Lessee has obtained, and there are in full force and effect,
such insurance policies with respect to the Aircraft as are required to be
obtained under the terms of the Lease.
5. The balance sheet and statement of income of the Lessee or any
consolidated group of companies of which the Lessee is a member,
heretofore delivered to the Lessor, have been prepared in accordance with
generally accepted accounting principles, and fairly represent the
financial position of the Lessee or any consolidated group of companies of
which the Lessee is a member, on and as of the date thereof and the
results of its or their operations for the period or periods covered
thereby. Since the date of such balance sheet, there has been no material
adverse change in the financial or operating condition of the Lessee, or
any consolidated group of companies of which Lessee is a member.
This Lease Supplement and Receipt may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same instrument.
IN WITNESS WHEREOF, the Lessor and the Lessee have caused this Lease
Supplement and Receipt to be duly executed as of the date and year first above
written.
FIRST SECURITY BANK OF UTAH, N.A.,
not in its individual capacity but solely as owner trustee under that certain
Trust Agreement dated as of December 10, 1989,
the Lessor
By:
Title:
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
the Lessee
By:
Title:
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SCHEDULE 1 TO LEASE SUPPLEMENT AND RECEIPT: AIRCRAFT DESCRIPTION
Airframe: Boeing model 727-251, manufacturer serial number 21160, US
registration mark N281US
Total hours: _____ Total cycles: _____
Time since C 10 check: _____
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
695256.
Total hours: _____ Total cycles: _____
Time remaining on limiter: _____ (hours) _____ (cycles)
Time since last shop visit: _____ (hours) _____ (cycles)
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
700215.
Total hours: _____ Total cycles: _____
Time remaining on limiter: _____ (hours) _____ (cycles)
Time since last shop visit: _____ (hours) _____ (cycles)
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
696523.
Total hours: _____ Total cycles: _____
Time remaining on limiter: _____ (hours) _____ (cycles)
Time since last shop visit: _____ (hours) _____ (cycles)
Landing gear time since overhaul: L ___ hours, R ___ hours, N ___ hours
Auxiliary power unit: manufacturer _____ serial number _____
Avionics (specified by manufacturer): see attachment consisting of _____ pages
Interior configuration:
Loose equipment: [SPECIFY GALLEY EQUIPMENT, EXTRA SEATS, EMERGENCY EQUIPMENT,
ETC.]
Operating weights: Maximum ramp weight:
Maximum gross take-off weight:
Maximum landing weight:
Zero fuel weight:
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SCHEDULE 2 TO LEASE SUPPLEMENT AND RECEIPT: AIRCRAFT DOCUMENTS
See attachment consisting of _____ pages.
*AIRCRAFT DOCUMENTS CHECKLIST
1. Aircraft Description and Status Summary
2. Cockpit Installation Drawings
3. Emergency Equipment Installation Drawings
4. Avionics Installation List
5. Original Manufacturer's Inventory List
6. Current Component Inventory List
7. Service Bulletin (SB) Accomplishment List
8. List of Equipment to be removed prior to Delivery
9. List of Equipment not provided with U.S. Technical Standard Orders
(TSO) or otherwise unapproved for U.S. operation
10. Record of last Compass Swing
11. List of Oils and Fluids
12. FAA Approved Airplane Flight Manual (AEM)
13. Manufacturer's Flight Crew Operating Manual (FCOM)
14. Releasing Operator's Flight Crew Operating Manual
15. Weight and Balance Manual; last weighing
16. Minimum Equipment List (MEL)
17. MEL Procedures Manual
18. Maintenance Manuals
19. Wiring Diagram Manual; Termination and Equipment Lists
20. System Schematics
21. Fault Isolation Manuals
22. Non-Destructive Test (NDT) Manual
23. Structural Repair Manual (SRM)
24. Illustrated Parts Catalog (IPC)
25. Inspection Procedures Manual (IPM); FAR 145 Repair Station
26. Aircraft/Cockpit Log Books
27. Engine Log Books
28. Auxiliary Power Unit (APU) Log Book
29. Original Export Airworthiness Certificate
30. Current Export Airworthiness Certificate
31. Current, or last, Airworthiness Certificate
32. Current, or last, Noise Certificate
33. Current, or last, Registration
34. Current, or last, Radio License
35. Flight Manual Certificate
36. Supplemental Type Certificates (STC)
37. Certificate of Sanitary Construction, Galleys
49
<PAGE>
38. Modification Records
39. Form 337, Major Repair and Alteration
40. Major and Minor Repair Records
41. Airworthiness Directive (AD) Accomplishment List
42. Airworthiness Directive (AD) Records and Documentation
43. Quality Control Statements:
i)....Maintenance Program Certification or Approval
ii)...Automated Record System Procedures and Security Controls
iii)..Operator's Standards of Maintenance
iv)...List of supporting FAR 145 Repair Stations
v)....Accidents and Incidents
vi)...Assistance in acquiring outstanding records
vii)..Identification of signatures, initials, stamps, etc.,
utilized in the verification and authentication of records
viii).Specific List of all Records and Documentation transferred with
the equipment
44. Cross Reference List; Operator/Manufacturer Part Number and Serial Number
45. Scheduled Maintenance Program; Maintenance Requirements Manual - Function
List
46. Maintenance Requirements Item List
47. Aging Aircraft Program
i)....Aging Aircraft Service Action Requirements
ii)...Corrosion Prevention and Control
iii)..Supplemental Inspection Program (SID)
iv)...Aging Aircraft Repair Assessment Program
v)....Aging Aircraft Maintenance Planning
48. Time Controlled Component (TCC) List, history and status
49. Life Limited Part (LLP) List, history and status
50. Scheduled Maintenance Check Status
51. Total Time and Cycle Justification
52. Maintenance Records
50
<PAGE>
SCHEDULE 3 TO LEASE SUPPLEMENT AND RECEIPT:
QUALIFICATIONS TO RETURN CONDITIONS
Lessor and Lessee hereby agree that the following particulars of the
condition of the Aircraft shall be qualifications to the return conditions set
forth in Section 6 of the Lease.
IN WITNESS WHEREOF, the Lessor and the Lessee have caused this
Schedule 3 to Lease Supplement and Receipt to be duly executed as of _____,1996.
FIRST SECURITY BANK OF UTAH, N.A.,
not in its individual capacity but solely as owner trustee under that certain
Trust Agreement dated as of December 10, 1989,
the Lessor
By:
Title:
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
the Lessee
By:
Title:
51
<PAGE>
EXHIBIT B: FORM OF AIRCRAFT RETURN RECEIPT AND LEASE TERMINATION
The undersigned FIRST SECURITY BANK OF UTAH, N.A., not in its individual
capacity but solely as owner trustee pursuant to a Trust Agreement dated as of
December 10, 1989 ("Lessor") has inspected the following described Aircraft in
conjunction with its return to the Lessor under the Aircraft Lease Agreement
dated as of March 15, 1996 (the "Lease") by and between Lessor and PRIME AIR,
INC., dba TRANSMERIDIAN AIRLINES ("Lessee"). Lessor hereby certifies that said
Aircraft has been found to be in the condition required by the Lease, except for
the discrepancies agreed to by the parties, listed below. Lessor hereby accepts
return of the Aircraft from Lessee and acknowledges receipt thereof.
Airframe: Boeing model 727-251, manufacturer serial number 21160, US
registration mark N281US
Total hours: _____ Total cycles: _____
Time since C check: _____ Time since D check: _____
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
695256.
Total hours: _____ Total cycles: _____
Time remaining on limiter: _____ (hours) _____ (cycles)
Time since last shop visit: _____ (hours) _____ (cycles)
Confirm borescope: _____ all compressor sections _____ all turbine sections
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
700215.
Total hours: _____ Total cycles: _____
Time remaining on limiter: _____ (hours) _____ (cycles)
Time since last shop visit: _____ (hours) _____ (cycles)
Confirm borescope: ____ all compressor sections ____ all turbine sections
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
696523.
Total hours: _____ Total cycles: _____
Time remaining on limiter: _____ (hours) _____ (cycles)
Time since last shop visit: _____ (hours) _____ (cycles)
Confirm borescope: _____ all compressor sections ____ all turbine sections
Landing gear time since overhaul: L ___ hours, R ___ hours, N ___ hours
Auxiliary power unit: manufacturer serial number
Avionics (specified by manufacturer): see attachment consisting of _____ pages
Interior configuration:
Loose equipment: [SPECIFY GALLEY EQUIPMENT, EXTRA SEATS, ETC.]
52
<PAGE>
Discrepancies in components returned (see Schedule 1 to Lease Supplement and
Receipt):
Discrepancies in Aircraft Documents (see Schedule 2 to Lease Supplement and
Receipt):
Discrepancies in Aircraft return condition (see Lease Section 6):
Confirm that all installed Airframe Life Limited Components (excluding landing
gear) are cleared for a minimum of 3,000 hours (or zero time in the case of an
Airframe Life Limited Component with a total useful life of less than 3,000
hours), or 365 days in the case of an Airframe Life Limited Component controlled
by calendar time, in each case as required by the Northwest Airlines maintenance
program. Yes ___ No ___
53
<PAGE>
Lessor and Lessee each agree with the other in respect to said Aircraft:
1. Lessee shall execute and deliver an FAA Aircraft Registry Lease
Termination in the form attached hereto as Schedule 1.
2. Subject to the foregoing discrepancies and subject to all covenants and
indemnities of Lessee under the Lease which, by the terms of the Lease,
survive Expiry of the Lease, the Lease is hereby terminated.
Executed this _____ day of _____, 1996, at ____________
FIRST SECURITY BANK OF UTAH, N.A., not in its individual capacity but solely as
owner trustee under that certain Trust Agreement dated as of December 10, 1989,
the Lessor
By:
Title:
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
the Lessee
By:
Title:
54
<PAGE>
EXHIBIT B SCHEDULE 1
FAA AIRCRAFT REGISTRY
TERMINATION OF LEASE
The undersigned FIRST SECURITY BANK OF UTAH, N.A., not in its individual
capacity but solely as owner trustee under that certain Trust Agreement dated as
of December 10, 1989 ("Lessor"), and PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES
("Lessee") are parties to that certain Aircraft Lease Agreement dated as of
March 15, 1996 (as amended, the "Lease") by and between Lessor and Lessee, which
Lease was recorded by the FAA Aircraft Registry on ____________ as conveyance
number ____________, and which Lease covers Boeing model 727-251 airframe,
serial number _______, registration mark N_____, equipped with three Pratt &
Whitney model JT8D-15A engines, serial numbers _______, _______, and _______
(collectively, the "Aircraft").
The Lease has been terminated on _________, 199__, and the Aircraft is no
longer subject to the terms and provisions thereof.
FIRST SECURITY BANK OF UTAH, N.A.,
not in its individual capacity but solely as owner trustee under that certain
Trust Agreement dated as of December 10, 1989,
the Lessor
By:
Title:
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
the Lessee
By:
Title:
55
<PAGE>
EXHIBIT C: FORM OF LETTER OF CREDIT
Standby Irrevocable Letter of Credit US$_______
Date: ,1996
BENEFICIARY:
Equis Financial Group, as agent
98 North Washington Street
Boston, Massachusetts 02114
Attn: Corporate Treasurer
Gentlemen:
We hereby issue our Standby Irrevocable Letter of Credit in your favor and
authorize you to draw on us for the account of ___________ (the "Account Party")
up to an aggregate amount of United States Dollars ____________ and no/100
available by draft(s) at sight.
We engage with you that all drafts drawn under and in compliance with the terms
of this Credit will be duly honored if presented to ___________________ (name of
US Bank) on or before ________________ (the "Expiration Date"); provided,
however, it is a condition of this Letter of Credit that it shall be
automatically extended for additional periods of one year from the present
expiration date, unless eighty (80) days prior to such Expiration Date, we
notify you in writing by registered mail, return receipt requested, that we will
not renew this Letter of Credit for such additional one year term. If this
Letter of Credit is not renewed, extended or replaced at least sixty (60) days
prior to the Expiration Date you shall be entitled to draw upon us for the
account of the Account Party for an amount up to the full amount of our
liability hereunder as set forth above without submission of the certificate
described above and irrespective of any default as described above.
Partial drawings are permitted. This credit is transferrable. We hereby confirm
the credit and hereby undertake to honor each draft drawn and presented.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 revision), International Chamber of Commerce,
Publication No. 500.
56
<PAGE>
LEASE AMENDMENT NO. 1
(N281US)
This Lease Amendment No. 1 (N281US), dated 14 April 1997, ("Amendment") is
entered into between FIRST SECURITY BANK, N.A. (fka FIRST SECURITY BANK OF UTAH,
N.A.), not in its individual capacity but solely as owner trustee pursuant to a
Trust Agreement dated as of December 10, 1989 with its principal place of
business at 79 South Main Street, Salt Lake City, Utah, 84111 ("Lessor"), and
PRIME AIR, INC., d.b.a. TRANSMERIDIAN AIRLINES, a Texas corporation, with its
principal place of business at 1111 Bagby, Suite 2520, Houston, Texas 77002
("Lessee").
WHEREAS, Lessor and Lessee are parties to the Aircraft Lease Agreement
(N281US) dated as of March 15, 1996, between Lessor and Lessee (the "Lease"),
which Lease covers that certain Boeing model 727-251 airframe, U.S. registration
mark N281US, manufacturer serial number 21160, equipped with three Pratt &
Whitney model JT8D-15A engines, serial numbers 695256, 696523 and 700215, and
which Lease is filed and recorded with the Aviation Authority with this
Amendment as one instrument;
WHEREAS, Section 20 of the Lease provides "No term or provision of this
Lease may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which the enforcement of the
change, waiver, discharge or termination is sought", and
WHEREAS, Lessee and Lessor have agreed to amend the Lease;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is acknowledged by
the parties, Lessor and Lessee hereby agree as follows:
1. Capitalized terms used herein shall have the meaning defined in the Lease.
2. The definition of "Engine" in Lease Section 1 is amended to read in its
entirety as follows:
"Engine" means each of three Pratt & Whitney model JT8D-17 engines,
serial numbers 702613, 702619 and 707154, or any other engine which may
from time to time replace an Engine leased hereunder in accordance with
the terms hereof, and component Parts thereof, so long as the same shall
be either incorporated or installed in or attached to such Engine or
required to be subject to this Lease as provided in Section 5 hereof.
3. Lease Section 3.1.1 is amended to read in its entirety as follows:
3.1.1 Initial Term. The term for which the Aircraft is leased
hereunder (the "Term") shall commence on the Delivery Date and shall
expire on October 31, 1998, unless Expiry occurs sooner pursuant to
the express provisions of this Lease.
Lease Amendment No. 1 (N281US)
Page 1
<PAGE>
4. Lease Section 3.1.2 is amended as follows:
In the fourth line of Section 3.1.2 of the Lease, the words "in
advance" are deleted and replaced with "prior to the end of the
Initial Term".
5. Lease Section 3.2 is amended in its entirety to read as follows:
3.2. Basic Rent. The Lessee shall pay to the Lessor monthly rental
for the Aircraft (the "Basic Rent"), payable in advance on the
Delivery Date and on each Rent Payment Date during the Term in the
amount of Eighty Thousand United States Dollars (US $80,000) for the
first through the eighth month of the Term; and in the amount of
Seventy Thousand United States Dollars (US $70,000) for the ninth
through eighteenth month of the Term; and for the final month of the
Term the Basic Rent of Eighty Thousand United States Dollars (US
$80,000) shall be pro rated on a daily basis, provided, however,
that if the Lessee elects to install hushkits in accordance with
Section 3.7 hereof, the Lessee shall pay Basic Rent in the amount of
One Hundred Fifteen Thousand United States Dollars (US$115,000)
subject to adjustment set forth in Section 3.7, from the first Rent
Payment Date following hushkit installation for the remainder of the
Term (i.e., sixty months). Basic Rent to cover an extension of the
Term less than a calendar month to coincide with expiration of the
then-current C Cheek shall be calculated per diem.
6. Lease Section 3.7 is amended as follows:
In the third line of Section 3.7 of the Lease, the words "after the
twenty-fourth month of the Term" are deleted and replaced with "no
less than 120 days prior to the expiration of the Initial Term".
7. Lease Section 4.4 is amended to include the following:
4.4.7 Cargo Liability Insurance. Lessee will not permit the Aircraft
to carry cargo of any type other than general passenger baggage
which is not covered by the insurance provided by Lessee pursuant to
Section 10 of the Lease without first obtaining Cargo Legal
Liability insurance in form satisfactory to Lessor. Lessee shall
provide Lessor with prior written evidence satisfactory to Lessor
that such coverage has been bound and is in full force.
8. Lease Section 10 is amended as follows:
10.7 Aircraft Documents. Notwithstanding anything to the contrary in
this Section 10 of the Lease, Lessee shall not be required to
provide insurance coverage for the Aircraft Documents, except in the
event Lessee or either Guarantor suffers a material adverse change
in its financial condition.
Lease Amendment No. 1 (N281US)
Page 2
<PAGE>
9. Lease Section 10.5 is amended as follows:
In the third line of Section 10.5 of the Lease, the words "passenger
legal liability and cargo legal liability" are deleted and replaced
with "and passenger legal liability".
10. Lease Section 17 is amended in its entirety to read as follows:
Section 17. Notices. All notices required under the terms and
provisions hereof shall be in writing in the English language, and
any such notice shall become effective when received by the other
party, by hand, by registered mail with proper postage for airmail
prepaid, by overnight courier service, or, if in the form of a
telecopy, upon confirmation of receipt thereof, in each case
addressed (i) if to the Lessee:
TransMeridian Airlines
1111 Bagby, Suite 2520
Houston, TX 77002
Attention: Managing Director
Telecopier: 713 615-6044
With copies to each Guarantor at the address provided in writing to
Lessor on the Delivery Date, or to such other address as the Lessee
shall from time to time designate in writing to the Lessor, or (ii)
if to the Lessor:
First Security Bank, N.A.
79 South Main Street
Salt Lake City, Utah 84111
Attention: Corporate Trust Department
Telecopier: 810-246-5053
with copy to:
Equis Financial Group
98 North Washington Street
Boston, MA 02114
Attention: Aircraft Management
Telecopier: 617 523 1410
or to such other address as the Lessor shall form time to time
designate in writing to Lessee.
11. Except as set forth above, all of the other terms and provisions of the
Lease shall remain in full force and effect.
Lease Amendment No. 1 (N281US)
Page 3
<PAGE>
12. This Amendment shall be governed by and construed under substantive law
(without regard to the conflict to laws provisions) and decisions of the
Commonwealth of Massachusetts.
13. This Amendment may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute but one and
the same instrument.
[THE REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
Lease Amendment No. 1 (N281US)
Page 4
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have each caused this Amendment to
be duly executed by their respective officers.
FIRST SECURITY BANK, N.A.,
not in its individual capacity but solely as owner trustee under that certain
Trust Agreement dated as of December 10, 1989,
the Lessor
By: /s/ Greg A. Hawley
--------------------------
Name: Greg A. Hawley
------------------------
Title: Vice President
-----------------------
PRIME AIR, INC., d.b.a. TRANSMERIDIAN AIRLINES,
the Lessee
By: /s/ Thomas E. Upton
--------------------------
Name: Thomas E. Upton
------------------------
Title: C.F.O.
-----------------------
<PAGE>
LEASE SUPPLEMENT AND RECEIPT (N281US)
LEASE SUPPLEMENT AND RECEIPT (N281US) dated April 30, 1997 between FIRST
SECURITY BANK N.A. (f/k/a FIRST SECURITY BANK OF UTAH, N.A.), not in its
individual capacity but solely as trustee pursuant to a Trust Agreement dated as
of December 10, 1989 (the "Lessor"), and PRIME AIR, INC., dba TRANSMERIDIAN
AIRLINES (the "Lessee").
The Lessor and the Lessee have heretofore entered into that certain
Aircraft Lease Agreement dated March 15, 1996 and Lease Amendment No. 1 (N281US)
dated as of April 14, 1997 (herein collectively called the "Lease" and the
defined terms therein being hereinafter used with the same meanings), relating
to one Boeing model 727-251 aircraft, U.S. registration mark N281US,
manufacturer serial number 21160. The Lease provides for the execution and
delivery of a Lease Supplement and Receipt.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, the Lessor and the Lessee hereby agree as follows:
A. THE LEASE. The Lease and all related Operative Documents to be executed
by the Lessee have been duly authorized, executed and delivered by Lessee and
constitute valid, legal and binding agreements, enforceable in accordance with
their terms. All of the terms and provisions of the Lease are hereby
incorporated by reference in this Lease Supplement and Receipt to the same
extent as if fully set forth herein. The parties confirm that the Delivery Date
is the date of this Lease Supplement and Receipt.
B. THE AIRCRAFT. The Lessee hereby certifies that the Aircraft described
in Schedule 1 hereto, consisting of two pages (including attachments) and made a
part hereof, and the Aircraft Documents described in Schedule 2 hereto,
consisting of three pages (including attachments) and made a part hereof, have
been delivered to the Lessee, inspected by the Lessee, found to be in good order
and accepted hereunder, and for all purposes of, the Lease, all on the date
hereof. Any qualifications to the return conditions set forth in Lease Section 6
are attached hereto in Schedule 3. Lessee accepts delivery of the Aircraft "AS
IS", "WHERE IS", AND SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND
REPRESENTATION AS SET FORTH IN SECTIONS 4.3 OF THE LEASE.
C. REPRESENTATIONS BY THE LESSEE. The Lessee hereby represents and
warrants to the Lessor that on the date hereof:
1. The representations and warranties of the Lessee set forth in the Lease
are true and correct in all material respects as though made on and as of the
date hereof.
2. The Lessee has satisfied or complied with all requirements set forth in
the Lease to be satisfied or complied with on or prior to the date thereof.
3. No default or Event of Default under the Lease has occurred and is
continuing on the date hereof with the exception of the Lessee's Default under
Section 13.6 of the Lease resulting from Lessee's failure to protect or preserve
Lessor's title to the Aircraft, which Default is not
Lease Supplement and Receipt
(N281US)
Page 1
<PAGE>
IN WITNESS WHEREOF, the Lessor and the Lessee have caused this Lease
Supplement and Receipt to be duly executed as of the date and year first above
written.
FIRST SECURITY BANK, N.A.
not in its individual capacity but solely as owner trustee under that certain
Trust Agreement dated as of December 10, 1989.
the Lessor
By: /s/ Greg A. Hawley
--------------------------
Name: Greg A. Hawley
------------------------
Title: Vice President
-----------------------
PRIME AIR, INC., d.b.a. TRANSMERIDIAN AIRLINES,
the Lessee
By: /s/ Thomas E. Upton
--------------------------
Name: Thomas E. Upton
------------------------
Title: C.F.O.
-----------------------
Lease Supplement and Receipt
(N281US)
Page 3
<PAGE>
SCHEDULE 1 TO LEASE SUPPLEMENT AND RECEIPT (N281US)
AIRCRAFT DESCRIPTION
Airframe: Boeing model 727-251, mfgr. serial number 21160, US registration mark
N281US.
Total hours: 50,926:37 Total cycles: 35,723
Engine: Pratt & Whitney model JT8D-17 engine, manufacturer serial number 702613.
Total Hours: 25,637:37 Total cycles: 24,889
Time remaining on limiter: 8,917:23 (hours) 3,162 (cycles)
Time since last shop visit: 9:37 (hours) 8 (cycles)
Engine: Pratt & Whitney model JT8D-17 engine, manufacturer serial number 702619.
Total Hours: 24,038:37 Total Cycles: 23,074
Time remaining on limiter: 7,232:23 (hours) 5,344 (cycles)
Time since last shop visit: 9:37 (hours) 8 (cycles)
Engine: Pratt & Whitney model JT8D-17R engine, manufacturer serial number
707154.
Total Hours: 24,711:37 Total Cycles: 17,687
Time remaining on limiter: 5,276:23 (hours) 9,777 (cycles)
Time since last shop visit: 9:37 (hours) 8.0 (cycles)
Landing Gear time since overhaul (Hours): L 15,033:37; R3,328:37; N 11:07.
Auxiliary power unit: manufacturer Garrett, serial number P36731.
Avionics (specified by manufacturer): see attachment consisting of one (1)
pages.
Interior configuration: 170Y, Galleys 1,2,3,4 and 4A.
Loose equipment:
1. Galley Equipment including ovens with inserts, coffee makers, food
carriers and trolleys.
2. Full compliment of emergency equipment as required by emergency
equipment location drawing. Lessor acknowledges that the following
items are the property of Lessee: (i) one emergency locator
transmitter; (ii) Three first aid kits; (iii) five PBE hoods; (iv)
one emergency medical kit; and (v) Three halon extinguishers.
3. Life vests and rafts are property of Lessee.
4. Lessor acknowledges that, on the Delivery Date, the following items
were not delivered with the Aircraft: One coffee maker, two trolleys
and three tray tables. Lessee will notify Lessor in writing when
these items are delivered to Lessee.
Operating weights: Maximum ramp weight: 195,500
Maximum gross take-off weight: 195,000
Maximum landing weight: 161,000
Zero fuel weight: 141,000
Lease Supplement and Receipt
(N281US)
Page 4
Each of the above described aircraft engines is 750 or more rated takeoff
horsepower or its equivalent.
<PAGE>
ATTACHMENT 1 TO
SCHEDULE 1 TO LEASE SUPPLEMENT AND RECEIPT (N281US)
AIRCRAFT DESCRIPTION
AUTO PILOT 1 SPERRY SP50
VHF COMM 3 COLLINS 618-M3
VHF NAV 3 COLLINS 522-4280-XXX
MARKER 1 BENDIX 2087821-2811
ADF 1 BENDIX 2087786-7300
DME 2 COLLINS 622-2920-001
TRANSPONDER 2 COLLINS MODE S TPR72O 621-A6
RADAR 1 BENDIX 2067157-0103
RADIO ALT 1 BENDIX 2067631-5315
FLT DIR 1 COLLINS 562A-5F4
GROUND PROX 1 BENDIX 2041033-8313
TCAS 1 HONEYWELL 4066010-904
WINDSHEAR 1 HONEYWELL 4061048-904
CVR 1 FAIRCHILD A152
DFDR 1 COLLINS 980-4100-GQUS
THE FOLLOWING ARE THE PROPERTY OF LESSEE:
HF SYSTEM 2 COLLINS 522-1501-000
GPS SYSTEM 2 HONEYWELL/
TRIMBLE 81845-3101-005
Lease Supplement and Receipt
(N28lUS)
Page 5
<PAGE>
SCHEDULE 2 TO LEASE SUPPLEMENT AND RECEIPT (N281US)
AIRCRAFT DOCUMENTS
[SEE ATTACHMENT 1 TO SCHEDULE 2]
[2 PAGES]
Lease Supplement and Receipt
(N281US)
Page 6
<PAGE>
page 2 of 2
BOX 9 Film 4 cartridges NWA 727 IPC
Manuals 3 SunCountry maintenance documents
All of the below listed items, previously in box 9, are on board the
aircraft while at Fort Worth
Film 4 cartridges NWA 727 IPC
Film 3 cartridges NWA 727 MM
Film 1 cartridge Boeing SRM
Film 1 cartridge NWA 727 WD
Film 1 cartridge P&W JT8D MM
Film 1 cartridge P&W JT8D IPC
Manual 1 727 cockpit operating
Manual 1 FAA AFM 2 vol
Manual I NWA operating
BOX 10 NavCom work documents C10, Aging, CPCP, Bridging, STCs
BOX 11 NavCom work documents C10, Aging, CPCP, Bridgine, STCs
BOX 12 NavCom work documents C10, Aging, CPCP, Bridging, STCs
BOX 13 NavCom work documents C10, Aging, CPCP, Bridginel, STCs
BOX 14 Engine 702613 Log book and Korean historical records
BOX 15 Engine 702619 Log book and Korean historical records
BOX 16/17 Engine 717154 Avianca historical records
PACK 18 XRAs performed during NavCom maintenance
PAGE 8
<PAGE>
SCHEDULE 3 TO LEASE SUPPLEMENT AND RECEIPT:
QUALIFICATIONS TO RETURN CONDITIONS
Lessor and Lessee hereby agree that the following particulars of the
condition of the Aircraft shall be qualifications to the return conditions set
forth in Section 6 of the Lease.
[SEE ATTACHMENT 1 TO SCHEDULE 3]
[1 PAGE]
IN WITNESS WHEREOF, the Lessor and the Lessee have caused this Schedule 3
to Lease Supplement and Receipt to be duly executed as of April 30, 1997.
FIRST SECURITY BANK, N.A.
not in its individual capacity but solely as owner trustee under that certain
Trust Agreement dated of December 10, 1989.
the Lessor
By: /s/ Greg A. Hawley
--------------------------
Name: Greg A. Hawley
------------------------
Title: Vice President
-----------------------
PRIME AIR, INC., d.b.a. TRANSMERIDIAN AIRLINES,
the Lessee
By: /s/ Thomas E. Upton
--------------------------
Name: Thomas E. Upton
------------------------
Title: C.F.O.
-----------------------
Page 9
<PAGE>
ATTACHMENT 1 TO
SCHEDULE 3 TO LEASE SUPPLEMENT AND RECEIPT:
QUALIFICATIONS TO RETURN CONDITIONS
1. Seat 2A right arm rest plastic cracked (two places)
2. Row 4 lower air vent upper corner broken-off
3. Small nick on tray table left bottom side
4. 4C left arm rest plastic cracked
5. 7B right arm rest plastic cracked
6. 7A right arm rest plastic cracked
7. 8B right arm rest plastic cracked
8. 10A right arm rest plastic cracked
9. 13B both arm rest plastic cracked
10. 14A right arm rest plastic cracked
11. 17B both arm rest plastic cracked
12. 19A right arm rest plastic cracked
13. 21B right arm rest plastic cracked
14. 23B both arm rest plastic cracked
15. Row 24 and 25 left and right different style arm rests
16. 25A arm rest plastic cracked
17. 25A tray table distorted
18. 26C right arm rest cracked also has sheet metal repair
19. 27 right different style arm rest
20. 27A right arm deteriorated
21. 32F left arm rest plastic cracked
22. 26E both arm rest plastic cracked, with sheet metal repair
23. 26 right all arm rest different style
24. 23 right all arm rest different style
25. 22E both arm rest cracked, with sheet metal repair
26. 21E and F arm rest recline button not standard
27. Row 20 right tray tables wrong style
28. 19E both arm rest plastic cracked
29. 17E both arm rest plastic cracked
30. Rows 14 and 15 right arm rest plastic cracked
31. 12E both arm rest plastic broken
32. 11E both arm rest plastic broken
33. 10E both arm rest plastic broken
34. 9F left arm rest plastic cracked
35. 5F both arm rest plastic cracked
Lease Supplement and Receipt
(N281US)
Page 10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,448,960
<SECURITIES> 140,844
<RECEIVABLES> 1,566,060
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,155,864
<PP&E> 5,498,839
<DEPRECIATION> 5,498,839
<TOTAL-ASSETS> 4,155,864
<CURRENT-LIABILITIES> 1,253,009
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,902,855
<TOTAL-LIABILITY-AND-EQUITY> 4,155,864
<SALES> 0
<TOTAL-REVENUES> 689,091
<CGS> 0
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<INCOME-CONTINUING> 361,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 361,806
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
